CAPITAL AUTOMOTIVE REIT
S-11/A, 1998-02-06
REAL ESTATE INVESTMENT TRUSTS
Previous: B&G FOODS INC, S-4/A, 1998-02-06
Next: CAPITAL AUTOMOTIVE REIT, 8-A12G/A, 1998-02-06



<PAGE>
 
    
 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998     
                                                     REGISTRATION NO. 333-41183
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                
                             AMENDMENT NO. 3     
                                      TO
                                   FORM S-11
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                               ----------------
                            CAPITAL AUTOMOTIVE REIT
        (EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
 
               MARYLAND                              54-1870224
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)             IDENTIFICATION NUMBER)
                       1925 NORTH LYNN STREET, SUITE 306
                           ARLINGTON, VIRGINIA 22209
  [ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES]
 
           THOMAS D. ECKERT                         DAVID S. KAY
 PRESIDENT AND CHIEF EXECUTIVE OFFICER   VICE PRESIDENT AND CHIEF FINANCIAL
     TELEPHONE NO. (703) 469-1300                      OFFICER
                                            TELEPHONE NO. (703) 469-1300
 
                       1925 NORTH LYNN STREET, SUITE 306
                           ARLINGTON, VIRGINIA 22209
                         FACSIMILE NO. (703) 469-1106
  [NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, AND FACSIMILE NUMBER
                   INCLUDING AREA CODE OF AGENT FOR SERVICE]
 
                               ----------------
                                  COPIES TO:
        GEORGE P. STAMAS, ESQ.               GEORGE C. HOWELL, III, ESQ.
         JOHN B. WATKINS, ESQ.                 JACK A. MOLENKAMP, ESQ.
      WILMER, CUTLER & PICKERING                  HUNTON & WILLIAMS
          2445 M STREET, N.W.               RIVERFRONT PLAZA, EAST TOWER
      WASHINGTON, D.C. 20037-1420               951 EAST BYRD STREET
     TELEPHONE NO. (202) 663-6000              RICHMOND, VA 23219-4074
     FACSIMILE NO. (202) 663-6363           TELEPHONE NO. (804) 788-8200
                                            FACSIMILE NO. (804) 788-8218
 
  APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES 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 statement number of the earlier
effective registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
                               ----------------
                        CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                      PROPOSED       PROPOSED
                          AMOUNT      MAXIMUM        MAXIMUM
  TITLE OF SECURITIES     BEING    OFFERING PRICE   AGGREGATE         AMOUNT OF
   BEING REGISTERED     REGISTERED   PER SHARE    OFFERING PRICE REGISTRATION FEE(1)
- ------------------------------------------------------------------------------------
<S>                     <C>        <C>            <C>            <C>
Common Shares of
 Beneficial Interest
 (par value $.01 per
 share)...............  24,277,794     $16.00      $388,444,704       $133,946
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

(1) The Company has previously paid the Commission the registration fee.
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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, DATED FEBRUARY 5, 1998     
PROSPECTUS
                            20,000,000 COMMON SHARES
                            CAPITAL AUTOMOTIVE REIT
 
[LOGO OF CARS APPEARS HERE]
                      COMMON SHARES OF BENEFICIAL INTEREST
 
                                  ----------
 
  Capital Automotive REIT (the "Company") is a newly organized self-
administered and self-managed Maryland real estate investment trust formed to
invest in the real property and improvements used by operators (the "Dealers")
of multi-site, multi-franchised motor vehicle dealerships ("Dealerships") and
motor vehicle related businesses located in major metropolitan areas throughout
the United States. The Company is the first publicly-offered real estate
investment trust ("REIT") formed primarily to acquire and lease back real
property and improvements for use by Dealers. The Company has entered into
agreements to acquire
                                                        (continued on next page)
 
                                  ----------
 
  SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN MATERIAL
RISKS TO BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON SHARES,
INCLUDING, AMONG OTHERS:
 
  . Inability of the Company to close the acquisition of any initial property
    or close such acquisition as scheduled, which may adversely affect the
    financial results of the Company and distributions to shareholders;
 
  . Dependence on the ability of Lessees to pay rent to the Company, which
    ability may be affected by risks inherent in operating Dealerships and
    related businesses, and which failure to pay rent would adversely affect
    the financial results of the Company;
 
  . Conflicts of interest between the Company and certain Trustees of the
    Company, and the potential influence of such Trustees or their affiliates
    with respect to the business of, and decisions affecting, the Company,
    which may affect the sale or refinancing of certain properties or
    enforcement of certain agreements;
 
  . The Company's lack of operating history and management's lack of
    experience operating a REIT;
     
  . Approximately 66% of the net proceeds of the Offering (assuming the
    Underwriters do not exercise their over-allotment option) have not been
    committed to specific investments; the Company may face significant
    competition in acquiring additional properties, which may inhibit the
    Company's ability to achieve its investment objectives; the shareholders
    will not have the opportunity to evaluate such acquisitions by the
    Company;     
 
  . The Company's limited control over the management of the properties, which
    may affect the maintenance and repair of those properties; and
 
  . Adverse tax consequences of failing to qualify as a REIT and the decrease
    in funds available to pay distributions to shareholders resulting from
    taxation as a regular corporation.
 
                                  ----------
 
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 COMMIS-SION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                       UNDERWRITING
                                             PRICE TO DISCOUNTS AND  PROCEEDS TO
                                              PUBLIC  COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S>                                          <C>      <C>            <C>
Per Common Share...........................    $           $            $
- --------------------------------------------------------------------------------
Total(3)(4)................................   $           $            $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
    liabilities, including liabilities under the Securities Act of 1933, as
    amended (the "Securities Act"). See "Underwriting."
   
(2) Before deducting expenses payable by the Company estimated to be
    approximately $1,650,000, including reimbursement of certain out of pocket
    expenses of Friedman, Billings, Ramsey & Co., Inc., the Representative of
    the Underwriters, including reimbursement of fees and expenses of its
    counsel. The Company has granted to the Representative warrants to purchase
    1,277,794 Common Shares (equal to 4% of the Common Shares to be outstanding
    on the closing of the Offering (excluding exercise of the Underwriters'
    over-allotment option) on a fully diluted basis). The Common Shares
    issuable upon exercise of the Warrants have been registered by the Company.
    See "Underwriting." Approximately $2,525,000 of the net proceeds of this
    Offering will be used to repay indebtedness to FBR Group, Inc., an
    affiliate of the Representative. See "Use of Proceeds."     
(3) The Company has granted the Underwriters a 30-day over-allotment option to
    purchase up to 3,000,000 additional Common Shares on the same terms and
    conditions as set forth above. If all such additional shares are purchased
    by the Underwriters, the total Price to Public, Underwriting Discounts and
    Commissions and Proceeds to the Company will be $   , $    and $   ,
    respectively. See "Underwriting."
(4) The Underwriters have agreed to reserve up to 2% of the Common Shares
    offered hereby for sale to certain persons associated with the Company,
    including executive officers and Trustees of the Company and their
    families, at the Price to Public net of underwriting discounts and
    commissions. To the extent such reserved shares are sold to such
    individuals, the total Underwriting Discounts and Commissions will be
    reduced. See "Underwriting."
 
                                  ----------
 
  The Common Shares are offered by the Underwriters subject to receipt and
acceptance by the Underwriters, approval of certain legal matters by counsel
for the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offers and to reject orders in whole
or in part. It is expected that delivery of the Common Shares will be made in
New York, New York on or about       , 1998.
 
                                  ----------
 
                     FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
 
                    The date of this Prospectus is    , 1998
<PAGE>
 
 
 
             [Map Showing Location by State of Initial Properties]
 
 
 
  CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE THE MARKET PRICE,
PURCHASES OF THE COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
 
  IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
 
  The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters.
<PAGE>
 
(continuation of cover page)
   
36 properties, of which 20 are located in the Washington, D.C. Metropolitan
Area. The Company will lease back its properties toto Dealers or their
affiliates under long-term leases that require the lessee to pay all taxes,
utilities, insurance, repairs, maintenance and other expenses (commonly
referred to as "triple net" leases). Sixteen of those properties will be
acquired from affiliates of John J. Pohanka and Robert M. Rosenthal, who have
agreed to join the Board of Trustees of the Company upon closing of this
Offering.     
 
  All of the Company's common shares of beneficial interest, par value $.01
per share (the "Common Shares"), offered hereby are being sold by the Company.
To assist the Company in maintaining its qualification as a REIT, ownership of
Common Shares by any person is generally limited to 9.9% of the outstanding
Common Shares. Prior to the Offering, there has been no public market for the
Common Shares. It is currently estimated that the initial public offering
price will be between $14.00 and $16.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied for listing of the Common Shares on
The Nasdaq Stock Market National Market under the symbol "CARS." See
"Glossary" beginning on page G-1 for the definition of certain terms used in
this Prospectus.
 
  Assuming (i) conversion of units of limited partnership interest of Capital
Automotive L.P. ("Units") into Common Shares (which are redeemable beginning
on the first anniversary of the date of issuance by the holder), (ii) exercise
of warrants to acquire Common Shares or Units to be issued to the
Representative or affiliates of the Company, (iii) exercise of options to
acquire Common Shares or Units to be issued to executive officers of the
Company, and (iv) the purchase of $13 million of Common Shares by Mr. Pohanka
and his family in this Offering, Trustees and executive officers of the
Company would collectively own 28.92% and the Representative and its
affiliates would collectively own 9.71% of the outstanding Common Shares
(27.20% and 8.77% if the Underwriters' over-allotment option is exercised in
full), subject to the 9.9% limitation on ownership of Common Shares by a
shareholder. See "Principal Shareholders of the Company."
 
  FBR Asset Investment Corporation, an affiliate of the Representative of the
Underwriters, has agreed to acquire 1,792,115 Common Shares in a private
placement that will close concurrently with this Offering at the initial
public offering price, net of underwriting discounts and commissions.
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<S>                                                                         <C>
PROSPECTUS SUMMARY.........................................................   1
THE COMPANY................................................................   1
RISK FACTORS...............................................................   3
THE INITIAL PROPERTIES, LEASES AND DEALERSHIPS.............................   6
STRATEGY...................................................................  10
SUMMARY SELECTED FINANCIAL INFORMATION.....................................  11
BENEFITS TO RELATED PARTIES................................................  12
STRUCTURE OF THE COMPANY...................................................  14
FORMATION TRANSACTIONS.....................................................  15
DISTRIBUTIONS..............................................................  16
TAX STATUS OF THE COMPANY..................................................  16
THE OFFERING...............................................................  17
RISK FACTORS...............................................................  18
  Inability of the Company to Close the Acquisition of Property or Close
   such Acquisition as Scheduled...........................................  18
  The Company is Dependent upon Dealers Generating Sufficient Revenues From
   Their Operations to Permit the Lessees to Pay Rent and Fulfill Their
   Other Obligations Under the Leases......................................  18
    Dependence on Lessees for Payment of Rent and Performance of Lease
     Terms ................................................................  18
    Dependence on Guarantors for Payment of Rent and Performance of Lease
     Terms Upon Default of Lessee .........................................  19
    The Company Has No Rights Under,
     or Control Over, Franchise Agreements ................................  19
    Rejection of Leases Under Federal Bankruptcy Codes.....................  19
    Inability of the Company to Resell or Re-Lease Properties..............  20
    Responsibility for Uninsurable Losses..................................  20
  General Risks Associated With Operating Dealerships and Related
   Businesses..............................................................  21
    Dependence on Manufacturers for Supply of Motor Vehicles...............  21
    Restrictions in Franchise Agreements that Govern Ability of Dealerships
     to Sell Motor Vehicles or its Assets or Properties....................  21
    Mature Industry and Cyclicality With Limited Growth Potential..........  22
    Dealership Competition for Sale of Motor Vehicles......................  22
    Restrictions that Could Limit Supply of Motor Vehicles.................  22
  Conflicts of Interest Among the Company and Certain Trustees.............  22
    Ability of Certain Trustees to Influence the Company...................  23
    Terms of Initial Sale of Initial Properties by Affiliates of Messrs.
     Pohanka and Rosenthal.................................................  23
    Terms of Initial Leases for Lease of Initial Properties to Affiliates
     of Messrs. Pohanka and Rosenthal......................................  23
    Ability of Certain Trustees and Their Affiliates to Influence the Sale
     or Refinancing of the Initial Properties..............................  23
  Purchase Prices of Properties Have Not Been Based on Independent
   Appraisals and as a Result the Market Capitalization of the Company May
   Exceed the Fair Market Value of the Company's Properties if Determined
   by Appraisal............................................................  24
  The Company's Lack of Operating History; No Assurance that the Company
   Will Be Able to Generate Sufficient Revenue to Make or Sustain
   Distributions to Shareholders...........................................  24
  There Can Be No Assurance that the Company Will Complete Any Additional
   Acquisitions of Properties..............................................  25
  Risk That the Company Could Be Treated as an Investment Company if
   Proceeds Have Not Been Invested Within One Year ........................  25
  Risk of Leverage.........................................................  25
  The Company will not Exercise Control Over the Management or Maintenance
   of the Properties.......................................................  26
  Dependence on Key Personnel..............................................  26
  Geographic Concentration of the Initial Properties in Certain Markets
   Renders the Company Vulnerable to Local Economic Conditions.............  26
  General Real Estate Investment Risks.....................................  26
    General Risks of Real Estate Investment................................  27
    Real Estate Tax Increases..............................................  27
    Operating Expenses Increases ..........................................  27
    Risks Associated with Illiquidity of Real Estate.......................  27
  Governmental Regulations; Environmental Matters..........................  27
    Environmental Laws.....................................................  27
    Americans with Disabilities Act of 1990................................  28
</TABLE>
 
                                       i
<PAGE>

<TABLE>
<S>                                                                         <C>
    Other Regulations......................................................  29
  Competition with Other Companies with Similar Business Objectives and
   Strategies..............................................................  29
  Adverse Consequences of Failure to Qualify as a REIT; Other Tax
   Liabilities.............................................................  29
    Tax Liabilities as a Consequence of Failure to Qualify as a REIT.......  29
    Adverse Effects of REIT Minimum Distribution Requirements..............  30
    Consequences of Failure to Qualify as a Partnership....................  30
    Risks Regarding Characterization of Initial Leases.....................  30
    Other Tax Liabilities..................................................  31
  The Ownership Limit......................................................  31
  Certain Tax and Anti-takeover Provisions May Inhibit a Change in Control
   of the Company..........................................................  31
    Ownership Limit........................................................  31
    Removal of Trustees; Vacancies.........................................  32
    Preferred Shares.......................................................  32
    Maryland Business Combination Statute..................................  32
  Changes in Policies......................................................  32
  No Prior Market for Common Shares........................................  32
  Effect on Market Interest Rates on Share Prices..........................  33
  Possible Adverse Effects on Share Price Arising from Common Shares
   Eligible for Future Sale................................................  33
USE OF PROCEEDS............................................................  34
CAPITALIZATION.............................................................  36
DILUTION...................................................................  37
CONFLICTS OF INTEREST POLICIES.............................................  38
SELECTED FINANCIAL INFORMATION.............................................  40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
 OPERATIONS................................................................  41
  Overview.................................................................  41
  Results of Operations....................................................  41
  Pro Forma Results of Operations..........................................  41
    Environmental Matters..................................................  42
  Liquidity and Capital Resources..........................................  42
BUSINESS OF THE COMPANY AND PROPERTIES.....................................  44
  Overview.................................................................  44
  Strategy.................................................................  46
  The Initial Leases, Properties and Dealerships...........................  47
  Typical Initial Lease Terms............................................... 51
    Use of the Properties................................................... 51
    Amounts Payable under the Leases; Net Provisions........................ 51
    Maintenance, Alterations, Additions or Improvements..................... 51
    Insurance............................................................... 52
    Damage to, or Condemnation of, a Property............................... 52
    Financial Covenants..................................................... 53
    Assignment and Subletting............................................... 53
    Indemnification......................................................... 53
    Environmental Matters................................................... 54
    Events of Default....................................................... 54
    Right of First Offer and Option to Purchase Property.................... 55
    Governing Law........................................................... 55
  Washington, D.C. Metropolitan Area ....................................... 56
  Governmental Regulations Affecting the Properties......................... 56
    Environmental Laws...................................................... 56
    Americans with Disabilities Act of 1990................................. 56
  Franchise Agreements...................................................... 57
  Competition............................................................... 58
  Other Investment Policies................................................. 58
  Employees................................................................. 58
  Legal Proceedings......................................................... 58
MANAGEMENT.................................................................. 59
  Trustees, Executive Officers and Key Employees............................ 59
  Committees of the Board of Trustees....................................... 61
    Audit Committee......................................................... 61
    Executive Committee..................................................... 61
    Executive Compensation Committee........................................ 61
  Compensation of Trustees.................................................. 61
  Executive Compensation.................................................... 61
  Employment Agreements..................................................... 62
  1998 Equity Incentive Plan................................................ 62
  Option Grants in Connection with the Formation Transactions............... 63
  Indemnification of Trustees and Officers.................................. 64
STRUCTURE AND FORMATION OF THE COMPANY...................................... 65
  Structure of the Company.................................................. 65
  Formation Transactions.................................................... 65
  Benefits to Related Parties............................................... 66
  Lock-Out Provisions....................................................... 68
  Benefits of the UPREIT Structure.......................................... 68
  Acquisition of the Initial Properties from the Initial Sellers............ 68
RELATED TRANSACTIONS........................................................ 69
  Transactions with Trustees................................................ 69
</TABLE>
 
                                       ii
<PAGE>

<TABLE>
<S>                                                                         <C>
   Dealer Warrants.........................................................   69
   Acquisitions of Initial Properties......................................   69
   Initial Leases..........................................................   69
   Sale of Common Shares in this Offering..................................   69
PARTNERSHIP AGREEMENT......................................................   70
  Management...............................................................   70
  Indemnification..........................................................   70
  Transferability of Interests.............................................   70
  Extraordinary Transactions...............................................   71
  Issuance of Additional Units.............................................   71
  Capital Contributions and Additional Funds...............................   71
  Awards Under Plan........................................................   71
  Distributions............................................................   71
  Operations...............................................................   72
  Limited Partner Redemption Rights........................................   72
  Tax Matters..............................................................   72
  Term.....................................................................   72
PRINCIPAL SHAREHOLDERS OF THE COMPANY......................................   73
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST...............................   74
  Authorized Shares........................................................   74
  Common Shares............................................................   74
  Preferred Shares.........................................................   75
  Restrictions on Ownership and Transfer...................................   76
  Certain Provisions of Maryland Law and of the Declaration of Trust and    
   Bylaws..................................................................   78
    Business Combinations..................................................   78
    Control Share Acquisitions.............................................   79
    Limitation of Liability and Indemnification............................   79
    Maryland Asset Requirements............................................   80
    Meetings of Shareholders...............................................   80
COMMON SHARES ELIGIBLE FOR FUTURE SALE.....................................   81
    General................................................................   81
    Underwriting Warrants..................................................   82
    Dealer Warrants........................................................   82
    Conversion of Units....................................................   82
    Registration Rights.....................................................  82
FEDERAL INCOME TAX CONSEQUENCES.............................................  83
  Taxation of the Company as a REIT.........................................  83
    General.................................................................  83
    Requirements for Qualification..........................................  84
    Income Tests............................................................  84
    Asset Tests.............................................................  88
    Annual Distribution Requirements........................................  89
    Partnership Anti-Abuse Rule.............................................  89
    Failure to Qualify......................................................  90
  Taxation of Holders of Common Shares......................................  90
    U.S. Shareholders.......................................................  90
    Backup Withholding......................................................  92
    Taxation of Tax-Exempt Shareholders.....................................  92
    Non-U.S. Shareholders...................................................  92
    Ordinary Dividends......................................................  93
    Return of Capital.......................................................  93
    Capital Gain Dividends..................................................  94
    Sales of Common Shares..................................................  94
    Backup Withholding......................................................  94
  Other Tax Consequences....................................................  95
  Tax Aspects of the Operating Partnership..................................  95
    Classification as a Partnership.........................................  95
    Partnership Allocations.................................................  96
    Tax Allocations with Respect to the Properties..........................  97
    Basis in Operating Partnership Interest.................................  98
    Sale of the Properties..................................................  98
UNDERWRITING................................................................  99
LEGAL MATTERS............................................................... 101
EXPERTS..................................................................... 101
ADDITIONAL INFORMATION...................................................... 102
INDEX TO FINANCIAL STATEMENTS............................................... F-1
GLOSSARY.................................................................... G-1
</TABLE>
 
                                      iii
<PAGE>
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information and financial information, including the historical and pro forma
financial statements and notes thereto, appearing elsewhere in this Prospectus.
This Prospectus contains forward looking statements that involve risks and
uncertainties. The Company's actual operations may differ significantly from
the results discussed in the forward-looking statements. Such statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"could," "should," "expect," "anticipate," "estimate," or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
cautionary statements set forth under the caption "Risk Factors" and elsewhere
in the Prospectus identify important factors with respect to such forward-
looking statements, including certain risks and uncertainties, that could cause
actual results to differ materially from those in such forward-looking
statements.
 
  Unless otherwise indicated, the information contained in this Prospectus
assumes: (i) the consummation of the transactions described under "Structure
and Formation of the Company" (collectively, the "Formation Transactions")
contemporaneously with the closing of this Offering, (ii) an initial public
offering price of $15.00 per Common Share (representing the midpoint of the
price range), (iii) the purchase by FBR Asset Investment Corporation of
1,792,115 Common Shares at the assumed initial public offering price (net of
underwriting discounts and commissions), and (iv) that the Underwriters' over-
allotment option will not be exercised.
 
  This Prospectus includes statistical industry data regarding Dealerships and
Related Businesses. Unless otherwise indicated, such data is taken or derived
from information published by (i) the Industry Analysis Division of the
National Automobile Dealers Association ("NADA") in its NADA Data 1996 and NADA
Data 1997, and on the "NADANET" web-site located at
"www.nadanet.com/news/nadadata/econfyi.htm," (ii) Crain Communications Inc. in
its Automotive News 100-Year Almanac, 1996 Market Data Book and 1997 Market
Data Book, (iii) ADT Automotive, Inc. in its 1997 Used Car Market Report, (iv)
the Bureau of the Census in the U.S. Department of Commerce in its Statistical
Abstract of the United States 1996 from the National Data Book, or (v) the
Washington Business Journal, thirteenth annual The Book of Lists, 1997-1998.
   
  Unless the context otherwise requires, all references to (i) the "Company" in
this Prospectus include Capital Automotive REIT and its sole subsidiary,
Capital Automotive L.P., a Delaware limited partnership (the "Operating
Partnership"), or either of them, and (ii) the Dealers, the Initial Sellers and
Sellers (as hereafter defined) and the Initial Lessees and Lessees (as defined
hereafter) and the Representative also refer to persons or entities who are
their affiliates ("Affiliates") as defined in Rule 405 of the Securities Act of
1933, as amended (the "Securities Act") where the context requires. See
"Glossary" beginning on page G-1 for the definition of certain other terms used
in this Prospectus.     
 
                                  THE COMPANY
 
  The Company is a newly organized self-administered and self-managed Maryland
REIT formed on October 20, 1997 to invest in the real property and improvements
used by operators ("Dealers") of multi-site, multi-franchised motor vehicle
dealerships ("Dealerships") and motor vehicle related businesses ("Related
Businesses") located in major metropolitan areas throughout the United States.
The Company is the first publicly-offered REIT formed primarily to acquire and
lease back properties for use by Dealers (the initial real estate and
improvements are referred to as the "Initial Properties" or together with any
future real estate and improvements are referred to as the "Properties").
 
  The Company's primary business strategy is to acquire a diversified portfolio
of Properties used by Dealers throughout the United States, including
Properties used by new motor vehicle retail dealerships, used motor vehicle
retail dealerships, motor vehicle auctioneers, and service, repair or parts
businesses. In addition, the Company intends to commit to purchase Properties
under construction, renovation or expansion upon completion
 
                                       1
<PAGE>
 
of such construction, renovation or expansion. The Company believes that its
acquisition strategy will provide sellers with an opportunity (i) to acquire
liquidity, while maintaining ownership and control of the Dealerships or
Related Businesses, (ii) to diversify their investments, (iii) to obtain funds
to expand the operations of their Dealerships or Related Businesses, and (iv)
to facilitate their estate planning. The Company has adopted a policy, which
may be changed by the Board of Trustees without shareholder approval, to limit
the debt to total market capitalization ratio to not more than 50%.
 
  The Company has entered into agreements to acquire 36 Initial Properties on
which 54 franchisees of 24 brands of motor vehicles are located. Twenty of the
Initial Properties are located in the Washington, D.C. Metropolitan Area, which
Initial Properties are operated by four of the top 20 Dealers in the
Washington, D.C. Metropolitan Area, as measured by total new vehicles sold in
1996. Other Initial Properties are located in Colorado, the eastern shore of
Maryland, Nevada, Pennsylvania, Texas and southern Virginia. Dealers located on
the Initial Properties sell domestic and imported luxury, family, economy and
sport utility vehicles, and trucks and vans, including Mercedes-Benz, Honda,
Toyota, Lexus, Chevrolet, Saturn, Ford, GMC, Mazda, Infiniti, Jaguar, Acura,
Lincoln-Mercury, Mitsubishi and Nissan. The Initial Properties will be
purchased from their owners, who are Affiliates of the Dealers (the "Initial
Sellers" or together with any future sellers, the "Sellers") and will be leased
back to the Dealers or their Affiliates (the "Initial Lessees" or together with
any future lessees, the "Lessees"). The Initial Leases will be long-term leases
that require the Initial Lessees to pay all operating costs of the Initial
Properties, as well as all taxes, utilities, insurance, repairs, maintenance
and other expenses (commonly referred to as "triple net" leases).
 
  The Initial Lessees are Affiliates of the Pohanka Automotive Group
("Pohanka"), the Rosenthal Automotive Organization ("Rosenthal"), Sheehy Auto
Stores ("Sheehy"), Cherner Automotive Group ("Cherner"), Cross-Continent Auto
Retailers, Inc. ("Cross-Continent"), Good News Auto Mall ("Good News") and
Kline Automotive Group ("Kline"). Each of the Dealership groups has received
numerous industry awards. See "Business of the Company and Properties."
Collectively, Initial Sellers affiliated with Pohanka, Rosenthal, Sheehy and
Cherner will own 1,204,342; 3,438,298; 295,439; and 103,470 Units in the
Operating Partnership, respectively. Mr. Pohanka and his family have advised
the Representative that they intend to purchase $13 million of registered
Common Shares in this Offering at the initial public offering price. Messrs.
Pohanka and Rosenthal also will have the right to acquire an aggregate of
1,414,158 Units (equal to 4% of the Common Shares to be outstanding on the
closing of the Offering (including exercise of the Underwriters' over-allotment
option) on a fully diluted basis). Messrs. Pohanka and Rosenthal have agreed to
join the Company's Board of Trustees prior to the closing of the Offering.
   
  Thomas D. Eckert, President and Chief Executive Officer, Scott M. Stahr,
Executive Vice President and Chief Operating Officer, Donald L. Keithley,
Executive Vice President of Business Development, and David S. Kay, Vice
President and Chief Financial Officer, the Company's executive officers, have
22; 12; 38; and 10 years of experience, respectively, in the real estate,
financial and motor vehicle industries, although they do not have experience
managing or operating a REIT. Following the Offering, the Company's executive
officers will own or have the right to acquire in the aggregate 106,667 Common
Shares and 2,368,107 Units (equal to 7% of the Common Shares to be outstanding
on the closing of the Offering (including exercise of the Underwriters' over-
allotment in full) on a fully diluted basis) pursuant to options granted under
the Company's 1998 Equity Incentive Plan (the "Plan"). See "Management--1998
Equity Incentive Plan."     
 
  Certain conflicts of interest could exist between the Company and Mr. Pohanka
or Mr. Rosenthal in his capacity as a Trustee of the Company and as Affiliates
of certain Initial Sellers and Initial Lessees. Messrs. Pohanka and Rosenthal
may exert influence over the Company in connection with (i) the terms of the
contribution agreements and leases for Initial Properties or future Properties
to be acquired from any one of them, (ii) the exercise and terms of the right
of first offer and repurchase right of an affiliated Initial Lessee under an
 
                                       2
<PAGE>
 
Initial Lease, (iii) the decision to sell or refinance a Property, (iv) the
terms of any "lock-out" restrictions, that limit the ability of the Company to
sell or refinance particular Properties, and (v) the enforcement of Initial
Leases and agreements with Mr. Pohanka or Mr. Rosenthal or their respective
Affiliates. The Company has adopted certain policies that are designed to
eliminate or minimize certain potential conflicts of interest. See "Conflicts
of Interest Policies."
 
  Assuming (i) conversion of Units to Common Shares upon exercise of redemption
rights (which are redeemable beginning on the first anniversary of the date of
issuance by the holder), (ii) exercise of warrants to acquire Common Shares or
Units to be issued to the Representative or affiliates of the Company, (iii)
exercise of options to acquire Common Shares or Units to be issued to executive
officers of the Company, and (iv) the purchase of $13 million of Common Shares
by Mr. Pohanka and his family in this Offering, Trustees and executive officers
of the Company would collectively own 28.92%, and the Representative and its
Affiliates would collectively own 9.71% of the outstanding Common Shares
(27.20% and 8.77% if the Underwriters' over-allotment option is exercised in
full), subject to the 9.9% limitation on ownership of Common Shares by a
shareholder. See "Principal Shareholders of the Company."
 
  The Company's principal executive offices are located at 1925 North Lynn
Street, Suite 306, Arlington, Virginia 22209. Its telephone number is
(703) 469-1300.
 
                                  RISK FACTORS
 
  An investment in the Common Shares involves various risks. Prospective
shareholders should carefully consider the matters discussed under "Risk
Factors" prior to making an investment decision regarding the Common Shares
offered hereby. These risks include:
 
  . Inability of the Company to close the acquisition of any Initial Property
    or close such acquisition as scheduled, which may adversely affect the
    financial results of the Company and distributions to shareholders;
 
  . Dependence on the ability of Lessees to pay rent and perform their
    obligations under the Leases, which ability may be affected by risks
    inherent in operating Dealerships or Related Businesses, including, but
    not limited to, (i) the ability of Dealers to access financing, (ii)
    competitive factors, including consolidation of ownership, (iii) the
    expansion or contraction of the motor vehicle retail industry,
    (iv) performance of Dealers under their Franchise Agreements with
    Manufacturers, (v) general factors affecting Manufacturers, including
    union and labor issues, product safety issues, health and safety
    regulations, environmental regulations, consumer tastes and preferences,
    recalls and litigation, (vi) governmental regulation, including health,
    safety and environmental regulation, and (vii) general economic factors
    that affect new and used motor vehicle sales and leases;
 
  . Conflicts of interest between the Company and Mr. Pohanka or Mr.
    Rosenthal, who have agreed to join the Board of Trustees prior to the
    closing of this Offering and who are Affiliates of certain Initial
    Sellers and Initial Lessees, and the potential influence of those
    Trustees and their Affiliates over the business and affairs of the
    Company, including, but not limited to, (i) negotiation of the terms of
    the contribution agreements and Initial Leases for the Initial Properties
    to be acquired from any one of them, (ii) operation of the Company's
    ongoing businesses, including conflicts associated with the tax
    consequences to certain Initial Sellers, which, together with certain
    provisions of the Partnership Agreement, may influence the Company's
    decision to sell or finance, or to prepay debt secured by, certain
    Properties, (iii) potential election by the Lessee to exercise its right
    of first offer or option to purchase the Properties at the end of the
    initial Lease term or any renewal term and negotiation of the terms of
    such acquisitions, (iv) the terms of any lock-out restrictions, that
    limit the ability of the Company to sell or refinance particular
    Properties, and (v) the enforcement of the Initial Leases or other
    agreements;
 
  . The lack of operating history of the Company and management's lack of
    experience operating a REIT;
 
                                       3
<PAGE>
 
     
  . Approximately 66% of the net proceeds of the Offering (assuming the
    Underwriters do not exercise their over-allotment option) has not been
    committed to specific investments; the Company may face significant
    competition in acquiring additional Properties, which may inhibit the
    Company's ability to achieve its investment objectives and necessitate
    the investment of the proceeds of this Offering in short-term or
    government securities that could produce a lower yield to the Company
    than could be generated from an investment in real estate. The
    shareholders will not have the opportunity to evaluate such acquisitions
    by the Company;     
 
  . The Company's limited control over the management of the Properties,
    which could affect the maintenance and repair of the Properties;
 
  . The taxation of the Company as a regular corporation if it fails to
    qualify as a REIT and the resulting decrease in funds available to pay
    distributions to shareholders;
 
  . The possibility that the consideration paid by the Company for certain
    Properties acquired by the Company may exceed fair market values
    estimated by other methodologies, such as third party appraisals (such
    consideration has been or will be determined through negotiations with
    the Seller, wherein the Company considers (i) the Property's market value
    based on its analysis of comparable property sales, (ii) the rents and
    terms of the Lease at which the Property will be leased back to the
    Seller, (iii) the potential for appreciation of the value of the Property
    over the Lease term and any renewal term, (iv) the characteristics of the
    Property, including the size, configuration, and zoning, (v) the
    condition of the real estate and improvements, and assessment of its
    useful life, and (vi) alternative uses for the Property);
 
  . Inability to obtain consents required under certain Franchise Agreements
    that impose restrictions relating to the sale or transfer of certain
    assets or Property of certain Dealerships without the consent or waiver
    of Manufacturers, which could result in the Company being unable to
    acquire certain Initial Properties or additional Properties;
 
  . The Company's dependence on key officers and Trustees of the Company,
    including Thomas D. Eckert, President and Chief Executive Officer, Scott
    M. Stahr, Executive Vice President and Chief Operating Officer, Donald L.
    Keithley, Executive Vice President of Business Development, and David S.
    Kay, Vice President and Chief Financial Officer, the loss of whom could
    adversely affect the management of the Company. The executive officers
    will receive substantial compensation from the Company. See "Management--
    Executive Compensation;"
 
  . The distribution requirements for a REIT under federal income tax laws,
    which may limit the Company's ability to finance future acquisitions,
    developments and improvements without additional debt or equity
    financing;
 
  . The geographic concentration of the Initial Properties primarily in
    suburban communities of Washington, D.C., which could render the Company
    vulnerable to local economic conditions and other local factors;
 
  . General risks relating to commercial real estate ownership and
    investment, including, but not limited to (i) the effect of economic and
    other conditions on real estate values, including, those associated with
    cyclical weaknesses in the real estate markets, (ii) the general lack of
    liquidity of investments in real estate, (iii) competition from other
    real estate investors seeking properties of the types which the Company
    intends to acquire or finance, (iv) the inability of Lessees to make rent
    payments, (v) the possibility that the Company may not be able to replace
    existing Lessees, if necessary, or reposition properties for alternative
    uses, (vi) governmental regulation, including, changes in use, zoning,
    health and safety and environmental requirements, (vii) potential for
    unknown or future environmental or other liabilities, and (viii)
    uninsurable losses;
 
  . Limitations on the Company's ability to sell or refinance certain
    Properties, which could adversely effect the financial performance of the
    Company;
 
  . The ability of the Board of Trustees to change the policies of the
    Company, including investment, financing, leverage and distribution
    policies, without a vote of the shareholders;
 
                                       4
<PAGE>
 
 
  . Failure by the Company to invest a significant portion of the proceeds of
    this Offering in Properties within one year of closing of the Offering,
    which could result in the Company investing any unused proceeds in
    certain government securities in order to avoid registering as an
    investment company and becoming subject to the requirements of the
    Investment Company Act of 1940, as amended (the "Investment Company
    Act");
 
  . The potential anti-takeover effects of provisions in the Company's
    Declaration of Trust and Bylaws, including, among other things,
    provisions generally limiting the actual or constructive ownership of
    Common Shares by any one person or entity to 9.9% of the outstanding
    Common Shares, unless the Board of Trustees waives that restriction,
    which could deter the acquisition of control by a third party, thus
    making it more difficult to effect a change in management or limiting the
    opportunity for shareholders to receive a premium over the market price
    for their Common Shares;
 
  . The Company intends to use leverage, generally with a ratio of debt to
    total market capitalization of not more than 50%. This policy may be
    changed by the Board of Trustees without the approval of the
    shareholders. If the Company modifies this strategy to permit a higher
    degree of leverage and incurs additional indebtedness, debt service
    requirements would increase accordingly, and such an increase could
    adversely affect the Company's financial condition and results of
    operations. In addition, increased leverage could increase the risk of
    default by the Company on its debt obligations, with the potential for
    loss of the Properties secured thereby, cash available for distribution,
    and asset values, of the Company;
 
  . The potential fluctuations in market interest rates or equity markets,
    which may lead prospective shareholders to demand higher yields, may
    adversely affect the market price of the Common Shares or may limit the
    Company's ability to raise additional equity to finance future
    acquisitions, developments and improvements;
 
  . The possible reduction of the market price of the Common Shares or
    dilution on a per share basis, due to the potential future sale of
    additional Common Shares or the issuance of Units as consideration for
    the acquisition of Properties; and
 
  . The absence of a prior public market for the Common Shares and the
    possibility that the trading volume of the Common Shares may be limited.
 
                                       5
<PAGE>
 
                 THE INITIAL PROPERTIES, LEASES AND DEALERSHIPS
   
  The Company has entered into agreements to acquire 20 Initial Properties that
are located primarily in suburban communities of the Washington, D.C.
Metropolitan Area. The locations of the additional 16 Initial Properties
include Colorado, the eastern shore of Maryland, Nevada, Pennsylvania, Texas
and southern Virginia. The Company's interest in each Initial Property includes
the land, buildings and improvements, related easements and rights and
fixtures. The Company will not own or lease any personal property, furniture or
equipment at any Initial Property, all of which will be owned or leased from
third parties or by the respective Initial Lessees. The Initial Properties are
generally zoned for a wide range of commercial uses and typically have frontage
on major transportation arteries with high traffic patterns, high visibility,
bright signage, and ease of entrance and exit. The improvements on the Initial
Properties generally consist of one or more retail showrooms, office space
(which may or may not be contained in separate buildings), adjacent full
service and repair facilities, parts and accessories departments, and in many
cases, acreage set aside for used car sales, body shops and parking for
inventory.     
 
  Set forth below is certain information relating to the Initial Properties:
<TABLE>   
<CAPTION>
                                                                     AGGREGATE
                                                                       GROSS
                                                            LAND     LEASEABLE
                                               PURCHASE     AREA      BUILDING
     DEALERSHIPS(1)            LOCATION      PRICE(2)(3)  IN ACRES AREA (SQ. FT.)
     --------------            --------      ------------ -------- --------------
<S>                       <C>                <C>          <C>      <C>
Rosenthal Infiniti,
 Mazda/Nissan...........  Tysons Corner, VA  $ 23,873,587   12.0       84,384
Rosenthal Nissan, Acura,
 Mazda & Isuzu..........  Gaithersburg, MD     11,855,771    8.4       68,898
Rosenthal Honda &
 Jaguar.................  Tysons Corner, VA    11,454,528    7.8       46,836
Rosenthal Chevrolet &
 Jeep/Eagle.............  Arlington, VA         6,779,469    5.2       67,000
Rosenthal Mazda.........  Arlington, VA         5,356,973    2.2       16,176
Rosenthal Storage Lot...  Arlington, VA         4,890,991    4.7       32,349
Rosenthal Body Shop.....  Tysons Corner, VA     1,057,392    0.9       16,000
                                             ------------  -----      -------
   Subtotal.............                     $ 65,268,711   41.2      331,643
                                             ============  =====      =======
Pohanka Acura &
 Chevrolet/GEO(4).......  Chantilly, VA      $  7,651,113    5.1       48,571
Pohanka Saturn/Isuzu
 Oldsmobile & GMC
 Truck(4)...............  Marlow Heights, MD    4,326,150    5.9       38,377
Pohanka Saturn(4).......  Bowie, MD             4,064,550    5.3       22,679
Pohanka Honda(4)........  Marlow Heights, MD    3,700,387    2.3       40,769
Pohanka Lexus(4)........  Chantilly, VA         3,438,343    2.3       15,111
Pohanka Cadillac,
 Hyundai, Nissan &
 Kia(4).................  Fredricksburg, VA     3,432,650    6.2       42,473
Pohanka Undeveloped
 Dealership Lot(4)......  Chantilly, VA         2,459,742    7.1          --
Pohanka Hyundai &
 Subaru(4)..............  Marlow Heights, MD    1,556,465    2.6       15,372
Pohanka Body Shop(4)....  Marlow Heights, MD      694,575    2.7        2,550
                                             ------------  -----      -------
   Subtotal.............                     $ 31,323,975   39.5      225,902
                                             ============  =====      =======
Sheehy Ford & Kia.......  Springfield, VA    $  6,308,000    6.6       51,512
Chapman Ford Sales(5)...  Philadelphia, PA      3,000,000    7.9          --
Sheehy Lincoln-Mercury &
 Mitsubishi.............  Woodbridge, VA        2,565,925    3.1       24,597
Sheehy Ford.............  Marlow Heights, MD    2,132,000    4.6       26,400
                                             ------------  -----      -------
   Subtotal.............                     $ 14,005,925   22.2      102,509
                                             ============  =====      =======
Cherner Lincoln-
 Mercury................  Annandale, VA      $  6,322,909    5.3       43,884
                                             ============  =====      =======
T. West Sales & Service
 (Toyota)...............  Las Vegas, NV      $ 13,205,000    8.8      126,685
Douglas Motors
 (Toyota)...............  Denver, CO            8,905,000    6.5      148,461
Plains Chevrolet........  Amarillo, TX          4,705,000   16.1      121,425
Westgate Chevrolet......  Amarillo, TX          4,405,000    8.0       48,000
Midway Chevrolet........  Amarillo, TX          3,105,000   12.2       43,262
Quality Nissan..........  Amarillo, TX          1,005,000    3.4       16,947
                                             ------------  -----      -------
   Subtotal.............                     $ 35,330,000   55.0      504,780
                                             ============  =====      =======
</TABLE>    
 
                                       6
<PAGE>
 
<TABLE>   
<CAPTION>
                                                                 AGGREGATE
                                                                   GROSS
                                                        LAND     LEASEABLE
                                           PURCHASE     AREA      BUILDING
     DEALERSHIPS(1)          LOCATION    PRICE(2)(3)  IN ACRES AREA (SQ. FT.)
     --------------          --------    ------------ -------- --------------
<S>                       <C>            <C>          <C>      <C>            
Price Buick & Pontiac...  Salisbury, MD  $  1,344,826    3.3        12,500
Good News Body Shop.....  Salisbury, MD     1,268,500    6.2        12,200
Good News Olds-Cadillac-
 GMC Truck..............  Salisbury, MD       830,300    3.5        14,700
Good News Honda.........  Salisbury, MD       586,560    2.4        11,800
Towne Toyota & Mercedes-
 Benz...................  Salisbury, MD       568,500    2.3        12,100
Good News Nissan........  Salisbury, MD       449,400    1.2        17,200
Good News Mazda.........  Salisbury, MD       413,000    1.4        12,400
                                         ------------  -----     ---------
   Subtotal.............                 $  5,461,086   20.3        92,900
                                         ============  =====     =========
Kline Toyota
 Greenbrier/Kline
 Chevrolet..............  Chesapeake, VA $  6,984,755   11.2        71,280
Kline (Land)............  Chesapeake, VA    1,525,245   14.0           --
                                         ------------  -----     ---------
   Subtotal.............                 $  8,510,000   25.2        71,280
                                         ============  =====     =========
   Total                                 $166,222,606  208.7     1,372,898
                                         ============  =====     =========
</TABLE>    
- --------
   
(1) The Company currently intends to close the acquisitions of the Initial
    Properties within 60 days of the date of closing of this Offering, except
    that the acquisition of the Cross-Continent Initial Properties located in
    Las Vegas, Nevada and Denver, Colorado are scheduled to close in July 1998.
        
(2) The purchase prices for the Initial Properties are allocated among the
    initial selling groups as follows:
<TABLE>   
<CAPTION>
                                                  ALLOCATION OF PURCHASE PRICE
                                             ---------------------------------------
                                                            APPROXIMATE
                             TOTAL PURCHASE                   ASSUMED      ESTIMATED
   SELLING GROUP                  PRICE          CASH     MORTGAGE DEBT(A)   UNITS
   -------------             --------------- ------------ ---------------- ---------
   <S>                       <C>             <C>          <C>              <C>
   Pohanka Automotive
    Group..................  $    31,323,975 $        --    $13,258,844    1,204,342
   Rosenthal Automotive
    Organization...........       65,268,711          --     13,694,242    3,438,298
   Sheehy Auto Stores......       14,005,925          --      9,574,333      295,439
   Cherner Automotive
    Group..................        6,322,909          --      4,770,863      103,470
   Cross-Continent Auto
    Retailers, Inc. .......       35,330,000   35,330,000           --           --
   Good News Auto Mall.....        5,461,086    5,461,086           --           --
   Kline Automotive Group..        8,510,000    8,510,000           --           --
                             --------------- ------------   -----------    ---------
      Totals...............  $   166,222,606 $ 49,301,086   $41,298,282    5,041,549
                             =============== ============   ===========    =========
</TABLE>    
- --------
   
    (a) Based on mortgage debt outstanding as of December 31, 1997.     
   
(3) Includes an aggregate of approximately $1.4 million attributable to
    estimated acquisition fees and expenses (including transfer taxes,
    recordation taxes and title insurance but excludes $1.5 million
    attributable to estimated consulting and attorneys' fees). The Initial
    Sellers who are Affiliates of Pohanka, Rosenthal, Sheehy or Cherner may
    elect to receive the portion of the purchase price relative to acquisition
    fees or expenses either in cash or in Units.     
   
(4) The Company expects to enter into a line of credit with NationsBank, N.A.
    in the amount of $10 million and to borrow $5 million at closing of this
    Offering. The line of credit will be secured by a blanket mortgage or
    mortgages (the "Pohanka Mortgage") on all of the Initial Properties to be
    acquired from Affiliates of Mr. Pohanka (collectively, the "Pohanka
    Properties"). The Pohanka Mortgages will accrue interest payable monthly in
    arrears at a floating interest rate equal to 90 day Libor + 1.50%. The line
    of credit (and the mortgages) will mature in August 1998. At maturity, a
    balloon principal payment of the then outstanding borrowings plus any
    accrued and unpaid interest will be due and payable, unless the line of
    credit is renewed or is refinanced as is currently contemplated by the
    Company. The line of credit and Pohanka Mortgage may be paid in full at any
    time without prepayment penalty and premium. In addition, approximately
    $2.5 million of the line of credit will be guaranteed by Affiliates of Mr.
    Sheehy and approximately $2.5 million will be guaranteed by Affiliates of
    Mr. Rosenthal.     
   
(5) The Company will acquire the land but not the improvements occupying the
    land of Chapman Ford Sales.     
   
  Concurrently with the Company's acquisition of the Initial Properties, the
Company will lease them back to the Initial Lessees pursuant to the Initial
Leases. The Company expects that the Initial Leases will generally have initial
terms ranging from eight to 11 years (the "Fixed Term") and may be extended for
two additional ten year terms (the "Extended Term") at the option of the
respective Initial Lessees. The Initial Leases will require the Initial Lessees
to pay substantially all expenses associated with the operation of the Initial
Properties, such as real estate taxes and other governmental charges,
insurance, utilities, service and maintenance and, therefore, will be on a
"triple-net" basis. The Initial Leases also require the Initial Lessees to
undertake and pay for any additions, repairs, renovations and improvements to
the Initial Properties after receiving the consent of the Company, unless the
Company decides, at its option, to pay for such expenditures, which would be on
terms to be negotiated. Upon expiration or termination of the Initial Leases,
the Initial Leases generally provide that additions, repairs, renovations and
improvements will become the Property of the Company. Each Initial Lease will
require the Initial Lessee to operate the Initial Property only for the same
purpose for which it was used on the Company's purchase date, unless the
Company consents to a different use.     
  The annual rent for the first year (the "Initial Annual Base Rent") under
each Initial Lease has been negotiated by the Company to produce an appropriate
yield to the Company (based on the Company's determination of the appropriate
return on the Company's investment considering (i) the purchase price for the
Property, (ii) the credit worthiness of the Lessee, (iii)
 
                                       7
<PAGE>
 
   
the rental rates for similarly situated properties in the geographic location
in which the Property is situated, (iv) the characteristics of the Property,
(v) the cost to the Company of the funds used to acquire the Property, and (vi)
the return that the Company could realize from alternative investments) on that
Initial Property's purchase price (including acquisition fees and expenses).
The yield to the Company from an investment in Properties will differ from the
yield to shareholders from an investment in the Common Shares. The Initial
Annual Base Rent and the adjusted annual base rent for each year thereafter
(the "Annual Base Rent") will be adjusted upward periodically based on a factor
of the CPI. The CPI adjustments range from one-half of CPI adjusted every other
year to full CPI adjusted every year. Certain Initial Leases establish minimum
and maximum periodic adjustments, that range from zero to 3% of base annual
rent. The Company will have general recourse to the Initial Lessees, but the
Initial Lessees' payment obligations under the Initial Leases will be
unsecured.     
 
                                      7-1
<PAGE>
 
 
  Set forth below is certain information relating to the Initial Lessees:
<TABLE>   
<CAPTION>
                                                            INITIAL ANNUAL   LEASE     FIXED
      LESSEE (DEALERSHIPS)(1)(2)              LOCATION        BASE RENT    EXPIRATION   TERM   EXTENDED TERM(3)
      --------------------------         ------------------ -------------- ---------- -------- -----------------
<S>                                      <C>                <C>            <C>        <C>      <C>
Geneva Enterprises, Inc.
 d/b/a Rosenthal Nissan/Mazda(4).......  Tysons Corner, VA  $    2,506,727 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Mazda.......................  Arlington, VA             621,408 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Chevrolet/Jeep/Eagle
 (Storage Lot).........................  Arlington, VA             562,464 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Honda(4)....................  Tysons Corner, VA         511,866 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Jaguar(4)...................  Tysons Corner, VA         511,854 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Geneva
 Management (Related Business).........  Arlington, VA             453,600 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Isuzu.......................  Gaithersburg, MD          451,418 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc.
 d/b/a Nissan Gaithersburg.............  Gaithersburg, MD          350,214 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Acura.......................  Gaithersburg, MD          330,111 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc.
 d/b/a Rosenthal Chevrolet/Jeep/Eagle..  Arlington, VA             312,476 Feb. 2008  10 years 2-10 year options
Maryland Imported Cars, Inc.
 d/b/a Gaithersburg Mazda(5)...........  Gaithersburg, MD          261,308 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Honda (2-acre lot)(4).......  Tysons Corner, VA         178,997 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Honda (Body Shop)(4)........  Tysons Corner, VA         126,887 Feb. 2008  10 years 2-10 year options
                                                            --------------
   Subtotal............................                     $    7,179,330
                                                            ==============
Pohanka Properties, Inc. (Chevrolet/GEO
 and Acura)(6).........................  Chantilly, VA      $      841,622 Feb. 2009  11 years 2-10 year options
Pohanka Properties, Inc.
 (Saturn, Isuzu, Oldsmobile & GMC
 Truck)(6) ............................  Marlow Heights, MD        475,877 Feb. 2009  11 years 2-10 year options
Pohanka Virginia Properties Partnership
 (Saturn)(6)...........................  Bowie, MD                 447,101 Feb. 2008  10 years 2-10 year options
Pohanka Properties, Inc. (Honda)(6) ...  Marlow Heights, MD        407,043 Feb. 2009  11 years 2-10 year options
Pohanka Properties, Inc. (Lexus)(6)....  Chantilly, VA             378,218 Feb. 2009  11 years 2-10 year options
Pohanka Virginia Properties Partnership
 (Cadillac, Hyundai, Nissan, Oldsmobile
 & Kia)(6).............................  Fredricksburg, VA         377,592 Feb. 2008  10 years 2-10 year options
Pohanka Virginia Properties Partnership
 (Undeveloped Dealership Lot)(6).......  Chantilly, VA             270,658 Feb. 2008  10 years 2-10 year options
Pohanka Properties, Inc. (Hyundai &
 Subaru)(6)............................  Marlow Heights, MD        171,211 Feb. 2009  11 years 2-10 year options
Pohanka Properties, Inc. (Body
 Shop)(6)..............................  Marlow Heights, MD         76,403 Feb. 2009  11 years 2-10 year options
                                                            --------------
   Subtotal............................                     $    3,445,725
                                                            ==============
Sheehy Ford of Springfield, Inc. (Ford
 & Kia)................................  Springfield, VA    $      662,340 Feb. 2008  10 years 2-10 year options
Sheehy Ford, Inc.(7)...................  Philadelphia, PA          330,000 Oct. 2007   9 years 2-10 year options
Sheehy Lincoln-Mercury, Inc. (Lincoln-
 Mercury & Mitsubishi).................  Woodbridge, VA            282,252 Feb. 2008  10 years 2-10 year options
Sheehy Ford, Inc.......................  Marlow Heights, MD        255,840 Feb. 2008  10 years 2-10 year options
                                                            --------------
   Subtotal............................                     $    1,530,432
                                                            ==============
Cherner Lincoln Mercury-Annandale,
 Inc...................................  Annandale, VA      $      695,520 Feb. 2008  10 years 2-10 year options
                                                            ==============
</TABLE>    
 
                                       8
<PAGE>
 
<TABLE>
<CAPTION>
                                           INITIAL
         LESSEE                          ANNUAL BASE   LEASE     FIXED
  (DEALERSHIPS)(1)(2)        LOCATION       RENT     EXPIRATION   TERM     EXTENDED TERM(3)
  -------------------     -------------- ----------- ---------- -------- ---------------------
<S>                       <C>            <C>         <C>        <C>      <C>
T. West Sales & Service,
 Inc. (Toyota) (8)......  Las Vegas, NV  $ 1,452,000 Feb. 2008  10 years     2-10 year options
Douglas Motors, Inc.
 (Toyota)(8)............  Denver, CO         979,000 Feb. 2008  10 years     2-10 year options
Plains Chevrolet,
 Inc.(8)................  Amarillo, TX       517,000 Feb. 2008  10 years     2-10 year options
Westgate Chevrolet,
 Inc.(8)................  Amarillo, TX       484,000 Feb. 2008  10 years     2-10 year options
Midway Chevrolet,
 Inc.(8)................  Amarillo, TX       341,000 Feb. 2008  10 years     2-10 year options
Quality Nissan,
 Inc.(8)................  Amarillo, TX       110,000 Feb. 2008  10 years     2-10 year options
                                         -----------
   Subtotal.............                 $ 3,883,000
                                         ===========
Good News Salisbury,
 Inc.(9)................  Salisbury, MD  $   469,920 Feb. 2008  10 years     2-10 year options
Price Buick-Pontiac,
 Inc., and The Price
 Organization(10)(11)...  Salisbury, MD      154,080 Dec. 2006   8 years                   N/A
                                         -----------
   Subtotal.............                 $   624,000
                                         ===========
Kline Chevrolet Sales
 Corp.(12)..............  Chesapeake, VA $   960,000 Feb. 2008  10 years 3-10 year options(13)
                                         ===========
    Total..............................  $18,318,007
                                         ===========
</TABLE>
- --------
(1) See the historical financial statements for Geneva Enterprises, Inc. and an
    affiliated company and summary financial information of Cross-Continent.
(2) The Company believes that all the Initial Properties are adequately covered
    by insurance.
(3) If any Initial Lease is renewed for a second Extended Term, the Annual Base
    Rent will be renegotiated at the time of renewal by the parties to reflect
    the fair market rate at the renewal date.
(4) The Initial Lessees may assign these Initial Leases (subject to compliance
    with certain conditions to the satisfaction of the Company), to a limited
    liability company to be formed by Mr. Rosenthal or his Affiliates as
    members.
(5) Guaranteed by Geneva Enterprises, Inc.
   
(6) Each Initial Lease with an Affiliate of Pohanka Automotive Group will be
    guaranteed by each other Initial Lessee and Dealership affiliated with the
    Pohanka Automotive Group.     
(7) The occupant is Chapman Ford Sales, which is an unrelated third party.
(8) Guaranteed by Cross-Continent.
(9) Master Lease covering all Initial Properties acquired from Affiliates of
    Good News Automotive, Inc. other than Price Buick-Pontiac.
   
(10) The occupant is Price Buick Pontiac, which is an unrelated third party.
     The Company is assuming an existing Lease among Price Buick-Pontiac, Inc.
     and The Price Organization (Lessees) and Meyers and Rose (Lessor) dated
     December 10, 1991 and terminating December 31, 2006.     
(11) Guaranteed by Warren A. Price and Good News Salisbury, Inc.
(12) Guaranteed by Kline Imports Chesapeake, Inc. The Property is occupied by
     both Kline Chevrolet and Kline Toyota (sublease to Kline Chesapeake).
(13) If the Company is required by the Initial Lessee to pay for repairs to
     such Initial Property in an amount in excess of $50,000 during the 29th
     lease year, the Initial Lessee will be required to extend such Initial
     Lease for a third 10-year term at a rental rate equal to fair market
     value.
 
   In addition to selling new vehicles, many Dealers lease new vehicles and
sell used vehicles. Lease arrangements typically provide Dealers with a source
of late-model, off-lease vehicles for its used vehicle inventory. Dealers also
provide service and parts primarily for the vehicle makes and models that they
sell or lease, and perform both warranty and non-warranty service work. In
general, parts departments support the sales and service divisions. Dealers may
also sell factory-approved parts at retail to their customers or at wholesale
to independent repair shops. Dealers arrange third party financing for their
customers, sell vehicle service contracts and arrange selected types of credit
insurance for which they receive financing fees, subject to a charge-back
against a portion of the finance fees if contracts are terminated prior to
their scheduled maturity.
 
                                       9
<PAGE>

                                    STRATEGY
 
  The Company's primary objective is to become an owner and lessor of
Properties used by Dealers throughout the United States for the primary purpose
of generating rental income in order to provide the Company with predictable
streams of cash flow to maximize shareholder value. To achieve these
objectives, the Company plans to:
 
  . Implement an aggressive, yet disciplined, acquisition program by
    purchasing Properties used by Dealers of multi-site, multi-franchised
    Dealerships or Related Businesses that have demonstrated historic growth,
    are well managed, and have been maintained in good condition, and whose
    location and characteristics will be suitable for alternative use by:
 
    . Diversifying geographically by acquiring Properties located primarily
      in major consolidated metropolitan statistical areas ("CMSAs") in
      order to minimize the potential adverse impact of economic downturns
      in certain markets;
 
    . Leveraging the contacts and experience of the Company's management to
      develop relationships with Dealers;
 
    . Maintaining long-term working relationships with Dealers, by providing
      capital for multiple acquisitions of Properties on a market-by-market
      basis; and
 
    . Taking advantage of opportunities created by the fragmented ownership
      of Dealerships and Related Businesses, and the large number of
      suitable locations with adequate roadway frontage, high visibility and
      appropriate zoning.
 
  . Use the Company's UPREIT structure to acquire Properties in exchange for
    cash or Units, or a combination of cash and Units, thereby deferring some
    or all of a Seller's potential taxable gain, and enhancing the ability of
    the Company to consummate transactions and to structure more competitive
    acquisitions than other real estate companies in the market that may lack
    the Company's access to capital and the ability to acquire Properties for
    Units.
 
  . Use several valuation mechanisms, including calculations of discounted
    cash flow, evaluations of comparable sales and leases of properties,
    analysis of the alternative uses of the Properties, and evaluation of the
    Dealers' financial strength, to determine the purchase price and lease
    terms for the Properties.
 
  . Lease back the Properties to Lessees on a triple-net basis, thereby
    eliminating brokerage, re-leasing and similar costs and the risk of high
    Lessee turnover due to the generally historic long-term operation of
    Dealerships or Related Businesses at Property locations.
 
  . Negotiate Lease covenants designed to minimize the likelihood of loss to
    the Company, by permitting the Company to establish the ability of
    affiliated Lessees (together with any guarantors) to pay rent by bi-
    annually monitoring compliance with a rent coverage ratio ("Rent Coverage
    Ratio") of 1.5 to 1 or require the Lessee to provide additional security
    in the form of a guarantee of an Affiliate.
 
  . Utilize a variety of other financing sources, that may include the
    issuance of Units or other equity securities or debt securities, or a
    combination thereof, and enter into a bank credit facility, that will be
    used to leverage Properties, acquire additional Properties and for
    working capital purposes as a means to gain positive spread on
    investment. The Company's policy is to operate with a debt to total
    market capitalization ratio of not more than 50%, which policy may be
    changed from time to time by the Board of Trustees.
 
                                       10
<PAGE>
 
                     SUMMARY SELECTED FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  The following table sets forth summary selected historical and pro forma
financial information for the Company. The unaudited pro forma operating
information is presented as if the Formation Transactions had occurred as of
the beginning of the period indicated and therefore incorporates certain
assumptions that are included in the Company's Unaudited Pro Forma Financial
Statements. The unaudited pro forma balance sheet information is presented as
if the Formation Transactions had occurred on October 20, 1997. The unaudited
pro forma information does not purport to represent what the Company's
financial position or results of operations actually would have been had the
Formation Transactions, in fact, occurred on such date or at the beginning of
the period indicated, or to project the Company's financial position or results
of operations at any future date or for any future period. The historical and
unaudited pro forma financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
 
<TABLE>   
<CAPTION>
                                                 PRO FORMA FOR THE
                                                    PERIOD FROM     PRO FORMA
                                                  JANUARY 1, 1997   YEAR ENDED
                                                      THROUGH      DECEMBER 31,
                                                 OCTOBER 20, 1997      1996
                                                 ----------------- ------------
                                                          (UNAUDITED)
<S>                                              <C>               <C>
STATEMENT OF OPERATIONS DATA:
Rental income(1)................................      $13,901        $15,887
General and administrative expenses(2)..........        3,063          3,500
Depreciation(3).................................        2,207          2,522
Minority interest(4)............................        1,545          1,765
Interest expense................................          411            470
Net earnings to Common Shareholders.............        6,675          7,630
Net earnings per Common Share...................         0.86           0.99
Weighted average Common Shares outstanding(5)...        7,718          7,718
<CAPTION>
                                                     PRO FORMA      HISTORICAL
                                                    OCTOBER 20,    OCTOBER 20,
                                                       1997            1997
                                                 ----------------- ------------
                                                    (UNAUDITED)
<S>                                              <C>               <C>
BALANCE SHEET DATA:
Real estate owned, at cost......................     $166,223        $   --
Total assets....................................      384,298            --
Debt outstanding under line of credit...........        5,000            --
Minority interest...............................       71,014            --
Total shareholders' equity......................      306,960            --
</TABLE>    
- --------
   
(1) Represents rental income from the Initial Lessees recorded in accordance
    with the terms of the Initial Leases as if all Initial Properties had been
    subject to the Initial Leases for the entire period. Excludes rental income
    of approximately $2.4 million and $2.1 million for the year ended December
    31, 1996 and the period ended October 20, 1997, respectively, for two of
    the Initial Properties as these Initial Properties are currently being
    developed for use.     
(2) Represents management's estimates of general and administrative expenses.
(3) Represents depreciation of the building and improvements as allocated from
    the purchase prices of the Initial Properties over a 20-year period.
(4) Represents approximately 18.8% of the Operating Partnership's net earnings.
   
(5) Represents the number of Common Shares whose proceeds will be used to repay
    mortgage debt assumed and to acquire the Initial Properties. If the total
    number of Common Shares issued in the Offering and the FBR Offering had
    been used, weighted average Common Shares outstanding would be 21,792 for
    both the year ended December 31, 1996 and for the period ended October 20,
    1997, resulting in net earnings per Common Share of $0.35 and $0.31 for the
    year ended December 31, 1996 and the period ended October 20, 1997,
    respectively.     
       
                                       11
<PAGE>
 
                          BENEFITS TO RELATED PARTIES
 
  The following table sets forth the benefits of the Formation Transactions to
the executive officers and trustees of the Company:
 
<TABLE>
<CAPTION>
PERSON RECEIVING BENEFIT                NATURE AND AMOUNT OF BENEFIT
- ------------------------                ----------------------------
<S>                       <C>
John J. Pohanka and
Robert M. Rosenthal.....  1,204,342 Units and 3,438,298 Units, respectively, in
                          connection with the sale of the Initial Properties, and
                          the repayment of approximately $13.3 million and $13.7
                          million in principal amount of debt, respectively. The
                          receipt of Units will permit the deferral of taxes on
                          the sale of such Initial Properties. In addition, the
                          Company will be prevented from selling, financing or
                          repaying debt secured by certain Initial Properties. See
                          "Structure and Formation of the Company--Lock-out
                          Provisions."

                          Affiliates of Messrs. Pohanka and Rosenthal will lease
                          such Initial Properties from the Company and will
                          continue to control the operations of the Dealership or
                          Related Business operated on those Initial Properties.
                          Each of Messrs. Pohanka and Rosenthal will receive
                          warrants to acquire Units equal to 2% of the outstanding
                          Common Shares following the Offering (including exercise
                          of the Underwriters' over-allotment option in full) on a
                          fully diluted basis at the initial public offering
                          price.

                          Beginning one year after the closing of the Offering,
                          the right to convert the Units held by them for Common
                          Shares, subject to the Ownership Limitation.

                          Purchase by Mr. Pohanka and his family of up to $13
                          million of Common Shares in this Offering at the initial
                          public offering price, of which a portion may be
                          purchased net of underwriting discounts and commissions
                          because executive officers and Trustees may acquire in
                          the aggregate up to 2% of the offered Common Shares at
                          the initial public offering price (net of underwriting
                          discounts and commissions).

Executive Officers......  Salary and bonus as executive officers of the Company
                          as described under "Management--Executive
                          Compensation." Options to acquire Common Shares and
                          Units equal to 3% (Thomas D. Eckert), 1.625% (Scott
                          M. Stahr), .75% (Donald L. Keithley) and 1.625%
                          (David S. Kay) of the outstanding Common Shares
                          following the Offering (including exercise of the
                          Underwriters' over-allotment option in full) on a
                          fully diluted basis at the initial public offering
                          price.

                          The executive officers and Trustees may acquire in
                          the aggregate up to 2% of the Common Shares in this
                          Offering at the initial public offering price (net of
                          underwriting discounts and commissions). The
                          executive officers have advised the Representative
                          that they currently intend to purchase an aggregate
                          of approximately 122,000 Common Shares in this
                          Offering.
</TABLE>
 
                                       12
<PAGE>

 
  In addition to the foregoing, the Representative of the Underwriters and its
Affiliates will receive certain benefits in connection with the Offering in
addition to its compensation as an underwriter (see "Underwriting") as set
forth below:
 
<TABLE>   
<CAPTION>
PERSON RECEIVING BENEFIT                NATURE AND AMOUNT OF BENEFIT
- ------------------------                ----------------------------
<S>                       <C>
Friedman, Billings,
 Ramsey Group, Inc......  Repayment of the loan made to the Company in the
                          amount of up to approximately $2.5 million, plus
                          interest thereon at the rate of 10% per annum.

FBR Asset Investment     
 Corporation............  Purchase of 1,792,115 Common Shares at the initial
                          public offering price (net of underwriting discounts
                          and commissions). Such purchaser will have certain
                          "demand" and "piggy-back" registration rights with
                          respect to such Common Shares. See "Common Shares
                          Eligible for Future Sale--Registration Rights."
</TABLE>    
 
                                       13
<PAGE>

                            STRUCTURE OF THE COMPANY
 
  The Company will be the sole general partner of the Operating Partnership.
The Company will contribute the proceeds of the Offering to the Operating
Partnership in exchange for Units representing approximately 81.2% of the
partnership interests in the Operating Partnership (the terms and conditions of
which will correspond to the Common Shares). The Company will conduct
substantially all of its business, and will hold all of its interests in the
Properties, through the Operating Partnership. As the sole general partner of
the Operating Partnership, the Company will have the exclusive power to manage
and conduct the business of the Operating Partnership, subject to certain
exceptions set forth in the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (the "Partnership Agreement"). See
"Partnership Agreement."
 
  The following diagram depicts the ownership structure of the Company and the
Operating Partnership upon completion of the Offering and the Formation
Transactions:
 
                           [FLOWCHART APPEARS HERE]
 
 
                                       14
<PAGE>
 
                             FORMATION TRANSACTIONS
 
  The following transactions will be completed in connection with the
completion of the Offering:
 
  . Concurrently with the closing of the Offering, FBR Asset Investment
    Corporation, an Affiliate of the Representative, will acquire 1,792,115
    Common Shares in a private placement at the initial public offering price
    (net of underwriting discounts and commissions) (the "FBR Offering").
 
  . Concurrently with the closing of the Offering, the Company will
    contribute the net proceeds of the Offering and the FBR Offering to the
    Operating Partnership in exchange for 21,792,115 Units.
     
  . At closings scheduled within 60 days of the closing of the Offering, the
    Company will acquire certain Initial Properties from Cross-Continent,
    Good News and Kline in exchange for cash consideration of $13.1 million,
    $5.5 million and $8.5 million, respectively.     
 
  . At closings scheduled within 60 days of the closing of the Offering, the
    Company will acquire Initial Properties from Pohanka, Rosenthal, Sheehy
    and Cherner in exchange for 1,204,342; 3,438,298; 295,439; and 103,470
    Units of the Operating Partnership, respectively. The Operating
    Partnership will acquire certain Initial Properties subject to existing
    mortgage debt of $41.3 million (the "Mortgage Debt"). The Company will
    pay Mortgage Debt of approximately $13.3 million, $13.7 million, $9.6
    million and $4.8 million assumed from Pohanka, Rosenthal, Sheehy and
    Cherner, respectively, in full at the closing of the purchase of such
    Initial Properties. See "Use of Proceeds" and "Business of the Company
    and Properties--The Initial Leases, Properties and Dealerships" for a
    description of the consideration to be paid and Mortgage Debt to be
    assumed by the Company with respect to the Initial Sellers.
     
  . At closings scheduled for July 1998, the Company will acquire certain
    Initial Properties from Cross-Continent for cash consideration of
    approximately $22.1 million.     
 
  . The Operating Partnership will use the aggregate net proceeds of the
    Offering and the FBR Offering of $302.4 million ($344.2 million if the
    Underwriters' over-allotment option is exercised in full) as described in
    "Use of Proceeds."
 
  . Dealers or their Affiliates will enter into long-term triple-net Leases
    with the Company with respect to the Initial Properties.
 
  . Each of Messrs. Pohanka and Rosenthal, who will be Trustees of the
    Company and Affiliates of certain Initial Sellers and Initial Lessees,
    will receive warrants representing the right to acquire up to 707,079
    Units (equal to 2% of the Common Shares to be outstanding on the closing
    of the Offering (including exercise of the Underwriters' over-allotment
    option) on a fully diluted basis), at an exercise price equal to the
    initial public offering price of the Common Shares, such warrants to be
    exercisable beginning on the closing of the Offering and for a period of
    five years thereafter (the "Dealer Warrants").
 
  . The Company will obtain a $10 million line of credit from NationsBank,
    N.A., and will borrow approximately $5 million at the closing of the
    Offering (approximately $2.5 million of which will be guaranteed by
    Affiliates of Mr. Rosenthal and approximately $2.5 million of which will
    be guaranteed by Affiliates of Mr. Sheehy).
 
                                       15
<PAGE>
 
 
                                 DISTRIBUTIONS
 
  The Company plans to pay regular quarterly distributions to its shareholders
of at least 95% of its taxable income (as defined in Section 857(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")) each year so as to
qualify for the benefits accorded to a REIT under the Code. The Board of
Directors may vary the dividend which will be distributed to holders of the
Common Shares based upon the actual results of operations of the Company,
including (i) the timing of the investment of the proceeds of the Offering and
the FBR Offering, (ii) the rent received from the Lessees, (iii) the ability of
the Lessees of the Properties to meet their obligations under the Leases, and
(iv) the operating expenses of the Company. See "Description of Shares of
Beneficial Interest" and "Partnership Agreement."
 
                           TAX STATUS OF THE COMPANY
 
  The Company will elect to be taxed as a REIT under Sections 856-859 of the
Code, commencing with its taxable year ending December 31, 1998. A REIT is
subject to a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its REIT taxable
income each year, determined without regard to the deduction for dividends paid
and by excluding any net capital gains. If the Company qualifies for taxation
as a REIT, the Company generally will not be subject to federal income tax at
the corporate level on income it distributes currently to its shareholders. If
the Company fails to qualify as a REIT for federal income tax purposes in any
taxable year, the Company will be subject to federal income tax (including any
alternative minimum tax) on its taxable income at regular corporate rates and
distributions to the shareholders in any such year will not be deductible by
the Company. See "Risk Factors--Adverse Consequences of Failure to Qualify as a
REIT; Other Tax Liabilities" and "Certain Federal Income Tax Considerations--
Failure to Qualify" for a more detailed discussion of the consequences of the
failure of the Company to qualify as a REIT for federal income tax purposes.
The Company may be subject to certain federal, state and local taxes on its
income and property notwithstanding its qualification for federal income
taxation as a REIT.
 
                                       16
<PAGE>
 
 
                                  THE OFFERING
 
Common Shares Offered
Hereby......................  20,000,000
 
Common Shares to be
 Outstanding after the        
 Offering...................  21,792,115(1)
     
Use of Proceeds.............  Approximately $49.3 million for the acquisition
                              of certain Initial Properties, $41.3 million for
                              repayment of Mortgage Debt, $2.5 million for
                              repayment of the FBR Loan, and the balance of
                              $209.2 million for the acquisition of additional
                              Properties and general working capital purposes.
                              See "Use of Proceeds."     
 
Proposed Nasdaq Symbol......  CARS
- --------
   
(1) Includes the Common Shares being offered hereby and the Common Shares to be
    acquired by FBR Asset Investment Corporation. Excludes 5,041,549 Common
    Shares reserved for issuance upon redemption of the Units issuable in
    connection with the acquisition of certain Initial Properties; 2,555,587
    Common Shares and Units reserved for issuance pursuant to the Plan, of
    which options to purchase 106,667 Common Shares and 2,129,472 Units have
    been granted to executive officers of the Company; 1,277,794 Common Shares
    issuable upon exercise of the Underwriting Warrants and 1,277,794 Common
    Shares issuable upon conversion of 1,277,794 Units issuable upon exercise
    of the Dealer Warrants. See "Structure and Formation Transactions,"
    "Management--1998 Equity Incentive Plan," "Related Transactions" and
    "Partnership Agreement."     
 
                                       17
<PAGE>
 
                                 RISK FACTORS
 
  In addition to the other information presented in this Prospectus,
prospective shareholders should carefully consider the following material
risks before purchasing Common Shares in the Offering. Each of these factors
could adversely affect the ability of the Company to make expected
distributions to shareholders.
 
  This Prospectus contains "forward-looking statements" which represent the
Company's expectations or beliefs, including, but not limited to, statements
concerning industry performance, the acquisitions, financing or leasing of
Properties, the Company's operations, performance, financial condition, plans,
strategies, growth and prospects. Any statements contained in this Prospectus
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, the use of
forward-looking terminology such as "may," "will," "could," "should,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof or
other variations thereon or comparable terminology. The cautionary statements
set forth under the caption "Risk Factors" and elsewhere in the Prospectus
identify important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
differ materially from those in such forward-looking statements. These
statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the Company's control, and actual results may
differ materially depending on a variety of important factors, including those
described below in this "Risk Factors" section and elsewhere in this
Prospectus.
 
INABILITY OF THE COMPANY TO CLOSE THE ACQUISITION OF PROPERTY OR CLOSE SUCH
ACQUISITION AS SCHEDULED
   
  The contribution agreements for the Initial Properties contain, and the
contribution agreements for the acquisition of future Properties will contain,
closing conditions typically required in connection with the acquisition of
commercial real estate. Those closing conditions include the receipt of a
survey, title insurance commitment and phase I environmental audit acceptable
to the Company. Information that may come to the attention of the Company
could disclose easements, title restrictions, other claims to title, zoning
irregularities, restrictive covenants, encumbrances or environmental
conditions that may otherwise cause the Company to conclude that the
acquisition of that Property is not in the best interests of the Company. In
such case, the Company could refuse to purchase such Property, or enter into
negotiations to resolve the relevant conditions, which could prevent, delay,
or result in a change of the terms of, the acquisition. In such event, it
could take the Company a longer time to invest the proceeds of this Offering
in Properties or adversely affect the timing of the investment of proceeds of
this Offering, which could have an adverse effect on the financial results of
the Company and distributions to shareholders.     
 
THE COMPANY IS DEPENDENT UPON DEALERS GENERATING SUFFICIENT REVENUES FROM
THEIR OPERATIONS TO PERMIT THE LESSEES TO PAY RENT AND FULFILL THEIR OTHER
OBLIGATIONS UNDER THE LEASES
 
  The Company will be dependent upon the payment of rent and the performance
of other Lease obligations, such as maintenance of the Properties, payment of
taxes, utilities and other charges and maintenance of insurance, by the
Lessees under the Leases. If the Lessees default in the payment of rent or
performance of other obligations, the Company could be required to declare a
default under the Lease and pursue its legal and equitable remedies, including
the eviction of the Lessee. If the Lease has been guaranteed, the Company
could attempt to collect under such guaranty. There is no assurance that any
Lessee will continue to pay rent or perform under a Lease or that the Company
can recover under a guaranty. In addition, if a Lessee or guarantor sought
protection under the bankruptcy laws, the Lease could be rejected and the
Company's ability to collect rent or pursue its legal or equitable remedies
(such as specific performance of a Lease term) could be adversely affected.
Furthermore, even if the Company was successful after undertaking any action,
it could incur substantial legal fees and the costs of leasing the Property to
a replacement Lessee. There is no assurance that the Company will be able to
relet a Property, relet the Property to a Dealer for use as a Dealership or
Related Business, or relet the Property on substantially equivalent or better
terms than the prior Lease, in which event the financial results and
operations of the Company could be materially adversely affected. These risks
are discussed below:
 
  Dependence on Lessees for Payment of Rent and Performance of Lease
Terms. The Lessees of the Properties will either be the Dealers or Affiliates
of those Dealers. None of the Initial Leases with affiliated
 
                                      18
<PAGE>
 
Dealers is cross-defaulted with each other. A Lessee may or may not generate
sufficient cash flow to be able to perform its obligations under its Lease.
Any Lessee may change or terminate its business, or engage other management to
operate a Property. See "Business of the Company and Properties--General
Initial Lease Terms--Financial Covenants." Nonperformance by the Lessees or
Affiliates who guaranty (the "Guaranties") the payment of rent and performance
of other obligations of the Lessees (the "Guarantors") could adversely affect
the ability of the Company to pay or maintain distributions or otherwise
operate its business. The failure of a Lessee to perform under a Lease could
require the Company to declare a default, evict the Lessee, repossess the
Property, find another tenant for the Property or resell the Property.
 
  Dependence on Guarantors for Payment of Rent and Performance of Lease Terms
Upon Default of Lessee. The Company will enter into separate Initial Leases
with each Dealer using an Initial Property. Certain Initial Leases will be
guaranteed by Affiliates of the Initial Lessees. The Guaranties will be of
payment and not of collection. There is no assurance that upon a default any
or all of the Guarantors will perform under a Guaranty. In the event of a
default under a Guaranty, the Company's remedy will be limited to seeking
payment from such Guarantor. Failure of a Guarantor to perform under a
Guaranty will not constitute a default under the Initial Lease pursuant to
which a Guarantor is an Initial Lessee. Because Messrs. Pohanka and Rosenthal
are Trustees of the Company, the Company's decision whether or not to pursue
payment from certain Guarantors could be influenced by Mr. Pohanka or Mr.
Rosenthal in his capacity as a Trustee. See "Risk Factors--Conflicts of
Interest."
 
  The Company Has No Rights Under, or Control Over, Franchise Agreements. In
general, a Manufacturer enters into a Franchise Agreement directly with the
Dealer, who may or may not be the Lessee of the Property. Upon expiration or
termination of a Lease, for default or otherwise, the Company will have no
rights under the relevant Franchise Agreements with the Manufacturer. Any
rights under the Franchise Agreements will accrue to the signatories to those
agreements. In addition, upon termination or non-renewal of any Franchise
Agreement, the Company will not have any rights to require the Manufacturer or
the Lessee to continue to operate a Dealership at a Property. Although a
Lessee may be obligated under a Lease to continue to pay rent and perform its
other obligations, there is no assurance that the Lessee will do so. If an
Initial Lessee moves a franchised Dealership or stops operating a franchised
Dealership from a Property, the Initial Leases provide that the Initial Lessee
has 24 months in which to replace or reopen the Dealership before such action
becomes an event of default under the Initial Lease. However, if a Property is
vacant for an extended period of time, that Property could be at a greater
risk of being vandalized, suffer an uninsured loss or of not being properly
maintained despite the lease provisions intended to minimize those risks. In
addition, if the Company ultimately declared a default, pursued its legal and
equitable remedies and regained possession of the Property, the Company could
be required to expend more funds to restore the Property and experience more
of a delay renting the Property than if the Property had not been vacant for
that period. The Company may enter into similar Lease provisions with other
Lessees.
 
  Rejection of Leases Under Federal Bankruptcy Codes. Any or all of the
Lessees (or Guarantors) may seek the protection of the federal Bankruptcy
Code, which could result in delays in rent payments or in the rejection and
termination of a Lease and thereby cause a reduction in the Company's cash
flow and the amounts available for distributions to its shareholders. No
assurance can be given that any Lessee (or Guarantor) will not seek protection
under the Bankruptcy Code in the future or, if any Lessee (or Guarantor) does
seek such protection, that it will assume its Lease (or Guaranty) and continue
to make rent payments in a timely manner. If any Lease (or Guaranty) is not
assumed following bankruptcy the Company's cash flow and the amounts available
for distribution to its shareholders may be adversely affected.
 
  If a Lessee filed bankruptcy, it initially would have at least 60 days to
decide whether to assume the Lease. That period could be extended by order of
the Bankruptcy Court. During the period before the Lease was assumed or
rejected, the Lessee would not be required to pay amounts due under the Lease
for the period before the bankruptcy was filed. If the Lease was assumed, the
Lessee would be required to pay all amounts then due under the Lease, but
would not be required to pay interest on those amounts.
 
                                      19
<PAGE>
 
  If a Lease was rejected by a bankrupt Lessee, the rejection would be treated
as a breach of the Lease and the Company would have a claim for damages
resulting from the breach. However, the claim would be limited to an amount
equal to the rent reserved under the lease, without acceleration, for the
greater of one year or 15% (but not more than three years) of the remaining
term of the Lease, plus rent already due but unpaid. In addition, the
Company's rejection claim ordinarily would be treated as a general unsecured
claim, and would be paid only to the extent that funds were available to pay
general unsecured claims against the Lessee. There can be no assurance that
any such payment would be sufficient to pay the amounts due under the lease.
 
  Inability of the Company to Resell or Re-Lease Properties. The failure of a
Lessee to perform under a Lease could require the Company to declare a
default, repossess the Property, find another tenant for the Property or
resell the Property. There is no assurance that the Company will be able to
lease such Property to a Dealer, or to successfully reposition the Property
for other uses, or if a replacement tenant or a different use would support
the same or higher level of lease payments. Moreover, there can be no
assurance that any individual Lessee will elect to extend a Lease upon
expiration of its Fixed Term, which would also force the Company to find a
suitable replacement tenant.
 
  The Company may or may not be able to sell a Property if or when the Company
decides to do so. The real estate market is affected by many factors, such as
general economic downturns, availability of financing, interest rates and
other factors, including supply and demand, that are beyond the control of the
Company. The Company cannot predict whether it would be able to sell any
Property for the price or on the terms set by the Company, or whether any
price or other terms offered by a prospective purchaser would be acceptable to
the Company. The Company cannot predict the length of time needed to find a
willing purchaser and to close the sale of a Property. The number of
competitive Properties operated as Dealerships or Related Businesses in a
particular area could have a material adverse effect on the Company's ability
to lease a Property in the event of loss of a Lessee.
 
  The Company may not be able to sell a Property as is. The Company may be
required to expend funds to correct defects, such as defects related to the
environment, health or safety or maintenance or repair. The Company may also
be required to make improvements before a Property can be sold. There is no
assurance that the Company will have funds available to correct defects or
make improvements. Furthermore, the expenditure of funds to correct defects or
make improvements may adversely affect the funds available for investment by
the Company or Actual Cash Available for Distribution to shareholders.
 
  If the Property is not occupied or if rent is not being paid or is being
paid in an amount that is insufficient to cover operating expenses, the
Company could be required to expend funds with respect to that Property,
including expenses relating to taxes, insurance, utilities and maintenance of
the Property. In connection with the acquisition of a Property, the Company
may agree on restrictions that prohibit the sale of that Property for a period
of time or impose other restrictions, such as a limitation on the amount of
debt that can be placed or repaid on that Property. Such provisions would
restrict the ability of the Company to resell or re-lease a Property.
 
  The Company may grant a Lessee a right of first offer or option to purchase
a Property. The Lessee may exercise the option to purchase only at the end of
an Extended Term. The Lessee may exercise the right to first offer only if the
Company decides to sell the Property. The terms for the purchase of the
Property under the right of first offer must be satisfactory to the Company in
its discretion. The purchase price under the option to purchase would be
determined by appraisal based on the highest and best use of the Property.
There is no assurance that the Lessee will exercise that right or that the
price offered by the Lessee in the case of a right of first offer will be
adequate. Furthermore, if a Lessee affiliated with a Trustee exercises its
right of first offer or option to purchase a Property, such Trustee could
influence the Company's decision to sell the Property.
 
  Responsibility for Uninsurable Losses. Each Lease requires the Lessee to
maintain insurance on the Properties and insure against customary risks, such
as fire, vandalism and malicious mischief, extended coverage perils, physical
loss perils, commercial general liability, flood (when the Property is located
in whole or in
 
                                      20
<PAGE>
 
material part in a designated flood plain area) and workers' compensation
insurance. There are, however, certain types of losses (such as from
environmental events, pollution, hurricanes, floods, earthquakes or wars) that
may be either uninsurable or not economically insurable. In addition, there is
no assurance that material losses in excess of insurance proceeds will not
occur. Although the Lease requires the Lessee to restore the Property
substantially to the condition it was in prior to the loss, should the Lessee
fail to restore the Property the Company could lose both its capital invested
in, and anticipated profits, from such Property. See "Business of the Company
and Properties--The Initial Leases, Properties and Dealerships" and "Business
of the Company and Properties--Typical Initial Lease Terms--Insurance."
 
GENERAL RISKS ASSOCIATED WITH OPERATING DEALERSHIPS AND RELATED BUSINESSES
 
  The Company's strategy is to concentrate on acquisitions of Properties used
in the operation of Dealerships and Related Businesses. As a result, the
Company will be subject to risks inherent in investments in that industry. The
effects on Actual Cash Available for Distribution to shareholders resulting
from a downturn of businesses within the industry will be more pronounced than
if the Company had diversified its investments in Properties used for a
variety of different purposes. The success of the operations of a Dealership
also depends on general economic and other factors. The factors affecting
motor vehicle sales include rates of employment, income growth, interest
rates, other national and local conditions, automotive innovations and general
consumer sentiment. These risks are discussed below:
 
  Dependence on Manufacturers for Supply of Motor Vehicles. Dealers operate
Dealerships pursuant to written Franchise Agreements with Manufacturers. The
ability of each Lessee to pay rent and perform its other obligations under a
Lease will be dependent to a significant extent on its relationship with the
Manufacturer on whom it is dependent for its inventory of new motor vehicles
and parts. A reduction in the availability of motor vehicles or parts, and
certain popular models in particular, could have an adverse effect on sales.
In addition, the financial condition of the Manufacturer, marketing programs
and expenditures, vehicle design, production capabilities and management of
the Manufacturer affect sales. Events such as strikes and other labor actions
by unions, or negative publicity concerning a particular Manufacturer or
vehicle model, product recalls and litigation also affect sales. Many of these
factors are beyond the control of the Company and could, at one time or
another, negatively impact a Lessee and therefore the Company.
 
  The Dealers affiliated with the Initial Lessees generally operate
Dealerships that sell the products of more than one Manufacturer. The sales
mix of makes and models of motor vehicles that account for a material portion
of the sales of such Dealers changes periodically, among other things, as a
result of changes in consumer taste, the aging of certain models, the redesign
of certain models or the introduction of new models. Therefore, sales of the
makes or models of one Manufacturer today may not reflect the level of future
sales of that Manufacturer's products. Although a Lessee's dependence on any
one Manufacturer may be lessened by its relationship with a number of
different domestic and import Manufacturers, adverse conditions affecting some
or all of the Manufacturers that account for a significant portion of sales
could materially adversely affect a Lessee's ability to pay rent (or if a
lease is guaranteed, an affiliated Guarantor's ability to honor its Guaranty)
or such Lessee's ability to otherwise continue as an occupant of an Initial
Property.
 
  Restrictions in Franchise Agreements that Govern Ability of Dealerships to
Sell Motor Vehicles or its Assets or Properties. Manufacturers exercise a
great degree of control over Dealerships, and the Franchise Agreements provide
for termination or non-renewal for a variety of causes. The Company believes
that each Initial Lessee is in compliance in all material respects with all of
their Franchise Agreements. These Franchise Agreements generally expire at
various times between one and five years, although some Franchise Agreements
have no specific expiration date and continue in effect unless terminated
under certain limited circumstances. The Company is not aware of any refusal
by a Manufacturer to renew a Franchise Agreement with Affiliates of an Initial
Lessee, and has no reason to believe that each Initial Lessee will not be able
to renew all of its Franchise Agreements upon expiration thereof. There can be
no assurance, however, that any of the Franchise Agreements will be renewed or
that the terms and conditions of such renewals will be favorable to the
Dealer. If a Manufacturer terminates or declines to renew one or more
Franchise Agreements for Dealerships operated on
 
                                      21
<PAGE>
 
any Property, such action could have a material adverse effect on the ability
of the Lessee to pay rent and perform its other obligations and, therefore, on
the ability of the Company to pay distributions. Actions taken by
Manufacturers to exploit their bargaining position in negotiating the terms of
such renewals or otherwise could also have a material adverse effect on the
Company by adversely affecting the ability of such Lessee to pay rent, any
Guarantor to honor its Guaranty or the Lessee's ability to otherwise continue
as an occupant of such Property.
 
  Certain Franchise Agreements also contain restrictions on the sale or
transfer of assets or real property necessary for operation of the
Dealerships, or may contain rights of first refusal in favor of certain
Manufacturers to purchase those assets or real property. There are no
assurances that certain Manufacturers will consent to the sale of, or waive
prior rights to purchase, certain Properties that the Company may negotiate to
acquire, when such consents or waivers are required. Failure to receive all or
some of the required consent or waiver could have a materially adverse effect
on the ability of the Company to acquire the Initial Properties and additional
Properties. If the Company acquired a Property for which Manufacturers'
consent was required but not obtained, the Manufacturer could seek legal
recourse against the Company and/or the Seller or could impair the Company's
ability to obtain clear title or to finance the Property. Also, such an event
could impair the relationship between the Dealer and Manufacturer. The
contribution agreements for the Initial Properties, and the contribution
agreements for future Properties will, require the Seller to indemnify the
Company if the Company does not acquire clear fee simple title to the
Property. See "Business of the Company and Properties--Franchise Agreements."
 
  Mature Industry and Cyclicality with Limited Growth Potential. The United
States motor vehicle industry generally is considered a mature industry in
which minimal growth is expected in unit sales of new vehicles. The motor
vehicle industry is cyclical and historically has experienced periodic
downturns, characterized by oversupply and weak demand. Many factors affect
the industry, including general economic conditions and consumer confidence,
the level of discretionary personal income, interest rates and credit
availability.
 
  Dealership Competition for Sale of Motor Vehicles. The operation of
Dealerships and Related Businesses is a highly competitive undertaking.
Dealers compete with other Dealerships selling the same or similar makes of
new and used vehicles, Dealers offering other models, buyers and sellers of
used vehicles, service center chains and independent service and repair shops,
some or all of which may offer motor vehicles, services or repairs at a lower
price, provide faster service or offer faster delivery than Dealerships or
Related Businesses operated by Affiliates of the Lessees. These competitors
may be larger and have greater financial and marketing resources than
Affiliates of the Lessees. In addition, certain Manufacturers have publicly
announced that they may directly enter the retail market in the future which
could have a material adverse effect on some or all of the Affiliates of
Lessees. In addition, the industry is undergoing consolidation, as Dealers who
represent single or a limited number of Manufacturers are acquired by Dealers
that represent many Manufacturers.
 
  Restrictions that could Limit Supply of Motor Vehicles. Certain motor
vehicles retailed by Dealers, as well as certain major components of vehicles
retailed by Dealers, are imported. Accordingly, the revenues generated by
those Dealerships could be adversely affected by import restrictions on
certain jurisdictions, export restrictions by certain jurisdictions, and could
be dependent to some extent upon general economic conditions in and political
relations with foreign countries, including Japan. Recently, Congress has been
considering the United States' trade relations with Japan, and actions by
Congress could restrict the importation of motor vehicles from Japan.
Additionally, fluctuations in currency exchange rates may adversely affect
sales of motor vehicles produced by Manufacturers of imports. Imports into the
United States may also be adversely affected by increased transportation
costs.
 
CONFLICTS OF INTEREST AMONG THE COMPANY AND CERTAIN TRUSTEES
 
  Certain conflicts of interest could exist between the Company and Mr.
Pohanka or Mr. Rosenthal in his capacity as a Trustee of the Company and
Affiliates of certain Initial Sellers and Initial Lessees. Messrs. Pohanka
and Rosenthal could significantly influence the business and operations of the
Company in connection with (i) the terms of the contribution agreements and
Leases for Initial Properties or future Properties to be acquired from
 
                                      22
<PAGE>
 
any one of them, (ii) the exercise and terms of the right of first offer and
repurchase right of an affiliated Initial Lessee under an Initial Lease, (iii)
the decision to sell or refinance a Property, (iv) the terms of any "lock-out"
restrictions, that limit the ability of the Company to sell or refinance
particular Properties, and (v) the enforcement of Initial Leases and
agreements with Messrs. Pohanka or Rosenthal or his affiliate. Mr. Pohanka and
his family have advised the Representative that they intend to purchase up to
$13 million of registered Common Shares in this Offering. The Company has
adopted certain policies that are designed to eliminate or minimize certain
potential conflicts of interest. See "Benefits to Related Parties" and
"Conflicts of Interest Policies."
 
  The following descriptions set forth the principal conflicts of interest,
including the relationships through which they arise, and the policies and
procedures implemented by the Company to address those conflicts.
   
  Ability of Certain Trustees to Influence the Company. Messrs. Pohanka and
Rosenthal, each an Affiliate of certain Initial Lessees and Initial Sellers,
have agreed to join the Board of Trustees prior to the closing of the
Offering. Upon completion of the Offering, assuming (i) conversion of the
Units issued to Affiliates of Messrs. Pohanka and Rosenthal to acquire Initial
Properties into Common Shares, (ii) exercise of the Dealer Warrants and
conversion of the Units to Common Shares, and (iii) the purchase of $13
million of Common Shares in this Offering by Mr. Pohanka and his family, Mr.
Pohanka and his Affiliates will own 9.56% and Mr. Rosenthal and his Affiliates
will own 14.27% of the outstanding Common Shares (including exercise of the
Underwriters' over-allotment option in full) on a fully diluted and converted
basis. The Units may be redeemed for Common Shares at the option of the
Company up to the Company's 9.9% ownership limit for Common Shares. Waiver of
the ownership limit for Trustees or their Affiliates under the Company's
Amended and Restated Declaration of Trust (the "Declaration of Trust")
requires the approval of a majority of the Independent Trustees of the Company
as defined in "Management." See "Conflicts of Interest Policies." Messrs.
Pohanka and Rosenthal, as Trustees and as major holders of Common Shares or
Units, will be in a position to exercise influence over the operations and
affairs of the Company.     
 
  Terms of Initial Sale of Initial Properties by Affiliates of Messrs. Pohanka
and Rosenthal. The terms of the sale of certain Initial Properties and the
Initial Leases with Affiliates of Messrs. Pohanka and Rosenthal may be more
advantageous with respect to their Properties than the terms the Company will
attempt to negotiate with Sellers of future Properties.
 
  Terms of Initial Leases for Lease of Initial Properties to Affiliates of
Messrs. Pohanka and Rosenthal. To the extent that Initial Lessees affiliated
with the Trustees exercise their rights to extend the Initial Lease for a
second Extended Term, the Initial Lessees will be required to negotiate a new
Base Annual Rent based on fair market value at the time of exercise of the
second Extended Term. The Trustees, to the extent they continue to sit on the
Board, may influence those negotiations and the terms of any such agreement.
In addition, the Trustees can influence the decision whether or not to take
action against an Initial Lessee or Guarantor affiliated with a Trustee in the
event of a default. The terms of any related party agreement or the
declaration of any default will require the authorization of a majority of the
Independent Trustees of the Company. See "--The Company is Dependent Upon
Dealers Generating Sufficient Revenues From Their Operations to Permit the
Lessees to Pay Rent and Fulfill Their Other Obligations Under the Leases--
Dependence on Guarantors for Payment of Rent and Performance of Lease Terms
Upon Default of Lessee."
 
  Ability of Certain Trustees and Their Affiliates to Influence the Sale or
Refinancing of the Initial Properties. The Initial Lessees who are Affiliates
of certain Trustees have entered into Initial Leases that grant certain rights
to the Initial Lessees to repurchase the Initial Properties at such time as
the Company shall determine to sell an Initial Property and upon expiration of
an Extended Term of the Initial Lease. Mr. Pohanka or Mr. Rosenthal could
influence the Company's decision to sell, and the terms of sale of, any
Initial Property to an affiliated Initial Lessee. These Initial Lessees could
experience different and more adverse tax consequences compared to those
experienced by shareholders or other holders of Units upon the sale of, or
reduction of mortgage indebtedness on, certain Initial Properties. While the
Company, as the sole general partner of the Operating Partnership, has the
exclusive authority to determine whether and on what terms to sell or finance
certain Properties, such parties may have different objectives regarding the
appropriate pricing and timing of any
 
                                      23
<PAGE>
 
sale of, or reduction of mortgage indebtedness on, such Properties. Affiliated
Trustees of the Company could influence the Company not to sell particular
Properties, or not to incur additional, or conversely, not to pay off
outstanding, indebtedness on particular Initial Properties, even though such
sales or financing might otherwise be financially advantageous to the Company
and its shareholders.
   
  Pursuant to the lock-out provisions, the Company may not sell (except in
certain events, including certain transactions that would not result in the
recognition of any gain for tax purposes), or may be required to maintain
certain debt levels, for periods ranging from four to seven years on certain
Initial Properties to be acquired from Affiliates of Mr. Pohanka or Mr.
Rosenthal. Thus, the lock-out provisions materially restrict the Company from
selling or otherwise disposing of or refinancing such Initial Properties. The
lock-out provisions apply even if it would otherwise be in the best interests
of the shareholders for the Company to sell one or more of such Initial
Properties, reduce the outstanding indebtedness with, respect to any of such
Initial Properties or not refinance such indebtedness on a nonrecourse basis
at maturity, or increase the amount of indebtedness with respect to such
Initial Properties. Such possible future limitations, together with the lock-
out provisions, may restrict the ability of the Company to sell substantially
all of its assets, even if such a sale would be in the best interests of its
shareholders. See "Structure and Formation of the Company."     
 
  The lock-out provisions could impair the ability of the Company to take
actions during the lock-out period that would otherwise be in the best
interests of the shareholders and, therefore, may have an adverse impact on
the value of the Common Shares (relative to the value that would result if the
lock-out provisions did not exist). In particular, the lock-out provisions
could preclude the Company from participating in certain major transactions
that could result in a disposition of the Company's assets or a change in
control of the Company even though that disposition or change in control might
be in the best interests of the shareholders.
 
PURCHASE PRICES OF PROPERTIES HAVE NOT BEEN BASED ON INDEPENDENT APPRAISALS
AND AS A RESULT THE MARKET CAPITALIZATION OF THE COMPANY MAY EXCEED THE FAIR
MARKET VALUE OF THE COMPANY'S PROPERTIES IF DETERMINED BY APPRAISAL
 
  The valuations of the Company's Properties have not, and in the future may
not, be determined by independent third-party appraisals. Therefore, the
consideration being paid by the Company for certain Properties may exceed the
fair market value of such Properties if determined by third-party appraisals.
The Company considers several methods of valuation including the review and
analyses of comparable properties and leases, discounted cash flow
calculations, valuing alternative uses of the Property, and evaluating the
financial strength of prospective Lessees. To the extent that Properties may
be purchased from Sellers whose affiliates hold positions with the Company,
including certain Trustees, the use of such valuation methodologies, and the
basis of negotiation of the purchase price, for such Properties may be
susceptible to conflict of interests. In connection with the acquisition of
Properties other than the Initial Properties, the Operating Partnership may
assign a value to Units for the purpose of determining the number of Units to
be issued in an acquisition below the market price at which the Common Shares
have been trading, which would result in the issuance of a greater number of
Units to the Seller.
 
  Furthermore, management believes it is appropriate to value the Company as
an operating enterprise rather than at the values that could be obtained from
a liquidation of the Company or of individual Properties. Accordingly, the
valuation of the Company has been determined based on the factors set forth in
the section captioned "Underwriting." See "Underwriting." Because the
liquidation value of the Company may be less than the value of the Company as
a going concern, shareholders may suffer a loss in the value of their Common
Shares if the Company is required to sell the Properties or any other assets.
 
THE COMPANY'S LACK OF OPERATING HISTORY; NO ASSURANCE THAT THE COMPANY WILL BE
ABLE TO GENERATE SUFFICIENT REVENUE TO MAKE OR SUSTAIN DISTRIBUTIONS TO
SHAREHOLDERS
 
  The Company has been recently organized and has no operating history. 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 "Distributions." The Company also
will be subject to the
 
                                      24
<PAGE>
 
risks generally associated with the formation of any new business. The
Company's management has extensive experience in the real estate industry but
has no experience operating a real estate investment trust and working
together.
 
  The Company's ability to make and sustain cash distributions is based on
many factors, including the ability of the Company to make additional
acquisitions, investment of the proceeds of this Offering, ability to
negotiate favorable Lease terms, the Lessee's performance under Leases and
anticipated operating expense levels, which may not prove accurate and actual
results may vary substantially from estimates. Some of the factors are beyond
the control of the Company, and a change in any such factor could affect the
Company's ability to pay future distributions. No assurance can be given as to
the Company's ability to pay or maintain distributions. Neither is there an
assurance that the level of distributions will increase over time, that
contractual increases in rent under the leases of the Properties or the
receipt of rental revenue in connection with future acquisitions of Properties
will increase the Company's Actual Cash Available for Distribution to
shareholders. However, in the event of a default or a lease termination, there
could be a decrease or cessation of rental payments and thereby a decrease in
Actual Cash Available for Distribution. See "Distributions."
 
THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL COMPLETE ANY ADDITIONAL
ACQUISITIONS OF PROPERTIES
   
  Apart from the Initial Properties, all except two of which the Company
expects to acquire within 60 days of the closing of the Offering, and two of
which the Company expects to acquire in July 1998, the Company has not
completed any acquisitions, financings or dispositions of Properties. There
can be no assurances that additional acquisitions of Properties or
opportunities to finance the development of Properties on terms that meet the
Company's investment criteria will be available to the Company or that the
Company will be successful in capitalizing on such opportunities.     
   
  Approximately 66% of the net proceeds of the Offering have not been
committed to the acquisition of Properties on the date of this Prospectus. The
Company cannot predict whether it will make future acquisitions for cash or
Units or any combination thereof.     
 
  Shareholders will not have an opportunity to approve or evaluate for
themselves the Properties acquired by the Company, the terms of such
acquisitions or the terms of the Leases. Shareholders must depend upon the
ability of management of the Company with respect to the selection of
Properties. Management has limited experience investing in Properties that are
used by Dealerships and Related Businesses.
 
RISK THAT THE COMPANY COULD BE TREATED AS AN INVESTMENT COMPANY IF PROCEEDS
HAVE NOT BEEN INVESTED WITHIN ONE YEAR
 
  In order to maintain the Company's exemption from regulation under the
Investment Company Act, the Investment Company Act requires, among other
things, that the Company be primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate,
within one year of the closing of the Offering. If the Company does not invest
a significant portion of the proceeds of this Offering in Properties within
one year of the closing date, the Company may temporarily invest any unused
proceeds in certain government securities that could yield lower returns than
other investments in order to avoid registering as an investment company and
becoming subject to the requirements of the Investment Company Act.
 
RISK OF LEVERAGE
 
  The Company intends to use leverage, generally with a ratio of debt to total
market capitalization of not more than 50%. This policy may be changed by the
Board of Trustees without the approval of the shareholders. If the Company
modifies this strategy to permit a higher degree of leverage and incurs
additional indebtedness, debt service requirements would increase accordingly,
and such an increase could adversely affect the Company's financial condition
and results of operations. In addition, increased leverage could increase the
risk of default by the Company on its debt obligations, with the potential for
loss of the Properties secured thereby, cash available for distribution, and
asset values, of the Company.
 
  In determining an appropriate level of leverage, the Company will utilize
its market capitalization rather than the aggregate book value of its assets.
The Company has chosen to use market capitalization because it
 
                                      25
<PAGE>
 
believes that the book value of its assets (which is primarily the historic
cost of real property less depreciation) may not always accurately reflect its
ability to borrow and to meet debt service requirements. The market
capitalization of the Company, however, is more variable than book value, and
does not necessarily reflect the fair market value of the underlying assets of
the Company at all times. Although the Company will consider factors other
than market capitalization in making decisions regarding the incurrence of
debt (such as the purchase price of Properties to be acquired with debt
financing, the estimated market value of the Properties to be financed, and
the ability of particular Properties and the Company as a whole to generate
cash flow to cover expected debt service and to make distributions), there can
be no assurance that management decisions based on the ratio of debt to total
market capitalization (or to any other measures of asset value) will not
adversely affect the expected level of distributions to shareholders.
 
THE COMPANY WILL NOT EXERCISE CONTROL OVER THE MANAGEMENT OR MAINTENANCE OF
THE PROPERTIES
 
  The Lessees will control the management or maintenance of the Properties
under the Leases. The Leases will generally require that the Lessees operate
the Properties in an efficient and professional manner and maintain the
Properties in good order, repair and appearance. During the terms of the
Leases, the Company will not have the authority to require any Lessees to
operate the Properties in a particular manner or to govern any particular
aspect of their operation except as set forth in the Leases. Thus, even if the
Company believes a Lessee is operating a Property in a manner adverse to the
Company's interests, the Company will not be able to require such Lessee to
change its method of operation. The Company is limited to seeking redress only
if a Lessee violates the terms of the Lease, in which case the Company's
primary remedy is to seek to enforce the Lease or terminate the Lease or, in
certain circumstances, proceed under a Guaranty, if any, and seek to recover
damages from such Lessee or to the extent applicable, any Guarantor of such
Lease.
 
DEPENDENCE ON KEY PERSONNEL
 
  The loss of the services of Thomas D. Eckert, the Company's President and
Chief Executive Officer, Scott M. Stahr, the Company's Executive Vice
President and Chief Operating Officer, Donald L. Keithley, the Company's
Executive Vice-President of Business Development, or David S. Kay, the
Company's Vice President and Chief Financial Officer of the Company, could
have a material adverse effect on the Company, its operations and its business
prospects. The executive officers will receive substantial compensation from
the Company. See "Management--Executive Compensation," "Management--Employment
Agreements." The Company's success also depends upon its ability to attract
and maintain qualified personnel.
 
GEOGRAPHIC CONCENTRATION OF THE INITIAL PROPERTIES IN CERTAIN MARKETS RENDERS
THE COMPANY VULNERABLE TO LOCAL ECONOMIC CONDITIONS
 
  Twenty Initial Properties representing approximately 70% of the aggregate
purchase prices for Initial Properties will be concentrated in the Washington,
D.C. Metropolitan area. The Company's revenues and the value of the Initial
Properties may be affected by a number of factors, including the local
economic climate (which may be adversely impacted by business layoffs or
downsizing, industry slowdowns, changing demographics and other factors). In
addition, local competitive conditions will affect the performance of the
Dealerships and Related Businesses. There can be no assurance that the Company
will be able to expand geographically, or that any such expansion will
adequately insulate it from the adverse effects of local or regional economic
conditions. See "Business of the Company and Properties--Washington, D.C.
Metropolitan Area."
 
GENERAL REAL ESTATE INVESTMENT RISKS
 
  The Company's investments will be subject to the risks generally incident to
the ownership of real property, including: (i) reliance on the Lessees to pay
rent and perform their other obligations under the Leases, to generate
revenues to meet fixed obligations, and cover debt service on borrowings; (ii)
adverse changes in national or local economic conditions; (iii) changes in the
investment climate for real estate; (iv) changes in real estate tax rates and
other operating expenses; (v) adverse changes in governmental rules and fiscal
policies; (vi) acts of God which may result in uninsured losses; (vii) the
financial condition of the Sellers and Lessees; and (viii) other factors which
are beyond the control of the Company. These factors are discussed below:
 
                                      26
<PAGE>
 
  General Risks of Real Estate Investment. Real property investments are
subject to varying degrees of risk. The yields available from equity
investments in real estate depend in large part on the amount of rental income
earned and capital appreciation generated, as well as property operating and
other expenses incurred. If the Company's Properties do not generate revenues
sufficient to meet operating expenses the Company may have to borrow amounts
to cover fixed costs, and the Company's Actual Cash Available for Distribution
may be adversely affected.
 
  The Leases require the Lessees to maintain the Properties and to return the
Properties to the Company at the end of the Lease term in good condition,
normal wear and tear excepted. The Company intends to collect one month's rent
as a security deposit from each Lessee. If the Lessee does not return the
Property to the Company in good condition, there is no assurance that the
security deposit will be sufficient to restore a Property, in which event the
Company would be required to expend its own funds to do so, which could be
significant.
 
  Real Estate Tax Increases. Certain local real property tax assessors may
seek to reassess certain of the Properties as a result of the Formation
Transactions or future acquisitions of such Properties, which could result in
those Properties being subject to higher real estate tax rates. The Leases
permit the Company to pass through such increases to the Lessees for payment
but there is no assurance that renewal Leases or future Leases will be
negotiated on the same basis and no assurance that the Lessees will be able to
make such payments.
 
  Operating Expense Increases. The Properties will be subject to operating
risks common to commercial real estate in general, any or all of which may
adversely affect the Company. The Properties will be subject to increases in
tax rates, utility costs, operating expenses, insurance costs, repairs and
maintenance and administrative expenses. While the Initial Properties will be
leased on a triple net basis, renewals of Leases or future Leases may not be
negotiated on that basis, in which event the Company will have to pay those
costs. If the Company is unable to lease Properties on a triple-net basis or
if the Lessees fail to pay required tax, utility and other impositions, the
Company could be required to pay those costs which could adversely affect
funds available for future acquisitions or the Company's Actual Cash Available
for Distribution.
 
  Risks Associated With Illiquidity of Real Estate. Equity real estate
investments are relatively illiquid and therefore may tend to limit the
ability of the Company to react promptly to changes in economic or other
conditions. In addition, certain significant expenditures associated with
equity real estate investments (such as interest payments, real estate taxes
and maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investments.
 
GOVERNMENTAL REGULATIONS; ENVIRONMENTAL MATTERS
 
  The Dealers and their Affiliates and the Company are subject to a wide range
of federal, state and local laws and regulations, such as local licensing
requirements, consumer protection laws and regulations relating to gasoline
storage, waste treatment and other environmental matters, including:
 
  Environmental Laws. All real property and the operations conducted on real
property are subject to federal, state and local laws and regulations relating
to environmental protection and human health and safety, including those
governing wastewater discharges, air emissions, the operation and removal of
underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and the
remediation of contamination associated with such disposal. Certain of these
laws and regulations may impose joint and several liability on certain
statutory classes of persons including lessees, owners or operators, for the
costs of investigation or remediation of contaminated properties, regardless
of fault or the legality of the original disposal.
 
  The past and present business operations of the Dealers that are subject to
such laws and regulations include the use, storage, handling and contracting
for recycling or disposal of hazardous or toxic substances or wastes,
including environmentally sensitive materials such as motor oil, waste motor
oil and filters, transmission fluid, antifreeze, freon, waste paint and
lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline
and
 
                                      27
<PAGE>
 
diesel fuels. The Company, Dealers, Lessees and Sellers may be subject to
other laws and regulations as a result of the past or present existence of
certain underground and/or above-ground storage tanks at the Properties. The
Dealers, Lessees or Sellers, like many of their competitors, have incurred,
and will continue to incur, capital and operating expenditures and other costs
in complying with such laws and regulations.
 
  Certain laws and regulations, including those governing air emissions and
underground and above-ground storage tanks, have been amended so as to require
compliance with new or more stringent standards as of future dates. The
Company cannot predict what other environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations will
be administered or interpreted or what environmental conditions may be found
to exist in the future. Compliance with new or more stringent laws or
regulations, stricter interpretation of existing laws or the future discovery
of environmental contamination may require expenditures by the Company or
additional expenditures by the Dealers, Sellers or Lessees and their
Affiliates, some of which may be material. There can be no assurance that (i)
future laws, ordinances or regulations will not impose any material
environmental liability, or (ii) the current environmental condition of the
Properties will not be affected by the operations of the Dealerships or
Related Businesses or their Affiliates, by the condition of the land or
operations in vicinity of the Properties (such as the presence of underground
storage tanks) or by the activities of unrelated third parties. Under various
federal, state and local laws, ordinances and regulations, a current or
previous owner, developer or operator of real estate may be liable for the
costs of removal or remediation of certain hazardous or toxic substances at,
on, under or in its property. The costs of such removal or remediation could
be substantial. See "Business of the Company and Properties--Government
Regulations Affecting the Properties--Environmental Laws."
 
  Limited environmental investigations have been conducted at certain of the
Initial Properties, with the results set out in "Phase 1 reports" prepared by
consultants retained by the Dealers and their Affiliates. The Phase 1 reports
describe environmental conditions of concern at certain of the Initial
Properties, including actual and potential releases of petroleum products from
underground storage tanks and the presence of asbestos-containing materials.
Based on the Phase 1 reports, the Company estimates that the aggregate cost
expected to remedy identified environmental conditions of concern will not be
material to the Company.
 
  The Initial Sellers are obligated to indemnify the Company for any third
party claims based on environmental conditions, including claims by subsequent
purchasers of the Property, at a minimum until such time as any relevant
statute of limitations has run. In addition, the Initial Lessees and their
Affiliates are obligated to comply with, indemnify and hold harmless the
Company and its officers, directors, employees, shareholders, agents and
Affiliates from, and to assume the cost of compliance with, all laws and
regulations applicable to its Dealerships and Related Businesses, including
environmental laws and remediation requirements. However, if any Initial
Seller and Initial Lessee fail to comply with such requirements, the Company
could be forced to pay such costs, which at such time could be significant,
and then seek reimbursement of those costs from the Initial Seller and the
Initial Lessee. Moreover, in the event remedial action addressing
environmental conditions of concern identified in the Phase 1 reports is not
conducted by the Initial Sellers or Initial Lessees or their Affiliates
pursuant to environmental laws and regulations, it is possible that the
existence of those conditions could impede the Company's ability to sell or
re-lease the affected Initial Properties in the future or negatively impact
future sales or rental proceeds.
 
  Americans With Disabilities Act of 1990. In addition, the Properties are
required to comply with Title III of the Americans with Disabilities Act of
1990 (the "ADA") to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Although
the Company believes that each of the Initial Properties is in substantial
compliance with the ADA, no assurance can be given that any investigation of
the Initial Properties will not reveal non-compliance with the ADA or that the
requirements of the ADA will not be changed. Although the Lessee will have
primary responsibility for complying with the ADA, there is no assurance that
the Lessee will comply, or that the Company would be reimbursed by the Lessee
if the Company had to make expenditures to comply with the ADA. See "Business
of the Company and Properties--Governmental Regulations Affecting the
Properties--Americans With Disabilities Act of 1990."
 
                                      28
<PAGE>
 
  Other Regulations. The Properties are and will be subject to state and local
fire, life-safety and similar requirements. The Leases will require that each
Lessee comply with all regulatory requirements. Failure to comply with those
requirements could result in the imposition of fines by governmental
authorities, awards of damages to private litigants, or restrictions on the
ability to conduct business on such properties.
 
COMPETITION FROM OTHER COMPANIES WITH SIMILAR BUSINESS OBJECTIVES AND
STRATEGIES
 
  The Company believes that it is the first publicly-offered REIT to focus
primarily on consolidating the Properties used by Dealers or Related
Businesses under one ownership structure. A subsidiary of Kimco Realty
Corporation, a diversified public real estate investment trust, has announced
that it will pursue the acquisition of properties used by Dealerships. Other
public or private entities may also target these types of properties for
acquisition, and some of those companies may have greater financial resources
or general real estate experience than the Company. Those entities will
compete with the Company in seeking Properties for acquisition and disposition
and re-leasing of Properties to Dealers as they become available. The Company
believes that competition for properties will primarily be on the basis of
acquisition price and rental rates. Competition could have the effect of
increasing acquisition prices and decreasing rents, which would have an
adverse affect on the financial results of the Company and distributions to
shareholders.
 
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
 
  Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company intends to operate its business so as to qualify as a REIT under the
Code commencing with its taxable year ending December 31, 1998. Although
management believes that the Company will be organized and will operate in
such a manner, no assurance can be given that the Company will be able to
operate in a manner so as to qualify as a REIT or remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and others on a quarterly or more frequent basis)
established under highly technical and complex Code provisions for which there
are only limited judicial and administrative interpretations and involves the
determination of various factual matters and circumstances not entirely within
the Company's control. The complexity of these provisions and of the
applicable Treasury Regulations that have been promulgated under the Code is
greater in the case of a REIT that holds its assets in partnership form. In
addition, no assurance can be given that new legislation, regulations,
administrative interpretations or court decisions will not significantly
change the tax laws with respect to qualification as a REIT or the federal
income tax consequences of such qualification. The Company, however, is not
aware of any pending tax legislation that would adversely affect the Company's
ability to operate as a REIT.
 
  Wilmer, Cutler & Pickering, counsel to the Company, will deliver its opinion
to the Company regarding the Company's ability to qualify as a REIT. See
"Certain Federal Income Tax Considerations--Taxation of the Company as a REIT"
and "Legal Matters." Such legal opinion will be based on various assumptions
and factual representations by the Company regarding the Company's ability to
meet the various requirements for qualification as a REIT, and no assurance
can be given that actual operating results will meet these requirements.
Wilmer, Cutler & Pickering has no obligation to advise the Company or its
shareholders of any subsequent change in the matters stated, represented or
assumed or of any subsequent change in applicable law. Such legal opinion is
not binding on the IRS or any court.
 
  If the Company fails to qualify as a REIT in any taxable year, except as to
certain failures for which there may be statutory relief or imposition of
intermediate sanctions in the form of monetary penalties, the Company would be
subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates and would not be allowed
a deduction in computing its taxable income for amounts distributed to its
shareholders. This treatment would reduce the net earnings of the Company
available for investment or distribution to shareholders because of the
additional tax liability to the Company for the years involved. In addition,
unless entitled to relief under certain statutory provisions, the Company also
would be
 
                                      29
<PAGE>
 
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification is lost. See "Certain Federal Income Tax
Consequences--Taxation of the Company as a REIT--Failure to Qualify." Although
the Company currently intends to operate in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Company to fail to qualify as a REIT or may cause
the Board of Trustees to revoke the Company's REIT election.
 
  Adverse Effects of REIT Minimum Distribution Requirements. To obtain the
favorable tax treatment accorded to REITs under the Code, the Company
generally will be required each year to distribute to its shareholders at
least 95% of its REIT taxable income. The Company will be subject to income
tax on any undistributed REIT taxable income and net capital gain, and to a 4%
non-deductible 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% of its ordinary income for the calendar year, (ii) 95% of its
capital gain net income for such year, and (iii) 100% of its undistributed
income from prior years.
 
  The Company intends to make distributions to its shareholders to comply with
the distribution provisions of the Code and to avoid federal income taxes and
the non-deductible 4% excise tax. The Company's income will consist primarily
of its share of the income of the Operating Partnership, and the Company's
cash flow will consist primarily of its share of distributions from the
Operating Partnership. Differences in timing between the receipt of income and
the payment of expenses in arriving at taxable income (of the Company or the
Operating Partnership) and the effect of non-deductible capital expenditures,
the creation of reserves or required debt amortization payments could in the
future require the Company to borrow funds through the Operating Partnership
on a short-term or long-term basis to meet the distribution requirements that
are necessary to continue to qualify as a REIT. In such circumstances, the
Company might need to borrow funds to avoid adverse tax consequences even if
management believes that the then prevailing market conditions generally are
not favorable for such borrowings or that such borrowings are not advisable in
the absence of such tax considerations.
 
  Distributions by the Operating Partnership are determined by the Company, as
general partner, and are dependent on a number of factors, including the
amount of Actual Cash Available For Distribution, the Operating Partnership's
financial condition, any decision by the Company's Board of Trustees to
reinvest funds rather than to distribute such funds, the Operating
Partnership's capital expenditure requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Board of Trustees deems relevant. There can be no assurance that the
Company will be able to continue to satisfy the annual distribution
requirement so as to avoid corporate income taxation of the earnings that it
distributes.
 
  Consequences of Failure to Qualify as a Partnership.  Wilmer, Cutler &
Pickering will deliver an opinion to the Company stating that, assuming that
the Operating Partnership is being operated in accordance with its
organizational documents, the Operating Partnership has been and will continue
to be treated as a partnership, and not as a corporation, for federal income
tax purposes. Such opinion is not binding on the IRS. If the IRS were to
challenge successfully the status of the Operating Partnership as a
partnership for federal income tax purposes, the Operating Partnership would
be taxable as a corporation. In such event, the Company would cease to qualify
as a REIT for federal income tax purposes. The imposition of a corporate tax
on the Operating Partnership with a resulting loss of REIT status of the
Company, would reduce substantially the amount of cash available for
distribution to the Company's shareholders.
 
  Risks Regarding Characterization of Initial Leases. Wilmer, Cutler &
Pickering is of the opinion that each Initial Lease will be treated as a true
lease for federal income tax purposes. Such opinion is not binding on the IRS.
If the IRS were to challenge successfully the characterization of the Initial
Leases as true leases, the Operating Partnership would not be treated as the
owner of the Property in question for federal income tax purposes and the
Operating Partnership would lose tax depreciation and cost recovery deduction
with respect to such Property, which in turn could cause the Company to fail
to qualify as a REIT. Although the Company will use its best efforts to
structure any leasing transaction for Properties acquired in the future such
that the Lease
 
                                      30
<PAGE>
 
will be characterized as a "true lease' and the Operating Partnership will be
treated as the owner of the Property in question for federal income tax
purposes, the Company will not seek an advance ruling from the IRS and may not
seek an opinion of counsel (except with respect to the Initial Leases) that it
will be treated as the owner of any leased Properties for federal income tax
purposes, and thus there can be no assurance that future leases will be
treated as true leases for federal income tax purposes.
 
  Other Tax Liabilities. Even if the Company qualifies as and maintains its
status as a REIT, it may be subject to certain federal income taxes if it has
a certain amount of non-qualified income. For example, if the Company has net
income from a "prohibited transaction," such income will be subject to a 100%
tax. See "Certain Federal Income Tax Consequences--Taxation of the Company as
a REIT--Requirements for Qualification." In addition, the Company will be
subject to state and local taxes on its income and property.
 
THE OWNERSHIP LIMIT
 
  For the Company to maintain its qualification as a REIT under the Code, not
more than 50% in value of the outstanding shares of beneficial interest of the
Company may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of the Company's taxable year (other than the first taxable year for
which the election to be treated as a REIT has been made).
   
  To ensure that the Company will not fail to qualify as a REIT under this and
other tests under the Code, the Company's Declaration of Trust, subject to
certain exceptions, authorizes the Board of Trustees to take such actions as
are necessary and desirable to preserve its qualification as a REIT and to
limit any person to direct or indirect ownership of no more than (i) 9.9% of
the number of the outstanding Common Shares, or (ii) 9.9% of the number of
outstanding Preferred Shares or any series of Preferred Shares (the "Ownership
Limit"). The Company's Board of Trustees, upon receipt of a ruling from the
IRS, an opinion of counsel or other evidence satisfactory to the Board and
upon such other conditions as the Board may establish, may exempt a proposed
transferee from the Ownership Limit; provided that such exemption would not
result in the termination of the Company's status as a REIT. The Company has
waived the Ownership Limit with respect to the Representative and its
Affiliates to permit ownership of the Common Shares. The Company's Declaration
of Trust and the Operating Partnership's Partnership Agreement contain
provisions that require the approval of a majority of the Independent Trustees
of the Company for waiver of the Ownership Limit with respect to any Trustee
or his Affiliates. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer." The foregoing restrictions on
transferability and ownership will continue to apply until (i) the Board of
Trustees determines that it is no longer in the best interests of the Company
to attempt to qualify, or to continue to qualify, as a REIT, and (ii) there is
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 the Company.
    
  The Ownership Limit may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company that might involve a
premium price for the Common Shares or otherwise be in the best interest of
the shareholders. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer."
 
CERTAIN TAX AND ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL OF
THE COMPANY
   
  Certain provisions contained in the Declaration of Trust and Amended and
Restated Bylaws of the Company (the "Bylaws") and the Maryland General
Corporation Law (the "MGCL"), as applicable to Maryland REITs, may have the
effect of discouraging a third party from making an acquisition proposal for
the Company 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
shareholders from being paid a premium for their Common Shares over then-
prevailing market prices. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer" and "--Certain Provisions of Maryland
Law and of the Company's Declaration of Trust and Bylaws." These provisions
are described below:     
 
  Ownership Limit. The Ownership Limit provides that no person or entity may
own, or be deemed to own more than 9.9% of the Common Shares or Preferred
Shares of the Company, unless waived by the Board of
 
                                      31
<PAGE>
 
Trustees. See "--The Ownership Limit." The foregoing ownership limitations may
have the effect of precluding acquisition of control of the Company without
the consent of the Board of Trustees and, consequently, shareholders may be
unable to realize a premium for their shares over the then-prevailing market
price (a premium is customarily associated with such acquisitions). See
"Description of Shares of Beneficial Interest--Restrictions on Ownership and
Transfer."
   
  Removal of Trustees; Vacancies. The Company's Declaration of Trust provides
that a Trustee may only be removed upon the affirmative vote of holders of
two-thirds of the outstanding Common Shares of the Company. Vacancies may only
be filled by the Board of Trustees. This requirement makes it more difficult
to change the management of the Company by removing and replacing Trustees.
    
  Preferred Shares. The Declaration of Trust permits the Board of Trustees to
issue up to 20 million Preferred Shares, issuable in one or more classes or
series. The Board of Trustees may classify or reclassify any unissued
Preferred Shares and establish the preferences and rights (including the right
to vote, participate in earnings, and to convert into Common Shares) of any
such Preferred Shares. Thus, the Board of Trustees could authorize the
issuance of Preferred Shares 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 the Common Shares might receive a premium for their
Common Shares over the then-prevailing market price of such Common Shares. See
"Description of Shares of Beneficial Interest--Preferred Shares."
 
  Maryland Business Combination Statute. Under the MGCL, as applicable to
Maryland REITs, certain "Business Combinations" (including certain issuances
of equity securities) between a Maryland REIT such as the Company and any
person who owns 10% or more of the voting power of the Company's beneficial
interests or an Affiliate of the trust which, 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 shares of beneficial interest of then-outstanding voting shares
of beneficial interest of the Company (an "Interested Shareholder"), are
prohibited for five years after the most recent date on which the Interested
Shareholder became an Interested Shareholder. Thereafter, any such "Business
Combination" must be approved by a super-majority shareholder vote unless,
among other things, the holders of shares of beneficial interest 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
Shareholder for its shares. As permitted by the MGCL, the Declaration of Trust
exempts any "Business Combinations" involving the issuance of Common Shares to
any Initial Seller upon the exchange of Units acquired by any of them in
connection with the Formation Transactions or the acquisition by any of them
of any additional shares of beneficial interest in the Company. Accordingly,
the five-year prohibition and the super-majority vote requirement will not
apply to any "Business Combinations" between the Sellers and the Company. As a
result, the Sellers may be able to enter into "Business Combinations" with the
Company, which may or may not be in the best interests of the shareholders,
without the super-majority shareholder approval. See "Description of Shares of
Beneficial Interest--Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and Bylaws--Business Combinations."
 
CHANGES IN POLICIES
 
  The major policies of the Company, including its policies with respect to
investments, financing, growth, debt capitalization, REIT qualification and
distributions, are determined by the Board of Trustees. Although it has no
present intention to do so, the Board of Trustees may amend or revise these
and other policies from time to time without a vote of the shareholders.
Accordingly, shareholders will have limited control over changes in policies
of the Company.
 
NO PRIOR MARKET FOR COMMON SHARES
 
  Prior to this Offering, there has been no public market for the Common
Shares. Although the Company has applied for listing of the Common Shares on
the Nasdaq National Market, there can be no assurance that an
 
                                      32
<PAGE>
 
active trading market will develop. The initial public offering price will be
determined through negotiations between the Company and the Underwriters and
may not be indicative of the market price of the Common Shares after the
Offering. See "Underwriting."
 
EFFECT OF MARKET INTEREST RATES ON SHARE PRICES
 
  One of the factors that may influence the price of the Common Shares in
public markets will be the annual yield on the price paid for Common Shares
from distributions by the Company. Thus, an increase in market interest rates
may lead purchasers of Common Shares to demand a higher annual yield, which
could adversely affect the market price of the Common Shares.
 
POSSIBLE ADVERSE EFFECTS ON SHARE PRICE ARISING FROM COMMON SHARES ELIGIBLE
FOR FUTURE SALE
 
  No prediction can be made as to the effect, if any, of future sales of
Common Shares, or the availability of shares for future sales, on the market
price of the Common Shares. Sales of substantial amounts of Common Shares
(including approximately up to 5,041,549 Common Shares issuable upon the
exchange of Units, issued in connection with the acquisition of the Initial
Properties; up to 2,828,314 Common Shares issuable upon exercise of options
under the Plan; up to 1,792,115 Common Shares issued to FBR Asset Investment
Corportion; up to 1,277,794 Common Shares issuable on exercise of the
Underwriting Warrants and up to 1,414,158 Common Shares issuable on conversion
of the Units issued on exercise of the Dealer Warrants, (all assuming exercise
of the Underwriters' over-allotment option in full)), or the perception that
such sales could occur, may adversely affect prevailing market prices for the
Common Shares. Such Common Shares and Units will be deemed to be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may
not be transferred unless such Common Shares or Units have been registered
under the Securities Act or an exemption from registration is available,
including any exemption from registration provided under Rule 144. In general,
upon satisfaction of certain conditions, Rule 144 permits the sale of certain
amounts of restricted securities one year following the date of acquisition of
the restricted securities from the Company and, after two years, permits
unlimited sales by persons unaffiliated with the Company.
   
  Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company will have 21,792,115 Common Shares outstanding
(24,792,115 Common Shares if the Underwriters' over-allotment option is
exercised in full), of which 20,000,000 Common Shares (23,000,000 Common
Shares if the Underwriters' over-allotment option is exercised in full) will
be freely tradeable in the public market by persons other than "Affiliates" of
the Company without restriction or registration under the Securities Act. The
Company's officers and Trustees have agreed not to offer, sell, offer to sell,
contract to sell, grant any option to purchase or otherwise sell or dispose of
(or announce any offer, sale, offer of sale, contract of sale, grant of any
option to purchase or other sale or disposition of) any Common Shares or other
shares of beneficial interest of the Company, or any securities convertible or
exercisable or exchangeable for any Units or Common Shares or other shares of
beneficial interest of the Company (other than pursuant to the Plan) for a
period of two years following the effective date of this Offering, without the
prior written consent of the Representative, subject to certain limited
exceptions. The Representative, at any time and without notice, may release
all or any portion of the Common Shares or Units subject to the foregoing
lock-up agreements.     
 
  If the Company exercises its option to deliver Common Shares upon the
redemption of Units, the Partnership Agreement provides that the Company will
deliver registered Common Shares to the holder. The Company has also granted
demand and piggyback registration rights to register the Common Shares being
privately placed with FBR Asset Investment Corporation. See "Common Shares
Eligible for Future Shares--Registration Rights."
 
  The Company may issue from time to time additional Common Shares or Units in
connection with the acquisition of Properties. See "Business of the Company
and Properties--Strategy." The Company anticipates that it will file a
registration statement with respect to the Common Shares issuable upon
exercise of options under the Plan following or concurrent with the completion
of this Offering. Such registration statement generally will allow Common
Shares covered thereby to be transferred or resold with fewer restrictions
under the Securities Act. See "Common Shares Eligible for Future Sale."
 
                                      33
<PAGE>
 
                                USE OF PROCEEDS
 
  The proceeds to the Company from the sale of the Common Shares offered
hereby, net of the estimated underwriting discounts and expenses of the
Offering, are expected to be approximately $277.4 million ($319.2 million if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price per share of $15.00. In addition, the Company
will receive an aggregate of $25 million from the proceeds of the FBR
Offering. The Company will use the net proceeds of the Offering to acquire
21,792,115 Units (24,792,115 Units if the Underwriters' over-allotment option
is exercised in full) (representing an 81.2% interest in the Operating
Partnership (83.1% if the Underwriters' over-allotment option is exercised in
full)). The Operating Partnership will use the net proceeds of the Offering as
follows:
 
<TABLE>   
<CAPTION>
                                                                  PROCEEDS OF
                                                                     PUBLIC
                                                                  OFFERING AND
                                                                  FBR OFFERING
                                                                  ------------
                                                                      (IN
                                                                   THOUSANDS)
<S>                                                               <C>
Gross Offering Proceeds..........................................   $325,000
                                                                    --------
  Less Public Offering Expenses:
    Estimated Offering Expenses..................................   $  1,650
    Estimated Underwriting Discounts and Commissions.............     21,000
                                                                    --------
      Subtotal...................................................   $ 22,650
                                                                    ========
Repayment of FBR Loan (1)........................................   $  2,525
                                                                    --------
Repayment of Mortgage Debt Assumed on Certain Initial Properties
 (Loan Balance as of December 31, 1997):
    Pohanka Automotive Group (2).................................   $ 13,259
    Rosenthal Automotive Organization (3)........................     13,694
    Sheehy Auto Stores (4).......................................      9,574
    Cherner Automotive Group (5).................................      4,771
                                                                    --------
      Subtotal...................................................   $ 41,298
                                                                    ========
Acquisition of Certain Initial Properties:
    Cross-Continent Auto Retailers...............................   $ 35,330
    Good News Auto Mall..........................................      5,461
    Kline Automotive Group.......................................      8,510
                                                                    --------
      Subtotal...................................................   $ 49,301
                                                                    ========
Amount Available for Future Investment in Properties and for
 General Working Capital Purposes................................   $209,226
                                                                    ========
</TABLE>    
- --------
(1) The proceeds of the FBR Loan were used to pay the operating expenses of
    the Company pending the closing of this Offering. The FBR Loan is payable
    on the earlier of (a) demand or (b) the closing of this Offering and
    accrues interest at the rate of 10%.
(2) The two assumed mortgage loans mature on April 7, 2003 and November 1,
    2000, respectively, and accrue interest at a weighted average interest
    rate of 8.5% as of December 31, 1997.
(3) Three of the four assumed mortgage loans mature on June 1, 2006 and the
    fourth assumed mortgage loan matures of October 1, 2007. The four assumed
    mortgage loans accrue interest at a weighted average interest rate of
    7.95% as of December 31, 1997.
(4) Three of the six assumed mortgage loans mature on May 29, 2002 and the
    other three mortgage loans are payable on demand. The six assumed mortgage
    loans accrue interest at a weighted average interest rate of 8.24% as of
    December 31, 1997.
(5) The two assumed mortgage loans mature on July 21, 2005 and July 21, 2000,
    respectively, and accrue interest at a weighted average rate of 8.22% as
    of December 31, 1997.
 
                                      34
<PAGE>
 
   
  The Company expects to enter into a bank line of credit with NationsBank,
N.A. for $10 million and to borrow approximately $5 million at closing
(approximately $2.5 million of which will be guaranteed by Affiliates of Mr.
Rosenthal and approximately $2.5 million of which will be guaranteed by
Affiliates of Mr. Sheehy). The NationsBank line of credit will be secured by
the Pohanka Properties. See "The Initial Properties, Leases and Dealerships."
While the Company may engage from time to time in discussions regarding
potential acquisitions, it has not entered into any agreement as of the date
of this Prospectus to make any such acquisition. Pending the described uses,
any remaining net proceeds will be invested in short-term readily marketable
interest-bearing securities, interest-bearing bank accounts, certificates of
deposit, money market securities, U.S. government securities or mortgage-
backed securities.     
 
                                      35
<PAGE>
 
                                CAPITALIZATION
 
  The following table sets forth the capitalization of the Company as of
October 20, 1997, and pro forma as adjusted to give effect to the completion
of the Offering (assuming no exercise of the Underwriters' over-allotment
option) and the completion of the concurrent FBR Offering. The table should be
read in conjunction with the historical and unaudited pro forma financial
information of the Company included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                     PRO FORMA
                                                                    AS ADJUSTED
                                                        HISTORICAL  OCTOBER 20,
                                                        OCTOBER 20,    1997
                                                           1997     (UNAUDITED)
                                                        ----------- -----------
                                                            (IN THOUSANDS)
<S>                                                     <C>         <C>
Debt outstanding under Line of Credit..................    $--       $  5,000
Minority Interest......................................     --         71,014
Shareholders' Equity:
  Preferred Shares of Beneficial Interest:
    Preferred Shares, par value $.01 per share; 20 mil-
     lion authorized; no shares outstanding historical;
     no shares outstanding pro forma...................     --            --
  Common Shares of Beneficial Interest:
    Common Shares, par value $.01 per share; 100
     million authorized; 10 shares outstanding
     historical; 21,792,115 shares outstanding pro
     forma as adjusted(1)..............................     --            218
  Additional Paid-in Capital...........................     --        306,742
                                                           ----      --------
    Total Shareholders' Equity.........................     --        306,960
                                                           ----      --------
    Total Capitalization...............................    $--       $382,974
                                                           ====      ========
</TABLE>
- --------
   
(1) Excludes 3,000,000 Common Shares reserved for the Underwriters' over-
    allotment option, 5,041,549 Common Shares reserved for issuance upon
    redemption of the Units issuable in connection with the acquisition of
    certain Initial Properties, 2,828,314 Common Shares and Units reserved for
    issuance pursuant to the Company's Plan, of which options to acquire
    106,667 Common Shares and 2,368,107 Units have been granted, 1,277,794
    Common Shares issuable upon exercise of the Underwriting Warrants and an
    aggregate of 1,414,158 Common Shares issuable upon conversion of Units
    issuable upon exercise of the Dealer Warrants (in each case assuming
    exercise of the Underwriters' over-allotment option in full). See
    "Structure and Formation of the Company," "Management--1998 Equity
    Incentive Plan" and "Related Transactions."     
 
                                      36
<PAGE>
 
                                   DILUTION
 
  The Company expects there will be no substantial difference between the
initial public offering price per Common Share and effective cash cost per
Common Share paid in the Offering and the FBR Offering. Accordingly, the
Company expects there will be no material dilution to new investors purchasing
Common Shares in this Offering, except for the payment of Underwriters'
discounts and commissions and other expenses of this Offering. The Company
expects that the dilution per Common Share will be approximately $.91,
determined by subtracting pro forma net tangible book value, after giving
effect to the Offering and the Formation Transactions, from the initial public
offering price paid by a new investor for a Common Share.
 
                                      37
<PAGE>
 
                        CONFLICTS OF INTEREST POLICIES
 
  The Company could be subject to various conflicts of interest arising from
its relationship with Mr. Pohanka or Mr. Rosenthal, who have agreed to join
the Board of Trustees of the Company prior to the closing of this Offering,
and certain Initial Sellers and Initial Lessees who are Affiliates of Mr.
Pohanka or Mr. Rosenthal. In order to mitigate any potential conflicts of
interest, the Company's Declaration of Trust contains a requirement that any
transaction involving the Company and a Trustee or an Affiliate of any Trustee
or any agreement to which they are a party or an increase in the Ownership
Limit for any Trustee or his Affiliate will require the approval of a majority
of the Independent Trustees of the Company. However, there can be no assurance
that these policies will be successful in all cases in eliminating the
influence of the Trustees, and if they are not successful, decisions could be
made that might fail to reflect fully the interest of the shareholders. See
"Risk Factors--Conflicts of Interest." The potential conflicts include:
 
  Ability of Messrs. Pohanka and Rosenthal to Influence the Company. Assuming
(i) conversion of the Units issued to Affiliates of Messrs. Pohanka and
Rosenthal to acquire certain Initial Properties into Common Shares, (ii)
exercise of the Dealer Warrants and conversion of the Units to Common Shares,
and (iii) the purchase of $13 million of Common Shares in this Offering by
Mr. Pohanka and his family, Mr. Pohanka and his Affiliates will own 9.56% and
Mr. Rosenthal and his Affiliates will own 14.27% of the outstanding Common
Shares (including exercise of the Underwriters' over-allotment option in full)
on a fully diluted and converted basis. The Units may be redeemed for Common
Shares at the option of the Company, up to the Company's 9.9% ownership limit
for Common Shares. The approval of the majority of the Independent Trustees of
the Company will be required to waive the Ownership Limit for Trustees or
their Affiliates under the Company's Declaration or Trust. As Trustees and
major holders of Common Shares or Units, Messrs. Pohanka and Rosenthal will be
in a position to exercise influence over the operations and affairs of the
Company.
 
  Terms of Sale and Lease of Properties. The Company has separately negotiated
the terms of the acquisition of the Initial Properties to be acquired by the
Company and the terms of the Initial Leases for those Initial Properties with
each of the Initial Sellers, including with each of Mr. Pohanka and Mr.
Rosenthal. Because Messrs. Pohanka and Rosenthal will join the Board as
Trustees, they may have had greater leverage to negotiate the terms of the
contribution agreements and Initial Leases covering the Initial Properties to
be sold by their respective Affiliates.
 
  Exercise of Rights and Obligations under Agreements with Company. Each of
the contribution agreements for the acquisition of Properties and the Leases
for such Properties contain certain continuing covenants, including, but not
limited to, obligations relating to (i) indemnification, (ii) payment of rent,
(iii) delivery of information, (iv) maintenance and repair of Properties, (v)
use of the Properties, and (vi) assignment and subletting. Failure to meet any
or all of the above obligations could constitute an event of default under the
relevant agreement or otherwise provide the Company with legal recourse to
seek enforcement of the obligation or monetary damages. Because Messrs.
Pohanka and Rosenthal will be Trustees of the Company, each of them could
influence the Company's decision to take legal action or otherwise declare a
default with respect to the failure of any related Seller or Lessee to perform
its obligations under any Agreement with the Company.
 
  Ability of Messrs. Pohanka and Rosenthal and Their Affiliates to Influence
the Sale or Refinancing of the Initial Properties. The Initial Lessees, who
are Affiliates of Messrs. Pohanka and Rosenthal, have entered into Initial
Leases that grant certain rights to the Initial Lessees to repurchase the
Initial Properties at such time as the Company shall determine to sell an
Initial Property or upon expiration of an Extended Term of the Initial Lease.
Messrs. Pohanka or Rosenthal could influence the timing of the Company's
decision to sell, the selection of a particular Initial Property to be sold,
and the decision of the Company to accept or reject any offer by any Initial
Lessee or third party. These Initial Lessees could experience different and
more adverse tax consequences compared to those experienced by shareholders or
other holders of Units upon the sale of, or reduction of mortgage indebtedness
on, or financing of, certain Properties. While the Company, as the sole
general partner of the Operating Partnership, has the exclusive authority to
determine whether and on what terms to sell or finance certain Properties,
such parties may have different objectives regarding the appropriate pricing
and timing of any sale of, or reduction of mortgage indebtedness on, such
Properties. Messrs. Pohanka or Rosenthal could influence the Company not to
sell particular Properties, or not to incur additional, or conversely, not to
pay off outstanding,
 
                                      38
<PAGE>
 
indebtedness on particular Initial Properties, even though such sales or
financing might otherwise be financially advantageous to the Company and its
shareholders.
   
  Pursuant to the lock-out provisions, the Company may not sell (except in
certain events, including certain transactions that would not result in the
recognition of any gain for tax purposes) or may be required to maintain
certain debt levels, for periods ranging from four to seven years on certain
Initial Properties to be acquired from Affiliates of Mr. Pohanka or Mr.
Rosenthal. Thus, the lock-out provisions materially restrict the Company from
selling or otherwise disposing of or refinancing such Initial Properties
without obtaining the consent of such Initial Sellers. The lock-out provisions
apply even if it would otherwise be in the best interests of the shareholders
for the Company to sell one or more of such Initial Properties, reduce the
outstanding indebtedness with respect to any of such Initial Properties or not
refinance such indebtedness on a nonrecourse basis at maturity, or increase
the amount of indebtedness with respect to such Initial Properties. In
addition, the lock-out provisions could preclude the Company from
participating in certain major transactions that could result in a disposition
of the Company or a change in control of the Company even though that
disposition or change in control might be in the best interests of the
shareholders.     
 
                                      39
<PAGE>
 
                         SELECTED FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  The following table sets forth summary selected historical and pro forma
financial information for the Company. The unaudited pro forma operating
information is presented as if the Formation Transactions had occurred as of
the beginning of the period indicated and therefore incorporates certain
assumptions that are included in the Company's Unaudited Pro Forma Financial
Statements. The unaudited pro forma balance sheet information is presented as
if the Formation Transactions had occurred on October 20, 1997. The unaudited
pro forma information does not purport to represent what the Company's
financial position or results of operations actually would have been had the
Formation Transactions, in fact, occurred on such date or at the beginning of
the period indicated, or to project the Company's financial position or results
of operations at any future date or for any future period. The historical and
unaudited pro forma financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
 
<TABLE>   
<CAPTION>
                                            PRO FORMA FOR THE
                                               PERIOD FROM     PRO FORMA
                                             JANUARY 1, 1997   YEAR ENDED
                                                 THROUGH      DECEMBER 31,
                                            OCTOBER 20, 1997      1996
                                            ----------------- ------------
                                                     (UNAUDITED)           
<S>                                         <C>               <C>          
STATEMENT OF OPERATIONS DATA:
Rental income(1)...........................      $13,901        $15,887
General and administrative expenses(2).....        3,063          3,500
Depreciation(3)............................        2,207          2,522
Minority interest(4).......................        1,545          1,765
Interest expense...........................          411            470
Net earnings to Common Shareholders........        6,675          7,630
Net earnings per Common Share..............         0.86           0.99
Weighted average Common Shares
 outstanding(5)............................        7,718          7,718
<CAPTION>
                                                PRO FORMA      HISTORICAL
                                               OCTOBER 20,    OCTOBER 20,
                                                  1997            1997
                                            ----------------- ------------
                                               (UNAUDITED)
<S>                                         <C>               <C>          
BALANCE SHEET DATA:
Real estate owned, at cost.................     $144,113        $   --
Total assets...............................      384,298            --
Debt outstanding under line of credit......        5,000            --
Minority interest..........................       71,014            --
Total shareholders' equity.................      306,960            --
</TABLE>    
- --------
   
(1) Represents rental income from the Initial Lessees recorded in accordance
    with the terms of the Initial Leases as if all Initial Properties had been
    subject to the Initial Leases for the entire period. Excludes rental income
    of approximately $2.4 million and $2.1 million for the year ended December
    31, 1996 and the period ended October 20, 1997, respectively, for two of
    the Initial Properties as these Initial Properties are currently being
    developed for use.     
(2) Represents management's estimates of general and administrative expenses.
(3) Represents depreciation of the building and improvements as allocated from
    the purchase prices of the Initial Properties over a 20-year period.
(4) Represents approximately 18.8% of the Operating Partnership's net earnings.
   
(5) Represents the number of Common Shares whose proceeds will be used to repay
    mortgage debt assumed and to acquire the Initial Properties. If the total
    number of Common Shares issued in the Offering and the FBR Offering had
    been used, weighted average Common Shares outstanding would be 21,792 for
    both the year ended December 31, 1996 and for the period ended October 20,
    1997, resulting in net earnings per Common Share of $0.35 and $0.31 for the
    year ended December 31, 1996 and the period ended October 20, 1997,
    respectively.     
       
                                       40
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
  The Company was organized as a Maryland REIT on October 20, 1997, and
intends to make an election to qualify under the Code as a REIT commencing
with its taxable year ending December 31, 1998. Substantially all of the
Company's initial revenues are expected to be derived from: (i) rents received
under long-term triple-net Leases of Properties operated as Dealerships and
Related Businesses, including 36 Initial Properties the Company anticipates
acquiring upon the completion of this Offering and which the Company
thereafter will lease back to the Initial Lessees pursuant to the Initial
Leases (which are in some cases guaranteed by affiliated Guarantors) and (ii)
interest earned from the temporary investment of funds in short-term
investments. The Initial Base Annual Rent for each Initial Property under the
Initial Leases is initially set at a fixed amount and the Base Annual Rent
will be adjusted upward periodically based on a factor of the CPI. The CPI
adjustments range from one-half of CPI adjusted every other year to full CPI
adjusted every year. Certain Initial Leases establish minimum or maximum
adjustment rates that range from zero to 3% of base annual rents.
 
  The Company will incur operating and administrative expenses including,
principally, compensation expense for its executive officers and other
employees, professional fees and various expenses incurred in the process of
acquiring additional Properties. The Company will be self-administered and
managed by its executive officers and staff, and will not engage a separate
advisor or pay an advisory fee for services, although the Company will engage
legal, accounting, tax and financial advisors from time to time.
 
  The primary non-cash expense of the Company will be the depreciation of its
Properties. The Company expects to depreciate buildings and improvements on
the Initial Properties over a 39.5-year and 20-year period for tax and
financial reporting purposes, respectively. The Company will not own or lease
any personal property, furniture or equipment at any Initial Property.
 
  The Company also expects to employ leverage, using a combination of debt or
other equity securities and a bank credit facility, to fund additional
investments, and will incur long and short-term indebtedness, and related
interest expense, from time to time. See "Risk Factors--There Can be No
Assurance That the Company Will Complete Any Additional Acquisitions of
Properties or that the Company Will Not be Treated as an Investment Company."
 
  The Company intends to make distributions to its shareholders in amounts not
less than the amounts required to maintain REIT status under the Code. The
Company's ability to make distributions will depend on actual results of
operations, including (i) the timing of the investment of the proceeds of the
Offering and the FBR Offering, (ii) the rent received from the Lessees, (iii)
the ability of the Lessees of the Properties to meet their obligations under
the Leases, and (iv) the operating expenses of the Company.
 
RESULTS OF OPERATIONS
  The Company has had no operations prior to October 20, 1997 (the date of
organization). The Company's future results of operations will depend upon the
Company's receipt of payments under the Initial Leases, the acquisition of the
additional Properties, and the terms of any other investments the Company may
make.
 
PRO FORMA RESULTS OF OPERATIONS
   
  The aggregate acquisition price for the Initial Properties will be $144.1
million, including the assumption of aggregate indebtedness of $41.3 million.
This aggregate purchase price excludes the agreed-upon purchase price of $22.1
million, for two of the Initial Properties, as these Initial Properties are
currently being developed for use. The Company estimates that after giving
effect to the Offering and the acquisition of the Initial Properties, rental
income would have been $15.9 million for the year ended December 31, 1996 and
$13.9 million for the period ended October 20, 1997. This rental income does
not include $2.4 million and $2.1 million for the year ended December 31, 1996
and the period ended October 20, 1997, respectively, for the two Initial
Properties referred to above. Estimated expenses, including depreciation and
amortization, general and administrative expense, and interest expense, would
have been $6.5 million and $5.7 million for the year ended December 31, 1996
and the period ended October 20, 1997, respectively. These expenses do not
include $.4 million and .3 million for the year ended December 31, 1996 and
the period ended October 20, 1997, respectively, for the two     
 
                                      41
<PAGE>
 
   
Initial Properties referred to above. Net earnings would have been $7.6
million or $0.99 per Common Share for the year ended December 31, 1996, and
$6.7 million or $0.86 per Common Share for the period ended October 20, 1997
(net earnings per Common Share would have been $0.35 and $0.31 for the year
ended December 31, 1996 and the period ended October 20, 1997, respectively,
if the Common Shares outstanding had included the Offering and the FBR
Offering). Pro forma rental income is recorded in accordance with the terms of
the Initial Leases as if all of the Initial Leases had been in effect for the
entire period. Additional information relating to the adjustments and
assumptions made for pro forma results of operations is reflected in the
Company's Unaudited Pro Forma Financial Statements, located elsewhere in this
Prospectus. See "Selected Financial Information."     
 
  Environmental Matters. Each Initial Lease and Contribution Agreement
provides for various representations and warranties by the Initial Lessee and
Initial Seller, respectively, relating to environmental matters with respect
to each Initial Property. The Phase 1 reports indicate that petroleum products
have been released from leaking underground storage tanks removed from three
of the Initial Properties and asbestos is present at two of the Initial
Properties. Each Initial Lease and Contribution Agreement requires the Initial
Lessee to indemnify and hold harmless the Company from and against third party
liabilities, costs and expenses imposed upon or asserted against the Company
or the Initial Property on account of, among other things, any federal, state
or local law, ordinance, regulation, order or decree relating to the
protection of human health or the environment in respect of the Initial
Property. Each Initial Lessee is obligated to comply with all environmental
laws. Notwithstanding the environmental laws impose liabilities on the owner
of property. The Company, therefore, could incur liabilities regardless of the
Initial Lease provisions, especially if the Initial Lessee defaults on its
obligations to the Company.
 
LIQUIDITY AND CAPITAL RESOURCES
  The Company anticipates that the proceeds of the Offering and the FBR
Offering, together with its cash from operations, and any bank credit facility
anticipated to be available to the Company, will provide adequate liquidity to
acquire additional Properties, conduct its operations, fund administrative and
operating costs, interest payments and acquisitions, and allow distributions
to shareholders in accordance with the Code's requirements for qualification
as a REIT and to avoid any corporate level federal income or excise tax.
 
  In order to qualify as a REIT for federal income tax purposes, the Company
will be required to make substantial distributions to its shareholders. The
following factors, among others, will affect Funds from Operations and will
influence the decisions of the Board of Trustees regarding distributions: (i)
increases in Annual Base Rent under the Leases; and (ii) returns from short-
term investments pending application of the net proceeds of the Offering.
Although the Company will receive most of its rental payments on a monthly
basis, it intends to make distributions quarterly. Amounts accumulated for
distribution will be invested by the Company in short-term investments.
 
  Under the terms of the Initial Leases, each Initial Lessee is responsible
for substantially all expenses associated with the operation of the related
Initial Property, such as taxes and other governmental charges, insurance,
utilities, service, maintenance and any ground lease payments. See "Business
of the Company and Properties--The Initial Properties, Leases and
Dealerships." As a result of these arrangements, the Company does not believe
it will be responsible for any major expenses in connection with the Initial
Properties during the terms of the respective Initial Leases. The Company
anticipates entering into similar Leases with respect to additional
Properties. After the terms of any respective Lease expires, or in the event a
Lessee is unable to meet its obligations, the Company anticipates that any
expenditures it might become responsible for in maintaining the related
Property will be funded by cash from operations and, in the case of major
expenditures, possibly by borrowings. To the extent that unanticipated
expenditures or significant borrowings are required, the Company's Funds from
Operations and liquidity may be adversely affected.
 
  Other than the purchase of the Initial Properties (including the repayment
of Mortgage Debt) and the repayment of the FBR Loan, the Company has no
commitments to make other capital expenditures at the date of this Prospectus.
The Company may raise additional long-term capital by issuing, in public or
private transactions,
 
                                      42
<PAGE>
 
   
debt or other equity securities, but the availability and terms of any such
issuance will depend upon the market and other conditions. The Company
anticipates that as a result of its initially low ratio of debt to total
market capitalization and its intention to maintain such ratio at no more than
50%, it will be able to obtain financing for its long-term capital needs.
However, there can be no assurance that additional financing or capital will
be available on terms acceptable to the Company. The Company intends to enter
into a bank credit facility with NationsBank, N.A. for $10 million,
approximately $5 million of which will be drawn down at the closing of the
Offering. The NationsBank line of credit will be secured by the Pohanka
Properties. See "Business of the Company and Properties--The Initial Leases,
Properties and Dealerships. The Company also intends to obtain an additional
line of credit for acquisition of Properties after the closing of this
Offering and may borrow additional amounts in connection with the acquisition
of additional Properties, the renovation or expansion of Properties, or, as
necessary, to meet certain distribution requirements imposed on a REIT under
the Code.     
 
  Acquisitions will be made subject to the investment objectives and policies
to maximize both current income and long-term growth in income described
elsewhere in this Prospectus. The Company's liquidity requirements with
respect to future acquisitions may be reduced to the extent the Company uses
Common Shares or Units as consideration for such purchases.
 
                                      43
<PAGE>
 
                    BUSINESS OF THE COMPANY AND PROPERTIES
 
OVERVIEW
 
  The Company is a newly organized self-administered and self-managed Maryland
REIT formed on October 20, 1997 to invest in the real property and
improvements used by Dealers of multi-site, multi-franchised Dealerships and
Related Businesses located in major metropolitan areas throughout the United
States. The Company is the first publicly-offered REIT formed primarily to
acquire and lease back Properties for use by Dealers.
 
  The Company has entered into agreements to acquire 36 Initial Properties on
which 54 franchisees of 24 brands are located. Twenty of the Initial
Properties are located in the Washington, D.C. Metropolitan Area, which
Initial Properties are operated by four of the top 20 Dealers in the
Washington, D.C. Metropolitan Area, as measured by total new vehicles sold in
1996. Other Initial Properties are located in Colorado, the eastern shore of
Maryland, Nevada, Pennsylvania, Texas and southern Virginia. Dealers located
on the Initial Properties sell domestic and imported luxury, family, economy,
and sport utility vehicles, trucks and vans, including Mercedes-Benz, Honda,
Toyota, Lexus, Chevrolet, Saturn, Ford, GMC, Mazda, Infiniti, Jaguar, Acura,
Lincoln-Mercury, Mitsubishi and Nissan. The Initial Properties have been
purchased from the Initial Sellers, each of whom is an Affiliate of a Dealer
and will be leased back to the Initial Lessees. The Initial Leases will be
long-term leases that require the Initial Lessees to pay all operating costs
of the Initial Properties, as well as all real estate taxes, utilities,
insurance, repairs, maintenance and other expenses (commonly referred to as
"triple net" leases).
 
  The Initial Lessees are Affiliates of Pohanka, Rosenthal, Sheehy, Cherner,
Cross-Continent, Good News and Kline. Intial Sellers affiliated with Pohanka,
Rosenthal, Sheehy and Cherner will own 1,204,342; 3,438,298; 295,439; and
103,470 Units, respectively, in the Operating Partnership. Each of Messrs.
Pohanka and Rosenthal will also have the right to acquire 707,079 Units (equal
to 2% of the Common Shares to be outstanding on the closing of the Offering
(including exercise of the Underwriters' over-allotment option in full) on a
fully diluted basis). Messrs. Pohanka and Rosenthal have agreed to join the
Company's Board of Trustees prior to the closing of the Offering. Mr. Pohanka
and his family have also advised the Representative that they intend to
purchase up to $13 million of registered Common Shares in this Offering.
 
  The Company has employees located in Chicago, Los Angeles and Naples,
Florida who will be responsible for identifying and negotiating acquisitions
of Properties. The Company expects to identify Dealers through existing
contacts, existing Sellers, participation in professional organizations or
through other methods or by Dealers contacting the Company.
   
  Thomas D. Eckert, President and Chief Executive Officer, Scott M. Stahr,
Executive Vice President and Chief Operating Officer, Donald L. Keithley,
Executive Vice President of Business Development, and David S. Kay, Vice
President and Chief Financial Officer, the Company's executive officers, have
22; 12; 38; and 10 years of experience, respectively, in the real estate,
financial and motor vehicle industries, although they do not have experience
managing or operating a REIT. Following the Offering, the Company's executive
officers will own or have the right to acquire in the aggregate of 106,667
Common Shares and 2,368,107 Units (equal to 7% of the Common Shares to be
outstanding on the closing of the Offering (including exercise of the
Underwriters' over-allotment option in full) on a fully diluted basis)
pursuant to options granted under the Company's Plan. See "Management--1998
Equity Incentive Plan."     
 
  The Pohanka Automotive Group, led by its Chairman, John J. Pohanka, has been
in business for almost 80 years. The Pohanka family began operating
dealerships in 1919, and the business' current leader, Mr. Pohanka has been
involved in the automotive industry for almost 50 years. Today the second and
third generation of the Pohanka family lead the business' operations. In 1996,
the Pohanka Automotive Group Dealerships sold 11,900 new and used motor
vehicles. The Pohanka Automotive Group is currently comprised of nine
Dealerships, each of which is located in the Washington, D.C. Metropolitan
Area. Under Mr. Pohanka's leadership, the Pohanka Automotive Group's
Dealerships have received numerous awards, including the Time Magazine Quality
Dealer Award. The Company has entered into agreements to purchase all of the
Properties used by the Pohanka Automotive Group.
 
                                      44
<PAGE>
 
  The Rosenthal Automotive Organization, led by its Chairman, Robert M.
Rosenthal, has been in business for over 40 years. With 19 franchises, the
Rosenthal Automotive Organization is the 14th largest automotive group in the
United States in terms of total new vehicles sold in 1996. In 1996, the
Rosenthal Automotive Organization Dealerships sold more than 31,500 new and
used motor vehicles. Under Mr. Rosenthal's leadership, the Rosenthal
Automotive Organization's Dealerships have received numerous national and
local awards, including the Time Magazine Quality Dealer Award, the
International American Automobile Dealers/Sports Illustrated Dealer of
Distinction, the Acura Precision Team Award, the Jaguar Pride of Jaguar Award,
and the Mazda President's Award. The Company has entered into agreements to
purchase seven of the 13 Properties used by the Rosenthal Automotive
Organization or its Affiliates (which are substantially all of the Properties
owned by the Rosenthal Automotive Organization).
 
  The Sheehy Auto Stores, led by its Chairman, Vincent A. Sheehy, were
established in 1965. Mr. Sheehy entered the automotive business in 1945. Mr.
Sheehy is a past chairman of the Ford Dealer Advertising Fund and a past
director of the National Automobile Dealers Association. Mr. Sheehy's
Dealerships have won numerous awards including the North American Customer
Excellence Awards in 1995, 1996 and 1997 and the President's Circle Award in
1996. The Sheehy Auto Stores sold approximately 14,500 motor vehicles in 1996.
The Company has entered into agreements to purchase four Initial Properties
used by the Sheehy Auto Stores.
 
  The Cherner Automotive Group first began operating in the mid-1920's in
Washington, D.C. Jonathan and Andrew Cherner took over management of the
Dealerships in 1993. Jonathan Cherner is a board member of the Washington
Lincoln Mercury Dealers Association, the Washington Area Isuzu Dealer
Advertising Association and the Isuzu National Dealer Council. Andrew Cherner
is an active member of Kia's National Dealer Council and the Lincoln Mercury
Regional Marketing Committee. The Cherner Automotive Group sold approximately
4,200 motor vehicles in 1996. The Company has entered into agreements to
purchase one Initial Property used by Cherner Automotive Group.
   
   Cross-Continent, led by its Chief Executive Officer, Bill Gilliland, was
created in 1996 by reorganizing the ownership of six Dealerships controlled by
Mr. Gilliland. Cross-Continent became a publicly-traded company on September
23, 1996, and is listed on the New York Stock Exchange under the symbol "XC."
Prior to this, Mr. Gilliland had been involved in the automotive industry for
over 30 years. Cross-Continent owns and operates 11 Dealerships and Related
Businesses located in Amarillo, Texas, Oklahoma City, Oklahoma, Denver,
Colorado and Las Vegas, Nevada, certain of which have been in continuous
operation under various owners since the 1920s. Since its 1996 initial public
offering Cross-Continent has acquired seven Dealerships located in Oklahoma
City, Oklahoma, Denver, Colorado, and Las Vegas, Nevada. The Company has
entered into agreements to purchase six Properties used by Cross-Continent.
    
  Good News, led by its Chairman, Roy L. Meyers, Jr., has been in business for
20 years. With Dealerships located on the eastern shore of Maryland that
represent nine franchises, the Good News sold 4,200 new and used motor
vehicles in 1996. Under Mr. Meyers' leadership, the Good News Dealerships have
won several awards, including top dealership awards from Honda, Toyota,
Nissan, Mazda and GMC Truck. The Company has entered into agreement to
purchase seven of the Properties used or owned by the Good News.
 
  The Kline Automotive Group, led by its Chairman and President, James M.
Kline, has been in business for over 70 years. The Kline family began
operating dealerships in 1926, and the business' current leader, Mr. Kline has
been involved in the automotive industry for over 40 years. In 1996, the Kline
Automotive Group's Dealerships sold over 16,400 new and used motor vehicles.
The Kline Automotive Group is currently comprised of six Dealerships located
in southern Virginia and the Washington, D.C. metropolitan area. Under Mr.
Kline's leadership, the Kline Automotive Group's Dealerships have received
numerous awards, including the Toyota President's Award, Board of Governor's
Award and Leadership Board Award and the Chevrolet Sales Volume Campaign
Award. The Company has entered into agreements to purchase two of the
Properties used by the Kline Automotive Group.
 
  New and used franchised motor vehicle retailing, including the sale of
trucks, minivans, and sport utility vehicles, parts and services, and other
ancillary businesses, is the largest consumer retail sector in the United
States, with approximately $500 billion in 1996 sales. Sales by franchised
motor vehicle retail dealerships are estimated to account for one-fifth of the
nation's total retail sales of all products and merchandise. In 1996, the
 
                                      45
<PAGE>
 
100 largest Dealership groups generated less than 10% of total sales revenue
and controlled approximately 5% of the over 22,000 existing franchised
Dealerships, demonstrating the fragmentation of the industry. The Company
believes that the size and the fragmentation of the industry and the
increasing capital needs of Dealers provide an attractive environment in which
the Company can seek to implement its primary business strategy. The current
trend is for Dealers to consolidate their operations to increase efficiency
and their competitive position. That trend should facilitate the Company's
strategy of acquiring Properties from Dealers with multi-site, multi-
franchised and diversified locations.
 
  The Company believes that because the real property and improvements are
single use properties used by a single industry, that type of property is a
major and discrete sector of the national retail real estate industry.
Industry sources estimate that Dealerships have over $40 billion currently
invested in Dealership-related real estate. The Company believes that those
properties present attractive acquisition and financing opportunities because
they have locations with frontage on, and visibility from, major thoroughfares
and zoning for a wide range of alternative uses. In the event that such
properties can no longer be leased to Dealers, the Company believes that they
can be redeveloped for other commercial or residential uses.
 
STRATEGY
 
  The Company's primary business strategy is to acquire a diversified
portfolio of Properties used by Dealers throughout the United States,
including Properties used by new motor vehicle retail dealerships, used motor
vehicle retail dealerships, motor vehicle auctioneers, and service, repair or
parts businesses. In addition, the Company intends to commit to purchase
Properties under construction, renovation or expansion upon completion of such
construction, renovation or expansion. The Company believes that its
acquisition strategy will provide sellers with an opportunity (i) to acquire
liquidity, while maintaining ownership and control of the Dealerships or
Related Businesses, (ii) to diversify their investments, (iii) to obtain funds
to expand the operations of their Dealerships or Related Businesses, and (iv)
to facilitate their estate planning.
 
  The Company's primary objective is to become an owner and lessor of
Properties used throughout the United States for the primary purpose of
generating rental income in order to provide the Company with predictable
streams of cash flow to maximize shareholder value. To achieve these
objectives, the Company plans to:
 
 .  Implement an aggressive, yet disciplined, acquisition program by purchasing
   Properties used by Dealers of multi-site, multi-franchised Dealerships or
   Related Businesses that have demonstrated historic growth, are well
   managed, and have been maintained in good condition, and whose location and
   characteristics will be suitable for alternative use by:
 
    .  Diversifying geographically by acquiring Properties located
       primarily in major CMSAs in order to minimize the potential adverse
       impact of economic downturns in certain markets;
 
    .  Leveraging the contacts and experience of the Company's management
       to build and maintain long-term relationships with Dealers;
 
    .  Maintaining long-term working relationships with Dealers, by
       providing capital for multiple acquisitions of Properties on a
       market-by-market basis, thereby enhancing efficiency and value; and
 
    .  Taking advantage of opportunities created by the fragmented
       ownership of Dealerships and Related Businesses, and the large
       number of suitable locations with adequate roadway frontage, high
       visibility and appropriate zoning.
 
 .  Use the Company's UPREIT structure to acquire Properties in exchange for
   cash or Units, or a combination of cash and Units, thereby deferring some
   or all of a Seller's potential taxable gain, and enhancing the ability of
   the Company to consummate transactions and to structure more competitive
   acquisitions than other real estate companies in the market that lack the
   Company's access to capital and the ability to acquire Properties with
   Units.
 
 .  Use several valuation mechanisms, including calculations of discounted cash
   flow, evaluations of comparable sales and leases of properties, analysis of
   the alternative uses of the Properties and evaluation of the Dealers'
   financial strength, to determine the purchase price and lease terms for the
   Properties.
 
                                      46
<PAGE>
 
 .  Lease back the Properties to Lessees on a triple-net basis, thereby
   eliminating brokerage, re-leasing and similar costs and the risk of high
   Lessee turnover due to the general historic long-term operation of
   Dealerships or Related Businesses at Property locations.
 
 .  Negotiate Lease covenants designed to minimize the likelihood of loss to
   the Company, by permitting the Company to establish the ability of the
   Lessees (together with any Guarantors) to pay rent by bi-annually
   monitoring compliance with a Rent Coverage Ratio of 1.5 to 1 or require the
   Lessee to provide additional security in the form of a Guarantee of an
   Affiliate.
 
 .  Utilize a variety of other financing sources, that may include the issuance
   of Units, or other equity securities or debt securities, or a combination
   thereof; and enter into a bank credit facility that will be used to
   leverage Properties, acquire additional Properties and for working capital
   purposes as a means to gain positive spread on investment. The Company's
   policy is to operate with a debt to total market capitalization ratio of
   not more than 50%, which policy may be changed from time to time by the
   Board of Trustees.
 
THE INITIAL LEASES, PROPERTIES AND DEALERSHIPS
   
  The Company has entered into agreements to acquire 20 Initial Properties
that are located primarily in suburban communities of the Washington, D.C.
Metropolitan Area. The locations of the other 16 Initial Properties include
Colorado, the eastern shore of Maryland, Nevada, Pennsylvania, Texas and
southern Virginia. The Company's interest in each Initial Property includes
the land, buildings and improvements, related easements and rights and
fixtures. The Company will not own or lease any personal property, furniture
or equipment at any Initial Property, all of which will be owned, or leased
from third parties or by the respective Initial Lessee. The Initial Properties
are generally zoned for a wide range of commercial uses and typically have
frontage on major transportation arteries with high traffic patterns, high
visibility, bright signage, and ease of entrance and exit. The improvements on
the Initial Properties generally consist of one or more retail showrooms,
office space (which may or may not be contained in separate buildings),
adjacent full service and repair facilities, parts and accessories
departments, and in many cases, acreage set aside for used car sales, body
shops and parking for inventory.     
   
  The Company will own fee simple title to the Initial Properties, with the
exception of Rosenthal Chevrolet, a portion of which is subject to a ground
lease. The sites of the Initial Properties are generally subject to standard
and customary utility and other easements, certain covenants and restrictions
and certain reciprocal easements regarding access. Fourteen of the Initial
Properties are secured by Mortgage Debt that will be paid in full from the
proceeds of this Offering. The Pohanka Properties will secure the line of
credit that the Company expects to obtain from NationsBank, N.A. in the amount
of $10 million. See "Use of Proceeds."     
 
  Set forth below is certain information relating to the Initial Properties:
<TABLE>   
<CAPTION>
                                                                      AGGREGATE
                                                                        GROSS
                                                             LAND     LEASEABLE
                                               PURCHASE      AREA      BUILDING
     DEALERSHIPS(1)            LOCATION       PRICE(2)(3)  IN ACRES AREA (SQ. FT.)
     --------------            --------      ------------- -------- --------------
<S>                       <C>                <C>           <C>      <C>
Rosenthal Infiniti,
 Mazda/Nissan...........  Tysons Corner, VA  $  23,873,587   12.0       84,384
Rosenthal Nissan, Acura,
 Mazda & Isuzu..........  Gaithersburg, MD      11,855,771    8.4       68,898
Rosenthal Honda &
 Jaguar.................  Tysons Corner, VA     11,454,528    7.8       46,836
Rosenthal Chevrolet &
 Jeep/Eagle.............  Arlington, VA          6,779,469    5.2       67,000
Rosenthal Mazda.........  Arlington, VA          5,356,973    2.2       16,176
Rosenthal Storage Lot...  Arlington, VA          4,890,991    4.7       32,349
Rosenthal Body Shop.....  Tysons Corner, VA      1,057,392    0.9       16,000
                                             -------------  -----      -------
   Subtotal.............                     $  65,268,711   41.2      331,643
                                             =============  =====      =======
Pohanka Acura &
 Chevrolet/GEO(4).......  Chantilly, VA      $   7,651,113    5.1       48,571
Pohanka Saturn/Isuzu
 Oldsmobile & GMC
 Truck(4)...............  Marlow Heights, MD     4,326,150    5.9       38,377
Pohanka Saturn(4).......  Bowie, MD              4,064,550    5.3       22,679
Pohanka Honda(4)........  Marlow Heights, MD     3,700,387    2.3       40,769
Pohanka Lexus(4)........  Chantilly, VA          3,438,343    2.3       15,111
Pohanka Cadillac,
 Hyundai, Nissan &
 Kia(4).................  Fredricksburg, VA      3,432,650    6.2       42,473
Pohanka Undeveloped
 Dealership Lot(4)......  Chantilly, VA          2,459,742    7.1          --
Pohanka Hyundai &
 Subaru(4)..............  Marlow Heights, MD     1,556,465    2.6       15,372
Pohanka Body Shop(4)....  Marlow Heights, MD       694,575    2.7        2,550
                                             -------------  -----      -------
   Subtotal.............                     $  31,323,975   39.5      225,902
                                             =============  =====      =======
</TABLE>    
 
                                      47
<PAGE>
 
<TABLE>   
<CAPTION>
                                                                     AGGREGATE
                                                                       GROSS
                                                            LAND     LEASEABLE
                                               PURCHASE     AREA      BUILDING
     DEALERSHIPS(1)            LOCATION      PRICE(2)(3)  IN ACRES AREA (SQ. FT.)
     --------------            --------      ------------ -------- --------------
<S>                       <C>                <C>          <C>      <C>
Sheehy Ford & Kia.......  Springfield, VA    $  6,308,000    6.6        51,512
Chapman Ford Sales(5)...  Philadelphia, PA      3,000,000    7.9           --
Sheehy Lincoln-Mercury &
 Mitsubishi.............  Woodbridge, VA        2,565,925    3.1        24,597
Sheehy Ford.............  Marlow Heights, MD    2,132,000    4.6        26,400
                                             ------------  -----     ---------
   Subtotal.............                     $ 14,005,925   22.2       102,509
                                             ============  =====     =========
Cherner Lincoln-
 Mercury................  Annandale, VA      $  6,322,909    5.3        43,884
                                             ============  =====     =========
T. West Sales & Service
 (Toyota)...............  Las Vegas, NV      $ 13,205,000    8.8       126,685
Douglas Motors
 (Toyota)...............  Denver, CO            8,905,000    6.5       148,461
Plains Chevrolet........  Amarillo, TX          4,705,000   16.1       121,425
Westgate Chevrolet......  Amarillo, TX          4,405,000    8.0        48,000
Midway Chevrolet........  Amarillo, TX          3,105,000   12.2        43,262
Quality Nissan..........  Amarillo, TX          1,005,000    3.4        16,947
                                             ------------  -----     ---------
   Subtotal.............                     $ 35,330,000   55.0       504,780
                                             ============  =====     =========
Price Buick & Pontiac...  Salisbury, MD      $  1,344,826    3.3        12,500
Good News Body Shop.....  Salisbury, MD         1,268,500    6.2        12,200
Good News Olds-Cadillac-
 GMC....................  Salisbury, MD           830,300    3.5        14,700
Good News Honda.........  Salisbury, MD           586,560    2.4        11,800
Towne Toyota & Mercedes-
 Benz...................  Salisbury, MD           568,500    2.3        12,100
Good News Nissan........  Salisbury, MD           449,400    1.2        17,200
Good News Mazda.........  Salisbury, MD           413,000    1.4        12,400
                                             ------------  -----     ---------
   Subtotal.............                     $  5,461,086   20.3        92,900
                                             ============  =====     =========
Kline Toyota
 Greenbrier/Kline
 Chevrolet..............  Chesapeake, VA     $  6,984,755   11.2        71,280
Kline (Land)............  Chesapeake, VA        1,525,245   14.0           --
                                             ------------  -----     ---------
   Subtotal.............                     $  8,510,000   25.2        71,280
                                             ============  =====     =========
   Total                                     $166,222,606  208.7     1,372,898
                                             ============  =====     =========
</TABLE>    
- --------
   
(1) The Company currently intends to close the acquisitions of the Initial
    Properties within 60 days of the date of closing of this Offering, except
    that the acquisition of the Cross-Continent Initial Properties located in
    Las Vegas, Nevada and Denver, Colorado are scheduled to close in July
    1998.     
(2) The purchase prices for the Initial Properties are allocated among the
    initial selling groups as follows:
<TABLE>   
<CAPTION>
                                              ASSUMED ALLOCATION OF PURCHASE PRICE
                                             --------------------------------------
                                                             ASSUMED
                             TOTAL PURCHASE                APPROXIMATE    ESTIMATED
   SELLING GROUP                  PRICE         CASH     MORTGAGE DEBT(A)   UNITS
   -------------             --------------- ----------- ---------------- ---------
   <S>                       <C>             <C>         <C>              <C>
   Pohanka Automotive
    Group..................  $    31,323,975 $       --    $13,258,844    1,204,342
   Rosenthal Automotive Or-
    ganization.............       65,268,711         --     13,694,242    3,438,298
   Sheehy Auto Stores......       14,005,925         --      9,574,333      295,439
   Cherner Automotive
    Group..................        6,322,909         --      4,770,863      103,470
   Cross-Continent Auto Re-
    tailers, Inc. .........       35,330,000  35,330,000           --           --
   Good News Auto Mall.....        5,461,086   5,461,086           --           --
   Kline Automotive Group..        8,510,000   8,510,000           --           --
                             --------------- -----------   -----------    ---------
                                                                          5,041,549
      Totals...............  $   166,222,606 $49,301,086   $41,298,282
                             =============== ===========   ===========    =========
</TABLE>    
- --------
   
    (a) Based on mortgage debt outstanding as of December 31, 1997.     
   
(3) Includes an aggregate of approximately $1.4 million attributable to
    estimated acquisition fees and expenses (including transfer taxes,
    recordation taxes and title insurance and costs of other services but
    excludes $1.5 million attributable to estimated consulting and attorneys'
    fees). The Initial Sellers who are Affiliates of Pohanka, Rosenthal,
    Sheehy or Cherner may elect to receive the portion of the purchase price
    relating to acquisition fees or expenses either in cash or in Units.     
   
(4) The Company expects to enter into a line of credit with NationsBank, N.A.
    in the amount of $10 million and to borrow $5 million at closing of this
    Offering. The line of credit will be secured by the Pohanka Mortgage on
    the Pohanka Properties. The Pohanka Mortgage will accrue interest payable
    monthly in arrears at a floating interest rate equal to 90 days Libor +
    1.50%. The line of credit (and Pohanka Mortgage) will mature in August
    1998. At maturity, a balloon principal payments in the aggregate amount of
    the then outstanding borrowings plus any accrued and unpaid interest will
    be due and payable, unless the line of credit is renewed or is refinanced
    as is currently contemplated by the Company. The line of credit and
    Pohanka Mortgage may be paid in full at any time without prepayment
    penalty or premium. In addition, approximately $2.5 million of the line of
    credit will be guaranteed by Affiliates of Mr. Sheehy and approximately
    $2.5 million will be guaranteed by Affiliates of Mr. Rosenthal.     
   
(5) The Company will acquire the land but not the improvements occupying the
    land of Chapman Ford Sales.     
   
  Concurrently with the Company's acquisition of the Initial Properties, the
Company will lease them back to the Initial Lessees pursuant to the Initial
Leases. The Company expects that the Initial Leases will be for the Fixed
Terms ranging from eight to 11 years and may be extended for one or two
Extended Terms of ten years at the option of the respective Initial Lessee.
The Initial Leases will require the Initial Lessees to pay substantially all
expenses associated with the operation of the Initial Properties, such as real
estate taxes and other governmental charges, insurance, utilities, service,
maintenance and, therefore, will be on a "triple-net" basis. The Initial
Leases also require the Initial Lessees     
 
                                      48
<PAGE>
 
to undertake and pay for any substantial additions, repairs, renovations and
improvements to the Initial Properties after receiving the consent of the
Company, unless the Company decides, at its option, to pay for such
expenditures, which would be on terms to be negotiated. Upon expiration or
termination of the Initial Leases, the Initial Leases generally provide that
additions, repairs, renovations and improvements will become the Property of
the Company. Each Initial Lease will require the Initial Lessee to operate the
Initial Property only for the same purpose for which it was used on the
Company's purchase date, unless the Company consents to a different use.
 
                                     48--1
<PAGE>

   
  The Initial Annual Base Rent under each Initial Lease has been negotiated by
the Company to produce an appropriate yield to the Company (based on the
return on the Company's investment) considering (i) the purchase price of the
Property, (ii) the credit worthiness of the Lessee, (iii) the rental rates for
similarly situated properties in the geographic location in which the Property
is situated, (iv) the characteristics of the Property, (v) the cost to the
Company of the funds used to acquire the Property, and (vi) the return that
the Company could realize from alternative investments on that Initial
Property's purchase price (including acquisition fees and expenses). The yield
to the Company from an investment in Properties will differ from the yield to
shareholders from an investment in the Common Shares. The Initial Annual Base
Rent and the Annual Base Rent will be adjusted upward periodically based on a
factor of the CPI. The CPI adjustments range from one half of CPI adjusted
every other year to full CPI adjusted every year. Certain Initial Leases
establish minimum and maximum periodic adjustments that range from zero to 3%
of base annual rent. The Company will have general recourse to the Initial
Lessees, but the Initial Lessees' payment obligations under the Initial Leases
will be unsecured.     
 
  Set forth below is certain information relating to the Initial Lessees:
<TABLE>   
<CAPTION>
                                                              INITIAL
                                                            ANNUAL BASE   LEASE     FIXED
      LESSEE (DEALERSHIPS)(1)(2)              LOCATION         RENT     EXPIRATION   TERM   EXTENDED TERM(3)
      --------------------------         ------------------ ----------- ---------- -------- -----------------
<S>                                      <C>                <C>         <C>        <C>      <C>
Geneva Enterprises, Inc.
 d/b/a Rosenthal Nissan/Mazda(4).......  Tysons Corner, VA  $ 2,506,727 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Mazda.......................  Arlington, VA          621,408 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Chevrolet/Jeep/Eagle
 (Storage Lot).........................  Arlington, VA          562,464 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Honda(4)....................  Tysons Corner, VA      511,866 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Jaguar(4)...................  Tysons Corner, VA      511,854 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a Geneva
 Management (Related Business).........  Arlington, VA          453,600 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Isuzu.......................  Gaithersburg, MD       451,418 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc.
 d/b/a Nissan Gaithersburg.............  Gaithersburg, MD       350,214 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Acura.......................  Gaithersburg, MD       330,111 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc.
 d/b/a Rosenthal Chevrolet/Jeep/Eagle..  Arlington, VA          312,476 Feb. 2008  10 years 2-10 year options
Maryland Imported Cars, Inc.
 d/b/a Gaithersburg Mazda(5)...........  Gaithersburg, MD       261,308 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Honda (2-acre lot)(4).......  Tysons Corner, VA      178,997 Feb. 2008  10 years 2-10 year options
Geneva Enterprises, Inc. d/b/a
 Rosenthal Honda (Body Shop)(4)........  Tysons Corner, VA      126,887 Feb. 2008  10 years 2-10 year options
                                                            -----------
   Subtotal............................                     $ 7,179,330
                                                            ===========
Pohanka Properties, Inc. (Chevrolet/GEO
 and Acura)(6).........................  Chantilly, VA      $   841,622 Feb. 2009  11 years 2-10 year options
Pohanka Properties, Inc.
 (Saturn, Isuzu, Oldsmobile and GMC
 Truck)(6) ............................  Marlow Heights, MD     475,877 Feb. 2009  11 years 2-10 year options
Pohanka Virginia Properties Partnership
 (Saturn)(6)...........................  Bowie, MD              447,101 Feb. 2008  10 years 2-10 year options
Pohanka Properties, Inc. (Honda)(6) ...  Marlow Heights, MD     407,043 Feb. 2009  11 years 2-10 year options
Pohanka Properties, Inc. (Lexus)(6)....  Chantilly, VA          378,218 Feb. 2009  11 years 2-10 year options
Pohanka Virginia Properties Partnership
 (Cadillac, Hyundai, Nissan, Oldsmobile
 & Kia)(6).............................  Fredricksburg, VA      377,592 Feb. 2008  10 years 2-10 year options
Pohanka Virginia Properties Partnership
 (Undeveloped Dealership Lot)(6).......  Chantilly, VA          270,658 Feb. 2008  10 years 2-10 year options
Pohanka Properties, Inc. (Hyundai &
 Subaru)(6)............................  Marlow Heights, MD     171,211 Feb. 2009  11 years 2-10 year options
Pohanka Properties, Inc. (Body
 Shop)(6)..............................  Marlow Heights, MD      76,403 Feb. 2009  11 years 2-10 year options
                                                            -----------
   Subtotal............................                     $ 3,445,725
                                                            ===========
Sheehy Ford of Springfield, Inc. (Ford
 & Kia)................................  Springfield, VA        662,340 Feb. 2008  10 years 2-10 year options
Sheehy Ford, Inc.(7)...................  Philadelphia, PA       330,000 Oct. 2007   9 years 2-10 year options
Sheehy Lincoln-Mercury, Inc. (Lincoln-
 Mercury & Mitsubishi).................  Woodbridge, VA         282,252 Feb. 2008  10 years 2-10 year options
Sheehy Ford, Inc.......................  Marlow Heights, MD     255,840 Feb. 2008  10 years 2-10 year options
                                                         --------------
   Subtotal............................                  $    1,530,432
                                                         ==============
</TABLE>    
 
                                      49
<PAGE>
 
<TABLE>
<CAPTION>
                                           INITIAL
         LESSEE                          ANNUAL BASE   LEASE     FIXED
  (DEALERSHIPS)(1)(2)        LOCATION       RENT     EXPIRATION   TERM     EXTENDED TERM(3)
  -------------------     -------------- ----------- ---------- -------- ---------------------
<S>                       <C>            <C>         <C>        <C>      <C>
Cherner Lincoln Mercury-
 Annadale, Inc. ........  Annandale, VA  $   695,520 Feb. 2008  10 years     2-10 year options
                                         ===========
T. West Sales & Service,
 Inc. (Toyota) (8)......  Las Vegas, NV  $ 1,452,000 Feb. 2008  10 years     2-10 year options
Douglas Motors, Inc.
 (Toyota)(8)............  Denver, CO         979,000 Feb. 2008  10 years     2-10 year options
Plains Chevrolet,
 Inc.(8)................  Amarillo, TX       517,000 Feb. 2008  10 years     2-10 year options
Westgate Chevrolet,
 Inc.(8)................  Amarillo, TX       484,000 Feb. 2008  10 years     2-10 year options
Midway Chevrolet,
 Inc.(8)................  Amarillo, TX       341,000 Feb. 2008  10 years     2-10 year options
Quality Nissan,
 Inc.(8)................  Amarillo, TX       110,000 Feb. 2008  10 years     2-10 year options
                                         -----------
   Subtotal.............                 $ 3,883,000
                                         ===========
Good News Salisbury,
 Inc.(9)................  Salisbury, MD  $   469,920 Feb. 2008  10 years     2-10 year options
Price Buick-Pontiac,
 Inc. and The Price
 Organization(10)(11)...  Salisbury, MD      154,080 Dec. 2006   8 years                   N/A
                                         -----------
   Subtotal.............                 $   624,000
                                         ===========
Kline Chevrolet Sales
 Corp.(12)..............  Chesapeake, VA $   960,000 Feb. 2008  10 years 3-10 year options(13)
                                         ===========
    Total..............................  $18,318,007
                                         ===========
</TABLE>
- --------
(1) See the historical financial statements for Geneva Enterprises, Inc. and
    an affiliated company and summary financial information of Cross-
    Continent.
(2) The Company believes that all the Initial Properties are adequately
    covered by insurance.
(3) If any Initial Lease is renewed for a second Extended Term, the Annual
    Base Rent will be renegotiated at the time of renewal by the parties to
    reflect the fair market rate at the renewal date.
(4) The Initial Lessees may assign these Initial Leases (subject to compliance
    with certain conditions to the satisfaction of the Company), to a limited
    liability company to be formed by Mr. Rosenthal or his Affiliates as
    members.
(5) Guaranteed by Geneva Enterprises, Inc.
   
(6) Each Initial Lease with an Affiliate of Pohanka Automotive Group will be
    guaranteed by each other Initial Lessee and Dealership affiliated with the
    Pohanka Automotive Group.     
(7) The occupant is Chapman Ford Sales, which is an unrelated third party.
(8) Guaranteed by Cross-Continent.
(9) Master Lease covering all Initial Properties acquired from Affiliates of
    Good News Automotive, Inc. other than Price Buick-Pontiac.
   
(10) The occupant is Price Buick Pontiac, which is an unrelated third party.
     The Company is assuming an existing Lease among Price Buick-Pontiac, Inc.
     and The Price Organization (Lessees) and Meyers and Rose (Lessor) dated
     December 10, 1991 and terminating December 31, 2006.     
(11) Guaranteed by Warren A. Price and Good News Salisbury, Inc.
(12) Guaranteed by Kline Imports Chesapeake, Inc. The Property is occupied by
     both Kline Chevrolet and Kline Toyota (sublease to Kline Chesapeake).
(13) If the Company is required by the Initial Lessee to pay for repairs to
     such Initial Property in an amount in excess of $50,000 during the 29th
     lease year, the Initial Lessee will be required to extend such Initial
     Lease for a third 10-year term at a rental rate equal to fair market
     value.
 
  The Dealerships are operated pursuant to written Franchise Agreements with
Manufacturers that, among other things, (i) generally designate the location
or geographic area in which the Dealerships have the right to sell and service
motor vehicles, (ii) impose requirements on the size, design, layout and
maintenance of showrooms and other structures, and (iii) provide guidelines
relating to matters such as advertising, inventory maintenance, personnel
training, and the use and display of the Manufacturers' trademarks, service
marks and designs. In addition, Dealers have entered into related agreements
with certain Manufacturers that establish financial covenants, and that, in
certain cases, restrict changes in control of the Dealerships without the
consent of such Manufacturers. Certain of the Franchise Agreements contain
certain restrictions relating to the sale or transfer of assets or Properties
necessary for the operation of the Dealership, or grant the Manufacturer a
right of first refusal to purchase such assets or Properties. The Franchise
Agreements generally have terms of one to five years, and have historically
been renewed by the Manufacturers in the ordinary course of business. Such
Dealers have never had their Franchise Agreements involuntarily terminated by
a Manufacturer nor has a Manufacturer failed to renew a Franchise Agreement
upon request for renewal by such Dealer. See "Business of the Company and
Properties--Franchise Agreements."
 
                                      50
<PAGE>
 
  Dealers affiliated with the Initial Lessees sell domestic and imported
luxury, family, economy and sport utility vehicles, trucks and vans including,
Mercedes-Benz, Honda, Toyota, Lexus, Chevrolet, Saturn, Ford, GMC, Mazda,
Infiniti, Jaguar, Acura, Lincoln-Mercury, Mitsubishi and Nissan. The
diversification of Manufacturers decreases the risks associated with changes
in consumer preferences and dependence on any single brand, Manufacturer or
market.
 
  In addition to selling new vehicles, many of those Dealers lease new
vehicles and sell used vehicles. Lease arrangements could provide Dealers with
a steady source of late-model, off-lease vehicles for its used vehicle
inventory. Dealers also provide service and parts primarily for the vehicle
makes and models that they sell or lease, and perform both warranty and non-
warranty service work. In general, parts departments support the sales and
service divisions. Dealers may also sell factory-approved parts at retail to
their customers or at wholesale to independent repair shops. Dealers arrange
third party financing for their customers, sell vehicle service contracts and
arrange selected types of credit insurance for which they receive financing
fees, subject to a charge-back against a portion of the finance fees if
contracts are terminated prior to their scheduled maturity.
 
TYPICAL INITIAL LEASE TERMS
 
  In general, the Company's Initial Leases will include the following general
lease terms. The Company expects to negotiate substantially the same terms
with Lessees of additional Properties.
 
  Use of the Properties. Generally the Initial Leases will require the Initial
Property to be continuously operated for the same purposes as they were used
on the Company's purchase date unless the Company consents otherwise. The
Initial Leases will generally require that the Initial Lessee or any permitted
assignee operate the Initial Properties in an efficient and professional
manner.
 
  Amounts Payable Under the Leases; Net Provisions. During the Fixed Term and
any Extended Terms, each Initial Lessee or its assigns will pay the Initial
Annual Base Rent and Annual Base Rent, which will be payable in monthly
installments. The Initial Annual Base Rent and Annual Base Rent will be
adjusted upward periodically based on a factor of the CPI, ranging from one-
half of CPI adjusted every other year to full CPI adjusted every year. Certain
Initial Leases establish minimum or maximum adjustments that range from zero
to 3% of base annual rent.
 
  Each Initial Lease is what is commonly referred to as a "triple net" lease,
under which each Initial Lessee is required to pay thereunder rent and
substantially all expenses associated with operation of a particular Initial
Property. Such expenses include all taxes, assessments and levies, excises,
fees, and all other governmental charges with respect to such Initial
Property, and all charges for insurance, utilities, service, repair and
maintenance, including, without limitation, electricity, telephone, trash
disposal, gas, oil, water, sewer, communication and all other utilities used
in each Initial Property, and any ground lease payments. Each Initial Lessee
will generally be obligated to comply with all laws, contracts, covenants and
restrictions affecting an Initial Property and to perform all obligations
under any ground lease affecting an Initial Property.
 
  Maintenance, Alterations, Capital Additions or Improvements. The Initial
Lessee or its assigns generally is obligated, at its sole cost and expense, to
maintain its Initial Property in good order, repair and appearance and to make
structural and non-structural, interior and exterior, foreseen and unforeseen,
and ordinary and extraordinary repairs and replacements, which may be
necessary and appropriate to keep such Initial Property in good order, repair
and appearance (excluding ordinary wear and tear) or which may be required by
any governmental authority, including those required to continue to satisfy
any licensure requirements related to the operation of the Dealership or
Related Business. The Company will not be required to build or rebuild any
improvements to any Initial Property, or to make any repairs, replacements,
alterations, restorations or renewals to any Initial Property.
 
  The Initial Lessee or its assigns, at its sole cost and expense, generally
may make alterations, additions, changes and/or improvements to each Initial
Property with the prior written consent of the Company, provided that the
value and primary intended use of such Initial Property (determined in the
Company's reasonable judgment) is not impaired. The Company may, but is under
no obligation to, provide or arrange construction, permanent or other
financing for any addition, alteration or improvement, the terms of which will
be separately
 
                                      51
<PAGE>
 
negotiated. Typically, all improvements, additions, alterations and
replacements constructed upon each Initial Property by the Initial Lessee
during the Fixed Term or an Extended Term of an Initial Lease will be the sole
property of the Initial Lessee until the expiration or early termination of
such Initial Lease, at which time all improvements, additions, alterations and
replacements will become the Property of the Company. All machinery,
equipment, furniture, furnishings and other personal property installed at the
expense of an Initial Lessee on any Initial Property will remain the property
of such Initial Lessee and may be removed by such Initial Lessee at the
expiration or earlier termination of the Initial Lease.
 
  Insurance. Each Initial Lease provides that the Initial Lessee will maintain
insurance on the related Initial Property under the Initial Lessee's insurance
policies providing for the following coverages in such amounts as are or shall
customarily be insured against with respect to properties similar to the
Initial Properties, including: (i) fire, vandalism and malicious mischief,
extended coverage perils and all physical loss perils, (ii) commercial general
public liability (including personal injury and property damage), (iii) flood
(when the Initial Property is located in whole or in material part in a
designated flood plain area), earthquake and other similar hazards as may be
customary for comparable properties in the area, (iv) worker's compensation
and (v) such other insurance as the Manufacturer under the relevant Franchise
Agreement or any holder of a mortgage, deed of trust or other security
agreement on such Initial Property (a "Company Mortgagee") may reasonably
require, which at the time is usual and commonly obtained on commercially
reasonable terms in connection with properties similar in type of building
size and use to the Initial Property and located in the geographic area where
the Initial Property is located. The foregoing insurance policies would name
the Company and any company mortgagee as additional insureds or loss payees,
as applicable. Each Initial Lease specifies the deductibles for insurance
covering each class of risk. Notwithstanding, there will be risks for which
insurance will not be obtainable or will be prohibitively expensive. In such
event, an Initial Lessee's ability to restore the Initial Property may be
dependent on its internally generated funds or borrowing capacity.
 
  Damage to, or Condemnation of, a Property. In the event of any insurable
damage or destruction to any Initial Property, the Initial Lessee is required
to submit complete and detailed plans and specifications to the Company, and
upon authorization of the Company (which will not be unreasonably withheld or
delayed), will have the obligation to promptly repair or restore the same, at
the Initial Lessee's expense so as to make such Leased Property at least equal
in value to such Initial Property immediately prior to such occurrence and as
nearly similar to it in character as is practicable and reasonable. Typically,
the Annual Base Rent, real estate taxes and other impositions on the
particular Initial Property will be proportionately abated during the time of
restoration, but only to the extent of any rental interruption insurance
proceeds actually received by the Company. If any Initial Property is damaged
by an insurable event to such an extent that the Initial Property is
"completely destroyed" (which will be sufficient damage to such Leased
Property such that the Company and the Initial Lessee agree to that
classification) or "partially destroyed" (which will be damage to such Initial
Property such that the Initial Property will not be suitable for use by a
Dealership or Related Business (as determined by a reasonable Dealer in light
of standard trade practices) within a specified period after the date of the
occurrence of such damages), the Initial Lessee may elect to terminate the
relevant Initial Lease upon notice to the Company. In the event of the
termination of the Initial Lease upon an Initial Property being "completely
destroyed" or "partially destroyed," typically, the Initial Lessee will have
no obligation to repair, rebuild or replace such Initial Property, and the
entire insurance proceeds will belong to the Company.
 
  Generally, under the Initial Lease terms, if at any time during the Term or
any Extended Term, any Initial Property is totally and permanently taken by
right of eminent domain or by conveyance made in response to the threat of the
exercise of such right ("Condemnation"), the Initial Lease will terminate as
to Initial Property so taken as of the date the condemning authority has the
right to possession of the Initial Property being condemned. Generally, the
Initial Lessee will be required to pay all outstanding applicable rent and
other charges through the date of termination. The Initial Lease generally
will not terminate if the condemnation occurred due to the failure of the
Initial Lessee to maintain such Initial Property, whether or not such failure
constituted an event of default at the time of the Condemnation.
 
                                      52
<PAGE>
 
  If a portion of an Initial Property is taken by condemnation, the Initial
Lease generally will remain in effect as to such Initial Property if such
Initial Property is not thereby rendered unsuitable for use as a Dealership or
Related Business. In such event, the Company will retain the amount of any
award received by the Company, is obligated to apply such award to restore the
Initial Property, and any excess after such application will be retained by
the Company. Any award made by the condemning authority to the Initial Lessee
will belong to the Initial Lessee.
 
  Financial Covenants. Substantially all affiliated Initial Lessees and
Guarantors, if any, as a group will be required to maintain a Rent Coverage
Ratio of at least 1.5 to 1 as of the date of the Initial Lease and at 24 month
intervals thereafter, computed as the aggregate of net income before taxes
plus mortgage interest, rent expense, depreciation, compensation of principals
of the Initial Lessees, management fees plus the annual LIFO adjustment and
other non-cash expenses, less recurring capital expenditures and gain (loss)
on sale of real estate, dividends and/or profits taken out of the Initial
Lessees and Guarantors if any, divided by the aggregate of the Initial
Lessees' and Guarantors', if any, obligations under the Initial Leases. In
addition, the Initial Lessee will be required to comply with all financial
covenants imposed by Manufacturers with whom the Initial Lessee has a
Franchise Agreement. These covenants have been designed to minimize the
likelihood of loss to the Company, by permitting the Company to establish the
ability of affiliated Initial Lessee's (and any Guarantors) to pay rent. The
Company will monitor bi-annually the Initial Lessee's compliance with the Rent
Coverage Ratio or require an Initial Lessee to provide additional security in
the form of a Guaranty of an Affiliate.
 
  Assignment and Subletting. The Initial Leases generally provide that each
Initial Lessee may not, without the prior written consent of the Company
(which will not be unreasonably withheld) or upon compliance with conditions
established by the Company, assign, mortgage, pledge, hypothecate, encumber or
otherwise transfer any Initial Lease or sublease any Initial Property, in
whole or in part, except to an Affiliate. Generally, an assignment of the
Initial Lease includes any change of control of the Initial Lessee. In the
event that (i) the Company withholds any consent to any assignment or transfer
of such Initial Lease or any interest herein, and (ii) such assignee or
transferee is approved by the relevant Manufacturer for continuation as a
franchisee, there will be a presumption that such assignment or transfer was
reasonable and the Company will have the burden of rebutting such presumption
and of proving that such consent was in fact reasonably withheld (or that such
conditions were reasonable). The Company will also receive an assignment of
all management, operating or service agreements relating to the maintenance,
management, possession or use of an Initial Property. Certain Initial Lessees
affiliated with Mr. Rosenthal may assign their Leases (subject to compliance
with certain conditions, including the requirements of the applicable
franchise agreement, to the satisfaction of the Company) to a limited
liability company to be formed by Mr. Rosenthal or his affiliates as members.
 
  Generally, if the Company withholds its consent to any assignment or if the
Company establishes conditions to approval of any assignment but such
conditions have not been complied with to the satisfaction of the Company, the
Initial Lessee will continue to be primarily liability under the Initial
Lease. Any assignment or other transfer of all or any portion of the Initial
Lessee's interest in an Initial Lease in violation of the restrictions on
assignment or subletting will be voidable at the Company's option.
 
  Generally, if the Initial Lessee requests the assignment of an Initial Lease
with respect to less than the entire Initial Property, and such Initial
Property is not a separate subdivided lot, the Company may condition its
approval of an assignment upon a showing that the Initial Lessee has taken the
actions necessary to sever and spin-off one or more of such parcels of such
Initial Property from such Initial Lease.
 
  The Initial Lessee will need the Company's prior approval before entering
into any sublease, license agreement or other arrangement which would have the
effect of causing all or a portion of the amount received or accrued by the
Company under the Initial Leases to be treated as other than "rents from real
property" within the meaning of Section 856(d) of the Code.
 
  Indemnification. Generally, an Initial Lessee will be required to indemnify,
and will be obligated to save harmless, the Company generally from and against
liabilities, costs and expenses (including reasonable attorneys' fees and
expenses) and actual or consequential damages imposed upon or asserted against
the Company, its officers, directors, employees, shareholders, agents or
Affiliates on account of, among other things, (a) the use, condition,
operation or occupancy of the Initial Properties; (b) any activity, work, or
thing done, or permitted or
 
                                      53
<PAGE>
 
suffered by the Initial Lessee in, on or about the Initial Properties; (c) any
acts, omissions, or negligence of the Initial Lessee or any person claiming
under the Initial Lessee, or the contractors, agents, employees, invitees, or
visitors of the Initial Lessee or any such person; (d) any breach, violation,
or nonperformance by the Initial Lessee or any person claiming under the
Initial Lessee or the employees, agents, contractors, invitees, or visitors of
the Initial Lessee or of any such person, of any term, representation,
warranty, covenant, or provision of this Initial Lease or any law, ordinance,
or governmental requirement of any kind; (e) any injury or damage to the
person, property or business of Lessee, its employees, agents, contractors,
invitees, visitors, or any other person entering upon any Initial Property
under the express or implied invitation of the Initial Lessee; (f) any
accident, injury to or death of persons or loss or damage to any item of
property occurring at any Initial Property; (g) any environmental law or any
pollution or other threat to human health or the environment at, arising out
of or relating to any Initial Property, and (h) any brokers' or agents' fees
and commissions. If any action or proceeding is brought against the Company or
any of its employees, or agents by reason of any such demand, claim, or cause
of action, the Initial Lessee, upon notice from the Company, will defend the
same at the Initial Lessee's expense with counsel reasonably satisfactory to
the Company. In the event the Company reasonably determines that its interests
and the interests of the Initial Lessee in any such action or proceeding are
not substantially the same and that Initial Lessee's counsel cannot adequately
represent the interests of the Company, the Company shall have the right to
hire separate counsel in any such action or proceeding and the reasonable
costs thereof shall be paid for by the Initial Lessee. The Initial Lessees'
obligations to indemnify the Company will continue after the expiration or
earlier termination of the Initial Lease until the later of (i) two years
following the date of the Initial Lease, (ii) the expiration of the period 90
days after the date the Company has actual knowledge of the existence of a
claim covered by indemnification, or (iii) 90 days after the expiration of the
applicable statute of limitations for claims arising from, or relating to, any
environmental law or any pollution or other threat to human health or the
environment.
 
  Environmental Matters. Generally, the Initial Leases provide for various
representations and warranties by the Lessee relating to environmental matters
with respect to each Initial Property. Each Initial Lease also requires the
Initial Lessee to indemnify and hold harmless the Company from and against all
liabilities, costs and expenses imposed upon or asserted against the Company,
the Initial Lessee or the Initial Property on account of, among other things,
any federal, state or local law, ordinance, regulation, order or decree
relating to the protection of human health or the environment in respect of
the Initial Property (irrespective of whether there has occured any violation
of any environmental law). Such Initial Lessee is required to comply with all
environmental laws. See "--Governmental Regulations Affecting the Properties--
Environmental Laws."
 
  Events of Default. Generally, the following events, among others, will
constitute "Events of Default" under the Initial Leases: (a) the Initial
Lessee fails to pay in full any installment of rent, or any other monetary
obligation payable by the Initial Lessee to the Company hereunder, within ten
days after notice is given by the Company to the Initial Lessee (except that
after two defaults within any 12 month period, any further default during such
12 month period will constitute an immediate event of default); (b) the
Initial Lessee fails to observe and perform any covenant (other than the
covenant in respect of insurance, and certain conditions or agreements
required to be performed by the Initial Lessee and such failure continues for
a period of 20 days after written notice thereof is given to Lessee by the
Company; or if, by reason of the nature of such default, the same cannot with
due diligence be remedied within said 20 days, such failure will not be deemed
to continue if the Initial Lessee proceeds promptly and with due diligence to
remedy the failure and diligently completes the remedy thereof; provided,
however, said cure period will not extend beyond 40 days if the facts or
circumstances giving rise to the default are creating a further harm to the
Company or the subject Initial Property and the Company makes a good faith
determination that the Initial Lessee is not undertaking remedial steps that
the Company would cause to be taken if the Initial Lease were then to
terminate; (c) if the Initial Lessee (i) admits in writing its inability to
pay its debts generally as they become due, (ii) files a petition in
bankruptcy or a petition to take advantage of any insolvency act, (iii) makes
an assignment for the benefit of its creditors, (iv) is unable to pay its
debts as they mature, (v) consents to the appointment of a receiver of itself
or of the whole or any substantial part of its property, or (vi) files a
petition or answer seeking reorganization or arrangement under the federal
bankruptcy laws or any other applicable law or statute of the United States of
America or any state thereof; (d) if the Initial Lessee, on insolvency
proceedings or on a petition in bankruptcy filed against it, is adjudicated as
 
                                      54
<PAGE>
 
bankrupt or a court of competent jurisdiction enters an order or decree
appointing, without the consent of the Initial Lessee, a receiver of Lessee of
the whole or substantially all of its property, or approving a petition filed
against it seeking reorganization or arrangement of the Initial Lessee under
the federal bankruptcy laws or any other applicable law or statute of the
United States or any state thereof, and such judgment, order or decree is not
vacated, dismissed or set aside within 60 days from the date of the entry
thereof; (e) if the estate or interest of the Initial Lessee in an Initial
Property or any part thereof is levied upon or attached in any proceeding and
the same is not vacated or discharged within 15 days after commencement
thereof (unless the Initial Lessee is contesting such lien or attachment in
accordance with the Initial Lease); (f) any representation, warranty or
covenant made by the Initial Lessee on behalf of itself or an Affiliate in the
Initial Lease or in any certificate, demand or request made pursuant hereto
proves to be incorrect, in any material respect, as of the date of issuance or
making thereof; (g) conviction of Lessee of a crime or offense constituting a
felony in the jurisdiction in which committed or under federal law; (h)
termination or relinquishment of the franchise or license pursuant to which an
Initial Lessee conducts business on or from the Initial Property, provided
that such event shall not constitute an Event of Default if (i) no other Event
of Default shall have occurred and be continuing, and (ii) at a date no later
than 24 months following such date of termination or relinquishment, the
Initial Lessee has entered into written new or amended franchises or licenses
for operation of the Dealership or Related Business at the Initial Property
satisfactory to the Company in its discretion applying commercially reasonable
standards; (i) default under any franchise or license pursuant to which Lessee
conducts business at a Property, if in the Company's judgment such default in
light of commercially reasonable standards and industry practice would have a
material adverse effect on the Initial Lessee or the Initial Property; (j) a
final, non-appealable judgment or judgments for the payment of money not fully
covered (excluding deductibles) by insurance is rendered against the Initial
Lessee and the same remains undischarged, unvacated, unbonded, unappealed or
unstayed for a period of 15 consecutive days; (k) the Initial Lessee shall
fail to observe the covenant in respect to insurance; or (l) except after the
effective date of a permitted assignment, if the Initial Lessee is liquidated
or dissolved or proceedings for that purpose or for the purpose of selling or
divesting the Initial Lessee of all or substantially all of its assets have
been brought.
 
  Subject to the Initial Lease, the Company may exercise any one or more of
the following remedies upon the occurrence of an event of default: (i) the
Company may terminate the Initial Lease, (ii) exclude the Initial Lessee from
possession of the Initial Property, and (iii) use reasonable efforts to lease
such Initial Property to others. If an Initial Lease is terminated with
respect to all or a portion of the Initial Property, the Initial Lessee will
remain liable to the Company for damages in an amount equal to the rent and
other sums which would have been owing by the Initial Lessee as to the Initial
Property for the balance of the Fixed Term or Extended Term as if the Lease
had not been so terminated, less the net proceeds, if any, of any re-letting
of the Initial Property by the Company subsequent to such termination, after
deducting all the Company's expenses in connection with such re-letting. In
the event of any event of default, the Company may cause the Initial Lessee to
vacate the Initial Property. In addition, the Company may exercise any other
rights that it may have under law or under the leases. However, except in
certain circumstances or for certain Initial Lessees, there will be no cross
defaults between or among any Initial Property to any other Initial Property
leased to affiliated Initial Lessees.
 
  Right of First Offer and Option to Purchase Property. The Initial Lessees
under the Initial Leases may have a right of first offer to purchase the
Initial Property if the Company decides to sell the Initial Property. The
Company will notify the Initial Lessee of its intention to sell the Initial
Property and the Initial Lessee will have 30 days to extend an offer,
including specifying the purchase price for the Initial Property. The Company
may reject the offer, at its discretion based on its reasonable judgment. If
the Company rejects the Initial Lessee's offer, it may sell the Initial
Property to a third party on other terms if the purchase price is higher or
the Company reasonably believes such terms are more advantageous than the
terms proposed by the Initial Lessee. In addition, upon expiration of any
Extended Term, provided that there is no event of default, the Initial Lessee
has an option to purchase the Initial Property at a purchase price equal to
the mean of the closest two appraised values of the Initial Property to be
determined by three independent appraisers.
   
  Governing Law. Each Initial Lease will be governed by and construed in
accordance with the law of the Commonwealth of Virginia (but not including
such state's conflict of laws rules) except when the law of the state in which
the Property is located is required to control.     
 
                                      55
<PAGE>
 
WASHINGTON, D.C. METROPOLITAN AREA
 
  The Company will own 20 Initial Properties in the Washington, D.C.
Metropolitan Area representing approximately 70% of the aggregate purchase
prices for the Initial Properties. According to Population Estimates Program,
Population Division, U.S. Bureau of the Census, December 1997 Internet
Reference, the 1996 mid-year population of the Washington, D.C. metropolitan
area was 4,563,123, an increase of 8.1% from the 1990 census (compared to a
6.7% increase for the United States as a whole). According to the U.S.
Department of Commerce, Economics and Statistics Administration, Bureau of
Economic Analysis, per capita income for the Washington, D.C. metropolitan
area for 1995 was $30,824, compared to $24,594 for U.S. metropolitan areas
generally. According to the U.S. Department of Labor, Bureau of Labor
Statistics, Philadelphia Regional Office, the average annual unemployment rate
for calendar year 1996 in Virginia was 4.4%, and the corresponding figure for
the first nine months of 1997 was 4.2%. According to that same source, the
average annual unemployment rate for calendar year 1996 in Maryland was 4.9%,
and the corresponding figure for the first nine months of 1997 was 4.7%
 
GOVERNMENTAL REGULATIONS AFFECTING THE PROPERTIES
 
  Environmental Laws. Under various federal, state and local laws, ordinances
and regulations, a current or previous owner, developer or operator of real
estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. The costs of
such removal or remediation could be substantial. Such laws often impose such
liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the owner's
ability to sell or rent such real estate or to borrow using such real estate
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person.
 
  The Company is not aware of any environmental liability that the Company
believes would have a material adverse effect on the Company's business,
financial condition or results of operations. Based on certain environmental
"Phase 1 reports" (described under "Risk-Factors--Governmental Regulations;
Environmental Matters" above), the Company estimates that the aggregate cost
of addressing environmental conditions at certain of the Initial Properties
identified in the Phase 1 reports will not be material. In addition, the
Initial Sellers of such Initial Properties have agreed to indemnify the
Company for third party claims based on those conditions at a minimum until
such time as the relevant statutes of limitations have expired, and the
Initial Lessees and their Affiliates are obligated to comply with
environmental laws and remediation requirements and hold harmless the Company
and its officers, directors, employees, shareholders, agents and Affiliates
from any failure to comply with those requirements. No assurance can be given,
however, that all potential environmental liabilities have been identified,
that no prior owner or operator or other person created any material
environmental condition not known to the Company or that future uses,
conditions or legal requirements (including, without limitation, those that
may result from future acts or omissions or changes in applicable
environmental laws and regulations) will not result in the imposition of
environmental liabilities. The Initial Lessees and the Initial Sellers have
made certain representations in the Initial Leases and Contribution
Agreements, respectively, regarding the environmental matters and will
indemnify the Company for third party claims arising from breach of such
representations. There can be no assurance that such indemnification will be
available or uncontested, however, or that any environmental conditions of
concern at such time which are not remediated by the Initial Sellers or
Initial Lessees and their Affiliates will not impede the ability of the
Company to sell or re-lease the Initial Properties in the future or negatively
impact future sales or rental proceeds.
 
  Americans With Disabilities Act of 1990. The Initial Properties and any
subsequently acquired Properties must comply with Title III of the ADA to the
extent that such properties are "public accommodations" and/or "commercial
facilities" as defined by the ADA. Compliance with the ADA requires that
public accommodations "reasonably accommodate" individuals with disabilities
and that new construction or alterations made to "commercial facilities"
conform to accessibility guidelines unless "structurally impracticable" for
new
 
                                      56
<PAGE>
 
construction, or technically infeasible for alterations. The Company believes
that the Properties substantially comply with all present requirements under
the ADA and applicable state laws. Under the Leases, the Lessee is responsible
for all costs associated with compliance with the ADA. However, noncompliance
with the ADA could result in the imposition of injunctive relief, fines, an
award of damages to private litigants or additional capital expenditures to
remedy such noncompliance.
 
FRANCHISE AGREEMENTS
 
  Each Dealer operates its Dealership pursuant to a written Franchise
Agreement with the applicable Manufacturer. The typical automotive Franchise
Agreement specifies the locations at which the Dealer has the right and the
obligation to sell motor vehicles and related parts and products and to
perform certain approved services in order to serve a specified market area.
The designation of such areas and the allocation of new vehicles among
Dealerships are subject to the discretion of the Manufacturer, which generally
does not guarantee exclusivity within a specified territory. A Franchise
Agreement may impose requirements on the Dealer concerning such matters as the
showrooms, the facilities and equipment for servicing vehicles, the
maintenance of inventories of vehicles and parts, the maintenance of minimum
net working capital and the training of personnel. Compliance with these
requirements is closely monitored by the Manufacturer. In addition,
Manufacturers require the Dealers to submit a financial statement of
operations on a monthly basis. The Franchise Agreement also grants the Dealers
the non-exclusive right to use and display the Manufacturer's trademarks,
service marks and designs in the form and manner approved by the Manufacturer.
 
  Each Franchise Agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the operations of a
Dealership and the names and ownership percentages of the approved owners of
the Dealership and contains provisions requiring the Manufacturer's prior
approval of changes in management or transfers of ownership of the Dealership.
Each Initial Lessee's Dealerships are owned, directly or indirectly, by such
Initial Lessee. Several Manufacturers include provisions in their Franchise
Agreements that prohibit transfers of assets or real property considered
necessary for the conduct of the Dealership or similar restrictions that could
prohibit or require the prior consent of a Manufacturer before a Seller can
sell and the Company can purchase a Property.
 
  Most Franchise Agreements expire after a specified period of time, ranging
from one to five years, and the Company believes that each Initial Lessee
expects to renew any expiring agreements in the ordinary course of business.
The typical Franchise Agreement provides for early termination or non-renewal
by the Manufacturer under certain circumstances such as change of management
or ownership without Manufacturer approval, insolvency or bankruptcy of the
Dealership, death or incapacity of the dealer manager, conviction of a dealer
manager or owner of certain crimes, misrepresentation of certain information
by the Dealer or owner to the Manufacturer, failure to adequately operate the
Dealership, failure to maintain any license, permit or authorization required
for the conduct of business, or material breach of other provisions of the
Franchise Agreement. The Dealership is typically entitled to terminate the
Franchise Agreement at any time without cause.
 
  The motor vehicle franchise relationship is also governed by various federal
and state laws established to protect Dealers from the general unequal
bargaining power between the parties. The following discussion of state court
and administrative holdings and various state laws is based on management's
beliefs and may not be an accurate description of the state court and
administrative holdings and various state laws. Under the laws of most states,
despite the terms of contracts between the Manufacturers and the Dealers,
Manufacturers may not unreasonably withhold approval of a transfer of a
Dealership, or reject a prospective transferee of a Dealership who is of good
moral character and who otherwise meets the Manufacturer's written, reasonable
and uniformly applied standards or qualifications relating to the prospective
transferee's business experience and financial qualifications. In addition,
under the laws of certain states, franchised Dealerships may challenge
Manufacturers' attempts to establish new franchises in the franchised dealers'
markets, and state regulators may deny applications to establish new
Dealerships for a number of reasons, including a determination that the
Manufacturer is adequately represented in the market. The laws of certain
states also limit the ability of Manufacturers to terminate or fail to renew
franchises.
 
                                      57
<PAGE>
 
COMPETITION
 
  The Company believes that it is the first publicly-offered REIT to primarily
focus on consolidating the Properties utilized by Dealerships or Related
Businesses under one ownership structure. A subsidiary of Kimco Realty
Corporation, a public diversified real estate investment trust, has publically
announced that it will pursue the acquisition of properties used by motor
vehicle dealerships. Other public or private entities may also decide to
pursue the same or similar strategy, some of which may have greater financial
resources or general real estate experience than the Company. Those entities
will compete with the Company in seeking Properties for acquisition and
disposition or, land for development. The Company believes that competition
for properties will primarily be on the basis of acquisition price and
negotiation of rents. Lessees or their Affiliates may own other Properties
that will not be acquired by the Company and which may instead be sold to
competitors. See "Risk Factors--Competition with Other Companies with Similar
Business Objectives and Strategies."
 
OTHER INVESTMENT POLICIES
 
  The Company will engage in the investment in Properties used by Dealerships
and Related Properties. The Company has established no limit on the amount
that can be invested in any one Property. The Company does not intend to
acquire Properties used by businesses other than Dealerships and Related
Businesses. Pending investment in real estate, the proceeds of this Offering
and the FBR Offering will be invested in various short term investments. See
"Use of Proceeds." The Company currently does not intend to invest in
mortgages (including participating and convertible mortgages), the securities
of other issuers, except in connection with acquisitions of indirect interests
in Properties (normally through partnership interests in special purpose
partnerships owning title to Properties) or generally to make loans to third
parties. The Company does not intend to underwrite the securities of other
issuers. The Company currently has no plans to repurchase or otherwise
reacquire its shares or the shares of others (except pursuant to the
redemption rights of holders of Units). The Company may change its policies
with respect to the above activities without the approval of its shareholders.
In any event, any activities of the Company with respect to investments in
securities of other issuers will be subject to the asset and gross income
tests necessary for REIT qualification for federal income tax purposes.
 
EMPLOYEES
 
  As of January 11, 1998, the Company had 11 employees. None of the employees
is represented by a collective bargaining unit. The Company believes that its
relationship with its employees is good.
 
LEGAL PROCEEDINGS
 
  The Company is not a party to any legal proceedings. Pursuant to the Leases,
the Lessees will indemnify the Company from and against all liabilities, costs
and expenses imposed upon or asserted against the Company as owner of the
Properties on account of certain matters relating to the operation of the
Properties by Lessee and, where appropriate, the ownership of the Properties
prior to their acquisition by the Company. See "--Typical Initial Lease
Terms--Indemnification."
 
                                      58
<PAGE>
 
                                  MANAGEMENT
 
TRUSTEES, EXECUTIVE OFFICERS AND KEY EMPLOYEES
 
  The following table sets forth certain information concerning each of the
Company's trustees, executive officers and key employees:
 
<TABLE>   
<CAPTION>
       NAME               AGE                       POSITION
       ----               ---                       --------
<S>                       <C> <C>
John J. Pohanka(1)......   69 Chairman of the Board of Trustees
Thomas D. Eckert........   50 President and Chief Executive Officer, Trustee
Scott M. Stahr..........   41 Executive Vice-President and Chief Operating Officer
Donald L. Keithley......   58 Executive Vice-President of Business Development
David S. Kay............   31 Vice President and Chief Financial Officer
Robert M. Rosenthal(1)..   69 Trustee
John D. Reilly(1)(2)....   71 Trustee
William E.
 Hoglund(1)(2)..........   63 Trustee
William R. Swanson(1)...   50 Trustee
</TABLE>    
- --------
   
(1) The Company anticipates that Messrs. Pohanka, Rosenthal, Reilly and
    Hoglund will become members of the Board of Trustees prior to the
    effective date of this Offering. Mr. Swanson will become a member of the
    Board of Trustees immediately after the closing of this Offering.     
   
(2) Members of Audit Committee.     
   
  The Company's Declaration of Trust requires that within 90 days of the
closing of this Offering, the Board of Trustees will increase the size of the
Board of Trustees to not less than nine and not more than 15 members, a
majority of whom will be unaffiliated with the Company, the Sellers, the
Lessees or the Representative (the "Independent Trustees"). Each Trustee will
hold office until the next annual meeting of shareholders of the Company and
his successor is elected and qualified.     
 
  John J. Pohanka will be the Chairman of the Board of Trustees. Mr. Pohanka
is the Chairman of the Pohanka Automotive Group. Mr. Pohanka has been involved
in the automotive industry for almost 50 years, and is a member of the second-
generation of the Pohanka family to be involved in the automotive industry,
with the first Pohanka dealership having been founded in 1919. The Pohanka
Automotive Group is currently comprised of eight Dealerships, each of which is
located in the Washington, D.C. Metropolitan Area. In 1996, the Pohanka
Automotive Group's Dealerships sold more than 11,900 new and used motor
vehicles. The Pohanka Automotive Group's Dealerships have received numerous
awards, including the Time Magazine Quality Dealer Award. Mr. Pohanka has been
active in a number of national and local industry and business groups during
his career, having served as past President of the National Automobile Dealers
Association, a past President of the National Capitol Area Automotive Trade
Association, and a past Chairman of the National Institute for Automotive
Service Excellence, a group which he co-founded. Mr. Pohanka also is a co-
founder of the National Automobile Technicians Educational Foundation. Mr.
Pohanka is a graduate of Princeton University.
 
  Thomas D. Eckert is the Company's President and Chief Executive Officer and
is a member of the Board of Trustees. From 1983 to 1997, Mr. Eckert was
employed by Pulte Home Corporation ("Pulte"), the largest homebuilding firm in
the U.S. Most recently, Mr. Eckert served as President of Pulte's Mid-Atlantic
Region, which included oversight of the company's land acquisition,
development and homebuilding operations from Virginia to New Jersey. Mr.
Eckert is a former director of PHM Mortgage Company and is currently a
director of the Munder Funds, a $6.2 billion mutual fund group, and the
Celotex Corporation, a building products manufacturing entity with $700
million in annual revenues. Prior to working at Pulte, Mr. Eckert was employed
with the public accounting firm of Arthur Andersen LLP for over seven years.
Mr. Eckert is a graduate of the University of Michigan. From November 1996 to
November 1997, Mr. Eckert was a director of the FBR Funds, a diversified
family of mutual funds affiliated with the Representative.
 
  Scott M. Stahr is the Company's Executive Vice-President and Chief Operating
Officer. From 1985 to 1997, Mr. Stahr was a Principal at LaSalle Partners, a
Chicago-based real estate investment firm. In that role, Mr. Stahr was
responsible for sourcing, underwriting and negotiating acquisitions of office,
retail, parking and industrial properties. Mr. Stahr has also advised and
provided consulting services to corporate and institutional clients on
 
                                      59
<PAGE>
 
the acquisition, disposition and value enhancement of their real estate-
related holdings. Prior to joining LaSalle Partners, Mr. Stahr was a
practicing attorney with a broad commercial litigation and real estate
practice. Mr. Stahr is a graduate of the University of Virginia and holds a
J.D. from the University of Texas.
 
  Donald L. Keithley is the Company's Executive Vice-President of Business
Development. Mr. Keithley was the J.D. Power and Associates Partner in charge
of Dealer Relations from 1984 to 1997. In 1996, Mr. Keithley authored "The
Revolution in Automotive Retailing: A Perspective of the New Millennia," a
book which addresses the rapidly evolving changes in the dealership franchise
system. He has given numerous presentations on this subject to executives
within the industry. Before his tenure at J.D. Power and Associates, Mr.
Keithley was employed by the Toyota Motor Company and the Ford Motor Company
for numerous years. Mr. Keithley received a Masters in Business Administration
from the University of California at Los Angeles, and currently serves on the
Business Advisory Council for Loyola Marymount University.
 
  David S. Kay is the Company's Vice-President and Chief Financial Officer.
Prior to joining the Company, Mr. Kay was employed by the public accounting
firm of Arthur Andersen LLP in Washington, D.C. for approximately ten years.
His areas of expertise included emerging companies in the automotive, retail,
and distribution industries. While at Arthur Andersen LLP, Mr. Kay provided
clients with consultation regarding mergers and acquisitions, business
planning and strategy and equity financing. He also has several years of
experience in capital formation projects, roll-up transactions, and initial
public offerings for motor vehicle dealerships across the nation. Mr. Kay has
participated on an NADA task force and has given presentations at NADA
conventions and at other industry seminars. Mr. Kay is a graduate of James
Madison University.
 
  Robert M. Rosenthal will be a member of the Board of Trustees. Mr. Rosenthal
is the Chairman of the Rosenthal Automotive Organization. Mr. Rosenthal has
been involved in the automotive industry for 50 years and during that time has
founded more than 35 Dealerships. Mr. Rosenthal is a second-generation member
of the Rosenthal family involved in the automotive industry. His father's
association with Chevrolet began in 1919. With 19 current Dealerships, the
Rosenthal Automotive Organization was the nation's 14th largest automotive
group in terms of total new and used vehicle retail sales. In 1996, the
Rosenthal Automotive Group Dealerships sold more than 31,500 new and used
motor vehicles. Under Mr. Rosenthal's leadership, the Rosenthal Automotive
Organization's Dealerships have received numerous national and local awards,
including the Time Magazine Quality Dealer Award, the International American
Automobile Dealers/Sports Illustrated Dealer of Distinction, the Acura
Precision Team Award, the Jaguar Pride of Jaguar Award, and the Mazda
President's Award. Mr. Rosenthal has been active in a number of national and
local industry and business groups during his career, including, the
Washington New Automobile Dealers Association, of which he has served as a
past Director and President, the National Capitol Automobile Dealers
Association, the Chief Executives Organization and the World Business Council.
He also serves on the Board of Directors of First Virginia Bank and is an
officer and trustee of the Phillips Collection. Mr. Rosenthal is a graduate of
Temple University.
 
  John E. Reilly will be a member of the Board of Trustees. Currently, Mr.
Reilly is serving as a consultant to American Isuzu Motors, Inc. From 1980
until his retirement in 1997, Mr. Reilly was employed by American Isuzu
Motors, Inc. At the time of his retirement, Mr. Reilly was serving as a Senior
Executive Advisor. His previous assignments at American Isuzu Motors, Inc.
included serving as Chairman and Senior Vice President. During his tenure, Mr.
Reilly oversaw the initial establishment of the Isuzu franchise in the U.S.
marketplace. Prior to his employment with American Isuzu Motors, Inc., Mr.
Reilly held a number of positions within the automotive industry, including
positions with General Motors Corporation, Toyota and Volkswagen of America.
Mr. Reilly has also served three terms as the Chairman of the Association of
International Automobile Manufacturers. Mr. Reilly attended Boston College and
Boston College Law School and is a graduate of Siena University.
 
  William E. Hoglund will be a member of the Board of Trustees. From 1956
until his retirement in 1994, Mr. Hoglund was employed by General Motors
Corporation. At the time of his retirement in 1994, Mr. Hoglund
 
                                      60
<PAGE>
 
was serving as an Executive Vice President and member of the General Motors
Corporation Board of Directors. His previous assignments at General Motors
Corporation included serving as Corporate Comptroller, Chief Financial
Officer, President of Saturn, General Manager of the Pontiac Division, and
Group Executive for the Buick-Oldsmobile-Cadillac Group. Currently, Mr.
Hoglund is a director of the Mead Corporation, Detroit Diesel Corporation and
the Sloan Foundation. Mr. Hoglund is a graduate of Princeton University and
received a Masters in Business Administration from the University of Michigan.
   
  William R. Swanson will be a member of the Board of Trustees. Mr. Swanson
has been a Managing Director of the Representative in its Real Estate Group
since February 1994. The Representative may be considered a promoter of the
Company under the Securities Act. From 1991 to 1994, Mr. Swanson served as a
founding director of H.G. Smithy Company, Inc., a full service commercial,
multi-family and mortgage servicing real estate company headquartered in
Washington, D.C. Mr. Swanson began working for LaSalle Partners, Ltd. in 1973
as the controller of the firm's first public fund and as the financial officer
for its development subsidiary. Mr. Swanson then served as a Managing Director
of LaSalle Partners from 1982 until his departure in 1991. While with LaSalle
Partners, he managed and directed the firm's acquisition and development
activities for the southeastern region of the United States. Mr. Swanson
received a Bachelor of Science in Accounting from the University of Illinois
at Urbana-Champaign and upon graduation joined KPMG Peat Marwick as a CPA and
tax specialist.     
       
       
COMMITTEES OF THE BOARD OF TRUSTEES
   
  Audit Committee. Promptly following the closing of the Offering, the Board
of Trustees of the Company will establish an Audit Committee. The Audit
Committee will be established to make recommendations concerning the
engagement of independent public accountants, to review with the independent
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. Messrs. Reilly and Hoglund will be members of
the Audit Committee.     
 
  Executive Committee. Promptly following the closing of the Offering, the
Board of Trustees of the Company will 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 Trustees,
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. Promptly following the closing of the
Offering, the Board of Trustees 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 Plan.
 
COMPENSATION OF TRUSTEES
 
  The Company intends to pay its Trustees who are not employees of the Company
or affiliated with a Seller $15,000 a year for their services as Trustees.
Each non-employee Trustee (other than Messrs. Pohanka and Rosenthal) also will
receive a grant of options to purchase 15,000 Units under the Company's Plan
upon election or appointment to the Company's Board of Trustees. See "--1998
Equity Incentive Plan."
 
EXECUTIVE COMPENSATION
 
  The Company was organized in October 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 below sets
forth the annual base salary rates and other compensation expected to be paid
in 1998 to the Company's Chief Executive Officer and each of the Company's
other executive officers. The Company will
 
                                      61
<PAGE>
 
   
assign certain of its rights and obligations under the employment agreements,
as amended (the "Employment Agreements"), with the executive officers to the
Operating Partnership, which will also employ the executive officers and will
pay their compensation.     
 
<TABLE>
<CAPTION>
                                                                    LONG TERM
                                            ANNUAL COMPENSATION    COMPENSATION
                                          ------------------------ ------------
                                                                    SECURITIES
                                                                    UNDERLYING
       NAME AND PRINCIPAL POSITION        SALARY($)(1) BONUS($)(2)   OPTIONS
       ---------------------------        ------------ ----------- ------------
<S>                                       <C>          <C>         <C>
Thomas D. Eckert.........................   350,000                  958,345
 President and Chief Executive Officer
Scott M. Stahr...........................   225,000                  519,104
 Executive Vice President and
 Chief Operating Officer(3)
Donald L. Keithley.......................   200,000                  239,586
 Executive Vice President of
 Business Development
David S. Kay.............................   150,000                  519,104
 Vice President and Chief Financial
 Officer
</TABLE>
- --------
   
(1) This reflects the initial annual base salaries payable for the 12-month
    period beginning on the date of commencement of each officer's Employment
    Agreement. See "--Employment Agreements."     
(2) Each executive officer named above will be eligible for a bonus of up to
    100% of their initial base salary. In addition, Mr. Keithley is also
    eligible for an additional incentive bonus of $200,000.
(3) Mr. Stahr received a signing bonus of $250,000 to compensate him for
    terminating his employment with his prior employer.
 
EMPLOYMENT AGREEMENTS
   
  The Company has entered into Employment Agreements with each of the
executive officers named in the table above. The Company has assigned the
Employment Agreements to the Operating Partnership and the Operating
Partnership has assumed these Agreements effective as of January 1, 1998.
These Agreements are for a four year term and provide that the executive
officers agree to devote their full business time to the operation of the
Company (except as the Company otherwise agrees, including on behalf of the
Operating Partnership). The term is shortened to June 30, 1998 if the Company
has not completed its initial public offering by such date. The Employment
Agreements permit the Company to terminate the executives' employment with
appropriate notice for or without cause. In general, cause is defined to
include (i) engaging in dishonesty relating materially to performance of
services or obligations contained in the Employment Agreements, (ii)
conviction of any misdemeanor (other than minor infractions) involving fraud,
breach of trust, misappropriation, or other similar activity or any felony,
(iii) performance of duties in a grossly negligent manner; or (iv) wilful
breach of the Employment Agreement in a manner materially injurious to the
Company. In addition, executives may resign for good reason (generally defined
in the Agreements to include the Company's failure to comply with the
agreements' material terms, the reduction of responsibilities and duties or,
for Mr. Eckert, his involuntary departure from the Board of Trustees),
relocation, or a change of control. In general terms, a change of control
occurs (i) if a person, entity, or group (with certain exceptions) acquires
more than 40% of the Company's then-outstanding voting securities, (ii) if the
Company merges into another entity unless prior Company shareholders have at
least 60% of the combined voting power of the securities in the merged entity,
or (iii) the liquidation, dissolution, or sale or disposition of substantially
all of the Company's assets.     
 
  If the executives' employment ends for any reason, the Company will pay
accrued salary, bonuses already determined, and other existing obligations. In
addition, if the Company terminates the executives' employment without cause
or any of them resigns for good reason, the Company will be obligated to pay
(i) a lump sum payment of severance equal to 24 months' salary, (ii) payment
of premiums for the period of group health coverage, if any, to which he is
entitled by law, and (iii) a pro rata annual bonus for the year of
termination. Notwithstanding the foregoing, the Company has not agreed to pay
severance and provide the foregoing benefits if the executives' employment
ends because of expiration or non-extension of their agreements. Friedman,
 
                                      62
<PAGE>
 
Billings, Ramsey Group, Inc., an affiliate of the Representative, has agreed
to employ Messrs. Eckert and Kay for a period of up to one year if the
Offering is not completed for any reason at substantially the same salaries
and equivalent benefits as set forth in their respective employment
agreements. See "Underwriting."
 
  While employed and for a one-year period after employment, the executives
have agreed not to compete with the Company by working with or investing in
any enterprise engaged in forming or operating Dealerships or that invest
primarily in Dealerships or Related Businesses or properties used by
Dealerships or Related Businesses or that provide real estate financing to
Dealerships or Related Businesses.
 
1998 EQUITY INCENTIVE PLAN
 
  The Company (including the Operating Partnership) has established the Plan
for the purpose of attracting and retaining trustees, executive officers and
other key employees. Each option granted pursuant to the Plan shall be
designated at the time of grant as either an "incentive option" or as a "non-
qualified option." If the grant is for an "incentive option," the Company will
issue options for Common Shares. If the grant is for "non-qualified options"
the Company intends to issue options for Units.
 
  The Plan provides for the grants of options ("Options") to purchase a
specified number of Common Shares or Units. Under the Plan, Common Shares and
Units in an aggregate number equal to 8% of the Common Shares to be
outstanding on the closing of the Offering (including exercise of the
Underwriters' over-allotment in full) on a fully diluted basis will be
available for grants. Contemporaneously with the completion of the Offering,
the Company will grant Options for an aggregate number of Common Shares and
Units equal to 7% of the Common Shares to be outstanding on the closing of the
Offering (including exercise of the Underwriters' over-allotment option in
full) on a fully diluted basis (the "Initial Grants") to the following key
officers and employees of the Company: Thomas D. Eckert, Scott M. Stahr,
Donald L. Keithley and David S. Kay. Participants in the Plan, who may be
trustees, officers or employees of the Company, or its subsidiaries or
Company-owned partnerships, will be selected by the Executive Compensation
Committee. See also "--Compensation of Trustees."
 
  The Plan authorizes the Executive Compensation Committee to grant incentive
Options for Common Shares at an exercise price to be determined by it,
provided that such price cannot be less than 100% of the fair market value of
Common Shares on the date on which the Option is granted. The exercise price
of non-qualified Options will be at 100% of the fair market value of Units on
the date the Option is granted as determined by the Executive Compensation
Committee.
 
  The Initial Grants will become exercisable, subject to certain conditions
being met, at a rate of 25% per year over four years commencing on the first
anniversary of their date of grant and will have a term of ten years. The
exercise price of the Options issued under the Initial Grants will be the
initial public offering price of the Common Shares. 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 Shares. The Plan provides that exercise may be delayed or
prohibited if it would adversely affect the Company's REIT status.
 
  All unexercisable Options held by an optionee will automatically be
forfeited if the optionee leaves employment for any reason other than death or
permanent disability. Upon a "change in control" (as defined in the Plan), all
unexercisable Options will become exercisable. The rights of any optionees to
exercise a Option may not be transferred in any way other than by will or
applicable laws of descent and distribution.
 
  The Company also anticipates that it will grant Options to its non-employee
Trustees (other than Messrs. Pohanka and Rosenthal). The exercise price for
any of these Options will generally be 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 Shares.
 
  The Executive Compensation Committee may grant options under the Plan in
substitution for outstanding options with higher exercise prices. In addition,
in the event of certain extraordinary events, the Executive Compensation
Committee may make adjustments in the aggregate number and kind of shares of
beneficial interest reserved for issuance, the number and kind of shares of
beneficial interest covered by outstanding awards and the exercise prices
specified therein as may be determined to be appropriate.
 
                                      63
<PAGE>
 
  The following table contains information concerning the grant of Share
Options under the Company's Plan expected to be made for the year ending
December 31, 1998. The table also lists potential realizable values of such
options on the basis of assumed annual compounded share appreciation rates of
5% and 10% over the life of the Options.
 
OPTION GRANTS IN CONNECTION WITH THE FORMATION TRANSACTIONS
<TABLE>
<CAPTION>
                                                                         POTENTIAL REALIZABLE
                                                                           VALUE AT ASSUMED
                                                                        ANNUAL RATES OF STOCK
                         NUMBER OF   % OF TOTAL                         PRICE APPRECIATION FOR
                         SECURITIES   OPTIONS                                OPTION TERM
        NAME AND         UNDERLYING  GRANTED TO  EXERCISE OR                (IN THOUSANDS)
       PRINCIPAL          OPTIONS   EMPLOYEES IN BASE PRICE  EXPIRATION ----------------------
        POSITION         GRANTED(1) FISCAL YEAR   PER SHARE   DATE(2)     5%(3)      10%(3)
       ---------         ---------- ------------ ----------- ----------   -----    -----------
<S>                      <C>        <C>          <C>         <C>        <C>        <C>
Thomas D. Eckert........  958,345       37.5%        $15                    $9,040     $22,910
 President and Chief
 Executive Officer
Scott M. Stahr..........  519,104       20.3          15                     4,897      12,410
 Executive Vice
 President and
 Chief Operating Officer
Donald L. Keithley......  239,586        9.4          15                     2,260       5,728
 Executive Vice
 President of Business
 Development
David S. Kay............  519,104       20.3          15                     4,896      12,410
 Vice President and
 Chief Financial Officer
</TABLE>
- --------
(1) The Options granted will become exercisable at a rate of 25% per year over
    four years commencing on the first anniversary of their date of grant.
(2) The expiration date of the Options will be ten years after the date of the
    grant.
(3) The potential realizable value is reported net of the option price, but
    before the income taxes associated with exercise. These amounts represent
    assumed annual compounded rates of appreciation at 5% and 10% from the
    date of grant to the expiration date of the Options.
 
INDEMNIFICATION OF TRUSTEES AND OFFICERS
 
  The Declaration of Trust contains a provision permitted under Maryland law
eliminating (with limited exceptions) each Trustee's personal liability for
monetary damages for breach of any duty as a Trustee. In addition, the
Declaration of Trust and Bylaws authorize the Company to indemnify its present
and former Trustees and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding to the maximum
extent permitted from time to time under Maryland law. Maryland law provides
that indemnification of a person who is a party, or threatened to be made a
party, to legal proceedings by reason of the fact that such a person is a
trustee, officer, employee or agent of a corporation or was a trustee or
officer of the corporation or is or was serving as a trustee or officer of a
corporation or other firm at the request of a corporation, against expenses,
judgments, fines and amounts paid in settlement, is mandatory in certain
circumstances and permissive in others, subject to authorization by the Board
of Trustees.
 
  The Company intends to enter into indemnification agreements with each of
the Company's Trustees and certain of its executive officers, either as
separate agreements or as part of their employment agreements. The
indemnification agreements will require, among other things, that the Company
indemnify its Trustees and officers to the fullest extent permitted by law,
and advance to the Trustees and officers all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company also must indemnify and advance all expenses incurred
by Trustees and officers seeking to enforce their rights under the
indemnification agreements and cover trustees and officers under the Company's
Trustees' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Declaration of Trust and Bylaws, it provides
greater assurance to Trustees and officers that indemnification will be
available, because as a contract, it cannot be unilaterally modified by the
Board of Trustees or by the shareholders to eliminate the rights it provides.
 
                                      64
<PAGE>

                    STRUCTURE AND FORMATION OF THE COMPANY
 
  The Company was formed on October 20, 1997. The Operating Partnership was
formed on November 13, 1997.
 
STRUCTURE OF THE COMPANY
 
  The Company will be the sole general partner of the Operating Partnership.
The Company will contribute the proceeds of the Offering to the Operating
Partnership in exchange for Units representing approximately 81.2% of the
partnership interests in the Operating Partnership (the terms and conditions
of which will correspond to the Common Shares). The Company will conduct
substantially all of its business, and will hold all of its interests in the
Properties, through the Operating Partnership. As the sole general partner of
the Operating Partnership, the Company will have the exclusive power to manage
and conduct the business of the Operating Partnership, subject to certain
exceptions set forth in the Partnership Agreement. See "Partnership
Agreement."
 
  The following diagram depicts the ownership structure of the Company and the
Operating Partnership upon completion of the Offering and the Formation
Transactions (as defined below):
 
                           [FLOWCHART APPEARS HERE]
 
FORMATION TRANSACTIONS
 
    The following transactions will be completed in connection with the
  completion of the Offering:
 
    .  Concurrently with the closing of this Offering, pursuant to the FBR
       Offering, FBR Asset Investment Corporation, an Affiliate of the
       Representative, has agreed to acquire 1,792,115 Common Shares in a
       private placement at the initial public offering price (net of
       underwriting discounts and commissions).
 
                                      65
<PAGE>
 
 
    .  Concurrently with the closing of the Offering, the Company will
       contribute the net proceeds of the Offering and the FBR Offering to
       the Operating Partnership in exchange for 21,792,115 Units.
       
    .  At closings scheduled within 60 days of the closing of the Offering,
       the Company will acquire certain Initial Properties from Cross-
       Continent, Good News and Kline in exchange for cash consideration of
       $13.1 million, $5.5 million and $8.5 million, respectively.     
       
    .  At closings scheduled for July 1998, the Company will acquire certain
       Initial Properties from Cross-Continent for cash consideration of
       approximately $22.1 million.     
 
    .  At closings scheduled within 60 days of the Offering, the Company
       will acquire Initial Properties
          
       from Pohanka, Rosenthal, Sheehy and Cherner in exchange for
       1,204,342; 3,438,298; 295,439; and 103,470 Units of the Operating
       Partnership, respectively. The Operating Partnership will acquire
       certain Initial Properties subject to existing mortgage debt of $41.3
       million. The Company will pay Mortgage Debt of approximately $13.3
       million, $13.7 million, $9.6 million and $4.8 million assumed from
       Pohanka, Rosenthal, Sheehy and Cherner, respectively, in full at the
       closing of the purchase of such Initial Properties. See "Use of
       Proceeds" and "Business of the Company and Properties--The Initial
       Leases, Properties and Dealerships" for a description of the
       consideration to be paid and Mortgage Debt to be assumed by the
       Company with respect to the Initial Sellers.     
 
    .  The Operating Partnership will use the aggregate net proceeds of the
       Offering and the FBR Offering of $302.4 million ($344.2 million of
       the Underwriters' over-allotment option is exercised in full) as
       described in "Use of Proceeds."
 
    .  Dealers or their Affiliates will enter into long-term triple-net
       Leases with the Company and may enter into other agreements with the
       Company with respect to the Initial Properties.
       
    .  Each of Messrs. Pohanka and Rosenthal, who will be Trustees of the
       Company and Affiliates of certain Initial Sellers and Initial
       Lessees, will receive warrants representing the right to acquire up
       to 707,079 Units (equal to 2% of the Common Shares to be outstanding
       on the closing of the Offering (including exercise of the
       Underwriters' over-allotment option in full) on a fully diluted
       basis), at an exercise price equal to the initial public offering
       price of the Common Shares, such warrants to be exercisable beginning
       on the closing of the Offering and for a period of five years
       thereafter.     
 
    .  The Company will obtain a $10 million line of credit from
       NationsBank, N.A. and will borrow approximately $5 million at the
       closing of the Offering (approximately $2.5 million of which will be
       guaranteed by Affiliates of Mr. Rosenthal and approximately $2.5
       million of which will be guaranteed by Affiliates of Mr. Sheehy).
 
BENEFITS TO RELATED PARTIES
 
  The following table sets forth the benefits of the Formation Transactions to
the executive officers and trustees of the Company:
 
<TABLE>
<CAPTION>
PERSON RECEIVING BENEFIT  NATURE AND AMOUNT OF BENEFIT
- ------------------------  ----------------------------
<S>                       <C>
John J. Pohanka and
Robert M. Rosenthal.....  1,204,342 Units and 3,438,298 Units, respectively, in
                          connection with the sale of the Initial Properties, and
                          the repayment of approximately $13.3 million and $13.7
                          million in principal amount of debt, respectively. The
                          receipt of Units will permit the deferral of taxes on
                          the sale of such Initial Properties. In addition, the
                          Company will be
</TABLE>
 
                                      66
<PAGE>

<TABLE>   
<CAPTION>
PERSON RECEIVING BENEFIT                NATURE AND AMOUNT OF BENEFIT
- ------------------------                ----------------------------
<S>                       <C>
                          prevented from selling, financing or repaying debt
                          secured by certain Initial Properties. See "Structure
                          and Formation of the Company--Lock-out Provisions."
                          Affiliates of Messrs. Pohanka and Rosenthal will
                          lease such Initial Properties from the Company and
                          will continue to control the operations of the
                          Dealership or Related Business operated on those
                          Initial Properties. Each of Messrs. Pohanka and
                          Rosenthal will receive Dealer Warrants to acquire
                          Units equal to 2% of the outstanding Common Shares
                          following the Offering (including exercise of the
                          Underwriters over-allotment option in full) on a
                          fully diluted basis at the intial public offering
                          price.

                          Beginning one year after the closing of the Offering,
                          the right to convert the Units held by them for Common
                          Shares, subject to the Ownership Limitation.

                          Purchase by Mr. Pohanka and his family of up to $13
                          million of Common Shares in this Offering at the
                          initial public offering price, of which a portion may
                          be purchased net of underwriting discounts and
                          commissions because executive officers and Trustees
                          may acquire in the aggregate up to 2% of the offered
                          Common Shares at the initial public offering price
                          (net of underwriting discounts and commissions).

Executive Officers......  Salary and bonus as an executive officer of the
                          Company as described under "Management--Executive
                          Compensation."

                          Options to acquire Common Shares and Units equal to 3%
                          (Thomas D. Eckert), 1.625% (Scott M. Stahr), .75%
                          (Donald L. Keithley) and 1.625% (David S. Kay) of the
                          outstanding Common Shares following the Offering
                          (including exercise of the Underwriters' the over-
                          allotment option on a fully diluted basis) at an
                          assumed initial public offering price.

                          The executive officers and Trustees may acquire in the
                          aggregate up to 2% of the Common Shares in this
                          Offering at the initial public offering price (net of
                          underwriting discounts and commissions). The executive
                          officers have advised the Representative that they
                          currently intend to purchase an aggregate of
                          approximately 122,000 Common Shares in this Offering.
 
  In addition to the foregoing, the Representative of the Underwriters and its
Affiliates will receive certain benefits in connection with the Offering in
addition to its compensation as an underwriter (see "Underwriting") as set
forth below:
 
Friedman, Billings, Ram-  Repayment of the loan made to the Company in the 
 sey Group, Inc.........  amount of up to approximately $2.5 million, plus
                          interest thereon at the rate of 10% per annum.

FBR Asset Investment      Purchase of 1,792,115 Common Shares at the initial
 Corporation............  public offering price (net of underwriting discounts
                          and commissions). Such purchaser will have certain
                          "demand" and "piggy-back" registration rights with
                          respect to such Common Shares. See "Common Shares
                          Eligible for Future Sale--Registration Rights."
</TABLE>    
 
                                      67
<PAGE>
 
LOCK-OUT PROVISIONS
 
  The Contribution Agreements contain "Lock-out Provisions" that restrict the
Company's ability to sell, or require the Company to maintain indebtedness on,
certain Initial Properties for periods ranging from zero to seven years
following the completion of the Offering, which will enable certain
participants in the Formation Transactions to defer certain tax consequences
associated with the Formation Transactions. See "Risk Factors--Conflicts of
Interests Among the Company and Certain Trustees--Ability of Certain Trustees
and Their Affiliates to Influence the Sale or Refinancing of the Initial
Properties--," "Business of the Company and Properties," "Management" and
"Related Transactions."
 
BENEFITS OF THE UPREIT STRUCTURE
 
The benefits of the Company's UPREIT status and structure include the
following:
 
 .  Access to Capital. The Company's structure will, in the Company's judgment,
   provide it with greater access to capital for refinancing and growth.
   Sources of capital include the Common Shares sold in the Offering and
   possible future issuances of debt or equity through public offerings or
   private placements. The financial strength of the Company should enable it
   to obtain financing at advantageous rates and on acceptable terms.
 
 .  Growth of the Company. The Company's structure will allow shareholders,
   through the ownership of Common Shares, and Sellers, through their
   ownership of Units, to participate in the growth of the real estate market
   through an ongoing business enterprise. In addition to the existing
   portfolio of Initial Properties, the Company gives shareholders and Sellers
   an interest in all future investment in those Properties.
 
 .  Liquidity. The Company's structure allows shareholders and Sellers the
   opportunity to liquidate their capital investment through the disposition
   of Common Shares or the conversion of Units into Common Shares. Pursuant to
   the Partnership Agreement and subject to certain conditions, each Unit held
   by the Company or any Seller may be redeemed for cash or, at the option of
   the Company, exchanged for one Common Share (subject to adjustment).
 
 .  Tax Deferral. The Formation Transactions provide to the Sellers the
   opportunity to defer the tax consequences that would arise from a sale or
   contribution of their interests in the Properties and other assets to the
   Company or to a third party.
 
ACQUISITION OF THE INITIAL PROPERTIES FROM THE INITIAL SELLERS
 
  The Operating Partnership will acquire the Initial Sellers' interests in the
Initial Properties pursuant to Contribution Agreements with each Initial
Seller negotiated on an arm's length basis. The obligations of the Initial
Sellers to transfer such Initial Properties pursuant to the Contribution
Agreements is or will be conditioned upon the completion of the Offering, the
closing of the transactions contemplated by the Initial Leases and the
Contribution Agreements, and normal and customary conditions to the closing of
real estate transactions, including the consents of lenders, if required. In
addition, in certain circumstances, the Initial Sellers' will be required to
deliver the consent of certain Manufacturers under the applicable Franchise
Agreements to the sale of certain Initial Properties. The Initial Sellers are
in the process of obtaining such lender or Manufacturer consents, if
applicable, and expect to obtain all necessary consents prior to the
completion of the Offering. The Contribution Agreements also contain
representations and warranties to the Operating Partnership concerning the
ownership and operation of the Initial Properties and environmental matters
and certain other covenants, representations and warranties customarily found
in real estate purchase agreements. Claims for indemnification for any breach
under the Contribution Agreements could be made by the Operating Partnership
for approximately two years from the completion of the Offering, subject to
longer periods for breaches relating to environmental matters. Although each
Initial Seller is obligated during the Indemnification period to maintain a
net worth equal to the purchase price for the relevant Initial Property, there
is no assurance that an Initial Seller will be able to satisfy its
indemnification obligation.
 
                                      68
<PAGE>
 
                             RELATED TRANSACTIONS
 
TRANSACTIONS WITH TRUSTEES
 
  Dealer Warrants. Messrs. Pohanka and Rosenthal are Trustees of the Company
and principals of certain Initial Sellers. They will each be granted the
Dealer Warrants.
   
  Acquisition of Initial Properties. Mr. John J. Pohanka is Chairman of
Pohanka Automotive Group. Upon consummation of this Offering, the Company will
purchase nine of the Initial Properties from Affiliates of Pohanka Automotive
Group for aggregate consideration of approximately $31.3 million through the
issuance of 1,204,342 Units and the assumption of $13.3 million of mortgage
debt. The Company has agreed not to sell, and to maintain specified levels of
debt on, the Initial Properties acquired from Affiliates of Mr. Pohanka for
periods ranging from four years to seven years, with most being subject to a
four year lock-out period.     
   
  Mr. Robert M. Rosenthal is Chairman of Rosenthal Automotive Organization.
Upon consummation of this Offering, the Company will purchase seven of the
Initial Properties from Affiliates of Rosenthal Automotive Organization for
aggregate consideration of approximately $65.3 million to be paid through the
issuance of 3,438,298 Units and the assumption of $13.7 million of mortgage
debt. The Company has agreed not to sell, and to maintain specified levels of
debt on, the Initial Properties acquired from Affiliates of Mr. Rosenthal for
periods ranging from five to seven years, with most being subject to a seven
year lock-out period.     
 
  Initial Leases. The Company will enter into Leases with Affiliates of
Pohanka Automotive Group for nine Initial Properties for aggregate initial
annual base rent of approximately $3.4 million. See "Business of the Company
and Properties--The Initial Properties, Leases and Dealerships."
 
  The Company will enter into Initial Leases with Affiliates of Rosenthal
Automotive Organization for seven Initial Properties for aggregate initial
annual base rent of approximately $7.2 million. See "Business of the Company
and Properties--The Initial Properties, Leases and Dealerships."
 
  Sale of Common Shares in This Offering. Mr. Pohanka has advised the
Representative that he and his family intend to purchase $13 million of
registered Common Shares in this Offering at a purchase price per share equal
to the initial public offering price, of which a portion may be purchased net
of underwriting discounts and commissions because executive officers and
Trustees may acquire in the aggregate up to 2% of the offered Common Shares
following the Offering (including exercise of the Underwriters' the over-
allotment option on a fully diluted basis) at an assumed initial public
offering price.
 
                                      69
<PAGE>
 
                             PARTNERSHIP AGREEMENT
 
  The following summary of 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.
 
MANAGEMENT
 
  The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company will initially
hold approximately 81.2% of the Units of the Operating Partnership, including
its interest held as a limited partner of the Operating Partnership (a
"Limited Partner"). The Company will conduct substantially all of its business
through the Operating Partnership. Pursuant to the Partnership Agreement, the
Company, as the sole general partner of the Operating Partnership, will
generally have full, exclusive and complete responsibility and discretion in
the 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.
 
  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. The Company, as general partner and without the
consent of the Limited Partners, may amend the Operating Partnership
Agreement; provided however, that any amendment (i) affecting the conversion
factor or redemption right in a manner adverse to the Limited Partners, (ii)
adversely affecting the rights of the Limited Partners to receive
distributions or allocations of profit or loss (other than in connection with
the issuance of additional Units), (iii) imposing on the Limited Partners any
obligation to make additional capital contributions, or (iv) affecting the
Limited Partners' registration rights, requires the consent of two-thirds of
the Limited Partners (excluding any Units held by the Company in its capacity
as a Limited Partner). Further, the Company, without the consent of the
Limited Partners (including the Company in its capacity as a Limited Partner)
holding at least two-thirds of the Units, may not sell, transfer or convey all
or substantially all of the assets of the Operating Partnership, including
without limitation a sale, assignment, transfer to another public or private
company or approve a merger or consolidation of the Operating Partnership. The
Limited Partners have no right to remove the Company as general partner of the
Operating Partnership.
 
INDEMNIFICATION
 
  To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as general partner, its officers and trustees
and such other persons as the Company may designate to the same extent
indemnification is provided to officers and trustees of the Company in the
Declaration of Trust, and limits the liability of the Company and its officers
and trustees to the Operating Partnership to the same extent liability of
officers and trustees of the Company is limited under the Declaration of
Trust.
 
TRANSFERABILITY OF INTERESTS
 
  Except for a transaction described in the following paragraph, the
Partnership Agreement provides that the Company may not voluntarily withdraw
from the Operating Partnership, or transfer or assign its interest in the
Operating Partnership. A Limited Partner may transfer its interests in the
Operating Partnership to a transferee subject to certain conditions,
including, the written consent of the Company and compliance with federal
securities laws and applicable state securities and blue sky laws, provided
further that such transfer does not cause the Operating Partnership to be
treated as an association taxable as a corporation 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. Such transferee will
be admitted as a substitute Limited Partner only upon assumption of all
obligations of the transferor Limited Partner, and the consent of the Company,
as general partner.
 
                                      70
<PAGE>
 
EXTRAORDINARY TRANSACTIONS
 
  The Partnership Agreement provides generally that the Company may not 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 Shares (a "Business
Combination"), unless the holders of Units will receive, or have the
opportunity to receive, the same consideration per Unit as shareholders
receive per Common Share in the transaction and no more than 75% of the equity
securities of the acquiring entity shall be owned by the Company or its
Affiliates. If, in connection with a Business Combination, a purchase, tender
or exchange offer (the "Offer") shall have been made to and accepted by the
holders of more than 50% of the outstanding Common Shares, each holder of
Units shall be given the option to exchange its Units for the greatest amount
of cash, securities or other property which a Limited Partner would have
received had it (i) exercised its right to cause its Units to be redeemed by
the Operating Partnership (the "Redemption Right") and pursuant to the
Company's option to issue Common Shares in exchange for Units, received Common
Shares immediately prior to the expiration of the Offer, and (ii) sold,
tendered or exchanged pursuant to the Offer the Common Shares received upon
the exercise of the Redemption Right. In addition, the Company may merge into
or consolidate with another entity if immediately after such merger or
consolidation (i) substantially all of the assets of the successor or
surviving entity (the "Surviving Entity"), other than Units held by the
Operating Partnership's general partner, are contributed to the Operating
Partnership as a Capital Contribution in exchange for Units with a fair market
value equal to the value of the assets so contributed as determined by the
Surviving Entity in good faith, and (ii) the Surviving Entity expressly agrees
to assume, or acknowledge and ratify, all obligations of the General Partner
under the Partnership Agreement.
 
ISSUANCE OF ADDITIONAL UNITS
 
  As sole general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional Units
representing general or limited partnership interests, including Preferred
Units in the Operating Partnership.
 
CAPITAL CONTRIBUTIONS AND ADDITIONAL FUNDS
 
  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 prior 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 the same terms and conditions as are
applicable to the Company's borrowing of such funds. The Partnership Agreement
and the Plan also provide that in the event the Company issues additional
shares of beneficial interest (including any issuance of Common Shares
pursuant thereto), 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. 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. 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 PLAN
 
  If Options granted in connection with the 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 Shares to such exercising participant. Upon such contribution the
Company will be issued a number of Units in the Operating Partnership equal to
the number of Common Shares so issued.
 
DISTRIBUTIONS
 
  The Partnership Agreement provides that the Operating Partnership shall
distribute cash on a quarterly basis (or more frequently at the election of
the Company, as general partner), pro rata in accordance with the partners'
respective percentage interests.
 
                                      71
<PAGE>
 
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, unless the Company otherwise ceases to qualify
as a REIT and to ensure that the Partnership will not be classified as a
publicly traded partnership under the Code. 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 REDEMPTION RIGHTS
 
  Beginning one year after the issuance of the Units, the Limited Partners
will have the right to redeem their Units for cash based on the average market
price of the Company's Common Shares for the twenty days immediately preceding
the five trading days prior to the exercise of the right to have Units
redeemed by the Operating Partnership. Under the Partnership Agreement, the
Operating Partnership may redeem Units for cash (calculated as provided in the
preceding sentence) prior to the expiration of the one-year holding period for
Units to the extent that a Limited Partner has pledged his Units to secure a
loan and has thereafter defaulted on such loan. The Company, in its sole
discretion, may assume the obligations of the Operating Partnership to redeem
Units, in which case the Company will have the option, in its sole discretion,
to exchange the Units for cash or the issuance of a like number of Common
Shares. The Company may not exchange any Common Shares for Units if actual or
constructive ownership of such Common Shares would (i) violate the Ownership
Limit, (ii) result in the Company's shares being owned by fewer than 100
persons, (iii) result in the Company being "closely held" within the meaning
of Section 856(h) of the Code, (iv) cause the Company to own, directly 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 Common
Shares by such Limited Partner to be "integrated" with any other distribution
of Common Shares for purposes of complying with the registration provisions of
the Securities Act. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer." Following the expiration of the
foregoing restrictions, any Common Shares issued to the Company or any of the
Limited Partners upon redemption of their Units may be sold in the public
market pursuant to the registration statements which the Company will be
obligated to file under the Partnership Agreement. See "Common Shares Eligible
for Future Sale."
 
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.
 
TERM
 
  The Operating Partnership will continue in full force and effect until
December 31, 2073 or until sooner dissolved and terminated (i) upon the
dissolution, bankruptcy, insolvency or termination of the Company (unless the
Limited Partners elect to continue the Operating Partnership), (ii) upon the
passage of 90 days after the sale or other disposition of all, or
substantially all the assets of the Operating Partnership, or (iii) upon the
election by the Company, as general partner, that the Operating Partnership
should be dissolved, or (iv) by operation of law.
 
                                      72
<PAGE>
 
                     PRINCIPAL SHAREHOLDERS OF THE COMPANY
 
  The following table sets forth certain information regarding the expected
beneficial ownership of the Common Shares immediately following the
consummation of the Offering and the Formation Transactions, by (a) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Shares, (b) each Trustee of the Company, (c) each executive officer of
the Company and (d) all Trustees and executive officers of the Company as a
group (excluding exercise of the Underwriters' over-allotment option in full).
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 Common Shares the person
holds or the number of Common Shares into which Units held by the person are
exchangeable (if the Company elects to issue shares or Units rather than pay
cash upon such exchange). The executive officers and Trustees of the Company
have agreed not to sell Common Shares (including Common Shares issued on
exercise of Units), without the consent of the Representative, for a period of
two years following completion of the Offering. See "Partnership Agreement--
Limited Partner Redemption Rights."
 
<TABLE>
<CAPTION>
                             NUMBER OF
                              COMMON                            NUMBER OF
                              SHARES        PERCENTAGE OF     COMMON SHARES   PERCENTAGE OF
                           BENEFICIALLY     COMMON SHARES     BENEFICIALLY    COMMON SHARES
                            OWNED PRIOR     OWNED PRIOR TO     OWNED AFTER   OWNED FOLLOWING
     NAME                 TO THE OFFERING THE OFFERING(1)(2) THE OFFERING(2) THE OFFERING(3)
     ----                 --------------- ------------------ --------------- ---------------
<S>                       <C>             <C>                <C>             <C>
Thomas D. Eckert(3)(4)..         10              100%                 -- (8)       -- (8)
Scott M. Stahr(3)(4)....        --               --                   -- (8)       -- (8)
Donald L.
 Keithley(3)(4).........        --               --                   -- (8)       -- (8)
David S. Kay(3)(4)......        --               --                   -- (8)       -- (8)
John J.
 Pohanka(1)(4)(5)(6)....        --               --               866,667          3.8%
Robert M.
 Rosenthal(1)(4)(5).....        --               --                   --           --
FBR Asset Investment
 Corporation(7).........        --               --             3,069,909         13.3%
Trustees and Executive
 Officers as a group
 (eight persons)........         10              100%             988,531          4.5%
</TABLE>
- --------
(1) Affiliates of Mr. Pohanka and Mr. Rosenthal will own an aggregate of
    1,204,342 Units and 3,438,298 Units respectively, that are not redeemable
    for a period of one year from the date of issuance. If the holder chooses
    to redeem the Units, the Operating Partnership may redeem them for cash,
    or at the option of the Company, they may be redeemed for Common Shares.
    However, the aggregate number of Units redeemable for Common Shares is
    subject to the Ownership Limit and certain other limitations.
(2) The total number of Common Shares outstanding used in calculating the
    percentage assumes that none of the Units is redeemed for Common Shares.
   
(3) Mr. Eckert owns 10 Common Shares prior to the Offering, which the Company
    intends to repurchase immediately prior to the effective date of the
    Offering. Excludes Options held by Messrs. Eckert, Stahr, Keithley and Kay
    to acquire 26,667; 26,667; 26,667; and 26,667 Common Shares and 931,678;
    492,437; 212,919; and 492,437 Units, respectively, which are not
    exercisable within 60 days from the date of the Prospectus.     
(4) The address for the executive officers and Trustees of the Company is c/o
    1925 North Lynn Street, Suite 306, Arlington, Virginia 22209. Messers.
    Pohanka and Rosenthal will join the Board of Trustees of the Company
    immediately prior to the effective date of the Offering.
(5) Does not assume redemption of Units for Common Shares issued on exercise
    of the Dealer Warrants that will be subject to a one year holding period
    from the closing date of the Offering. Assuming (i) conversion of the
    Units issued upon acquisition of Initial Properties acquired from
    Affiliates of Mr. Pohanka and Affiliates of Mr. Rosenthal, (ii) exercise
    of the Dealer Warrants and conversion of the Common Shares to be issued on
    exercise of Units, and (iii) the purchase of $13 million of registered
    Common Shares by Mr. Pohanka and his family, Mr. Pohanka and his
    Affiliates and Mr. Rosenthal and his Affiliates will own 2,709,906 and
    4,077,195 of the outstanding Common Shares at the closing of the Offering,
    respectively, representing 9.56% and 14.27% of "Common Shares Owned
    Following the Offering," respectively, on a fully diluted and converted
    basis. The total number of Common Shares outstanding used in calculating
    these percentages assumes that all of the Units are redeemed for Common
    Shares.
(6) Assumes Mr. Pohanka and his family purchases $13 million of Common Shares
    in the Offering.
(7) Includes Common Shares to be issued on exercise of the Underwriting
    Warrants issued to the Representative, an Affiliate of FBR Asset
    Investment Corporation.
(8) Represents less than 1%.
 
                                      73
<PAGE>
 
                 DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
 
  The Company was formed as a REIT under the laws of the State of Maryland.
Rights of shareholders are governed by Title 8 of the Corporations and
Associations Articles, Annotated Code of Maryland (the "Maryland REIT Law")
and by the Declaration of Trust and Bylaws. The following summary of the terms
of shares of beneficial interest of the Company does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Declaration of Trust and Bylaws, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
 
AUTHORIZED SHARES
 
  The Declaration of Trust provides that the Company may issue up to 100
million Common Shares, par value $.01 per share, and 20 million Preferred
Shares, par value $.01 per share. Upon completion of the Offering and the
consummation of the Formation Transactions, there will be 21,792,115 Common
Shares issued and outstanding.
 
  As permitted by the Maryland REIT Law, the Declaration of Trust contains a
provision permitting the Board of Trustees, without any action by the
shareholders of the Trust, to classify or reclassify any unissued Common
Shares or Preferred Shares into one or more classes or series of shares of
beneficial interest by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
distributions, qualifications or terms or conditions of redemption of such new
class or series of shares of beneficial interest, or amend the Declaration of
Trust to increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of any class of shares of beneficial interest
that the Trust has authority to issue. The Company believes that the power of
the Board of Trustees to issue additional shares of beneficial interest will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs that might arise. The
additional shares of beneficial interest, including possibly Common Shares,
will be available for issuance without further action by the Company's
shareholders, unless action by the shareholders is required by applicable law
or the rules of any stock exchange or automated quotation system on which the
Company's securities may be listed or traded. Although the Board of Trustees
currently has no intention of doing so, it could authorize the Company to
issue a class or series that could, depending on the terms of such class or
series, delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for the Common Shares and might
otherwise be in the best interests of the shareholders.
 
  The Maryland REIT Law provides that no shareholder of the Company will be
personally liable for any obligation of the Company solely as a result of his
or her status as a shareholder of the Company. The Declaration of Trust
provides that no shareholder shall be liable for any debt or obligation of the
Company by reason of being a shareholder nor shall any shareholder be subject
to any personal liability in tort, contract or otherwise to any person in
connection with the property or affairs of the Company by reason of being a
shareholder. The Company's Bylaws further provide that the Company shall
indemnify each present or former shareholder against any claim or liability to
which the shareholder may become subject by reason of being or having been a
shareholder and that the Company shall reimburse each shareholder for all
reasonable expenses incurred by him in connection with any such claim or
liability. Inasmuch as the Company carries public liability insurance which it
considers adequate, any risk of personal liability to shareholders is limited
to situations in which the Company's assets plus its insurance coverage would
be sufficient to satisfy the claims against the Company and its shareholders.
 
COMMON SHARES
 
  All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other class or series
of shares of beneficial interest and to the provisions of the Declaration of
Trust regarding the restriction of the transfer of shares of beneficial
interest, holders of Common Shares will be entitled to receive distributions
on shares if, as and when authorized and declared by the Board of
 
                                      74
<PAGE>
 
Trustees out of assets legally available therefor and to share ratably in the
assets of the Company legally available for distribution to the shareholders
in the event of the liquidation, dissolution or winding-up of the Company
after payment of, or adequate provision for, all known debts and liabilities
of the Company.
 
  Subject to the provisions of the Declaration of Trust regarding the
restriction of the transfer of shares of beneficial interest, each outstanding
Common Share entitles the holder to one vote on all matters submitted to a
vote of shareholders, including the election of trustees and, except as
provided with respect to any other class or series of shares of beneficial
interest, the holders of Common Shares will possess the exclusive voting
power. There is no cumulative voting in the election of Trustees, which means
that the holders of a majority of the outstanding Common Shares can elect all
of the Trustees then standing for election, and the holders of the remaining
shares will not be able to elect any trustees.
 
  Holders of Common Shares have no conversion, sinking fund, redemption,
exchange or appraisal rights, and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of shares of beneficial interest,
Common Shares have equal dividend, distribution, liquidation and other rights.
 
  Under the Maryland REIT Law, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the real estate investment trust's
declaration of trust. The Company's Declaration of Trust provides for approval
by a majority of all the votes entitled to be cast on the matter in all
situations permitting or requiring action by the shareholders except with
respect to (a) the intentional disqualification of the Company as a real
estate investment trust or revocation of its election to be taxed as a real
estate investment trust (which requires the affirmative vote of the holders of
two-thirds of the number of Common Shares entitled to vote on such matter at a
meeting of the shareholders of the Company), (b) the election of Trustees
(which requires a plurality of all the votes cast at a meeting of shareholders
of the Company at which a quorum is present), (c) the removal of Trustees
(which requires the affirmative vote of the holders of a two-thirds the
outstanding voting shares of the Company), (d) the amendment of the
Declaration of Trust by shareholders (which requires the affirmative vote of a
majority of votes entitled to be cast on the matter, except under certain
circumstances specified in the Declaration of Trust which require the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter), and (e) the dissolution of the Company (which requires the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter). Under the Maryland REIT Law, a declaration of trust may permit the
trustees by a two-thirds vote to amend the declaration of trust from time to
time to qualify as a real estate investment trust under the Code or the
Maryland REIT Law without the approval of the shareholders. The Company's
Declaration of Trust permits such action by the Board of Trustees. As
permitted by the Maryland REIT Law, the Declaration of Trust contains a
provision permitting the Board of Trustees, without any action by the
shareholders of the Trust, to amend the Declaration of Trust to increase or
decrease the aggregate number of shares of beneficial interest or the number
of shares of any class of shares of beneficial interest that the Trust has
authority to issue.
 
  The registrar and transfer agent and registrar for the Common Shares is
American Stock Transfer & Trust Company.
 
  The Company has applied for trading of the Common Shares on the Nasdaq
National Market System under the trading symbol "CARS."
 
PREFERRED SHARES
 
  Preferred Shares may be issued from time to time, in one or more series, as
authorized by the Board of Trustees. Prior to the issuance of shares of each
series, the Board of Trustees is required by the Maryland REIT Law and the
Declaration of Trust to fix for each series, subject to the provisions of the
Declaration of Trust, the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions,
 
                                      75
<PAGE>
 
qualifications and terms or conditions of redemption, as permitted by Maryland
law. Because the Board of Trustees has the power to establish the preferences,
powers and rights of each series of Preferred Shares, it may afford the
holders of any series of Preferred Shares preferences, powers and rights,
voting or otherwise, senior to the rights of holders of Common Shares. The
issuance of Preferred Shares could have the effect of delaying or preventing a
change of control of the Company that might involve a premium price for
holders of Common Shares or otherwise be in their best interest. The Board of
Trustees has no present plans to issue any Preferred Shares.
 
RESTRICTIONS ON OWNERSHIP AND TRANSFER
 
  For the Company to qualify as a REIT under the Code, among other things, no
more than 50% in value of its outstanding shares of beneficial interest may be
owned, actually 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) during the last half of a taxable year (other than the first year for
which the election to be taxed as a REIT has been made) or during a
proportionate part of a shorter taxable year (the "Five or Fewer
Requirement"). In addition, if the Company, or an owner of 10% or more of the
Company, actually or constructively owns 10% or more of a Lessee of the
Company, the rent received by the Company (either directly or through any such
partnership) from such Lessee will not be qualifying income for purposes of
the REIT gross income tests of the Code. A REIT's stock or beneficial
interests must also be 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 the first year for which an election to be treated as
a REIT has been made).
 
  Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to
own by virtue of the attribution provisions of the Code, shares in excess of
the Ownership Limitation. Any transfer of Common Shares or Preferred Shares
that would (i) result in any person owning, directly or indirectly, Common
Shares or Preferred Shares in excess of the Ownership Limitation, (ii) result
in the Common Shares and Preferred Shares 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, or (iv) cause the Company to own, directly 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, shall be null and void, and the intended
transferee will acquire no rights in such Common Shares or Preferred Shares.
The Company has waived the Ownership Limit with respect to the Representative
and its Affiliates to permit them to own the Common Shares.
 
  Subject to certain exceptions described below, if any purported transfer of
Common Shares or Preferred Shares would (i) result in any person owning,
directly or indirectly, Common Shares or Preferred Shares in excess of the
Ownership Limitation, (ii) result in the Common Shares and Preferred Shares
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, or (iv) cause the Company to own,
directly 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, the Common or Preferred Shares
will be designated as "Shares-in-Trust" and transferred automatically to a
trust (the "Share Trust") effective as of the close of business on the
business day before the purported transfer of such Common Shares or Preferred
Shares. The record holder of the Common Shares or Preferred Shares that are
designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of Common or Preferred Shares to the Company for
registration in the name of the Share Trust. The Share Trustee will be
designated by the Company, but will not be affiliated with the Company. The
beneficiary of the Share Trust (the "Beneficiary") will be one or more
charitable organizations that are named by the Company.
 
  Shares-in-Trust will remain issued and outstanding Common Shares or
Preferred Shares and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Share Trust will receive all
 
                                      76
<PAGE>
 
dividends and distributions on the Shares-in-Trust and will hold such
dividends and distributions in trust for the benefit of the Beneficiary. The
Share Trustee will vote all Shares-in-Trust. The Share Trustee will designate
a permitted transferee of the Shares-in-Trust, provided that the permitted
transferee (i) purchases such Shares-in-Trust for valuable consideration and
(ii) acquires such Shares-in-Trust without such acquisition resulting in a
transfer to another Share Trust and resulting in the redesignation of such
Common Shares or Preferred Shares as Shares-in-Trust.
 
  The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and
(ii) the record date for which was on or after the date that such shares
became Shares-in-Trust. Upon sale or other disposition of the Shares-in-Trust
to a permitted transferee, the Prohibited Owner generally will receive from
the Share Trustee, the lesser of (i) in the case of (a) a purported transfer
in which the Prohibited Owner gave value for Shares and which transfer
resulted in the transfer of the Shares to the Share Trust, the price per
share, if any, such Prohibited Owner paid for the Shares or (b) a case in
which the Prohibited Owner did not give value for such Shares (e.g., if the
Shares were received through a gift or devise), the price per share equal to
the Market Price (as defined below) on the date thereof, (ii) the price per
share received by the Share Trustee from the sale of such Shares-in-Trust. Any
amounts received by the Share Trustee in excess of the amounts to be paid to
the Prohibited Owner will be distributed to the Beneficiary. Unless sooner
sold to a permitted transferee, upon the liquidation, dissolution or winding
up of the Company, the Prohibited Owner generally will receive from the Share
Trustee its share of the liquidation proceeds, provided, however, the
Prohibited Owner may not receive amounts in excess of (i) the price per share
such Prohibited Owner paid for the Common Shares or Preferred Shares that were
designated as Shares-in-Trust or (ii) in the case of a gift or devise, the
Market Price per share on the date of such transfer.
 
  The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in
the case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust or (ii) the date the
Company determines in good faith that a transfer resulting in such Shares-in-
Trust occurred.
 
  "Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange
("NYSE") or, if the Common Shares or Preferred Shares are not listed or
admitted to trading on the NYSE, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the Common Shares or Preferred
Shares are listed or admitted to trading or, if the Common Shares or Preferred
Shares are not listed or admitted to trading on any national securities
exchange, on the National Market System of the Nasdaq Stock Market or, if the
shares are not listed for trading on the National Market System, the last
quoted price, or if not so quoted, the average of the closing bid and asked
prices in the over-the-counter market, as reported by Nasdaq or, if such
system is no longer in use, the principal automated quotation system that may
then be in use or, if the Common Shares or Preferred Shares are not quoted by
any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Common Shares
or Preferred Shares selected by the Board of Trustees. "Trading Day" shall
mean a day on which the principal national securities exchange on which the
Common Shares or Preferred Shares are listed or admitted to trading is open
for the transaction of business or, if the Common Shares or Preferred Shares
are not listed or admitted to trading on any national securities exchange or
stock market, 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.
 
                                      77
<PAGE>
 
  Any person who acquires or attempts to acquire Common or Preferred Shares in
violation of the foregoing restrictions, or any person who owned Common Shares
or Preferred Shares that were transferred to a Share Trust, will be required
(i) to give immediate written notice to the Company of such event and (ii) to
provide to the Company such other information as the Company may request in
order to determine the effect, if any, of such transfer on the Company's
status as a REIT.
 
  The Declaration of Trust requires all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required pursuant to
regulations under the Code) of the outstanding Common Shares and Preferred
Shares, within 30 days after January 1 of each year, to provide to the Company
a written statement or affidavit stating the name and address of such direct
or indirect owner, the number of Common Shares and Preferred Shares owned
directly or indirectly, and a description of how such shares are held. In
addition, each direct or indirect shareholder shall provide to the Company
such additional information as the Company may request in order to determine
the effect, if any, of such ownership on the Company's status as a REIT and to
ensure compliance with the Ownership Limitation.
 
  The Ownership Limitation generally will not apply to the acquisition of
Common Shares or Preferred Shares by an underwriter that participates in a
public offering of such shares. In addition, the Board of Trustees, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Trustees may direct, may exempt a person from
the Ownership Limitation under certain circumstances. However, the Board may
not grant an exemption from the Ownership Limit to any proposed transferee
whose ownership, direct or indirect, of shares of beneficial interest of the
Company in excess of the Ownership Limit would result in the termination of
the Company's status as a REIT. The foregoing restrictions will continue to
apply until (i) the Board of Trustees determines that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT, and (ii) there is 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 the Company. The Company has waived the Ownership Limit
with respect to the Representative and its Affiliates to permit them to own
the Common Shares.
 
  The Ownership Limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders of the Company.
 
  All certificates representing Common Shares or Preferred Shares will bear a
legend referring to the restrictions described above.
 
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE DECLARATION OF TRUST AND BYLAWS
 
  The following paragraphs summarize certain provisions of Maryland law and of
the Declaration of Trust and the Bylaws of the Company. This summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the MGCL, the Maryland REIT Law, the Declaration of Trust and the
Bylaws of the Company. The business combination provisions and, if the
applicable provision in the Bylaws is rescinded, the control share acquisition
provisions of the MGCL, the provisions of the Declaration of Trust on the
removal of Trustees and the advance notice provisions of the Bylaws could have
the affect of delaying, deferring or preventing a transaction or a change in
control of the Company that might involve a premium price for holders of
Common Shares or otherwise be in their best interest.
 
  Business Combinations. Under the MGCL, as applicable to Maryland REITs,
certain "business combinations" (including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland REIT and any person
who beneficially owns ten percent or more of the voting power of the REIT's
shares or an affiliate of the REIT who, at any time within the two-year period
prior to the date in question, was an Interested Shareholder (as defined
below) or an affiliate of such an Interest Shareholder are prohibited for five
years after the most recent date on which the Interested Shareholder becomes
an Interested Shareholder. Thereafter, any such business combination must be
recommended by the board of trustees of such REIT and approved by the
affirmative vote of at least (a) 80% of
 
                                      78
<PAGE>
 
the votes entitled to be cast by holders of the REIT' outstanding voting
shares of beneficial interest, and (b) two-thirds of the votes entitled to be
cast by holders of the REIT's outstanding voting shares of beneficial interest
other than shares held by the Interested Shareholder with whom or with whose
Affiliate the business combination is to be effected, unless, among other
conditions, the trust's common shareholders receive a minimum price (as
defined in the MGCL) for their shares of beneficial interest and the
consideration is received in cash or in the same form as previously paid by
the Interested Shareholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of trustees of the REIT prior to the time that the Interested
Shareholder becomes an Interested Shareholder. As permitted by the MGCL, the
Declaration of Trust exempts any "Business Combinations" involving the
issuance of Common Shares to any Initial Seller upon the exchange of Units
acquired by any of them in connection with the Formation Transactions or the
acquisition by any of them of any additional shares of beneficial interest in
the Company. Accordingly, the five-year prohibition and the super-majority
vote requirement will not apply to any "Business Combinations" between the
Initial Sellers and the Company. As a result, the Initial Sellers may be able
to enter into "Business Combinations" with the Company, which may or may not
be in the best interests of the shareholders, without the super-majority
shareholder approval.
 
  "Interested Shareholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland real estate investment trust's shares of
beneficial interest or an affiliate of the REIT which, 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 shares of
beneficial interest of the REIT.
 
  Control Share Acquisitions. The Declaration of Trust will contain a
provision exempting from the control share acquisition statute any and all
acquisitions by any person of the Company's shares of beneficial interest.
There can be no assurance that such provision will not be amended or
eliminated at any point in the future. The MGCL, as applicable to Maryland
REITs, provides that "control shares" of a Maryland real estate investment
REIT 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 beneficial interest owned by the acquiror
or by officers or trustees who are employees of the trust. "Control shares"
are voting shares of beneficial interest which, if aggregated with all other
such shares 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 acquiror to exercise
voting power in electing trustees 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 or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained shareholder 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 Trustees to call a
special meeting of shareholders 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 Company may itself present the question at any shareholders' meeting.
 
  Limitation of Liability and Indemnification. The Maryland REIT Law permits a
Maryland real estate investment trust to indemnify and advance expenses to its
Trustees, officers, employees and agents to the same extent as permitted by
the MGCL for trustees and officers of Maryland corporations. The MGCL permits
a corporation to indemnify its present and former trustees and officers, among
others, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the
trustees or officer was material to the matter giving rise to the proceeding
and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) the trustee or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the trustee or officer had reasonable cause to
believe that the act or omission was unlawful. However, a Maryland corporation
may not indemnify for an adverse judgment in a suit by or in the right of the
corporation. In accordance with the MGCL, the Bylaws of the Company require
it, as a condition to advancing expenses, to
 
                                      79
<PAGE>
 
obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification
by the Company as authorized by the Bylaws and (b) a written statement by or
on his behalf to repay the amount paid or reimbursed by the Company if it
shall ultimately be determined that the standard of conduct was not met. The
Declaration of Trust authorizes the Company to indemnify its officers and
Trustees to the maximum extent permitted by Maryland law. The Declaration of
Trust and Bylaws also permit the Company to indemnify any employee or agent of
the Company or a predecessor of the Company. The Bylaws require the Company to
indemnify each Trustee 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.
 
  The Company intends to enter into separate indemnification agreements with
each of the Company's Trustees and certain of its executive officers. The
indemnification agreements will require, among other things, that the Company
indemnify its Trustees and officers to the fullest extent permitted by law,
and advance to the Trustees and officers all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company also must indemnify and advance all expenses incurred
by Trustees and officers seeking to enforce their rights under the
indemnification agreements and cover trustees and officers under the Company's
Trustees' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Declaration of Trust and Bylaws, it provides
greater assurance to Trustees and officers that indemnification will be
available, because as a contract, it cannot be unilaterally modified by the
Board of Trustees or by the shareholders to eliminate the rights it provides.
 
  Maryland Asset Requirements. To maintain its qualification as a Maryland
real estate investment trust, the Maryland REIT Law requires that the Company
hold, either directly or indirectly, at least 75% of the value of its assets
in real estate assets, mortgages or mortgage related securities, government
securities, cash and cash equivalent items, including high-grade short-term
securities and receivables. The Maryland REIT Law also prohibits using or
applying land for farming, agricultural, horticultural or similar purposes.
 
  Meetings of Shareholders. The Bylaws provide for annual meetings of
shareholders to elect the Board of Trustees and transact such other business
as may properly be brought before the meeting. Special meetings of
shareholders may be called by the President, the Board of Trustees or the
Chairman of the Board and shall be called at the request in writing of the
holders of 50% or more of the outstanding shares of beneficial interest of the
Company entitled to vote.
 
  The Bylaws provide that any action required or permitted to be taken at a
meeting of shareholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
shareholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each shareholder entitled to notice of the meeting but
not entitled to vote at such meeting.
 
                                      80
<PAGE>
 
                    COMMON SHARES ELIGIBLE FOR FUTURE SALE
 
  General. Prior to the date of this Prospectus, there has been no public
market for the Common Shares. The Company has applied for trading of the
Common Shares on the Nasdaq National Market System, subject to official notice
of issuance. No prediction can be made as to the effect, if any, that future
sales of Common Shares (including sales pursuant to Rule 144) or the
availability of Common Shares for future sale will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Shares
(including Common Shares issued upon the exercise of options or the exchange
of Units), or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Shares and impair the Company's
ability to obtain additional capital through the sale of equity securities.
See "Risk Factors--Possible Adverse Effects on Share Price Arising from Common
Shares Eligible for Future Sale." For a description of certain restrictions on
transfers of Common Shares held by certain shareholders of the Company, see
"Underwriting" and "Description of Shares of Beneficial Interest."
   
  The executive officers and Trustees of the Company have agreed not to,
directly or indirectly, offer, sell, offer to sell, contract to sell, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, contract of sale, grant of any option to purchase or
other sale or disposition) of any Units or Common Shares or other shares of
beneficial interest of the Company, or any securities convertible or
exercisable or exchangeable for any Units or Common Shares or other shares of
beneficial interest of the Company (other than pursuant to the Plan) for a
period of two years following the effective date of this Offering, without the
prior written consent of the Representative. The Representative, at any time
and without notice, may release all or any portion of the Common Shares
subject to the foregoing lock-up agreements.     
 
  The Common Shares owned by "Affiliates" of the Company and the Common Shares
issuable upon exchange of Units, including Units issued upon conversion of the
Dealer Warrants, will be "restricted securities" under Rule 144 promulgated
under the Securities Act and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including exemptions contained in Rule 144. 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 securities acquired from the issuer or an
Affiliate of the issuer in a transaction not involving a public offering) for
at least one year, and including the holding period of any seller of
securities unless such seller is an Affiliate, would be entitled to sell
within any three-month period a number of Common Shares that does not exceed
the greater of 1% of the then-outstanding number of Common Shares or 1% of the
average weekly trading volume of the Common Shares on the Nasdaq National
Market during the four calendar weeks preceding each such sale. 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 (including any period of
ownership of preceding non-affiliated holders), 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 has established the Plan for the purpose of attracting and
retaining executive officers, Trustees and other key employees. See
"Management Incentive Plan." Contemporaneously with the completion of the
Offering, the Company will issue in the aggregate options to purchase an
aggregate of 106,667 Common Shares and 2,368,107 Units (equal to 7% of the
Common Shares to be outstanding on the closing of the Offering (including
exercise of the Underwriters' over-allotment option in full) on a fully
diluted basis) to executive officers and will reserve an additional number of
Common Shares and Units equal to 1% of the Common Shares to be outstanding on
the closing of the Offering (including exercise of the Underwriters' over-
allotment option in full) on a fully diluted basis for future issuance under
the Plan. The Company intends to file a registration statement under the
Securities Act registering the Common Shares reserved for issuance upon the
exercise of     
 
                                      81
<PAGE>
 
options granted under the Plan and redemption of Units issued under the Plan.
See "Management--Incentive Plan." This registration statement is expected to
be filed as of the date of the Prospectus and to become effective
automatically upon the effective date of registration of the Common Shares.
 
  Underwriting Warrants. The Representative of the Underwriters will receive
Underwriting Warrants representing the right to acquire a number of Common
Shares equal to 4% of the Common Shares to be outstanding on the closing of
the Offering (excluding exercise of the Underwriters' over-allotment option in
full) on a fully-diluted basis, at the initial public offering price of the
Common Shares, exercisable beginning on the closing date of the Offering and
for a period of five years thereafter, as compensation for its assistance in
the formation and structuring of the Company, identifying key managers of the
Company and raising the initial capital necessary to form the Company.
However, the Underwriting Warrants and any Common Shares received upon
exercise of the Underwriting Warrants may not be sold or otherwise transferred
(except to executive officers of the Representative or members of the selling
group) for a period of one year following the closing of the Offering.
 
  Dealer Warrants. Each of Messrs. Pohanka and Rosenthal, Trustees of the
Company, will be granted the Dealer Warrants representing the right of each of
them to acquire 1,414,158 Units (equal to 2% of the Common Shares to be
outstanding on the closing of the Offering (including exercise of the
Underwriters' over-allotment option in full) on a fully-diluted basis), at the
initial public offering price, exercisable beginning on the closing of the
Offering and for a period of five years thereafter.
 
  Conversion of Units. If the Company exercises its option to deliver Common
Shares upon the redemption of Units, the Partnership Agreement provides that
the Company will deliver registered Common Shares to the holder. The Company
will bear the expenses of registering those Common Shares.
   
  Registration Rights. The Company has granted certain "demand" and
"piggyback" registration rights to FBR Asset Investment Corporation with
respect to the Common Shares acquired by it in the FBR Offering. Subject to
certain conditions, the demand registration rights permit holders of such
shares to request one demand registration. Subject to certain conditions, the
piggyback registration rights permit the holders of such shares to include
their Common Shares 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) in connection with any
corporate reorganization, or (ii) in connection with an employee benefit plan.
FBR Asset Investment Corporation may not offer, pledge, sell, dispose of or
otherwise transfer the Common Shares acquired in the FBR Offering for a period
of one year following the closing of the Offering, without the consent of the
Representative.     
 
                                      82
<PAGE>
 
                        FEDERAL INCOME TAX CONSEQUENCES
 
  The following summary of the taxation of the Company and the material
federal income tax consequences to holders of the Common Shares is for general
information only, and is not tax advice. The tax treatment of a holder of
Common Shares will vary depending upon the holder's particular situation, and
this discussion addresses only holders that hold Common Shares as capital
assets and does not purport to deal with all aspects of taxation that may be
relevant to particular holders in light of their personal investment or tax
circumstances, or to certain types of holders (including dealers in securities
or currencies, banks, tax-exempt organizations, except as described herein,
life insurance companies, persons that hold Common Shares that are a hedge or
that are hedged against currency risks or that are part of a straddle or
conversion transaction) subject to special treatment under the federal income
tax laws. This summary is based on the Code, its legislative history, existing
and proposed regulations thereunder, published rulings and court decisions,
all as currently in effect and all subject to change at any time, perhaps with
retroactive effect.
 
  SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE
TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND SALE OF COMMON
SHARES, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
SUCH ACQUISITION, OWNERSHIP AND SALE IN THEIR PARTICULAR CIRCUMSTANCES AND
POTENTIAL CHANGES IN APPLICABLE LAWS.
 
TAXATION OF THE COMPANY AS A REIT
 
  General. The Company plans to make an election to be taxed as a REIT under
Sections 856 through 859 of the Code, commencing with its taxable year ending
December 31, 1998. The Company believes that, commencing with such taxable
year, it will be organized and will operate in such a manner as to qualify for
taxation as a REIT under the Code.
 
  In the opinion of Wilmer, Cutler & Pickering, commencing with its taxable
year ending December 31, 1998, the Company will be organized in conformity
with, and its proposed method of operation will enable it to meet, the
requirements for qualification and taxation as a REIT under the Code.
Shareholders should be aware, however, that opinions of counsel are not
binding upon the Internal Revenue Service or any court. In providing its
opinion, Wilmer, Cutler & Pickering is relying upon representations received
from the Company that its proposed method of operation will satisfy the
requirements to be treated as a REIT under the Code. The qualification and
taxation of the Company as a REIT depends upon its ability to meet, through
actual annual operating results, distribution levels, share ownership
requirements and the various qualification tests imposed under the Code.
Accordingly, while the Company intends to qualify to be treated as a REIT, no
assurance can be given that the actual results of the Company's operations for
any particular year will satisfy such requirements. Wilmer, Cutler & Pickering
will not monitor the compliance of the Company with the requirements for REIT
qualification on an ongoing basis. Accordingly, no assurance can be given that
the actual results of the Company's operations for any particular year will
satisfy such requirements.
 
  The sections of the Code applicable to REITs are highly technical and
complex. Certain aspects thereof are summarized below.
 
  As a REIT, the Company generally will not be subject to federal corporate
income tax on its net income that is currently distributed to its
shareholders. This treatment substantially eliminates the "double taxation"
(at the corporate and shareholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows. First, the Company will be taxed at regular
corporate rates on any undistributed real estate investment trust taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its undistributed items of tax preference. Third, if the Company 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 non-qualifying income from foreclosure property, it will be subject
to tax at the highest
 
                                      83
<PAGE>
 
corporate rate on such income. Fourth, if the Company has net income from
"prohibited transactions" (which are, in general, certain sales or other
dispositions of property, other than foreclosure property, held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount
equal to (a) the gross income attributable to the greater of the amount by
which the Company fails the 75% or 95% test, multiplied by (b) a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of
its real estate investment trust ordinary income for such year, (ii) 95% of
its real estate investment trust capital gain net income for such year, and
(iii) any undistributed taxable income from prior periods, the Company would
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Seventh, if the Company acquires any asset
from a C corporation (i.e., generally a corporation subject to full corporate-
level tax) in certain transactions in which the basis of the asset in the
hands of the Company is determined by reference to the basis of the asset (or
any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the ten-year period
beginning on the date on which such asset was acquired by the Company (the
"Recognition Period"), then, pursuant to Treasury regulations that have not
yet been issued and to the extent of the excess of the fair market value of
the asset as of the date of the Company's acquisition over the Company's
adjusted basis in such asset on such date, such gain will be subject to tax at
the highest regular corporate rate. The results described above with respect
to assets acquired from a C corporation assume that the Company will make an
election pursuant to Internal Revenue Service Notice 88-19.
 
  Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or
directors, (2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest, (3) which
would otherwise be taxable as a domestic corporation, but for Sections 856
through 859 of the Code, (4) which is neither a financial institution nor an
insurance company subject to certain provisions of the Code, (5) the
beneficial ownership of which is held by 100 or more persons, (6) during the
last half of each taxable year, not more than 50% in value of the outstanding
shares of which is owned, directly or constructively, by five or fewer
individuals (as defined in the Code to include certain entities) and (7) which
meets certain other tests, described below, regarding the nature of its income
and assets. The Code provides that conditions (1) to (4) must be met during
the entire taxable year and that condition (5) 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 (5) and (6) will not apply
until after the first taxable year for which an election is made to be taxed
as a REIT.
 
  The Company's Declaration of Trust provides for restrictions regarding the
ownership and transfer of the Company's shares of beneficial interest, which
restrictions are intended to assist the Company in satisfying the share
ownership requirements described in (5) and (6) above. The ownership and
transfer restrictions pertaining to the Common Shares are described under the
heading "Description of Shares of Beneficial Interest--Restrictions on
Ownership and Transfer."
 
  In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the gross income of the partnership attributable to such share. In addition,
the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of section 856 of the Code, including
satisfying the gross income and asset tests described below. The Company's
proportionate share of the assets and gross income of the Operating
Partnership will be treated as assets and gross income of the Company for
purposes of applying the requirements described herein.
 
  Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy two gross income requirements. First, at least 75% of
the Company'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") or from certain types of
 
                                      84
<PAGE>
 
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property investments, dividends, interest and
gain from the sale or disposition of stock or securities (or from any
combination of the foregoing).
   
  Pursuant to the Leases, the Lessees will lease from the Company the land,
buildings and improvements comprising the Properties for initial terms ranging
from eight to 11 years. The Leases will be "triple-net" leases which will
require the Lessees to pay substantially all expenses associated with the
operation of the Properties, such as real estate taxes, insurance, utilities,
services, maintenance and other operating expenses and any ground lease
payments. During the Fixed Term and the Extended Terms of the Leases, the
Lessees will pay the Initial Annual Base Rent and, thereafter, the Annual Base
Rent which will be payable in monthly installments. Initial Base Annual Rent
and Annual Base Rent will be adjusted upward periodically based on a factor of
the CPI, ranging from one-half of CPI adjusted every other year to full CPI
adjusted every year, which may be subject to periodic minimum or maximum
adjustment rates-ranging from zero to 3%, respectively.     
 
  Rents under the Leases (the "Rent") will constitute "rents from real
property" only if the Leases are treated as true leases for federal income tax
purposes and are not treated as service contracts, joint ventures, financing
arrangements or some other type of arrangement. The determination of whether
the Leases are true leases depends on an analysis of all surrounding facts and
circumstances. In making such a determination, courts have considered a
variety of factors, including the following: (i) the intent of the parties;
(ii) the form of the agreement; (iii) the degree of control over the property
that is retained by the property owner (e.g., whether the lessee has
substantial control over the operation of the property or whether the lessee
was required simply to use its best efforts to perform its obligations under
the agreement); (iv) the extent to which the property owner retains the risk
of loss with respect to the operation of the property (e.g., whether the
lessee bears the risk of increases in operating expenses or the risk of damage
to the property); and (v) the extent to which the property owner retains the
burdens and benefits of ownership of the property.
 
  Wilmer, Cutler & Pickering is of the opinion that each Initial Lease will be
treated as a true lease for federal income tax purposes. Such opinion is not
binding on the IRS. Such opinion is based, in part, on the following facts:
(i) the Company and the Lessees intend for their relationship to be that of a
lessor and lessee and such relationship will be documented by lease
agreements; (ii) the Lessees will have the right to exclusive possession and
use and quiet enjoyment of the Properties during the term of the Leases; (iii)
the Lessees will bear the cost of, and be responsible for, day-to-day
maintenance and repair of the Properties, and will dictate how the Properties
are operated, maintained, and improved; (iv) the Lessees will bear all of the
costs and expenses of operating the Properties during the terms of the Leases;
(v) the Lessees will benefit from any savings in the costs of operating the
Properties during the terms of the Leases; (vi) the Lessees will generally
indemnify the Company against all liabilities imposed on the Company during
the term of the Leases by reason of (a) injury to persons or damage to
property occurring at the Properties, or (b) the Lessees' use, management,
maintenance or repair of the Properties; (vii) the Lessees are obligated to
pay substantial fixed rent for the period of use of the Properties; (viii) the
Lessees stand to incur substantial losses (or reap substantial gains)
depending on how successfully it operates the Properties; (ix) the useful
lives of the Properties are significantly longer than the terms of the Leases;
and (x) the Company will receive the benefit of any increase in value, and
will bear the risk of any decrease in value, of the Properties during the
terms of the Leases. If the IRS were to challenge successfully the
characterization of the Initial Leases as true leases, the Operating
Partnership would not be treated as the owner of the Property in question for
federal income tax purposes and the Operating Partnership would lose tax
depreciation and cost recovery deductions with respect to such Property, which
in turn could cause the Company to fail to qualify as a REIT. See "--Annual
Distribution Requirements."
 
  Shareholders should be aware that there are no controlling Treasury
regulations, published rulings, or judicial decisions involving leases with
terms substantially similar to those contained in the Leases that address
whether such leases constitute true leases for federal income tax purposes. If
the Leases are recharacterized as
 
                                      85
<PAGE>
 
financing arrangements or partnership agreements, rather than true leases,
part or all of the payments that the Company receives from the Lessees may not
be considered rent or may not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or 95% gross income tests and, as
a result, would lose its REIT status. Although the Company will use its best
efforts to structure any leasing transaction for Properties acquired in the
future such that the Lease will be characterized as a "true lease' and the
Operating Partnership will be treated as the owner of the Property in question
for federal income tax purposes, the Company will not seek an advance ruling
from the IRS and may not seek an opinion of counsel (except with respect to
the Initial Leases) that it will be treated as the owner of any leased
Properties for federal income tax purposes, and thus there can be no assurance
that future leases will be treated as true leases for federal income tax
purposes.
 
  Rents received by the Company 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 must not be based 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 terms "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. The Company has represented that Rent paid
by the Lessees for the Properties will be a fixed amount, and will not be
based in whole or in part on the net income of any person with respect to the
Properties. Thus, the Rent should also satisfy this requirement.
 
  A second requirement for qualification of the Rent as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of any Initial Lessee or any other Lessee of the Properties (a "Related
Party Tenant"). The constructive ownership rules generally provide that if 10%
or more in value of the shares of the Company are owned, directly or
indirectly, by or for any person, the Company is considered as owning the
shares owned, directly or indirectly, by or for such person. The applicable
attribution rules, however, are highly complex and difficult to apply, and the
Company may inadvertently enter into leases with Lessees who, through
application of such rules, will constitute Related Party Tenants. In such
event, rent paid by the Related Party Tenant will not qualify as "rents from
real property," which may jeopardize the Company's status as a REIT. The
Company will use its best efforts not to rent any property to a Related Party
Tenant (taking into account the applicable constructive ownership rules),
unless the Company determines in its discretion that the rent received from
such Related Party Tenant is not material and will not jeopardize the
Company's status as a REIT.
   
  Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% 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". The Rent attributable to the
personal property associated with a property is the amount that bears the same
ratio to total rent for the taxable year as the average of the adjusted bases
of the personal property in the property at the beginning and at the end of
the taxable year bears to the average of the aggregate adjusted bases of both
the real and personal property comprising the property at the beginning and at
the end of such taxable year (the "Adjusted Basis Ratio"). The Company will
not lease any personal property to the Initial Lessees pursuant to the Initial
Leases. Accordingly, Rent received by the Company should satisfy this
requirement. If the Company were to lease personal property in connection with
a future lease, the Company intends to satisfy the 15% test described above.
    
  A fourth requirement for qualification of the Rent as "rents from real
property" is that the Company cannot furnish or render noncustomary services
to the Lessees of its properties, or manage or operate such properties, other
than through an independent contractor who is adequately compensated and from
whom the Company itself does not derive or receive any income provided,
however, that the Company may directly perform certain services that are
"usually or customarily rendered" in connection with the rental of space for
occupancy only or are not considered "rendered to the occupant" of the
property. Provided that the Leases are respected as true leases, the Company
should satisfy this requirement with respect to the Rent because it will not
perform any service for the Lessees. If the Company were to provide services
to a Lessee that are other than those usually or customarily provided in
connection with the rental of space for occupancy only, amounts received by
the Company for such services would not be treated as "rents from real
property" for purposes of the REIT gross income tests but would not cause
other amounts received with respect to the property to fail to be treated as
 
                                      86
<PAGE>
 
"rents from real property" unless the amounts received in respect of such
services, together with amounts received for certain management services,
exceed 1% of all amounts received or accrued by the Company during the taxable
year with respect to such property. However, if the 1% threshold is exceeded,
then all amounts received or accrued by the Company with respect to the
property will not qualify as "rents from real property." The Leases do not
provide for the Company to render any noncustomary services to the Lessees.
Further, the Company will not offer any services to the Lessees.
 
  Based on the foregoing, the Rent should qualify as "rents from real
property" for purposes of the 75% and 95% gross income tests. As described
above, however, there can be no complete assurance that the Service will not
assert successfully a contrary position and, therefore, prevent the Company
from qualifying as a REIT.
 
  On an ongoing basis, the Company will use its best efforts not: (i) to
charge rent for any 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 percentage of
receipts or sales, as described above); (ii) to rent any property to a Related
Party Lessee (taking into account the applicable constructive ownership
rules), unless the Company determines in its discretion that the rent received
from such Related Party Lessee is not material and will not jeopardize the
Company's status as a REIT; (iii) to derive rental income attributable to
personal property (other than personal property leased in connection with the
lease of real property, the amount of which is less than 15% of the total rent
received under the lease); and (iv) to perform services considered to be
rendered to the occupant of the property, unless such services generate rents
not in excess of 1% of all amounts received or accrued during the taxable year
with respect to such property, other than through an independent contractor
from whom the Company derives no revenue or if the provisions of such services
will not jeopardize the Company's status as a REIT. Because the Code
provisions applicable to REITs are complex, however, the Company may fail to
meet one or more of the foregoing.
 
  As part of its acquisition strategy, the Company may provide financing to
Operators for the development of Dealerships or Related Businesses and earn
interest with respect to such financings. The term "interest," as defined for
purposes of the 75% and 95% 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% and 95% 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% gross income test. However, if the Company receives interest income with
respect to a 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 fair market value of the real property on the date the Company
acquired the loan, the interest income from the loan will be apportioned
between the real property and the other property, which apportionment may
cause the Company to recognize income that is not qualifying income for
purposes of the 75% gross income test. The Company intends to structure any
such financing arrangements such that it will continue to qualify as a REIT.
 
  The Company will be 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% gross income test), less expenses directly
connected to 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 in 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
 
                                      87
<PAGE>
 
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. However, a REIT will not be considered to have
foreclosed on a property where such REIT takes control of the property as a
mortgagee-in-possession and cannot receive any profit or sustain any loss
except as a creditor of the mortgagor. Under the Code for taxable years of
REITs beginning after August 5, 1997, property generally ceases to be
foreclosure property with respect to a REIT on the last day of the third
taxable year following the taxable year in which the REIT acquired such
property (or longer if an extension is granted by the Secretary of the
Treasury). The foregoing grace period is terminated and foreclosure property
ceases to be foreclosure property on the first day (i) on which a lease is
entered into with respect to such property that, by its terms, will give rise
to income that does not qualify under the 75% gross income test or any amount
is received or accrued, directly or indirectly, pursuant to a lease entered
into on or after such day that will give rise to income that does not qualify
under the 75% gross income test, (ii) on which any construction takes place on
such property (other than completion of a building, or any other improvement,
where more than 10% of the construction of such building or other improvement
was completed before default became imminent) or (iii) that is more than 90
days after the day on which such property was acquired by the REIT and the
property is used in a trade or business that is conducted by the REIT (other
than through an independent contractor from whom the REIT itself does not
derive or receive any income).
 
  The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or business.
The Company believes that no asset owned by the Company or the Operating
Partnership will be held for sale to customers and that a sale of any such
asset will not be in the ordinary course of the Company's or the Operating
Partnership's business. Whether an asset 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 asset. Nevertheless, the Company 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 the Company 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."
 
  If the Company fails to satisfy one or both of the 75% or 95% 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 will generally be available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its federal income
tax return, and 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 the Company would be entitled to the benefit of these relief
provisions. As discussed above under "--General," even if these relief
provisions apply, a tax would be imposed with respect to the excess income.
 
  Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by
real estate assets (including (i) real estate assets held by the Company's
qualified REIT subsidiaries and the Company's allocable share of real estate
assets held by partnerships in which the Company owns an interest, (ii) for a
period of one year from the date of the Company's receipt of proceeds of an
offering of its shares of beneficial interest or long-term (at least five
years) debt, stock or debt instruments purchased with such proceeds and (iii)
stock issued by another REIT), cash, cash items and government securities.
Second, not more than 25% of the Company's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities
(other than securities issued by another REIT) owned by the Company may not
exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting
 
                                      88
<PAGE>
 
securities (other than securities issued by another REIT). All of the Initial
Properties will qualify as real estate assets. The Company intends to select
future investments so as to remain in compliance with REIT asset qualification
tests.
 
  Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of
the Company's "real estate investment trust taxable income" (computed without
regard to the dividends paid deduction and the Company's net capital gain) and
(ii) 95% of the net income (after tax), if any, from foreclosure property
minus (B) the sum of certain items of non-cash income. In addition, if the
Company disposes of any asset acquired from a C corporation in a carryover
basis transaction during its Recognition Period, the Company will be required,
pursuant to Treasury regulations which have not yet been promulgated, to
distribute at least 95% of the built-in gain (after tax), if any, recognized
on the disposition of such asset. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration.
To the extent that the Company does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its "real estate
investment trust taxable income," as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates. Furthermore,
if the Company should fail to distribute during each calendar year at least
the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually
distributed. The Company intends to satisfy the annual distribution
requirements.
 
  The Company may elect to retain and pay income tax on the net long-term
capital gain it receives in a taxable year. In that case, the Company's
shareholders would include in income their proportionate share of the
Company's undistributed long-term capital gain. In addition, the shareholders
would be deemed to have paid their proportionate share of the tax paid by the
Company, which would be credited or refunded to the shareholders. Each
shareholder's basis in his shares would be increased by the amount of the
undistributed long-term capital gain included in the shareholder's income,
less the shareholder's share of the tax paid by the Company. Such amount would
be treated as having been distributed for purposes of the 4% excise tax
described above.
 
  It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable
share dividends.
 
  The Company intends to calculate its "REIT taxable income" based upon the
conclusion that the Operating Partnership is the owner for federal income tax
purposes of all of the Properties. As a result, the Company expects that
depreciation deductions with respect to all such Properties will reduce its
"REIT taxable income". If the Service were to successfully challenge this
position, the Company might be deemed retroactively to have failed to meet the
distribution requirement and would have to rely on the payment of a
"deficiency dividend" in order to retain its REIT status.
 
  Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
 
  Partnership Anti-Abuse Rule. The United States Treasury Department has
issued a regulation (the "Anti-Abuse Rule") under the partnership provisions
of the Code (the "Partnership Provisions") that authorizes the Service, in
certain "abusive" transactions involving partnerships, to disregard the form
of the transaction and
 
                                      89
<PAGE>
 
recast it for federal tax purposes as the Service deems appropriate. The Anti-
Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal
purpose of substantially reducing the present value of the partners' aggregate
federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business
(including investment) activities through a flexible economic arrangement that
accurately reflects the partners' economic agreement and clearly reflects the
partners' income without incurring any entity-level tax. The purposes for
structuring a transaction involving a partnership are determined based on all
of the facts and circumstances, including a comparison of the purported
business purpose for a transaction and the claimed tax benefits resulting from
the transaction. A reduction in the present value of the partners' aggregate
federal tax liability through the use of a partnership does not, by itself,
establish inconsistency with the intent of the Partnership Provisions.
 
  The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partner interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate
bases in such property. In addition, the limited partners have the right,
beginning one year after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the corporation's option) equal to the fair market value of their
respective interests in the partnership at the time of the redemption. The
example concludes that the use of the partnership is not inconsistent with the
intent of the Partnership Provisions and, thus, cannot be recast by the
Service. Based on the foregoing, Wilmer, Cutler & Pickering is of the opinion
that the Anti-Abuse Rule will not have any adverse impact on the Company's
ability to qualify as a REIT. However, the Anti-Abuse Rule is extraordinarily
broad in scope and is applied based on an analysis of all of the facts and
circumstances. As a result, there can be no assurance that the Service will
not attempt to apply the Anti-Abuse Rule to the Company. If the conditions of
the Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Operating Partnership for
federal tax purposes or treating one or more of its partners as nonpartners.
Any such action potentially could jeopardize the Company's status as a REIT.
 
  Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year, and the relief provisions do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to shareholders in
any year in which the Company fails to qualify will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to
shareholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief.
 
TAXATION OF HOLDERS OF COMMON SHARES
 
  U.S. Shareholders. As used herein, the term "U.S. Shareholder" means a
holder of Common Shares who (for United States federal income tax purposes) is
(i) a citizen or resident of the United States, (ii) 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) an estate the
income of which is subject to United States federal income taxation, or (iv) a
trust with respect to the administration of which a court within the United
States is able to exercise primary supervision and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust.
 
  As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Shareholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of U.S. Shareholders
that are corporations. Distributions made by the Company that are properly
designated by the Company as capital gain dividends will be taxable to U.S.
Shareholders as
 
                                      90
<PAGE>
 
gain from the sale and exchange of a capital asset (to the extent that they do
not exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which a U.S. Shareholder has held his Common Shares.
U.S. Shareholders that are corporations may, however, be required to treat up
to 20% of certain capital gain dividends as ordinary income.
 
  Recently enacted legislation (The Taxpayer Relief Act of 1997 (the "1997
Act")) reduces the maximum rate on long-term capital gains of non-corporate
taxpayers from 28% to 20% (10% for taxpayers in the 15% tax bracket). The
lower rates generally apply to sales or exchanges of capital assets occurring
after May 6, 1997. However, the reduced long-term capital gains rates are
currently only available for sales or exchanges of capital assets held for
more than 18 months. Any long-term capital gains from the sale or exchange of
depreciable real property that would be subject to ordinary income taxation
(i.e., "depreciation recapture') if it were treated as personal property will
be subject to a maximum tax rate of 25% instead of the 20% maximum rate for
gains taken into account after July 28, 1997. In Notice 97-64, released
November 10, 1997, the IRS described temporary regulations to be published in
the near future pursuant to which a REIT may designate a capital gain dividend
as a 20% rate gain dividend, an unrecaptured section 1250 gain distribution in
the 25% rate group or as a 28% rate gain distribution.
 
  To the extent that the Company makes distributions (not designated as
capital gain dividends) 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. Shareholder, reducing the adjusted basis which such U.S.
Shareholder has in his Common Shares for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a U.S.
Shareholder's adjusted basis in his shares taxable as capital gains (provided
that the Common Shares have been held as a capital asset). Dividends
authorized by the Company in October, November or December of any year and
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company on or before January 31 of the following calendar year. Shareholders
may not include in their own income tax returns any net operating losses or
capital losses of the Company.
 
  Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Shareholder of Common Shares will not be treated as passive activity
income, and, as a result, U.S. Shareholders generally will not be able to
apply any "passive losses" against such income or gain.
 
  Upon any sale or other disposition of Common Shares, a U.S. Shareholder will
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 Common Shares for tax purposes. Such gain or loss will
be capital gain or loss if the Common Shares have been held by the U.S.
Shareholder as a capital asset. Long-term capital gain of an individual U.S.
Shareholder is generally subject to a maximum tax rate of 28% in respect of
property held for more than one year and the maximum rate is reduced to 20% in
the case of property held in excess of 18 months. In general, any loss
recognized by a U.S. Shareholder upon the sale or other disposition of Common
Shares of the Company 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. Shareholder from
the Company which were required to be treated as long-term capital gains.
 
  U.S. Shareholders holding Common Shares at the close of the Company's
taxable year will be required to include, in computing their long-term capital
gains for the taxable year in which the last day of the Company's taxable year
falls, such amount of undistributed long-term capital gains as the Company may
designate in a written notice mailed to its shareholders. The Company may not
designate amounts in excess of the Company's undistributed net capital gain
for the taxable year. Each U.S. Shareholder required to include such a
designated amount in determining such shareholder's long-term capital gains
will be deemed to have paid, in the taxable year of the inclusion, its
proportionate share of the tax paid by the Company in respect of such
undistributed net capital gains. U.S. Shareholders subject to these rules will
be allowed a credit or a refund, as the case may be, for the tax deemed to
have been paid by such shareholders. U.S. Shareholders will increase their
basis in their Common Shares by the difference between the amount of such
includible gains and the tax deemed paid by the shareholder in respect of such
gains.
 
                                      91
<PAGE>
 
  Backup Withholding. The Company will report to its U.S. Shareholders and the
IRS the amount of dividends paid during each calendar year, and the amount of
tax withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to dividends
paid unless such holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) 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. Shareholder that does not provide the Company
with his correct taxpayer identification number may also be subject to
penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their non-foreign status to the Company.
 
  Taxation of Tax-Exempt Shareholders. The IRS has ruled that amounts
distributed as dividends by a REIT generally do not constitute unrelated
business taxable income ("UBTI") when received by a tax-exempt entity. Based
on that ruling, provided that a tax-exempt shareholder (except certain tax-
exempt shareholders described below) has not held its Common Shares as "debt
financed property" within the meaning of the Code and such Common Shares are
not otherwise used in a trade or business, the dividend income from Common
Shares will not be UBTI to a tax-exempt shareholder. Similarly, income from
the sale of Common Shares will not constitute UBTI unless such tax-exempt
shareholder has held such Common Shares as "debt financed property" within the
meaning of the Code or has used the Common Shares in a trade or business.
 
  For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17), and (c)(20) of the Code, respectively, income from
an investment in the Company's Common Shares will constitute UBTI unless the
organization is able to properly deduct amounts set aside or placed in reserve
for certain purposes so as to offset the income generated by its Common
Shares. Such prospective shareholders should consult their own tax advisors
concerning these "set aside" and reserve requirements.
 
  Notwithstanding the foregoing, however, a portion of the dividends paid by a
"pension-held REIT" will be treated as UBTI to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section
501(a) of the Code, and (iii) holds more than 10% (by value) of the equity
interests in the REIT. Tax-exempt pension, profit-sharing and stock bonus
funds that are described in Section 401(a) of the Code are referred to below
as "qualified trusts."
 
  A REIT is a "pension-held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code provides that stock owned
by qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself) and (ii) either (A) at least one qualified trust holds more than
25% (by value) of the interests in the REIT or (B) one or more qualified
trusts, each of which owns more than 10% (by value) of the interests in the
REIT, hold in the aggregate more than 50% (by value) of the interests in the
REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the gross income (less direct expenses related thereto) of the
REIT from unrelated trades or businesses (determined as though the REIT were a
qualified trust) to (ii) the total gross income (less direct expenses related
thereto) of the REIT. A de minimis exception applies where this percentage is
less than 5% for any year. The Company does not expect to be classified as a
"pension-held REIT."
 
  Tax-exempt entities will be subject to the rules described above, under the
heading "--U.S. Shareholders" concerning the inclusion of the Company's
designated undistributed net capital gains in the income of its shareholders.
Thus, such entities will, after satisfying filing requirements, be allowed a
credit or refund of the tax deemed paid by such entities in respect of such
includible gains.
 
  Non-U.S. Shareholders. The rules governing U.S. federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex
and no attempt will be made herein to provide more than a limited summary of
such rules. Prospective Non-U.S. Shareholders should consult with their own
tax advisors to determine the impact of U.S. federal, state and local income
tax laws with regard to an investment in Common Shares, including any
reporting requirements.
 
                                      92
<PAGE>
 
  Ordinary Dividends. Distributions, other than distributions that are treated
as attributable to gain from sales or exchanges by the Company of U.S. real
property interests (discussed below) and other than distributions designated
by the Company as capital gain dividends, will be treated as ordinary income
to the extent that they are made out of current or accumulated earnings and
profits of the Company. Such distributions to Non-U.S. Shareholders will
ordinarily be subject to a withholding tax equal to 30% of the gross amount of
the distribution, unless an applicable tax treaty reduces that tax. However,
if income from the investment in the Common Shares is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a U.S. trade or business,
the Non-U.S. Shareholder generally will be subject to tax at graduated rates
in the same manner as U.S. Shareholders are taxed with respect to such
dividends (and may also be subject to the 30% branch profits tax if the
shareholder is a foreign corporation).
 
  The Company expects to withhold U.S. tax at the rate of 30% on the gross
amount of any dividends, other than dividends treated as attributable to gain
from sales or exchanges of U.S. real property interests and capital gain
dividends, paid to a Non-U.S. Shareholder, unless (i) a lower treaty rate
applies and the required form evidencing eligibility for that reduced rate is
filed with the Company or the appropriate withholding agent or (ii) the Non-
U.S. Shareholder files an IRS Form 4224 (or a successor form) with the Company
or the appropriate withholding agent claiming that the distributions are
"effectively connected" income.
 
  Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate.
 
  Under the recent Final Regulations that are proposed to be effective for
distributions made after December 31, 1998 (the "New Withholding
Regulations"), however, a Non-U.S. Shareholder who wishes to claim the benefit
of an applicable treaty rate would be required to satisfy applicable
certification requirements. In addition, under the Final Regulations, in the
case of Common Shares held by a foreign partnership, (x) the certification
requirement would generally be applied to the partners in the partnership and
(y) the partnership would be required to provide certain information,
including a United States taxpayer identification number. The New Withholding
Regulations provide look-through rules in the case of tiered partnerships.
Shareholders that are partnerships or entities that are similarly fiscally
transparent for federal income tax purposes, and persons holding Common Shares
through such entities, may be subject to restrictions on their ability to
claim benefits under U.S. tax treaties and should consult a tax advisor.
 
  The New Withholding Regulations also require a corporation that is a REIT to
treat as a dividend the portion of a distribution that is not designated as a
capital gain dividend or return of basis and apply the 30% withholding tax
(subject to any applicable deduction or exemption) to such portion, and to
apply the FIRPTA withholding rules (discussed below) with respect to the
portion of the distribution designated by the REIT as capital gain dividend.
The New Withholding Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. THE DISCUSSION
SET FORTH IN "TAXATION OF NON-U.S. SHAREHOLDERS" DOES NOT TAKE THE NEW
WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. SHAREHOLDERS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
 
  Distributions to a Non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gain dividends which are not
attributable to or treated as attributable to the disposition by the Company
of a U.S. real property interest generally will not be subject to U.S. federal
income taxation, except as described below.
 
  Return of Capital. Distributions in excess of current and accumulated
earnings and profits of the Company, which are not treated as attributable to
the gain from disposition by the Company of a U.S. real property interest,
will not be taxable to a Non-U.S. Shareholder to the extent that they do not
exceed the adjusted basis of the Non-U.S. Shareholder's Common Shares, but
rather will reduce the adjusted basis of such Common Shares. To the extent
that such distributions exceed the adjusted basis of a Non-U.S. Shareholder's
Common
 
                                      93
<PAGE>
 
Shares, they will give rise to tax liability if the Non-U.S. Shareholder
otherwise would be subject to tax on any gain from the sale or disposition of
its Common Shares, as described below. If it cannot be determined at the time
a distribution is made whether such distribution will be in excess of current
and accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to dividends. However, the Non-U.S.
Shareholder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
 
  Capital Gain Dividends. For any year in which the Company qualifies as a
REIT, distributions that are attributable to gain from sales or exchanges by
the Company of U.S. real property interests will be taxed to a Non-U.S.
Shareholder under the provisions of the Foreign Investment in Real Property
Tax Act of 1980, as amended ("FIRPTA"). Under FIRPTA, these distributions are
taxed to a Non-U.S. Shareholder as if such gain were effectively connected
with a U.S. business. Thus, Non-U.S. Shareholders will be taxed on such
distributions at the normal capital gain rates applicable to U.S. Shareholders
(subject to any applicable alternative minimum tax and special alternative
minimum tax in the case of nonresident alien individuals). The Company is
required by applicable Treasury regulations under FIRPTA to withhold 35% of
any distribution that could be designated by the Company as a capital gain
dividend. However, if the Company designates as a capital gain dividend a
distribution made prior to the day the Company actually effects such
designation, then (although such distribution may be taxable to a Non-U.S.
Shareholder) such distribution is not subject to withholding under FIRPTA;
rather, the Company must effect the 35% FIRPTA withholding from distributions
made on and after the date of such designation, until the distributions so
withheld equal the amount of the prior distribution designated as a capital
gain dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's U.S. tax liability.
 
  Sales of Common Shares. Gain recognized by a Non-U.S. Shareholder upon a
sale or exchange of Common Shares generally will not be taxed under FIRPTA if
the Company is a "domestically controlled REIT," defined generally as a REIT
in respect of which at all times during a specified testing period less than
50% in value of the stock is and was held directly or indirectly by foreign
persons. It is currently anticipated that the Company will continue to be a
"domestically controlled REIT," and, therefore, that the sale of Common Shares
will not be subject to taxation under FIRPTA. However, gain not subject to
FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in the
Common Shares is treated as "effectively connected" with the Non- U.S.
Shareholder's U.S. trade or business, in which case the Non-U.S. Shareholder
will be subject to the same treatment as U.S. Shareholders with respect to
such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, or maintains an office or a
fixed place of business in the United States to which the gain is
attributable, in which case the nonresident alien individual will be subject
to a 30% tax on the individual's capital gains. A similar rule will apply to
capital gain dividends not subject to FIRPTA.
 
  If the Company were not a domestically-controlled REIT, a Non-U.S.
Shareholder's sale of Common Shares would be subject to tax under FIRPTA only
if the selling Non-U.S. Shareholder owned more than 5% of the class of Common
Shares sold at any time during a specified period (generally the shorter of
the period that the Non- U.S. Shareholder owned the Common Shares sold or the
five-year period ending on the date of disposition). If the gain on the sale
of Common Shares were to be subject to tax under FIRPTA, the Non-U.S.
Shareholder would be subject to the same treatment as U.S. Shareholders with
respect to such gain (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of such Common Shares would be required to withhold 10% of
the gross purchase price.
 
  Backup Withholding. Backup withholding tax (which generally is withholding
tax imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the United States information reporting
requirements) and information reporting will generally not apply to
distributions to Non-U.S. Shareholders outside the United States that are
treated as (i) dividends subject to the 30% (or lower treaty rate) withholding
tax discussed above, (ii) capital gains dividends, or (iii) distributions
attributable to gain from the sale or exchange by the Company of United States
real property interests. As a general matter, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Common Shares by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply,
 
                                      94
<PAGE>
 
however, to a payment of the proceeds of a sale of Common Shares by a foreign
office of a broker that (a) is a United States person, (b) derives 50% or more
of its gross income for certain periods from the conduct of a trade or
business in the United States, or (c) is a "controlled foreign corporation"
(generally, a foreign corporation controlled by United States shareholders)
for United States tax purposes, unless the broker has documentary evidence in
its records that the holder is a Non-U.S. Shareholder and certain other
conditions are met, or the shareholder otherwise establishes an exemption.
Payment to or through a United States office of a broker of the proceeds of a
sale of Common Shares is subject to both backup withholding and information
reporting unless the shareholder certifies under penalty of perjury that the
shareholder is a Non-U.S. Shareholder, or otherwise establishes an exemption.
Backup withholding is not an additional tax. A Non-U.S. Shareholder may obtain
a refund of any amounts withheld under the backup withholding rules by filing
the appropriate claim for refund with the IRS.
 
OTHER TAX CONSEQUENCES
 
  The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders are urged to consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
 
TAX ASPECTS OF THE OPERATING PARTNERSHIP
 
  The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
 
  Classification as a Partnership. The Company will be entitled to include in
its income its distributive share of the Operating Partnership's income and to
deduct its distributive share of the Operating Partnership's losses only if
the Operating Partnership is classified for federal income tax purposes as a
partnership rather than as a corporation or an association taxable as a
corporation. An organization formed as a partnership will be treated as a
partnership, rather than as a corporation, for federal income tax purposes if
(i) it is not expressly classified as a corporation under Section 301.7701-
2(b)(l) through (8) of the Treasury Regulations; (ii) it does not elect to be
classified as an association taxable as a corporation; and (iii) it is not
treated as a corporation by virtue of being classified as a "publicly traded
partnership."
 
  The Operating Partnership will not request a ruling from the Service that it
will be classified as a partnership for federal income tax purposes. Instead,
at the Closing, Wilmer, Cutler & Pickering will deliver its opinion that,
based on the provisions of the Partnership Agreement, certain factual
assumptions and certain representations described in the opinion, the
Operating Partnership will be treated for federal income tax purposes as a
partnership and not as an association taxable as a corporation. Unlike a tax
ruling, an opinion of counsel is not binding upon the Service, and no
assurance can be given that the Service will not challenge the status of the
Operating Partnership as a partnership for federal income tax purposes. If
such challenge were sustained by a court, the Operating Partnership would be
treated as a corporation for federal income tax purposes, as described below.
In addition, the opinion of Wilmer, Cutler & Pickering is based on existing
law, which is to a great extent the result of administrative and judicial
interpretation. No assurance can be given that administrative or judicial
changes would not modify the conclusions expressed in the opinion.
 
  Under Section 7704 of the Code, a partnership is treated as a corporation
for federal income tax purposes if it is a "publicly traded partnership"
(except in situations in which 90% or more of the partnership's gross income
is of a specified type). A partnership is deemed to be publicly traded if its
interests are either (i) traded on an established securities market, or (ii)
readily tradable on a secondary market (or the substantial equivalent
thereof). While the Units will not be traded on an established securities
market, they could possibly be deemed to be traded on a secondary market or
its equivalent due to the Redemption Rights enabling the partners to dispose
of their Units.
 
                                      95
<PAGE>
 
  Under Treasury regulations governing the classification of partnerships
under Section 7704 (the "PTP Regulations"), the classification of partnerships
is generally based on a facts and circumstances analysis. However, the
regulations also provide limited "safe harbors" which preclude publicly traded
partnership status. Pursuant to one of those safe harbors, interests in a
partnership will not be treated as readily tradable on a secondary market or
the substantial equivalent thereof if (i) all interests in the partnership
were issued in a transaction (or transactions) that was not required to be
registered under the Securities Act, and (ii) the partnership does not have
more than 100 partners at any time during the partnership's taxable year. In
determining the number of partners in a partnership for this purpose, a person
owning an interest in a flow-through entity (i.e., a partnership, grantor
trust, or S corporation) that owns an interest in the partnership is treated
as a partner in such partnership only if (x) substantially all of the value of
the person's interest in the flow-through entity is attributable to the flow-
through entity's interest (direct or indirect) in the partnership and (y) a
principal purpose of the use of the tiered arrangement is to permit the
partnership to satisfy the 100-partner limitation.
 
  The Operating Partnership is expected to have less than 100 partners. The
Operating Partnership has not issued any Units required to be registered under
the Securities Act. Thus, the Operating Partnership presently qualifies for
the safe harbors provided in the PTP Regulations. If the Operating Partnership
were to have more than 100 partners (including, in certain circumstances,
persons owning interests through flow-through entities), it nevertheless would
be treated as a partnership for federal income tax purposes (rather than an
association taxable as a corporation) if at least 90% of its gross income in
each taxable year (commencing with the year in which it is treated as a
publicly traded partnership) consists of "qualifying income" within the
meaning of Section 7704(c)(2) of the Code (including interest, dividends,
"real property rents" and gains from the disposition of real property (the
"90% Passive-Type Income Exception"). For purposes of this test, Rents
received from greater than 10% owners of lessees, which owners also own 5% or
more of the interests in the Operating Partnership would not qualify as rents
from real property. Because of the substantial ownership of the Operating
Partnership by certain of the Initial Lessees (or their Affiliates), the
Operating Partnership currently would not be eligible for the 90% Passive-Type
Income Exception. Thus, if the Operating Partnership were to have more than
100 partners (including, in certain circumstances, persons owning interests
through flow-through entities), the Company would be required to place
appropriate restrictions on the ability of the Limited Partners to exercise
their redemption rights as and if deemed necessary to ensure that the
Operating Partnership does not constitute a publicly traded partnership.
However, there is no assurance that the Operating Partnership will at all
times in the future be able to avoid treatment as a publicly traded
partnership. The Company intends to conduct its operations in such a way as to
continue to fall within a safe harbor from publicly traded partnership status.
 
  If for any reason the Operating Partnership were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company
would not be able to satisfy the income and asset requirements for REIT
status. See "--Taxation of the Company as a REIT--Income Tests" and "--
Taxation of the Company as a REIT --Asset Tests." In addition, any change in
the Operating Partnership's status for tax purposes might be treated as a
taxable event, in which case the Company might incur a tax liability without
any related cash distribution. See "--Taxation of the Company as a REIT--
Annual Distribution Requirements." Further, items of income and deduction of
the Operating Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes. Consequently, the
Operating Partnership would be required to pay income tax at corporate tax
rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing the Operating
Partnership's taxable income.
 
  The following discussion assumes that the Operating Partnership will be
treated as a partnership for federal income tax purposes.
 
  Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes if they do not comply
 
                                      96
<PAGE>
 
with the provisions of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder. Generally, Section 704(b) and the Treasury Regulations
promulgated thereunder require that partnership allocations respect the
economic arrangement of the partners.
 
  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. The Operating Partnership's allocations of
taxable income and loss are intended to comply 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 (such as the Properties contributed by Initial Sellers
who are Affiliates of Pohanka, Rosenthal, Sheehy or Cherner) that is
contributed to a partnership in exchange for an interest in the partnership
must be allocated 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 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 of appreciated property
(including the Properties). Consequently, the Partnership Agreement will
require such allocations to be made in a manner consistent with Section 704(c)
of the Code.
 
  In general, the Initial Sellers who are Affiliates of Pohanka, Rosenthal,
Sheehy or Cherner will be allocated depreciation deductions for tax purposes
which are lower than such deductions would be if determined on a pro rata
basis. In addition, in the event of the disposition of any of the contributed
assets (including the Properties) which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will generally be allocated to the
Initial Sellers and the Company will generally be allocated only its share of
capital gains attributable to appreciation, if any, occurring after the
closing of the Offering. This will tend to eliminate the Book-Tax Difference
over such life of the Operating Partnership. However, the special allocation
rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
assets in the hands the Operating Partnership will cause the Company to be
allocated lower depreciation and other deductions, and possibly an amount of
taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. This may
cause the Company to recognize taxable income in excess of cash proceeds,
which might adversely affect the Company's ability to comply with the REIT
distribution requirements. See "--Taxation of the Company as a REIT--Annual
Distribution Requirements." The foregoing principles also apply in determining
the earnings and profits of the Company for purposes of determining the
portion of distributions taxable as dividend income. The application of these
rules over time may result in a higher portion of distributions being taxed as
dividends than would have occurred had the Company purchased the contributed
assets entirely for cash.
 
  The Treasury Regulations under Section 704(c) of the Code allow partnerships
to use any reasonable method of accounting for Book-Tax Differences so that
the contributing partner receives the tax benefits and burdens of any built-in
gain or loss associated with the contributed property. Under the Partnership
Agreement, the General Partner has the discretion to determine which of the
methods of accounting for Book-Tax Differences (specifically approved in the
Treasury Regulations) will be elected with respect to any properties
contributed to the Partnership. With respect to certain of the Initial
Properties, the Partnership has agreed to utilize the "traditional method with
ceiling rule" of eliminating the Book-Tax Difference with respect to such
Properties, except that the Operating Partnership will be permitted to utilize
a so-called "curative allocation" in connection with a sale of certain Initial
Properties in accordance with a special rule in the Treasury Regulations. The
use of this method may result in the Company being allocated less
depreciation, and therefore more taxable income in a given year than would be
the case if a different method for eliminating the Book-Tax Difference were
chosen. In such event, distributions to shareholders will be comprised of a
greater portion of taxable income as opposed to a return of capital than would
have been the case if another method were utilized. The Company has not
 
                                      97
<PAGE>
 
determined which of the alternative methods of accounting for Book-Tax
Differences will be elected with respect to its properties to be contributed
to the Operating Partnership in the future.
 
  Basis in Operating Partnership Interest. The Company's adjusted tax basis in
its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) will be increased by (a) its
allocable share of the Operating Partnership's income and (b) its allocable
share of indebtedness of the Operating Partnership and (iii) will be reduced,
but not below zero, by the Company's allocable share of (a) losses suffered by
the Operating Partnership, (b) the amount of cash distributed to the Company
and (c) by constructive distributions resulting from a reduction in the
Company's share of indebtedness of the Operating Partnership.
 
  If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss
will be deferred until such time and to the extent that the Company has
adjusted tax basis in its interest in the Operating Partnership. To the extent
that the Operating Partnership's distributions, or any decrease in the
Company's share of the indebtedness of the Operating Partnership (such
decreases being considered a cash distribution to the partners), exceeds the
Company's adjusted tax basis, such excess distributions (including such
constructive distributions) constitute taxable income to the Company. Such
taxable income will normally be characterized as a capital gain, and if the
Company's interest in the Operating Partnership has been held for longer than
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain. Under current law, capital gains and ordinary income of corporations are
generally taxed at the same marginal rates.
 
  Sale of the Properties. The Company's share of any gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to
customers in the ordinary course of the Operating Partnership's trade or
business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "--Taxation of the Company as a REIT--
Income Tests." Such prohibited transaction income may also have an adverse
effect upon the Company's ability to satisfy the income tests for
qualification as a REIT. See "--Taxation of the Company as a REIT--Income
Tests." Under existing law, whether property is held as inventory or primarily
for sale to customers in the ordinary course of a partnership's trade or
business is a question of fact that depends on all the facts and circumstances
with respect to the particular transaction. The Operating Partnership intends
to hold the Properties for investment with a view to long-term appreciation,
to engage in the business of acquiring, providing financing for the
development of, owning, and operating the Properties (and other similar
properties) and to make such occasional sales of the Properties, including
peripheral land, as are consistent with the Operating Partnership's investment
objectives.
 
                                      98
<PAGE>
 
                                 UNDERWRITING
 
  Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to each of the Underwriters named below and the
Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc. is acting as
Representative, has severally agreed to purchase, the number of Common Shares
offered hereby set forth below opposite its name.
 
<TABLE>
<CAPTION>
                                                                       NUMBER OF
     UNDERWRITER                                                        SHARES
     -----------                                                       ---------
     <S>                                                               <C>
     Friedman, Billings, Ramsey & Co., Inc. ..........................
                                                                         ----
         Total........................................................
                                                                         ====
</TABLE>
 
  Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the Common Shares offered hereby if
any are purchased. The Company has agreed to indemnify the Underwriters
against certain civil liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
 
  The Underwriters propose initially to offer the Common Shares 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 Common Share. The Underwriters may allow and such dealers
may reallow a concession not to exceed $   per Common Share to certain other
dealers. After the Common Shares are released for sale to the public, the
offering price and other selling terms may be changed by the Underwriters.
 
  The Company has granted to the Underwriters an option exercisable during a
30-day period after the date hereof to purchase, at the initial offering price
less underwriting discounts and commissions, up to an additional 3,000,000
Common Shares for the sole purpose of covering over-allotments, if any. To the
extent that the Underwriters exercise such option, each Underwriter will be
committed, subject to certain conditions, to purchase that number of
additional Common Shares which is proportionate to such Underwriter's initial
commitment.
 
  The Underwriters have agreed to reserve up to 2% of the Common Shares
offered hereby for sale to certain persons associated with the Company,
including executive officers and Trustees of the Company and their families,
at the initial public offering price net of underwriting discounts and
commissions. To the extent such reserved shares are sold to such individuals,
the total underwriting discounts and commissions will be reduced.
 
  The Company has agreed to grant to the Representative the Underwriting
Warrants representing the right to acquire 1,277,794 Common Shares, an amount
equal to 6.385% of the Common Shares offered hereby (excluding exercise of the
Underwriters' over-allotment option) and equal to 4% of the Common Shares to
be outstanding on the closing of the Offering (excluding exercise of the
Underwriters' over-allotment option) on a fully diluted basis. The
Underwriting Warrants will be exercisable on the closing date of the Offering
and for a period of five years thereafter at the initial public offering price
of the Common Shares. The Underwriting Warrants and the underlying Common
Shares issued upon exercise of the Underwriting Warrants may not be sold,
transferred, assigned or hypothecated for one year following the date of this
Prospectus, except to officers or partners of the Representative or members of
the selling group. The Company has also registered the Common Shares
underlying the Underwriting Warrants. The Underwriting Warrants enable the
Representative to profit from a rise in the market price of the Common Shares.
Dilution to the Common Shares will occur if the Underwriting Warrants are
exercised at a time when the exercise price is less than the market price of
the Common Shares. In addition, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected because the
holders of the Underwriting Warrants can be expected to exercise them at a
time when the Company likely would be able to obtain any needed capital on
terms more favorable to the Company than those provided in the Underwriting
Warrants.
   
  Prior to the Offering, Friedman, Billings, Ramsey Group, Inc. an affiliate
of the Representative, established in the Company's favor a short-term
revolving loan facility on a secured basis in the principal amount of up to
approximately $2.5 million. Any outstanding loan amount and any accrued
interest are due and payable in full from the net proceeds of this Offering on
the closing date of this Offering.     
 
                                      99
<PAGE>
 
   
  FBR Asset Investment Corporation, an Affiliate of the Representative of the
Underwriters, has subscribed to purchase 1,792,115 Common Shares in a private
placement at a purchase price equal to the initial price to the public (net of
underwriting discounts and commissions). FBR Asset Investment Corporation may
not offer, pledge, sell, dispose of or otherwise transfer the Common Shares
acquired in the FBR Offering for a period of one-year following the closing of
the Offering, without the consent of the Representative.     
 
  The Company has agreed to reimburse the Underwriters for their out-of-pocket
expenses, including fees and expenses of counsel to the Underwriters.
 
  The Company has granted to the Representative of the Underwriters
preferential rights for three years from the date of the Registration
Statement, assuming completion of the Offering, to act as the exclusive
underwriter for, or advisor to, the Company in specified transactions or
offerings for customary fees to be mutually agreed to by the parties.
 
  Thomas D. Eckert, the Company's President and Chief Executive Officer, and
David S. Kay, the Company's Chief Financial Officer, have agreements with
Friedman, Billings, Ramsey Group, Inc. providing that if the Offering is not
completed for whatever reason, Friedman, Billings, Ramsey Group, Inc. will
employ them at a rate equal to their respective annual salaries and benefits
provided under their respective employment agreements with the Company for up
to one year following the abandonment of the Offering.
 
  In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Shares. Specifically, the Underwriters may over-allot this Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase Common Shares in the open market to cover syndicate short
positions or to stabilize the price of the Common Shares. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members
if the syndicate repurchases previously distributed Common Shares in syndicate
covering transactions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Common
Shares above independent market levels. The Underwriters are not required to
engage in these activities and may end any of these activities at any time.
 
  Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price has been determined by negotiation
between the Company and the Representative. 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 Initial
Properties and the Company's prospects for future earnings, the general
conditions of the economy and the securities markets, and the prices, dividend
yields and other financial characteristics of comparable publicly traded
REITs. There can, however, be no assurance that the price at which the Common
Shares will sell in the public market after this Offering will not be lower
than the price at which they are sold by the Underwriters.
 
  The Company has been advised by the Representative that it and certain other
Underwriters intend to make a market in the Common Shares. However, the
Underwriters are not obligated to do so and such market making may be
interrupted or discontinued at any time without notice at the sole discretion
of the Underwriters. Application has been made by the Company to list the
Common Shares in The Nasdaq National Market under the symbol "CARS," but one
of the requirements for listing and continued listing is the presence of two
market makers for the Common Shares. The presence of a second market maker
cannot be assured. Accordingly, no assurance can be given as to the
development or liquidity of any market for the Common Shares.
 
  The Representative has informed the Company that the Underwriters do not
intend to confirm sales of the Common Shares offered hereby to any accounts
over which they exercise discretionary authority.
   
  The executive officers and Trustees of the Company have agreed not to,
directly or indirectly, offer, sell, offer to sell, contract to sell, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, contract of sale, grant of any option to purchase or
other sale or disposition) of any Units or     
 
                                      100
<PAGE>
 
   
Common Shares or other shares of beneficial interest of the Company, or any
securities convertible or exercisable or exchangeable for any Units or Common
Shares or other shares of beneficial interest of the Company (except for
Options granted under the Plan) for a period of two years from the effective
date of this Offering. The Representative, at any time and without notice, may
release all or any portion of the Common Shares subject to the foregoing lock-
up agreements.     
   
  The Representative may be considered a promoter of the Company under the
Securities Act. William R. Swanson, a Managing Director of the Representative,
will join the Board of Trustees of the Company following the closing of this
Offering.     
 
                                 LEGAL MATTERS
 
  Certain legal matters in connection with the Offering will be passed upon
for the Company by Wilmer, Cutler & Pickering, Washington, D.C. and for the
Underwriters by Hunton & Williams, Richmond, Virginia. In addition, the
description of federal income tax consequences contained in this Prospectus
under "Federal Income Tax Consequences" is, to the extent that it constitutes
matters of law, summaries of legal matters or legal conclusions, the opinion
of Wilmer, Cutler & Pickering.
 
                                    EXPERTS
 
  The financial statements of the Company as of October 20, 1997 included in
this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
 
  The financial statements of Geneva Enterprises, Inc. and Affiliated Company
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Walpert, Smullian & Blumenthal, P.A. independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
 
                                      101
<PAGE>
 
                            ADDITIONAL INFORMATION
 
  The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-11 under the Securities Act,
with respect to the Common Shares offered hereby (the "Registration
Statement"). This Prospectus, which is part of the Registration Statement,
does not contain all the information set forth in the Registration Statement
and the exhibits thereto. For further information with respect to the Company
and the Common Shares, reference is made to the Registration Statement and
such exhibits filed therewith. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
 
  For further information with respect to the Company and the Common Shares,
reference is made to the Registration Statement and such exhibits, copies of
which may be examined without charge at, or copies obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a web site that contains reports, proxy and information statements
and other information regarding registrants that file documents with the
Commission, including the Company, and the address is http://www.sec.gov.
 
  Following the closing of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and will, therefore, be required to file reports, proxy
and information statements and other information with the Commission pursuant
to the reporting requirements of Section 13(a) thereof, in addition to any
other legal or Nasdaq requirements. Such reports, statements and information
can also be inspected and copied at the Commission's offices and web site
listed above.
 
  The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters of each fiscal year.
 
                                      102
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                        <C>
INTRODUCTION TO FINANCIAL STATEMENTS......................................  F-2
CAPITAL AUTOMOTIVE REIT:
  Report of Independent Public Accountants--Arthur Andersen LLP...........  F-3
  Balance Sheet as of October 20, 1997....................................  F-4
  Notes to Balance Sheet..................................................  F-5
  Introduction to Pro Forma Financial Statements (Unaudited)..............  F-9
  Pro Forma Balance Sheet as of October 20, 1997 (Unaudited).............. F-10
  Pro Forma Statement of Operations for the Year Ended December 31, 1996
   (Unaudited)............................................................ F-11
  Pro Forma Statement of Operations for the Period Ended October 20, 1997
   (Unaudited)............................................................ F-12
  Notes to Pro Forma Financial Statements (Unaudited)..................... F-13
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY:
  Independent Auditors' Report--Walpert, Smullian & Blumenthal, P.A. ..... F-16
  Combined Balance Sheets as of December 31, 1996 and September 30, 1997
   (Unaudited)............................................................ F-17
  Combined Statements of Income for the Year Ended December 31, 1996 and
   the Nine Months Ended September 30, 1996 (Unaudited) and 1997
   (Unaudited)............................................................ F-18
  Combined Statements of Changes in Stockholders' Equity for the Year
   Ended December 31, 1996 and the Nine Months Ended September 30, 1997
   (Unaudited)............................................................ F-19
  Combined Statements of Cash Flows for the Year Ended December 31, 1996
   and the Nine Months Ended September 30, 1996 (Unaudited) and 1997
   (Unaudited)............................................................ F-20
  Notes to Combined Financial Statements.................................. F-21
CROSS-CONTINENT AUTO RETAILERS, INC.:
  Summary Historical Financial Information................................ F-28
</TABLE>
 
                                      F-1
<PAGE>
 
                     INTRODUCTION TO FINANCIAL STATEMENTS
 
  The following pages present the audited financial statements of the Company
and Geneva Enterprises, Inc. and Affiliated Company ("Geneva") as well as
summary historical financial information for Cross-Continent Auto Retailers,
Inc. ("Cross-Continent"). The audited financial statements of Geneva and the
summary financial information for Cross-Continent have been included in this
Prospectus to present the financial condition and historical operations of the
significant Initial Lessees, in order to show their ability to make base
rental payments under the Initial Leases. Only Geneva, who is the Lessee (or
has guaranteed the rent of the Lessee) of all the Rosenthal properties
acquired, and Cross-Continent have been presented, as they represent Initial
Lessees for which the purchase price of the related Initial Property under
lease represents greater than 20 percent of the aggregate purchase price of
all of the Initial Properties, and therefore are considered significant. As
Cross-Continent is a publicly traded entity, registered with the Securities
and Exchange Commission, only summary historical financial information has
been provided; however, audited historical financial statements and other
information as filed with the Securities and Exchange Commission is publicly
available.
 
  Financial Statements of the Operating Partnership have not been presented,
as it has not had any significant activity since its inception in November
1997. The Operating Partnership will commence activity concurrent with the
closing of the Offering.
 
                                      F-2
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
  We have audited the accompanying balance sheet of Capital Automotive REIT (a
Maryland real estate investment trust, the "Company") as of October 20, 1997.
This financial statement is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement 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 financial statement
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 Capital Automotive REIT as of
October 20, 1997, in conformity with generally accepted accounting principles.
 
                                          /s/ Arthur Andersen LLP
 
Washington, D.C.,
   
February 3, 1998     
 
                                      F-3
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                                 BALANCE SHEET
 
                             AS OF OCTOBER 20, 1997
 
<TABLE>
<S>                                                                       <C>
                                 ASSETS
Cash..................................................................... $ --
                                                                          -----
  Total assets........................................................... $ --
                                                                          =====
                  LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities........................................................ $ --
                                                                          -----
Common stock, par value $.01, 10 shares issued and outstanding...........   --
Additional paid-in capital...............................................   100
Stock subscriptions receivable...........................................  (100)
                                                                          -----
Total stockholders' equity...............................................   --
                                                                          -----
  Total liabilities and stockholders' equity............................. $ --
                                                                          =====
</TABLE>
 
 
 
       The accompanying notes are an integral part of this balance sheet.
 
                                      F-4
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                            NOTES TO BALANCE SHEET
 
                            AS OF OCTOBER 20, 1997
 
NOTE 1--THE COMPANY
 
  Capital Automotive REIT (the "Company") was formed as a Maryland real estate
investment trust on October 20, 1997 and was initially capitalized on such
date through the sale of 10 shares of common stock for a $100 stock
subscription receivable. The Company's mission is to invest in the real
property and improvements used by operators of motor vehicle dealerships and
related businesses, through its ownership interest in Capital Automotive L.P.
(the "Operating Partnership"). After its formation, the Company will
consolidate the Operating Partnership due to its control as sole general
partner. The accompanying balance sheet includes all accounts of the Company.
 
  The Company's sole activity through October 20, 1997, consisted of the
organization and start-up of the Company. Accordingly, no statement of
operations is presented.
 
  The Company is in the process of filing a Registration Statement for
approximately 20.0 million shares of common stock (the "IPO"). Contingent upon
the consummation of the IPO, the Company will be liable for organization and
offering expenses in connection with the sale of the shares of the common
stock offered. The Company will contribute the proceeds from the IPO to the
Operating Partnership in exchange for 20.0 million units in the Operating
Partnership.
 
  Contingent on the closing of the IPO, FBR Asset Investment Corporation, an
affiliate of Friedman, Billings, Ramsey & Co., Inc. ("FBR"), the
representatives of the underwriters in the IPO, will separately purchase
1,792,115 common shares of the Company at the initial public offering price
(net of underwriting discounts and commissions) (the "FBR Offering"). The
Company will contribute the proceeds from the FBR Offering to the Operating
Partnership in exchange for an equal number of units in the Operating
Partnership.
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
INCOME TAXES
 
  The Company intends to qualify as a real estate investment trust under the
provisions of the Internal Revenue Code of 1986, as amended. As a real estate
investment trust, the Company is required to distribute at least 95% of its
taxable income to shareholders and meet certain other requirements.
 
USE OF ESTIMATES
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
CONCENTRATION OF RISK
 
  The Company is in the development stage, and therefore is subject to several
risk factors, including the following:
 
  .  The lack of operating history of the Company;
 
  .  Dependence on the ability of lessees to pay rent or perform obligations
     under leases;
 
  .  Taxation of the Company as a regular corporation if it fails to qualify
     as a real estate investment trust;
 
  .  The Company's dependence on key officers and trustees of the Company;
     and
 
  .  The general risks relating to commercial real estate ownership and
     investment.
 
                                      F-5
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                      NOTES TO BALANCE SHEET--(CONTINUED)
 
 
NOTE 3--RELATED PARTY TRANSACTIONS
   
  In October 1997, and amended as of January 30, 1998, Friedman, Billings,
Ramsey Group, Inc., an affiliate of FBR, issued to the Company a short-term
revolving line of credit in the amount of approximately $2.5 million. Draws on
the line of credit are to be used by the Company for organizational costs and
offering costs, are due on demand and are to be repaid with the proceeds from
the IPO. Draws on the line of credit bear interest at a rate of 10 percent per
annum.     
 
NOTE 4--SUBSEQUENT EVENTS
 
ACQUISITIONS
 
  Since October 20, 1997, the Company, through the Operating Partnership, has
committed to acquire real property and improvements from the affiliates of
seven motor vehicle dealers (the "Dealers") for a total purchase price of
approximately $166.2 million, for which approximately $75.6 million will be
paid with units in the Operating Partnership (valued at the same price as the
Company's shares sold in the IPO), $41.3 million will consist of mortgage debt
assumed by the Company, and the remaining $49.3 million will be paid with the
proceeds of the IPO. The mortgage debt assumed will also be repaid with the
proceeds of the IPO. These acquisitions are contingent on the completion of
the IPO as discussed above. Summarized financial information for the Dealers
(on a combined basis) as of September 30, 1997 and for the year ended December
31, 1996 and the nine months ended September 30, 1997, is as follows
(unaudited, in thousands):
 
                                 BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                       AS OF
                                                                   SEPTEMBER 30,
                                                                       1997
                                                                   -------------
                                                                    (UNAUDITED)
   <S>                                                             <C>
   Inventory (dealer).............................................   $197,419
   Real estate, net...............................................     39,471
   Other assets...................................................    225,440
                                                                     --------
   Total assets...................................................   $462,330
                                                                     ========
   Mortgage and other debt........................................   $269,934
   Other liabilities..............................................     76,721
   Shareholders' equity...........................................    115,675
                                                                     --------
   Total liabilities and shareholders' equity.....................   $462,330
                                                                     ========
</TABLE>
 
 
                                      F-6
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                      NOTES TO BALANCE SHEET--(CONTINUED)
 
                           STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                 FOR THE YEAR  FOR THE NINE
                                                    ENDED      MONTHS ENDED
                                                 DECEMBER 31,  SEPTEMBER 30,
                                                     1996          1997
                                                 ------------  -------------
                                                        (UNAUDITED)
   <S>                                           <C>           <C>           
   Sales revenue................................ $ 1,784,366    $ 1,271,428
   Cost of sales................................  (1,567,565)    (1,119,370)
   Net operating income.........................     216,801        152,058
   Other income (expense).......................      14,825         (8,910)
   Selling, general and administrative..........    (211,226)      (126,078)
                                                 -----------    -----------
   Net income................................... $    20,400    $    17,070
                                                 ===========    ===========
</TABLE>
 
RENTAL INCOME
   
  As part of the acquisitions described above, the Company will enter into
lease agreements (the "Leases") with the operators of the Dealers (the
"Lessees"). The Leases generally have initial terms of eight to eleven years,
and generally may be extended upon the same terms and conditions for one or
two additional ten year terms, at the option of the Lessees. The Leases are
triple-net leases and require the Lessees to pay substantially all expenses
associated with operations, including taxes, insurance, utilities, service,
maintenance and ground lease payments. In addition, the majority of the Leases
are guaranteed by parent entities to the Lessees, but the Leases are not
cross-defaulted. Base rent will be increased annually over the term of the
Leases by a factor of the consumer price index. Future minimum rental payments
will be received as follows (in thousands):     
 
<TABLE>   
<CAPTION>
FOR THE YEAR ENDED
   DECEMBER 31,
- ------------------
   <S>                                                                 <C>
   1998............................................................... $ 14,353
   1999...............................................................   18,318
   2000...............................................................   18,318
   2001...............................................................   18,318
   2002...............................................................   18,318
   Thereafter.........................................................   97,963
                                                                       --------
                                                                       $185,588
                                                                       ========
</TABLE>    
 
STOCK OPTION PLANS
   
  The Company has established a plan (the "Plan") for the purpose of
attracting and retaining trustees, executive officers and other key employees.
Each option granted pursuant to the Plan shall be designated at the time of
grant as either an "incentive share option" or as a "non-qualified share
option." Options in the amount of 8 percent of the aggregate number of the
Operating Partnership's units outstanding (on a fully diluted basis and
including exercise of the overallotment option) are available for grant under
the Plan. The options will become exercisable, subject to certain conditions,
at a rate of 25 percent per year over a four year period, commencing on the
first anniversary of the date of grant and with a term of ten years.     
 
  Concurrent with the closing of the IPO, the Company will grant options in
the amount of 7 percent of the aggregate number of the Operating Partnership's
units outstanding as a result of the IPO (including exercise of the
overallotment option), fully diluted for the FBR Offering, warrants issued
(see below) and the acquisitions described above. Such options will be granted
under the Plan to several key officers and employees of the Company,
exercisable at the IPO price.
 
                                      F-7
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                      NOTES TO BALANCE SHEET--(CONTINUED)
 
 
STOCK WARRANTS
 
  As part of the IPO, the Company will issue warrants to two affiliates of the
Dealers, representing the right to acquire units in the Operating Partnership
in the aggregate amount of 4 percent of the Operating Partnership's
outstanding units as a result of the IPO, fully diluted for the FBR Offering,
management stock options FBR warrants (see below) and the acquisitions
described above. In addition, the Company will issue warrants to FBR,
representing the right to acquire 1,277,794 shares of common stock of the
Company. These warrants are exercisable on the effective date of the IPO and
for a period of five years thereafter, with an exercise price equal to the IPO
price.
 
EMPLOYMENT AGREEMENTS
 
  The Company has entered into employment agreements with each of its four
executive officers. The Company will assign the employment agreements to the
Operating Partnership effective January 1, 1998. The agreements are for a four
year term and provide that the executive officers agree to devote their full
time to the operation of the Company (except as the Company otherwise agrees,
including on behalf of the Operating Partnership). The term is shortened to
June 30, 1998 if the Company has not completed its initial public offering by
such date.
 
  Two of the Company's executive officers have agreements with FBR providing
that if the IPO cannot be completed, FBR will employ each of them for a term
of one year (or until the individual finds new employment) at a compensation
equal to that under their current employment agreement.
 
                                      F-8
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
              PRO FORMA BALANCE SHEET AS OF OCTOBER 20, 1997 AND
             PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
            DECEMBER 31, 1996 AND THE PERIOD ENDED OCTOBER 20, 1997
 
                                  (UNAUDITED)
 
  The following unaudited pro forma balance sheet gives effect to: (i) the
completion of the Offering and the concurrent FBR Offering, (ii) the
acquisition of certain of the Initial Properties, (iii) the commencement of
the Initial Leases, and (iv) certain other transactions described in the notes
hereto as though such transactions occurred on October 20, 1997.
 
  The following unaudited pro forma statements of operations give effect to
(i) the completion of the Offering and the concurrent FBR Offering, (ii) the
acquisition of certain of the Initial Properties, (iii) the commencement of
the Initial Leases, and (iv) certain other transactions described in the notes
hereto as though such transactions occurred at the beginning of the presented
period.
 
  The following unaudited pro forma data is not necessarily indicative of what
the actual financial position or results of operations of the Company would
have been as of the date or for the period indicated, nor does it purport to
represent the financial position or results of operations for the Company for
future periods.
 
                                      F-9
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                            PRO FORMA BALANCE SHEET
                             AS OF OCTOBER 20, 1997
 
                           (UNAUDITED, IN THOUSANDS)
 
<TABLE>   
<CAPTION>
                                                                          PRO
                                           HISTORICAL ADJUSTMENTS       FORMA(H)
                                           ---------- -----------       --------
<S>                                        <C>        <C>               <C>
                  ASSETS
Cash......................................    $--      $277,350 (A)     $211,725
                                                          5,000 (B)
                                                        (41,298)(C)
                                                        (49,301)(D)
                                                         25,000 (F)
                                                          1,324 (G)
                                                           (350)(B)
Land......................................     --       115,784 (D)      115,784
Building and improvements.................     --        50,439 (D)       50,439
                                              ----                      --------
Total real estate.........................     --                        166,223
Other assets..............................     --           350 (B)          350
                                              ----                      --------
    Total assets..........................    $--                       $384,298
                                              ====                      ========
   LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage payable..........................    $--      $ 41,298 (D)     $    --
                                                        (41,298)(C)
Line of credit............................     --         5,000 (B)        5,000
Security deposits payable.................     --         1,324 (G)        1,324
                                              ----                      --------
    Total liabilities.....................     --                          6,324
                                              ----                      --------
Minority interest.........................     --        71,014 (D)(E)    71,014
Shareholders' equity:
  Common stock............................     --           200 (A)          218
                                                             18 (F)
  Additional paid-in capital..............     --       277,150 (A)      306,742
                                                          4,610 (D)
                                                         24,982 (F)
                                              ----                      --------
    Total shareholders' equity............     --                        306,960
                                              ----                      --------
    Total liabilities and shareholders'
     equity...............................    $--                       $384,298
                                              ====                      ========
</TABLE>    
 
 
The accompanying notes are an integral part of this unaudited pro forma balance
                                     sheet.
 
                                      F-10
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                       PRO FORMA STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1996
 
                (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>   
<CAPTION>
                                         HISTORICAL ADJUSTMENTS   PRO FORMA(H)
                                         ---------- -----------   ------------
<S>                                      <C>        <C>           <C>
Total revenue..........................     $--       $15,887 (I)   $15,887
Depreciation and amortization..........      --         2,522 (D)     2,522
General and administrative expense.....      --         3,500 (J)     3,500
Interest expense.......................      --           470 (B)       470
                                            ----                    -------
  Total expenses.......................      --                       6,492
                                            ----                    -------
Net income before minority interest....      --                       9,395
Minority interest......................      --        (1,765)(E)    (1,765)
                                            ----                    -------
Net income applicable to common
 shareholders..........................     $--                     $ 7,630
                                            ====                    =======
Shares of common stock outstanding used
 to compute earnings per share.........                               7,718 (K)
                                                                    =======
Earnings per share of common stock
 outstanding...........................                             $  0.99
                                                                    =======
</TABLE>    
 
 
    The accompanying notes are an integral part of these unaudited pro forma
                             financial statements.
 
                                      F-11
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                       PRO FORMA STATEMENT OF OPERATIONS
                     FOR THE PERIOD ENDED OCTOBER 20, 1997
 
                (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>   
<CAPTION>
                                         HISTORICAL ADJUSTMENTS   PRO FORMA (H)
                                         ---------- -----------   -------------
<S>                                      <C>        <C>           <C>
Total revenue..........................     --        $13,901 (I)    $13,901
Depreciation and amortization..........     --          2,207 (D)      2,207
General and administrative expense.....     --          3,063 (J)      3,063
Interest expense.......................     --            411 (B)        411
                                            ---                      -------
  Total expenses.......................     --                         5,681
                                            ---                      -------
Net income before minority interest....     --                         8,220
Minority interest......................     --         (1,545)(E)     (1,545)
                                            ---       -------        -------
Net income applicable to common
 shareholders..........................     --                       $ 6,675
                                            ===                      =======
Shares of common stock outstanding used
 to compare earnings per share.........                                7,718(K)
                                                                     =======
Earnings per share of common stock
 outstanding...........................                              $  0.86
                                                                     =======
</TABLE>    
 
 
    The accompanying notes are an integral part of these unaudited pro forma
                             financial statements.
 
                                      F-12
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
                    NOTES TO PRO FORMA FINANCIAL STATEMENTS
 
                                  (UNAUDITED)
 
  (A) Represents 20.0 million shares of common stock issued in the initial
public offering, at $15.00 per share with a par value of $.01 per share.
Adjustments consist of the following (in thousands):
 
<TABLE>
   <S>                                                                 <C>
   Proceeds of offering............................................... $300,000
   Underwriters discount..............................................  (21,000)
   Offering expenses..................................................   (1,650)
                                                                       --------
   Net proceeds....................................................... $277,350
                                                                       ========
   Common stock....................................................... $    200
   Additional paid-in capital.........................................  277,150
                                                                       --------
   Net proceeds....................................................... $277,350
                                                                       ========
</TABLE>
   
  (B) Represents a draw of $5.0 million on a $10.0 million line-of-credit
intended to be obtained by management upon closing of the Offering and
guaranteed by one of the Initial Properties. The $5.0 million draw will be
guaranteed by certain of the Initial Sellers for tax purposes. Draws on the
line of credit are assumed to bear interest at a rate of 8 percent. Costs in
the amount of $350,000 are assumed to be incurred in connection with obtaining
this line-of-credit and future long-term financing. These costs will be
capitalized and amortized into interest expense over the term of the line
(assumed to be five years).     
 
  (C) Represents the immediate repayment of the mortgage debt assumed from the
Initial Properties with proceeds from the Offering. See "Use of Proceeds"
elsewhere in this Prospectus.
   
  (D) Represents contribution of the Initial Properties for units of the
Operating Partnership (assuming the IPO price of the Company's Common Shares),
assumption of mortgage debt, and cash. In the opinion of management, the
purchase price of the real property acquired estimated fair value as of the
date of commitment to acquire. In addition, the purchase price of real
property includes approximately $1.4 million in acquisition costs to be paid
by the Company. The purchase price of real property has been allocated 65%/35%
between land and buildings, respectively, for purposes of the unaudited pro
forma financial statements with the exception of two of the cross-continent
properties, which are being developed for use. Final allocations will be
calculated and recorded by the Operating Partnership upon closing. Adjustments
are comprised of the following (in thousands):     
 
<TABLE>   
<CAPTION>
                                                       TOTAL     LAND   BUILDING
                                                      -------- -------- --------
   <S>                                                <C>      <C>      <C>
   Rosenthal......................................... $ 65,269 $ 42,425 $22,844
   Pohanka...........................................   31,324   20,361  10,963
   Sheehy............................................   14,006    9,104   4,902
   Cherner...........................................    6,323    4,110   2,213
   Cross-Continent...................................   35,330   30,703   4,627
   Good News.........................................    5,461    3,550   1,911
   Kline.............................................    8,510    5,531   2,979
                                                      -------- -------- -------
                                                      $166,223 $115,784 $50,439
                                                      ======== ======== =======
   Units issued-Minority interest.................... $ 71,014
   Units issued-Additional paid-in capital...........    4,610
   Cash paid.........................................   49,301
   Mortgage debt assumed.............................   41,298
                                                      --------
                                                      $166,223
                                                      ========
</TABLE>    
 
                                     F-13
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
             NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Depreciation is computed using the straight-line method assuming estimated
useful lives of 20 years for the buildings and improvements.
 
  (E) Minority interest is calculated at approximately 18.8 percent of the
Operating Partnership's partners' capital and net income. The ownership of the
Operating Partnership is as follows (in thousands):
 
<TABLE>   
<CAPTION>
                                                              $     UNITS   %
                                                           -------- ------ ----
   <S>                                                     <C>      <C>    <C>
   Partners' capital:
     Certain Initial Sellers.............................. $ 75,624  5,042 18.8%
     The Company..........................................  302,350 21,792 81.2%
                                                           -------- ------ ----
       Total.............................................. $377,974 26,834  100%
                                                           ======== ====== ====
</TABLE>    
 
  (F) Represents 1,792,115 shares of common stock issued to FBR at the initial
public offering price (net of underwriting discounts and commissions of $1.05
per share of Common Stock or $1,881,721).
   
  (G) Represents security deposits to be received from the Initial Lessees in
the amount of one month's base rent. Does not include approximately $.2
million in security deposits for two of the Cross-Continent Initial
Properties, as these Properties are currently being developed for use.     
 
  (H) The Company, as sole general partner of the Operating Partnership, will
have, subject to certain protective rights of the Limited Partners, full,
exclusive and complete responsibility and discretion in the management and
unilateral control of the Operating Partnership. Such responsibilities permit
the Company 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. Further, the Company
may not be replaced as general partner by the Limited Partners, except in
certain limited circumstances. Accordingly, for accounting purposes, the
Company is considered to control the Operating Partnership and the
accompanying unaudited pro forma financial statements consolidate the accounts
of the Company and the Operating Partnership. Financial statements of the
Operating Partnership have not been presented as it has not had any activity
since its inception.
   
  (I) Represents payments of base rent from the Initial Lessees to the Company
calculated on a pro forma basis as if the beginning of the period presented
was the beginning of a lease year. Base rent adjustments have been calculated
from signed lease agreements (subject to consummation) which have initial
terms ranging generally from 8 to 11 years, with the first year annual rent
negotiated to produce a yield on the initial purchase price (approximately 11
percent). Amounts do not include approximately $2.4 million and $2.1 million,
for the periods ended December 31, 1996 and October 20, 1997, respectively, in
base rent for two of the Cross-Continent properties, as these properties are
currently being developed for use.     
 
  (J) Adjustment represents management's estimate for legal, audit, office
costs, salaries and other general and administrative expenses to be paid by
the Company, based on its current activity, as follows (in thousands). This
amount may increase based on additional acquisition activity:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED  PERIOD ENDED
                                                     DECEMBER 31, OCTOBER 20,
                                                         1996         1997
                                                     ------------ ------------
   <S>                                               <C>          <C>
   Salaries and benefits--executive officers........    $1,800       $1,575
   Other salaries and benefits......................       400          350
   Directors and officers insurance.................       300          263
   Legal and accounting.............................       250          219
   Directors fees and travel........................       150          131
   Travel and entertainment.........................       250          219
   Office rent, telephone, supplies and other
    administrative..................................       250          219
   Other............................................       100           87
                                                        ------       ------
     Total..........................................    $3,500       $3,063
                                                        ======       ======
</TABLE>
 
 
                                     F-14
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
 
             NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
 
  Salaries and benefits are based upon employee contracts with the respective
employees and executive management. Other amounts are based upon management's
estimates of expenses to be incurred given the Company's level of operations
and related administrative requirements.
   
  (K) Shares of common stock outstanding represent the number of shares whose
proceeds will be used to repay mortgage debt assumed and to acquire the
Initial Properties. If the total number of shares issued in the Offering and
the FBR Offering had been used, shares of common stock outstanding would be
approximately 21.8 million for both the year ended December 31, 1996 and for
the period ended October 20, 1997, resulting in earnings per share of common
stock outstanding of $0.35 and $0.31 for the year ended December 31, 1996 and
the period ended October 20, 1997, respectively.     
 
                                     F-15
<PAGE>
 
To The Board of Directors
Geneva Enterprises, Inc. and Affiliated Company
 
                         INDEPENDENT AUDITORS' REPORT
 
  We have audited the accompanying combined balance sheet of Geneva
Enterprises, Inc. and Affiliated Company as of December 31, 1996, and the
related combined statements of income, changes in stockholders' equity, and
cash flows for the year 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Geneva
Enterprises, Inc. and Affiliated Company as of December 31, 1996 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
 
                                          /s/  Walpert, Smullian & Blumenthal,
                                           P.A.
Baltimore, Maryland
November 6, 1997
 
                                     F-16
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
                            COMBINED BALANCE SHEETS
 
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                    DECEMBER 31, SEPTEMBER 30,
                                                        1996         1997
                                                    ------------ -------------
                                                                  (UNAUDITED)
<S>                                                 <C>          <C>
                      ASSETS
Current Assets
  Cash and cash equivalents........................   $  1,556     $  3,805
  Accounts receivable
    Customers......................................      9,211       10,900
    Contracts-in-transit...........................      9,864        8,791
    Finance reserves...............................        635          906
    Factory........................................      2,670        2,095
    Related parties................................      2,318        1,902
    Other..........................................        963          195
  Current portion of notes receivable--related
   parties.........................................      3,089        3,968
  Inventories......................................     62,373       44,873
  Prepaid expenses.................................        354          411
                                                      --------     --------
      Total Current Assets.........................     93,033       77,846
                                                      --------     --------
Notes Receivable--related parties--Less Current
 Portion...........................................        394          --
                                                      --------     --------
Property, Plant and Equipment--
  At Cost
    Land...........................................        881          881
    Buildings and improvements.....................        639          639
    Leasehold improvements.........................      3,237        3,251
    Parts and services equipment...................      3,545        3,600
    Furniture and fixtures.........................      4,788        4,888
    Service vehicles...............................        832          804
                                                      --------     --------
                                                        13,922       14,063
    Less: Accumulated depreciation and
     amortization..................................    (10,189)     (10,521)
                                                      --------     --------
                                                         3,733        3,542
                                                      --------     --------
Other Assets.......................................         61           93
                                                      --------     --------
      Total Assets.................................    $97,221      $81,481
                                                      ========     ========
       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities................................
  Bank overdraft...................................   $  5,626     $  1,164
  Notes payable--vehicles floor plan...............     64,228       47,913
  Notes payable to related parties.................      1,624        1,124
  Accounts payable.................................
    Trade..........................................      5,106        6,832
    Related parties................................      2,439          440
  Customer deposits................................        717          650
  Accrued salaries and commissions.................      1,505        1,622
  Other accrued liabilities........................      6,406        8,308
                                                      --------     --------
      Total Current Liabilities....................     87,651       68,053
                                                      --------     --------
Commitments and Contingencies
Stockholders' Equity
  Common Stock.....................................         23           23
  Additional paid-in capital.......................      3,969        4,532
  Stockholders' notes receivable...................       (820)        (820)
  Retained earnings................................      6,398        9,693
                                                      --------     --------
      Total Stockholders' Equity...................      9,570       13,428
                                                      --------     --------
      Total Liabilities and Stockholders' Equity...   $ 97,221     $ 81,481
                                                      ========     ========
</TABLE>
   The accompanying notes are an integral part of these financial statements.
 
                                      F-17
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
                         COMBINED STATEMENTS OF INCOME
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               FOR THE NINE
                                                FOR THE YEAR   MONTHS ENDED
                                                   ENDED       SEPTEMBER 30,
                                                DECEMBER 31, ------------------
                                                    1996       1996      1997
                                                ------------ --------  --------
                                                                (UNAUDITED)
<S>                                             <C>          <C>       <C>
Sales..........................................   $489,065   $374,352  $397,371
Cost of Sales..................................    434,502    334,181   355,823
                                                  --------   --------  --------
    Gross Profit...............................     54,563     40,171    41,548
                                                  --------   --------  --------
Other Operating Income
  Finance......................................      5,927      4,971     4,590
  Insurance....................................        629        556       396
  Warranty.....................................      2,960      2,388     1,758
  Miscellaneous................................      7,683      6,514     8,512
                                                  --------   --------  --------
                                                    17,199     14,429    15,256
                                                  --------   --------  --------
Selling, General, Administrative
 and Interest Expenses.........................    (68,768)   (51,867)  (53,509)
                                                  --------   --------  --------
    Net Income.................................   $  2,994   $  2,733  $  3,295
                                                  ========   ========  ========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-18
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
             COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                     STOCK-             TOTAL
                          COMMON STOCK  ADDITIONAL  HOLDERS'            STOCK-
                          -------------  PAID-IN     NOTES    RETAINED HOLDERS'
                          SHARES AMOUNT  CAPITAL   RECEIVABLE EARNINGS  EQUITY
                          ------ ------ ---------- ---------- -------- --------
<S>                       <C>    <C>    <C>        <C>        <C>      <C>
Balance--January 1,
 1996...................    550   $25     $4,261    $(1,428)   $3,367  $ 6,225
Net income..............                                        2,994    2,994
Collections on
 stockholders' notes
 receivable.............    --    --         --         608       --       608
Proceeds from stock
 issuance...............     19   --         650        --        --       650
Stock retirements.......    (20)   (2)      (942)       --         37     (907)
                           ----   ---     ------    -------    ------  -------
Balance--December 31,
 1996...................    549    23      3,969       (820)    6,398    9,570
Net income (unaudited)..    --    --         --         --      3,295    3,295
Proceeds from stock
 issuance (unaudited)...    --    --         563        --        --       563
                           ----   ---     ------    -------    ------  -------
Balance, September 30,
 1997 (unaudited).......    549   $23     $4,532    $  (820)   $9,693  $13,428
                           ====   ===     ======    =======    ======  =======
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-19
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
                       COMBINED STATEMENTS OF CASH FLOWS
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               FOR THE NINE
                                                               MONTHS ENDED
                                              FOR THE YEAR     SEPTEMBER 30,
                                                  ENDED       ----------------
                                            DECEMBER 31, 1996  1996     1997
                                            ----------------- -------  -------
                                                                (UNAUDITED)
<S>                                         <C>               <C>      <C>
Cash Flow From Operating Activities
  Net income...............................      $ 2,994      $ 2,733  $ 3,295
                                                 -------      -------  -------
  Adjustments to reconcile net income to
   net cash (used in)/provided by operating
   activities:
    Depreciation and amortization..........          585          421      360
    Gain on disposition of property and
     equipment.............................           (8)         --       --
    Forgiveness of debt from affiliate.....          --           --      (500)
  Changes in Assets and Liabilities
   (Increase)/Decrease in Assets:
    Accounts receivable....................         (959)      (1,741)     872
    Inventories............................       (8,490)      13,001   17,500
    Prepaid expenses.......................          (74)        (293)     (57)
    Other assets...........................          271          261      (32)
   Increase/(Decrease) in Liabilities:
    Accounts payable.......................         (986)        (448)    (273)
    Customer deposits......................           69           98      (67)
    Accrued salaries and commissions.......          505          238      117
    Other accrued liabilities..............       (1,259)       1,550    1,902
                                                 -------      -------  -------
      Total Adjustments....................      (10,346)      13,087   19,822
                                                 -------      -------  -------
      Net Cash (Used In)/Provided By
       Operating Activities................       (7,352)      15,820   23,117
                                                 -------      -------  -------
Cash Flow From Investing Activities
  Advances to related parties..............         (433)         (91)    (550)
  Loans to stockholders....................       (1,402)      (1,072)     --
  Repayment from related parties...........           52           52       65
  Proceeds from sale of property and
   equipment...............................           57          --       --
  Purchases of property and equipment......         (467)        (190)    (169)
                                                 -------      -------  -------
      Net Cash Used In Investing
       Activities..........................       (2,193)      (1,301)    (654)
                                                 -------      -------  -------
Cash Flow From Financing Activities
  Stock retirements........................         (907)        (907)     --
  Capital contributions....................          650          650      563
  Net borrowings under floor plan..........        7,897      (11,776) (16,315)
  Repayments of notes payable to related
   parties.................................         (761)        (647)     --
  Collections on stockholders' notes
   receivable..............................          607          548      --
  Increase/(Decrease) in bank overdraft....        1,883       (2,187)  (4,462)
                                                 -------      -------  -------
      Net Cash Provided By/(Used In)
        Financing Activities...............        9,369      (14,319) (20,214)
                                                 -------      -------  -------
Net (Decrease)/Increase in Cash and Cash
 Equivalents...............................         (176)         200    2,249
Cash and Cash Equivalents--Beginning of
 Year......................................        1,732        1,732    1,556
                                                 -------      -------  -------
Cash and Cash Equivalents--End of Year.....      $ 1,556      $ 1,932  $ 3,805
                                                 =======      =======  =======
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-20
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
                    NOTES TO COMBINED FINANCIAL STATEMENTS
 
NATURE OF BUSINESS
 
  Geneva Enterprises, Inc. and Affiliated Company (the Company) has as its
principal business activity the sale and service of new and used vehicles in
the Washington, D.C. metropolitan area.
 
PRINCIPLES OF COMBINATION
 
  The accompanying combined financial statements include the accounts of the
following entities which are affiliated through common ownership:
 
  .  Geneva Enterprises, Inc., which includes the accounts of the following
     divisions (collectively called the Divisions):
 
     Rosenthal Nissan/Mazda        Rosenthal Chevrolet
     Rosenthal Infiniti            Landmark Honda
     Rosenthal Gaithersburg Nissan Rosenthal Acura
     Rosenthal Jaguar              Rosenthal
     Rosenthal Honda               Cadillac/Buick/Isuzu
     Rosenthal Mazda               Geneva Management
 
     All the Divisions except Geneva Management sell new and used vehicles
     and related parts and service. Geneva Management provides management
     services to all the Divisions, other related companies and outside
     companies.
 
  .  Maryland Imported Cars, Inc.
 
  All significant intercompany and interdivisional accounts and transactions
have been eliminated upon combination.
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  A. Cash and Cash Equivalents: Cash and cash equivalents are comprised of
highly liquid instruments purchased with original maturities of three months
or less.
 
  B. Concentration of Credit Risk: The Company maintains part of its cash in
bank deposit accounts at financial institutions, where the balances, at times,
may exceed federally insured limits. At December 31, 1996, the Company's cash
balance exceeded the insured limit by approximately $2,271,000.
 
  Included in receivables at December 31, 1996 are significant concentrations
of amounts due from customers located in the Baltimore and Washington, D.C.
metropolitan areas. The Company generally requires no collateral in extending
credit to its customers other than the vehicles which are sold.
 
  C. Accounts Receivable: The Company has established a mandatory write-off
policy for all receivables older than 90 days. At December 31, 1996, no
allowance for uncollectible accounts was deemed necessary.
 
  D. Inventories: Inventories are stated at cost. Cost is determined by the
last-in, first-out (LIFO) method for new vehicles and parts and accessories,
and the specific cost method for used vehicles.
 
  E. Property and Equipment and Related Depreciation and
Amortization: Equipment is recorded at cost and is depreciated using
accelerated methods over its estimated useful lives which range from 5 to 7
years. Buildings and leasehold improvements are amortized using the straight-
line method over its estimated useful lives which range from 31 1/2 to 39
years.
 
  F. Recognition of Finance Fees and Insurance Commissions: The Company
arranges financing for its customers' vehicle purchases and arranges insurance
in connection therewith. The Company receives a fee from the financial
institution for arranging the financing and receives a commission for the sale
of an insurance policy.
 
                                     F-21
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
The Company is charged back for a portion of this fee should the customer
terminate the finance or insurance contract before its scheduled term or
before specified dates under arrangements with such institutions. The
estimated allowance for these chargebacks (approximately $3,426,000 at
December 31, 1996) is reflected in Other Accrued Liabilities and is based upon
the Company's historical experience for prepayments or defaults on these
contracts. Finance reserves are fees due to the Company from financial
institutions for fees on contracts arranged to finance vehicle purchases.
 
  G. Income Taxes: The Company has elected by consent of its stockholders, to
be taxed under the provisions of Subchapter "S" of the Internal Revenue Code,
whereby the Company's income is treated for federal and state income taxes
substantially as though the Company were a partnership. No provision for
income taxes has been reflected in the financial statements, since taxable
attributes flow through to the individual stockholders.
 
  H. Major Suppliers: The Company purchases substantially all of its new
vehicles and parts and accessories from a limited number of suppliers.
 
  I. Advertising Expense: The Company expenses costs associated with
advertising as incurred. Total advertising expense for the year ended December
31, 1996, the majority of which was purchased through an affiliated company
(Note 8), was approximately $6,642,000.
 
  J. Use of Estimates: The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 
  K. Interest: The Company earned approximately $260,000 in interest
reimbursements during the year ended December 31, 1996, which has been netted
against interest expense. These interest reimbursements compensated the
Company for incurring interest on floor plan notes for vehicle purchases which
were not received on the Company's lot until after the obligations were
incurred. The Company incurred floor plan and other interest expense of
$3,485,000 during the year ended December 31, 1996.
 
  L. Interim Financial Statements: The accompanying unaudited financial
statements as of September 30, 1997 and for the nine month periods ended
September 30, 1997 and 1996 have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Although certain information and
footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been omitted, the Company believes that the
disclosures included herein are adequate to make the information presented not
misleading. Operating results for the nine month period ended September 30,
1997, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. These unaudited financial statements should
be read in conjunction with the accompanying audited financial statements and
related footnotes as of and for the year ended December 31, 1996. In the
opinion of the Company, the unaudited financial statements contain all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the results for the nine month periods ended September 30,
1997 and 1996.
 
                                     F-22
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  M. Basis of Accounting: The accompanying combined financial statements are
prepared in accordance with generally accepted accounting principles. In
addition to these financial statements, Geneva Enterprises, Inc. and Maryland
Imported Cars, Inc. issue separate financial statements on the basis of
accounting each company uses for income tax purposes, which is a comprehensive
basis of accounting other than generally accepted accounting principles. The
differences between generally accepted accounting principles and the income
tax basis of accounting relating to retained earnings and net income are as
follows:
 
<TABLE>
<CAPTION>
                                                         INCOME
                                                GAAP    TAX BASIS DIFFERENCES
                                               -------  --------- -----------
   <S>                                         <C>      <C>       <C>
   Retained Earnings/(Deficit), January 1,
    1996......................................
     Geneva Enterprises, Inc. ................ $ 4,395   $ 9,040    $(4,645)
     Maryland Imported Cars, Inc. ............  (1,029)     (916)      (113)
                                               -------   -------    -------
                                               $ 3,366   $ 8,124    $(4,758)
                                               =======   =======    =======
   Net Income/(Loss)--1996
     Geneva Enterprises, Inc. ................ $ 3,771   $ 3,342    $   429
     Maryland Imported Cars, Inc. ............    (777)     (751)       (26)
                                               -------   -------    -------
                                               $ 2,994   $ 2,591    $   403
                                               =======   =======    =======
   Retained Earnings/(Deficit), December 31,
    1996
     Geneva Enterprises, Inc. ................ $ 8,166   $11,841    $(3,675)
     Maryland Imported Cars, Inc. ............  (1,768)   (1,629)      (139)
                                               -------   -------    -------
                                               $ 6,398   $10,212    $(3,814)
                                               =======   =======    =======
</TABLE>
 
  N. Fair value of Financial Instruments: The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair
value of financial instruments approximates their recorded values due
primarily to the short-term nature of their related interest rate or their
maturities. In the opinion of management, the fair value of the notes payable
described in Note 4 and the notes receivable described in Note 7 is considered
unestimable due to the related party nature of such financial instruments.
 
NOTE 2--INVENTORIES
 
  The classification of inventories is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                        1996
                                                                    ------------
   <S>                                                              <C>
   New vehicles....................................................   $59,110
   Parts and accessories...........................................     5,684
                                                                      -------
                                                                       64,794
   Less: Allowance to reduce carrying value to LIFO basis..........   (12,122)
                                                                      -------
                                                                       52,672
   Used vehicles...................................................     9,701
                                                                      -------
                                                                      $62,373
                                                                      =======
</TABLE>
 
  If the first-in, first-out (FIFO) method had been used for new vehicles and
parts and accessories inventories, net income would have been approximately
$2,474,000 for the year ended December 31, 1996 and $2,097,000 and $2,371,000
for the nine month periods ended September 30, 1997 and 1996, respectively.
 
                                     F-23
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 3--WHOLESALE FINANCE LIABILITY
 
  The Company finances its acquisition of new and certain used vehicle
inventories through floor plan facilities with financial institutions. These
floor plan facilities are in the form of revolving credit arrangements
evidenced by floor plan notes, and are collateralized by new vehicle
inventories. The balance under the floor plan facility with respect to any
particular vehicle is due when the vehicle is sold. Floor plan notes payable
are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                        1996
                                                                    ------------
   <S>                                                              <C>
   First Virginia Bank, bearing interest at LIBOR plus 1.75%. The
    borrowing rate was approximately 7.34% at December 31, 1996...    $43,881
   NationsBank, bearing interest at the prime interest rate. The
    prime interest rate at December 31, 1996 was 8.25%............     13,642
   Jaguar Credit Corporation, bearing interest at variable
    interest rates. The weighted average interest rate at December
    31, 1996 was 6.25%............................................      4,672
   Citizens Bank & Trust Co. of Maryland, bearing interest at the
    prime interest rate...........................................      2,033
                                                                      -------
                                                                      $64,228
                                                                      =======
</TABLE>
 
  Management believes that the fair value of the Company's floor plan debt
approximates its recorded value based on the floating nature of the related
interest rates.
 
  Vehicles securing floor plan notes of approximately $6,639,000 were sold
prior to December 31, 1996. The notes were paid in January 1997.
 
NOTE 4--NOTES PAYABLE TO RELATED PARTIES
 
  Notes payable to related parties consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                     1996
                                                                 ------------
   <S>                                                           <C>
   Notes payable to uncombined affiliated company, due on
    demand, interest payable at a variable rate based on the
    prime rate as determined by First Virginia Bank
    (approximately 8.75% at December 31, 1996)..................    $  500
   Notes payable to stockholders, due on demand, interest
    payable annually at a variable rate based on the prime rate
    as determined by First Virginia Bank (approximately 8.75% at
    December 31, 1996). ........................................       437
   9% notes payable to stockholders, due on demand, interest
    payable annually............................................        64
   Note payable to stockholder, due on demand, with interest
    payable annually at a variable rate based on the prime rate
    as determined by First Virginia Bank (approximately 8.75% at
    December 31, 1996). ........................................       287
   8.50% subordinated notes payable to stockholders, due on
    demand, interest payable annually. .........................       336
                                                                    ------
                                                                    $1,624
                                                                    ======
</TABLE>
 
  Interest expense on the notes payable to related parties was approximately
$161,000 for the year ended December 31, 1996. Although certain of the above
notes are due on demand, they may not be paid in the next year.
 
  Other Operating Income includes $500,000 resulting from forgiveness of
indebtedness by an uncombined affiliated company.
 
                                     F-24
<PAGE>

                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 5--LEASES
 
  The Company leases most of the premises it occupies under operating leases
with related parties. The majority of the leases have initial 10-year terms
with options to renew the leases for additional 5 year periods. The basic
annual rental is subject to adjustment every two years based on the Consumer
Price Index for the Metropolitan Washington area.
 
  Future minimum rental commitments under noncancellable leases are as follows
(in thousands):
 
<TABLE>
<CAPTION>
   YEAR ENDING DECEMBER 31,
   ------------------------
   <S>                                                                   <C>
     1997............................................................... $ 7,109
     1998...............................................................   6,660
     1999...............................................................   5,894
     2000...............................................................   5,777
     2001...............................................................   5,700
     Thereafter.........................................................  25,879
                                                                         -------
                                                                         $57,019
                                                                         =======
</TABLE>
 
  Rent expense charged to operations amounted to approximately $7,396,000 for
the year ended December 31, 1996.
 
NOTE 6--SUPPLEMENTAL CASH FLOW INFORMATION
 
  Cash paid for interest was approximately $3,482,000 during the year ended
December 31, 1996.
 
NOTE 7--RELATED PARTY TRANSACTIONS
 
  Accounts Receivable and Accounts Payable--Related Parties: Included in
related parties' receivable and payable balances are amounts due from and
payable to uncombined companies under common ownership control.
 
  Notes Receivable: The Company has entered into various note receivable
agreements to fund amounts to uncombined affiliated companies, stockholders
and employees. The following notes are due from stockholders or uncombined
affiliated companies under common control (in thousands):
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                       1996
                                                                   ------------
   <S>                                                             <C>
   Stockholders, due on demand, non-interest-bearing..............    $1,402
   Stockholder, due on demand, non-interest-bearing...............       400
   Stockholder, due on demand, non-interest-bearing...............        75
   Stockholder, due on demand, interest payable annually at 5%....       133
   Stockholder, due on demand, interest payable annually at 5%....       719
   Stockholder, due on demand, interest payable at 10%............        20
   Stockholder, due on demand, interest payable at 10%............        15
   Stockholder, due October 21, 1998, non-interest bearing........       394
   Related Party, due on demand, non-interest-bearing.............       157
   Related Party, due on demand, interest payable annually at 9%..       168
                                                                     -------
                                                                       3,483
   Less: Current portion..........................................    (3,089)
                                                                     -------
     Long-Term Portion............................................   $   394
                                                                     =======
</TABLE>
 
                                     F-25
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Interest income on the above notes was approximately $61,000 for the year
ended December 31, 1996.
 
  During 1993, the Company issued 30,794 shares of common stock to existing
stockholders in exchange for notes totaling $1,598,000. The notes are due on
demand, but no later than December 31, 1997. Interest is due only if the
respective stockholder's employment ends. Upon separation of service, interest
would be computed on a cumulative basis at the short-term blended federal rate
for demand instruments as announced year to year by the Internal Revenue
Service (4.58% at December 31, 1996) for each year the notes were outstanding
and would be recorded in the year that employment ends. During the year ended
December 31, 1996, one of the stockholders terminated his employment. As a
result, approximately $43,000 was recognized as interest income during the
year ended December 31, 1996. As of December 31, 1996, the total outstanding
balance on these notes was approximately $820,000.
 
  Advertising Expenditures: The Company incurred approximately $6,503,000 for
the year ended December 31, 1996 in advertising expenses purchased through an
affiliated company.
 
  Inventory Purchases and Sales: The Company purchased and sold certain new
and used vehicles, at cost, to uncombined affiliated dealerships during the
year ended December 31, 1996.
 
  Management Fees: Management fees earned from uncombined affiliated companies
amounted to approximately $450,000 for the year ended December 31, 1996.
 
NOTE 8--CONTINGENCIES
 
  The Company is a party to various legal actions and claims arising during
the ordinary course of business. Although the total amount of liability with
respect to these legal actions and claims cannot be ascertained, management of
the Company believes that any resulting liability should not have a material
effect on the results of operations or the financial position of the Company.
 
  In January, 1996, the Company and certain affiliates entered into a long-
term employment agreement (the "Agreement") with its President and Chief
Operating Officer (the "COO") which is effective January 1, 1996 through
December 31, 2000. The terms of the Agreement call for the Company and certain
affiliates to grant the COO an additional 2% ownership interest in the Company
and certain affiliates for each year of the Agreement. Per the Agreement,
compensation expense is to be computed at 2% of each respective Company's
adjusted net book value (FIFO basis) at each year-end discounted by 50%. For
the year ended December 31, 1996, the Company recognized approximately
$261,000 as compensation expense in connection with the Agreement. In
addition, the Agreement gives the COO a stated minimum compensation each year
through December 31, 2000. Should the COO be terminated for any reason, the
unearned compensation for the remainder of the Agreement will become due and
is to be paid over 48 months at the prime interest rate. Furthermore, should
the Company and certain affiliates be sold prior to December 31, 2000, or if
the COO is terminated for any reason, the COO is to receive a minimum of
$5,000,000 for his stock holdings acquired under this agreement.
 
NOTE 9--RETIREMENT PLAN
 
  In 1995, the Company adopted a discretionary 401(k) retirement and profit-
sharing plan. All full-time employees having one year of continuous service
and who are at least 21 years of age at the specified entry dates are eligible
to participate. The Company makes a matching contribution of 20% of the first
5% for compensation each plan participant defers. The Company's contribution
for the year ended December 31, 1996 was approximately $149,000.
 
                                     F-26
<PAGE>
 
                GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 10--STOCKHOLDERS' EQUITY
 
  Stockholders' equity is comprised of the following as of December 31, 1996
(in thousands):
 
<TABLE>
<CAPTION>
                                                  STOCK-
                                     ADDITIONAL  HOLDERS'
                              COMMON  PAID-IN      NOTES    RETAINED
                              STOCK   CAPITAL   RECEIVABLES EARNINGS   TOTAL
                              ------ ---------- ----------- --------  -------
<S>                           <C>    <C>        <C>         <C>       <C>
Geneva Enterprises, Inc. ....  $ 5     $3,650      $(820)    $8,166   $11,001
Maryland Imported Cars,
 Inc. .......................   18        319        --      (1,768)   (1,431)
                               ---     ------      -----    -------   -------
                               $23     $3,969      $(820)    $6,398   $ 9,570
                               ===     ======      =====    =======   =======
</TABLE>
 
  Common stock of the Companies with the following shares authorized, issued
and outstanding as of December 31, 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                                       SHARES
                                                                       ISSUED
                                                     PAR    SHARES       AND
                                                    VALUE AUTHORIZED OUTSTANDING
                                                    ----- ---------- -----------
   <S>                                              <C>   <C>        <C>
   Geneva Enterprises, Inc. ....................... $ .01 1,000,000    531,286
   Maryland Imported Cars, Inc. ................... $1.00    25,000     18,000
                                                          ---------    -------
                                                          1,025,000    549,286
                                                          =========    =======
</TABLE>
 
NOTE 11--SUBSEQUENT EVENT
 
  As part of General Motors' Project 2000 marketing strategy, Geneva
Enterprises, Inc. transferred and sold the Cadillac and Buick franchises from
its Rosenthal Cadillac/Buick/Isuzu division to General Motors in October 1997.
 
                                     F-27
<PAGE>
 
                     CROSS-CONTINENT AUTO RETAILERS, INC.
 
                   SUMMARY HISTORICAL FINANCIAL INFORMATION
 
                AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
 
                     IN THOUSANDS, EXCEPT PER SHARE DATA)
 
                                 BALANCE SHEET
 
<TABLE>
<CAPTION>
                                               AS OF
                             ------------------------------------------
                             DECEMBER 30, 1996(A) SEPTEMBER 30, 1997(B)
                             -------------------- ---------------------
   <S>                       <C>                  <C>                   
   Inventory (dealer)......        $ 48,168             $ 56,718
   Real estate, net........          13,391               27,390
   Other assets............          80,887               96,080
                                   --------             --------
   Total assets............        $142,446             $180,188
                                   ========             ========
   Mortgage and other long-
    term debt..............         $58,195             $ 92,804
   Other liabilities.......          25,733               24,268
   Shareholders' equity....          58,518               63,116
                                   --------             --------
   Total liabilities and
    shareholders' equity...        $142,446             $180,188
                                   ========             ========
</TABLE>
 
                            STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                FOR THE YEAR          NINE MONTHS           NINE MONTHS
                                   ENDED                 ENDED                 ENDED
                            DECEMBER 31, 1996(A) SEPTEMBER 30, 1997(B) SEPTEMBER 30, 1996(B)
                            -------------------- --------------------- ---------------------
   <S>                      <C>                  <C>                   <C>
   Sales revenue...........      $ 321,583             $ 359,193             $217,824
   Cost of sales...........       (271,650)             (296,756)            (184,449)
                                 ---------             ---------             --------
   Net operating income....         49,933                62,437               33,375
   Selling, general and
    administrative.........        (38,796)              (47,590)             (25,930)
                                 ---------             ---------
   Income before interest
    and taxes..............         11,137                14,847                7,445
   Interest expense........         (3,193)               (4,066)              (2,594)
                                 ---------             ---------             --------
   Income before taxes.....          7,944                10,781                4,851
   Income tax provision....         (3,362)               (4,157)              (2,186)
                                 ---------             ---------             --------
   Net income..............      $   4,582             $   6,624             $  2,665
                                 =========             =========             ========
</TABLE>
(A) Financial information as of and for the year ended December 31, 1996 has
    been summarized from the audited financial statements of Cross-Continent
    as filed with the Securities and Exchange Commission on Form 10-K.
 
(B) Financial information as of September 30, 1997 and for the nine months
    ended September 30, 1997 and 1996 has been summarized from the unaudited
    financial statements of Cross-Continent filed with the Securities and
    Exchange Commission on Form 10-Q.
 
 
                                     F-28
<PAGE>
 
                                   GLOSSARY
 
  Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
 
  "Actual Cash Available for Distribution" means net earnings plus
depreciation and amortization and minus capital expenditures and principal
payments on indebtedness.
 
  "ADA" means the Americans with Disabilities Act of 1990, as amended, and the
regulations promulgated under the authority conferred thereby.
 
  "Affiliates" means an affiliate as defined in Rule 405 of the Securities
Act.
 
  "Annual Base Rent" means the annual base rent each Lessee or its assigns
will pay to Lessor each Lease year following the first Lease year annual base
rent which will be payable in monthly installments.
 
  "Audit Committee" means the audit committee of the Board of Trustees of the
Company.
 
  "Beneficiary" means the qualified charitable organization selected by the
Company which would receive the automatic transfer of any Shares-in-Trust.
 
  "Board of Trustees" means the board of trustees of the Company.
 
  "Book-Tax Difference" means, with respect to appreciated or depreciated
property that is contributed to a partnership, the amount of unrealized gain
or unrealized loss associated with the property at the time of contribution,
which 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.
 
  "Business Combination" means a 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
Shares.
 
  "Bylaws" means the bylaws of the Company, as amended.
 
  "CMSA" means consolidated metropolitan statistical area.
 
  "CARS" is the proposed trading symbol of the Company on The Nasdaq Stock
Market National Market.
 
  "Code" means the Internal Revenue Code of 1986, as amended.
 
  "Commission" means the United States Securities and Exchange Commission.
 
  "Common Shares" means the common shares of beneficial interest, par value
$.01 per share, of the Company.
 
  "Company" means Capital Automotive REIT, a Maryland REIT, and its
subsidiaries, including the Operating Partnership.
 
  "Contribution Agreements" means the respective contribution or purchase
agreements between the Company and the Sellers relating to the acquisition of
the Properties or interests therein owned by the Sellers.
 
 
                                      G-1
<PAGE>
 
  "Control Shares" means voting shares of beneficial interest of a Maryland
REIT which, if aggregated with all other such shares of beneficial interest
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 trustees 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 the acquiror is then entitled to vote as a result of having
previously obtained shareholder approval.
 
  "Control Share Acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
 
  "CPI" means the Consumer Price Index, the economic index issued by the U.S.
Department of Labor indicating price increases or decreases for the U.S.
economy.
 
  "Dealer" means the signatory to the Franchise Agreement, or the operator of
a Dealership or Related Business.
 
  "Dealer Warrants" means warrants that each of Messrs. Pohanka and Rosenthal
will receive to each purchase a number of Units equal to 2% of the Common
Shares to be outstanding on closing of the Offering (including exercise of the
Underwriters over-allotment option in full) on a fully diluted basis, at the
initial public offering price of the Common Shares, exercisable beginning on
the closing date of the Offering and for a period of five years thereafter.
 
  "Dealerships" means franchised motor vehicle dealerships.
 
  "Declaration of Trust" means the Amended and Restated Declaration of Trust
of the Company.
 
  "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
 
  "Events of Default" means events of default under any Leases as generally
outlined in the Prospectus.
 
  "Exchange Act" means the Securities Exchange Act of 1934, as amended.
 
  "Executive Committee" means the executive committee of the Board of Trustees
of the Company.
 
  "Executive Compensation Committee" means the executive compensation
committee of the Board of Trustees of the Company.
 
  "Extended Term" means the one or two additional ten year terms for which the
respective Initial Leases may be extended at the option of the respective
Initial Lessees.
   
  "FBR Loan" means the short term secured revolving loan in the principal
amount of $2,525,000 extended by Friedman, Billings, Ramsey Group, Inc. to the
Company.     
 
  "Five or fewer requirement" means the requirement under the Code that not
more than 50% in value of the Company's outstanding shares of beneficial
interest may be owned directly or indirectly by five or fewer individuals (as
defined in the Code) during the last half of the taxable year (other than the
first year).
   
  "Fixed Term" means the initial term of eight to 11 years that the Initial
Leases will generally have.     
 
  "Formation Transactions" means those transactions relating to the
organization of the Company and the Operating Partnership, including the (i)
transfer of certain Initial Properties to the Company in exchange for Units,
(ii) transfer of certain Initial Properties to the Company for cash, (iii) the
Offering and the FBR Offering, (iv) the contribution of the net proceeds of
the Offering and the FBR Offering by the Company to the Operating Partnership
in exchange for Units, and (v) the offering and qualification of the Company
as a REIT for federal income tax purposes for the taxable year beginning
December 31, 1998, all as described under "Structure and Formation of the
Company--Formation Transactions."
 
                                      G-2
<PAGE>
 
  "Franchise Agreements" means certain Dealer Sales and Service Agreements and
related agreements, and the standard terms and conditions incorporated by
reference in such agreements, entered into between Manufacturers and
Dealerships.
 
  "GAAP" means generally accepted accounting principles in the United States.
 
  "Independent Trustee" means trustees who are not affiliated with the
Company, the Sellers, the Lessees or the Representative.
 
  "Initial Annual Base Rent" means the first year's rent under any Lease.
 
  "Initial Grants" means the Options that the Company will grant to certain
key officers and employees of the Company upon completion of the Offering.
 
  "Initial Leases" means the leases pursuant to which the Company will lease
back the Initial Properties to the Initial Lessees on a triple net basis.
 
  "Initial Lessees" means the Lessees of the Initial Properties.
 
  "Initial Sellers" means the respective Sellers of the Initial Properties
from whom the Company will acquire the Initial Properties.
 
  "Initial Properties" means the 36 Properties that the Company currently has
entered into contracts to acquire.
 
  "Interested Shareholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland real estate investment trust's shares of
beneficial interest or an Affiliate of the REIT which, 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 shares of
beneficial interest of the trust.
 
  "Investment Company Act" means the Investment Company Act of 1940, as
amended.
 
  "IRA" means an individual retirement account as defined by the Code and the
applicable Treasury Regulations.
 
  "IRS" means the United States Internal Revenue Service.
 
  "Lease" means any Lease pursuant to which the Company will lease Properties
back to Lessees on a triple net basis.
 
  "Lessee" means any owner or operator of a Dealership to whom the Company
will lease back a Property.
 
  "Limited Partner" initially means, any of the Company and the limited
partners, each of which holds Units and is a limited partner of the Operating
Partnership.
 
  "Manufacturers" means motor vehicle or parts manufacturers (or authorized
distributors thereof).
 
  "Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange
("NYSE") or, if the Common Shares or Preferred Shares are not listed or
admitted to trading on the NYSE, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the Common Shares or Preferred
Shares are listed or admitted to trading or, if the
 
                                      G-3
<PAGE>
 
Common Shares or Preferred Shares are not listed or admitted to trading on any
national securities exchange on the National Market System of the Nasdaq Stock
Market or, if the shares are not listed for trading on the National Market
System, the last quoted price, or if not so quoted, the average of the closing
bid and asked prices in the over-the-counter market, as reported by Nasdaq or,
if such system is no longer in use, the principal automated quotations system
that may then be in use or, if the Common Shares or Preferred Shares are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Common Shares or Preferred Shares selected by the Board of Trustees. "Trading
Day" shall mean a day on which the principal national securities exchange on
which the Common Shares or Preferred Shares are listed or admitted to trading
is open for the transaction of business or, if the Common Shares or Preferred
Shares are not listed or admitted to trading on any national securities
exchange, 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.
 
  "Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended.
 
  "MGCL" means the Maryland General Corporation Law, as amended.
 
  "Mortgage Debt" means the $41.3 million of indebtedness secured by certain
Initial Properties that will be assumed by the Company pursuant to the
relevant Contribution Agreements.
 
  "NADA" means the National Automobile Dealers Association.
 
  "1997 Tax Act" means the Taxpayer Relief Act of 1997, as amended.
 
  "Non-U.S. Shareholder" means a holder of Common Shares who is a nonresident
alien individual, foreign corporation, foreign partnership, foreign trust or
estate or other foreign shareholder.
 
  "Nasdaq" means The Nasdaq Stock Market, Inc.
 
  "Offering" means the offering of Common Shares of the Company pursuant to
and as described in this Prospectus.
 
  "Operating Partnership" means Capital Automotive L. P., a Delaware limited
partnership having its principal offices at 1925 North Lynn Street, Suite 306,
Arlington, Virginia 22209.
 
  "Options" means incentive options to acquire Common Shares or non-qualified
options to acquire Units, which the Company (including the Operating
Partnership) is authorized to grant pursuant to the 1998 Equity Incentive
Plan.
 
  "Ownership Limit" means the prohibition in the Declaration of Trust limiting
any person to direct or indirect ownership of no more than (i) 9.9% of the
number of outstanding Common Shares, or (ii) 9.9% of the number of ownership
Preferred Shares or any series of Preferred Shares.
 
  "Partnership Agreement" means the Amended and Restated Limited Partnership
Agreement of the Operating Partnership.
 
  "Plan" means the 1998 equity incentive plan established by the Company and
the Operating Partnership, as further described in this Prospectus under the
caption entitled "Management--1998 Equity Incentive Plan."
   
  "Pohanka Mortgage" means the mortgage or mortgages on the Pohanka Properties
that secure the NationsBank, N.A. line of credit in the amount of $10 million.
       
  "Pohanka Properties" means all of the Initial Properties acquired by the
Company from Affiliates of John J. Pohanka.     
 
  "Prohibited Transferee" means any purported transferee of Common Shares who
would otherwise violate the Ownership Limit or such other limit as provided in
the Declaration of Trust.
 
  "Prohibited Owner" means any purported owner of Common Shares who would
otherwise violate the Ownership Limit or such other limit as provided in the
Declaration of Trust.
 
 
                                      G-4
<PAGE>
 
  "Properties" means any real property and improvements acquired, or to be
acquired, from time to time, by the Company.
 
  "Prospectus" means the prospectus used in connection with the Offering.
 
  "Recognition Period" means the ten-year period beginning on the date a
"built-in gain asset" is acquired by the Company.
 
  "Registration Rights" means those certain registration rights granted to FBR
Asset Investment Corporation in connection with the Formation Transactions.
 
  "Registration Statement" means the registration statement on Form S-11 filed
with the Commission in connection with the Offering.
 
  "REIT" means a self-managed real estate investment trust as defined by the
Code and the applicable Treasury Regulations.
 
  "REIT Requirements" means the requirements for qualifying as a REIT.
 
  "Related Businesses" means any motor vehicle related businesses.
 
  "Rent Measurement Date" means the date of execution of a Initial Lease and a
date ending at each 24- month interval thereafter.
 
  "Rent Measurement Period" means the 24-month prior period ending on each
Rent Measurement Date.
 
  "Rent Coverage Ratio" means a ratio of at least 1.5-to-1 as of the date of
the Lease and at each Rent as of the date of the Initial Lease and at 24-month
intervals thereafter, computed on an aggregate basis for all affiliated
Initial Lessees and Guarantors, if any, as the aggregate of net income before
taxes plus mortgage interest, rent expense, depreciation, compensation of
principals of the Initial Lessee, management fees plus the annual LIFO
adjustment and other non-cash expenses, less recurring capital expenditures
and gain (loss) on sale of real estate, dividends and/or profits taken out of
the Initial Lessees and Guarantors, if any, divided by the aggregate of the
Initial Lessee's (and Guarantor's, if any), obligations under the Initial
Leases.
 
  "Representative" means Friedman, Billings, Ramsey & Co., Inc.
 
  "Rule 144" means Rule 144 promulgated under the Securities Act.
 
  "Securities Act" means the Securities Act of 1933, as amended.
 
  "Seller" means any owner from whom the Company acquires a Property.
 
  "Share Trust" means a trust which holds Common or Preferred Shares of
beneficial interest of the Company which have been designated as Shares-in-
Trust.
 
  "Shares-in-Trust" means Common or Preferred Shares of beneficial interest of
the Company which are automatically converted on a one for one basis and
transferred to the Share Trust upon a purported transfer of such Common Shares
or Preferred Shares which is violation of the applicable restrictions on
transfer.
 
  "Tax Counsel" means the law firm of Wilmer, Cutler & Pickering, which has
acted as a special tax counsel to the Company in connection with the offering
and the preparation of the Prospectus.
 
                                      G-5
<PAGE>
 
  "Total market capitalization" means the sum of the aggregate market value of
the outstanding Common Shares, assuming the full exchange of all Units for
Common Shares, plus the Company's total outstanding debt.
 
  "Treasury Regulations" means the rules and regulations promulgated by the
United States Department of the Treasury under the Code, as such rules and
regulations are amended from time to time.
 
  "Triple-Net Basis" means the leasing of a Property to a Lessee pursuant to a
Lease under which a Lessee is responsible for the base rent in addition to the
costs and expenses in connection with and related to property taxes, insurance
and repairs and maintenance applicable to the leased space.
 
  "U.S. Shareholder" means a holder of Common Shares 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, or (iii) is an estate or trust which is subject to
taxation in the United States regardless of the source of its income or which
is under the primary supervision or authority of a United States court or a
United States fiduciary.
 
  "United States" or "U.S." means the United States of America (including the
District of Columbia), its territories, possessions and other areas subject to
its jurisdiction.
 
  "Units" means units of partnership interests representing the equity in the
Operating Partnership.
 
  "Underwriters" means Friedman, Billings, Ramsey & Co., Inc. and members of
the underwriting syndicate as set forth in the section captioned
"Underwriting" in this Prospectus.
 
  "Underwriting Warrants" means warrants that Friedman, Billings, Ramsey &
Co., Inc., the Representative of the Underwriter of, will receive exercisable
for a number of Common Shares equal to 4% of the number of Common Shares to be
outstanding on closing of the Offering (excluding exercise of, the
Underwriters over-allotment option) on a fully diluted basis, at an exercise
price equal to the initial public offering price of the Common Shares,
exercisable beginning on the closing date of the Offering and for a period of
five years thereafter.
 
                                      G-6
<PAGE>
 
================================================================================
 NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SE-
CURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
 
                                ---------------
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   1
The Company..............................................................   1
Risk Factors.............................................................   3
The Initial Properties, Leases and Dealerships...........................   6
Strategy.................................................................  10
Summary Selected Financial Information...................................  11
Benefits to Related Parties..............................................  12
Structure of the Company.................................................  14
Formation Transactions...................................................  15
Distributions............................................................  16
Tax Status of the Company................................................  16
The Offering.............................................................  17
Risk Factors.............................................................  18
Use of Proceeds..........................................................  34
Capitalization...........................................................  36
Dilution.................................................................  37
Conflicts of Interest Policies...........................................  38
Selected Financial Information...........................................  40
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  41
Business of the Company and Properties...................................  44
Management...............................................................  59
Structure and Formation of the Company...................................  65
Related Transactions.....................................................  69
Partnership Agreement....................................................  70
Principal Shareholders of the Company....................................  73
Description of Shares of Beneficial Interest.............................  74
Common Shares Eligible for Future Sale...................................  81
Federal Income Tax Consequences..........................................  83
Underwriting.............................................................  99
Legal Matters............................................................ 101
Experts.................................................................. 101
Additional Information................................................... 102
Index to Financial Statements............................................ F-1
Glossary................................................................. G-1
</TABLE>
 
                                ---------------
 
 UNTIL       , 1998 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. 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.
 
================================================================================
================================================================================
 
                            20,000,000 COMMON SHARES
 
 
                         [LOGO OF CARS APPEARS HERE]
 
                            CAPITAL AUTOMOTIVE REIT
 
                      COMMON SHARES OF BENEFICIAL INTEREST
 
                                ---------------
                                   PROSPECTUS
                                ---------------
 
                     FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
 
                                        , 1998
 
================================================================================
<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
<TABLE>
   <S>                                                               <C>
   SEC registration fee............................................. $  134,040
   NASD fee.........................................................     30,500
   The Nasdaq Stock Market fee......................................     50,000
   Blue Sky fees and expenses.......................................      5,000
   Printing and engraving expenses..................................    300,000
   Legal fees and expenses..........................................    600,000
   Accounting fees and expenses.....................................    200,000
   Representative's Reimbursement of Expenses.......................    320,000
   Miscellaneous....................................................     10,460
                                                                     ----------
     Total.......................................................... $1,650,000
                                                                     ==========
</TABLE>
 
ITEM 31. SALES TO SPECIAL PARTIES
 
  See response to Item 32.
 
ITEM 32. 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.
 
(1) Simultaneously with the completion of the Offering, the Company will cause
the Operating Partnership to issue to the Initial Sellers who are Affiliates
of Pohanka, Rosenthal, Sheehy and Cherner, Units at the initial public
offering price in exchange for their respective interests in the Initial
Properties.
   
(2) Simultaneously with the completion of the Offering, the Company will grant
options to purchase an aggregate number of Common Shares and Units equal to
3%, 1.625%, .75% and 1.625% of the Common Shares to be outstanding on closing
of the Offering (including exercise of the Underwriters' over-allotment
option) on a fully diluted basis to Messrs. Eckert, Stahr, Keithley and Kay,
respectively, exercisable at the initial public offering price under the
Company's Incentive Plan.     
 
(3)Simultaneously with the completion of the Offering, FBR Investment Asset
Corporation will purchase 1,792,115 Common Shares at the initial public
offering price (net of underwriting discounts and commissions).
 
(4) Simultaneously with the completion of the Offering, the Company will issue
to each of Messrs. Pohanka and Rosenthal the Dealer Warrants which will be
exercisable for an aggregate number of Units equal to 2% of the Common Shares
to be outstanding on closing of the Offering (including exercise of the
Underwriters' over-allotment option) on a fully diluted basis, exercisable at
the initial public offering price.
 
(5) Simultaneously with the completion of the Offering, the Company will issue
to Friedman, Billings, Ramsey & Co., Inc. the Underwriting Warrants, which
will be exercisable for a number of Common Shares equal to 4% of the Common
Shares to be outstanding on closing of the Offering (excluding exercise of the
Underwriters' over-allotment option) on a fully diluted basis, exercisable at
the initial public offering price.
 
ITEM 33. INDEMNIFICATION OF TRUSTEES AND OFFICERS
 
  The Declaration of Trust and By-laws authorize the Company to indemnify its
present and former trustees and officers and to pay or reimburse expenses for
such individuals in advance of the final disposition of a
 
                                     II-1
<PAGE>

proceeding to the maximum extent permitted from time to time under Maryland
law. The MGCL, as applicable to Maryland REITs, currently provides that
indemnification of a person who is a party, or threatened to be made a party,
to legal proceedings by reason of the fact that such a person is or was a
trustee, officer, employee or agent of a corporation, or is or was serving as
a trustee, officer, employee or agent of a corporation or other firm at the
request of a corporation, against judgments, fines, penalties, amounts paid in
settlement and reasonable expenses, is mandatory in certain circumstances and
permissive in others, subject to authorization by the board of trustees, a
committee of the board of trustees consisting of two or more trustees not
parties to the proceeding (if there does not exist a majority vote quorum of
the board of trustees consisting of trustees not parties to the proceeding),
special legal counsel appointed by the board of trustees or such committee of
the board of trustees, or by the shareholders, so long as it is not
established that the act or omission of such person was material to the matter
giving rise to the proceedings and was committed in bad faith, was the result
of active and deliberate dishonesty, involved such person receiving an
improper personal benefit in money, property or services, or, in the case of
criminal proceedings, such person had reason to believe that his or her act or
omission was unlawful.
 
  The Company's officers and trustees are also indemnified pursuant to the
Partnership Agreement and their respective employment agreements, which
agreements are filed as exhibits hereto.
 
  The Company intends to purchase an insurance policy which purports to insure
the officers and trustees of the Company against certain liabilities incurred
by them in the discharge of their functions as such officers and trustees,
except for liabilities resulting from their own malfeasance.
 
ITEM 34. TREATMENT OF PROCEEDS FROM COMMON SHARES BEING REGISTERED
 
  Not Applicable.
 
ITEM 35. FINANCIAL STATEMENT AND EXHIBITS.
 
  (a) FINANCIAL STATEMENTS
 
  All other schedules are omitted because the required information is not
applicable or the information required has been disclosed in the financial
statements and related notes included in the Prospectus.
 
  (b) EXHIBITS
 
<TABLE>   
<CAPTION>
     EXHIBIT
     NUMBER  DESCRIPTION
     ------- -----------
     <C>     <S>
      1.1*** Underwriting Agreement
      3.1*** Amended and Restated Declaration of Trust of Capital Automotive
             REIT
      3.2*** Amended and Restated Bylaws of Capital Automotive REIT
      4.1*** Specimen Common Share certificate
      5.1*** Opinion of Wilmer, Cutler & Pickering regarding the validity of
             the Common Shares being registered
      8.1*** Opinion of Wilmer, Cutler & Pickering regarding tax matters
     10.1*** Form of Agreement of Limited Partnership of Capital Automotive
             L.P.
     10.2**  Form of Indemnification Agreement
     10.3*** Form of 1998 Equity Incentive Plan
     10.4**  Employment Agreement by and between the Company and Thomas D.
             Eckert
     10.5**  Employment Agreement by and between the Company and Scott M. Stahr
     10.6**  Employment Agreement by and between the Company and Donald L.
             Keithley
     10.7**  Employment Agreement by and between the Company and David S. Kay
</TABLE>    

 
                                     II-2
<PAGE>

<TABLE>   
<CAPTION>
     EXHIBIT
      NUMBER  DESCRIPTION
     -------  -----------
     <C>      <S>
     10.8***  Form of Option Agreement
     10.9***  Form of NationsBank, N.A. Credit Agreement
     10.10**  FBR Asset Investment Purchase Agreement
     10.11**  FBR Registration Rights Agreement
     10.12**  Pohanka Contribution Agreement dated as of November 21, 1997, as
              amended
     10.13**  Rosenthal Contribution Agreement dated as of November 21, 1997,
              as amended
     10.14**  Sheehy Contribution Agreement dated as of November 24, 1997, as
              amended
     10.15**  Cherner Contribution Agreement dated as of November 24, 1997, as
              amended
     10.16*** Cross-Continent Auto Retailers, Inc. Purchase Agreement dated as
              of December 31, 1997, as amended
     10.17**  Form of Pohanka Lease Agreement
     10.18**  Form of Rosenthal Lease Agreement
     10.19**  Form of Sheehy Lease Agreement
     10.20**  Form of Cherner Lease Agreement
     10.21*** Form of Cross-Continent Lease Agreement
     10.22*** Form of Underwriting Warrant
     10.23*** Form of Dealers' Warrant
     10.24**  Form of Guaranty Agreement with Affiliate of John J. Pohanka
     10.25**  Form of Guaranty Agreement with Affiliate of Robert M. Rosenthal
     10.26*** Amendment No. 1 to Friedman, Billings, Ramsey Group, Inc. Loan
              Agreement
     10.27*** Amendment No. 1 to Friedman, Billings, Ramsey Group, Inc.
              Security Agreement
     10.28*** Form of Guaranty Agreement with Cross-Continent Auto Retailers,
              Inc.
     10.29*** Meyers Family Limited Partnership L.P. (Good News) Purchase
              Agreement dated as of January 10, 1998
     10.30*** Form of Good News Lease Agreement
     10.31*** Form of Guaranty Agreement with Good News Salisbury, Inc. and
              Warren A. Price
     10.32*** Kline Purchase Agreement dated as of January 12, 1998
     10.33*** Form of Kline Lease Agreement
     10.34*** Form of Guaranty Agreement with Kline Imports Chesapeake, Inc.
     10.35*** Amended and Restated Employment Agreement by and between Capital
              Automotive L.P. and Thomas D. Eckert
     10.36*** Amended and Restated Employment Agreement by and between Capital
              Automotive L.P. and Scott M. Stahr
     10.37*** Amended and Restated Employment Agreement by and between Capital
              Automotive L.P. and Donald L. Keithley
     10.38*** Amended and Restated Employment Agreement by and between Capital
              Automotive L.P. and David S. Kay
     10.39*** Meyers Family Limited Partnership (Good News) Purchase Agreement
              dated as of January 10, 1998
</TABLE>    
 
 
                                      II-3
<PAGE>
 
<TABLE>   
<CAPTION>
     EXHIBIT
      NUMBER  DESCRIPTION
     -------  -----------
     <C>      <S>
     21.1**   Subsidiaries of the Company
     23.1***  Consent of Wilmer, Cutler & Pickering (included in Exhibits 5.1
              and 8.1)
     23.3**   Consent of Arthur Andersen LLP dated November 24, 1997
     23.4**   Consent of Walpert, Smullian & Blumenthal, P.A. dated November
              24, 1997
     23.5***  Consent to be named Trustee of John J. Pohanka
     23.6***  Consent to be named Trustee of Robert M. Rosenthal
     23.7***  Consent to be named Trustee of John D. Reilly
     23.8***  Consent to be named Trustee of William E. Hoglund
     23.9**   Consent of Arthur Andersen LLP dated January 13, 1998
     23.10**  Consent of Walpert, Smullian & Blumenthal, P.A. dated January 13,
              1998
     23.11**  Consent of Arthur Andersen LLP dated January 16, 1998
     23.12**  Consent of Walpert, Smullian & Blumenthal, P.A. dated January 16,
              1998
     23.13*** Consent to be named Trustee of William R. Swanson
     23.14*** Consent of Arthur Andersen LLP dated February 3, 1998
     23.15*** Consent of Walpert, Smullian & Blumenthal, P.A. dated February 3,
              1998
     24.1     Power of Attorney (included on signature page in Part II of the
              initial filing)
</TABLE>    
- --------
 **Previously filed
***Filed herewith
 
                                      II-4
<PAGE>

ITEM 36. UNDERTAKINGS.
 
  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.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the provisions described under Item 34 above, 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 of 1933 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 trustee, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, 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 of 1933 and will be
governed by the final adjudication of such issue.
 
  The undersigned registrant hereby undertakes that:
 
    (1) For purposes of determining any liability under the Securities Act of
  1933, 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 purpose of determining any liability under the Securities Act
  of 1933, 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-5
<PAGE>
 
                                 EXHIBIT INDEX
<TABLE>   
<CAPTION>
     EXHIBIT
      NUMBER  DESCRIPTION
     -------  -----------
     <C>      <S>
      1.1***  Underwriting Agreement
      3.1***  Amended and Restated Declaration of Trust of Capital Automotive
              REIT
      3.2***  Amended and Restated Bylaws of Capital Automotive REIT
      4.1***  Specimen Common Share certificate
      5.1***  Opinion of Wilmer, Cutler & Pickering regarding the validity of
              the Common Shares being registered
      8.1***  Opinion of Wilmer, Cutler & Pickering regarding tax matters
     10.1***  Form of Agreement of Limited Partnership of Capital Automotive
              L.P.
     10.2**   Form of Indemnification Agreement
     10.3***  Form of 1998 Equity Incentive Plan
     10.4**   Employment Agreement by and between the Company and Thomas D.
              Eckert
     10.5**   Employment Agreement by and between the Company and Scott M.
              Stahr
     10.6**   Employment Agreement by and between the Company and Donald L.
              Keithley
     10.7**   Employment Agreement by and between the Company and David S. Kay
     10.8***  Form of Option Agreement
     10.9***  Form of NationsBank, N.A. Credit Agreement
     10.10**  FBR Asset Investment Purchase Agreement
     10.11**  FBR Registration Rights Agreement
     10.12**  Pohanka Contribution Agreement dated as of November 21, 1997, as
              amended
     10.13**  Rosenthal Contribution Agreement dated as of November 21, 1997,
              as amended
     10.14**  Sheehy Contribution Agreement dated as of November 24, 1997, as
              amended
     10.15**  Cherner Contribution Agreement dated as of November 24, 1997, as
              amended
     10.16*** Cross-Continent Auto Retailers, Inc. Purchase Agreement dated as
              of December 31, 1997, as amended
     10.17**  Form of Pohanka Lease Agreement
     10.18**  Form of Rosenthal Lease Agreement
     10.19**  Form of Sheehy Lease Agreement
     10.20**  Form of Cherner Lease Agreement
     10.21*** Form of Cross-Continent Lease Agreement
     10.22*** Form of Underwriting Warrant
     10.23*** Form of Dealers' Warrant
     10.24**  Form of Guaranty Agreement with Affiliate of John J. Pohanka
     10.25**  Form of Guaranty Agreement with Affiliate of Robert M. Rosenthal
     10.26*** Amendment No. 1 to Friedman, Billings, Ramsey Group, Inc. Loan
              Agreement
     10.27*** Amendment No. 1 to Friedman, Billings, Ramsey Group, Inc.
              Security Agreement
     10.28*** Form of Guaranty Agreement with Cross-Continent Auto Retailers,
              Inc.
     10.29*** Meyers Family Limited Partnership L.P. (Good News) Purchase
              Agreement dated as of January 10, 1998
     10.30*** Form of Good News Lease Agreement
     10.31*** Form of Guaranty Agreement with Good News Salisbury, Inc. and
              Warren A. Price
     10.32*** Kline Purchase Agreement dated as of January 12, 1998
     10.33*** Form of Kline Lease Agreement
     10.34*** Form of Guaranty Agreement with Kline Imports Chesapeake, Inc.
     10.35*** Amended and Restated Employment Agreement by and between Capital
              Automotive L.P. and Thomas D. Eckert
     10.36*** Amended and Restated Employment Agreement by and between Capital
              Automotive L.P. and Scott M. Stahr
     10.37*** Amended and Restated Employment Agreement by and between Capital
              Automotive L.P. and Donald L. Keithley
     10.38*** Amended and Restated Employment Agreement by and between Capital
              Automotive L.P. and David S. Kay
</TABLE>    
- --------
   
 ** Previously filed     
   
*** Filed herewith     
<PAGE>
 
<TABLE>   
<CAPTION>
     EXHIBIT
      NUMBER  DESCRIPTION
     -------  -----------
     <C>      <S>
     10.39*** Meyers Family Limited Partnership (Good News) Purchase Agreement
              dated as of January 10, 1998
     21.1**   Subsidiaries of the Company
     23.1***  Consent of Wilmer, Cutler & Pickering (included in Exhibits 5.1
              and 8.1)
     23.3**   Consent of Arthur Andersen LLP dated November 24, 1997
     23.4**   Consent of Walpert, Smullian & Blumenthal, P.A. dated November
              24, 1997
     23.5***  Consent to be named Trustee of John J. Pohanka
     23.6***  Consent to be named Trustee of Robert M. Rosenthal
     23.7***  Consent to be named Trustee of John D. Reilly
     23.8***  Consent to be named Trustee of William E. Hoglund
     23.9**   Consent of Arthur Andersen LLP dated January 13, 1998
     23.10**  Consent of Walpert, Smullian & Blumenthal, P.A. dated January 13,
              1998
     23.11**  Consent of Arthur Andersen LLP dated January 16, 1998
     23.12**  Consent of Walpert, Smullian & Blumenthal, P.A. dated January 16,
              1998
     23.13*** Consent to be named Trustee of William R. Swanson
     23.14*** Consent of Arthur Andersen LLP dated February 3, 1998
     23.15*** Consent of Walpert, Smullian & Blumenthal, P.A. dated February 3,
              1998
     24.1     Power of Attorney (included on signature page in Part II of the
              initial filing)
</TABLE>    
       
- --------
  *To be filed by amendment.
 **Previously filed
***Filed herewith
<PAGE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                               ----------------
 
                                    EXHIBITS
             
          TO AMENDMENT NO. 3 TO FORM S-11 REGISTRATION STATEMENT     
                        UNDER THE SECURITIES ACT OF 1933
 
                                    VOLUME I
 
                            CAPITAL AUTOMOTIVE REIT
        (EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
<PAGE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                               ----------------
 
                                    EXHIBITS
             
          TO AMENDMENT NO. 3 TO FORM S-11 REGISTRATION STATEMENT     
                        UNDER THE SECURITIES ACT OF 1933
 
                                   VOLUME II
 
                            CAPITAL AUTOMOTIVE REIT
        (EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
<PAGE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                               ----------------
 
                                    EXHIBITS
             
          TO AMENDMENT NO. 3 TO FORM S-11 REGISTRATION STATEMENT     
                        UNDER THE SECURITIES ACT OF 1933
 
                                   VOLUME III
 
                            CAPITAL AUTOMOTIVE REIT
        (EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 

<PAGE>
 
                                                                     Exhibit 1.1

                            CAPITAL AUTOMOTIVE REIT

                   20,000,000 Shares of Beneficial Interest

                            UNDERWRITING AGREEMENT


                                                                   _______, 1998


FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representative of the several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, Virginia 22209

Dear Sirs:

      Capital Automotive REIT, a Maryland real estate investment trust (the
"Company"), confirms its agreement with Friedman, Billings, Ramsey & Co., Inc.
and each of the other Underwriters listed on Schedule I hereto (collectively,
the "Underwriters"), for whom Friedman, Billings, Ramsey & Co., Inc. is acting
as representative (in such capacity, the "Representative"), with respect to (i)
the sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective numbers of common shares of beneficial
interest of the Company, $.01 par value per share (the "Common Shares"), set
forth in Schedule I hereto and (ii) the grant by the Company to the
Underwriters, acting severally and not jointly, of the option described in
Section 1(b) hereof to purchase all or any part of 3,000,000 Common Shares to
cover over-allotments, if any. The 20,000,000 Common Shares to be purchased by
the Underwriters (the "Initial Shares") and all or any part of the 3,000,000
Common Shares subject to the option described in Section 1(b) hereof (the
"Option Shares") are hereinafter called, collectively, the "Shares".

      The Company understands that the Underwriters propose to make a public
offering of the Shares as soon as the Underwriters deem advisable after this
Agreement has been executed and delivered.

      The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-11 (No. 333-41183) and a
related preliminary prospectus subject to completion for the registration of the
Shares under the Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations thereunder (the "Securities Act Regulations"). The
Company has prepared and filed such amendments thereto, if any, and such amended
preliminary prospectuses, if any, as may have been required to the date hereof,
and will file such additional amendments or supplements thereto and such amended
or supplemented prospectuses as may hereafter be required. The registration
statement has been declared effective under the Securities Act by the
Commission. The 
<PAGE>
 
registration statement as amended at the time it became effective (including all
information deemed to be a part of the registration statement at the time it
became effective pursuant to Rule 430A of the Securities Act Regulations) is
hereinafter called the "Registration Statement," except that, if the Company
files a post-effective amendment to such registration statement which becomes
effective prior to the Closing Time (as defined below), "Registration Statement"
shall refer to such registration statement as so amended. Any registration
statement filed pursuant to Rule 462(b) of the Securities Act Regulations is
hereinafter called the "Rule 462(b) Registration Statement," and after such
filing the term "Registration Statement" shall include the 462(b) Registration
Statement, as amended from time to time. Each prospectus included in the
registration statement, or amendments thereof or supplements thereto, before it
became effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Underwriters pursuant to Rule
424(a) of the Securities Act Regulations is hereinafter called the "Preliminary
Prospectus." The term "Prospectus" means the final prospectus, as first filed
with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the
Securities Act Regulations, and any amendments thereof or supplements thereto.

      The Company also will issue and sell at the Closing Time (as hereinafter
defined) to the Representative for its own account warrants (the "Warrants") to
purchase at the Public Offering Price (as defined below) up to 1,277,794 Common
Shares (the "Warrant Shares"), which Warrant Shares will be registered under the
Securities Act pursuant to the Registration Statement and which issuance will be
consummated in accordance with the terms and conditions of the Warrant Agreement
in the form filed as an exhibit to the Registration Statement (the "Warrant
Agreement").

      The Company and the Underwriters agree as follows:

      1.    Sale and Purchase:
            -----------------

      (a)   Initial Shares. Upon the basis of the warranties and representations
and other terms and conditions herein set forth, the Company agrees to sell to
each Underwriter, severally and not jointly, and each Underwriter agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share of $_____, the number of Initial Shares set forth in Schedule I
opposite such Underwriter's name, plus any additional number of Initial Shares
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 8 hereof subject, in each case, to such adjustments among
the Underwriters as the Representative in its sole discretion shall make to
eliminate any sales or purchases of fractional shares.

      (b)   Option Shares. In addition, upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not jointly, to
purchase from the Company all or any part of the Option Shares, at the purchase
price per share set forth in paragraph (a) above, plus any additional number of
Option Shares which such Underwriter may become obligated to purchase pursuant
to the provisions of Section 8 hereof. The option hereby granted will expire 30
days after the date hereof and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments, which may be made in
connection with the offering and distribution of the Initial Shares, upon
written notice by the Representative to the Company no later than 12:00 noon,
New York City time, at least two and no more than five days before the 

                                       2
<PAGE>
 
date specified for closing in such notice setting forth the number of Option
Shares as to which the several Underwriters are then exercising the option and
the time and date of payment and delivery for such Option Shares. Any such time
and date of delivery (a "Date of Delivery") shall be determined by the
Representative, but shall not be later than three full business days (nor
earlier, without the consent of the Company, than two full business days) after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Shares, each of the Underwriters, acting severally and not jointly, will
purchase that proportion of the total number of Option Shares then being
purchased which the number of Initial Shares set forth in Schedule I opposite
the name of such Underwriter bears to the total number of Initial Shares,
subject in each case to such adjustments as the Representative in its sole
discretion shall make to eliminate any sales or purchases of fractional shares.

      (c) Terms of Public Offering. The Company is advised by the Underwriters
that the Shares are to be offered to the public initially at $ a share (the
"Public Offering Price") and to certain dealers selected by the Underwriters at
a price that represents a concession not in excess of $ per Share, and that any
Underwriter may allow, and such dealers may reallow, a concession, not in excess
of $ per Share, to any Underwriter or to certain other dealers. The Underwriters
may from time to time increase or decrease the Public Offering Price of the
Shares after the initial public offering to such extent as the Underwriters may
determine.

      (d) Reserved Shares. At the Company's direction, the Underwriters will
reserve up to 2% of the Initial Shares for sale to certain persons associated
with the Company, including executive officers and Trustees of the Company and
members of their families, at the Public Offering Price net of underwriting
discounts and commissions.

      (e) Warrants. Upon the basis of the warranties and representations and
other terms and conditions herein set forth, the Company also agrees to issue to
the Representative, in further consideration of the Representative's efforts in
connection with the sale and purchase of the Initial Shares and the Option
Shares, the Warrants to purchase up to 1,277,794 Warrant Shares at an exercise
price equal to the Public Offering Price.

      2.  Payment and Delivery:
          --------------------

      (a) Initial Shares and Warrants. Payment of the purchase price for the
Initial Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal
(same-day) funds to an account which has been designated in writing by the
Company to the Representative at the offices of Wilmer, Cutler & Pickering
located at 2445 M Street, N.W., Washington, D.C. 20037-1420 (unless another
place shall be agreed upon by the Representative and the Company) against
delivery of the certificates for the Initial Shares to the Representative for
the respective accounts of the Underwriters and the delivery of the Warrants,
represented by one or more certificates as the Representative may specify, to
the Representative. Such payment and delivery shall be made at 9:30 a.m., New
York City time, on the third (fourth, if pricing occurs after 4:30 p.m., New
York City time) business day after the date hereof (unless another time, not
later than ten business days after such date, shall be agreed to by the
Representative and the Company). The time at which such payment and delivery are
actually made is hereinafter sometimes called the "Closing Time." Certificates
for 

                                       3
<PAGE>
 
the Initial Shares shall be delivered to the Representative in definitive form
registered in such names and in such denominations as the Representative shall
specify. For the purpose of expediting the checking of the certificates for the
Initial Shares by the Representative, the Company agrees to make such
certificates available to the Representative for such purpose at least one full
business day preceding the Closing Time.

      (b) Option Shares. In addition, payment of the purchase price for the
Option Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal
(same-day) funds to an account which has been designated in writing by the
Company to the Representative at the offices of Wilmer, Cutler & Pickering
located at 2445 M Street, N.W., Washington, D.C. 20037-1420 (unless another
place shall be agreed upon by the Representative and the Company), against
delivery of the certificates for the Option Shares to the Representative for the
respective accounts of the Underwriters. Such payment and delivery shall be made
at 9:30 a.m., New York City time, on each Date of Delivery. Certificates for the
Option Shares shall be delivered to the Representative in definitive form
registered in such names and in such denominations as the Representative shall
specify. For the purpose of expediting the checking of the certificates for the
Option Shares by the Representative, the Company agrees to make such
certificates available to the Representative for such purpose at least one full
business day preceding the relevant Date of Delivery.

      3. Representations and Warranties of the Company and the Partnership:
         -----------------------------------------------------------------

      The Company and Capital Automotive L.P., a Delaware limited partnership
(the "Partnership"), represent and warrant to the Underwriters that:

      (a) each of the Company and the Partnership has been duly incorporated or
formed, as the case may be, and is validly existing and in good standing under
the laws of its respective jurisdiction of incorporation or formation with all
requisite corporate power and authority to own, lease and operate its respective
properties and to conduct its respective business as now conducted and as
proposed to be conducted as described in the Registration Statement and
Prospectus;

      (b) the Company and the Partnership are duly qualified or registered to
transact business in each jurisdiction in which they conduct their respective
businesses as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus and in which the failure, individually
or in the aggregate, to be so qualified or registered would have a material
adverse effect on the assets, operations, business prospects or condition
(financial or otherwise) of the Company and the Partnership taken as a whole,
and the Company and the Partnership are in good standing in each jurisdiction in
which they maintain an office or in which an Initial Property (as defined in the
Prospectus) is located or in which the nature or conduct of their respective
businesses as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to be in good standing would not have a material adverse
effect on the assets, operations, business prospects or condition (financial or
otherwise) of the Company and the Partnership taken as a whole (a "Material
Adverse Effect");

                                      4
<PAGE>
     
      (c) the Company and the Partnership are in compliance in all respects with
all applicable laws, rules, regulations, orders, decrees and judgments, except
where non-compliance would not have a Material Adverse Effect;      
 
      (d) neither the Company nor the Partnership is in breach of, or in default
under (nor has any event occurred which with notice, lapse of time, or both
would constitute a breach of, or default under), its respective declaration of
trust, by-laws, certificate of limited partnership or partnership agreement, as
the case may be, or in the performance or observance of any obligation,
agreement, covenant or condition contained in any license, indenture, mortgage,
deed of trust, loan or credit agreement or other agreement or instrument to
which the Company or the Partnership is a party or by which any of them or their
respective properties is bound, except for such breaches or defaults which would
not have a Material Adverse Effect;

      (e) the issuance, sale and delivery by the Company of the Shares will not
conflict with, or result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time, or both would constitute
a breach of, or default under), (i) any provision of the declaration of trust,
by-laws, certificate of limited partnership or partnership agreement, as the
case may be, of the Company or the Partnership, (ii) any provision of any
license, indenture, mortgage, deed of trust, loan or credit agreement or other
agreement or instrument to which the Company or the Partnership is a party or by
which either of them or their respective properties may be bound or affected, or
(iii) any federal, state, local or foreign law, regulation or rule or any
decree, judgment or order applicable to the Company or the Partnership, except
in the case of clause (ii) for such breaches or defaults which would not have a
Material Adverse Effect; or result in the creation or imposition of any lien,
charge, claim or encumbrance upon any property or asset of the Company or
Partnership.

      (f) the execution, delivery and performance of this Agreement and the
other agreements listed in the Prospectus and listed on Schedule III attached
hereto (the "Other Transaction Documents"), and consummation of the transactions
contemplated hereby and thereby will not conflict with, or result in any breach
of, or constitute a default under (nor constitute any event which with notice,
lapse of time, or both would constitute a breach of, or default under), (i) any
provision of the declaration of trust, by-laws, certificate of limited
partnership or partnership agreement as the case may be, of the Company or the
Partnership, (ii) any provision of any license, indenture, mortgage, deed of
trust, loan or credit agreement or other agreement or instrument to which the
Company or the Partnership is a party or by which either of them or their
respective properties may be bound or affected, or (iii) any federal, state,
local or foreign law, regulation or rule or any decree, judgment or order
applicable to the Company or the Partnership, except in the case of clause (ii)
for such breaches or defaults which would not have a Material Adverse Effect; or
result in the creation or imposition of any lien, charge, claim or encumbrance
upon any property or asset of the Company or the Partnership, which would have a
Material Adverse Effect;

      (g) the Company has full legal right, power and authority to enter into
and perform this Agreement and to consummate the transactions contemplated
herein to which it is a party; this Agreement has been duly authorized, executed
and delivered by the Company and is a legal, valid and binding agreement of the
Company enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting

                                       5
<PAGE>
 
creditors' rights generally, or by general principles of equity and except to
the extent that the indemnification provisions of Section 9 hereof may be
limited by federal or state securities laws and public policy considerations in
respect thereof;

      (h) the Partnership has full legal right, power and authority to enter
into and perform this Agreement and to consummate the transactions contemplated
herein to which it is a party; this Agreement has been duly authorized, executed
and delivered by or on behalf of the Partnership and constitutes a valid and
binding agreement of the Partnership enforceable in accordance with its terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally, or by general principles
of equity and except to the extent that the indemnification provisions of
Section 9 hereof may be limited by federal or state securities laws and public
policy considerations in respect thereof;

 
      (i) the Limited Partnership Agreement of the Partnership, including any
amendment thereto (the "Partnership Agreement"), has been duly and validly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally or by general principles
of equity;
 

      (j) the issuance and sale of the Shares to the Underwriters hereunder have
been duly authorized by the Company; when issued and delivered against payment
therefor as provided in this Agreement, the Shares will be validly issued, fully
paid and non-assessable and the issuance of the Shares will not be subject to
any preemptive or similar rights; except as contemplated herein, no person or
entity holds a right to require or participate in the registration under the
Securities Act of the Shares pursuant to the Registration Statement; no person
or entity has a right of participation or first refusal with respect to the sale
of the Shares by the Company; except as set forth in the Prospectus, there are
no contracts, agreements or understandings between the Company and any person or
entity granting such person or entity the right to require the Company to file a
registration statement under the Securities Act with respect to any securities
of the Company; the form of certificates evidencing the Shares complies with all
applicable requirements of Maryland law and with all applicable requirements of
the declaration of trust and by-laws of the Company and the requirements of the
Nasdaq National Market;

      (k) the issuance of the Warrants has been duly authorized by the Company;
when issued and delivered pursuant to the terms of the Warrant Agreement, the
Warrants will constitute legal, valid and binding obligations of the Company
enforceable in accordance with their terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, or by general principles of equity; the Warrant
Shares have been duly reserved for issuance by the Company upon exercise of the
Warrants in accordance with the terms of the Warrant Agreement; and the Warrants
will conform in all material respects to the description thereof in the
Registration Statement and the Prospectus;

      (l) the Warrant Agreement and the Other Transaction Documents have been
duly authorized and will be, upon execution and delivery by the Company, legal,
valid and binding agreements of the Company enforceable in accordance with their
terms, except as may be limited 

                                       6
<PAGE>
 
by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, or by general principles of equity;

      (m) no approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the execution, delivery and
performance of this Agreement and the Other Transaction Documents, the
consummation of the transaction contemplated hereby and thereby, the sale and
delivery of the Shares, issuance of the Warrants or the Warrant Shares by the
Company as contemplated hereby or in the Warrant Agreement other than (i) such
as have been obtained, or will have been obtained at the Closing Time or the
relevant Date of Delivery, as the case may be, under the Securities Act or the
Securities Exchange Act of 1934, (ii) such approvals as have been obtained in
connection with the approval of the quotation of the Shares on the Nasdaq
National Market and (iii) any necessary qualification under the securities or
blue sky laws of the various jurisdictions in which the Shares are being offered
by the Underwriters;

      (n) each of the Company and the Partnership has all necessary licenses,
authorizations, consents and approvals and has made all necessary filings
required under any applicable federal, state or local law, regulation or rule,
and has obtained all necessary authorizations, consents and approvals from other
persons required in order to conduct their respective businesses as described in
the Registration Statement and Prospectus, except to the extent that any failure
to have any such licenses, authorizations, consents or approvals, to make any
such filings or to obtain any such authorizations, consents or approvals would
not have, individually or in the aggregate, a Material Adverse Effect; neither
the Company nor the Partnership is in violation of, in default under, or has
received any notice regarding a possible violation, default or revocation of any
such license, authorization, consent or approval or any federal, state, local or
foreign law, regulation or rule or any decree, order or judgment applicable to
the Company or the Partnership, which would have a Material Adverse Effect; and
no such license, authorization, consent or approval contains a materially
burdensome restriction that is not adequately disclosed in the Registration
Statement and the Prospectus;

      (o) each of the Registration Statement and any Rule 462(b) Registration
Statement has become effective under the Securities Act and no stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the Securities Act and no
proceedings for that purpose have been instituted or are pending or, to the
knowledge of the Company, are threatened by the Commission, and any request on
the part of the Commission for additional information has been complied with;

      (p) the Company and the transactions contemplated by this Agreement meet
the requirements and conditions for using a registration statement on Form S-11
under the Securities Act, set forth in the General Instructions to Form S-11;
the Preliminary Prospectus and the Registration Statement comply and the
Prospectus and any further amendments or supplements thereto will comply, when
they have become effective or are filed with the Commission, as the case may be,
in all material respects with the requirements of the Securities Act and the
Securities Act Regulations; the Registration Statement did not, and any
amendment thereto will not, in each case as of the applicable effective date,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and the Preliminary Prospectus does not, and the Prospectus 

                                       7
<PAGE>
 
or any amendment or supplement thereto will not, as of the applicable filing
date and at the Closing Time and on each Date of Delivery (if any), contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that the Company makes no warranty or representation with respect to any
statement contained in the Registration Statement or the Prospectus made in
reliance upon and in conformity with the information concerning the Underwriters
and furnished in writing by or on behalf of the Underwriters through the
Representative to the Company expressly for use in the Registration Statement or
the Prospectus (that information being limited to that described in the last
sentence of the first paragraph of Section 9(b) hereof);

      (q) the Preliminary Prospectus was and the Prospectus delivered to the
Underwriters for use in connection with this offering will be identical to the
versions of the Preliminary Prospectus and Prospectus created to be transmitted
to the Commission for filing via the Electronic Data Gathering Analysis and
Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T;

      (r) all legal or governmental proceedings, contracts or documents which
are material and of a character required to be filed as exhibits to the
Registration Statement or to be summarized or described in the Prospectus have
been so filed, summarized or described as required;

      (s) there are no actions, suits, proceedings, inquiries or investigations
pending or, to the Company's knowledge, threatened against the Company or the
Partnership or any of their respective officers and trustees or to which the
properties, assets or rights of any such entity is subject, at law or in equity,
before or by any federal, state, local or foreign governmental or regulatory
commission, board, body, authority, arbital panel or agency which could
reasonably be expected to result in a judgment, decree, award or order having a
material adverse effect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company and the Partnership taken as a
whole, or which could adversely affect the consummation of the transactions
contemplated by this Agreement in any material respect;

     
      (t) the financial statements, including the notes thereto, included in the
Registration Statement and the Prospectus present fairly the financial position
of the Company as of the dates indicated and the results of operations and
changes in financial position and cash flows of the Company for the periods
specified; such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as indicated in the notes thereto); the financial
statement schedules included in the Registration Statement and the Prospectus
fairly present the information required to be shown therein; no other financial
statements or schedules are required by Form S-11 or otherwise to be included in
the Registration Statement or Prospectus; the unaudited pro forma financial
information, including the notes thereto, included in the Prospectus or any
Preliminary Prospectus complies as to form in all material respects to the
applicable accounting requirements of the Securities Act and the Securities Act
Regulations, and management of the Company believes that the assumptions
underlying the pro forma adjustments are reasonable; such pro forma adjustments
have been properly applied to the historical amounts in the compilation of the
information and such information fairly presents with respect to the Company and
the Partnership on a consolidated basis, the financial position, results of     

                                       8
<PAGE>
 
    
operations and other information purported to be shown therein at the respective
dates and for the respective periods specified;      
 
      (u) Arthur Andersen LLP, whose reports on the audited financial statements
of the Company and the Partnership are included as part of the Registration
Statement and Prospectus, are and were during the periods covered by their
reports independent public accountants within the meaning of the Securities Act
and the Securities Act Regulations;

      (v) subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, and except as may be otherwise
stated in the Registration Statement or Prospectus, there has not been (i) any
material adverse change in the assets, operations, business, prospects or
condition (financial or otherwise), present or prospective, of the Company and
the Partnership taken as a whole, whether or not arising in the ordinary course
of business, (ii) any transaction, which is material to the Company and the
Partnership taken as a whole, planned or entered into by the Company or the
Partnership, (iii) any obligation, contingent or otherwise, directly or
indirectly incurred by the Company or the Partnership, which is material to the
Company and the Partnership taken as a whole or (iv) any dividend or
distribution of any kind declared, paid or made with respect to the capital
stock of the Company or with respect to the partnership interests of the
Partnership;

      (w) other than as set forth in the Registration Statement, there are no
persons with registration or other similar rights to have any equity securities
registered pursuant to the Registration Statement or otherwise registered by the
Company under the Securities Act;

 
      (x) the authorized shares of beneficial interest of the Company conform in
all material respects to the description thereof contained in the Prospectus;
the Company has an authorized, issued and outstanding capitalization as set
forth in the Prospectus under the caption "Capitalization"; immediately after
the Closing Time, upon payment therefor, 21,792,115 Common Shares will be issued
and outstanding (excluding the Underwriters' over-allotment option described in
Section 1(b) hereof) and no shares of beneficial interest of any other class of
beneficial interest will be issued and outstanding. All of the issued and
outstanding shares of beneficial interest of the Company have been duly
authorized and are validly issued, fully paid and non-assessable, and have been
offered, sold and issued by the Company in compliance with all applicable laws
(including, without limitation, federal and state securities laws); none of the
issued shares of beneficial interest of the Company have been issued in
violation of any preemptive or similar rights granted by the Company; except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of beneficial interest of the Company or any security
convertible into or exchangeable for shares of beneficial interest of the
Company; the private placement of Common Shares by the Company to FBR Asset 
Investment Corporation (the "FBR Offering") is not required to be registered
under the Securities Act or any state securities law;
 
    
      (y) when the Warrant Shares have been issued and duly delivered against
payment therefor as contemplated by the Warrant Agreement, the Warrant Shares
will be validly issued, fully paid and nonassessable, free and clear of any
pledge, lien, encumbrance, security interest, or other claim; the issuance and
     
                                       9
<PAGE>
     
sale of the Warrants and the Warrant Shares by the Company is not subject to
preemptive or other similar rights arising by operation of law, under the
declaration of trust or by-laws of the Company, under any agreement to which the
Company or the Partnership is a party or by which they are bound;      

      (z)  immediately after the Closing Time, all of the issued and outstanding
units of partnership interest in the Partnership ("Common Units") will be
validly issued, fully paid and non-assessable; none of the Common Units has been
or will be issued or is owned or held in violation of any preemptive right; the
Common Units have been or will be offered, sold and issued by the Partnership in
compliance with all applicable laws (including, without limitation, federal and
state securities laws);

      (aa) each of the Company, the Partnership, and each of their respective
officers, trustees and controlling persons has not taken, and will not take,
directly or indirectly, any action which is designed to or which has constituted
or which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares;

      (bb) neither the Company nor any of its affiliates (i) is required to
register as a "broker" or "dealer" in accordance with the provisions of the
Securities Exchange Act of 1934 or the rules and regulations thereunder, or (ii)
directly, or indirectly through one or more intermediaries, controls or has any
other association with (within the meaning of Article 1 of the By-laws of the
National Association of Securities Dealers, Inc. (the "NASD")) any member firm
of the NASD;

      (cc) the Company has not relied upon the Representative or legal counsel
for the Representative for any legal, tax or accounting advice in connection
with the offering and sale of the Shares or the Warrant Shares;

      (dd) any certificate signed by any officer of the Company or the
Partnership delivered to the Representative or to counsel for the Underwriters
pursuant to or in connection with this Agreement shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby;

      (ee) to the knowledge of the Company and the Partnership, there are no
statutes or regulations applicable to the Company or the Partnership or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company or the
Partnership of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein; all agreements between the Company or the Partnership and
third parties expressly referenced in the Prospectus are legal, valid and
binding obligations of the Company or the Partnership, enforceable in accordance
with their respective terms, except to the extent enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by general principles of equity and except to the
extent that any indemnification provisions in this Agreement may be limited by
federal or state securities laws and public policy considerations in respect
thereof;

                                      10
<PAGE>
 
      (ff) no relationship, direct or indirect, exists between or among the
Company or the Partnership on the one hand, and the trustees, officers,
shareholders, customers or suppliers of the Company or the Partnership on the
other hand, which is required by the Securities Act to be described in the
Registration Statement and the Prospectus which is not so described;

      (gg) each of the Company and the Partnership owns or possesses adequate
license or other rights to use all patents, trademarks, service marks, trade
names, copyrights, software and design licenses, trade secrets, manufacturing
processes, other intangible property rights and know-how, if any (collectively
"Intangibles"), necessary to entitle the Company and the Partnership to conduct
its business as described in the Prospectus, and neither the Company, nor the
Partnership, has received notice of infringement of or conflict with (and knows
of no such infringement of or conflict with) asserted rights of others with
respect to any Intangibles which could materially and adversely affect the
assets, operations, business, prospects or condition (financial or otherwise) of
the Company or the Partnership;

      (hh) each of the Company and the Partnership has filed on a timely basis
all necessary federal, state, local and foreign income and franchise tax
returns, if any such returns were required to be filed, through the date hereof
and have paid all taxes shown as due thereon; and no tax deficiency has been
asserted against the Company or the Partnership, nor does the Company or the
Partnership know of any tax deficiency which is likely to be asserted against
either entity which, if determined adversely to any such entity, could
materially adversely affect the assets, operations, business, prospects or
condition (financial or otherwise) of either entity, respectively; all tax
liabilities, if any, are adequately provided for on the respective books of the
entities;

      (ii) each of the Company and the Partnership maintains insurance (issued
by insurers of recognized financial responsibility) of the types and in the
amounts generally deemed adequate, if any, for their respective businesses and
consistent with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and personal
property owned or leased by the Company and the Partnership against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect;

     
      (jj) the Company or the Partnership, as the case may be, will have good
and marketable title in fee simple to the Initial Properties to be acquired by
it, if any, and good title to all personal property owned by them, in each case
free and clear of all liens, security interests, pledges, charges, encumbrances,
mortgages and defects, except such as are disclosed in the Prospectus, the
Exhibits to the Registration Statement or the financial statements thereto or
such as do not materially and adversely affect the value of such property and do
not interfere with the use made or proposed to be made of such property by the
Company or the Partnership; the Initial Properties to be acquired by it held
under lease by the Company or the Partnership are held under valid, existing and
enforceable leases, with such exceptions, liens, security interests, pledges,
charges, encumbrances, mortgages and defects, as are disclosed in the
Prospectus, the Exhibits to the Registration Statement or the financial
statements thereto or will not result in a Material Adverse Effect and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or the Partnership; the Company or the Partnership has
obtained an owner's title insurance policy, from a title insurance company
licensed to issue such policy, on the Initial Properties to be acquired by it,
that insures the Company's or the Partnership's fee or leasehold interest in
such property (other than the leasehold interest of the Company with      

                                       11
<PAGE>
 
    
respect to its principal executive offices as described in the Registration
Statement), with coverage in an amount at least equal to the fair market value
of such fee or leasehold interest in such real property, or a lender's title
insurance policy insuring the lien of its mortgage securing such real property
with coverage equal to the maximum aggregate principal amount of any
indebtedness held by the Company or the Partnership and secured by the Initial
Properties to be acquired by it;     
 
      (kk) except as otherwise disclosed in the Prospectus or in the
environmental reports regarding any Initial Property (copies of which have been
provided to the Representative (collectively, the "Environmental Reports"),
neither the Company nor the Partnership nor, to their knowledge, any former
owner of any Initial Property has authorized or conducted or has knowledge of
the generation, transportation, storage, presence, use, treatment, disposal,
release, or other handling of any hazardous substance, hazardous waste,
hazardous material, hazardous constituent, toxic substance, pollutant,
contaminant, asbestos, radon, polychlorinated biphenyls ("PCBs"), petroleum
product or waste (including crude oil or any fraction thereof), natural gas,
liquefied gas, synthetic gas or other material defined, regulated, controlled or
potentially subject to any remediation requirement under any environmental law
(collectively, "Hazardous Materials"), on, in, under or affecting any Initial
Property, except in material compliance with applicable laws; except as
disclosed in the Prospectus, or as disclosed in the Environmental Reports, to
the knowledge of the Company and the Partnership, the Initial Properties, and
the Company's, the Partnership's and the Initial Sellers' operations with
respect to the Initial Properties, are and were in compliance with all federal,
state and local laws, ordinances, rules, regulations and other governmental
requirements relating to pollution, control of chemicals, management of waste,
discharges of materials into the environment, health, safety, natural resources,
and the environment (collectively, "Environmental Laws"), and the Company and
the Partnership are in compliance with, all licenses, permits, registrations and
government authorizations necessary to operate under all applicable
Environmental Laws in all material respects; except as otherwise disclosed in
the Prospectus, or as disclosed in the Environmental Reports, neither the
Company nor, to the knowledge of the Company, any former owner of any Initial
Property has received any written or oral notice from any governmental entity or
any other person and there is no pending or, to the knowledge of the Company and
the Partnership threatened claim, litigation or any administrative agency
proceeding that: alleges a violation of any Environmental Laws by the Company or
the Partnership; or that the Company or the Partnership is a liable party or a
potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (S) 9601, et seq., or any state
superfund law; has resulted in or could result in the attachment of an
environmental lien on any of the Initial Properties; or alleges that the Company
or the Partnership is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Initial Properties or elsewhere)
involving Hazardous Materials, whether arising under the Environmental Laws,
common law principles, or other legal standards;
    
      (ll) there are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities
     

                                       12
<PAGE>
 
    
and any potential liabilities to third parties) which would, singly or in the
aggregate, have a Material Adverse Effect;     
    
      (mm) none of the entities which prepared Phase I environmental assessment
reports with respect to the Initial Properties was employed for such purpose by
the Company on a contingent basis or has any substantial interest in the Company
or the Partnership, and none of their directors, officers or employees is
connected with the Company or the Partnership as a promoter, selling agent,
voting trustee, officer or employee;     
 
      (nn) except as otherwise disclosed in the Prospectus, there are no
material outstanding loans or advances or material guarantees of indebtedness by
the Company or the Partnership to or for the benefit of any of the officers or
trustees of the Company or the Partnership or any of the members of the families
of any of them;

      (oo) neither the Company nor the Partnership nor, to the Company's
knowledge, any employee or agent of the Company or the Partnership, has made any
payment of funds of the Company or the Partnership or received or retained any
funds in violation of any law, rule or regulation or of a character required to
be disclosed in the Prospectus;

      (pp) the Company is organized in conformity with the requirements for
qualification as a real estate investment trust under the Internal Revenue Code
of 1986, as amended (the "Code"), and the Company's proposed method of operation
will enable it to meet the requirements for taxation as a real estate investment
trust under the Code; the Partnership will be treated as a partnership for
federal income tax purposes and not as a corporation or association taxable as a
corporation;

      (qq)  the Shares have been approved for listing,  upon  official  notice
of issuance, on the Nasdaq National Market;

      (rr) in connection with this offering, the Company has not offered and
will not offer its Common Shares or any other securities convertible into or
exchangeable or exercisable for Common Shares in a manner in violation of the
Securities Act or the Securities Act Regulations; the Company has not
distributed and will not distribute any Prospectus or other offering material in
connection with the offer and sale of the Shares, except as contemplated herein;

      (ss) the Company has complied and will comply with all the provisions of
Florida Statutes, Section 517.075 (Chapter 92-198, Laws of Florida); neither the
Company nor the Partnership nor their respective affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba;

      (tt) neither the Company nor the Partnership is or, solely as a result of
transactions contemplated hereby and the application of the proceeds from the
sale of the Shares, will become an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"); and

      (uu) the Company has not incurred any liability for any finder's fees or
similar payments in connection with the transactions herein contemplated, except
as contemplated hereby.

                                       13
<PAGE>
 
      4. Certain Covenants of the Company and the Partnership:
         ----------------------------------------------------
  
      The Company and the Partnership hereby covenant with each Underwriter:

      (a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the securities or
blue sky laws of such states as the Representative may designate and to maintain
such qualifications in effect as long as required for the distribution of the
Shares, provided that the Company shall not be required to qualify as a foreign
corporation or to consent to the service of process under the laws of any such
state (except service of process with respect to the offering and sale of the
Shares); or to take any action which would subject it to taxation in such state
solely on account of registration of the Shares.

      (b) if, at the time this Agreement is executed and delivered, it is
necessary for a post-effective amendment to the Registration Statement to be
declared effective before the offering of the Shares may commence, the Company
will endeavor to cause such post-effective amendment to become effective as soon
as possible;
    
      (c) to prepare the Prospectus in a form approved by the Underwriters in
compliance with Rule 430A and file such Prospectus with the Commission pursuant
to Rule 424(b) within the time period prescribed by law and to furnish promptly
to the Underwriters as many copies of the Prospectus (or of the Prospectus as
amended or supplemented if the Company shall have made any amendments or
supplements thereto after the effective date of the Registration Statement) as
the Underwriters may reasonably request for the purposes contemplated by the
Securities Act Regulations, which Prospectus and any amendments or supplements
thereto furnished to the Underwriters will be identical to the version created
to be transmitted to the Commission for filing via EDGAR, except to the extent
permitted by Regulation S-T;      
 
      (d) to advise the Representative promptly, confirming such advice in
writing, when the Registration Statement has become effective and when any
post-effective amendment thereto becomes effective under the Securities Act
Regulations and will advise the Representative promptly and, if requested by the
Representative, will confirm such advice in writing, when such post effective
amendment has become effective;
     
      (e) to advise the Representative immediately, confirming such advice in
writing, of (i) the receipt of any comments from, or any request by, the
Commission for amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or, to the knowledge of the Company, threatening of any proceedings
for any of such purposes and, if the Commission or any other government agency
or authority should issue any such order, to make every reasonable effort to
obtain the lifting or removal of such order as soon as possible; to advise the
Representative promptly of any proposal to amend or supplement the Registration
Statement or      

                                       14
<PAGE>
 
Prospectus and to file no such amendment or supplement to which the
Representative shall reasonably object in writing;
 
      (f) before amending or supplementing the Registration Statement or the
Prospectus, or during any period of time in which a Prospectus relating to the
Shares is required to be delivered under the Securities Act Regulations, to
furnish to the Representative a copy of each such proposed amendment or
supplement before filing any such amendment or supplement with the Commission;

      (g) to furnish to the Underwriters for a period of five years from the
date of this Agreement (i) as soon as available, copies of all annual, quarterly
and current reports or other communications supplied to holders of Common
Shares, (ii) as soon as practicable after the filing thereof, copies of all
reports filed by the Company with the Commission, the NASD or any securities
exchange and (iii) such other publicly available information as the Underwriters
may reasonably request regarding the Company and the Partnership;
 
      (h) to advise the Underwriters promptly during any period of time in which
a Prospectus relating to the Shares is required to be delivered under the
Securities Act Regulations (i) of any material change in the Company's assets,
operations, business, prospects or condition (financial or otherwise) or (ii) of
the happening of any event, which change or event would require the making of
any change in the Prospectus then being used so that the Prospectus would not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, and,
during such time, to prepare and furnish, at the Company's expense, to the
Underwriters promptly such amendments or supplements to the Prospectus as may be
necessary to reflect any such change;

      (i) to furnish promptly to the Representative a signed copy of the
Registration Statement, as initially filed with the Commission, and of all
amendments or supplements thereto (including all exhibits filed therewith) and
such number of conformed copies of the foregoing as the Underwriters may
reasonably request;

      (j) to furnish to the Underwriters, not less than two business days before
filing with the Commission subsequent to the effective date of the Prospectus
and during the period referred to in paragraph (h) above, a copy of any document
proposed to be filed with the Commission pursuant to Section 13, 14, or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act");

      (k) to apply the net proceeds of the sale of the Shares substantially in
accordance with its statements under the caption "Use of Proceeds" in the
Prospectus;

      (l) to make generally available to its security holders as soon as
practicable, but in any event not later than the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the Registration
Statement, an earnings statement complying with the provisions of Section 11(a)
of the Securities Act (in form, at the option of the Company, complying with the
provisions of Rule 158 of the Securities Act Regulations) covering a period of
12 months after the effective date of the Registration Statement;

                                       15
<PAGE>
 
      (m) to use its best efforts to effect and maintain the quotation of the
Shares on the Nasdaq National Market and to file with the Nasdaq National Market
all documents and notices required by the Nasdaq National Market of companies
that have securities that are included on the Nasdaq National Market;
     
      (n) to refrain during a period of [___] days from the date of the
Prospectus, without the prior written consent of the Representative, from (i)
offering, pledging, selling, contracting to sell, selling any option or contract
to purchase, purchasing any option or contract to sell, granting any option for
the sale of, or otherwise disposing of or transferring, directly or indirectly,
any Common Shares or any securities convertible into or exercisable or
exchangeable for Common Shares, or filing any registration statement under the
Securities Act with respect to any of the foregoing or (ii) entering 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 Shares, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Shares or such other
securities, in cash or otherwise; the foregoing shall not apply to the Shares or
Units or options or warrants therefor contemplated to be granted, sold or issued
as described in the Prospectus or pursuant to a dividend reinvestment plan
adopted hereafter;     

      (o) to execute and deliver to the representative the Warrant Agreement and
to comply with the terms of the Warrant Agreement;

      (p) the Company shall not, and shall use its best efforts to cause its
officers, trustees and affiliates not to, (i) take, directly or indirectly prior
to termination of the underwriting syndicate contemplated by this Agreement, any
action designed to stabilize or manipulate the price of any security of the
Company, or which would cause or result in, the stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
any of the Shares, (ii) sell, bid for, purchase or pay anyone any compensation
for soliciting purchases of the Shares other than ordinary brokers transactions
for such person's own account, or (iii) pay or agree to pay to any person any
compensation for soliciting any order to purchase any other securities of the
Company;

      (q) the Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for its Common Shares;

      (r) the Company will use its best efforts (i) to meet the requirements to
qualify as a real estate investment trust under the Code and (ii) to cause the
Partnership to be treated as a partnership for federal income tax purposes;

      (s) the Company will comply with all of the provisions of any undertakings
in the Registration Statement;
 
      (t) the Company and the Partnership will use their best efforts to conduct
their affairs in such a manner so as to ensure that neither the Company nor the
Partnership will be an "investment company" or an entity "controlled" by an
investment company within the meaning of the 1940 Act; and

                                       16
<PAGE>
 
      (u) to maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

      5.  Payment of Expenses; Right of First Refusal:
          -------------------------------------------

      (a) The Company agrees to pay all costs and expenses incident to the
performance of the Company's obligations under this Agreement and the Warrant
Agreement, whether or not the transactions contemplated hereunder or thereunder
are consummated or this Agreement and the Warrant Agreement are terminated,
including, but not limited to, all fees and expenses of filing with the
Commission and the NASD; all Blue Sky fees and expenses, including filing fees
and disbursements of the Representative's Blue Sky counsel; reasonable fees and
expenses of Representative's counsel, fees and disbursements of counsel and
accountants for the Company, and printing costs, including costs of printing the
prospectus, and any amendments thereto; all underwriting documents, Blue Sky
Memoranda, a reasonable quantity of prospectuses requested by the
Representative, and the Company's road show costs and expenses.

      (b) The Company agrees to reimburse the Representative upon request for
its reasonable out-of-pocket expenses incurred in connection with its
obligations under this Agreement whether or not the Offering is consummated,
including the reasonable fees and disbursements of the Representative's legal
counsel, Blue Sky counsel (which shall undertake all Blue Sky matters), and road
show costs and expenses.
     
      (c) If this Agreement shall be terminated by the Underwriters (other than
as a result of a default or refusal by the Underwriters, or any of them, to
fulfill the terms of this Agreement), or any of them, because of any failure or
refusal on the part of the Company to comply with the terms or to fulfill any of
the conditions of this Agreement, or if for any reason the Company shall be
unable to perform its obligations under this Agreement (other than as a result
of a default or refusal by the Underwriters to fulfill the terms of this
Agreement), the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the reasonable fees and disbursements of their
counsel) reasonably incurred by such Underwriters in connection with this
Agreement or the transactions contemplated herein.    

      6.  Conditions of the Underwriters' Obligations:

      The obligations of the Underwriters hereunder are subject to (i) the
accuracy of the representations and warranties on the part of the Company in all
material respects on the date hereof and at the Closing Time and on each Date of
Delivery, (ii) the performance by the Company of its obligations hereunder in
all material respects, and (iii) the following further conditions:

                                       17
<PAGE>
 
      (a) If, at the time this Agreement is executed and delivered, it is
necessary for a post-effective amendment to the Registration Statement to be
declared effective before the offering of the Shares may commence, such
post-effective amendment shall have become effective not later than 5:30 p.m.,
New York City time, on the date hereof, or at such later date and time as shall
be consented to in writing by the Representative.

      (b) The Company shall furnish to the Underwriters at the Closing Time and
on each Date of Delivery an opinion of Wilmer, Cutler & Pickering, counsel for
the Company, addressed to the Underwriters and dated the Closing Time and each
Date of Delivery and in form satisfactory to Hunton & Williams, counsel for the
Underwriters, stating that:

            (i)   the Company meets the requirements for the use of Form S-11
      under the Securities Act; the authorized shares of beneficial interest of
      the Company conform as to legal matters to the description thereof
      contained in the Prospectus in all material respects; the Company has an
      authorized capitalization as set forth in the Prospectus under the caption
      "Capitalization"; the outstanding shares of beneficial interest of the
      Company have been duly and validly authorized and issued and are fully
      paid and non-assessable; except as disclosed in the Prospectus, there are
      no authorized and validly issued (i) securities or obligations of the
      Company or the Partnership convertible into or exchangeable for any shares
      of beneficial interest of the Company or any interests in the Partnership
      or (ii) warrants, rights or options to subscribe for or purchase from the
      Company or the Partnership any such shares of beneficial interest, capital
      stock, interests or any such convertible or exchangeable securities or
      obligations; except as set forth in the Prospectus or contemplated by this
      Agreement, there are no outstanding obligations of the Company or the
      Partnership to issue any shares of beneficial interest, capital stock or
      interests, any such convertible or exchangeable securities or obligation,
      or any such warrants, rights or options;

            (ii)  the Company has been duly incorporated and is validly existing
      and in good standing under the laws of its jurisdiction of incorporation
      with the requisite power and authority to own its properties and to
      conduct its business as described in the Registration Statement and
      Prospectus and to execute and deliver this Agreement, the Warrant
      Agreement and the Other Transaction Documents and to consummate the
      transactions described in each such agreement;
     
            (iii) the Company is duly qualified in or registered by and is in
      good standing in each jurisdiction in which the Initial Properties are
      located and in which the failure, individually or in the aggregate, to be
      so qualified would have a Material Adverse Effect. Except as disclosed in
      the Prospectus, the Partnership is not prohibited or restricted by its
      certificate of limited partnership or partnership agreement, or, to the
      knowledge of such counsel, or by the Other Transaction Documents, directly
      or indirectly, from (a) paying dividends to the Company, (b) making any
      other distribution with respect to the Partnership's interest, (c) paying
      the Company, any loans or advances, or (d) transferring any of the
      Partnership's property or assets to the Company;     
    
            (iv)  the Partnership has been duly formed and is validly existing
      as a limited partnership under the laws of the jurisdiction of its
      organization, with all requisite partnership power and authority to own,
                                                                               
                                       18
<PAGE>
 
          
      lease and operate its properties and to conduct its business as now
      conducted as described in the Registration Statement and the Prospectus.
      The Partnership has been duly qualified or registered to do business as a
      foreign partnership in those jurisdictions in which the Initial Properties
      are located and in which the failure, individually or in the aggregate, to
      be so qualified or registered would have a Material Adverse Effect;      

            (v)   to such counsel's knowledge, except as disclosed on the
      Registration Statement and the Prospectus, neither the Company nor the
      Partnership is in material breach of, or in material default under (nor
      has any event occurred which with notice, lapse of time, or both would
      constitute a material breach of, or material default under) its respective
      declaration of trust, by-laws, certificate of limited partnership or
      partnership agreement, as the case may be, or in the performance or
      observation of any license, indenture, mortgage, deed of trust, loan or
      credit agreement or any other agreement or instrument to which the Company
      or the Partnership is a party or by which either of them or their
      respective properties may be bound or affected, except such breaches or
      defaults which would not have a Material Adverse Effect;
 
            (vi)  the issuance, sale and delivery by the Company of the Shares
      do not and will not conflict with, or result in any breach of, or
      constitute a default under (nor constitute any event which with notice,
      lapse of time, or both would constitute a breach of or default under), (i)
      any provisions of the declaration of trust, by-laws, certificate of
      limited partnership or partnership agreement, as the case may be, of the
      Company or the Partnership, (ii) to such counsel's knowledge, any
      provision of any license, indenture, mortgage, deed of trust, loan or
      credit agreement or other agreement or instrument to which the Company or
      the Partnership is a party or by which any of them or their respective
      properties may be bound or affected, or (iii) to such counsel's knowledge,
      any law or regulation or any decree, judgment or order applicable to the
      Company or the Partnership, except in the case of clauses (ii) and (iii)
      for such conflicts, breaches or defaults, laws, regulations, decrees,
      judgments or orders, which individually or in the aggregate would not have
      a Material Adverse Effect; or result in the creation or imposition of any
      lien, encumbrance, charge or claim upon any property or assets of the
      Company or the Partnership;

            (vii) the execution, delivery and performance of this Agreement, the
      Warrant Agreement and the Other Transaction Documents by the Company and
      the consummation by the Company of the transactions contemplated under
      this Agreement, the Warrant Agreement or the Other Transaction Documents,
      as the case may be, do not and will not conflict with, or result in any
      breach of, or constitute a default under (nor constitute any event which
      with notice, lapse of time, or both would constitute a breach of or
      default under), (i) any provisions of the declaration of trust, by-laws,
      certificate of limited partnership or partnership agreement, as the case
      may be, of the Company or the Partnership, (ii) to such counsel's
      knowledge, any license, indenture, mortgage, deed of trust, loan or credit
      agreement or other agreement or instrument to which the Company or the
      Partnership is a party or by which any of them or their respective
      properties may be bound or affected, or (iii) to such counsel's knowledge,
      any law or regulation or any decree, judgment or order applicable to the
      Company or the Partnership, except in the 

                                       19
<PAGE>
 
      case of clauses (ii) and (iii) for such conflicts, breaches or defaults,
      laws, regulations, decrees, judgments or orders, which individually or in
      the aggregate would not have a Material Adverse Effect; or, to such
      counsel's knowledge, with the exception of the Other Transaction
      Documents, result in the creation or imposition of any lien, encumbrance,
      charge or claim upon any property or assets of the Company or the
      Partnership which would have a Material Adverse Effect;

            (viii) the Company has full trust power and authority to enter into
      and perform this Agreement and to consummate the transactions contemplated
      herein; this Agreement has been duly authorized, executed and delivered by
      the Company and is a legal, valid and binding agreement of the Company
      enforceable in accordance with its terms, except as may be limited by
      bankruptcy, insolvency, reorganization, moratorium or similar laws
      affecting creditors' rights generally, and by general principles of
      equity, and except that enforceability of the indemnification and
      contribution provisions set forth in Section 9 hereof may be limited by
      the federal or state securities laws of the United States or public policy
      underlying such laws;

            (ix)   the Partnership has full partnership power and authority to
      enter into and perform this Agreement and to consummate the transactions
      contemplated herein. This Agreement has been duly authorized, executed and
      delivered by or on behalf of the Partnership and constitutes a valid and
      binding agreement of the Partnership enforceable in accordance with its
      terms, except as may be limited by bankruptcy, insolvency, reorganization,
      moratorium or similar laws affecting creditors' rights generally, and by
      general principles of equity, and except that enforceability of the
      indemnification and contribution provisions set forth in Section 9 hereof
      may be limited by federal or state securities laws of the United States or
      public policy underlying such laws;
     
            (x)    the Other Transaction Documents to which the Company or the
      Partnership is a party have been duly authorized, executed, and delivered
      by the Company or the Partnership, and are legal, valid and binding
      agreements of the Company or the Partnership enforceable against it in
      accordance with their terms, except as may be limited by bankruptcy,
      insolvency, reorganization, moratorium or similar laws affecting
      creditors' rights generally, and by general principles of equity; when
      issued and delivered pursuant to the terms of the Warrant Agreement, the
      Warrants will constitute legal, valid and binding obligations of the
      Company enforceable in accordance with their terms, except as may be
      limited by bankruptcy, insolvency, reorganization, moratorium or similar
      laws affecting creditors' rights generally, and by general principles of
      equity; the Warrant Shares have been duly reserved for issuance upon
      exercise of the Warrants in accordance with the terms of the Warrant
      Agreement; and the Warrants will conform to the description thereof in the
      Registration Statement and the Prospectus;      
 
            (xi)   no approval, authorization, consent or order of or filing
      with any federal or state governmental or regulatory commission, board,
      body, authority or agency is required in connection with the execution,
      delivery and performance of this Agreement and the Other Transaction
      Documents or the consummation of the transaction contemplated hereby and
      thereby by the Company and the Partnership, the sale and delivery of the
      Shares by the Company as contemplated hereby other than such as have

                                       20
<PAGE>
 
      been obtained or made under the Securities Act and except that such
      counsel need express no opinion as to any necessary qualification under
      the state securities or blue sky laws of the various jurisdictions in
      which the Shares are being offered by the Underwriters or any approval of
      the underwriting terms and arrangements by the National Association of
      Securities Dealers, Inc.;

            (xii)   the Shares, the Warrants, and the Warrant Shares have been
      duly authorized and, when the Shares and the Warrant Shares have been
      issued and duly delivered against payment therefor as contemplated by this
      Agreement or the Warrant Agreement, as the case may be, the Shares and the
      Warrant Shares will be validly issued, fully paid and nonassessable, and,
      except for any action that may have been taken by the holder thereof, free
      and clear of any pledge, lien, encumbrance, security interest, or other
      claim;

            (xiii)  immediately after the Closing Time, all of the issued and
      outstanding units of partnership interest in the Partnership (the "Common
      Units") will be validly issued, fully paid and non-assessable. The
      issuance of the outstanding Common Units by the Partnership was exempt
      from the registration requirements of the Securities Act and applicable
      state securities laws;

            (xiv)   the issuance and sale of the Shares, the Warrants, and the
      Warrant Shares and the Common Units by the Company is not subject to
      preemptive or other similar rights arising by operation of law, under the
      declaration of trust or by-laws of the Company or the certificate of
      limited partnership or Partnership Agreement of the Partnership, under any
      agreement known to such counsel to which the Company or the Partnership is
      a party or, to such counsel's knowledge, otherwise;

            (xv)    to counsel's knowledge, there are no persons with
      registration or other similar rights to have any securities registered
      pursuant to the Registration Statement or otherwise registered by the
      Company under the Securities Act, except as disclosed in the Prospectus;

            (xvi)   the form of certificate used to evidence the Common Shares
      complies with Maryland law, with any applicable requirements of the
      declaration of trust and by-laws of the Company and the requirements of
      the Nasdaq National Market;
 
            (xvii)  the Registration Statement has become effective under the
      Securities Act and, to such counsel's knowledge, no stop order suspending
      the effectiveness of the Registration Statement has been issued and, to
      such counsel's knowledge, no proceedings with respect thereto have been
      commenced or threatened;

            (xviii) as of the effective date of the Registration Statement, the
      Registration Statement and the Prospectus (except as to the financial
      statements and other financial and pro forma or statistical data contained
      therein, as to which such counsel need express no opinion) complied as to
      form in all material respects with the requirements of the Securities Act
      and the Securities Act Regulations;

                                       21
<PAGE>
 
            (xix)   the statements under the captions "Risk Factors," "Tax
      Status of the Company," "Description of Shares of Beneficial Interest,"
      "Common Shares Eligible for Future Sale," and "Federal Income Tax
      Consequences" in the Registration Statement and the Prospectus, insofar as
      such statements constitute a summary of the legal matters referred to
      therein, constitute accurate summaries thereof in all material respects;

            (xx)    the Shares have been approved for quotation on the Nasdaq
      National Market;

            (xxi)   to such counsel's knowledge, there are no actions, suits or
      proceedings, inquiries, or investigations pending or threatened against
      the Company or the Partnership or any of their respective officers and
      trustees or to which the properties of any such entity are subject, at law
      or in equity, before or by any federal, state, local or foreign
      governmental or regulatory commission, board, body, authority, arbital
      panel or agency that are required to be described in the Prospectus but
      are not so described;

            (xxii)  to such counsel's knowledge, there are no contracts or
      documents of a character that are required to be filed as exhibits to the
      Registration Statement or to be described or summarized in the Prospectus
      which have not been so filed, summarized or described;
 
            (xxiii) the Company is organized in conformity with the
      requirements for qualification as a real estate investment trust pursuant
      to Sections 856 through 860 of the Code, and the Company's proposed method
      of operation will enable it to meet the requirements for qualification and
      taxation as a real estate investment trust under the Code. The Partnership
      will be treated as a partnership for federal income tax purposes and not
      as a corporation or an association taxable as a corporation;

            (xxiv)  neither the Company nor the Partnership is or, solely as a
      result of transactions contemplated hereby and the application of the
      proceeds from the sale of the Shares as described in the Registration
      Statement and the Prospectus under the caption "Use of Proceeds," will
      become an "investment company" or a company "controlled" by an "investment
      company" within the meaning of the Investment Company Act of 1940, as
      amended (the "1940 Act"); and

            (xxv)   the issuance of Common Shares in the FBR Offering was exempt
      from the registration requirements of the Securities Act and applicable
      state securities laws.
     
      In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company, independent
public accountants of the Company and Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs
(viii) and (xix) above), have not independently, checked, investigated or
verified such statements and has relied as to materiality upon discussions with,
and representations and opinions of officers and other representatives of the
Company nothing has caused them to believe that the     

                                       22
<PAGE>
 
Registration Statement, as of the date it became effective, and the Preliminary
Prospectus or the Prospectus, as of their respective dates and as of the date of
such counsel's opinion, contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that, in each
case, such counsel need express no view with respect to the financial statements
and other financial and pro forma or statistical data included in the
Registration Statement, Preliminary Prospectus or Prospectus).

      (c) All Initial Properties shall be acquired pursuant to purchase
agreements that contain representations and warranties, rights and other terms
reasonably acceptable to the Representative.

      (d) The Representative shall have received from Arthur Andersen LLP,
letters dated, respectively, as of the date of this Agreement, the Closing Time
and each Date of Delivery, as the case may be, addressed to the Representative
as representative of the Underwriters and in form and substance satisfactory to
the Representative.

      (e) The Underwriters shall have received at the Closing Time and on each
Date of Delivery the favorable opinion of Hunton & Williams, dated the Closing
Time or such Date of Delivery, addressed to the Representative and in form and
substance satisfactory to the Representative.

      (f) No amendment or supplement to the Registration Statement or Prospectus
shall have been filed to which the Underwriters shall have objected in writing.

      (g) Prior to the Closing Time and each Date of Delivery (i) no stop order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus has
been issued by the Commission, and no suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes, has occurred; and (ii)
the Registration Statement and the Prospectus, as amended or supplemented, shall
not contain an untrue statement of material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
    
      (h) Between the time of execution of this Agreement and the Closing Time
or the relevant Date of Delivery (i) no material and unfavorable change in the
assets, results of operations, business, or condition (financial or otherwise)
of the Company and the Partnership taken as a whole shall occur or become known
(whether or not arising in the ordinary course of business) [or that makes it,
in the judgment of the Representative, impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus], or (ii) no transaction
which is material and unfavorable to the Company shall have been entered into by
the Company or the Partnership.      

      (i) At the Closing Time, the Warrant Agreement and the Other Transaction
Documents shall have been entered into and delivered by all required parties.

                                       23
<PAGE>
 
      (j) At the Closing Time, the Shares shall have been approved for quotation
on the Nasdaq National Market.

      (k) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
 
      (l) The Representative shall have received a two year lock-up letter from
each officer and a one-year lock-up letter from each trustee of the Company, in
form and substance reasonably satisfactory to the Representative.
 
      (m) The Company will, at the Closing Time and on each Date of Delivery,
deliver to the Underwriters a certificate of two principal executive officers to
the effect that, to each of such officer's knowledge, the representations and
warranties of the Company set forth in this Agreement and the conditions set
forth in paragraphs (g), (h), (i), (j) and (p) of this Section 6 have been met
and are true and correct as of such date.

      (n) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any statement
in the Registration Statement and the Prospectus, the representations,
warranties and statement of the Company contained herein and in the Warrant
Agreement, and the performance by the Company of its covenants contained herein
and therein, and the fulfillment of any conditions contained herein or therein,
as of the Closing Time or any Date of Delivery as the Underwriters may
reasonably request.

      (o) All filings with the Commission required by Rule 424 under the
Securities Act shall have been made within the applicable time period prescribed
for such filing by such Rule.

      (p) The Company shall perform such of its obligations under this Agreement
and the Warrant Agreement as are to be performed by the terms hereof and thereof
at or before the Closing Time or the relevant Date of Delivery.

      The several obligations of the Underwriters to purchase Option Shares
hereunder are subject to the delivery to the Representative on the Date if
Delivery of such documents as the Underwriter may reasonably request with
respect to the good standing of the Company, the due authorization and issuance
of the Option Shares and other matters related to the issuance of the Option
Shares.

      7.  Termination:
          ----------- 

      The obligations of the several Underwriters hereunder shall be subject to
termination in the absolute discretion of the Representative, at any time prior
to the Closing Time or any Date of Delivery, (i) if any of the conditions
specified in Section 6 shall not have been fulfilled when and as required by
this Agreement to be fulfilled, or (ii) if there has been since the respective
dates as of which information is given in the Registration Statement, any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the assets, operations, business, prospects or
condition (financial or otherwise) of the Company, whether or not arising in the
ordinary course of business, or (iii) if there has occurred outbreak or
escalation of hostilities or other national or international calamity or crisis
or change in economic, political or other conditions the effect of which on the
financial markets of the United 

                                       24
<PAGE>
 
States is such as to make it, in the judgment of the Representative,
impracticable to market or deliver the Shares or enforce contracts for the sale
of the Shares, or (iv) if trading in any securities of the Company has been
suspended by the Commission or by Nasdaq or if trading generally on the New York
Stock Exchange or in the Nasdaq over-the-counter market has been suspended
(including automatic halt in trading pursuant to market-decline triggers other
than those in which solely program trading is temporarily halted), or
limitations on prices for trading (other than limitations on hours or numbers of
days of trading) have been fixed, or maximum ranges for prices for securities
have been required, by such exchange or the NASD or Nasdaq or by order of the
Commission or any other governmental authority, or (v) if there has been any
downgrading in the rating of any of the Company's debt securities or preferred
stock by any "nationally recognized statistical rating organization" (as defined
for purposes of Rule 436(g) under the Securities Act), or (vi) any federal or
state statute, regulation, rule or order of any court or other governmental
authority has been enacted, published, decreed or otherwise promulgated which in
the reasonable opinion of the Representative has a material adverse affect or
will have a material adverse affect on the assets, operations, business,
prospects or condition (financial or otherwise) of the Company, or (viii) any
action has been taken by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in the reasonable opinion of the
Representative has a material adverse effect on the securities markets in the
United States.

      If the Representative elects to terminate this Agreement as provided in
this Section 7, the Company and the Underwriters shall be notified promptly by
telephone, promptly confirmed by letter or telegram.

      If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply in all material respects with any of the terms of this
Agreement, the Company shall not be under any obligation or liability under this
Agreement (except to the extent provided in Sections 5 and 9 hereof) and the
Underwriters shall be under no obligation or liability to the Company under this
Agreement (except to the extent provided in Section 9 hereof) or to one another
hereunder.

      8.  Increase in Underwriters' Commitments:
          -------------------------------------

      If any Underwriter shall default at the Closing Time or on a Date of
Delivery in its obligation to take up and pay for the Shares to be purchased by
it under this Agreement on such date, the Representative shall have the right,
within 36 hours after such default, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Shares which such Underwriter shall have agreed but failed
to take up and pay for (the "Defaulted Shares"). Absent the completion of such
arrangements within such 36 hour period, (i) if the total number of Defaulted
Shares does not exceed 10% of the total number of Shares to be purchased on such
date, each non-defaulting Underwriter shall take up and pay for (in addition to
the number of Shares which it is otherwise obligated to purchase on such date
pursuant to this Agreement) the portion of the total number of Shares agreed to
be purchased by the defaulting Underwriter on such date in the proportion that
its underwriting obligations hereunder bears to the underwriting obligations of
all non-defaulting Underwriters; and (ii) if the total number of Defaulted
Shares exceeds 10% of such total, the 

                                       25
<PAGE>
 
Representative may terminate this Agreement by notice to the Company, without
liability to any non-defaulting Underwriter.

      Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Shares hereunder on such date unless all of the Shares to be
purchased on such date are purchased on such date by the Underwriters (or by
substituted Underwriters selected by the Representative with the approval of the
Company or selected by the Company with the approval of the Representative).

      If a new Underwriter or Underwriters are substituted for a defaulting
Underwriter in accordance with the foregoing provision, the Company or the
non-defaulting Underwriters shall have the right to postpone the Closing Time or
the relevant Date of Delivery for a period not exceeding five business days in
order that any necessary changes in the Registration Statement and Prospectus
and other documents may be effected.

      The term Underwriter as used in this Agreement shall refer to and include
any Underwriter substituted under this Section 8 with the like effect as if such
substituted Underwriter had originally been named in this Agreement.

      9.  Indemnity and Contribution by the Company, the Partnership and the
          ------------------------------------------------------------------
Underwriters:
- ------------
 
      (a) The Company and the Partnership, jointly and severally agree to
indemnify, defend and hold harmless each Underwriter and any person who controls
any Underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any loss, expense, liability,
damage or claim (including the reasonable cost of investigation) which, jointly
or severally, any such Underwriter or controlling person may incur under the
Securities Act, the Exchange Act or otherwise, insofar as such loss, expense,
liability, damage or claim arises out of or is based upon [(i) any breach of any
representation, warranty or covenant of the Company or the Partnership contained
herein or] (ii) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or in the Registration Statement
as amended by any post-effective amendment thereof by the Company) or in a
Prospectus (the term Prospectus for the purpose of this Section 9 being deemed
to include any Preliminary Prospectus, the Prospectus and the Prospectus as
amended or supplemented by the Company), or arises out of (iii) any omission or
alleged omission to state a material fact required to be stated in either such
Registration Statement or Prospectus or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as any such loss, expense, liability, damage or claim
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission of a material fact contained in and in
conformity with information furnished in writing by the Underwriters through the
Representative to the Company or the Partnership expressly for use in such
Registration Statement or such Prospectus; provided, however, that the indemnity
agreement contained in this subsection (a) with respect to the Preliminary
Prospectus or the Prospectus shall not inure to the benefit of an Underwriter
(or to the benefit of any person controlling such Underwriter) with respect to
any person asserting any such loss, expense, liability, damage or claim which is
the subject thereof if the Prospectus or any supplement thereto prepared with
the consent of the Representative and furnished to the Underwriters prior to 

                                       26
<PAGE>
 
the Closing Time corrected any such alleged untrue statement or omission and if
such Underwriter failed to send or give a copy of the Prospectus or supplement
thereto to such person at or prior to the written confirmation of the sale of
Shares to such person, unless such failure resulted from noncompliance by the
Company or the Partnership with Section 4(c) of this Agreement.

      If any action is brought against an Underwriter or controlling person in
respect of which indemnity may be sought against the Company or the Partnership
pursuant to the preceding paragraph, such Underwriter shall promptly notify the
Company and the Partnership in writing of the institution of such action and the
Company and the Partnership shall assume the defense of such action, including
the employment of counsel and payment of expenses; provided, however, that any
failure or delay to so notify the Company or the Partnership will not relieve
the Company or the Partnership of any obligation hereunder, except to the extent
that its ability to defend is actually impaired by such failure or delay. Such
Underwriter or controlling person shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of such Underwriter or such controlling person unless the
employment of such counsel shall have been authorized in writing by the Company
and the Partnership in connection with the defense of such action or the Company
and the Partnership shall not have employed counsel to have charge of the
defense of such action within a reasonable time or such indemnified party or
parties shall have reasonably concluded (based on the advice of counsel) that
there may be defenses available to it or them which are different from or
additional to those available to the Company or the Partnership and which
counsel to the Underwriter believes may present a conflict for counsel
representing the Company or the Partnership and the Underwriter (in which case
the Company and the Partnership shall not have the right to direct the defense
of such action on behalf of the indemnified party or parties), in any of which
events such fees and expenses shall be borne by the Company and the Partnership
and paid as incurred (it being understood, however, that the Company and the
Partnership shall not be liable for the expenses of more than one separate firm
of attorneys for the Underwriters or controlling persons in any one action or
series of related actions in the same jurisdiction representing the indemnified
parties who are parties to such action). Anything in this paragraph to the
contrary notwithstanding, neither the Company nor the Partnership shall be
liable for any settlement of any such claim or action effected without its
written consent.

      (b) Each Underwriter agrees, severally and not jointly, to indemnify,
defend and hold harmless the Partnership, the Company, their trustees and
officers that signed the Registration Statement and any person who controls the
Partnership or the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act from and against any loss, expense,
liability, damage or claim (including the reasonable cost of investigation)
which, jointly or severally, the Company, the Partnership or any such person may
incur under the Securities Act, the Exchange Act or otherwise, insofar as such
loss, expense, liability, damage or claim arises out of or is based upon any
untrue statement or alleged untrue statement of a material fact contained in and
in conformity with information furnished in writing by such Underwriter through
the Representative to the Company or the Partnership expressly for use in the
Registration Statement (or in the Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus, or arises
out of or is based upon any omission or alleged omission to state a material
fact in connection with such information required to be stated either in the
Registration Statement or Prospectus or necessary to make such 

                                       27
<PAGE>
 
information, in the light of the circumstances under which made, not misleading.
The statements set forth in the last paragraph on the cover page and under the
caption "Underwriting," and the information regarding "Stabilizing" and "Passive
Market Making" in the Preliminary Prospectus and the Prospectus (to the extent
such statements relate to the Underwriters) constitute the only information
furnished by or on behalf of any Underwriter through the Representative to the
Company for purposes of Section 3(p) and this Section 9.

      If any action is brought against the Company, the Partnership or any such
person in respect of which indemnity may be sought against any Underwriter
pursuant to the foregoing paragraph, the Company, the Partnership or such person
shall promptly notify the Representative in writing of the institution of such
action and the Representative, on behalf of the Underwriters, shall assume the
defense of such action, including the employment of counsel and payment of
expenses, provided, however, that any failure or delay to so notify the
Representative will not relieve any such Underwriter of any obligation
hereunder, except to the extent that its ability to defend is actually impaired
by such failure or delay. The Company, the Partnership or such person shall have
the right to employ its own counsel in any such case, but the fees and expenses
of such counsel shall be at the expense of the Company, the Partnership or such
person unless the employment of such counsel shall have been authorized in
writing by the Representative in connection with the defense of such action or
the Representative shall not have employed counsel to have charge of the defense
of such action within a reasonable time or such indemnified party or parties
shall have reasonably concluded (based on the advice of counsel) that there may
be defenses available to it or them which are different from or additional to
those available to the Underwriters (in which case the Representative shall not
have the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses shall be borne
by such Underwriter and paid as incurred (it being understood, however, that the
Underwriters shall not be liable for the expenses of more than one separate firm
of attorneys in any one action or series of related actions in the same
jurisdiction representing the indemnified parties who are parties to such
action). Anything in this paragraph to the contrary notwithstanding, no
Underwriter shall be liable for any settlement of any such claim or action
effected without the written consent of the Representative.

      (c) If the indemnification provided for in this Section 9 is unavailable
to an indemnified party under subsections (a) and (b) of this Section 9 in
respect of any losses, expenses, liabilities, damages or claims referred to
therein, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, expenses, liabilities, damages or
claims (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Partnership on the one hand and the Underwriters
on the other hand from the offering of the Shares or (ii) if (but only if) the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Partnership on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
expenses, liabilities, damages or claims, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Partnership on the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and the 

                                       28
<PAGE>
 
Partnership bear to the underwriting discounts and commissions received by the
Underwriters. The relative fault of the Company and the Partnership on the one
hand and of the Underwriters on the other shall be determined by reference to,
among other things, whether the untrue statement or alleged untrue statement of
a material fact or omission or alleged omission relates to information supplied
by the Company or the Partnership or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any claim or action.

      (d) The Company and the Partnership, on the one hand, and the
Underwriters, on the other, agree that it would not be just and equitable if
contribution pursuant to this Section 9 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in subsection (c)(i) and, if applicable (ii), above.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.

      10. Survival:
          --------

      The indemnity and contribution agreements contained in Section 9 and the
covenants, warranties and representations of the Company and the Partnership
contained in Sections 3, 4 and 5 of this Agreement shall remain in full force
and effect regardless of any investigation made by or on behalf of any
Underwriter, or any person who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, or by or on
behalf of the Company and the Partnership, their trustees and officers or any
person who controls the Company or the Partnership within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, and shall survive
any termination of this Agreement or the sale and delivery of the Shares. The
Company, the Partnership and each Underwriter agree promptly to notify the
others of the commencement of any litigation or proceeding against it and, in
the case of the Company, against any of the Company's officers and trustees, in
connection with the sale and delivery of the Shares, or in connection with the
Registration Statement or Prospectus, it being understood that notice by the
Company or the Partnership to the Representative in accordance with Section 11
shall constitute prompt and adequate notice to the Underwriters.

      11. Notices:
          -------

      Except as otherwise herein provided, all statements, requests, notices and
agreements shall be in writing or by telegram and, if to the Underwriters, shall
be sufficient in all respects if delivered to Friedman, Billings, Ramsey & Co.,
Inc., 1001 19th Street North, Arlington, Virginia 22209, Attention: Syndicate
Department; if to the Company, shall be sufficient in all respects if 

                                       29
<PAGE>
 
delivered to the Company at the offices of the Company at 1925 North Lynn
Street, Suite 306, Arlington, Virginia 22209, attention: Thomas D. Eckert, Chief
Executive Officer and President; and, if to the Partnership, shall be sufficient
in all respects if delivered to the offices of the Partnership at 1925 North
Lynn Street, Suite 306, Arlington, Virginia 22209, attention: Thomas D. Eckert,
Chief Executive Officer and President.

      12. Governing Law; Consent to Jurisdiction; Headings:
          ------------------------------------------------

      THIS AGREEMENT  SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE  WITH,
THE LAWS OF THE COMMONWEALTH OF VIRGINIA,  WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.

      13. Parties in Interest:
          -------------------

      The Agreement herein set forth has been and is made solely for the benefit
of the Underwriters, the Company, the Partnership and the controlling persons,
trustees and officers referred to in Sections 9 and 10 hereof, and their
respective successors, assigns, executors and administrators. No other person,
partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.

      14. Counterparts:
          ------------

      This Agreement may be signed by the parties in counterparts which together
shall constitute one and the same agreement among the parties.

                                       30
<PAGE>
 
      If the foregoing correctly sets forth the understanding among the Company,
the Partnership and the Underwriters, please so indicate in the space provided
below for the purpose, whereupon this Agreement shall constitute a binding
agreement among the Company, the Partnership and the Underwriters.

                                       Very truly yours,

                                       CAPITAL AUTOMOTIVE REIT



                                       By:
                                          ------------------------------
                                       Name:
                                            ----------------------------
                                       Title:
                                             ---------------------------

                                       CAPITAL AUTOMOTIVE L.P.

                                          By:   Capital Automotive REIT
                                          Its:  General Partner


                                       By:
                                          -----------------------------
                                       Name:
                                            ---------------------------
                                       Title:
                                             --------------------------

                                       31
<PAGE>
 
Accepted and agreed to as 
of the date first above written:

FRIEDMAN, BILLINGS, RAMSEY &
CO., INC.


By:
   ------------------------------------
Name:
     ----------------------------------
Title:
      ---------------------------------





For themselves and as Representative
of the other Underwriters named on
Schedule I hereto.

                                       32
<PAGE>
 
                                  Schedule I

                                                 Number of
Underwriter                                      Initial
                                                 Shares to be
                                                 Purchased

Friedman, Billings, Ramsey & Co., Inc.           [____________]
[_______________________________]                [____________]

                                                 ===============
      Total                                      $20,000,000


<PAGE>
 
                                  Schedule II
                          Subsidiaries of the Company


Capital Automotive L.P.


<PAGE>
 
                                 Schedule III
                          Other Transaction Documents


Agreement of Limited Partnership of Capital Automotive L.P.
Indemnification Agreement
1998 Equity Incentive Plan
Employment Agreement by and between the Company and Thomas D. Eckert, as amended
Employment Agreement by and between the Company and Scott M. Stahr, as amended
Employment Agreement by and between the Company and Donald L. Keithley, as
amended Employment Agreement by and between the Company and David S. Kay, as
amended 
Option Agreement 
NationsBank, N.A. Line of Credit Agreement 
FBR Asset Investment Purchase Agreement, as amended 
FBR Registration Rights Agreement
Pohanka Contribution Agreement dated as of November 21, 1997, as amended
Rosenthal Contribution Agreement dated as of November 21, 1997, as amended
Sheehy Contribution Agreement dated as of November 24, 1997, as amended 
Cherner Contribution Agreement dated as of November 24, 1997, as amended 
Cross-Continent Auto Retailers, Inc. Purchase Agreement dated as of December 31,
1997, as amended
Pohanka Lease Agreement 
Rosenthal Lease Agreement 
Sheehy Lease Agreement
Cherner Lease Agreement 
Cross-Continent Lease Agreement 
Underwriters Warrant Agreement 
Dealers Warrant Agreement 
Pohanka Guaranty Agreement 
Rosenthal Guaranty Agreement 
Friedman, Billings, Ramsey Group, Inc. Loan Agreement, as
amended 
Friedman, Billings, Ramsey Group, Inc. Security Agreement
Cross-Continent Guaranty Agreement 
Good News Purchase Agreement dated as of
January 10, 1998, as amended 
Good News Lease Agreement 
Good News Guaranty Agreement 
Kline Purchase Agreement dated as of January 12, 1998 
Kline Lease Agreement 
Kline Guaranty Agreement


<PAGE>
 
                                   Schedule IV
               Directors, Officers and Employees of the Company
                       For Whom Shares Have Been Reserved



<PAGE>
 
                                                EXHIBIT 3.1



                            CAPITAL AUTOMOTIVE REIT



                   AMENDED AND RESTATED DECLARATION OF TRUST



                          Dated as of February 3, 1998
<PAGE>
 
                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                         Page
<S>            <C>                                                       <C>
ARTICLE I      FORMATION................................................    1

ARTICLE II     NAME.....................................................    1

ARTICLE III    NATURE, PURPOSE AND POWERS...............................    2
               Section 1.  Purposes.....................................    2
               Section 2.  Powers.......................................    2

ARTICLE IV     RESIDENT AGENT...........................................    2

ARTICLE V      DEFINITIONS..............................................    2

ARTICLE VI     BOARD OF TRUSTEES........................................    7
               Section 1.  Powers.......................................    7
               Section 2.  Initial Trustee; Trustees....................    7
               Section 3.  Vacancies....................................    8
               Section 4.  Resignation, Removal or Death................    8
               Section 5.  Independent Trustees.........................    8
               Section 6.  Business Activities of Trustees..............    8

ARTICLE VII    SHARES OF BENEFICIAL INTEREST............................    9
               Section 1.  Authorized Shares............................    9
               Section 2.  Common Shares................................    9
               Section 3.  Preferred Shares.............................   10
               Section 4.  Classified or Reclassified Shares............   12
               Section 5.  Authorization by Board of Share Issuance.....   12
               Section 6.  General Nature of Shares.....................   13
               Section 7.  Fractional Shares............................   13
               Section 8.  Declaration of Trust and Bylaws..............   13
               Section 9.  Preemptive Rights............................   13

ARTICLE VIII   RESTRICTIONS ON TRANSFER AND SHARES-IN-TRUST.............   13
               Section 1.  Restrictions on Transfers....................   13
               Section 2.  Shares-in-Trust..............................   17
               Section 3.  Remedies Not Limited.........................   19
               Section 4.  Ambiguity....................................   20
               Section 5.  Legend.......................................   20
               Section 6.  Severability.................................   20
</TABLE>

                                      -i-
<PAGE>
 
<TABLE>
<S>            <C>                                                       <C>
ARTICLE IX     SHAREHOLDERS.............................................   21
               Section 1.  Meetings.....................................   21
               Section 2.  Voting Rights................................   21
               Section 3.  Preemptive and Appraisal Rights..............   21
               Section 4.  Extraordinary Actions........................   21
               Section 5.  Board Approval...............................   22
               Section 6.  Action By Shareholders Without a Meeting.....   22

ARTICLE X      LIABILITY LIMITATION, INDEMNIFICATION AND TRANSACTIONS
               WITH THE TRUST...........................................   22
               Section 1.  Limitation of Shareholder Liability..........   22
               Section 2.  Limitation of Trustee and Officer Liability..   22
               Section 3.  Express Exculpatory Clauses in Instruments...   22
               Section 4.  Indemnification..............................   23
               Section 5.  Transactions Between the Trust and its
                           Trustees, Officers, Employees and Agents.....   23

ARTICLE XI     AMENDMENTS...............................................   23
               Section 1.  General......................................   23
               Section 2.  By Trustees..................................   23
               Section 3.  By Shareholders..............................   24

ARTICLE XII    MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY..........   24

ARTICLE XIII   DURATION AND TERMINATION OF TRUST........................   24
               Section 1.  Duration.....................................   24
               Section 2.  Termination..................................   24

ARTICLE XIV    CONTROL SHARE ACQUISITIONS...............................   25

ARTICLE XV     MISCELLANEOUS............................................   25
               Section 1.  Governing Law................................   25
               Section 2.  Reliance by Third Parties....................   25
               Section 3.  Severability.................................   26
               Section 4.  Construction.................................   26
               Section 5.  Recordation..................................   26
</TABLE>

                                     -ii-
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT

                              DECLARATION OF TRUST

          This AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration of Trust"
or "Declaration") of Capital Automotive REIT, a Maryland real estate investment
trust (the "Trust") is made as of the date set forth above by the undersigned
Trustees.

          WHEREAS, a real estate investment trust under Title 8 of the
Corporations and Associations Article of the Annotated Code of Maryland, as
amended ("Title 8") was formed on October 20, 1997; and

          WHEREAS, the Board of Trustees of the Trust desire that the Trust
qualify as a "real estate investment trust" under the Internal Revenue Code of
1986, as amended (the "Code"), so long as such qualification, in the opinion of
the Trustees, is advantageous to the Shareholders; and

          WHEREAS, the beneficial interest in the Trust shall be divided into
transferable shares of one or more classes or series evidenced by certificates;

          NOW, THEREFORE, the Trustees hereby declare that they will hold all
property which they have or may hereafter acquire as such Trustees, together
with the proceeds thereof, in trust, and manage the Trust Property (as defined
herein) for the benefit of the Shareholders as provided by this Declaration of
Trust.

          The Trust under Title 8 hereby amends and restates its Declaration of
Trust as currently in effect to read in its entirety as follows:

          The following provisions are all the provisions of the  Declaration of
Trust currently in effect and as hereinafter amended:

                                   ARTICLE I
                                   FORMATION

          The Trust is a REIT within the meaning of Title 8.  The Trust shall
not be deemed to be a general partnership, limited partnership, joint venture,
joint stock company or a corporation (but nothing herein shall preclude the
Trust from being treated for tax purposes as an association under the Code).
 
                                   ARTICLE II
                                      NAME

          The name of the Trust is Capital Automotive REIT.
<PAGE>
 
          So far as may be practicable, the business of the Trust shall be
conducted and transacted under that name, which name (and the word "Trust"
wherever used in this Declaration of Trust, except where the context otherwise
requires) shall refer to the Trustees collectively but not individually or
personally and shall not refer to the Shareholders or to any officers, employees
or agents of the Trust or of such Trustees.

          Under circumstances in which the Board of Trustees determines that the
use of the name "Capital Automotive REIT" is not practicable, the Trust may use
any other designation or name for the Trust.

                                  ARTICLE III
                           NATURE, PURPOSE AND POWERS

          Section 1.     Purposes.  The purposes for which the Trust is formed
                         ---------                                            
is to engage in any business or activity permitted to be engaged in by a REIT
under Title 8, including, without limitation or obligation, engaging in business
as a REIT under the Code.

          Section 2.     Powers.  The Trust shall have all of the powers granted
                         -------                                                
to a REIT by Title 8 and all other powers set forth in the Declaration of Trust
which are not inconsistent with law and are appropriate to promote and attain
the purposes set forth in the Declaration of Trust.

                                   ARTICLE IV
                                 RESIDENT AGENT

          The name of the resident agent for service of process of the Trust in
the State of Maryland is WC&P Agent Corporation, 100 Light Street, Baltimore,
Maryland 21202. The Trust may have such offices or places of business within or
without the State of Maryland as the Trustees may from time to time determine.

                                   ARTICLE V
                                  DEFINITIONS

          As used in this Declaration of Trust, the following terms shall have
the following meanings unless the context otherwise requires:

          "Affiliate" of a person shall mean (i) any person that, directly or
indirectly, controls or is controlled by or is under common control with such
person, (ii) any other person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital shares, shares or equity
interests of such person, or (iii) any officer, director, employee, partner,
member, manager or trustee of such person or of any person controlling,
controlled by or under common control with such person (excluding trustees and
persons serving in similar capacities who are not otherwise an Affiliate of such
person).  For the purpose of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any person, shall mean the possession, directly
or 

                                      -2-
<PAGE>
 
indirectly, of the power to direct or cause the direction of the management
and policies of such person, through the ownership of voting securities,
partnership interests or other equity interests.

          "Beneficial Ownership" shall mean ownership of Shares (or options to
acquire Shares) by a Person who would be treated as an owner of such Shares
under Section 542(a)(2) of the Code either directly or indirectly through the
application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of
the Code (but without regard to Section 856(h)(3) of the Code). The terms
"Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have
correlative meanings.

          "Beneficiary" shall mean, with respect to any Share Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the
Share Trust as the beneficiary or beneficiaries of such Share Trust, in
accordance with the provisions of Section 2(A) of Article VIII hereof.
 
          "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

          "Common Shares" shall mean the common shares of beneficial interest of
the Company, par value $.01 per share.
 
          "Constructive Ownership" shall mean ownership of Shares (or options to
acquire Shares) by a Person who would be treated as an owner of such Shares
either directly or indirectly through the application of Section 318 of the
Code, as modified by Section 856(d)(5) of the Code.  The terms "Constructive
Owner," "Constructively Owns," and "Constructively Owned" shall have correlative
meanings.  For purposes of Article VIII of the Declaration, the right of a
limited partner in the Operating Partnership, to require the partnership to
redeem units of  limited partnership interest pursuant to the Partnership
Agreement shall not be considered to be an option or similar right to acquire
Shares of the Trust.

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.

          "Initial Public Offering" means the sale of Common Shares pursuant to
the Trust's first effective registration statement for such Common Shares filed
under the Securities Act.

          "Market Price" on any date shall mean the average of the Closing Price
for the five consecutive Trading Days ending on such date.  The "Closing Price"
on any date shall mean the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Shares are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Shares are listed or
admitted to trading or, if the Shares are not listed or admitted to trading on
any 

                                      -3-
<PAGE>
 
national securities exchange, on National Market System of The Nasdaq Stock
Market or, if the Shares are not quoted on such National Market System, the
average closing bid and asked prices on such day in the over-the-counter market
as reported by Nasdaq or, if bid and asked prices for the Shares on such day
shall not have been reported through Nasdaq, the average of the bid and asked
prices on such day as furnished by any NYSE member firm regularly making a
market in the Shares selected for such purpose by the Board of Trustees.

          "Non-Transfer Event" shall mean an event (other than a purported
Transfer) that would cause any Person to Beneficially Own or Constructively Own
Shares in excess of the Ownership Limit, including, but not limited to, the
granting of any option or entering into any agreement for the sale, transfer or
other disposition of Shares or the sale, transfer, assignment or other
disposition of any securities or rights convertible into or exchangeable for
Shares.

          "Ownership Limit" shall mean (i) with respect to the Common Shares,
9.9% of the number of outstanding shares; and (ii) with respect to any class or
series of Preferred Shares, 9.9% of the number of outstanding shares of such
class or series of Preferred Stock.

          "Operating Partnership" means Capital Automotive L.P., a Delaware
limited partnership.

          "Partnership Agreement" shall mean the agreement of limited
partnership of the Operating Partnership, as amended and restated from time to
time.

          "Partnership Unit" shall mean a fractional, undivided share of the
partnership interests of the Operating Partnership.

          "Preferred Shares" shall mean the preferred shares of beneficial
interest of the Company, par value $.01 per share.

          "Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 2(E) of Article VIII
hereof.

          "Person" means (unless otherwise stated herein) an individual, a
corporation, a partnership, a company, an estate, a trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside for or to be used exclusively for the purposes described
in Section 642(c) of the Code,  a joint venture, a bank, an association, a
private foundation within the meaning of Section 509(a) of the Code, a stock
company or association, a limited liability company or an other entity, or any
government or agency or political subdivision thereof, and also includes a
"group" as that term is used for purposes of Section 13(d)(3) of the Exchange
Act and shall include any successor (by merger, consolidation, reorganization or
otherwise) of such entity or group; but does not include an underwriter which
participated in any public offering registered under the Securities Act of any
Shares of the Trust for a period of 90 days following the purchase by such
underwriter of such Shares; provided, further, that the restrictions contained
in Article VIII hereof will not be violated following the distribution by such
underwriter of such underwritten Shares.

                                      -4-
<PAGE>
 
          "Prohibited Owner" shall mean, with respect to any purported Transfer
or Non-Transfer Event, any Person who, but for the provisions of Section 1(B) of
Article VIII hereof, would own record title to Shares.

          "Redemption Rights" shall mean the rights granted under the
Partnership Agreement to the limited partners to redeem, under certain
circumstances, their limited partnership interests for cash (or, at the option
of the Trust, Common Shares).

          "REIT" shall mean a real estate investment trust under Section 856 of
the Code.

          "Restriction Termination Date" shall mean the first day after the date
of the Initial Public Offering on which the Board of Trustees and the
Shareholders of the Trust determine, pursuant to 1(C) of Article VI and Section
2 of Article IX, that it is no longer in the best interests of the Trust to
attempt to, or continue to, qualify as a REIT.

          "Shares" shall mean shares of beneficial interest of the Trust of any
class or series. The term "Shares" shall include all shares that are held as
Shares-in-Trust in accordance with the provisions of Section 2 of Article VIII.
 
          "Shares-in-Trust" shall mean any Shares designated Shares-in-Trust
pursuant to Section 1(B) of Article VIII hereof.

          "Share Trust" shall mean any separate trust created pursuant to
Section 1(B) of Article VIII hereof and administered in accordance with the
terms of Section 2 of Article VIII hereof, for the exclusive benefit of any
Beneficiary.

          "Share Trustee" shall mean any person or entity unaffiliated with both
the Trust and any Prohibited Owner, such Share Trustee to be designated by the
Trust to act as trustee of any Share Trust, or any successor trustee thereof.

          "Trading Day" shall mean a day on which the principal national
securities exchange on which the Shares are listed or admitted to trading is
open for the transaction of business or, if the Shares are not listed or
admitted to trading on any national securities exchange, 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.

          "Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of Shares, whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise (including (i) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
Shares or (ii) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Shares).  "Transfer"
(as a verb) shall have the correlative meaning.

                                      -5-
<PAGE>
 
          "Real Property" or "Real Estate" means land, rights in land (including
leasehold interests), and any buildings, structures, improvements, furnishings,
fixtures and equipment located on or used in connection with land and rights or
interests in land.

          "Securities" means Shares, any stock, shares or other evidences of
equity or beneficial or other interests, voting trust certificates, bonds,
debentures, notes or other evidences of indebtedness, secured or unsecured,
convertible, subordinated or otherwise, or in general any instruments commonly
known as "securities" or any certificates of interest, shares or participations
in, temporary or interim certificates for, receipts for, guarantees of, or
warrants, options or rights to subscribe to, purchase or acquire, any of the
foregoing, or shares or other securities of any successor in interest of the
Trust.

          "Securities Act" means the Securities Act of 1933, as amended.

          "Securities of the Trust" means any Securities issued by the Trust.

          "Shareholders" means holders of record of outstanding Shares.

          "Shares" means shares of beneficial interest of the Trust of any class
or series.

          "Trustees", "Board" or "Board of Trustees" means, collectively, all
individuals who have been duly elected and qualify as trustees of the Trust
hereunder.

          "Trust Property" means any and all property, real, personal or
otherwise, tangible or intangible, which is transferred or conveyed to the Trust
or the Trustees (including all rents, income, profits and gains therefrom),
which is owned or held by, or for the account of, the Trust.

                                      -6-
<PAGE>
 
                                   ARTICLE VI
                               BOARD OF TRUSTEES

           Section 1.    Powers.
                         -------

                         (A) Subject to any express limitations contained in the
Declaration of Trust or in the Bylaws, (i) the business and affairs of the Trust
shall be managed under the direction of the Board of Trustees and (ii) the Board
shall have full, exclusive and absolute power, control and authority over any
and all property of the Trust. The Board may take any action as it, in its sole
judgment and discretion, deems necessary or appropriate to conduct the business
and affairs of the Trust. The Declaration of Trust shall be construed with a
presumption in favor of the grant of power and authority to the Board. Any
construction of the Declaration of Trust or determination made in good faith by
the Board concerning its powers and authority hereunder shall be conclusive. The
enumeration and definition of particular powers of the Trustees included in the
Declaration of Trust or in the Bylaws shall in no way be construed or deemed by
inference or otherwise in any manner to exclude or limit the powers conferred
upon the Board of Trustees under the general laws of the State of Maryland or
any other applicable laws.

                         (B) Except as otherwise provided in the Bylaws of the
Trust (the "Bylaws"), the Board, without any action by the Shareholders, shall
have and may exercise, on behalf of the Trust, without limitation and in its
sole discretion, the power to adopt, amend and repeal Bylaws; to elect officers
in the manner prescribed in the Bylaws; to solicit proxies from holders of
Shares; and to do any other acts and deliver any other documents necessary or
appropriate to the foregoing powers.

                         (C) It shall be the duty of the Board of Trustees to
ensure that the Trust satisfies the requirements for qualification as a REIT
under the Code, including, but not limited to, the ownership of outstanding
Shares, the nature of its assets, the sources of its income, and the amount and
timing of its distributions to its Shareholders. The Board of Trustees shall
take no intentional action to disqualify the Trust as a REIT or to otherwise
revoke the Trust's election to be taxed as a REIT without the affirmative vote
of two-thirds of the number of Shares to vote on such matter at a meeting of the
Shareholders. The Board of Trustees, without any action by the Shareholders, may
amend the Declaration from time to time to qualify as a REIT under the Code or
Title 8 by a vote of two-thirds of the Trustees.

          Section 2.     Initial Trustee; Trustees.  The number of Trustees
                         --------------------------                        
initially shall be one, which number may be increased or decreased by the
Trustees then in office from time to time pursuant to the Bylaws of the Trust
or, as specified in any rights or preferences of any class or series of Shares
as set forth in the Declaration of Trust; provided, that the total number of
Trustees shall be increased to not less than seven nor more than 15.  Except as
specified in any rights and preferences of any class or series of Shares, no
reduction in the number of Trustees shall cause the removal of any Trustee from
office prior to the expiration of his term.  Unless otherwise provided in the
Declaration of Trust, each Trustee shall hold office for a term expiring at the
succeeding annual meeting of Shareholders following his election and 

                                      -7-
<PAGE>
 
until his successor shall have been elected and shall have qualified. The name
and address of the Trustees who shall serve as the initial Trustee and until his
successors is duly elected and qualified is:

Name                          Address
- ----                          -------
Thomas D. Eckert              1925 North Lynn Street
                              Arlington, Virginia 22209

          Section 3.     Vacancies.  The Trustees may increase the number of
                         ----------                                         
Trustees and fill any vacancy, whether resulting from an increase in the number
of Trustees or otherwise, on the Board of Trustees in the manner provided in the
Bylaws.  It shall not be necessary to list in the Declaration of Trust the names
and addresses of any Trustees hereinafter elected.

          Section 4.     Resignation, Removal or Death.  Any Trustee may resign
                         ------------------------------                        
by written notice to the Board, effective upon execution and delivery to the
Trust of such written notice or upon any future date specified in the notice.
Subject to the rights of holders of one or more classes or series of Shares to
elect one or more Trustees, a Trustee may be removed at any time, with or
without cause, at a meeting of the Shareholders, by the affirmative vote of the
holders of not less than two-thirds of the Shares then outstanding and entitled
to vote generally in the election of Trustees.

          Section 5.     Independent Trustees.  Notwithstanding anything herein
                         ---------------------                                 
to the contrary, at all times (except during a period not to exceed ninety (90)
days following the death, resignation, incapacity or removal from office of a
Trustee prior to expiration of the Trustee's term of office), a majority of the
Board of Trustees shall be comprised of persons  (each such person serving on
the Board of Trustees being an "Independent Trustee") who are not, and within
the last two years have not been, (i) executive officers or employees of the
Trust or the Operating Partnership or any subsidiary thereof, (ii) a holder or a
group of affiliated holders of securities of the Trust, who own or have the
right to acquire 10% or more of the Common Shares and/or Preferred Shares of the
Trust on a fully diluted and converted basis, or an officer, director, trustee,
member, employee or Affiliate thereof or person who is a designee or nominee of
any such holder to the Board of Trustees, or (iii) is a partner or an officer,
director, trustee, member, employee or  Affiliate of a partner of the Operating
Partnership.

           Section 6.    Business Activities by Trustees.
                         --------------------------------

                         (A) Each (a) contract, (b) agreement, and (c)
transaction between or among (i) the Trust and any of its Trustees, officers or
employees, (ii) the Trust and any Affiliate of the Trust, (iii) the Trust and
any person affiliated with any Trustee, officer or employee, and (iv) the Trust
and any partner of the Operating Partnership or person affiliated with a partner
of the Operating Partnership, shall be void or voidable by the Trust unless such
contract, agreement or transaction shall have been approved, authorized or
ratified by a majority of the Independent Trustees of the Trust.

                                      -8-
<PAGE>
 
                         (B) Notwithstanding anything herein to the contrary,
each individual Trustee, including each Independent Trustee, may engage in other
business activities of the type conducted by the Trust and is not required to
present to the Trust any investment or business opportunities presented to them
even though the investment or business opportunities may be within the scope of
the Trust's investment or business policies, provided, that no Trustee shall be
permitted to pursue or take any action with respect to an investment or business
opportunity that was identified by, presented to, or otherwise came to the
attention of, the Trust, unless the majority of the Independent Trustees
authorize, approve or ratify such actions by such Trustee.

                         (C) Sections 5 and 6 of this Article VI shall not apply
to any employment agreement between the Trust and any officer or employee, or
the establishment of compensation or benefits for any officer, employee or
Trustee, including any bonus or incentive compensation, whether in the form of
cash, shares, options or otherwise, or the approval of any benefit, bonus or
incentive plan, including any share option, share purchase, restricted share or
similar plan.

                                  ARTICLE VII
                         SHARES OF BENEFICIAL INTEREST

          Section 1.     Authorized Shares.  The beneficial interest of the
                         ------------------                                
Trust shall be divided into shares of beneficial interest.  The Trust has
authority to issue One Hundred Twenty Million (120,000,000) shares of beneficial
interest, $.01 par value per share, of which One Hundred Million (100,000,000)
shall be common shares of beneficial interest, par value $.01 per share ("Common
Shares"), and Twenty Million (20,000,000) shall be preferred shares of
beneficial interest, $.01 par value per share ("Preferred Shares").  The Board
of Trustees, without any action by the Shareholders of the Trust, may amend the
Declaration of Trust from time to time to increase or decrease the aggregate
number of Shares or the number of Shares of any class or series that the Trust
has authority to issue.

           Section 2.    Common Shares.
                         --------------

                         (A)   Voting Rights.  Subject to any preferential or
                               --------------                                
classified voting rights of any class or series of Shares, each Common Share
shall entitle the holder thereof to one vote on each matter upon which holders
of Common Shares are entitled to vote.  The Board of Trustees may reclassify any
unissued Common Shares from time to time in one or more classes or series of
Shares.  Except as otherwise provided in respect of any Shares hereafter
classified or reclassified, the exclusive voting power for all purposes shall be
vested in the holders of the Common Stock. Holders of Common Shares may not
engage in cumulative voting in the election of Trustees.

                         (B)   Dividend Rights.  Subject to any preferential 
                               ----------------    
dividend rights, the holders of Common Shares shall be entitled to receive such
dividends as may be declared by the Board of Trustees with respect to the Common
Shares. The holders of all Common Shares will participate equally in dividends
payable to holders of Common Shares when and as authorized and declared by the
Board of Trustees. The Board of Trustees may from 

                                      -9-
<PAGE>
 
time to time authorize and declare to Shareholders such dividends or
distributions, in cash or other assets of the Trust or in securities of the
Trust or from any other source as the Board of Trustees in its discretion shall
determine. The Board of Trustees shall endeavor to declare and pay such
dividends and distributions as shall be necessary for the Trust to qualify as a
REIT under the Code. Subject to any preferential dividend rights, Shareholders
shall have no right to any dividend or distribution unless and until authorized
and declared by the Board.

                         (C)   Rights Upon Liquidation.  Subject to any 
                               ------------------------    
preferential rights upon liquidation, dissolution or winding up of the Trust,
holders of Common Shares shall be entitled to share ratably in the assets of the
Trust legally available for distribution to the Shareholders in the event of the
liquidation, dissolution or winding up of the Trust after payment of, or
adequate provision for, all known debts and liabilities of the Trust.

          Section 3.     Preferred Shares.
                         -----------------

                         (A) The Board of Trustees shall have, without
limitation, subject to the provisions of the Declaration of Trust, the power and
authority to classify or reclassify any unissued Shares a class or classes of
preferred stock, preference stock, special stock or other stock, and to divide
and classify shares of any class into one or more class or series of such class,
by determining, fixing or altering one or more of the following:

                             (1) The distinctive designation of such class or
series and the number of shares to constitute such class or series; provided
that, unless otherwise prohibited by the terms of such or any other class or
series, the number of shares of any class or series may be decreased by the
Board of Trustees in connection with any classification or reclassification of
unissued shares and the number of shares of such class or series may be
increased by the Board of Trustees in connection with any such classification or
reclassification, and any shares of any class or series which have been
redeemed, purchased, otherwise acquired or converted into Common Shares or any
other class or series shall become part of the authorized capital stock and be
subject to classification and reclassification as provided in this sub-
paragraph.

                             (2) Whether or not and, if so, the rates, amounts
and times at which, and the conditions under which, dividends shall be payable
on shares of such class or series, whether any such dividends shall rank senior
or junior to or on a parity with the dividends payable on any other class or
series of stock, and the status of any such dividends as cumulative, cumulative
to a limited extent or non-cumulative and participating or non-participating.

                             (3) Whether or not shares of such class or series
shall have voting rights, in addition to any voting rights provided by law and,
if so, the terms of such voting rights.

                             (4) Whether or not shares of such class or series
shall have conversion or exchange privileges and, if so, the terms and
conditions thereof, 

                                     -10-
<PAGE>
 
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Trustees shall determine.

                             (5) Whether or not shares of such class or series
shall be subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall be
redeemable and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates; and
whether or not there shall be any sinking fund or purchase account in respect
thereof, and if so, the terms thereof.

                             (6) The rights of the holders of shares of such
class or series upon the liquidation, dissolution or winding up of the affairs
of, or upon any distribution of the assets of, the Trust, which rights may vary
depending upon whether such liquidation, dissolution or winding up is voluntary
or involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on parity with such rights of any other
class or series of stock.

                             (7) Whether or not there shall be any limitations
applicable, while shares of such class or series are outstanding, upon the
payment of dividends or making of distributions on, or the acquisition of, or
the use of moneys for purchase or redemption of, any stock of the Trust, or upon
any other action of the Trust, including action under this sub-paragraph, and,
if so, the terms and conditions thereof.

                             (8) Any other preferences, rights, restrictions,
including restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and the Declaration of Trust of the
Trust.

                         (B) For the purposes hereof and of any articles
supplementary to the Declaration of Trust providing for the classification or
reclassification of any Shares or of any other organizational document of the
Trust (unless otherwise provided in such articles or document), any class or
series of Shares of the Trust shall be deemed to rank:

                             (1) prior to another class or series either as to
dividends or upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on liquidation,
dissolution or winding up, as the case may be, in the preference or priority to
holders of such other class or series;

                             (2) on a parity with another class or series either
as to dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation price per share thereof be different
rom those of such others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to their respective
dividend rates or redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and

                                     -11-
<PAGE>
 
                              (3) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of such class or
series shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the amounts
distributable upon liquidation, dissolution or winding up, as the case may be.

          Section 4.     Classified or Reclassified Shares.  Prior to issuance
                         ----------------------------------                   
of classified or reclassified Shares of any class or series, the Board of
Trustees by resolution shall (a) designate that class or series to distinguish
it from all other classes and series of Shares; (b) specify the number of Shares
to be included in the class or series; (c) set, subject to the express terms of
any class or series of Shares outstanding at the time, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption for each series; and (d) cause the Trust to file articles
supplementary with the State Department of Assessments and Taxation of Maryland
("SDAT") in form and substance as prescribed by Maryland law.  Any of the terms
of any class or series of Shares set pursuant to clause (c) of this Section 4
may be made dependent upon facts or events ascertainable outside the Declaration
of Trust (including determinations by the Board of Trustees or other facts or
events within the control of the Trust) and may vary among holders thereof,
provided that the manner in which such facts, events or variations shall operate
upon the terms of such class or series of Shares is clearly and expressly set
forth in articles supplementary filed with the SDAT.

          Section 5.     Authorization by Board of Share Issuance.  The Board of
                         -----------------------------------------              
Trustees may authorize the issuance from time to time of Shares of any class or
series, whether now or hereafter authorized, or securities or rights convertible
into Shares of any class or series, whether now or hereafter authorized, for
such consideration (whether in cash, property, past or future services,
obligation for future payment or otherwise) as the Board of Trustees may deem
advisable (or without consideration in the case of a Share split or Share
dividend) and without any action by the Shareholders, subject to such
restrictions or limitations, if any, as may be set forth in the Declaration of
Trust or the Bylaws of the Trust.  Notwithstanding any other provision in the
Declaration of Trust, no determination shall be made by the Board of Trustees
nor shall any transaction be entered into by the Trust which would cause any
Shares or other beneficial interest in the Trust not to constitute "transferable
shares" or "transferable certificates of beneficial interest" under Section
856(a)(2) of the Code or which would cause any distribution to constitute a
preferential dividend as described in Section 562(c) of the Code.

          Section 6.     General Nature of Shares.  All Shares shall be personal
                         -------------------------                              
property entitling the Shareholders only to those rights provided in the
Declaration of Trust.  The Shareholders shall have no interest in the property
of the Trust and shall have no right to compel any partition, division, dividend
or distribution of the Trust or of the property of the Trust.  The death of a
Shareholder shall not terminate the Trust.  The Trust is entitled to treat as
Shareholders only those persons in whose names Shares are registered as holders
of Shares on the beneficial interest ledger of the Trust.

                                     -12-
<PAGE>
 
          Section 7.     Fractional Shares.  The Trust may, without the consent
                         ------------------                                    
or approval of any Shareholder, issue fractional Shares, eliminate a fraction of
a Share by rounding up or down to a full Share, arrange for the disposition of a
fraction of a Share by the person entitled to it, or pay cash for the fair value
of a fraction of a Share.

          Section 8.     Declaration of Trust and Bylaws.  All Shareholders are
                         --------------------------------                      
subject to the provisions of the Declaration of Trust and the Bylaws of the
Trust.

          Section 9.     Preemptive Rights.   Subject to Section 3 of Article
                         ------------------                                  
IX, no holder of any Shares or any other securities of the Trust, whether now or
hereafter authorized, shall have any preemptive right to subscribe for or
purchase any Shares or any other securities of the Trust other than such, if
any, as the Board of Trustees, in its sole discretion, may determine and at such
price or prices and upon such other terms as the Board of Trustees, in its sole
discretion, may fix; and any Shares or other securities which the Board of
Trustees may determine to offer for subscription may, as the Board of Trustees
in its sole discretion shall determine, be offered to the holders of any class,
series or type of Shares or other securities at the time outstanding to the
exclusion of the holders of any or all other classes, series or types of Shares
or other securities at the time outstanding.

                                 ARTICLE VIII
                 RESTRICTIONS ON TRANSFER AND SHARES-IN-TRUST

           Section 1.    Restrictions on Transfer.

                         (A)  Restrictions on Transfers.
                              --------------------------

                              (1) Except as provided in Section 1(F) hereof,
from the date of the Initial Public Offering and prior to the Restriction
Termination Date, no Person shall Beneficially Own or Constructively Own
outstanding Shares in excess of the Ownership Limit.

                              (2) Except as provided in Section 1(F) hereof,
from the date of the Initial Public Offering and prior to the Restriction
Termination Date, any Transfer that, if effective, would result in any Person
Beneficially Owning or Constructively Owning Shares in excess of the Ownership
Limit shall be void ab initio as to the Transfer of that number of Shares which
would be otherwise Beneficially Owned or Constructively Owned by such Person in
excess of the Ownership Limit and the intended transferee shall acquire no
rights in such excess Shares.

                              (3) From the date of the Initial Public Offering
and prior to the Restriction Termination Date, any Transfer that, if effective,
would result in the Shares being beneficially owned by fewer than 100 Persons
(determined without reference to any rules of attribution) shall be void ab
initio as to the Transfer of that number of shares which would be otherwise
beneficially owned (determined without reference to any rules of attribution) by
the transferee, and the intended transferee shall acquire no rights in such
excess Shares.

                                     -13-
<PAGE>
 
                              (4) From the date of the Initial Public Offering
and prior to the Restriction Termination Date, any Transfer of Shares that, if
effective, would result in the Trust being "closely held" within the meaning of
Section 856(h) of the Code shall be void ab initio as to the Transfer of that
number of Shares which would cause the Trust to be "closely held" within the
meaning of Section 856(h) of the Code, and the intended transferee shall acquire
no rights in such excess Shares.

                              (5) Except as provided in Section 1(F) hereof,
from the date of the Initial Public Offering and prior to the Restriction
Termination Date, any Transfer of Shares that, if effective, would cause the
Trust to Constructively Own 10% or more of the ownership interests in a tenant
of the Trust's real property, within the meaning of Section 856(d)(2)(B) of the
Code, shall be void ab initio as to the Transfer of that number of Shares which
would cause the Trust to Constructively Own 10% or more of the ownership
interests in a tenant of the Trust's real property, within the meaning of
Section 856(d)(2)(B) of the Code, and the intended transferee shall acquire no
rights in such excess Shares.

                         (B)  Transfer to Share Trust.
                              ------------------------

                              (1) If, notwithstanding the other provisions
contained in this Section 1 of Article VIII, at any time after the date of the
Initial Public Offering and prior to the Restriction Termination Date, there is
a purported Transfer or Non-Transfer Event such that any Person would either
Beneficially Own or Constructively Own Shares in excess of the Ownership Limit,
then, (x) except as otherwise provided in Section 1(F) hereof, the purported
transferee shall acquire no right or interest (or, in the case of a Non-Transfer
Event, the person holding record title to the Shares Beneficially Owned or
Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease
to own any right or interest) in such number of Shares which would cause such
Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own
Shares in excess of the Ownership Limit, (y) such number of Shares in excess of
the Ownership Limit (rounded up to the nearest whole share), shall be designated
Shares-in-Trust and, in accordance with the provisions of Section 2 hereof,
transferred automatically and by operation of law to the Share Trust to be held
in accordance with that Section 2 and (z) the Prohibited Owner shall submit such
number of Shares to the Trust for registration into the name of the Share Trust.
Such transfer to a Share Trust and the designation of shares as Shares-in-Trust
shall be effective as of the close of business on the business day prior to the
date of the Transfer or Non-Transfer Event, as the case may be.

                              (2) If, notwithstanding the other provisions
contained in this Section 1 of Article VIII, at any time after the date of the
Initial Public Offering and prior to the Restriction Termination Date, there is
a purported Transfer or Non-Transfer Event that, if effective, would (i) result
in the Shares being beneficially owned by fewer than 100 Persons (determined
without reference to any rules of attribution), (ii) result in the Trust being
"closely held" within the meaning of Section 856(h) of the Code, or (iii) cause
the Trust to Constructively Own 10% or more of the ownership interests in a
tenant of the Trust's real property, within the meaning of Section 856(d)(2)(B)
of the Code, then (x) the purported transferee shall not acquire any right or
interest (or, in the case of a Non-Transfer Event, the person holding record
title of 

                                     -14-
<PAGE>
 
the Shares with respect to which such Non-Transfer Event occurred, shall cease
to own any right or interest) in such number of Shares, the ownership of which
by such purported transferee or record holder would (A) result in the Shares
being beneficially owned by fewer than 100 Persons (determined without reference
to any rules of attribution), (B) result in the Trust being "closely held"
within the meaning of Section 856(h) of the Code, or (C) cause the Trust to
Constructively Own 10% or more of the ownership interests in a tenant of the
Trust's real property, within the meaning of Section 856(d)(2)(B) of the Code,
(y) such number of Shares (rounded up to the nearest whole share) shall be
designated Shares-in-Trust and, in accordance with the provisions of Section 2
hereof, transferred automatically and by operation of law to the Share Trust to
be held in accordance with that Section 2, and (z) the Prohibited Owner shall
submit such number of Shares to the Trust for registration into the name of the
Share Trust. Such transfer to a Share Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event, as the case may be.
If, for any reason, the transfer to the Share Trust is not automatically
effective to prevent the result described in (A), (B) or (C) of this paragraph,
then the Transfer or Non-Transfer Event to the extent of the number of shares
calculated in clause (y) of this paragraph shall be void.

                         (C)  Remedies For Breach. If the Trust, or its
                              -------------------
designees, shall at any time determine in good faith that a Transfer has taken
place in violation of Section 1(A) hereof or that a Person intends to acquire or
has attempted to acquire Beneficial Ownership or Constructive Ownership of any
Shares in violation of Section 1(A) hereof, the Trust shall take such action as
it deems advisable to refuse to give effect to or to prevent such Transfer or
acquisition, including, but not limited to, refusing to give effect to such
Transfer on the books of the Trust or instituting proceedings to enjoin such
Transfer or acquisition.

                         (D)  Notice of Restricted Transfer. Any Person who
                              -----------------------------
acquires or attempts to acquire Shares in violation of Section 1(A) hereof, or
any Person who owned Shares that were transferred to the Share Trust pursuant to
the provisions of Section 1(B) hereof, shall immediately give written notice to
the Trust of such event and shall provide to the Trust such other information as
the Trust may request in order to determine the effect, if any, of such Transfer
or Non-Transfer Event, as the case may be, on the Trust's status as a REIT.

                         (E)  Owners Required To Provide Information. From the
                              --------------------------------------
date of the Initial Public Offering and prior to the Restriction Termination
Date:

                              (1) Every Beneficial Owner or Constructive Owner
of more than 5%, or such lower percentages as required pursuant to regulations
under the Code, of the outstanding Shares of the Trust shall, within 30 days
after January 1 of each year, provide to the Trust a written statement or
affidavit stating the name and address of such Beneficial Owner or Constructive
Owner, the number of Shares Beneficially Owned or Constructively Owned, and a
description of how such Shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Trust such additional information as the
Trust may request in order to determine the effect, if any, of such Beneficial
Ownership or Constructive Ownership on the Trust's status as a REIT and to
ensure compliance with the Ownership Limit.

                                     -15-
<PAGE>
 
                              (2) Each Person who is a Beneficial Owner or
Constructive Owner of Shares and each Person (including the Shareholder of
record) who is holding Shares for a Beneficial Owner or Constructive Owner shall
provide to the Trust a written statement or affidavit stating such information
as the Trust may request in order to determine the Trust's status as a REIT and
to ensure compliance with the Ownership Limit.

                         (F)  Exception to Ownership Limit. The Ownership Limit
                              ----------------------------
shall not apply to the acquisition of Shares by an underwriter that participates
in a public offering of such shares for a period of 90 days following the
purchase by such underwriter of such Shares, provided, further, that the
restrictions contained in Section 1(A) of this Article VIII will not be violated
following the distribution by such underwriter of such underwritten Shares. In
addition, the Board of Trustees, upon receipt of a ruling from the Internal
Revenue Service or an opinion of counsel in each case to the effect that the
restrictions contained in Section 1(A)(3) and/or Section 1(A)(4) hereof will not
be violated and that REIT status will not otherwise be lost, may exempt a Person
from the Ownership Limit if such Person is not an individual for purposes of
Section 542(a)(2) of the Code, provided that (i) the Board of Trustees obtains
such representations and undertakings from such Person as are reasonably
necessary to ascertain that no individual's Beneficial Ownership or Constructive
Ownership of Shares will cause the Trust to lose its status as a REIT and (ii)
such Person agrees that any violation or attempted violation of such
representations and undertakings will result in a transfer to the Share Trust of
Shares pursuant to Section 1(B) hereof.

           Section 2.    Shares-in-Trust.
                         ----------------

                         (A)  Share Trust.  Any Shares transferred to a Share
                              -----------
Trust and designated Shares-in-Trust pursuant to Section 1(B) hereof shall be
held for the exclusive benefit of the Beneficiary. The Trust shall name a
beneficiary of each Share Trust within five days after discovery of the
existence thereof. Any transfer to a Share Trust, and subsequent designation of
Shares as Shares-in-Trust, pursuant to Section 1(B) hereof shall be effective as
of the close of business on the business day prior to the date of the Transfer
or Non-Transfer Event that results in the transfer to the Share Trust. Shares-
in-Trust shall remain issued and outstanding Shares of the Trust and shall be
entitled to the same rights and privileges on identical terms and conditions as
are all other issued and outstanding Shares of the same class and series. When
transferred to a Permitted Transferee in accordance with the provisions of
Section 2(E) hereof, such Shares-in-Trust shall cease to be designated as 
Shares-in-Trust.

                         (B)  Dividend Rights.  The Share Trust, as record
                              ---------------
holder of Shares-in-Trust, shall be entitled to receive all dividends and
distributions as may be declared by the Board of Trustees on such Shares and
shall hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to
the Share Trust the amount of any dividends or distributions received by it that
(i) are attributable to any Shares designated Shares-in-Trust and (ii) the
record date for which was on or after the date that such shares became Shares-
in-Trust. The Trust shall take all measures that it determines reasonably
necessary to recover the amount of any such dividend or distribution paid to a
Prohibited Owner, including, if necessary, withholding any portion of future
dividends or

                                     -16-
<PAGE>
 
distributions payable on Shares Beneficially Owned or Constructively Owned by
the Person who, but for the provisions of Section 1(B) hereof, would
Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as
reasonably practicable following the Trust's receipt or withholding thereof,
shall pay over to the Share Trust for the benefit of the Beneficiary the
dividends so received or withheld, as the case may be.

                         (C)  Rights Upon Liquidation.  In the event of any
                              -----------------------
voluntary or involuntary liquidation, dissolution or winding up of, or any
distribution of the assets of, the Trust, each holder of Shares-in-Trust shall
be entitled to receive, ratably with each other holder of Shares of the same
class or series, that portion of the assets of the Trust which is available for
distribution to the holders of such class and series of Shares. The Share Trust
shall distribute to the Prohibited Owner the amounts received upon such
liquidation, dissolution, or winding up, or distribution; provided, however,
that the Prohibited Owner shall not be entitled to receive amounts pursuant to
this Section 2(C) in excess of, (i) in the case of a purported Transfer in which
the Prohibited Owner gave value for Shares and which Transfer resulted in the
transfer of the shares to the Share Trust, the price per share, if any, such
Prohibited Owner paid for the Shares and, (ii) in the case of a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Share Trust, the price per share equal to the Market Price on the
date of such Non-Transfer Event or Transfer. Any remaining amount in such Share
Trust shall be distributed to the Beneficiary.

                         (D)  Voting Rights.   The Share Trustee shall be
                              -------------
entitled to vote all Shares-in-Trust. Any vote by a Prohibited Owner as a holder
of Shares prior to the discovery by the Trust that the Shares are Shares-in-
Trust shall, subject to applicable law, be rescinded and shall be void ab initio
with respect to such Shares-in-Trust and the Prohibited Owner shall be deemed to
have given, as of the close of business on the business day prior to the date of
the purported Transfer or Non-Transfer Event that results in the transfer to the
Share Trust of Shares under Section 1(B) hereof, an irrevocable proxy to the
Share Trustee to vote the Shares-in-Trust in the manner in which the Share
Trustee, in its sole and absolute discretion, desires. If, however, the Trust
has already taken irreversible action, then the Share Trustee shall not have the
authority to rescind and revoke such vote.

                         (E)  Designation of Permitted Transferee.  The Share
                              -----------------------------------
Trustee shall have the exclusive and absolute right to designate a Permitted
Transferee of any and all Shares-in-Trust. In an orderly fashion so as not to
materially adversely affect the Market Price of the Shares-in-Trust, the Share
Trustee shall designate any Person as Permitted Transferee, provided, however,
that (i) the Permitted Transferee so designated purchases for valuable
consideration (whether in a public or private sale), at a price as set forth in
Section 2(G) hereof, the Shares-in-Trust and (ii) the Permitted Transferee so
designated may acquire such Shares-in-Trust without such acquisition resulting
in a transfer to a Share Trust and the redesignation of such Shares so acquired
as Shares-in-Trust under Section 1(B) hereof. Upon the designation by the Share
Trustee of a Permitted Transferee in accordance with the provisions of this
Section 2(E), the Share Trustee shall (i) cause to be transferred to the
Permitted Transferee 

                                     -17-
<PAGE>
 
that number of Shares-in-Trust acquired by the Permitted Transferee, (ii) cause
to be recorded on the books of the Trust that the Permitted Transferee is the
holder of record of such number of Shares, (iii) cause the Shares-in-Trust to be
canceled and (iv) distribute to the Beneficiary any and all amounts held with
respect to the Shares-in-Trust after making the payment to the Prohibited Owner
pursuant to Section 2(F) hereof.

                         (F) Compensation to Record Holder of Shares that Become
                             ---------------------------------------------------
Shares-in-Trust. Any Prohibited Owner shall be entitled (following discovery of
- ---------------
the Shares-in-Trust and subsequent designation of the Permitted Transferee in
accordance with Section 2(E) hereof or following the acceptance of the offer to
purchase such shares in accordance with Section 2(G) hereof) to receive from the
Share Trustee following the sale or other disposition of such Shares-in-Trust
the lesser of (i) in the case of (a) a purported Transfer in which the
Prohibited Owner gave value for Shares and which Transfer resulted in the
transfer of the Shares to the Share Trust, the price per share, if any, such
Prohibited Owner paid for the Shares, or (b) a Non-Transfer Event or Transfer in
which the Prohibited Owner did not give value for such Shares (e.g., if the
Shares were received through a gift or devise) and which Non-Transfer Event or
Transfer, as the case may be, resulted in the transfer of shares to the Share
Trust, the price per share equal to the Market Price on the date of such Non-
Transfer Event or Transfer and (ii) the price per Share received by the Share
Trustee from the sale or other disposition of such Shares-in-Trust in accordance
with Section 2(E) hereof. Any amounts received by the Share Trustee in respect
of such Shares-in-Trust and in excess of such amounts to be paid the Prohibited
Owner pursuant to this Section 2(F) shall be distributed to the Beneficiary in
accordance with the provisions of Section 2(E) hereof. Each Beneficiary and
Prohibited Owner waive any and all claims that they may have against the Share
Trustee and the Share Trust arising out of the disposition of Shares-in-Trust,
except for claims arising out of the gross negligence or willful misconduct of,
or any failure to make payments in accordance with this Section 2 by such Share
Trustee or the Trust.

                         (G)  Purchase Right in Shares-in-Trust.  Shares-in-
                              ---------------------------------
Trust shall be deemed to have been offered for sale to the Trust, or its
designee, at a price per share equal to the lesser of (i) the price per share in
the transaction that created such Shares-in-Trust (or, in the case of devise,
gift or Non-Transfer Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Trust, or its
designee, accepts such offer. The Trust shall have the right to accept such
offer for a period of ninety days after the later of (i) the date of the Non-
Transfer Event or purported Transfer which resulted in such Shares-in-Trust or
(ii) the date the Trust determines in good faith that a Transfer or Non-Transfer
Event resulting in Shares-in-Trust has occurred, if the Trust does not receive a
notice of such Transfer or Non-Transfer Event pursuant to Section 1(D) hereof.

          Section 3.     Remedies Not Limited.  Subject to Section 1 of Article
                         ---------------------                                 
VI, nothing contained in this Article VIII shall limit the authority of the
Board of Trustees to take such other action as it deems necessary or advisable
to protect the Trust and the interests of its Shareholders by preservation of
the Trust's status as a REIT and to ensure compliance with the Ownership Limit.

                                     -18-
<PAGE>
 
          Section 4.     Ambiguity.   In the case of an ambiguity in the
                         ----------                                     
application of any of the provisions of Article VIII, including any defined term
used herein, the Board of Trustees shall have the power to determine the
application of the provisions of this Article VIII with respect to any situation
based on the facts known to it.

           Section 5.    Legend.    Each certificate for Shares shall bear the
                         -------                                              
following legend:

          "The Common Shares or Preferred Shares or other Shares represented by
this certificate are subject to restrictions on transfer for the purpose of the
Trust's maintenance of its status as a real estate investment trust under the
Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain
further restrictions and except as provided in the Declaration of Trust of the
Trust, no Person may (i) Beneficially or Constructively Own Common Shares in
excess of 9.9% of the number of outstanding Common Shares, (ii) Beneficially or
Constructively Own Shares of any class or series of Preferred Shares in excess
of 9.9% of the number of outstanding Preferred Shares of such class or series,
(iii) Beneficially Own Shares that would result in the Shares being beneficially
owned by fewer than 100 Persons (determined without reference to any rules of
attribution), (iv) Beneficially Own Shares that would result in the Trust being
"closely held" under Section 856(h) of the Code, or (v) Constructively Own
Shares that would cause the Trust to Constructively Own 10% or more of the
ownership interests in a tenant of the Trust's real property, within the meaning
of Section 856(d)(2)(B) of the Code. Any Person who attempts to Beneficially or
Constructively Own Shares in excess of the above limitations must immediately
notify the Trust in writing. If any restrictions above are violated, the Shares
represented hereby will be transferred automatically to a Share Trust and shall
be designated Shares-in-Trust to a trustee of a trust for the benefit of one or
more charitable beneficiaries. In addition, upon the occurrence of certain
events, attempted transfers in violation of the restrictions described above may
be void ab initio. All capitalized terms in this legend have the meanings
defined in the Trust's Amended and Restated Declaration of Trust, as the same
may be further amended from time to time, a copy of which, including the
restrictions on transfer, will be sent without charge to each Shareholder who so
requests. Such requests must be made to the secretary of the trust at its
principal office or to the transfer agent."

          Section 6.     Severability.  If any provision of this Article VIII or
                         -------------                                          
any application of any such provision is determined to be invalid by any federal
or state court having jurisdiction over the issues, the validity of the
remaining provisions shall not be affected and other applications of such
provision shall be affected only to the extent necessary to comply with the
determination of such court.

                                  ARTICLE IX
                                 SHAREHOLDERS

          Section 1.     Meetings.  There shall be an annual meeting of the
                         ---------                                         
Shareholders, to be held on proper notice at such time (after the delivery of
the annual report) and convenient location as shall be determined by or in the
manner prescribed in the Bylaws, for the election of the Trustees, if required,
and for the transaction of any other business within the 

                                     -19-
<PAGE>
 
powers of the Trust. Except as otherwise provided in the Declaration of Trust,
special meetings of Shareholders may be called in the manner provided in the
Bylaws. If there are no Trustees, the officers of the Trust shall promptly call
a special meeting of the Shareholders entitled to vote for the election of
successor Trustees. Any meeting may be adjourned and reconvened as the Trustees
determine or as provided in the Bylaws. With respect to any meeting of
Shareholders (or a special meeting in lieu of an annual meeting), the nomination
of persons for election to the Board of Trustees or the proposal of business to
be considered by Shareholders may be made only (a) by the Board of Trustees, (b)
as otherwise provided in the Declaration of Trust, or (c) as otherwise provided
in the Bylaws. With respect to a special meeting of Shareholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting.

          Section 2.     Voting Rights.  Subject to the provisions of any class
                         --------------                                        
or series of Shares then outstanding and Maryland law, the Shareholders shall be
entitled to vote only on the following matters: (a) termination of REIT status
as provided in Section (1)(C) of Article VI, (b) election of Trustees as
provided in Section 2 of Article VI and the Bylaws and the removal of Trustees
as provided in Section 4 of Article VI ; (c) amendment of the Declaration of
Trust as provided in Article X; (d) termination of the Trust as provided in
Section 2 of  Article XIII; (e) merger or consolidation of the Trust, or the
sale or disposition of substantially all of the Trust Property, as provided in
Article XII; and (f) such other matters with respect to which a vote of the
Shareholders is required by applicable law or the Board of Trustees has adopted
a resolution declaring that a proposed action is advisable and directing that
the matter be submitted to the Shareholders for approval or ratification.
Except with respect to the foregoing matters, no action taken by the
Shareholders at any meeting shall in any way bind the Board of Trustees.

          Section 3.     Preemptive and Appraisal Rights.  Except as may be
                         --------------------------------                  
provided by the Board of Trustees in setting the terms of classified or
reclassified Shares pursuant to Section 4 of Article VII or the Declaration of
Trust, no holder of Shares shall, as such holder, (a) have any preemptive or
preferential right to purchase or subscribe for any additional Shares of the
Trust or any other security of the Trust which it may issue or sell or (b),
except as expressly required by Title 8, have any right to require the Trust to
pay him the fair value of his Shares in an appraisal or similar proceeding.

          Section 4.     Extraordinary Actions.  Except as specifically provided
                         ----------------------                                 
in Sections 1(C) and 4 of Article VI, Article VIII, Sections 1, 2 and 3 of
Article XI, and Section 2 of Article XIII, of the Declaration of Trust,
notwithstanding any provision of law permitting or requiring any action to be
taken or authorized by the affirmative vote of the holders of a greater number
of votes, any such action shall be effective and valid if taken or authorized by
the affirmative vote of holders of Shares entitled to cast a majority of all the
votes entitled to be cast on the matter.

          Section 5.     Board Approval.  The submission of any action to
                         ---------------                                     
the Shareholders for their consideration shall first be approved by the Board of
Trustees.

          Section 6.     Action By Shareholders Without a Meeting.  The Bylaws
                         -----------------------------------------            
of the Trust may provide that any action required or permitted to be taken by
the Shareholders may be 

                                     -20-
<PAGE>
 
taken without a meeting by the unanimous written consent of the Shareholders
entitled to vote on such matter.

                                   ARTICLE X
                  LIABILITY LIMITATION, INDEMNIFICATION AND 
                          TRANSACTIONS WITH THE TRUST

          Section 1.     Limitation of Shareholder Liability.  No Shareholder
                         ------------------------------------                
shall be liable for any debt, claim, demand, judgment or obligation of any kind
of, against or with respect to the Trust by reason of his being a Shareholder,
nor shall any Shareholder be subject to any personal liability whatsoever, in
tort, contract or otherwise, to any person in connection with the property or
the affairs of the Trust by reason of his being a Shareholder.

          Section 2.     Limitation of Trustee and Officer Liability.  To the
                         --------------------------------------------        
maximum extent that Maryland law in effect from time to time permits limitation
of the liability of trustees and officers of a REIT, no Trustee or officer of
the Trust shall be liable to the Trust or to any Shareholder for money damages.
Neither the amendment nor repeal of this Section, nor the adoption or amendment
of any other provision of the Declaration of Trust or Bylaws of the Trust
inconsistent with this Section, shall apply to or affect in any respect the
applicability of the preceding sentence with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.  In the absence
of any Maryland statute limiting the liability of trustees and officers of a
Maryland REIT for money damages in a suit by or on behalf of the Trust or by any
Shareholder, no Trustee or officer of the Trust shall be liable to the Trust or
to any Shareholder for money damages except to the extent that (a) the Trustee
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 (b) a judgment or other final adjudication
adverse to the Trustee or officer is entered in a proceeding based on a finding
in the proceeding that the Trustee'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.

          Section 3.     Express Exculpatory Clauses in Instruments.  Neither
                         -------------------------------------------         
the Shareholders nor the Trustees, officers, employees or agents of the Trust
shall be liable under any written instrument creating an obligation of the
Trust, and all Persons shall look solely to the Trust Property for the payment
of any claim under or for the performance of that instrument. The omission of
the foregoing exculpatory language from any instrument shall not affect the
validity or enforceability of such instrument and shall not render any
Shareholder, Trustee, officer, employee or agent liable thereunder to any third
party, nor shall the Trustees or any officer, employee or agent of the Trust be
liable to anyone for such omission.

          Section 4.     Indemnification.  The Trust shall have the power, to
                         ----------------                                    
the maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former Shareholder, Trustee or officer of the Trust or (b) any
individual who, while a Trustee of the Trust and at the request of the Trust,
serves or has served  as a director, officer, partner, trustee, employee or
agent of another 

                                     -21-
<PAGE>
 
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as a
present or former Shareholder, Trustee or officer of the Trust. The Trust shall
have the power, with the approval of its Board of Trustees, to provide such
indemnification and advancement of expenses to a person who served as a
predecessor of the Trust in any of the capacities described in (a) or (b) above,
and to any employee or agent of the Trust or a predecessor of the Trust.

          Section 5.     Transactions Between the Trust and its Trustees,
                         ------------------------------------------------
Officers, Employees and Agents.  Subject to any express restrictions in the
- -------------------------------                                            
Declaration of Trust or adopted by the Trustees in the Bylaws or by resolution,
the Trust may enter into any contract or transaction of any kind with any
person, including any Trustee, officer, employee or agent of the Trust or any
person affiliated with a Trustee, officer, employee or agent of the Trust,
whether or not any of them has a financial interest in such transaction.

                                     -22-
<PAGE>
 
                                   ARTICLE XI
                                   AMENDMENTS

          Section 1.     General.   The Trust reserves the right from time to
                         --------                                            
time to make any amendment to the Declaration of Trust, now or hereafter
authorized by law, including any amendment altering the terms or contract
rights, as expressly set forth in the Declaration of Trust, of any Shares. All
rights and powers conferred by this Declaration of Trust on Shareholders,
Trustees and officers are granted subject to this reservation. An amendment to
the Declaration of Trust (a) shall be signed and acknowledged by at least a
majority of the Trustees, (b) shall be filed for record with SDAT as provided in
Article XIII, Section 5 and (c) shall become effective as of the later of the
time the SDAT accepts the amendment for record or the time established in the
amendment, not to exceed 30 days after the amendment is accepted for record. All
references to the Declaration of Trust shall include all amendments thereto.

          Section 2.     By Trustees.  The Trustees by a two-thirds vote may
                         ------------                                       
amend the Declaration of Trust from time to time, in the manner provided by
Title 8, without any action by the Shareholders, to qualify as a REIT under the
Code or under Title 8.

          Section 3.     By Shareholders.  Other than amendments pursuant to
                         ----------------                                   
Section 2 of this Article XI, any amendment to the Declaration of Trust shall be
valid only if approved by the affirmative vote of at least a majority of all the
votes entitled to be cast on the matter, except that any amendment to Sections
1(C) and 4 of Article VI, Article VIII, Sections 1, 2 and 3 of Article XI and
Section 2 of Article XIII, of the Declaration of Trust shall be valid only if
approved by the affirmative vote of two-thirds of all the votes entitled to be
cast on the matter.

                                  ARTICLE XII
                MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY

          Subject to the provisions of any class or series of Shares at the time
outstanding, the Trust may (a) merge the Trust into a Maryland or foreign
business trust, corporation having capital stock, limited partnership or limited
liability company; or one or more such business trusts, such corporations,
domestic or foreign limited partnerships or limited liability companies may
merge into it, (b) consolidate the Trust with  a Maryland or foreign business
trust, corporation having capital stock, limited partnership or limited
liability company; or one or more such business trusts, such corporations,
domestic or foreign limited partnerships or limited liability companies may
consolidate into it, (c) participate in a share exchange either as the successor
or as the entity whose securities are to be acquired, or (d) sell, exchange or
otherwise transfer all or substantially all of the Trust Property.  Any such
action must be approved by the Board of Trustees and, after notice to all
Shareholders entitled to vote on the matter, by the affirmative vote of a
majority of all the votes entitled to be cast on the matter.  As used herein, a
sale, exchange or other transfer of substantially all of the assets of the Trust
shall mean a sale, exchange or other transfer of 90% or more of the total assets
of the Company (based upon the most recent appraised values) within a twelve-
month period.

                                  ARTICLE XIII

                                     -23-
<PAGE>
 
                       DURATION AND TERMINATION OF TRUST

          Section 1.     Duration.  The Trust shall continue perpetually unless
                         ---------                                             
terminated pursuant to Section 2 of this Article XIII or pursuant to any
applicable provision of Title 8.

           Section 2.    Termination.
                         ------------

                         (A) Subject to the provisions of any class or series of
Shares at the time outstanding, the Trust may be terminated at any meeting of
Shareholders, by the affirmative vote of two thirds of all the votes entitled to
be cast on the matter. Upon the termination of the Trust:

                             (1) The Trust shall carry on no business except for
the purpose of winding up its affairs .

                             (2) The Trustees shall proceed to wind up the
affairs of the Trust and all of the powers of the Trustees under the Declaration
of Trust shall continue, including the powers to fulfill or discharge the
Trust's contracts, collect its assets, sell, convey, assign, exchange, transfer
or otherwise dispose of all or any part of the remaining property of the Trust
to one or more persons at public or private sale for consideration which may
consist in whole or in part of cash, securities or other property of any kind,
discharge or pay its liabilities and do all other acts appropriate to liquidate
its business.

                             (3) After paying or adequately providing for the
payment of all debts and liabilities of the Trust, and upon receipt of such
releases, indemnities and agreements as they deem necessary for their
protection, the Trust may distribute the remaining property of the Trust among
the Shareholders so that after payment in full or the setting apart for payment
of such preferential amounts, if any, to which the holders of any Shares at the
time outstanding shall be entitled, the remaining property of the Trust shall,
subject to any participating or similar rights of Shares at the time
outstanding, be distributed ratably among the holders of Common Shares at the
time outstanding.

                         (B) After termination of the Trust, the liquidation of
its business and the distribution to the Shareholders as herein provided, a
majority of the Trustees shall execute and file with the Trust's records a
document certifying that the Trust has been duly terminated, and the Trustees
shall be discharged from all liabilities and duties hereunder, and the rights
and interests of all Shareholders shall cease.

                                     -24-
<PAGE>
 
                                  ARTICLES XIV
                           CONTROL SHARE ACQUISITIONS

          The Trust will not be governed by Title 3, Subtitle 7 of the
Corporations and Associations Article of the Annotated Code of Maryland entitled
Voting Rights of Certain Control Shares.

                                   ARTICLE XV
                                 MISCELLANEOUS

          Section 1.     Governing Law.   The Declaration of Trust is executed
                         --------------                                       
by the undersigned Trustee constituting all of the Trustees of the Trust and
delivered in the State of Maryland with reference to the laws thereof, and the
rights of all parties and the validity, construction and effect of every
provision hereof shall be subject to and construed according to the laws of the
State of Maryland without regard to conflicts of laws provisions thereof.

          Section 2.     Reliance by Third Parties.  Any certificate shall be
                         --------------------------                          
final and conclusive as to any person dealing with the Trust if executed by the
Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying
to: (a) the number or identity of Trustees, officers of the Trust or
Shareholders; (b) the due authorization of the execution of any document; (c)
the action or vote taken, and the existence of a quorum, at a meeting of the
Board of Trustees or Shareholders; (d) a copy of the Declaration of Trust or of
the Bylaws as a true and complete copy as then in force; (e) an amendment to the
Declaration of Trust; (f) the termination of the Trust; or (g) the existence of
any fact relating to the affairs of the Trust.  No purchaser, lender, transfer
agent or other person shall be bound to make any inquiry concerning the validity
of any transaction purporting to be made by the Trust on its behalf or by any
officer, employee or agent of the Trust.

           Section 3.    Severability.
                         -------------

                         (A) The provisions of the Declaration of Trust are
severable, and if the Board of Trustees shall determine, with the advice of
counsel, that any one or more of such provisions (the "Conflicting Provisions")
are in conflict with the Code, Title 8 or other applicable federal or state
laws, the Conflicting Provisions, to the extent of the conflict, shall be deemed
never to have constituted a part of the Declaration of Trust, even without any
amendment of the Declaration of Trust pursuant to Article XI and without
affecting or impairing any of the remaining provisions of the Declaration of
Trust or rendering invalid or improper any action taken or omitted prior to such
determination. No Trustee shall be liable for making or failing to make such a
determination. In the event of any such determination by the Board of Trustees,
the Board shall amend the Declaration of Trust in the manner provided in Section
2 of Article XI.

                         (B) If any provision of the Declaration of Trust shall
be held invalid or unenforceable in any jurisdiction, such holding shall apply
only to the extent of any such invalidity or unenforceability and shall not in
any manner affect, impair or render invalid or 

                                     -25-
<PAGE>
 
unenforceable such provision in any other jurisdiction or any other provision of
the Declaration of Trust in any jurisdiction.

          Section 4.     Construction.  In the Declaration of Trust, unless the
                         -------------                                         
context otherwise requires, words used in the singular or in the plural include
both the plural and singular and words denoting any gender include all genders.
The title and headings of different parts are inserted for convenience and shall
not affect the meaning, construction or effect of the Declaration of Trust.  In
defining or interpreting the powers and duties of the Trust and its Trustees and
officers, reference may be made by the Trustees or officers, to the extent
appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3
of the Corporations and Associations Article of the Annotated Code of Maryland.
In furtherance and not in limitation of the foregoing, in accordance with the
provisions of Title 3, Subtitles 6 and 7, of the Corporations and Associations
Article of the Annotated Code of Maryland, the Trust shall be included within
the definition of "corporation" for purposes of such provisions.

          Section 5.     Recordation.  The Declaration of Trust and any
                         ------------                                  
amendment hereto shall be filed for record with the SDAT and may also be filed
or recorded in such other places as the Trustees deem appropriate, but failure
to file for record the Declaration of Trust or any amendment hereto in any
office other than in the State of Maryland shall not affect or impair the
validity or effectiveness of the Declaration of Trust or any amendment hereto.
A restated Declaration of Trust shall, upon filing, be conclusive evidence of
all amendments contained therein and may thereafter be referred to in lieu of
the original Declaration of Trust and the various amendments thereto.

          Section 6.     Approval by Sole Trustee and Sole Stockholder.  This
                         ----------------------------------------------      
Amended and Restated Declaration of Trust has been approved by unanimous written
consent of the sole Trustee and the sole stockholder of the Trust effective the
date hereof.

          Section 7.     Authorized Capital Shares.
                         --------------------------

                 (a)     Prior hereto the authorized shares of beneficial
interest of the Trust consists of One Million (1,000,000) shares of beneficial
interest, $.01 par value per share, all of which have been designated as common
shares of beneficial interest, $.01 par value per share.

                 (b)     Upon filing hereof with the Maryland State Department
of Assessments and Taxation the authorized beneficial interest of the Trust
shall consist of One Hundred Twenty Million (120,000,000) shares of beneficial
interest, $.01 par value per share, of which One Hundred Million (100,000,000)
shall be common shares of beneficial interest, par value $.01 per share, and
Twenty Million (20,000,000) shall be preferred shares of beneficial interest,
$.01 par value per share.

                 (c)     Increase in Aggregate Par Value of Shares of Beneficial
                         -------------------------------------------------------
Interest. Upon filing of the Amended and Declaration of Trust the aggregate par
- --------
value of authorized capital shares of beneficial interest of the Trust shall
increase from $10,000 to $1,200,000.
 
                                     -26-
<PAGE>
 
          IN WITNESS WHEREOF, this Declaration of Trust has been signed on this
3rd day of February 1998 by the undersigned sole Trustee of the Trust and
witnessed by the undersigned Secretary of the Trust, each of whom acknowledges
that this document is his free act and deed, and that to the best of his
knowledge, information, and belief, the matters and facts set forth herein are
true in all material respects and that the statement is made under the penalties
for perjury.

                                        CAPITAL AUTOMOTIVE REIT



                                        /s/ Thomas D. Eckert
                                        ----------------------------------
                                        Thomas D. Eckert, sole Trustee

ATTEST:


          IN WITNESS WHEREOF, this Declaration of Trust has been signed on this
3rd day of February 1998 by the sole Trustee of the Trust who acknowledges that
this document is his free act and deed, and that to the best of his knowledge,
information, and belief, the matters and facts set forth herein are true in all
material respects and that the statement is made under the penalties for
perjury.



                                         /s/  David S. Kay
                                         ---------------------------------(SEAL)
                                         David S. Kay,  Secretary

                                     -27-

<PAGE>
 
                                                                     Exhibit 3.2
 
                            CAPITAL AUTOMOTIVE REIT

                                    BY-LAWS

                                   ARTICLE I

                                      NAME
                                        
     Section 1.1    Name.     The name of the trust is CAPITAL AUTOMOTIVE REIT.
                    -----                                                      

     Section 1.2    State of Formation.  The trust has been formed under the
                    -------------------                                     
laws of the State of Maryland.

                                  ARTICLE II

                       REGISTERED AND PRINCIPAL OFFICES

     Section 2.1    Registered Office.   The registered office of the trust in
                    ------------------                                        
the State of Maryland shall be at  WC&P Agent Corporation, whose address is 100
Light Street, Baltimore, Maryland 21202..

     Section 2.2    Offices.  The principal office of the trust and any other
                    --------                                                 
offices of the trust shall be located at such places, within and without the
State of Maryland, as the Board of Trustees may from time to time determine or
as the business of the trust may require.

                                  ARTICLE III

                           MEETINGS OF SHAREHOLDERS

     Section 3.1    Place of Meetings.  All meetings of the holders
                    ------------------                             
("shareholders") of shares of beneficial interest ("shares") of the trust shall
be held at such place or places, within or without the State of Maryland, as
shall be determined by the Board of Trustees from time to time.

     Section 3.2    Annual Meetings.  An annual meeting of the shareholders for
                    ----------------                                           
the election of Trustees and the transaction of any business within the powers
of the trust shall be held during the month of May of each year, after the
delivery of the annual report, referred to in Section 3.15 of this Article III,
at a convenient location and on proper notice, on a date and at the time set by
the Trustees, beginning with the year 1998.  Failure to hold an annual meeting
does not invalidate the Trust's existence or affect any otherwise valid acts of
the trust.

     Section 3.3    Special Meetings.  Special meetings of the shareholders may
                    -----------------                                          
be called at any time by the Chairman of the Board, Chief Executive Officer,
President or the Board of 

                                       1
<PAGE>
 
Trustees and shall be called upon the request in writing of holders of 50% or
more of the outstanding shares entitled to vote. Special meetings of the
shareholders shall be held on a date fixed by the Secretary of the trust which
shall be not more than ninety (90) days after the date of the call, or after
receipt of the request. If the Secretary shall neglect or refuse to fix the date
or to give notice as required by Section 3.4, below, the person or persons
making the request may do so.

     Section 3.4    Notice of Meetings.  Written notice of every meeting of
                    -------------------                                    
shareholders, stating the time and place thereof, shall be given as herein
provided by, or at the direction of, the person authorized to call the meeting,
to each shareholder of record entitled to vote at the meeting, not less than ten
(10) nor more than ninety (90) days prior to the day named for the meeting,
unless a greater period of notice is required by statute in a particular case.
In the case of a special meeting of shareholders, the notice shall also set
forth the purpose of the meeting. When a meeting is adjourned, it shall not be
necessary to give any notice of the adjourned meeting or of the business to be
transacted at any adjourned meeting, other than by announcement at the meeting
at which such adjournment is taken. Except as set forth in Section 4.4, below,
business to be conducted at any annual, special in lieu of annual or special
meeting of shareholders may be proposed only by the Board of Trustees or by a
shareholder who is entitled to vote at the meeting and who has filed his
proposed item of business with the Secretary of the trust within the time limits
set forth in the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or, if the trust is not subject to the requirements of the Exchange Act,
forty-five (45) days prior to the meeting. Only the business specified in the
notice of meeting may be brought before the meeting.

     Section 3.5    Quorum.   At any meeting of shareholders, the presence in
                    -------                                                  
person or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this Section
shall not affect any requirement under any statute or the Declaration of Trust
(the "Declaration") for the vote necessary for the adoption of any measure.  If,
however, such quorum shall not be present at any meeting of the shareholders,
the shareholders entitled to vote at such meeting, present in person or by
proxy, shall have the power to adjourn the meeting from time to time to a date
not more than 120 days after the original record date without notice other than
announcement at the meeting.  At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.

     Section 3.6    Voting.   A plurality of all the votes cast at a meeting of
                    -------                                                    
shareholders duly called and at which a quorum is present shall be sufficient to
elect a Trustee.  Each share may be voted for as many individuals as there are
Trustees to be elected and for whose election the share is entitled to be voted.
A majority of the votes cast at a meeting of shareholders duly called and at
which a quorum is present shall be sufficient to approve any other matter which
may properly come before the meeting, unless more than a majority of the votes
cast is required herein or by statute or by the Declaration.  Unless otherwise
provided in the Declaration, each

                                       2
<PAGE>
 
outstanding share, regardless of class, shall be entitled to one vote on each
matter submitted to a vote at a meeting of shareholders.

     Section 3.7    Voting by Ballot.  Voting on any question or in any election
                    -----------------                                           
may be viva voce unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.

     Section 3.8    Voting by Proxy.  At each meeting of the shareholders, every
                    ----------------                                            
shareholder having the right to vote shall be entitled to vote in person or by
proxy appointed by an instrument in writing subscribed by such shareholder and
delivered to the Secretary at the meeting. No unrevoked proxy shall be valid
after eleven (11) months from the date of its execution, unless a longer time is
expressly provided therein.

     Section 3.9    Unpaid Shares.  No share upon which any installment is due
                    --------------                                            
the trust and unpaid shall be voted at any meeting.

     Section 3.10   Voting List.    The officer or agent having charge of the
                    ------------                                             
transfer books shall make, at least five (5) days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, setting forth the address of and the
number of shares held by each, which list shall be kept on file at the
registered office of the trust, and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting, and shall be
subject to the inspection of any shareholder during the whole time of the
meeting. The original share ledger or transfer book, or a duplicate thereof
(kept at the office of the transfer agent for the trust) shall be prima facie
evidence as to who are the shareholders entitled to examine such list or share
ledger or transfer book, or to vote in person or by proxy, at any meeting of
shareholders.

     Section 3.11   Action by Consent.  Any action required or permitted to be
                    ------------------                                        
taken at a meeting of shareholders may be taken without a meeting if a consent
in writing, setting forth such action, is signed by each shareholder entitled to
vote on the matter and any other shareholder entitled to notice of a meeting of
shareholders (but not to vote thereat) has waived in writing any right to
dissent from such action, and such consent and waiver are filed with the minutes
of proceedings of the shareholders.

     Section 3.12.  Cumulative Voting.  Unless the Declaration expressly
                    ------------------                                  
provides for cumulative voting, in all elections for Trustees, every shareholder
entitled to vote shall have the right, in person or by proxy, to cast one vote
per share; there shall be no cumulative voting.

     Section 3.13.  Voting of Shares by Certain Holders.  Shares of the trust
                    ------------------------------------                     
registered in the name of a corporation, partnership, trust or other entity, if
entitled to be voted, may be voted by the president or a vice president, a
general partner or trustee thereof, as the case may be, or a proxy appointed by
any of the foregoing individuals, unless some other person who has been

                                       3
<PAGE>
 
appointed to vote such shares pursuant to a bylaw or a resolution of the
governing board of such corporation or other entity or agreement of the partners
of the partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such shares. Any trustee or other
fiduciary may vote shares registered in his name as such fiduciary, either in
person or by proxy.

          The Trustees may adopt by resolution a procedure by which a
shareholder may certify in writing to the trust that any shares registered in
the name of the shareholder are held for the account of a specified person other
than the shareholder.  The resolution shall set forth the class of shareholders
who may make the certification, the purpose for which the certification may be
made, the form of certification and the information to be contained in it; if
the certification is with respect to a record date or closing of the share
transfer books, the time after the record date or closing of the share transfer
books within which the certification must be received by the trust; and any
other provisions with respect to the procedure which the Trustees consider
necessary or desirable. On receipt of such certification, the person specified
in the certification shall be regarded as, for the purposes set forth in the
certification, the shareholder of record of the specified shares in place of the
shareholder who makes the certification.

     Section 3.14   Inspectors.  At any meeting of shareholders, the chairman of
                    ----------
the meeting may, or upon the request of any shareholder shall, appoint one or
more persons as inspectors for such meeting.  Such inspectors shall ascertain
and report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the shareholders.

          Each report of an inspector shall be in writing and signed by him or
by a majority of them if there is more than one inspector acting at such
meeting.  If there is more than one inspector, the report of a majority shall be
the report of the inspectors.  The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.

     Section 3.15   Reports to Shareholders.
                    ------------------------

       (a)     Not later than 90 days after the close of each fiscal year of the
trust, the Trustees shall deliver or cause to be delivered a report of the
business and operations of the trust during such fiscal year to the
shareholders, containing a balance sheet and a statement of income and surplus
of the trust, accompanied by the certification of an independent certified
public accountant based on the accountant's full examination of the books and
records of the real estate investment trust in accordance with generally
accepted auditing procedure, and such further information as the Trustees may
determine is required pursuant to any law or regulation to which the trust is
subject. A signed copy of the annual report and the accountant's certificate
shall be placed on file at the principal office of the trust and filed by the
Trustees with such governmental agencies, if any, as may be required by law and
as the Trustees may deem appropriate.

                                       4
<PAGE>
 
          (b)      Not later than 45 days after the end of each of the first
three quarterly periods of each fiscal year, the Trustees shall deliver or cause
to be delivered an interim report to the shareholders containing unaudited
financial statements for such quarter and for the period from the beginning of
the fiscal year to the end of such quarter, and such further information as the
Trustees may determine is required pursuant to any law or regulation to which
the trust is subject.

                                  ARTICLE IV

                          TRUSTEES AND BOARD MEETINGS

     Section 4.1    Management by Board of Trustees.  The business, property and
                    --------------------------------                            
affairs of the trust shall be managed by its Board of Trustees. The Board of
Trustees may exercise all such powers of the trust and do all such lawful acts
and things as are not by statute or by the Declaration or by these By-laws
directed or required to be exercised or done by the shareholders. A Trustee
shall be an individual at least 21 years of age who is not under legal
disability.  Unless otherwise agreed between the trust and the Trustee, each
individual Trustee, including each Independent Trustee (as defined in the
Trust's Declaration) , may engage in other business activities of the type
conducted by the trust and is not required to present to the trust any
investment opportunities presented to them even though the investment
opportunities may be within the scope of the trust's investment policies.  In
case of failure to elect Trustees at an annual meeting of the shareholders, the
Trustees holding over shall continue to direct the management of the business
and affairs of the trust until their successors are elected and qualify.

     Section 4.2    Annual and Regular Meetings.  An annual meeting of the
                    ----------------------------                          
Trustees shall be held immediately after and at the same place as the annual
meeting of shareholders, no notice other than this By-law being necessary.  The
Trustees may provide, by resolution, the time and place, either within or
without the State of Maryland, for the holding of regular meetings of the
Trustees without other notice than such resolution.

     Section 4.3    Special Meetings.  Special meetings of the Trustees may be
                    -----------------                                         
called by or at the request of the Chairman of the Board, the Chief Executive
Officer or the President or by a majority of the Trustees then in office.  The
person or persons authorized to call special meetings of the Trustees may fix
any place, either within or without the State of Maryland, as the place for
holding any special meeting of the Trustees called by them.

     Section 4.4    Notice.   Notice of any special meeting shall be given by
                    -------                                                  
written notice delivered personally, telegraphed or mailed to each Trustee at
his business or residence address.  Personally delivered or telegraphed notices
shall be given at least two days prior to the meeting.  Notice by mail shall be
given at least five days prior to the meeting.  Telephone notice shall be given
at least 24 hours prior to the meeting.  If mailed, such notice shall be deemed
to be given when deposited in the United States mail properly addressed, with
postage thereon prepaid. If given by telegram, such notice shall be deemed to be
given when the telegram is delivered to 

                                       5
<PAGE>
 
the telegraph company. Telephone notice shall be deemed given when the Trustee
is personally given such notice in a telephone call to which he is a party.
Neither the business to be transacted at, nor the purpose of, any annual,
regular or special meeting of the Trustees need be stated in the notice, unless
specifically required by statute or these By-laws.

     Section 4.5    Quorum.   Except as provided in subsection (b) of Section
                    -------                                                  
4.6, a majority of the entire Board of Trustees shall constitute a quorum for
transaction of business at any meeting of the Trustees, provided that, if less
than a majority of such Trustees are present at said meeting, a majority of the
Trustees present may adjourn the meeting from time to time without further
notice, and provided further that if, pursuant to the Declaration or these By-
laws, the vote of a majority of a particular group of Trustees is required for
action, a quorum must also include a majority of such group.

          The Trustees present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough Trustees to leave less than a quorum.

     Section 4.6    Voting.   The action of the majority of the Trustees present
                    -------                                                     
at a meeting at which a quorum is present shall be the action of the Trustees,
unless the concurrence of a greater proportion is required for such action by
the Declaration, these By-laws or applicable statute.

     Section 4.7    Telephone Meetings.  Trustees may participate in a meeting
                    -------------------                                       
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.

     Section 4.8    Informal Action by Trustees.  Any action required or
                    ----------------------------                        
permitted to be taken at any meeting of the Trustees may be taken without a
meeting, if a consent in writing to such action is signed by each Trustee and
such written consent is filed with the minutes of proceedings of the Trustees.

     Section 4.9    Vacancies.      If for any reason any or all the Trustees
                    ----------                                               
cease to be Trustees, such event shall not terminate the trust or affect these
By-laws or the powers of the remaining Trustees hereunder (even if fewer than
two Trustees remain).  If the office of any Trustee shall become vacant by
reason of death, resignation, disqualification or other cause, such vacancy or
vacancies, including vacancies resulting from an increase in the number of
Trustees, shall be filled by a majority of the remaining members of the Board,
though less than a quorum. Each person so elected by the Board of Trustees to
fill a vacancy shall be a Trustee until his or her successor is elected by the
shareholders who may make such election at the next annual meeting of
shareholders, or at any earlier special meeting of the shareholders duty called
for that purpose, and until such successor shall qualify.

                                       6
<PAGE>
 
     Section 4.10   Compensation.  Trustees shall not receive any stated
                    -------------                                       
salary for their services as Trustees but, by resolution of the Trustees, may
receive cash compensation or a fixed sum of common shares of the trust for any
service or activity they performed or engaged in as Trustees.  By resolution of
the Trustees, Trustees may receive a fee for and may be reimbursed for expenses
in connection with attendance, if any, at each annual, regular or special
meeting of the Trustees or of any committee thereof; and for their expenses, if
any, in connection with each property visit and any other service or activity
performed or engaged in as Trustees; but nothing herein contained shall be
construed to preclude any Trustees from serving the trust in any other capacity
and receiving compensation therefor.

     Section 4.11   Removal of Trustees.  The shareholders may, at any time,
                    --------------------                                    
remove any Trustee in the manner provided in the Declaration.

     Section 4.12   Loss of Deposits.  No Trustee shall be liable for any loss
                    -----------------                                         
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or shares have been
deposited.

     Section 4.13   Surety Bonds.   Unless required by law, no Trustee shall be
                    -------------                                              
obligated to give any bond or surety or other security for the performance of
any of his duties.

     Section 4.14   Number, Tenure and Qualifications.  The number of Trustees
                    ---------------------------------                         
of the trust shall not be less than three (3) nor more than nine (9), as
determined from time to time by the Board of Trustees, except that the number of
Trustees may be equal to the number of shareholders of the Company, if the
number of shareholders is less than three.  Trustees need not be shareholders of
the trust.

     Section 4.15   Interested Trustee Transactions.  Notwithstanding any other
                    --------------------------------                           
provision of these By-laws, the following actions of the Board of Trustees shall
require the approval of the Independent Committee, as defined in Article V of
these By-laws: (i) the election of operators for the trust's properties; and
(ii) all transactions between the trust and Corrections Corporation of America
and its affiliates, including, but not limited to, the negotiation, enforcement
and renegotiation of the terms of any lease of any of the trust's properties.

                                   ARTICLE V

                                  COMMITTEES
                                        
     Section 5.1    General.  The Board of Trustees may, by resolution passed by
                    --------                                                    
a majority of the whole board, designate one or more committees, each such
committee to consist of one or more of the Trustees of the trust.  The board may
designate one or more Trustees as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.  Any
such committee, to the extent provided in the resolution of the Board of
Trustees shall have and may exercise all the powers and authority of the Board
of Trustees in the 

                                       7
<PAGE>
 
management of the business and affairs of the trust, and may authorize the seal
of the trust to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Declaration (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares adopted by the
Board of Trustees, fix the designations and any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution or
assets of the trust or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of any series of shares
or authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation, recommending to the shareholders the sale,
lease or exchange of all or substantially all of the trust's property and
assets, recommending to the shareholders a dissolution of the trust or a
revocation of a dissolution, or amending the By-laws of the trust; and, unless
the resolution or the Declaration expressly so provides, no such committee shall
have the power or authority to declare a dividend, to authorize the issuance of
shares or to adopt a certificate of ownership and merger.

     Section 5.2    Committees.     The committees designated by the trust may
                    ----------                                                
include the following committees, the specific authority and members of which
shall be as designated herein or by resolution of the Board of Trustees.

          (a)      An Independent Committee, which shall consist solely of
Independent Trustees and which shall have the authority to approve the actions
of the Board of Trustees as specified in Section 4.15 of Article IV.

          (b)      An Audit Committee, which will consist solely of Independent
Trustees and which shall make recommendations concerning the engagement of
independent public accounts, review with the independent public accountants the
plans and results of the audit engagement, approve professional services
provided by the independent public accounts, review the independence of the
independent public accounts, consider the range of audit and non-audit fees and
review the adequacy of the trust's initial accounting controls.

          (c)      A Compensation Committee, which shall determine compensation
for the trust's executive officers and administer any share incentive plans
adopted by the trust.

     Section 5.3.   Records of Committee Meetings.  Each committee shall keep
                    ------------------------------                           
regular minutes of its meetings and report the same to the Board of Trustees
when required.  The presence of a majority of the total membership of any
committee shall constitute a quorum for the transaction of business at any
meeting of such committee and the act of a majority of those present shall be
necessary and sufficient for the taking of any action at such meeting.

                                  ARTICLE VI

                                   OFFICERS

                                       8
<PAGE>
 
     Section 6.1    General Provisions.  The officers of the trust may consist
                    --------------------                                      
of a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive
Officer, a President, one or more Vice Presidents, a Chief Financial Officer, a
Treasurer, one or more Assistant Treasurers, a Secretary, and one or more
Assistant Secretaries.  In addition, the Trustees may from time to time appoint
such other officers with such powers and duties as they shall deem necessary or
desirable.  The officers of the trust shall be elected annually by the Trustees
at the first meeting of the Trustees held after each annual meeting of
shareholders.  If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as may be convenient. Each
officer shall hold office until his successor is elected and qualifies or until
his death, resignation or removal in the manner hereinafter provided.  Any two
or more offices except President and Vice President may be held by the same
person.  In their discretion, the Trustees may leave unfilled any office except
that of President and Secretary. Election of an officer or agent shall not of
itself create contract rights between the Trust and such officer or agent.

     Section 6.2    Removal and Resignation.  Except as otherwise provided in an
                    ------------------------                                    
employment contract  or other agreement governing terms of employment to which
the Company and the officer are a party, in which case the terms therein shall
govern, any officer or agent of the trust may be removed by the Trustees if in
their judgment the best interests of the trust would be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.  Any officer of the trust may resign at any time by giving written
notice of his resignation to the Trustees, the Chairman of the Board, the
President or the Secretary.  Any resignation shall take effect at any time
subsequent to the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The acceptance
of a resignation shall not be necessary to make it effective unless otherwise
stated in the resignation.  Such resignation shall be without prejudice to the
contract rights, if any, of the trust.

     Section 6.3    Vacancies.  A vacancy in any office may be filled by the
                    ----------                                              
Trustees for the balance of the term.

     Section 6.4    Chairman and Vice Chairman of the Board.   The Trustees may
                    ----------------------------------------                   
designate a Chairman of the Board and a Vice Chairman of the Board from among
the Trustees. If there shall be a Chairman of the Board or a Vice-Chairman or
the Board, the Chairman of the Board shall preside over the meetings of the
Trustees and of the shareholders at which he shall be present and shall in
general oversee all of the business and affairs of the trust.  In the absence of
the Chairman of the Board, the Vice Chairman of the Board shall preside at such
meetings at which he shall be present.  The Chairman and the Vice Chairman of
the Board may execute any deed, mortgage, bond, contract or other instrument,
except in cases where the execution thereof shall be expressly delegated by the
Trustees or by these By-laws to some other officer or agent of the trust or
shall be required by law to be otherwise executed.  The Chairman of the Board
and the Vice Chairman of the Board shall perform such other duties as may be
assigned to him or them by the Trustees. In the absence of a Chairman of the
Board and Vice Chairman of the Board, the Chief Executive Officer shall preside.

                                       9
<PAGE>
 
     Section 6.5    Chief Executive Officer.  The Trustees may designate a Chief
                    ------------------------                                    
Executive Officer from among the elected officers.  The Chief Executive Officer
shall have responsibility for implementation of the policies of the trust, as
determined by the Trustees, and for the administration of the business affairs
of the trust.  In the absence of both the Chairman and Vice Chairman of the
Board, the Chief Executive Officer shall preside over the meetings of the
Trustees and of the shareholders at which he shall be present.

     Section 6.6    Chief Operating Officer.  The Trustees may designate a Chief
                    ------------------------                                    
Operating Officer from among the elected officers.  Said officer will have the
responsibilities and duties as set forth by the Trustees or the Chief Executive
Officer.

     Section 6.7    Chief Development Officer. The Trustees may designate a
                    --------------------------                             
Chief Development Officer from among the elected officers.  Said officer will
have the responsibilities and duties as set forth by the Trustees or the Chief
Executive Officer.

     Section 6.8    Chief Financial Officer.  The Trustees may designate a Chief
                    ------------------------                                    
Financial Officer from among the elected officers.  Said officer will have the
responsibilities and duties as set forth by the Trustees or the Chief Executive
Officer.

     Section 6.9    President.  In the absence of the Chairman, the Vice
                    ----------                                          
Chairman of the Board and the Chief Executive Officer, the President shall
preside over the meetings of the Trustees and of the shareholders at which he
shall be present.  In the absence of a designation of a Chief Executive Officer
by the Trustees, the President shall be the Chief Executive Officer and shall be
ex officio a member of all committees that may, from time to time, be
constituted by the Trustees.  The President may execute any deed, mortgage,
bond, contract or other instrument, except in cases where the execution thereof
shall be expressly delegated by the Trustees or by these By-laws to some other
officer or agent of the trust or shall be required by law to be otherwise
executed; and in general shall perform all duties incident to the office of
President and such other duties as may be prescribed by the Trustees from time
to time.

     Section 6.10   Vice Presidents.  In the absence of the President or in the
                    ----------------                                           
event of a vacancy in such office, the Vice President (or in the event there be
more than one Vice President, the Vice Presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the President and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President; and shall perform such other duties as from time to time may be
assigned to him by the President or by the Trustees.  The Trustees may designate
one or more Vice Presidents as Executive Vice President or as Vice President for
particular areas of responsibility.

     Section 6.11   Secretary.      The Secretary shall (a) keep the minutes of
                    ----------                                                 
the proceedings of the shareholders, the Trustees and committees of the Trustees
in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these 

                                       10
<PAGE>
 
By-laws or as required by law; (c) be custodian of the trust records and of the
seal of the trust; (d) keep a register of the post office address of each
shareholder which shall be furnished to the Secretary by such shareholder; (e)
have general charge of the share transfer books of the trust; and (f) in general
perform such other duties as from time to time may be assigned to him by the
Chief Executive Officer, the President or by the Trustees.

     Section 6.12   Treasurer.  The Treasurer shall have the custody of the
                    ----------                                             
funds and securities of the trust and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the trust and shall deposit all
moneys and other valuable effects in the name and to the credit of the trust in
such depositories as may be designated by the Trustees.

          The Treasurer shall disburse the funds of the trust as may be ordered
by the Trustees, taking proper vouchers for such disbursements, and shall render
to the President and Trustees, at the regular meetings of the Trustees or
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the trust.

          If required by the Trustees, the Treasurer shall give the trust a bond
in such sum and with such surety or sureties as shall be satisfactory to the
Trustees for the faithful performance of the duties of his office and for the
restoration to the trust, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, moneys and other property
of whatever kind in his possession or under his control belonging to the trust.

     Section 6.13   Assistant Secretaries and Assistant Treasurers.  The
                    -----------------------------------------------     
Assistant Secretaries and Assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Secretary or Treasurer, respectively,
or by the President or the Trustees. The Assistant Treasurers shall, if required
by the Trustees, give bonds for the faithful performance of their duties in such
sums and with such surety or sureties as shall be satisfactory to the Trustees.

     Section 6.14   Salaries.  The salaries of the officers shall be fixed from
                    ---------                                                  
time to time by the Trustees and no officer shall be prevented from receiving
such salary by reason of the fact that he is also a Trustee.

                                  ARTICLE VII

                     CONTRACTS, LOANS, CHECKS AND DEPOSITS
                                        
     Section 7.1    Contracts.  The Trustees may authorize any officer or agent
                    ----------                                                 
to enter into any contract or to execute and deliver any instrument in the name
of and on behalf of the trust and such authority may be general or confined to
specific instances.  Any agreement, deed, mortgage, lease or other document
executed by one or more of the Trustees or by an authorized person shall be
valid and binding upon the Trustees and upon the trust when authorized or
ratified by action of the Trustees.

                                       11
<PAGE>
 
     Section 7.2    Checks and Drafts.  All checks, drafts or other orders for
                    ------------------                                        
the payment of money, notes or other evidences of indebtedness issued in the
name of the trust shall be signed by such officer or officers, agent or agents
of the trust in such manner as shall from time to time be determined by the
Trustees.

     Section 7.3    Deposits.  All funds of the trust not otherwise employed
                    ---------                                               
shall be deposited from time to time to the credit of the trust in such banks,
trust companies or other depositories as the Trustees may designate.

                                 ARTICLE VIII

                                    SHARES

     Section 8.1    Certificates.  Each shareholder shall be entitled to a
                    -------------                                         
certificate or certificates which shall represent and certify the number of
shares of each class of beneficial interests held by him in the trust.  Each
certificate shall be signed by the Chief Executive Officer, the President or a
Vice President and countersigned by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer and may be sealed with the seal, if any,
of the trust.  The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the trust shall, from time to time,
issue several classes of shares, each class may have its own number series.  A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued.  Each certificate representing shares
which are restricted as to their transferability or voting powers, which are
preferred or limited as to their dividends or as to their allocable portion of
the assets upon liquidation or which are redeemable at the option of the trust,
shall have a statement of such restriction, limitation, preference or redemption
provision, or a summary thereof, plainly stated on the certificate. In lieu of
such statement or summary, the trust may set forth upon the face or back of the
certificate a statement that the trust will furnish to any shareholder, upon
request and without charge, a full statement of such information.

     Section 8.2    Transfers.      Certificates shall be treated as negotiable,
                    ----------                                                  
and title thereto and to the shares they represent shall be transferred by
delivery thereof to the same extent as those of a Maryland stock corporation.
No transfers of shares of the trust shall be made if (i) void ab initio pursuant
to any provision of the Declaration, (ii) the Board of Trustees, pursuant to any
provision of the Declaration or other written agreement between or among any
shareholder(s) and the Company, shall have refused to permit the transfer of
such shares, or (iii) the shares have not been registered under the Securities
Act of 1933, as amended (the "Act"), or under applicable state blue-sky or
securities laws, unless exemptions from the registration requirements of the Act
and applicable state blue-sky or securities laws are, in the opinion of counsel,
satisfactory to the trust, for the transferor, available.  Permitted transfers
of shares of the trust shall be made on the share records of the trust only upon
the instruction of the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and upon surrender of the certificate
or certificates, if issued, for such shares properly endorsed or accompanied by
a duly 

                                       12
<PAGE>
 
executed share transfer power and the payment of all taxes thereon. Upon
surrender to the trust or the transfer agent of the trust of a certificate for
shares duly endorsed or accompanied by proper evidence of succession, assignment
or authority to transfer, as to any transfers not prohibited by any provision of
the Declaration or by action of the Board of Trustees thereunder, it shall be
the duty of the trust to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.

     Section 8.3    Replacement Certificate.  Any officer designated by the
                    ------------------------                               
Trustees may direct a new certificate to be issued in place of any certificate
previously issued by the trust alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed.  When authorizing the issuance of a
new certificate, the officer designated by the Trustees may, in his discretion
and as a condition precedent to the issuance thereof , require the owner of such
lost, stolen or destroyed certificate or the owner's legal representative to
advertise the same in such manner as he shall require and/or to give bond, with
sufficient surety, to the trust to indemnify it against any loss or claim which
may arise as a result of the issuance of a new certificate.

     Section 8.4    Closing of Transfer Books or Fixing of Record Date.   The
                    ---------------------------------------------------      
Trustees may set, in advance, a record date for the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
determining shareholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
shareholders for any other purpose. Such date, in any case, shall not be prior
to the close of business on the day the record date is fixed and shall be not
more than 90 days and in the case of a meeting of shareholders not less than ten
days, before the date on which the meeting or particular action requiring such
determination of shareholders of record is to be held or taken.

          In lieu of fixing a record date, the Trustees may provide that the
share transfer books shall be closed for a stated period but not longer than 20
days.  If the share transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days before the date of such meeting.

          If no record date is fixed and the share transfer books are not closed
for the determination of shareholders, (a) the record date for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of shareholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the Trustees,
declaring the dividend or allotment of rights, is adopted.

          When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment 

                                       13
<PAGE>
 
thereof, except when (i) the determination has been made through the closing of
the transfer books and the stated period of closing has expired or (ii) the
meeting is adjourned to a date more than 120 days after the record date fixed
for the original meeting, in either of which case a new record date shall be
determined as set forth herein.

     Section 8.5    Share Ledger.  The trust shall maintain at its principal
                    -------------                                           
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
shareholder and the number of shares of each class held by such shareholder.

     Section 8.6    Fractional Share; Issuance of Units.  The Trustees may issue
                    ------------------------------------                        
fractional shares or provide for the issuance of scrip, all on such terms and
under such conditions as they may determine.  Notwithstanding any other
provision of the Declaration or these By-laws, the Trustees may issue units
consisting of different securities of the trust.  Any security issued in a unit
shall have the same characteristics as any identical securities issued by the
trust, except that the Trustees may provide that for a specified period
securities of the trust issued in such unit may be transferred on the books of
the trust only in such unit.

     Section 8.7    Agreements Restricting Transfer of Shares.  The Board of
                    ------------------------------------------              
Trustees may authorize the trust to become party to agreements with shareholders
and others relating to transfer, repurchase, and issuance, of shares of the
trust; provided, however, that such agreement must be filed with the trust and
all share certificates affected thereby shall have clearly imprinted thereon a
legend containing such agreement or referring thereto.

                                  ARTICLE IX

                                 DISTRIBUTIONS
                                        
     Section 9.1    Authorization.  Dividends and other distributions upon the
                    --------------                                            
shares of the trust may be authorized and declared by the Board Trustees in
their discretion, subject to the provisions of law and the Declaration.
Dividends may be paid in cash, property or shares of the trust, subject  to the
provisions of law and the Declaration.

     Section 9.2    Contingencies.  Before payment of any dividends, there may
                    --------------                                            
be set aside out of any funds of the trust available for dividends such sum or
sums as the Trustees may from time to time, in their absolute discretion, think
proper as a reserve fund for contingencies, for equalizing dividends, for
repairing or maintaining any property of the trust or for such other purpose as
the Trustees shall determine to be in the best interest of the trust, and the
Trustees may modify or abolish any such reserve in the manner in which it was
created.

                                   ARTICLE X

                                     SEAL

                                       14
<PAGE>
 
     Section 10.1    Seal.  The Trustees may authorize the adoption of a seal
                     -----                                              
by the trust. The seal shall have inscribed thereon the name of the trust and
the year of its formation. The Trustees may authorize one or more duplicate
seals and provide for the custody thereof.

     Section 10.2   Affixing Seal.  Whenever the trust is required to place its
                    --------------                                             
seal to a document, it shall be sufficient to meet the requirements of any law,
rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the
signature of the person authorized to execute the document on behalf of the
trust.

                                  ARTICLE XI

                   INDEMNIFICATION AND ADVANCES FOR EXPENSES

          To the maximum extent permitted by Maryland law in effect from time to
time, the trust, without requiring a preliminary determination of the ultimate
entitlement to indemnification, shall indemnify (a) any Trustee or officer or
any former Trustee or officer (including among the foregoing, for all purposes
of this Article XI and without limitation, any individual who, while a Trustee
or officer and at the express request of the trust, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, shareholder, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) who has been successful, on the merits or otherwise, in the defense
of a proceeding to which he was made a party by reason of service in such
capacity, against reasonable expenses incurred by him in connection with the
proceeding, and (b) any Trustee or officer or any former Trustee or officer
against any claim or liability to which he may become subject by reason of such
status unless it is established that (i) his act or omission was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty, (ii) he actually received an
improper personal benefit in money, property or services or (iii) in the case of
a criminal proceeding, he had reasonable cause to believe that his act or
omission was unlawful.  In addition, the trust shall pay or reimburse, in
advance of final disposition of a proceeding, reasonable expenses incurred by a
Trustee or officer or former Trustee or officer made a party to a proceeding by
reason such status, provided that, the trust shall have received (i) a written
affirmation by the Trustee or officer of his good faith belief that he has met
the applicable standard of conduct necessary for indemnification by the trust as
authorized by these By-laws and (ii) a written undertaking by or on its behalf
to repay the amount paid or reimbursed by the trust if it shall ultimately be
determined that the applicable standard of conduct was not met. The trust may,
with the approval of its Trustees, provide such indemnification or payment or
reimbursement of expenses to any Trustee or officer or any former Trustee or
officer who served a predecessor of the trust and to any employee or agent of
the trust or a  predecessor of the trust. Neither the amendment nor repeal of
this Article,  nor the adoption or amendment of any other provision of the
Declaration or these By-laws inconsistent with this Article, shall apply to or

                                       15
<PAGE>
 
affect  in any respect the applicability of this Article with respect to any act
or failure to act which occurred prior to such amendment, repeal or adoption.

          Any indemnification or payment or reimbursement of the expenses
permitted by these By-laws shall be furnished in accordance with the procedures
provided for indemnification or payment or reimbursement of expenses, as the
case may be, under Section 2-418 of the Maryland General Corporation Law (the
"MGCL") for directors of Maryland corporations. The trust may provide to
Trustees, officers and shareholders such other and further indemnification or
payment or reimbursement of expenses, as the case may be, to the fullest extent
permitted by the MGCL, as in effect from time to time, for directors of Maryland
corporations.

          The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under Maryland law, the Declaration, any by-law, agreement, resolution
of shareholders or trustees or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a trustee, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.

          The trust shall have power to purchase and maintain insurance on
behalf of any person who is or was a trustee, officer, employee or agent of the
trust, or is or was serving at the request of the trust as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust, other enterprise or employee benefit plan against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the trust would have the power to indemnify
him against such liability under the specified statutory authority, the
Declaration or the provisions of this Article XI.


                                  ARTICLE XII

            LIABILITY OF TRUSTEES AND RELATION OF OFFICERS TO TRUST

     Section 12.1   Fiduciary Relationship.  Trustees and officers of the trust
                    -----------------------                                    
shall discharge the duties of their respective positions in good faith, in a
manner they reasonably believe to be in the best interests of the trust and with
the care which ordinarily prudent persons in like positions would use under
similar circumstances.

     Section 12.2   Liability of Trustees to the Trust.  The Trustees and
                    -----------------------------------                  
officers of the trust shall not be personally liable for monetary damages as
such for any action except to the extent that (i) it is proved that any such
person actually received an improper benefit or profit in money, property or
services or (ii) a judgment or other final adjudication adverse to the person is
entered in a proceeding based on a finding in the proceeding that the person'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.

                                       16
<PAGE>
 
                                 ARTICLE XIII

                             RECORDS OF THE TRUST

     Section 13.1   Proceedings of Shareholders and Trustees. There shall be
                    -----------------------------------------               
kept at the principal office of the trust an original or duplicate record of the
proceedings of the shareholders and of the Trustees, and the original or a copy
of its By-laws, including all amendments or alterations thereof to date,
together with other necessary and appropriate corporate records.

     Section 13.2   Shareholders' Right to Examine Records of Trust.  Every
                    ------------------------------------------------       
shareholder shall, upon written demand, have a right to examine, in person or by
agent or attorney, during the usual hours for business, the By-laws, minutes of
the proceedings of the shareholders and Trustees, annual statements of affairs
and voting trust agreements on file at the trust's principal office, and make
copies or extracts therefrom. A shareholder shall, upon written demand, have a
right to receive a sworn statement from the President or Chief Financial Officer
of the trust showing all shares and securities issued by the trust during a
specified period of not more than 12 months before the date of the request,
including: (i) the number of shares or amounts of each class of shares or other
securities issued during the specified period; (ii) the consideration received
per share or unit; and (iii) the value of any consideration other than money as
set forth in a resolution of the Board of Trustees. In addition, one or more
persons who together are and have been for at least six months holders of record
of at least 5% of the outstanding shares of any class may (i) in person or by
agent, on written request, inspect and copy during usual business hours the
trust's books of account and its share ledger; (ii) present to any officer or
resident agent of the trust a written request for a statement of its affairs;
and (iii) in the case the trust does not maintain the original or a duplicate
stock ledger at its principal office, present to any officer or resident agent
of the trust a written request for a list of its shareholders. Within 20 days
after a request for information is made by the person or persons referred to in
the preceding sentence, the trust shall prepare and have available on file at
its principal office (a) in the case of a request for a statement of affairs, a
statement verified under oath by the President, Chief Financial Officer or a
vice-president which sets forth in reasonable detail the trust's assets and
liabilities as of a reasonably current date; and (b) in the case of a request
for a list of shareholders, a list verified under oath by one of its officers or
its transfer agent or registrar which sets forth the name and address of each
shareholder and the number of shares of each class which the shareholder holds.

                                  ARTICLE XIV

                                WAIVER OF NOTICE

     Whenever any notice is required to be given pursuant to the Declaration or
By-laws or pursuant to applicable law, a waiver thereof in writing, signed by
the person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice. Neither
the business to be transacted at nor the purpose of any meeting

                                       17
<PAGE>
 
need be set forth in the waiver of notice, unless specifically required by
statute. The attendance of any person at any meeting shall constitute a waiver
of notice of such meeting, except where such person attends a meeting for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.


                                   ARTICLE XV

                              AMENDMENT OF BY-LAWS

     The Trustees shall have the exclusive power to adopt, alter or repeal any
provision of these By-laws and to make new By-laws in accordance with Article IV
hereof.

                                  ARTICLE XVI

                                 MISCELLANEOUS

     Section 16.1   Fiscal Year. The fiscal year of the trust shall be as fixed
                    ------------                                               
by resolution of the Board of Trustees. If the Board of Trustees shall not do
so, the Chief Executive Officer shall fix the fiscal year.

     Section 16.2   Designation of Presiding and Recording Officers. The
                    ------------------------------------------------    
Trustees or shareholders, at any meeting of Trustees or shareholders, as the
case may be, shall have the right to designate any person, whether or not an
officer, Trustee or shareholder to preside over, or record the proceedings of,
such meeting.

     Section 16.3   Amendments and Supplements to By-Laws.  All references to
                    --------------------------------------                   
the Declaration shall include any amendments or supplements thereto.  Recording
Amendments and Alterations. The text of all amendments and alterations to these
By-laws shall be attached to the By-laws with a notation of the date of each
such amendment or alteration.

                                  ARTICLE XVII

                    ADOPTION OF BY-LAWS RECORD OR AMENDMENT

         These By-laws have been adopted and filed with the undersigned to be
effective as of the _____ day of October, 1997.


                       ---------------------------------
                       David Kay, Secretary

                                       18

<PAGE>

                                                                     Exhibit 4.1

- --------------------------------------------------------------------------------
The Common Shares or Preferred Shares or other Shares represented by this
certificate are subject to restrictions on transfer for the purpose of the Trust
& maintenance of its status as a real estate investment trust under the Internal
Revenue Code of 1986, as amended (the "Code"). Subject to certain further
restrictions and except as provided in the Declaration of Trust of the Trust, no
Person may (i) Beneficially or Constructively Own Common Shares in excess of
9.9% of the number of outstanding Common Shares, (ii) Beneficially or
Constructively Own Shares of any class or series of Preferred Shares in excess
of 9.9% of the number of outstanding Preferred Shares of such class or series,
(iii) Beneficially Own Shares that would result in the Shares being beneficially
owned by fewer than 100 Persons (determined without reference to any rules of
attribution), (iv) Beneficially Own Shares that would result in the Trust being
"closely held" under Section 856(h) of the Code, or (v) Constructively Own
Shares that would cause the Trust to Constructively Own 10% or more of the
ownership interests in a tenant of the Trust's real property within the meaning
of Section 856(d)(2)(8) of the Code. Any Person who attempts to Beneficially or
Constructively Own Shares in excess of the above limitations must immediately
notify the Trust in writing. If any restrictions above are violated, the Shares
represented hereby will be transferred automatically to a Share Trust and shall
be designated Shares-In-Trust to a trustee of a trust for the benefit of one or
more charitable beneficiaries. In addition, upon the occurrence of certain
events, attempted transfers in violation of the restrictions described above may
be void ab initio. All capitalized terms in this legend have the meanings
defined in the Trust's Amended and Restated Declaration of Trust, as the same
may be further amended from time to time, a copy of which, including the
restrictions on transfer, will be sent without charge to each Shareholder who so
requests. Such requests must be made to the Secretary of the Trust at its
principal office or to the transfer agent.
- --------------------------------------------------------------------------------


   NUMBER                                                          SHARES

     CA

                            CAPITAL AUTOMOTIVE REIT
               A REAL ESTATE INVESTMENT TRUST FORMED UNDER THE     
                         LAWS OF THE STATE OF MARYLAND

     COMMON SHARES                                              
 OF BENEFICIAL INTEREST                                        SEE REVERSE FOR
PAR VALUE $.01 PER SHARE                                     CERTAIN DEFINITIONS

                                                              CUSIP 139733 10 9

THIS CERTIFIES THAT






is the owner of 

     FULLY PAID AND NON-ASSESSABLE COMMON SHARES OF BENEFICIAL INTEREST, 
                         PAR VALUE $.01 PER SHARE, OF

                             CERTIFICATE OF STOCK

Capital Automotive REIT (the "Trust") transferable on the books of the Trust in 
person or by attorney duly authorized in writing upon surrender of this 
certificate properly endorsed. This certificate and the shares represented 
hereby are issued and shall be held subject to all provisions of the Trust's
Declaration of Trust and Bylaws and any amendments thereof, copies of which are
on file with the transfer agent, to all the provisions of which the holder
hereof by acceptance of this certificate assents. This certificate is not valid
until countersigned and registered by the transfer agent and registrar.

        Witness the facsimile Seal of the Trust and the facsimile signatures of
its duly authorized officers.


Dated:                                             COUNTERSIGNED AND REGISTERED:
                               [SEAL OF CAPITAL       AMERICAN STOCK TRANSFER & 
                                AUTOMOTIVE REIT         TRUST COMPANY (NEW YORK,
                                APPEARS HERE]           N.Y.) TRANSFER AGENT AND
                                                        REGISTRAR

                                                    BY

                                                          AUTHORIZED SIGNATURE


   [SIGNATURE                                            [SIGNATURE   
  APPEARS HERE]                                         APPEARS HERE]         
    PRESIDENT                                            SECRETARY
<PAGE>
 
     The Trust will furnish to any shareholder upon request and without charge 
a full statement of the designations, preferences, conversion and other rights, 
voting powers, restrictions, limitations as to dividends, qualifications and 
terms and conditions of redemption of shares of each class authorized to be 
issued and, with respect to the classes of shares which may be issued in series,
the difference in the relative rights and preferences between the shares of each
series, to the extent that they have been set, and the authority of the Board of
Trustees to fix and determine the relative rights and preferences of subsequent
series. Such request may be made to the Secretary of the Trust at its principal
office or to the transfer agent.


     The following abbreviations, when used in the inscription on the face of 
this certificate, shall be construed as though they were written out in full 
according to applicable laws or regulations:

<TABLE> 
<S>                                                    <C> 
     TEN COM - as tenants in common                    UNIF GIFT MIN ACT-_____________________ Custodian ___________________
     TEN ENT - as tenants by the entireties                                    (Cust)                          (Minor)
     JT TEN  - as joint tenants with right                               under Uniform Gifts to Minors
               of survivorship and not as tenants                        Act ________________________
               in common                                                           (State)

                              Additional abbreviations may also be used though not in the above list.
</TABLE> 

For value received, ______________________ hereby sell, assign and transfer unto

   PLEASE INSERT SOCIAL SECURITY OR OTHER
       IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------

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

- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE

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

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

______________________________________ Common Shares of Beneficial Interest, par
value $.01 per share, represented by the within Certificate, and do hereby
irrevocably constitute and appoint

______________________________________________________________________ Attorney
to transfer the said Shares on the books of the within-named Trust with full 
power of substitution in the premises.

Dated, _________________________



                                         (Sign here)
                                                    ----------------------------


                                     -------------------------------------------
                            NOTICE:  THE SIGNATURE OF THIS ASSIGNMENT MUST
                                     CORRESPOND WITH THE NAME AS WRITTEN UPON
                                     THE FACE OF THE CERTIFICATE IN EVERY
                                     PARTICULAR, WITHOUT ALTERATION OR
                                     ENLARGEMENT OR ANY CHANGE WHATEVER.
      




     SIGNATURE(S) GUARANTEED: 
                              --------------------------------------------------
                              THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
                              ELIGIBLE GUARANTOR INSTITUTION (BANKS,
                              STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
                              CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
                              SIGNATURE MEDALLION PROGRAM). PURSUANT TO S.E.C.
                              RULE 17Ad-15


KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR 
DESTROYED, THE TRUST WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE 
ISSUANCE OF A REPLACEMENT CERTIFICATE.

<PAGE>
 
                                  EXHIBIT 5.1

                          WILMER, CUTLER & PICKERING
                              100 LIGHT STREET                     WASHINGTON 
                           BALTIMORE, MARYLAND 21202               BALTIMORE
                                                                   LONDON
                                 ----------                        BRUSSELS
                            TELEPHONE (410) 986-2800               BERLIN
                             FACSMILE (410) 986-2828

                               February 4, 1998

Capital Automotive REIT
1925 North Lynn Street
Suite 306
Arlington Virginia 22209

Gentlemen:

          As counsel for Capital Automotive REIT, a real estate investment trust
organized under the laws of Maryland (the "Company"), we are familiar with the
Company's Registration Statement on Form S-11 (File No. 333-41183), first filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), on November 26, 1997, as amended
by Amendment No. 1 to the Registration Statement filed with the Commission on
January 13, 1998, Amendment No. 2 to the Registration Statement filed with the
Commission on January 16, 1998 and Amendment No. 3 to the Registration Statement
filed with the Commission on February 4, 1998, as may be further amended or
supplemented (collectively, the "Registration Statement"), with respect to the
offering (the "Offering") of up to 20,000,000 common shares of beneficial
interest, $.01 par value (the "Firm Shares") and up to an additional 3,000,000
shares (the "Option Shares") subject to an Underwriters' over-allotment option
(the "Over-allotment Option"), all of which are offered for the account of the
Company. The Firm Shares and the Option Shares are hereafter referred to as the
"Shares."  In addition, the Registration Statement covers up to 1,277,794 common
shares of beneficial interest of the Company, par value $.01 per share (the
"Warrant Shares"), reserved for issuance upon exercise of the warrants to be
issued to Friedman, Billings, Ramsey & Co., Inc. pursuant to the Warrant
Agreement between the Company and American Stock (the "Underwriting Warrants").

          In connection with the foregoing, we have examined (i) the Declaration
of Trust of the Company filed with the Maryland State Department of Assessments
and Taxation ("SDAT") on October 20, 1997, (ii) the Amended and Restated
Declaration of Trust of the Company filed as an Exhibit to the Registration
Statement to be filed with SDAT immediately prior to the Closing of the Offering
(the "Amended and Restated Declaration"), (iii) the Amended and Restated By-Laws
of the Company dated as of February 3, 1998; (iv) the proposed 
<PAGE>
 
Capital Automotive REIT
February 4, 1998

Page 2


form of Underwriting Agreement filed as an Exhibit to the Registration Statement
with respect to the Shares (the "Underwriting Agreement"); (v) such records of
the corporate proceedings of the Company, such certificates of public officials
and such other documents as we deemed necessary to render this opinion. We have
assumed that the Amended and Restated Declaration will have been filed with SDAT
prior the sale and issuance of the Shares. Based on such examination and
assumption, we are of the opinion that:

          1.   The Company is duly organized as a real estate investment trust
under the laws of the State of Maryland.

          2.   The Shares have been duly authorized and when sold, issued and
paid for pursuant to the duly executed Underwriting Agreement (in substantially
the form filed as an exhibit to the Registration Statement) will be validly
issued, fully paid and nonassessable.

          We hereby consent to the filing of this Opinion as Exhibit 5.1 to the
Registration Statement and the reference to us in the Prospectus which is part
of the Registration Statement.

                              Very truly yours,

                              WILMER, CUTLER & PICKERING


                              By: /s/ JOHN B. WATKINS, JR.
                                 -------------------------------------
                                      John B. Watkins, Jr., a partner

<PAGE>
 
EXHIBIT 8.1

 
                          WILMER, CUTLER & PICKERING                          
                             2445 M Street, N.W.                  WASHINGTON  
                         Washington, D.C. 20037-1420              BALTIMORE   
                                     ----                         LONDON      
                           Telephone: (202) 663-6000              BRUSSELS    
                           Facsimile: (202) 663-6363              BERLIN      


                               February 4, 1998




Capital Automotive REIT
1925 North Lynn Street, #306
Arlington, Virginia  22204

                            Capital Automotive REIT
                            -----------------------
                 Qualification as Real Estate Investment Trust
                 ---------------------------------------------

Ladies and Gentlemen:

          We have acted as counsel to Capital Automotive REIT, a Maryland real
estate investment trust (the "Trust"), in connection with the preparation of a
Form S-11 registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission on November 26, 1997 (No. 333-41183), as
amended through the date hereof, with respect to the offering and sale (the
"Offering") of up to 23,000,000 common shares of beneficial interest, par value
$0.01 per share, of the Trust (the "Common Shares"), and the Trust's
contribution of (i) a portion of the net proceeds of the Offering to Capital
Automotive, L.P., a Delaware limited partnership (the "Operating Partnership"),
in exchange for a 1% general partnership interest in the Operating Partnership
and (ii) the remainder of the net proceeds of the Offering to the Operating
Partnership in exchange for a limited partnership interest in the Operating
Partnership. You have requested our opinion regarding certain U.S. federal
income tax matters in connection with the Offering.  Unless specifically defined
otherwise, all terms used herein have the meaning set forth in the Registration
Statement.

          The Operating Partnership will acquire real property and improvements
in properties used by automotive retail dealerships (the "Properties"), from the
current owners of such Properties (the "Sellers").  The Operating Partnership
will lease the Properties to the Sellers or their affiliates (the "Lessees")
pursuant to substantially similar leases (the "Leases").

          In giving this opinion letter, we have examined the following:

          1.   the Trust's Declaration of Trust, as duly filed with the
Department of Assessments and Taxation of the State of Maryland on October 20,
1997;
<PAGE>
 
Capital Automotive REIT
February 4, 1998
Page 2

          2.   the Trust's Amended and Restated Declaration of Trust, as duly
filed with the Department of Assessments and Taxation of the State of Maryland
on February 3, 1998;

          3.   the Amended and Restated Bylaws of the Trust dated as of February
3, 1998;

          4.   the Registration Statement, including the prospectus contained as
part of the Registration Statement (the "Prospectus");

          5.   the Agreement of Limited Partnership of the Operating
Partnership, dated as of November 21, 1997, among the Trust, as general partner,
and Scott M. Stahr as limited partner;

          6.   a form of First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, dated February __, 1998, among the
Trust, as general partner, and several limited partners (the "Partnership
Agreement");

          7.   the forms of Leases among the Operating Partnership and the
Lessees;

          8.   the various agreements between or among the Operating Partnership
and each Seller or Sellers for the purchase or contribution of each Property or
Properties; and

          9.   such other documents as we have deemed necessary or appropriate
for purposes of this opinion.

          In connection with the opinions rendered below, we have assumed, with
your consent, that:

          1.   each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy; has not been amended; and any unexecuted documents have been or will be
executed substantially in the form and content reviewed by us;

          2.   during its taxable year ending December 31, 1998 and subsequent
taxable years, the Trust will operate in such a manner that will make the
representations contained in a certificate, dated February 4, 1998 and executed
by a duly appointed officer of the Trust (the "Officer's Certificate"), true for
such years;

          3.   the Trust will not make any amendments to its organizational
documents, the Partnership Agreement or any other agreements, after the date of
this opinion that would affect its qualification as a real estate investment
trust (a "REIT") for U.S. federal income tax purposes for any taxable year;
<PAGE>
 
Capital Automotive REIT
February 4, 1998
Page 3

          4.   each partner of the Operating Partnership (each, a "Partner")
that is a corporation or other entity has a valid legal existence;

          5.   each Partner has full power, authority, and legal right to enter
into and to perform the terms of the Partnership Agreement and the transactions
contemplated thereby;

          6.   each Partner has been motivated in acquiring its partnership
interest by such Partner's anticipation of economic rewards apart from tax
considerations; and

          7.   no action will be taken by the Trust, the Operating Partnership
or the Partners after the date hereof that would have the effect of altering the
facts upon which the opinions set forth below are based.

          In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. For the purposes of rendering this opinion, we have not made an
independent investigation of the facts set forth in any of the aforementioned
documents, including without limitation the Prospectus and the Officer's
Certificate. We have consequently relied upon your representations that the
information presented in such documents or otherwise furnished to us accurately
and completely describes all material facts relevant to this opinion. After
reasonable inquiry, no facts have come to our attention that would cause us to
question the accuracy and completeness of the facts contained in the documents
and assumptions set forth above, the representations set forth in the Officer's
Certificate, or the Prospectus in a material way.

          Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Consequences" (which is
incorporated herein by reference), we are of the opinion that:

          (a)  commencing with the Trust's taxable year ending December 31,
     1998, the Trust will qualify to be taxed as a REIT pursuant to sections 856
     through 859 of the Code, and the Trust's organization and proposed method
     of operation will enable it to continue to meet the requirements for
     qualification and taxation as a REIT under the Code;

          (b)  the descriptions of the law and the legal conclusions contained
     in the Prospectus under the caption "Federal Income Tax Consequences" are
     correct in all material respects, and the discussion thereunder fairly
     summarizes the federal income tax consequences that are likely to be
     material to a holder of the Common Shares;

          (c)  the Operating Partnership will be treated for federal income tax
     purposes as a partnership and not as a corporation or association taxable
     as a corporation or, as of the date hereof, a publicly traded partnership;
     and
<PAGE>
 
Capital Automotive REIT
February 4, 1998
Page 4

          (d)  each Lease will be treated as a true lease for federal income tax
     purposes.

We will not review on a continuing basis the Trust's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that (i) the
actual results of the Trust's operations for any given taxable year will satisfy
the requirements for qualification and taxation as a REIT or (ii) the Operating
Partnership will continue not to be treated for federal income tax purposes as a
publicly traded partnership.

          The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and published
court decisions.  The Internal Revenue Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification.  No assurance can be given that the law will not
change in a way that will prevent the Trust from qualifying as a REIT, or the
Operating Partnership from being classified as a partnership for federal income
tax purposes.

          We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.  We also consent to the references to Wilmer, Cutler &
Pickering under the caption "Federal Income Tax Consequences" in the Prospectus.
In giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations promulgated thereunder by the Securities
and Exchange Commission.

          The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality.  We undertake no obligation to update
the opinions expressed herein after the date of this letter.  This opinion
letter is solely for the information and use of the addressees, and it may not
be distributed, relied upon for any purpose by any other person, quoted in whole
or in part or otherwise reproduced in any document, or filed with any
governmental agency without our express written consent.

                              Very truly yours,


                              Wilmer, Cutler & Pickering

                              By:  /s/ Robert B. Stack
                                  -------------------------------------------
                                   Robert B. Stack, a Partner

<PAGE>


                                  EXHIBIT 10.1     
                                 


                              AMENDED AND RESTATED
                        AGREEMENT OF LIMITED PARTNERSHIP





                                       OF





                             CAPITAL AUTOMOTIVE L.P.
<PAGE>
 
<TABLE> 
<CAPTION> 

                                                    TABLE OF CONTENTS
<S>      <C>      <C>                                                                                            <C>
ARTICLE I - DEFINED TERMS.........................................................................................2

ARTICLE II - PARTNERSHIP FORMATION AND IDENTIFICATION.............................................................9
         2.01     Name, Office and Registered Agent...............................................................9
         2.02     Partners........................................................................................9
         2.03     Term and Dissolution............................................................................9
         2.04     Filing of Certificate and Perfection of Limited Partnership....................................10

ARTICLE III - BUSINESS OF THE PARTNERSHIP........................................................................10

ARTICLE IV - CAPITAL CONTRIBUTIONS AND ACCOUNTS..................................................................10
         4.01     Capital Contributions..........................................................................10
         4.02     Additional Capital Contributions and Issuances of Additional
                  Partnership Interests..........................................................................11
         4.03     General Partner Loans..........................................................................13
         4.04     Capital Accounts...............................................................................13
         4.05     Percentage Interests...........................................................................14
         4.06     No Interest on Contributions...................................................................14
         4.07     Return of Capital Contributions................................................................14
         4.08     No Third Party Beneficiary.....................................................................14
         4.09     Equity Incentive Plan..........................................................................15

ARTICLE V - PROFITS AND LOSSES; DISTRIBUTIONS....................................................................16
         5.01     Allocation of Profit and Loss..................................................................16
         5.02     Distribution of Cash...........................................................................17
         5.03     Reit Distribution Requirements.................................................................19
         5.04     No Right to Distributions in Kind..............................................................19
         5.05     Limitations on Return of Capital Contributions.................................................19
         5.06     Distributions upon Liquidation.................................................................19
         5.07     Substantial Economic Effect....................................................................20

ARTICLE VI - RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER...............................................20
         6.01     Management of the Partnership..................................................................20
         6.02     Delegation of Authority........................................................................22
         6.03     Indemnification and Exculpation of Indemnitees.................................................22
         6.04     Liability of the General Partner...............................................................24
         6.05     Expenditures by the Partnership................................................................25
         6.06     Outside Activities.............................................................................25
         6.07     Employment or Retention of Affiliates..........................................................25
         6.08     General Partner Participation..................................................................26
         6.09     Title to Partnership Assets....................................................................26
         6.10     Miscellaneous..................................................................................26

ARTICLE VII - CHANGES IN GENERAL PARTNER.........................................................................27
         7.01     Transfer of the General Partner's Partnership Interest.........................................27
         7.02     Admission of a Substitute or Successor General Partner.........................................28

</TABLE>

                                        i
<PAGE>
 
<TABLE>
<S>      <C>      <C>                                                                                            <C>
         7.03     Effect of Bankruptcy, Withdrawal, Death or Dissolution of a
                  General Partner................................................................................28
         7.04     Removal of a General Partner...................................................................29

ARTICLE VIII - RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS....................................................30
         8.01     Management of the Partnership..................................................................30
         8.02     Power of Attorney..............................................................................30
         8.03     Limitation on Liability of Limited Partners....................................................31
         8.04     Redemption Right...............................................................................31
         8.05     Registration...................................................................................33
         8.06     "Piggyback" Registration Rights................................................................34

ARTICLE IX - TRANSFERS OF LIMITED PARTNERSHIP INTERESTS..........................................................39
         9.01     Purchase for Investment........................................................................39
         9.02     Restrictions on Transfer of Limited Partnership Interests......................................40
         9.03     Admission of Substitute Limited Partner........................................................41
         9.04     Rights of Assignees of Partnership Interests...................................................43
         9.05     Effect of Bankruptcy, Death, Incompetence or Termination of a
                  Limited Partner................................................................................43
         9.06     Joint Ownership of Interests...................................................................43

ARTICLE X - BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS...........................................................44
         10.01    Books and Records..............................................................................44
         10.02    Custody of Partnership Funds; Bank Accounts....................................................44
         10.03    Fiscal and Taxable Year........................................................................44
         10.04    Annual Tax Information and Report..............................................................45
         10.05    Tax Matters Partner; Tax Elections; Special Basis Adjustments..................................45
         10.06    Reports to Limited Partners....................................................................45

ARTICLE XI - AMENDMENT OF AGREEMENT; SALE OF ALL OR SUBSTANTIALLY ALL OF COMPANY'S ASSETS........................46
         11.01    Amendment of Agreement.........................................................................46
         11.02    Sale of All or Substantially All of the Assets of the Partnership; Change in Control...........46

ARTICLE XII - GENERAL PROVISIONS.................................................................................47
         12.01    Notices........................................................................................47
         12.02    Survival of Rights.............................................................................47
         12.03    Additional Documents...........................................................................47
         12.04    Severability...................................................................................47
         12.05    Entire Agreement...............................................................................47
         12.06    Pronouns and Plurals...........................................................................47
         12.07    Headings.......................................................................................47
         12.08    Counterparts...................................................................................47
         12.09    Governing Law..................................................................................48
         12.10    Guaranty by Company............................................................................48

EXHIBIT A -       SCHEDULE OF PARTNERS, NUMBER OF PARTNERSHIP UNITS AND THE AGREED VALUE OF NON-CASH CAPITAL
                  CONTRIBUTIONS.................................................................................A-1

</TABLE>

                                       ii
<PAGE>
 
<TABLE>
<S>               <C>                                                                                           <C>
EXHIBIT B -       INITIAL PROPERTIES............................................................................B-1

EXHIBIT C -       NOTICE OF EXERCISE OF REDEMPTION RIGHT........................................................C-1

</TABLE>

                                       iii
<PAGE>
 
                             AMENDED AND RESTATED
                       AGREEMENT OF LIMITED PARTNERSHIP

                                      OF

                            CAPITAL AUTOMOTIVE L.P.


     THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF CAPITAL
AUTOMOTIVE L.P. (this "Agreement"), is made this ____, day of February, 1998 by
and among CAPITAL AUTOMOTIVE REIT, a Maryland real estate investment trust (in
its capacity as General Partner, the "General Partner"), and each of the Limited
Partners signatory hereto.

     THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts,
understandings and intentions:

     A.    Capital Automotive L.P. (the "Partnership") was formed as a limited
partnership under the laws of the State of Delaware by a Certificate of Limited
Partnership filed with the Secretary of State of Delaware on November 14, 1997.
The Partnership is governed by a Limited Partnership Agreement dated November
21, 1997 maintained at the offices of the Partnership.

     B.    Capital Automotive L.P. is intended to result in an umbrella
partnership real estate investment trust in which Capital Automotive REIT shall
be the general partner.

     C.    In order to fund certain Administrative Expenses, as defined herein,
the Partnership assumed the obligation to repay certain obligations of the
General Partner, and has otherwise agreed to reimburse the General Partner for
any and all Administrative Expenses in connection with the formation of Capital
Automotive REIT and the Partnership.

     D.    The parties have reached certain understandings with respect to their
relative sharing of the benefits and burdens to be derived from the business
operations of the Partnership, and desire to enter into this Agreement in order
to (i) set forth herein such understandings and agreements; and (ii) set forth
their rights, obligations and understandings with respect to the Partnership and
its business.

     NOW, THEREFORE, in consideration of the foregoing, and the covenants and
agreements between the parties hereto, and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

1.   DEFINED TERMS

     The following defined terms used in this Agreement shall have the meanings
specified below:

     "Act" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time.

     "Additional Limited Partner" means a Person admitted to this Partnership as
a Limited Partner pursuant to Section 4.02 hereof.
<PAGE>
 
     "Administrative Expenses" means (i) all administrative and operating costs
and expenses incurred by the Partnership, (ii) all administrative and operating
costs and expenses of the General Partner, including any salaries or other
payments to trustees, officers and/or employees of the General Partner, and any
accounting and legal expenses of the General Partner, all of which costs and
expenses, the Partners have agreed, are expenses of the Partnership and not the
General Partner, and (iii) to the extent not included in clause (ii) above, REIT
Expenses.

     "Affiliate" means, (i) any Person that, directly or indirectly, controls or
is controlled by or is under common control with such Person, (ii) any other
Person that owns, beneficially, directly or indirectly, 5% or more of the
outstanding capital stock, shares or equity interests of such Person, or (iii)
any officer, director, employee, partner or trustee of such Person or any Person
controlling, controlled by or under common control with such Person (excluding
trustees and persons serving in similar capacities who are not otherwise an
Affiliate of such Person). For the purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the ownership
of voting securities, partnership interests or other equity interests.

     "Agreed Value" means the fair market value of a Partner's non-cash Capital
Contribution as of the date hereof as agreed to by the Partners.  For purposes
of this Agreement, the Agreed Value of a Partner's non-cash Capital Contribution
shall be equal to the number of Partnership Units received by such Partner in
exchange for an Initial Property or an interest therein or in connection with
the merger of a partnership of which such person is a partner with and into the
Partnership, or for any other non-cash asset so contributed, multiplied by the
Public Offering Price or, if the contribution is made after the date hereof, the
"Market Price" on the date of the contribution calculated in accordance with the
second and third sentences of the definition of "Cash Amount." The names and
addresses of the Partners, number of Partnership Units issued to each Partner,
and the Agreed Value of non-cash Capital Contributions is set forth on EXHIBIT
A.

     "Agreement" means this Agreement of Limited Partnership of the Partnership.

     "Capital Account" has the meaning provided in Section 4.04 hereof.

     "Capital Automotive L.P." means Capital Automotive L.P., a Delaware limited
partnership.

     "Capital Automotive REIT" means Capital Automotive REIT, a Maryland real
estate investment trust.

     "Capital Contribution" means the total amount of capital initially
contributed or agreed to be contributed, as the context requires, to the
Partnership by each Partner pursuant to the terms of the Agreement. Any
reference to the Capital Contribution of a Partner shall include the Capital
Contribution made by a predecessor holder of the Partnership Interest of such
Partner. The paid-in Capital Contribution shall mean the cash amount or the
Agreed Value of other assets actually contributed by each Partner to the capital
of the Partnership.

     "Capital Transaction" means the refinancing, sale, exchange, condemnation,
recovery of a damage award or insurance proceeds (other than business or rental
interruption insurance 

                                       2
<PAGE>
 
proceeds not reinvested in the repair or reconstruction of Properties), or other
disposition of any Property (or the Partnership's interest therein).

     "Cash Amount" means an amount of cash per Partnership Unit equal to the
value of the REIT Shares Amount on the date of receipt by the General Partner of
a Notice of Redemption. The value of the REIT Shares Amount shall be based on
the average of the daily market price of REIT Shares for the twenty consecutive
trading days immediately preceding the five trading days prior to the date of
receipt by the General Partner of a Notice of Redemption. The market price for
each such trading day shall be: (i) if the REIT Shares are listed or admitted to
trading on any securities exchange or the NYSE, the sale price, regular way, on
such day, or if no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, on such day, (ii) if the REIT Shares are not
listed or admitted to trading on any securities exchange or the NYSE, the last
reported sale price on such day or, if no sale takes place on such day, the
average of the closing bid and asked prices on such day, as reported by a
reliable quotation source designated by the General Partner, or (iii) if the
REIT Shares are not listed or admitted to trading on any securities exchange or
the NYSE and no such last reported sale price or closing bid and asked prices
are available, the average of the reported high bid and low asked prices on such
day, as reported by a reliable quotation source designated by the General
Partner, or if there shall be no bid and asked prices on such day, the average
of the high bid and low asked prices, as so reported, on the most recent day
(not more than 10 days prior to the date in question) for which prices have been
so reported; PROVIDED THAT if there are no bid and asked prices reported during
the ten days prior to the date in question, the value of the REIT Shares shall
be determined by the General Partner acting in good faith on the basis of such
quotations and other information as it considers, in its reasonable judgment,
appropriate.  In the event the REIT Shares Amount includes rights that a holder
of REIT Shares would be entitled to receive, then the value of such rights shall
be determined by the Company acting in good faith on the basis of such
quotations and other information as it considers, in its reasonable judgment,
appropriate.

     "Certificate" means any instrument or document that is required under the
laws of the State of Delaware, or any other jurisdiction in which the
Partnership conducts business, to be signed and sworn to by the Partners of the
Partnership (either by themselves or pursuant to the power-of-attorney granted
to the General Partner in Section 8.02 hereof) and filed for recording in the
appropriate public offices within the State of Delaware or such other
jurisdiction to perfect or maintain the Partnership as a limited partnership, to
effect the admission, withdrawal, or substitution of any Partner of the
Partnership, or to protect the limited liability of the Limited Partners as
limited partners under the laws of the State of Delaware or such other
jurisdiction.

     "Charter" means the Declaration of Trust filed with the Secretary of State
of the State of Maryland, as amended or restated from time to time.

     "Code" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
succeeding provision of the Code.

     "Commission" means the U.S. Securities and Exchange Commission.

     "Company" means Capital Automotive REIT, a Maryland real estate investment
trust.

     "Conversion Factor" means 1.0, PROVIDED THAT in the event that the Company
(i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or
makes a 

                                       3
<PAGE>
 
distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii)
subdivides its outstanding REIT Shares, or (iii) combines its outstanding REIT
Shares into a smaller number of REIT Shares, the Conversion Factor shall be
adjusted by multiplying the Conversion Factor by a fraction, the numerator of
which shall be the number of REIT Shares issued and outstanding on the record
date for such dividend, distribution, subdivision or combination (assuming for
such purposes that such dividend, distribution, subdivision or combination has
occurred as of such time), and the denominator of which shall be the actual
number of REIT Shares (determined without the above assumption) issued and
outstanding on such date. Any adjustment to the Conversion Factor shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event; PROVIDED, HOWEVER, that if the Company
receives a Notice of Redemption after the record date, but prior to the
effective date of such dividend, distribution, subdivision or combination, the
Conversion Factor shall be determined as if the Company had received the Notice
of Redemption immediately prior to the record date for such dividend,
distribution, subdivision or combination.

     "Defaulting Limited Partner" has the meaning provided in Section 5.02(b)
hereof.

     "Effective Date" means the date of closing of the Initial Offering.

     "Equity Incentive Plan" means the Capital Automotive REIT 1998 Equity
Incentive Plan, as such plan may be amended from time to time, or any equity
incentive plan adopted in the future by the Company.

     "Event of Bankruptcy" as to any Person means the filing of a petition for
relief as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978
or similar provision of law of any jurisdiction (except if such petition is
contested by such Person and has been dismissed within 90 days); insolvency or
bankruptcy of such Person as finally determined by a court proceeding; filing by
such Person of a petition or application to accomplish the same or for the
appointment of a receiver or a trustee for such Person or a substantial part of
his assets; commencement of any proceedings relating to such Person as a debtor
under any other reorganization, arrangement, insolvency, adjustment of debt or
liquidation law of any jurisdiction, whether now in existence or hereinafter in
effect, either by such Person or by another, provided that if such proceeding is
commenced by another, such Person indicates his approval of such proceeding,
consents thereto or acquiesces therein, or such proceeding is contested by such
Person and has not been finally dismissed within 90 days.

     "Funding Loan" has the meaning provided in Section 4.03 hereof.

     "GAAP" means generally accepted accounting principles, consistently
applied.

     "General Partner" means Capital Automotive REIT, a Maryland real estate
investment trust, and any Person who becomes a substitute or additional General
Partner as provided herein, and any of their successors as General Partner.

     "General Partnership Interest" means the Partnership Interest held by the
General Partner.

     "Incentive Rights" has the meaning set forth in Section 4.02 hereof.

     "Indemnitee" means (i) any Person made a party to a proceeding by reason of
his status as the General Partner or an affiliate of the General Partner or a
trustee or officer of the 

                                       4
<PAGE>
 
Partnership or the General Partner or an affiliate of the General Partner or the
Partnership and (ii) such other Persons as the General Partner may designate in
good faith from time to time, in its reasonable discretion, giving consideration
to the interest of the Partnership.

     "Independent Trustee" shall mean those individuals, who shall comprise a
majority of the Board of Trustee of the Company, who are not officers or
employees of the Company or Affiliates of (i) any lessee of any property of the
Company or the Partnership, (ii) any subsidiary of the Company or (iii) any
partnership which is an Affiliate of the Company, including the Partnership.

     "Initial Properties" means those properties listed on EXHIBIT B attached
hereto.

     "Initial Offering" means the initial offer and sale by the Company and the
purchase by the Underwriters (as defined in the Prospectus) of the common shares
of the Company for sale to the public.

     "Limited Partner" means any Person named as a Limited Partner on EXHIBIT A
attached hereto, and any Person who becomes a Substitute or Additional Limited
Partner, in such Person's capacity as a Limited Partner in the Partnership.

     "Limited Partnership Interest" means the ownership interest of a Limited
Partner in the Partnership at any particular time, including the right of such
Limited Partner to any and all benefits to which such Limited Partner may be
entitled as provided in this Agreement and in the Act, together with the
obligations of such Limited Partner to comply with all the provisions of this
Agreement and of such Act.

     "Loss" has the meaning provided in Section 5.01(f) hereof.

     "Minimum Limited Partnership Interest" means the lesser of (i) 1% or (ii)
if the total Capital Contributions to the Partnership exceed $50 million, 1%
divided by the ratio of the total Capital Contributions to the Partnership to
$50 million; provided, however, that the Minimum Limited Partnership Interest
shall not be less than 0.2% at any time.

     "New Securities" has the meaning set forth in Section 4.02(a)(ii) hereof.

     "Notice of Redemption" means the Notice of Exercise of Redemption Right
substantially in the form attached as EXHIBIT C hereto.

     "NYSE" means the New York Stock Exchange.

     "Partner" means any General Partner or Limited Partner.

     "Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Regulations Section 1.704-2(i).  A Partner's share of Partner Nonrecourse Debt
Minimum Gain shall be determined in accordance with Regulations Section 1.704-
2(i)(5).

     "Partnership Interest" means an ownership interest in the Partnership by
either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement.

                                       5
<PAGE>
 
     "Partnership Minimum Gain" has the meaning set forth in Regulations Section
1.704-2(d). In accordance with Regulations Section 1.704-2(d), the amount of
Partnership Minimum Gain is determined by first computing, for each Partnership
nonrecourse liability, any gain the Partnership would realize if it disposed of
the property subject to that liability for no consideration other than full
satisfaction of the liability, and then aggregating the separately computed
gains. A Partner's share of Partnership Minimum Gain shall be determined in
accordance with Regulations Section 1.704-2(g)(1).

     "Partnership Record Date" means the record date established by the General
Partner for the distribution of cash pursuant to Section 5.02 hereof, which
record date shall be the same as the record date established by the Company for
a distribution to its shareholders of some or all of its portion of such
distribution.

     "Partnership Unit" means a fractional, undivided share of the Partnership
Interests of all Partners issued hereunder. The initial allocation of
Partnership Units among the Partners is as set forth on EXHIBIT A, as may be
amended from time to time.

     "Percentage Interest" means the percentage ownership interest in the
Partnership of each Partner, as determined by dividing the Partnership Units
owned by a Partner by the total number of Partnership Units then outstanding.
The initial Percentage Interest of each Partner is as set forth opposite its
respective name on EXHIBIT A, as may be amended from time to time.

     "Person" means any individual, partnership, corporation, joint venture,
trust or other entity.

     "Profit" has the meaning provided in Section 5.01(f) hereof.

     "Property" means any real estate property or other investment in which the
Partnership holds an ownership interest.

     "Prospectus" means the final prospectus delivered to purchasers of the
Company's common stock in the Initial Offering.

     "Public Offering Price" shall mean the initial public offering price set
forth in the Prospectus.

     "Redeeming Partner" has the meaning provided in Section 8.04(a) hereof.

     "Redemption Amount" means either the Cash Amount or the REIT Shares Amount,
as determined pursuant to Section 8.04(b) hereof.

     "Redemption Right" has the meaning provided in Section 8.04(a) hereof.

     "Redemption Shares" has the meaning provided in Section 8.05(a) hereof.

     "Regulations" means the Federal Income Tax Regulations issued under the
Code, as amended and as hereafter amended from time to time.  Reference to any
particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any succeeding provision of the Regulations.

                                       6
<PAGE>
 
     "REIT" means a real estate investment trust under Sections 856 through 859
of the Code.

     "REIT Expenses" means (i) costs and expenses relating to the formation and
continuity of existence of the Company, including taxes, fees and assessments
associated therewith, any and all costs, expenses or fees payable to any
trustee, officer, or employee of the Company, (ii) costs and expenses relating
to the public offering and registration of securities by the Company and all
statements, reports, fees and expenses incidental thereto, including
underwriting discounts and selling commissions applicable to any such offering
of securities, (iii) costs and expenses associated with the preparation and
filing of any periodic reports by the Company under federal, state or local laws
or regulations, including filings with the Commission, (iv) costs and expenses
associated with compliance by the Company with laws, rules and regulations
promulgated by any regulatory body, including the Commission, and (v) all other
operating or administrative costs of the Company incurred in the ordinary course
of its business on behalf of the Partnership.

     "REIT Share" means a share of common stock of the Company.

     "REIT Shares Amount" shall mean a number of REIT Shares equal to the number
of Partnership Units offered for redemption by a Redeeming Partner, multiplied
by the Conversion Factor; PROVIDED THAT in the event the Company issues to all
holders of REIT Shares rights, options, warrants or convertible or exchangeable
securities entitling the shareholders to subscribe for or purchase REIT Shares,
or any other securities or property (collectively, the "rights"), then the REIT
Shares Amount shall also include such rights that a holder of that number of
REIT Shares would be entitled to receive.

     "Rule 144" has the meaning set forth in Section 8.05(a) hereof.

     "SEC" means the United States Securities and Exchange Commission.

     "Securities Act" has the meaning set forth in Section 8.04(b) hereof.

     "Service" means the Internal Revenue Service.

     "Specified Redemption Date" means  30 days after the receipt by the Company
of the Notice of Redemption.

     "Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.

     "Substitute Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to Section 9.03 hereof.

     "Transaction" has the meaning set forth in Section 7.01(c) hereof.

     "Transfer" has the meaning set forth in Section 9.02(a) hereof.

 2.  PARTNERSHIP FORMATION AND IDENTIFICATION

     a.    NAME, OFFICE AND REGISTERED AGENT. The name of the Partnership shall
           be Capital Automotive L.P. The specified office and place of business
           of the

                                       7
<PAGE>
 
           Partnership shall be 1925 North Lynn Street, #306, Arlington,
           Virginia 22209. The General Partner may at any time change the
           location of such office, provided the General Partner gives notice to
           the Partners of any such change. The name and address of the
           Partnership's registered agent is Corporation Service Company, 1013
           Centre Road, Wilmington, Delaware 19805. The sole duty of the
           registered agent as such is to forward to the Partnership any notice
           that is served on him as registered agent.

     b.    PARTNERS.

           i.    As of the date hereof, the General Partner of the Partnership
                 shall be Capital Automotive REIT, a Maryland real estate
                 investment trust. Its principal place of business shall be the
                 same as that of the Partnership.

           ii.   The Limited Partners shall be those Persons identified as
                 Limited Partners in EXHIBIT A hereto, as amended from time to
                 time. The Limited Partners (other than the Original Limited
                 Partner) hereby are admitted as Limited Partners.

     c.    TERM AND DISSOLUTION.

           i.    The term of the Partnership shall continue in full force and
                 effect until December 31, 2073 except that the Partnership
                 shall be dissolved upon the happening of any of the following
                 events:

                 (1)   The occurrence of an Event of Bankruptcy as to a General
                       Partner or the dissolution, death or withdrawal of a
                       General Partner unless the business of the Partnership is
                       continued pursuant to Section 7.03(b) hereof; PROVIDED
                       THAT if a General Partner is on the date of such
                       occurrence a partnership, the dissolution of such General
                       Partner as a result of the dissolution, death,
                       withdrawal, removal or Event of Bankruptcy of a partner
                       in such partnership shall not be an event of dissolution
                       of the Partnership if the business of such General
                       Partner is continued by the remaining partner or
                       partners, either alone or with additional partners, and
                       such General Partner and such partners comply with any
                       other applicable requirements of this Agreement;

                 (2)   The passage of 90 days after the sale or other
                       disposition of all or substantially all the assets of the
                       Partnership; (provided that if the Partnership receives
                       an installment obligation as consideration for such sale
                       or other disposition, the Partnership shall continue,
                       unless sooner dissolved under the provisions of this
                       Agreement, until such time as such note or notes are paid
                       in full);

                 (3)   The redemption of all Limited Partnership Interests
                       (other than any of such interests held by the Company);
                       or

                 (4)   The election by the General Partner that the Partnership
                       should be dissolved.

                                       8
<PAGE>
 
           ii.   Upon dissolution of the Partnership (unless the business of the
                 Partnership is continued pursuant to Section 7.03(b) hereof),
                 the General Partner (or its trustee, receiver, successor or
                 legal representative) shall amend or cancel the Certificate and
                 liquidate the Partnership's assets and apply and distribute the
                 proceeds thereof in accordance with Section 5.06 hereof.
                 Notwithstanding the foregoing, the liquidating General Partner
                 may either (i) defer liquidation of, or withhold from
                 distribution, for a reasonable time, any assets of the
                 Partnership (including those necessary to satisfy the
                 Partnership's debts and obligations), or (ii) distribute the
                 assets to the Partners in kind.

     d.    FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP. The
           General Partner shall execute, acknowledge, record and file at the
           expense of the Partnership, the Certificate and any and all
           amendments thereto and all requisite fictitious name statements and
           notices in such places and jurisdictions as may be necessary to cause
           the Partnership to be treated as a limited partnership under, and
           otherwise to comply with, the laws of each state or other
           jurisdiction in which the Partnership conducts business.

3.   BUSINESS OF THE PARTNERSHIP

     The purpose and nature of the business to be conducted by the Partnership
is (i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act, provided, however, that such business
shall be limited to and conducted in such a manner as to permit the Company at
all times to qualify as a REIT, unless the Company otherwise ceases to qualify
as a REIT, (ii) to enter into any partnership, joint venture or other similar
arrangement to engage in any of the foregoing or the ownership of interests in
any entity engaged in any of the foregoing and (iii) to do anything necessary or
incidental to the foregoing. The General Partner shall also be empowered to do
any and all acts and things necessary or prudent to ensure that the Partnership
will not be classified as a "publicly traded partnership" for purposes of
Section 7704 of the Code.

4.   CAPITAL CONTRIBUTIONS AND ACCOUNTS

     a.    CAPITAL CONTRIBUTIONS.  The Company, in its capacity as General
           Partner and as a Limited Partner shall contribute to the capital of
           the Partnership cash in an amount set forth on EXHIBIT A, which shall
           represent the gross proceeds of the Initial Offering. The Limited
           Partners, other than the Company, shall contribute to the capital of
           the Partnership certain real property interests in one or more of the
           Initial Properties as set forth opposite their names on EXHIBIT A.
           The Agreed Values of the Limited Partners' ownership interests in the
           Initial Property that are contributed to the Partnership are as set
           forth opposite their names on EXHIBIT A.

     b.    ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL
           PARTNERSHIP INTERESTS.  Except as provided in Sections 4.02 or 4.03,
           the Partners shall have no right or obligation to make any additional
           Capital Contributions or loans to the Partnership. The General
           Partner may contribute additional capital to the Partnership, from
           time to time, and receive 

                                       9
<PAGE>
 
           additional Partnership Interests in respect thereof, in the manner
           contemplated in this Section 4.02.

           i.    ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS.

                 (1)   GENERAL. The General Partner is hereby authorized to
                       cause the Partnership to issue such additional
                       Partnership Interests in the form of Partnership Units
                       for any Partnership purpose at any time or from time to
                       time, to the Partners (including the Company) or to other
                       Persons for such consideration and on such terms and
                       conditions as shall be established by the General Partner
                       in its sole and absolute discretion, all without the
                       approval of any Limited Partners. Any additional
                       Partnership Interests issued thereby may be issued in one
                       or more classes, or one or more series of any of such
                       classes, with such designations, preferences and
                       relative, participating, optional or other special
                       rights, powers and duties, including rights, powers and
                       duties senior to Limited Partnership Interests, all as
                       shall be determined by the General Partner in its sole
                       and absolute discretion and without the approval of any
                       Limited Partner, subject to Delaware law, including,
                       without limitation, (i) the allocation of items of
                       Partnership income, gain, loss, deduction and credit to
                       each such class or series of Partnership Interests; (ii)
                       the right of each such class or series of Partnership
                       Interests to share in Partnership distributions; and
                       (iii) the rights of each such class or series of
                       Partnership Interests upon dissolution and liquidation of
                       the Partnership; PROVIDED, HOWEVER, that no additional
                       Partnership Interests shall be issued to the Company
                       unless either:

                       (a)   the additional Partnership Interests are issued in
                             connection with an issuance of shares of or other
                             interests in the Company, which shares or interests
                             have designations, preferences and other rights,
                             all such that the economic interests are
                             substantially similar to the designations,
                             preferences and other rights of the additional
                             Partnership Interests issued to the Company by the
                             Partnership in accordance with this Section 4.02
                             and (B) except as provided in Section 4.02(a)(ii)
                             hereof, the Company shall make a Capital
                             Contribution to the Partnership in an amount equal
                             to the proceeds raised in connection with the
                             issuance of such shares of or other interests in
                             the Company, or

                       (b)   the additional Partnership Interests are issued to
                             all Partners in proportion to their respective
                             Percentage Interests.

                 Without limiting the foregoing, the General Partner is
           expressly authorized to cause the Partnership to issue Partnership
           Units for less than fair market value, under the Equity Incentive
           Plan or otherwise, so long as the General Partner

                                       10
<PAGE>
 
          concludes in good faith that such issuance is in the best interests of
          the General Partner, the Company and the Partnership.

               (2)  UPON ISSUANCE OF NEW SECURITIES.  After the Initial
                    Offering, the Company shall not issue any additional REIT
                    Shares (other than REIT Shares issued in connection with a
                    redemption pursuant to Section 8.04 hereof) or rights,
                    options, warrants or convertible or exchangeable securities
                    containing the right to subscribe for or purchase REIT
                    Shares (collectively, "New Securities") other than to all
                    holders of REIT Shares, unless (A) the General Partner shall
                    cause the Partnership to issue to the Company Partnership
                    Interests or rights, options, warrants or convertible or
                    exchangeable securities of the Partnership having
                    designations, preferences and other rights, all such that
                    the economic interests are substantially similar to those of
                    the New Securities, and (B) the Company contributes the
                    proceeds from the issuance of such New Securities (including
                    property) and from the exercise of rights contained in such
                    New Securities to the Partnership; provided, however, that
                    the Company is allowed to issue New Securities in connection
                    with an acquisition of property to be held directly by the
                    Company, but if and only if, such direct acquisition and
                    issuance of New Securities have been approved and determined
                    to be in the best interests of the Company and the
                    Partnership by a majority of the Independent Trustees.
                    Without limiting the foregoing, the Company is expressly
                    authorized to issue New Securities for less than fair market
                    value, and to cause the Partnership to issue to the General
                    Partner corresponding Partnership Interests, so long as (x)
                    the General Partner concludes in good faith that such
                    issuance is in the best interests of the General Partner and
                    the Partnership (for example, and not by way of limitation,
                    the issuance of REIT Shares and corresponding Partnership
                    Units pursuant to an employee stock purchase plan providing
                    for employee purchases of REIT Shares at a discount from
                    fair market value or employee stock options that have an
                    exercise price that is less than the fair market value of
                    the REIT Shares, either at the time of issuance or at the
                    time of exercise), and (y) the Company contributes all
                    proceeds from such issuance to the Partnership.  By way of
                    example, in the event the Company issues REIT Shares for a
                    cash purchase price and contributes all of the proceeds of
                    such issuance to the Partnership as required hereunder, the
                    Company shall be issued a number of additional Partnership
                    Units equal to the product of (A) the number of such REIT
                    Shares issued by the Company the proceeds of which were so
                    contributed, multiplied by (B) a fraction, the numerator of
                    which is one hundred percent (100%), and the denominator of
                    which is the Conversion Factor in effect on the date of such
                    contribution.

          ii.  CERTAIN DEEMED CONTRIBUTIONS OF PROCEEDS OF ISSUANCE OF SHARES.
               In connection with any and all issuances of 

                                       11
<PAGE>
 
               REIT Shares, the Company shall contribute all of the proceeds
               raised in connection with such issuance as capital contributions
               to the Partnership of such proceeds, provided that if the
               proceeds actually received by and contributed by the Company are
               less than the gross proceeds of such issuance as a result of any
               underwriter's discount or other expenses paid or incurred in
               connection with such issuance, then the Company shall be deemed
               to have made a Capital Contribution to the Partnership in the
               amount of the gross proceeds of such issuance and the Partnership
               shall be deemed simultaneously to have paid such offering
               expenses as an expense of the Partnership in connection with the
               required issuance of additional Partnership Units to the Company
               for such Capital Contribution pursuant to Section 4.02(a) hereof.

          iii. MINIMUM LIMITED PARTNERSHIP INTEREST.  In the event that either a
               redemption pursuant to Section 8.04 hereof or an additional
               Capital Contribution by the Company would result in the Limited
               Partners (other than the Company in its capacity as a Limited
               Partner), in the aggregate, owning less than the Minimum Limited
               Partnership Interest, the General Partner and the Limited
               Partners shall form another partnership and contribute sufficient
               Limited Partnership Interests together with such other Limited
               Partners so that the Limited Partners (other than the Company in
               its capacity as a Limited Partner) own at least the Minimum
               Limited Partnership Interest.

          iv.  WARRANTS.  No warrant issued by the Company or the Partnership
               may be exercised for Partnership Units if, in the opinion of
               legal counsel for the Partnership, the issuance of such
               Partnership Units would result in the Partnership's being treated
               as an association taxable as a corporation (other than a
               qualified REIT subsidiary within the meaning of Section 856(i) of
               the Code).

     c.   GENERAL PARTNER LOANS.  The General Partner may from time to time
advance funds to the Partnership for any proper Partnership purpose as a loan
("Funding Loan"), provided that any such funds must first be obtained by the
General Partner from a third party lender, and then all of such funds must be
loaned by the General Partner to the Partnership on the same terms and
conditions, including principal amount, interest rate, repayment schedule and
costs and expenses, as shall be applicable with respect to or incurred in
connection with such loan with such third party lender. Except for Funding
Loans, the General Partner shall not incur any indebtedness for borrowed funds;
provided, however, that any loan proceeds received by the General Partner may be
distributed to the Company and, in turn, to the Company's shareholders or other
equity holders if such loan and distribution have been approved and determined
to be necessary to enable the Company to maintain its status as a REIT under
Sections 856-859 of the Code by a majority of the Independent Trustees.

     d.   CAPITAL ACCOUNTS.  A separate capital account (a "Capital Account")
shall be established and maintained for each Partner in accordance with
Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner acquires
an additional Partnership Interest in exchange for more than a de minimis
Capital Contribution, 

                                       12
<PAGE>
 
          (ii) the Partnership distributes to a Partner more than a de minimis
          amount of Partnership property as consideration for a Partnership
          Interest, or (iii) the Partnership is liquidated within the meaning of
          Regulation Section 1.704-l(b)(2)(ii)(g), the General Partner shall
          revalue the property of the Partnership to its fair market value (as
          determined by the General Partner and taking into account Section
          7701(g) of the Code) in accordance with Regulations Section 1.704-
          l(b)(2)(iv)(f). When the Partnership's property is revalued by the
          General Partner, the Capital Accounts of the Partners shall be
          adjusted in accordance with Regulations Sections 1.704-1(b)(2)(iv)(f)
          and (g), which generally require such Capital Accounts to be adjusted
          to reflect the manner in which the unrealized gain or loss inherent in
          such property (that has not been reflected in the Capital Accounts
          previously) would be allocated among the Partners pursuant to Section
          5.01 if there were a taxable disposition of such property for its fair
          market value (as determined by the General Partner and taking into
          account Section 7701(g) of the Code) on the date of the revaluation.

     e.   PERCENTAGE INTERESTS. If the number of outstanding Partnership Units
          increases or decreases during a taxable year, each Partner's
          Percentage Interest shall be adjusted to a percentage equal to the
          number of Partnership Units held by such Partner divided by the
          aggregate number of Partnership Units outstanding after giving effect
          to such increase or decrease. If the Partners' Percentage Interests
          are adjusted pursuant to this Section 4.05, the Profits and Losses for
          the taxable year in which the adjustment occurs shall be allocated
          between the part of the year ending on the day of the adjustment and
          the part of the year beginning on the following day either (i) as if
          the taxable year had ended on the date of the adjustment or (ii) based
          on the number of days in each part. The General Partner, in its sole
          discretion, shall determine which method shall be used to allocate
          Profits and Losses for the taxable year in which the adjustment
          occurs. The allocation of Profits and Losses for the earlier part of
          the year shall be based on the Percentage Interests before adjustment,
          and the allocation of Profits and Losses for the later part shall be
          based on the adjusted Percentage Interests.

     f.   NO INTEREST ON CONTRIBUTIONS. No Partner shall be entitled to interest
          on its Capital Contribution.

     g.   RETURN OF CAPITAL CONTRIBUTIONS. No Partner shall be entitled to
          withdraw any part of its Capital Contribution or its Capital Account
          or to receive any distribution from the Partnership, except as
          specifically provided in this Agreement. Except as otherwise provided
          herein, there shall be no obligation to return to any Partner or
          withdrawn Partner any part of such Partner's Capital Contribution for
          so long as the Partnership continues in existence.

     h.   NO THIRD PARTY BENEFICIARY. No creditor or other third party having
          dealings with the Partnership shall have the right to enforce the
          right or obligation of any Partner to make Capital Contributions or
          loans or to pursue any other right or remedy hereunder or at law or in
          equity, it being understood and agreed that the provisions of this
          Agreement shall be solely for the benefit of, and may be enforced
          solely by, the parties hereto and their respective successors and
          assigns. None of the rights or obligations of the Partners herein set
          forth to make Capital Contributions or loans to the Partnership shall
          be deemed an asset of the 

                                       13
<PAGE>
 
          Partnership for any purpose by any creditor or other third party, nor
          may such rights or obligations be sold, transferred or assigned by the
          Partnership or pledged or encumbered by the Partnership to secure any
          debt or other obligation of the Partnership or of any of the Partners.
          In addition, it is the intent of the parties hereto that no
          distribution to any Limited Partner shall be deemed a return of money
          or other property in violation of the Act.

     i.   EQUITY INCENTIVE PLAN.

          i.   If grants of REIT Shares are made in connection with a Equity
               Incentive Plan:

               (1)  The Company shall contribute, as soon as practicable after
                    such grant, to the Partnership (to be thereafter taken into
                    account for the purposes of calculating any cash
                    distributable to the Partners), an amount equal to the
                    price, if any, paid to the Company by the party receiving
                    such REIT Shares;

               (2)  The Partnership shall issue to the Company an aggregate
                    number of additional Partnership Units equal to the product
                    of (1) the number of such REIT Shares issued by the Company,
                    multiplied by (2) a fraction, the numerator of which is
                    100%, and the denominator of which is the Conversion Factor
                    in effect on the date of such contribution; and

               (3)  The Company's Percentage Interest and the Percentage
                    Interests of the other Limited Partners shall be adjusted as
                    set forth in Section 4.02.

          ii.  If stock options or warrants granted in connection with a Equity
               Incentive Plan or the Initial Offering are exercised:

               (1)  The Company shall contribute, as soon as practicable after
                    such exercise, to the Partnership (to be thereafter taken
                    into account for purposes of calculating any cash
                    distributable to the Partners), an amount equal to the
                    exercise price, if any, paid to the Company by the
                    exercising party in connection with the exercise of the
                    option or warrant;

               (2)  The Partnership shall issue to the Company as a
                    reimbursement of a Partnership expense pursuant to Section
                    6.05 an aggregate number of additional Partnership Units
                    equal to the product of (1) the number of REIT Shares issued
                    by the Company in satisfaction of such exercised option or
                    warrant, multiplied by (2) a fraction, the numerator of
                    which is 100%, and the denominator of which is the
                    Conversion Factor in effect on the date of such
                    contribution; and

                                       14
<PAGE>
 
               (3)  The Company's Percentage Interest and the Percentage
                    Interests of the other Limited Partners shall be adjusted as
                    set forth in Section 4.02.

          iii. If the Company grants any trustee or, officer or employee share
               appreciation rights, performance share awards or other similar
               rights ("Incentive Rights"), then simultaneously, the Partnership
               shall grant the Company corresponding and economically equivalent
               rights with respect to their Partnership Units.  Consequently,
               upon the cash payment by the Company to its trustees, officers or
               employees pursuant to such Incentive Rights, the Partnership
               shall make an equal cash payment to the Company as a
               reimbursement of a Partnership expense pursuant to Section 6.05
               hereof.

 5.  PROFITS AND LOSSES; DISTRIBUTIONS

     a.   ALLOCATION OF PROFIT AND LOSS.

          i.   GENERAL.  Except as otherwise provided in this Section 5.01,
               Profit and Loss of the Partnership for each fiscal year of the
               Partnership shall be allocated among the Partners in accordance
               with their respective Percentage Interests.

          ii.  MINIMUM GAIN CHARGEBACK.  Notwithstanding any provision to the
               contrary, (i) any expense of the Partnership that is a
               "nonrecourse deduction" within the meaning of Regulations Section
               1.704-2(b)(1) shall be allocated in accordance with the Partners'
               respective Percentage Interests, (ii) any expense of the
               Partnership that is a "partner nonrecourse deduction" within the
               meaning of  Regulations Section 1.704-2(i)(2) shall be allocated
               in accordance with Regulations Section 1.704-2(i)(1), (iii) if
               there is a net decrease in Partnership Minimum Gain within the
               meaning of Regulations Section 1.704-2(f)(1) for any Partnership
               taxable year, items of gain and income shall be allocated among
               the Partners in accordance with Regulations Section 1.704-2(f)
               and the ordering rules contained in Regulations Section 1.704-
               2(j), and (iv) if there is a net decrease in Partner Nonrecourse
               Debt Minimum Gain within the meaning of Regulations Section
               1.704-2(i)(4) for any Partnership taxable year, items of gain and
               income shall be allocated among the Partners in accordance with
               Regulations Section 1.704-2(i)(4) and the ordering rules
               contained in Regulations Section 1.704-2(j). A Partner's
               "interest in partnership profits" for purposes of determining its
               share of the nonrecourse liabilities of the Partnership within
               the meaning of Regulations Section 1.752-3(a)(3) shall be such
               Partner's Percentage Interest.

          iii. QUALIFIED INCOME OFFSET.  If a Limited Partner receives in any
               taxable year an adjustment, allocation, or distribution described
               in subparagraphs (4), (5), or (6) of Regulations Section 1.704-
               l(b)(2)(ii)(d) that causes or increases a negative balance in
               such Partner's Capital Account that exceeds the sum of such
               Partner's shares of Partnership 

                                       15
<PAGE>
 
               Minimum Gain and Partner Nonrecourse Debt Minimum Gain, as
               determined in accordance with Regulations Sections 1.704-2(g) and
               1.704-2(i), such Partner shall be allocated specially for such
               taxable year (and, if necessary, later taxable years) items of
               income and gain in an amount and manner sufficient to eliminate
               such negative Capital Account balance as quickly as possible as
               provided in Regulations Section 1.704-l(b)(2)(ii)(d). After the
               occurrence of an allocation of income or gain to a Limited
               Partner in accordance with this Section 5.01(c), to the extent
               permitted by Regulations Section 1.704-l(b), items of expense or
               loss shall be allocated to such Partner in an amount necessary to
               offset the income or gain previously allocated to such Partner
               under this Section 5.01(c).

          iv.  CAPITAL ACCOUNT DEFICITS. Loss shall not be allocated to a
               Limited Partner to the extent that such allocation would cause a
               deficit in such Partner's Capital Account (after reduction to
               reflect the items described in Regulations Section 1.704-
               1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of such
               Partner's shares of Partnership Minimum Gain and Partner
               Nonrecourse Debt Minimum Gain. Any Loss in excess of that
               limitation shall be allocated to the General Partner. After the
               occurrence of an allocation of Loss to the General Partner in
               accordance with this Section 5.01(d), to the extent permitted by
               Regulations Section 1.704-l(b), Profit shall be allocated to such
               Partner in an amount necessary to offset the Loss previously
               allocated to such Partner under this Section 5.01(d).

          v.   ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE. If a Partner
               transfers any part or all of its Partnership Interest, and the
               transferee is admitted as a substitute Partner as provided
               herein, the distributive shares of the various items of Profit
               and Loss allocable among the Partners during such fiscal year of
               the Partnership shall be allocated between the transferor and the
               substitute Partner either (i) as if the Partnership's fiscal year
               had ended on the date of the transfer, or (ii) based on the
               number of days of such fiscal year that each was a Partner
               without regard to the results of Partnership activities in the
               respective portions of such fiscal year in which the transferor
               and the transferee were Partners. The General Partner, in its
               sole discretion, shall determine which method shall be used to
               allocate the distributive shares of the various items of Profit
               and Loss between the transferor and the substitute Partner.

          vi.  DEFINITION OF PROFIT AND LOSS. "Profit" and "Loss" and any items
               of income, gain, expense, or loss referred to in this Agreement
               shall be determined in accordance with federal income tax
               accounting principles, as modified by Regulations Section 1.704-
               l(b)(2)(iv), except that Profit and Loss shall not include items
               of income, gain and expense that are specially allocated pursuant
               to Section 5.01(b), 5.01(c), or 5.01(d). All allocations of
               income, Profit, gain, Loss, and expense (and all items contained
               therein) for federal income tax purposes shall be identical to
               all allocations of such items set forth in this Section 5.01,
               except as otherwise required by Section 704(c) of the Code and
               Regulations Section 1.704-l(b)(4). The General Partner shall have
               the authority to elect the method to be used by the Partnership
               for allocating items of income, gain, and 

                                       16
<PAGE>
 
               expense as required by Section 704(c) of the Code and such
               election shall be binding on all Partners.

     b.   DISTRIBUTION OF CASH.

          i.   The General Partner shall distribute cash on a quarterly (or, at
               the election of the General Partner, more frequent) basis, in an
               amount determined by the General Partner in its sole discretion,
               to the Partners who are Partners on the Partnership Record Date
               with respect to such quarter (or other distribution period) in
               accordance with their respective Percentage Interests on the
               Partnership Record Date; PROVIDED, HOWEVER, that if a new or
               existing Partner acquires an additional Partnership Interest in
               exchange for a Capital Contribution on any date other than a
               Partnership Record Date, the cash distribution attributable to
               such additional Partnership Interest relating to the Partnership
               Record Date next following the issuance of such additional
               Partnership Interest shall be reduced in the proportion to (i)
               the number of days that such additional Partnership Interest is
               held by such Partner bears to (ii) the number of days between
               such Partnership Record Date and the immediately preceding
               Partnership Record Date.

          ii.  Notwithstanding any other provision of this Agreement, the
               General Partner is authorized to take any action that it
               determines to be necessary or appropriate to cause the
               Partnership to comply with any withholding requirements
               established under the Code or any other federal, state or local
               law including, without limitation, pursuant to Sections 1441,
               1442, 1445 and 1446 of the Code.  To the extent that the
               Partnership is required to withhold and pay over to any taxing
               authority any amount resulting from the allocation or
               distribution of income to the Partner or assignee (including by
               reason of Section 1446 of the Code), either (i) if the actual
               amount to be distributed to the Partner or assignee equals or
               exceeds the amount required to be withheld by the Partnership,
               the amount withheld shall be treated as a distribution of cash in
               the amount of such withholding to such Partner or assignee, or
               (ii) if the actual amount to be distributed to the Partner or
               assignee is less than the amount required to be withheld by the
               Partnership, the amount required to be withheld shall be treated
               as a loan (a "Partnership Loan") from the Partnership to the
               Partner on the day the Partnership pays over such amount to the
               applicable taxing authority. A Partnership Loan shall be repaid
               through withholding by the Partnership with respect to subsequent
               distributions to the applicable Partner or assignee.  In the
               event that a Limited Partner or assignee (collectively, a
               "Defaulting Limited Partner") fails to pay any amount owed to the
               Partnership with respect to the Partnership Loan within 15 days
               after demand for payment thereof is made by the Partnership on
               the Defaulting Limited Partner, the General Partner, in its sole
               discretion, may elect to make the payment to the Partnership on
               behalf of such Defaulting Limited Partner.  In such event, on the
               date of payment, the General Partner shall be deemed to have
               extended a loan (a "General Partner Loan") to the Defaulting
               Limited Partner in the amount of the payment made by the General
               Partner and shall succeed to all rights and remedies of the

                                       17
<PAGE>
 
               Partnership against the Defaulting Limited Partner as to that
               amount. Without limitation, the General Partner shall have the
               right to receive any distributions that otherwise would be made
               by the Partnership to the Defaulting Limited Partner until such
               time as the General Partner Loan has been paid in full, and any
               such distributions so received by the General Partner shall be
               treated as having been received by the Defaulting Limited Partner
               and immediately paid to the General Partner.

          Any amounts treated as a Partnership Loan or a General Partner Loan
pursuant to this Section 5.02(b) shall bear interest at the lesser of (i) the
base rate on corporate loans at large United States money center commercial
banks, as published from time to time in THE WALL STREET JOURNAL, or (ii) the
maximum lawful rate of interest on such obligation, such interest to accrue from
the date the Partnership or the General Partner, as applicable, is deemed to
extend the loan until such loan is repaid in full.

          iii. In no event may a Partner receive a distribution of cash with
               respect to a Partnership Unit if such Partner is entitled to
               receive a dividend with respect to a REIT Share for which all or
               part of such Partnership Unit has been or will be exchanged.

     c.   REIT DISTRIBUTION REQUIREMENTS. The General Partner shall use its
          reasonable efforts to cause the Partnership to distribute amounts
          sufficient to enable the Company (i) to meet its distribution
          requirement for qualification as a REIT as set forth in Section
          857(a)(1) of the Code and (ii) to avoid any federal income or excise
          tax liability imposed by the Code.

     d.   NO RIGHT TO DISTRIBUTIONS IN KIND. No Partner shall be entitled to
          demand property other than cash in connection with any distributions
          by the Partnership.

     e.   LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS. Notwithstanding any of
          the provisions of this Article V, no Partner shall have the right to
          receive and the General Partner shall not have the right to make, a
          distribution which includes a return of all or part of a Partner's
          Capital Contributions, unless after giving effect to the return of a
          Capital Contribution, the sum of all liabilities of the Partnership,
          other than the liabilities to a Partner for the return of his Capital
          Contribution, does not exceed the fair market value of the
          Partnership's assets.

     f.   DISTRIBUTIONS UPON LIQUIDATION.

          i.   Upon liquidation of the Partnership, after payment of, or
               adequate provision for, debts and obligations of the Partnership,
               including any Partner loans, any remaining assets of the
               Partnership shall be distributed to all Partners with positive
               Capital Accounts in accordance with their respective positive
               Capital Account balances. For purposes of the preceding sentence,
               the Capital Account of each Partner shall be determined after all
               adjustments made in accordance with Sections 5.01 and 5.02
               resulting from Partnership operations and from all sales and
               dispositions of all or any part of the Partnership's assets. Any
               distributions 

                                       18
<PAGE>
 
               pursuant to this Section 5.06 should be made by the end of the
               Partnership's taxable year in which the liquidation occurs (or,
               if later, within 90 days after the date of the liquidation). To
               the extent deemed advisable by the General Partner, appropriate
               arrangements (including the use of a liquidating trust) may be
               made to assure that adequate funds are available to pay any
               contingent debts or obligations.

          ii.  If the General Partner has a negative balance in its Capital
               Account following a liquidation of the Partnership, as determined
               after taking into account all Capital Account adjustments in
               accordance with Sections 5.01 and 5.02 resulting from Partnership
               operations and from all sales and dispositions of all or any part
               of the Partnership's assets, the General Partner shall contribute
               to the Partnership an amount of cash equal to the negative
               balance in its Capital Account and such cash shall be paid or
               distributed by the Partnership to creditors, if any, and then to
               the Limited Partners in accordance with Section 5.06(a).  Such
               contribution by the General Partner shall be made by the end of
               the Partnership's taxable year in which the liquidation occurs
               (or, if later, within 90 days after the date of the liquidation).

     g.   SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners that the
          allocations of Profit and Loss under the Agreement have substantial
          economic effect (or be consistent with the Partners' interests in the
          Partnership in the case of the allocation of losses attributable to
          nonrecourse debt) within the meaning of Section 704(b) of the Code as
          interpreted by the Regulations promulgated pursuant thereto. Article V
          and other relevant provisions of this Agreement shall be interpreted
          in a manner consistent with such intent.

 6.  RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER

     a.   MANAGEMENT OF THE PARTNERSHIP.

          i.   Except as otherwise expressly provided in this Agreement, the
               General Partner shall have full, complete and exclusive
               discretion to manage and control the business of the Partnership
               for the purposes herein stated, and shall make all decisions
               affecting the business and assets of the Partnership. Subject to
               the restrictions specifically contained in this Agreement, the
               powers of the General Partner shall include, without limitation,
               the authority to take the following actions on behalf of the
               Partnership:

               (1)  to acquire, purchase, own, lease and dispose of any real
                    property and any other property or assets that the General
                    Partner determines are necessary or appropriate or in the
                    best interests of the business of the Partnership;

               (2)  subject to the terms of any applicable lease, to construct
                    buildings and make other improvements on the properties
                    owned or leased by the Partnership;

                                       19
<PAGE>
 
               (3)  to borrow money for the Partnership, issue evidences of
                    indebtedness in connection therewith, refinance, guarantee,
                    increase the amount of, modify, amend or change the terms
                    of, or extend the time for the payment of, any indebtedness
                    or obligation to the Partnership, and secure such
                    indebtedness by mortgage, deed of trust, pledge or other
                    lien on the Partnership's assets;

               (4)  to pay, either directly or by reimbursement, for all
                    operating costs and general administrative expenses of the
                    Company or the Partnership, to third parties or to the
                    General Partner as set forth in this Agreement;

               (5)  to lease all or any portion of any of the Partnership's
                    assets, whether or not the terms of such leases extend
                    beyond the termination date of the Partnership and whether
                    or not any portion of the Partnership's assets so leased are
                    to be occupied by the lessee, or, in turn, subleased in
                    whole or in part to others, for such consideration and on
                    such terms as the General Partner may determine;

               (6)  to prosecute, defend, arbitrate, or compromise any and all
                    claims or Liabilities in favor of or against the
                    Partnership, on such terms and in such manner as the General
                    Partner may reasonably determine, and similarly to
                    prosecute, settle or defend litigation with respect to the
                    Partners, the Partnership, or the Partnership's assets;
                    PROVIDED, HOWEVER, that the General Partner may not, without
                    the consent of all of the Partners, confess a judgment
                    against the Partnership;

               (7)  to file applications, communicate, and otherwise deal with
                    any and all governmental agencies having jurisdiction over,
                    or in any way affecting, the Partnership's assets or any
                    other aspect of the Partnership business;

               (8)  to make or revoke any election permitted or required of the
                    Partnership by any taxing authority;

               (9)  to maintain such insurance coverage for public liability,
                    fire and casualty, and any and all other insurance for the
                    protection of the Partnership, for the conservation of
                    Partnership assets, or for any other purpose convenient or
                    beneficial to the Partnership, in such amounts and such
                    types, as it shall determine from time to time;

               (10) to determine whether or not to apply any insurance proceeds
                    for any property to the restoration of such property or to
                    distribute the same;

               (11) to retain legal counsel, accountants, consultants, real
                    estate brokers, and such other persons, as the General
                    Partner may deem necessary or appropriate in connection with
                    the Partnership business and to

                                       20
<PAGE>
 
                    pay therefor such reasonable remuneration as the General
                    Partner may deem reasonable and proper;

               (12) to retain other services of any kind or nature in connection
                    with the Partnership business, and to pay therefor such
                    remuneration as the General Partner may deem reasonable and
                    proper;

               (13) to negotiate and conclude agreements on behalf of the
                    Partnership with respect to any of the rights, powers and
                    authority conferred upon the General Partner;

               (14) to maintain accurate accounting records and to file promptly
                    all federal, state and local income tax returns on behalf of
                    the Partnership;

               (15) to distribute Partnership cash or other Partnership assets
                    in accordance with this Agreement;

               (16) to form or acquire an interest in, and contribute property
                    to, any further limited or general partnerships, joint
                    ventures or other relationships that it deems desirable
                    (including, without limitation, the acquisition of interests
                    in, and the contributions of property to, its Subsidiaries
                    and any other Person in which it has an equity interest from
                    time to time);

               (17) to establish Partnership reserves for working capital,
                    capital expenditures, contingent liabilities, or any other
                    valid Partnership purpose; and

               (18) to take such other action, execute, acknowledge, swear to or
                    deliver such other documents and instruments, and perform
                    any and all other acts the General Partner deems necessary
                    or appropriate for the formation, continuation and conduct
                    of the business and affairs of the Partnership (including,
                    without limitation, all actions consistent with allowing the
                    Company at all times to qualify as a REIT unless the Company
                    voluntarily terminates its REIT status) and to possess and
                    enjoy all of the rights and powers of a general partner as
                    provided by the Act.

          ii.  Except as otherwise provided herein, to the extent the duties of
               the General Partner require expenditures of funds to be paid to
               third parties, the General Partner shall not have any obligations
               hereunder except to the extent that Partnership funds are
               reasonably available to it for the performance of such duties,
               and nothing herein contained shall be deemed to authorize or
               require the General Partner, in its capacity as such, to expend
               its individual funds for payment to third parties or to undertake
               any individual liability or obligation on behalf of the
               Partnership.

     b.   DELEGATION OF AUTHORITY. The General Partner may delegate any or all
          of its powers, rights and obligations hereunder, and may appoint,
          employ, contract

                                       21
<PAGE>
 
          or otherwise deal with any Person for the transaction of the business
          of the Partnership, which Person may, under supervision of the General
          Partner, perform any acts or services for the Partnership as the
          General Partner may approve.

     c.   INDEMNIFICATION AND EXCULPATION OF INDEMNITEES.

          i.   The Partnership shall indemnify an Indemnitee from and against
               any and all losses, claims, damages, liabilities (joint or
               several), expenses (including reasonable legal fees and
               expenses), judgments, fines, settlements, and other amounts
               arising from any and all claims, demands, actions, suits or
               proceedings, civil, criminal, administrative or investigative,
               that relate to the operations of the Partnership as set forth in
               this Agreement in which any Indemnitee may be involved, or is
               threatened to be involved, as a party or otherwise, unless it is
               established that:  (i) the act or omission of the Indemnitee was
               material to the matter giving rise to the proceeding and either
               was committed in bad faith or was the result of active and
               deliberate dishonesty; (ii) the Indemnitee actually received an
               improper personal benefit in money, property or services; or
               (iii) in the case of any criminal proceeding, the Indemnitee had
               reasonable cause to believe that the act or omission was
               unlawful. The termination of any proceeding by judgment, order or
               settlement does not create a presumption that the Indemnitee did
               not meet the requisite standard of conduct set forth in this
               Section 6.03(a). The termination of any proceeding by conviction
               or upon a plea of nolo contendere or its equivalent, or an entry
               of an order of probation prior to judgment, creates a rebuttable
               presumption that the Indemnitee acted in a manner contrary to
               that specified in this Section 6.03(a). Any indemnification
               pursuant to this Section 6.03 shall be made only out of the
               assets of the Partnership.

          ii.  The Partnership may reimburse an Indemnitee for reasonable
               expenses incurred by an Indemnitee who is a party to a proceeding
               in advance of the final disposition of the proceeding upon
               receipt by the Partnership of (i) a written affirmation by the
               Indemnitee of the Indemnitee's good faith belief that the
               standard of conduct necessary for indemnification by the
               Partnership as authorized in this Section 6.03 has been met, and
               (ii) a written undertaking by or on behalf of the Indemnitee to
               repay the amount if it shall ultimately be determined that the
               standard of conduct has not been met.

          iii. The indemnification provided by this Section 6.03 shall be in
               addition to any other rights to which an Indemnitee or any other
               Person may be entitled under any agreement, pursuant to any vote
               of the Partners, as a matter of law or otherwise, and shall
               continue as to an Indemnitee who has ceased to serve in such
               capacity.

          iv.  The Partnership may purchase and maintain insurance, on behalf of
               the Indemnitees and such other Persons as the General Partner
               shall determine, against any liability that may be asserted
               against or expenses that may be incurred by such Person in
               connection with the Partnership's activities, regardless of
               whether the Partnership would have the power to 

                                       22
<PAGE>
 
               indemnify such Person against such liability under the provisions
               of this Agreement.

          v.   For purposes of this Section 6.03, the Partnership shall be
               deemed to have requested an Indemnitee to serve as fiduciary of
               an employee benefit plan whenever the performance by it of its
               duties to the Partnership also imposes duties on, or otherwise
               involves services by, it to the plan or participants or
               beneficiaries of the plan; excise taxes assessed on an Indemnitee
               with respect to an employee benefit plan pursuant to applicable
               law shall constitute fines within the meaning of this Section
               6.03; and actions taken or omitted by the Indemnitee with respect
               to an employee benefit plan in the performance of its duties for
               a purpose reasonably believed by it to be in the interest of the
               participants and beneficiaries of the plan shall be deemed to be
               for a purpose which is not opposed to the best interests of the
               Partnership.

          vi.  In no event may an Indemnitee subject the Limited Partners to
               personal liability by reason of the indemnification provisions
               set forth in this Agreement.

          vii. An Indemnitee shall not be denied indemnification in whole or in
               part under this Section 6.03 because the Indemnitee had an
               interest in the transaction with respect to which the
               indemnification applies if the transaction was otherwise
               permitted by the terms of this Agreement.

          viii.The provisions of this Section 6.03 are for the benefit of the
               Indemnitees, their heirs, successors, assigns and administrators
               and shall not be deemed to create any rights for the benefit of
               any other Persons.

     d.   LIABILITY OF THE GENERAL PARTNER.

          i.   Notwithstanding anything to the contrary set forth in this
               Agreement, the General Partner shall not be liable for monetary
               damages to the Partnership or any Partners for losses sustained
               or liabilities incurred as a result of errors in judgment or of
               any act or omission if the General Partner acted in good faith.
               Additionally, the General Partner shall not be in breach of any
               duty that the General Partner may owe to the Limited Partners or
               the Partnership or any other Persons under this Agreement or of
               any duty stated or implied by law or equity, provided the General
               Partner, acting in good faith, abides by the terms of this
               Agreement.

          ii.  The Limited Partners expressly acknowledge that the General
               Partner is acting on behalf of the Partnership and the Company's
               shareholders collectively, that the General Partner is under no
               obligation to consider the separate interests of the Limited
               Partners (including, without limitation, the tax consequences to
               the Limited Partners) in deciding whether to cause the
               Partnership to take (or decline to take) any actions.  In the
               event of a conflict between the interests of the shareholders of
               the Company on one hand and the Limited Partners on the other,
               the General Partner shall endeavor in good faith to resolve the
               conflict in a manner not adverse to

                                       23
<PAGE>
 
               either the shareholders of the Company or the Limited Partners;
               provided the General Partner shall not be liable for monetary
               damages for losses sustained, liabilities incurred, or benefits
               not derived by Limited Partners in connection with such
               decisions, provided that the General Partner has acted in good
               faith.

          iii. Subject to its obligations and duties as General Partner set
               forth in Section 6.01 hereof, the General Partner may exercise
               any of the powers granted to it under this Agreement and perform
               any of the duties imposed upon it hereunder either directly or by
               or through its agents. The General Partner shall not be
               responsible for any misconduct or negligence on the part of any
               such agent appointed by it in good faith.

          iv.  Notwithstanding any other provisions of this Agreement or the
               Act, any action of the General Partner on behalf of the
               Partnership or any decision of the General Partner to refrain
               from acting on behalf of the Partnership, undertaken in the good
               faith belief that such action or omission is necessary or
               advisable in order (i) to protect the ability of the Company to
               continue to qualify as a REIT or (ii) to prevent the Company from
               incurring any taxes under Section 857, Section 4981, or any other
               provision of the Code, is expressly authorized under this
               Agreement and is deemed approved by all of the Limited Partners.

          v.   Any amendment, modification or repeal of this Section 6.04 or any
               provision hereof shall be prospective only and shall not in any
               way affect the limitations on the General Partner's liability to
               the Partnership and the Limited Partners under this Section 6.04
               as in effect immediately prior to such amendment, modification or
               repeal with respect to matters occurring, in whole or in part,
               prior to such amendment, modification or repeal, regardless of
               when claims relating to such matters may arise or be asserted.

     e.   EXPENDITURES BY THE PARTNERSHIP. The General Partner is hereby
          authorized to pay compensation for accounting, administrative, legal,
          technical, management and other services rendered to the Partnership.
          All of the aforesaid expenditures (including Administrative Expenses)
          shall be obligations of the Partnership, and the General Partner shall
          be entitled to reimbursement by the Partnership for any expenditure
          (including Administrative Expenses) incurred by it on behalf of the
          Partnership which shall be made other than out of the funds of the
          Partnership. The Partnership shall also assume, and pay when due, all
          Administrative Expenses. This provision shall be given effect as of
          the date of formation of the Partnership.

     f.   OUTSIDE ACTIVITIES. Subject to Section 6.08 hereof, the Charter and
          any agreements entered into by the General Partner or its Affiliates
          with the Partnership or a Subsidiary, any officer, director, employee,
          agent, trustee, Affiliate or shareholder of the General Partner shall
          be entitled to and may have business interests and engage in business
          activities in addition to those relating to the Partnership, including
          business interests and activities substantially similar or identical
          to those of the Partnership. Neither the Partnership nor any of the

                                       24
<PAGE>
 
          Limited Partners shall have any rights by virtue of this Agreement in
          any such business ventures, interests or activities. None of the
          Limited Partners nor any other Person shall have any rights by virtue
          of this Agreement or the partnership relationship established hereby
          in any such business ventures, interests or activities, and the
          General Partner shall have no obligation pursuant to this Agreement to
          offer any interest in any such business ventures, interests and
          activities to the Partnership or any Limited Partner, even if such
          opportunity is of a character which, if presented to the Partnership
          or any Limited Partner, could be taken by such Person.

     g.   EMPLOYMENT OR RETENTION OF AFFILIATES.

          i.   Any Affiliate of the General Partner may be employed or retained
               by the Partnership and may otherwise deal with the Partnership
               (whether as a buyer, lessor, lessee, manager, furnisher of goods
               or services, broker, agent, lender or otherwise) and may receive
               from the Partnership any compensation, price, or other payment
               therefor which the General Partner determines to be fair and
               reasonable.

          ii.  The Partnership may lend or contribute to its Subsidiaries or
               other Persons in which it has an equity investment, and such
               Persons may borrow funds from the Partnership, on terms and
               conditions established in the sole and absolute discretion of the
               General Partner.  The foregoing authority shall not create any
               right or benefit in favor of any Subsidiary or any other Person.

          iii. The Partnership may transfer assets to joint ventures, other
               partnerships, corporations or other business entities in which it
               is or thereby becomes a participant upon such terms and subject
               to such conditions as the General Partner deems are consistent
               with this Agreement and applicable law.

          iv.  Except as expressly permitted by this Agreement, neither the
               General Partner nor any of its Affiliates shall sell, transfer or
               convey any property to, or purchase any property from, the
               Partnership, directly or indirectly, except pursuant to
               transactions that are on terms that are fair and reasonable to
               the Partnership.

     h.   GENERAL PARTNER PARTICIPATION. The General Partner agrees that all
          business activities of the General Partner, including activities
          pertaining to the acquisition, development and/or ownership of
          property, shall be conducted through the Partnership or one or more
          subsidiary partnerships. The General Partner also agrees that all
          loans from the General Partner to the Partnership shall constitute
          Funding Loans, subject to the exception set forth in Section 4.03
          hereof.

     i.   TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether
          real, personal or mixed and whether tangible or intangible, shall be
          deemed to be owned by the Partnership as an entity, and no Partner,
          individually or collectively, shall have any ownership interest in
          such Partnership assets or any portion thereof. Title to any or all of
          the Partnership assets may be held in the name of the Partnership, the
          General Partner or one or more nominees, as the General

                                       25
<PAGE>
 
          Partner may determine, including Affiliates of the General Partner.
          The General Partner hereby declares and warrants that any Partnership
          assets for which legal title is held in the name of the General
          Partner or any nominee or Affiliate of the General Partner shall be
          held by the General Partner for the use and benefit of the Partnership
          in accordance with the provisions of this Agreement; PROVIDED,
          HOWEVER, that the General Partner shall use its best efforts to cause
          beneficial and record title to such assets to be vested in the
          Partnership as soon as reasonably practicable. All Partnership assets
          shall be recorded as the property of the Partnership in its books and
          records, irrespective of the name in which legal title to such
          Partnership assets is held.

     j.   MISCELLANEOUS. In the event the Company redeems any REIT Shares, then
          the General Partner shall cause the Partnership to purchase from the
          Company a number of Partnership Units as determined based on the
          application of the Conversion Factor on the same terms that the
          Company redeemed such REIT Shares. Moreover, if the Company makes a
          cash tender offer or other offer to acquire REIT Shares, then the
          General Partner shall cause the Partnership to make a corresponding
          offer to the Company to acquire an equal number of Partnership Units
          held by the Company. In the event any REIT Shares are redeemed by the
          Company pursuant to such offer, the Partnership shall redeem an
          equivalent number of the Company's Partnership Units for an equivalent
          purchase price based on the application of the Conversion Factor.

 7.  CHANGES IN GENERAL PARTNER

     a.   TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST.

          i.   The General Partner may not transfer or assign any of its General
               Partnership Interest or withdraw as General Partner except as
               provided in Section 7.01(c) or in connection with a transaction
               described in Section 7.01(d).

          ii.  The Company agrees that it will at all times own, through its
               General Partnership Interest and Limited Partnership Interest, in
               the aggregate at least a 20% Percentage Interest in the
               Partnership.

          iii. Except as otherwise provided in Section 6.07(c) or Section
               7.01(d) hereof, the Company shall not 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, or any recapitalization or change of
               outstanding REIT Shares (other than a change in par value, or
               from par value to no par value, or as a result of a subdivision
               or combination of REIT Shares) (a "Transaction"), unless (i) the
               Transaction also includes a merger of the Partnership or sale of
               substantially all of the assets of the Partnership as a result of
               which all Limited Partners will receive for each Partnership Unit
               an amount of cash, securities, or other property equal to the
               product of the Conversion Factor and the greatest amount of cash,
               securities or other property paid in the Transaction to a holder
               of one REIT Share in consideration of one REIT Share, PROVIDED
               THAT if, in connection with the Transaction, a purchase, tender
               or exchange offer

                                       26
<PAGE>
 
               ("Offer") shall have been made to and accepted by the holders of
               more than 50% of the outstanding REIT Shares, each holder of
               Partnership Units shall be given the option to exchange its
               Partnership Units for the greatest amount of cash, securities, or
               other property which a Limited Partner would have received had it
               (A) exercised its Redemption Right and received REIT Shares and
               (B) sold, tendered or exchanged pursuant to the Offer the REIT
               Shares received upon exercise of the Redemption Right immediately
               prior to the expiration of the Offer; and (ii) no more than 75%
               of the equity securities of the acquiring Person in such
               Transaction shall be owned, after consummation of such
               Transaction, by the General Partner or Persons who were
               Affiliates of the Partnership or the General Partner immediately
               prior to the date on which the Transaction is consummated.

          iv.  Notwithstanding Section 7.01(c), the Company may merge into or
               consolidate with another entity if immediately after such merger
               or consolidation (i) substantially all of the assets of the
               successor or surviving entity (the "Surviving Entity"), other
               than Partnership Units held by the General Partner, are
               contributed to the Partnership as a Capital Contribution in
               exchange for Partnership Units with a fair market value equal to
               the value of the assets so contributed as determined by the
               Surviving Entity in good faith and (ii) the Surviving Entity
               expressly agrees to assume, or acknowledge and ratify, all
               obligations of the General Partner under the Partnership
               Agreement. Upon such contribution and assumption, the Surviving
               Entity shall have the right and duty to amend this Agreement as
               set forth in this Section 7.01(d). The Surviving Entity shall in
               good faith arrive at a new method for the calculation of the Cash
               Amount and Conversion Factor for a Partnership Unit after any
               such merger or consolidation so as to approximate the existing
               method for such calculation as closely as reasonably possible.
               Such calculation shall take into account, among other things, the
               kind and amount of securities, cash and other property that was
               receivable upon such merger or consolidation by a holder of REIT
               Shares and/or options, warrants or other rights relating thereto,
               and to which a holder of Partnership Units could have acquired
               had such Partnership Units been redeemed immediately prior to
               such merger or consolidation.  Such amendment to this Agreement
               shall provide for adjustment to such method of calculation which
               shall be as nearly equivalent as may be practicable to the
               adjustments provided for with respect to the Conversion Factor.
               The above provisions of this Section 7.01(d) shall similarly
               apply to successive mergers or consolidations permitted
               hereunder.

     b.   ADMISSION OF A SUBSTITUTE OR SUCCESSOR GENERAL PARTNER. A Person shall
          be admitted as a substitute or successor General Partner of the
          Partnership only if the following terms and conditions are satisfied:

          i.   a majority in interest of the Limited Partners (other than the
               Company in its capacity as a Limited Partner) shall have
               consented in writing to the admission of the substitute or
               successor General Partner;

                                       27
<PAGE>
 
          ii.  the Person to be admitted as a substitute or additional General
               Partner shall have accepted and agreed to be bound by all the
               terms and provisions of this Agreement by executing a counterpart
               thereof and such other documents or instruments as may be
               required or appropriate in order to effect the admission of such
               Person as a General Partner, and a certificate evidencing the
               admission of such Person as a General Partner shall have been
               filed for recordation and all other actions required  by Section
               2.05 hereof in connection with such admission shall have been
               performed;

          iii. if the Person to be admitted as a substitute or additional
               General Partner is a corporation or a partnership it shall have
               provided the Partnership with evidence satisfactory to counsel
               for the Partnership of such Person's authority to become a
               General Partner and to be bound by the terms and provisions of
               this Agreement; and

          iv.  counsel for the Partnership shall have rendered an opinion
               (relying on such opinions from other counsel and the state or any
               other jurisdiction as may be necessary) that the admission of the
               person to be admitted as a substitute or additional General
               Partner is in conformity with the Act, that none of the actions
               taken in connection with the admission of such Person as a
               substitute or additional General Partner will cause (i) the
               Partnership to be classified other than as a partnership for
               federal income tax purposes, or (ii) the loss of any Limited
               Partner's limited liability.

     c.   EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A GENERAL
          PARTNER.

          i.   Upon the occurrence of an Event of Bankruptcy as to a General
               Partner (and its removal pursuant to Section 7.04(a) hereof) or
               the withdrawal, death or dissolution of a General Partner (except
               that, if a General Partner is on the date of such occurrence a
               partnership, the withdrawal, death, dissolution, Event of
               Bankruptcy as to, or removal of a partner in, such partnership
               shall be deemed not to be a dissolution of such General Partner
               if the business of such General Partner is continued by the
               remaining partner or partners), the Partnership shall be
               dissolved and terminated unless the Partnership is continued
               pursuant to Section 7.03(b) hereof.

          ii.  Following the occurrence of an Event of Bankruptcy as to a
               General Partner (and its removal pursuant to Section 7.04(a)
               hereof) or the death, withdrawal, removal or dissolution of a
               General Partner (except that, if a General Partner is on the date
               of such occurrence a partnership, the withdrawal, death,
               dissolution, Event of Bankruptcy as to, or removal of a partner
               in, such partnership shall be deemed not to be a dissolution of
               such General Partner if the business of such General Partner is
               continued by the remaining partner or partners), the Limited
               Partners, within 90 days after such occurrence, may elect to
               reconstitute the Partnership and continue the business of the
               Partnership for the balance of the term specified in Section 2.04
               hereof by selecting, subject to Section 7.02 hereof and any other
               provisions of this Agreement, a substitute General Partner by
               unanimous consent of the Limited Partners. If the Limited
               Partners elect to              

                                       28
<PAGE>
 
               reconstitute the Partnership and admit a substitute General
               Partner, the relationship with the Partners and of any Person who
               has acquired an interest of a Partner in the Partnership shall be
               governed by this Agreement.

     d.   REMOVAL OF A GENERAL PARTNER.

          i.   Upon the occurrence of an Event of Bankruptcy as to, or the
               dissolution of, a General Partner, such General Partner shall be
               deemed to be removed automatically; PROVIDED, HOWEVER, that if a
               General Partner is on the date of such occurrence a partnership,
               the withdrawal, death, dissolution, Event of Bankruptcy as to or
               removal of a partner in such partnership shall be deemed not to
               be a dissolution of the General Partner if the business of such
               General Partner is continued by the remaining partner or
               partners.

          ii.  If a General Partner has been removed pursuant to this Section
               7.04 and the Partnership is continued pursuant to Section 7.03
               hereof, such General Partner shall promptly transfer and assign
               its General Partnership Interest in the Partnership to the
               substitute General Partner approved by a majority in interest of
               the Limited Partners (excluding the Company in its capacity as a
               Limited Partner) in accordance with Section 7.03(b) hereof and
               otherwise admitted to the Partnership in accordance with Section
               7.02 hereof.  At the time of assignment, the removed General
               Partner shall be entitled to receive from the substitute General
               Partner the fair market value of the General Partnership Interest
               of such removed General Partner as reduced by any damages caused
               to the Partnership Interest of such removed General Partner.
               Such fair market value shall be determined by an appraiser
               mutually agreed upon by the General Partner and a majority in
               interest of the Limited Partners (excluding the Company in its
               capacity as a Limited Partner) within 10 days following the
               removal of the General Partner.  In the event that the parties
               are unable to agree upon an appraiser, the removed General
               Partner and a majority in interest of the Limited Partners
               (excluding the Company in its capacity as a Limited Partner) each
               shall select an appraiser.  Each such appraiser shall complete an
               appraisal of the fair market value of the removed General
               Partner's General Partnership Interest within 30 days of the
               General Partner's removal, and the fair market value of the
               removed General Partner's General Partnership Interest shall be
               the average of the two appraisals; PROVIDED, HOWEVER, that if the
               higher appraisal exceeds the lower appraisal by more than 20% of
               the amount of the lower appraisal, the two appraisers, no later
               than 40 days after the removal of the General Partner, shall
               select a third appraiser who shall complete an appraisal of the
               fair market value of the removed General Partner's General
               Partnership Interest no later than 60 days after the removal of
               the General Partner.  In such case, the fair market value of the
               removed General Partner's General Partnership Interest shall be
               the average of the two appraisals closest in value.

                                       29
<PAGE>
 
          iii. The General Partnership Interest of a removed General Partner,
               during the time after default until transfer under Section
               7.04(b), shall be converted to that of a special Limited Partner;
               PROVIDED, HOWEVER, such removed General Partner shall not have
               any rights to participate in the management and affairs of the
               Partnership, and shall not be entitled to any portion of the
               income, expense, profit, gain or loss allocations or cash
               distributions allocable or payable, as the case may be, to the
               Limited Partners.  Instead, such removed General Partner shall
               receive and be entitled only to retain distributions or
               allocations of such items that it would have been entitled to
               receive in its capacity as General Partner, until the transfer is
               effective pursuant to Section 7.04(b).

          iv.  All Partners shall have given and hereby do give such consents,
               shall take such actions and shall execute such documents as shall
               be legally necessary and sufficient to effect all the foregoing
               provisions of this Section.

 8.  RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS

     a.   MANAGEMENT OF THE PARTNERSHIP. The Limited Partners shall not
          participate in the management or control of Partnership business nor
          shall they transact any business for the Partnership, nor shall they
          have the power to sign for or bind the Partnership, such powers being
          vested solely and exclusively in the General Partner.

     b.   POWER OF ATTORNEY. Each Limited Partner hereby irrevocably appoints
          the General Partner his true and lawful attorney-in-fact, who may act
          for each Limited Partner and in his name, place and stead, and for his
          use and benefit, to sign, acknowledge, swear to, deliver, file and
          record, at the appropriate public offices, any and all documents,
          certificates, and instruments as may be deemed necessary or desirable
          by the General Partner to carry out fully the provisions of this
          Agreement and the Act in accordance with their terms, which power of
          attorney is coupled with an interest and shall survive the death,
          dissolution or legal incapacity of the Limited Partner, or the
          transfer by the Limited Partner of any part or all of his Partnership
          Interest.

     c.   LIMITATION ON LIABILITY OF LIMITED PARTNERS. No Limited Partner shall
          be liable for any debts, liabilities, contracts or obligations of the
          Partnership. A Limited Partner shall be liable to the Partnership only
          to make payments of his Capital Contribution, if any, as and when due
          hereunder. After his Capital Contribution is fully paid, no Limited
          Partner shall, except as otherwise required by the Act, be required to
          make any further Capital Contributions or other payments or lend any
          funds to the Partnership.

     d.   REDEMPTION RIGHT.

          i.   Subject to Sections 8.04(b)-(f), on or after the date which is
               one (1) year after the Effective Date, each Limited Partner
               (other than the Company in its capacity as a Limited Partner)
               shall have the right (the "Redemption Right") to require the
               Partnership to redeem on a Specified Redemption 

                                       30
<PAGE>
 
               Date all or a portion of the Partnership Units held by such
               Limited Partner at a redemption price equal to and in the form of
               the Cash Amount to be paid by the Partnership. The Redemption
               Right shall be exercised pursuant to a Notice of Redemption
               delivered to the Partnership (with a copy to the General Partner)
               by the Limited Partner who is exercising the Redemption Right
               (the "Redeeming Partner"); provided, however, that the
               Partnership shall not be obligated to satisfy such Redemption
               Right if the Company elects to purchase the Partnership Units
               subject to the Notice of Redemption pursuant to Section 8.04(b);
               and provided, further, that no Limited Partner may deliver to the
               General Partner more than four (4) Notices of Redemption during
               each calendar year. In addition to the restrictions on redemption
               set forth in Section 8.04(f), a Limited Partner may not exercise
               the Redemption Right for less than one thousand (1,000)
               Partnership Units or, if such Limited Partner holds less than one
               thousand (1,000) Partnership Units, all of the Partnership Units
               held by such Partner. Notwithstanding the foregoing provisions of
               this Section 8.04(a), the Company agrees to use its best efforts
               to cause the closing of the acquisition of redeemed Partnership
               Units hereunder to occur as quickly as reasonably possible. The
               Redeeming Partner shall have no right, with respect to any
               Partnership Units so redeemed, to receive any distribution paid
               with respect to Partnership Units if the record date for such
               distribution is on or after the Specified Redemption Date.

          ii.  Notwithstanding the provisions of Section 8.04(a), a Limited
               Partner that exercises the Redemption Right shall be deemed to
               have offered to sell the Partnership Units described in the
               Notice of Redemption to the Company, and the Company may, in its
               sole and absolute discretion, elect to purchase directly and
               acquire such Partnership Units by paying to the Redeeming Partner
               either the Cash Amount, or, provided that the REIT Shares have
               been registered pursuant to a registration statement declared
               effective under the Securities Act of 1933, as amended (the
               "Securities Act") the REIT Shares Amount, as elected by the
               Company (in its sole and absolute discretion), on the Specified
               Redemption Date, whereupon the Company shall acquire the
               Partnership Units offered for redemption by the Redeeming Partner
               and shall be treated for all purposes of this Agreement as the
               owner of such Partnership Units.  If the Company shall elect to
               exercise its right to purchase Partnership Units under this
               Section 8.04(b) with respect to a Notice of Redemption, it shall
               so notify the Redeeming Partner within five Business Days after
               the receipt by the General Partner of such Notice of Redemption.
               Unless the Company (in its sole and absolute discretion) shall
               exercise its right to purchase Partnership Units from the
               Redeeming Partner pursuant to this Section 8.04(b), the Company
               shall not have any obligation to the Redeeming Partner or the
               Partnership with respect to the Redeeming Partner's exercise of
               the Redemption Right.  In the event the Company shall exercise
               its right to purchase Partnership Units with respect to the
               exercise of a Redemption Right in the manner described in the
               first sentence of this Section 8.04(b), the Partnership shall
               have no obligation to pay any amount to the Redeeming Partner
               with respect to such Redeeming Partner's exercise of such
               Redemption Right, and each of the Redeeming Partner, the

                                       31
<PAGE>
 
               Partnership, and the Company, as the case may be, shall treat the
               transaction between the Company and the Redeeming Partner for
               federal income tax purposes as a sale of the Redeeming Partner's
               Partnership Units to the Company.  Each Redeeming Partner agrees
               to execute such documents as the General Partner may reasonably
               require in connection with the issuance of REIT Shares upon
               exercise of the Redemption Right.

          iii. Notwithstanding the provisions of Section 8.04(a) and 8.04(b),
               the Company shall not exercise its rights under Section 8.04(b)
               to deliver the REIT Shares Amount, if the delivery of REIT Shares
               to a Redeeming Partner on the Specified Redemption Date by the
               Company pursuant to Section 8.04(b) would (i) result in such
               Partner or any other person owning, directly or indirectly, REIT
               Shares in excess of the Ownership Limit (as defined in the
               Charter) and calculated in accordance therewith, except as
               provided in the Charter, (ii) result in REIT Shares 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, directly or constructively, 10% or more
               of the ownership interests in a tenant of the Company's, the
               Partnership's, or a subsidiary partnership's, real property,
               within the meaning of Section 856(d)(2)(B) of the Code, (v) cause
               the acquisition of REIT Shares by such Partner to be "integrated"
               with any other distribution of REIT Shares for purposes of
               complying with the registration provisions of the Securities Act,
               or (vi) otherwise violate the Charter.

          iv.  Any Cash Amount to be paid to a Redeeming Partner pursuant to
               this Section 8.04 shall be paid within 30 days after the initial
               date of receipt by the Company of the Notice of Redemption
               relating to the Partnership Units to be redeemed.
               Notwithstanding the foregoing, the Company agrees to use its best
               efforts to cause the closing of the acquisition of redeemed
               Partnership Units hereunder to occur as quickly as reasonably
               possible.

          v.   In the event that the General Partner permits the pledge of a
               Limited Partner's Partnership Units to a lender, the General
               Partner may agree, in its sole discretion, to allow such lender,
               upon foreclosure of such Partnership Units, to redeem such
               Partnership Units prior to the expiration of the one-year period
               described in Section 8.04(a); provided, that any such redemption
               shall be effected by the Partnership in the form of the Cash
               Amount.

          vi.  Notwithstanding any other provision of this Agreement, the
               General Partner shall place appropriate restrictions on the
               ability of the Limited Partners to exercise their Redemption
               Rights as and if deemed necessary to ensure that the Partnership
               does not constitute a "publicly traded partnership" under Section
               7704 of the Code.

     e.   REGISTRATION.

                                       32
<PAGE>
 
          i.   SHELF REGISTRATION. Prior to or on the first date upon which the
               Partnership Units owned by any Limited Partner may be redeemed,
               at the request of a Limited Partner, the Company agrees to file
               with the Commission, a shelf registration statement on Form S-3
               under Rule 415 of the Securities Act, or any similar rule that
               may be adopted by the Commission (the "Shelf Registration"), with
               respect to all of the REIT Shares issued to the Limited Partners
               pursuant to Section 8.04(b) hereof (the "Redemption Shares").
               The Company will use its best efforts to have the Shelf
               Registration declared effective under the Securities Act and to
               keep the Shelf Registration continuously effective until a date
               agreed upon by the Company and a majority of the Limited Partners
               or until such time as all of the shares registered pursuant to
               such Shelf Registration (i) have been disposed of pursuant to
               such Shelf Registration, (ii) have otherwise been distributed
               pursuant to Rule 144 promulgated under the Securities Act ("Rule
               144"), or (iii) have been otherwise transferred in a transaction
               resulting in the transferee receiving REIT Shares not deemed to
               be "restricted securities" under Rule 144. The Company further
               agrees to supplement or make amendments to the Shelf
               Registration, if required by the rules, regulations or
               instructions applicable to the registration form utilized by the
               Company or by the Securities Act or rules and regulations
               thereunder for the Shelf Registration.  No provision of this
               Agreement shall require the Company to file a registration
               statement on any form other than Form S-3.  The Company, in the
               exercise of its reasonable judgment, shall have the right to
               delay the filing of the Shelf Registration for up to 120 days.

          ii.  REGISTRATION AND QUALIFICATION PROCEDURES. The Company, upon the
               written request of a Limited Partner, is required by the
               provisions of Section 8.05(a) hereof to use its best efforts to
               have the Shelf Registration declared effective under the
               Securities Act. Accordingly, the Company will:

               (1)  prepare and file with the Commission a registration
                    statement, including amendments thereof and supplements
                    relating thereto, with respect to the Redemption Shares;

               (2)  use its best efforts to cause the Shelf Registration to be
                    declared effective by the Commission;

               (3)  keep the Shelf Registration effective and the related
                    prospectus current as described in Section 8.04(a) hereof;
                    provided, however, that the Company shall have no obligation
                    to file any amendment or supplement at its own expense or
                    the Partnership's expense more than 90 days after the
                    effective date of the Shelf Registration;

               (4)  furnish to each holder of Redemption Shares such numbers of
                    copies of prospectuses, and supplements or amendments
                    thereto, and such other documents as such holder reasonably
                    requests;

                                       33
<PAGE>
 
               (5)  register or qualify the securities covered by the
                    registration statement under the securities or blue sky laws
                    of such jurisdictions within the United States as any holder
                    of Redemption Shares shall reasonably request, and do such
                    other reasonable acts and things as may be required of it to
                    enable such holders to consummate the sale or other
                    disposition in such jurisdictions of the Redemption Shares;
                    provided, however, that the Company shall not be required to
                    (i) qualify as a foreign corporation or consent to a general
                    and unlimited service or process in any jurisdictions in
                    which it would not otherwise be required to be qualified or
                    so consent or (ii) qualify as a dealer in securities; and

               (6)  keep the holders of Redemption Shares advised as to the
                    initiation and progress of the registration.

          iii. ALLOCATION OF EXPENSES. The Partnership shall pay all expenses in
               connection with the Shelf Registration, including without
               limitation (i) all expenses incident to filing with the National
               Association of Securities Dealers, Inc., (ii) registration fees,
               (iii) printing expenses, (iv) accounting and legal fees and
               expenses, except to the extent holders of Redemption Shares elect
               to engage accountants or attorneys in addition to the accountants
               and attorneys engaged by the Partnership or the Company, (v)
               accounting expenses incident to or required by any such
               registration or qualification and (vi) expenses of complying with
               the securities or blue sky laws of any jurisdictions in
               connection with such registration or qualification; provided,
               however, the Partnership shall not be liable for (A) any
               discounts or commissions to any broker attributable to the sale
               of Redemption Shares, or (B) any fees or expenses incurred by
               holders of Redemption Shares in connection with such registration
               which, according to the written instructions of any regulatory
               authority, the Partnership is not permitted to pay.

          iv.  SALE OF REDEMPTION SHARES.  The Company may require in its sole
               discretion that the Redemption Shares be sold in block trades
               through underwriters or broker-dealers or that the sale of the
               Redemption Shares be underwritten by investment banking firms
               selected by the Company.

          v.   LISTING ON SECURITIES EXCHANGE.  If the Company shall list or
               maintain the listing of any REIT Shares on any securities
               exchange or national market system, it will at its expense and as
               necessary to permit the registration and sale of the Redemption
               Shares hereunder, list thereon, maintain and, when necessary,
               increase such listing to include such Redemption Shares.

     f.   "PIGGYBACK" REGISTRATION RIGHTS.

          i.   NOTICE OF REGISTRATION.  If, at any time commencing upon the date
               upon which all or any portion of the Partnership Units shall have
               been redeemed for the Redemption Shares (but not if such
               Partnership Units shall have been redeemed for cash in accordance
               with the provisions 

                                       34
<PAGE>
 
               hereof), the Company files a registration statement under the
               Securities Act with respect to a firm commitment underwritten
               public offering of any securities of the Company, the Company
               shall give thirty (30) days prior written notice thereof to each
               Limited Partner and shall, upon the written request of any or all
               of the Limited Partners, include in the underwritten public
               offering the number of Redemption Shares that each such Limited
               Partner may request (except as set forth in Section 8.06(b)
               below). The Company will keep such registration statement
               effective and current under the Securities Act permitting the
               sale of Redemption Shares covered thereby for the same period
               that the registration statement is maintained effective for the
               other persons (including the Company) selling thereunder. In any
               underwritten offering, however, the Redemption Shares to be
               included will be sold at the same time and at the same price as
               the Company's securities. In the event that the Company fails to
               receive a written request from a Limited Partner within thirty
               (30) days of its written notice, then the Company shall have no
               obligation to include any of the Redemption Shares in the
               offering. In connection with any registration statement or
               subsequent amendment or similar document filed pursuant to this
               Section 8.06, the Company shall take all reasonable steps to make
               the securities covered thereby eligible for public offering and
               sale under the securities or blue sky laws of the applicable
               jurisdictions by the effective date of such registration
               statement; provided that in no event shall the Company be
               obligated to qualify to do business in any jurisdiction where it
               is not so qualified at the time of filing such documents or to
               take any action which would subject it to unlimited service of
               process in any jurisdiction where it is not so subject at such
               time. The Company shall keep such filing current for the length
               of time it must keep any registration statement, post-effective
               amendment, prospectus or offering circular effective pursuant
               hereto.

          ii.  UNDERWRITING.  In the event of an offering by the Company in
               which one or more Limited Partners wishes to include Redemption
               Shares under this Section 8.06, and it is determined in good
               faith by the managing underwriter of such offering, giving effect
               to the number of REIT Shares to be offered by the Company, that
               the total number of Redemption Shares that would consequently be
               offered is in excess of the number of Redemption Shares that can
               be sold at the proposed price, then the number of Redemption
               Shares of the Limited Partners to be offered will be reduced
               ratably, based upon the number of Redemption Shares each Limited
               Partner has requested to include in such registration; provided,
               however, that notwithstanding anything in this Section 8.06(b) to
               the contrary, the Limited Partners shall have the right to
               contribute, on a pro-rata basis as described above, an aggregate
               of Redemption Shares equaling at least fifteen percent (15%) of
               the total value of such offering.

          iii. OBLIGATION OF LIMITED PARTNERS UPON REGISTRATION.  To include
               Redemption Shares in any registration, each Limited Partner
               shall:

                                       35
<PAGE>
 
               (1)  Cooperate with the Company in preparing each such
                    registration and execute all such agreements as any
                    underwriter may deem reasonably necessary in favor of such
                    underwriter;

               (2)  Promptly supply the Company with all information, documents,
                    representations and agreements as such underwriter may deem
                    reasonably necessary in connection with such registration;
                    and

               (3)  Agree in writing not to sell or transfer any share of the
                    Redemption Shares not included in such underwritten offering
                    for a period of seven (7) days prior to and thirty (30) days
                    after the effective date of such registration without the
                    underwriters' consent, but no Limited Partner shall be
                    required to make such agreement unless the other Limited
                    Partners included in any offering covered by such
                    registration shall similarly agree.

          iv.  COMPANY'S OBLIGATIONS UPON REGISTRATION.  If and whenever the
               Company is obligated by the provisions of this Section 8.06 to
               effect the registration of any offering of REIT Shares under the
               Securities Act, as expeditiously as possible the Company will, or
               will use its best efforts to, as the case may be:

               (1)  Prepare and file with the SEC a registration statement with
                    respect to such REIT Shares and, use its best efforts to
                    cause such registration statement to become effective;

               (2)  Prepare and file with the SEC such amendments and
                    supplements to such registration statement and the
                    prospectus used in connection therewith as may be necessary
                    to keep such registration statement effective until the
                    earlier of the sale of all securities covered thereby or the
                    date on which such REIT Shares may be sold into the market
                    without restriction under Rule 144;

               (3)  Furnish to each Limited Partner so many copies of a
                    prospectus, including a preliminary prospectus, in
                    conformity with the requirements of the Securities Act, and
                    such other documents, as such Limited Partner may reasonably
                    request; and

               (4)  Register or qualify the securities covered by such
                    registration statement under such other securities or blue
                    sky laws of such jurisdictions as such Limited Partner shall
                    reasonably request, and do any and all other acts and things
                    that may be reasonably necessary or advisable to enable the
                    Limited Partners to consummate the disposition in such
                    jurisdictions of such securities.

          v.   EXPENSES.  In connection with any filing or other registration
               hereunder the Partnership shall bear all the expenses and
               professional fees which arise in connection with such filings or
               registration (except for the Limited Partner's pro rata share of
               any underwriters' discount) and all expenses incurred in making
               such filings and keeping them effective and correct as 

                                       36
<PAGE>
 
               provided hereunder and shall also provide each Limited Partner
               with a reasonable number of printed copies of the prospectus,
               offering circulars and/or supplemental prospectuses or amended
               prospectuses in final and preliminary form; PROVIDED, HOWEVER,
               each Limited Partner will pay its own direct out-of-pocket costs
               incurred with the registration of REIT Shares, including but not
               limited to Limited Partner's attorney and accountants; fees,
               travel expenses and any consulting fees.

          vi.  INDEMNIFICATION BY THE COMPANY.  The Company will indemnify each
               Limited Partner, each of its officers and trustees, and each
               person controlling the Limited Partner, with respect to which
               registration, qualification or compliance has been effected
               pursuant to this Section 8.06, against all claims, losses,
               damages, costs, expenses and liabilities whatsoever (or actions
               in respect thereof) arising out of or based on (i) any untrue
               statement, (or alleged untrue statement) of a material fact
               contained in any registration statement, prospectus, offering
               circular or other similar document (including any related
               registration statement, notification or the like) incident to any
               such registration, qualification or compliance, or based on any
               omission (or alleged omission) to state therein a material fact
               required to be stated therein or necessary to make the statements
               therein not misleading in the light of the circumstances under
               which they were made or (ii) any violation by the Company of the
               Securities Act or any state securities law or of any rule or
               regulation promulgated under the Securities Act or any state
               securities law applicable to the Company and relating to action
               or inaction required of the Company in connection with any such
               registration, qualification or compliance, and will reimburse the
               Limited Partner, each of its officers and trustees, and each
               person controlling the Limited Partner, for any legal and any
               other expenses reasonably incurred in connection with
               investigating or defending any such claim, loss, damage,
               liability or action, provided, however, that (x) the Company will
               not be liable in any such case to the extent that any such claim,
               loss, damage, liability, or action arises out of or is based on
               any untrue statement (or alleged untrue statement) or omission
               (or alleged omission) based upon written information furnished to
               the Company by an instrument duly executed by the Limited Partner
               and stated to be specifically for use therein or furnished by the
               Limited Partner to the Company in response to a request by the
               Company stating specifically that such information will be used
               by the Company therein, and (y) such indemnity agreement shall
               not inure to the benefit of the Limited Partner, insofar as it
               relates to any such untrue statement (or alleged untrue
               statement) or omission (or alleged omission) made in the
               preliminary prospectus or prospectus but eliminated or remedied
               in the amended prospectus on file with the Commission at the time
               the registration statement becomes effective or in the amended
               prospectus filed with the Commission pursuant to Rule 424(b)
               under the Securities Act or in any subsequent amended prospectus
               filed with the Commission prior to the written confirmation of
               the sale of the Registrable Securities at issue (collectively,
               the "Final Prospectus"), if a copy of the Final Prospectus was
               not furnished to the person or entity asserting the loss,
               liability, claim 

                                       37
<PAGE>
 
               or damage at or prior to the time such action is required by the
               Securities Act.

          vii. INDEMNIFICATION BY THE LIMITED PARTNERS.  The Limited Partners
               will, if Redemption Shares held by or issuable to such Limited
               Partners are included in the REIT Shares to which such
               registration, qualification or compliance is being effected,
               indemnify the Company, each of its trustees and officers, each
               underwriter, if any, of the REIT Shares covered by such
               registration statement, and each person who controls the Company
               within the meaning of the Securities Act against all claims,
               losses, damages, costs, expenses and liabilities whatsoever (or
               actions in respect thereof) arising out of or based on any untrue
               Statement (or alleged untrue statement) of a material fact
               contained in any such registration statement, prospectus,
               offering circular or other similar document (including any
               related registration statement, notification or the like)
               incident to any such registration, qualification or compliance,
               or based on any omission (or alleged omission) to state therein a
               material fact required to be stated therein or necessary to make
               the statements therein not misleading in light of the
               circumstances under which they were made, and will reimburse the
               Company, such trustees, officers, persons or underwriters for any
               legal or any other expenses reasonably incurred in connection
               with investigating or defending any such claim, loss, damage,
               costs, expense, liability or action, in each case to the extent,
               but only to the extent, that such untrue statement (or alleged
               untrue statement) or omission (or alleged omission) is made in
               such registration statement, prospectus, offering circular or
               other document in reliance upon and in conformity with written
               information furnished to the Company by an instrument duly
               executed by the Limited Partners and stated to be specifically
               for use therein or furnished by any Limited Partner to the
               Company in response to a request by the Company stating
               specifically that such information will be used by the Company
               therein, provided, however, that the foregoing indemnity
               agreement is subject to the condition that, such indemnity
               agreement shall not inure to the benefit of the Company or any
               underwriter insofar as it relates to any such untrue statements
               (or alleged untrue statements) or omission (or alleged omission)
               made in the preliminary prospectus or prospectus but eliminated
               or remedied in the Final Prospectus, if a copy of the Final
               Prospectus was not furnished to the person or entity asserting
               the loss, liability, claim or damage at or prior to the time such
               action is required by the Securities Act.

          vii. INDEMNIFICATION PROCEDURES.  Each party entitled to
               indemnification under this Section 8.06 (the "Indemnified Party")
               shall give notice to the party required to provide
               indemnification (the "Indemnifying Party") promptly after such
               Indemnified Party has actual knowledge of any claim as to which
               indemnity may be sought, and shall permit the Indemnifying Party
               to assume the defense of any such claim or any litigation
               resulting therefrom, provided that counsel for the Indemnifying
               Party, who shall conduct the defense of such claim or litigation,
               shall be approved by the Indemnified Party (whose approval shall
               not unreasonably be withheld).  The failure of any Indemnified
               Party 

                                       38
<PAGE>
 
               to give notice as provided herein shall relieve the Indemnifying
               Party of its obligations under this Agreement only to the extent
               that such failure to give notice shall materially prejudice the
               Indemnifying Party in the defense of any such claim or any such
               litigation. No Indemnifying Party, in the defense of any such
               claim or litigation, shall, except with the consent of each
               Indemnified Party, consent to entry of any judgment or enter into
               any settlement that attributes any liability to the Indemnified
               Party, unless the settlement includes as an unconditional term
               thereof the giving by the claimant or plaintiff to such
               Indemnified Party of a release from all liability in respect to
               such claim or litigation. If any such Indemnified Party shall
               have been advised by counsel chosen by it that there may be one
               or more legal defenses available to such Indemnified Party that
               are different from or additional to those available to the
               Indemnifying Party, the Indemnifying Party shall not have the
               right to assume the defense of such action on behalf of such
               Indemnified Party and will reimburse such Indemnified Party and
               any person controlling such Indemnified Party for the reasonable
               fees and expenses of any counsel retained by the Indemnified
               Party, it being understood that the Indemnifying Party shall not,
               in connection with any one action or separate but similar or
               related actions in the same jurisdiction arising out of the same
               general allegations or circumstances, be liable for the
               reasonable fees and expenses of more than one separate firm of
               attorneys for each Indemnified Party or controlling person (and
               all other Indemnified Parties and controlling persons which may
               be represented without conflict by one counsel), which firm shall
               be designated in writing by the Indemnified Party (or Indemnified
               Parties, if more than one Indemnified Party is to be represented
               by such counsel) to the Indemnifying Party. The Indemnifying
               Party shall not be subject to any liability for any settlement
               made without its consent, which shall not be unreasonably
               withheld.

          If the indemnification provided for in this Section 8.06 from the
Indemnifying Party is unavailable to an Indemnified Party hereunder in respect
of any losses, claims, damages, labilities or expenses referred to therein, then
the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages, labilities or expenses in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Parties in connection with the actions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations.  The relative fault of such Indemnifying Party and
Indemnified Parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such Indemnifying Party or
Indemnified Parties, and the parties, relative intent, knowledge, access to
information and opportunity to correct or prevent such action.  The amount paid
or payable by a party as a result of the losses claims, damages, liabilities and
expenses referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with any investigation
or proceeding.

          The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 8.06 were determined by pro rata
allocation or by any other method of 

                                       39
<PAGE>
 
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. No person guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.

 9.  TRANSFERS OF LIMITED PARTNERSHIP INTERESTS

     a.   PURCHASE FOR INVESTMENT.

          i.   Each Limited Partner hereby represents and warrants to the
               Company and to the Partnership that the acquisition of his
               Partnership Interest is made as a principal for his account for
               investment purposes only and not with a view to the resale or
               distribution of such Partnership Interest.

          ii.  Each Limited Partner agrees that he will not sell, assign or
               otherwise transfer his Partnership Interest or any fraction
               thereof, whether voluntarily or by operation of law or at
               judicial sale or otherwise, to any Person who does not make the
               representations and warranties to the Company set forth in
               Section 9.01(a) above and similarly agree not to sell, assign or
               transfer such Partnership Interest or fraction thereof to any
               Person who does not similarly represent, warrant and agree.

     b.   RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS.

          i.   Except as otherwise provided in Section 9.02(d) hereof and except
               for the pledge rights contained in Section 9.02(f) hereof, no
               Limited Partner (other than the General Partner) may offer, sell,
               assign, hypothecate, pledge or otherwise transfer his Limited
               Partnership Interest, in whole or in part, whether voluntarily or
               by operation of law or at judicial sale or otherwise
               (collectively, a "Transfer") without the written consent of the
               General Partner, which consent may be withheld in the reasonable
               discretion of the General Partner.  The General Partner may
               require, as a condition of any Transfer, that the transferor
               assume all costs incurred by the Partnership in connection
               therewith.

          ii.  No Limited Partner may effect a Transfer of his Limited
               Partnership Interest, in whole or in part, if, in the opinion of
               legal counsel for the Partnership, such proposed Transfer would
               require the registration of the Limited Partnership Interest
               under the Securities Act or would otherwise violate any
               applicable federal or state  securities or "Blue Sky" law
               (including investment suitability standards).

          iii  No transfer by a Limited Partner of his Partnership Units, in
               whole or in part, may be made to any Person if (i) in the opinion
               of legal counsel for the Partnership, the transfer would result
               in the Partnership's being treated as an association taxable as a
               corporation (other than a qualified REIT subsidiary within the
               meaning of Section 856(i) of the Code), or (ii) such transfer is
               effectuated through an "established securities market" or a
               "secondary market (or the substantial equivalent thereof)" within
               the meaning of Section 7704 of the Code.

                                       40
<PAGE>
 
          iv.  Section 9.02(a) shall not apply to the following transactions,
               except that the General Partner may require that the transferor
               assume all costs incurred by the Partnership in connection
               therewith:

               (1)  any Transfer by a Limited Partner pursuant to the exercise
                    of its Redemption Right under Section 8.04 hereof;

               (2)  any Transfer by a Limited Partner that is a corporation or
                    other business entity to any of its Affiliates or
                    subsidiaries or to any successor in interest of such Limited
                    Partner; or

               (3)  any donative Transfer (including for such purposes transfers
                    at death) by an individual Limited Partner to his immediate
                    family members or any trust in which the individual or his
                    immediate family members own, collectively, 100% of the
                    beneficial interests. For purposes of this Section
                    9.02(d)(iii), the term "immediate family member" shall be
                    deemed to include only an individual Limited Partner's
                    spouse, children,  grandchildren, nieces and nephews,

provided that such Limited Partner shall give 30 days notice of any transfer
- -------------                                                               
under this Section 9.02(d) to the General Partner so that a determination can be
made whether the transfer otherwise is prohibited under Sections 9.02(b) or
9.02(c).
          v.   Any Transfer in contravention of any of the provisions of this
               Article IX shall be void and ineffectual and shall not be binding
               upon, or recognized by, the Partnership.

          vi.  Notwithstanding Section 9.01(a), during the period in which all
               or a portion of a Limited Partner's Partnership Units are
               restricted from transfer pursuant to Article 9 hereof, the
               Limited Partner may pledge any or all of its Partnership Units as
               collateral in any borrowing from an institutional lender upon
               receiving the consent of the General Partner to such pledge.  The
               Limited Partner must seek such consent in writing and provide to
               the General Partner complete copies of the commitment letter, all
               loan documentation and any other materials deemed necessary in
               the General Partner's discretion.  Upon granting its consent, the
               General Partner will agree to issue a letter to such lender
               agreeing to exchange or redeem such Limited Partner's Partnership
               Units for the Cash Amount upon a default by the applicable
               Limited Partner under such loan if (i) the lender and the
               applicable Limited Partner each request that such letter be
               issued; (ii) such loan transaction is deemed by the General
               Partner to be arm's-length and not designed to circumvent the
               Agreement or restrictions contained herein; and (iii) the
               applicable Limited Partner acknowledges that any such exchange or
               redemption could potentially cause a taxable event to such
               Limited Partner.  In no event will the Company or the Partnership
               guarantee or be liable to the lender or others for any such
               permissible loans wherein the Limited Partner's Partnership Units
               are used as collateral.

                                       41
<PAGE>
 
         vii.  No transfer of any Partnership Units may be made to a lender to
               the Partnership or to any Person who is related (within the
               meaning of Regulations Section 1.752-4(b)) to any lender to the
               Partnership whose loan constitutes a non-recourse liability
               (within the meaning of Regulations Section 1.752-1(a)(2)),
               without the consent of the General Partner, which may be withheld
               in its sole and absolute discretion; PROVIDED, HOWEVER, that as a
               condition to such consent the lender will be required to enter
               into an arrangement with the Partnership and the General Partner
               to exchange or redeem for the Cash Amount any Partnership Units
               in which a security interest is held simultaneously with the time
               at which such lender would be deemed to be a partner in the
               Partnership for purposes of allocating liabilities to such lender
               under Section 752 of the Code.

         viii. No Limited Partner may effect a Transfer of any warrant held by
               such Limited Partner, in whole or in part, if, in the opinion of
               legal counsel for the Partnership, such proposed Transfer would
               result in the Partnership's being treated as an association
               taxable as a corporation (other than a qualified REIT subsidiary
               within the meaning of Section 856(i) of the Code), determined as
               if such warrant had been exercised.  Such Limited Partner shall
               give 30 days notice of any transfer under this Section 9.02(d) to
               the General Partner so that a determination can be made whether
               the transfer otherwise is prohibited under Sections 9.02(b) or
               9.02(c).

     c.  ADMISSION OF SUBSTITUTE LIMITED PARTNER.

         i.    Subject to the other provisions of this Article IX, an assignee
               of the Limited Partnership Interest of a Limited Partner (which
               shall be understood to include any purchaser, transferee, donee,
               or other recipient of any disposition of such Limited Partnership
               Interest) shall be deemed admitted as a Limited Partner of the
               Partnership only upon the satisfactory completion of the
               following:

               (1)  The assignee shall have accepted and agreed to be bound by
                    the terms and provisions of this Agreement by executing a
                    counterpart or an amendment thereof, including a revised
                    EXHIBIT A, and such other documents or instruments as the
                    General Partner may require in order to effect the admission
                    of such Person as a Limited Partner.

               (2)  To the extent required, an amended Certificate evidencing
                    the admission of such Person as a Limited Partner shall have
                    been signed, acknowledged and filed for record in accordance
                    with the Act.

               (3)  The assignee shall have delivered a letter containing the
                    representation set forth in Section 9.01(a) hereof and the
                    agreement set forth in Section 9.01(b) hereof.

                                       42
<PAGE>
 
               (4)  If the assignee is a corporation, partnership or trust, the
                    assignee shall have provided the General Partner with
                    evidence satisfactory to counsel for the Partnership of the
                    assignee's authority to become a Limited Partner under the
                    terms and provisions of this Agreement.

               (5)  The assignee shall have executed a power of attorney
                    containing the terms and provisions set forth in Section
                    8.02 hereof.

               (6)  The assignee shall have paid all reasonable legal fees of
                    the Partnership and the General Partner and filing and
                    publication costs in connection with his substitution as a
                    Limited Partner.

               (7)  The assignee has obtained the prior written consent of the
                    General Partner to its admission as a Substitute Limited
                    Partner, which consent may be given or denied in the
                    exercise of General Partner's sole and absolute discretion.

               (8)  In the case of an assignee of the Limited Partnership
                    Interest of the General Partner except in the case of a
                    transaction described in Section 7.01(c) or (d) (in which
                    case no consent is  necessary), the assignee has obtained
                    the prior written consent of a majority-in-interest of the
                    Limited Partners (other than the General Partner) to its
                    admission as a Substitute Limited Partner, which consent may
                    be given or denied in the exercise of such Limited Partners'
                    sole and absolute discretion.

          ii.  For the purpose of allocating profits and losses and distributing
               cash received by the Partnership, a Substitute Limited Partner
               shall be treated as having become, and appearing in the records
               of the Partnership as, a Partner upon the filing of the
               Certificate described in Section 9.03(a)(ii) hereof or, if no
               such filing is required, the later of the date specified in the
               transfer documents or the date on which the General Partner has
               received all necessary instruments of transfer and substitution.

          iii. The General Partner shall cooperate with the Person seeking to
               become a Substitute Limited Partner by preparing the
               documentation required by this Section and making all official
               filings and publications. The Partnership shall take all such
               action as promptly as practicable after the satisfaction of the
               conditions in this Article IX to the admission of such Person as
               a Limited Partner of the Partnership.

     d.   RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS.

          i.   Subject to the provisions of Sections 9.01 and 9.02 hereof,
               except as required by operation of law, the Partnership shall not
               be obligated for any purposes whatsoever to recognize the
               assignment by any Limited Partner of his Partnership Interest
               until the Partnership has received notice thereof.

                                       43
<PAGE>
 
          ii.  Any Person who is the assignee of all or any portion of a Limited
               Partner's Limited Partnership Interest, but does not become a
               Substitute Limited Partner and desires to make a further
               assignment of such Limited Partnership Interest, shall be subject
               to all the provisions of this Article IX to the same extent and
               in the same manner as any Limited Partner desiring to make an
               assignment of his Limited Partnership Interest.

     e.   EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A LIMITED
          PARTNER. The occurrence of an Event of Bankruptcy as to a Limited
          Partner, the death of a Limited Partner or a final adjudication that a
          Limited Partner is incompetent (which term shall include, but not be
          limited to, insanity) shall not cause the termination or dissolution
          of the Partnership, and the business of the Partnership shall continue
          if an order for relief in a bankruptcy proceeding is entered against a
          Limited Partner. The trustee or receiver of his estate or, if he dies,
          his executor, administrator or trustee or, if he is finally
          adjudicated incompetent, his committee, guardian or conservator shall
          have the rights of such Limited Partner for the purpose of settling or
          managing his estate property and such power as the bankrupt, deceased
          or incompetent Limited Partner possessed to assign all or any part of
          his Partnership Interest and to join with the assignee in satisfying
          conditions precedent to the admission of the assignee as a Substitute
          Limited Partner.

     f.   JOINT OWNERSHIP OF INTERESTS. A Partnership Interest may be acquired
          by two individuals as joint tenants with right of survivorship,
          provided that such individuals either are married or are related and
          share the same home as tenants in common. The written consent or vote
          of both owners of any such jointly held Partnership Interest shall be
          required to constitute the action of the owners of such Partnership
          Interest; provided, however, that the written consent of only one
          joint owner will be required if the Partnership has been provided with
          evidence satisfactory to the counsel for the Partnership that the
          actions of a single joint owner can bind both owners under the
          applicable laws of the state of residence of such joint owners. Upon
          the death of one owner of a Partnership Interest held in a joint
          tenancy with a right of survivorship, the Partnership Interest shall
          become owned solely by the survivor as a Limited Partner and not as an
          assignee. The Partnership need not recognize the death of one of the
          owners of a jointly-held Partnership Interest until it shall have
          received notice of such death. Upon notice to the General Partner from
          either owner, the General Partner shall cause the Partnership Interest
          to be divided into two equal Partnership Interests, which shall
          thereafter be owned separately by each of the former owners.

 10. BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS

     a.   BOOKS AND RECORDS. At all times during the continuance of the
          Partnership, the Partners shall keep or cause to be kept at the
          Partnership's specified office true and complete books of account in
          accordance with generally accepted accounting principles, including:
          (a) a current list of the full name and last known business address of
          each Partner, (b) a copy of the Certificate of Limited Partnership and
          all certificates of amendment thereto, (c) copies of the Partnership's
          federal, state and local income tax returns and reports, (d) copies of
          the Agreement and any financial statements of the Partnership for the
          three most 

                                       44
<PAGE>
 
          recent years and (e) all documents and information required under the
          Act. Any Partner or his duly authorized representative, upon paying
          the costs of collection, duplication and mailing, shall be entitled to
          inspect or copy such records during ordinary business hours.

     b.   CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS.

          i.   All funds of the Partnership not otherwise invested shall be
               deposited in one or more accounts maintained in such banking or
               brokerage institutions as the General Partner shall determine,
               and withdrawals shall be made only on such signature or
               signatures as the General Partner may, from time to time,
               determine.

          ii.  All deposits and other funds not needed in the operation of the
               business of the Partnership may be invested by the General
               Partner in investment grade instruments (or investment companies
               whose portfolio consists primarily thereof), government
               obligations, certificates of deposit, bankers' acceptances and
               municipal notes and bonds. The funds of the Partnership shall not
               be commingled with the funds of any other Person except for such
               commingling as may necessarily result from an investment in those
               investment companies permitted by this Section 10.02(b).

     c.   FISCAL AND TAXABLE YEAR.  The fiscal and taxable year of the
          Partnership shall be the calendar year.

     d.   ANNUAL TAX INFORMATION AND REPORT. Within 90 days after the end of
          each fiscal year of the Partnership, the General Partner shall furnish
          to each person who was a Limited Partner at any time during such year
          the tax information necessary to file such Limited Partner's
          individual tax returns as shall be reasonably required by law.

     e.   TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS.

          i.   The General Partner shall be the Tax Matters Partner of the
               Partnership within the meaning of Section 6231(a)(7) of the Code.
               As Tax Matters Partner, the General Partner shall have the right
               and obligation to take all actions authorized and required,
               respectively, by the Code for the Tax Matters Partner. The
               General Partner shall have the right to retain professional
               assistance in respect of any audit of the Partnership by the
               Service and all out-of-pocket expenses and fees incurred by the
               General Partner on behalf of the Partnership as Tax Matters
               Partner shall constitute Partnership expenses. In the event the
               General Partner receives notice of a final Partnership adjustment
               under Section 6223(a)(2) of the Code, the General Partner shall
               either (i) file a court petition for judicial review of such
               final adjustment within the period provided under Section 6226(a)
               of the Code, a copy of which petition shall be mailed to all
               Limited Partners on the date such petition is filed, or (ii) mail
               a written notice to all Limited Partners, within such period,
               that describes the General Partner's reasons for determining not
               to file such a petition.

                                       45
<PAGE>
 
          ii.  All elections required or permitted to be made by the Partnership
               under the Code or under any applicable state law shall be made by
               the General Partner in its sole discretion.

          iii. In the event of a transfer of all or any part of the Partnership
               Interest of any Partner, the Partnership, at the option of the
               General Partner, may elect pursuant to Section 754 of the Code to
               adjust the basis of the Properties. Notwithstanding anything
               contained in Article V of this Agreement, any adjustments made
               pursuant to Section 754 shall affect only the successor in
               interest to the transferring Partner and in no event shall be
               taken into account in establishing, maintaining or computing
               Capital Accounts for the other Partners for any purpose under
               this Agreement.  Each Partner will furnish the Partnership with
               all information necessary to give effect to such election.

     f.   REPORTS TO LIMITED PARTNERS.

          i.   As soon as practicable after the close of each fiscal quarter,
               but in no event later than 45 days (other than the last quarter
               of the fiscal year), the General Partner shall cause to be mailed
               to each Limited Partner a quarterly report containing financial
               statements of the Partnership, or of the Company if such
               statements are prepared solely on a consolidated basis with the
               Company, for such fiscal quarter, presented in accordance with
               generally accepted accounting principles.  As soon as practicable
               after the close of each fiscal year, the General Partner shall
               cause to be mailed to each Limited Partner an annual report
               containing financial statements of the Partnership, or of the
               Company if such statements are prepared solely on a consolidated
               basis with the Company for such fiscal year, prepared in
               accordance with generally accepted accounting principles.  The
               annual financial statements shall be audited by accountants
               selected by the General Partner.

          ii.  Any Partner shall further have the right to a private audit of
               the books and records of the Partnership, provided such audit is
               made for Partnership purposes, at the expense of the Partner
               desiring it and is made during normal business hours.

 11. AMENDMENT OF AGREEMENT;
              SALE OF ALL OR SUBSTANTIALLY ALL OF COMPANY'S ASSETS

     a.   AMENDMENT OF AGREEMENT. The General Partner, without the consent of
          the Limited Partners, may amend this Agreement in any respect;
          provided, however, that the following amendments shall require the
          consent of Limited Partners (other than the Company in its capacity as
          a Limited Partner) holding at least two-thirds (2/3rds) of the
          Percentage Interests of the Limited Partners (other than the Company
          in its capacity as a Limited Partner):

                                       46
<PAGE>
 
          i.   any amendment affecting the operation of the Conversion Factor or
               Redemption Right (except as provided in Section 8.04(d) hereof)
               in a manner adverse to the Limited Partners;

          ii.  any amendment that would adversely affect the rights of the
               Limited Partners to receive the distributions payable to them
               hereunder other than with respect to the issuance of additional
               Partnership Units pursuant to Section 4.02 of this Agreement;

          iii. any amendment that would alter the Partnership's allocations of
               Profit and Loss to the Limited Partners in a manner adverse to
               Limited Partners, other than with respect to the issuance of
               additional Partnership Units pursuant to Section 4.02 of this
               Agreement;

          iv.  any amendment that would impose on the Limited Partners any
               obligation to make additional Capital Contributions to the
               Partnership;

          v.   any amendment to Section 8.06 above in a manner adverse to any
               Limited Partner; and

          vi.  any amendment to this Article XI.

     b.   SALE OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF THE PARTNERSHIP;
          CHANGE IN CONTROL. The General Partner, without the consent of the
          Limited Partners (including the Company in its capacity as a Limited
          Partner) holding 66.67% of the Percentage Interests of the Limited
          Partners (including the Company in its capacity as a Limited Partner),
          may not sell, transfer, or convey all or substantially all of the
          assets of the Partnership, including, without limitation, a sale,
          assignment or transfer to another public or private company, or
          approve a merger or consolidation of the Partnership.

 12. GENERAL PROVISIONS

     a.   NOTICES. All communications required or permitted under this Agreement
          shall be in writing and shall be deemed to have been given when
          delivered personally or upon deposit in the United States mail,
          registered, postage prepaid return receipt requested, to the Partners
          at the addresses set forth in EXHIBIT A attached hereto; provided,
          however, that any Partner may specify a different address by notifying
          the General Partner in writing of such different address. Notices to
          the Partnership shall be delivered at or mailed to its specified
          office.

     b.   SURVIVAL OF RIGHTS. Subject to the provisions hereof limiting
          transfers, this Agreement shall be binding upon and inure to the
          benefit of the Partners and the Partnership and their respective legal
          representatives, successors, transferees and assigns.

     c.   ADDITIONAL DOCUMENTS. Each Partner agrees to perform all further acts
          and execute, swear to, acknowledge and deliver all further documents
          which may be reasonable, necessary, appropriate or desirable to carry
          out the provisions of this Agreement or the Act.

                                       47
<PAGE>
 
     d.   SEVERABILITY. If any provision of this Agreement shall be declared
          illegal, invalid, or unenforceable in any jurisdiction, then such
          provision shall be deemed to be severable from this Agreement (to the
          extent permitted by law) and in any event such illegality, invalidity
          or unenforceability shall not affect the remainder hereof.

     e.   ENTIRE AGREEMENT. This Agreement and exhibits attached hereto
          constitute the entire Agreement of the Partners and supersede all
          prior written agreements and prior and contemporaneous oral
          agreements, understandings and negotiations with respect to the
          subject matter hereof.

     f.   PRONOUNS AND PLURALS. When the context in which words are used in the
          Agreement indicates that such is the intent, words in the singular
          number shall include the plural and the masculine gender shall include
          the neuter or female gender as the context may require.

     g.   HEADINGS. The Article headings or sections in this Agreement are for
          convenience only and shall not be used in construing the scope of this
          Agreement or any particular Article.

     h.   COUNTERPARTS. This Agreement may be executed in several counterparts,
          each of which shall be deemed to be an original copy and all of which
          together shall constitute one and the same instrument binding on all
          parties hereto, notwithstanding that all parties shall not have signed
          the same counterpart.

     i.   GOVERNING LAW.  This Agreement shall be governed by and construed in
          accordance with the laws of the State of Delaware.

     j.   GUARANTY BY COMPANY. The Company unconditionally and irrevocably
          guarantees to the Limited Partners the performance by the Company of
          its respective obligations as the General Partner and a Limited
          Partner under this Agreement. This guaranty is exclusively for the
          benefit of the Limited Partners and shall not extend to the benefit of
          any creditor of the Partnership.


                  (Remainder of Page Intentionally Left Blank)

                                       48
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Agreement of Limited Partnership, all as of the ___ day of
February, 1998.

               GENERAL PARTNER

               CAPITAL AUTOMOTIVE REIT, a
               Maryland real estate investment trust

               By:  ______________________
               Its: _______________________


               LIMITED PARTNERS


               By:  ______________________
               Its: _______________________


          [to be added]

 

                                       49
<PAGE>
 
                                   EXHIBIT A
                             SCHEDULE OF PARTNERS,
                        NUMBER OF PARTNERSHIP UNITS AND
               THE AGREED VALUE OF NON-CASH CAPITAL CONTRIBUTIONS





                                      A-1
<PAGE>
 
                                   EXHIBIT B
                               INITIAL PROPERTIES







                                      B-1
<PAGE>
 
                                   EXHIBIT C
                     NOTICE OF EXERCISE OF REDEMPTION RIGHT


In accordance with Section 8.04 of the Agreement of Limited Partnership (the
"Agreement") of Capital Automotive L.P., the undersigned hereby irrevocably (i)
presents for redemption ________ units of limited partnership interest ("Units")
in Capital Automotive L.P. (the "Partnership") in accordance with the terms of
the Agreement and the "Redemption Right" referred to in Section 8.04 thereof,
(ii) surrenders such Units and all right, title and interest therein, (iii)
surrenders herewith any certificate or other writing evidencing the Units (and
requests that any Units so evidenced that are not redeemed be evidenced by the
issuance of a new certificate or writing) and (iv) directs that the "Cash
Amount" or "REIT Shares Amount" (as determined by the General Partner), as
defined in the Agreement, deliverable upon exercise of the Redemption Rights be
delivered to the address specified below, and if REIT Shares are to be
delivered, such REIT Shares be registered or placed in the name(s) and at the
address(es) specified below.

          Dated: __________________________

          Name of Limited Partner:

          _________________________________
          (Signature of Limited Partner)

          _________________________________
          (Mailing Address)

          _________________________________
          (City) (State) (Zip Code)

          Signature Guaranteed by:


          _________________________________

          If REIT Shares are to be issued, issue to:
          _________________________________
          _________________________________
          _________________________________

          Please insert social security or identifying number:

          _________________________________

                                      C-1

<PAGE>
 
                                 EXHIBIT 10.3


                           CAPITAL AUTOMOTIVE GROUP
                          1998 Equity Incentive Plan


Purpose         Capital Automotive REIT, a Maryland real estate investment trust
                (the "REIT" or the "Company"), and the Capital Automotive, L.P.
                (the "Operating Partnership") wish to recruit, reward, and
                retain employees and outside trustees. To further these
                objectives, the Company and the Operating Partnership hereby set
                forth the Capital Automotive Group 1998 Equity Incentive Plan
                (the "Plan"), effective as of the effective date (the "Effective
                Date") of the Company's initial public offering ("IPO"), to
                provide options ("Options") to employees and outside trustees to
                purchase common shares of beneficial interest of the Company
                (the "Common Shares") and/or units of limited partnership
                interest in the Operating Partnership (the "Units").

Optionees       All Employees of the REIT, its Eligible Subsidiaries, and the
                Operating Partnership are eligible for option grants under this
                Plan, as are the trustees of the REIT (except for Messrs.
                Pohanka and Rosenthal) and the directors of the Eligible
                Subsidiaries who are not employees ("Eligible Trustees").
                Eligible employees and trustees become optionees when the
                Administrator grants them an option under this Plan. The
                Administrator may also grant options to certain other service
                providers. The term optionee also includes, where appropriate, a
                person authorized to exercise an Option in place of the original
                recipient.

                Employee means any person employed as a common law employee of
                the Company, its Eligible Subsidiaries, or the Operating
                Partnership.

Administrator   The Administrator will be the Executive Compensation Committee
                of the Board of Trustees of the REIT (the "Compensation
                Committee"). The Board may also act under the Plan as though it
                were the Compensation Committee.

               The Administrator is responsible for the general operation and
               administration of the Plan and for carrying out its provisions
               and has full 
<PAGE>
 
               discretion in interpreting and administering the provisions of
               the Plan. Subject to the express provisions of the Plan, the
               Administrator may exercise such powers and authority of the Board
               as the Administrator may find necessary or appropriate to carry
               out its functions. The Administrator may delegate its functions
               (other than those described in the Granting of Options section)
               to officers or employees of the REIT with respect to the REIT and
               to managers or employees of the Operating Partnership with
               respect to the Operating Partnership.

               The Administrator's powers will include, but not be limited to,
               the power to amend, waive, or extend any provision or limitation
               of any Option. The Administrator may act through meetings of a
               majority of its members or by unanimous consent.

Granting of    Subject to the terms of the Plan, the Administrator will, in
Options        its sole discretion, determine

                    the recipients of option grants,

                    the terms of such grants,

                    the schedule for exercisability (including any requirements
                    that the optionee or the Company satisfy performance
                    criteria),

                    the time and conditions for expiration of the Option, and

                    the form of payment due upon exercise.

               The Administrator's determinations under the Plan need not be
               uniform and need not consider whether possible optionees are
               similarly situated.

               All employees, Eligible Trustees, and other persons selected to
               receive an option may receive options to acquire Units ("Unit
               Options").  In addition, employees of the REIT or any Eligible
               Subsidiary may receive "incentive stock options" ("ISOs") within
               the meaning of Section 422 of the Internal Revenue Code of 1986,
               as amended from time to time (the "Code"), or the corresponding
               provision of any subsequently enacted tax statute.
<PAGE>
 
                The Administrator may also grant Options in substitution for
                options held by individuals who become Employees of the Company,
                the Operating Partnership, or an Eligible Subsidiary as a result
                of the granting entity's acquiring the individual's employer. If
                necessary to conform the Options to the options for which they
                are substitutes, the Administrator may grant substitute Options
                under terms and conditions that vary from those the Plan
                otherwise requires.

Date of Grant   The Date of Grant will be the date as of which the Administrator
                awards an Option to an optionee, as specified in the
                Administrator's minutes.

Exercise Price  The Exercise Price is the value of the consideration that an
                optionee must provide under an Option Agreement in exchange for
                one Common Share or one Unit. The Administrator will determine
                the Exercise Price under each Option. The Administrator may set
                the Exercise Price of an Option without regard to the Exercise
                Price of any other Options granted at the same or any other
                time.

                The Exercise Price per share for ISOs may not be less than 100%
                of the Fair Market Value (on the Date of Grant) of a Common
                Share covered by the Option; provided, however, that if the
                                             --------  -------       
                employee would otherwise be barred from receiving an ISO by
                reason of the provisions of Code Sections 422(b)(6) and 424(d)
                (relating to more-than-10%-stock-owners), the Exercise Price of
                an Option that is intended to be an ISO may not be less than
                110% of the Fair Market Value (on the Date of Grant) of a Common
                Share covered by the Option. The Exercise Price per Unit for
                Unit Options may not be less than 100% of the Fair Market Value
                of a Unit on the Date of Grant.

Fair Market     The Administrator will determine Fair Market Value for purposes 
Value           of the Plan as follows:

                    For Common Shares:

                    if the Common Shares are traded on a national securities
                    exchange, the closing sale price on that date;

                    if the Common Shares are not traded on any such exchange,
                    the closing sale price as reported by the National
                    Association of 
<PAGE>
 
                    Securities Dealers, Inc. Automated Quotation System
                    ("Nasdaq") for such date;

                    if no such closing sale price information is available, the
                    average of the closing bid and asked prices as reported by
                    Nasdaq for such date; or

                    if there are no such closing bid and asked prices, the
                    average of the closing bid and asked prices as reported by
                    any other commercial service for such date.

                    For any date that is not a trading day, the Fair Market
                    Value of a Common Share for such date shall be determined by
                    using the closing sale price or the average of the closing
                    bid and asked prices, as appropriate, for the immediately
                    preceding trading day.

                    For Units:

                    The Fair Market Value of a Unit will equal the Fair Market
                    Value of a Common Share.

                The Fair Market Value will be deemed to equal the IPO price for
                any Options granted as of the date of consummation of the IPO.

Exercisability  The Administrator will determine the times and conditions for
                exercise of each Option but may not extend the period for
                exercise beyond the tenth anniversary of an Option's Date of
                Grant.

                Options will become exercisable at such times and in such manner
                as the Administrator determines and the Option Agreement
                indicates; provided, however, that the Administrator may, on
                           --------  -------  
                such terms and conditions as it determines appropriate,
                accelerate the time at which the optionee may exercise any
                portion of an Option. In addition, the Administrator may delay
                or prohibit the exercise of an Option if it would adversely
                affect the Company's REIT status or would cause the Operating
                Partnership to be treated as an association taxable as a
                corporation (other than a qualified REIT subsidiary within the
                meaning of section 856(i) of the Code).
<PAGE>
 
                No portion of an Option that is unexercisable at an optionee's
                termination of employment will thereafter become exercisable,
                unless the Option Agreement provides otherwise, either initially
                or by amendment.

Change of       Upon a Change of Control (as defined below), all Options will
Control         become fully exercisable. A Change of Control for this purpose
                means the occurrence, after the Company's initial public
                offering of any one or more of the following events:

                     a person, entity, or group (other than the Company, the
                     Operating Partnership, any subsidiary of either, any
                     Company benefit plan, or any underwriter temporarily
                     holding securities for an offering of such securities)
                     acquires ownership of more than 40% of the undiluted total
                     voting power of the Company's then-outstanding securities
                     eligible to vote to elect members of the Board ("Company
                     Voting Securities");

                     consummation of a merger or consolidation of the Company
                     into any other entity -- unless the holders of the Company
                     Voting Securities outstanding immediately before such
                     consummation, together with any trustee or other fiduciary
                     holding securities under a Company benefit plan, hold
                     securities that represent immediately after such merger or
                     consolidation more than 60% of the combined voting power of
                     the then outstanding voting securities of either the
                     Company or the other surviving entity or its parent; or

                     the stockholders of the Company approve (i) a plan of
                     complete liquidation or dissolution of the Company or (ii)
                     an agreement for the Company's sale or disposition of all
                     or substantially all the Company's assets, and such
                     liquidation, dissolution, sale, or disposition is
                     consummated.

                     Even if other tests are met, a Change of Control has not
                     occurred under any circumstance in which the Company files
                     for bankruptcy protection or is reorganized following a
                     bankruptcy filing.
<PAGE>
 
                The Adjustment Upon Changes in Shares and Units provisions will
                also apply if the Change of Control is a Substantial Operational
                Change (as defined in those provisions).

Limitation on   An Option granted to an employee will be an ISO only to the
ISOs            extent that the aggregate Fair Market Value (determined at the
                Date of Grant) of the shares with respect to which ISOs are
                exercisable for the first time by the optionee during any
                calendar year (under the Plan and all other plans of the Company
                and its subsidiary corporations, within the meaning of Code
                Section 422(d)), does not exceed $100,000. This limitation will
                be applied by taking Options into account in the order in which
                such Options were granted.

Trustee         As of each Eligible Trustee's initial election or appointment as
Formula         an Eligible Trustee, he will receive a Formula Option to
Grants          purchase 15,000 Units.

     Exercise   The Exercise Price of each Option granted to an Eligible Trustee
     Price      will be the Fair Market Value on the Date of Grant.

     Exercise   A Formula Option will become exercisable for one-third of the
     Schedule   Units it covers six months after the Date of Grant, for another
                one-third on the first anniversary of the Date of Grant, and for
                the remaining one-third on the second anniversary of the Date of
                Grant. Formula Options will be forfeited to the extent they are
                not then exercisable if a Trustee resigns or fails to be
                reelected as a Trustee.

Method of       To exercise any exercisable portion of an Option, the optionee
Exercise        must:

                    Deliver a written notice of exercise to the Secretary of the
                    Company (or to whomever the Administrator designates), in a
                    form complying with any rules the Administrator may issue,
                    signed by the optionee, and specifying the number of Common
                    Shares or Units underlying the portion of the Option the
                    optionee is exercising;

                    Pay the full Exercise Price by cashier's or certified check
                    for the Common Shares or Units with respect to which the
                    Option is being exercised, unless the Administrator consents
                    to another form of
<PAGE>
 
                    payment (which could include the use of Common Shares or
                    Units); and

                    Deliver to the Administrator such representations and
                    documents as the Administrator, in its sole discretion, may
                    consider necessary or advisable.

               Payment in full of the Exercise Price need not accompany the
               written notice of exercise with respect to Common Shares provided
               the notice directs that the certificates for the shares issued
               upon the exercise be delivered to a licensed broker acceptable to
               the Company as the agent for the individual exercising the option
               and at the time the certificates are delivered to the broker, the
               broker will tender to the Company cash or cash equivalents
               acceptable to the Company and equal to the Exercise Price.

               If the Administrator agrees to payment of Options for Common
               Shares through tender to the Company of Common Shares, the
               individual must have held the shares being tendered for at least
               six months at the time of surrender.  Common Shares offered as
               payment will be valued, for purposes of determining the extent to
               which the optionee has paid the Exercise Price, at their Fair
               Market Value on the date of exercise.  The Administrator may
               also, in its discretion, accept attestation of ownership of
               Common Shares and issue a net number of shares upon Option
               exercise.

               The Company or the Operating Partnership may use the
               consideration it receives from the optionee for general corporate
               or partnership purposes.

Special        The Administrator may cause the Operating Partnership to
Unit Option    distribute cash to an optionee exercising a Unit Option equal to
Procedure      the excess of
         
                    the aggregate amount the Operating Partnership will credit
                    to the optionee's capital account in connection with the
                    Option exercise, over

                    the aggregate Exercise Price the optionee pays on exercise.
<PAGE>
 
                The Administrator may require the optionee to immediately
                contribute this cash distribution to the Operating Partnership
                in exchange (with the Exercise Price) for the number of Units
                for which the optionee is exercising the Option.

Option          No one may exercise an Option more than ten years after its Date
Expiration      of Grant (or five years, for an ISO granted to a more-than-10%
                shareholder). Unless the Option Agreement provides otherwise,
                either initially or by amendment, no one may exercise an Option
                after the first to occur of:

     Employment     The 90th day after the date of termination of employment
     Termination    (other than for death or disability) in the case of ISOs and
                    the date of termination of employment (other than for death
                    or disability) in the case of Unit Options, where
                    termination of employment means the time when the employer-
                    employee or other service-providing relationship between the
                    employee and the Company ends for any reason, including
                    retirement. Unless the Option Agreement provides otherwise,
                    termination of employment does not include instances in
                    which the Company immediately rehires a common law employee
                    as an independent contractor or in which the Company or the
                    Operating Partnership hires someone employed by the other.
                    The Administrator, in its sole discretion, will determine
                    all questions of whether particular terminations or leaves
                    of absence are terminations of employment;

     Disability     For disability, the earlier of (i) the first anniversary of
                    the optionee's termination of employment for disability and
                    (ii) thirty (30) days after the optionee no longer has a
                    disability, where disability means the inability to engage
                    in any substantial gainful activity by reason of any
                    medically determinable physical or mental impairment that
                    can be expected to result in death or that has lasted or can
                    be expected to last for a continuous period of not less than
                    twelve months; or

     Death          The date twelve months after the optionee's death.

               If exercise is permitted after termination of employment, the
               Option will nevertheless expire as of the date that the former
               employee violates any 
<PAGE>
 
               covenant not to compete in effect between the Company and the
               former employee. In addition, an optionee who exercises an Option
               more than 90 days after termination of employment with the
               Company and/or the Eligible Subsidiaries will only receive ISO
               treatment to the extent permitted by law, and remaining an
               employee of the Operating Partnership or an independent
               contractor to the Company will not preserve any ISO treatment in
               that situation.

               Nothing in this Plan extends the term of an Option beyond the
               tenth anniversary of its Date of Grant, nor does anything in this
               Option Expiration section make an Option exercisable that has not
               otherwise become exercisable.

Option         Option Agreements will set forth the terms of each Option and
Agreement      will include such terms and conditions, consistent with the Plan,
               as the Administrator may determine are necessary or advisable. To
               the extent the agreement is inconsistent with the Plan, the Plan
               will govern. The Option Agreements may contain special rules.

Shares and     The Common Shares will come from either authorized but unissued
Units Subject  shares or from previously issued shares that the Company
to Plan        reacquires, including shares it purchases on the open market. The
               Units will come directly or indirectly from the Operating
               Partnership as indicated below. If any Option expires, is
               canceled, or terminates for any other reason, the Common Shares
               or Units available under that Option will again be available for
               the granting of new Options (but will be counted against that
               calendar year's limit for a given individual).

               Except as adjusted below under Adjustments upon Changes in Shares
               and Units,

                    the aggregate number of Common Shares and Units that the
                    Plan may issue under the Options (whether ISOs or Unit
                    Options) may not exceed [8% of the Common Shares outstanding
                    on the closing of the IPO (including exercise in full of the
                    underwriters' over-allotment],

                    the aggregate number of Common Shares that the Plan may
                    issue under ISOs may not exceed 1,000,000 shares, and
<PAGE>
 
                    the maximum number of Common Shares that may be subject to
                    ISOs granted to a single individual in the calendar year of
                    the IPO may not exceed 60,000 and may not exceed 120,000 in
                    subsequent calendar years.

               No adjustment will be made for a dividend or other right for
               which the record date precedes the date of exercise.

               The optionee will have no rights of a shareholder or limited
               partner with respect to the Common Shares or Units subject to an
               Option except to the extent that the Company has issued
               certificates for such shares or documents indicating purchase of
               a Unit upon the exercise of the Option.

               The Company will not issue fractional shares or units pursuant to
               the exercise of an Option, but the Administrator may, in its
               discretion, direct the Company to make a cash payment in lieu of
               fractional shares or units.

PERSON WHO     During the optionee's lifetime, only the optionee or his duly
MAY EXERCISE   appointed guardian or personal representative may exercise the
               Options. After his death, his personal representative or any    
               other person authorized under a will or under the laws of       
               descent and distribution may exercise any then exercisable      
               portion of an Option. If someone other than the original        
               recipient seeks to exercise any portion of an Option, the       
               Administrator may request such proof as it may consider         
               necessary or appropriate of the person's right to exercise the  
               Option.                                                         
                                                                               

ADJUSTMENTS    Subject to any required action by the Company or the Operating
UPON CHANGES   Partnership (which each shall promptly take) or its shareholders
IN SHARES OR   or partners, and subject to the provisions of applicable 
UNITS          corporate or partnership law, if, after the Date of Grant of an
               Option, 

                     the outstanding Common Shares or Units increase or decrease
                     or change into or are exchanged for a different number or
                     kind of security by reason of any recapitalization,
                     reclassification, share split, reverse share split,
                     combination of shares, exchange of shares, share dividend,
                     or other distribution payable in capital shares or
                     partnership units, or
<PAGE>
 
                    some other increase or decrease in such Common Shares or
                    Units occurs without the Company's or the Operating
                    Partnership's receiving consideration,

               the Administrator will make an appropriate adjustment in the
               number and kind of Common Shares or Units underlying each Option
               and to the exercise price of any Option, so that the rights of
               the Optionee immediately following such event will neither be
               enlarged nor diminished from those in effect immediately before
               such event. Unless the Administrator determines another method
               would be appropriate, any such adjustment in outstanding Options
               will not change the aggregate Exercise Price payable with respect
               to shares or units subject to the unexercised portion of the
               Option outstanding but will include a corresponding proportionate
               adjustment in the Exercise Price per share or unit, so that the
               proportionate interest of the Optionee immediately following such
               event will, to the extent practicable, be the same as immediately
               before such event. Any such adjustment to an Option will not
               change the total price with respect to Common Shares or Units
               underlying the unexercised portion of the Option but will include
               a corresponding proportionate adjustment in the Option's Exercise
               Price.

               The Administrator will make a commensurate change to the maximum
               number and kind of shares or units provided in the Shares and
               Units Subject to Plan section.

               Any issue by the Company or the Operating Partnership of any
               class of preferred shares, or securities convertible into shares
               of common or preferred shares of any class, or preferred
               partnership units will not affect, and no adjustment by reason
               thereof will be made with respect to, the number of Common Shares
               or Units subject to any Option or the Exercise Price except as
               this Adjustments section specifically provides. The grant of an
               option under the Plan will not affect in any way the right or
               power of the Company or the Operating Partnership to make
               adjustments, reclassifications, reorganizations or changes of its
               capital or business structure, or to merge or to consolidate, or
               to dissolve, liquidate, sell, or transfer all or any part of its
               business or assets.
<PAGE>
 
SUBSTANTIAL    Upon a Substantial Operational Change, the Plan and the Options
OPERATIONAL    will terminate unless provision is made in writing in connection
CHANGE         with such transaction for                    
                            
                                

                    the assumption or continuation of outstanding Options, or

                    the substitution for such options or grants of any options
                    or grants covering the stock or securities of a successor
                    employer corporation or partnership, or a parent or
                    subsidiary of such successor, with appropriate adjustments
                    as to the number and kind of shares of stock or securities
                    and prices, in which event the Options will continue in the
                    manner and under the terms so provided.

               Unless the Board determines otherwise, if an Option would
               otherwise terminate pursuant to the preceding sentence, the
               optionee will have the right, at such time before the
               consummation of the transaction causing such termination as the
               Board reasonably designates, to exercise any unexercised portions
               of the Option, whether or not they had previously become
               exercisable.  However, the acceleration will not occur if it
               would render unavailable "pooling of interest" accounting for any
               reorganization, merger, or consolidation of the Company.

               A Substantial Operational Change means the

                    dissolution or liquidation of the Company or the Operating
                    Partnership,

                    merger, consolidation, or reorganization of the Company or
                    the Operating Partnership with one or more corporations or
                    partnerships in which the Company or Operating Partnership
                    is not the surviving entity,

                    the sale of substantially all of the assets of the Company
                    or the Operating Partnership to another entity, or

                    any transaction (including a merger or reorganization in
                    which the Company or the Operating Partnership survives)
                    approved by the Board that results in any person or entity
                    (other than any affiliate 
<PAGE>
 
                    of the Company or the Operating Partnership as defined in
                    Rule 144(a)(1) under the Securities Act) owning 100% of the
                    combined voting power of all classes of shares of the
                    Company or 100% of the combined Units of the Operating
                    Partnership.

SUBSIDIARY     Employees of Company Subsidiaries will be entitled to participate
EMPLOYEES      in the Plan, except as otherwise designated by the Board of 
               Trustees or the Committee.

               Eligible Subsidiary means each of the Company's Subsidiaries,
               except as the Board otherwise specifies. For ISO grants,
               Subsidiary means any corporation (other than the Company) in an
               unbroken chain of corporations beginning with the Company if, at
               the time an ISO is granted to an Optionee under the Plan, each of
               the corporations (other than the last corporation in the unbroken
               chain) owns stock possessing 50% or more of the total combined
               voting power of all classes of stock in one of the other
               corporations in such chain.

LEGAL          The Company and the Operating Partnership will not issue any
COMPLIANCE     Common Shares or Units under an Option until all applicable
               requirements imposed by Federal and state securities and other
               laws, rules, and regulations, and by any applicable regulatory
               agencies or stock exchanges, have been fully met. To that end,
               the Company and/or the Operating Partnership may require the
               optionee to take any reasonable action to comply with such
               requirements before issuing such shares or units. No provision in
               the Plan or action taken under it authorizes any action that is
               otherwise prohibited by Federal or state laws.

               The Plan is intended to conform to the extent necessary with all
               provisions of the Securities Act of 1933 ("Securities Act") and
               the Securities Exchange Act of 1934 and all regulations and rules
               the Securities and Exchange Commission issues under those laws.
               Notwithstanding anything in the Plan to the contrary, the
               Administrator must administer the Plan, and Options may be
               granted and exercised, only in a way that conforms to such laws,
               rules, and regulations.  To the extent permitted by applicable
               law, the Plan and any Options will be deemed amended to the
               extent necessary to conform to such laws, rules, and regulations.
<PAGE>
 
REIT           The Administrator has sole discretion to refrain from selling or
Qualification  issuing any Common Shares or Units under Options if the sale or
               issuance of such shares would cause the Company to fail to
               qualify as a real estate investment trust for Federal income tax
               purposes or would result in the optionee's ownership of Common
               Shares in violation of the restrictions on ownership and transfer
               of Common Shares set forth in the Company's Declaration of Trust.

Operating      The Administrator has sole discretion to refrain from selling or
Partnership    issuing any Units under Options if the sale or issuance of such
Qualification  shares would cause the Partnership to be treated as an
               association taxable as a corporation (other than a qualified REIT
               subsidiary within the meaning of section 856(i) of the Code). 
<PAGE>
 
Purchase for   Unless a registration statement under the Securities Act covers
Investment     the Common Shares or Units an optionee receives upon exercise of
and Other      his Option, the Administrator may require, at the time of such
Restrictions   exercise, that the optionee agree in writing to acquire such
               shares or units for investment and not for public resale or
               distribution, unless and until the shares or units subject to the
               Option are registered under the Securities Act. Unless the shares
               or units are registered under the Securities Act, the optionee
               must acknowledge:

                    that the shares or units purchased on exercise of the Option
                    are not so registered,

                    that the optionee may not sell or otherwise transfer the
                    shares or units unless

                         the shares or units have been registered under the
                         Securities Act in connection with the sale or transfer
                         thereof, or

                         counsel satisfactory to the Company has issued an
                         opinion satisfactory to the Company that the sale or
                         other transfer of such shares or units is exempt from
                         registration under the Securities Act, and

                         such sale or transfer complies with all other
                         applicable laws, rules, and regulations, including all
                         applicable Federal and state securities laws, rules,
                         and regulations.

               Additionally, the Common Shares and Units, when issued upon the
               exercise of an Option, will be subject to any other transfer
               restrictions, rights of first refusal, and rights of repurchase
               set forth in or incorporated by reference into other applicable
               documents, including the Company's articles or certificate of
               incorporation, by-laws, or generally applicable shareholders'
               agreements and the Operating Partnership's Amended and Restated
               Partnership Agreement.

               The Administrator may, in its sole discretion, take whatever
               additional actions it deems appropriate to comply with such
               restrictions and applicable laws, including placing legends on
               certificates and issuing stop-transfer orders to transfer agents
               and registrars.
<PAGE>
 
Tax            The optionee must satisfy all applicable Federal, state, and
Withholding    local income and employment tax withholding requirements before
               the Company or the Operating Partnership will deliver
               certificates upon the exercise of an Option. The Company or the
               Operating Partnership, as appropriate, may decide to satisfy the
               withholding obligations through additional withholding on salary
               or wages. If the Company or the Operating Partnership does not or
               cannot withhold from other compensation, the optionee must pay
               the Company or the Partnership, with a cashier's check or
               certified check, the full amounts required by withholding.
               Payment of withholding obligations is due at the same time as is
               payment of the Exercise Price. If the Committee so determines,
               the optionee may instead satisfy the withholding obligations by
               directing the Company to retain shares or units from the Option
               exercise, by tendering previously owned shares or units, or by
               attesting to his ownership of shares or units (with the
               distribution of net shares or units).

Transfers,     An Option may not be assigned, pledged, or otherwise transferred
Assignments,   in any way, whether by operation of law or otherwise or through
and Pledges    any legal or equitable proceedings (including bankruptcy), by the
               optionee to any person, except by will or by operation of
               applicable laws of descent and distribution. If Rule 16b-3 then
               applies to an Option, the optionee may not transfer or pledge
               Common Shares acquired upon exercise of an Option until at least
               six (6) months have elapsed from (but excluding) the Date of
               Grant, unless the Administrator approves otherwise in advance in
               writing.

               Notwithstanding the prior paragraph, under no circumstances may
               an option be transferred if the exercise of such option would
               cause the Operating Partnership to be taxable as an association
               for federal income tax purposes.

Amendment or   The Board may amend, suspend, or terminate the Plan at any time,
Termination    without the consent of the optionees or their beneficiaries;
of Plan and    provided, however, that no amendment will deprive any optionee or
Options        --------  -------
               beneficiary of any previously declared Option. Except as required
               by law or by the Operational Changes section, the Administrator
               may not, without the optionee's or beneficiary's consent, modify
               the terms and conditions of an Option so as to adversely affect
               the optionee. No amendment, suspension, or termination of the
               Plan will, without the optionee's or 
<PAGE>
 
               beneficiary's consent, terminate or adversely affect any right or
               obligations under any outstanding Options.

Privileges of  No optionee and no beneficiary or other person claiming under or
Ownership      through such optionee will have any right, title, or interest in
               or to any Common Shares or Units allocated or reserved under the
               Plan or subject to any Option except as to such Common Shares or
               Units, if any, that have been issued to such optionee.

Effect on      Whether exercising an Option causes the optionee to accrue or
Other Plans    receive additional benefits under any pension or other plan is
               governed solely by the terms of such other plan.

Limitations    Notwithstanding any other provisions of the Plan, no individual
   on          acting as a Trustee, employee, or agent of the Company or the
Liability      Operating Partnership shall be liable to any optionee, former
               optionee, spouse, beneficiary, or any other person for any claim,
               loss, liability, or expense incurred in connection with the Plan,
               nor shall such individual be personally liable because of any
               contract or other instrument he executes in such other capacity.
               The Company or the Operating Partnership will indemnify and hold
               harmless each Trustee, employee, or agent of the Company or the
               Operating Partnership to whom any duty or power relating to the
               administration or interpretation of the Plan has been or will be
               delegated, against any cost or expense (including attorneys'
               fees) or liability (including any sum paid in settlement of a
               claim with the Board's approval) arising out of any act or
               omission to act concerning this Plan unless arising out of such
               person's own fraud or bad faith.

No Employment  Nothing contained in this Plan constitutes an employment contract
Contract       between the Company or the Operating Partnership and any
               individual. The Plan does not give the optionee any right to be
               retained in the Company's or Operating Partnership's employ, nor
               does it enlarge or diminish the Company's or Operating
               Partnership's right to terminate the optionee's employment.

Applicable     The laws of the State of Maryland (other than its choice of law
Law            provisions) govern this Plan and its interpretation.
<PAGE>
 
Duration       Unless the Board extends the Plan's term, the Administrator may
of Plan        not grant Options after ______________, 2008. The Plan will then
               terminate but will continue to govern unexercised and unexpired
               Options.

Approval of    The Plan must be submitted to the shareholders of the Company for
Shareholders   their approval within 12 months after the Board of Trustees of
               the Company adopts the Plan. The adoption of the Plan is
               conditioned upon the approval of the shareholders of the Company,
               and failure to receive their approval will render the Plan and
               any outstanding options thereunder void and of no effect.

<PAGE>
 
                                  EXHIBIT 10.8         |__| Optionee's Copy
                                                       |__| Company's Copy

                           Capital Automotive Group
                          1998 Equity Incentive Plan
                       Incentive Stock Option Agreement


To ____________________:

Capital Automotive REIT (the "Company") has granted you an option (the "Option")
under the Capital Automotive Group 1998 Equity Incentive Plan (the "Plan") to
purchase _____________________________________ common shares of beneficial
interest of the Company (the "Common Shares"), at _____ Dollars and ________
Cents ($_____) per share (the "Exercise Price").  The Date of Grant was
__________________________.

The Option is subject in all respects to the applicable provisions of the Plan,
a copy of which is attached.  By signing this agreement (the "Agreement"), you
acknowledge receiving the Plan. This Agreement incorporates the Plan by
reference and specifies other applicable terms and conditions.  All terms not
defined by this Agreement have the meanings given in the Plan.  The Plan's
Administrator may adjust the number of Shares and the Exercise Price from time
to time under the Plan. The Option is intended to be an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") to the extent permitted by the Code and to be a
nonqualified stock option for any additional shares.

In addition to the terms, conditions, and restrictions set forth in the Plan,
the following terms, conditions, and restrictions apply to the Option:

(1)  The schedule for exercising the Option is as follows, subject to Section
     (4) below on   expiration:

     a.   You may exercise the Option on the following schedule:

          [i.  25%, on or after the first anniversary of the Date of Grant;

          ii.  50%, on or after the second anniversary of the Date of Grant;

          iii. 75%, on or after the third anniversary of the Date of Grant; and

          iv.  100%, on or after the fourth anniversary of the Date of Grant.]

     b.   The Administrator may, in its sole discretion, accelerate the time at
          which you may exercise part or all of the Option.
<PAGE>
 
(2)  You agree to give prompt notice to the Company if you dispose of any Shares
     acquired upon exercise of the Option within one year after you acquire them
     or within two years after the Date of Grant.

(3)  Subject to this Agreement and the Plan, you may exercise the Option only by
     written notice to the Company on or before the date of expiration of the
     Option.  Each such notice must:

     a.   state the election to exercise the Option and the number of Shares
          with respect to which it is being exercised;

     b.   be signed by you or, in the event of your death or disability, by the
          party entitled to exercise the Option;

     c.   contain such representations as the Company requires; and

     d.   be accompanied by cash or a check in the amount of the Exercise Price
          payable to the order of the Company [or, to the extent the Plan and
          the Administrator permit, by Common Shares of the Company with a Fair
          Market Value equal to all or part of the Exercise Price (with any
          balance paid by cash or check); provided, however, that you may not
                                          --------  ------- 
          surrender Common Shares of the Company as payment unless you have held
          such stock for more than six months before the surrender.
          Alternatively, your notice may direct the Company to send the share
          certificates to be issued under this Option to a licensed broker
          acceptable to the Company as your agent in exchange for the broker's
          tendering to the Company cash (or acceptable cash equivalents) equal
          to the Exercise Price.]

     For all purposes of the Plan, the date of exercise will be the date on
     which you have delivered the notice and any required payment to the
     Company.

(4)  The Option will expire no later than the close of business on
     __________________ (the tenth anniversary of the Date of Grant).  Unless
     the Administrator determines otherwise at any time, you will forfeit any
     unexercised portions of the Option (whether or not then exercisable) upon
     the first to occur of (i) the Option's expiration, (ii) the 90th day after
     your resignation or other termination of employment, or (iii) as provided
     in the Plan if you die or become disabled.

(5)  The Company may postpone the issuance and delivery of any Shares for so
     long as the Company determines to be necessary or advisable to satisfy the
     following:

     a.   the completion or amendment of any registration or qualification of
          the Shares or satisfaction of any exemption from registration under
          any Federal or state law, rule, or regulation;

     b.   compliance with any requests for representations under the Plan;
<PAGE>
 
     c.   receipt of proof satisfactory to the Company that a person seeking to
          exercise the Option after your death is authorized and entitled to
          exercise the Option; and

     d.   compliance with any federal, state, or local tax withholding
          obligations.

(5)  The Administrator may delay or prohibit the exercise of the Option if
     exercise would adversely affect the Company's status under the Code as a
     real estate investment trust or would result in your owning Common Shares
     in violation of the restrictions on ownership and transfer of Common Shares
     provided in the Company's Declaration of Trust.

(6)  If, at the time the Company should issue you Shares because of your
     exercise of the Option, no current registration statement under the
     Securities Act of 1933 (the "Act") covers such issuance, you must, before
     the Company will issue such Shares to you:

     a.   represent to the Company, in form satisfactory to counsel for the
          Company, that you are acquiring the Shares for your own account and
          not with a view to the resale or distribution of the Shares; and

     b.   agree that you may not sell, transfer, or otherwise dispose of the
          Shares issued to you under the Option unless:

          i.   a registration statement under the Act is effective at the time
               of disposition with respect to the Shares sold, transferred, or
               otherwise disposed of; or

          ii.  the Company has received an opinion of counsel or other
               information and representations satisfactory to it to the effect
               that registration under the Act is not required by reason of Rule
               144 under the Act or otherwise.

(7)  To the extent the Plan provides, in the event of (i) a dissolution,
     liquidation, or sale of substantially all of the assets of the Company,
     (ii) a merger or consolidation in which the Company is not the surviving
     corporation, (iii) a reverse merger in which the Company is the surviving
     corporation but the shares of Common Shares outstanding immediately before
     the merger are converted by virtue of the merger into other property,
     securities, or cash, or (iv) any other Substantial Operational Change,
     then, at the Board's sole discretion and to the extent the law permits, the
     Option will (a) be exercisable in full before such event and then terminate
     or (b) continue in full force and effect and, if applicable, the surviving
     corporation or an affiliate of the surviving corporation will be required
     to assume the Option and/or substitute a similar option or award in place
     of the Option.

     Subject to the preceding paragraph, if any change is made in the Common
     Shares, without the Company's receiving consideration (through merger,
     consolidation, reorganization, recapitalization, reincorporation, stock
     dividend, dividend in property other than cash, stock split, liquidating
     dividend, combination of shares, exchange of shares, change in corporate
     structure, or other transaction not involving the Company's receipt of
     consideration), the Board will adjust the Option as to the class(es) and
     number
<PAGE>
 
     of shares and price per share of securities subject to the Option, with the
     Board's adjustments being final, binding, and conclusive. The conversion of
     any convertible securities of the Company will not be treated as a
     "transaction not involving the Company's receipt of consideration."

(8)  You may not exercise the Option if the issuance of the Shares upon such
     exercise would violate any applicable federal or state securities laws or
     other laws or regulations.

(9)  Nothing in this Agreement restricts the right of the Company or any of its
     affiliates to terminate your employment at any time, with or without cause.
     The termination of employment, whether by the Company or any of its
     affiliates or otherwise, and regardless of the reason therefor, has the
     consequences provided for under the Plan and any applicable employment or
     severance agreement.

(10) You understand and agree that you will not be deemed for any purpose to be
     a stockholder of the Company with respect to any of the Shares unless and
     until they have been issued to you after your exercise of this Option and
     payment for the shares.

(11) You understand and agree that the existence of this Option will not affect
     in any way the right or power of the Company or its stockholders to make or
     authorize any or all adjustments, recapitalizations, reorganizations, or
     other changes in the Company's capital structure or its business, or any
     merger or consolidation of the Company, or any issuance of bonds,
     debentures, preferred or other stocks with preference ahead of or
     convertible into, or otherwise affecting the common shares or the rights
     thereof, or the dissolution or liquidation of the Company, or any sale or
     transfer of all or any part of its assets or business, or any other
     corporate act or proceeding, whether of a similar character or otherwise.

(12) The laws of the State of Maryland will govern all matters relating to this
     Agreement, without regard to the principles of conflict of laws.

(13) Any notice you give to the Company (including notice of exercise of all or
     part of the Option) must be in writing and either hand-delivered or mailed
     to the office of the Secretary of the Company (or to the Chair of the
     Administrator if you are then serving as Secretary).  If mailed, it should
     be addressed to the Secretary (or the Chair of the Administrator) of the
     Company at the Company's then corporate headquarters.  Any notice given to
     you will be addressed to you at your address as reflected on the personnel
     records of the Company.  You and the Company may change the address for
     notice by like notice to the other.  Notice will be deemed to have been
     duly delivered when hand-delivered or, if mailed, on the day such notice is
     postmarked.

(14) Wherever a conflict may arise between the terms of this Agreement and the
     terms of the Plan, the terms of the Plan will control.
<PAGE>
 
                                    Capital Automotive REIT

Date: __________________            By:  __________________________________

                                         Name:      ____________________________

                                         Title:     ____________________________



                                ACKNOWLEDGMENT
                                --------------

     I acknowledge receipt of a copy of the Plan, attached hereto. I represent
     that I have read and am familiar with the Plan's terms. I accept the Option
     subject to all of the terms and provisions of this Agreement and of the
     Plan under which it is granted, as the Plan may be amended in accordance
     with its terms. I agree to accept as binding, conclusive, and final all
     decisions or interpretations of the Administrator concerning any questions
     arising under the Plan with respect to the Option.


Date:__________________             __________________________________
                                           Signature of Optionee

     No one may sell, transfer, or distribute this Option or the securities that
     may be purchased upon exercise of this Option without an effective
     registration statement relating thereto or a satisfactory opinion of
     counsel satisfactory to the Company or other information and
     representations satisfactory to the Company that such registration is not
     required.

     The shares that may be purchased upon exercise of this Option may be
     transferred only in accordance with the terms of a share purchase agreement
     to be entered into between the holder of this Option and the Company upon
     exercise of this Option, a copy of which agreement will thereafter be on
     file with the Secretary of the Company.
<PAGE>
 
                         EXHIBIT 10.36        |__| Employee's Copy
                                              |__| Partnership's Copy

                            CAPITAL AUTOMOTIVE L.P.
                              Employment Agreement

To Scott M. Stahr:

     This Agreement establishes the terms of your employment with Capital
Automotive L.P., a Maryland limited partnership (the "Partnership").  It
replaces your prior employment agreement with Capital Automotive REIT, a
Maryland real estate investment trust (the "Company"), under which the Company
assigned your agreement to the Partnership.  You remain an employee of the
Company, but your primary responsibility is as an employee of the Partnership.

Employment and Duties   You and the Partnership agree to your employment as
                        Executive Vice President - Acquisitions on the terms
                        contained herein. In such position, you will report
                        directly to the Company's Chief Executive Officer (the
                        "CEO") and to the General Partner of the Partnership.
                        You agree to perform whatever duties the Partnership may
                        assign you from time to time, consistent with your
                        position as a senior executive. During your employment,
                        you agree to devote your full business time, attention,
                        and energies to performing those duties (except as the
                        CEO otherwise agrees from time to time). You agree to
                        faithfully serve the Partnership, to conform to and
                        comply with the lawful and good faith directions and
                        instructions given you by the Partnership, and to use
                        your best efforts to promote and serve the interests of
                        the Partnership. You agree to comply with the
                        noncompetition, secrecy, and other provisions of Exhibit
                        A to this Agreement.

Term of Employment      Your employment under this Agreement begins as of
                        January 1, 1998 (the "Effective Date"). Unless sooner
                        terminated under this Agreement, your employment ends at
                        6:00 p.m. Eastern Time on

                             June 30, 1998, if the Company has not consummated
                             its initial public offering ("IPO") by that date,
                             or

                             October 19, 2001, if the Company has consummated
                             its IPO on or before June 30, 1998.
<PAGE>
 
                             The period running from the Effective Date to the
                             applicable date in the preceding sentence is the
                             "Term."

                             Termination or expiration of this Agreement ends
                             your employment but does not end your obligation to
                             comply with Exhibit A.

Compensation

     Salary                  The Partnership (or, in its discretion, the
                             Company) will pay you an annual salary (the
                             "Salary") from the Effective Date at the rate of
                             not less than $225,000 in accordance with its
                             payroll practices. The Partnership or the
                             Compensation Committee of the General Partner
                             ("Compensation Committee") will review your Salary
                             annually and consider you for increases.

     Bonus                   The Partnership or the Compensation Committee will
                             establish annual bonus targets under which you will
                             be eligible for an annual bonus equal to up to 100%
                             of your Salary.
 
     Employee Benefits       While you are employed under this Agreement, the
                             Partnership will provide you with the same
                             benefits, including medical insurance coverage, as
                             the Partnership makes generally available from time
                             to time to the Partnership's employees, as those
                             benefits are amended or terminated from time to
                             time, and such other benefits as are commensurate
                             with your position as a senior executive of a
                             public company , including either a company
                             automobile or an allowance for an automobile. Your
                             participation in the Partnership's benefit plans
                             will be subject to the terms of the applicable plan
                             documents and the Partnership's generally applied
                             policies, and the Partnership in its sole
                             discretion may from time to time adopt, modify,
                             interpret, or discontinue such plans or policies.
 
Place of Employment          Your principal place of employment will be at the
                             Partnership's headquarters in the Washington
                             metropolitan area (or such other offices as the
                             Partnership may establish from time to time and to
                             which it assigns you in its sole discretion). You
                             understand and agree that you must travel from time
                             to time for business reasons.
<PAGE>
 
Indemnification    The Partnership will indemnify you to the fullest extent
                   authorized by law if you are made a party to any action,
                   suit, or proceeding, whether criminal, civil, administrative,
                   or investigative, because you are or were a manager, officer,
                   or employee of the Partnership or serve or served any other
                   entity as a director, officer, or employee at the
                   Partnership's request; provided, however, that you must repay
                                          --------  -------
                   the Partnership for any indemnification if the final
                   determination of an arbitrator or a court of competent
                   jurisdiction declares, after the expiration of the time
                   within which judicial review (if permitted) of such
                   determination may be perfected, that indemnification by the
                   Partnership is not permissible under applicable law.

Expenses           The Partnership will reimburse you for reasonable and
                   necessary travel and other business-related expenses you
                   incur for the Partnership in performing your duties under
                   this Agreement. You must itemize and substantiate all
                   requests for reimbursements. You must submit requests for
                   reimbursement in accordance with the policies and practices
                   of the Partnership and within 60 days after incurring the
                   expense.

No Other           For so long as you are employed by the Partnership, you
Employment         agree that you will not, directly or indirectly, provide
                   services to any person or organization for which you receive
                   compensation or otherwise engage in activities that would
                   conflict or interfere significantly with the faithful
                   performance of your duties to the Partnership without the
                   Partnership's prior written consent. (This prohibition
                   excludes any work performed at the Partnership's direction
                   including any work for the Partnership.) You may manage your
                   personal investments, as long as the management takes only
                   minimal amounts of time and is consistent with the provisions
                   of the No Competition Section in Exhibit A and is otherwise
                   consistent with the policies and practices of the
                   Partnership.

                   You represent to the Partnership that you are not subject to
                   any agreement, commitment, or policy of any third party that
                   would prevent you from entering into or performing your
                   duties under this Agreement, and you agree that you will not
                   enter into any agreement or commitment or agree to any policy
                   that would 
<PAGE>
 
                   prevent or hinder your performance of duties and obligations
                   under this Agreement, including Exhibit A.

No Conflicts of    You confirm that you have fully disclosed to the Partnership
Interest           and the Company, to the best of your knowledge, all
                   circumstances under which you, your spouse, and your
                   relatives (including their spouses, children, and relatives)
                   have or may have a conflict of interest with the Partnership
                   or the Company. You further agree to fully disclose to the
                   Partnership any such circumstances that might arise during
                   the Term. You agree to fully comply with the Partnership's
                   policy and practices relating to conflicts of interest.

No Payments to     You will neither pay nor permit payment of any remuneration
Governmental       to or on behalf of any governmental official other than
Officials          payments required or permitted by applicable law.

Termination        Subject to the provisions of this section, the Partnership
                   may terminate your employment, or you may resign, except
                   that, if you voluntarily resign, you must provide the
                   Partnership with 90 days' prior written notice (unless the
                   Partnership has previously waived such notice in writing or
                   authorized a shorter notice period).

     For Cause     The Partnership may terminate your employment for "Cause" if
                   you:

                        (i)    engage in dishonesty that relates materially to
                        the performance of services or any obligations under
                        this Agreement, including Exhibit A;

                        (ii)   are convicted of any misdemeanor (other than for
                        minor infractions) involving fraud, breach of trust,
                        misappropriation, or other similar activity or any
                        felony;

                        (iii)  perform your duties under this Agreement in a
                        grossly negligent manner; or

                        (iv)   willfully breach this Agreement, including
                        Exhibit A, in a manner materially injurious to the
                        Partnership. An act or omission is only "willful" if you
                        acted in bad faith or without any reasonable belief that
                        the action or omission 
<PAGE>
 
                        was in the interests of the Partnership and consistent
                        with your duties and obligations under this Agreement.

                   Your termination for Cause under (i) and (ii) will be
                   effective immediately upon the Partnership's mailing or
                   transmission of such notice. Before terminating your
                   employment for Cause under (iii) or (iv), the Partnership
                   will specify in writing to you the nature of the act,
                   omission, refusal, or failure that it deems to constitute
                   Cause. The Partnership will give you the opportunity to
                   correct the situation (and thus avoid termination for Cause
                   under (iii) or (iv)). You must complete the correction within
                   a reasonable period of time after the written notice to you,
                   and the Partnership agrees to provide you no less than 15
                   days for such correction.

     Without       Subject to the provisions below under Payments on 
     Cause         Termination, the Partnership may terminate your employment 
                   under this Agreement before the end of the Term without
                   Cause.

     Good Reason   You may resign for Good Reason with 45 days' advance written
                   notice as provided below. "Good Reason" means the occurrence,
                   without your written consent, of any of the following
                   circumstances:

                        the Partnership's failure to perform or observe any of
                        the material terms or provisions of this Agreement,

                        the assignment to you of any duties inconsistent with,
                        or any substantial diminution in, your employment status
                        or responsibilities as in effect on the date of this
                        Agreement,

                        the Partnership's relocation of its corporate
                        headquarters to a location that would increase your
                        commuting distance by more than 50 miles, based on your
                        residence when this Agreement is executed, or

                        a Change of Control after consummation of an IPO,
                        consisting of any one or more of the following events:

                             a person, entity, or group (other than the Company,
                             the Partnership, any subsidiary of either, any
<PAGE>
 
                             Company Group benefit plan, or any underwriter
                             temporarily holding securities for an offering of
                             such securities) acquires ownership of more than
                             40% of the undiluted total voting power of the
                             Company's then-outstanding securities eligible to
                             vote to elect members of the Board ("Company Voting
                             Securities");

                             consummation of a merger or consolidation of the
                             Company into any other entity -- unless the holders
                             of the Company Voting Securities outstanding
                             immediately before such consummation, together with
                             any trustee or other fiduciary holding securities
                             under a Company Group benefit plan, hold securities
                             that represent immediately after such merger or
                             consolidation more than 60% of the combined voting
                             power of the then outstanding voting securities of
                             either the Company or the other surviving entity or
                             its parent; or

                             the stockholders of the Company approve (i) a plan
                             of complete liquidation or dissolution of the
                             Company or (ii) an agreement for the Company's sale
                             or disposition of all or substantially all the
                             Company's assets, and such liquidation,
                             dissolution, sale, or disposition is consummated.

               Even if other tests are met, a Change of Control has not occurred
               under any circumstance in which the Company files for bankruptcy
               protection or is reorganized following a bankruptcy filing.

               You must give notice to the Partnership of your intention to
               resign for Good Reason within 30 days after the occurrence of the
               event that you assert entitles you to resign for Good Reason. In
               that notice, you must specify the condition that you consider
               provides you with Good Reason and must give the Partnership an
               opportunity to cure the condition within 30 days after your
               notice. If the Partnership fails to cure the condition, your
               resignation will be effective on the 45th day after your notice
               (unless the 
<PAGE>
 
                        Partnership has previously waived such notice period in
                        writing or agreed to a shorter notice period).

                        You will not be treated as resigning for Good Reason if
                        the Partnership had Cause to terminate your employment
                        as of the date of your notice of resignation.

     Disability         If you become "disabled" (as defined below), the
                        Partnership may terminate your employment. You are
                        "disabled" if you are unable, despite whatever
                        reasonable accommodations the law requires, to render
                        services to the Partnership for more than 90 consecutive
                        days because of physical or mental disability,
                        incapacity, or illness. You are also disabled if you are
                        deemed to be disabled within the meaning of the
                        Partnership's long-term disability policy as then in
                        effect.

     Death              If you die during the Term, the Term will end as of the
                        date of your death.

     Payments on   If the Partnership terminates your employment for or without
     Termination   Cause or because of disability or death or because the
                   Company does not consummate its IPO or you resign, the
                   Partnership will pay you any unpaid portion of your Salary
                   pro-rated through the date of actual termination and any
                   annual bonuses already determined by such date but not yet
                   paid, reimburse any substantiated but unreimbursed business
                   expenses, pay any accrued and unused vacation time (to the
                   extent consistent with the Partnership's policies), and
                   provide such other benefits as applicable laws or the terms
                   of the benefits require. Except to the extent the law
                   requires otherwise or as provided in the Severance paragraph,
                   neither you nor your beneficiary or estate will have any
                   rights or claims under this Agreement or otherwise to receive
                   severance or any other compensation, or to participate in any
                   other plan, arrangement, or benefit, after such termination.

          Severance          In addition to the foregoing payments, if the
                             Partnership terminates your employment without
                             Cause or you resign for Good Reason before the end
                             of the Term, the Partnership will
<PAGE>
 
                             pay you severance equal to your Salary, as then in
                             effect, for 24 months in a single lump sum as soon
                             as practicable but in any event no more than 90
                             days after termination;

                             pay the premium cost for you to receive any group
                             health coverage the Partnership must offer you
                             under Section 4980B of the Internal Revenue Code of
                             1986 ("COBRA Coverage") for the period of such
                             coverage; and

                             pay you, at the time the Partnership would
                             otherwise pay your annual bonus, your pro rata
                             share of the bonus for the year of your
                             termination, where the pro rata factor is based on
                             days elapsed in your year of termination till date
                             of termination over 365, less any portion of the
                             bonus for the year of your termination already
                             paid.

                        You are not required to mitigate amounts payable under
                        the Severance paragraph by seeking other employment or
                        otherwise; however, you agree to return any payments
                        under this Severance paragraph if you fail to comply
                        with Exhibit A. Expiration of this Agreement, whether
                        because of notice of non-renewal or otherwise, does not
                        constitute termination without Cause nor is it grounds
                        for resignation with Good Reason.

Assignment         The Partnership may assign or otherwise transfer this
                   Agreement and any and all of its rights, duties, obligations,
                   or interests under it to

                        the Company or any of the affiliates or subsidiaries of
                        the Company or the Partnership or

                        to any business entity that at any time by merger,
                        consolidation, or otherwise acquires all or
                        substantially all of the Company's stock or assets or
                        the partnership units or assets of the Partnership or to
                        which the Company or the Partnership transfers all or
                        substantially all of its assets.
<PAGE>
 
                        Upon such assignment or transfer, any such business
                        entity will be deemed to be substituted for the
                        Partnership for all purposes. Assignment or transfer
                        does not constitute termination without Cause nor is it
                        grounds for resignation with Good Reason absent the
                        occurrence of a Change of Control. This Agreement binds
                        the Partnership, its successors or assigns, and your
                        heirs and the personal representatives of your estate.
                        Without the Partnership's prior written consent, you may
                        not assign or delegate this Agreement or any or all
                        rights, duties, obligations, or interests under it.

Severability            If the final determination of an arbitrator or a court
                        of competent jurisdiction declares, after the expiration
                        of the time within which judicial review (if permitted)
                        of such determination may be perfected, that any term or
                        provision of this Agreement, including any provision of
                        Exhibit A, is invalid or unenforceable, the remaining
                        terms and provisions will be unimpaired, and the invalid
                        or unenforceable term or provision will be deemed
                        replaced by a term or provision that is valid and
                        enforceable and that comes closest to expressing the
                        intention of the invalid or unenforceable term or
                        provision.

Amendment; Waiver       Neither you nor the Partnership may modify, amend, or
                        waive the terms of this Agreement other than by a
                        written instrument signed by you and a duly authorized
                        representative of the General Partner. Either party's
                        waiver of the other party's compliance with any
                        provision of this Agreement is not a waiver of any other
                        provision of this Agreement or of any subsequent breach
                        by such party of a provision of this Agreement.

Withholding             The Partnership will reduce its compensatory payments to
                        you for withholding and FICA taxes and any other
                        withholdings and contributions required by law.

Third Party             You understand and agree that the Partnership is a 
Beneficiary             third party beneficiary of this Agreement.

Governing Law           The laws of the Commonwealth of Virginia (other than its
                        conflict of laws provisions) govern this Agreement.
<PAGE>
 
Notices                 Notices must be given in writing by personal delivery,
                        by certified mail, return receipt requested, by
                        telecopy, or by overnight delivery. You should send or
                        deliver your notices to the Partnership's headquarters.
                        The Partnership will send or deliver any notice given to
                        you at your address as reflected on the Partnership's
                        personnel records. You and the Partnership may change
                        the address for notice by like notice to the others. You
                        and the Partnership agree that notice is received on the
                        date it is personally delivered, the date it is received
                        by certified mail, the date of guaranteed delivery by
                        the overnight service, or the date the fax machine
                        confirms receipt.

Legal Fees              If a claim is asserted for breach of any provision of
                        this Agreement, you will be entitled to recover your
                        reasonable attorney's fees and expenses if you prevail.

Superseding Effect      This Agreement supersedes any prior oral or written
                        employment, severance, option, or fringe benefit
                        agreements between you and the Company or the
                        Partnership. This Agreement supersedes all prior or
                        contemporaneous negotiations, commitments, agreements,
                        and writings with respect to the subject matter of this
                        Agreement. All such other negotiations, commitments,
                        agreements, and writings will have no further force or
                        effect; and the parties to any such other negotiation,
                        commitment, agreement, or writing will have no further
                        rights or obligations thereunder.

If you accept the terms of this Agreement, please sign in the space indicated
below. We encourage you to consult with any advisors of your choosing.

                                   CAPITAL AUTOMOTIVE L.P.


                                   General Partner:

                                   CAPITAL AUTOMOTIVE REIT, a Maryland real
                                   estate investment trust


                                    By:
                                       ------------------------------------ 

                                    Its:
                                        -----------------------------------
<PAGE>
 
I accept and agree to the terms of employment set
forth in this Agreement:



- ------------------------------------
         Scott M. Stahr


Dated:
      ------------------------------
<PAGE>
 
                                   Exhibit A
                                   ---------

No Competition      In consideration of your employment by the Partnership and
                    salary and benefits under this Agreement, during the term of
                    your employment, and except as set forth below, until the
                    date one year after your employment with the Company, the
                    Partnership, or their successors, assigns, affiliates, or
                    subsidiaries (collectively, the "Company Group") ends for
                    any reason (the "Restricted Period"), you agree as follows:

                    The Company is a real estate investment trust formed to
                    acquire real properties owned by automobile dealerships and
                    other automotive-related businesses and lease the properties
                    to such businesses. You will not, directly or indirectly,
                    promote, be employed by, lend money to, invest in, or engage
                    in any Competing Business within the Market Area. That
                    prohibition includes, but is not limited to, acting, either
                    singly or jointly or as agent for, or as an employee of or
                    consultant to, any one or more persons, firms, entities, or
                    corporations directly or indirectly (as a director,
                    independent contractor, representative, consultant, member,
                    or otherwise) that constitutes such a Competing Business.
                    You may own up to 3% of the outstanding capital stock of any
                    corporation that is actively publicly traded without
                    violating this No Competition covenant. This covenant does
                    not preclude you from being employed by any automobile
                    dealership or dealership group or other automotive-related
                    business that is a lessee or prospective lessee of
                    properties the Company or the Partnership holds or is
                    actively considering acquiring.

                    If, during the Restricted Period, you are offered and want
                    to accept employment with a business that engages in
                    activities similar to the Company's or the Partnership's,
                    you will inform the Partnership in writing of the identity
                    of the business, your proposed duties with that business,
                    and the proposed starting date of that employment. You will
                    also inform that business of the terms of this Exhibit A.
                    The Partnership will analyze the proposed employment and
                    make a good faith determination as to whether it would
                    threaten the Partnership's legitimate competitive interests.
                    If the Partnership 
<PAGE>
 
                    determines that the proposed employment would not pose an
                    unacceptable threat to its interests, the Partnership will
                    notify you that it does not object to the employment.

                    You acknowledge that, during the portion of the Restricted
                    Period that follows your employment, you may engage in any
                    business activity or gainful employment of any type and in
                    any place except as described above.  You acknowledge that
                    you will be reasonably able to earn a livelihood without
                    violating the terms of this Agreement.

                    You understand and agree that the rights and obligations set
                    forth in this No Competition Section will continue for one
                    year from the date of termination of this Agreement and your
                    employment with the Partnership or the Company Group, unless
                    the Company does not consummate its IPO by June 30, 1998, in
                    which event your obligations under this No Competition
                    Section end when your employment ends.

Definitions

     Competing      Competing Business means any service or financial product 
     Business       of any person or organization other than the Company Group,
                    in existence or then under development, that competes or
                    could potentially compete, directly or indirectly, with any
                    service or financial product of the Company Group upon which
                    or with which you have worked for the Partnership or the
                    Company Group or about which you acquire knowledge while
                    working for the Partnership or the Company Group. Competing
                    Business includes any enterprise engaged in the formation or
                    operation of real estate investment trusts or other entities
                    that invest primarily in automobile dealership or 
                    automotive-related properties or provide real estate
                    financing to automobile dealerships or automotive-related
                    businesses. Competing Business excludes real estate
                    investment trusts and similar entities that do not engage in
                    activities related to automotive dealerships or automotive-
                    related businesses.

     Market Area    The Market Area consists of the United States.

No Interference;    During the Restricted Period, you agree that you will not,
                    directly
<PAGE>
 
No Solicitation     or indirectly, whether for yourself or for any other
                    individual or entity (other than the Partnership or its
                    affiliates or subsidiaries), intentionally solicit or
                    endeavor to entice away from the Company Group:

                         any person whom the Company Group employs (other than
                         as your personal secretary) or otherwise engages to
                         perform services as a consultant or sales
                         representatives; or

                         any person or entity who is, or was, within the
                         Restricted Period, a contractor or subcontractor of the
                         Company Group known to you or a lessee or prospective
                         lessee of properties the Company Group holds or is
                         actively considering acquiring.

Secrecy

     Preserving     Your employment with the Partnership under and, if 
     Partnership    applicable, before this Agreement has given and will give 
     Confidences    you Confidential Information (as defined below). You
                    acknowledge and agree that using, disclosing, or publishing
                    any Confidential Information in an unauthorized or improper
                    manner could cause the Partnership or Company Group
                    substantial loss and damages that could not be readily
                    calculated and for which no remedy at law would be adequate.
                    Accordingly, you agree with the Partnership that you will
                    not at any time, except in performing your employment duties
                    to the Partnership or the Company Group under this Agreement
                    (or with the Partnership's prior written consent), directly
                    or indirectly, use, disclose, or publish, or permit others
                    not so authorized to use, disclose, or publish any
                    Confidential Information that you may learn or become aware
                    of, or may have learned or become aware of, because of your
                    prior or continuing employment, ownership, or association
                    with the Partnership or the Company Group or any of their
                    predecessors, or use any such information in a manner
                    detrimental to the interests of the Partnership or the
                    Company Group.

     Preserving     You agree not to use in working for the Company Group and 
     Others'        not to disclose to the Company Group any trade secrets or 
                    other
<PAGE>
 
     Confidences    information you do not have the right to use or disclose and
                    that the Company Group is not free to use without liability
                    of any kind. You agree to promptly inform the Partnership in
                    writing of any patents, copyrights, trademarks, or other
                    proprietary rights known to you that the Partnership or the
                    Company Group might violate because of information you
                    provide.

     Confidential   "Confidential Information" includes, without limitation,
     Information    information the Partnership or the Company Group has
                    not previously disclosed to the public or to the trade with
                    respect to the Partnership's or the Company Group's present
                    or future business, operations, services, products,
                    research, inventions, discoveries, drawings, designs, plans,
                    processes, models, technical information, facilities,
                    methods, trade secrets, copyrights, software, source code,
                    systems, patents, procedures, manuals, specifications, any
                    other intellectual property, confidential reports, price
                    lists, pricing formulas, customer lists, financial
                    information (including the revenues, costs, or profits
                    associated with any of the Partnership's or the Company
                    Group's products or services), business plans, lease
                    structure, projections, opportunities or strategies,
                    acquisitions or mergers, advertising or promotions,
                    personnel matters, legal matters, any other confidential and
                    proprietary information, and any other information not
                    generally known outside the Partnership or the Company Group
                    that may be of value to the Partnership or the Company Group
                    but excludes any information already properly in the public
                    domain. "Confidential Information" also includes
                    confidential and proprietary information and trade secrets
                    that third parties entrust to the Partnership or the Company
                    Group in confidence.

                    You understand and agree that the rights and obligations set
                    forth in this Secrecy Section will continue indefinitely and
                    will survive termination of this Agreement and your
                    employment with the Partnership or the Company Group.

Exclusive Property  You confirm that all Confidential Information is and must
                    remain the exclusive property of the Partnership or the
                    relevant member of the Company Group. All business records,
                    business papers, and business documents you keep or make in
                    the course of your employment by the Partnership relating to
                    the Partnership or any 
<PAGE>
 
                    member of the Company Group must be and remain the property
                    of the Partnership or the relevant member of the Company
                    Group. Upon the termination of this Agreement with the
                    Partnership or upon the Partnership's request at any time,
                    you must promptly deliver to the Partnership or to the
                    relevant member of the Company Group any Confidential
                    Information or other materials (written or otherwise) not
                    available to the public or made available to the public in a
                    manner you know or reasonably should recognize the
                    Partnership did not authorize, and any copies, excerpts,
                    summaries, compilations, records and documents you made or
                    that came into your possession during your employment. You
                    agree that you will not, without the Partnership's consent,
                    retain copies, excerpts, summaries or compilations of the
                    foregoing information and materials. You understand and
                    agree that the rights and obligations set forth in this
                    Exclusive Property Section will continue indefinitely and
                    will survive termination of this Agreement and your
                    employment with the Company Group.

Maximum Limits      If any of the provisions of Exhibit A are ever deemed to
                    exceed the time, geographic area, or activity limitations
                    the law permits, you and the Partnership agree to reduce the
                    limitations to the maximum permissible limitation, and you
                    and the Partnership authorize a court or arbitrator having
                    jurisdiction to reform the provisions to the maximum time,
                    geographic area, and activity limitations the law permits.

Injunctive Relief   Without limiting the remedies available to the Partnership,
                    you acknowledge

                         that a breach of any of the covenants in this Exhibit A
                         may result in material irreparable injury to the
                         Partnership and Company Group for which there is no
                         adequate remedy at law, and

                         that it will not be possible to measure damages for
                         such injuries precisely.

                    You agree that, if there is a breach or threatened breach,
                    the Partnership or any member of the Company Group will be
                    entitled to obtain a temporary restraining order and/or a
                    preliminary or
<PAGE>
 
                    permanent injunction restraining you from engaging in
                    activities prohibited by any provisions of this Exhibit A or
                    such other relief as may be required to specifically enforce
                    any of the covenants in this Exhibit A.

<PAGE>
 
                                 EXHIBIT 10.9
                           (FORM OF CREDIT AGREEMENT)

     THIS CREDIT AGREEMENT is dated as of February __, 1998, between CAPITAL
AUTOMOTIVE, L.P., a Maryland limited partnership (the "Company"), and
NATIONSBANK, N.A. (the "Bank").

 
     The parties hereto hereby agree as follows:

                                   ARTICLE I.
                                  DEFINITIONS
                                  -----------

     Section 1.1  Defined Terms.  As used in this Agreement, the following terms
                  -------------                                                 
have the following meanings:

     "Agreement": this Credit Agreement, as amended, supplemented or otherwise
      ---------                                                               
modified from time to time.

     "Business Day": any day except a Saturday, Sunday or other day on which
      ------------                                                          
commercial banks in Norfolk, Virginia or New York, New York are authorized by
law to close.

     "CAR": Capital Automotive REIT, a Maryland real estate investment trust.
      ---                                                                    

     "CD": the certificate of deposit issued by the Bank and owned by the
      --                                                                 
Company in the amount of $10,000,000.
 
     "Code": the Internal Revenue Code of 1986, as amended from time to time.
      ----                                                                   

     "Commonly Controlled Entity": an entity, whether or not incorporated, which
      --------------------------                                                
is under common control with the Company within the meaning of Section 414(b),
(c), (m) or (n) of the Code.

     "Contingent Obligation": as to any Person, any obligation of such Person
      ---------------------                                                  
guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or
other obligations ("primary obligations") of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, any obligation of such Person, whether or not contingent, (a) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (b) to advance or supply funds (i) for the purchase
or payment of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary

                                       1
<PAGE>
 
obligation or (d) otherwise to assure or hold harmless the owner of such primary
obligation against loss in respect thereof; provided, however, that the term
                                            --------  -------               
Contingent Obligation shall not include endorsements of instruments for deposit
or collection in the ordinary course of business.

     "Contractual Obligation": as to any Person, any provision of any security
      ----------------------                                                  
issued by such Person or of any agreement, instrument or undertaking to which
such Person is a party or by which it or any of its property is bound.

     "Debt Service Coverage Ratio": the consolidated ratio for the Company and
      ---------------------------                                             
CAR, calculated at the end of any fiscal quarter as an average of that quarter
and the immediately preceding three quarters, by dividing (A) the sum of (i) net
profit, (ii) depreciation, (iii) amortization and (iv) interest expense, minus
the sum of (i) distributions, (ii) non-recurring gains and (iii) charges to
equity, by (B) the sum of (i) interest expense, (ii) prior year current
maturities of long term debt and (iii) prior year current maturities of capital
leases.

     "Default": any of the events specified in Article VII, whether or not any
      -------                                                                 
requirement for the giving of notice, the lapse of time, or both, or any other
condition, has been satisfied.

     "ERISA": the Employee Retirement Income Security Act of 1974, as amended
      -----                                                                  
from time to time.

     "Event of Default": any of the events specified in Article VII, provided
      ----------------                                                       
that any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.

     "Funds from Operations": net income (determined in accordance with GAAP)
      ---------------------                                                  
excluding gains (or losses) from debt restructuring and sales of depreciated
property, plus depreciation and amortization related to real estate investment,
and after adjustments for minority interest and unconsolidated partnerships and
joint ventures.
 
     "GAAP": Generally Accepted Accounting Principles in the United States of
      ----                                                                   
America in effect from time to time.

     "Governmental Authority": any nation or government, any state or other
      ----------------------                                               
political subdivision thereof, and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled (through stock or
capital ownership or otherwise) by any of the foregoing.

     "Guarantee": the collective reference to the guarantees dated as of the
      ---------                                                             
date hereof from the Guarantors to the Bank, as the Guarantee may be amended,
supplemented or otherwise modified from time to time.

     "Guarantors": CAR, Vince Sheehy and Robert Rosenthal, jointly and
      ----------                                                      
severally.

                                       2
<PAGE>
 
     "Indebtedness": as to any Person, at a particular time, (a) all
      ------------                                                  
indebtedness for borrowed money or for the deferred purchase price of property
or services in respect of which such Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which such
Person otherwise assures a creditor against loss, including, without limitation,
accounts payable, accrued expenses and other current liabilities, and inter-
company accounts, (b) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment thereof, and (c) capitalized lease obligations of such
Person.

     "Lien": any mortgage, pledge, hypothecation, assignment, deposit
      ----                                                           
arrangement, encumbrance, lien (statutory or other), or preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any financing lease having substantially the same economic
effect as any of the foregoing, and the filing of any financing statement under
the Uniform Commercial Code or comparable law of any jurisdiction).

     "Loan": the loan to be made to the Company by the Bank pursuant to Section
      ----                                                                     
2.1, evidenced by the Note.

     "Loan Documents": the collective reference to this Agreement, the Note, the
      --------------                                                            
Guarantee, the Security Documents and all other documents which have been
executed and delivered by the Company in connection with the Loans;
individually, a "Loan Document".

     "Multiemployer Plan": a Plan which is a multiemployer plan as defined in
      ------------------                                                     
Section 4001(a)(3) of ERISA.

     "Note": as defined in Section 2.1.
      ----                             

     "PBGC": the Pension Benefit Guaranty Corporation established pursuant to
      ----                                                                   
Subtitle A of Title IV of ERISA or any entity succeeding to any or all of its
functions under ERISA.
 
     "Person": an individual, a partnership, a corporation, a real estate
      ------                                                             
investment trust, a limited liability company, a business trust, a joint stock
company, a trust, an unincorporated association, a joint venture, a Governmental
Authority or any other entity of whatever nature.

     "Plan": at any time an employee pension benefit plan which is covered by
      ----                                                                   
Title IV of ERISA or subject to the minimum funding standards under Section 412
of the Code and is either (i) maintained by a member of the Commonly Controlled
Entity for employees of a member or members of the Commonly Controlled Entity,
or (ii) maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
a member of the Commonly Controlled Entity is then making or accruing an
obligation to make contributions or has within the preceding five years made
contributions.

                                       3
<PAGE>
 
     "Pledge Agreement": the Pledge Agreement dated as of the date hereof 
      ----------------   
between the Company and the Bank, pledging the CD to the Bank as collateral for
the Loans.

     "Reportable Event": any of the events set forth in Section 4043(b) of ERISA
      ----------------                                                          
or the regulations thereunder.

     "Requirement of Law": as to any Person, the partnership agreement, the
      ------------------                                                   
Certificate or Articles of Incorporation and Bylaws, or Articles of
Organization, or other organizational or governing documents of such Person, and
any law, treaty, rule or regulation, or determination of an arbitrator or a
court or other Governmental Authority, in each case applicable to or binding
upon such Person or any of its properties or to which such Person or any of its
property is subject.

     "Responsible Officer": the ________of the Company, or the ________ of CAR
      -------------------                                                     
or, with respect to financial matters, the chief financial officer of a Person
or the chief accounting officer of a Person.

     "Security Documents": the Pledge Agreement and any other instruments or
      ------------------                                                    
documents executed by the Company or others as security for the Note, as they
may be amended, supplemented or otherwise modified from time to time.

     "Subsidiary": as to any Person, a corporation of which shares of stock
      ----------                                                           
having ordinary voting power (other than stock having such power only by reason
of the happening of a contingency) to elect a majority of the board of directors
or other managers of such corporation are at the time owned, or the management
of which is otherwise controlled, directly, or indirectly through one or more
intermediaries, or both, by such Person.

     "Tangible Net Worth": at a particular date, all amounts which would, in
      ------------------                                                    
conformity with GAAP, be included under shareholders' equity on a balance sheet
of a Person at such date; provided, however, such amounts are to be net of
                          --------  -------                               
amounts carried on the books of such Person for (a) any write-up in the book
value of any assets of such Person resulting from a revaluation thereof, (b)
treasury stock, (c) unamortized debt discount and expense, (d) any cost of
investments in excess of net assets acquired at any time of acquisition by such
Person, (e) patents, patent applications, copyrights, trademarks, trade names,
and other like intangibles and (f) goodwill, experimental or organizational
expenses and other like intangibles.

     "Termination Date": August __, 1998.
      ----------------                   

     "Total Liabilities": at a particular date, the total liabilities of a
      -----------------                                                   
Person, determined in accordance with GAAP.

     "Unfunded Vested Liabilities": with respect to any Plan at any time, the
      ---------------------------                                            
amount (if any) by which (i) the present value of all vested nonforfeitable
benefits under the Plan exceeds (ii) the 

                                       4
<PAGE>
 
fair market value of all Plan assets allocable to such benefits, all determined
as of the then most recent valuation date for such Plan, but only to the extent
that such excess represents a potential liability of a member of the Commonly
Controlled Entity to the PBGC or the Plan under Title IV of ERISA.

     "Withdrawal Liability": at a particular date, the aggregate liability of
      --------------------                                                   
the Company or any Commonly Controlled Entity (regardless of the date of
payment) to any Multiemployer Plans pursuant to (S) 4201 of ERISA if, on such
date, the Company or any Commonly Controlled Entity were to withdraw (partially
or completely) from such Plans.

     Section 1.2  Other Definitional Provisions.
                  ----------------------------- 

          (a)  All terms defined in this Agreement shall have the defined
meanings when used in the Note, the other Loan Documents, and in any certificate
or other document made or delivered pursuant hereto or thereto, unless otherwise
defined therein.

          (b)  As used herein and in the Note, and any certificate or other
document made or delivered pursuant hereto, accounting terms not defined in
Section 1.1, and accounting terms partly defined in Section 1.1 to the extent
not defined, shall have the respective meanings given to them under GAAP.

                                  ARTICLE II.
                            AMOUNT AND TERMS OF LOAN
                            ------------------------

     Section 2.1 The Loan.  Subject to the terms and conditions hereof, and
                 --------                                                    
until the Termination Date, the Bank agrees to make a revolving loan to the
Company in an amount up to $10,000,000 (the "Loan"). The Loan shall be evidenced
by the revolving note of the Company (the "Note"), dated the date hereof, and
payable to the order of the Bank in the maximum original principal amount of
$10,000,000.  The Note shall bear interest from the date thereof on the unpaid
principal amount thereof at a rate per annum equal to the rate of interest paid
by the Bank to the Company on the CD plus 1%.  Interest only on the Note shall
be payable monthly in arrears, on the first day of each month, beginning on the
first such date to occur after the date hereof.  The Note shall mature on the
Termination Date.  The Bank is authorized to endorse the date and amount of each
Loan of the Bank and each payment of principal with respect thereto on the
schedule annexed to and constituting a part of the Note, which endorsement shall
constitute prima facie evidence of the accuracy of the information endorsed.
           ----- -----                                                       
Subject to the terms and conditions hereof, the Company may borrow, repay and
reborrow the  Loan.  The Note shall be secured by the Security Documents.
 
     Section 2.2  Default Interest; Late Charges.  After any amount on the
                  ------------------------------                          
Note becomes due and payable, (whether at the stated maturity, by acceleration
or otherwise) the Note shall bear interest at a rate per annum equal to three
percent (3%) above the rate otherwise applicable until paid in full (both before
and after judgment).  In the event the Company fails to pay any 

                                       5
<PAGE>
 
installment of principal and/or interest or otherwise fails to repay the Note
within fifteen (15) days of its due date, the Company will pay the Bank on
demand a late charge of 5% of the overdue payment.

     Section 2.3  Prepayments.   The Company may, at its option, from time to
                  -----------                                                
time, prepay the Loans in whole or in part without premium or penalty at any
time or times.

     Section 2.4  Computation of Interest and Fees.  Interest and fees shall be
                  --------------------------------                             
calculated on the basis of a 360-day year for the actual days elapsed.

     Section 2.5  Notice of Borrowing; Disbursements and Payments.  The Company
                  -----------------------------------------------              
shall give the Bank notice of a requested advance under the Loan before ______,
specifying a Business Day on which the Loan is to be made and the amount of such
Loan, which shall be in a minimum amount of ______.  All proceeds of the Loans
shall be disbursed by the Bank to the Company.  Each payment by the Company on
account of principal, interest and fees with respect to the Loans shall be made
to the Bank.  All payments (including prepayments) by the Company on account of
principal, interest and fees shall be made without set-off or counterclaim to
the Bank at the office of the Bank in lawful money of the United States of
America and in immediately available funds.  If any payment hereunder or on the
Note becomes due and payable on a day other than a Business Day, the maturity
thereof shall be extended to the next succeeding Business Day, and, with respect
to payments of principal or interest thereon shall be payable at the then
applicable rate during such extension.

     Section 2.6  Use of Proceeds.   The proceeds of the Loan shall be used by
                  ---------------                                             
the Company for working capital.

                                  ARTICLE III
                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------

     In order to induce the Bank to enter into this Agreement and to make the
loans herein provided for, the Company hereby represents and warrants to the
Bank that:

     Section 3.1 Financial Condition.  The consolidated financial statements of
                 -------------------                                           
the Company and CAR provided to the Bank by the Company,  accurately reflect the
financial condition of the Company and CAR on the dates stated therein.

     Section 3.2  No Change.  Since the date of the most recent consolidated
                  ---------                                                 
financial statements of the Company and CAR provided to the Bank, there has been
no material adverse change in the business, operations, assets or financial or
other condition of the Company and/or CAR.

     Section 3.3 Partnership Existence; Compliance with Law.  The Company (a) is
                 ------------------------------------------                     
duly organized, validly existing and in good standing as a limited partnership
under the laws of 

                                       6
<PAGE>
 
Maryland, (b) has the partnership power and authority to own and operate its
property, to lease the property it operates and to conduct the business in which
it is currently engaged, (c) is duly qualified as a limited partnership and in
good standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business required such
qualification, and (d) is in compliance with all Requirements of Law, except to
the extent that the failure to comply therewith could not, in the aggregate,
have a material adverse effect on the business, operations, property or
financial or other condition of the Company and could not materially adversely
affect the ability of the Company to perform its obligations under this
Agreement, the Note, and the Security Documents and to effectuate the
transactions contemplated hereby and thereby.

     Section 3.4 Partnership Power; Authorization; Enforceable Obligations.  The
                 --------------------------------------------- -----------      
Company has the partnership power and authority to make, deliver and perform the
Loan Documents to which it is a party, to borrow hereunder and to effectuate the
transactions contemplated hereby and has taken all necessary action to authorize
the borrowings on the terms and conditions of this Agreement and the Note, to
grant the mortgage liens and security interests pursuant to the Security
Documents and to authorize the execution, delivery and performance of the Loan
Documents to which it is a party.  No consent or authorization of, filing with,
or other act by or in respect of any Person or any Governmental Authority, is
required or advisable in connection with the borrowings hereunder or with the
execution, delivery, performance, validity or enforceability of the Loan
Documents to which it is a party.  The Loan Documents to which the Company is a
party have been duly executed and delivered on behalf of the Company and
constitute the legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally.

     Section 3.5 No Legal Bar.  The execution, delivery and performance of the
                 ------------                                                 
Loan Documents and the borrowings hereunder, the use of the proceeds thereof and
the granting of the security interests pursuant to the Security Documents will
not violate any Requirement of Law or any Contractual Obligation of the Company,
and will not result in, or require, the creation or imposition of any Lien on
any of its properties or revenues pursuant to any Requirement of Law or
Contractual Obligation except as permitted in Section 5.2 hereof.

     Section 3.6 No Material Litigation.  No litigation, investigation or
                 ----------------------                                  
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the knowledge of the Company, threatened by or against the Company, any of
its employee benefit programs, policies or Plans or against any of its
properties or revenues (a) with respect to the Loan Documents or any of the
transactions contemplated thereby, or (b) which could have a material adverse
effect on the business, operations, property or financial or other condition of
the Company.

     Section 3.7 No Default.  The Company is not in default under or with
                 ----------                                              
respect to any Contractual Obligation in any respect which could be materially
adverse to the business, opera-  

                                       7
<PAGE>
 
tions, property or financial or other condition of the Company, or which could
materially adversely affect the ability of the Company to perform its
obligations under the Loan Documents. No Default or Event of Default has
occurred and is continuing.

     Section 3.8 Ownership of Property; Liens.  The Company has good record and
                 ----------------------------                                  
marketable title in fee simple to all its real property, and good title to all
its other property, and none of such property is subject to any Lien, except as
permitted in Section 5.2 hereof.

     Section 3.9 No Burdensome Restrictions.  No Contractual Obligation of the
                 --------------------------                                   
Company and no Requirement of Law materially adversely affects, or insofar as
the Company may reasonably foresee may so affect, the business, operations,
property or financial or other condition of the Company.

     Section 3.10 Taxes.  The Company has filed or caused to be filed all tax
                  -----                                                      
returns which to the knowledge of the Company are required to be filed, and has
paid all taxes shown to be due and payable on said returns or on any assessments
made against it or any of its property and all other taxes, fees or other
charges imposed on it or any of its property by any Governmental Authority; and
no tax liens have been filed and, to the knowledge of the Company, no claims are
being asserted with respect to any such taxes, fees or other charges.

     Section 3.11 Federal Regulations.  The Company is not engaged and will not
                  -------------------                                          
engage, principally or as one of its important activities, in the business of
extending credit for the purpose of "purchasing" or "carrying" any "margin
stock" within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.  No part of the proceeds of any loans
hereunder will be used for "purchasing" or "carrying" "margin stock" as so
defined or for any purpose which violates, or which would be inconsistent with,
the provisions of the Regulations of such Board of Governors.

     Section 3.12 Compliance with ERISA; Prohibited Transactions.  Each member
                  ----------------------------------------------              
of the Commonly Controlled Entity has fulfilled its obligations under the
minimum funding standards of ERISA and the Code with respect to each Plan and is
in compliance in all material respects with provisions of ERISA and the Code and
published regulations presently applicable to each Plan.  No member of the
Commonly Controlled Entity has incurred any liability, or has entered into any
transaction that is likely to cause any liability to be incurred to the PBGC or
any Plan under Title IV of ERISA.  No Lien has been attached and no Person has
threatened to attach a Lien on any property of the Company as a result of the
Company's failure to comply with ERISA.  None of the Plans is a Multiemployer
Plan.  With respect to each Plan, the Plan has not at any time:

          (a) engaged in any "prohibited transaction," as such term is defined
in Section 4975 of the Code or in Section 406 of ERISA;

                                       8
<PAGE>
 
          (b) incurred any "accumulated funding deficiency," as such term is
defined in Sections 302(a)(2) and 4243 of ERISA, whether or not waived; or

          (c) been terminated in a manner which could result in the imposition
of a Lien on the property of the Company pursuant to Section 4068 of ERISA.

     Section 3.13 Investment Company Act.  The Company is not an "investment
                  ----------------------                                    
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.

     Section 3.14 Subsidiaries.  There are no Subsidiaries of the Company.
                  ------------                                            

     Section 3.15 Operations and Business.  The Company has engaged in no
                  -----------------------                                
business other than the business currently being conducted by the Company.

     Section 3.16 Patents, Copyrights, Permits, Licenses, Trademarks and Leases.
                  -------------------------------------------------------------
The Company owns all of the patents, trademarks, permits, service marks, trade
names, copyrights and licenses, or rights with respect to the foregoing, and has
obtained, or shall have obtained, all assignments of all leases and other rights
of whatever nature, necessary for the present and planned future conduct of its
business, without any known conflict with the rights of others which might
result in a material adverse effect on the business, operations, property or
financial or other condition of the Company.

     Section 3.17 The Security Documents.  Upon the due execution and delivery
                  ----------------------                                      
thereof pursuant to this Agreement, the provisions of the Security Documents
will be effective to create in favor of the Bank, a legal, valid and enforceable
security interest in all right, title and interest of the Company in the
collateral described therein.  When the CD has been delivered to the Bank, the
Security Documents shall constitute fully perfected security interests in all
right, title and interest of the Company in such collateral superior in right to
any Liens, existing or future, which the Company or any third Person may have
against such collateral or interests therein, except as permitted by Section 5.2
below or specifically consented to by the Bank.


                                   ARTICLE IV
                              CONDITIONS PRECEDENT
                              --------------------

     Section 4.1  Conditions to First Loan.  The obligation of the Bank to make
                  ------------------------                                     
its first Loan hereunder is subject to the satisfaction of the following
conditions precedent:

          (a) Note.  The Bank shall have received the Note conforming to the
              ----                                                          
requirements hereof, duly executed and delivered by a duly authorized officer of
the Company.

          (b) Legal Opinion of Counsel.  The Bank shall have received the
              ------------------------                                   
executed legal 

                                       9
<PAGE>
 
opinion of Wilmer, Cutler & Pickering dated the date of the making of the
initial Loan hereunder and addressed to the Bank, covering such matters
incidental to the transactions contemplated hereby as the Bank may reasonably
require and satisfactory in form and substance to the Bank.

          (c) Partnership Proceedings.  The Bank shall have received a copy of
              -----------------------                                         
the resolutions (in form and substance satisfactory to the Bank) of the Company
authorizing (i) the execution, delivery and performance of the Loan Documents to
which it is a party, (ii) the consummation of the transactions contemplated
thereby and (iii) the borrowings herein provided for and the granting of the
mortgage liens and security interests pursuant to the Security Documents,
certified by the general partner of the Company on the date of the making of the
initial Loan hereunder.  Such certificate shall state that the resolutions set
forth therein have not been amended, modified, revoked or rescinded as of the
date of such certificate.

          (d) Incumbency Certificate of Company.  The Bank shall have received a
              ---------------------------------                                 
certificate of the Company, dated the date of the making of the initial Loan
hereunder, as to the incumbency and signature of the representatives of the
general partner of the Company executing the Loan Documents and any certificate
or other document to be delivered pursuant hereto or thereto.

          (e) Proceedings of CAR.  The Bank shall have received a copy (in form
              ------------------                                               
and substance satisfactory to the Bank) of the resolutions of CAR, certified by
a Responsible Officer of CAR on the date of the making of the initial advance
hereunder, authorizing CAR's execution, delivery and performance of the Loan
Documents to which it is a party.  Such certificate shall state that the
resolutions set forth therein have not been amended, modified, revoked or
rescinded as of the date of such certificate.

          (f) Incumbency Certificate of CAR.  The Bank shall have received a
              -----------------------------                                 
certificate of CAR, dated the date of the making of the initial advance
hereunder, as to the incumbency and signature of the Responsible Officer
authorized to sign the Loan Documents to which it is a party and any other
certificate or other document to be delivered pursuant thereto.

          (g) Guarantee.  The Bank shall have received the Guarantee, duly
              ---------                                                   
executed and delivered by the Guarantors and dated the date hereof.

          (h) Security Documents.  The Bank shall have received the Security
              ------------------                                            
Documents, each duly executed and delivered by a duly authorized Responsible
Officer of the Company.

          (i) Filings, Registrations and Recordings.  Any documents required to
              -------------------------------------                            
be filed, registered or recorded in order to create, in favor of the Bank, a
perfected Lien on the collateral described in the Security Documents shall have
been properly filed, registered or recorded in each office in each jurisdiction
in which such filings, registrations and recordations are required; the Bank
shall have received acknowledgment copies of all such filings, registrations and
recordations stamped by the appropriate filing, registration or recording
officer (or, in lieu 

                                       10
<PAGE>
 
thereof, other evidence satisfactory to the Bank that all such filings,
registrations and recordations have been made); and the Bank shall have received
evidence that all necessary filing, subscription and inscription fees and all
recording and other similar fees, and all taxes and other expenses related to
such filings, registrations and recordings have been paid in full by or on
behalf of the Company.

          (j) No Proceedings or Litigation.  No action, suit or proceeding
              ----------------------------                                
before any arbitrator or any Governmental Authority shall have been commenced,
no investigation by any Governmental Authority shall have been threatened,
against the Company or any Guarantor or any of the officers or representatives
of the Company or any Guarantor, seeking to restrain, prevent or change the
transactions contemplated by the Loan Documents, in whole or in part, or
questioning the validity or legality of the transactions contemplated by the
Loan Documents or seeking damages in connection with such transactions.

          (k) Insurance.  The Bank shall have received evidence satisfactory to
              ---------                                                        
it that the Company or other appropriate party has obtained the policies of
insurance required by the Security Documents and Section 5.5 of this Agreement.

          (l) Consents, Licenses, Approvals, etc.  The Bank shall have received
              ----------------------------------                               
certified true copies of all consents, licenses and approvals required or
advisable in connection with the execution, delivery, performance, validity and
enforceability of the Loan Documents, and such consents, licenses and approvals
shall be in full force and effect and be satisfactory in form and substance to
the Bank.

          (m) No Default or Event of Default.  No Default or Event of Default
              ------------------------------                                 
shall have occurred and be continuing hereunder or after giving effect to the
making of the Loans hereunder.

          (n) Initial Public Offering.  CAR shall have completed an initial
              -----------------------                                      
public offering in which at least $225,000,000 of equity capitalization was
raised from the public and contributed to the equity of the Company.

          (o) Additional Information.  The Bank shall have received such
              ----------------------                                    
additional information as it shall have reasonably requested, including, without
limitation, copies of any debt agreements, security agreements and other
material contracts.

          (p) Additional Matters.  All corporate and other proceedings and all
              ------------------                                              
other documents and legal matters in connection with the transactions
contemplated by the Loan Documents shall be satisfactory in form and substance
to the Bank and its counsel.

     Section 4.2  Conditions to All Loans.  The obligation of the Bank to make
                  -----------------------                                     
any Loan hereunder on any date is subject to the satisfaction of the following
conditions precedent:

                                       11
<PAGE>
 
          (a) Representations and Warranties.  The representations and
              ------------------------------                          
warranties made by the Company or any Guarantor in the Loan Documents to which
any of them is a party, or which are contained in any certificate, document or
financial or other statement furnished at any time under or in connection
herewith or therewith, shall be correct on and as of the date of such Loan as if
made on and as of such date.

          (b) No Default or Event of Default.  No Default or Event of Default
              ------------------------------                                 
shall have occurred on or before such date and/or after giving effect to the
Loan to be made on such date.

          (c) Satisfaction of Conditions.  Each borrowing by the Company under
              --------------------------                                      
this Agreement shall constitute a representation and warranty by the Company as
of the date of each such borrowing that the conditions contained in the
foregoing paragraphs (a) and (b) of this Section 4.2 have been satisfied.


                                   ARTICLE V
                             AFFIRMATIVE COVENANTS
                             ---------------------

     The Company hereby agrees that, so long as the Note remains outstanding and
unpaid or any other amount is owing to the Bank hereunder, the Company shall:

     Section 5.1  Financial Statements.  Furnish to the Bank:
                  --------------------                       

             (a) as soon as available, but in any event within ninety (90) days
after the end of each fiscal year of the Company, a copy of the audited
financial statements of the Company prepared on a consolidated and consolidating
basis with CAR in accordance with GAAP as at the end of such year, including a
balance sheet and statements of income and retained earnings and paid-in capital
and changes in financial position, setting forth in each case in comparative
form the figures for the previous year, certified without a "going concern" or
like qualification or exception, or qualification arising out of the scope of
the audit, by independent certified public accountants of nationally recognized
standing acceptable to the Bank, and certified by a Responsible Officer of the
Company as being true and correct in all material respects;

             (b) as soon as available, but in any event not later than twenty-
five (25) days after the end of each accounting quarter of the Company
internally prepared financial statements of the Company prepared on a
consolidated and consolidating basis with CAR in accordance with GAAP as at the
end of such quarter, including a balance sheet and statements of income and
retained earnings and paid-in capital and changes in financial position,
certified by a Responsible Officer;

all such financial statements to be complete and correct in all material
respects and to be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods.

                                       12
<PAGE>
 
     Section 5.2  Certificates; Other Information.  Furnish to the Bank:
                  -------------------------------                       

             (a) concurrently with the delivery of the financial statements
referred to in Sections 5.1(a) and (b) above, a certificate of a Responsible
Officer of the Company (i) stating that, to the best of such officer's
knowledge, the Company during such period has observed or performed all of its
covenants and other agreements, and satisfied every condition, contained in the
Loan Documents to be observed, performed or satisfied by them, and that such
officers have obtained no knowledge of any Default or Event of Default except as
specified in such certificate, and (ii) showing in detail in form and substance
satisfactory to the Bank, the calculations supporting such statement in respect
of Section 5.9 hereof;

             (b) within five days after the same are sent, copies of all
financial statements and reports which the Company sends to partners, and within
five days after the same are filed, copies of all financial statements and
reports, which the Company or CAR may make to, or file with, the Securities and
Exchange Commission or any successor or analogous Governmental Authority;

             (c) furnish to the Bank by January 31 of each year an estimate of
the Withdrawal Liability as of the end of the Plan year occurring in the
preceding year for each Plan that is a Multiemployer Plan; and

             (d) promptly, such additional financial and other information as
the Bank may from time to time reasonably request.

     Section 5.3  Payment of Obligations.  Pay, discharge or otherwise satisfy
                  ----------------------                                      
at or before maturity or before they become delinquent, as the case may be, all
its Indebtedness and other obligations of whatever nature, except, in the case
of such other obligations, when the amount or validity thereof is currently
being contested in good faith by appropriate proceedings and reserves in
conformity with GAAP with respect thereto have been provided on the books of the
Company.

     Section 5.4  Conduct of Business and Maintenance of Existence.  Engage in
                  ------------------------------------------------            
business of the same general type as now conducted by the Company, and preserve,
renew and keep in full force and effect its partnership existence and take all
reasonable action to maintain all rights, privileges and franchises necessary or
desirable in the normal conduct of its business; comply with all Contractual
Obligations and Requirements of Law except to the extent that the failure to
comply therewith could not, in the aggregate, have a material adverse effect on
the business, operations, property or financial or other condition of the
Company.

     Section 5.5  Maintenance of Property, Insurance.  Keep all property useful
                  ----------------------------------                           
and necessary in its business in good working order and condition, normal wear
and tear excepted; maintain with financially sound and reputable insurance
companies insurance on all its property, including the Real Property, in at
least such amounts and against at least such risks as are usually insured

                                       13
<PAGE>
 
against in the same general area by companies engaged in the same or a similar
business, designating the Bank as loss payee, provided that, in any event, the
                                              -------- ----  -- --- -----     
Company shall maintain insurance at all times on its tangible personal property
and real property in an amount equal to the replacement cost of such property at
such time and shall maintain extended coverage for vandalism and malicious
mischief; and furnish to the Bank, upon written request, full information as to
the insurance carried.

     Section 5.6  Inspection of Property; Books and Records; Discussions.  Keep
                  -----------------------------------------  -----------       
proper books of record and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and permit
representatives of the Bank to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time and as often as may reasonably be desired, and to discuss the business,
operations, properties and financial and other condition of the Company with
officers and employees of the Company and with its independent certified public
accountants.

     Section 5.7  Notices.  Promptly give notice to the Bank:
                  -------                                    

             (a) of the occurrence of any Default or Event of Default;

             (b) of any (i) default or event of default under any Contractual
Obligation of the Company or (ii) litigation, investigation or proceeding which
may exist at any time between the Company and any Governmental Authority, which
in either case could have a material adverse effect on the business, operations,
property or financial or other condition of the Company;

             (c) of any litigation or proceeding affecting the Company, or any
of its employee benefit programs, policies or plans in which the amount sued for
is $__________ or more and not fully covered by insurance or in which injunctive
or similar relief is sought and of any material adverse development in such
litigation or proceeding;

             (d) of the following events, as soon as possible, and in any event
no later than the date the Company gives or is required to give notice to the
PBGC of (i) the occurrence of any Reportable Event with respect to any Plan
which might constitute grounds for a termination of such Plan under Title IV of
ERISA, or knows the Plan Administrator of any Plan has given or is required to
give notice of any such Reportable Event given or required to be given to the
PBGC, or (ii) the institution of proceedings or the taking or expected taking of
any other action by PBGC or the Company or any Plan, and in addition to such
notice, deliver to the Bank whichever of the following may be applicable (A) a
certificate of the chief financial officer of the Company setting forth details
as to such Reportable Event and the action that the Company or Commonly
Controlled Entity proposes to take with respect thereto, together with a copy of
any notice of such Reportable Event that may be required to be filed with PBGC,
or (B) any notice delivered by PBGC evidencing its intent to institute such
proceedings to terminate the Plan or to appoint a trustee to administer the Plan
or any notice to PBGC that such Plan is to be terminated, as the 

                                       14
<PAGE>
 
case may be, or (iii) any member of the Commonly Controlled Entity receives
notice of complete or partial withdrawal liability under Title IV of ERISA; and

              (e) of a material adverse change in the business, operations,
property or financial or other condition of  the Company.

     Each notice pursuant to this Section shall be accompanied by a statement of
the chief executive officer or chief financial officer of the Company setting
forth details of the occurrence referred to therein and stating what action the
Company proposes to take with respect thereto. For all purposes of clause (d) of
this Section 5.7, the Company shall be deemed to have all knowledge of all facts
attributable to the administrator of such Plan.

     Section 5.8  Further Assurances.  Execute and file all such further
                  ------------------                                    
instruments, and perform such other acts, as the Bank may determine are
necessary or advisable.

     Section 5.9 Financial Covenants.  Maintain, on a consolidated basis with
                 -------------------                                         
CAR:

             (a) a Debt Service Coverage Ratio of no less than 2.50 to 1.0;

             (b) a ratio of Total Liabilities to Tangible Net Worth of not more
than .35 to 1.0, measured at the end of each fiscal quarter of the Company; and

             (c) a minimum Tangible Net Worth of $200,000,000, plus 80% of the
net cash proceeds from any future equity offerings.


                                   ARTICLE VI
                               NEGATIVE COVENANTS
                               ------------------

     The Company hereby agrees that, so long as the Note remains outstanding and
unpaid or any other amount is owing to the Bank hereunder, the Company shall
not, directly or indirectly, without the Bank's consent:

     Section 6.1  Indebtedness.  Create, incur, assume or suffer to exist any
                  ------------                                               
Indebtedness (other than current trade and other current accounts payable in the
ordinary course of business in accordance with customary trade terms), except:

             (a) Indebtedness in respect of the Note;

             (b) Indebtedness to the Bank; and

             (c) Indebtedness expressly consented to by the Bank in writing.

                                       15
<PAGE>
 
     Section 6.2  Limitation on Liens.  Create, incur, assume or suffer to
                  -------------------                                     
exist, any Lien upon any of its property, assets or revenues, whether now owned
or hereafter acquired, except:

              (a) Liens in favor of the Bank created pursuant to the Security
Documents or otherwise;

              (b) Liens expressly consented to by the Bank in writing;

             (c) Liens for taxes, assessments or governmental charges not yet
due or which are being contested in good faith and by appropriate proceedings if
adequate reserves with respect thereto are maintained on the books of the
Company in accordance with GAAP;

             (d) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
are not overdue for a period of more than 30 days or which are being contested
in good faith and by appropriate proceedings;

             (e) pledges or deposits in connection with workmen's compensation,
unemployment insurance and other social security legislation;

             (f) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature incurred
in the ordinary course of business; and

             (g) easements, municipal zoning ordinances, rights-of-way,
restrictions and other similar encumbrances incurred in the ordinary course of
business which, in the aggregate, are not substantial in amount, and which do
not in any case materially detract from the value of the property subject
thereto or interfere with the ordinary conduct of the business of the Company.

     Section 6.3  Limitation on Contingent Obligations.  Agree to, or assume,
                  ------------------------------------                       
guarantee, endorse or otherwise in any way, be or become responsible or liable
for, directly or indirectly, any Contingent Obligation.

     Section 6.4  Prohibition of Fundamental Changes.  Enter into any
                  ----------------------------------                 
transaction of merger or consolidation or amalgamation, or liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution), convey, sell, lease,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or any part of its business or assets, whether now owned or
hereafter acquired (including, without limitation, receivables and leasehold
interests but excluding obsolete or worn out property, or Inventory disposed of
in the ordinary course of business), or acquire by purchase or otherwise all or
substantially all the business or assets of, or stock or other evidence of
beneficial ownership of, any Person, or make any material change in its present
method of conducting business.

     Section 6.5  Distributions.  Make any distribution to its partners in
                  -------------                                           
excess of an amount 

                                       16
<PAGE>
 
equal to 95% of Funds from Operations.

     Section 6.6 Investments.  Except as otherwise specifically permitted
                 -----------                                             
hereunder, make or commit to make, any advance, loan, extension of credit or
capital contribution to, or purchase of any stock, bonds, note, debentures or
other securities of, or make any other investment in, any Person (all such
transactions being herein called "investments") except:

            (a)  investments in accounts, contract rights and chattel paper (as
defined in the Uniform Commercial Code), arising or acquired in the ordinary
course of business; and

            (b)  investments in bank certificates of deposit, open market
commercial paper maturing within one year having the highest rating of either
Standard & Poor's Corporation or Moody's Investors Service, Inc., U.S. Treasury
Bills and other short term obligations issued or guaranteed by the U.S.
Government or any agency thereof.

     Section 6.7 Transactions with Affiliates and Officers.  (i) Enter into any
                 -----------------------------------------                     
transactions, including, without limitation, the purchase, sale or exchange of
property or the rendering of any services, with any Affiliate, or enter into,
assume or suffer to exist any employment or consulting contract with any
Affiliate or any officer thereof, except a transaction or contract which is in
the ordinary course of the Company's business and which is upon fair and
reasonable terms no less favorable to the Company than it would obtain in a
comparable arm's length transaction with a Person not an Affiliate or (ii)  make
any advance or loan in excess of $_______ in the aggregate in any fiscal year to
any Affiliate or any officer or employee thereof or of the Company or to any
trust of which any of the foregoing is a beneficiary, or to any Person on the
guarantee of any of the foregoing except for loans specifically permitted by
this Agreement, or (iii) pay any fees or expenses to, or reimburse or assume any
obligation for the reimbursement of any expenses incurred by any Affiliate
except for travel advances made by the Company in the ordinary course of
business.

     Section 6.8 Sale and Leaseback.  Enter into any arrangement with any Person
                 ------------------                                             
providing for the leasing by the Company of real or personal property which has
been or is to be sold or transferred by the Company to such Person or to any
other Person to whom funds have been or are to be advanced by such Person on the
security of such property or rental obligations of the Company.

     Section 6.9 Compliance with ERISA.  (a) Terminate any Plan so as to result
                 ---------------------                                         
in any material liability to PBGC or any material Withdrawal Liability, (b)
engage in or permit any Person to engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan
which would subject the Company to any material tax, penalty or other liability,
(c) incur or suffer to exist any material "accumulated funding deficiency" (as
defined in Sections 302(a)(2) and 4243 of ERISA), whether or not waived,
involving any Plan, except for contingent Withdrawal Liability not in excess of
$_______, or (d) allow or permit to exist any event or condition which presents
a material risk of incurring a 

                                       17
<PAGE>
 
material liability to PBGC.

     Section 6.10 No Subsidiaries.  Directly or indirectly form or hold any
                  ---------------                                          
Subsidiaries.

 
                                  ARTICLE VII
                               EVENTS OF DEFAULT
                               -----------------

     Upon the occurrence of any of the following events:

             (a) The Company shall fail to pay any principal or interest on the
Note when due, or the Company shall fail to pay any other amount payable
hereunder in accordance with the terms hereof, or

             (b) Any representation or warranty made or deemed made by the
Company herein or in any other Loan Document, or by any Guarantor in any Loan
Document to which it is a party or in any certificate, document or financial or
other statement furnished at any time under or in connection with any Loan
Document shall prove to have been incorrect in any material respect on or as of
the date made or deemed made; or

             (c) The Company shall default in the observance or performance of
any agreement contained in Section 5.5 or Article VI hereof; or

             (d) Any of the Guarantors shall default under or breach the terms
of the Guarantee; or

             (e) The Company or any Guarantor shall default in the observance or
performance of any other covenant or agreement contained in any Loan Document
and such default shall continue unremedied for a period of ten (10) days after
written notice shall have been given by the Bank to the Company; or

             (f) Any Loan Document shall cease, for any reason, to be in full
force and effect in accordance with its terms or any party thereto shall so
assert in writing; or any Security Document shall cease, for any reason, to
grant to the Bank a legal, valid and enforceable Lien on any of the collateral
described therein or shall cease, for any reason, to have the priority purport
ed to be created thereby at the time of the execution thereof; or any party to
any Loan Document shall default in the observance or performance of any of the
covenants or agreements contained therein; or

             (g) Any default or event of default shall occur and remain uncured
beyond any applicable grace period under any note, security documents,
guarantees, agreements, documents or other instruments (other than the Loan
Documents) between the Bank and (i) any Guarantor, (ii) the Company or (iii) any
Affiliate of any Guarantor or the Company; or

                                       18
<PAGE>
 
          (h) The Company, shall (i) default in any payment of principal of or
interest on any Indebtedness or in the payment of any Contingent Obligation,
beyond the period of grace, if any, provided in the instrument or agreement
under which such Indebtedness or Contingent Obligation was created; or (ii)
default in the observance or performance of any other agreement or condition
relating to any such Indebtedness or Contingent Obligation or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event shall occur, the effect of which default or other event is (A) to cause
such Indebtedness to become due prior to its stated maturity or such Contingent
Obligation to become payable, or (B) to allow the holder or holders of such
Indebtedness or beneficiary or beneficiaries of such Contingent Obligation (or a
trustee or agent on behalf of such holder or holders or beneficiary or
beneficiaries), to cause, with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity or such Contingent
Obligation to become payable; or

         (i) (i) the Company shall commence any case, proceeding or other action
(A) under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking
to have an order for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian
or other similar official for it, or for all or any substantial part of its
assets, or the Company shall make a general assignment for the benefit of its
creditors; or (ii) there shall be commenced against the Company any case,
proceeding or other action of a nature referred to in clause (i) above which is
not dismissed within sixty (60) days or which results in the entry of an order
for relief or any such adjudication or appointment which shall not have been
vacated, discharged or stayed or bonded pending appeal within sixty (60) days
from the entry thereof; or (iii) there shall be commenced against the Company
any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or any
substantial part of its assets, which results in the entry of an order for any
such relief which shall not have been vacated, discharged, or stayed or bonded
pending appeal within 60 days from the entry thereof; or (iv) the Company, shall
take any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above;
or (v) the Company shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due; or

         (j) (i) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan,
(ii) any "accumulated funding deficiency" (as defined in Sections 302(a)(2) and
4243 of ERISA), whether or not waived, shall exist with respect to any Plan,
(iii) a Reportable Event shall occur with respect to, or proceedings shall
commence to have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate, any Plan, which Reportable Event or institution of
proceedings is, in the reasonable opinion of the Bank, likely to result in the
termination of such Plan for purposes of Title IV of ERISA and, in the case of a
Reportable Event, the continuance of such Reportable Event unremedied for ten
days after the earlier of the date when the Company obtains actual 

                                       19
<PAGE>
 
knowledge of the Reportable Event or the date when notice of such Reportable
Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or the
continuance of such proceedings for ten days after commencement thereof, as the
case may be, (iv) any Plan shall terminate for purposes of Title IV of ERISA,
(v) if on any date, the Withdrawal Liability exceeds $100,000, or (vi) any other
event or condition shall occur or exist and in each case in clauses (i) through
(vi) above, such event or condition, together with all other such events or
conditions, if any, could subject the Company to any tax, penalty or other
liabilities which in the aggregate are material in relation to the business,
operations, property or financial or other condition of the Company; or

         (k)  One or more judgments or decrees shall be entered against the
Company and such judgments or decrees shall not have been vacated, discharged,
or stayed within 60 days from the entry thereof; or

         (l)  If any material adverse change shall occur in the business
operations or financial condition of the Company, as determined in the Bank's
sole discretion;

     Then, and in any such event, (a) if such event is an Event of Default
specified in paragraph (i) above, automatically the obligation of the Bank to
make Loans hereunder shall immediately terminate and the Loans hereunder (with
accrued interest thereon) and all other amounts owing under this Agreement and
the Note shall immediately become due and payable, and (b) if such event is any
other Event of Default and has not been cured within any applicable grace
period,  (i) the Bank may, by notice to the Company, terminate its obligation to
make Loans hereunder, whereupon it shall immediately terminate; and/or (ii) the
Bank may, by notice of default to the Company, declare the Loans hereunder (with
accrued interest thereon) and all other amounts owing under this Agreement and
the Note to be due and payable forthwith, whereupon the same shall immediately
become due and payable.  Except as expressly provided above in this Section,
presentment, demand, protest and all other notices of any kind are hereby
expressly waived.



                                 ARTICLE VIII
                                 MISCELLANEOUS
                                 -------------

     Section 8.1  Amendments and Waivers.  No provision of any Loan Document may
                  ----------------------                                        
be amended or modified in any way, nor may non-compliance therewith be waived,
except pursuant to a written instrument executed by the Bank and the Company.
In the case of any waiver, the Company and the Bank shall be restored to their
former position and rights hereunder and under the outstanding Note, the
Guarantee and the Security Documents, and any Default or Event of Default waived
shall be deemed to be cured and not continuing; but no such waiver shall extend
to any subsequent or other Default or Event of Default, or impair any right
consequent thereon.

     Section 8.2  Notices.  All notices, requests and demands to or upon the
                  -------                                                   
respective parties 

                                       20
<PAGE>
 
hereto to be effective shall be in writing or by telefax and, unless otherwise
expressly provided herein, shall be deemed to have been duly given or made when
delivered by hand, or when deposited in the mail, postage prepaid, or, in the
case of telefaxed notice, when sent, or in the case of private courier, when
delivered to such courier, addressed as follows or to such address as may be
hereafter notified by the respective parties hereto and any future holders of
the Note:

          The Company:  Capital Automotive L.P.
                        Attn: Thomas D. Eckert               
                        1925 North Lynn Street, Suite 306
                        Arlington, Virginia 22209

          The Bank:     NationsBank, N.A.
                        Dealer Financial Services
                        Attn: Michael R. Burkitt, Vice President
                        6830 Old Dominion Drive, Suite 200
                        McLean, Virginia 22101

provided that any notice, request or demand to or upon the Bank shall not be
effective until received.

     Section 8.3  No Waiver; Cumulative Remedies.  No failure to exercise and no
                  ------------------------------                                
delay in exercising, on the part of the Bank, any right, remedy, power or
privilege hereunder or under any Loan Document, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder or thereunder preclude any other or further exercise thereof
or the exercise of any other right, remedy, power or privilege.  The rights,
remedies, powers and privileges herein or therein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.

     Section 8.4  Survival of Representations and Warranties.  All
                  ------------------------------------------      
representations and warranties made under any Loan Document and in any document,
certificate or statement delivered pursuant thereto or in connection therewith
shall survive the execution and delivery of such Loan Document.

     Section 8.5  Payment of Expenses and Taxes.  The Company agrees (a) to pay
                  -----------------------------                                
or reimburse the Bank for all of its out-of-pocket costs and expenses incurred
in connection with the development, preparation and execution of, and any
amendment, supplement or modification to the Loan Documents and any other
documents prepared in connection therewith, and the consummation of the
transactions contemplated hereby and thereby, including, without limitation, the
fees and disbursements of counsel to the Bank, (b) to pay or reimburse the Bank
for all its costs and expenses incurred in connection with the enforcement or
preservation of any rights under the Loan Documents and any such other
documents, including, without limitation, fees and disbursements of counsel to
the Bank, (c) to pay, indemnify, and to hold the Bank harmless from, any
engineering fees, any and all recording and filing fees and taxes and any and

                                       21
<PAGE>
 
all liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes, if any, which may be payable or determined to be payable
in connection with the execution and delivery and recordation of, or
consummation of any of the transactions contemplated by, or any amendment,
supplement or modification of, or any waiver or consent under or in respect of
the Loan Documents, and any such other documents, and (d) to pay, indemnify, and
hold the Bank harmless from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever with respect to the
execution, delivery, enforcement, performance and administration of the Loan
Documents or any transaction financed in whole or in part directly or indirectly
with the proceeds of any loans made under this Agreement (all the foregoing,
collectively, the "indemnified liabilities"), provided, that the Company shall
                                              --------                        
have no obligation hereunder with respect to indemnified liabilities arising
from (i) the gross negligence or willful misconduct of the Bank or (ii) legal
proceedings commenced against the Bank by any security holder or creditor
thereof arising out of and based upon rights afforded any such security holder
or creditor solely in its capacity as such or (iii) a breach of this Agreement
by the Bank.  The agreements in this Section shall survive repayment of the Note
and all other amounts payable hereunder.

     Section 8.6  Successors and Assigns.  This Agreement shall be binding upon
                  ----------------------                                       
and inure to the benefit of the Company and the Bank, all future holders of the
Note and their respective successors and assigns, except that the Company may
not assign or transfer any of its rights or obligations under this Agreement
without the prior written consent of the Bank.

     Section 8.7   Setoff.
                   ------ 

          (a) The Company agrees that the Bank shall have the right to set off
and apply against all amounts owing to the Bank by the Company under the Note or
any other Loan Document any amount owing to the Company from the Bank.

          (b) In addition to any rights and remedies of the Bank provided by
law, the Bank shall have the right, without prior notice to the Company, any
such notice being expressly waived by the Company to the extent permitted by
applicable law, upon the filing of a petition under any of the provisions of the
federal bankruptcy act or amendments thereto, by or against; the making of an
assignment for the benefit of creditors by; the application for the appointment,
or the appointment of any receiver of, or of any of the property of; the
issuance of any execution against any of the property of; the issuance of a
subpoena or order, in supplementary proceedings, against or with respect to any
of the property of; or the issuance of a warrant of attachment against any of
the property of; the Company, to set off and apply against all amounts owing to
the Bank by the Company under the Note or any other Loan Documents, and against
any other Indebtedness, whether matured or unmatured, of the Company to the
Bank, any amount owing from the Bank to the Company, at or at any time after the
happening of any of the above-mentioned events, and the aforesaid right of set
off may be exercised by the Bank against the Company or against any trustee in
bankruptcy, debtor in possession, assignee for the benefit of creditors,
receiver, or execution, judgment or attachment creditor of the Company, or any
of 

                                       22
<PAGE>
 
them, or against anyone else claiming through or against the Company or such
trustee in bankruptcy, debtor in possession, assignee for the benefit of
creditors, receiver, or execution, judgment or attachment creditor,
notwithstanding the fact that such right of set off shall not have been
exercised by the Bank prior to the making, filing or issuance, or service upon
the Bank of, or of notice of, any such petition; assignment for the benefit of
creditors; appointment or application for the appointment of a receiver; or
issuance of execution, subpoena or order or warrant.

     Section 8.8  Counterparts.  This Agreement may be executed by one or more
                  ------------                                                
of the parties to this Agreement on any number of separate counterparts and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument.  A set of the copies of this Agreement signed by all the
parties shall be lodged with the Company and the Bank.

     Section 8.9 Governing Law.  The Loan Documents and the rights and
                 -------------                                        
obligations of the parties thereunder shall be governed by, and construed and
interpreted in accordance with, the law of the State of _________, except to the
extent that the law of other states governs creation and perfection of security
interests in collateral located in such states.

     Section 8.10  Arbitration.  Any controversy or claim between or among the
                   -----------                                                
parties hereto including but not limited to those arising out of or relating to
the Note, this Agreement or any related agreements or instruments, including any
claim based on or arising from an alleged tort, shall be determined by binding
arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the Rules of Practice and Procedure for
the Arbitration of Commercial Disputes of Judicial Arbitration and Mediation
Services, Inc. (J.A.M.S.), and the "Special Rules" set forth below.  In the
event of any inconsistency, the Special Rules shall control.  Judgment upon any
arbitration award may be entered in any court having jurisdiction. Any party to
this Agreement may bring an action, including a summary or expedited proceeding,
to compel arbitration of any controversy or claim to which this Agreement
applies in any court having jurisdiction over such action.

     (a.) Special Rules  The arbitration shall be conducted in the city of the
          -------------                                                       
     Company's domicile at time of this Agreement's execution and administered
     by J.A.M.S.; if J.A.M.S. is unable or legally precluded from administering
     the arbitration, then the American Arbitration Association shall administer
     such arbitration.  All arbitration hearings will be commenced within 90
     days of demand for arbitration; further, the arbitrator shall only, upon a
     showing of cause, be permitted to extend the commencement of such hearing
     for an additional 60 days.

     (b.) Reservation of Rights  Nothing in this Agreement shall be deemed to
          ---------------------                                              
     (A) limit the applicability of any otherwise applicable statutes of
     limitation or repose and any waivers contained in this Agreement; or (B) be
     a waiver by the Bank of the protection afforded to it by 12 U.S.C. (S)91
     or any substantially equivalent state law; or (C) limit the right of any
     party hereto to exercise self-help remedies such as (but not limited to)
     setoff, or to 

                                       23
<PAGE>
 
     foreclose against any real or personal property collateral, or to obtain
     from a court provisional or ancillary remedies such as (but not limited to)
     injunctive relief or the appointment of a receiver. Any party may exercise
     such self-help rights, foreclose upon such property, or obtain such
     provisional or ancillary remedies before, during or after the pendency of
     any arbitration proceeding brought pursuant to this Agreement. At the
     Bank's option, foreclosure under a deed of trust or mortgage may be
     accomplished by either the exercise of power of sale under the deed of
     trust or mortgage, or by judicial sale under the deed of trust or mortgage,
     or by judicial foreclosure. Neither exercise of self-help remedies nor the
     institution or maintenance of an action for foreclosure or provisional or
     ancillary remedies shall constitute a waiver of the right of any party,
     including the claimant in any such action, to arbitrate the merits of the
     controversy or claim occasioning resort to such remedies.

     Section 8.11 Waiver of Jury Trial.  THE COMPANY AND THE BANK EACH WAIVE ALL
                  --------------------                                          
RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY
EITHER PARTY AGAINST THE OTHER ON ANY MATTER ARISING OUT OF THIS AGREEMENT, THE
NOTE, THE SECURITY DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY.



     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly signed, sealed and delivered by their properly and duly authorized officers
as of the day and year first above-written.

                             CAPITAL AUTOMOTIVE, L.P.

                             By: CAPITAL AUTOMOTIVE REIT,
                                     General Partner


                             By:                              [Seal]
                                ------------------------------
                             Title:
                                   ---------------------------
 

                             NATIONSBANK, N.A.


                             By:                              [Seal]
                                ------------------------------
                             Title:
                                   ---------------------------

                                       24

<PAGE>
 
                                 EXHIBIT 10.16









                            CAPITAL AUTOMOTIVE L.P.
                            -----------------------

                       REAL PROPERTY PURCHASE AGREEMENT
                       --------------------------------









                               December 31, 1997
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE> 
<CAPTION> 
                                                                           Page
<S>       <C>                                                              <C> 
I.    PURCHASE AND SALE                                                    - 1 -
          1.1   Certain Definitions.....................................   - 1 -
          1.2   Agreement to Purchase and Sell..........................   - 2 -
          1.3   Encumbrances............................................   - 2 -
          1.4   Purchase Price..........................................   - 2 -
          1.5   Capitalized Terms.......................................   - 3 -

II.   OPERATION OF PROPERTY THROUGH CLOSING.............................   - 3 -
          2.1   Business Practice.......................................   - 3 -
          2.2   No Sale or Encumbrance..................................   - 3 -
          2.3   Leases, Service Contracts and Management Contracts......   - 3 -
          2.4   Termination of Leases; New Company Leases...............   - 4 -
          2.5   Compliance..............................................   - 4 -
          2.6   Notice of Inaccuracy or Incompleteness..................   - 4 -
          2.7   Access..................................................   - 4 -
          2.8   Insurance...............................................   - 4 -
          2.9   Fulfillment of Obligation...............................   - 4 -
          2.10  Financial Statements and Reports........................   - 5 -
          2.11  Under Construction Properties...........................   - 5 -

III.  STATUS OF TITLE TO PROPERTY.......................................   - 7 -
          3.1   State of Title..........................................   - 7 -
          3.2   Preliminary Evidence of Title...........................   - 7 -
          3.3   Title Defects...........................................  - 10 -

IV.   CLOSING PRORATIONS AND ADJUSTMENTS................................  - 10 -
          4.1   Prorations and Adjustments..............................  - 10 -

V.    CLOSING...........................................................  - 11 -
          5.1   Closing Date............................................  - 11 -
          5.2   Closing Documents.......................................  - 12 -
          5.3   Conditions to the Partnership's Obligation to Close.....  - 15 -
          5.4   Conditions to the Seller's Obligation to Close..........  - 17 -
          5.5   Transaction Costs.......................................  - 17 -

VI.   CASUALTY LOSS AND CONDEMNATION....................................  - 18 -
          6.1   Casualty................................................  - 18 -
          6.2   Condemnation or Taking..................................  - 18 -
</TABLE> 

                                     -ii-
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                           Page
<S>       <C>                                                              <C> 
VII.  REPRESENTATIONS AND WARRANTIES OF THE SELLERS.....................  - 19 -
          7.1   Organization............................................  - 19 -
          7.2   Authority...............................................  - 19 -
          7.3   Interest in Contributed Properties......................  - 20 -
          7.4   No Defaults.............................................  - 20 -
          7.5   No Litigation; No Condemnation..........................  - 20 -
          7.6   No Violation............................................  - 21 -
          7.7   Required Obligations....................................  - 21 -
          7.8   Condition of Properties.................................  - 21 -
          7.9   Warranties..............................................  - 22 -
          7.10  Utilities...............................................  - 22 -
          7.11  Zoning..................................................  - 22 -
          7.12  Improvements............................................  - 22 -
          7.13  Environmental Matters...................................  - 22 -
          7.14  Insurance...............................................  - 25 -
          7.15  Compliance..............................................  - 25 -
          7.16  Leases..................................................  - 25 -
          7.17  Service Contracts; Management Contracts.................  - 26 -
          7.18  Permits.................................................  - 26 -
          7.19  Other Liabilities.......................................  - 26 -
          7.20  Tax Matters.............................................  - 26 -
          7.21  Taxes...................................................  - 27 -
          7.22  Special Filings.........................................  - 27 -
          7.23  Books and Records.......................................  - 27 -
          7.24  No Brokers..............................................  - 27 -
          7.25  All Material Information................................  - 27 -
          7.26  Survival of Warranties..................................  - 27 -

VIII. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
PARTNERSHIP.............................................................  - 28 -
          8.1   Organization, Good Standing and Qualification...........  - 28 -
          8.2   Authorization...........................................  - 28 -
          8.3   No Violation............................................  - 29 -
          8.4   Tax Status..............................................  - 29 -
          8.5   No Litigation...........................................  - 29 -
          8.6   No Brokers..............................................  - 29 -
          8.7   Survival................................................  - 29 -

IX.   COVENANTS.........................................................  - 29 -
          9.1   Covenants of the Company and the Partnership............  - 29 -
          9.2   Covenants of the Sellers and the Contributing Entities..  - 31 -
          9.3   No Claim Against Property...............................  - 32 -
</TABLE> 

                                     -iii-
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                           Page
<S>       <C>                                                              <C> 
X.    DUE DILIGENCE PERIOD..............................................  - 32 -
          10.1  Due Diligence Period....................................  - 32 -
          10.2  Access to Properties and Materials......................  - 32 -
          10.3  Adjustment Following Due Diligence......................  - 33 -

XI.   DEFAULTS AND REMEDIES.............................................  - 33 -
          11.1  Indemnification by Sellers..............................  - 33 -
          11.2  Remedies................................................  - 34 -
          11.3  Indemnification by the Company and the Partnership......  - 35 -
          11.4  Indemnification Procedures..............................  - 35 -

XII.  MISCELLANEOUS.....................................................  - 38 -
          12.1  Assignment..............................................  - 38 -
          12.2  Entire Agreement........................................  - 38 -
          12.3  Notices.................................................  - 39 -
          12.4  Governing Law...........................................  - 39 -
          12.5  Litigation Costs........................................  - 40 -
          12.6  Counterparts............................................  - 40 -
          12.7  Offer and Acceptance....................................  - 40 -
          12.8  Arbitration.............................................  - 40 -
</TABLE>

                                     -iv-
<PAGE>
 
<TABLE> 
<CAPTION> 

                                   EXHIBITS
<S>            <C> 
2.4(a)         Form of  Company Lease
2.4(c)         Guaranty and Subordination Agreement
5.2.1(m)       Opinion of Seller's Counsel
5.2.2(d)       Opinion of Company Counsel
          
<CAPTION> 
                                   SCHEDULES
<S>            <C> 
I.             Sellers (Names and Addresses)
1.2            Schedule of Properties; Ownership Interests in Properties and Purchase Price
2.1            Prior Occupants
2.4(b)         Guarantors
2.11(a)        Construction Contracts for Douglas Toyota and Toyota West
2.11(b)        Plans and Specifications for Douglas Toyota and Toyota West
7.5            Litigation
7.13.5(a)      The Treatment, Storage and Disposal Locations for Substances of Concern
7.13.5(f)      Environmental Permits and Authorizations
7.14           Insurance
7.17(a)        Material Contracts
9.1.4          Restrictions on Sale and/or Financing of Specified Properties
</TABLE> 

                                      -v-
<PAGE>
 
                            CAPITAL AUTOMOTIVE L.P.

                       REAL PROPERTY PURCHASE AGREEMENT
                       --------------------------------

          THIS REAL PROPERTY PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of this 31st day of December, 1997, by and among the persons and
entities named on Schedule I hereto consisting of all of the owners of an
                  ----------                                             
interest in any of the Properties listed on Schedule 1.2 (each individually, a
                                            ------------                      
"Seller" and, if more than one Seller, collectively, the "Sellers"), and CAPITAL
AUTOMOTIVE L.P., a Delaware limited partnership (the "Partnership"), having
offices at 1925 North Lynn Street, Suite 306, Arlington, Virginia 22209,and
CAPITAL AUTOMOTIVE REIT, a Maryland real estate investment trust (the
"Company"), having offices at 1925 North Lynn Street, Suite 306, Arlington,
Virginia 22209 on its own behalf and as the general partner of the Partnership.


                                   RECITALS
                                   --------

          A.   The Sellers are the legal and beneficial owners of all of the
interests in fee simple title to all of the real property and improvements set
forth on such Schedule 1.2 hereto (including the residual interests in any
              ------------                                                
tenant improvements thereon), which are individually referred to as a "Property"
and collectively, the "Properties."  Such Properties are identified on Schedule
                                                                       --------
1.2  by street address and property tax identification number, or if such
- ----                                                                     
Properties constitute more than one parcel, by the several applicable property
tax identification numbers.

          B.   Each Seller desires to sell all of its interest in each of the
Properties to the Partnership and the Partnership desires to purchase all of the
Sellers' interests in such Properties.

          NOW THEREFORE, in consideration of and in reliance upon the above
Recitals, the terms, covenants and conditions contained in this Agreement, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:


          I.   PURCHASE AND SALE
               -----------------

          1.1  Certain Definitions.  For purposes of this Agreement:
               -------------------                                      

               1.1.1    "Mortgage Debt" means the aggregate amount of mortgage
                        indebtedness, if any, encumbering the Properties as set
                        forth opposite the description of each Property on
                        Schedule 1.2.
                        ------------ 

               1.1.2    "Purchase Price" means the amount, in U.S. dollars, that
                        is the purchase price of each Property, as identified on
                        Schedule 1.2 for each such Property.
                        ------------
<PAGE>
 
               1.1.3    "Affiliate" means with respect to any Person, (i) any
                        Person that holds direct or indirect beneficial
                        ownership (as defined in Rule 13d-3 under the Securities
                        Exchange Act of 1934, as amended) of voting securities
                        or other voting interests representing at least five
                        percent (5%) of the outstanding voting power of a Person
                        or equity securities or other equity interests
                        representing at least five percent (5%) of the
                        outstanding equity securities or interests in a Person,
                        or (ii) any Person that directly, or indirectly through
                        one or more intermediaries, controls, or is controlled
                        by, or is under common control with such Person.

               1.1.4    A "Person" shall mean and include natural persons,
                        corporations, limited partnerships, general
                        partnerships, joint stock companies, joint ventures,
                        associations, companies, trusts, banks, trust companies,
                        land trusts, business trusts, Indian tribes or other
                        organizations, whether or not legal entities, and
                        governments and agencies and political subdivisions
                        thereof.

               1.1.5    For purposes of this Agreement, the "knowledge" of a
                        Person shall mean the actual knowledge of such Person's
                        officers, senior executives, managing partners, general
                        partners, majority shareholders, key employees or their
                        equivalents.

               1.2   Agreement to Purchase and Sell.  Subject to the terms and
                     ------------------------------                           
conditions of this Agreement, at the Closing (as hereinafter defined), each
Seller shall sell, transfer and convey to the Partnership, and the Partnership
shall purchase and accept from the Sellers, all of the Sellers' right, title and
interest in and to the Properties identified on Schedule 1.2, excluding items of
                                                ------------                    
movable personal property attached to such Properties that relate to the
business conducted on such Properties and may readily be removed from such
Properties without material damage whether or not such items are "fixtures,"
("Excluded Personal Property").

               1.3   Encumbrances.  The Partnership shall acquire each Property
                     ------------                                              
free and clear of all liabilities, obligations and commitments of Sellers and
free and clear of all liens, options, adverse claims and encumbrances other than
Permitted Exceptions.

               1.4   Purchase Price.   On the terms and subject to the
                     --------------
conditions of this Agreement, at the Closing Sellers shall sell, transfer,
convey, assign and deliver to the Partnership, and the Partnership shall
purchase and accept from Sellers all the right, title and interest of Sellers to
and under the Properties for an aggregate purchase price (the "Aggregate
Purchase Price") in an amount equal to:



                                      -2-
<PAGE>
 
                    (i)    THIRTY FIVE MILLION THREE HUNDRED THOUSAND U.S.
                    Dollars ($35,300,000)
 
           minus
           -----

                    (ii)   the amount of the Mortgage Debt as of the Closing
                    Date.

The Aggregate Purchase Price will be adjusted pursuant to Sections 3.3,
5.2.1(k), 5.2.1(l), 6.1, 6.2, 10.3 as applicable.

               1.5  Capitalized Terms.  Capitalized terms used in this Agreement
                    -----------------                                           
that are not otherwise defined herein shall have the meanings required by
context.


          II.  OPERATION OF PROPERTY THROUGH CLOSING
               -------------------------------------

               Through the Closing Date:

          2.1  Business Practice.  Except as otherwise provided in this Article
               -----------------                                               
               2, the Sellers shall continue, or shall cause any Affiliate,
               tenant, or third party managing, maintaining or occupying, as the
               case may be, any of the Properties (referred to herein
               individually as a "Prior Occupant" and collectively as the "Prior
               Occupants") to continue, to manage, to maintain and to operate
               the Properties in accordance with sound and prudent business
               practices and keep the Properties and the tangible personal
               property thereon in good condition and repair, ordinary wear and
               tear excepted. The Sellers shall instruct such Prior Occupant not
               to make any material change in its management, maintenance or
               operation of the Properties or in its normal and customary other
               practices. The Prior Occupants are identified on Schedule 2.1 to
                                                                ------------
               this Agreement.

          2.2  No Sale or Encumbrance.  None of the Sellers shall sell,
               ----------------------                                  
               mortgage, pledge, hypothecate or otherwise transfer or dispose of
               all, or any part of any Property or any interest therein, nor
               shall any Seller initiate, consent to, approve or otherwise take
               any action with respect to zoning or any other governmental rules
               or regulations presently applicable to all or any part of any
               Property, nor shall any Seller (other than Cross-Continent Auto
               Retailers, Inc.) permit any new limited or general partners,
               shareholders or members to be admitted to any Seller.

          2.3  Leases, Service Contracts and Management Contracts.  Except as
               --------------------------------------------------            
               provided in Section 2.4, the Sellers shall not, nor shall they
               cause or permit any Prior Occupant to, terminate, modify, extend,
               amend or renew any Lease (as defined in Section 4.1.3 hereof),
               Service Contract (as defined in Section 7.17 



                                      -3-
<PAGE>
 
               hereof), or Management Contract (as defined in Section 7.17
               hereof) or enter into any new Lease (other than the Company Lease
               pursuant to Section 2.4 of this Agreement) or Service Contract
               without the prior written consent of the Company or the
               Partnership; provided, however, that the failure of the Company
               or the Partnership to object to any such action within fifteen
               (15) days after written notice to it by Seller shall be deemed to
               reflect the Company's or the Partnership's consent thereto.
               Notwithstanding the foregoing, all Service Contracts and
               Management Contracts relating to the respective Properties shall
               remain in effect after the Closing Date, except for those Service
               Contracts and Management Contracts that the Partnership requires,
               in writing, to be terminated as of the Closing Date.

          2.4  Termination of Leases; New Company Leases.  Prior to the Closing
               -----------------------------------------                       
               Date, the Sellers shall cause the termination of all Leases. Not
               later than five (5) days before the Closing Date (as defined
               hereafter), the Sellers of each Property, or an Affiliate
               thereof, shall execute and deliver to the Partnership an
               occupancy lease with the Partnership for each of the Properties
               substantially in the form attached hereto as Exhibit 2.4(a)
                                                            --------------
               (referred to hereafter individually as a "Company Lease" and
               collectively as the "Company Leases"), on terms and conditions
               (including Rent (as defined in such Company Lease)) acceptable to
               the Partnership and Sellers. The Base Annual Rent (as defined in
               the Company Lease) called for under the Company Lease for each
               Property shall be eleven percent (11%) of the Purchase Price (the
               "Rate of Return") for such Property. The effective date of such
               Company Leases shall be the Closing Date. The Company Leases
               shall be guaranteed as reflected on Schedule 2.4(b) using a
                                                   ---------------
               Guaranty and Subordination Agreement substantially in the form
               attached hereto as Exhibit 2.4(c).
                                  -------------- 

          2.5  Compliance.  None of the Sellers shall knowingly take or fail to
               ----------                                                      
               take any action that will cause the Properties to fail to comply
               with any federal, state, municipal and other governmental laws,
               ordinances, requirements, rules, regulations, notices, codes and
               orders, or any agreements, covenants, conditions, easements and
               restrictions currently in effect relating to the Properties.

          2.6  Notice of Inaccuracy or Incompleteness.  The Sellers shall
               --------------------------------------                    
               promptly give written notice to the Company before Closing of the
               occurrence of any event of which Sellers have knowledge and which
               may adversely affect the completeness or accuracy of any
               representation or warranty made or to be made by Sellers under or
               pursuant to this Agreement.

          2.7  Access.  The Sellers shall cause the Company and the Partnership
               ------                                                          
               and its representatives to have reasonable access to the
               Properties, subject to the 



                                      -4-
<PAGE>
 
               prior rights, if any, of any Prior Occupant; provided, however,
               that without the consent of the Seller, the representatives of
               the Partnership shall not disclose to any Prior Occupant the
               existence of this Agreement or the transactions contemplated
               hereby.

          2.8  Insurance.  The Sellers shall cause the existing insurance
               ---------                                                 
               coverages on the Properties and the business of the Sellers to be
               maintained in full force and effect through the Closing Date.

          2.9  Fulfillment of Obligation.  To the extent any Seller is
               -------------------------                              
               obligated, pursuant to any contract, agreement, covenant, lease,
               including any Lease, or other understanding entered into prior to
               the date hereof with any Prior Occupant, governmental subdivision
               or any other third party, to effect any construction, make any
               improvements or take any action, the Sellers shall cause any such
               construction, improvements and/or action to be taken, completed
               and fully paid for by such Seller, at its expense, prior to the
               Closing Date. No such obligation shall be unfulfilled, and no
               liability for or payment in respect of any such obligation shall
               be unsatisfied as of the Closing Date.

          2.10 Financial Statements and Reports.  The Sellers shall provide to
               --------------------------------                               
               the Company financial statements, agings of accounts receivable,
               and other financial, operating or statistical information for
               each Property upon any reasonable request of the Company, and the
               general partner or chief financial officer, as the case may be,
               of each Seller shall certify that, to the best of his or its
               knowledge, such financial statements and other reports are true,
               accurate and complete in all material respects.

               2.11 Under Construction Properties.  Notwithstanding anything to
                    -----------------------------
the contrary contained in this Agreement, the Partnership and the Company
recognize that the two properties listed in Schedule 1.2 to this Agreement as
                                            ------------
Property No. 5 and Property No. 6 (collectively, the "Under Construction
Properties") are presently being improved pursuant to the construction contracts
listed on Exhibit 2.11(a) hereto and the plans and specifications listed on
          ---------------
Exhibit 2.11(b) hereto. The contracts, plans and specifications so listed are
- ---------------
referred to herein, collectively, as the "Contract Documents." With respect to
the Under Construction Properties, the parties to this Agreement agree as
follows:

               2.11.1      The Purchase Price of each such property, as stated
                           in Schedule 1.2 to this Agreement, is based upon the
                              ------------
                           assumption that each such property will be conveyed
                           to the Partnership at the Closing Date identified in
                           Section 5.1 hereto, but in no event later than the
                           date to which the Sellers and the Partnership shall
                           agree in writing:



                                      -5-
<PAGE>
 
                           a.    with all improvements called for under the
                                 Contract Documents complete in all respects and
                                 in conformity with all requirements of the
                                 Contract Documents;
 
                           b.    free of all liens and claims of any and all
                                 persons, firms, companies, corporations or
                                 other entities supplying any labor, services,
                                 materials, supplies or other things of value in
                                 connection with or in respect of any
                                 construction or other improvement to the Under
                                 Construction Properties or either of them (the
                                 "Construction Service/Material Suppliers"); and
 
                           c.    with certificates of occupancy and/or other
                                 certificates issued by all appropriate
                                 governmental bodies or agencies attesting to
                                 the fact of the completion of all improvements
                                 in conformity with all building, zoning and
                                 other applicable codes or regulations so as to
                                 permit the immediate occupancy of the
                                 improvements for the purposes contemplated by
                                 the Company Lease.

               2.11.2      The Seller of the Under Construction Properties
                           agrees that it will do all things necessary to convey
                           the Under Construction Properties as contemplated in
                           Section 2.11.1 hereto.

               2.11.3      If the Seller of the Under Construction Properties
                           shall have any dispute with any Construction
                           Service/Material Supplier referred to in Section
                           2.11.1.b above, and that dispute prevents the
                           delivery of the properties or either of them free of
                           any lien or claim, such Seller may deliver the
                           property so affected subject to such lien or claim;
                           provided however that: 

                           a.    by such Seller's "bonding off" or posting money
                                 with the Partnership's Title Insurer, such
                                 Title Insurer will "insure over" the lien or
                                 claim in question; and

                           b.    such Seller diligently pursues the dispute to
                                 its conclusion.



                                      -6-
<PAGE>
 
               2.11.4      If for any reason (including the resolution of a
                           dispute specified in Section 2.11.3 above) the Seller
                           is required to pay more money (the "Excess") than is
                           specified in the Contract Documents as they exist on
                           the date of this Agreement, then if the Partnership
                           determines that the Excess, when added to the
                           Purchase Price specified in this Agreement, results
                           in an aggregate amount not in excess of fair market
                           value of the property in question, the Purchase Price
                           specified in this Agreement for the property in
                           question will be increased by the amount of the
                           Excess and the Base Annual Rent payable under the
                           applicable Company Lease will be increased by an
                           amount equal to the amount of the Excess times the
                           Rate of Return.

               2.11.5      The Seller of the Under Development Properties agrees
                           that nothing in this Section 2.11 shall lessen the
                           Seller's obligations under other provisions of this
                           Agreement or lower the requirements with respect to
                           such Properties as specified therein.

               2.11.6      The Partnership, as purchaser of the Under
                           Development Properties, intends to enter into a
                           separate construction management agreement (the
                           "CMA") with the Seller of such Properties (or an
                           Affiliate of such Seller) with respect to the
                           improvements specified in the Contract Documents. All
                           parties to this Agreement agree with respect to the
                           CMA:

                           a.    Nothing in the CMA shall affect this Agreement
                                 or the obligations of the Sellers hereunder, or
                                 constitute the acceptance of title to the
                                 Properties affected thereby, or give any rights
                                 to any entities specified in Section 2.11.1.b
                                 above; and

                           b.    No part of the sums paid to the Seller (or its
                                 Affiliate) under the CMA shall be considered as
                                 part of the Purchase Price of the Under
                                 Development Properties or be included in the
                                 calculation of the Base Annual Rent under the
                                 applicable Company Lease.


        III.   STATUS OF TITLE TO PROPERTY
               ---------------------------



                                      -7-
<PAGE>
 
          3.1  State of Title.  At Closing, the Sellers shall own, beneficially
               --------------                                                  
               and of record, good and marketable fee simple title to the
               Properties, subject only to the mortgages creating the Mortgage
               Debt listed on Schedule 1.2 hereto and those covenants,
                              ------------
               conditions, restrictions and other matters affecting title as set
               forth in the land Title Commitments, UCC Searches and/or Surveys
               to be delivered to the Partnership hereunder and found to be
               acceptable to the Partnership under Section 3.3 hereto (the
               "Scheduled Exceptions"). The Mortgage Debt and Scheduled
               Exceptions are referred to collectively herein as the "Permitted
               Exceptions."

          3.2  Preliminary Evidence of Title.  Within no more than 30 days after
               -----------------------------                                    
               the date hereof, the Sellers and the Partnership shall obtain, in
               a form acceptable to the Partnership, the following documents to
               evidence the condition of the title to each of the Properties:

               3.2.1    Commitments (the "Title Commitments") to the Partnership
                        for ALTA Form B (1987) Owner's Title Insurance Policies
                        (and for any Properties located within the State of
                        Texas the standard form of commitment for title
                        insurance promulgated by the Texas State Board of
                        Insurance) committing to insure, at standard rates,
                        title to each Property as being good and marketable
                        (except for Properties located within the State of
                        Texas, in which case such title shall be good and
                        indefeasible), subject only to the Permitted Exceptions,
                        in the amount of the Purchase Price of each such
                        Property, issued by a title company acceptable to the
                        Company and the Partnership (the "Title Insurer"). The
                        Title Commitments shall be effective as of the Closing
                        Date, and shall reflect that fee simple title is held by
                        the respective Seller. Each Owner's Title Insurance
                        Policy to be issued to the Partnership at Closing
                        pursuant to Section 7.2.2 below ("Title Insurance
                        Policies") shall contain (to the extent available under
                        applicable state law) an extended coverage endorsement
                        over the general or standard exceptions which are a part
                        of the printed form of the policy and subject only to
                        the Permitted Exceptions. If available for a title
                        insurance policy under applicable laws and regulations
                        in the state of issuance, , each Title Insurance Policy
                        shall, in addition, (a) include provisions for co-
                        insurance, in such amounts of liability acceptable to
                        the Partnership and the Company; (b) not contain any
                        survey exception, (c) not contain any exceptions for (i)
                        liens for labor or material, whether or not of record,
                        (ii) parties in possession (other than Prior Occupants
                        under the 



                                      -8-
<PAGE>
 
                        Leases, solely as such Prior Occupants), (iii)
                        unrecorded easements, and (iv) taxes and special
                        assessments not shown on the public records, (d) provide
                        for the following endorsements: (i) an access
                        endorsement insuring that there is direct and
                        unencumbered access to the land from all adjacent public
                        streets and roads, (ii) a survey endorsement insuring
                        that all foundations in place as of the date of such
                        policy are within the lot lines and applicable setback
                        lines, that the improvements do not encroach on
                        adjoining land or any easements, and that there are no
                        encroachments of improvements from adjoining land on any
                        or the Properties or any part thereof, (iii) an ALTA
                        Form 3.1 zoning endorsement insuring that the Properties
                        are zoned for the buildings and the operation thereof as
                        contemplated by the terms and provisions of this
                        Agreement, (iv) a non-imputation endorsement, by which
                        the Title Insurer waives any defense based upon
                        knowledge of any person or entity (other than the
                        knowledge of the Partnership or its designees), (v) a
                        statement that each Property constitutes a separate lot
                        of record and is separately assessed for real estate tax
                        purposes, (vi) an endorsement commonly referred to as a
                        "Fairway endorsement," providing among other things,
                        that the Title Insurer waives any defense based on a
                        dissolution or termination of the insured partnership or
                        the formation of a new partnership solely by reason of
                        one or more transfers of all or any part of the
                        partnership interests of any one or more of the general
                        partners of the insured to the Company or the
                        Partnership and/or any one or more of the limited
                        partners of the insured, and/or the transfer of any one
                        or more of the limited partner's interests to the
                        current general partner, the Company or the Partnership,
                        and (vii) such other endorsements as the Partnership and
                        the Company may reasonably require.

               3.2.2    Written results of searches reflecting any liens,
                        judgements, tax liens, bankruptcies, and open dockets
                        (the "UCC Searches"), conducted by a company reasonably
                        acceptable to the Partnership. The UCC Searches shall
                        name each Seller, Prior Occupant, and Property, and
                        shall search the appropriate land records and central
                        filing office for Uniform Commercial Code financing
                        statements.

               3.2.3    Legible copies of all documents of record referred to in
                        any Title Commitment or disclosed by the UCC Searches,
                        and all 



                                      -9-
<PAGE>
 
                        other documents evidencing or, to the extent in the
                        possession or control of the Sellers, relating to,
                        matters reflected in any Title Commitment or the UCC
                        Searches.

               3.2.4    Current ALTA/ACSM land title surveys (if available in
                        the jurisdiction or their equivalent if not available in
                        such jurisdiction) of each of the Properties (the
                        "Surveys") dated on or after the date of this Agreement,
                        certified to the Partnership and the Title Insurer (and
                        such other persons or entities as the Partnership may
                        designate) by a surveyor registered in the State where
                        the Property is located. Each Survey shall be in form
                        and substance acceptable to the Partnership and the
                        Title Insurer, provided that the Partnership shall
                        accept a recertified Survey on any Property if the
                        Survey conforms with ALTA/ACSM standards and is
                        acceptable to the Title Insurer.

          3.3  Title Defects.  The Partnership shall have the right to review
               -------------                                                 
               the Title Commitments, UCC Searches or Surveys (or any revision
               or update of any of them) and to require the Seller to remove,
               correct, and cure any defects in the title or other such matters
               relating to the title that the Partnership determines, in its
               sole discretion, are unacceptable. The Partnership shall notify
               the Sellers in writing within ten (10) business days after the
               Partnership receives the Title Commitments, UCC Searches or
               Surveys, as the case may be, of any such defects or matters that
               the Partnership finds to be unacceptable, and, within sixty (60)
               days from the receipt of notice, such Sellers shall, (i) as to
               any such exception or other matter of a nonmonetary nature, use
               reasonable efforts to remove, correct and cure such defects or
               such other matters, and (ii) as to any such defect or other
               matter of a monetary nature, cause such lien or encumbrance or
               other matter to be discharged and released, in each case to the
               reasonable satisfaction of the Partnership. If such Seller fails
               to remove, correct and cure such defects or such other matters,
               the Partnership may, at its option and as its exclusive remedy,
               (x) terminate this Agreement, in which event this Agreement,
               without further action of the parties, shall become null and void
               and neither party shall have any further rights or obligations
               under this Agreement, (y) terminate this Agreement with respect
               to such Property and reduce the Aggregate Purchase Price by the
               Purchase Price for such Property with respect to which the Seller
               fails to correct and cure such defects or other such matters, or
               (z) elect to accept title to such Property and discharge or
               release any liens, encumbrances or other matters of a monetary
               nature and reduce the Aggregate Purchase Price by the amount
               necessary to correct or cure such monetary liens, encumbrances or
               other matters. If the Partnership fails to make any such



                                     -10-
<PAGE>
 
               election, the Partnership shall be deemed to have elected the
               option contained in clause (y).

          IV.  CLOSING PRORATIONS AND ADJUSTMENTS
               ----------------------------------

          4.1  Prorations and Adjustments.  All prorations and adjustments (the
               --------------------------                                      
               "Prorations") with respect to each Property, for the period up to
               and through the Closing Date, shall be the responsibility of or
               belong to the Sellers and all Prorations for the period after the
               Closing Date shall be the responsibility of or belong to the
               tenant under the applicable Company Lease. The Company and the
               Partnership shall have no responsibility for, and will receive no
               benefit from, the Prorations, and the Seller shall have liability
               for such Prorations. Such Prorations shall include, but not be
               limited to, the following:

               4.1.1    real estate and personal property taxes and assessments;

               4.1.2    common area maintenance fees and reimbursements for
                        prior years property taxes payable by Prior Occupants;

               4.1.3    the rent payable by Prior Occupants under leases in
                        effect immediately prior to the Closing Date (the
                        "Leases") as set forth on Schedule 2.1 hereto;
                                                  ------------        

               4.1.4    the full amount of security deposits paid under the
                        Leases, together with interest thereon if required by
                        law or otherwise;

               4.1.5    water, electric, telephone and all other utility and
                        fuel charges (those that are meter read will be read by
                        the appropriate utility and service transferred as of
                        the Closing Date);

               4.1.6    amounts due and prepayments under the Service Contracts;

               4.1.7    assignable license and permit fees;

               4.1.8    other expenses of operation and similar items; and

               4.1.9    all or any other disbursements, payments, and
                        obligations relating to the Property.

               4.1.10   notwithstanding the foregoing, any refunds of real or
                        personal property taxes for tax years beginning prior to
                        the Closing Date shall belong to Sellers, and if paid to
                        the Partnership 



                                     -11-
<PAGE>
 
                        shall be promptly refunded by the Partnership to Sellers
                        in cash.

               4.1.11   with respect to Mortgage Debt, at the time of Closing,
                        all obligations accrued up to the Closing Date, whether
                        the same shall constitute principal, interest, or other
                        payments, shall be paid by the Seller by way of a
                        reduction to the Purchase Price for each Property in the
                        amount of such obligations according to Section 1.4
                        hereof.


          V.   CLOSING
               -------

          5.1  Closing Date.  Provided that all conditions to closing have been
               ------------                                                    
               satisfied or waived, the Closing of the transactions contemplated
               by this Agreement (each of the following being a "Closing") for
               (i) the acquisition of the Properties other than the Under
               Construction Properties shall occur on February 15, 1998, or such
               other time or place following the closing of the initial public
               offering of Initial Shares of the Company pursuant to the
               Registration Statement as the Sellers and the Partnership shall
               agree in writing, and for (ii) the acquisition of the Under
               Construction Properties shall occur within fifteen (15) business
               days of the completion of construction under the Contract
               Documents, or at such other time and place as the Sellers and the
               Company shall agree in writing. The Closing shall occur at the
               offices of Wilmer, Cutler & Pickering, 2445 M Street, N.W.
               Washington, D.C. 20037-1420, at 10:00 a.m. on the scheduled date
               of the Closing (the "Closing Date"). Notwithstanding the
               foregoing, the Partnership may reschedule the Closing Date (x)
               until ten (10) business days following the completion of any
               Seller's cure of any title defects pursuant to Section 3.3
               hereto, and (y) up to an additional thirty (30) days if the
               Closing Date under this Agreement would conflict with the timing
               and completion of any other closing under any other agreement
               entered into by the Partnership to acquire properties.

          5.2  Closing Documents
               -----------------

               5.2.1    Sellers. Not later than five (5) business days prior to
                        -------
                        the Closing Date, the Sellers shall deliver to the
                        Company and the Partnership, to be held in escrow
                        pending closing, the following:

                        a.    special warranty deeds and assignments for the
                              Properties;



                                     -12-
<PAGE>
 
                        b.    executed copies of all Company Leases, effective
                              at Closing;

                        c.    any affidavits, certificates and other documents
                              (including without limitation non-imputation
                              affidavits and/or certificates) that are
                              reasonably necessary for the Title Insurer to
                              issue the Owner's Title Insurance Policies in the
                              form and condition required by this Agreement;
 
                        d.    evidence satisfactory to the Partnership that all
                              mortgages and other indebtedness secured by the
                              Properties that are not being specifically assumed
                              or paid off by the Partnership on the Closing Date
                              have been paid in full;

                        e.    for each Seller that is a corporation, a corporate
                              resolution authorizing the transactions
                              contemplated by this Agreement, a certificate of
                              good standing, a certified copy of its articles or
                              certificate of incorporation and bylaws, and a
                              certificate of incumbency certifying the titles
                              and signatures of the corporate officers
                              authorized to consummate the transactions
                              contemplated hereunder on behalf of Seller and
                              such other evidence of such Seller's power and
                              authority as the Company or Partnership reasonably
                              requests;

                        f.    for each Seller that is a partnership or a limited
                              liability company, a partnership resolution
                              authorizing the transactions contemplated by this
                              Agreement, a certificate of good standing, a
                              certified copy of the partnership or operating
                              agreement governing such Seller, and a certificate
                              of incumbency certifying the titles and signatures
                              of the general partners or members authorized to
                              consummate the transactions contemplated hereunder
                              on behalf of such Seller and such other evidence
                              of power and authority of such Seller as the
                              Company or Partnership reasonably requests;

                        g.    for each Seller, an affidavit stating, under
                              penalty of perjury, its U.S. taxpayer
                              identification number and 



                                     -13-
<PAGE>
 
                              that it is not a foreign person within the meaning
                              of Section 1445 of the Internal Revenue Code of
                              1986, as amended (the "Code");

                        h.    agreements from each Prior Occupant who leases any
                              Property terminating its Leases with Sellers and
                              an estoppel certificate from such Prior Occupant
                              stating that it has no claims under the Lease;

                        i.    all of the original Leases, and copies, certified
                              and warranted by Seller to be correct and accurate
                              in all respects to the best of each Seller's
                              knowledge, of any written Service Contracts and
                              Management Contracts and any and all building
                              plans, surveys, site plans, engineering plans and
                              studies, utility plans, landscaping plans,
                              development plans, specifications drawings,
                              marketing artwork, construction drawings, soil
                              tests, complete warranty book including all
                              contractors and subcontractors and other
                              documentation concerning all or any part of each
                              Property to the extent that any of the foregoing
                              documents are in the possession or control of
                              Sellers;

                        j.    any bonds, warranties or guaranties which are in
                              any way applicable to any Property or any part
                              thereof to the extent any of the foregoing are in
                              the possession or control of Sellers;

                        k.    If the Company or Partnership shall so request,
                              each Seller shall deliver to the Company a letter
                              (an "Estoppel Letter") in a form acceptable to the
                              Company, dated not more than thirty (30) days
                              prior to the Closing Date, from each Prior
                              Occupant under each Lease. The Estoppel Letter
                              shall be fully completed in a manner reasonably
                              satisfactory to the Company, and with no
                              modifications other than those reasonably
                              acceptable to the Company. In the event Estoppel
                              Letters in form and content reasonably
                              satisfactory to the Company are not received by
                              the Company and the Partnership within the time
                              prescribed herein, then the Partnership and the
                              Company, at their option and as a non-exclusive



                                     -14-
<PAGE>
 
                              remedy, upon notice to the Sellers, may
                              immediately terminate this Agreement, or may
                              terminate this Agreement with respect to the
                              relevant Property, in which case the Aggregate
                              Purchase Price shall be reduced by the Purchase
                              Price of such Property.

                        l.    [Intentionally Omitted]

                        m.    an opinion of Seller's counsel substantially in
                              the form attached hereto as Exhibit 5.2.1(m); and
                                                          ----------------     

                        n.    all other documents reasonably required by the
                              Partnership or the Company in connection with the
                              transactions contemplated by this Agreement.

               5.2.2    Partnership.  At the Closing, the Partnership shall
                        -----------                                        
                        deliver the following:

                        a.    an executed counterpart of the Partnership
                              Agreement executed by the Company, as the General
                              Partner of the Partnership;

                        b.    for the Company, a resolution of its Board of
                              Trustees authorizing the transactions contemplated
                              hereby and a certificate of good standing from the
                              State Department of Assessments and Taxation of
                              the State of Maryland;

                        c.    for the Partnership, evidence of the Partnership's
                              authorization of the transactions contemplated
                              hereby and a certified copy of the Partnership
                              Agreement and a Certificate of Limited Partnership
                              certified by the Secretary of State of Delaware;
                              and

                        d.    an opinion of Wilmer, Cutler & Pickering,
                              substantially in the form attached hereto as
                              Exhibit 5.2.2(d).
                              ---------------- 

          5.3  Conditions to the Partnership's Obligation to Close.  At the
               ---------------------------------------------------         
               option of the Partnership, the obligations of the Company and the
               Partnership under this Agreement are subject to the satisfaction
               of the following conditions (unless explicitly waived in
               writing):



                                     -15-
<PAGE>
 
               5.3.1    Each Seller shall have terminated such existing
                        Management Contracts that Partnership has required, in
                        writing, to be terminated prior to the Closing Date.

               5.3.2    Each Seller shall have terminated all Leases prior to
                        the Closing Date.

               5.3.3    Each Seller shall have terminated such existing Service
                        Contracts that the Partnership has required, in writing,
                        to be terminated prior to the Closing Date.

               5.3.4    Each and every representation and warranty of the
                        Sellers contained in this Agreement is true, correct and
                        complete in all material respects as of the date hereof
                        and at all times through the Closing Date.

               5.3.5    The Sellers shall have fully performed and satisfied
                        each and every material obligation, term and condition
                        to be performed and satisfied by them under this
                        Agreement.

               5.3.6    All consents, authorizations, certificates, Estoppel
                        Letters, and approvals required to be obtained by the
                        Sellers in connection with the Agreement shall have been
                        obtained, including but not limited to all consents,
                        approvals and authorizations (without any conditions or
                        requirements) required to be obtained under any
                        Mortgage, deed of trust or other instrument relating to
                        any of the Properties or pursuant to which any of the
                        Sellers are bound in order to complete the transactions
                        contemplated under this Agreement.

               5.3.7    The Company shall have completed the Company's initial
                        public offering.

               5.3.8    The Sellers shall have paid in full, other than the
                        Mortgage Debt, which shall be paid off at Closing with
                        purchase proceeds, all indebtedness secured by the
                        Properties as required by the Company and Partnership
                        and shall have provided the Company and Partnership with
                        satisfactory evidence thereof, and to the extent that
                        such Mortgage Debt is to be paid off following Closing,
                        the mortgagee shall deliver pay-off letters to the
                        Company and the Partnership no later than five (5) days
                        prior to the Closing Date.



                                     -16-
<PAGE>
 
               5.3.9    The condition of the Property shall not have materially
                        changed.

               5.3.10   The Partnership shall have received an Owner's Title
                        Insurance Policy (or marked-up commitment therefor) for
                        each Property insuring fee simple title to such Property
                        in the amount of the Purchase Price of such Property
                        subject only to Permitted Exceptions, and otherwise in
                        the form and condition required by this Agreement;

               5.3.11   If the Sellers do not deliver completed Schedules to the
                                                                ---------
                        Company and Partnership at the time of the execution of
                        this Agreement, the Sellers shall deliver to the Company
                        and Partnership, in substantially completed form, all
                        Schedules required by this Agreement within fifteen (15)
                        --------- 
                        business days after the date of the execution of this
                        Agreement.

               5.3.12   The Sellers shall have delivered to the Company all
                        closing documents required by Section 5.2.1 hereof.

               5.3.13   The Partnership shall enter into a Company Lease for
                        each Property with each Seller or Seller's Affiliate.

               5.3.14   Quality Nissan, Inc. shall have exercised its option to
                        and shall have closed the acquisition (in fee simple
                        title) of the parcel of the Quality Nissan, Inc.
                        Property currently subject to the ground lease by and
                        between Quality Nissan, Inc. (tenant) and John W. Adams,
                        Eleanore A. Braly, Trustee of the Eleanore A. Braly
                        Trust, Romie G. Carpenter, Melody Lynn Goff, and Selden
                        Simpson (landlords) dated March 1, 1994.

          5.4  Conditions to the Seller's Obligation to Close.  The obligations
               ----------------------------------------------                  
               of the Seller under this Agreement are subject to the
               satisfaction of the following conditions (unless explicitly
               waived in writing):

               5.4.1    Each of the representations and warranties of the
                        Partnership contained in this Agreement is true, correct
                        and complete as of the date hereof and at all times
                        through the Closing Date.



                                     -17-
<PAGE>
 
               5.4.2    The Partnership and the Company shall have fully
                        performed and satisfied each and every obligation, term
                        and condition to be performed and satisfied by them
                        under this Agreement.

               5.4.3    The Company shall have completed its initial public
                        offering pursuant to the Registration Statement.

               5.4.4    All consents, authorizations and approvals required to
                        have been obtained by the Company and the Partnership in
                        connection with this Agreement shall have been obtained.

               5.4.5    The Sellers shall have obtained approvals to the
                        purchase and sale of the Properties under this
                        Agreement, if any are required, from any third party,
                        including (i) franchisors under the franchise agreements
                        between any Seller and any automobile manufacturer (the
                        "Franchise Agreements") and (ii) Texas Commerce Bank,
                        N.A. ("TCB"), under the revolving credit agreement dated
                        June 26, 1997, by and between Cross-Continent Auto
                        Retailers, Inc. and TCB.

               5.4.6    The Sellers and the Partnership shall have entered into
                        the CMA referred to in Section 2.11.6 hereof.

               5.4.7    The Partnership shall enter into a Company Lease for
                        each Property with each Seller or Seller's Affiliate.

          5.5  Transaction Costs.
               ----------------- 

               5.5.1    The Sellers shall pay all costs (including, but not
                        limited to, any recordation and transfer taxes, surveys,
                        title insurance (including all special endorsements
                        (except that the Company or the Partnership shall pay
                        for the survey endorsement, if requested pursuant to
                        Section 3.2.1(d)(ii) hereof, for each of such Properties
                        located within the State of Texas, and the Company or
                        Partnership shall pay for the zoning endorsement and the
                        survey endorsement, if requested, for the Property
                        located in Colorado)), searches made pursuant to Section
                        3.2.2 hereof, fees and expenses of going to record) in
                        connection with the transfer by the Sellers of the
                        Properties (collectively referred to as the "Closing
                        Costs"). The Company and the Partnership shall bear the
                        cost of their due diligence activities.



                                     -18-
<PAGE>
 
               5.5.2    The Sellers shall pay all prepayment penalties,
                        premiums, lender's consent fees or other such charges
                        ("Consent Fees") imposed in connection with the
                        transactions contemplated hereby.

               5.5.3    Except as specified above and elsewhere in this
                        Agreement, each party shall bear and pay its expenses in
                        connection with this Agreement and the transactions
                        contemplated herein, including the fees of their
                        respective professional advisors.


          VI.  CASUALTY LOSS AND CONDEMNATION
               ------------------------------

          6.1  Casualty.  Prior to Closing, all risk of loss shall belong to the
               --------                                                         
               Sellers. If, prior to Closing, the Properties or any part thereof
               shall be destroyed or materially damaged by fire or other
               casualty, the Seller of such Property shall repair such damage
               prior to Closing to the reasonable satisfaction of the
               Partnership, at no cost or expense to the Company or the
               Partnership, in which event the proceeds of any insurance
               applicable thereto shall be paid to the Seller. Seller shall, at
               Closing and thereafter, execute and deliver to the Partnership
               all required proofs of loss, assignments of claims and other
               similar items. Notwithstanding anything herein to the contrary,
               in the event such loss or casualty shall constitute a total or
               substantial loss or casualty or, in the opinion of the Company,
               in its reasonable discretion, shall render the Property
               unsuitable for its intended purpose for a period of one hundred
               twenty (120) days or longer, then the Company and the
               Partnership, at their option, may terminate this Agreement with
               respect to such Property upon notice to the Seller, and reduce
               the Aggregate Purchase Price by the Purchase Price of such
               Property.

          6.2  Condemnation or Taking.  If, prior to Closing, any Property or
               ----------------------                                        
               any part thereof shall be condemned or taken and such
               condemnation or taking materially interferes with the existing
               business use of the Property, the Company and the Partnership may
               (i) terminate this Agreement either as to all the Properties or
               solely as to such Property, in the discretion of the Partnership
               and the Company, or (ii) complete the transactions contemplated
               by this Agreement notwithstanding such condemnation. If the
               Company and the Partnership elect to complete the transactions
               contemplated hereby, the Partnership shall be entitled to receive
               the condemnation proceeds and the appropriate Seller shall, at
               Closing and thereafter, execute and deliver to the Partnership
               and the Company all required assignments of claims and other
               similar items. If the Partnership and the Company elect to
               terminate this Agreement, then upon written notice to the Sellers
               and without further action



                                     -19-
<PAGE>
 
               of the parties, this Agreement shall become null and void and no
               party shall have any rights or obligations under this Agreement.
               If the Partnership and the Company elect to terminate this
               Agreement solely with respect to the affected Property, the
               Aggregate Purchase Price shall be reduced by the Purchase Price
               of such Property.


         VII.  REPRESENTATIONS AND WARRANTIES OF THE SELLERS
               ---------------------------------------------

               The Sellers, jointly and severally, represent and warrant to the
Company and the Partnership that, except as described on the Schedules attached
                                                             ---------
hereto and incorporated by reference herein, the following are true, complete
and correct as of the date of this Agreement and as of the Closing Date:

          7.1  Organization.  Each Seller is duly organized and validly existing
               ------------                                                     
               and in good standing under the laws of the state of its
               organization, and has all requisite power and authority to own or
               lease and operate its properties (including the Properties) and
               assets and conduct its business in the manner in which they are
               being owned or leased and operated and conducted, as the case may
               be. Each Seller is duly qualified and authorized and is in good
               standing in all jurisdictions where its ownership, lease or
               operation of assets and properties (including the Properties) or
               the conduct of its business requires such qualification or
               authorization.

          7.2  Authority.  The execution and delivery of this Agreement and all
               ---------                                                       
               agreements, documents and instruments contemplated hereby and the
               performance of all transactions contemplated herein or therein,
               have been duly and validly authorized by all requisite
               partnership, corporate or trust action, as the case may be, and
               by the requisite general partners, the board of directors,
               stockholders, or trustees of each Seller, as the case may be.
               This Agreement and the agreements, documents and instruments
               executed and delivered in connection herewith constitute the
               legal, valid and binding obligations of the Sellers, enforceable
               in accordance with their respective terms, subject to applicable
               bankruptcy, insolvency, fraudulent conveyance, reorganization,
               moratorium and similar laws affecting creditors' rights and
               remedies generally, and subject, as to enforceability, to general
               principles of equity, including principles of commercial
               reasonableness, good faith and fair dealing (regardless of
               whether enforcement is sought in a proceeding at law or in
               equity) and except to the extent that rights to indemnification
               and sale and purchase under or contemplated by this Agreement or
               such other agreements may be limited by federal or state
               securities laws or public policy relating thereto. To the
               knowledge of the Sellers, none of the Sellers are required to
               obtain any consent, authorization, approval or waiver from any

                                     -20-
<PAGE>
 
               governmental agency or authority or from any third party in
               connection with the execution and delivery of, and the
               performance of the obligations to be performed under, this
               Agreement and the documents and instruments executed and
               delivered in connection herewith, or if any of the foregoing is
               required, it has been obtained; except for any approval of a
               holder of the Mortgage Debt, of TCB under the revolving credit
               agreement, or of a franchisor under any Franchise Agreement,
               which approval Seller shall use its best efforts to obtain prior
               to Closing.

          7.3  Interest in Contributed Properties.  Each Seller is the record
               ----------------------------------                            
               and beneficial owner of, and has good and marketable and
               insurable fee simple title (except with respect to that portion
               of the Quality Nissan, Inc. Property in Amarillo, Texas which is
               currently subject to a ground lease by and between Quality
               Nissan, Inc. (tenant) and John W. Adams, Eleanore A. Braly,
               Trustee of the Eleanore A. Braly Trust, Romie G. Carpenter,
               Melody Lynn Goff, and Selden Simpson (landlords) dated March 1,
               1994, which parcel is to be acquired in fee simple title by
               Quality Nissan, Inc. from such landlords prior to the Closing
               Date hereof) to, the interests in the Properties set forth
               opposite such Seller's name on Schedule 1.2, free and clear of
                                              ------------
               all liens, options, adverse claims or encumbrances, except the
               Permitted Exceptions, and Schedule 1.2 is true, accurate and
                                         ------------
               complete in all material respects as to each seller. Between the
               date hereof and the Closing Date, no liens, claims or
               encumbrances will be created or permitted to be created on any
               Property other than the Permitted Exceptions. Prior to or at the
               Closing all monetary encumbrances on any Property, other than the
               Permitted Exceptions, shall be duly canceled, removed and
               discharged of record, and proof thereof satisfactory to the Title
               Insurer, the Company and the Partnership shall be delivered to
               the Company and the Partnership. Except for Prior Occupants,
               there are no parties in possession of any part of the Properties
               as of the Closing Date, and there are no other rights of
               possession, or agreements providing for the sale, assignment or
               transfer of title to any Property or portion thereof (other than
               this Agreement), which have been granted to any third parties.
               Such Seller has the full power, capacity and authority to sell,
               transfer and assign the legal and equitable ownership of his/her
               or its interest to the Partnership as provided in this Agreement,
               and the Sellers have not entered into any agreement and have no
               knowledge of any agreement or understanding to issue any
               additional interests in any Seller (other than Cross-Continent
               Auto-Retailers, Inc.) to any other person or entity.

          7.4  No Defaults.  No Seller, or party thereto, is in default of any
               -----------                                                    
               of its material obligations under any agreement, franchise,
               license, contract, deed, mortgage, lease, instrument,
               certificate, affidavit or covenant affecting title to the
               Properties, whether or not listed on Schedule 7.17(a) hereto; (b)
                                                    ----------------
               no Seller, or 

                                     -21-
<PAGE>
 
               party thereto, is in material default or breach under any Service
               Contract; (c) no Seller, or party thereto, is in material default
               or breach under any Management Contract; and (d) except as
               disclosed on Schedule 7.5, there are no judgments, orders,
               decrees or settlement agreements to which any Seller is a party
               or by which any Property is bound or will be bound after the
               Closing.

          7.5  No Litigation; No Condemnation.  Except as set out on Schedule
               ------------------------------                        --------
               7.5, there are no actions, suits, proceedings or claims pending,
               ---
               or to the knowledge of any Seller, threatened or contemplated,
               with respect to or in any manner affecting the Properties, or any
               Seller's interest therein; or the ability of any Sellers to
               complete the transactions contemplated by this Agreement or which
               could prevent any Seller from satisfying its obligations under
               this Agreement. No Seller has received notice of any pending or
               threatened condemnation or similar proceedings or special
               assessments affecting the Properties, or any part thereof.

          7.6  No Violation.  Except for the required approval of the holder of
               ------------                                                    
               the Mortgage Debt, TCB under the revolving credit agreement, and
               the respective franchisor of each Seller to any Seller's
               performance under this Agreement, the execution and delivery of
               this Agreement and the agreements, documents and instruments
               executed and delivered in connection herewith, the consummation
               of the transactions contemplated hereby or thereby, and the
               operation of any Property shall not: (a) conflict with, or result
               in a breach of, the terms, conditions or provisions of, or
               constitute a default under, any agreement, contract, mortgage,
               deed, lease, license, franchise or instrument to which any Seller
               is a party or is subject or to which any Property is subject; (b)
               to Sellers' knowledge, violate any agreement, contract, mortgage,
               deed, lease, license, franchise, restriction, easement,
               restrictive covenant, or instrument to which any Seller or any
               Property is subject; (c) to Sellers' knowledge, constitute a
               violation of any applicable code, resolution, law, statute,
               regulation, ordinance, rule, judgment, decree or order; (d) with
               respect to each Seller that is an entity, violate any provision
               of its charter, bylaws or other organizational document; (e)
               except as to any indebtedness in respect of which the consent of
               the lender shall have been obtained prior to the Closing Date,
               result in the acceleration of any indebtedness or any encumbrance
               pertaining to any Seller or any Property, or the cancellation of
               any contract, agreement, franchise, license, instrument or lease
               pertaining to any Property (other than as specifically requested
               by the Company or the Partnership pursuant to this Agreement);
               except that, if any Seller discovers during the Due Diligence
               period that an approval to Seller's execution, delivery, or
               performance of this Agreement is required from any third party,
               such Seller shall have a period of fifteen (15) business days or
               until five (5) 

                                     -22-
<PAGE>
 
                days before the Closing Date, which ever period is shorter, to
                obtain such approval; or (f) except as to any Permitted
                Exceptions, result in the creation of any lien, encumbrance or
                security interest upon any Property. Except as set out on
                Schedule 7.5, none of the Sellers have received any written
                ------------ 
                notice of any violation (both as to condition of the Property
                and use) of any applicable laws, statutes, ordinances, codes
                (including, but not limited to, zoning, building, subdivision,
                pollution, environmental protection, water disposal, health,
                fire and safety engineering codes, and laws and regulations with
                respect to the submetering of any utilities serving any
                Property), and the rules and regulations of, by governmental
                authority having jurisdiction over the Properties.

          7.7   Required Obligations.  The Sellers have paid and performed all
                --------------------                                          
                material obligations relating to the Properties required to have
                been paid or performed prior to the date hereof and prior to the
                Closing Date, including but not limited to all principal
                installments, interest payments, taxes, penalties and other
                charges in connection with all indebtedness relating to or
                secured by any of the Properties or an interest in any of the
                Properties.

          7.8   Condition of Properties.  No Seller has been notified that the
                -----------------------                                       
                structural, mechanical, electrical, plumbing, roofing and other
                major systems on any Property and items of equipment and
                components located thereon, require to be replaced or are in
                need of material repair.

          7.9   Warranties.  The Sellers have not released or modified any
                ----------                                                
                warranties of builders, contractors, manufacturers or other
                tradespersons that have been given to any Seller without the
                consent of the Company or the Partnership.

          7.10  Utilities.  Usable sanitary and storm sewers and public water,
                ---------                                                     
                and electrical utilities (collectively, the "Utilities") of
                adequate capacity required for the operation of the Properties,
                are installed in, and are duly connected to, the Properties and
                can be used without any charge except the normal user charges
                for sanitary sewers and the normal and usual charges imposed for
                public water, gas and electric utilities.

          7.11  Zoning.  Each Property is currently located in the areas zoned
                ------                                                        
                for its current use which classification permits the
                development, use and operation of the improvements on such
                Property as such improvements currently are being used without
                special exception or permit. The Sellers have no knowledge of
                any threat of, and have not received written notice of, any
                proceeding to change adversely or down-zone the existing zoning
                classification as to any portion of any Property.

                                     -23-
<PAGE>
 
          7.12  Improvements.  To Sellers' knowledge, all improvements on the
                ------------                                                 
                Properties have been constructed in accordance with, and
                substantially comply with, all requirements of all applicable
                laws, ordinances, regulations and orders, including without
                limitation applicable zoning, building and fire safety codes and
                all restrictive covenants, if any, and other easements,
                encumbrances or agreements affecting title to any Properties or
                improvements. For purposes of this Section 7.12, "substantially"
                means that Sellers shall not be permitted to engage in even de
                minimis non-compliance with applicable laws, ordinance,
                regulations and orders if such de minimis non-compliance could
                result in any governmental, administrative or other authority
                executing any penalty, fine, remedy or other disciplinary action
                against such Seller or such Seller's Business (as defined in the
                Company Lease).

          7.13  Environmental Matters.
                --------------------- 

                7.13.1    For purposes of this Agreement:

                          a.     "Environmental Claim" means any claim, action,
                                 cause of action, investigation, or notice
                                 (written or oral) by any person or entity
                                 alleging potential liability (including,
                                 without limitation, potential liability for
                                 investigatory costs, cleanup costs,
                                 governmental response costs, natural resource
                                 damages, property damages, personal injuries,
                                 or civil or criminal penalties) arising out of
                                 or resulting from (i) the actual or alleged
                                 presence or release into the environment of any
                                 Substance of Concern at any location, whether
                                 or not owned or operated by the Seller, or (ii)
                                 circumstances forming the basis of any actual
                                 or alleged violation of any Environmental Law.

                          b.     "Environmental Laws" means all federal, state,
                                 local, and foreign laws and regulations
                                 relating to pollution or protection of human
                                 health or the environment (including, without
                                 limitation, ambient air, surface water, ground
                                 water, wetlands, land surface, subsurface
                                 strata, and indoor and outdoor workplace),
                                 including, without limitation, (i) laws and
                                 regulations relating to emissions, discharges,
                                 releases, or threatened releases of Substances
                                 of Concern, and (ii) common law principles of
                                 tort liability.

                                     -24-
<PAGE>
 
                          c.     "Substances of Concern" means chemicals,
                                 pollutants, contaminants, wastes, toxic
                                 substances, hazardous substances, radioactive
                                 materials or genetically modified organisms,
                                 which are, have been or become regulated by any
                                 federal, state or local government authority
                                 including, without limitation, (i) petroleum or
                                 any fraction thereof, (ii) asbestos, (iii) any
                                 substance or material defined as a "hazardous
                                 substance" pursuant to (S) 101 of the
                                 Comprehensive Environmental Response,
                                 Compensation, and Liability Act (42 U.S.C. (S)
                                 9601), or (iv) any substance or material
                                 defined as a "hazardous chemical" pursuant to
                                 the federal Hazard Communication Standard (29
                                 C.F.R. (S) 1910.1200).

                7.13.2    To the Sellers' knowledge, each Seller and Property
                          are in full compliance with all applicable
                          Environmental Laws, which compliance includes, but is
                          not limited to, possession by each Seller of all
                          permits and other governmental authorizations required
                          under applicable Environmental Laws, and compliance
                          with the terms and conditions thereof. No Seller has
                          received any communication (written or oral), whether
                          from a governmental authority, citizens group,
                          employee or otherwise, that alleges that such Seller
                          or Property is not in full compliance with the
                          Environmental Laws, and, to the Sellers' best
                          knowledge after due inquiry, there are no
                          circumstances that may prevent or interfere with such
                          full compliance in the future.

                7.13.3    There is no Environmental Claim pending (or to any
                          Sellers' knowledge threatened) against any Seller or,
                          to each Seller's best knowledge after due inquiry,
                          against any person or entity whose liability for any
                          Environmental Claim any Seller has retained or assumed
                          either contractually or by operation of law.

                7.13.4    To the Sellers' knowledge, there are no past or
                          present actions, activities, circumstances,
                          conditions, events or incidents, including, without
                          limitation, the release, emission, discharge,
                          presence, or disposal of any Substance of Concern, at
                          or relating to any of the Properties that could form
                          the basis of any Environmental Claim against any
                          Seller or, to each 

                                     -25-
<PAGE>
 
                          Seller's best knowledge after due inquiry, against any
                          person or entity whose liability for any Environmental
                          Claim any Seller has retained or assumed either
                          contractually or by operation of law.

                7.13.5    Without in any way limiting the generality of the
                          foregoing, to the best of any Seller's knowledge, (a)
                          all on-site and off-site locations where any Seller
                          has treated, disposed, or arranged for the disposal of
                          Substances of Concern or stored hazardous wastes (as
                          defined under the Resource Conservation and Recovery
                          Act or analogous state laws) are identified in
                          Schedule 7.13.5(a); (b) no Property has any
                          ------------------
                          underground or aboveground storage tanks, whether or
                          not currently in use, and, no underground or above
                          ground storage tank that has been removed from any
                          Property has leaked; (c) there is no asbestos
                          contained in or forming part of any building, building
                          component, structure or office space on any Property;
                          (d) no polychlorinated biphenyls (PCBs) are used or
                          stored on any Property; (e) the Sellers have
                          previously provided to the Company copies of all
                          environmental audit reports, Phase I and Phase II
                          investigation reports, technical reports regarding
                          environmental sampling results, and similar
                          environmental reports in the possession of the Sellers
                          or their contractors or agents relating to any
                          Property; and (f) all permits and other governmental
                          authorizations currently held by any Seller for any
                          Property pursuant to the Environmental Laws are
                          identified in Schedule 7.13.5(f).
                                        ------------------ 

          7.14  Insurance.  Schedule 7.14 contains a complete and correct
                ---------   -------------                                
                description of all policies of insurance presently maintained by
                the Sellers with respect to all Properties and the operations
                thereof. To the knowledge of the Sellers, each Seller and
                Property is in compliance with the requirements of each such
                policy, there is no violation of any of the provisions thereof,
                and each such policy is in full force and effect. No Seller has
                received from any insurance company which carries underwriters
                insurance on any Property, or any Board of Fire Underwriters,
                any notice of any defect or inadequacy in connection with any
                Property or its operation which, since the date of such notice,
                has not been corrected.

          7.15  Compliance.  To each Seller's knowledge, each Seller has
                ----------                                              
                complied in all material respects with all laws, ordinances,
                rules, regulations and orders of all governmental authorities
                applicable to the ownership, management, operation,
                construction, maintenance and repair of any Property.

                                     -26-
<PAGE>
 
          7.16  Leases.
                ------ 

                7.16.1    Copies of all Leases for each of the Properties and
                          all parts thereof, as amended through the date hereof
                          have been made available to the Company and the
                          Partnership; such copies are and shall be, in all
                          material respects, true, accurate and complete records
                          of all agreements and understandings with respect to
                          the use or lease of all or any portion of any of the
                          Properties or otherwise constituting Leases that are
                          currently outstanding including all amendments and
                          modifications thereto.

                7.16.2    Schedule 2.1 contains a true, complete and correct
                          ------------                                      
                          list of all current Leases for the Properties or any
                          part thereof.

                7.16.3    No Prior Occupant has an option or right of refusal to
                          purchase any Property or any part thereof.

                7.16.4    Except as specified in the Estoppel Letter approved by
                          the Company and sent to a Prior Occupant, no Prior
                          Occupant is entitled to any rebate, concession,
                          deduction or offset.

                7.16.5    Except as specified in the Estoppel Letter approved by
                          the Company and sent to a Prior Occupant, no Prior
                          Occupant has paid any rent, additional rent or other
                          charge of any nature for a period of more than thirty
                          (30) days in advance.

                7.16.6    No Prior Occupant has any claim or basis for any claim
                          for reduction, deduction or set-off against the
                          landlord or the rent under such Lease.

                7.16.7    No Seller or Affiliate has refused to execute and
                          deliver the Company Lease at Closing, or no Prior
                          Occupant has refused to vacate its premises or such
                          Property, or otherwise to cease occupancy of its
                          premises or such Property.

                7.16.8    Except as set forth on Schedule 2.1, the Seller is
                                                 ------------               
                          the landlord under the Leases.

        7.17    Service Contracts; Management Contracts. Schedule 7.17(a) is a
                ---------------------------------------------------------
                list of all contracts affecting or pertaining to the Properties
                or Sellers' Business that have a monetary obligation of at least
                $25,000 per year and are not 

                                     -27-
<PAGE>
 
                cancellable without penalty by Sellers upon notice of one year
                or less, including all employment, union, purchase, service and
                maintenance agreements, leasing agreements, listing agreements,
                equipment leases, utility contracts, licensing or leasing
                contracts for personal property, and any other agreements,
                contracts, licenses and permits of any kind affecting or
                pertaining to the Properties or any part thereof (the "Service
                Contracts"), and including a list of all management contracts
                relating to the Properties (the "Management Contracts"). There
                will be no contract or agreement in effect, between Seller and
                any third party for the management or leasing of any Property
                other than the Management Contracts and no leasing commission is
                due and owing. Each of the Service Contracts is in full force
                and effect and constitutes the legal, valid and binding
                obligation of the respective parties thereto, enforceable in
                accordance with its terms, and has not been modified, amended or
                extended. Each of the Management Contracts is in full force and
                effect and constitutes the legal, valid and binding obligation
                of the respective parties thereto, enforceable in accordance
                with its terms, and has not been modified, amended or extended.

          7.18  Permits.  All permits, licenses, inspections and other approvals
                -------                                                         
                from all applicable governmental authorities having jurisdiction
                over each Seller and Property that are necessary in connection
                with the operation of the use, ownership and operation of each
                Property as it is currently used, have been obtained and are in
                full force and effect.

          7.19  Other Liabilities.  Other than the Mortgage Debt, there are no
                -----------------                                             
                debts, liabilities or obligations (whether known or unknown,
                disputed or undisputed, fixed, contingent or otherwise)
                associated with or relating to any of the Properties, or secured
                by any of the Properties.

          7.20  Tax Matters.  The Sellers or their Designees have relied solely
                -----------                                                    
                on their own counsel for advice on any and all federal, state
                and local tax matters relating to this Agreement and the
                transactions contemplated herein and have not relied on any
                advice or representations of the Company, the Partnership, or
                their counsel with respect to any federal, state and local tax
                matters relating to this Agreement or the transactions
                contemplated herein.

          7.21  Taxes.  The Sellers have filed all federal, state and local tax
                -----                                                          
                returns required to be filed by the Sellers. With respect to any
                periods prior to the Closing Date, each Seller (i) has no
                knowledge of any unpaid taxes that would create a lien on any
                Property, and (ii) has paid in full all taxes and assessments
                payable or is diligently pursing with the appropriate authority
                any dispute such Seller has regarding any unpaid taxes or
                assessments as of the Closing Date.

                                     -28-
<PAGE>
 
          7.22  Special Filings.  No Seller is required to submit any notice,
                ---------------                                              
                report or other filing to any governmental or regulatory
                authority in connection with the execution, delivery or
                performance of this Agreement or any document or instrument
                executed and delivered in connection herewith or the
                consummation of the transactions contemplated hereby other than
                the filing of the tax returns required by the terms of this
                Agreement and the filing of an 8-K notice with the Securities
                and Exchange Commission.

          7.23  Books and Records.  The books and records of each Seller with
                -----------------                                            
                respect to each Property, all of which have been or will be made
                available to the Company and the Partnership, are, and will be
                at all times until Closing, complete and correct in all material
                respects. All of such books and records shall be made available
                to the Company for examination prior to the Closing.

          7.24  No Brokers.  No Seller has dealt with any agent, broker or other
                ----------                                                      
                person acting pursuant to express or implied authority of any
                Seller (each a "Broker"), and no person or entity is entitled to
                a commission or finder's fee in connection with the sale and
                purchase described by this Agreement or will be entitled to make
                any claim against the Company, or the Partnership for a
                commission or finder's fee by reason of any Seller having
                engaged such Broker.

          7.25  All Material Information.  With respect to all information,
                ------------------------                                   
                statements, representations and warranties made herein, any
                agreements or documents contemplated hereby, any schedules or
                exhibits hereto, and any certificates or instruments delivered
                in connection herewith, the Sellers hereby represent and warrant
                that no information, statement, representation or warranty
                herein or therein contains any untrue statement of a material
                fact or omits to state a material fact necessary in order to
                make the statements contained herein or therein, in light of the
                circumstances in which made, not misleading; or necessary in
                order to provide the Partnership or the Company with true,
                accurate and complete information. No Seller has knowledge or
                information of any facts, circumstances or conditions which do
                or could (whether by the passage of time or the giving of notice
                or both) materially and adversely affect any Property or the
                operation or intended use of the same.

          7.26  Survival of Warranties, Representations and Covenants.  The
                -----------------------------------------------------
                foregoing representations and warranties shall not be affected
                by any investigation or verification made by or on behalf of the
                Company or the Partnership. The representations, warranties and
                covenants of Sellers made in this Agreement shall survive the
                Closing and consummation of the transactions contemplated
                hereby, and shall remain in full force and effect so long as the
                Company or the Partnership provides the Sellers with written
                notice of any breach, 

                                     -29-
<PAGE>
 
               violation or right to indemnification thereunder within a period
               ending 24 months from the date of this Agreement, except that in
               the case of any claim arising out of the representations or
               warranties herein relating to Section 7.13 (Environmental
               Matters) and Section 7.21 (Taxes), such representations and
               warranties shall survive in each case until the applicable
               statute of limitations has run. After Closing, neither the
               Company nor the Partnership shall prosecute any claim against any
               Seller for a breach of the foregoing representations and
               warranties if the Company or the Partnership have obtained
               knowledge of such breach prior to Closing.


          VII  REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PARTNERSHIP
               -----------------------------------------------------------------

          The Partnership and the Company, jointly and severally, represent and
warrant to the Seller that the following are true, complete and correct as of
the date of this Agreement and as of the Closing:

          8.1  Organization, Good Standing and Qualification.  Each of the
               ---------------------------------------------              
               Company and the Partnership (i) is an entity duly organized,
               validly existing and in good standing under the laws of the
               jurisdiction of its organization, (ii) has all requisite power
               and authority to carry on its business and own or lease and
               operate its assets and properties in the manner in which it is
               being conducted and owned or leased and operated, as the case may
               be, and (iii) is duly qualified and authorized to transact
               business and is in good standing in all jurisdictions where its
               ownership, lease or operation of its properties or assets or the
               conduct of its business requires such qualification or
               authorization.

          8.2  Authorization.   The execution and delivery of this Agreement and
               --------------                                                   
               all agreements, documents and instruments contemplated hereby and
               the performance of all transactions contemplated herein or
               therein, have been duly and validly authorized by all requisite
               action by the Company and its board of trustees; and by all
               requisite action of the Partnership. This Agreement and the
               agreements, documents and instruments executed and delivered in
               connection herewith constitute the legal, valid and binding
               obligation of each of the Company and the Partnership,
               enforceable in accordance with their respective terms, subject to
               applicable bankruptcy, insolvency, fraudulent conveyance,
               reorganization, moratorium and similar laws affecting creditors'
               rights and remedies generally, and subject, as to enforceability,
               to general principles of equity, including principles of
               commercial reasonableness, good faith and fair dealing
               (regardless of whether enforcement is sought in a proceeding at
               law or in equity) and except to the extent that rights to
               indemnification and sale and purchase under or 

                                     -30-
<PAGE>
 
               contemplated by this Agreement or such other agreements may be
               limited by federal or state securities laws or public policy
               relating thereto. To the knowledge of the Partnership, the
               Partnership is not required to obtain any consent, authorization,
               approval or waiver from any governmental agency or authority or
               from any third party in connection with the execution and
               delivery of, and the performance of the obligations to be
               performed under, this Agreement and the documents and instruments
               executed and delivered in connection herewith, or if any of the
               foregoing is required, it has been obtained.

          8.3  No Violation.    The execution and delivery of this Agreement and
               -------------                                                    
               the agreements, documents and instruments executed and delivered
               in connection herewith, the consummation of the transactions
               hereby or thereby, and the operation of any Property shall not:
               (i) conflict with, violate, or result in a breach of, the terms,
               conditions or provisions of, or constitute a default under, any
               agreement, contract, Mortgage, deed, lease, license, franchise or
               instrument to which the Company or the Partnership is a party or
               is subject; (ii) constitute a violation of any applicable code,
               resolution, law, statute, regulation, ordinance, rule, judgment,
               decree or order to the Company or the Partnership; or (iii)
               violate any provision of the organizational documents of the
               Company or the Partnership.

          8.4  Tax Status.  As of the Closing, the Partnership will be qualified
               ----------                                                       
               as a partnership for Federal income tax purposes, and the Company
               will be qualified as a real estate investment trust organized
               under the laws of the State of Maryland.

          8.5  No Litigation.  Neither the Partnership nor the Company is
               -------------                                             
               involved in any pending or, to its knowledge, threatened
               litigation that would materially or adversely effect its
               operations or financial condition or the ability to perform under
               this Agreement or the Partnership Agreement.

          8.6  No Brokers.  Neither the Partnership nor the Company has dealt
               ----------                                                    
               with any agent, broker or other person acting pursuant to express
               or implied authority of either such party, and no person or
               entity is entitled to a commission or finder's fee in connection
               with the transactions contemplated by this Agreement or will be
               entitled to make any claim against any Seller for a commission or
               finder's fee by reason of the Company or the Partnership having
               engaged him/her/it.

          8.7  Survival.  The representations and warranties of the Company and
               --------                                                        
               the Partnership made in this Section 11 shall survive the Closing
               and consummation of the transactions contemplated hereby, and
               shall remain in 

                                     -31-
<PAGE>
 
               full force and effect so long as the Seller provides the Company
               or the Partnership with written notice of any breach, violation
               or right to indemnification thereunder within a period ending
               twenty-four (24) months from the date of this Agreement. After
               Closing, the Seller shall not prosecute any claim against the
               Company or the Partnership for a breach of the foregoing
               representations and warranties if the Seller obtained knowledge
               of such breach prior to Closing.


          IX.  COVENANTS
               ---------

          9.1  Covenants of the Company and the Partnership.  Each of the
               --------------------------------------------              
               Company and the Partnership hereby covenants as follows:

                    9.1.1    If this Agreement is terminated for any reason, (a)
                             the Partnership and the Company shall promptly
                             return to Sellers all materials furnished by
                             Sellers to the Partnership and the Company pursuant
                             to this Agreement, and (b) the Partnership and the
                             Company shall promptly restore the Properties to
                             substantially the same condition in which they
                             existed immediately before any physical tests
                             conducted by or on behalf of the Partnership and
                             the Company pursuant to the purposes of this
                             Agreement.

                    9.1.2    Prior to the Closing Date, except as may be
                             required to be disclosed by law (including federal
                             and state securities laws, and the rules and
                             regulations thereunder), regulation or legal
                             process, or unless otherwise consented to in
                             writing by the Sellers, which consent shall not be
                             unreasonably withheld, the Partnership and the
                             Company shall keep all information learned by the
                             Partnership and the Company in connection with the
                             Properties or any operation thereof confidential.

                    9.1.3    In connection with inspection of the Properties,
                             the Partnership and the Company shall not
                             unreasonably interfere with any Prior Occupants or
                             any Seller's business operations.

                    9.1.4    The Partnership shall not sell, repay Mortgage
                             Debt, finance, refinance or otherwise take any
                             actions that are prohibited with respect to any
                             specified Properties to the extent described on
                             Schedule 9.1.4. Notwithstanding the provisions of
                             --------------
                             this Section, the Partnership may (A) at any time,
                             sell or exchange one or more of the Properties in a
                             "like kind 

                                     -32-
<PAGE>
 
                             exchange" under Section 1031 the Code (or any
                             successor or similar section) in which no gain is
                             recognized by the Partnership and reasonable
                             provisions are made (such as by substituted debt)
                             to avoid triggering gain to the Seller.
                             Notwithstanding the provisions of this Section, the
                             Company may sell the Properties which relate to
                             the: (1) closure of the Dealership on such Property
                             due to termination of the Franchise Agreement, (2)
                             sale of the Dealership on such Property, or (3)
                             closure of the Dealership on such Property for any
                             reason if a new Dealership does not open on such
                             Property with 24 months, unless expressly waived by
                             the Company.

                    9.1.5    [Intentionally Omitted]

                    9.1.6    The parties acknowledge and agree that the Sellers
                             and their affiliates are required under this
                             Agreement and the Company Leases to provide to the
                             Company certain confidential financial information
                             (the "Confidential Information") with respect to
                             the business conducted on the Leased Properties.
                             The Company agrees to use the Confidential
                             Information solely for the purposes of monitoring
                             compliance with the terms of this Agreement and the
                             Company Leases, and the Confidential Information
                             shall be disclosed only to those of the Company's
                             employees, advisors and consultants to whom it is
                             necessary for such purposes. Moreover, the Company
                             will use its best efforts to implement policies and
                             procedures at the Board of Trustees level so as to
                             minimize the disclosure of Confidential Information
                             to Trustees having interest in businesses that
                             compete with the Sellers and their affiliates.

                    9.1.7    Between the date of this Agreement and the Closing
                             Date, the Partnership and the Company will use
                             their best efforts to cause the conditions in this
                             Agreement to be satisfied.

                    9.1.8    Except as otherwise required under this Agreement,
                             the Partnership shall pay-off the Mortgage Debt at
                             Closing and obtain and record full releases of such
                             Mortgage Debt.

               9.2  Covenants of the Sellers and the Contributing Entities.  The
                    ------------------------------------------------------      
                    Sellers hereby covenant and agree as follows:

                                     -33-
<PAGE>
 
                    9.2.1    If this Agreement is terminated as to all
                             Properties for any reason, the Sellers shall
                             promptly return to the Company or the Partnership,
                             as the case may be, all materials furnished by the
                             Company or the Partnership, to such Sellers
                             pursuant to this Agreement.

                    9.2.2    Each Seller shall keep all information relating to
                             the Partnership or the Company or any operation
                             thereof confidential.

                    9.2.3    In the event that facts or circumstances are
                             discovered or develop that could form the basis of
                             an Environmental Claim with respect to a specific
                             Property or Properties, the Seller(s) of such
                             Property or Properties shall take all actions
                             necessary to fully address such circumstances,
                             including, without limitation, providing notice to
                             appropriate governmental authorities; conducting
                             environmental studies, sampling and testing
                             procedures; taking remedial action; and modifying
                             operations or physical facilities to otherwise
                             eliminate potential liability and ensure full
                             compliance with the Environmental Laws. Without
                             limiting the foregoing, each Seller shall ensure
                             that it has identified any underground storage
                             tanks ("USTs") used in conjunction with its
                             operations and that all registration,
                             investigation, remedial action and technical
                             upgrade requirements have been complied with fully
                             in respect of each such UST.

                    9.2.4    Between the date of this Agreement and the Closing
                             Date, Sellers shall use their best efforts to cause
                             the conditions in this Agreement to be satisfied.

               9.3  No Claim Against Property.  Each Seller hereby represents,
                    -------------------------                                 
                    warrants, covenants and agrees that, as of the Closing Date,
                    each Seller: (i) will have no claim of any kind or nature
                    against any Property by reason of the execution of this
                    Agreement; and (ii) hereby waives, releases and discharges
                    any claim any Seller has or may have with respect thereto.
                    Notwithstanding Section 7.26, this representation, warranty,
                    covenant and agreement shall survive the closing of the
                    transactions contemplated hereby and shall continue in
                    effect.


               X.   DUE DILIGENCE PERIOD
                    --------------------

                                     -34-
<PAGE>
 
          10.1  Due Diligence Period.  The period from the date hereof until the
                --------------------                                            
                Closing Date is referred to herein as the "Due Diligence
                Period."

          10.2  Access to Properties and Materials.  During the Due Diligence
                ----------------------------------                           
                Period and upon twenty-four (24) hours prior notice, the Company
                and the Partnership and their agents, engineers, surveyors,
                appraisers, auditors, counsel and other representatives shall
                have the right to enter upon the Properties to inspect, examine,
                survey, obtain engineering inspections and environmental
                studies, appraise, and otherwise do that which, in the opinion
                of the Partnership and the Company, is necessary to determine
                the boundaries, acreage and condition of the Properties and to
                determine the suitability of the Properties for the uses
                intended by the Partnership (including, without limitation,
                inspect, review and copy any and all documents in the possession
                or control of Sellers, or their respective agents, contractors
                or employees, and which pertain to the construction, ownership,
                title, use, occupancy or operation of the Properties or any part
                thereof). During the Due Diligence Period, the Sellers, at their
                expense and at such times as will not unreasonably interfere
                with the business being conducted on the Property or hinder the
                Partnership's due diligence review, shall make available to the
                Company and the Partnership copies or originals of all of their
                respective books, files and records relating in any way to the
                Properties, complete copies (or originals when requested) of all
                title information and title insurance policies, easements,
                leases, brokerage agreements, licenses, permits, surveys, zoning
                information, environmental reports, structural reports,
                violation or default notices, contracts, tax bills and
                assessments, information regarding pending or threatened claims,
                suits or proceedings, and all consents and other documents
                required to be obtained for the completion of the transactions
                contemplated hereunder.

          10.3  Adjustment Following Due Diligence.  If the Company or
                ----------------------------------                    
                Partnership determines that one or more representations or
                warranties or any information included on any Schedule relating
                                                              --------
                to any Property is incomplete or inaccurate in any material
                respect (the "Non-Conforming Property"), the Company shall have
                the option to: (a) proceed with the transactions contemplated
                hereby, (b) declare this Agreement null and void in which case
                no party shall have any rights or obligations under this
                Agreement, or (c) terminate this Agreement with respect to such
                Non-Conforming Property and proceed with the transactions hereby
                with respect to the other Properties, in which case the
                Aggregate Purchase Price shall be reduced by the Purchase Price
                of such Non-Conforming Property. Notwithstanding anything herein
                to the contrary, if the Partnership exercises its rights under
                Section 10.3(c) above with respect to any Non-Conforming
                Property other than due to a title defect (pursuant to Section
                3.3) or a misrepresentation or breach of any 

                                     -35-
<PAGE>
 
                environmental representation, warranty or covenant (as set forth
                in Section 7.13), then the Sellers shall have the option of
                declaring this Agreement null and void with respect to all
                Properties.


          XI.   DEFAULTS AND REMEDIES
                ---------------------

          11.1  Indemnification by Sellers.  The Sellers, jointly and severally
                --------------------------                                     
                (each, for purposes of Sections 11.1 and 11.2, a "Seller
                Indemnifying Party"), shall indemnify, defend and hold harmless
                the Partnership, the Company and their respective shareholders,
                partners, trustees, officers, agents, representatives,
                employees, Affiliates, successors and assigns (collectively, for
                purposes of this paragraph, the "Company Indemnified Parties")
                from and against any and all losses, damages, claims,
                liabilities, actions, suits, proceedings and reasonable costs
                and expenses of investigation or defense thereof, including
                reasonable attorneys' fees payable as incurred, arising out of
                or relating to any (a) misrepresentation or breach of warranty
                by any Seller or nonfulfillment of any covenant or agreement to
                be performed or complied with by such Seller under this
                Agreement and any agreement, document, instrument, certificate,
                schedule or exhibit contemplated hereby; (b) untrue or
                incomplete statement of a material fact contained in any
                statement or information provided by any Seller or based on any
                omission to state therein a material fact required to be stated
                therein or other information necessary to make the statements
                therein not misleading, to the extent such alleged untrue or
                incomplete statement or omission was made with any Seller's
                knowledge that the statement was untrue or incomplete or omitted
                to state a material fact; (c) any debts, liabilities or
                obligations (whether known or unknown, disputed or undisputed,
                fixed, contingent or otherwise) associated with or relating to
                any of the Sellers, their officers, directors, partners,
                trustees or Affiliates or the Properties, or secured by any of
                the Sellers, or by any of the Properties, including any
                obligations under any of the Leases, Service Contracts and
                Management Contracts, to the extent any such obligation was to
                be performed prior to the Closing Date, or was to be performed
                after the Closing Date as a result of a breach or default under
                any of the Leases or Service Contracts by any Seller or its
                Affiliates prior to the Closing Date; (d) any action taken, or
                any failure to act, by any Seller in connection with this
                transaction and the transactions contemplated herein
                constituting a breach of this Agreement or any agreement,
                document or instrument contemplated hereby or a breach of a duty
                owed to any person, including, without limitation, any action
                taken to redeem or otherwise liquidate the interest of certain
                holders in anticipation of the transactions contemplated herein,
                to the extent such action or failure to act results in a
                violation (or alleged violation) of applicable laws or of the
                fiduciary duties owed to such holders; (e) 

                                     -36-
<PAGE>
 
                pollution or threat to human health or the environment, or any
                Environmental Claim against any person or entity whose liability
                for such Environmental Claim any Seller has assumed or retained
                either contractually or by operation of law, that is related in
                any way to any of the Properties, including, without limitation,
                all on-site and off-site activities relating to any of the
                Properties involving Substances of Concern, and that occurred,
                existed, arises out of conditions or circumstances that occurred
                or existed, or was caused, in whole or in part, on or before the
                Closing Date, whether or not the pollution or threat to human
                health or the environment, or the existence of any Environmental
                Claim, is known to any Seller; (f) regardless of whether it
                arises as a breach of any representation or warranty, any debts,
                liabilities or obligations of any Seller (whether known or
                unknown, disputed or undisputed, fixed, contingent or otherwise)
                of, associated with or relating to any asset or property other
                than the Properties; and (g) any and all damages and expenses
                incident to any of the foregoing or to the enforcement of this
                Section 11.1.


          11.2  Remedies.
                -------- 

                11.2.1                   [Intentionally Omitted]

                11.2.2                   Each Seller Indemnifying Party shall be
                                         fully responsible and jointly and
                                         severally liable for any of the
                                         following and any and all losses,
                                         damages, claims, liabilities, actions,
                                         suits, proceedings and reasonable costs
                                         and expenses of defense thereof,
                                         including reasonable attorneys' fees
                                         payable as incurred, arising out of or
                                         relating to: (a) each representation
                                         and warranty made by each Seller
                                         hereunder relating to or associated
                                         with title such Seller's interest in
                                         any Property and such Seller's ability
                                         to convey such Seller's interest as
                                         contemplated by this Agreement; (b)
                                         regardless of whether it arises as a
                                         breach of any representation or
                                         warranty, any debts, liabilities or
                                         obligations (whether known or unknown,
                                         disputed or undisputed, fixed,
                                         contingent or otherwise) of, associated
                                         with or relating to any of the Sellers,
                                         or the Properties, or secured by any of
                                         the Sellers or by any of the
                                         Properties, and (c) regardless of
                                         whether it arises as a breach of any
                                         representation or warranty, any debts,
                                         liabilities or obligations of the
                                         Sellers (whether known or unknown,
                                         disputed or undisputed, fixed,
                                         contingent or otherwise) of, associated
                                         with or relating to any other asset or
                                         property other than the Properties.

                                     -37-
<PAGE>
 
                11.2.3                   Each Seller hereby represents,
                                         warrants, covenants and agrees that
                                         he/she/it presently has, a tangible net
                                         worth (such term meaning net worth
                                         exclusive of the value (if any) of
                                         goodwill, going concern value and
                                         similar assets, but inclusive of the
                                         value of shares of stock, interests in
                                         partnerships and other business
                                         enterprises and similar assets) of not
                                         less than the Aggregate Purchase Price,
                                         minus all Mortgage Debt for all
                                         Properties being acquired by the
                                         Partnership pursuant to this Agreement.

          11.3  Indemnification by the Company and the Partnership.  The Company
                --------------------------------------------------              
                and the Partnership (each, for purposes of this Section 11.3, a
                "Company Indemnifying Party") shall indemnify, defend and hold
                harmless each Seller and their respective shareholders,
                partners, directors, officers, partners, agents, employees,
                Affiliates, successors and assigns (collectively, for purposes
                of this paragraph, "Seller Indemnified Parties") from and
                against any and all losses, damages, claims, liabilities,
                actions, suits, proceeds and costs and expenses of defense
                therefore, including attorneys' fees payable as incurred,
                arising out of or relating to any (a) misrepresentation or
                breach of warranty by such Company Indemnifying Party or
                nonfulfillment of any covenant or agreement to be performed or
                complied with by such Company Indemnifying Party under this
                Agreement; (b) untrue or incomplete statement (or allegation by
                a third party of an untrue or incomplete statement) of a
                material fact contained in any statement or information provided
                by such Company Indemnifying Party or based on any omission (or
                allegation by a third party of an untrue or incomplete
                statement) to state therein a material fact required to be
                stated therein or other information necessary to make the
                statements therein not misleading, to the extent such alleged
                untrue or incomplete statement or omission was made with the
                Company's or the Partnership's knowledge that the statement was
                untrue or incomplete or omitted to state a material fact; (c)
                any Service Contracts that survive the Closing Date, to the
                extent any such obligation is to be performed after the Closing
                Date, except to the extent any such obligation is to be
                performed after the Closing Date as a result of a breach or
                default under any of the Leases or Service Contracts by the
                Seller prior to the Closing Date; (d) any damage caused to the
                Property or incurred by any third party as a result of the
                Partnership's environmental review or due diligence
                investigation; and (e) any and all damages and expenses incident
                to any of the foregoing or to the enforcement of this Section
                11.3.

          11.4  Indemnification Procedures. All claims for indemnification under
                --------------------------                                      
                this Article 14 shall be asserted and resolved as follows:

                                     -38-
<PAGE>
 
                11.4.1                   In the event that any Seller
                                         Indemnified Party or  Company
                                         Indemnified Party (the "Indemnified
                                         Party") has a Claim against any Seller
                                         Indemnifying Party or Company
                                         Indemnifying Party obligated to provide
                                         indemnification pursuant to Sections
                                         11.1 or 11.2 hereof, on the one hand,
                                         or Section 11.3 hereof, on the other
                                         hand  (the "Indemnifying Party"), which
                                         does not involve a claim being asserted
                                         against or sought to be collected by a
                                         third party, the Indemnified Party
                                         shall with reasonable promptness send a
                                         written notice (the "Claim Notice")
                                         with respect to such claim to the
                                         Indemnifying Party.  If the
                                         Indemnifying Party does not notify the
                                         Indemnified Party within the thirty
                                         (30) days thereafter (the "Notice
                                         Period") that the Indemnifying Party
                                         disputes such claim, the amount of such
                                         claim shall be conclusively deemed a
                                         liability of the Indemnifying Party
                                         hereunder.  In case an objection is
                                         made in writing in accordance with this
                                         Section 11.4.1, the Indemnified Party
                                         shall have thirty (30) days to respond
                                         in a written statement to the
                                         objection.  If after such thirty (30)
                                         day period there remains a dispute as
                                         to any claims, the parties shall
                                         attempt in good faith for sixty (60)
                                         days to agree upon the rights of the
                                         respective parties with respect to each
                                         of such claims.  If the parties should
                                         so agree, a memorandum setting forth
                                         such agreement shall be prepared and
                                         signed by both parties.

                11.4.2                   In the event that any claim for which
                                         the Indemnifying Party would be liable
                                         to an Indemnified Party hereunder is
                                         asserted, or any action or proceeding
                                         commenced, against an Indemnified Party
                                         by a third party, the Indemnified Party
                                         shall with reasonable promptness notify
                                         the Indemnifying Party of such claim,
                                         specifying the nature of such claim and
                                         the amount or the estimated amount
                                         thereof to the extent then feasible
                                         (which estimate shall not be conclusive
                                         of the final amount of such Claim) (the
                                         "Third Party Claim Notice"). The
                                         Indemnifying Party shall have 30 days
                                         from the receipt of the Claim Notice
                                         (the "Third Party Notice Period") to
                                         notify the Indemnified Party (a)
                                         whether or not such party disputes the
                                         liability to the Indemnified Party
                                         hereunder with respect to such claim
                                         and (b) if such party does not dispute
                                         such liability, whether or not the
                                         Indemnifying Party desires, at the sole
                                         cost and expense of the Indemnifying
                                         Party, to defend against such claim,
                                         provided that such party is hereby

                                     -39-
<PAGE>
 
                                         authorized (but not obligated) prior to
                                         and during the Third Party Notice
                                         Period to file any motion, answer or
                                         other pleading and to take any other
                                         action which the Indemnifying Party
                                         shall deem necessary or appropriate to
                                         protect the Indemnifying Party's
                                         interests.  In the event that the
                                         Indemnifying Party notifies the
                                         Indemnified Party within the Third
                                         Party Notice Period that the
                                         Indemnifying Party does not dispute the
                                         Indemnifying Party's obligation to
                                         indemnify hereunder and desires to
                                         defend the Indemnified Party against
                                         such claim, except as hereinafter
                                         provided, such party shall have the
                                         right to defend by appropriate
                                         proceedings. No non-monetary settlement
                                         of any such matter shall be entered
                                         into without the written consent of the
                                         Indemnified Party, which consent shall
                                         not be unreasonably withheld; provided
                                         that, unless the Indemnified Party
                                         otherwise agrees in writing, such party
                                         may not settle any matter (in whole or
                                         in part) unless such settlement
                                         includes a complete and unconditional
                                         release of the Indemnified Party.  If
                                         the Indemnified Party desires to
                                         participate in, but not control, any
                                         such defense or settlement the
                                         Indemnified Party may do so at its sole
                                         cost and expense. If the Indemnifying
                                         Party elects not to defend the
                                         Indemnified Party against such claim,
                                         whether by failure of such party to
                                         give the Indemnified Party timely
                                         notice as provided above or otherwise,
                                         then the Indemnified Party, without
                                         waiving any rights against such party,
                                         may settle or defend against any such
                                         claim in the Indemnified Party's sole
                                         discretion and the Indemnified Party
                                         shall be entitled to recover from the
                                         Indemnifying Party the amount of any
                                         settlement or judgment to the extent
                                         the Indemnified Party is entitled to
                                         indemnification and, on an ongoing
                                         basis, all indemnifiable costs and
                                         expenses of the Indemnified Party with
                                         respect thereto, including interest
                                         from the date such costs and expenses
                                         were incurred.

                11.4.3                   If at any time, in the reasonable
                                         opinion of the Indemnified Party,
                                         notice of which shall be given in
                                         writing to the Indemnifying Party, any
                                         such claim seeks material prospective
                                         or other relief which could have a
                                         materially adverse effect on the
                                         assets, liabilities, financial
                                         condition, results of operations or
                                         business prospects of any Indemnified
                                         Party or in the reasonable opinion of
                                         counsel for the Indemnified Party a
                                         conflict exists, the Indemnified Party
                                         shall have the right to control or
                                         assume (as the case may be) 

                                     -40-
<PAGE>
 
                                         the defense of any such claim and the
                                         amount of any judgment or settlement
                                         and the reasonable costs and expenses
                                         of defense shall be included as part of
                                         the indemnification obligations of the
                                         Indemnifying Party hereunder. If the
                                         Indemnified Party should elect to
                                         exercise such right, the Indemnifying
                                         Party shall have the right to
                                         participate in, but not control, the
                                         defense of such claim or demand at the
                                         sole cost and expense of the
                                         Indemnifying Party.

                11.4.4                   Nothing herein shall be deemed to
                                         prevent the Indemnified Party from
                                         making a claim, and an Indemnified
                                         Party may make a claim hereunder, for
                                         potential or contingent claims or
                                         demands provided the Claim Notice or
                                         Third Party Claim Notice, as the case
                                         may be, sets forth the specific basis
                                         for any such potential or contingent
                                         claim or demand to the extent then
                                         feasible and the Indemnified Party has
                                         reasonable grounds to believe that such
                                         a claim or demand may be made.

                11.4.5                   The Indemnified Party's failure to give
                                         reasonably prompt notice as required by
                                         this Section 11.4 of any actual,
                                         threatened or possible claim, demand,
                                         action or proceeding which may give
                                         rise to a right of indemnification
                                         hereunder shall not relieve the
                                         Indemnifying Party of any liability
                                         which the Indemnifying Party may have
                                         to the Indemnified Party unless the
                                         failure to give such notice materially
                                         and adversely prejudiced the
                                         Indemnifying Party or increases the
                                         amount of indemnification which the
                                         Indemnifying Party is obligated to pay
                                         hereunder.  In any such event, the
                                         amount of indemnification which the
                                         Indemnified Party will be entitled to
                                         receive hereunder shall be reduced to
                                         an amount which the Indemnified Party
                                         would have been entitled to receive had
                                         such notice been timely.


          XII.  MISCELLANEOUS
                -------------

          12.1  Assignment.  Neither this Agreement nor any interest hereunder
                ----------                                                    
                may be assigned or transferred by any Seller without the prior
                written consent of the Company or the Partnership. As of the
                Closing Date, the Company or the Partnership may assign,
                transfer or demise any or all of its interest in any Property to
                any Affiliate (the "Permitted Transferees") without the prior
                consent of the Sellers.

                                     -41-
<PAGE>
 
          12.2  Entire Agreement.  Any prior agreement or understanding among
                ----------------
                the parties concerning the subject matter hereof is hereby
                superseded. This Agreement constitutes the entire agreement
                among the parties with respect to the subject matter hereof and
                the transactions contemplated herein and shall not be modified
                or amended except in a written document signed by all of the
                parties hereto.

          12.3  Notices.  All notices or other communications required or
                -------                                                  
                permitted under this Agreement shall be in writing and delivered
                personally or by registered or certified mail, return receipt
                requested, postage prepaid, or by a nationally recognized
                overnight courier (such as Federal Express) with receipted
                delivery. Notices to the parties shall be addressed as follows:

     If to the Sellers to the addresses contained in Schedule I;
                                                     ---------- 

with a copy to:

     Sprouse, Mozola, Smith & Rowley, P.C.
     801 S. Filmore, Suite 600
     Amarillo, Texas  79101
     Attention: Jeff Tankersley

If to the Partnership or to the Company:

     Capital Automotive REIT
     1925 North Lynn Street
     Suite 306
     Arlington, Virginia 22209
     Attention: Thomas D. Eckert, President and Chief Executive Officer

With a copy to:

     Wilmer, Cutler & Pickering
     2445 M Street, N.W.
     Washington, DC  20037
     Attention: George P. Stamas, Esq.

     All notices given in accordance with the terms hereof shall be deemed
effective (a) if delivered in person or by overnight courier, on the business
day it is delivered, and (b if sent by registered or certified mail, three (3)
business days after deposit with the U.S. mail.  Any party hereto may change its
address by written notice to all parties hereto sent in accordance with the
terms of this Section and any such Notice of change of address shall be
effective five (5) days after delivery.

                                     -42-
<PAGE>
 
     12.4  Governing Law.  This Agreement shall be governed and interpreted in
           -------------                                                      
           accordance with the laws of the Commonwealth of Virginia without
           regard to its principles of conflicts of laws, and any action brought
           under or arising out of this Agreement or the matters relating hereto
           shall be submitted to the jurisdiction of the United States District
           Court for the Eastern District of Virginia. Each party acknowledges
           and agrees to such jurisdiction.

     12.5  Litigation Costs.  If there is any legal action or proceeding
           ----------------                                             
           between the parties hereto arising from or based upon this Agreement,
           the unsuccessful party to such action or proceeding shall pay to the
           prevailing party all litigation costs and expenses, including
           reasonable attorneys' fees, incurred by such prevailing party in such
           action or proceeding and in any appeal in connection therewith, and
           if such prevailing party recovers a judgment in any such action,
           proceeding or appeal, such costs, expenses and attorneys' fees shall
           be included in as part of such judgment.

     12.6  Counterparts.  This Agreement may be executed in any number of
           ------------                                                  
           identical counterparts, any or all of which may contain the
           signatures of fewer than all of the parties but all of which shall be
           taken together as a single instrument.

     12.7  Offer and Acceptance.  This Agreement constitutes an offer by the
           --------------------                                             
           Company and the Partnership which must be accepted, by delivery to
           the Company of a duly signed and completed signature page hereof, by
           all of the Sellers within five (5) days after the date this Agreement
           is signed by the Company and the Partnership. If, within such time
           period, less than all of the persons owning any interest in a Seller
           shall have signed this Agreement, then the Seller and the Property
           owned by such Seller shall, at the sole option of the Company, be
           excluded from the sale and purchase hereunder, this Agreement shall
           remain in full force and effect as to the other Sellers and
           Properties, and an appropriate adjustment shall be made with respect
           to the relevant Property, in which case the Aggregate Purchase Price
           shall be reduced by the Purchase Price of such Property as provided
           in this Agreement; if after the expiration of such time period all of
           the Sellers execute this Agreement, the Company, at its sole option,
           may elect to re-include, or may continue to exclude, any such Seller
           and Property.

           12.8 Arbitration.  In the event a dispute arises between the parties
                -----------
as to any of the requirements of this Agreement or the performance under this
Agreement, which the parties are unable to resolve, the parties agree to waive
the remedy of litigation (except for extraordinary relief in an emergency
situation) and agree that such dispute or disputes shall be determined by
arbitration. Notwithstanding the foregoing, the parties acknowledge and agree
that this Section 12.8 is not intended to create new rights.

                                     -43-
<PAGE>
 
            [THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK]

                                     -44-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal, with the intention that it be a sea ed instrument, as of the date
set forth above.

WITNESS                        CAPITAL AUTOMOTIVE REIT
                             
                             
                             
By:    /s/ P. James Kahler     By:    /s/ Thomas D. Eckert 
Name:  P. James Kahler         Name:  Thomas D. Eckert (SEAL)
Title: A.V.P.  Acquisitions    Title: President and Chief Executive Officer
                             
                               CAPITAL AUTOMOTIVE L.P.
                             
WITNESS                        By: Capital Automotive REIT, as General Partner
 
 
By:    /s/ P. James Kahler     By:    /s/ Thomas D. Eckert (SEAL)
Name:  P. James Kahler         Name:  Thomas D. Eckert
Title: A.V.P. Acquisitions     Title: President and Chief Executive Officer
 
WITNESS                        SELLER:     PLAINS CHEVROLET, INC.,
                                           a Texas corporation
 
By:    /s/ Roxanne Lincycomb   By:    /s/ Robert W. Hall (SEAL)
Name:  Roxanne Lincycomb       Name:  Robert W. Hall
Title: Legal Secretary         Title: Vice President
                               Address:P.O. Box 750
                                       Amarillo, Texas  79105-0750
                               Telephone #: (806) 374-8653
                               Facsimile #: (806) 374-3818
                               Social Security # or TIN: 75-1057395






                    [SIGNATURES CONTINUE ON FOLLOWING PAGE]

                                     -45-
<PAGE>
 
WITNESS                        SELLER:     MIDWAY CHEVROLET, INC.
                                           (formerly Yarbrough Chevrolet, Inc.),
                                           a Texas corporation

By:    /s/ Roxanne Lincycomb   By:    /s/ Robert W. Hall (SEAL)
Name:  Roxanne Lincycomb       Name:  Robert W. Hall
Title: Legal Secretary         Title: Vice President
                               Address:P.O. Box 750
                                       Amarillo, Texas  79105-0750
                               Telephone #: (806) 374-8653
                               Facsimile #: (806) 374-3818
                               Social Security # or TIN: 75-1631858
 
WITNESS                        SELLER:     WESTGATE CHEVROLET, INC.,
                                           a Texas corporation
 
By:    /s/ Roxanne Lincycomb   By:    /s/ Robert W. Hall (SEAL)
Name:  Roxanne Lincycomb       Name:  Robert W. Hall
Title: Legal Secretary         Title: Vice President
                               Address:P.O. Box 750
                                       Amarillo, Texas  79105-0750
                               Telephone #: (806) 374-8653
                               Facsimile #: (806) 374-3818
                               Social Security # or TIN: 75-1324586
 
WITNESS                        SELLER:     QUALITY NISSAN, INC.,
                                           a Texas corporation
 
By:    /s/ Roxanne Lincycomb   By:    /s/ Robert W. Hall (SEAL)
Name:  Roxanne Lincycomb       Name:  Robert W. Hall
Title: Legal Secretary         Title: Vice President
                               Address:P.O. Box 750
                                       Amarillo, Texas  79105-0750
                               Telephone #: (806) 374-8653
                               Facsimile #: (806) 374-3818
                               Social Security # or TIN: 75-1847218




                    [SIGNATURES CONTINUE ON FOLLOWING PAGE]

                                     -46-
<PAGE>
 
WITNESS                        SELLER:     CROSS-CONTINENT AUTO
                                           RETAILERS, INC.
                                           a Delaware corporation
 

By:    /s/ Roxanne Lincycomb   By:    /s/ Robert W. Hall (SEAL)
Name:  Roxanne Lincycomb       Name:  Robert W. Hall
Title: Legal Secretary         Title: Vice Chairman
                               Address:P.O. Box 750
                                       Amarillo, Texas  79105-0750
                               Telephone #: (806) 374-8653
                               Facsimile #: (806) 374-3818
                               Social Security # or TIN: 75-2653095

                                     -47-
<PAGE>
 
           CROSS-CONTINENT PURCHASE AGREEMENT EXHIBITS AND SCHEDULES

                                    EXHIBITS

     2.4(a)    Form of  Company Lease
     2.4(c)    Guaranty and Subordination Agreement
     5.2.1(m)  Opinion of Seller's Counsel
     5.2.2(d)  Opinion of Company Counsel
 
                                   SCHEDULES

     I.        Sellers (Names and Addresses)
     1.2       Schedule of Properties; Ownership Interests in Properties and
               Purchase Amounts
     2.1       Prior Occupants
     2.4(b)    Guarantors
     2.11(a)   Construction Contracts for Douglas Toyota and Toyota West
     2.11(b)   Plans and Specifications for Douglas Toyota and Toyota West
     7.5       Litigation
     7.8       Condition of Properties
     7.13.5(a) The Treatment, Storage and Disposal Locations for Substances of
               Concern
     7.13.5(f) Environmental Permits and Authorizations
     7.14      Insurance
     7.17(a)   Material Contracts
     9.1.4     Restrictions on Sale and/or Financing of Specified Properties
<PAGE>
 
                                EXHIBIT 2.4(a)
                                --------------

                             Form of Company Lease








                                LEASE AGREEMENT
                                ---------------

                                    BETWEEN
                                    -------

                       CAPITAL AUTOMOTIVE L.P., LANDLORD
                       ---------------------------------

                                      AND
                                      ---

               [                                      ], TENANT
               ________________________________________________


                           DATED: ____________, 1997
<PAGE>
 
<TABLE>
<CAPTION>

<S>                                                                         <C>
ARTICLE I
     LEASE AGREEMENT, LEASED PROPERTY AND TERM.............................  1
     1.01   Lease Agreement................................................  1
     1.02   Contingent Upon Acquisition of the Leased Property.............  2
     1.03   Term...........................................................  2
     1.04   Holding Over...................................................  3
     1.05   Surrender......................................................  4

ARTICLE II
     RENT..................................................................  4
     2.01   Base Rent......................................................  4
     2.02   Payment........................................................  4
     2.03   Security Deposit...............................................  4
     2.04   Base Annual Rent Adjustment....................................  5
     2.05   Additional Rent................................................  5
     2.06   Place(s) of Payment of Rent; Direct Payment of Additional Rent.  5
     2.07   Net Lease......................................................  5
     2.08   No Termination, Abatement, Etc.................................  5

ARTICLE III
     IMPOSITIONS AND UTILITIES.............................................  6
     3.01   Payment of Impositions.........................................  6
     3.02   Definition of Impositions......................................  7
     3.03   Utilities......................................................  8
     3.04   Escrow of Impositions..........................................  8
     3.05   Discontinuance of Utilities....................................  9
     3.06   Liens..........................................................  9

ARTICLE IV
     INSURANCE.............................................................  9
     4.01   Insurance......................................................  9
     4.02   Insurance Limits............................................... 11
     4.03   Insurance Requirements......................................... 11
     4.04   Replacement Cost............................................... 12
     4.05   Blanket Policy................................................. 12
     4.06   No Separate Insurance.......................................... 12
     4.07   Waiver of Subrogation.......................................... 13
     4.08   Mortgages...................................................... 13
     4.09   Other Insurance Requirements................................... 13

ARTICLE V
     INDEMNITY; SUBSTANCES OF CONCERN...................................... 13
</TABLE>
<PAGE>
 
<TABLE>
<S>                                                                         <C>
     5.01   Tenant's Indemnification....................................... 13
     5.02   Substances of Concern.......................................... 14
     5.03   Audits......................................................... 16
     5.04   Landlord's Option Re: Compliance............................... 17
     5.05   Environmental Indemnification.................................. 17
     5.06   Tenant's Cleanup Obligation.................................... 18
     5.07   Existing Environmental Conditions.............................. 18
     5.08   Survival of Tenant's Obligations............................... 18

ARTICLE VI
     USE AND ACCEPTANCE OF PREMISES........................................ 18
     6.01   Use of Leased Properties....................................... 18
     6.02   Acceptance of Leased Properties................................ 19
     6.03   Conditions of Use and Occupancy................................ 19
     6.04   Financial Statements and Other Information..................... 19

ARTICLE VII
     REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS................... 20
     7.01   Maintenance.................................................... 20
     7.02   Compliance with Laws........................................... 20
     7.03   Required Alterations........................................... 21
     7.04   Mechanics' Liens............................................... 21
     7.05   Replacements of Fixtures....................................... 21
     7.06   Encroachments; Restrictions.................................... 22

ARTICLE VIII
     ALTERATIONS AND SIGNS; TENANT'S PROPERTY;                                
     CAPITAL ADDITIONS TO THE LEASED PROPERTIES............................ 22
     8.01   Tenant's Right to Construct.................................... 22
     8.02   Scope of Right................................................. 23
     8.03   Cooperation of Landlord........................................ 23
     8.04   Commencement of Construction................................... 24
     8.05   Rights in Tenant Improvements.................................. 24
     8.06   Personal Property.............................................. 25
     8.07   Requirements for the Tenant's Personal Property................ 25
     8.08   Financings of Capital Additions to a Leased Property........... 26

ARTICLE IX
     DEFAULTS AND REMEDIES................................................. 27
     9.01   Events of Default.............................................. 27
     9.02   Remedies....................................................... 29
     9.03   Right of Set-Off............................................... 32
     9.04   Performance of Tenant's Covenants.............................. 32
</TABLE>

                                     -ii-
<PAGE>
 
<TABLE>
<S>                                                                         <C>
     9.05   Late Charge.................................................... 32
     9.06   Litigation; Attorneys' Fees.................................... 32
     9.07   Remedies Cumulative............................................ 33
     9.08   Escrows and Application of Payments............................ 33
     9.09   Power of Attorney.............................................. 33

ARTICLE X
     DAMAGE AND DESTRUCTION................................................ 34
     10.01  General........................................................ 34
     10.02  Landlord's Inspection.......................................... 35
     10.03  Landlord's Costs............................................... 35
     10.04  Rent Abatement................................................. 35
     10.05  Substantial Damage During Lease Term........................... 35
     10.06  Damage Near End of Term........................................ 36
     10.07  Risk of Loss................................................... 36

ARTICLE XI
     CONDEMNATION.......................................................... 37
     11.01  Total Taking................................................... 37
     11.02  Partial Taking................................................. 37
     11.03  Restoration.................................................... 37
     11.04  Landlord's Inspection.......................................... 38
     11.05  Award Distribution............................................. 38
     11.06  Temporary Taking............................................... 38

ARTICLE XII
     ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS........ 39
     12.01  Organization and Qualification................................. 39
     12.02  Material Agreements............................................ 40
     12.03  Changes in Condition........................................... 40
     12.04  Franchises, Licenses, etc...................................... 40
     12.05  Litigation..................................................... 41
     12.06  Authorization and Enforceability............................... 41
     12.07  No Legal Obstacle to Lease..................................... 41
     12.08  Certain Business Representations............................... 42
     12.09  Certain Financial Covenants.................................... 43
     12.10  Cash Flow Coverage Ratio Covenant.............................. 43
     12.11  Disclosure..................................................... 43
     12.12  Covenant Not to Acquire........................................ 44

ARTICLE XIII
     ASSIGNMENT AND SUBLETTING; ATTORNMENT................................. 44
</TABLE>

                                     -iii-
<PAGE>
 
<TABLE>
<S>                                                                         <C>
     13.01  Prohibition Against Subletting and Assignment.................. 44
     13.02  Changes of Control............................................. 44
     13.03  Operating/Service Agreements................................... 45
     13.04  Assignment..................................................... 46
     13.05  REIT Limitations............................................... 46
     13.06  Attornment..................................................... 47
     13.07  Severance and Spin-Off......................................... 47

ARTICLE XIV
     ARBITRATION........................................................... 48
     14.01  Controversies.................................................. 48
     14.02  Appointment of Arbitrators..................................... 48
     14.03  Arbitration Procedure.......................................... 48
     14.04  Expenses....................................................... 48
     14.05  Enforcement of the Arbitration Award........................... 49

ARTICLE XV
     QUIET ENJOYMENT, SUBORDINATION,
     ATTORNMENT, ESTOPPEL CERTIFICATES..................................... 49
     15.01  Quiet Enjoyment................................................ 49
     15.02  Landlord Mortgages; Subordination.............................. 49
     15.03  Attornment..................................................... 49
     15.04  Estoppel Certificates.......................................... 50
     15.05  Waiver of Landlord's Lien...................................... 50

ARTICLE XVI RIGHT OF FIRST OFFER........................................... 51
     16.01  Right of First Offer During Lease Term or Extension Term....... 51
     16.02  Right to Purchase at End of an Extension Term.................. 52

ARTICLE XVII
     MISCELLANEOUS......................................................... 53
     17.01  Notices........................................................ 53
     17.02  Advertisement of a Leased Property............................. 54
     17.03  Landlord's Access.............................................. 54
     17.04  Entire Agreement............................................... 54
     17.05  Severability................................................... 55
     17.06  Captions and Headings.......................................... 55
     17.07  Governing Law.................................................. 55
     17.08  Memorandum of Lease or Certain Rights Under the Lease.......... 55
     17.09  Waiver......................................................... 55
     17.10  Assignment; Binding Effect..................................... 55
     17.11  Consents and Approvals......................................... 55
     17.12  Single Property................................................ 56
</TABLE>

                                     -iv-
<PAGE>
 
<TABLE>
<S>                                                                         <C>
     17.13  Modification................................................... 56
     17.14  Incorporation by Reference..................................... 56
     17.15  No Merger...................................................... 56
     17.16  Force Majeure.................................................. 56
     17.17  Laches......................................................... 56
     17.18  Waiver of Jury Trial........................................... 56
     17.19  Permitted Contests............................................. 57
     17.20  Construction of Lease.......................................... 57
     17.21  Counterparts................................................... 58
     17.22  Relationship of Landlord and Tenant............................ 58
</TABLE>

                                      -v-
<PAGE>
 
                                   SCHEDULES

     A         Leased Properties and Initial Base Rent
     B         Permitted Exceptions
     12.02     Material Agreements
     12.03     Changes in Condition


                                    EXHIBITS

     2.02      Payment Account Information
     2.04      Base Annual Rent Adjustment
     5.07      Environmental Reports
     15.02     Form of Subordination and Non-Disturbance Agreement

                                     -vi-
<PAGE>
 
                                LEASE AGREEMENT

          THIS LEASE AGREEMENT ("Lease") dated as of the ______ day of ________,
1997 by and between CAPITAL AUTOMOTIVE L.P., a Delaware limited partnership
("Landlord"), having its principal office at 1925 North Lynn Street, Suite 306,
Arlington, Virginia 22209, and [                                              ],
a ___________ [corporation], having its principal office at [________________]
("Tenant").

                                    RECITALS

          WHEREAS, Tenant or an Affiliate (as hereafter defined) has conveyed or
will convey to Landlord certain parcels of real estate and improvements thereon
upon which Tenant engages in motor vehicle retail and/or motor vehicle related
businesses (the "Business"), which parcels of real estate and improvements
thereon are described on Schedule A attached hereto and incorporated herein by
                         ----------                                           
reference (each hereinafter a "Leased Property" or collectively, the "Leased
Properties"), and Landlord and Tenant desire to provide for the lease by
Landlord to Tenant of the Leased Properties; and

          WHEREAS, Landlord and Tenant desire that each of the Leased Properties
shall be the subject of this Lease and be used by Tenant in its operation of the
Business; and

          WHEREAS, this Lease provides that additional real estate and
improvements thereon may be made subject to the operation and effect of this
Lease, upon execution by Landlord and Tenant of a Lease Supplement designating
each such additional property as a Leased Property hereunder.

          NOW, THEREFORE, in consideration of the foregoing premises and of
their respective agreements and undertakings herein, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:

                                   ARTICLE I
                   LEASE AGREEMENT, LEASED PROPERTY AND TERM

          1.01      Lease Agreement.  Landlord does hereby let and lease unto
                    ---------------                                          
Tenant, and Tenant does hereby take and hire from Landlord, the Leased
Properties, which shall respectively consist of:

          (a)       The parcels of land described and located at the addresses
                    listed in Schedule A hereto, as more particularly described
                              ----------                                       
                    therein, together with any additional parcels of real estate
                    and improvements thereon subsequently designated as a Leased
                    Property by the parties pursuant to a Lease Supplement as
                    provided for herein, together with all rights, titles,
                    appurtenant interests, covenants, licenses, privileges and
                    benefits thereto belonging, and any easements, rights-of-
                    way, rights of ingress or egress or other interests in, on,
                    or to any land, highway, street, road or avenue, open or
                    proposed, in, on, across, in 
<PAGE>
 
                    front of, abutting or adjoining such real property
                    including, without limitation, any strips and gores adjacent
                    to or lying between such real estate and any adjacent real
                    estate (the "Land");

          (b)       All buildings, improvements, structures and Fixtures (as
                    hereinafter defined) now located or to be located or to be
                    constructed on the Land, including, without limitation,
                    sidewalks, landscaping, parking lots and structures, roads,
                    drainage and all above ground and underground utility
                    structures and conduits (on-site or off-site), equipment
                    systems and other so-called "infrastructure" improvements
                    (the "Improvements");

          (c)       All equipment, machinery, fixtures, and other items of real
                    and/or personal property, including all components thereof,
                    located in, on or used in connection with, and permanently
                    affixed to or incorporated into, the Improvements,
                    including, without limitation, all furnaces, boilers,
                    heaters, electrical equipment, heating, plumbing, lighting,
                    ventilating, refrigerating, incineration, air and water
                    pollution control, waste disposal, air-cooling and air-
                    conditioning systems and apparatus, sprinkler systems and
                    fire and theft protection equipment, and similar systems,
                    all of which, to the greatest extent permitted by law, are
                    hereby deemed to constitute real estate, together with all
                    replacements, modifications, alterations and additions
                    thereto (collectively the "Fixtures"); and

          (d)       All easements, rights and appurtenances relating to the Land
                    and the Improvements.

          SUBJECT, HOWEVER, to the liens, encumbrances, restrictions,
agreements, and other title matters listed or specifically referred to in
Schedule B ("Permitted Exceptions").
- ----------                          

          The Leased Properties shall however exclude all furniture, equipment,
inventory and items of moveable personal property attached to the Land or
Improvements that relate to the business being conducted on the Leased Property
which items may readily be removed without material damage to the Land and
Improvements whether or not such items might legally be considered to be
"fixtures" (all of which are owned by Tenant and shall hereinafter be defined as
the "Excluded Personal Property").

          1.02      Contingent Upon Acquisition of the Leased Property.  In the
                    --------------------------------------------------         
event this Lease is executed prior to the conveyance by Tenant or an Affiliate
of the Leased Property to Landlord, the parties acknowledge that the
effectiveness of this Lease in respect of such Leased Property is contingent
upon the closing of such conveyance (the "Commencement Date").

          1.03      Term.  The initial term of this Lease (the "Term") shall be
                    ----                                                       
for a fixed term of One Hundred and Twenty (120) months commencing on the
Commencement Date.  The initial term 

                                      -2-
<PAGE>
 
for any Leased Property designated in a Lease Supplement shall begin on the date
of such Lease Supplement and expire at the end of the Term or then current
Extension Term (as hereafter defined), as the case may be. Tenant shall have the
right to extend this Lease for the Leased Properties as a group, at Tenant's
option, for one One Hundred and Twenty (120) month renewal term from the
expiration of the Term (the "First Extension Term"), provided that no Event of
Default (as defined in Section 9.01 hereof) shall exist and be continuing. In
addition, Tenant shall have the right to extend this Lease for the Leased
Properties as a group at Tenant's option, for a second One Hundred and Twenty
(120) month renewal term from the expiration of the First Extension Term (the
"Second Extension Term", each an "Extension Term", and collectively with the
First Extension Term, the "Extension Terms") provided that no Event of Default
(as defined in Section 9.01 hereof) shall exist and be continuing. Tenant shall
exercise the First Extension Term by written notice to Landlord no later than
twelve (12) months prior to the end of the Term. Tenant shall exercise the
Second Extension Term by written notice to Landlord no later than twelve (12)
months prior to the end of the First Extension Term. Notwithstanding anything
else to the contrary in this Agreement, the Rent during the Second Extension
Term shall be the Fair Market Rent (as hereafter defined) for the Leased
Property. Fair Market Rent shall be determined as soon as possible after receipt
by Landlord of Tenant's notice of option exercise, on the basis of appraisals of
independent appraisers selected in accordance with the provisions of Section
16.02(b). Tenant shall have the right, in its sole discretion, to rescind the
exercise of Tenant's option to extend the Lease for the Second Extension Term
during a period of fifteen (15) business days after the determination of the
Fair Market Rent. If Tenant shall fail to exercise the right to rescind within
such fifteen (15) day period, the election to extend shall be irrevocable and
the Fair Market Rent so determined shall be the Base Annual Rent during the
Second Extension Term notwithstanding any changes in the market rental rates,
whether upward or downward, which may occur after such determination. However,
notwithstanding anything else in this Agreement, Fair Market Rent shall become
the Base Annual Rent (as defined hereafter) and shall be subject to Base Annual
Rent Adjustments as set forth in Section 2.04.

          1.04      Holding Over.  Should Tenant, without the express consent of
                    ------------                                                
Landlord, continue to hold and occupy any Leased Property after the expiration
or earlier termination of the Term or any Extension Term, as the case may be,
such holding over beyond the Term and the acceptance or collection of Rent (as
defined hereinafter) by Landlord shall operate and be construed as creating a
tenancy from month-to-month and not for any other term whatsoever.  During any
such holdover period Tenant shall pay to Landlord for each month (or portion
thereof) Tenant remains in such Leased Property, in lieu of the Base Annual Rent
(as defined hereafter) for such Leased Property, an amount equal to the sum of
one-twelfth (1/12) of (i) one hundred seven percent (107%) of such Base Annual
Rent (the "Holdover Rate"), and (ii) as applicable, one hundred percent (100%)
of the Additional Rent (as defined hereinafter) for such Leased Property and
Other Additional Rent (as defined hereinafter) for such Leased Property, each as
in effect on the expiration date.  Said month-to-month tenancy may be terminated
by Landlord by giving Tenant thirty (30) days written notice, and at any time
thereafter Landlord may re-enter and take possession of such Leased Property.

                                      -3-
<PAGE>
 
          1.05      Surrender.  Except as a result of (a) Tenant Improvements
                    ---------                                                
and Capital Additions (as defined hereinafter); (b) normal and reasonable wear
and tear (subject to the obligation of Tenant to maintain each Leased Property
in good order and repair during the Term); and (c) casualty, taking or other
damage and destruction not required to be repaired by Tenant, Tenant shall
surrender and deliver up each Leased Property at the expiration or termination
of the Term or the Extension Term therefor, as the case may be, broom clean, in
good order and repair, free of the Excluded Personal Property and any additional
items of Tenant's personal property (together with the Excluded Personal
Property, the "Tenant's Personal Property"), all of which Tenant shall remove
prior to such surrender and delivery, and in as good order and condition as of
the Commencement Date.


                                   ARTICLE II
                                      RENT

          2.01      Base Rent.  Tenant shall pay Landlord annual base rent (the
                    ---------                                                  
"Base Annual Rent") as to the Leased Property for each year during the Term or
the Extension Term (each such year a "Lease Year"), which Base Annual Rent shall
be subject to upward adjustment pursuant to Section 2.04.  In the first Lease
Year, Base Annual Rent shall be in the amount set forth on Schedule A (the
                                                           ----------     
"Initial Base Annual Rent"), paid to Landlord in twelve equal monthly
installments.

          2.02      Payment.  Tenant shall pay Landlord the Base Annual Rent as
                    -------                                                    
to the Leased Property for each Lease Year, without notice, demand, set-off or
counterclaim in advance, in lawful money of the United States of America and
payable in consecutive monthly installments commencing on the Commencement Date
and thereafter on the first day of each month during the Term.  Tenant will, to
the extent that such method of payment is compatible with its business
practices, make such payments by direct deposit of immediately available funds
to the account set forth in Exhibit 2.02 (which Exhibit 2.02 may be modified by
                            ------------        ------------                   
Landlord from time to time upon Notice (as hereafter defined) to Tenant).

          2.03      Security Deposit.  Prior to the Commencement Date, Tenant
                    ----------------                                         
shall deliver to Landlord an amount equal to one-twelfth (1/12th) of the Initial
Base Annual Rent, which amount shall be held by Landlord as security (the
"Security Deposit") for the performance of Tenant's payment and other
obligations under this Lease.  Upon an Event of Default and the continuance
thereof, Landlord shall have the right, but not the obligation, to apply the
Security Deposit as set forth in Section 9.08. If Tenant has fully and
faithfully carried out all of the terms, covenants and conditions hereof,
Landlord shall return the Security Deposit, without interest, after expiration
of this Lease, or upon early termination of this Lease in accordance with
Article X, Article XI, or otherwise less any amounts that Landlord may deduct
from such Security Deposit for unpaid amounts due and owing under this Lease at
the time of termination.  In the event that Landlord eliminates its standard
business policy of requiring security deposits from tenants, then Landlord shall
refund the Security Deposit to Tenant within thirty (30) days of such policy
change.

                                      -4-
<PAGE>
 
           2.04   Base Annual Rent Adjustment.
                  --------------------------- 

                  (a) The Base Annual Rent shall be adjusted during the Lease
                      Term or the Extension Terms under the procedures set forth
                      in Exhibit 2.04 (the "Base Annual Rent Adjustment").
                         ------------
 
                  (b) As used in Exhibit 2.04, the "Index" shall mean the CPI-U
                                 ------------                                  
                      published by the United States Department of Labor, Bureau
                      of Labor Statistics Consumer Price Index for All Urban
                      Consumers, U.S. City Average. If at any time during the
                      Term or the Extension Term, as the case may be, the Index
                      shall be discontinued, Landlord shall select a substitute
                      index, being an existing official index published by the
                      Bureau of Labor Statistics or its successor or another,
                      similar governmental agency, which index is most nearly
                      equivalent to the Index.

          2.05    Additional Rent.  As to each Leased Property, in addition to
                  ---------------                                             
the Base Annual Rent, Tenant shall pay all other amounts, liabilities,
obligations and Impositions (as hereinafter defined) which Tenant assumes or
agrees to pay under this Lease and any fine, penalty, interest, charge and cost
which may be added for nonpayment or late payment of such items (collectively,
the "Additional Rent").

          2.06    Place(s) of Payment of Rent; Direct Payment of Additional
                  ---------------------------------------------------------
Rent.  The Base Annual Rent and Additional Rent are hereinafter referred to as
- -----                                                                         
"Rent."  Landlord shall have all legal, equitable and contractual rights, powers
and remedies provided in this Lease or by statute or otherwise in the case of
nonpayment of the Rent for each Leased Property. Tenant shall make all payments
of Rent at Landlord's address set forth in Section 17.01 or as Landlord may
otherwise from time to time direct in writing, or, if Landlord shall direct
Tenant, directly to a bank account specified by Landlord to Tenant in writing.
At the direction of the Landlord, Tenant shall make payments of Additional Rent
directly to the person or persons to whom such amount is owing at the time and
times when such payments are due, and Tenant shall give to Landlord such
evidence of such direct payments as Landlord shall reasonably request.

          2.07    Net Lease.  This Lease shall be deemed and construed to be
                  ----------                                                
an "absolute net lease" or "triple net lease," (i.e. that Tenant shall pay all
costs and expenses related to the ownership and operations of each Leased
Property, thereby leaving all Rent as an absolutely net return to Landlord) and
as to each Leased Property, Tenant shall pay all Rent, Impositions, and other
charges and expenses in connection with such Leased Property throughout the Term
and any Extension Term, without abatement, deduction or set-off.

          2.08    No Termination, Abatement, Etc.  Except as otherwise
                  -------------------------------                     
specifically provided herein, Tenant shall remain bound by this Lease in
accordance with its terms. Except as otherwise specifically provided herein,
Tenant shall not, without the prior written consent of Landlord, modify,
surrender or terminate this Lease as to any Leased Property, nor seek nor be
entitled to any 

                                      -5-
<PAGE>
 
abatement, deduction, deferment or reduction of Rent, or set-off against the
Rent as to any Leased Property for any reason whatsoever. Except as specifically
provided herein, the obligations of Landlord and Tenant shall not be affected by
reason of: (a) the lawful or unlawful prohibition of, or restriction upon,
Tenant's use of any Leased Property, or any part thereof, the interference with
such use by any person, corporation, partnership or other entity, or by reason
of eviction by paramount title; (b) any claim which Tenant has or might have
against Landlord or by reason of any default or breach of any warranty by
Landlord under this Lease or any other agreement between Landlord and Tenant, or
to which Landlord and Tenant are parties; (c) any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding up
or other proceeding affecting Landlord or any assignee or transferee of
Landlord; (d) any damage to, or destruction of, any Leased Property or any
portion thereof for whatever cause, or any taking of the Leased Property or any
portion thereof; or (e) any other cause, whether similar or dissimilar to any of
the foregoing, other than a discharge of Tenant from any such obligations as a
matter of law. Except as otherwise specifically provided herein, and to the
maximum extent permitted by law, Tenant hereby specifically waives all rights,
including but not limited to any rights under any statute relating to rights of
tenants in the jurisdictions where the Leased Properties are located, which may
now be conferred upon it by law, relating to: (a) the modification, surrender or
termination of this Lease, or the quitting or surrender of any Leased Property
or any portion thereof; (b) any abatement, reduction, suspension or deferment of
the Rent or other sums payable by Tenant hereunder; or (c) any rights of
redemption. As to each Leased Property, the obligations of Landlord and Tenant
hereunder shall be separate and the Rent and all other sums shall continue to be
payable in all events unless the obligations to pay the same shall be terminated
pursuant to the express provisions of this Lease or by termination of this Lease
other than by reason of an Event of Default.


                                  ARTICLE III
                           IMPOSITIONS AND UTILITIES

          3.01      Payment of Impositions.  Subject to the adjustments set
                    ----------------------                                 
forth herein, Tenant shall pay, in the manner set forth in Section 3.04, as
Additional Rent, to the Landlord an amount equal to the amount necessary to pay
all Impositions (as hereinafter defined) that may be levied or become a lien on
any Leased Property or any part thereof at any time (whether prior to or during
the Term), without regard to prior ownership of said Leased Property, before the
same becomes delinquent.  Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon any
Leased Property or any part thereof.  Tenant, at its expense, shall prepare and
file all tax returns and reports in respect of any Imposition as may be required
by governmental authorities, provided, however, that Tenant shall provide to
Landlord copies of all filings of such tax returns or reports in respect of any
real or personal property owned by Landlord.  Tenant shall be entitled to any
refund due in respect of such Impositions from any taxing authority if no Event
of Default shall have occurred hereunder and be continuing.  Any refunds in
respect of such Impositions retained by Landlord due to an Event of Default
shall be applied as provided in Section 9.08.  Landlord and Tenant shall, upon
request of the other, provide such data as is maintained by the party to whom
the request is made with respect to a Leased 

                                      -6-
<PAGE>
 
Property as may be necessary to prepare any required tax returns and reports. In
the event governmental authorities classify any property covered by this Lease
as personal property, Landlord and Tenant shall file all personal property tax
returns in such jurisdictions where it may legally so file with respect to their
respective owned personal property. Landlord, to the extent it possesses the
same, and Tenant, to the extent it possesses the same, will provide the other
party, upon request, with cost and depreciation records necessary for filing
such returns or reports for any property so classified as personal property. To
the extent that Landlord is legally required to file personal property tax
returns, Tenant will be provided with copies of assessment notices indicating a
value in excess of the reported value in sufficient time for Tenant to file a
protest. Tenant may, upon notice to Landlord, at Tenant's option and at Tenant's
sole cost and expense, protest, appeal, or institute such other proceedings as
Tenant may deem appropriate to effect a reduction of real estate or personal
property assessments and Landlord, at Tenant's expense as aforesaid, shall fully
cooperate with Tenant in such protest, appeal, or other action. Tenant shall
provide Landlord copies of all materials filed or presented in connection with
any such proceeding. Tenant shall promptly reimburse Landlord for all taxes paid
by Landlord, which were not paid with deposits received from Tenant, upon
receipt of billings accompanied by copies of a bill therefor and payments
thereof which identify the property with respect to which such payments are
made. Impositions imposed with respect to the tax-fiscal period during which the
Term commences and terminates as to each Leased Property shall be adjusted and
prorated between Landlord and Tenant on a per diem basis, with Tenant being
obligated to pay its pro rata share from and including the Commencement Date to
and including the expiration or termination date of the Term or Extension Term,
as the case may be, whether or not such Imposition is imposed before or after
such commencement or termination, and Tenant's obligation to pay its prorated
share thereof shall survive such termination. Tenant shall also pay to Landlord
a sum equal to the amount which Landlord may be caused to pay of any privilege
tax, sales tax, gross receipts tax, rent tax, occupancy tax or like tax
(excluding any tax based on net income), hereinafter levied, assessed, or
imposed by any federal, state, city, county or municipal or other local
governmental authority, or any subdivision thereof, upon or measured by rent or
other consideration required to be paid by Tenant under this Lease.

          3.02    Definition of Impositions.  "Impositions" means,
                  -------------------------                       
collectively:  (a) taxes (including without limitation, all real estate and
personal property ad valorem (whether assessed as part of the real estate or
separately assessed as unsecured personal property), sales and use, business or
occupation, single business, gross receipts, transaction, privilege, rent or
similar taxes, but not including income or franchise or excise taxes payable
with respect to Landlord's receipt of Rent); (b) assessments, whether in the
nature of a special assessment or otherwise (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term or any Extension Term, as the case may be), provided that all assessments
shall be paid over the longest amortization period available without causing a
penalty or the accrual of interest; (c) ground rents, water, sewer or other
rents and charges, excises, tax levies, and fees (including, without limitation,
license, permit, inspection, authorization and similar fees); (d) to the extent
they may become a lien on a Leased Property, all taxes imposed on Tenant's
operations of such Leased Property including without limitation, Tenant's or
Affiliates of Tenant's employee withholding taxes, income taxes and 

                                      -7-
<PAGE>
 
intangible taxes; and (e) all other governmental charges, in each case whether
general or special, ordinary or extraordinary, or foreseen or unforseen, of
every character in respect of each Leased Property or any part thereof, the
Business conducted by Tenant thereon, and/or the Rent (including all interest
and penalties thereon due to any failure in payment by Tenant), which at any
time prior to, during or in respect of the Term or any Extension Term, as the
case may be, hereof may be assessed or imposed on or in respect of or be a lien
upon (i) Landlord or Landlord's interest in any Leased Property or any part
thereof; (ii) any Leased Property or any part thereof or any rent therefrom or
any estate, right, title or interest therein; or (iii) any occupancy, operation,
use or possession of, or sales from, or activity conducted on, or in connection
with any Leased Property or the leasing or use of any Leased Property or any
part thereof. Tenant shall not, however, be required to pay: (x) any tax based
on net income (whether denominated as a franchise or capital stock or other tax)
imposed on Landlord or (y) except as provided in Section 13.01, any tax imposed
with respect to the sale, exchange or other disposition by Landlord of a Leased
Property or the proceeds thereof; provided, however, that if any tax,
assessment, tax levy or charge which Tenant is obligated to pay pursuant to the
first sentence of this definition and which is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (x) or (y) immediately above is levied, assessed or
imposed expressly in lieu thereof Tenant shall then pay such tax, levy, or
charge set forth in said clause (x) or (y).

          3.03    Utilities.  Tenant shall contract for, in its own name, and
                  ---------                                                  
will pay, as Additional Rent all taxes, assessments, charges/deposits, and bills
for utilities, including without limitation charges for water, gas, oil,
sanitary and storm sewer, electricity, telephone service, trash collection, and
all other utilities which may be charged against the occupant of the
Improvements during the Term.  Tenant shall at all times maintain that amount of
heat necessary to ensure against the freezing of water lines.  Tenant hereby
agrees to indemnify and hold Landlord harmless from and against any liability or
damages to the utility systems of each  Leased Property that may result from
Tenant's failure to maintain sufficient heat in the Improvements therefor.

          3.04    Escrow of Impositions. If Tenant is in default under this
                  ---------------------                                    
Lease beyond any applicable cure period, Tenant shall thereafter deposit with
Landlord on the first day of each month during the  Term hereof and any
Extension Term, as the case may be, a sum equal to one-twelfth (1/12th) of the
Impositions assessed against such Leased Property which sums shall be used by
Landlord toward payment of such Impositions.  If, at the end of any applicable
tax year, any such funds held by Landlord are insufficient to make full payment
of taxes or other Impositions for which such funds are held, Tenant, on demand,
shall pay to Landlord any additional funds necessary to pay and discharge in
full the obligations of Tenant pursuant to the provisions of this Section.  If,
however, at the end of any applicable tax year, such funds held by Landlord are
in excess of the total payment required to satisfy taxes or other Impositions
for which such funds are held, Landlord shall apply such excess amounts to a tax
and Imposition escrow fund for the next tax year.  With respect to each Leased
Property, if any such excess exists following the expiration or earlier
termination of this Lease, and subject to Section 8.08 below, Landlord shall
promptly refund such excess amounts to Tenant.  The receipt by Landlord of the
payment of such Impositions by and from Tenant shall 

                                      -8-
<PAGE>
 
only be as an accommodation to Tenant and the taxing authorities, and shall not
be construed as rent or income to Landlord, Landlord serving, if at all, only as
a conduit for delivery purposes.

          3.05    Discontinuance of Utilities.  Landlord will not be liable
                  ---------------------------                              
for damages to person or property or for injury to, or interruption of, business
for any discontinuance of utilities at any Leased Property nor will such
discontinuance in any way be construed as an eviction of Tenant from such Leased
Property or cause an abatement of Rent as to such Leased Property or operate to
release Tenant from any of Tenant's obligations as to such Leased Property under
this Lease. Notwithstanding the forgoing, however, Landlord shall be liable for
damages to person or property or for injury to, or interruption of business, for
any discontinuance of utilities at any Leased Property, in the event and to the
extent, such damages or injury are caused by the gross negligence or wilful
misconduct of the Landlord.

          3.06    Liens.  Subject to Section 17.19 relating to contests,
                  -----                                                 
Tenant shall not directly or indirectly create or allow to remain, and will
promptly discharge at its expense, any lien, encumbrance, attachment, title
retention agreement or claim upon any Leased Property or any attachment, levy,
claim or encumbrance in respect of any Rent provided under this Lease, not
including, however:  (a) this Lease; (b) utility easements and road rights-of-
way in the customary form (i) provided the same do not adversely affect the
intended use of the Leased Properties (including the Improvements) and do not
create a material adverse effect on the value of the Leased Properties or (ii)
which result solely from the action or inaction of Landlord; (c) zoning and
building laws or ordinances, provided they do not prohibit the use of the Leased
Properties for the Business and so long as the Leased Properties are in
compliance with same; (d) such encumbrances as are subsequently consented to in
writing by Landlord, but excluding liens in respect of Impositions required to
be paid under Section 3.01;  (e) liens for Impositions so long as (i) the same
are not yet payable or are payable without the addition of any fine or penalty
or (ii) such liens are being contested as permitted under Section 17.19; and (f)
other encumbrances, easements, rights of way or liens (i) provided the same do
not adversely affect the intended use of the Leased Properties (including the
Improvements) and do not create a material adverse effect on the value of the
Leased properties, or (ii) which result solely from the action or inaction of
Landlord.

          3.07    Tax Statements.  Tenant shall immediately after the
                  --------------
Commencement Date notify the appropriate taxing authorities in the jurisdiction
in which the Leased Properties are situated that all tax statements, assessments
and bills for Impositions shall be delivered directly to Tenant for payment.


                                   ARTICLE IV
                                   INSURANCE

          4.01    Insurance.  Tenant shall, at Tenant's expense, keep the
                  ---------                                              
Improvements, Fixtures, and other components of each Leased Property insured
against the following risks:

                                      -9-
<PAGE>
 
               (a)  Loss or damage by fire with extended coverage (including
                    windstorm and subsidence), vandalism and malicious mischief,
                    sprinkler leakage and all other physical loss perils
                    commonly covered by "All Risk" insurance in an amount not
                    less than one hundred percent (100%) of the then full
                    replacement cost thereof (as hereinafter defined).  Such
                    policy shall include an agreed amount endorsement if
                    available at a reasonable cost.  Such policy shall also
                    include endorsements for contingent liability for operation
                    of building laws, demolition costs, and increased cost of
                    construction.

               (b)  Loss or damage by explosion of steam boilers, pressure
                    vessels, or similar apparatus, now or hereafter installed on
                    any Leased Property, in commercially reasonable amounts
                    acceptable to Landlord.

               (c)  [Intentionally Omitted]

               (d)  If the Land or any portion thereof related to a Leased
                    Property is located in whole or in part within a designated
                    flood plain area, loss or damage caused by flood in
                    commercially reasonable amounts acceptable to Landlord.

               (e)  Loss or damage commonly covered by blanket crime insurance
                    including employee dishonesty, loss of money orders or paper
                    currency, depositor's forgery, and loss of property accepted
                    by Tenant for safekeeping, in commercially reasonable
                    amounts acceptable to Landlord.

               (f)  Workers' compensation insurance as required by statute in
                    respect of any work or other operations on or about each
                    Leased Property.

               (g)  Comprehensive liability insurance as to each Leased Property
                    in amounts equal to the greater of (i) One Million Dollars
                    ($1,000,000) for each occurrence and Two Million Dollars
                    ($2,000,000) in the aggregate, or (ii) the limits of
                    liability generally required under the franchise agreements
                    or other agreements pursuant to which Tenant operates the
                    Businesses conducted on or about each Leased Property.

               (h)  Commercial comprehensive catastrophic liability insurance
                    with limits of liability of not less than the greater of (i)
                    Five Million ($5,000,000) and (ii) the limits of liability
                    generally required under the franchise agreements or other
                    agreements pursuant to which Tenant operates the Businesses
                    conducted on or about each Leased Property.

                                     -10-
<PAGE>
 
               (i)  upon Landlord's request if such insurance is customary in
                    the region in which the Leased Property is situated,
                    earthquake insurance in an amount not less than the full
                    insurable value of each Leased Property.

               (j)  During the period when any addition, alteration,
                    construction, installation or demolition is being made or
                    performed to any part of the Leased Property, contingent
                    liability, public liability, completed value, builder's risk
                    (non-reporting form) workers' compensation and other
                    insurance as is deemed reasonably prudent by Landlord.

         4.02  Insurance Limits.  Deductible provisions for the insurance
               ----------------                                          
required under Section 4.01(a) shall not exceed Twenty-Five Thousand Dollars
($25,000) per location per occurrence and One Hundred Thousand Dollars
($100,000) aggregate per occurrence; under clause(d),  Twenty-Five Thousand
Dollars ($25,000) per occurrence, except that if federal flood insurance is
available then such deductible shall not be greater than the lowest deductible
available with respect to such federal flood insurance; under clause (g), Fifty
Thousand Dollars ($50,000) per occurrence; under clause (h), Twenty-Five
Thousand Dollars ($25,000) per occurrence; and under clause (j), Twenty-Five
Thousand Dollars ($25,000) per occurrence.

         4.03  Insurance Requirements.  The following provisions shall apply to
               -----------------------                                
all insurance coverages required hereunder:

               (a)  The carriers of all policies shall have a Best's Rating of
                    "A-" or better and a Best's Financial Category of XII or
                    larger and shall be authorized to do insurance business in
                    the jurisdiction in which the Leased Property is located.

               (b)  Tenant shall be the "named insured" and Landlord and any
                    mortgagee of Landlord shall be an "additional named insured"
                    on each policy with respect to such mortgagee's and the
                    Landlord's interest in the Leased Property, except the
                    coverages required under Section 4.01(f) hereto.

               (c)  Tenant shall deliver to Landlord certificates or policies
                    showing the required coverages and endorsements.  Each
                    policy or certificate of insurance shall provide that such
                    policy or certificate (i) may not be canceled, (ii) may not
                    lapse for failure to renew, and (iii) no material change or
                    reduction in coverage may be made, without at least thirty
                    (30) days' prior written notice to Landlord.

               (d)  The policies shall contain a severability of interest and/or
                    cross-liability endorsement, provide that the acts or
                    omissions of 

                                     -11-
<PAGE>
 
                    Tenant will not invalidate Landlord's coverage,
                    and provide that Landlord shall not be responsible for
                    payment of premiums.

               (e)  All loss adjustment shall require the written consent of
                    Landlord and Tenant, as their interests may appear.

               (f)  At least (30) thirty days prior to the expiration of each
                    policy, Tenant shall deliver to Landlord a certificate
                    showing renewal of such policy and payment of the annual
                    premium therefor.

          Landlord shall have the right to review the insurance coverages
required hereunder with Tenant from time to time, to obtain the input of third
party professional insurance advisors (at Landlord's expense) with respect to
such insurance coverages, and to consult with Tenant in Tenant's annual review
and renewal of such insurance coverages.  All insurance coverages hereunder
shall be in such form, substance and amounts as are customary or standard in
Tenant's industry, but at a minimum shall comply with the requirements set forth
herein.

         4.04  Replacement Cost.  The term "full replacement cost" means the 
               ----------------                                         
actual replacement cost of the Improvements from time to time including
increased cost of construction, with no reductions or deductions. Tenant shall,
not later than thirty (30) days after the anniversary of each policy of
insurance, increase the amount of the replacement cost endorsement for the
Improvements to the extent necessary to reflect increased costs of construction.
If Tenant makes any Permitted Alterations (as hereinafter defined) to any Leased
Property, Landlord may have such full replacement cost redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement cost was last determined.

         4.05  Blanket Policy.  Tenant may carry the insurance required by this 
               --------------                                             
Article under a blanket policy of insurance, provided that the coverage afforded
Tenant will not be reduced or diminished or otherwise be different from that
which would exist under a separate policy meeting all of the requirements of
this Lease and the Landlord approves the form of the policy.

         4.06  No Separate Insurance.  Tenant shall not take out separate
               ----------------------                                    
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing insurance
by securing an additional policy or additional policies, unless all parties
having an insurable interest in the subject matter of the insurance, including
Landlord and any mortgagees, are included therein as additional named insureds
or loss payees, the loss is payable under said insurance in the same manner as
losses are payable under this Lease, and such additional insurance is not
prohibited by the existing policies of insurance required pursuant to this
Article.  Tenant shall immediately notify Landlord of the taking out of such
separate insurance or the increasing of any of the amounts of the existing
insurance by securing an additional policy or additional policies.  The term
"mortgages" as used in this Lease includes, but is not limited to, Deeds of
Trust and the term "mortgagees" includes, but is not limited to, trustees and
beneficiaries under a Deed of Trust.

                                     -12-
<PAGE>
 
         4.07  Waiver of Subrogation.  Each party hereto hereby waives any and 
               ---------------------                                      
every claim which arises or may arise in its favor and against the other party
hereto during the Term or any Extension Term or renewal thereof, for any and all
loss of, or damage to, any of its property located within or upon, or
constituting a part of, any Leased Property, which loss or damage is covered by
valid and collectible insurance policies, to the extent that such loss or damage
is recoverable in full under such policies. Said mutual waiver shall be in
addition to, and not in limitation or derogation of, any other waiver or release
contained in this Lease with respect to any loss or damage to property of the
parties hereto. Inasmuch as the said waivers will preclude the assignment of any
aforesaid claim by way of subrogation (or otherwise) to an insurance company (or
any other person), each party hereto agrees immediately to give each insurance
company which has issued to it policies of insurance, written notice of the
terms of said mutual waivers, and to have such insurance policies properly
endorsed, if necessary, to prevent the invalidation of said insurance coverage
by reason of said waivers, so long as such endorsement is available at a
reasonable cost.

         4.08  Mortgages.  The following provisions shall apply if Landlord at 
               ---------                                                   
the Commencement Date or thereafter places a mortgage on any Leased Property or
any part thereof: (a) Tenant shall obtain a standard form of mortgage clause
insuring the interest of the mortgagee; (b) Tenant shall deliver evidence of
insurance to such mortgagee; (c) loss adjustment shall require the consent of
the mortgagee but such consent shall not be unreasonably withheld and may not
include any requirement that the funds be paid to mortgagee in lieu of
reconstruction; and (d) Tenant shall obtain such other coverages and provide
such other information and documents as may be reasonably required by the
mortgagee. Tenant shall be required to pay for the cost of the mortgage clause
insuring the interest of the mortgagee only if Landlord places a mortgage on a
Leased Property at the Commencement Date.

         4.09  Other Insurance Requirements.  Notwithstanding anything in this 
               ----------------------------                              
Lease to the contrary and not by way of limitation, in addition to the types and
amounts of insurance required to be carried by Tenant herein, Tenant covenants
to insure and continue in effect such types and amounts of insurance as the
Tenant shall be required to carry pursuant to any contract, agreement,
instrument, statute, law, rule or regulation relating to the use of the Leased
Property and the operations of any Business or other activities thereon,
including noncancellable written notice to mortgagee.

                                   ARTICLE V
                       INDEMNITY; SUBSTANCES OF CONCERN

         5.01  Tenant's Indemnification.  Subject to Section 4.07, Tenant
               ------------------------                                  
hereby agrees to indemnify and hold harmless Landlord, its agents, and employees
from and against any and all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, costs and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) (the "Claims") incurred in connection with or arising
from: (a) the use, condition, operation or occupancy of the Leased Properties;
(b) any activity, work, or thing done, or permitted or suffered by Tenant in, on
or about the Leased Properties; (c) any acts, omissions, or negligence of Tenant
or any person 

                                     -13-
<PAGE>
 
claiming under Tenant, or the contractors, agents, employees,invitees, or
visitors of Tenant or any such person; (d) any breach, violation, or
nonperformance by Tenant or any person claiming under Tenant or the employees,
agents, contractors, invitees, or visitors of Tenant or of any such person, of
any term, representation, warranty, covenant, or provision of this Lease or any
law, ordinance, or governmental requirement of any kind; (e) any injury or
damage to the person, property or Business of Tenant, its employees, agents,
contractors, invitees, visitors, or any other person entering upon any Leased
Property; (f) any accident, injury to or death of persons or loss or damage to
any item of property occurring on or about any Leased Property; (g) any
Environmental Law or any pollution or other threat to human health or the
environment at, arising out of or relating to any Leased Property as set forth
in Section 5.05, and (h) any brokers' or agents' fees and commissions. If any
action or proceeding is brought against Landlord, its employees, or agents by
reason of any such demand, claim, or cause of action, Tenant, upon notice from
Landlord, will defend the same at Tenant's expense with counsel reasonably
satisfactory to Landlord. In the event Landlord reasonably determines that its
interests and the interests of Tenant in any such action or proceeding are not
substantially the same and that Tenant's counsel cannot adequately represent the
interests of Landlord therein, Landlord shall have the right to hire separate
counsel in any such action or proceeding and the reasonable costs thereof shall
be paid for by Tenant. Tenant's indemnification obligations with respect to a
Claim shall survive the expiration or earlier termination of this Lease until
the later of (i) two (2) years from the date hereof, or (ii) the expiration of
the period ninety (90) days after the date on which Landlord has actual
knowledge of the existence of such Claim, provided, however, that Tenant's
indemnification obligations shall survive the expiration or earlier termination
of this Lease until ninety (90) days after the expiration of the applicable
statute of limitations for Claims incurred in connection with, arising out of,
or related to (i) Section 5.01(g) or (ii) the failure to pay, as provided for in
this Agreement, any Imposition. Nothing herein is intended to have Tenant
indemnify or hold harmless Landlord for any actions or failures to act by
Landlord, its agents, employees, servants and invitees.

         5.02  Substances of Concern.
               --------------------- 

               (a)  For purposes of this Section 5:
  
                    (i)   "Substances of Concern" means, without limitation,
                          chemicals, pollutants, contaminants, wastes, toxic
                          substances, radioactive materials or genetically
                          modified organisms, which are, have been or become
                          regulated by any federal, state or local government
                          authority including, without limitation, (1) petroleum
                          or any fraction thereof, (2) asbestos, (3) any
                          substance or material defined as a "hazardous
                          substance" pursuant to (S)101 of the Comprehensive
                          Environmental Response Compensation and Liability Act
                          (42 U.S.C. (S)9601), or (4) any substance or material
                          defined as a "hazardous chemical" pursuant to the
                          federal Hazard Communication Standard (29 C.F.R. 
                          (S)1910.1200).

                                     -14-
<PAGE>
 
                    (ii)  "Environmental Laws" means all federal, state, local,
                          and foreign laws and regulations relating to pollution
                          or protection of human health or the environment
                          (including, without limitation, ambient air, surface
                          water, ground water, wetlands, land surface,
                          subsurface strata, and indoor and outdoor workplace),
                          including, without limitation, (1) laws and
                          regulations relating to emissions, discharges,
                          releases, or threatened releases of Substances of
                          Concern, and (2) common law principles of tort
                          liability.

               (b)  Tenant shall not, either with or without negligence, injure,
                    overload, deface, damage or otherwise harm any Leased
                    Property or any part or component thereof; commit any
                    nuisance; permit the emission of any Substances of Concern;
                    allow the release or other escape of any biologically or
                    chemically active substances or materials or other
                    Substances of Concern so as to impregnate, impair or in any
                    manner affect, even temporarily, any element or part of any
                    Leased Property or neighboring property, or allow the
                    storage or use of such substances or materials in any manner
                    not sanctioned by law and by reasonable standards prevailing
                    in the automobile retail and related industries for the
                    storage and use of such substances or materials; nor shall
                    Tenant permit the occurrence of objectionable noise or
                    odors; or make, allow or suffer any waste whatsoever to any
                    Leased Property. Landlord may inspect each Leased Property
                    from time to time, and Tenant will cooperate with such
                    inspections.

               (c)  Notwithstanding the foregoing, Tenant anticipates using,
                    storing and disposing of certain Substances of Concern in
                    connection with operation of its Business. Such Substances
                    of Concern include, but are not limited to, the following:
                    motor oil, waste motor oil and filters, transmission fluid,
                    antifreeze, refrigerants, waste paint and lacquer thinner,
                    batteries, solvents, lubricants, degreasing agents, gasoline
                    and diesel fuels. Tenant shall ascertain and comply fully
                    with all applicable Environmental Laws and environmental
                    standards and requirements set by federal, state or local
                    laws, rules, regulations or governmental directives related
                    to the Leased Properties or Tenant's use or occupancy of the
                    Leased Property ("Environmental Standards"), including but
                    not limited to any laws or standards (a) regulating the use,
                    storage, generation or disposal of Substances of Concern,
                    (b) regulating the monitoring or use of any underground or
                    aboveground storage tanks at the Leased Properties, or (c)
                    establishing any permitting, notification or reporting
                    requirements. As promptly as practicable after the
                    Commencement Date (but in no

                                     -15-
<PAGE>
 
                    event later than 120 days thereafter), Tenant shall
                    establish and implement a program of compliance with all
                    applicable Environmental Laws and Environmental Standards
                    ("Environmental Compliance Program"). Tenant shall update
                    such Environmental Compliance Program every three (3) years
                    during the Term. Tenant shall submit its Environmental
                    Compliance Program and each update thereto to Landlord;
                    provided, however, such submittal shall not relieve Tenant
                    of its obligations pursuant to this Section 5. Tenant's
                    Environmental Compliance Program shall include a program for
                    monitoring Tenant's compliance with Environmental Laws and
                    Environmental Standards and a plan for correcting
                    immediately any incident of noncompliance. Tenant shall
                    comply with its Environmental Compliance Program.

               (d)  In the event of any noncompliance with any Environmental
                    Laws or Environmental Standards or any spill, release or
                    discharge of Substances of Concern in a reportable quantity
                    under federal, state or local law, Tenant shall:

                    (i)   give Landlord immediate notice of the incident by
                          telephone or facsimile, providing as much detail as
                          possible. Such notice shall be provided to Landlord's
                          National Dealership Real Estate Manager or to such
                          other person as Landlord shall designate in accordance
                          with Section 16.01 below;
                          
                    (ii)  as soon as possible, but no later than seventy-two
                          (72) hours, after discovery of an incident of
                          noncompliance, submit a written report to Landlord,
                          identifying the source or case of the noncompliance or
                          spill, release or discharge (including the names and
                          quantities of any Substances of Concern involved) and
                          the method or action required to correct the problem;
                          and

                    (iii) cooperate with Landlord or its designated agents or
                          contractors with respect to the investigation and
                          correction of such problem.

          Tenant shall also be solely responsible for providing any notice to
any federal, state or local governmental authority required by applicable laws
and regulations as a result of such incident.

         5.03  Audits.  Landlord shall have the right to conduct, at its
               ------                                                   
expense, periodic audits of Tenant's compliance with the Environmental
Compliance Program and management of Substances of Concern at the Leased
Properties and/or periodic tests of air, soil, surface water or 

                                     -16-
<PAGE>
 
groundwater at or near the Leased Properties. Landlord shall not be obligated to
provide Tenant with the results of any audit or tests unless such results are
the basis for a claim by Landlord that Tenant has breached its obligations under
this Lease or a demand by Landlord that Tenant modify its Environmental
Compliance Program or operations or remediate or remove a spill, release or
discharge of Substances of Concern in accordance with Section 5.06 below. Tenant
agrees promptly to modify its Environmental Compliance Program or the conduct of
its operations in accordance with Landlord's reasonable recommendations directed
at improvement of Tenant's handling, use and disposal of Substances of Concern
in, on or from any Leased Property to bring Tenant into compliance with
Environmental Laws. If, as a result of an environmental audit performed by
Landlord with respect to any Leased Property, Landlord reasonably determines in
its judgment that alterations or improvements of equipment or buildings located
on the Leased Property are necessary to comply with Environmental Laws, Tenant
shall perform such alterations or improvements as are reasonable under the
circumstances and pay all costs and expenses relating thereto. If Tenant shall
fail to pay any such costs or expenses, Tenant shall deposit with Landlord the
full amount necessary to pay such costs in full within ten (10) days of
Landlord's demand. Nothing contained herein shall be construed to obligate or
require Landlord to perform any audits, tests, inquiry or investigation. Should
Landlord elect or be required to disclose to Tenant the results of any audit or
tests, Landlord shall not be liable in any way for the truth or accuracy of such
information.

         5.04  Landlord's Option Re: Compliance.  If Tenant, after notice from 
               --------------------------------                          
Landlord, fails to comply with or perform any of its obligations pursuant to
this Section 5, including, but not limited to, obligations to clean up spills,
releases or discharges, Landlord may, but shall not be obligated to, perform
such obligations and Tenant shall pay Landlord within ten (10) days of demand
Landlord's costs therefor, including any overhead and administrative costs.

         5.05  Environmental Indemnification.  Tenant shall indemnify and hold 
               -----------------------------                             
harmless Landlord from and against all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, and expenses (including,
without limitation, attorneys' fees, court costs, and the costs set forth in
Section 9.06) imposed upon or asserted against Tenant, Landlord or any Leased
Property on account of any Environmental Law (irrespective of whether there has
occurred any violation of any Environmental Law) relating to any Leased
Property, including (a) response costs and costs of removal and remedial action
incurred by the United States Government or any state or local governmental unit
to any other person or entity, or damages from injury to or destruction or loss
of natural resources, including the reasonable costs of assessing such injury,
destruction or loss, incurred pursuant to any Environmental Law, (b) costs and
expenses of abatement, investigation, removal, remediation, correction or
cleanup, fines, damages, response costs or penalties which arise from the
provisions of any Environmental Law, (c) liability for personal injury or
property damage arising under any statutory or common-law tort theory, including
damages assessed for the maintenance of a public or private nuisance or for
carrying on of a dangerous activity, (d) liability by reason of a breach of an
environmental representation or warranty by Tenant, and (e) failure of Tenant to
complete in a timely manner alterations or improvements of equipment or
buildings located on the Leased Property

                                     -17-
<PAGE>
 
deemed necessary or advisable by Landlord pursuant to Section 5.03 in a manner
acceptable to Landlord.

         5.06  Tenant's Cleanup Obligation.  If any spill, release or discharge
               ---------------------------                           
of Substances of Concern occurs on, at or from the Leased Properties during the
Term, Tenant shall promptly take all actions, at its sole expense, as are
necessary to remove or remediate such spill, release or discharge and to return
the Leased Property to the condition existing prior to the introduction of any
such Substances of Concern to the Leased Property, provided that Landlord's
approval of such action shall first be obtained, which approval shall not be
unreasonably withheld so long as such actions would not potentially have any
material adverse effect on the Leased Property.

         5.07  Existing Environmental Conditions.  Tenant acknowledges that it 
               ---------------------------------                           
has had the opportunity to review the Environmental Reports attached hereto as 
Exhibit 5.07.  Tenant hereby represents that it has reviewed and is aware of the
- ------------                                                                
matters disclosed in the Environmental Reports.

         As a material consideration for Landlord's willingness to enter into
this Lease, Tenant, for itself and its Affiliates, and each of their
shareholders, directors, officers, employees, agents, contractors,
representatives, insurers, successors and assigns hereby waives and releases
Landlord and its Affiliates and each of their shareholders, directors, officers,
employees, representatives, agents, contractors, representatives, insurers,
successors and assigns from any and all claims, demands, liabilities, costs,
expenses, causes of action and rights of action whatsoever, past, present or
future, known or unknown, suspected or unsuspected, which arise out of or relate
in any way to the violation of Environmental Laws or the use, storage,
treatment, disposal, presence, spill, release, or discharge of Substances of
Concern at, on or from the Leased Properties before the Commencement Date
(collectively, the "Released Claims").

         In the event that Landlord is ordered by a governmental agency, or
determines that it is in its best interest, to remedy any violation of
Environmental Laws or to remove or remediate any Substances of Concern present
on, under or about the Leased Properties on the Commencement Date, or spilled,
released or discharged on, at or from the Leased Properties before the
Commencement Date, Tenant shall immediately upon notice from Landlord take all
actions, at Tenant's sole expense, to promptly complete such removal or
remediation.
 
         5.08  Survival of Tenant's Obligations.  Tenant's obligations under
               --------------------------------                       
this Section 5 shall survive the expiration or earlier termination of this
Lease. During any period of time employed by Tenant after the termination of
this Lease to complete the removal from the Leased Property of any Substances of
Concern, if the premises are not rentable for uses contemplated under this
Lease, Tenant shall continue to pay the full amount of Rent due under this
Lease, which Rent shall be prorated daily for the final month of such period of
time.


                                  ARTICLE VI
                        USE AND ACCEPTANCE OF PREMISES

                                     -18-
<PAGE>
 
         6.01  Use of Leased Properties.  For so long as this Lease is in
               ------------------------                                  
effect (including following any sublease or assignment thereof), Tenant shall
use and occupy each Leased Property exclusively for the purpose of conducting
the Business or for any other legal purpose for which such Leased Property is
being used as of the Commencement Date, and for no other purpose without the
prior written consent of Landlord.  Tenant shall obtain and maintain all
approvals, licenses, and consents needed to use and operate the Leased
Properties for such purposes. Tenant shall promptly deliver to Landlord complete
copies of surveys, examinations, certification and licensure inspections,
compliance certificates, and other similar reports issued to Tenant by any
governmental agency.

         6.02  Acceptance of Leased Properties.  Except as otherwise 
               -------------------------------                      
specifically provided in this Lease, Tenant acknowledges (i) Tenant and its
agents have had an opportunity to inspect each Leased Property; (ii) Tenant has
found each Leased Property fit for Tenant's use; (iii) delivery of each Leased
Property to Tenant is in an "as-is" condition; (iv) Landlord is not obligated to
make any improvements or repairs to any Leased Property; and (v) the roof,
walls, foundation, heating, ventilating, air conditioning, telephone, sewer,
electrical, mechanical, utility, plumbing, and other portions of each Leased
Property are in good working order.  Tenant waives any claim or action against
Landlord with respect to the condition of any  Leased Property.  LANDLORD MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTIES OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION OR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO QUALITY OR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY TENANT.

         6.03  Conditions of Use and Occupancy.  Tenant agrees that during the
               -------------------------------                            
Term it shall use and keep each Leased Property in a careful, safe and proper
manner; not commit or suffer waste thereon; not use or occupy any Leased
Property for any unlawful purposes; not use or occupy any Leased Property or
permit the same to be used or occupied, for any purpose or business deemed extra
hazardous on account of fire or otherwise; keep each Leased Property in such
repair and condition as may be required by the local board of health, or other
city, state or federal authorities, free of all cost to Landlord; not permit any
acts to be done which will cause the cancellation, invalidation, or suspension
of any insurance policy; and permit Landlord and its agents to enter upon each
Leased Property at all reasonable times after notice to Tenant to examine the
condition thereof. In addition, at any time and from time to time upon not less
than fifteen (15) days prior written notice, Tenant shall permit Landlord and
any mortgagee or lender and their authorized representatives, to inspect the
Leased Properties during normal Business hours, provided that such inspections
shall not unreasonably interfere with Business of Tenant.

         6.04  Financial Statements and Other Information.  Tenant shall provide
               ------------------------------------------               
Landlord and any mortgagee or lender regularly (or more often as may be
reasonably requested by Landlord in writing), the following financial
information from Cross-Continent Auto Retailers, Inc.: (a) as to each Leased
Property within thirty (30) days after each fiscal quarter during the Term or
any Extension Term, as the case may be, (except the fourth quarter), Tenant-
prepared financial

                                     -19-
<PAGE>
 
statements prepared in accordance with generally accepted accounting principles
("GAAP") consistently applied; and (b) as to each Leased Property and itself,
Tenant shall use its best efforts to provide Landlord within ninety (90) days
after the end of each fiscal year of Tenant during the Term or any Extension
Term, as the case may be, and in no event later than one hundred and twenty
(120) days after the end of each fiscal year of Tenant during the Term or any
Extension Term, as the case may be, financial statements, audited, reviewed or
compiled by a certified public accountant (the "Annual Financial Statements").
Tenant shall also deliver to Landlord such additional financial information as
Landlord may reasonably request, provided the same is of a type normally
maintained by Tenant or can be obtained without undue cost or burden on Tenant's
personnel and does not constitute information which Tenant reasonably determines
to be proprietary or confidential. Additionally, upon Landlord's request, Tenant
shall provide Landlord with copies of Tenant's annual capital expenditure
budgets for each Leased Property and any reports generated by Tenant regarding
maintenance and repairs of each Leased Property and statements delivered by
Tenant to its automobile franchisors.


                                  ARTICLE VII
              REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS


         7.01  Maintenance.  Tenant shall maintain each Leased Property in good
               -----------                                                
order, repair and appearance, and repair each Leased Property, including without
limitation, all interior and exterior, structural and nonstructural repairs and
replacements to the roof, foundations, exterior walls, building systems, HVAC
systems, parking areas, sidewalks, water, sewer and gas connections, pipes, and
mains. Tenant shall pay as Additional Rent the full cost of such maintenance,
repairs, and replacements, and to the extent that Tenant has paid such costs
directly to third parties, Tenant shall receive a credit against Additional Rent
payments for such amounts. Tenant shall maintain all drives, sidewalks, parking
areas, and lawns on or about each Leased Property in a clean and orderly
condition, free of accumulations of dirt, rubbish, snow and ice. Tenant shall
permit Landlord to inspect each Leased Property at all reasonable times, and
shall implement all reasonable suggestions of Landlord as to the maintenance and
repair of each Leased Property.

         7.02  Compliance with Laws.  Tenant shall comply with all laws,
               --------------------                                     
ordinances, orders, rules, regulations, and other governmental requirements
relating to the use, condition, or occupancy of each Leased Property, whether
now or hereafter enacted and in force including without limitation:  (a)
licensure requirements for operation of the Business; (b) requirements of any
board of casualty insurance underwriters or insurance service office for any
other similar body having jurisdiction over any Leased Property; (c) all zoning
and building codes; and (d) Environmental Laws.  At Landlord's request, from
time to time, Tenant shall deliver to Landlord copies of certificates or permits
evidencing compliance with such laws, including without limitation, copies of
any applicable licenses, certificates of occupancy and building permits.  Tenant
shall provide Landlord with copies of any notice from any governmental authority
alleging any non-compliance by Tenant or any Leased Property with any of the
foregoing requirements and such evidence as 

                                     -20-
<PAGE>
 
Landlord may reasonably require of Tenant's remediation thereof. Tenant hereby
agrees to defend, indemnify and hold Landlord, its agents, and employees from
and against any and all demands, claims, causes of action, fines, penalties,
damages (including punitive and consequential damages), losses, liabilities
(including strict liability), judgments, costs and expenses (including, without
limitation, attorneys' fees, court costs, and the costs set forth in Section
9.06) resulting from any failure by Tenant to comply with any laws, ordinances,
rules, regulations, and other governmental requirements.

         7.03  Required Alterations.  Tenant shall, at Tenant's sole cost and
               --------------------                                      
expense, make any additions, changes, improvements or alterations to each Leased
Property, including structural alterations, which may be required by any
governmental authorities, including those required to continue to satisfy any
licensure requirements related to the operation of the Business, whether such
changes are required by Tenant's use, changes in the law, ordinances, or
governmental regulations, defects existing as of the date of this Lease, or any
other cause whatsoever. Tenant shall provide thirty (30) days prior written
notice to Landlord of any changes to a Leased Property pursuant to this Section
7.03 which involve changes to the structural integrity thereof or materially
affect the operational capabilities thereof. All such additions, changes,
improvements or alterations shall be deemed to be a Tenant Improvement and shall
comply with all laws relating to such alterations and with the provisions of
Section 8.01.

         7.04  Mechanics' Liens.  Tenant shall have no authority to permit or
               ----------------                                           
create a lien against Landlord's interest in any Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in each Leased Property against liens. Tenant hereby agrees
to defend, indemnify, and hold Landlord harmless from and against any mechanics'
liens against any Leased Property by reason of work, labor services or materials
supplied or claimed to have been supplied on or to such Leased Property.  Tenant
shall immediately remove, bond-off, or otherwise obtain the release of any
mechanics' lien filed against any Leased Property. Tenant shall pay all expenses
in connection therewith, including without limitation, damages, interest, court
costs and reasonable attorneys' fees.

         7.05  Replacements of Fixtures.  Tenant shall not remove Fixtures from 
               -------------------------                                  
any Leased Property except to replace such Fixtures with other items used for
similar or analogous purposes, which replacement items are of equal or greater
quality and value. Items being replaced by Tenant may be removed and shall
become the property of Tenant and items replacing the same shall be and remain
the property of Landlord. Tenant shall execute, upon written request from
Landlord, any and all documents necessary to evidence Landlord's ownership of
the Fixtures and replacements therefor. Tenant may not finance Fixture
replacements by security agreement or equipment lease unless: (a) Landlord has
consented to the terms and conditions of the equipment lease or security
agreement; (b) the equipment lessor or lender has entered into a non-disturbance
agreement with Landlord upon terms and conditions acceptable to Landlord,
including without limitation (i) Landlord shall have the right (but not the
obligation) to assume such security agreement or equipment lease upon the
occurrence of an Event of Default by Tenant hereunder; (ii) the equipment lessor
or lender shall promptly notify Landlord of any default by Tenant under the
equipment lease or security agreement

                                     -21-
<PAGE>
 
and give Landlord a reasonable opportunity to cure such default; and (iii)
Landlord shall have the right to assign its rights under the equipment lease,
security agreement, or non-disturbance agreement; (c) the equipment lessor or
lender shall subordinate its security interest to the security interest of any
of Landlord's lessors, mortgagors or lenders, whether now created or hereafter
existing, and (d) Tenant shall, within ten (10) days after receipt of an invoice
from Landlord, reimburse Landlord for all costs and expenses incurred in
reviewing and approving the equipment lease, security agreement, and non-
disturbance agreement, including without limitation, reasonable attorneys' fees
and costs.

         7.06  Encroachments; Restrictions.  If any of the Improvements shall, 
               ---------------------------                             
at any time, encroach upon any property, street or right-of-way adjacent to a
Leased Property, or shall materially violate the agreements or conditions
contained in any restrictive covenant or other agreement affecting a Leased
Property, other than one which is created or consented to by Landlord without
Tenant's consent, or shall materially impair the rights of others under an
easement or right-of-way to which a Leased Property is subject, other than one
which is created or consented to by Landlord without Tenant's consent, then
promptly upon the request of Landlord or at the request of any person affected
by any such encroachment, violation or impairment, Tenant shall, at its expense,
subject to its right to contest the existence of any encroachment, violation or
impairment and in such case, in the event of an adverse final determination,
either (a) obtain valid and effective waivers or settlements of all claims,
liabilities and damages resulting from each such encroachment, violation or
impairment, whether the same shall affect Landlord or Tenant or (b) make such
changes in the Improvements and take such other actions as shall be necessary to
remove such encroachment and to end such violation or impairment, including, if
necessary, the alteration of improvements. Any such alteration shall be made in
conformity with the requirements of Article VIII. For purposes of this Section
7.06, "materially" shall mean any violation of restrictive covenants or
agreements or impairment of rights for which Landlord or Tenant receives any
notice from any person, entity, governmental authority or other source.


                                 ARTICLE VIII
                   ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
                  CAPITAL ADDITIONS TO THE LEASED PROPERTIES

         8.01  Tenant's Right to Construct.  As to each Leased Property, during
               ---------------------------                              
the Term of this Lease or any Extension Term, as the case may be, so long
as no Event of Default shall have occurred and be continuing as to such Leased
Property, Tenant may make Capital Additions (as defined herein), or other
alterations, additions, changes and/or improvements to such Leased Property as
deemed necessary or useful to operate such Leased Property for Tenant's Business
(individually, a "Tenant Improvement," or collectively, the "Tenant
Improvements").  "Capital Additions" shall mean the construction of one or more
new buildings or one or more additional structures annexed to any portion of any
of the Improvements on a Leased Property, which are constructed on any parcel
or portion of the Land comprising a Leased Property, including the construction
of a new floor, or the repair, replacement, restoration, remodeling or
rebuilding of the 

                                     -22-
<PAGE>
 
Improvements or any portion thereof on a Leased Property which are not normal,
ordinary or recurring to maintain such Leased Property. Except as otherwise
agreed to by Landlord herein or otherwise in writing, any such Tenant
Improvement or Capital Addition shall be made at Tenant's sole expense and shall
become the property of Landlord upon termination of this Lease. Unless made on
an emergency basis to prevent injury to person or property, as to each Leased
Property, Tenant must obtain Landlord's prior written approval, such approval
not to be unreasonably withheld or delayed, for any Capital Addition or for any
Tenant Improvement which is not a Capital Addition and which has a cost of more
than One Hundred Thousand Dollars ($100,000) or a cost which, when aggregated
with the costs of all such Tenant Improvements on such Leased Property in a
given Lease Year, would cause the total costs of all such Tenant Improvements on
such Leased Property to exceed Two Hundred Fifty Thousand Dollars ($250,000).
Additionally, in connection with any Tenant Improvement, including any Capital
Addition, Tenant shall provide Landlord with copies of any plans and
specification therefor, Tenant's budget relating thereto, any required
governmental permits or approvals, any construction contracts or agreements
relating thereto, and any other information relating to such Tenant Improvement
as Landlord shall reasonably request. In addition to the preceding rights and
obligations, Tenant or its franchisor may erect on the Property the maximum
amount of signage permitted by applicable laws.

         8.02  Scope of Right.  Subject to Section 8.01 herein and Section 7.03
               --------------                                             
concerning required alterations, at Tenant's cost and expense, Tenant shall have
the right to:

               (a)  seek any governmental approvals, including building permits,
                    licenses, conditional use permits and any certificates of
                    need that Tenant requires to construct any Tenant
                    Improvement;

               (b)  erect upon each Leased Property such Tenant Improvements as
                    Tenant deems desirable;

               (c)  make additions, alterations, changes and improvements in any
                    Tenant Improvement so erected; and

               (d)  engage in any other lawful activities that Tenant determines
                    are necessary or desirable for the development of each
                    Leased Property in accordance with the Tenant's Business;

provided, however, Tenant shall not make any Tenant Improvement which would, in
Landlord's reasonable judgment, impair the value of the Leased Property without
Landlord's prior written consent and provided, further that Tenant shall not be
permitted to create a mortgage, lien or any other encumbrance on any Leased
Property without Landlord's prior written consent.

         8.03  Cooperation of Landlord.  Landlord shall cooperate with Tenant
               -----------------------                                
and take such actions, including the execution and delivery to Tenant of any
applications or other documents, reasonably requested by Tenant in order to
obtain any governmental permits, licenses or approvals

                                     -23-
<PAGE>
 
sought by Tenant to construct any Tenant Improvement within ten (10) business
days following the later of: (a) the date Landlord receives Tenant's request or
(b) the date of delivery of any such application or document to Landlord;
provided, the taking of such action by Landlord, including the execution of said
applications or documents, shall be without cost to Landlord (or if there is a
cost to Landlord, such cost shall be reimbursed by Tenant), shall not cause
Landlord to be in violation of any law, ordinance or regulation, and shall not
be deemed a waiver by Landlord of any of its rights or of any of Tenant's
obligations, including but not limited to indemnification.

         8.04  Commencement of Construction.  Tenant agrees that:
               ----------------------------                      

               (a)  Tenant shall diligently seek all governmental approvals
                    relating to the construction of any Tenant Improvement;

               (b)  Once Tenant begins the construction of any Tenant
                    Improvement, Tenant shall diligently oversee any such
                    construction to completion in accordance with applicable
                    insurance requirements and the laws, rules and regulations
                    of all governmental bodies or agencies having jurisdiction
                    over the subject Leased Property;

               (c)  Landlord shall have the right at any time and from time to
                    time to post and maintain upon each Leased Property such
                    notices as may be necessary to protect Landlord's interest
                    from mechanics' liens, materialmen's liens or liens of a
                    similar nature;

               (d)  Tenant shall not suffer or permit any mechanics' liens or
                    any other claims or demands arising from the work of
                    construction of any Tenant Improvement to be enforced
                    against any Leased Property or any part thereof, and Tenant
                    agrees to hold Landlord, its agents and employees and said
                    Leased Property free and harmless from all demands, claims,
                    causes of action, fines, penalties, damages (including
                    punitive and consequential damages), losses, liabilities
                    (including strict liability), judgments, costs and expenses
                    (including, without limitation, attorneys' fees, court
                    costs, and the costs set forth in Section 9.06) incurred in
                    connection with or arising therefrom;

               (e)  All work shall be performed in a satisfactory and
                    workmanlike manner consistent with standards in the
                    industry; and

               (f)  Subject to Section 8.08 in the case of Capital Additions,
                    Tenant shall not secure any construction or other financing
                    for the Tenant Improvements which is secured by a portion of
                    any Leased Property without Landlord's prior written
                    consent, and any such financing (i) shall not exceed the
                    cost of the Tenant Improvements, (ii) shall be

                                     -24-
<PAGE>
 
                    subordinate to any mortgage or encumbrance now existing or
                    hereinafter created with respect to such Leased Property,
                    and (iii) shall be limited solely to Tenant's interest in
                    the subject Leased Property.

             8.05   Rights in Tenant Improvements.  Notwithstanding anything to
                    ------------------------------                             
the contrary in this Lease, all Tenant Improvements existing on the Leased
Property or constructed upon each Leased Property pursuant to Section 8.01, any
and all subsequent additions thereto and alterations and replacements thereof
shall be the sole and absolute property of Tenant during the Term and any
Extension Term, as the case may be, of this Lease (in respect of such Leased
Property). Upon the expiration or early termination of this Lease in respect of
a Leased Property, all such Tenant Improvements located thereon shall become the
property of Landlord. Without limiting the generality of the foregoing, prior to
the expiration or early termination of this Lease in respect of a Leased
Property, Tenant shall be entitled to all federal and state income tax benefits
associated with all Tenant Improvements located on such Leased Property.

             8.06   Personal Property.  Tenant shall install, place, and use on
                    -----------------                                          
each Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures Tenant may, from time to time,
deem necessary or useful to operate such Leased Property in the operation of the
Business.

             8.07   Requirements for the Tenant's Personal Property.  Tenant
                    -----------------------------------------------         
shall comply with all of the following requirements in connection with the
Tenant's Personal Property:

                    (a)  RESERVED.

                    (b)  The Tenant's Personal Property shall be installed in a
                         good and workmanlike manner, in compliance with all
                         governmental laws, ordinances, rules, and regulations
                         and all insurance requirements, and be installed free
                         and clear of any mechanics' liens.

                    (c)  Tenant shall, at Tenant's sole cost and expense,
                         maintain, repair, and replace the Tenant's Personal
                         Property.

                    (d)  Tenant shall, at Tenant's sole cost and expense, keep
                         the Tenant's Personal Property insured against loss or
                         damage by fire, vandalism and malicious mischief,
                         sprinkler leakage, and other physical loss perils
                         commonly covered by fire and extended coverage, boiler
                         and machinery, and difference in conditions insurance
                         (which insurance shall meet the requirements of Section
                         4.03 hereof) in an amount not less than the full
                         replacement cost thereof or such other amount as
                         appears on a schedule submitted by Tenant to Landlord,
                         which schedule shall be subject to Landlord's approval,
                         and Tenant shall use 


                                     -25-
<PAGE>
 
                         the proceeds from any such policy for the repair and
                         replacement of such items of Tenant's Personal
                         Property; provided, however, that if Landlord fails to
                         object to the schedule so submitted by Tenant within
                         five (5) business days of Landlord's receipt of such
                         schedule, Landlord's approval of such schedule shall be
                         deemed given.

                    (e)  Tenant shall pay all Impositions and other taxes
                         applicable to Tenant's Personal Property.

                    (f)  If Tenant's Personal Property is damaged or destroyed
                         by fire or otherwise, Tenant shall promptly repair or
                         replace Tenant's Personal Property unless Tenant is
                         entitled to and elects to terminate the Lease pursuant
                         to Section 10.05.

                    (g)  As to each Leased Property, unless an Event of Default
                         (or any event which, with the giving of notice or lapse
                         of time, or both, would constitute an Event of Default)
                         has occurred and remains uncured beyond any applicable
                         grace period, Tenant may remove Tenant's Personal
                         Property from such Leased Property from time to time
                         provided that Tenant promptly repairs any damage to
                         such Leased Property resulting from the removal of
                         Tenant's Personal Property.

                    (h)  As to each Leased Property, Tenant shall remove all of
                         Tenant's Personal Property upon the termination or
                         expiration of the Lease and shall promptly repair any
                         damage to such Leased Property resulting from the
                         removal thereof to the reasonable satisfaction of
                         Landlord; provided, however, if Tenant fails to remove
                         Tenant's Personal Property from such Leased Property
                         within thirty (30) days after the termination or
                         expiration of this Lease with respect thereto, then
                         Tenant shall be deemed to have abandoned such items of
                         Tenant's Personal Property, all of which shall become
                         the property of Landlord, and Landlord may remove,
                         store and dispose of such property and Tenant shall
                         have no claim or right against Landlord for such
                         property or the value thereof regardless of the
                         disposition thereof by Landlord. Tenant shall pay
                         Landlord, upon demand, all expenses incurred by
                         Landlord in removing, storing, and disposing of such
                         items of Tenant's Personal Property and repairing any
                         damage caused by such removal. Tenant's obligations
                         hereunder shall survive the termination or expiration
                         of this Lease as to such Leased Property.

                    (i)  Tenant shall perform its obligations under any
                         equipment lease or security agreement for Tenant's
                         Personal Property.


                                     -26-
<PAGE>
 
             8.08   Financings of Capital Additions to a Leased Property.
                    ----------------------------------------------------- 
Landlord may, but shall be under no obligation to, provide or arrange
construction, permanent or other financing for any Capital Addition proposed to
be made to a Leased Property by Tenant. Any financing so provided by Landlord
shall be made in accordance with, and subject to, a written Addendum to this
Lease.


                                  ARTICLE IX
                             DEFAULTS AND REMEDIES

             9.01   Events of Default.  The occurrence of any one or more of the
                    -----------------                                           
following shall be an event of default ("Event of Default") hereunder:

                    (a)  Tenant fails to pay in full any installment of Rent, or
                         any other monetary obligation payable by Tenant to
                         Landlord hereunder, within ten (10) days after the due
                         date thereof and after written notice thereof and an
                         opportunity to cure within a ten (10) day period after
                         such notice is given to Tenant by Landlord. In the
                         event of Tenant's failure to make timely payment of
                         such obligations two (2) times during any twelve (12)
                         month period, each subsequent such failure within the
                         twelve (12) months immediately following such second
                         failure shall immediately constitute an Event of
                         Default, and Landlord shall not be required to provide
                         notice thereof, nor shall Tenant have any further
                         opportunity to cure such failure;

                    (b)  Tenant fails to observe and perform any covenant (other
                         than the covenant in respect of insurance set forth in
                         Article IV), condition or agreement hereunder to be
                         performed by Tenant (except those described in Section
                         9.01(a) of this Lease) and such failure continues for a
                         period of thirty (30) days after written notice thereof
                         is given to Tenant by Landlord; or if, by reason of the
                         nature of such default, the same cannot with due
                         diligence be remedied within said thirty (30) days,
                         such failure will not be deemed to continue if Tenant
                         proceeds promptly and with due diligence to remedy the
                         failure and diligently completes the remedy thereof;
                         provided, however, said cure period will not extend
                         beyond sixty (60) days if the facts or circumstances
                         giving rise to the default are creating a further harm
                         to Landlord or the subject Leased Property and Landlord
                         makes a good faith determination that Tenant is not
                         undertaking remedial steps that Landlord would cause to
                         be taken if this Lease were then to terminate;


                                     -27-
<PAGE>
 
                    (c)  If Tenant: (i) admits in writing its inability to pay
                         its debts generally as they become due; (ii) files a
                         petition in bankruptcy or a petition to take advantage
                         of any insolvency act; (iii) makes an assignment for
                         the benefit of its creditors; (iv) is unable to pay its
                         debts as they mature; (v) consents to the appointment
                         of a receiver of itself or of the whole or any
                         substantial part of its property; or (vi) files a
                         petition or answer seeking reorganization or
                         arrangement under the federal bankruptcy laws or any
                         other applicable law or statute of the United States of
                         America or any state thereof;

                    (d)  If Tenant, on insolvency proceedings or on a petition
                         in bankruptcy filed against it, is adjudicated as
                         bankrupt or a court of competent jurisdiction enters an
                         order or decree appointing, without the consent of
                         Tenant, a receiver of Tenant of the whole or
                         substantially all of its property, or approving a
                         petition filed against it seeking reorganization or
                         arrangement of Tenant under the federal bankruptcy laws
                         or any other applicable law or statute of the United
                         States of America or any state thereof, and such
                         judgment, order or decree is not vacated, dismissed or
                         set aside within sixty (60) days from the date of the
                         entry thereof, and within an additional thirty (30)
                         days, provided that under applicable laws, rules and
                         regulations no action can be taken within such thirty
                         (30) day period by the party obtaining such judgment,
                         order or decree;

                    (e)  If the estate or interest of Tenant in a Leased
                         Property or any part thereof is levied upon or attached
                         in any proceeding and the same is not vacated or
                         discharged within fifteen (15) days after commencement
                         thereof (unless Tenant is contesting such lien or
                         attachment in accordance with this Lease) or if such
                         estate or interest of Tenant is assigned, conveyed or
                         involuntarily transferred in violation of this Lease;

                    (f)  Any representation, warranty or covenant made by Tenant
                         on behalf of itself or an Affiliate in this Lease or in
                         any certificate, demand or request made pursuant hereto
                         proves to be incorrect, in any material respect, as of
                         the date of issuance or making thereof;

                    (g)  Conviction of Tenant or an Affiliate of a crime or
                         offense constituting a felony in the jurisdiction in
                         which committed or under federal law which conviction
                         results in the termination of the franchise.

                    (h)  Termination or relinquishment of the franchise or
                         license pursuant to which Tenant or an Affiliate
                         conducts business on or from any 


                                     -28-
<PAGE>
 
                         Leased Property, provided that such event shall not
                         constitute an Event of Default if (i) no other Event of
                         Default enumerated in this Section 9.01 shall occur and
                         be continuing, and (ii) at a date no later than twenty-
                         four (24) months following such date of termination or
                         relinquishment, Tenant or an Affiliate has entered into
                         written new or amended franchises or licenses for
                         operation of motor vehicle retail or motor vehicle
                         related businesses at such Leased Property satisfactory
                         to Landlord in its discretion applying commercially
                         reasonable standards;

                    (i)  Default, beyond any applicable cure period, under any
                         franchise or license pursuant to which Tenant or an
                         Affiliate conducts business at a Leased Property, if in
                         the Landlord's judgment such default in light of
                         commercially reasonable standards and industry practice
                         would have a material adverse effect on the Leased
                         Property;

                    (j)  A final, non-appealable judgment or judgments for the
                         payment of money not fully covered (excluding
                         deductibles) by insurance is rendered against Tenant
                         and the same remains undischarged, unvacated, unbonded,
                         unappealed or unstayed for a period of thirty (30)
                         consecutive days, and within an additional thirty (30)
                         days, provided that under applicable laws, rules and
                         regulations no action can be taken within such thirty
                         (30) day period by the party obtaining such judgment,
                         order or decree;

                    (k)  Tenant shall fail to observe the covenant in respect to
                         insurance under Article IV provided Landlord shall have
                         provided notice of such failure to Tenant and Tenant
                         shall have failed to cure such failure within five (5)
                         business days of such notice; or

                    (l)  Except after the effective date of a permitted
                         assignment meeting the requirements of Article XIII, if
                         Tenant is liquidated or dissolved, or begins
                         proceedings toward liquidation or dissolution, or in
                         any manner permits the sale or divestiture of
                         substantially all of its assets.

             9.02   Remedies.  To the extent an Event of Default is applicable
                    --------                                                  
only to a specific Leased Property or specific Leased Properties (in accordance
with Section 9.01 above), the remedies set forth herein shall be exercisable
solely with respect to such Leased Property or Leased Properties, and shall not
be exercisable with respect to any other Leased Property. To the extent an Event
of Default constitutes an Event of Default as to all of the Leased Properties
(in accordance with Section 9.01 above), the remedies set forth herein shall be
exercisable with respect to all of the Leased Properties. Subject to the
foregoing provisions, Landlord may exercise any one or more of the following
remedies upon the occurrence of an Event of Default:


                                     -29-
<PAGE>
 
                    (a)  Landlord may terminate this Lease, exclude Tenant from
                         possession of the subject Leased Property and use
                         reasonable efforts to lease the subject Leased Property
                         to others. If this Lease is terminated pursuant to the
                         provisions of this subparagraph (a) with respect to one
                         or more, but less than all, of the Leased Properties
                         identified on Schedule A hereto, Tenant will remain
                                       ----------
                         liable to Landlord for the Rent for all of the Leased
                         Properties identified on Schedule A and other sums then
                                                  ----------
                         due and for the balance of the Term as if the Lease had
                         not been terminated with respect to the subject Leased
                         Property, less the net proceeds, if any, of any re-
                         letting of the subject Leased Property by Landlord
                         subsequent to such termination, after deducting all
                         Landlord's expenses in connection with such re-letting,
                         including without limitation, the expenses set forth in
                         Section 9.02(b)(ii) below. Notwithstanding the
                         termination of this Lease with respect to a subject
                         Leased Property, Tenant shall pay to Landlord all
                         amounts due as Rent, and such other amounts then due,
                         under this Lease on the days that such Rent and such
                         other amounts become due and payable as required by
                         this Lease.

                    (b)  Without demand or notice, Landlord may re-enter and
                         take possession of the subject Leased Property or any
                         part thereof; and repossess such Leased Property as of
                         Landlord's former estate; and expel Tenant and those
                         claiming through or under Tenant from such Leased
                         Property; and, remove the effects of both or either,
                         without being deemed guilty of any manner of trespass
                         and without prejudice to any remedies for arrears of
                         Rent or preceding breach of covenants or conditions. If
                         Landlord elects to re-enter, as provided in this
                         paragraph (b) or if Landlord takes possession of such
                         Leased Property pursuant to legal proceedings or
                         pursuant to any notice provided by law, Landlord,
                         without terminating any portion of this Lease, shall
                         use reasonable efforts to re-let such Leased Property
                         or any part of such Leased Property, either alone or in
                         conjunction with other portions of the Improvements of
                         which such Leased Property are a part, in Landlord's
                         name but for the account of Tenant, for such term or
                         terms (which may be greater or less than the period
                         which would otherwise have constituted the balance of
                         the Term of this Lease) and on such terms and
                         conditions (which may include concessions of free rent,
                         and the alteration and repair of such Leased Property)
                         as Landlord, in its reasonable discretion, may
                         determine. Landlord may collect and receive the Rents
                         for such Leased Property. Unless Tenant can establish
                         that Landlord's efforts to re-let were unreasonable or
                         that Landlord's efforts to collect Rents were
                         unreasonable, Landlord will not be responsible or
                         liable for any 


                                     -30-
<PAGE>
 
                         failure to re-let such Leased Property, or any part of
                         such Leased Property, or for any failure to collect any
                         Rent due upon such re-letting. No such re-entry or
                         taking possession of such Leased Property by Landlord
                         will be construed as an election on Landlord's part to
                         terminate this Lease unless a written notice of such
                         intention is given to Tenant. No notice from Landlord
                         under this Lease or under a forcible entry and detainer
                         statute or similar law will constitute an election by
                         Landlord to terminate this Lease unless such notice
                         specifically says so. Landlord reserves the right
                         following any such re-entry or re-letting, or both, to
                         exercise its right to terminate this Lease by giving
                         Tenant such written notice, and, in that event such
                         Lease will terminate as specified in such notice.

                    (c)  If Landlord elects to take possession of a Leased
                         Property according to subparagraph (b) of this Section
                         9.02 without terminating this Lease, Tenant will pay
                         Landlord (A) the Rent and other sums which would be
                         payable under this Lease with respect to such Leased
                         Property if such repossession had not occurred, less
                         (B) the net proceeds, if any, of any re-letting of such
                         Leased Property after deducting all of Landlord's
                         reasonable expenses incurred in connection with such 
                         re-letting, including without limitation, all
                         reasonable repossession costs, brokerage commissions,
                         legal expense, attorneys' fees, expense of employees,
                         alteration, remodeling, repair costs, and expense of
                         preparation for such re-letting. If, in connection with
                         any re-letting, any resulting lease term for the
                         subject Leased Property extends beyond the existing
                         Term or Extension Term, as the case may be, or such
                         Leased Property covered by such re-letting includes
                         areas which are not part of such Leased Property, a
                         fair apportionment of the Rent received from such re-
                         letting and the expenses incurred in connection with
                         such re-letting will be made in determining the net
                         proceeds received from such re-letting. In addition, in
                         determining the net proceeds from such re-letting, any
                         rent concessions will be apportioned over the term of
                         the new lease. Tenant will pay such amounts to Landlord
                         monthly on the days on which the Rent and all other
                         amounts owing under this Lease would have been payable
                         if possession had not been retaken, and Landlord will
                         be entitled to receive the rent and other amounts from
                         Tenant on each such day. Notwithstanding anything
                         herein to the contrary, Landlord, at its option, may
                         collect and apply any Rent received from such re-
                         letting in accordance herewith and in such case shall
                         remit any balance thereof to Tenant. Landlord shall
                         incur no liability or obligation to Tenant arising out
                         of the collection or application of Rent by Landlord
                         hereunder.


                                     -31-
<PAGE>
 
                    (d)  Landlord may re-enter the applicable Leased Property
                         and have, repossess and enjoy such Leased Property as
                         if this Lease had not been made, and in such event,
                         Tenant and its successors and assigns shall remain
                         liable for any contingent or unliquidated obligations
                         or sums owing at the time of such repossession.

                    (e)  Landlord may take whatever action at law or in equity
                         as may appear necessary or desirable to collect the
                         Rent and other amounts payable hereunder with respect
                         to the subject Leased Property then due and thereafter
                         to become due, or to enforce performance and observance
                         of any obligations, agreements or covenants of Tenant
                         under this Lease.

             9.03   Right of Set-Off.  Landlord may, and is hereby authorized by
                    -----------------                                           
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord in respect of a Leased
Property, including all sums held in any escrow for Impositions, any
indebtedness of Landlord to Tenant, and any claims by Tenant against Landlord,
against any obligations of Tenant under this Lease in respect of such Leased
Property and against any claims by Landlord against Tenant, whether or not
Landlord has exercised any other remedies hereunder. Landlord shall set-off and
apply such sums first, to delinquent real estate taxes, unless such taxes are
being protested in good faith and no lien has attached to any Leased Property
with respect thereto, second, to currently due and owing real estate taxes, and
next, to other Tenant's obligations in the order which Landlord may determine.
The rights of Landlord under this Section are in addition to any other rights
and remedies Landlord may have against Tenant.

             9.04   Performance of Tenant's Covenants.  Landlord may, without
                    ---------------------------------                        
waiving or releasing any obligation of Tenant, and without waiving or releasing
any obligation or default, perform any obligation of Tenant which Tenant has
failed to commence to perform within fifteen (15) business days after Landlord
has sent a written notice to Tenant informing it of its specific failure
(provided no such notice shall be required if Landlord has previously notified
Tenant of such failure under the provisions of Section 9.01). In the event
Landlord deems, in its discretion, that Tenant's failure to perform such
obligation has given rise to an emergency situation, Landlord may perform such
obligation without waiving or releasing any obligation of Tenant, and without
waiving or releasing any obligation or default; provided, however, that Landlord
shall notify Tenant of such performance as soon as it is reasonably practicable
to do so. Tenant shall reimburse Landlord on demand, as Additional Rent, for any
reasonable expenditures thus incurred by Landlord and shall pay interest thereon
at the New York Prime Rate.

             9.05   Late Charge.  Any payment not made by Tenant for more than
                    -----------                                               
five (5) business days after the due date shall be subject to a late charge
payable by Tenant as Rent of four percent (4%) of the amount of such overdue
payment. Notwithstanding the foregoing, in the event that Tenant's payment is
not made more than five (5) business days after the due date more than two (2)
times during any twelve (12) month period, any such subsequent overdue payments
within the 


                                     -32-
<PAGE>
 
twelve (12) months immediately following such second failure shall be subject to
a late charge payable by Tenant as Rent of seven percent (7%) of the amount of
such overdue payment.

             9.06   Litigation; Attorneys' Fees. Within ten (10) business days
                    ----------------------------                               
after Tenant has knowledge of any litigation or other proceeding related to or
arising out of this Agreement or the Leased Property in which claims are
asserted in an amount in excess of $50,000, that (1) may be instituted against
Tenant, (2) may be instituted against any Leased Property to secure or recover
possession thereof, or (3) may affect the title to or the interest of Landlord
in any Leased Property (other than litigation or proceedings relating to
Landlord's indebtedness on the Leased Property or claims caused solely by
Landlord), Tenant shall give written notice thereof to Landlord. In the event
that Landlord determines that Tenant has failed to give adequate cooperation or
information with respect to any such litigation, investigation, receivership,
administrative, bankruptcy, insolvency or other similar proceeding, Landlord
may, after notice to Tenant, undertake such investigation or proceeding and
Tenant shall pay all reasonable costs and expenses (the "Costs") related thereto
that are incurred by Landlord, whether or not Landlord has received notice from
Tenant of such investigation or proceeding, and whether or not an Event of
Default has actually occurred or has been declared and thereafter cured, which
Costs shall include, without limitation: (a) the reasonable fees, expenses, and
costs of any litigation, investigation, receivership, administrative,
bankruptcy, insolvency or other similar proceeding; (b) reasonable attorney,
paralegal, consulting and witness fees and disbursements; and (c) the reasonable
expenses, including, without limitation, lodging, meals, and transportation, of
Landlord and its employees, agents, attorneys, and witnesses in investigating or
preparing for litigation, administrative, bankruptcy, insolvency or other
similar proceedings and attendance at hearings, depositions, and trials in
connection therewith. Within ten (10) days of Landlord's presentation of an
invoice of Costs incurred by Landlord pursuant to the preceding sentence or
otherwise incurred by Landlord in enforcing or preserving Landlord's rights
under this Lease, whether or not an Event of Default has actually occurred or
has been declared and thereafter cured, Tenant shall pay all such Costs. All
such Costs as incurred shall be deemed to be Additional Rent under this Lease.

             9.07   Remedies Cumulative.  The remedies of Landlord herein are
                    -------------------                                      
cumulative to and not in lieu of any other remedies available to Landlord at law
or in equity. The use of, or failure to use, any one remedy shall not be taken
to exclude or waive the right to use any other remedy.

             9.08   Escrows and Application of Payments.  As security for the
                    -----------------------------------                      
performance of its obligations hereunder, Tenant hereby assigns to Landlord all
its right, title and interest in and to all monies escrowed with Landlord under
this Lease and all deposits with utility companies, taxing authorities, and
insurance companies; provided, however, that Landlord shall not exercise its
rights hereunder with respect to any Leased Property until an Event of Default
has occurred in respect of such Leased Property. Any payments received by
Landlord under any provisions of this Lease during the existence, or continuance
of an Event of Default shall be applied to Tenant's obligations, first, to
delinquent real estate taxes, unless such taxes are being protested in good
faith and no lien has attached to any Leased Property with respect thereto,
second, to currently due and owing real estate taxes, and next, to other
Tenant's obligations in the order which Landlord may determine.


                                     -33-
<PAGE>
 
             9.09   Power of Attorney.  Tenant hereby irrevocably and
                    -----------------                                
unconditionally appoints Landlord, or Landlord's authorized officer, agent,
employee or designee, as Tenant's true and lawful attorney-in-fact, to act,
after an Event of Default, for Tenant in Tenant's name, place, and stead, and
for Tenant's and Landlord's use and benefit, to execute, deliver and file all
applications and any and all other necessary documents or things, to effect a
transfer, reinstatement, renewal and/or extension of any and all licenses and
other governmental authorizations issued to Tenant in connection with Tenant's
operation of the Leased Properties, and to do any and all other acts incidental
to any of the foregoing. Tenant irrevocably and unconditionally grants to
Landlord as its attorney-in-fact full power and authority to do and perform,
after an Event of Default, every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of Tenant's obligations hereunder.


                                   ARTICLE X
                            DAMAGE AND DESTRUCTION

             10.01  General.  Tenant shall notify Landlord if any Leased
                    -------                                             
Property is damaged or destroyed by reason of fire or any other cause. Tenant
shall promptly repair, rebuild, or restore such Leased Property, at Tenant's
expense, so as to make such Leased Property at least equal in value to such
Leased Property existing immediately prior to such occurrence and as nearly
similar to it in character as is practicable and reasonable. Before beginning
such repairs or rebuilding, or executing any contracts in connection with such
repairs or rebuilding, Tenant will submit for Landlord's approval, which
approval Landlord will not unreasonably withhold or delay, complete and detailed
plans and specifications for such repairs or rebuilding. Promptly after
receiving Landlord's approval of the plans and specifications, Tenant will begin
such repairs or rebuilding and will oversee the repairs and rebuilding to
completion with diligence, subject, however, to strikes, lockouts, acts of God,
embargoes, governmental restrictions, and other causes beyond Tenant's
reasonable control. Landlord will make available to Tenant the net proceeds of
any fire or other casualty insurance paid to Landlord for such repair or
rebuilding as the same progresses, less (if Landlord has accrued collection
costs after Tenant has failed to diligently pursue collection of such insurance
proceeds) any reasonable costs of collection, including attorney's fees. Payment
will be made against properly certified vouchers of a competent architect in
charge of the work and approved by Landlord. Prior to commencing the repairing
or rebuilding, Tenant shall deliver to Landlord for Landlord's approval a
schedule setting forth the estimated monthly draws for such work. Landlord will
contribute to such payments out of the insurance proceeds an amount equal to the
proportion that the total net amount received by Landlord from insurers bears to
the total estimated cost of the rebuilding or repairing, multiplied by the
payment by Tenant on account of such work. Landlord may, however, withhold ten
percent (10%) from each such payment and shall disburse such amount after: (a)
the work of repairing or rebuilding is completed and proof has been furnished to
Landlord that no lien or liability has attached or will attach to such Leased
Property or to Landlord in connection with such repairing 


                                     -34-
<PAGE>
 
or rebuilding and (b) Tenant has obtained a certificate of use and occupancy (or
its functional equivalent) for the portion of such Leased Property being
repaired or rebuilt. Upon the completion of rebuilding or repairing and the
furnishing of such proof, the balance of the net proceeds of such insurance
payable to Tenant on account of such repairs or rebuilding will be paid to
Tenant. Tenant will obtain and deliver to Landlord a temporary or final
certificate of occupancy before such Leased Property is reoccupied for any
purpose. Tenant shall complete such repairs or rebuilding free and clear of
mechanic's or other liens, and in accordance with the building codes and all
applicable laws, ordinances, regulations, or orders of any state, municipal, or
other public authority affecting the repairs or rebuilding, and also in
accordance with all requirements of the insurance rating organization, or
similar body. Any remaining proceeds of insurance after such restoration will be
Tenant's property.

             10.02  Landlord's Inspection.  During the progress of such repairs
                    ----------------------                                     
or rebuilding, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
repairs or rebuilding. Tenant will keep all plans, shop drawings, and
specifications available, and Landlord and its architects and engineers may
examine them at all reasonable times. If, during such repairs or rebuilding,
Landlord and its architects and engineers determine that the repairs or
rebuilding are not being done in accordance with the approved plans and
specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such repairs or rebuilding do not accord with the approved
plans and specifications. Upon the receipt of any such notice, Tenant will cause
corrections to be made to any deficiencies, omissions, or such other respect.
Tenant's obligations to supply insurance, according to Article IV, will be
applicable to any repairs or rebuilding under this Section 10.02.

             10.03  Landlord's Costs.  Tenant shall, within fifteen (15) days
                    ----------------                                         
after receipt of an invoice from Landlord, pay the reasonable costs, expenses,
and fees of any architect or engineer employed by Landlord to review any plans
and specifications and to supervise and approve any construction, or for any
services rendered by such architect or engineer to Landlord as contemplated by
any of the provisions of this Lease, or for any services performed by Landlord's
attorneys in connection therewith; provided, however, that Landlord will consult
with Tenant and notify Tenant of the estimated amount of such expenses.

             10.04  Rent Abatement.  Notwithstanding the occurrence of any event
                    --------------                                              
that causes any interruption, disruption or interference of any kind (whether or
not substantial) of Tenant's Business on the Leased Property, Tenant shall
continue to pay to Landlord the full amount of the Base Annual Rent as required
by this Lease without abatement, reduction, interruption, or delay of any kind.

             10.05  Substantial Damage During Lease Term.  Provided Tenant has
                    ------------------------------------                      
fully complied with Section 4.01 hereof and has satisfied the conditions of the
last sentence of this Section 10.05, if, at any time during the Term or any
Extension Term, as the case may be, of this Lease, any Leased 


                                     -35-
<PAGE>
 
Property is so damaged by fire or otherwise that it is Completely Destroyed or
Partially Destroyed (as such terms are hereafter defined), Tenant may, within
one hundred and eighty (180) days after such damage, give notice of its election
to terminate this Lease with respect to such Leased Property and, subject to the
further provisions of this Section, this Lease will cease with respect to such
Leased Property on the thirtieth (30th) day after the delivery of such notice.
If the Lease is so terminated, Tenant will have no obligation to repair, rebuild
or replace such Leased Property, and the entire insurance proceeds will belong
to Landlord. If the Lease is not so terminated, Tenant shall rebuild such Leased
Property in accordance with Section 10.01. If Tenant elects to terminate this
Lease pursuant to this Section 10.05, Tenant will pay (or cause to be paid) to
Landlord, an amount equal to the excess amount, if any, of the book value of the
damaged property (excluding the land) as shown in Landlord's financial
statements as of the date of such termination, over the amount of all insurance
proceeds received by Landlord. A Leased Property shall be deemed to be
"Completely Destroyed" if there is sufficient damage to such Leased Property
that Landlord and Tenant agree to its classification as such. A Leased Property
shall be deemed to be "Partially Destroyed" if, as a result of damages to it, a
substantial part of the Business (as determined by a reasonable dealer in the
trade, in light of standard trade practices) cannot be conducted on it within
one hundred and eighty (180) days of the occurrence of such damages. In the
event that Landlord and Tenant are unable to agree to a determination of whether
any Leased Property is Completely Destroyed, Partially Destroyed or otherwise,
such determination shall be made pursuant to the Arbitration provisions set
forth in Article XIV.

             10.06  Damage Near End of Term.  Notwithstanding any provisions of
                    -----------------------                                    
Sections 10.01 or 10.05 to the contrary, if damage to or destruction of any
Leased Property occurs during the last twenty-four (24) months of the Term or
any Extension Term, and if such damage or destruction renders the Leased
Property Completely Destroyed or Partially Destroyed, either party shall have
the right to terminate this Lease as to such Leased Property by giving notice to
the other within ten (10) days after the date of damage or destruction, in which
event Landlord shall be entitled to retain the insurance proceeds and Tenant
shall pay to Landlord on demand the amount of any deductible or uninsured loss
arising in connection therewith; provided, however, that any such notice given
by Landlord shall be void and of no force and effect if Tenant exercises an
available option for an Extension Term with respect to such Leased Property
pursuant to provisions of this Lease within ten (10) business days following
receipt of such termination notice.

             10.07  Risk of Loss.  Notwithstanding anything herein to the
                    ------------                                         
contrary, during the Term or any Extension Term, as the case may be, the risk of
loss of or decrease in the enjoyment and beneficial use of the Leased Properties
in consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise is assumed by Tenant, and Landlord
shall in no event be answerable or accountable therefor except in the case of
gross negligence, willful misconduct or breach of this Lease by Landlord
resulting in such damage or destruction. In addition, all risk of loss or
decrease in enjoyment and beneficial use in consequence of foreclosures,
attachments, levies or executions is assumed by Tenant except for foreclosure
due to Landlord's indebtedness.


                                     -36-
<PAGE>
 
                                  ARTICLE XI
                                 CONDEMNATION

             11.01  Total Taking.  If at any time during the Term or any
                    ------------                                        
Extension Term, as the case may be, any Leased Property is totally and
permanently taken by right of eminent domain or by conveyance made in response
to the threat of the exercise of such right ("Condemnation"), this Lease shall
terminate as to such Leased Property on the Date of Taking (which shall mean the
date the condemning authority has the right to possession of the property being
condemned), and Tenant shall promptly pay all outstanding applicable Rent and
other charges through the date of termination, provided, however, this Lease
shall not so terminate if the Condemnation occurred due to the failure of Tenant
to maintain such Leased Property as required by Article VII hereof or other
applicable provisions hereof, whether or not such failure on the part of Tenant
constituted an Event of Default hereunder at the time of the Condemnation.
 
             11.02  Partial Taking.  If a portion of a Leased Property is taken
                    --------------                                             
by Condemnation, this Lease shall remain in effect as to such Leased Property if
such Leased Property is not thereby rendered Unsuitable for the continuation of
Tenant's Business on that Leased Property (which shall mean that such Leased
Property is in such a state or condition such that in the good faith judgment of
Tenant, reasonably exercised, it cannot be used on a commercially practicable
basis in the operation of the Business), but if such Leased Property is thereby
rendered Unsuitable for the continuation of Tenant's Business on that Leased
Property, this Lease shall terminate as to such Leased Property on the Date of
Taking, provided such Condemnation was not as a result of Tenant's failure to
maintain such Leased Property as provided for in Section 11.01.

             11.03  Restoration.  If there is a partial taking of any Leased
                    -----------                                             
Property and this Lease remains in full force and effect pursuant to Section
11.02, Landlord shall retain the amount of any Landlord Award (as hereafter
defined) received by Landlord, Landlord shall apply such Landlord Award to
accomplish all necessary restoration to the Leased Property, and any excess
after such application shall be retained by Landlord. If there is a partial
taking of any Leased Property and this Lease remains in full force and effect
pursuant to Section 11.02, Tenant shall retain the amount of any Tenant Award
(as hereafter defined) received by Tenant, Tenant shall apply such Tenant Award
to accomplish all necessary restoration of Tenant's property, and any excess
after such application shall be retained by Tenant. Notwithstanding anything in
this Section to the contrary, in the event that there is a partial taking of any
Leased Property and this Lease remains in full force and effect pursuant to
Section 11.02, and there is a single Award with respect to such partial taking,
then the Landlord and Tenant shall use their good faith efforts to determine the
proper apportionment of such Award (as hereafter defined) to restoration of
Landlord's and Tenant's respective properties. In the event that the parties are
unable to agree on such apportionment within thirty (30) days, the parties shall
submit to arbitration of an apportionment subject to the arbitration provisions
set forth in Article XIV.

             11.04  Landlord's Inspection.  During the progress of such
                    ---------------------                              
restoration, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be 


                                     -37-
<PAGE>
 
furnished, if required by them, with copies of all plans, shop drawings, and
specifications relating to such restoration. Tenant will keep all plans, shop
drawings, and specifications available, and Landlord and its architects and
engineers may examine them at all reasonable times. If, during such restoration,
Landlord and its architects and engineers determine that the restoration is not
being done in accordance with the approved plans and specifications, Landlord
will give prompt notice in writing to Tenant, specifying in detail the
particular deficiency, omission, or other respect in which Landlord claims such
restoration does not accord with the approved plans and specifications. Upon the
receipt of any such notice, Tenant will cause corrections to be made to any
deficiencies, omissions, or such other respect. Tenant's obligations to supply
insurance, according to Article IV, will be applicable to any restoration under
this Section.

             11.05  Award Distribution.  The entire compensation, sums or
                    ------------------                                   
anything of value awarded, paid or received on a total or partial Condemnation
of a Leased Property that is awarded to Landlord shall belong to Landlord (the
"Landlord Award"). The entire compensation, sums or anything of value awarded,
paid or received on a total or partial Condemnation of a Leased Property that is
awarded to Tenant shall belong to Tenant (the "Tenant Award", collectively with
the Landlord Award, the "Awards", and each, individually, an "Award").
Notwithstanding anything in this Section to the contrary, in the event that
there is a total or partial Condemnation of a Leased Property and there is a
single Award with respect to such Condemnation, then the Landlord and Tenant
shall use their good faith efforts to determine the proper apportionment of such
Award to Landlord's and Tenant's respective properties. In the event that the
parties are unable to agree on such apportionment within thirty (30) days, the
parties shall submit to arbitration of an apportionment subject to the
arbitration provisions set forth in Article XIV.

             11.06  Temporary Taking.  The taking of any Leased Property, or any
                    ----------------                                            
part thereof, by military or other public authority shall constitute a taking by
Condemnation only when the use and occupancy by the taking authority has
continued for longer than twenty four (24) months. During any such twenty-four
(24) month period, which shall be a temporary taking, all the provisions of this
Lease shall remain in full force and effect as to such Leased Property with no
abatement of rent payable by Tenant hereunder. In the event of any such
temporary taking, the entire amount of any such Award made for such temporary
taking allocable to the Term hereof, whether paid by way of damages, Rent or
otherwise, shall be paid to Tenant.


                                     -38-
<PAGE>
 
                                  ARTICLE XII
        ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS

          Tenant hereby represents, warrants and covenants to Landlord as
follows:

          12.01  Organization and Qualification.
                 ------------------------------ 

          (a)    Tenant is a [_________] corporation duly organized, validly
                 existing and in good standing under the laws of its state of
                 incorporation or organization, with all power and authority,
                 corporate or otherwise, necessary to: (i) enter into and
                 perform this Lease and (ii) own and lease its assets and
                 properties, and conduct its Business, as it is now being
                 conducted or proposed to be conducted. Tenant is duly qualified
                 as a foreign corporation or other entity, as the case may be,
                 to conduct its Business and own and lease its assets and
                 properties, and is in good standing, in each jurisdiction where
                 the character of its assets and properties owned or held under
                 lease or the nature of its Business makes such qualification
                 necessary or advisable, and is duly qualified and licensed
                 under all laws, regulations, ordinances or orders of public or
                 governmental authorities, or otherwise to carry on its Business
                 and own or lease its assets and properties in the places and in
                 the manner in which they are owned, leased or conducted or
                 proposed to be owned, leased or conducted, except where the
                 failure to be so organized, qualified and in good standing or
                 to have such authority, qualification or licensing could not
                 result in a Material Adverse Change. Complete and correct
                 copies of Tenant's Charter, as in effect on the date hereof,
                 and Tenant's by-laws, also as in effect on the date hereof,
                 have been delivered to Landlord.

          (b)    Each Affiliate that conducts operations or business on or from
                 any Leased Property, whether now or at any time in the future,
                 is duly organized, validly existing and in good standing under
                 the laws of its organization, with all power and authority,
                 corporate or otherwise, necessary to own and lease its assets
                 and properties, and conduct its business, as it is now being
                 conducted or proposed to be conducted. Each Affiliate is duly
                 qualified as a foreign corporation or other entity, as the case
                 may be, to do business and own and lease its assets and
                 properties, and is in good standing, in each jurisdiction where
                 the character of its assets and properties owned or held under
                 lease or the nature of its activities or business makes such
                 qualification necessary or advisable, and is duly qualified and
                 licensed under all laws, regulations, ordinances or orders or
                 public or governmental authorities or otherwise to carry on its
                 business and own or lease its assets and properties in the
                 places and in the manner in which they are owned, leased or is
                 conducted or proposed to be owned, leased or conducted, except
                 where the failure to be so


                                     -39-
<PAGE>
 
                    organized, qualified and in good standing or to have such
                    authority, qualification or licensing could not result in a
                    Material Adverse Change.

          "Material Adverse Change" since a particular specified date, or a date
which may be specified from the circumstances existing immediately prior to the
happening of a specified event or occurrence, or, if no date or event is
specified, with reference to the most recent Annual Financial Statements
delivered pursuant to this Lease, means a material adverse change in the
Business, assets, properties, franchises, financial condition or income of
Tenant or the operations,  business, assets, properties, franchises, financial
condition, income or prospects of any Affiliate, whether or not such event or
occurrence is an Event of Default.

          "Affiliate" means with respect to any Person, (i) any Person that
holds direct or indirect beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of voting securities or other
voting interests representing at least five percent (5%) of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least five percent (5%) of the outstanding equity securities or
interests in a Person, or (ii) any Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such Person.

          A "Person" shall mean and include natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations, whether or not legal
entities, and governments and agencies and political subdivisions thereof.

          12.02  Material Agreements.  Schedule 12.02 is a complete list of
                 -------------------   --------------                      
all agreements to which Tenant is a party that are material to the ownership and
use of the Leased Property or the operation of Tenant's Business, and Tenant has
delivered to Landlord a copy of each of these agreements (including all
exhibits, schedules and amendments thereto).

          12.03  Changes in Condition.  Since the date of the latest Annual
                 ---------------------                                     
Financial Statements, no Material Adverse Change has occurred between such date
and the date hereof, and neither Tenant nor any Affiliate has entered into any
material transaction outside the ordinary course of its or their operations or
business, including the Business, except as set forth in Schedule 12.03 and the
                                                         --------------        
matters contemplated by this Lease.

          12.04  Franchises, Licenses, etc.  Tenant and its subsidiaries own,
                 --------------------------                                  
or have sufficient interests in, all franchises, trademarks, trademark rights,
trade names, trade name rights, copyrights, licenses, permits, authorizations
and other rights as are necessary for the conduct of Tenant's Business and its
subsidiaries' businesses as now conducted or proposed to be conducted by Tenant
or any Affiliate, as well as rights under any agreement under which Tenant or
its subsidiaries has access to confidential information used by Tenant or its
subsidiaries in Tenants' Business or the businesses of its subsidiaries, as the
case may be (collectively, the "Intellectual Property").  All Intellectual
Property is in full force and effect in all material respects, and Tenant and
its subsidiaries 

                                     -40-
<PAGE>
 
are in substantial compliance with the foregoing without any conflict with the
valid rights of others, which has resulted, or could be reasonably likely to
result in any Material Adverse Change. Neither Tenant nor any Affiliate has
violated, or received any communication that by conducting its Business or any
Affiliate's businesses, it or any Affiliate would violate any franchises,
licenses, patents, trademarks, service marks, trade names, copyrights, trade
secrets, proprietary rights or processes of any other Person (as hereafter
defined) nor is Tenant or any Affiliate aware of any such violations. No event
has occurred which permits, or after notice or lapse of time or both would
permit, the revocation or termination of any such license, franchise or other
right or affect the rights of Tenant or any Affiliate so as to result in or
reasonably be likely to result in any Material Adverse Change. There is no
litigation or other proceeding or dispute or, to the knowledge of Tenant or any
Affiliate, threat thereof with respect to the validity or, where applicable, the
extension or renewal, of any of the foregoing which has resulted, or could
result, in any Material Adverse Change.

          12.05  Litigation.  No litigation, at law or in equity, or any
                 -----------                                            
proceeding before any court, board or other governmental or administrative
agency or any arbitrator or other forum of alternative dispute resolution is
pending or, to the knowledge of Tenant or any Affiliate, threatened which
involves any risk of any final judgment, order or liability which, after giving
effect to any applicable insurance, has resulted, or could result, in any
Material Adverse Change or which seeks to enjoin the execution and consummation
of this Lease and the performance of Tenant's obligations hereunder.  No
judgment, decree or order of any court, board or other governmental or
administrative agency or any arbitrator has been issued against or binds Tenant
or any Affiliate, which has resulted, or could result, in any Material Adverse
Change.

          12.06  Authorization and Enforceability.  Tenant has taken all
                 ---------------------------------                      
corporate or other action required to execute, deliver and perform this Lease.
This Lease constitutes the legal, valid and binding obligation of Tenant and is
enforceable against Tenant in accordance with its terms.

          12.07  No Legal Obstacle to Lease.  Neither the execution and delivery
                 ---------------------------                                    
of this Lease nor the performance of any obligation hereunder has constituted or
resulted in or will constitute or result in:

                 (a) any breach, violation of, conflict with, default under or
                     termination of any agreement, contract, mortgage,
                     instrument, deed or lease to which Tenant or any Affiliate
                     is a party or by which it or they are bound;

                 (b) the violation of or conflict with any law, statute,
                     ordinance, judgment, decree, order, rule or regulation
                     applicable to Tenant, any Affiliate, any Improvements or
                     any Leased Property; or

                 (c) any violation of or conflict with Tenant's or any
                     Affiliate's Charter or By-Laws or other organizational
                     documents, as the case may be.

                                     -41-
<PAGE>
 
          No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other Person is
required to be obtained or made by Tenant in connection with the execution,
delivery and performance of this Lease.
 
           12.08 Certain Business Representations:
                 -------------------------------- 

                 (a) Labor Relations.  No dispute or controversy between Tenant
                     --------------- 
                     or any Affiliate and its or their employees has resulted
                     in, or is reasonably likely to result in, any Material
                     Adverse Change, and neither Tenant nor any Affiliate
                     anticipates that its relationships with its unions or
                     employees will result, or are reasonably likely to result,
                     in any Material Adverse Change. Tenant and each Affiliate
                     is in compliance in all material respects with all federal
                     and state laws relating to employees and labor relations,
                     including, but not limited to, laws relating to health and
                     safety in the workplace, non-discrimination in employment
                     and the payment of wages.

                 (b) Antitrust.  Tenant and each Affiliate is in compliance in 
                     ----------       
                     all material respects with all federal and state antitrust
                     laws relating to Tenant's Business and the subsidiaries'
                     businesses and the geographic concentration thereof.

                 (c) Consumer Protection.  Neither Tenant nor any Affiliate is 
                     --------------------    
                     in violation of any rule, regulation, order, or
                     interpretation of any rule, regulation or order of the
                     Federal Trade Commission (including truth-in-lending) or
                     other federal, state or local public or governmental
                     authority or agency, with which the failure to comply, in
                     the aggregate, has resulted in, could result in, a Material
                     Adverse Change.

                 (d) Future Expenditures.  Neither Tenant nor any Affiliate,
                     -------------------                                     
                     anticipates that further expenditures, if any, by Tenant or
                     any Affiliate needed to meet the provisions of any federal,
                     state or foreign governmental statutes, orders, rules or
                     regulation could result in any Material Adverse Change.

                 (e) Benefit Liabilities.  Neither Tenant nor any ERISA 
                     -------------------       
                     Affiliate maintains, contributes to, or is obligated to
                     contribute to, nor has Tenant or any ERISA Affiliate
                     maintained, contributed to, been obligated to contribute
                     to, or had any direct, indirect, or contingent liability
                     with respect to, any Title IV Plan (as hereafter defined).
                     Each Tenant Benefit Plan has been maintained in compliance
                     with its terms and with applicable laws (including
                     specifically the Code and the Employee Retirement Income
                     Security Act of 1974 ("ERISA"). 

                                     -42-
<PAGE>
 
                     "Tenant Benefit Plan" means any plan, fund, or other
                     similar program described in Section 3(2) of ERISA and
                     established or maintained or with respect to which Tenant
                     and/or any ERISA Affiliate has an obligation to contribute
                     for the benefit of its employees (or for which Tenant could
                     be directly or contingently liable). "Title IV Plan" means
                     an "employee benefit plan" (as defined in Section 3(3) of
                     ERISA) that is subject to Title IV of ERISA and is or has
                     been established or maintained, by Tenant or any ERISA
                     Affiliate, or to which contributions are, have been, or
                     should have been made. "ERISA Affiliate" means any trade or
                     business, whether or not incorporated, that, together with
                     Tenant, is or has been under common control, within the
                     meaning of Section 414(b), (c), (m), or (o) of the Code or
                     Section 4001 of ERISA.

              12.09  Certain Financial Covenants.  Tenant or an Affiliate, as
                     ---------------------------
applicable, is in compliance in all material respects with all financial
covenants required to be maintained pursuant to any franchise or other agreement
pursuant to which Tenant or such Affiliate operates its business, except in such
respects as shall not result in any franchisor under any franchise or operating
agreement to which Tenant is a party taking any action that could result in a
Material Adverse Change.

              12.10  Cash Flow Coverage Ratio Covenant.  On the date of this
                     ---------------------------------                      
Lease and measured at a date that is twenty-four (24) months following such date
(each a "Cash Flow Measurement Date"), and on each anniversary date  that is
twenty-four (24) months following a prior Cash Flow Measurement Date, Tenant
shall have maintained a Cash Flow Coverage Ratio of not less than 1.5 to 1.0
based on the Annual Financial Statements to be delivered to Landlord in
accordance with Section 6.04 hereof.  "Cash Flow Coverage Ratio" means the
aggregate of net income before taxes plus mortgage interest, rent expense,
depreciation, compensation of principals of the Business, management fees plus
the annual LIFO adjustment and other non-cash expenses, less recurring capital
expenditures and gain (loss) on sale of real estate, dividends and/or profits
taken out of Tenant divided by the aggregate of the Tenant's obligations under
this Lease.  Notwithstanding anything herein to the contrary, in the event that
Tenant shall not be in compliance with this covenant at a Cash Flow Measurement
Date or Tenant shall have knowledge of such non-compliance prior to any Cash
Flow Measurement Date, the Tenant shall have the right to cure such breach
through any reasonable commercial means, including, but not limited to,
providing guarantees acceptable to Landlord,  increasing capital, or cross
collateralizing with any other property of Tenant or an Affiliate, provided that
such breach is cured within one hundred and eighty (180) days after Notice by
Landlord to Tenant of the existence of such breach.

              12.11  Disclosure.  This Lease does not contain any untrue
                     ----------                                         
statement of a material fact or omit to state a material fact necessary in order
to make any statement contained herein not misleading in light of the
circumstances under which it was made.  To Tenant's knowledge, there is no
event, fact or occurrence that has resulted, or in the future (so far as Tenant
can reasonably 

                                     -43-
<PAGE>
 
foresee) could result, in any Material Adverse Change, except to the extent that
present or future general and sector-specific economic conditions may result in
a Material Adverse Change.

              12.12  Covenant Not to Acquire.  Tenant covenants and agrees that
                     -----------------------                                   
during the Term and any Extension Term, as the case may be, Tenant and its
controlling shareholders or its or their Affiliates will not acquire, directly
or indirectly, more that 9.90% of the outstanding common shares of beneficial
interest of Capital Automotive REIT.  Tenant covenants and agrees that it will
divest itself of such shares of Capital Automotive REIT as may be necessary to
satisfy the limitations of this Section 12.12.



                                  ARTICLE XIII
                     ASSIGNMENT AND SUBLETTING; ATTORNMENT

              13.01  Prohibition Against Subletting and Assignment.  Subject to
                     ---------------------------------------------             
Section 13.03, Tenant shall not, without the prior written consent of Landlord,
or upon compliance with any conditions established by Landlord, in its sole
discretion, assign, mortgage, pledge, hypothecate, encumber or otherwise
transfer (except to an Affiliate) this Lease or any interest herein, or all or
any part of any Leased Property, or suffer or permit this Lease or the leasehold
estate created hereby or any other rights arising hereunder to be assigned,
transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in
part, whether voluntarily, involuntarily or by operation of law.  For purposes
of this Section 13.01, an assignment of this Lease shall be deemed to include
any Change of Control of Tenant, as if such Change of Control were an assignment
of the Lease.  In the event that (i) Landlord shall withhold any consent to any
assignment or transfer of this Lease or any interest herein, and (ii) such
assignee or transferee is approved by the relevant manufacturer for continuation
as a franchisee, there shall be a presumption that such assignment or transfer
was reasonable and Landlord shall have the burden of rebutting such presumption
and of proving that such consent was in fact reasonably withheld (or that such
conditions were reasonable).

              13.02  Changes of Control.  A Change of Control requiring the
                     ------------------                                    
consent of Landlord shall mean:

                     (a) the issuance and/or sale by Tenant or the sale by any
                         shareholder or equity holder of Tenant of a Controlling
                         (which shall mean, as applied to any Person, the
                         possession, directly or indirectly, of the power to
                         direct or cause the direction of the management and
                         policies of such Person, whether through the ownership
                         of voting securities, by contract or otherwise)
                         interest in Tenant to a Person other than an Affiliate
                         of Tenant, other than in either case a distribution to
                         the public pursuant to an effective registration
                         statement under the Securities Act of 1933, as amended
                         (a "Registered Offering");

                                     -44-
<PAGE>
 
                  (b) the sale, conveyance or other transfer of all or
                      substantially all of the assets of Tenant (whether by
                      operation of law or otherwise) provided, however, that no
                      Change of Control shall be deemed to have occurred in the
                      event of the transfer of assets as a result of the death
                      of a person involved in the Business, so long as the
                      transferee is approved by the manufacturer for the
                      continuation of the Business; or

                  (c) any transaction pursuant to which Tenant is merged with or
                      consolidated into another entity (other than an entity
                      owned and Controlled by an Affiliate), and Tenant is not
                      the surviving entity.

           13.03  Operating/Service Agreements.
                  -----------------------------

                  (a) Permitted Agreements.  Tenant shall, without Landlord's 
                      --------------------
                      prior approval, be permitted to enter into such
                      operating/service agreements for portions of each Leased
                      Property to various licensees in connection with Tenant's
                      Business as are customarily associated with or incidental
                      to the operation of such Leased Property, which agreements
                      may be in the nature of a sublease agreement.

                  (b) Terms of Agreements.  Each operating/service agreement
                      -------------------                                   
                      concerning a Leased Property shall be subject and
                      subordinate to the provisions hereof. No agreement made as
                      permitted by Section 13.03(a) shall affect or reduce any
                      of the obligations of Tenant hereunder, and all such
                      obligations shall continue in full force and effect as if
                      no agreement had been made. No agreement shall impose any
                      additional obligations on Landlord hereunder.

                  (c) Copies.  Tenant shall, within ten (10) days after the 
                      ------   
                      execution and delivery of any operating/service agreement
                      permitted by Section 13.03(a), deliver a duplicate
                      original thereof to Landlord.

                  (d) Assignment of Rights in Agreements.  As security for
                      ----------------------------------                  
                      performance of its obligations hereunder, Tenant hereby
                      grants, conveys and assigns to Landlord all right, title
                      and interest of Tenant in and to all operating/service
                      agreements now in existence or hereinafter entered into
                      for each Leased Property, and all extensions,
                      modifications and renewals thereof and all rents, issues
                      and profits therefrom, to the extent the same are
                      assignable by Tenant. Landlord hereby grants to Tenant a
                      license to collect and enjoy all rents and other sums of
                      money payable under any such agreement; provided, however,
                      that Landlord shall have the absolute right at any time
                      after the occurrence and continuance of an Event of
                      Default upon notice to Tenant and any 

                                     -45-
<PAGE>
 
                      vendors or licensees to revoke said license and to collect
                      such rents and sums of money and to retain the same.
                      Tenant shall not (i) after the occurrence and continuance
                      of an Event of Default, consent to, cause, or allow, any
                      material modification or alteration of any of the terms,
                      conditions or covenants of any of the agreements or the
                      termination thereof, without the prior written approval of
                      Landlord nor (ii) accept any rents (other than customary
                      security deposits) more than thirty (30) days in advance
                      of the accrual thereof nor permit anything to be done, the
                      doing of which, nor omit or refrain from doing anything,
                      the omission of which, will or could be a breach of or
                      default in the terms of any of the agreements.

                  (e) Licenses, Etc.  For purposes of Section 13.03, the
                      -------------                                     
                      operating/service agreements shall mean any licenses,
                      concession arrangements, or other arrangements relating to
                      the possession or use of all or any part of any Leased
                      Property.

           13.04  Assignment.  If Landlord shall withhold its consent to any
                  ----------                                                
assignment or if Landlord shall have established conditions to approval of any
assignment but such conditions shall not have been complied with, to the
satisfaction of  Landlord, such assignment shall not in any way impair the
continuing primary liability of Tenant hereunder.  No consent to any assignment
in a particular instance shall be deemed to be a general waiver of the
prohibition set forth in Article XIII. Any assignment shall be solely of
Tenant's entire interest in this Lease with respect to the subject Leased
Property or Leased Properties.  Any assignment or other transfer of all or any
portion of Tenant's interest in this Lease in contravention of Article XIII
shall be voidable at Landlord's option.

           13.05  REIT Limitations.
                  ---------------- 

                  (a) Anything contained herein to the contrary notwithstanding,
                      Tenant shall not: (a) sublet or assign a Leased Property
                      or this Lease on any basis such that the rental or other
                      amounts to be paid by the sublessee or assignee thereunder
                      would be based, in whole or in part, on the income or
                      profits derived by the business activities of the
                      sublessee or assignee; (b) sublet or assign a Leased
                      Property or this Lease to any Person that, under Section
                      856(d)(2)(B) of the Internal Revenue Code of 1986, as
                      amended (the "Code"), Landlord or its general partner
                      owns, directly or indirectly (by applying constructive
                      ownership rules set forth in Section 856(d) (5) of the
                      Code, a ten percent (10%) or greater interest; or (c)
                      sublet or assign a Leased Property or this Lease in any
                      other manner or otherwise derive any income which could
                      cause any portion of the amounts received by Landlord
                      pursuant hereto or any sublease to fail to qualify as
                      "rents from real property" within the meaning of Section
                      856(d) of the 

                                     -46-
<PAGE>
 
                      Code, or which could cause any other income received by
                      Landlord to fail to qualify as income described in Section
                      856(c) (2) of the Code. The requirements of this Section
                      13.05 shall likewise apply to any further subleasing by
                      any subtenant.

                  (b) Tenant acknowledges that Capital Automotive REIT, a
                      Maryland real estate investment trust and the general
                      partner of Landlord (the "Company"), intends to elect to
                      be taxed as a real estate investment trust (a "REIT")
                      under the Code. Tenant shall not do anything which would
                      adversely affect the Company's status as a REIT. Tenant
                      hereby agrees to modifications of this Lease which do not
                      materially adversely affect Tenant's rights and
                      liabilities if such modifications are required to retain
                      or clarify the Company's status as a REIT.

          13.06   Attornment.  Tenant shall insert in each sublease permitted
                  ----------                                                 
under Section 13.03(a) provisions to the effect that:  (a) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and to
the rights of Landlord hereunder; (b) in the event this Lease shall terminate
before the expiration of such sublease, the sublessee thereunder will, at
Landlords' option, attorn to Landlord and waive any right the sublessee may have
to terminate the sublease or to surrender possession thereunder, as a result of
the termination hereof; and (c) in the event the sublessee receives a written
notice from Landlord or Landlord's assignees, if any, stating that Tenant is in
default under this Lease, the sublessee shall thereafter be obligated to pay all
rentals accruing under said sublease directly to the party giving such notice,
or as such party may direct.  All rentals received from the sublessee by
Landlord or Landlord's assignees in respect of a Leased Property, if any, as the
case may be, shall be credit against the amounts owing by Tenant hereunder with
respect to such Leased Property.

          13.07   Severance and Spin-Off.  If at any time while this Lease is
                  ----------------------                                     
in effect any Leased Property shall be utilized by Tenant in the operation of
more than one automobile franchise, then provided that there is no existing
Event of Default and there exists no condition which, with the passage of time,
could become an Event of Default, Tenant shall have the right (the "Spin-Off
Right") to sever and spin-off one or more parcels (each referred to as a
"Spin-Off Parcel") of the Leased Property from this Lease, subject to compliance
with the requirements of Section 13.08.

          13.08   Assignment.  If the Leased Property is not a separate
                  ----------                                           
subdivided lot, Landlord may condition its approval of an assignment upon Tenant
showing that there are appropriate provisions (such as a condominium regime,
subdivision, and/or reciprocal easements, lender and/or franchisor consents if
necessary, and separate tax lots) which allow the Leased Property to be
separately owned and operated without interference from or dependence upon,
another person as to items such as access, real estate taxes, or utilities.

                                     -47-
<PAGE>
 
                                  ARTICLE XIV
                                  ARBITRATION

          14.01   Controversies.  Except with respect to the payment of Rent
                  -------------                                             
hereunder, which shall be subject to the provisions of Section 9.02, in the
event a controversy arises between the parties as to any of the requirements of
this Lease or the performance hereunder, which the parties are unable to
resolve, the parties agree to waive the remedy of litigation (except for
extraordinary relief in an emergency situation) and agree that such controversy
or controversies shall be determined by arbitration as hereafter provided in
this Article.

          14.02   Appointment of Arbitrators.  The party or parties requesting
                  --------------------------                                  
arbitration shall serve upon the other a demand therefor, in writing, specifying
in detail the controversy and matter(s) to be submitted to arbitration before
the American Arbitration Association.  The selection of arbitrators shall be
conducted pursuant to the rules for resolution of commercial disputes
promulgated by the American Arbitration Association.  The party or parties
giving notice shall request a listing of available arbitrators from the American
Arbitration Association, and each party shall respond in the selection process
within fifteen (15) days after each receipt of such listings until a panel of
three (3) arbitrators has been designated.  If either party fails to respond
within fifteen (15) days, it is agreed that the American Arbitration Association
may make such selections as are necessary to complete the panel of three (3)
arbitrators.

          14.03   Arbitration Procedure.  Within five (5) business days after
                  ---------------------                                      
the selection of the arbitration panel, the arbitrators shall give written
notice to each party as to the time and the place of each meeting, which shall
be held in Washington, D.C., at which the parties may appear and be heard, which
shall be no later than fifteen (15) days after certification of the arbitration
panel.  The parties specifically waive discovery, and further waive the
applicability of rules of evidence or rules of procedure in the proceedings. The
applicable rules shall be those in effect at the time for the resolution of
commercial disputes promulgated by the American Arbitration Association.
Notwithstanding the foregoing, the substantive law governing the arbitration
shall be the laws of the State of Delaware (without application of choice of law
provisions).  The arbitrators shall take such testimony and make such
examination and investigations as the arbitrators reasonably deem necessary.
The decision of the arbitrators shall be in writing signed by a majority of the
panel which decision shall be final and binding upon the parties to the
controversy.  Provided, however, in rendering their decisions and making awards,
the arbitrators shall not add to, subtract from or otherwise modify the
provisions of this Lease.

          14.04   Expenses.  The expenses of the arbitration shall be assessed
                  --------                                                    
by the arbitrators and specified in the written decision.  In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally between
Landlord and Tenant.  Each party in interest shall be responsible for and pay
the fees, costs and expenses of its own counsel, unless the arbitration award
provides for an assessment of reasonable attorneys' fees and costs.

                                     -48-
<PAGE>
 
          14.05   Enforcement of the Arbitration Award.  There shall be no
                  ------------------------------------                    
appeal from the decision of the arbitrators, and upon the rendering of an award,
any party thereto may file the arbitrators' decision in the United States
District Court for the Eastern District of Virginia for enforcement as provided
by applicable law.


                                   ARTICLE XV
                        QUIET ENJOYMENT, SUBORDINATION,
                       ATTORNMENT, ESTOPPEL CERTIFICATES

          15.01   Quiet Enjoyment.  So long as Tenant performs all of its
                  ---------------                                        
obligations under this Lease, Tenant's possession of the Leased Properties will
not be disturbed by or through Landlord.

          15.02   Landlord Mortgages; Subordination.  Subject to Section
                  ---------------------------------                     
15.03, without the consent of Tenant, Landlord may, from time to time, directly
or indirectly, create or otherwise cause to exist any liens, encumbrances,
security interests or title retention agreements on any  Leased Property, or any
portion thereof or any interest therein, whether to secure any borrowing or
other means of financing or refinancing.  Tenant shall execute, acknowledge and
deliver to Landlord, at any time and from time to time (up to three times per
calendar year) upon demand by Landlord or any mortgagee or any holder of any
mortgage or other instrument described in this Section, without cost to
Landlord, a Subordination and Non-Disturbance Agreement in substantially the
form attached hereto as Exhibit 15.02, which provides that (i) Tenant's rights
                        -------------                                         
hereunder are subordinate to any ground lease or underlying lease, first
mortgage, first deed of trust, or other first lien against any Leased Property,
together with any renewal, consolidation, extension, modification, or
replacement thereof, which now or at any subsequent time affects any Leased
Property or any interest of Landlord in any Leased Property, except to the
extent that any such instrument expressly provides that this Lease is superior;
and (ii) in the event such party succeeds to Landlord's interest under the Lease
and provided that no Event of Default by Tenant exists, such party will not
disturb Tenant's possession, use or occupancy of the subject Leased Property or
Tenant's rights under this Lease.  If Tenant fails or refuses to execute,
acknowledge, and deliver such Subordination and Non-Disclosure Agreement within
ten (10) business days after written demand, then Landlord shall send to Tenant
a second written demand.  If Tenant fails or refuses to execute, acknowledge and
deliver such Subordination and Non-Disclosure Agreement within ten (10) days
after such second written demand, then Landlord or such successor in interest
may execute, acknowledge and deliver such Subordination and Non-Disclosure
Agreement on behalf of Tenant as Tenant's attorney-in-fact.  Tenant hereby
constitutes and irrevocably appoints Landlord, its successors and assigns, as
Tenant's attorney-in-fact to execute, acknowledge, and deliver on behalf of
Tenant the Subordination and Non-Disclosure Agreement.  This power of attorney
is coupled with an interest and is irrevocable.

          15.03   Attornment.  If any holder of any mortgage, indenture, deed
                  ----------                                                 
of trust, or other similar instrument described in Section 15.02 succeeds to
Landlord's interest in any Leased Property, Tenant will pay to such holder all
Rent subsequently payable hereunder as to such Leased Property. Tenant shall,
upon request of anyone succeeding to the interest of Landlord, automatically
become

                                     -49-
<PAGE>
 
the tenant of, and attorn to, such successor in interest without changing this
Lease. The successor in interest will not be bound by: (a) any payment of Rent
for more than one (1) month in advance; (b) any amendment or modification hereof
made without its written consent; (c) any claim against Landlord arising prior
to the date on which the successor succeeded to Landlord's interest; or (d) any
claim or offset of Rent against Landlord.

          15.04   Estoppel Certificates.  At the request of Landlord or any
                  ---------------------                                    
mortgagee or purchaser of a Leased Property, Tenant shall execute, acknowledge,
and deliver an estoppel certificate, in recordable form, in favor of Landlord or
any mortgagee or purchaser of any Leased Property certifying the following as to
such Leased Property:  (a) that this Lease is unmodified and in full force and
effect, or if there have been modifications that the same is in full force and
effect as modified and stating the modifications; (b) the date to which Rent and
other charges have been paid; (c) that neither Tenant nor Landlord is in default
nor is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default, if that be the case, or specifying any existing
default; (d) that Tenant has accepted and occupies such Leased Property; (e)
that Tenant has no defenses, set-offs, deductions, credits, or counterclaims
against Landlord, if that be the case, or specifying such that exist; (f) that
Landlord has no outstanding construction or repair obligations; and (g) such
other information as may reasonably be requested by Landlord or any mortgagee or
purchaser.  Any purchaser or mortgagee may rely on this estoppel certificate.
If Tenant fails to deliver the estoppel certificates to Landlord within ten (10)
business days after the request of Landlord, then Landlord shall request such
delivery a second time.  If Tenant fails to deliver the estoppel certificates to
Landlord within ten (10) days after such second request by Landlord, then Tenant
shall be deemed to have certified that: (a) this Lease is in full force and
effect and has not been modified, or that this Lease has been modified as set
forth in the certificate delivered to Tenant; (b) Tenant has not prepaid any
Rent or other charges except for the current month; (c) Tenant has accepted and
occupies such Leased Property; (d) neither Tenant nor Landlord is in default nor
is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default; (e) Landlord has no outstanding construction or
repair obligation; and (f) Tenant has no defenses, set-offs, deductions,
credits, or counterclaims against Landlord.  Tenant hereby irrevocably appoints
Landlord as Tenant's attorney-in-fact to execute, acknowledge and deliver on
Tenant's behalf any estoppel certificate which Tenant does not object to within
twenty (20) days after Landlord sends the certificate to Tenant.  This power of
attorney is coupled with an interest and is irrevocable.

          15.05   Waiver of Landlord's Lien.  Landlord agrees to and does
                  -------------------------                              
hereby waive its Landlord's lien and any other rights that it may have with
respect to property or assets representing the security or collateral under
Tenant's "floor-plan" or similar financing arrangements, during the Term or any
Extension Term.  Landlord shall, upon request by any such lender, execute such
reasonable documents as are requested by Tenant's lender to acknowledge such
waiver and allow the lender access to the Leased Property.

                                     -50-
<PAGE>
 
                                  ARTICLE XVI
                              RIGHT OF FIRST OFFER

      16.01  Right of First Offer During Lease Term or Extension Term.
             ---------------------------------------------------------

             (a) If and when during the Term or Extension Term, as the case may
                 be, Landlord shall decide to sell the Leased Properties to a
                 Person who is not an Affiliate of Landlord (the "Decision to
                 Sell"), provided that no Event of Default has occurred and is
                 continuing under the Lease, Landlord shall notify Tenant in
                 writing within ten (10) business days after Landlord makes a
                 Decision to Sell.  Tenant shall have ten (10) business days
                 thereafter in which to notify Landlord in writing of its desire
                 to purchase the Leased Properties.  If Tenant shall give such
                 notice, Tenant shall have a period of thirty (30) days within
                 which to make a written offer to purchase the property (the
                 "First Offer").  The First Offer must set forth the purchase
                 price, deposit amounts and closing date and any and all other
                 terms and conditions being proposed by Tenant.

             (b) Within thirty (30) days of receipt of the First Offer, Landlord
                 shall give Tenant written notice of its acceptance or rejection
                 thereof.  If accepted, Tenant shall, within five (5) days after
                 receipt of the acceptance notice, make the deposit called for
                 in the First Offer and the parties shall proceed to contract
                 and closing upon the terms thereof.  If the First Offer is
                 rejected, then, subject to the provisions of subsections (c)
                 and (d) of this Section 16.01, Tenant shall have no further
                 rights with respect to the purchase of the Leased Properties
                 during the Term or Extension Term, as the case may be.

             (c) If Landlord shall reject the First Offer, for a one year period
                 thereafter it may proceed to sell the Leased Properties,
                 subject to the Lease and the remaining Term or Extension Term
                 thereof, as the case may be, to any third party, provided (i)
                 the purchase price of such sale shall exceed that specified in
                 the First Offer, or (ii) if the purchase price of such sale
                 does not exceed that specified in the First Offer, the terms of
                 such sale, taken together, are more favorable to Landlord, in
                 Landlord's reasonable judgement, than those of the First Offer.
                 There shall be a presumption that Landlord's judgment was
                 reasonable and Tenant shall have the burden of rebutting such
                 presumption and of proving that such judgment was in fact
                 unreasonable.

             (d) If no sale is effected by Landlord within the period specified
                 in subsection (c) above, then if Landlord thereafter desires to
                 sell the 

                                     -51-
<PAGE>
 
                 Leased Properties, the procedure set forth in subsections (a),
                 (b) and (c) shall be followed.

             (e) This option shall terminate in any event twenty (20) years
                 after the death of the last descendant of William Jefferson
                 Clinton, current President of the United States, living at the
                 time of execution of this Lease.
 
        16.02    Right to Purchase at End of an Extension Term.
                 ----------------------------------------------
 
             (a) Landlord hereby grants the Tenant the right and option to
                 purchase the Leased Properties (the "Option to Purchase") at an
                 amount equal to the Property Consideration (as hereafter
                 defined) upon termination of an Extension Term of this Lease.
                 The Option to Purchase shall not be granted if Tenant does not
                 extend the Term of this Lease pursuant to Section 1.03 or if on
                 the Option Exercise Date (as hereafter defined) an Event of
                 Default with respect to any Leased Property exists and has not
                 been cured.  The Tenant shall notify Landlord in writing of its
                 intent to exercise this Option to Purchase, thirty (30) days
                 prior to the end of an Extension Term of this Lease (the
                 "Option Exercise Date").

             (b) The consideration to be paid for the Leased Properties upon
                 exercise of the Option to Purchase (the "Property
                 Consideration") shall be the Appraised Value (as hereafter
                 defined) determined by (1) an independent appraiser, who is a
                 member of the Appraisal Institute, and will be selected by
                 Landlord, (the "Landlord MAI Appraiser"), (2) a second
                 appraiser, who is a member of the Appraisal Institute, and will
                 be selected by the Tenant (the "Tenant MAI Appraiser"), and (3)
                 a third MAI Appraiser selected by agreement of the Landlord MAI
                 Appraiser and the Tenant MAI Appraiser (the "Third MAI
                 Appraiser") (each an "Appraiser" and, collectively, the
                 "Appraisers"). Landlord and Tenant shall, as promptly as
                 possible, but in no event later than ten (10) days following
                 the Option Exercise Date, select its respective Appraiser.  The
                 Third MAI Appraiser shall be selected no later than five (5)
                 days after the selection of the other Appraisers. The costs of
                 the Appraisers' appraisals shall be shared equally by the
                 parties.  As promptly as possible but in no event later than
                 fifteen (15) days after selection of the Third Appraiser, each
                 Appraiser shall deliver his or her written report of the
                 Appraisers' determination of the fair market value of the
                 Leased Property, which determination shall be based, for each
                 Leased Property, upon the highest and best use of such Leased
                 Property, taking into consideration the location of 

                                     -52-
<PAGE>
 
                 such Leased Property and other properties comparable thereto.
                 The "Appraised Value" of the Real Property shall be equal to
                 the arithmetic mean of the two (2) fair market value
                 determinations of the Appraisers that are closest in value. In
                 the event that the values of (i) the difference between the
                 highest appraisal value and the next lower appraisal value, and
                 (ii) the difference between the lowest appraisal value and the
                 next higher appraisal value, are equal, then the "Appraised
                 Value" shall be equal to the arithmetic mean of the fair market
                 value determinations of all Appraisers.

             (c) Upon determination of the Property Consideration, Landlord and
                 Tenant agree to cooperate to close the sale and purchase of the
                 Leased Property entirely for cash on an " as is, where as
                 basis" and with no warranties by Landlord other than in a
                 special warranty deed, within forty-five (45) days after the
                 date of determination of the Property Consideration (the
                 "Option Closing Period").  If the sale and purchase of the
                 Leased Property does not close within the Option Closing Period
                 due to Tenant's default, Landlord shall have no further
                 obligations to Tenant pursuant to this Section 16.02 (a).


                                  ARTICLE XVII
                                 MISCELLANEOUS

          17.01   Notices.  Landlord and Tenant hereby agree that all notices,
                  -------                                                     
demands, requests, and consents (hereinafter "Notices") required to be given
pursuant to the terms of this Lease shall be in writing and shall be addressed
as follows:

          If to Tenant:

          [tenant]
          c/o Cross-Continent Auto Retailers, Inc.
          1201 S. Taylor
          P.O. Box 750
          Amarillo, Texas 79105
          Attention: R. Wayne Moore, Esq.
 
          With a copy to:

          Sprouse, Mozola, Smith & Rowley, P.C.
          801 South Fillmore, Suite 620
          Amarillo, Texas 79101
          Attention: Jeff E. Tankersley, Esq.

                                     -53-
<PAGE>
 
          If to Landlord:

          Capital Automotive L.P.
          1925 North Lynn Street
          Suite 306
          Arlington, Virginia 22209
          Attention: Thomas D. Eckert

          With a copy to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037
          Attention:  George P. Stamas, Esq.

and shall be served by:  (a) personal delivery; (b) certified mail, return
receipt requested, postage prepaid; or (c) nationally recognized overnight
courier.  All notices shall be deemed to be given upon the earlier of actual
receipt or three (3) days after mailing, or one (1) business day after deposit
with the overnight courier.  Any Notices meeting the requirements of this
Section shall be effective, regardless of whether or not actually received.
Landlord or Tenant may change its notice address at any time by giving the other
party Notice of such change.  Any such Notice of change of address shall be
effective five (5) days after delivery.

          17.02  Advertisement of a Leased Property.  In the event the
                 ----------------------------------                   
parties hereto have not executed a renewal lease, or agreed to the Extension
Term, as to the Leased Property within twelve (12) months prior to the
expiration of the Term or an Extension Term, as the case may be, then Landlord
or its agent shall have the right to enter such Leased Property at all
reasonable times for the purpose of exhibiting such Leased Property to others
and to place upon such Leased Property for and during the period commencing two-
hundred seventy (270) days prior to the expiration of the Term or an Extension
Term, as the case may be, "for sale" or "for rent" notices or signs.

          17.03  Landlord's Access.  Landlord, or its designated agents or
                 -----------------                                        
contractors, shall have the right to enter upon each  Leased Property, upon
reasonable prior notice to Tenant, for purposes of inspecting the same and
assuring Tenant's compliance with this Lease provided, any such entry by
Landlord shall be subject to all rules, guidelines and procedures prescribed by
Tenant in connection therewith.  Landlord shall not be allowed entry to a Leased
Property unless accompanied by such of Tenant's personnel as Tenant shall
require and which Tenant shall promptly provide.

          17.04  Entire Agreement.  This Lease contains the entire agreement
                 ----------------                                           
between Landlord and Tenant with respect to the subject matter hereof.  No
representations, warranties, and agreements have been made by Landlord or Tenant
except as set forth in this Lease.

                                     -54-
<PAGE>
 
          17.05     Severability.  If any term or provision of this Lease is
                    ------------                                            
held by Landlord to be invalid or unenforceable as to a Leased Property, such
holding shall not affect the remainder of this Lease as to such Leased Property,
or the validity or enforceability of this Lease as to any other Leased Property,
and the same shall remain in full force and effect, unless such holding
substantially deprives Tenant of the use of such Leased Property or Landlord of
the Rents therefor, in which case this Lease shall forthwith terminate as to
such Leased Property as if by expiration of the Term or an Extension Term, as
the case may be, but shall remain in full force and effect with respect to each
other Leased Property.

          17.06     Captions and Headings.  The captions and headings are
                    ----------------------                               
inserted only as a matter of convenience and for reference and in no way define,
limit or describe the scope of this Lease or the intent of any provision hereof.

          17.07     Governing Law.  This Lease shall be construed under the laws
                    -------------                                               
of the State of Virginia (without application of choice of law provisions).

          17.08     Memorandum of Lease or Certain Rights Under the Lease.
                    -----------------------------------------------------  
Landlord and Tenant agree that a record of this Lease or of certain rights under
this Lease may be recorded by either party in a memorandum of lease approved by
Landlord and Tenant with respect to each Leased Property.  The party recording
such memorandum must bear all costs of such recording.

          17.09     Waiver.  No waiver by Landlord of any condition or covenant
                    ------                                                     
herein contained, or of any breach of any such condition or covenant, shall be
held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach thereof
or of any condition or covenant, nor shall the acceptance of Rent by Landlord at
any time when Tenant is in default in the performance or observance of any
condition or covenant herein be construed as a waiver of such default, or of
Landlord's right to terminate this Lease or exercise any other remedy granted
herein on account of such default.

          17.10     Assignment; Binding Effect.  Except as otherwise set forth
                    --------------------------                                
herein, this Lease shall not be assignable by Tenant, without the prior written
consent of Landlord.  This Lease will be binding upon and inure to the benefit
of the heirs, successors, personal representatives, and permitted assigns of
Landlord and Tenant.

          17.11     Consents and Approvals.   In each instance in this Lease 
                    ----------------------     
where the Landlord is required or permitted to give a consent or approval, or to
make a determination, the Landlord's decision and any conditions thereon must be
reasonable under the circumstances. Except as provided in Sections 8.07(d),
13.01 and 13.07, there shall be a presumption that each such decision and any
conditions thereon by Landlord was in fact reasonable, and Tenant shall have the
burden of proof in any attempt to rebut that presumption. With respect to
Sections 8.07(d), 13.01 and 13.07, there shall be a presumption that each such
decision and any conditions thereon by Landlord was in fact unreasonable, and
Landlord shall have the burden of proof in any attempt to rebut that
presumption.

                                     -55-
<PAGE>
 
          17.12     Single Property.  Throughout the form of this Lease there 
                    ---------------                              
are references to "Leased Properties".  If, in fact, there is only one Leased
Property being leased hereunder, all such references shall, without further
action, be deemed amended to refer solely to such Leased Property and all
provisions relating to Leased Properties, including remedies applicable to only
one Leased Property, shall likewise be amended to the extent necessary, but only
to the extent necessary, to give effect to the fact that there is only one
Leased Property.

          17.13     Modification.  This Lease may only be modified by a writing
                    ------------                                               
signed by both Landlord and Tenant.

          17.14     Incorporation by Reference.  All schedules and exhibits
                    --------------------------                             
referred to in this Lease are incorporated herein by reference.

          17.15     No Merger.  As to each Leased Property, the surrender of
                    ---------                                               
this Lease by Tenant or the cancellation of this Lease by agreement of Tenant
and Landlord or the termination of this Lease on account of Tenant's default
will not work a merger, and will, at Landlord's option, terminate any subleases
or operate as an assignment to Landlord of any subleases.  Landlord's option
under this paragraph will be exercised by notice to Tenant and all known
subtenants of such Leased Property.

          17.16     Force Majeure.  Landlord, its agents and employees, will not
                    -------------                                               
be liable for any loss, injury, death, or damage (including consequential
damages) to persons, property, or Tenant's Business occasioned by theft, act of
God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition, order of governmental body or authority, fire, explosion, falling
objects, steam, water, rain or snow, leak or flow of water (including water from
the elevator system), rain or snow from any Leased Property or into any Leased
Property or from the roof, street, subsurface or from any other place, or by
dampness or from the breakage, leakage, obstruction, or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning, or lighting
fixtures of any Leased Property, or from construction, repair, or alteration of
any Leased Property or from any acts or omissions of any other occupant or
visitor of any Leased Property, or from the release, emission, discharge,
presence or disposal of any hazardous substance or material on or from any
Leased Property, or from any other cause beyond Landlord's control.

          17.17     Laches.  No delay or omission by either party hereto to
                    -------                                                
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such right
or power or be construed to be a waiver thereof.

          17.18     Waiver of Jury Trial.  To the extent that there is any claim
                    --------------------                                        
by one party against the other that is not to be settled by arbitration as
provided in Article XIV hereof, Landlord and Tenant waive trial by jury in any
action, proceeding or counterclaim brought by either of them against the other
on all matters arising out of this Lease or the use and occupancy of any Leased
Property (except claims for personal injury or property damage).  If Landlord
commences any

                                      -56-
<PAGE>
 
summary proceeding for nonpayment of Rent, Tenant will not interpose, and waives
the right to interpose, any counterclaim in any such proceeding.

          17.19     Permitted Contests.  Tenant, on its own or on Landlord's
                    -------------------                                     
behalf (or in Landlord's name), but at Tenant's expense, may contest, by
appropriate legal proceedings conducted in good faith and with due diligence,
the amount or validity or application, in whole or in part, of any Imposition or
any legal requirement or insurance requirement or any lien, attachment, levy,
encumbrance, charge or claim provided that:  (a) in the case of an unpaid
Imposition, lien, attachment, levy, encumbrance, charge or claim, the
commencement and continuation of such proceedings shall suspend the collection
thereof from Landlord and from the subject Leased Property; (b) neither the
subject Leased Property nor any Rent therefrom nor any part thereof or interest
therein would be in any immediate danger of being sold, forfeited, attached or
lost; (c) in the case of a legal requirement, Landlord would not be in any
immediate danger of civil or criminal liability for failure to comply therewith
pending the outcome of such proceedings; (d) in the event that any such contest
shall involve a sum of money or potential loss in excess of Twenty Five Thousand
Dollars ($25,000), Tenant shall deliver to Landlord and its counsel an opinion
of Tenant's counsel to the effect set forth in clauses (a), (b) and (c), to the
extent applicable; (e) in the case of a legal requirement and/or an Imposition,
lien, encumbrance, or charge, Tenant shall give such reasonable security as may
be demanded by Landlord to insure ultimate payment of the same and to prevent
any sale or forfeiture of a subject Leased Property or the Rent in respect
thereof by reason of such nonpayment or noncompliance; provided, however, the
provisions of this Section shall not be construed to permit Tenant to contest
the payment of Rent (except as to contests concerning the method of computation
or the basis of levy of any Imposition or the basis for the assertion of any
other claim) or any other sums payable by Tenant to Landlord hereunder; (f) in
the case of an insurance requirement, the coverage required by Article IV shall
be maintained; and (g) if such contest be finally resolved against Landlord or
Tenant, Tenant shall, as Additional Rent due hereunder, promptly pay the amount
required to be paid, together with all interest and penalties accrued thereon,
or comply with the applicable legal requirement or insurance requirement.
Landlord, at Tenant's expense, shall execute and deliver to Tenant such
authorizations and other documents as may be reasonably required in any such
contest, and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein.  Tenant hereby agrees to indemnify and
hold harmless Landlord, its officers, trustees, employees, shareholders,
affiliates and agents from and against any and all demands, claims, causes of
action, fines, penalties, damages (including punitive and consequential
damages), losses, liabilities (including strict liability), judgments, costs and
expenses (including, without limitation, attorneys' fees, court costs, and the
costs set forth in Section 9.06) that may be incurred in connection with or
arise from any such contest.

          17.20     Construction of Lease.  This Lease has been reviewed by
                    ---------------------                                  
Landlord and Tenant and their respective professional advisors.  Landlord and
Tenant believe that this Lease is the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in favor
of either Landlord or Tenant or against either Landlord or Tenant merely because
of any party's efforts in preparing such documents.

                                     -57-
<PAGE>
 
          17.21     Counterparts.  This Lease may be executed in duplicate
                    -------------                                         
counterparts, each of which shall be deemed an original hereof or thereof.

          17.22     Relationship of Landlord and Tenant.  The relationship of
                    -----------------------------------                      
Landlord and Tenant is the relationship of lessor and lessee.  Landlord and
Tenant are not partners, joint venturers, or associates.

                [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]

                                     -58-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Lease or
caused the same to be executed by their respective duly authorized officers as
of the date first set forth above.

                    CAPITAL AUTOMOTIVE L.P.

                    By:       Capital Automotive REIT,
                              Its General Partner

                              By:  
                                  -----------------------------------
                              Name:    
                                  -----------------------------------
                              Title:   
                                  -----------------------------------

                     [                      ]
 

                     By:  
                         -----------------------------------
                     Name:    
                         -----------------------------------
                     Title:   
                         -----------------------------------


                                     -59-
<PAGE>
 
         PLAINS CHEVROLET, INC. LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

     A              Leased Properties
     B              Permitted Liens
     12.02          Material Agreements
     12.03          Changes in Condition

 
                                    EXHIBITS

     2.02           Payment Account Information
     2.04           Base Annual Rent Adjustment
     5.07           Environmental Reports
     15.02          Form of Subordination and Non-Disturbance Agreement
<PAGE>
 
         MIDWAY CHEVROLET, INC. LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

     A              Leased Properties
     B              Permitted Liens
     12.02          Material Agreements
     12.03          Changes in Condition

 
                                    EXHIBITS

     2.02           Payment Account Information
     2.04           Base Annual Rent Adjustment
     5.07           Environmental Reports
     15.02          Form of Subordination and Non-Disturbance Agreement
<PAGE>
 
                         WESTGATE CHEVROLET, INC. LEASE
                        AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

     A              Leased Properties
     B              Permitted Liens
     12.02          Material Agreements
     12.03          Changes in Condition

 
                                    EXHIBITS

     2.02           Payment Account Information
     2.04           Base Annual Rent Adjustment
     5.07           Environmental Reports
     15.02          Form of Subordination and Non-Disturbance Agreement
<PAGE>
 
          QUALITY NISSAN, INC. LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

     A              Leased Properties
     B              Permitted Liens
     12.02          Material Agreements
     12.03          Changes in Condition

 
                                    EXHIBITS

     2.02           Payment Account Information
     2.04           Base Annual Rent Adjustment
     5.07           Environmental Reports
     15.02          Form of Subordination and Non-Disturbance Agreement
<PAGE>
 
          DOUGLAS MOTORS, INC. LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

     A              Leased Properties
     B              Permitted Liens
     12.02          Material Agreements
     12.03          Changes in Condition

 
                                    EXHIBITS


     2.02           Payment Account Information
     2.04           Base Annual Rent Adjustment
     5.07           Environmental Reports
     15.02          Form of Subordination and Non-Disturbance Agreement
<PAGE>
 
                          T-WEST SALES & SERVICE, INC.
                     LEASEAGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

     A              Leased Properties
     B              Permitted Liens
     12.02          Material Agreements
     12.03          Changes in Condition

 
                                    EXHIBITS


     2.02           Payment Account Information
     2.04           Base Annual Rent Adjustment
     5.07           Environmental Reports
     15.02          Form of Subordination and Non-Disturbance Agreement
<PAGE>
 
                                   SCHEDULE A
                                   ----------

                               Leased Properties

Lessee:             Plains Chevrolet, Inc.

Leased Property:    2200 I-40 East
                    Amarillo, Texas  79103

                    2316 I-40 East
                    Amarillo, Texas 79103

                    2400 I-40 East
                    Amarillo, Texas 79103

Initial Base Rent:  $517,000
<PAGE>
 
                                   SCHEDULE A
                                   ----------

                               Leased Properties


Lessee:             Midway Chevrolet, Inc.

Leased Property:    16301 Interstate I-27
                    Amarillo, Texas  79120

Initial Base Rent:  $341,000
<PAGE>
 
                                   SCHEDULE A
                                   ----------

                               Leased Properties

Lessee:             Westgate Chevrolet, Inc.

Leased Property:    7400 I-40 West
                    Amarillo, Texas  79106

Initial Base Rent:  $484,000
<PAGE>
 
                                   SCHEDULE A
                                   ----------

                               Leased Properties

Lessee:             Quality Nissan, Inc.

Leased Property:    4121 S. Georgia
                    Amarillo, Texas  79110

Initial Base Rent:  $110,000
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties

Lessee:            Douglas Motors, Inc.

Leased Property:   7300 North Broadway
                   Denver, Colorado 80221

Initial Base Rent: $979,000
<PAGE>
 
                                   SCHEDULE A
                                   ----------

                               Leased Properties

Lessee:            T-West Sales & Service, Inc.

Leased Property:   6300 West Sahara
                   Las Vegas, Nevada 89102

Initial Base Rent: $1,452,000
<PAGE>
 
                                   SCHEDULE B
                                   ----------

                                Permitted Liens
<PAGE>
 
                                   SCHEDULE B
                                   ----------

                                Permitted Liens
<PAGE>
 
                                   SCHEDULE B
                                   ----------

                                Permitted Liens
<PAGE>
 
                                   SCHEDULE B
                                   ----------

                                Permitted Liens
<PAGE>
 
                                   SCHEDULE B
                                   ----------

                                Permitted Liens
<PAGE>
 
                                   SCHEDULE B
                                   ----------

                                Permitted Liens
<PAGE>
 
                                SCHEDULE 12.02
                                --------------

                              Material Agreements
                              -------------------
<PAGE>
 
                                 SCHEDULE 12.03
                                 --------------

                              Changes in Condition
<PAGE>
 
                                  EXHIBIT 2.02
                                  ------------

                          Payment Account Information

     Wiring instructions for the Landlord's operating account are as follows:

     FIRST UNION NATIONAL BANK OF VIRGINIA
     CHARLOTTE, NC
     ABA# 051400549

     For Credit to:  CAPITAL AUTOMOTIVE REIT, Operating Account
                     Account # 2050000478240
<PAGE>
 
                                 EXHIBIT 2.04
                                 ------------

                          Base Annual Rent Adjustment

     The Base Annual Rent shall be increased, effective as of the commencement
of the fourth Lease Year and as of each subsequent Lease Year by an amount equal
to the Base Annual Rent multiplied by 100 percent (100%) of the change in the
Index during the immediately preceding one (1) year period; provided, however,
that, in the event that the above-calculated adjustment is greater than two
percent and one-half (2 1/2%), such adjustment shall be equal to two and one-
half percent (2 1/2%).
<PAGE>
 
                                 EXHIBIT 5.07
                                 ------------

                             Environmental Reports
<PAGE>
 
                                 EXHIBIT 15.02
                                 -------------

                  Subordination and Non-Disturbance Agreement
                  -------------------------------------------


     THIS AGREEMENT is made as of this ___ day of __________, 1998, among
_____________, a ___________ organized under the laws of the State of
_____________ ("Lender"), __________________ ("Tenant"), and CAPITAL AUTOMOTIVE
L.P., a Delaware limited partnership ("Landlord").

                                  WITNESSETH:
                                  -----------

     WHEREAS, Landlord and Tenant have entered into a certain Lease, dated
____________________, which lease and all amendments, modifications,
assignments, subleases  and other agreements related thereto are attached hereto
as Exhibit A and incorporated herein by this reference (collectively, the
   ---------                                                             
"Lease"), which Lease relates to the premises described therein (the
"Premises"), and

     WHEREAS, Lender has made or has committed to make a first mortgage loan to
Landlord in the principal amount not to exceed $_________ (the "Loan"), the Loan
being secured by a mortgage, deed of  trust or security deed (collectively, the
"Mortgage") and an assignment(s) of leases and rents from Landlord to Lender
covering the Premises; and

     WHEREAS, Tenant has agreed that the Lease shall be subject and subordinate
to the Mortgage held by Lender, provided Tenant is assured of continued
occupancy of the Premises under the terms of the Lease;

     NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, the sum of Ten Dollars ($10.00) and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
and notwithstanding anything in the Lease to the contrary, it is hereby agreed
as follows:

     1.    Subordination of Lease.  Lender, Tenant and Landlord do hereby
           ----------------------                                        
covenant and agree that the Lease with all rights, options, liens and charges
created thereby, is and shall continue to be subject and subordinate in all
respects to the Mortgage and to any renewals, modifications, consolidations,
replacements and extensions thereof and to all advancements made thereunder.

     2.    Nondisturbance of Tenant.  Lender does hereby agree with Tenant that,
           ------------------------
in the event Lender becomes the owner of the Premises by foreclosure, conveyance
in lieu of foreclosure or otherwise, so long as Tenant complies with and
performs its obligations under the Lease, (a) Lender will take no action which
will interfere with or disturb Tenant's possession or use of the Premises or
other rights under the Lease, and (b) the Premises shall be subject to the Lease
and Lender shall recognize Tenant as the tenant of the Premises for the
remainder of the terms of the Lease in accordance with the provisions thereof,
provided, however, that Lender shall not be subject to any offsets or defenses
which Tenant might have against any prior landlord except those which arose
<PAGE>
 
under the provisions of the Lease out of such landlord's default and for which
Tenant had notified Lender and given Lender the opportunity to cure same as
hereinbelow provided, nor shall Lender be bound by any rent or additional rent
which Tenant might have paid for more than the current month.

     3.    Attornment by Tenant.  Tenant does hereby agree with Lender that, in
           --------------------                                                
the event Lender becomes the owner of the Premises by foreclosure, conveyance in
lieu of foreclosure or otherwise, then Tenant shall attorn to and recognize
Lender as the landlord under the Lease for the remainder of the term thereof,
and Tenant shall perform and observe its obligations thereunder, subject only to
the terms and conditions of the Lease. In such event, Lender shall not be
liable for any act or omission of any prior landlord for which Tenant had
notified Lender and given Lender the opportunity to cure the same, liable for
return of the security deposit unless same was actually delivered to Lender,
bound by any rent paid more than thirty (30) days in advance, or be subject to
any set-off or defense Tenant might have had against any prior landlord. Tenant
further covenants and agrees to execute and deliver upon request of Lender or
its assigns, an appropriate Agreement of Attornment to Lender and any subsequent
titleholder of the Premises.

     4.    Acknowledgment of Acquisition Rights. Lender acknowledges that Tenant
           ------------------------------------                                 
has certain purchase rights under the lease. So long as Tenant complies with
the provisions of the Lease, Lender acknowledges that Tenant may exercise such
rights and Lender will honor such rights so long as Tenant pays the acquisition
price to Lender or otherwise obtains a release from Lender.

     5.    Curative Rights, Modification of Lease, and Advance Payment of Rent.
           -------------------------------------------------------------------  
So long as the Mortgage remains outstanding and unsatisfied:

           (a)   Tenant will mail or deliver to Lender, at the address and in
the manner hereinbelow provided, a copy of all notices permitted or required to
be given to the Landlord by Tenant under and pursuant to the terms and
provisions of the Lease. At any time before the rights of the Landlord shall
have been forfeited or adversely affected because of any default of the
Landlord, or within the time permitted the Landlord for curing any default under
the Lease as therein provided, Lender may, but shall have no obligation to, pay
any taxes and assessments, make any repairs and improvements, make any deposits
or do any other act or thing required of the Landlord by the terms of the Lease;
and all payments so made and all things so done and performed by Lender shall be
as effective to prevent the rights of the Landlord from being forfeited or
adversely affected because of any default under the Lease as the same would have
been if done and performed by the Landlord.

           (b)   Tenant will not consent to the modification of the Lease, nor
to the termination thereof, without the prior written consent of Lender, such
consent not to be unreasonably withheld or delayed, nor will Tenant pay any rent
under the Lease more than thirty (30) days in advance. If Lender fails to grant
or deny its consent within ten (10) days after receiving Tenant's request, such
consent shall be deemed to have been given.

                                      -2-
<PAGE>
 
     6.   Consent to Assignment.  Tenant acknowledges that Landlord will execute
          ---------------------                                                 
and deliver to Lender an assignment of the Lease as security for the Loan, and
Tenant hereby expressly consents to such assignment.

     7.   Limitation of Liability.  Tenant agrees that if Lender becomes the
          -----------------------                                           
owner of the Premises, Tenant shall look solely to the estate or interest of
Lender in the Premises for satisfaction of  any obligation which may be or
become owing by Lender to Tenant hereunder or under the Lease.

     8.   Landlord and Tenant Certifications.  Landlord and Tenant hereby
          ----------------------------------                             
certify to Lender that the Lease has been duly executed by Landlord and Tenant
and is in full force and effect, that the Lease and any modifications and
amendments specified herein are a complete statement of the agreement between
Landlord and Tenant with respect to the leasing of the Premises, and the Lease
has not been modified or amended except as specified herein; that to the
knowledge of Landlord and Tenant, no party to the Lease is in default
thereunder; that no rent under the Lease has been paid more than thirty (30)
days in advance of its due date; and that Tenant, as of this date, has no
charge, lien or claim of offset under the Lease, or otherwise, against the rents
or other charges due or to become due thereunder.

     9.   Tenant Estoppel Certifications.  With the knowledge that Lender, as
          ------------------------------                                     
beneficiary of the mortgage encumbering the premises, will place substantial
reliance thereon in connection with the closing and funding of the Loan, Tenant
hereby makes the following certifications:

          (a) The term of the Lease commenced on ________, 19__, and will
terminate on ______________.

          (b) The Lease, as described above, has not been modified, amended,
assigned or subleased except as set forth in Exhibit A attached hereto, and is
                                             ---------                        
in good standing and in full force and effect.

          (c) The Lease provides for rental payments over the term of the Lease,
all as specifically provided in the Lease.  No rent under the Lease has been
paid more than thirty (30) days in advance of the due date of same.  For the
year ____, monthly payments, which are due on the first (1st) day of each month,
are as follows:


Basic Rent -        $________


     Payment of the above amount was timely made for the months of ______,
___and _____, ____, and the next payment of the above amount will be due on
________, ____.  In addition to the above amount, certain additional sums are
due to Landlord from Tenant under the Lease, all as specifically set forth in
the Lease.

                                      -3-
<PAGE>
 
          (d) Tenant has paid a security deposit under the Lease.

          (e) To Tenant's knowledge there are no defaults by Landlord under the
Lease and there are no existing circumstances which, with the passage of time,
or notice, or both, would give rise to a default under the Lease.

          (f) Tenant has accepted and is occupying the Premises, and Landlord
has no unperformed obligation under the Lease to construct any improvements for
the Tenant related to the Premises.

          (g) As of the date of this Agreement, Tenant has no charge, lien,
claim of set-off or defense against rents or other charges due or to become due
under the Lease or otherwise under any of the terms, conditions, or covenants
contained therein.

          (h) Tenant has received no notice from any insurance company of any
defects or inadequacies in the Premises or in any part thereof which would
adversely affect the insurability of the Premises.

          (i) Except as provided in the Lease, Tenant does not have any right or
option to purchase the Premises.

          (j) Except as provided in the Lease, Tenant does not have any rights
or options to renew the Lease or to lease additional space in any building owned
by the Landlord.

     10.  Tenant Covenants.  In addition to other covenants and obligations of
          ----------------                                                    
Tenant contained herein:

          (a) From and after the date hereof, Tenant will not pay any rent under
the Lease more than thirty (30) days in advance of its due date.

          (b) From and after the date hereof, so long as there shall be any
assignment of Landlord's interest in the Lease to Lender, or any successor
thereto, Tenant will not: nor seek to terminate the Lease by reason of any act
or omission of Landlord until Tenant shall have given written notice of such act
or omission to such Lender's last address furnished Tenant, and until a
reasonable period of time shall have elapsed following the giving of such notice
(not to exceed thirty (30) days, during which period the Lender shall have the
right, but not the obligation, to remedy such act or omission.

          (c) Upon written notice of the default by Landlord under any of the
loan documents held by Lender and assignment of the Landlord's interest under
the Lease by Landlord to Lender, Tenant, if Lender so requests, will recognize
such Lender as the Landlord under the Lease and will thereafter pay rent and
other sums to Lender (or to the party designated by the Lender in writing) in
accordance with the terms of the Lease, and, in such event, such Lender will not
be liable 

                                      -4-
<PAGE>
 
for return of the security deposit unless same was actually delivered to Lender,
bound by any rent paid more than thirty (30) days in advance, or be subject to
any set-off or defense Tenant might have had against any prior lessor.

     11.  Notices.  Unless and except as otherwise specifically provided herein,
          -------                                                               
any and all notices, elections, approvals, consents, demands, requests and
responses thereto ("Communications") permitted or required to be given under
this Agreement shall be in writing, signed by or on behalf of the party giving
the same, and shall be deemed to have been properly given and shall be effective
upon the earlier of receipt thereof or three (3) days after deposit thereof in
the United States mail, postage prepaid, certified with return receipt
requested, to the other party at the address of such other party set forth
hereinbelow or at such other address within the continental United States as
such other party may designate by notice specifically designated as a notice of
change of address and given in accordance herewith; provided, however, that the
time period in which a response to any Communication must be given shall
commence on the date of receipt thereof, and provided further that no notice of
change of address shall be effective with respect to Communications sent prior
to the time of receipt of such change.  Receipt of Communications hereunder
shall occur upon actual delivery (whether by mail, facsimile transmission,
messenger, courier service, or otherwise) to an individual party or to an
officer, member, or general or limited partner of a party or to any agent or
employee of such party at the address of such party set forth hereinbelow,
subject to change as provided hereinabove.  An attempted delivery in accordance
with  the foregoing, acceptance of which is refused or rejected, shall be deemed
to be and shall constitute receipt; and an attempted delivery in accordance with
the foregoing by mail, messenger, or courier service (whichever is chosen by the
sender) which is not completed because of changed address of which no notice was
received by the sender in accordance with this provision prior to the sending of
the Communication shall also be deemed to be and constitute receipt.  Any
Communication, if given to Lender, must be addressed as follows, subject to
change as provided hereinabove:

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

and, if given to Tenant, must be addressed as follows, subject to change as
provided hereinabove:

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

and, if given to Landlord, must be addressed as follows, subject to change as
provided hereinabove:

                           Capital Automotive, L.P.
                           1925 North Lynn Street, Suite 306
                           Arlington, Virginia 22209

                                      -5-
<PAGE>
 
     12.  Miscellaneous.  This Agreement shall be binding upon and inure to the
          -------------                                                        
benefit of the parties hereto and their respective heirs, legal representatives,
successors, successors-in-title and assigns.  When used herein, the term
"Landlord" or "landlord" refers to Landlord and to any successor to the interest
of Landlord under the Lease.


                     [THIS SPACE INTENTIONALLY LEFT BLANK]


                                      -6-
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first above written.

                                    LENDER:

Signed, sealed and delivered
in the presence of:                 By:
                                    Title:

- ----------------------------------  --------------------------------------------
Witness                             (CORPORATE SEAL)

                                    TENANT:

Signed, sealed and delivered
in the presence of:                 By:
                                    Title:

- ----------------------------------  --------------------------------------------
Witness                             (CORPORATE SEAL)

                                    LANDLORD:

Signed, sealed and delivered
in the presence of:                 By:
                                    Title:

- ----------------------------------  --------------------------------------------
Witness                             (PARTNERSHIP SEAL)

                                      -7-
<PAGE>
 
                                   EXHIBIT A


Lease Dated __________ from ________________ to _______________ with Exhibit A
attached, all in the form attached hereto as Attachment to Exhibit A.
                                             ------------------------

                                      -8-
<PAGE>
 
County of ____________________________:
                                          SS:
State of _____________________________:

     This is to certify that on this ____ day of ________, 1998, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Lender in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Lender.



                              --------------------------------------------------
                              Notary Public

                              My commission expires:

                                      -9-
<PAGE>
 
County of  ________________________:
                                       SS:
State of __________________________:

     This is to certify that on this ____ day of _________, 1998, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Tenant in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Tenant.



                              --------------------------------------------------
                              Notary Public

                              My commission expires:

                                     -10-
<PAGE>
 
County of ____________________
                                  SS:
State of _____________________ 

     This is to certify that on this ____ day of _______, 1998, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Landlord in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Landlord.



                              --------------------------------------------------
                              Notary Public

                              My commission expires:

                                     -11-
 
<PAGE>
 
                                 EXHIBIT 2.4(c)

                      Guaranty and Subordination Agreement
                      ------------------------------------


     THIS GUARANTY AND SUBORDINATION AGREEMENT (this "Agreement"), made as of
the  ______ day of _________, 19__, by  ______________ , a _______________
corporation ("Guarantor"), in favor of Capital Automotive, L.P., a Delaware
limited partnership ("Landlord").

                                  WITNESSETH:
                                  ---------- 

     WHEREAS, Landlord has this day entered into a lease (the "Lease") of
certain Properties identified on Schedule A hereto (individually a "Property"
and collectively the "Properties") with   ____________, a ________________
corporation ("Tenant"), this Agreement being attached to the Lease;

     WHEREAS, Tenant is a subsidiary [affiliate] of Guarantor; and

     WHEREAS, Landlord has required, as a condition to entering into the Lease,
Guarantor to be a guarantor of each and every obligation imposed upon Tenant by
the Lease.

     NOW, THEREFORE, to induce Landlord to enter into the Lease and in
consideration of the foregoing premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor, for itself, its successors and assigns, hereby covenants and agrees
for the benefit of Landlord, as follows:

     1.   Guaranty.  Guarantor does hereby unconditionally and irrevocably
          --------                                                        
guarantee to Landlord the full, complete and timely performance of all
obligations imposed on Tenant by the terms of the Lease, including, but  not
limited to, the full, complete and timely payment of rent and all other sums due
by Tenant under the Lease, and the payment as required by the Lease of all
damages to Landlord which may result from Tenant's breach of any provision of
the Lease, including, but not limited to, those relating to damage to any
Property or the leased premises.

     2.   Guaranty of Payment and Performance.  Guarantor acknowledges and
          -----------------------------------                             
agrees that this is a guaranty of payment and performance and not mere
collection.  The liability of Guarantor under this Agreement shall be direct and
immediate and not conditional or contingent upon the pursuit of any remedies
against Tenant or any other person or entity.  Guarantor waives any right to
require that an action be brought against Tenant or any other person or entity.
In the event, on account of the Bankruptcy Reform Act of 1978, as amended, or
any other debtor relief law (whether statutory, common law, case law or
otherwise) of any jurisdiction whatsoever, now or hereafter in effect, which may
be or become applicable, Tenant shall be relieved of the Lease or any debt,
obligation or liability as provided in the Lease, Guarantor shall nevertheless
be fully liable for the complete and timely performance of all obligations
imposed on Tenant by the Lease throughout the entire term of the Lease, all to
the same extent as if Guarantor had been the original tenant thereunder and the
Lease shall be deemed unaffected by any such relief granted to Tenant.  In the
event of a default 
<PAGE>
 
under the Lease which is not cured within any applicable grace or cure period,
Landlord shall have the right to enforce its rights, powers and remedies
thereunder or hereunder, in any order to the maximum extent permitted by law,
and all rights, powers and remedies provided thereunder or hereunder or by law
or in equity. If the obligations guaranteed hereby are partially performed, paid
or discharged by reason of the exercise of any of the remedies available to
Landlord, this Agreement shall nevertheless remain in full force and effect, and
Guarantor shall continue to be liable for all remaining obligations guaranteed
hereby, even though any rights which Guarantor may have against Tenant may be
destroyed or dismissed by the exercise of any such remedy.

     3.   Waivers by Guarantor.  To the extent permitted by law, Guarantor
          --------------------                                            
hereby waives and agrees not to assert or take advantage of:

          (a) Any right to require Landlord to proceed against Tenant or any
other person or entity or to proceed against or exhaust any security held by
Landlord at any time or to pursue any other remedy in Landlord's power or under
any other agreement before proceeding against Guarantor;

          (b) Any defense that may arise by reason of the incapacity, lack of
authority, death or disability of any other person or persons or the failure of
Landlord to file or enforce a claim against the estate (in administration,
bankruptcy or any other proceeding) of any other person or persons:

          (c) Any defense based upon an election of remedies by Landlord;

          (d) Any right or claim or right to cause a marshaling of the assets of
Tenant or Guarantor;

          (e) Any invalidity, irregularity or unenforceability, in whole or in
part, of any one or more provisions of the Lease;

          (f) Any modification of the Lease or of any obligation of Tenant
thereunder by amendments to the Lease, by waivers granted by Landlord or by
operation of law or by action of any court, whether pursuant to the Bankruptcy
Reform Act of 1978, as amended, or any other debtor relief law (whether
statutory, common law, case law or otherwise) of any jurisdiction whatsoever,
now or hereafter in effect, or otherwise.

     4.   Subordination.  Guarantor and those parties signing below for the
          -------------                                                    
purpose of being bound by this Section 4 (collectively, "Section 4 Signers)
hereby unconditionally and irrevocably subordinate (i) all payments due or to
become due by Tenant to the Section 4 Signers, or any of them, by reason of any
and all debts or other obligations, including the obligation to pay salaries or
other compensation (collectively "Debt Payments") and (ii) the receipt of all
dividends or other distributions of any kind or nature (collectively,
"Distributions") to the payment of all sums due or to become due by Tenant to
Landlord under the Lease, including the payment of Rent and all 

                                      -2-
<PAGE>
 
damages due by reason of Tenant's breach of the Lease; provided, however, that
for so long as there shall be no existing Event of Default under the Lease,
after the payment of each monthly installment of Rent, the Section 4 Signers
shall be entitled to receive Debt Payments due for such month.
 
     5.   General Provisions.
          ------------------ 

          (a) Survival.  This Agreement shall be deemed to be continuing in
              --------                                                     
nature and shall remain in full force and effect and shall survive the exercise
of any remedy by Landlord under the Lease;

          (b) No Subrogation; No Recourse Against Landlord.  Notwithstanding the
              --------------------------------------------                      
satisfaction by Guarantor of any liability hereunder, Guarantor's rights of
subrogation, contribution, reimbursement or indemnity, if any, or any right of
recourse to or with respect to the assets or property of Tenant, shall be
subject and subordinate to the rights of Landlord.  Guarantor expressly agrees
not to exercise any and all rights of subrogation against Landlord.

          (c) Entire Agreement; Amendment; Severability.  This Agreement
              -----------------------------------------                 
contains the entire agreement between the parties respecting the matters herein
set forth and supersedes all prior agreements, whether written or oral, between
the parties respecting such matters.  Any amendments or modifications hereto, in
order to be effective, shall be in writing and executed by Landlord and
Guarantor.  A determination that any provision of this Agreement is
unenforceable or invalid shall not affect the enforceability or validity of any
other provision, and any determination that the application of any provision of
this Agreement to any person or circumstance is illegal or unenforceable shall
not affect the enforceability or validity of such provision as it may apply to
any other persons or circumstances.

          (d) Governing Law: Binding Effect; Waiver of Acceptance.  This
              ---------------------------------------------------       
Agreement shall be governed by and construed in accordance with the laws of the
State of Virginia without regard to conflicts of laws principles thereof.  This
Agreement shall bind Guarantor, it successors and assigns (but in the event of
an assignment, Guarantor shall not be relieved of its obligations hereunder),
and shall inure to the benefit of Landlord, its successors and assigns.
Guarantor hereby waives any acceptance of this Agreement by Landlord and this
Agreement shall immediately be binding upon Guarantor.

          (e) Notice.  All notices, demands, requests or other communications to
              ------                                                            
be sent by one party to the other hereunder or required by law shall be in
writing and shall be deemed to have been validly given or served by delivery of
the same in person to the intended addressee, or certified mail or by depositing
the same with Federal Express or another reputable private courier service for
next business day delivery to the intended addressee at its address set forth in
the last section of this Agreement or at such other address as may be designated
by such party as herein provided.  All notices, demands and requests shall be
effective upon such personal delivery, or one (1) business day after being
deposited with the private courier service, or two (2) business days after being
deposited in the United States mail as required above.  Rejection or other
refusal to accept or 

                                      -3-
<PAGE>
 
the inability to deliver because of changed address of which no notice was given
as herein required shall be deemed to be receipt of the notice, demand or
request sent. By giving to the other party hereto at least seven (7) days' prior
written notice thereof in accordance with the provisions hereof, each party
shall have the right from time to time to change their respective addresses and
each shall have the right to specify as its address any other address within the
United States of America.

          (f) No Waiver; Time of Essence.  The failure of either party to
              --------------------------                                 
enforce any of the respective rights or remedies hereunder, or to promptly
enforce any such rights or remedies, shall not constitute a waiver thereof nor
give rise to any estoppel against such party nor excuse any of the parties
hereto from their respective obligations hereunder.  Any waiver of such right or
remedy must be in writing and signed by the party to be bound and must expressly
state that such right or remedy has been or thereby is waived.  This Agreement
is subject to enforcement at law or in equity, including actions for damages or
specific performance.  Time is of the essence hereof.

          (g) Captions for Convenience.  The captions and headings of the
              ------------------------                                   
section and paragraphs of this Agreement are for convenience of reference only
and shall not be construed in interpreting the provisions hereof.

          (h) Attorney's Fees.  In the event it is necessary for Landlord to
              ---------------                                               
retain the services of an attorney or any other consultants in order to enforce
this Agreement, or any portion hereof, Guarantor shall promptly pay to Landlord
any and all costs and expenses, including, without limitation, attorney's fees,
incurred by Landlord as a result thereof and such costs, fees and expenses shall
be included in the costs of the case to the extent the Landlord wins the issue
under contest.

          (i) Successive Actions.  Separate and successive actions may be
              ------------------                                         
brought hereunder to enforce any of the provisions hereof at any time and from
time to time.  No action hereunder shall preclude any subsequent action, and
Guarantor hereby waives any covenants to the maximum extent permitted by law not
to assert any defense in the nature of splitting of causes of action or merger
of judgments.

          (j) Reliance.  Landlord would not enter into the Lease without this
              --------                                                       
Agreement. Accordingly, Guarantor intentionally, irrevocably and unconditionally
enters into the covenants and agreements as set forth above and understand that,
in reliance upon and in consideration of such covenants and agreements, the
Lease has been made.

     4.   Notices:  The following addresses shall be used for notice purposes:
          -------                                                             

          If to Landlord:
 
          Capital Automotive L.P.
          1925North Lynn Street, Suite 306
          Arlington, Virginia  22209

                                      -4-
<PAGE>
 
          With copies to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037-1420
          attn: George P. Stamas

     IN WITNESS WHEREOF, Guarantor has executed this Agreement under seal as of
the day and year first above written:

                                    GUARANTOR:

ATTEST/WITNESS:                  
                                    ---------------------------------
                                    By:  
- ----------------------------------       ----------------------------
Name:                               Name: 
       ---------------------------         --------------------------
Title:                              Title:  
       ---------------------------         --------------------------

                                      -5-
<PAGE>
 
                                EXHIBIT 5.2.1(m)
                                ----------------


             Opinion of Seller's Counsel to be Delivered at Closing

1.  The Sellers are duly organized or formed, validly existing and in good
standing under the laws of their respective State's of organization or
formation.

2.  Each of the Sellers has the requisite corporate, partnership or other entity
power and authority to execute and deliver, and to perform its obligations under
the Agreement and to carry on its business.

3.  The execution and delivery by each of the Sellers has been duly authorized
by all necessary corporate, partnership or other entity actions and the persons
executing the Agreement have been duly authorized to do so.

4.  The execution, delivery and performance by the Company will not violate the
charter, organizational documents, bylaws, operating agreements or partnership
agreements of any of the Sellers.

5.  The Agreement has been duly executed and delivered by each of the Sellers in
compliance with the laws of the State of Texas, and is the legal, valid and
binding obligation of each, enforceable against each in accordance with its
terms, except that enforcement may be limited by bankruptcy, insolvency,
reorganization, arrangement, moratorium, or similar laws, or by equitable
principles, relating to or limiting the rights of creditors generally.

6.  To the undersigned's knowledge, without investigation, the execution and
delivery of the Agreement will not breach or otherwise violate the provisions of
or cause an event of default under any agreement, contract, mortgage or other
binding commitment or existing obligation of any of the Sellers and will not
breach or otherwise violate any permit, license, court judgment, decree or order
of any Court or any law, rule or regulation of any governmental body to which
any of Sellers are subject to or bound.

7.  To the undersigned's knowledge, without investigation, there are no actions,
suits or proceedings pending or threatened against any of the Sellers or the
Properties that affect the Properties or would materially affect the Sellers
ability to perform under the Agreement or which seeks to affect the
enforceability of the Agreement.

8.  To the undersigned's knowledge, without investigation, no Seller is in
default or has received any notice of default with respect to any judgment,
order, writ, injunction or decree or any lease, contract, agreement, commitment,
instrument or obligation to which it is a party or by which the Property is
bound or may be subject that affects the Property or could materially affect any
Seller's ability to perform its obligations under the Agreement.

9. To the undersigned's knowledge, all consents, approvals, or authorization
required by any third party or governmental authority in connection with the
Sellers' obligations under the Agreement 
<PAGE>
 
have been properly obtained and Sellers have complied with all applicable
provisions of law requiring any filing, registration or qualification with any
governmental authority in connection with the execution and delivery of the
deeds to the Properties.
<PAGE>
 
                                EXHIBIT 5.2.2(d)
                                ----------------

       Opinion of Wilmer, Cutler & Pickering to be Delivered at Closing:

1.  The Company is a corporation duly organized or formed, validly existing and
in good standing under the laws of the State of Delaware.

2.  The Partnership is a limited partnership duly organized or formed, validly
existing and in good standing under the laws of the State of Maryland.

3.  Each of the Company and the Partnership has the requisite corporate or
partnership power (respectively) to execute and deliver, and to perform its
obligations under, the Agreement.

4.  The general partner of the Partnership has the requisite partnership power
and authority to carry on its business and to execute an deliver, and to perform
its obligations under, the Agreement and to execute and deliver on behalf of
such Partnership, and to bind the Partnership to, the Agreement.

5.  The execution and delivery by each of the Company and the Partnership has
been duly authorized by all necessary corporate or partnership actions
(respectively).

6.  The execution, delivery and performance of the Agreement by the general
partner of the Partnership on behalf of the Partnership have been duly
authorized by all necessary partnership actions, and the individuals executing
the Agreement on behalf of such general partner have been duly authorized to do
so.

7.  The execution, delivery and performance by the Company will not violate the
charter or bylaws of the Company.

8.  The execution, delivery and performance by the general partner of the
Partnership, and such general partner's performance of its obligations under,
the Agreement on behalf of the Partnership will not violate the Partnerships
Organizational Documents.

9.  The Agreement has been duly executed and delivered by each of the
Partnership and the Company and is the legal, valid and binding obligation of
each, enforceable against each in accordance with its terms.
<PAGE>
 
                                   SCHEDULE 1
                          Sellers' Names and Addresses

<TABLE>
<CAPTION>

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

                                Property                           
                                Numbers                                               Required                
                                 from                                              Signature on                Interest
   Seller's Name             Schedule 1.2            Property Address                Agreement                   Owned  
====================================================================================================================================

<S>                         <C>               <C>                                  <C>                 <C> 
Plains Chevrolet, Inc.,     1a                2200 I-40 East                       Robert W. Hall,     Plains Chevrolet, Inc.; 100%
a Texas corporation                           Amarillo, Texas 79103                Vice President
                                                                                                 
                            1b                2316 I-40 East                       Robert W. Hall,     Plains Chevrolet, Inc.; 100%
                                              Amarillo, Texas 79103                Vice President
                                                                                                 
                            1c                2400 I-40 East                       Robert W. Hall,     Plains Chevrolet, Inc.; 100%
                                              Amarillo, Texas 79103                Vice President 
- ------------------------------------------------------------------------------------------------------------------------------------

Yarbrough Chevrolet, Inc.   2                 16301 Interstate I-27                Robert W. Hall,     Midway Chevrolet, Inc.; 100%
(Title holder of record,                      Amarillo, Texas 79120                Vice President
but Midway Chevrolet,                                    
Inc. [formerly Yarbrough                                    
Chevrolet, Inc.] is the                     
borrower on Mortgage debt)
- ------------------------------------------------------------------------------------------------------------------------------------

Westgate Chevrolet, Inc.    3a                7400 I-40 West                       Robert W. Hall,    Westgate Chevrolet, Inc.; 100%
                                              Amarillo, Texas 79106                Vice President     
                                                  
                             3b               7400 I-40 West
                                              Amarillo, Texas 79106
- ------------------------------------------------------------------------------------------------------------------------------------

Quality Nissan, Inc.         4 (1.115         4121 S. Georgia                      Robert W. Hall,    Quality Nissan, Inc.; 100%
                             acres)           Amarillo, Texas 79110                Vice President
                             (3 acres                                                                                 
                             per Option                                                                      
                             Contract)                                              
- ------------------------------------------------------------------------------------------------------------------------------------

Cross-Continent Auto         5                7300 North Broadway                  Robert W. Hall,    Cross-Continent Auto 
Retailers, Inc. (Douglas                      Denver, Colorado 80221               Vice Chairman      Retailers, Inc.; 100%
Motors, Inc.)                                                                                                              
- ------------------------------------------------------------------------------------------------------------------------------------

Cross-Continent Auto         6                6300 West Sahara                     Robert W. Hall,    Cross-Continent Auto 
Retailers, Inc. (T-West                       Las Vegas, Nevada 89102              Vice Chairman      Retailers, Inc.; 100% 
Sales & Service, Inc.)                                  
- ------------------------------------------------------------------------------------------------------------------------------------


</TABLE>

Note: Notices to be delivered to the Sellers under this Agreement should go to:
      R. Wayne Moore, General Counsel, Cross-Continent Auto Retailers, Inc.,
      P.O. Box 750, Amarillo, Texas 79105-0750
<PAGE>
 
                                  SCHEDULE 1.2

             Ownership Interests in Properties and Purchase Prices

<TABLE>
<CAPTION>

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

Property No.                   Seller             Property Tax I.D.      Property Address        Mortgage Debt       Purchase Price
====================================================================================================================================

<S>                          <C>                       <C>                    <C>                <C>                  <C>
1a                  Plains Chevrolet, Inc.        044-4200-4970-01    2200 I-40 East          $3,400,000 (to         $ 4,700,000
                    (Owner of fee simple-                             Amarillo, Texas 79103   GMAC)
                    surface estate only)                             

1b                                                044-4200-4975-01    2316 I-40 East
                                                                      Amarillo, Texas 79103

1c                                                044-4200-5045-01    2400 I-40 East
                                                                      Amarillo, Texas 79103
- ------------------------------------------------------------------------------------------------------------------------------------

2                   Yarbrough Chevrolet,          R0758 0320 7600     16301 Interstate I-27   $640,945 (Borrower     $ 3,100,000
                    Inc. (Title owner per                             Amarillo, Texas 79120   is Midway
                    title policy dated                                                        Chevrolet, Inc.
                    2/8/88) (Midway                                                           Owed to GMAC)
                    Chevrolet, Inc.
                    formerly Yarbrough
                    Chevrolet, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------------

3a                  Westgate Chevrolet, Inc.      R0005 7540 1650     (New Cars) 7300 I-40    $2,500,000 (to         $ 4,400,000
                                                                      West                    GMAC)
                                                                      Amarillo, Texas 79106
3b                                                                                            
                    Westgate Chevrolet, Inc.      R0005 7540 1650-1   (Used Cars) 7400 I-40   $1,156,250 (to
                                                                      West                    GMAC)         
                                                                      Amarillo, Texas 79106  
- ------------------------------------------------------------------------------------------------------------------------------------

4                   Quality Nissan, Inc.          018-1300-7850-01    4121 S. Georgia         N/A                    $ 1,000,000    
                                                                      Amarillo, Texas 79110

                    Quality Nissan, Inc.          022-6200-0055-01    4119 S. Georgia         N/A
                                                                      Amarillo, Texas 79110        
- ------------------------------------------------------------------------------------------------------------------------------------


</TABLE> 
<PAGE>
 
Schedule 1.2 Cont'd

<TABLE> 
<CAPTION> 

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

Property No.                   Seller             Property Tax I.D.      Property Address        Mortgage Debt       Purchase Price
====================================================================================================================================

<S>                   <C>                        <C>                    <C>                      <C>                 <C> 
5                     Cross-Continent Auto       Not available at       7300 North Broadway      $2,000,000 (to      $ 8,900,000
                      Retailers, Inc.            this time.             Denver, Colorado 80221   RDS, Inc.)
                      (Douglas Motors, Inc.                                                      $7,400,000 (to R.
                      d/b/a Douglas Toyota)                                                      Douglas Spedding
                                                                                                 for construction
                                                                                                 loan)
- ------------------------------------------------------------------------------------------------------------------------------------

6                     Cross-Continent Auto       Not available at       6300 West Sahara         $5,500,000 (to R.   $13,200,000
                      Retailers, Inc.            this time.             Las Vegas,               Douglas Spedding)
                      (T-West Sales &                                   Nevada 89102             $7,400,000 (to R.
                      Service, Inc. d/b/a                                                        Douglas Spedding
                      Toyota West Sales &                                                        for construction
                      Service)                                                                   loan)
- ------------------------------------------------------------------------------------------------------------------------------------


</TABLE>
<PAGE>
 
                                  SCHEDULE 2.1
                                Prior Occupants

<TABLE>
<CAPTION>

                                                                      
                                                                                                             Landlord
 Property No.                Lessee                            Term of Lease        Amount of Rent        (if not Seller)
====================================================================================================================================

<S>              <C>                                         <C>                  <C>                     <C>
1b               Allied 2000 Collision Center, Inc.          5 years              $5,000/month                 Seller
                 2316 I-40 East
                 Amarillo, Texas 79103
- ------------------------------------------------------------------------------------------------------------------------------------

1b               Enterprise Rent-A-Car Company               Expires 1/31/99      $1,400/month                 Seller
                 2316 I-40 East
                 Amarillo, Texas 79103
- ------------------------------------------------------------------------------------------------------------------------------------

1c               Working Man's Credit Plan, Inc.             5 years              $1,000/month                 Seller
                 2400 I-40 East
                 Amarillo, Texas 79103
- ------------------------------------------------------------------------------------------------------------------------------------

2*               Enterprise Rent-A-Car Company               1 year               $900/month                   Seller
                 1931 East Ben White Blvd.
                 Suite 400
                 Austin, Texas 78741-7843
- ------------------------------------------------------------------------------------------------------------------------------------

3a               Enterprise Rent-A-Car Company               Expires 10/31/98     $750/month                   Seller
                 7400 I-40 West                              with 2 year renewal
                 Amarillo, Texas 79106                       option
- ------------------------------------------------------------------------------------------------------------------------------------


</TABLE>

*Lease is terminated effective January 31, 1998 per notice given by lessee.
<PAGE>
 
                                SCHEDULE 2.4(b)

                                    Guaranty

<TABLE>
<CAPTION>
 
                                                                Percent
         Guarantor             Guarantor's Address            Guaranteed
- --------------------------------------------------------------------------------
<S>                          <C>                        <C> 
Cross-Continent Auto         1201 S. Taylor Street      100% Unconditional
Retailers, Inc.              Amarillo, Texas 79101      Guaranty of all 6 leases
("C-CAR")                                               to be signed by Seller
                             P.O. Box 750               or Affiliates.
                             Amarillo, Texas
                             79105-0750
- --------------------------------------------------------------------------------

</TABLE>
<PAGE>
 
                                SCHEDULE 2.11(a)

                             Construction Contracts

<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------
     Property &
      Location                  Owner           Contractor        Contract Date
================================================================================
<S>                          <C>              <C>                 <C> 
Douglas Toyota               R.D.S., Inc.     G. J.'s General     March 1, 1997
Denver, Colorado                              Contractors, Inc.
- --------------------------------------------------------------------------------
Toyota West                  R.D.S., Inc.     G.J.'s General      March 24, 1997
Las Vegas, Nevada                             Contractors, Inc.
- --------------------------------------------------------------------------------

</TABLE>


Note: Each of the above construction contracts have been assigned by R.D.S.,
Inc. to Cross-Continent Auto Retailers, Inc.
<PAGE>
 
                                SCHEDULE 2.11(b)
          Plans and Specifications for Douglas Toyota and Toyota West

<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------
                              Plans and Specifications
       Property                     Prepared by                 Date Prepared
================================================================================
<S>                        <C>                                  <C>
Douglas Toyota             Martin Design, Inc.                  March 6, 1997
                           Contact: Tom Chidley, Architect
                           1360 S. Clarkson Street
                           Denver, Colorado 80210
                           (303) 744-7839         
- --------------------------------------------------------------------------------
Toyota West                Martin Design, Inc.                  March 3, 1997
                           Contact: Tom Chidley, Architect
                           1360 S. Clarkson Street
                           Denver, Colorado 80210
                           (303) 744-7839
- --------------------------------------------------------------------------------

</TABLE>
<PAGE>
 
                                  SCHEDULE 7.5

                                   Litigation



TOYOTA WEST
- -----------

G.J.'s Construction Company was served a Temporary Restraining Order to cease
construction until all permits were in line.  As of December 12, 1997, all
permits have been received by the State Board of Contractors.  The officiating
Judge ruled along with the State Board of Contractors to allow G.J.'s
Construction Company and a new general contractor to continue and complete the
construction.


DOUGLAS TOYOTA
- --------------

Colorado Department of Transportation (CDOT) v. RDS, Inc., C-CAR, et al.
(Colorado Court of Appeals Case No. 97-CA-2105).  At the trial court level in
this condemnation action, RDS and CDOT settled with regard to the value of the
property actually taken by CDOT from RDS, and reserved for appeal the issue of
whether RDS is entitled to recover damages for an alleged reduction in value to
the remaining parcel caused by the diminished access to said parcel.  As of
early January 1998, the parties were awaiting the trial court's designation of
the record to the Court of Appeals.  As part of the sale of the subject property
by RDS to C-CAR at a reduced value due to the then pending condemnation, C-CAR
assigned all of its rights in or to this action to RDS and, therefore, the
outcome of this action should not have any material financial effect upon C-CAR.
(Note: The settlement amount for the property taken was $460,000.  The disputed
value of the remainder is $753,000.
<PAGE>
 
                                SCHEDULE 7.13.5(a)

                              Environmental Disposal

<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------
Property                     Disposal of        Disposal of         Disposal of
                             Antifreeze         Oil & Filters           Tires
================================================================================
<S>                          <C>                <C>                <C>
Plains Chevrolet             Safety Kleen       Safety Kleen       Peerless Tire
                             3811 I-40 East     3811 I-40 East     3339 S.
                             Amarillo, Texas    Amarillo, Texas    Western
                             79104              79104              Amarillo,
                                                                   Texas 79109
- --------------------------------------------------------------------------------
Midway Chevrolet             E & E Enterprise   E & E Enterprise   Peerless Tire
                             Box 658            Box 658            3339 S.
                             Brownfield,        Brownfield,        Western
                             Texas 79316        Texas 79316        Amarillo,
                                                                   Texas 79109
- --------------------------------------------------------------------------------
Westgate Chevrolet           Specialty Oil Co.  Specialty Oil Co.  Peerless Tire
                             1011 East 3rd      1011 East 3rd      3339 S.
                             Avenue             Avenue             Western
                             Amarillo, Texas    Amarillo, Texas    Amarillo,
                             79102              79102              Texas 79109
- --------------------------------------------------------------------------------
Quality Nissan               Safety Kleen       Safety Kleen       Peerless Tire
                             3811 I-40 East     3811 I-40 East     3339 S.
                             Amarillo, Texas    Amarillo, Texas    Western
                             79104              79104              Amarillo,
                                                                   Texas 79109
- --------------------------------------------------------------------------------
Douglas Toyota               No collection      Siegal Oil Co.     Rocks Tire &
                                                2801 S. Tejon      Wheel
                                                Englewood,         10535 Melody
                                                Colorado           Dr.
                                                                   North Glenn,
                                                                   Colo
- --------------------------------------------------------------------------------
Toyota West                  Thermo-Fluids      Thermo-Fluids      No tires
                             9 W. Delhi         9 W. Delhi
                             Las Vegas,         Las Vegas,
                             Nevada 89030       Nevada 89030
- --------------------------------------------------------------------------------

</TABLE>
<PAGE>
 
                                SCHEDULE 7.13.5(f)

                     Environmental Permits and Authorizations



No permits or other governmental authorizations are required.
<PAGE>
 
                                  SCHEDULE 7.14

                                Insurance Policies
    (Blanket - Covers all Dealerships Owned by Cross-Continent Auto Retailers,
                                     Inc.)

<TABLE>
<CAPTION>
 
- ------------------------------------------------------------------------------------------------------------------------------------


       Named Insured               Insurer               Term             Policy Number                   Type
====================================================================================================================================

<S>                          <C>                  <C>                    <C>                    <C>
 Cross-Continent Auto        Wausau Insurance     November 1, 1997 to    1668-00-137200         Property
 Retailers, Inc.                Companies         November 1, 1998
 P.O. Box 750
 Amarillo, TX 79105-0750
- ------------------------------------------------------------------------------------------------------------------------------------

 Cross-Continent Auto         Wausau Insurance    November 1, 1997 to    1668-00-137200         Boiler & Machinery
 Retailers, Inc.                 Companies        November 1, 1998
 P.O. Box 750                         
 Amarillo, TX 79105-0750
- ------------------------------------------------------------------------------------------------------------------------------------

 Cross-Continent Auto         Wausau Insurance    November 1, 1997 to    1668-00-137200,        Garage &
 Retailers, Inc.                 Companies        November 1, 1998       1638-02-137200         Garagekeepers Liability
 P.O. Box 750                         
 Amarillo, TX 79105-0750
- ------------------------------------------------------------------------------------------------------------------------------------

 Cross-Continent Auto         Wausau Insurance    November 1, 1997 to    1668-00-137200         Workers
 Retailers, Inc.                 Companies        November 1, 1998                              Compensation
 P.O. Box 750                         
 Amarillo, TX 79105-0750
- ------------------------------------------------------------------------------------------------------------------------------------

 Cross-Continent Auto         Wausau Insurance    November 1, 1997 to    Binder                 General Liability $2,000,000
 Retailers, Inc.              Companies           November 1, 1998                              General Aggregate; $2,000,000
 P.O. Box 750                                                                                   Products & Completed Operations
 Amarillo, TX 79105-0750                                                                        Aggregate; $1,000,000 Each
                                                                                                Occurrence; $1,000,000 Personal &
                                                                                                Advertising Injury Limit
- ------------------------------------------------------------------------------------------------------------------------------------


</TABLE>
<PAGE>
 
                                 SCHEDULE 7.17(a)

                                Material Contracts

<TABLE>
<CAPTION>
 
                                              Type of                        
         Property               Vendor       Contract        Date           Terms
- ---------------------------------------------------------------------------------------------------
<S>                          <C>            <C>           <C>         <C>
Midway Chevrolet             Southwestern   Contract        05/03/95  .021781 c / Kwh;
                             Public         for                       Monthly pole
                             Service        Floodlight                charges (see
                             Company        Service                   attached contract)
                                            (Lease                    Term of contract
                                            Lighting)                 shall be for a
                                                                      period of not 
                                                                      less than five   
                                                                      years.      
- ---------------------------------------------------------------------------------------------------
   Westgate Chevrolet        Southwestern   Contract        04/15/94  Same as above
                             Public         for                       
                             Service        Floodlight
                             Company        Service
                                            (Lease
                                            Lighting)
- ---------------------------------------------------------------------------------------------------
Plains Chevrolet             Southwestern   Contract        08/23/95  Same as above
                             Public         for                       
                             Service        Floodlight
                             Company        Service
                                            (Lease
                                            Lighting)
- ---------------------------------------------------------------------------------------------------
Quality Nissan               Southwestern   Contract      Not         Same as above
                             Public         for           available   
                             Service        Floodlight
                             Company        Service
                                            (Lease
                                            Lighting)
- ---------------------------------------------------------------------------------------------------

</TABLE>

Note: The signage on each property is subject to agreement with franchisor by
which the franchisor owns and maintains the signage.

             Texas Commerce Bank Acquisition and Working Capital Loan

  Revolving Credit Agreement in the amount of $40,000,000 dated as of June 26,
1997 by and among Cross-Continent Auto Retailers, Inc., and Texas Commerce Bank
National Association, Individually and as Agent.

                  Agreement with The Reynolds & Reynolds Company

  The Reynolds and Reynolds Company leases computers and computer parts to all
of the dealerships under numerous contracts.  The Reynolds and Reynolds Company
address is: 800 Germantown Street, Dayton, Ohio 45407.

                               Franchise Agreements

  Midway Chevrolet - Chevrolet-GEO Dealer Sales and Service Agreement (copy to
                      be provided)
  Westgate Chevrolet - Chevrolet - GEO Dealer Sales and Service Agreement (copy
                        to be provided)
  Plains Chevrolet - Chevrolet - GEO Dealers Sales and Service Agreement (copy
                      to be provided)
  Quality Nissan - Nissan Dealer Term Sales and Service Agreement (copy to be
                    provided)
  Douglas Toyota -Toyota Dealer Agreement (copy to be provided)
  Toyota West - Toyota Dealer Agreement (copy to be provided)
<PAGE>
 
                                 SCHEDULE 9.1.4

                Restrictions on Debt Payment and Sale of Property



  None

<PAGE>
 
                                 EXHIBIT 10.21

                        (Form of Cross Continent Lease)








                                LEASE AGREEMENT
                                ---------------

                                    BETWEEN
                                    -------

                       CAPITAL AUTOMOTIVE L.P., LANDLORD
                       ---------------------------------

                                      AND
                                      ---

    [                                                              ], TENANT
    ________________________________________________________________________


                           DATED: ____________, 1997
<PAGE>
 
ARTICLE I
                LEASE AGREEMENT, LEASED PROPERTY AND TERM......................1
                1.01  Lease Agreement..........................................1
                1.02  Contingent Upon Acquisition of the Leased Property.......2
                1.03  Term.....................................................2
                1.04  Holding Over.............................................3
                1.05  Surrender................................................4
                        
ARTICLE II      
                RENT...........................................................4
                2.01  Base Rent................................................4
                2.02  Payment..................................................4
                2.03  Security Deposit.........................................4
                2.04  Base Annual Rent Adjustment..............................5
                2.05  Additional Rent..........................................5
                2.06  Place(s) of Payment of Rent; Direct Payment of
                       Additional Rent.........................................5
                2.07  Net Lease................................................5
                2.08  No Termination, Abatement, Etc...........................5
                        
ARTICLE III     
                IMPOSITIONS AND UTILITIES......................................6
                3.01  Payment of Impositions...................................6
                3.02  Definition of Impositions................................7
                3.03  Utilities................................................8
                3.04  Escrow of Impositions....................................8
                3.05  Discontinuance of Utilities..............................9
                3.06  Liens....................................................9
                        
ARTICLE IV      
                INSURANCE......................................................9
                4.01  Insurance................................................9
                4.02  Insurance Limits........................................11
                4.03  Insurance Requirements..................................11
                4.04  Replacement Cost........................................12
                4.05  Blanket Policy..........................................12
                4.06  No Separate Insurance...................................12
                4.07  Waiver of Subrogation...................................13
                4.08  Mortgages...............................................13
                4.09  Other Insurance Requirements............................13
                        
ARTICLE V       
                INDEMNITY; SUBSTANCES OF CONCERN..............................13
<PAGE>
 
                5.01  Tenant's Indemnification................................13
                5.02  Substances of Concern...................................14
                5.03  Audits..................................................16
                5.04  Landlord's Option Re: Compliance........................17
                5.05  Environmental Indemnification...........................17
                5.06  Tenant's Cleanup Obligation.............................18
                5.07  Existing Environmental Conditions.......................18
                5.08  Survival of Tenant's Obligations........................18
                        
ARTICLE VI      
                USE AND ACCEPTANCE OF PREMISES................................18
                6.01  Use of Leased Properties................................18
                6.02  Acceptance of Leased Properties.........................19
                6.03  Conditions of Use and Occupancy.........................19
                6.04  Financial Statements and Other Information..............19
                        
ARTICLE VII     
                REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS...........20
                7.01  Maintenance.............................................20
                7.02  Compliance with Laws....................................20
                7.03  Required Alterations....................................21
                7.04  Mechanics' Liens........................................21
                7.05  Replacements of Fixtures................................21
                7.06  Encroachments; Restrictions.............................22
 
ARTICLE VIII             
                ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
                CAPITAL ADDITIONS TO THE LEASED PROPERTIES....................22
                8.01  Tenant's Right to Construct.............................22
                8.02  Scope of Right..........................................23
                8.03  Cooperation of Landlord.................................23
                8.04  Commencement of Construction............................24
                8.05  Rights in Tenant Improvements ..........................24
                8.06  Personal Property.......................................25
                8.07  Requirements for the Tenant's Personal Property.........25
                8.08  Financings of Capital Additions to a Leased Property....26
 
ARTICLE IX      DEFAULTS AND REMEDIES.........................................27
                9.01  Events of Default.......................................27
                9.02  Remedies................................................29
                9.03  Right of Set-Off........................................32
                9.04  Performance of Tenant's Covenants.......................32


                                      ii
<PAGE>
 
                  9.05   Late Charge......................................... 32
                  9.06   Litigation; Attorneys' Fees......................... 32
                  9.07   Remedies Cumulative................................. 33
                  9.08   Escrows and Application of Payments................. 33
                  9.09   Power of Attorney................................... 33

ARTICLE X
                  DAMAGE AND DESTRUCTION..................................... 34
                  10.01  General............................................. 34
                  10.02  Landlord's Inspection............................... 35
                  10.03  Landlord's Costs.................................... 35
                  10.04  Rent Abatement...................................... 35
                  10.05  Substantial Damage During Lease Term................ 35
                  10.06  Damage Near End of Term............................. 36
                  10.07  Risk of Loss........................................ 36

ARTICLE XI
                  CONDEMNATION............................................... 37
                  11.01  Total Taking........................................ 37
                  11.02  Partial Taking...................................... 37
                  11.03  Restoration......................................... 37
                  11.04  Landlord's Inspection............................... 38
                  11.05  Award Distribution.................................. 38
                  11.06  Temporary Taking.................................... 38

ARTICLE XII
                  ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL
                  COVENANTS
                  12.01  Organization and Qualification...................... 39
                  12.02  Material Agreements................................. 40
                  12.03  Changes in Condition................................ 40
                  12.04  Franchises, Licenses, etc........................... 40
                  12.05  Litigation.......................................... 41
                  12.06  Authorization and Enforceability.................... 41
                  12.07  No Legal Obstacle to Lease.......................... 41
                  12.08  Certain Business Representations.................... 42
                  12.09  Certain Financial Covenants......................... 43
                  12.10  Cash Flow Coverage Ratio Covenant................... 43
                  12.11  Disclosure.......................................... 43
                  12.12  Covenant Not to Acquire............................. 44

ARTICLE XIII
                  ASSIGNMENT AND SUBLETTING; ATTORNMENT...................... 44

                                      iii
<PAGE>
 
                  13.01  Prohibition Against Subletting and Assignment....... 44
                  13.02  Changes of Control.................................. 44
                  13.03  Operating/Service Agreements........................ 45
                  13.04  Assignment.......................................... 46
                  13.05  REIT Limitations.................................... 46
                  13.06  Attornment.......................................... 47
                  13.07  Severance and Spin-Off.............................. 47

ARTICLE XIV       ARBITRATION................................................ 48
                  14.01  Controversies....................................... 48
                  14.02  Appointment of Arbitrators.......................... 48
                  14.03  Arbitration Procedure............................... 48
                  14.04  Expenses............................................ 48
                  14.05  Enforcement of the Arbitration Award................ 49

ARTICLE XV        QUIET ENJOYMENT, SUBORDINATION,
                  ATTORNMENT, ESTOPPEL CERTIFICATES.......................... 49
                  15.01  Quiet Enjoyment..................................... 49
                  15.02  Landlord Mortgages; Subordination................... 49
                  15.03  Attornment.......................................... 49
                  15.04  Estoppel Certificates............................... 50
                  15.05  Waiver of Landlord's Lien........................... 50

ARTICLE XVI       RIGHT OF FIRST OFFER....................................... 51
                  16.01  Right of First Offer During Lease Term or
                         Extension Term...................................... 51
                  16.02  Right to Purchase at End of an Extension Term....... 52

ARTICLE XVII      MISCELLANEOUS.............................................. 53
                  17.01  Notices............................................. 53
                  17.02  Advertisement of a Leased Property.................. 54
                  17.03  Landlord's Access................................... 54
                  17.04  Entire Agreement.................................... 54
                  17.05  Severability........................................ 55
                  17.06  Captions and Headings............................... 55
                  17.07  Governing Law....................................... 55
                  17.08  Memorandum of Lease or Certain Rights Under
                         the Lease........................................... 55
                  17.09  Waiver.............................................. 55
                  17.10  Assignment; Binding Effect.......................... 55
                  17.11  Consents and Approvals.............................. 55
                  17.12  Single Property..................................... 56

                                      iv
<PAGE>
 
                  17.13  Modification........................................ 56
                  17.14  Incorporation by Reference.......................... 56
                  17.15  No Merger........................................... 56
                  17.16  Force Majeure....................................... 56
                  17.17  Laches.............................................. 56
                  17.18  Waiver of Jury Trial................................ 56
                  17.19  Permitted Contests.................................. 57
                  17.20  Construction of Lease............................... 57
                  17.21  Counterparts........................................ 58
                  17.22  Relationship of Landlord and Tenant................. 58

                                       v
<PAGE>
 
                                   SCHEDULES

          A         Leased Properties and Initial Base Rent
          B         Permitted Exceptions
          12.02     Material Agreements
          12.03     Changes in Condition


                                   EXHIBITS

          2.02      Payment Account Information
          2.04      Base Annual Rent Adjustment
          5.07      Environmental Reports
          15.02     Form of Subordination and Non-Disturbance Agreement



                                      vi
<PAGE>
 
                                LEASE AGREEMENT

          THIS LEASE AGREEMENT ("Lease") dated as of the ______ day of ________,
1997 by and between CAPITAL AUTOMOTIVE L.P., a Delaware limited partnership
("Landlord"), having its principal office at 1925 North Lynn Street, Suite 306,
Arlington, Virginia 22209, and [                 ], a ___________ [corporation],
having its principal office at [________________] ("Tenant").

                                    RECITALS

          WHEREAS, Tenant or an Affiliate (as hereafter defined) has conveyed or
will convey to Landlord certain parcels of real estate and improvements thereon
upon which Tenant engages in motor vehicle retail and/or motor vehicle related
businesses (the "Business"), which parcels of real estate and improvements
thereon are described on Schedule A attached hereto and incorporated herein by
                         ----------                                           
reference (each hereinafter a "Leased Property" or collectively, the "Leased
Properties"), and Landlord and Tenant desire to provide for the lease by
Landlord to Tenant of the Leased Properties; and

          WHEREAS, Landlord and Tenant desire that each of the Leased Properties
shall be the subject of this Lease and be used by Tenant in its operation of the
Business; and

          WHEREAS, this Lease provides that additional real estate and
improvements thereon may be made subject to the operation and effect of this
Lease, upon execution by Landlord and Tenant of a Lease Supplement designating
each such additional property as a Leased Property hereunder.

          NOW, THEREFORE, in consideration of the foregoing premises and of
their respective agreements and undertakings herein, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:

                                   ARTICLE I
                   LEASE AGREEMENT, LEASED PROPERTY AND TERM

          1.01   Lease Agreement.  Landlord does hereby let and lease unto
                 ---------------                                          
Tenant, and Tenant does hereby take and hire from Landlord, the Leased
Properties, which shall respectively consist of:

          (a)    The parcels of land described and located at the addresses
                 listed in Schedule A hereto, as more particularly described
                           ----------
                 therein, together with any additional parcels of real estate
                 and improvements thereon subsequently designated as a Leased
                 Property by the parties pursuant to a Lease Supplement as
                 provided for herein, together with all rights, titles,
                 appurtenant interests, covenants, licenses, privileges and
                 benefits thereto belonging, and any easements, rights-of-way,
                 rights of ingress or egress or 
<PAGE>
 
                 other interests in, on, or to any land, highway, street, road
                 or avenue, open or proposed, in, on, across, in front of,
                 abutting or adjoining such real property including, without
                 limitation, any strips and gores adjacent to or lying between
                 such real estate and any adjacent real estate (the "Land");

          (b)    All buildings, improvements, structures and Fixtures (as
                 hereinafter defined) now located or to be located or to be
                 constructed on the Land, including, without limitation,
                 sidewalks, landscaping, parking lots and structures, roads,
                 drainage and all above ground and underground utility
                 structures and conduits (on-site or off-site), equipment
                 systems and other so-called "infrastructure" improvements (the
                 "Improvements");

          (c)    All equipment, machinery, fixtures, and other items of real
                 and/or personal property, including all components thereof,
                 located in, on or used in connection with, and permanently
                 affixed to or incorporated into, the Improvements, including,
                 without limitation, all furnaces, boilers, heaters, electrical
                 equipment, heating, plumbing, lighting, ventilating,
                 refrigerating, incineration, air and water pollution control,
                 waste disposal, air-cooling and air-conditioning systems and
                 apparatus, sprinkler systems and fire and theft protection
                 equipment, and similar systems, all of which, to the greatest
                 extent permitted by law, are hereby deemed to constitute real
                 estate, together with all replacements, modifications,
                 alterations and additions thereto (collectively the
                 "Fixtures"); and

          (d)    All easements, rights and appurtenances relating to the Land
                 and the Improvements.

          SUBJECT, HOWEVER, to the liens, encumbrances, restrictions,
agreements, and other title matters listed or specifically referred to in
Schedule B ("Permitted Exceptions").
- ----------                          

          The Leased Properties shall however exclude all furniture, equipment,
inventory and items of moveable personal property attached to the Land or
Improvements that relate to the business being conducted on the Leased Property
which items may readily be removed without material damage to the Land and
Improvements whether or not such items might legally be considered to be
"fixtures" (all of which are owned by Tenant and shall hereinafter be defined as
the "Excluded Personal Property").

          1.02   Contingent Upon Acquisition of the Leased Property.  In the
                 --------------------------------------------------         
event this Lease is executed prior to the conveyance by Tenant or an Affiliate
of the Leased Property to Landlord, the parties acknowledge that the
effectiveness of this Lease in respect of such Leased Property is contingent
upon the closing of such conveyance (the "Commencement Date").



                                       2
<PAGE>
 
          1.03   Term.  The initial term of this Lease (the "Term") shall be
                 ----                                                       
for a fixed term of One Hundred and Twenty (120) months commencing on the
Commencement Date.  The initial term for any Leased Property designated in a
Lease Supplement shall begin on the date of such Lease Supplement and expire at
the end of the Term or then current Extension Term (as hereafter defined), as
the case may be.  Tenant shall have the right to extend this Lease for the
Leased Properties as a group, at Tenant's option, for one One Hundred and Twenty
(120) month renewal term from the expiration of the Term (the "First Extension
Term"), provided that no Event of Default (as defined in Section 9.01 hereof)
shall exist and be continuing.  In addition, Tenant shall have the right to
extend this Lease for the Leased Properties as a group at Tenant's option, for a
second One Hundred and Twenty (120) month renewal term from the expiration of
the First Extension Term (the "Second Extension Term", each an "Extension Term",
and collectively with the First Extension Term, the "Extension Terms") provided
that no Event of Default (as defined in Section 9.01 hereof) shall exist and be
continuing.  Tenant shall exercise the First Extension Term by written notice to
Landlord  no later than twelve (12) months prior to the end of the Term.  Tenant
shall exercise the Second Extension Term by written notice to Landlord no later
than twelve (12) months prior to the end of the First Extension Term.
Notwithstanding anything else to the contrary in this Agreement, the Rent during
the Second Extension Term shall be the Fair Market Rent (as hereafter defined)
for the Leased Property. Fair Market Rent shall be determined as soon as
possible after receipt by Landlord of Tenant's notice of option exercise, on the
basis of appraisals of independent appraisers selected in accordance with the
provisions of Section 16.02(b).  Tenant shall have the right, in its sole
discretion, to rescind the exercise of Tenant's option to extend the Lease for
the Second Extension Term during a period of fifteen (15) business days after
the determination of the Fair Market Rent.  If Tenant shall fail to exercise the
right to rescind within such fifteen (15) day period, the election to extend
shall be irrevocable and the Fair Market Rent so determined shall be the Base
Annual Rent during the Second Extension Term notwithstanding any changes in the
market rental rates, whether upward or downward, which may occur after such
determination. However, notwithstanding anything else in this Agreement, Fair
Market Rent shall become the Base Annual Rent (as defined hereafter) and shall
be subject to Base Annual Rent Adjustments as set forth in Section 2.04.

          1.04   Holding Over.  Should Tenant, without the express consent of
                 ------------                                                
Landlord, continue to hold and occupy any Leased Property after the expiration
or earlier termination of the Term or any Extension Term, as the case may be,
such holding over beyond the Term and the acceptance or collection of Rent (as
defined hereinafter) by Landlord shall operate and be construed as creating a
tenancy from month-to-month and not for any other term whatsoever. During any
such holdover period Tenant shall pay to Landlord for each month (or portion
thereof) Tenant remains in such Leased Property, in lieu of the Base Annual Rent
(as defined hereafter) for such Leased Property, an amount equal to the sum of
one-twelfth (1/12) of (i) one hundred seven percent (107%) of such Base Annual
Rent (the "Holdover Rate"), and (ii) as applicable, one hundred percent (100%)
of the Additional Rent (as defined hereinafter) for such Leased Property and
Other Additional Rent (as defined hereinafter) for such Leased Property, each as
in effect on the expiration date.  Said month-to-month tenancy may be terminated
by



                                       3
<PAGE>
 
Landlord by giving Tenant thirty (30) days written notice, and at any time
thereafter Landlord may re-enter and take possession of such Leased Property.

          1.05   Surrender.  Except as a result of (a) Tenant Improvements
                 ---------                                                
and Capital Additions (as defined hereinafter); (b) normal and reasonable wear
and tear (subject to the obligation of Tenant to maintain each Leased Property
in good order and repair during the Term); and (c) casualty, taking or other
damage and destruction not required to be repaired by Tenant, Tenant shall
surrender and deliver up each Leased Property at the expiration or termination
of the Term or the Extension Term therefor, as the case may be, broom clean, in
good order and repair, free of the Excluded Personal Property and any additional
items of Tenant's personal property (together with the Excluded Personal
Property, the "Tenant's Personal Property"), all of which Tenant shall remove
prior to such surrender and delivery, and in as good order and condition as of
the Commencement Date.


                                  ARTICLE II
                                     RENT

          2.01   Base Rent.  Tenant shall pay Landlord annual base rent (the
                 ---------                                                  
"Base Annual Rent") as to the Leased Property for each year during the Term or
the Extension Term (each such year a "Lease Year"), which Base Annual Rent shall
be subject to upward adjustment pursuant to Section 2.04.  In the first Lease
Year, Base Annual Rent shall be in the amount set forth on Schedule A (the
                                                           ----------     
"Initial Base Annual Rent"), paid to Landlord in twelve equal monthly
installments.

          2.02   Payment.  Tenant shall pay Landlord the Base Annual Rent as
                 -------                                                    
to the Leased Property for each Lease Year, without notice, demand, set-off or
counterclaim in advance, in lawful money of the United States of America and
payable in consecutive monthly installments commencing on the Commencement Date
and thereafter on the first day of each month during the Term.  Tenant will, to
the extent that such method of payment is compatible with its business
practices, make such payments by direct deposit of immediately available funds
to the account set forth in Exhibit 2.02 (which Exhibit 2.02 may be modified by
                            ------------        ------------                   
Landlord from time to time upon Notice (as hereafter defined) to Tenant).

          2.03   Security Deposit.  Prior to the Commencement Date, Tenant
                 ----------------                                         
shall deliver to Landlord an amount equal to one-twelfth (1/12th) of the Initial
Base Annual Rent, which amount shall be held by Landlord as security (the
"Security Deposit") for the performance of Tenant's payment and other
obligations under this Lease.  Upon an Event of Default and the continuance
thereof, Landlord shall have the right, but not the obligation, to apply the
Security Deposit as set forth in Section 9.08. If Tenant has fully and
faithfully carried out all of the terms, covenants and conditions hereof,
Landlord shall return the Security Deposit, without interest, after expiration
of this Lease, or upon early termination of this Lease in accordance with
Article X, Article XI, or otherwise less any amounts that Landlord may deduct
from such Security 



                                       4
<PAGE>
 
Deposit for unpaid amounts due and owing under this Lease at the time of
termination. In the event that Landlord eliminates its standard business policy
of requiring security deposits from tenants, then Landlord shall refund the
Security Deposit to Tenant within thirty (30) days of such policy change.

          2.04   Base Annual Rent Adjustment.
                 --------------------------- 

                 (a) The Base Annual Rent shall be adjusted during the Lease
          Term or the Extension Terms under the procedures set forth in Exhibit
                                                                        -------
          2.04 (the "Base Annual Rent Adjustment").
          ----
 
                 (b) As used in Exhibit 2.04, the "Index" shall mean the CPI-U
                                ------------                                  
          published by  the United States Department of Labor, Bureau of Labor
          Statistics Consumer Price Index for All Urban Consumers, U.S. City
          Average.  If at any time during the Term or the Extension Term, as the
          case may be, the Index shall be discontinued, Landlord shall select a
          substitute index, being an existing official index published by the
          Bureau of Labor Statistics or its successor or another, similar
          governmental agency, which index is most nearly equivalent to the
          Index.

          2.05   Additional Rent.  As to each Leased Property, in addition to
                 ---------------                                             
the Base Annual Rent, Tenant shall pay all other amounts, liabilities,
obligations and Impositions (as hereinafter defined) which Tenant assumes or
agrees to pay under this Lease and any fine, penalty, interest, charge and cost
which may be added for nonpayment or late payment of such items (collectively,
the "Additional Rent").

          2.06   Place(s) of Payment of Rent; Direct Payment of Additional
                 ---------------------------------------------------------
Rent.  The Base Annual Rent and Additional Rent are hereinafter referred to as
- -----                                                                         
"Rent."  Landlord shall have all legal, equitable and contractual rights, powers
and remedies provided in this Lease or by statute or otherwise in the case of
nonpayment of the Rent for each Leased Property. Tenant shall make all payments
of Rent at Landlord's address set forth in Section 17.01 or as Landlord may
otherwise from time to time direct in writing, or, if Landlord shall direct
Tenant, directly to a bank account specified by Landlord to Tenant in writing.
At the direction of the Landlord, Tenant shall make payments of Additional Rent
directly to the person or persons to whom such amount is owing at the time and
times when such payments are due, and Tenant shall give to Landlord such
evidence of such direct payments as Landlord shall reasonably request.

          2.07   Net Lease.  This Lease shall be deemed and construed to be
                 ----------                                                
an "absolute net lease" or "triple net lease," (i.e. that Tenant shall pay all
costs and expenses related to the ownership and operations of each Leased
Property, thereby leaving all Rent as an absolutely net return to Landlord) and
as to each Leased Property, Tenant shall pay all Rent, Impositions, and 


                                       5
<PAGE>
 
other charges and expenses in connection with such Leased Property throughout
the Term and any Extension Term, without abatement, deduction or set-off.

          2.08   No Termination, Abatement, Etc.  Except as otherwise
                 -------------------------------                     
specifically provided herein, Tenant shall remain bound by this Lease in
accordance with its terms. Except as otherwise specifically provided herein,
Tenant shall not, without the prior written consent of Landlord, modify,
surrender or terminate this Lease as to any Leased Property, nor seek nor be
entitled to any abatement, deduction, deferment or reduction of Rent, or set-off
against the Rent as to any Leased Property for any reason whatsoever.  Except as
specifically provided herein, the obligations of Landlord and Tenant shall not
be affected by reason of:  (a) the lawful or unlawful prohibition of, or
restriction upon, Tenant's use of any Leased Property, or any part thereof, the
interference with such use by any person, corporation, partnership or other
entity, or by reason of eviction by paramount title; (b) any claim which Tenant
has or might have against Landlord or by reason of any default or breach of any
warranty by Landlord under this Lease or any other agreement between Landlord
and Tenant, or to which Landlord and Tenant are parties; (c) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceeding affecting Landlord or any assignee or transferee
of Landlord; (d) any damage to, or destruction of, any Leased Property or any
portion thereof for whatever cause, or any taking of the Leased Property or any
portion thereof; or (e) any other cause, whether similar or dissimilar to any of
the foregoing, other than a discharge of Tenant from any such obligations as a
matter of law.  Except as otherwise specifically provided herein, and to the
maximum extent permitted by law, Tenant hereby specifically waives all rights,
including but not limited to any rights under any statute relating to rights of
tenants in the jurisdictions where the Leased Properties are located, which may
now be conferred upon it by law, relating to:  (a) the modification, surrender
or termination of this Lease, or the quitting or surrender of any Leased
Property or any portion thereof; (b) any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Tenant hereunder; or (c) any
rights of redemption.  As to each Leased Property, the obligations of Landlord
and Tenant hereunder shall be separate and the Rent and all other sums shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated pursuant to the express provisions of this Lease or by
termination of this Lease other than by reason of an Event of Default.


                                  ARTICLE III
                           IMPOSITIONS AND UTILITIES

          3.01   Payment of Impositions.  Subject to the adjustments set forth
                 ----------------------                                 
herein, Tenant shall pay, in the manner set forth in Section 3.04, as
Additional Rent, to the Landlord an amount equal to the amount necessary to pay
all Impositions (as hereinafter defined) that may be levied or become a lien on
any Leased Property or any part thereof at any time (whether prior to or during
the Term), without regard to prior ownership of said Leased Property, before the
same becomes delinquent.  Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon any
Leased Property or any part 



                                       6
<PAGE>
 
thereof. Tenant, at its expense, shall prepare and file all tax returns and
reports in respect of any Imposition as may be required by governmental
authorities, provided, however, that Tenant shall provide to Landlord copies of
all filings of such tax returns or reports in respect of any real or personal
property owned by Landlord. Tenant shall be entitled to any refund due in
respect of such Impositions from any taxing authority if no Event of Default
shall have occurred hereunder and be continuing. Any refunds in respect of such
Impositions retained by Landlord due to an Event of Default shall be applied as
provided in Section 9.08. Landlord and Tenant shall, upon request of the other,
provide such data as is maintained by the party to whom the request is made with
respect to a Leased Property as may be necessary to prepare any required tax
returns and reports. In the event governmental authorities classify any property
covered by this Lease as personal property, Landlord and Tenant shall file all
personal property tax returns in such jurisdictions where it may legally so file
with respect to their respective owned personal property. Landlord, to the
extent it possesses the same, and Tenant, to the extent it possesses the same,
will provide the other party, upon request, with cost and depreciation records
necessary for filing such returns or reports for any property so classified as
personal property. To the extent that Landlord is legally required to file
personal property tax returns, Tenant will be provided with copies of assessment
notices indicating a value in excess of the reported value in sufficient time
for Tenant to file a protest. Tenant may, upon notice to Landlord, at Tenant's
option and at Tenant's sole cost and expense, protest, appeal, or institute such
other proceedings as Tenant may deem appropriate to effect a reduction of real
estate or personal property assessments and Landlord, at Tenant's expense as
aforesaid, shall fully cooperate with Tenant in such protest, appeal, or other
action. Tenant shall provide Landlord copies of all materials filed or presented
in connection with any such proceeding. Tenant shall promptly reimburse Landlord
for all taxes paid by Landlord, which were not paid with deposits received from
Tenant, upon receipt of billings accompanied by copies of a bill therefor and
payments thereof which identify the property with respect to which such payments
are made. Impositions imposed with respect to the tax-fiscal period during which
the Term commences and terminates as to each Leased Property shall be adjusted
and prorated between Landlord and Tenant on a per diem basis, with Tenant being
obligated to pay its pro rata share from and including the Commencement Date to
and including the expiration or termination date of the Term or Extension Term,
as the case may be, whether or not such Imposition is imposed before or after
such commencement or termination, and Tenant's obligation to pay its prorated
share thereof shall survive such termination. Tenant shall also pay to Landlord
a sum equal to the amount which Landlord may be caused to pay of any privilege
tax, sales tax, gross receipts tax, rent tax, occupancy tax or like tax
(excluding any tax based on net income), hereinafter levied, assessed, or
imposed by any federal, state, city, county or municipal or other local
governmental authority, or any subdivision thereof, upon or measured by rent or
other consideration required to be paid by Tenant under this Lease.

          3.02   Definition of Impositions.  "Impositions" means,
                 -------------------------                       
collectively:  (a) taxes (including without limitation, all real estate and
personal property ad valorem (whether assessed as part of the real estate or
separately assessed as unsecured personal property), sales and use, business or
occupation, single business, gross receipts, transaction, privilege, rent or
similar taxes, but not including income or franchise or excise taxes payable
with respect to Landlord's 



                                       
                                       7
<PAGE>
 
receipt of Rent); (b) assessments, whether in the nature of a special assessment
or otherwise (including, without limitation, all assessments for public
improvements or benefits, whether or not commenced or completed prior to the
date hereof and whether or not to be completed within the Term or any Extension
Term, as the case may be), provided that all assessments shall be paid over the
longest amortization period available without causing a penalty or the accrual
of interest; (c) ground rents, water, sewer or other rents and charges, excises,
tax levies, and fees (including, without limitation, license, permit,
inspection, authorization and similar fees); (d) to the extent they may become a
lien on a Leased Property, all taxes imposed on Tenant's operations of such
Leased Property including without limitation, Tenant's or Affiliates of Tenant's
employee withholding taxes, income taxes and intangible taxes; and (e) all other
governmental charges, in each case whether general or special, ordinary or
extraordinary, or foreseen or unforseen, of every character in respect of each
Leased Property or any part thereof, the Business conducted by Tenant thereon,
and/or the Rent (including all interest and penalties thereon due to any failure
in payment by Tenant), which at any time prior to, during or in respect of the
Term or any Extension Term, as the case may be, hereof may be assessed or
imposed on or in respect of or be a lien upon (i) Landlord or Landlord's
interest in any Leased Property or any part thereof; (ii) any Leased Property or
any part thereof or any rent therefrom or any estate, right, title or interest
therein; or (iii) any occupancy, operation, use or possession of, or sales from,
or activity conducted on, or in connection with any Leased Property or the
leasing or use of any Leased Property or any part thereof. Tenant shall not,
however, be required to pay: (x) any tax based on net income (whether
denominated as a franchise or capital stock or other tax) imposed on Landlord or
(y) except as provided in Section 13.01, any tax imposed with respect to the
sale, exchange or other disposition by Landlord of a Leased Property or the
proceeds thereof; provided, however, that if any tax, assessment, tax levy or
charge which Tenant is obligated to pay pursuant to the first sentence of this
definition and which is in effect at any time during the Term hereof is totally
or partially repealed, and a tax, assessment, tax levy or charge set forth in
clause (x) or (y) immediately above is levied, assessed or imposed expressly in
lieu thereof Tenant shall then pay such tax, levy, or charge set forth in said
clause (x) or (y).

          3.03   Utilities.  Tenant shall contract for, in its own name, and
                 ---------                                                  
will pay, as Additional Rent all taxes, assessments, charges/deposits, and bills
for utilities, including without limitation charges for water, gas, oil,
sanitary and storm sewer, electricity, telephone service, trash collection, and
all other utilities which may be charged against the occupant of the
Improvements during the Term.  Tenant shall at all times maintain that amount of
heat necessary to ensure against the freezing of water lines.  Tenant hereby
agrees to indemnify and hold Landlord harmless from and against any liability or
damages to the utility systems of each Leased Property that may result from
Tenant's failure to maintain sufficient heat in the Improvements therefor.

          3.04   Escrow of Impositions. If Tenant is in default under this
                 ---------------------                                    
Lease beyond any applicable cure period, Tenant shall thereafter deposit with
Landlord on the first day of each month during the  Term hereof and any
Extension Term, as the case may be, a sum equal to one-twelfth (1/12th) of the
Impositions assessed against such Leased Property which sums shall 



                                       8
<PAGE>
 
be used by Landlord toward payment of such Impositions. If, at the end of any
applicable tax year, any such funds held by Landlord are insufficient to make
full payment of taxes or other Impositions for which such funds are held,
Tenant, on demand, shall pay to Landlord any additional funds necessary to pay
and discharge in full the obligations of Tenant pursuant to the provisions of
this Section. If, however, at the end of any applicable tax year, such funds
held by Landlord are in excess of the total payment required to satisfy taxes or
other Impositions for which such funds are held, Landlord shall apply such
excess amounts to a tax and Imposition escrow fund for the next tax year. With
respect to each Leased Property, if any such excess exists following the
expiration or earlier termination of this Lease, and subject to Section 8.08
below, Landlord shall promptly refund such excess amounts to Tenant. The receipt
by Landlord of the payment of such Impositions by and from Tenant shall only be
as an accommodation to Tenant and the taxing authorities, and shall not be
construed as rent or income to Landlord, Landlord serving, if at all, only as a
conduit for delivery purposes.

          3.05   Discontinuance of Utilities.  Landlord will not be liable
                 ---------------------------                              
for damages to person or property or for injury to, or interruption of, business
for any discontinuance of utilities at any Leased Property nor will such
discontinuance in any way be construed as an eviction of Tenant from such Leased
Property or cause an abatement of Rent as to such Leased Property or operate to
release Tenant from any of Tenant's obligations as to such Leased Property under
this Lease.  Notwithstanding the forgoing, however, Landlord shall be liable for
damages to person or property or for injury to, or interruption of business, for
any discontinuance of utilities at any Leased Property, in the event and to the
extent, such damages or injury are caused by the gross negligence or wilful
misconduct of the Landlord.

          3.06   Liens.  Subject to Section 17.19 relating to contests,
                 -----                                                 
Tenant shall not directly or indirectly create or allow to remain, and will
promptly discharge at its expense, any lien, encumbrance, attachment, title
retention agreement or claim upon any Leased Property or any attachment, levy,
claim or encumbrance in respect of any Rent provided under this Lease, not
including, however:  (a) this Lease; (b) utility easements and road rights-of-
way in the customary form (i) provided the same do not adversely affect the
intended use of the Leased Properties (including the Improvements) and do not
create a material adverse effect on the value of the Leased Properties or (ii)
which result solely from the action or inaction of Landlord; (c) zoning and
building laws or ordinances, provided they do not prohibit the use of the Leased
Properties for the Business and so long as the Leased Properties are in
compliance with same; (d) such encumbrances as are subsequently consented to in
writing by Landlord, but excluding liens in respect of Impositions required to
be paid under Section 3.01;  (e) liens for Impositions so long as (i) the same
are not yet payable or are payable without the addition of any fine or penalty
or (ii) such liens are being contested as permitted under Section 17.19; and (f)
other encumbrances, easements, rights of way or liens (i) provided the same do
not adversely affect the intended use of the Leased Properties (including the
Improvements) and do not create a material adverse effect on the value of the
Leased properties, or (ii) which result solely from the action or inaction of
Landlord.




                                       9
<PAGE>
 
          3.07   Tax Statements.  Tenant shall immediately after the
                 --------------
Commencement Date notify the appropriate taxing authorities in the jurisdiction
in which the Leased Properties are situated that all tax statements, assessments
and bills for Impositions shall be delivered directly to Tenant for payment.


                                  ARTICLE IV
                                   INSURANCE

          4.01   Insurance.  Tenant shall, at Tenant's expense, keep the
                 ---------
Improvements, Fixtures, and other components of each Leased Property insured
against the following risks:

                 (a)  Loss or damage by fire with extended coverage (including
                      windstorm and subsidence), vandalism and malicious
                      mischief, sprinkler leakage and all other physical loss
                      perils commonly covered by "All Risk" insurance in an
                      amount not less than one hundred percent (100%) of the
                      then full replacement cost thereof (as hereinafter
                      defined). Such policy shall include an agreed amount
                      endorsement if available at a reasonable cost. Such policy
                      shall also include endorsements for contingent liability
                      for operation of building laws, demolition costs, and
                      increased cost of construction.

                 (b)  Loss or damage by explosion of steam boilers, pressure
                      vessels, or similar apparatus, now or hereafter installed
                      on any Leased Property, in commercially reasonable amounts
                      acceptable to Landlord.

                 (c)  [Intentionally Omitted]

                 (d)  If the Land or any portion thereof related to a Leased
                      Property is located in whole or in part within a
                      designated flood plain area, loss or damage caused by
                      flood in commercially reasonable amounts acceptable to
                      Landlord.

                 (e)  Loss or damage commonly covered by blanket crime insurance
                      including employee dishonesty, loss of money orders or
                      paper currency, depositor's forgery, and loss of property
                      accepted by Tenant for safekeeping, in commercially
                      reasonable amounts acceptable to Landlord.

                 (f)  Workers' compensation insurance as required by statute in
                      respect of any work or other operations on or about each
                      Leased Property.



                                      10
<PAGE>
 
                 (g)  Comprehensive liability insurance as to each Leased
                      Property in amounts equal to the greater of (i) One
                      Million Dollars ($1,000,000) for each occurrence and Two
                      Million Dollars ($2,000,000) in the aggregate, or (ii) the
                      limits of liability generally required under the franchise
                      agreements or other agreements pursuant to which Tenant
                      operates the Businesses conducted on or about each Leased
                      Property.

                 (h)  Commercial comprehensive catastrophic liability insurance
                      with limits of liability of not less than the greater of
                      (i) Five Million ($5,000,000) and (ii) the limits of
                      liability generally required under the franchise
                      agreements or other agreements pursuant to which Tenant
                      operates the Businesses conducted on or about each Leased
                      Property.

                 (i)  upon Landlord's request if such insurance is customary in
                      the region in which the Leased Property is situated,
                      earthquake insurance in an amount not less than the full
                      insurable value of each Leased Property.

                 (j)  During the period when any addition, alteration,
                      construction, installation or demolition is being made or
                      performed to any part of the Leased Property, contingent
                      liability, public liability, completed value, builder's
                      risk (non-reporting form) workers' compensation and other
                      insurance as is deemed reasonably prudent by Landlord.

          4.02   Insurance Limits.  Deductible provisions for the insurance
                 ----------------                                          
required under Section 4.01(a) shall not exceed Twenty-Five Thousand Dollars
($25,000) per location per occurrence and One Hundred Thousand Dollars
($100,000) aggregate per occurrence; under clause(d),  Twenty-Five Thousand
Dollars ($25,000) per occurrence, except that if federal flood insurance is
available then such deductible shall not be greater than the lowest deductible
available with respect to such federal flood insurance; under clause (g), Fifty
Thousand Dollars ($50,000) per occurrence; under clause (h), Twenty-Five
Thousand Dollars ($25,000) per occurrence; and under clause (j), Twenty-Five
Thousand Dollars ($25,000) per occurrence.

           4.03  Insurance Requirements.  The following provisions shall apply
                 -----------------------                                
to all insurance coverages required hereunder:

                 (a)  The carriers of all policies shall have a Best's Rating of
                      "A-" or better and a Best's Financial Category of XII or
                      larger and shall be authorized to do insurance business in
                      the jurisdiction in which the Leased Property is located.



                                      11
<PAGE>
 
                 (b)  Tenant shall be the "named insured" and Landlord and any
                      mortgagee of Landlord shall be an "additional named
                      insured" on each policy with respect to such mortgagee's
                      and the Landlord's interest in the Leased Property, except
                      the coverages required under Section 4.01(f) hereto.

                 (c)  Tenant shall deliver to Landlord certificates or policies
                      showing the required coverages and endorsements. Each
                      policy or certificate of insurance shall provide that such
                      policy or certificate (i) may not be canceled, (ii) may
                      not lapse for failure to renew, and (iii) no material
                      change or reduction in coverage may be made, without at
                      least thirty (30) days' prior written notice to Landlord.

                 (d)  The policies shall contain a severability of interest
                      and/or cross-liability endorsement, provide that the acts
                      or omissions of Tenant will not invalidate Landlord's
                      coverage, and provide that Landlord shall not be
                      responsible for payment of premiums.

                 (e)  All loss adjustment shall require the written consent of
                      Landlord and Tenant, as their interests may appear.

                 (f)  At least (30) thirty days prior to the expiration of each
                      policy, Tenant shall deliver to Landlord a certificate
                      showing renewal of such policy and payment of the annual
                      premium therefor.

          Landlord shall have the right to review the insurance coverages
required hereunder with Tenant from time to time, to obtain the input of third
party professional insurance advisors (at Landlord's expense) with respect to
such insurance coverages, and to consult with Tenant in Tenant's annual review
and renewal of such insurance coverages.  All insurance coverages hereunder
shall be in such form, substance and amounts as are customary or standard in
Tenant's industry, but at a minimum shall comply with the requirements set forth
herein.

          4.04   Replacement Cost.  The term "full replacement cost" means the
                 ----------------                                         
actual replacement cost of the Improvements from time to time including
increased cost of construction, with no reductions or deductions. Tenant shall,
not later than thirty (30) days after the anniversary of each policy of
insurance, increase the amount of the replacement cost endorsement for the
Improvements to the extent necessary to reflect increased costs of construction.
If Tenant makes any Permitted Alterations (as hereinafter defined) to any Leased
Property, Landlord may have such full replacement cost redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement cost was last determined.

          4.05   Blanket Policy.  Tenant may carry the insurance required by
                 --------------                                             
this Article under a blanket policy of insurance, provided that the coverage
afforded Tenant will not be 



                                      12
<PAGE>
 
reduced or diminished or otherwise be different from that which would exist
under a separate policy meeting all of the requirements of this Lease and the
Landlord approves the form of the policy.

          4.06   No Separate Insurance.  Tenant shall not take out separate
                 ----------------------                                    
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing insurance
by securing an additional policy or additional policies, unless all parties
having an insurable interest in the subject matter of the insurance, including
Landlord and any mortgagees, are included therein as additional named insureds
or loss payees, the loss is payable under said insurance in the same manner as
losses are payable under this Lease, and such additional insurance is not
prohibited by the existing policies of insurance required pursuant to this
Article.  Tenant shall immediately notify Landlord of the taking out of such
separate insurance or the increasing of any of the amounts of the existing
insurance by securing an additional policy or additional policies.  The term
"mortgages" as used in this Lease includes, but is not limited to, Deeds of
Trust and the term "mortgagees" includes, but is not limited to, trustees and
beneficiaries under a Deed of Trust.

          4.07   Waiver of Subrogation.  Each party hereto hereby waives any
                 ---------------------                                      
and every claim which arises or may arise in its favor and against the other
party hereto during the Term or any Extension Term or renewal thereof, for any
and all loss of, or damage to, any of its property located within or upon, or
constituting a part of, any Leased Property, which loss or damage is covered by
valid and collectible insurance policies, to the extent that such loss or damage
is recoverable in full under such policies.  Said mutual waiver shall be in
addition to, and not in limitation or derogation of, any other waiver or release
contained in this Lease with respect to any loss or damage to property of the
parties hereto.  Inasmuch as the said waivers will preclude the assignment of
any aforesaid claim by way of subrogation (or otherwise) to an insurance company
(or any other person), each party hereto agrees immediately to give each
insurance company which has issued to it policies of insurance, written notice
of the terms of said mutual waivers, and to have such insurance policies
properly endorsed, if necessary, to prevent the invalidation of said insurance
coverage by reason of said waivers, so long as such endorsement is available at
a reasonable cost.

          4.08   Mortgages.  The following provisions shall apply if Landlord
                 ---------                                                   
at the Commencement Date or thereafter places a mortgage on any Leased Property
or any part thereof: (a) Tenant shall obtain a standard form of mortgage clause
insuring the interest of the mortgagee; (b) Tenant shall deliver evidence of
insurance to such mortgagee; (c) loss adjustment shall require the consent of
the mortgagee but such consent shall not be unreasonably withheld and may not
include any requirement that the funds be paid to mortgagee in lieu of
reconstruction; and (d) Tenant shall obtain such other coverages and provide
such other information and documents as may be reasonably required by the
mortgagee.  Tenant shall be required to pay for the cost of the mortgage clause
insuring the interest of the mortgagee only if Landlord places a mortgage on a
Leased Property at the Commencement Date.



                                      13
<PAGE>
 
          4.09      Other Insurance Requirements.  Notwithstanding anything in
                    ----------------------------                              
this Lease to the contrary and not by way of limitation, in addition to the
types and amounts of insurance required to be carried by Tenant herein, Tenant
covenants to insure and continue in effect such types and amounts of insurance
as the Tenant shall be required to carry pursuant to any contract, agreement,
instrument, statute, law, rule or regulation relating to the use of the Leased
Property and the operations of any Business or other activities thereon,
including noncancellable written notice to mortgagee.

                                   ARTICLE V
                        INDEMNITY; SUBSTANCES OF CONCERN

          5.01      Tenant's Indemnification.  Subject to Section 4.07, Tenant
                    ------------------------                                  
hereby agrees to indemnify and hold harmless Landlord, its agents, and employees
from and against any and all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, costs and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) (the "Claims") incurred in connection with or arising
from: (a) the use, condition, operation or occupancy of the Leased Properties;
(b) any activity, work, or thing done, or permitted or suffered by Tenant in, on
or about the Leased Properties; (c) any acts, omissions, or negligence of Tenant
or any person claiming under Tenant, or the contractors, agents, employees,
invitees, or visitors of Tenant or any such person; (d) any breach, violation,
or nonperformance by Tenant or any person claiming under Tenant or the
employees, agents, contractors, invitees, or visitors of Tenant or of any such
person, of any term, representation, warranty, covenant, or provision of this
Lease or any law, ordinance, or governmental requirement of any kind; (e) any
injury or damage to the person, property or Business of Tenant, its employees,
agents, contractors, invitees, visitors, or any other person entering upon any
Leased Property; (f) any accident, injury to or death of persons or loss or
damage to any item of property occurring on or about any Leased Property; (g)
any Environmental Law or any pollution or other threat to human health or the
environment at, arising out of or relating to any Leased Property as set forth
in Section 5.05, and (h) any brokers' or agents' fees and commissions.  If any
action or proceeding is brought against Landlord, its employees, or agents by
reason of any such demand, claim, or cause of action, Tenant, upon notice from
Landlord, will defend the same at Tenant's expense with counsel reasonably
satisfactory to Landlord.  In the event Landlord reasonably determines that its
interests and the interests of Tenant in any such action or proceeding are not
substantially the same and that Tenant's counsel cannot adequately represent the
interests of Landlord therein, Landlord shall have the right to hire separate
counsel in any such action or proceeding and the reasonable costs thereof shall
be paid for by Tenant.  Tenant's indemnification obligations with respect to a
Claim shall survive the expiration or earlier termination of this Lease until
the later of (i) two (2) years from the date hereof, or (ii) the expiration of
the period ninety (90) days after the date on which Landlord has actual
knowledge of the existence of such Claim, provided, however, that Tenant's
indemnification obligations shall survive the expiration or earlier termination
of this Lease until ninety (90) days after the expiration of the applicable
statute of limitations for Claims incurred in connection with, arising out of,
or related to (i) Section 5.01(g) or (ii) the failure to pay, as provided for in
this Agreement, any Imposition.  Nothing herein is 

                                      14
<PAGE>
 
intended to have Tenant indemnify or hold harmless Landlord for any actions or
failures to act by Landlord, its agents, employees, servants and invitees.

           5.02     Substances of Concern.
                    --------------------- 

                    (a)  For purposes of this Section 5:

                         (i)  "Substances of Concern" means, without limitation,
                              chemicals, pollutants, contaminants, wastes, toxic
                              substances, radioactive materials or genetically
                              modified organisms, which are, have been or become
                              regulated by any federal, state or local
                              government authority including, without
                              limitation, (1) petroleum or any fraction thereof,
                              (2) asbestos, (3) any substance or material
                              defined as a "hazardous substance" pursuant to (S)
                              101 of the Comprehensive Environmental Response
                              Compensation and Liability Act (42 U.S.C. (S)
                              9601), or (4) any substance or material defined as
                              a "hazardous chemical" pursuant to the federal
                              Hazard Communication Standard (29 C.F.R. (S)
                              1910.1200).

                         (ii) "Environmental Laws" means all federal, state,
                              local, and foreign laws and regulations relating
                              to pollution or protection of human health or the
                              environment (including, without limitation,
                              ambient air, surface water, ground water,
                              wetlands, land surface, subsurface strata, and
                              indoor and outdoor workplace), including, without
                              limitation, (1) laws and regulations relating to
                              emissions, discharges, releases, or threatened
                              releases of Substances of Concern, and (2) common
                              law principles of tort liability.

                    (b)  Tenant shall not, either with or without negligence,
                         injure, overload, deface, damage or otherwise harm any
                         Leased Property or any part or component thereof;
                         commit any nuisance; permit the emission of any
                         Substances of Concern; allow the release or other
                         escape of any biologically or chemically active
                         substances or materials or other Substances of Concern
                         so as to impregnate, impair or in any manner affect,
                         even temporarily, any element or part of any Leased
                         Property or neighboring property, or allow the storage
                         or use of such substances or materials in any manner
                         not sanctioned by law and by reasonable standards
                         prevailing in the automobile retail and related
                         industries for the storage and use of such substances
                         or materials; nor shall Tenant permit the 

                                      15
<PAGE>
 
                         occurrence of objectionable noise or odors; or make,
                         allow or suffer any waste whatsoever to any Leased
                         Property. Landlord may inspect each Leased Property
                         from time to time, and Tenant will cooperate with such
                         inspections.

                   (c)   Notwithstanding the foregoing, Tenant anticipates
                         using, storing and disposing of certain Substances of
                         Concern in connection with operation of its Business.
                         Such Substances of Concern include, but are not limited
                         to, the following: motor oil, waste motor oil and
                         filters, transmission fluid, antifreeze, refrigerants,
                         waste paint and lacquer thinner, batteries, solvents,
                         lubricants, degreasing agents, gasoline and diesel
                         fuels. Tenant shall ascertain and comply fully with all
                         applicable Environmental Laws and environmental
                         standards and requirements set by federal, state or
                         local laws, rules, regulations or governmental
                         directives related to the Leased Properties or Tenant's
                         use or occupancy of the Leased Property ("Environmental
                         Standards"), including but not limited to any laws or
                         standards (a) regulating the use, storage, generation
                         or disposal of Substances of Concern, (b) regulating
                         the monitoring or use of any underground or aboveground
                         storage tanks at the Leased Properties, or (c)
                         establishing any permitting, notification or reporting
                         requirements. As promptly as practicable after the
                         Commencement Date (but in no event later than 120 days
                         thereafter), Tenant shall establish and implement a
                         program of compliance with all applicable Environmental
                         Laws and Environmental Standards ("Environmental
                         Compliance Program"). Tenant shall update such
                         Environmental Compliance Program every three (3) years
                         during the Term. Tenant shall submit its Environmental
                         Compliance Program and each update thereto to Landlord;
                         provided, however, such submittal shall not relieve
                         Tenant of its obligations pursuant to this Section 5.
                         Tenant's Environmental Compliance Program shall include
                         a program for monitoring Tenant's compliance with
                         Environmental Laws and Environmental Standards and a
                         plan for correcting immediately any incident of
                         noncompliance. Tenant shall comply with its
                         Environmental Compliance Program.

                   (d)   In the event of any noncompliance with any
                         Environmental Laws or Environmental Standards or any
                         spill, release or discharge of Substances of Concern in
                         a reportable quantity under federal, state or local
                         law, Tenant shall:

                                      16
<PAGE>
 
                         (i)    give Landlord immediate notice of the incident
                                by telephone or facsimile, providing as much
                                detail as possible. Such notice shall be
                                provided to Landlord's National Dealership Real
                                Estate Manager or to such other person as
                                Landlord shall designate in accordance with
                                Section 16.01 below;

                         (ii)   as soon as possible, but no later than seventy-
                                two (72) hours, after discovery of an incident
                                of noncompliance, submit a written report to
                                Landlord, identifying the source or case of the
                                noncompliance or spill, release or discharge
                                (including the names and quantities of any
                                Substances of Concern involved) and the method
                                or action required to correct the problem; and

                         (iii)  cooperate with Landlord or its designated agents
                                or contractors with respect to the investigation
                                and correction of such problem.

                    Tenant shall also be solely responsible for providing any
notice to any federal, state or local governmental authority required by
applicable laws and regulations as a result of such incident.

          5.03      Audits.  Landlord shall have the right to conduct, at its
                    ------                                                   
expense, periodic audits of Tenant's compliance with the Environmental
Compliance Program and management of Substances of Concern at the Leased
Properties and/or periodic tests of air, soil, surface water or groundwater at
or near the Leased Properties.  Landlord shall not be obligated to provide
Tenant with the results of any audit or tests unless such results are the basis
for a claim by Landlord that Tenant has breached its obligations under this
Lease or a demand by Landlord that Tenant modify its Environmental Compliance
Program or operations or remediate or remove a spill, release or discharge of
Substances of Concern in accordance with Section 5.06 below.  Tenant agrees
promptly to modify its Environmental Compliance Program or the conduct of its
operations in accordance with Landlord's reasonable recommendations directed at
improvement of Tenant's handling, use and disposal of Substances of Concern  in,
on or from any Leased Property to bring Tenant into compliance with
Environmental Laws.  If, as a result of an environmental audit performed by
Landlord with respect to any Leased Property, Landlord reasonably determines in
its judgment that alterations or improvements of equipment or buildings located
on the Leased Property are necessary to comply with Environmental Laws, Tenant
shall perform such alterations or improvements as are reasonable under the
circumstances and pay all costs and expenses relating thereto.   If Tenant shall
fail to pay any such costs or expenses, Tenant shall deposit with Landlord the
full amount necessary to pay such costs in full within ten (10) days of
Landlord's demand.  Nothing contained herein shall be construed to obligate or
require Landlord to perform any audits, tests, inquiry or investigation.  Should

                                      17
<PAGE>
 
Landlord elect or be required to disclose to Tenant the results of any audit or
tests, Landlord shall not be liable in any way for the truth or accuracy of such
information.

          5.04      Landlord's Option Re: Compliance.  If Tenant, after notice
                    --------------------------------                          
from Landlord, fails to comply with or perform any of its obligations pursuant
to this Section 5, including, but not limited to, obligations to clean up
spills, releases or discharges, Landlord may, but shall not be obligated to,
perform such obligations and Tenant shall pay Landlord within ten (10) days of
demand Landlord's costs therefor, including any overhead and administrative
costs.

          5.05      Environmental Indemnification.  Tenant shall indemnify and
                    -----------------------------                             
hold harmless Landlord from and against all demands, claims, causes of action,
fines, penalties, damages (including punitive and consequential damages),
losses, liabilities (including strict liability), judgments, and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) imposed upon or asserted against Tenant, Landlord or any
Leased Property on account of any Environmental Law (irrespective of whether
there has occurred any violation of any Environmental Law) relating to any
Leased Property, including (a) response costs and costs of removal and remedial
action incurred by the United States Government or any state or local
governmental unit to any other person or entity, or damages from injury to or
destruction or loss of natural resources, including the reasonable costs of
assessing such injury, destruction or loss, incurred pursuant to any
Environmental Law, (b) costs and expenses of abatement, investigation, removal,
remediation, correction or cleanup, fines, damages, response costs or penalties
which arise from the provisions of any Environmental Law, (c) liability for
personal injury or property damage arising under any statutory or common-law
tort theory, including damages assessed for the maintenance of a public or
private nuisance or for carrying on of a dangerous activity, (d) liability by
reason of a breach of an environmental representation or warranty by Tenant, and
(e) failure of Tenant to complete in a timely manner alterations or improvements
of equipment or buildings located on the Leased Property deemed necessary or
advisable by Landlord pursuant to Section 5.03 in a manner acceptable to
Landlord.

          5.06      Tenant's Cleanup Obligation.  If any spill, release or
                    ---------------------------                           
discharge of Substances of Concern occurs on, at or from the Leased Properties
during the Term, Tenant shall promptly take all actions, at its sole expense, as
are necessary to remove or remediate such spill, release or discharge and to
return the Leased Property to the condition existing prior to the introduction
of any such Substances of Concern to the Leased Property, provided that
Landlord's approval of such action shall first be obtained, which approval shall
not be unreasonably withheld so long as such actions would not potentially have
any material adverse effect on the Leased Property.

          5.07      Existing Environmental Conditions.  Tenant acknowledges that
                    ---------------------------------                           
it has had the opportunity to review the Environmental Reports attached hereto
as Exhibit 5.07.  Tenant hereby represents that it has reviewed and is aware of
   ------------                                                                
the matters disclosed in the Environmental Reports.

                                      18
<PAGE>
 
                    As a material consideration for Landlord's willingness to
enter into this Lease, Tenant, for itself and its Affiliates, and each of their
shareholders, directors, officers, employees, agents, contractors,
representatives, insurers, successors and assigns hereby waives and releases
Landlord and its Affiliates and each of their shareholders, directors, officers,
employees, representatives, agents, contractors, representatives, insurers,
successors and assigns from any and all claims, demands, liabilities, costs,
expenses, causes of action and rights of action whatsoever, past, present or
future, known or unknown, suspected or unsuspected, which arise out of or relate
in any way to the violation of Environmental Laws or the use, storage,
treatment, disposal, presence, spill, release, or discharge of Substances of
Concern at, on or from the Leased Properties before the Commencement Date
(collectively, the "Released Claims").

                    In the event that Landlord is ordered by a governmental
agency, or determines that it is in its best interest, to remedy any violation
of Environmental Laws or to remove or remediate any Substances of Concern
present on, under or about the Leased Properties on the Commencement Date, or
spilled, released or discharged on, at or from the Leased Properties before the
Commencement Date, Tenant shall immediately upon notice from Landlord take all
actions, at Tenant's sole expense, to promptly complete such removal or
remediation.

          5.08      Survival of Tenant's Obligations.  Tenant's obligations
                    --------------------------------                       
under this Section 5 shall survive the expiration or earlier termination of this
Lease.  During any period of time employed by Tenant after the termination of
this Lease to complete the removal from the Leased Property of any Substances of
Concern, if the premises are not rentable for uses contemplated under this
Lease, Tenant shall continue to pay the full amount of  Rent due under this
Lease, which Rent shall be prorated daily for the final month of such period of
time.


                                   ARTICLE VI
                         USE AND ACCEPTANCE OF PREMISES

          6.01      Use of Leased Properties.  For so long as this Lease is in
                    ------------------------                                  
effect (including following any sublease or assignment thereof), Tenant shall
use and occupy each Leased Property exclusively for the purpose of conducting
the Business or for any other legal purpose for which such Leased Property is
being used as of the Commencement Date, and for no other purpose without the
prior written consent of Landlord.  Tenant shall obtain and maintain all
approvals, licenses, and consents needed to use and operate the Leased
Properties for such purposes. Tenant shall promptly deliver to Landlord complete
copies of surveys, examinations, certification and licensure inspections,
compliance certificates, and other similar reports issued to Tenant by any
governmental agency.

          6.02      Acceptance of Leased Properties.  Except as otherwise
                    -------------------------------                      
specifically provided in this Lease, Tenant acknowledges (i) Tenant and its
agents have had an opportunity to inspect each Leased Property; (ii) Tenant has
found each Leased Property fit for Tenant's use; (iii) delivery of each Leased
Property to Tenant is in an "as-is" condition; (iv) Landlord is not 

                                      19
<PAGE>
 
obligated to make any improvements or repairs to any Leased Property; and (v)
the roof, walls, foundation, heating, ventilating, air conditioning, telephone,
sewer, electrical, mechanical, utility, plumbing, and other portions of each
Leased Property are in good working order. Tenant waives any claim or action
against Landlord with respect to the condition of any Leased Property. LANDLORD
MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE
LEASED PROPERTIES OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN
OR CONDITION OR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO QUALITY OR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY TENANT.

          6.03      Conditions of Use and Occupancy.  Tenant agrees that during
                    -------------------------------                            
the Term it shall use and keep each Leased Property in a careful, safe and
proper manner; not commit or suffer waste thereon; not use or occupy any Leased
Property for any unlawful purposes; not use or occupy any Leased Property or
permit the same to be used or occupied, for any purpose or business deemed extra
hazardous on account of fire or otherwise; keep each Leased Property in such
repair and condition as may be required by the local board of health, or other
city, state or federal authorities, free of all cost to Landlord; not permit any
acts to be done which will cause the cancellation, invalidation, or suspension
of any insurance policy; and permit Landlord and its agents to enter upon each
Leased Property at all reasonable times after notice to Tenant to examine the
condition thereof.  In addition, at any time and from time to time upon not less
than fifteen (15) days prior written notice, Tenant shall permit Landlord and
any mortgagee or lender and their authorized representatives, to inspect the
Leased Properties during normal Business hours, provided that such inspections
shall not unreasonably interfere with Business of Tenant.

          6.04      Financial Statements and Other Information.  Tenant shall
                    ------------------------------------------               
provide Landlord and any mortgagee or lender regularly (or more often as may be
reasonably requested by Landlord in writing), the following financial
information from Cross-Continent Auto Retailers, Inc.: (a) as to each Leased
Property within thirty (30) days after each fiscal quarter during the Term or
any Extension Term, as the case may be, (except the fourth quarter), Tenant-
prepared financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") consistently applied; and (b) as to each Leased
Property and itself, Tenant shall use its best efforts to provide Landlord
within ninety (90) days after the end of each fiscal year of Tenant during the
Term or any Extension Term, as the case may be, and in no event later than one
hundred and twenty (120) days after the end of each fiscal year of Tenant during
the Term or any Extension Term, as the case may be, financial statements,
audited, reviewed or compiled by a certified public accountant  (the "Annual
Financial Statements").  Tenant shall also deliver to Landlord such additional
financial information as Landlord may reasonably request, provided the same is
of a type normally maintained by Tenant or can be obtained without undue cost or
burden on Tenant's personnel and does not constitute information which Tenant
reasonably determines to be proprietary or confidential.  Additionally, upon
Landlord's request, Tenant shall provide Landlord with copies of Tenant's annual
capital expenditure budgets for each Leased Property and any reports generated
by Tenant regarding maintenance 

                                      20
<PAGE>
 
and repairs of each Leased Property and statements delivered by Tenant to its
automobile franchisors.



                                  ARTICLE VII
              REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS

          7.01      Maintenance.  Tenant shall maintain each Leased Property in
                    -----------                                                
good order, repair and appearance, and repair each Leased Property, including
without limitation, all interior and exterior, structural and nonstructural
repairs and replacements to the roof, foundations, exterior walls, building
systems, HVAC systems, parking areas, sidewalks, water, sewer and gas
connections, pipes, and mains.  Tenant shall pay as Additional Rent the full
cost of such maintenance, repairs, and replacements, and to the extent that
Tenant has paid such costs directly to third parties, Tenant shall receive a
credit against Additional Rent payments for such amounts. Tenant shall maintain
all drives, sidewalks, parking areas, and lawns on or about each Leased Property
in a clean and orderly condition, free of accumulations of dirt, rubbish, snow
and ice. Tenant shall permit Landlord to inspect each Leased Property at all
reasonable times, and shall implement all reasonable suggestions of Landlord as
to the maintenance and repair of each Leased Property.

          7.02      Compliance with Laws.  Tenant shall comply with all laws,
                    --------------------                                     
ordinances, orders, rules, regulations, and other governmental requirements
relating to the use, condition, or occupancy of each Leased Property, whether
now or hereafter enacted and in force including without limitation:  (a)
licensure requirements for operation of the Business; (b) requirements of any
board of casualty insurance underwriters or insurance service office for any
other similar body having jurisdiction over any Leased Property; (c) all zoning
and building codes; and (d) Environmental Laws.  At Landlord's request, from
time to time, Tenant shall deliver to Landlord copies of certificates or permits
evidencing compliance with such laws, including without limitation, copies of
any applicable licenses, certificates of occupancy and building permits. Tenant
shall provide Landlord with copies of any notice from any governmental authority
alleging any non-compliance by Tenant or any Leased Property with any of the
foregoing requirements and such evidence as Landlord may reasonably require of
Tenant's remediation thereof.  Tenant hereby agrees to defend, indemnify and
hold Landlord, its agents, and employees from and against any and all demands,
claims, causes of action, fines, penalties, damages (including punitive and
consequential damages), losses, liabilities (including strict liability),
judgments, costs and expenses (including, without limitation, attorneys' fees,
court costs, and the costs set forth in Section 9.06) resulting from any failure
by Tenant to comply with any laws, ordinances, rules, regulations, and other
governmental requirements.

          7.03      Required Alterations.  Tenant shall, at Tenant's sole cost
                    --------------------                                      
and expense, make any additions, changes, improvements or alterations to each
Leased Property, including structural alterations, which may be required by any
governmental authorities, including those 

                                      21
<PAGE>
 
required to continue to satisfy any licensure requirements related to the
operation of the Business, whether such changes are required by Tenant's use,
changes in the law, ordinances, or governmental regulations, defects existing as
of the date of this Lease, or any other cause whatsoever. Tenant shall provide
thirty (30) days prior written notice to Landlord of any changes to a Leased
Property pursuant to this Section 7.03 which involve changes to the structural
integrity thereof or materially affect the operational capabilities thereof. All
such additions, changes, improvements or alterations shall be deemed to be a
Tenant Improvement and shall comply with all laws relating to such alterations
and with the provisions of Section 8.01.

          7.04      Mechanics' Liens.  Tenant shall have no authority to permit
                    ----------------                                           
or create a lien against Landlord's interest in any Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in each Leased Property against liens.  Tenant hereby agrees
to defend, indemnify, and hold Landlord harmless from and against any mechanics'
liens against any Leased Property by reason of work, labor services or materials
supplied or claimed to have been supplied on or to such Leased Property.  Tenant
shall immediately remove, bond-off, or otherwise obtain the release of any
mechanics' lien filed against any Leased Property.  Tenant shall pay all
expenses in connection therewith, including without limitation, damages,
interest, court costs and reasonable attorneys' fees.

          7.05      Replacements of Fixtures.  Tenant shall not remove Fixtures
                    -------------------------                                  
from any Leased Property except to replace such Fixtures with other items used
for similar or analogous purposes, which replacement items are of equal or
greater quality and value.  Items being replaced by Tenant may be removed and
shall become the property of Tenant and items replacing the same shall be and
remain the property of Landlord.  Tenant shall execute, upon written request
from Landlord, any and all documents necessary to evidence Landlord's ownership
of the Fixtures and replacements therefor.  Tenant may not finance Fixture
replacements by security agreement or equipment lease unless:  (a) Landlord has
consented to the terms and conditions of the equipment lease or security
agreement; (b) the equipment lessor or lender has entered into a non-disturbance
agreement with Landlord upon terms and conditions acceptable to Landlord,
including without limitation (i) Landlord shall have the right (but not the
obligation) to assume such security agreement or equipment lease upon the
occurrence of an Event of Default by Tenant hereunder; (ii) the equipment lessor
or lender shall promptly notify Landlord of any default by Tenant under the
equipment lease or security agreement and give Landlord a reasonable opportunity
to cure such default; and (iii) Landlord shall have the right to assign its
rights under the equipment lease, security agreement, or non-disturbance
agreement; (c) the equipment lessor or lender shall subordinate its security
interest to the security interest of any of Landlord's lessors, mortgagors or
lenders, whether now created or hereafter existing, and (d) Tenant shall, within
ten (10) days after receipt of an invoice from Landlord, reimburse Landlord for
all costs and expenses incurred in reviewing and approving the equipment lease,
security agreement, and non-disturbance agreement, including without limitation,
reasonable attorneys' fees and costs.

                                      22
<PAGE>
 
          7.06      Encroachments; Restrictions.  If any of the Improvements
                    ---------------------------                             
shall, at any time, encroach upon any property, street or right-of-way adjacent
to a Leased Property, or shall materially violate the agreements or conditions
contained in any restrictive covenant or other agreement affecting a Leased
Property, other than one which is created or consented to by Landlord without
Tenant's consent, or shall materially impair the rights of others under an
easement or right-of-way to which a Leased Property is subject, other than one
which is created or consented to by Landlord without Tenant's consent, then
promptly upon the request of Landlord or at the request of any person affected
by any such encroachment, violation or impairment, Tenant shall, at its expense,
subject to its right to contest the existence of any encroachment, violation or
impairment and in such case, in the event of an adverse final determination,
either (a) obtain valid and effective waivers or settlements of all claims,
liabilities and damages resulting from each such encroachment, violation or
impairment, whether the same shall affect Landlord or Tenant or (b) make such
changes in the Improvements and take such other actions as shall be necessary to
remove such encroachment and to end such violation or impairment, including, if
necessary, the alteration of improvements.  Any such alteration shall be made in
conformity with the requirements of Article VIII.  For purposes of this Section
7.06, "materially" shall mean any violation of restrictive covenants or
agreements or impairment of rights for which Landlord or Tenant receives any
notice from any person, entity, governmental authority or other source.


                                  ARTICLE VIII
                   ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
                   CAPITAL ADDITIONS TO THE LEASED PROPERTIES

          8.01      Tenant's Right to Construct.  As to each Leased Property,
                    ---------------------------                              
during the Term of this Lease or any Extension Term, as the case may be, so long
as no Event of Default shall have occurred and be continuing as to such Leased
Property, Tenant may make Capital Additions (as defined herein), or other
alterations, additions, changes and/or improvements to such Leased Property as
deemed necessary or useful to operate such Leased Property for Tenant's Business
(individually, a "Tenant Improvement," or collectively, the "Tenant
Improvements").  "Capital Additions" shall mean the construction of one or more
new buildings or one or more additional structures annexed to any portion of any
of the Improvements on a Leased Property, which are constructed on any parcel
or portion of the Land comprising a Leased Property, including the construction
of a new floor, or the repair, replacement, restoration, remodeling or
rebuilding of the Improvements or any portion thereof on a Leased Property which
are not normal, ordinary or recurring to maintain such Leased Property.  Except
as otherwise agreed to by Landlord herein or otherwise in writing, any such
Tenant Improvement or Capital Addition shall be made at Tenant's sole expense
and shall become the property of Landlord upon termination of this Lease. Unless
made on an emergency basis to prevent injury to person or property, as to each
Leased Property, Tenant must obtain Landlord's prior written approval, such
approval not to be unreasonably withheld or delayed, for any Capital Addition or
for any Tenant Improvement which is not a Capital Addition and which has a cost
of more than One Hundred Thousand 

                                      23
<PAGE>
 
Dollars ($100,000) or a cost which, when aggregated with the costs of all such
Tenant Improvements on such Leased Property in a given Lease Year, would cause
the total costs of all such Tenant Improvements on such Leased Property to
exceed Two Hundred Fifty Thousand Dollars ($250,000). Additionally, in
connection with any Tenant Improvement, including any Capital Addition, Tenant
shall provide Landlord with copies of any plans and specification therefor,
Tenant's budget relating thereto, any required governmental permits or
approvals, any construction contracts or agreements relating thereto, and any
other information relating to such Tenant Improvement as Landlord shall
reasonably request. In addition to the preceding rights and obligations, Tenant
or its franchisor may erect on the Property the maximum amount of signage
permitted by applicable laws.

          8.02      Scope of Right.  Subject to Section 8.01 herein and Section
                    --------------                                             
7.03 concerning required alterations, at Tenant's cost and expense, Tenant shall
have the right to:

                    (a)  seek any governmental approvals, including building
                         permits, licenses, conditional use permits and any
                         certificates of need that Tenant requires to construct
                         any Tenant Improvement;

                    (b)  erect upon each Leased Property such Tenant
                         Improvements as Tenant deems desirable;

                    (c)  make additions, alterations, changes and improvements
                         in any Tenant Improvement so erected; and

                    (d)  engage in any other lawful activities that Tenant
                         determines are necessary or desirable for the
                         development of each Leased Property in accordance with
                         the Tenant's Business;

provided, however, Tenant shall not make any Tenant Improvement which would, in
Landlord's reasonable judgment, impair the value of the Leased Property without
Landlord's prior written consent and provided, further that Tenant shall not be
permitted to create a mortgage, lien or any other encumbrance on any Leased
Property without Landlord's prior written consent.

          8.03      Cooperation of Landlord.  Landlord shall cooperate with
                    -----------------------                                
Tenant and take such actions, including the execution and delivery to Tenant of
any applications or other documents, reasonably requested by Tenant in order to
obtain any governmental permits, licenses or approvals sought by Tenant to
construct any Tenant Improvement within ten (10) business days following the
later of:  (a) the date Landlord receives Tenant's request or (b) the date of
delivery of any such application or document to Landlord; provided, the taking
of such action by Landlord, including the execution of said applications or
documents, shall be without cost to Landlord (or if there is a cost to Landlord,
such cost shall be reimbursed by Tenant), shall not cause Landlord to be in
violation of any law, ordinance or regulation, and shall not be deemed a 

                                      24
<PAGE>
 
waiver by Landlord of any of its rights or of any of Tenant's obligations,
including but not limited to indemnification.

           8.04     Commencement of Construction.  Tenant agrees that:
                    ----------------------------                      

                    (a)  Tenant shall diligently seek all governmental approvals
                         relating to the construction of any Tenant Improvement;

                    (b)  Once Tenant begins the construction of any Tenant
                         Improvement, Tenant shall diligently oversee any such
                         construction to completion in accordance with
                         applicable insurance requirements and the laws, rules
                         and regulations of all governmental bodies or agencies
                         having jurisdiction over the subject Leased Property;

                    (c)  Landlord shall have the right at any time and from time
                         to time to post and maintain upon each Leased Property
                         such notices as may be necessary to protect Landlord's
                         interest from mechanics' liens, materialmen's liens or
                         liens of a similar nature;

                    (d)  Tenant shall not suffer or permit any mechanics' liens
                         or any other claims or demands arising from the work of
                         construction of any Tenant Improvement to be enforced
                         against any Leased Property or any part thereof, and
                         Tenant agrees to hold Landlord, its agents and
                         employees and said Leased Property free and harmless
                         from all demands, claims, causes of action, fines,
                         penalties, damages (including punitive and
                         consequential damages), losses, liabilities (including
                         strict liability), judgments, costs and expenses
                         (including, without limitation, attorneys' fees, court
                         costs, and the costs set forth in Section 9.06)
                         incurred in connection with or arising therefrom;

                    (e)  All work shall be performed in a satisfactory and
                         workmanlike manner consistent with standards in the
                         industry; and

                    (f)  Subject to Section 8.08 in the case of Capital
                         Additions, Tenant shall not secure any construction or
                         other financing for the Tenant Improvements which is
                         secured by a portion of any Leased Property without
                         Landlord's prior written consent, and any such
                         financing (i) shall not exceed the cost of the Tenant
                         Improvements, (ii) shall be subordinate to any mortgage
                         or encumbrance now existing or hereinafter created with
                         respect to such Leased Property, and (iii) shall be
                         limited solely to Tenant's interest in the subject
                         Leased Property.

                                      25
<PAGE>
 
          8.05      Rights in Tenant Improvements.  Notwithstanding anything to
                    ------------------------------                             
the contrary in this Lease, all Tenant Improvements existing on the Leased
Property or constructed upon each Leased Property pursuant to Section 8.01, any
and all subsequent additions thereto and alterations and replacements thereof
shall be the sole and absolute property of Tenant during the Term and any
Extension Term, as the case may be, of this Lease (in respect of such Leased
Property).  Upon the expiration or early termination of this Lease in respect of
a Leased Property, all such Tenant Improvements located thereon shall become the
property of Landlord.  Without limiting the generality of the foregoing, prior
to the expiration or early termination of this Lease in respect of a Leased
Property, Tenant shall be entitled to all federal and state income tax benefits
associated with all Tenant Improvements located on such Leased Property.

          8.06      Personal Property.  Tenant shall install, place, and use on
                    -----------------                                          
each Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures Tenant may, from time to time,
deem necessary or useful to operate such Leased Property in the operation of the
Business.

          8.07      Requirements for the Tenant's Personal Property.  Tenant
                    -----------------------------------------------         
shall comply with all of the following requirements in connection with the
Tenant's Personal Property:

                    (a)  RESERVED.

                    (b)  The Tenant's Personal Property shall be installed in a
                         good and workmanlike manner, in compliance with all
                         governmental laws, ordinances, rules, and regulations
                         and all insurance requirements, and be installed free
                         and clear of any mechanics' liens.

                    (c)  Tenant shall, at Tenant's sole cost and expense,
                         maintain, repair, and replace the Tenant's Personal
                         Property.

                    (d)  Tenant shall, at Tenant's sole cost and expense, keep
                         the Tenant's Personal Property insured against loss or
                         damage by fire, vandalism and malicious mischief,
                         sprinkler leakage, and other physical loss perils
                         commonly covered by fire and extended coverage, boiler
                         and machinery, and difference in conditions insurance
                         (which insurance shall meet the requirements of Section
                         4.03 hereof) in an amount not less than the full
                         replacement cost thereof or such other amount as
                         appears on a schedule submitted by Tenant to Landlord,
                         which schedule shall be subject to Landlord's approval,
                         and Tenant shall use the proceeds from any such policy
                         for the repair and replacement of such items of
                         Tenant's Personal Property; provided, however, that if
                         Landlord fails to object to the schedule so submitted
                         by Tenant within five 

                                      26
<PAGE>
 
                    (5) business days of Landlord's receipt of such schedule,
                    Landlord's approval of such schedule shall be deemed given.

               (e)  Tenant shall pay all Impositions and other taxes applicable
                    to Tenant's Personal Property.

               (f)  If Tenant's Personal Property is damaged or destroyed by
                    fire or otherwise, Tenant shall promptly repair or replace
                    Tenant's Personal Property unless Tenant is entitled to and
                    elects to terminate the Lease pursuant to Section 10.05.

               (g)  As to each Leased Property, unless an Event of Default (or
                    any event which, with the giving of notice or lapse of time,
                    or both, would constitute an Event of Default) has occurred
                    and remains uncured beyond any applicable grace period,
                    Tenant may remove Tenant's Personal Property from such
                    Leased Property from time to time provided that Tenant
                    promptly repairs any damage to such Leased Property
                    resulting from the removal of Tenant's Personal Property.

               (h)  As to each Leased Property, Tenant shall remove all of
                    Tenant's Personal Property upon the termination or
                    expiration of the Lease and shall promptly repair any damage
                    to such Leased Property resulting from the removal thereof
                    to the reasonable satisfaction of Landlord; provided,
                    however, if Tenant fails to remove Tenant's Personal
                    Property from such Leased Property within thirty (30) days
                    after the termination or expiration of this Lease with
                    respect thereto, then Tenant shall be deemed to have
                    abandoned such items of Tenant's Personal Property, all of
                    which  shall become the property of Landlord, and Landlord
                    may remove, store and dispose of such property and Tenant
                    shall have no claim or right against Landlord for such
                    property or the value thereof regardless of the disposition
                    thereof by Landlord.  Tenant shall pay Landlord, upon
                    demand, all expenses incurred by Landlord in removing,
                    storing, and disposing of such items of Tenant's Personal
                    Property and repairing any damage caused by such removal.
                    Tenant's obligations hereunder shall survive the termination
                    or expiration of this Lease as to such Leased Property.

               (i)  Tenant shall perform its obligations under any equipment
                    lease or security agreement for Tenant's Personal Property.

                                      27
<PAGE>
 
          8.08      Financings of Capital Additions to a Leased Property.
                    ----------------------------------------------------- 
Landlord may, but shall be under no obligation to, provide or arrange
construction, permanent or other financing for any Capital Addition proposed to
be made to a Leased Property by Tenant.  Any financing so provided by Landlord
shall be made in accordance with, and subject to, a written Addendum to this
Lease.


                                   ARTICLE IX
                             DEFAULTS AND REMEDIES

          9.01      Events of Default.  The occurrence of any one or more of the
                    -----------------                                           
following shall be an event of default ("Event of Default") hereunder:

                    (a)  Tenant fails to pay in full any installment of Rent, or
                         any other monetary obligation payable by Tenant to
                         Landlord hereunder, within ten (10) days after the due
                         date thereof and after written notice thereof and an
                         opportunity to cure within a ten (10) day period after
                         such notice is given to Tenant by Landlord. In the
                         event of Tenant's failure to make timely payment of
                         such obligations two (2) times during any twelve (12)
                         month period, each subsequent such failure within the
                         twelve (12) months immediately following such second
                         failure shall immediately constitute an Event of
                         Default, and Landlord shall not be required to provide
                         notice thereof, nor shall Tenant have any further
                         opportunity to cure such failure;

                    (b)  Tenant fails to observe and perform any covenant (other
                         than the covenant in respect of insurance set forth in
                         Article IV), condition or agreement hereunder to be
                         performed by Tenant (except those described in Section
                         9.01(a) of this Lease) and such failure continues for a
                         period of thirty (30) days after written notice thereof
                         is given to Tenant by Landlord; or if, by reason of the
                         nature of such default, the same cannot with due
                         diligence be remedied within said thirty (30) days,
                         such failure will not be deemed to continue if Tenant
                         proceeds promptly and with due diligence to remedy the
                         failure and diligently completes the remedy thereof;
                         provided, however, said cure period will not extend
                         beyond sixty (60) days if the facts or circumstances
                         giving rise to the default are creating a further harm
                         to Landlord or the subject Leased Property and Landlord
                         makes a good faith determination that Tenant is not
                         undertaking remedial steps that Landlord would cause to
                         be taken if this Lease were then to terminate;

                                      28
<PAGE>
 
               (c)  If Tenant:  (i) admits in writing its inability to pay its
                    debts generally as they become due; (ii) files a petition in
                    bankruptcy or a petition to take advantage of any insolvency
                    act; (iii) makes an assignment for the benefit of its
                    creditors; (iv) is unable to pay its debts as they mature;
                    (v) consents to the appointment of a receiver of itself or
                    of the whole or any substantial part of its property; or
                    (vi) files a petition or answer seeking reorganization or
                    arrangement under the federal bankruptcy laws or any other
                    applicable law or statute of the United States of America or
                    any state thereof;

               (d)  If Tenant, on insolvency proceedings or on a petition in
                    bankruptcy filed against it, is adjudicated as bankrupt or a
                    court of competent jurisdiction enters an order or decree
                    appointing, without the consent of Tenant, a receiver of
                    Tenant of the whole or substantially all of its property, or
                    approving a petition filed against it seeking reorganization
                    or arrangement of Tenant under the federal bankruptcy laws
                    or any other applicable law or statute of the United States
                    of America or any state thereof, and such judgment, order or
                    decree is not vacated, dismissed or set aside within sixty
                    (60) days from the date of the entry thereof, and within an
                    additional thirty (30) days, provided that under applicable
                    laws, rules and regulations no action can be taken within
                    such thirty (30) day period by the party obtaining such
                    judgment, order or decree;

               (e)  If the estate or interest of Tenant in a Leased Property or
                    any part thereof is levied upon or attached in any
                    proceeding and the same is not vacated or discharged within
                    fifteen (15) days after commencement thereof (unless Tenant
                    is contesting such lien or attachment in accordance with
                    this Lease) or if such estate or interest of Tenant is
                    assigned, conveyed or involuntarily transferred in violation
                    of this Lease;

               (f)  Any representation, warranty or covenant made by Tenant on
                    behalf of itself or an Affiliate in this Lease or in any
                    certificate, demand or request made pursuant hereto proves
                    to be incorrect, in any material respect, as of the date of
                    issuance or making thereof;

               (g)  Conviction of Tenant or an Affiliate of a crime or offense
                    constituting a felony in the jurisdiction in which committed
                    or under federal law which conviction results in the
                    termination of the franchise.

                                      29
<PAGE>
 
               (h)  Termination or relinquishment of the franchise or license
                    pursuant to which Tenant or an Affiliate conducts business
                    on or from any Leased Property, provided that such event
                    shall not constitute an Event of Default if (i) no other
                    Event of Default enumerated in this Section 9.01 shall occur
                    and be continuing, and (ii) at a date no later than twenty-
                    four (24) months following such date of termination or
                    relinquishment, Tenant or an Affiliate has entered into
                    written new or amended franchises or licenses for operation
                    of motor vehicle retail or motor vehicle related businesses
                    at such Leased Property satisfactory to Landlord in its
                    discretion applying commercially reasonable standards;

               (i)  Default, beyond any applicable cure period, under any
                    franchise or license pursuant to which Tenant or an
                    Affiliate conducts business at a Leased Property, if in the
                    Landlord's judgment such default in light of commercially
                    reasonable standards and industry practice would have a
                    material adverse effect on the Leased Property;

               (j)  A final, non-appealable judgment or judgments for the
                    payment of money not fully covered (excluding deductibles)
                    by insurance is rendered against Tenant and the same remains
                    undischarged, unvacated, unbonded, unappealed or unstayed
                    for a period of thirty (30) consecutive days, and within an
                    additional thirty (30) days, provided that under applicable
                    laws, rules and regulations no action can be taken within
                    such thirty (30) day period by the party obtaining such
                    judgment, order or decree;

               (k)  Tenant shall fail to observe the covenant in respect to
                    insurance under Article IV provided Landlord shall have
                    provided notice of such failure to Tenant and Tenant shall
                    have failed to cure such failure within five (5) business
                    days of such notice; or

               (l)  Except after the effective date of a permitted assignment
                    meeting the requirements of Article XIII, if Tenant is
                    liquidated or dissolved, or begins proceedings toward
                    liquidation or dissolution, or in any manner permits the
                    sale or divestiture of substantially all of its assets.

          9.02 Remedies.  To the extent an Event of Default is applicable
               --------                                                  
only to a specific Leased Property or specific Leased Properties (in accordance
with Section 9.01 above), the remedies set forth herein shall be exercisable
solely with respect to such Leased Property or Leased Properties, and shall not
be exercisable with respect to any other Leased Property.  To the extent an
Event of Default constitutes an Event of Default as to all of the Leased
Properties (in 

                                      30
<PAGE>
 
accordance with Section 9.01 above), the remedies set forth herein shall be
exercisable with respect to all of the Leased Properties. Subject to the
foregoing provisions, Landlord may exercise any one or more of the following
remedies upon the occurrence of an Event of Default:

               (a)  Landlord may terminate this Lease, exclude Tenant from
                    possession of the subject Leased Property and use reasonable
                    efforts to lease the subject Leased Property to others.  If
                    this Lease is terminated pursuant to the provisions of this
                    subparagraph (a) with respect to one or more, but less than
                    all, of the Leased Properties identified on Schedule A
                                                                ----------
                    hereto, Tenant will remain liable to Landlord for the Rent
                    for all of the Leased Properties identified on Schedule A
                                                                   ----------
                    and other sums then due and for the balance of the Term as
                    if the Lease had not been terminated with respect to the
                    subject Leased Property, less the net proceeds, if any, of
                    any re-letting of the subject Leased Property by Landlord
                    subsequent to such termination, after deducting all
                    Landlord's expenses in connection with such re-letting,
                    including without limitation, the expenses set forth in
                    Section 9.02(b)(ii) below. Notwithstanding the termination
                    of this Lease with respect to a subject Leased Property,
                    Tenant shall pay to Landlord all amounts due as Rent, and
                    such other amounts then due, under this Lease on the days
                    that such Rent and such other amounts become due and payable
                    as required by this Lease.

               (b)  Without demand or notice, Landlord may re-enter and take
                    possession of the subject Leased Property or any part
                    thereof; and repossess such Leased Property as of Landlord's
                    former estate; and expel Tenant and those claiming through
                    or under Tenant from such Leased Property; and, remove the
                    effects of both or either, without being deemed guilty of
                    any manner of trespass and without prejudice to any remedies
                    for arrears of Rent or preceding breach of covenants or
                    conditions.  If Landlord elects to re-enter, as provided in
                    this paragraph (b) or if Landlord takes possession of such
                    Leased Property pursuant to legal proceedings or pursuant to
                    any notice provided by law, Landlord, without terminating
                    any portion of this Lease, shall use reasonable efforts to
                    re-let such Leased Property or any part of such Leased
                    Property, either alone or in conjunction with other portions
                    of the Improvements of which such Leased Property are a
                    part, in Landlord's name but for the account of Tenant, for
                    such term or terms (which may be greater or less than the
                    period which would otherwise have constituted the balance of
                    the Term of this Lease) and on such terms and conditions
                    (which may include concessions of free rent, 

                                      31
<PAGE>
 
                    and the alteration and repair of such Leased Property) as
                    Landlord, in its reasonable discretion, may determine.
                    Landlord may collect and receive the Rents for such Leased
                    Property. Unless Tenant can establish that Landlord's
                    efforts to re-let were unreasonable or that Landlord's
                    efforts to collect Rents were unreasonable, Landlord will
                    not be responsible or liable for any failure to re-let such
                    Leased Property, or any part of such Leased Property, or for
                    any failure to collect any Rent due upon such re-letting. No
                    such re-entry or taking possession of such Leased Property
                    by Landlord will be construed as an election on Landlord's
                    part to terminate this Lease unless a written notice of such
                    intention is given to Tenant. No notice from Landlord under
                    this Lease or under a forcible entry and detainer statute or
                    similar law will constitute an election by Landlord to
                    terminate this Lease unless such notice specifically says
                    so. Landlord reserves the right following any such re-entry
                    or re-letting, or both, to exercise its right to terminate
                    this Lease by giving Tenant such written notice, and, in
                    that event such Lease will terminate as specified in such
                    notice.

               (c)  If Landlord elects to take possession of a Leased Property
                    according to subparagraph (b) of this Section 9.02 without
                    terminating this Lease, Tenant will pay Landlord (A) the
                    Rent and other sums which would be payable under this Lease
                    with respect to such Leased Property if such repossession
                    had not occurred, less (B) the net proceeds, if any, of any
                    re-letting of such Leased Property after deducting all of
                    Landlord's reasonable expenses incurred in connection with
                    such re-letting, including without limitation, all
                    reasonable repossession costs, brokerage commissions, legal
                    expense, attorneys' fees, expense of employees, alteration,
                    remodeling, repair costs, and expense of preparation for
                    such re-letting. If, in connection with any re-letting, any
                    resulting lease term for the subject Leased Property extends
                    beyond the existing Term or Extension Term, as the case may
                    be, or such Leased Property covered by such re-letting
                    includes areas which are not part of such Leased Property, a
                    fair apportionment of the Rent received from such re-letting
                    and the expenses incurred in connection with such re-letting
                    will be made in determining the net proceeds received from
                    such re-letting. In addition, in determining the net
                    proceeds from such re-letting, any rent concessions will be
                    apportioned over the term of the new lease. Tenant will pay
                    such amounts to Landlord monthly on the days on which the
                    Rent and all other amounts owing under this Lease would have
                    been payable if possession had not been retaken, and
                    Landlord will be entitled to 

                                      32
<PAGE>
 
                    receive the rent and other amounts from Tenant on each such
                    day. Notwithstanding anything herein to the contrary,
                    Landlord, at its option, may collect and apply any Rent
                    received from such re-letting in accordance herewith and in
                    such case shall remit any balance thereof to Tenant.
                    Landlord shall incur no liability or obligation to Tenant
                    arising out of the collection or application of Rent by
                    Landlord hereunder.

               (d)  Landlord may re-enter the applicable Leased Property and
                    have, repossess and enjoy such Leased Property as if this
                    Lease had not been made, and in such event, Tenant and its
                    successors and assigns shall remain liable for any
                    contingent or unliquidated obligations or sums owing at the
                    time of such repossession.

               (e)  Landlord may take whatever action at law or in equity as may
                    appear necessary or desirable to collect the Rent and other
                    amounts payable hereunder with respect to the subject Leased
                    Property then due and thereafter to become due, or to
                    enforce performance and observance of any obligations,
                    agreements or covenants of Tenant under this Lease.

          9.03 Right of Set-Off.  Landlord may, and is hereby authorized by
               -----------------                                           
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord in respect of a Leased
Property, including all sums held in any escrow for Impositions, any
indebtedness of Landlord to Tenant, and any claims by Tenant against Landlord,
against any obligations of Tenant under this Lease in respect of such Leased
Property and against any claims by Landlord against Tenant, whether or not
Landlord has exercised any other remedies hereunder.  Landlord shall set-off and
apply such sums first, to delinquent real estate taxes, unless such taxes are
being protested in good faith and no lien has attached to any Leased Property
with respect thereto, second, to currently due and owing real estate taxes, and
next, to other Tenant's obligations in the order which Landlord may determine.
The rights of Landlord under this Section are in addition to any other rights
and remedies Landlord may have against Tenant.

          9.04 Performance of Tenant's Covenants.  Landlord may, without
               ---------------------------------                        
waiving or releasing any obligation of Tenant, and without waiving or releasing
any obligation or default, perform any obligation of Tenant which Tenant has
failed to commence to perform within fifteen (15) business days after Landlord
has sent a written notice to Tenant informing it of its specific failure
(provided no such notice shall be required if Landlord has previously notified
Tenant of such failure under the provisions of Section 9.01).  In the event
Landlord deems, in its discretion, that Tenant's failure to perform such
obligation has given rise to an emergency situation, Landlord may perform such
obligation without waiving or releasing any obligation of Tenant, and without
waiving or releasing any obligation or default; provided, however, that Landlord

                                      33
<PAGE>
 
shall notify Tenant of such performance as soon as it is reasonably practicable
to do so.  Tenant shall reimburse Landlord on demand, as Additional Rent, for
any reasonable expenditures thus incurred by Landlord and shall pay interest
thereon at the New York Prime Rate.

          9.05 Late Charge.  Any payment not made by Tenant for more than
               -----------                                               
five (5) business days after the due date shall be subject to a late charge
payable by Tenant as Rent of four percent (4%) of the amount of such overdue
payment.   Notwithstanding the foregoing, in the event that Tenant's payment is
not made more than five (5) business days after the due date more than two (2)
times during any twelve (12) month period, any such subsequent overdue payments
within the twelve (12) months immediately following such second failure shall be
subject to a late charge payable by Tenant as Rent of seven percent (7%) of the
amount of such overdue payment.

          9.06 Litigation; Attorneys' Fees.  Within ten (10) business days
               ----------------------------                               
after Tenant has knowledge of any litigation or other proceeding related to or
arising out of this Agreement or the Leased Property in which claims are
asserted in an amount in excess of $50,000, that (1) may be instituted against
Tenant, (2) may be instituted against any Leased Property to secure or recover
possession thereof, or (3) may affect the title to or the interest of Landlord
in any Leased Property (other than litigation or proceedings relating to
Landlord's indebtedness on the Leased Property or claims caused solely by
Landlord), Tenant shall give written notice thereof to Landlord.  In the event
that Landlord determines that Tenant has failed to give adequate cooperation or
information with respect to any such litigation, investigation, receivership,
administrative, bankruptcy, insolvency or other similar proceeding, Landlord
may, after notice to Tenant, undertake such investigation or proceeding and
Tenant shall pay all reasonable costs and expenses (the "Costs") related thereto
that are incurred by Landlord, whether or not Landlord has received notice from
Tenant of such investigation or proceeding, and whether or not an Event of
Default has actually occurred or has been declared and thereafter cured, which
Costs shall include, without limitation:  (a) the reasonable fees, expenses, and
costs of any litigation, investigation, receivership, administrative,
bankruptcy, insolvency or other similar proceeding; (b) reasonable attorney,
paralegal, consulting and witness fees and disbursements; and (c) the reasonable
expenses, including, without limitation, lodging, meals, and transportation, of
Landlord and its employees, agents, attorneys, and witnesses in investigating or
preparing for litigation, administrative, bankruptcy, insolvency or other
similar proceedings and attendance at hearings, depositions, and trials in
connection therewith.  Within ten (10) days of Landlord's presentation of an
invoice of Costs incurred by Landlord pursuant to the preceeding sentence or
otherwise incurred by Landlord in enforcing or preserving Landlord's rights
under this Lease, whether or not an Event of Default has actually occurred or
has been declared and thereafter cured, Tenant shall pay all such Costs.  All
such Costs as incurred shall be deemed to be Additional Rent under this Lease.

          9.07 Remedies Cumulative.  The remedies of Landlord herein are
               -------------------                                      
cumulative to and not in lieu of any other remedies available to Landlord at law
or in equity.  The use of, or 

                                      34
<PAGE>
 
failure to use, any one remedy shall not be taken to exclude or waive the right
to use any other remedy.

          9.08  Escrows and Application of Payments.  As security for the
                -----------------------------------                      
performance of its obligations hereunder, Tenant hereby assigns to Landlord all
its right, title and interest in and to all monies escrowed with Landlord under
this Lease and all deposits with utility companies, taxing authorities, and
insurance companies; provided, however, that Landlord shall not exercise its
rights hereunder with respect to any Leased Property until an Event of Default
has occurred in respect of such Leased Property.  Any payments received by
Landlord under any provisions of this Lease during the existence, or continuance
of an Event of Default shall be applied to Tenant's obligations, first, to
delinquent real estate taxes, unless such taxes are being protested in good
faith and no lien has attached to any Leased Property with respect thereto,
second, to currently due and owing real estate taxes, and next, to other
Tenant's obligations in the order which Landlord may determine.

          9.09  Power of Attorney.  Tenant hereby irrevocably and
                -----------------                                
unconditionally appoints Landlord, or Landlord's authorized officer, agent,
employee or designee, as Tenant's true and lawful attorney-in-fact, to act,
after an Event of Default, for Tenant in Tenant's name, place, and stead, and
for Tenant's and Landlord's use and benefit, to execute, deliver and file all
applications and any and all other necessary documents or things, to effect a
transfer, reinstatement, renewal and/or extension of any and all licenses and
other governmental authorizations issued to Tenant in connection with Tenant's
operation of the Leased Properties, and to do any and all other acts incidental
to any of the foregoing.  Tenant irrevocably and unconditionally grants to
Landlord as its attorney-in-fact full power and authority to do and perform,
after an Event of Default, every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof.  This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of Tenant's obligations hereunder.


                                   ARTICLE X
                             DAMAGE AND DESTRUCTION

          10.01 General.  Tenant shall notify Landlord if any Leased
                -------                                             
Property is damaged or destroyed by reason of fire or any other cause.  Tenant
shall promptly repair, rebuild, or restore such Leased Property, at Tenant's
expense, so as to make such Leased Property at least equal in value to such
Leased Property existing immediately prior to such occurrence and as nearly
similar to it in character as is practicable and reasonable.  Before beginning
such repairs or rebuilding, or executing any contracts in connection with such
repairs or rebuilding, Tenant will submit for Landlord's approval, which
approval Landlord will not unreasonably withhold or delay, complete and detailed
plans and specifications for such repairs or rebuilding.  Promptly after
receiving Landlord's approval of the plans and specifications, Tenant will begin
such repairs 

                                      35
<PAGE>
 
or rebuilding and will oversee the repairs and rebuilding to completion with
diligence, subject, however, to strikes, lockouts, acts of God, embargoes,
governmental restrictions, and other causes beyond Tenant's reasonable control.
Landlord will make available to Tenant the net proceeds of any fire or other
casualty insurance paid to Landlord for such repair or rebuilding as the same
progresses, less (if Landlord has accrued collection costs after Tenant has
failed to diligently pursue collection of such insurance proceeds) any
reasonable costs of collection, including attorney's fees. Payment will be made
against properly certified vouchers of a competent architect in charge of the
work and approved by Landlord. Prior to commencing the repairing or rebuilding,
Tenant shall deliver to Landlord for Landlord's approval a schedule setting
forth the estimated monthly draws for such work. Landlord will contribute to
such payments out of the insurance proceeds an amount equal to the proportion
that the total net amount received by Landlord from insurers bears to the total
estimated cost of the rebuilding or repairing, multiplied by the payment by
Tenant on account of such work. Landlord may, however, withhold ten percent
(10%) from each such payment and shall disburse such amount after: (a) the work
of repairing or rebuilding is completed and proof has been furnished to Landlord
that no lien or liability has attached or will attach to such Leased Property or
to Landlord in connection with such repairing or rebuilding and (b) Tenant has
obtained a certificate of use and occupancy (or its functional equivalent) for
the portion of such Leased Property being repaired or rebuilt. Upon the
completion of rebuilding or repairing and the furnishing of such proof, the
balance of the net proceeds of such insurance payable to Tenant on account of
such repairs or rebuilding will be paid to Tenant. Tenant will obtain and
deliver to Landlord a temporary or final certificate of occupancy before such
Leased Property is reoccupied for any purpose. Tenant shall complete such
repairs or rebuilding free and clear of mechanic's or other liens, and in
accordance with the building codes and all applicable laws, ordinances,
regulations, or orders of any state, municipal, or other public authority
affecting the repairs or rebuilding, and also in accordance with all
requirements of the insurance rating organization, or similar body. Any
remaining proceeds of insurance after such restoration will be Tenant's
property.

          10.02 Landlord's Inspection.  During the progress of such repairs
                ----------------------                                     
or rebuilding, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
repairs or rebuilding.  Tenant will keep all plans, shop drawings, and
specifications available, and Landlord and its architects and engineers may
examine them at all reasonable times.  If, during such repairs or rebuilding,
Landlord and its architects and engineers determine that the repairs or
rebuilding are not being done in accordance with the approved plans and
specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such repairs or rebuilding do not accord with the approved
plans and specifications.  Upon the receipt of any such notice, Tenant will
cause corrections to be made to any deficiencies, omissions, or such other
respect.  Tenant's obligations to supply insurance, according to Article IV,
will be applicable to any repairs or rebuilding under this Section 10.02.

                                      36
<PAGE>
 
          10.03 Landlord's Costs.  Tenant shall, within fifteen (15) days
                ----------------                                         
after receipt of an invoice from Landlord, pay the reasonable costs, expenses,
and fees of any architect or engineer employed by Landlord to review any plans
and specifications and to supervise and approve any construction, or for any
services rendered by such architect or engineer to Landlord as contemplated by
any of the provisions of this Lease, or for any services performed by Landlord's
attorneys in connection therewith; provided, however, that Landlord will consult
with Tenant and notify Tenant of the estimated amount of such expenses.

          10.04 Rent Abatement.  Notwithstanding the occurrence of any event
                --------------                                              
that causes any interruption, disruption or interference of any kind (whether or
not substantial) of Tenant's Business on the Leased Property, Tenant shall
continue to pay to Landlord the full amount of the Base Annual Rent as required
by this Lease without abatement, reduction, interruption, or delay of any kind.

          10.05 Substantial Damage During Lease Term.  Provided Tenant has
                ------------------------------------                      
fully complied with Section 4.01 hereof and has satisfied the conditions of the
last sentence of this Section 10.05, if, at any time during the Term or any
Extension Term, as the case may be, of this Lease, any Leased Property is so
damaged by fire or otherwise that it is Completely Destroyed or Partially
Destroyed (as such terms are hereafter defined), Tenant may, within one hundred
and eighty (180) days after such damage, give notice of its election to
terminate this Lease with respect to such Leased Property and, subject to the
further provisions of this Section, this Lease will cease with respect to such
Leased Property on the thirtieth (30th) day after the delivery of such notice.
If the Lease is so terminated, Tenant will have no obligation to repair, rebuild
or replace such Leased Property, and the entire insurance proceeds will belong
to Landlord.  If the Lease is not so terminated, Tenant shall rebuild such
Leased Property in accordance with Section 10.01.  If Tenant elects to terminate
this Lease pursuant to this Section 10.05, Tenant will pay (or cause to be paid)
to Landlord, an amount equal to the excess amount, if any, of the book value of
the damaged property (excluding the land) as shown in Landlord's financial
statements as of the date of such termination, over the amount of all insurance
proceeds received by Landlord.  A Leased Property shall be deemed to be
"Completely Destroyed" if there is sufficient damage to such Leased Property
that Landlord and Tenant agree to its classification as such.  A Leased Property
shall be deemed to be "Partially Destroyed" if, as a result of damages to it, a
substantial part of the Business (as determined by a reasonable dealer in the
trade, in light of standard trade practices) cannot be conducted on it within
one hundred and eighty (180) days of the occurrence of such damages.  In the
event that Landlord and Tenant are unable to agree to a determination of whether
any Leased Property is Completely Destroyed, Partially Destroyed or otherwise,
such determination shall be made pursuant to the Arbitration provisions set
forth in Article XIV.

          10.06 Damage Near End of Term.  Notwithstanding any provisions of
                -----------------------                                    
Sections 10.01 or 10.05 to the contrary, if damage to or destruction of any
Leased Property occurs during the last twenty-four (24) months of the Term or
any Extension Term, and if such damage or destruction renders the Leased
Property Completely Destroyed or Partially Destroyed, either party shall have
the right to terminate this Lease as to such Leased Property by giving notice to

                                      37
<PAGE>
 
the other within ten (10) days after the date of damage or destruction, in which
event Landlord shall be entitled to retain the insurance proceeds and Tenant
shall pay to Landlord on demand the amount of any deductible or uninsured loss
arising in connection therewith; provided, however, that any such notice given
by Landlord shall be void and of no force and effect if Tenant exercises an
available option for an Extension Term with respect to such Leased Property
pursuant to provisions of this Lease within ten (10) business days following
receipt of such termination notice.

          10.07 Risk of Loss.  Notwithstanding anything herein to the
                ------------                                         
contrary, during the Term or any Extension Term, as the case may be, the risk of
loss of or decrease in the enjoyment and beneficial use of the Leased Properties
in consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise is assumed by Tenant, and Landlord
shall in no event be answerable or accountable therefor except in the case of
gross negligence, willful misconduct or breach of this Lease by Landlord
resulting in such damage or destruction.  In addition, all risk of loss or
decrease in enjoyment and beneficial use in consequence of foreclosures,
attachments, levies or executions is assumed by Tenant except for foreclosure
due to Landlord's indebtedness.


                                   ARTICLE XI
                                  CONDEMNATION

          11.01 Total Taking.  If at any time during the Term or any
                ------------                                        
Extension Term, as the case may be, any Leased Property is totally and
permanently taken by right of eminent domain or by conveyance made in response
to the threat of the exercise of such right ("Condemnation"), this Lease shall
terminate as to such Leased Property on the Date of Taking (which shall mean the
date the condemning authority has the right to possession of the property being
condemned), and Tenant shall promptly pay all outstanding applicable Rent and
other charges through the date of termination, provided, however, this Lease
shall not so terminate if the Condemnation occurred due to the failure of Tenant
to maintain such Leased Property as required by Article VII hereof or other
applicable provisions hereof, whether or not such failure on the part of Tenant
constituted an Event of Default hereunder at the time of the Condemnation.
 
          11.02 Partial Taking.  If a portion of a Leased Property is taken
                --------------                                             
by Condemnation, this Lease shall remain in effect as to such Leased Property if
such Leased Property is not thereby rendered Unsuitable for the continuation of
Tenant's Business on that Leased Property (which shall mean that such Leased
Property is in such a state or condition such that in the good faith judgment of
Tenant, reasonably exercised, it cannot be used on a commercially practicable
basis in the operation of the Business), but if such Leased Property is thereby
rendered Unsuitable for the continuation of Tenant's Business on that Leased
Property, this Lease shall terminate as to such Leased Property on the Date of
Taking, provided such Condemnation was not as a result of Tenant's failure to
maintain such  Leased Property as provided for in Section 11.01.

                                      38
<PAGE>
 
          11.03 Restoration.  If there is a partial taking of any Leased
                -----------                                             
Property and this Lease remains in full force and effect pursuant to Section
11.02, Landlord shall retain the amount of any Landlord Award (as hereafter
defined) received by Landlord, Landlord shall apply such Landlord Award to
accomplish all necessary restoration to the Leased Property, and any excess
after such application shall be retained by Landlord.  If there is a partial
taking of any Leased Property and this Lease remains in full force and effect
pursuant to Section 11.02, Tenant shall retain the amount of any Tenant Award
(as hereafter defined) received by Tenant, Tenant shall apply such Tenant Award
to accomplish all necessary restoration of Tenant's property, and any excess
after such application shall be retained by Tenant.  Notwithstanding anything in
this Section to the contrary, in the event that there is a partial taking of any
Leased Property and this Lease remains in full force and effect pursuant to
Section 11.02, and there is a single Award with respect to such partial taking,
then the Landlord and Tenant shall use their good faith efforts to determine the
proper apportionment of such Award (as hereafter defined) to restoration of
Landlord's and Tenant's respective properties.  In the event that the parties
are unable to agree on such apportionment within thirty (30) days, the parties
shall submit to arbitration of an apportionment subject to the arbitration
provisions set forth in Article XIV.

          11.04 Landlord's Inspection.  During the progress of such
                ---------------------                              
restoration, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
restoration.  Tenant will keep all plans, shop drawings, and specifications
available, and Landlord and its architects and engineers may examine them at all
reasonable times.  If, during such restoration, Landlord and its architects and
engineers determine that the restoration is not being done in accordance with
the approved plans and specifications, Landlord will give prompt notice in
writing to Tenant, specifying in detail the particular deficiency, omission, or
other respect in which Landlord claims such restoration does not accord with the
approved plans and specifications.  Upon the receipt of any such notice, Tenant
will cause corrections to be made to any deficiencies, omissions, or such other
respect.  Tenant's obligations to supply insurance, according to Article IV,
will be applicable to any restoration under this Section.

          11.05 Award Distribution.  The entire compensation, sums or
                ------------------                                   
anything of value awarded, paid or received on a total or partial Condemnation
of a Leased Property that is awarded to Landlord shall belong to Landlord (the
"Landlord Award").  The entire compensation, sums or anything of value awarded,
paid or received on a total or partial Condemnation of a Leased Property that is
awarded to Tenant shall belong to Tenant (the "Tenant Award", collectively with
the Landlord Award, the "Awards", and each, individually, an "Award").
Notwithstanding anything in this Section to the contrary, in the event that
there is a total or partial Condemnation of a Leased Property and there is a
single Award with respect to such Condemnation, then the Landlord and Tenant
shall use their good faith efforts to determine the proper apportionment of such
Award to Landlord's and Tenant's respective properties.  In the event that the
parties are unable to agree on such apportionment within thirty (30) days, the

                                      39
<PAGE>
 
parties shall submit to arbitration of an apportionment subject to the
arbitration provisions set forth in Article XIV.

          11.06 Temporary Taking.  The taking of any Leased Property, or any
                ----------------                                            
part thereof, by military or other public authority shall constitute a taking by
Condemnation only when the use and occupancy by the taking authority has
continued for longer than twenty four (24) months.  During any such twenty-four
(24) month period, which shall be a temporary taking, all the provisions of this
Lease shall remain in full force and effect as to such Leased Property with no
abatement of rent payable by Tenant hereunder.  In the event of any such
temporary taking, the entire amount of any such Award made for such temporary
taking allocable to the Term hereof, whether paid by way of damages, Rent or
otherwise, shall be paid to Tenant.


                                  ARTICLE XII
         ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS

          Tenant hereby represents, warrants and covenants to Landlord as
follows:

          12.01 Organization and Qualification.
                ------------------------------ 

          (a)   Tenant is a [_________] corporation duly organized, validly
                existing and in good standing under the laws of its state of
                incorporation or organization, with all power and authority,
                corporate or otherwise, necessary to: (i) enter into and perform
                this Lease and (ii) own and lease its assets and properties, and
                conduct its Business, as it is now being conducted or proposed
                to be conducted. Tenant is duly qualified as a foreign
                corporation or other entity, as the case may be, to conduct its
                Business and own and lease its assets and properties, and is in
                good standing, in each jurisdiction where the character of its
                assets and properties owned or held under lease or the nature of
                its Business makes such qualification necessary or advisable,
                and is duly qualified and licensed under all laws, regulations,
                ordinances or orders of public or governmental authorities, or
                otherwise to carry on its Business and own or lease its assets
                and properties in the places and in the manner in which they are
                owned, leased or conducted or proposed to be owned, leased or
                conducted, except where the failure to be so organized,
                qualified and in good standing or to have such authority,
                qualification or licensing could not result in a Material
                Adverse Change. Complete and correct copies of Tenant's Charter,
                as in effect on the date hereof, and Tenant's by-laws, also as
                in effect on the date hereof, have been delivered to Landlord.

          (b)   Each Affiliate that conducts operations or business on or from
                any Leased Property, whether now or at any time in the future,
                is duly organized, 

                                      40
<PAGE>
 
                validly existing and in good standing under the laws of its
                organization, with all power and authority, corporate or
                otherwise, necessary to own and lease its assets and properties,
                and conduct its business, as it is now being conducted or
                proposed to be conducted. Each Affiliate is duly qualified as a
                foreign corporation or other entity, as the case may be, to do
                business and own and lease its assets and properties, and is in
                good standing, in each jurisdiction where the character of its
                assets and properties owned or held under lease or the nature of
                its activities or business makes such qualification necessary or
                advisable, and is duly qualified and licensed under all laws,
                regulations, ordinances or orders or public or governmental
                authorities or otherwise to carry on its business and own or
                lease its assets and properties in the places and in the manner
                in which they are owned, leased or is conducted or proposed to
                be owned, leased or conducted, except where the failure to be so
                organized, qualified and in good standing or to have such
                authority, qualification or licensing could not result in a
                Material Adverse Change.

          "Material Adverse Change" since a particular specified date, or a date
which may be specified from the circumstances existing immediately prior to the
happening of a specified event or occurrence, or, if no date or event is
specified, with reference to the most recent Annual Financial Statements
delivered pursuant to this Lease, means a material adverse change in the
Business, assets, properties, franchises, financial condition or income of
Tenant or the operations,  business, assets, properties, franchises, financial
condition, income or prospects of any Affiliate, whether or not such event or
occurrence is an Event of Default.

          "Affiliate" means with respect to any Person, (i) any Person that
holds direct or indirect beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of voting securities or other
voting interests representing at least five percent (5%) of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least five percent (5%) of the outstanding equity securities or
interests in a Person, or (ii) any Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such Person.

          A "Person" shall mean and include natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations, whether or not legal
entities, and governments and agencies and political subdivisions thereof.

          12.02 Material Agreements.  Schedule 12.02 is a complete list of
                -------------------   --------------                      
all agreements to which Tenant is a party that are material to the ownership and
use of the Leased Property or the operation of Tenant's Business, and Tenant has
delivered to Landlord a copy of each of these agreements (including all
exhibits, schedules and amendments thereto).

                                      41
<PAGE>
 
          12.03  Changes in Condition.  Since the date of the latest Annual
                 ---------------------                                     
Financial Statements, no Material Adverse Change has occurred between such date
and the date hereof, and neither Tenant nor any Affiliate has entered into any
material transaction outside the ordinary course of its or their operations or
business, including the Business, except as set forth in Schedule 12.03 and the
                                                         --------------        
matters contemplated by this Lease.

          12.04 Franchises, Licenses, etc.  Tenant and its subsidiaries own,
                --------------------------                                  
or have sufficient interests in, all franchises, trademarks, trademark rights,
trade names, trade name rights, copyrights, licenses, permits, authorizations
and other rights as are necessary for the conduct of Tenant's Business and its
subsidiaries' businesses as now conducted or proposed to be conducted by Tenant
or any Affiliate, as well as rights under any agreement under which Tenant or
its subsidiaries has access to confidential information used by Tenant or its
subsidiaries in Tenants' Business or the businesses of its subsidiaries, as the
case may be (collectively, the "Intellectual Property").  All Intellectual
Property is in full force and effect in all material respects, and Tenant and
its subsidiaries are in substantial compliance with the foregoing without any
conflict with the valid rights of others, which has resulted, or could be
reasonably likely to result in any Material Adverse Change.  Neither Tenant nor
any Affiliate has violated, or received any communication that by conducting its
Business or any Affiliate's businesses, it or any Affiliate would violate any
franchises, licenses, patents, trademarks, service marks, trade names,
copyrights, trade secrets, proprietary rights or processes of any other Person
(as hereafter defined) nor is Tenant or any Affiliate aware of any such
violations.  No event has occurred which permits, or after notice or lapse of
time or both would permit, the revocation or termination of any such license,
franchise or other right or affect the rights of Tenant or any Affiliate so as
to result in or reasonably be likely to result in any Material Adverse Change.
There is no litigation or other proceeding or dispute or, to the knowledge of
Tenant or any Affiliate, threat thereof with respect to the validity or, where
applicable, the extension or renewal, of any of the foregoing which has
resulted, or could result, in any Material Adverse Change.

          12.05 Litigation.  No litigation, at law or in equity, or any
                -----------                                            
proceeding before any court, board or other governmental or administrative
agency or any arbitrator or other forum of alternative dispute resolution is
pending or, to the knowledge of Tenant or any Affiliate, threatened which
involves any risk of any final judgment, order or liability which, after giving
effect to any applicable insurance, has resulted, or could result, in any
Material Adverse Change or which seeks to enjoin the execution and consummation
of this Lease and the performance of Tenant's obligations hereunder.  No
judgment, decree or order of any court, board or other governmental or
administrative agency or any arbitrator has been issued against or binds Tenant
or any Affiliate, which has resulted, or could result, in any Material Adverse
Change.

          12.06 Authorization and Enforceability.  Tenant has taken all
                ---------------------------------                      
corporate or other action required to execute, deliver and perform this Lease.
This Lease constitutes the legal, valid and binding obligation of Tenant and is
enforceable against Tenant in accordance with its terms.

                                      42
<PAGE>
 
          12.07  No Legal Obstacle to Lease.  Neither the execution and delivery
                 ---------------------------                                    
of this Lease nor the performance of any obligation hereunder has constituted or
resulted in or will constitute or result in:

                 (a) any breach, violation of, conflict with, default under or
                     termination of any agreement, contract, mortgage,
                     instrument, deed or lease to which Tenant or any Affiliate
                     is a party or by which it or they are bound;

                 (b) the violation of or conflict with any law, statute,
                     ordinance, judgment, decree, order, rule or regulation
                     applicable to Tenant, any Affiliate, any Improvements or
                     any Leased Property; or

                 (c) any violation of or conflict with Tenant's or any
                     Affiliate's Charter or By-Laws or other organizational
                     documents, as the case may be.

          No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other Person is
required to be obtained or made by Tenant in connection with the execution,
delivery and performance of this Lease.
 
          12.08  Certain Business Representations:
                 -------------------------------- 

                 (a) Labor Relations. No dispute or controversy between Tenant
                     ---------------
                     or any Affiliate and its or their employees has resulted
                     in, or is reasonably likely to result in, any Material
                     Adverse Change, and neither Tenant nor any Affiliate
                     anticipates that its relationships with its unions or
                     employees will result, or are reasonably likely to result,
                     in any Material Adverse Change. Tenant and each Affiliate
                     is in compliance in all material respects with all federal
                     and state laws relating to employees and labor relations,
                     including, but not limited to, laws relating to health and
                     safety in the workplace, non-discrimination in employment
                     and the payment of wages.

                 (b) Antitrust. Tenant and each Affiliate is in compliance in
                     ---------
                     all material respects with all federal and state antitrust
                     laws relating to Tenant's Business and the subsidiaries'
                     businesses and the geographic concentration thereof.

                 (c) Consumer Protection. Neither Tenant nor any Affiliate is in
                     -------------------
                     violation of any rule, regulation, order, or interpretation
                     of any rule, regulation or order of the Federal Trade
                     Commission (including truth-in-lending) or other federal,
                     state or local public or governmental authority or agency,
                     with which the failure to 


                                      43
<PAGE>
 
                     comply, in the aggregate, has resulted in, could result in,
                     a Material Adverse Change.

                 (d) Future Expenditures.  Neither Tenant nor any Affiliate,
                     -------------------                                     
                     anticipates that further expenditures, if any, by Tenant or
                     any Affiliate needed to meet the provisions of any federal,
                     state or foreign governmental statutes, orders, rules or
                     regulation could result in any Material Adverse Change.

                 (e) Benefit Liabilities. Neither Tenant nor any ERISA Affiliate
                     -------------------
                     maintains, contributes to, or is obligated to contribute
                     to, nor has Tenant or any ERISA Affiliate maintained,
                     contributed to, been obligated to contribute to, or had any
                     direct, indirect, or contingent liability with respect to,
                     any Title IV Plan (as hereafter defined). Each Tenant
                     Benefit Plan has been maintained in compliance with its
                     terms and with applicable laws (including specifically the
                     Code and the Employee Retirement Income Security Act of
                     1974 ("ERISA"). "Tenant Benefit Plan" means any plan, fund,
                     or other similar program described in Section 3(2) of ERISA
                     and established or maintained or with respect to which
                     Tenant and/or any ERISA Affiliate has an obligation to
                     contribute for the benefit of its employees (or for which
                     Tenant could be directly or contingently liable). "Title IV
                     Plan" means an "employee benefit plan" (as defined in
                     Section 3(3) of ERISA) that is subject to Title IV of ERISA
                     and is or has been established or maintained, by Tenant or
                     any ERISA Affiliate, or to which contributions are, have
                     been, or should have been made. "ERISA Affiliate" means any
                     trade or business, whether or not incorporated, that,
                     together with Tenant, is or has been under common control,
                     within the meaning of Section 414(b), (c), (m), or (o) of
                     the Code or Section 4001 of ERISA.

          12.09  Certain Financial Covenants.  Tenant or an Affiliate, as
                 ----------------------------                            
applicable, is in compliance in all material respects with all financial
covenants required to be maintained pursuant to any franchise or other agreement
pursuant to which Tenant or such Affiliate operates its business, except in such
respects as shall not result in any franchisor under any franchise or operating
agreement to which Tenant is a party taking any action that could result in a
Material Adverse Change.

          12.10  Cash Flow Coverage Ratio Covenant.  On the date of this
                 ---------------------------------                      
Lease and measured at a date that is twenty-four (24) months following such date
(each a "Cash Flow Measurement Date"), and on each anniversary date  that is
twenty-four (24) months following a prior Cash Flow Measurement Date, Tenant
shall have maintained a Cash Flow Coverage Ratio 


                                      44
<PAGE>
 
of not less than 1.5 to 1.0 based on the Annual Financial Statements to be
delivered to Landlord in accordance with Section 6.04 hereof. "Cash Flow
Coverage Ratio" means the aggregate of net income before taxes plus mortgage
interest, rent expense, depreciation, compensation of principals of the
Business, management fees plus the annual LIFO adjustment and other non-cash
expenses, less recurring capital expenditures and gain (loss) on sale of real
estate, dividends and/or profits taken out of Tenant divided by the aggregate of
the Tenant's obligations under this Lease. Notwithstanding anything herein to
the contrary, in the event that Tenant shall not be in compliance with this
covenant at a Cash Flow Measurement Date or Tenant shall have knowledge of such
non-compliance prior to any Cash Flow Measurement Date, the Tenant shall have
the right to cure such breach through any reasonable commercial means,
including, but not limited to, providing guarantees acceptable to Landlord,
increasing capital, or cross collateralizing with any other property of Tenant
or an Affiliate, provided that such breach is cured within one hundred and
eighty (180) days after Notice by Landlord to Tenant of the existence of such
breach.

          12.11  Disclosure.  This Lease does not contain any untrue
                 ----------                                         
statement of a material fact or omit to state a material fact necessary in order
to make any statement contained herein not misleading in light of the
circumstances under which it was made.  To Tenant's knowledge, there is no
event, fact or occurrence that has resulted, or in the future (so far as Tenant
can reasonably foresee) could result, in any Material Adverse Change, except to
the extent that present or future general and sector-specific economic
conditions may result in a Material Adverse Change.

          12.12  Covenant Not to Acquire.  Tenant covenants and agrees that
                 -----------------------                                   
during the Term and any Extension Term, as the case may be, Tenant and its
controlling shareholders or its or their Affiliates will not acquire, directly
or indirectly, more that 9.90% of the outstanding common shares of beneficial
interest of Capital Automotive REIT.  Tenant covenants and agrees that it will
divest itself of such shares of Capital Automotive REIT as may be necessary to
satisfy the limitations of this Section 12.12.



                                 ARTICLE XIII
                     ASSIGNMENT AND SUBLETTING; ATTORNMENT

          13.01  Prohibition Against Subletting and Assignment.  Subject to
                 ---------------------------------------------             
Section 13.03, Tenant shall not, without the prior written consent of Landlord,
or upon compliance with any conditions established by Landlord, in its sole
discretion, assign, mortgage, pledge, hypothecate, encumber or otherwise
transfer (except to an Affiliate) this Lease or any interest herein, or all or
any part of any Leased Property, or suffer or permit this Lease or the leasehold
estate created hereby or any other rights arising hereunder to be assigned,
transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in
part, whether voluntarily, involuntarily or by operation of law.  For purposes
of this Section 13.01, an assignment of this Lease shall be 


                                      45
<PAGE>
 
deemed to include any Change of Control of Tenant, as if such Change of Control
were an assignment of the Lease. In the event that (i) Landlord shall withhold
any consent to any assignment or transfer of this Lease or any interest herein,
and (ii) such assignee or transferee is approved by the relevant manufacturer
for continuation as a franchisee, there shall be a presumption that such
assignment or transfer was reasonable and Landlord shall have the burden of
rebutting such presumption and of proving that such consent was in fact
reasonably withheld (or that such conditions were reasonable).

          13.02  Changes of Control.  A Change of Control requiring the
                 ------------------                                    
consent of Landlord shall mean:

                 (a) the issuance and/or sale by Tenant or the sale by any
                     shareholder or equity holder of Tenant of a Controlling
                     (which shall mean, as applied to any Person, the
                     possession, directly or indirectly, of the power to direct
                     or cause the direction of the management and policies of
                     such Person, whether through the ownership of voting
                     securities, by contract or otherwise) interest in Tenant to
                     a Person other than an Affiliate of Tenant, other than in
                     either case a distribution to the public pursuant to an
                     effective registration statement under the Securities Act
                     of 1933, as amended (a "Registered Offering");

                 (b) the sale, conveyance or other transfer of all or
                     substantially all of the assets of Tenant (whether by
                     operation of law or otherwise) provided, however, that no
                     Change of Control shall be deemed to have occurred in the
                     event of the transfer of assets as a result of the death of
                     a person involved in the Business, so long as the
                     transferee is approved by the manufacturer for the
                     continuation of the Business; or

                 (c) any transaction pursuant to which Tenant is merged with or
                     consolidated into another entity (other than an entity
                     owned and Controlled by an Affiliate), and Tenant is not
                     the surviving entity.

          13.03  Operating/Service Agreements.
                 -----------------------------

                 (a) Permitted Agreements.  Tenant shall, without Landlord's
                     --------------------
                     prior approval, be permitted to enter into such
                     operating/service agreements for portions of each Leased
                     Property to various licensees in connection with Tenant's
                     Business as are customarily associated with or incidental
                     to the operation of such Leased Property, which agreements
                     may be in the nature of a sublease agreement.



                                      46
<PAGE>
 
                 (b) Terms of Agreements.  Each operating/service agreement
                     -------------------                                   
                     concerning a Leased Property shall be subject and
                     subordinate to the provisions hereof. No agreement made as
                     permitted by Section 13.03(a) shall affect or reduce any of
                     the obligations of Tenant hereunder, and all such
                     obligations shall continue in full force and effect as if
                     no agreement had been made. No agreement shall impose any
                     additional obligations on Landlord hereunder.

                 (c) Copies.  Tenant shall, within ten (10) days after the
                     ------
                     execution and delivery of any operating/service agreement
                     permitted by Section 13.03(a), deliver a duplicate original
                     thereof to Landlord.

                 (d) Assignment of Rights in Agreements.  As security for
                     ----------------------------------                  
                     performance of its obligations hereunder, Tenant hereby
                     grants, conveys and assigns to Landlord all right, title
                     and interest of Tenant in and to all operating/service
                     agreements now in existence or hereinafter entered into for
                     each Leased Property, and all extensions, modifications and
                     renewals thereof and all rents, issues and profits
                     therefrom, to the extent the same are assignable by Tenant.
                     Landlord hereby grants to Tenant a license to collect and
                     enjoy all rents and other sums of money payable under any
                     such agreement; provided, however, that Landlord shall have
                     the absolute right at any time after the occurrence and
                     continuance of an Event of Default upon notice to Tenant
                     and any vendors or licensees to revoke said license and to
                     collect such rents and sums of money and to retain the
                     same. Tenant shall not (i) after the occurrence and
                     continuance of an Event of Default, consent to, cause, or
                     allow, any material modification or alteration of any of
                     the terms, conditions or covenants of any of the agreements
                     or the termination thereof, without the prior written
                     approval of Landlord nor (ii) accept any rents (other than
                     customary security deposits) more than thirty (30) days in
                     advance of the accrual thereof nor permit anything to be
                     done, the doing of which, nor omit or refrain from doing
                     anything, the omission of which, will or could be a breach
                     of or default in the terms of any of the agreements.

                 (e) Licenses, Etc.  For purposes of Section 13.03, the
                     -------------                                     
                     operating/service agreements shall mean any licenses,
                     concession arrangements, or other arrangements relating to
                     the possession or use of all or any part of any Leased
                     Property.

          13.04  Assignment.  If Landlord shall withhold its consent to any
                 ----------                                                
assignment or if Landlord shall have established conditions to approval of any
assignment but such conditions 



                                      47
<PAGE>
 
shall not have been complied with, to the satisfaction of Landlord, such
assignment shall not in any way impair the continuing primary liability of
Tenant hereunder. No consent to any assignment in a particular instance shall be
deemed to be a general waiver of the prohibition set forth in Article XIII. Any
assignment shall be solely of Tenant's entire interest in this Lease with
respect to the subject Leased Property or Leased Properties. Any assignment or
other transfer of all or any portion of Tenant's interest in this Lease in
contravention of Article XIII shall be voidable at Landlord's option.

          13.05  REIT Limitations.
                 ---------------- 

                 (a) Anything contained herein to the contrary notwithstanding,
                     Tenant shall not: (a) sublet or assign a Leased Property or
                     this Lease on any basis such that the rental or other
                     amounts to be paid by the sublessee or assignee thereunder
                     would be based, in whole or in part, on the income or
                     profits derived by the business activities of the sublessee
                     or assignee; (b) sublet or assign a Leased Property or this
                     Lease to any Person that, under Section 856(d)(2)(B) of the
                     Internal Revenue Code of 1986, as amended (the "Code"),
                     Landlord or its general partner owns, directly or
                     indirectly (by applying constructive ownership rules set
                     forth in Section 856(d) (5) of the Code, a ten percent
                     (10%) or greater interest; or (c) sublet or assign a Leased
                     Property or this Lease in any other manner or otherwise
                     derive any income which could cause any portion of the
                     amounts received by Landlord pursuant hereto or any
                     sublease to fail to qualify as "rents from real property"
                     within the meaning of Section 856(d) of the Code, or which
                     could cause any other income received by Landlord to fail
                     to qualify as income described in Section 856(c)(2) of the
                     Code. The requirements of this Section 13.05 shall likewise
                     apply to any further subleasing by any subtenant.

                 (b) Tenant acknowledges that Capital Automotive REIT, a
                     Maryland real estate investment trust and the general
                     partner of Landlord (the "Company"), intends to elect to be
                     taxed as a real estate investment trust (a "REIT") under
                     the Code. Tenant shall not do anything which would
                     adversely affect the Company's status as a REIT. Tenant
                     hereby agrees to modifications of this Lease which do not
                     materially adversely affect Tenant's rights and liabilities
                     if such modifications are required to retain or clarify the
                     Company's status as a REIT.

          13.06  Attornment.  Tenant shall insert in each sublease permitted
                 ----------                                                 
under Section 13.03(a) provisions to the effect that:  (a) such sublease is
subject and subordinate to all of the 



                                      48
<PAGE>
 
terms and provisions of this Lease and to the rights of Landlord hereunder; (b)
in the event this Lease shall terminate before the expiration of such sublease,
the sublessee thereunder will, at Landlords' option, attorn to Landlord and
waive any right the sublessee may have to terminate the sublease or to surrender
possession thereunder, as a result of the termination hereof; and (c) in the
event the sublessee receives a written notice from Landlord or Landlord's
assignees, if any, stating that Tenant is in default under this Lease, the
sublessee shall thereafter be obligated to pay all rentals accruing under said
sublease directly to the party giving such notice, or as such party may direct.
All rentals received from the sublessee by Landlord or Landlord's assignees in
respect of a Leased Property, if any, as the case may be, shall be credit
against the amounts owing by Tenant hereunder with respect to such Leased
Property.

          13.07  Severance and Spin-Off.  If at any time while this Lease is
                 ----------------------                                     
in effect any Leased Property shall be utilized by Tenant in the operation of
more than one automobile franchise, then provided that there is no existing
Event of Default and there exists no condition which, with the passage of time,
could become an Event of Default, Tenant shall have the right (the "Spin-Off
Right") to sever and spin-off one or more parcels (each referred to as a
"Spin-Off Parcel") of the Leased Property from this Lease, subject to compliance
with the requirements of Section 13.08.

          13.08  Assignment.  If the Leased Property is not a separate
                 ----------                                           
subdivided lot, Landlord may condition its approval of an assignment upon Tenant
showing that there are appropriate provisions (such as a condominium regime,
subdivision, and/or reciprocal easements, lender and/or franchisor consents if
necessary, and separate tax lots) which allow the Leased Property to be
separately owned and operated without interference from or dependence upon,
another person as to items such as access, real estate taxes, or utilities.


                                  ARTICLE XIV
                                  ARBITRATION

          14.01  Controversies.  Except with respect to the payment of Rent
                 -------------                                             
hereunder, which shall be subject to the provisions of Section 9.02, in the
event a controversy arises between the parties as to any of the requirements of
this Lease or the performance hereunder, which the parties are unable to
resolve, the parties agree to waive the remedy of litigation (except for
extraordinary relief in an emergency situation) and agree that such controversy
or controversies shall be determined by arbitration as hereafter provided in
this Article.

          14.02  Appointment of Arbitrators.  The party or parties requesting
                 --------------------------                                  
arbitration shall serve upon the other a demand therefor, in writing, specifying
in detail the controversy and matter(s) to be submitted to arbitration before
the American Arbitration Association.  The selection of arbitrators shall be
conducted pursuant to the rules for resolution of commercial disputes
promulgated by the American Arbitration Association.  The party or parties
giving notice shall request a listing of available arbitrators from the American
Arbitration Association, 



                                      49
<PAGE>
 
and each party shall respond in the selection process within fifteen (15) days
after each receipt of such listings until a panel of three (3) arbitrators has
been designated. If either party fails to respond within fifteen (15) days, it
is agreed that the American Arbitration Association may make such selections as
are necessary to complete the panel of three (3) arbitrators.

          14.03  Arbitration Procedure.  Within five (5) business days after
                 ---------------------                                      
the selection of the arbitration panel, the arbitrators shall give written
notice to each party as to the time and the place of each meeting, which shall
be held in Washington, D.C., at which the parties may appear and be heard, which
shall be no later than fifteen (15) days after certification of the arbitration
panel.  The parties specifically waive discovery, and further waive the
applicability of rules of evidence or rules of procedure in the proceedings. The
applicable rules shall be those in effect at the time for the resolution of
commercial disputes promulgated by the American Arbitration Association.
Notwithstanding the foregoing, the substantive law governing the arbitration
shall be the laws of the State of Delaware (without application of choice of law
provisions).  The arbitrators shall take such testimony and make such
examination and investigations as the arbitrators reasonably deem necessary.
The decision of the arbitrators shall be in writing signed by a majority of the
panel which decision shall be final and binding upon the parties to the
controversy.  Provided, however, in rendering their decisions and making awards,
the arbitrators shall not add to, subtract from or otherwise modify the
provisions of this Lease.

          14.04  Expenses.  The expenses of the arbitration shall be assessed
                 --------                                                    
by the arbitrators and specified in the written decision.  In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally between
Landlord and Tenant.  Each party in interest shall be responsible for and pay
the fees, costs and expenses of its own counsel, unless the arbitration award
provides for an assessment of reasonable attorneys' fees and costs.

          14.05  Enforcement of the Arbitration Award.  There shall be no
                 ------------------------------------                    
appeal from the decision of the arbitrators, and upon the rendering of an award,
any party thereto may file the arbitrators' decision in the United States
District Court for the Eastern District of Virginia for enforcement as provided
by applicable law.


                                   ARTICLE XV
                        QUIET ENJOYMENT, SUBORDINATION,
                       ATTORNMENT, ESTOPPEL CERTIFICATES

          15.01  Quiet Enjoyment.  So long as Tenant performs all of its
                 ---------------                                        
obligations under this Lease, Tenant's possession of the Leased Properties will
not be disturbed by or through Landlord.

          15.02  Landlord Mortgages; Subordination.  Subject to Section 15.03,
                 ---------------------------------                     
without the consent of Tenant, Landlord may, from time to time, directly or
indirectly, create or otherwise 



                                      50
<PAGE>
 
cause to exist any liens, encumbrances, security interests or title retention
agreements on any Leased Property, or any portion thereof or any interest
therein, whether to secure any borrowing or other means of financing or
refinancing. Tenant shall execute, acknowledge and deliver to Landlord, at any
time and from time to time (up to three times per calendar year) upon demand by
Landlord or any mortgagee or any holder of any mortgage or other instrument
described in this Section, without cost to Landlord, a Subordination and Non-
Disturbance Agreement in substantially the form attached hereto as Exhibit
                                                                   -------
15.02, which provides that (i) Tenant's rights hereunder are subordinate to any
- -----
ground lease or underlying lease, first mortgage, first deed of trust, or other
first lien against any Leased Property, together with any renewal,
consolidation, extension, modification, or replacement thereof, which now or at
any subsequent time affects any Leased Property or any interest of Landlord in
any Leased Property, except to the extent that any such instrument expressly
provides that this Lease is superior; and (ii) in the event such party succeeds
to Landlord's interest under the Lease and provided that no Event of Default by
Tenant exists, such party will not disturb Tenant's possession, use or occupancy
of the subject Leased Property or Tenant's rights under this Lease. If Tenant
fails or refuses to execute, acknowledge, and deliver such Subordination and 
Non-Disclosure Agreement within ten (10) business days after written demand,
then Landlord shall send to Tenant a second written demand. If Tenant fails or
refuses to execute, acknowledge and deliver such Subordination and Non-
Disclosure Agreement within ten (10) days after such second written demand, then
Landlord or such successor in interest may execute, acknowledge and deliver such
Subordination and Non-Disclosure Agreement on behalf of Tenant as Tenant's
attorney-in-fact. Tenant hereby constitutes and irrevocably appoints Landlord,
its successors and assigns, as Tenant's attorney-in-fact to execute,
acknowledge, and deliver on behalf of Tenant the Subordination and Non-
Disclosure Agreement. This power of attorney is coupled with an interest and is
irrevocable.

          15.03  Attornment.  If any holder of any mortgage, indenture, deed
                 ----------                                                 
of trust, or other similar instrument described in Section 15.02 succeeds to
Landlord's interest in any Leased Property, Tenant will pay to such holder all
Rent subsequently payable hereunder as to such Leased Property.  Tenant shall,
upon request of anyone succeeding to the interest of Landlord, automatically
become the tenant of, and attorn to, such successor in interest without changing
this Lease.  The successor in interest will not be bound by: (a) any payment of
Rent for more than one (1) month in advance; (b) any amendment or modification
hereof made without its written consent; (c) any claim against Landlord arising
prior to the date on which the successor succeeded to Landlord's interest; or
(d) any claim or offset of Rent against Landlord.

          15.04  Estoppel Certificates.  At the request of Landlord or any
                 ---------------------                                    
mortgagee or purchaser of a Leased Property, Tenant shall execute, acknowledge,
and deliver an estoppel certificate, in recordable form, in favor of Landlord or
any mortgagee or purchaser of any Leased Property certifying the following as to
such Leased Property:  (a) that this Lease is unmodified and in full force and
effect, or if there have been modifications that the same is in full force and
effect as modified and stating the modifications; (b) the date to which Rent and
other charges have been paid; (c) that neither Tenant nor Landlord is in default
nor is there any fact or 



                                      51
<PAGE>
 
condition which, with notice or lapse of time, or both, would constitute a
default, if that be the case, or specifying any existing default; (d) that
Tenant has accepted and occupies such Leased Property; (e) that Tenant has no
defenses, set-offs, deductions, credits, or counterclaims against Landlord, if
that be the case, or specifying such that exist; (f) that Landlord has no
outstanding construction or repair obligations; and (g) such other information
as may reasonably be requested by Landlord or any mortgagee or purchaser. Any
purchaser or mortgagee may rely on this estoppel certificate. If Tenant fails to
deliver the estoppel certificates to Landlord within ten (10) business days
after the request of Landlord, then Landlord shall request such delivery a
second time. If Tenant fails to deliver the estoppel certificates to Landlord
within ten (10) days after such second request by Landlord, then Tenant shall be
deemed to have certified that: (a) this Lease is in full force and effect and
has not been modified, or that this Lease has been modified as set forth in the
certificate delivered to Tenant; (b) Tenant has not prepaid any Rent or other
charges except for the current month; (c) Tenant has accepted and occupies such
Leased Property; (d) neither Tenant nor Landlord is in default nor is there any
fact or condition which, with notice or lapse of time, or both, would constitute
a default; (e) Landlord has no outstanding construction or repair obligation;
and (f) Tenant has no defenses, set-offs, deductions, credits, or counterclaims
against Landlord. Tenant hereby irrevocably appoints Landlord as Tenant's
attorney-in-fact to execute, acknowledge and deliver on Tenant's behalf any
estoppel certificate which Tenant does not object to within twenty (20) days
after Landlord sends the certificate to Tenant. This power of attorney is
coupled with an interest and is irrevocable.

          15.05  Waiver of Landlord's Lien.  Landlord agrees to and does
                 -------------------------                              
hereby waive its Landlord's lien and any other rights that it may have with
respect to property or assets representing the security or collateral under
Tenant's "floor-plan" or similar financing arrangements, during the Term or any
Extension Term.  Landlord shall, upon request by any such lender, execute such
reasonable documents as are requested by Tenant's lender to acknowledge such
waiver and allow the lender access to the Leased Property.



                                  ARTICLE XVI
                             RIGHT OF FIRST OFFER

          16.01  Right of First Offer During Lease Term or Extension Term.
                 ---------------------------------------------------------

                 (a) If and when during the Term or Extension Term, as the case
                     may be, Landlord shall decide to sell the Leased Properties
                     to a Person who is not an Affiliate of Landlord (the
                     "Decision to Sell"), provided that no Event of Default has
                     occurred and is continuing under the Lease, Landlord shall
                     notify Tenant in writing within ten (10) business days
                     after Landlord makes a Decision to Sell. Tenant shall have
                     ten (10) business days thereafter in which to notify
                     Landlord in writing of its desire to purchase the Leased
                     


                                      52
<PAGE>
 
                     Properties. If Tenant shall give such notice, Tenant shall
                     have a period of thirty (30) days within which to make a
                     written offer to purchase the property (the "First Offer").
                     The First Offer must set forth the purchase price, deposit
                     amounts and closing date and any and all other terms and
                     conditions being proposed by Tenant.

                 (b) Within thirty (30) days of receipt of the First Offer,
                     Landlord shall give Tenant written notice of its acceptance
                     or rejection thereof. If accepted, Tenant shall, within
                     five (5) days after receipt of the acceptance notice, make
                     the deposit called for in the First Offer and the parties
                     shall proceed to contract and closing upon the terms
                     thereof. If the First Offer is rejected, then, subject to
                     the provisions of subsections (c) and (d) of this Section
                     16.01, Tenant shall have no further rights with respect to
                     the purchase of the Leased Properties during the Term or
                     Extension Term, as the case may be.

                 (c) If Landlord shall reject the First Offer, for a one year
                     period thereafter it may proceed to sell the Leased
                     Properties, subject to the Lease and the remaining Term or
                     Extension Term thereof, as the case may be, to any third
                     party, provided (i) the purchase price of such sale shall
                     exceed that specified in the First Offer, or (ii) if the
                     purchase price of such sale does not exceed that specified
                     in the First Offer, the terms of such sale, taken together,
                     are more favorable to Landlord, in Landlord's reasonable
                     judgement, than those of the First Offer. There shall be a
                     presumption that Landlord's judgment was reasonable and
                     Tenant shall have the burden of rebutting such presumption
                     and of proving that such judgment was in fact unreasonable.

                 (d) If no sale is effected by Landlord within the period
                     specified in subsection (c) above, then if Landlord
                     thereafter desires to sell the Leased Properties, the
                     procedure set forth in subsections (a), (b) and (c) shall
                     be followed.

                 (e) This option shall terminate in any event twenty (20) years
                     after the death of the last descendant of William Jefferson
                     Clinton, current President of the United States, living at
                     the time of execution of this Lease.



                                      53
<PAGE>
 
          16.02  Right to Purchase at End of an Extension Term.
                 ---------------------------------------------
 
                 (a) Landlord hereby grants the Tenant the right and option to
                     purchase the Leased Properties (the "Option to Purchase")
                     at an amount equal to the Property Consideration (as
                     hereafter defined) upon termination of an Extension Term of
                     this Lease. The Option to Purchase shall not be granted if
                     Tenant does not extend the Term of this Lease pursuant to
                     Section 1.03 or if on the Option Exercise Date (as
                     hereafter defined) an Event of Default with respect to any
                     Leased Property exists and has not been cured. The Tenant
                     shall notify Landlord in writing of its intent to exercise
                     this Option to Purchase, thirty (30) days prior to the end
                     of an Extension Term of this Lease (the "Option Exercise
                     Date").

                 (b) The consideration to be paid for the Leased Properties upon
                     exercise of the Option to Purchase (the "Property
                     Consideration") shall be the Appraised Value (as hereafter
                     defined) determined by (1) an independent appraiser, who is
                     a member of the Appraisal Institute, and will be selected
                     by Landlord, (the "Landlord MAI Appraiser"), (2) a second
                     appraiser, who is a member of the Appraisal Institute, and
                     will be selected by the Tenant (the "Tenant MAI
                     Appraiser"), and (3) a third MAI Appraiser selected by
                     agreement of the Landlord MAI Appraiser and the Tenant MAI
                     Appraiser (the "Third MAI Appraiser") (each an "Appraiser"
                     and, collectively, the "Appraisers"). Landlord and Tenant
                     shall, as promptly as possible, but in no event later than
                     ten (10) days following the Option Exercise Date, select
                     its respective Appraiser. The Third MAI Appraiser shall be
                     selected no later than five (5) days after the selection of
                     the other Appraisers. The costs of the Appraisers'
                     appraisals shall be shared equally by the parties. As
                     promptly as possible but in no event later than fifteen
                     (15) days after selection of the Third Appraiser, each
                     Appraiser shall deliver his or her written report of the
                     Appraisers' determination of the fair market value of the
                     Leased Property, which determination shall be based, for
                     each Leased Property, upon the highest and best use of such
                     Leased Property, taking into consideration the location of
                     such Leased Property and other properties comparable
                     thereto. The "Appraised Value" of the Real Property shall
                     be equal to the arithmetic mean of the two (2) fair market
                     value determinations of the Appraisers that are closest in
                     value. In the event that the values of (i) the difference
                     between the highest appraisal value and the next lower
                     appraisal value, and (ii) the difference between the lowest
                     appraisal value and the next 



                                      54
<PAGE>
 
                     higher appraisal value, are equal, then the "Appraised
                     Value" shall be equal to the arithmetic mean of the fair
                     market value determinations of all Appraisers.

                 (c) Upon determination of the Property Consideration, Landlord
                     and Tenant agree to cooperate to close the sale and
                     purchase of the Leased Property entirely for cash on an "
                     as is, where as basis" and with no warranties by Landlord
                     other than in a special warranty deed, within forty-five
                     (45) days after the date of determination of the Property
                     Consideration (the "Option Closing Period"). If the sale
                     and purchase of the Leased Property does not close within
                     the Option Closing Period due to Tenant's default, Landlord
                     shall have no further obligations to Tenant pursuant to
                     this Section 16.02 (a).


                                 ARTICLE XVII
                                 MISCELLANEOUS

          17.01  Notices.  Landlord and Tenant hereby agree that all notices,
                 -------                                                     
demands, requests, and consents (hereinafter "Notices") required to be given
pursuant to the terms of this Lease shall be in writing and shall be addressed
as follows:

          If to Tenant:

          [tenant]
          c/o Cross-Continent Auto Retailers, Inc.
          1201 S. Taylor
          P.O. Box 750
          Amarillo, Texas 79105
          Attention: R. Wayne Moore, Esq.
 
          With a copy to:

          Sprouse, Mozola, Smith & Rowley, P.C.
          801 South Fillmore, Suite 620
          Amarillo, Texas 79101
          Attention: Jeff E. Tankersley, Esq.

          If to Landlord:

          Capital Automotive L.P.
          1925 North Lynn Street
          Suite 306



                                      55
<PAGE>
 
          Arlington, Virginia 22209
          Attention: Thomas D. Eckert

          With a copy to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037
          Attention:  George P. Stamas, Esq.

and shall be served by:  (a) personal delivery; (b) certified mail, return
receipt requested, postage prepaid; or (c) nationally recognized overnight
courier.  All notices shall be deemed to be given upon the earlier of actual
receipt or three (3) days after mailing, or one (1) business day after deposit
with the overnight courier.  Any Notices meeting the requirements of this
Section shall be effective, regardless of whether or not actually received.
Landlord or Tenant may change its notice address at any time by giving the other
party Notice of such change.  Any such Notice of change of address shall be
effective five (5) days after delivery.

          17.02  Advertisement of a Leased Property.  In the event the parties
                 ----------------------------------                   
hereto have not executed a renewal lease, or agreed to the Extension Term, as to
the Leased Property within twelve (12) months prior to the expiration of the
Term or an Extension Term, as the case may be, then Landlord or its agent shall
have the right to enter such Leased Property at all reasonable times for the
purpose of exhibiting such Leased Property to others and to place upon such
Leased Property for and during the period commencing two-hundred seventy (270)
days prior to the expiration of the Term or an Extension Term, as the case may
be, "for sale" or "for rent" notices or signs.

          17.03  Landlord's Access.  Landlord, or its designated agents or
                 -----------------                                        
contractors, shall have the right to enter upon each  Leased Property, upon
reasonable prior notice to Tenant, for purposes of inspecting the same and
assuring Tenant's compliance with this Lease provided, any such entry by
Landlord shall be subject to all rules, guidelines and procedures prescribed by
Tenant in connection therewith.  Landlord shall not be allowed entry to a Leased
Property unless accompanied by such of Tenant's personnel as Tenant shall
require and which Tenant shall promptly provide.

          17.04  Entire Agreement.  This Lease contains the entire agreement
                 ----------------                                           
between Landlord and Tenant with respect to the subject matter hereof.  No
representations, warranties, and agreements have been made by Landlord or Tenant
except as set forth in this Lease.

          17.05  Severability.  If any term or provision of this Lease is
                 ------------                                            
held by Landlord to be invalid or unenforceable as to a Leased Property, such
holding shall not affect the remainder of this Lease as to such Leased Property,
or the validity or enforceability of this Lease as to any other Leased Property,
and the same shall remain in full force and effect, unless such holding



                                      56
<PAGE>
 
substantially deprives Tenant of the use of such Leased Property or Landlord of
the Rents therefor, in which case this Lease shall forthwith terminate as to
such Leased Property as if by expiration of the Term or an Extension Term, as
the case may be, but shall remain in full force and effect with respect to each
other Leased Property.

          17.06  Captions and Headings. The captions and headings are inserted
                 ---------------------
only as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Lease or the intent of any provision hereof.

          17.07  Governing Law.  This Lease shall be construed under the laws
                 -------------                                               
of the State of Virginia (without application of choice of law provisions).

          17.08  Memorandum of Lease or Certain Rights Under the Lease. Landlord
                 -----------------------------------------------------
and Tenant agree that a record of this Lease or of certain rights under this
Lease may be recorded by either party in a memorandum of lease approved by
Landlord and Tenant with respect to each Leased Property. The party recording
such memorandum must bear all costs of such recording.

          17.09  Waiver.  No waiver by Landlord of any condition or covenant
                 ------                                                     
herein contained, or of any breach of any such condition or covenant, shall be
held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach thereof
or of any condition or covenant, nor shall the acceptance of Rent by Landlord at
any time when Tenant is in default in the performance or observance of any
condition or covenant herein be construed as a waiver of such default, or of
Landlord's right to terminate this Lease or exercise any other remedy granted
herein on account of such default.

          17.10  Assignment; Binding Effect.  Except as otherwise set forth 
                 --------------------------                                
herein, this Lease shall not be assignable by Tenant, without the prior written
consent of Landlord.  This Lease will be binding upon and inure to the benefit
of the heirs, successors, personal representatives, and permitted assigns of
Landlord and Tenant.

          17.11  Consents and Approvals.   In each instance in this Lease where
                 ----------------------                                        
the Landlord is required or permitted to give a consent or approval, or to make
a determination, the Landlord's decision and any conditions thereon must be
reasonable under the circumstances. Except as provided in Sections 8.07(d),
13.01 and 13.07, there shall be a presumption that each such decision and any
conditions thereon by Landlord was in fact reasonable, and Tenant shall have the
burden of proof in any attempt to rebut that presumption.  With respect to
Sections 8.07(d), 13.01 and 13.07, there shall be a presumption that each such
decision and any conditions thereon by Landlord was in fact unreasonable, and
Landlord shall have the burden of proof in any attempt to rebut that
presumption.

          17.12  Single Property.  Throughout the form of this Lease there are
                 ---------------                                              
references to "Leased Properties".  If, in fact, there is only one Leased
Property being leased hereunder, all 



                                      57
<PAGE>
 
such references shall, without further action, be deemed amended to refer solely
to such Leased Property and all provisions relating to Leased Properties,
including remedies applicable to only one Leased Property, shall likewise be
amended to the extent necessary, but only to the extent necessary, to give
effect to the fact that there is only one Leased Property.

          17.13  Modification.  This Lease may only be modified by a writing
                 ------------                                               
signed by both Landlord and Tenant.

          17.14  Incorporation by Reference.  All schedules and exhibits 
                 ---------------------------                             
referred to in this Lease are incorporated herein by reference.

          17.15  No Merger.  As to each Leased Property, the surrender of this
                 ---------                                               
Lease by Tenant or the cancellation of this Lease by agreement of Tenant and
Landlord or the termination of this Lease on account of Tenant's default will
not work a merger, and will, at Landlord's option, terminate any subleases or
operate as an assignment to Landlord of any subleases. Landlord's option under
this paragraph will be exercised by notice to Tenant and all known subtenants of
such Leased Property.

          17.16  Force Majeure.  Landlord, its agents and employees, will not
                 -------------                                               
be liable for any loss, injury, death, or damage (including consequential
damages) to persons, property, or Tenant's Business occasioned by theft, act of
God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition, order of governmental body or authority, fire, explosion, falling
objects, steam, water, rain or snow, leak or flow of water (including water from
the elevator system), rain or snow from any Leased Property or into any Leased
Property or from the roof, street, subsurface or from any other place, or by
dampness or from the breakage, leakage, obstruction, or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning, or lighting
fixtures of any Leased Property, or from construction, repair, or alteration of
any Leased Property or from any acts or omissions of any other occupant or
visitor of any Leased Property, or from the release, emission, discharge,
presence or disposal of any hazardous substance or material on or from any
Leased Property, or from any other cause beyond Landlord's control.

          17.17  Laches.  No delay or omission by either party hereto to
                 -------                                                
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such right
or power or be construed to be a waiver thereof.

          17.18  Waiver of Jury Trial.  To the extent that there is any claim
                 --------------------                                        
by one party against the other that is not to be settled by arbitration as
provided in Article XIV hereof, Landlord and Tenant waive trial by jury in any
action, proceeding or counterclaim brought by either of them against the other
on all matters arising out of this Lease or the use and occupancy of any Leased
Property (except claims for personal injury or property damage).  If Landlord
commences any summary proceeding for nonpayment of Rent, Tenant will not
interpose, and waives the right to interpose, any counterclaim in any such
proceeding.




                                      58
<PAGE>
 
          17.19  Permitted Contests.  Tenant, on its own or on Landlord's
                 -------------------                                     
behalf (or in Landlord's name), but at Tenant's expense, may contest, by
appropriate legal proceedings conducted in good faith and with due diligence,
the amount or validity or application, in whole or in part, of any Imposition or
any legal requirement or insurance requirement or any lien, attachment, levy,
encumbrance, charge or claim provided that:  (a) in the case of an unpaid
Imposition, lien, attachment, levy, encumbrance, charge or claim, the
commencement and continuation of such proceedings shall suspend the collection
thereof from Landlord and from the subject Leased Property; (b) neither the
subject Leased Property nor any Rent therefrom nor any part thereof or interest
therein would be in any immediate danger of being sold, forfeited, attached or
lost; (c) in the case of a legal requirement, Landlord would not be in any
immediate danger of civil or criminal liability for failure to comply therewith
pending the outcome of such proceedings; (d) in the event that any such contest
shall involve a sum of money or potential loss in excess of Twenty Five Thousand
Dollars ($25,000), Tenant shall deliver to Landlord and its counsel an opinion
of Tenant's counsel to the effect set forth in clauses (a), (b) and (c), to the
extent applicable; (e) in the case of a legal requirement and/or an Imposition,
lien, encumbrance, or charge, Tenant shall give such reasonable security as may
be demanded by Landlord to insure ultimate payment of the same and to prevent
any sale or forfeiture of a subject Leased Property or the Rent in respect
thereof by reason of such nonpayment or noncompliance; provided, however, the
provisions of this Section shall not be construed to permit Tenant to contest
the payment of Rent (except as to contests concerning the method of computation
or the basis of levy of any Imposition or the basis for the assertion of any
other claim) or any other sums payable by Tenant to Landlord hereunder; (f) in
the case of an insurance requirement, the coverage required by Article IV shall
be maintained; and (g) if such contest be finally resolved against Landlord or
Tenant, Tenant shall, as Additional Rent due hereunder, promptly pay the amount
required to be paid, together with all interest and penalties accrued thereon,
or comply with the applicable legal requirement or insurance requirement.
Landlord, at Tenant's expense, shall execute and deliver to Tenant such
authorizations and other documents as may be reasonably required in any such
contest, and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein.  Tenant hereby agrees to indemnify and
hold harmless Landlord, its officers, trustees, employees, shareholders,
affiliates and agents from and against any and all demands, claims, causes of
action, fines, penalties, damages (including punitive and consequential
damages), losses, liabilities (including strict liability), judgments, costs and
expenses (including, without limitation, attorneys' fees, court costs, and the
costs set forth in Section 9.06) that may be incurred in connection with or
arise from any such contest.

          17.20  Construction of Lease.  This Lease has been reviewed by
                 ---------------------                                  
Landlord and Tenant and their respective professional advisors.  Landlord and
Tenant believe that this Lease is the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in favor
of either Landlord or Tenant or against either Landlord or Tenant merely because
of any party's efforts in preparing such documents.

          17.21  Counterparts.  This Lease may be executed in duplicate
                 -------------                                         
counterparts, each of which shall be deemed an original hereof or thereof.




                                      59
<PAGE>
 
          17.22  Relationship of Landlord and Tenant.  The relationship of
                 -----------------------------------                      
Landlord and Tenant is the relationship of lessor and lessee.  Landlord and
Tenant are not partners, joint venturers, or associates.

               {remainder of this page left intentionally blank}



                                      60
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Lease or
caused the same to be executed by their respective duly authorized officers as
of the date first set forth above.

                    CAPITAL AUTOMOTIVE L.P.

                    By:  Capital Automotive REIT,
                         Its General Partner

                         By:    
                                 --------------------------------
                         Name:      
                                 --------------------------------
                         Title:     
                                 --------------------------------

                    [                      ]
 

                    By:  
                           --------------------------------
                    Name:  
                           --------------------------------
                    Title: 
                           --------------------------------




                                      61
<PAGE>
 
         PLAINS CHEVROLET, INC. LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

            A         Leased Properties        
            B         Permitted Liens          
            12.02     Material Agreements 
            12.03     Changes in Condition 

 
                                   EXHIBITS

            2.02      Payment Account Information                        
            2.04      Base Annual Rent Adjustment                        
            5.07      Environmental Reports                              
            15.02     Form of Subordination and Non-Disturbance Agreement 
<PAGE>
 
         MIDWAY CHEVROLET, INC. LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

            A         Leased Properties        
            B         Permitted Liens          
            12.02     Material Agreements 
            12.03     Changes in Condition 

 
                                   EXHIBITS

            2.02      Payment Account Information                        
            2.04      Base Annual Rent Adjustment                        
            5.07      Environmental Reports                              
            15.02     Form of Subordination and Non-Disturbance Agreement 
<PAGE>
 
                        WESTGATE CHEVROLET, INC. LEASE
                       AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

            A         Leased Properties        
            B         Permitted Liens          
            12.02     Material Agreements 
            12.03     Changes in Condition 

 
                                   EXHIBITS

            2.02      Payment Account Information                        
            2.04      Base Annual Rent Adjustment                        
            5.07      Environmental Reports                              
            15.02     Form of Subordination and Non-Disturbance Agreement 
<PAGE>
 
          QUALITY NISSAN, INC. LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

            A         Leased Properties        
            B         Permitted Liens          
            12.02     Material Agreements 
            12.03     Changes in Condition 

 
                                   EXHIBITS

            2.02      Payment Account Information                         
            2.04      Base Annual Rent Adjustment                        
            5.07      Environmental Reports                              
            15.02     Form of Subordination and Non-Disturbance Agreement 
<PAGE>
 
          DOUGLAS MOTORS, INC. LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

            A         Leased Properties        
            B         Permitted Liens          
            12.02     Material Agreements 
            12.03     Changes in Condition 

 
                                   EXHIBITS

            2.02      Payment Account Information                        
            2.04      Base Annual Rent Adjustment                        
            5.07      Environmental Reports                              
            15.02     Form of Subordination and Non-Disturbance Agreement 
<PAGE>
 
                         T-WEST SALES & SERVICE, INC.
                     LEASE AGREEMENT SCHEDULES AND EXHIBITS

                                   SCHEDULES

            A         Leased Properties        
            B         Permitted Liens          
            12.02     Material Agreements 
            12.03     Changes in Condition 

 
                                   EXHIBITS

            2.02      Payment Account Information                        
            2.04      Base Annual Rent Adjustment                        
            5.07      Environmental Reports                              
            15.02     Form of Subordination and Non-Disturbance Agreement 
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties

Lessee:             Plains Chevrolet, Inc.

Leased Property:    2200 I-40 East
                    Amarillo, Texas  79103

                    2316 I-40 East
                    Amarillo, Texas 79103
                                         
                    2400 I-40 East       
                    Amarillo, Texas 79103 
               
Initial Base Rent:  $517,000
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties

Lessee:             Midway Chevrolet, Inc.

Leased Property:    16301 Interstate I-27
                    Amarillo, Texas  79120

Initial Base Rent:  $341,000
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties

Lessee:             Westgate Chevrolet, Inc.

Leased Property:    7400 I-40 West
                    Amarillo, Texas  79106

Initial Base Rent:  $484,000
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties

Lessee:             Quality Nissan, Inc.

Leased Property:    4121 S. Georgia
                    Amarillo, Texas  79110

Initial Base Rent:  $110,000
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties

Lessee:             Douglas Motors, Inc.

Leased Property:    7300 North Broadway
                    Denver, Colorado 80221

Initial Base Rent:  $979,000
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties

Lessee:             T-West Sales & Service, Inc.

Leased Property:    6300 West Sahara
                    Las Vegas, Nevada 89102

Initial Base Rent:  $1,452,000
<PAGE>
 
                                  SCHEDULE B
                                  ----------

                                Permitted Liens
<PAGE>
 
                                  SCHEDULE B
                                  ----------

                                Permitted Liens
<PAGE>
 
                                  SCHEDULE B
                                  ----------

                                Permitted Liens
<PAGE>
 
                                  SCHEDULE B
                                  ----------

                                Permitted Liens
<PAGE>
 
                                  SCHEDULE B
                                  ----------

                                Permitted Liens
<PAGE>
 
                                  SCHEDULE B
                                  ----------

                                Permitted Liens
<PAGE>
 
                                SCHEDULE 12.02
                                --------------

                              Material Agreements
                              -------------------
<PAGE>
 
                                SCHEDULE 12.03
                                --------------

                             Changes in Condition
<PAGE>
 
                                 EXHIBIT 2.02
                                 ------------

                          Payment Account Information

     Wiring instructions for the Landlord's operating account are as follows:

     FIRST UNION NATIONAL BANK OF VIRGINIA
     CHARLOTTE, NC
     ABA# 051400549

     For Credit to:  CAPITAL AUTOMOTIVE REIT, Operating Account
                     Account # 2050000478240
<PAGE>
 
                                 EXHIBIT 2.04
                                 ------------

                          Base Annual Rent Adjustment

   The Base Annual Rent shall be increased, effective as of the commencement of
the fourth Lease Year and as of each subsequent Lease Year by an amount equal to
the Base Annual Rent multiplied by 100 percent (100%) of the change in the Index
during the immediately preceding one (1) year period; provided, however, that,
in the event that the above-calculated adjustment is greater than two percent
and one-half (2 1/2%), such adjustment shall be equal to two and one-half
percent (2 1/2%).
<PAGE>
 
                                 EXHIBIT 5.07
                                 ------------

                             Environmental Reports
<PAGE>
 
                                 EXHIBIT 15.02
                                 -------------

                  Subordination and Non-Disturbance Agreement
                  -------------------------------------------


     THIS AGREEMENT is made as of this ___ day of __________, 1998, among
_____________, a ___________ organized under the laws of the State of
_____________ ("Lender"), __________________ ("Tenant"), and CAPITAL AUTOMOTIVE
L.P., a Delaware limited partnership ("Landlord").

                                  WITNESSETH:
                                  -----------

     WHEREAS, Landlord and Tenant have entered into a certain Lease, dated
____________________ , which lease and all amendments, modifications,
assignments, subleases  and other agreements related thereto are attached hereto
as Exhibit A and incorporated herein by this reference (collectively, the
   ---------                                                             
"Lease"), which Lease relates to the premises described therein (the
"Premises"), and

     WHEREAS, Lender has made or has committed to make a first mortgage loan to
Landlord in the principal amount not to exceed $_________ (the "Loan"), the Loan
being secured by a mortgage, deed of  trust or security deed (collectively, the
"Mortgage") and an assignment(s) of leases and rents from Landlord to Lender
covering the Premises; and

     WHEREAS, Tenant has agreed that the Lease shall be subject and subordinate
to the Mortgage held by Lender, provided Tenant is assured of continued
occupancy of the Premises under the terms of the Lease;

     NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, the sum of Ten Dollars ($10.00) and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
and notwithstanding anything in the Lease to the contrary, it is hereby agreed
as follows:

     1.   Subordination of Lease.  Lender, Tenant and Landlord do hereby
          ----------------------                                        
covenant and agree that the Lease with all rights, options, liens and charges
created thereby, is and shall continue to be subject and subordinate in all
respects to the Mortgage and to any renewals, modifications, consolidations,
replacements and extensions thereof and to all advancements made thereunder.

     2.   Nondisturbance of Tenant.  Lender does  hereby agree with Tenant that,
          ------------------------                                              
in the event Lender becomes the owner of the Premises by foreclosure, conveyance
in lieu of foreclosure or otherwise, so long as Tenant complies with and
performs its obligations under the Lease, (a) Lender will take no action which
will interfere with or disturb Tenant's possession or use of the Premises or
other rights under the Lease, and (b) the Premises shall be subject to the Lease
and Lender shall recognize Tenant as the tenant of the Premises for the
remainder of the terms of the Lease in accordance with the provisions thereof,
provided, however, that Lender 
<PAGE>
 
shall not be subject to any offsets or defenses which Tenant might have against
any prior landlord except those which arose under the provisions of the Lease
out of such landlord's default and for which Tenant had notified Lender and
given Lender the opportunity to cure same as hereinbelow provided, nor shall
Lender be bound by any rent or additional rent which Tenant might have paid for
more than the current month.

     3.   Attornment by Tenant.  Tenant does hereby agree with Lender that, in
          --------------------                                                
the event Lender becomes the owner of the Premises by foreclosure, conveyance in
lieu of foreclosure or otherwise, then Tenant shall attorn to and recognize
Lender as the landlord under the Lease for the remainder of the term thereof,
and Tenant shall perform and observe its obligations thereunder, subject only to
the terms and conditions of the Lease.  In such event, Lender shall not be
liable for any act or omission of any prior landlord for which Tenant had
notified Lender and given Lender the opportunity to cure the same, liable for
return of the security deposit unless same was actually delivered to Lender,
bound by any rent paid more than thirty (30) days in advance, or be subject to
any set-off or defense Tenant might have had against any prior landlord.  Tenant
further covenants and agrees to execute and deliver upon request of Lender or
its assigns, an appropriate Agreement of Attornment to Lender and any subsequent
titleholder of the Premises.

     4.   Acknowledgment of Acquisition Rights. Lender acknowledges that Tenant
          ------------------------------------                                 
has certain purchase rights under the lease.  So long as Tenant complies with
the provisions of the Lease, Lender acknowledges that Tenant may exercise such
rights and Lender will honor such rights so long as Tenant pays the acquisition
price to Lender or otherwise obtains a release from Lender.

     5.   Curative Rights, Modification of Lease, and Advance Payment of Rent.
          -------------------------------------------------------------------  
So long as the Mortgage remains outstanding and unsatisfied:

          (a) Tenant will mail or deliver to Lender, at the address and in the
manner hereinbelow provided, a copy of  all notices permitted or required to be
given to the Landlord by Tenant under and pursuant to the terms and provisions
of the Lease.  At any time before the rights of the Landlord shall have been
forfeited or adversely affected because of any default of the Landlord, or
within the time permitted the Landlord for curing any default under the Lease as
therein provided, Lender may, but shall have no obligation to, pay any taxes and
assessments, make any repairs and improvements, make any deposits or do any
other act or thing required of the Landlord by the terms of the Lease; and all
payments so made and all things so done and performed by Lender shall be as
effective to prevent the rights of the Landlord from being forfeited or
adversely affected because of any default under the Lease as the same would have
been if done and performed by the Landlord.

          (b) Tenant will not consent to the modification of the Lease, nor to
the termination thereof, without the prior written consent of Lender, such
consent not to be unreasonably withheld or delayed, nor will Tenant pay any rent
under the Lease more than thirty 


                                      -2-
<PAGE>
 
(30) days in advance. If Lender fails to grant or deny its consent within ten
(10) days after receiving Tenant's request, such consent shall be deemed to have
been given.

     6.   Consent to Assignment.  Tenant acknowledges that Landlord will execute
          ---------------------                                                 
and deliver to Lender an assignment of the Lease as security for the Loan, and
Tenant hereby expressly consents to such assignment.

     7.   Limitation of Liability.  Tenant agrees that if Lender becomes the
          -----------------------                                           
owner of the Premises, Tenant shall look solely to the estate or interest of
Lender in the Premises for satisfaction of  any obligation which may be or
become owing by Lender to Tenant hereunder or under the Lease.

     8.   Landlord and Tenant Certifications.  Landlord and Tenant hereby
          ----------------------------------                             
certify to Lender that the Lease has been duly executed by Landlord and Tenant
and is in full force and effect, that the Lease and any modifications and
amendments specified herein are a complete statement of the agreement between
Landlord and Tenant with respect to the leasing of the Premises, and the Lease
has not been modified or amended except as specified herein; that to the
knowledge of Landlord and Tenant, no party to the Lease is in default
thereunder; that no rent under the Lease has been paid more than thirty (30)
days in advance of its due date; and that Tenant, as of this date, has no
charge, lien or claim of offset under the Lease, or otherwise, against the rents
or other charges due or to become due thereunder.

     9.   Tenant Estoppel Certifications.  With the knowledge that Lender, as
          ------------------------------                                     
beneficiary of the mortgage encumbering the premises, will place substantial
reliance thereon in connection with the closing and funding of the Loan, Tenant
hereby makes the following certifications:

          (a) The term of the Lease commenced on ________, 19__, and will
terminate on ______________.

          (b) The Lease, as described above, has not been modified, amended,
assigned or subleased except as set forth in Exhibit A attached hereto, and is
                                             ---------                        
in good standing and in full force and effect.

          (c) The Lease provides for rental payments over the term of the Lease,
all as specifically provided in the Lease.  No rent under the Lease has been
paid more than thirty (30) days in advance of the due date of same.  For the
year ____, monthly payments, which are due on the first (1st) day of each month,
are as follows:


Basic Rent -        $________



                                      -3-
<PAGE>
 
     Payment of the above amount was timely made for the months of ______,
___and _____, ____, and the next payment of the above amount will be due on
________, ____.  In addition to the above amount, certain additional sums are
due to Landlord from Tenant under the Lease, all as specifically set forth in
the Lease.

          (d) Tenant has paid a security deposit under the Lease.

          (e) To Tenant's knowledge there are no defaults by Landlord under the
Lease and there are no existing circumstances which, with the passage of time,
or notice, or both, would give rise to a default under the Lease.

          (f) Tenant has accepted and is occupying the Premises, and Landlord
has no unperformed obligation under the Lease to construct any improvements for
the Tenant related to the Premises.

          (g) As of the date of this Agreement, Tenant has no charge, lien,
claim of set-off or defense against rents or other charges due or to become due
under the Lease or otherwise under any of the terms, conditions, or covenants
contained therein.

          (h) Tenant has received no notice from any insurance company of any
defects or inadequacies in the Premises or in any part thereof which would
adversely affect the insurability of the Premises.

          (i) Except as provided in the Lease, Tenant does not have any right or
option to purchase the Premises.

          (j) Except as provided in the Lease, Tenant does not have any rights
or options to renew the Lease or to lease additional space in any building owned
by the Landlord.

     10.  Tenant Covenants.  In addition to other covenants and obligations of
          ----------------                                                    
Tenant contained herein:

          (a) From and after the date hereof, Tenant will not pay any rent under
the Lease more than thirty (30) days in advance of its due date.

          (b) From and after the date hereof, so long as there shall be any
assignment of Landlord's interest in the Lease to Lender, or any successor
thereto, Tenant will not: nor seek to terminate the Lease by reason of any act
or omission of Landlord until Tenant shall have given written notice of such act
or omission to such Lender's last address furnished Tenant, and until a
reasonable period of time shall have elapsed following the giving of such notice
(not to exceed thirty (30) days, during which period the Lender shall have the
right, but not the obligation, to remedy such act or omission.




                                      -4-
<PAGE>
 
          (c) Upon written notice of the default by Landlord under any of the
loan documents held by Lender and assignment of the Landlord's interest under
the Lease by Landlord to Lender, Tenant, if Lender so requests, will recognize
such Lender as the Landlord under the Lease and will thereafter pay rent and
other sums to Lender (or to the party designated by the Lender in writing) in
accordance with the terms of the Lease, and, in such event, such Lender will not
be liable for return of the security deposit unless same was actually delivered
to Lender, bound by any rent paid more than thirty (30) days in advance, or be
subject to any set-off or defense Tenant might have had against any prior
lessor.

     11.  Notices.  Unless and except as otherwise specifically provided herein,
          -------                                                               
any and all notices, elections, approvals, consents, demands, requests and
responses thereto ("Communications") permitted or required to be given under
this Agreement shall be in writing, signed by or on behalf of the party giving
the same, and shall be deemed to have been properly given and shall be effective
upon the earlier of receipt thereof or three (3) days after deposit thereof in
the United States mail, postage prepaid, certified with return receipt
requested, to the other party at the address of such other party set forth
hereinbelow or at such other address within the continental United States as
such other party may designate by notice specifically designated as a notice of
change of address and given in accordance herewith; provided, however, that the
time period in which a response to any Communication must be given shall
commence on the date of receipt thereof, and provided further that no notice of
change of address shall be effective with respect to Communications sent prior
to the time of receipt of such change.  Receipt of Communications hereunder
shall occur upon actual delivery (whether by mail, facsimile transmission,
messenger, courier service, or otherwise) to an individual party or to an
officer, member, or general or limited partner of a party or to any agent or
employee of such party at the address of such party set forth hereinbelow,
subject to change as provided hereinabove.  An attempted delivery in accordance
with  the foregoing, acceptance of which is refused or rejected, shall be deemed
to be and shall constitute receipt; and an attempted delivery in accordance with
the foregoing by mail, messenger, or courier service (whichever is chosen by the
sender) which is not completed because of changed address of which no notice was
received by the sender in accordance with this provision prior to the sending of
the Communication shall also be deemed to be and constitute receipt.  Any
Communication, if given to Lender, must be addressed as follows, subject to
change as provided hereinabove:

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

and, if given to Tenant, must be addressed as follows, subject to change as
provided hereinabove:


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



                                      -5-
<PAGE>
 
and, if given to Landlord, must be addressed as follows, subject to change as
provided hereinabove:

                    Capital Automotive, L.P.
                    1925 North Lynn Street, Suite 306
                    Arlington, Virginia 22209

     12.  Miscellaneous.  This Agreement shall be binding upon and inure to the
          -------------                                                        
benefit of the parties hereto and their respective heirs, legal representatives,
successors, successors-in-title and assigns.  When used herein, the term
"Landlord" or "landlord" refers to Landlord and to any successor to the interest
of Landlord under the Lease.


                     [THIS SPACE INTENTIONALLY LEFT BLANK]





                                      -6-
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first above written.

                                    LENDER:
   
Signed, sealed and delivered
in the presence of:                 By:
                                    Title:

- ------------------------------      ------------------------------
Witness                             (CORPORATE SEAL)


                                    TENANT:

Signed, sealed and delivered
in the presence of:                 By:
                                    Title:

- ------------------------------      ------------------------------
Witness                             (CORPORATE SEAL)


                                    LANDLORD:

Signed, sealed and delivered
in the presence of:                 By:
                                    Title:

- ------------------------------      ------------------------------
Witness                             (PARTNERSHIP SEAL)



                                      -7-
<PAGE>
 
                                   EXHIBIT A


Lease Dated __________ from ________________ to _______________ with Exhibit A
attached, all in the form attached hereto as Attachment to Exhibit A.
                                             ------------------------




                                      -8-
<PAGE>
 
County of ________________________________:
                                               SS:
State of _________________________________:

     This is to certify that on this ____ day of ________, 1998, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Lender in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Lender.



                                ------------------------------
                                Notary Public

                                My commission expires:



                                      -9-
<PAGE>
 
County of ________________________________:
                                               SS:
State of _________________________________:

     This is to certify that on this ____ day of _________, 1998, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Tenant in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Tenant.



                                ------------------------------
                                Notary Public

                                My commission expires:




                                     -10-
<PAGE>
 
County of ________________________________:
                                               SS:
State of _________________________________:

     This is to certify that on this ____ day of _______, 1998, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Landlord in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Landlord.



                                ------------------------------
                                Notary Public

                                My commission expires:



                                     -11-

<PAGE>
 
================================================================================




                            CAPITAL AUTOMOTIVE REIT


                                      and


                    AMERICAN STOCK TRANSFER & TRUST COMPANY


                               as Warrant Agent


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


                               WARRANT AGREEMENT

                        Dated as of ______________, 1998




================================================================================
<PAGE>
 
                                TABLE OF CONTENTS
                                -----------------

                                                                            Page
                                                                            ----

PARTIES      ................................................................1

RECITALS     ................................................................1

ARTICLE I    ISSUANCE, EXECUTION, EXPIRATION AND TRANSFER OF 
             WARRANT CERTIFICATES............................................1
     1.01.   Form of Warrant Certificates....................................1
     1.02.   Execution of Warrant Certificates...............................2
     1.03.   Issuance, Delivery and Registration of Warrant 
               Certificates..................................................2
     1.04.   Transfer and Exchange of Warrant Certificates...................2

ARTICLE II   COMMON SHARES ISSUABLE, EXERCISE PRICE, 
             EXPIRATION DATE AND EXERCISE OF WARRANTS........................3
     2.01.   Warrant Shares Issuable; Exercise Price; 
               Expiration Date...............................................3
     2.02.   Exercise of Warrants............................................3
     2.03.   No Fractional Shares to Be Issued...............................4
     2.04.   Cancellation of Warrants........................................5

ARTICLE III  ADJUSTMENT OF EXERCISE PRICE; MERGER, 
             ACQUISITION, ETC.; RESERVATION OF COMMON SHARES; 
             PAYMENT OF TAXES................................................5
     3.01.   Adjustment of Exercise Price and Number of
               Warrant Shares................................................5
     3.02.   Exercise Price Adjustment Formula...............................6
     3.03.   Constructive Issuance of Shares.................................6
     3.04.   Stock Dividends.................................................8
     3.05.   Extraordinary Dividends and Distributions.......................8
     3.06.   Stock Splits and Reverse Stock Splits...........................8
     3.07.   Reorganizations and Asset Sales.................................8
     3.08.   Covenant to Reserve Shares for Issuance on 
               Exercise......................................................9
     3.09.   Warrant Agent Not Responsible for Validity of 
               Shares........................................................9
     3.10.   Statements on Warrants..........................................9
     3.11.   Notice of Change in Securities Issuable, etc...................10
     3.12.   References to Common Shares....................................10

                                       i
<PAGE>
 
ARTICLE IV   OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS 
             OF WARRANTS....................................................10
     4.01.   No Rights as Shareholders......................................10
     4.03.   Liquidation, Merger, etc.; Notice to 
               Warrantholders...............................................11

ARTICLE V    CONCERNING THE WARRANT AGENT...................................12
     5.01.   Change of Warrant Agent........................................12
     5.02.   Compensation; Further Assurances...............................13
     5.03.   Reliance on Counsel............................................13
     5.04.   Proof of Actions Taken.........................................13
     5.05.   Correctness of Statements......................................14
     5.06.   Validity of Agreement..........................................14
     5.07.   Use of Agents..................................................14
     5.08.   Liability of Warrant Agent.....................................14
     5.09.   Legal Proceedings..............................................14
     5.10.   Other Transactions in Shares of the Company....................14
     5.11.   Actions as Agent...............................................15
     5.12.   Appointment and Acceptance of Agency...........................15

ARTICLE VI   MISCELLANEOUS..................................................15
     6.01.   Reservation of Shares..........................................15
     6.02.   Registration of Warrant Shares.................................15
     6.03.   Enforcement of Warrant Rights..................................15
     6.04.   Negotiability and Ownership....................................15
     6.05.   Warrant Legend.................................................16
     6.06.   Supplements and Amendments.....................................16
     6.07.   Covenant as to Status as a Real Estate 
               Investment Trust.............................................17
     6.08.   Successors and Assigns.........................................17
     6.09.   Notices........................................................17
     6.10.   Applicable Law.................................................18
     6.11.   Benefits of this Agreement.....................................18
     6.12.   Registered Warrantholders......................................18
     6.13.   Inspection of Agreement........................................18
     6.14.   Headings.......................................................19
     6.15.   Counterparts...................................................19


SIGNATURE AND SEALS.........................................................20

EXHIBIT A. FORM OF WARRANT CERTIFICATE.....................................A-1

                                      ii
<PAGE>
 
                               WARRANT AGREEMENT

     This Agreement is made as of _______________, 1998 between Capital
Automotive REIT, a Maryland real estate investment trust (the "Company"), and
American Stock Transfer & Trust Company (the "Warrant Agent").

                                   RECITALS

     A. In connection with its initial public offering (the "Offering"), the
Company proposes to sell, pursuant to an Underwriting Agreement dated
_____________, 1998 (the "Underwriting Agreement") between the Company and
Friedman, Billings, Ramsey & Co., Inc. ("FBR"), 20,000,000 common shares of
beneficial interest, par value $.01 per share, of the Company (the "Common
Shares"), to certain underwriters, for which FBR is acting as representative
(the "Underwriters") and up to 3,000,000 Common Shares, to cover
over-allotments, if any. The Common Shares have been registered under the
Securities Act of 1933, as amended (the "Securities Act") on form S-11,
Registration No. 333-41183.

     B. The Company deems it advisable, in consideration for the services
rendered to the Company by FBR in connection with the offering of the Common
Shares, to issue to FBR warrants (the "Warrants") entitling the holders thereof
to purchase an aggregate of 1,277,794 Common Shares. The Common Shares issued
upon exercise of the Warrants are referred to as the "Warrant Shares".

     C. The Company desires to enter into this Agreement to set forth the terms
and conditions of the Warrants and the rights of the holders thereof.

     D. The Company desires that the Warrant Agent act on behalf of the Company,
and the Warrant Agent is willing to act in connection with the issuance,
exchange, transfer, substitution and exercise of Warrants;

     NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
herein contained, the parties hereto agree as follows:

                                   ARTICLE I

                ISSUANCE, EXECUTION, EXPIRATION AND TRANSFER OF
                             WARRANT CERTIFICATES

     Section 1.01 Form of Warrant Certificates. The Warrants shall be evidenced
                  ----------------------------
by certificates in temporary or definitive fully registered form (the "Warrant
Certificates") substantially in the form of Exhibit A, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with any law or with
any rule or regulation made pursuant thereto or with any rule or regulation of
any securities exchange, or to conform to usage, or as consistently herewith may
be determined by the officers executing such Warrant Certificates, as evidenced
by their execution of the Warrant Certificates. Each Warrant Certificate shall
evidence the right, subject to the 


                                       1
<PAGE>
 
provisions of this Agreement and of the Warrant Certificate, to purchase the
number of Common Shares stated therein, adjusted as provided for in Article III,
upon payment of the Exercise Price (as defined in Section 2.01).

     Section 1.02 Execution of Warrant Certificates. Each Warrant Certificate,
                  ---------------------------------
whenever issued, shall be dated as of the date of countersignature thereof by
the Warrant Agent either upon initial issuance or upon exchange, substitution or
transfer, shall be signed manually by, or bear the facsimile signature of, the
Chairman of the Board or the President or a Vice President and the Secretary or
Assistant Secretary of the Company, shall have the Company's seal or a facsimile
thereof affixed or imprinted thereon and shall be attested by the manual or
facsimile signature of the Secretary or an Assistant Secretary of the Company.
In case any officer of the Company whose manual or facsimile signature has been
placed upon any Warrant Certificate shall have ceased to be such before such
Warrant Certificate is issued, it may be issued with the same effect as if such
officer had not ceased to be such at the date of issuance. Warrant Certificates
shall be countersigned manually by the Warrant Agent (or successor Warrant
Agent) and shall not be valid for any purpose unless so countersigned. Warrant
Certificates may be countersigned by the Warrant Agent (or successor Warrant
Agent), however, notwithstanding that the persons whose manual or facsimile
signatures appear thereon as proper officers of the Company shall have ceased to
be such officers at the time of such countersignature, issuance or delivery. Any
Warrant Certificate may be signed on behalf of the Company by any person who, at
the actual date of the execution of such Warrant Certificate, shall be a proper
officer of the Company to sign such Warrant Certificate, although at the date of
the execution of this Agreement any such person was not such an officer.

     Section 1.03 Issuance, Delivery and Registration of Warrant Certificates.
                  -----------------------------------------------------------
Upon receipt of written instructions from the Company, the Warrant Agent shall
issue and deliver, at the closing of the sale of the Common Shares to the
Underwriters as provided in the Underwriting Agreement, to FBR or its designees
a Warrant Certificate entitling the holder thereof to purchase an aggregate of
1,277,794 Common Shares. Additionally, the Warrant Agent shall countersign and
deliver Warrant Certificates upon exchange, transfer or substitution for one or
more previously countersigned Warrant Certificates as hereinafter provided. The
Warrant Agent shall maintain books for the registration of transfer and
registration of Warrant Certificates (the "Warrant Register").

     Section 1.04 Transfer and Exchange of Warrant Certificates. The Warrant
                  ---------------------------------------------
Agent, from time to time, shall register the transfer of any outstanding Warrant
Certificates in the Warrant Register upon surrender at the office or agency
maintained in The City of New York for such purpose or at the principal office
of the Warrant Agent (or successor Warrant Agent) of Warrant Certificates
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Company and the Warrant Agent, duly executed by the holder
of the Warrant Certificate (the terms "Warrantholder" and "holder of any
Warrants" and all other similar terms used herein shall mean such person in
whose name Warrants are registered in the Warrant Register) or the
Warrantholder's attorney duly authorized in writing, and evidence, satisfactory
to the Warrant Agent, of compliance with the provisions of Section 6.04. Upon
any such registration of transfer, a new Warrant Certificate shall be
countersigned by the Warrant Agent

                                       2
<PAGE>
 
and issued to the transferee and the surrendered Warrant Certificate shall be
canceled by the Warrant Agent. Warrant Certificates may be exchanged at the
option of the holder thereof, upon surrender, properly endorsed, at the office
or agency maintained in The City of New York for such purpose or at the
principal office of the Warrant Agent (or successor Warrant Agent), with written
instructions, for other Warrant Certificates countersigned by the Warrant Agent
entitling the registered holder thereof, subject to the provisions thereof and
of this Agreement, to purchase in the aggregate a like number of Common Shares
as the Warrant Certificate so surrendered. The Company or the Warrant Agent may
require the payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any such exchange or transfer.

                                  ARTICLE II

          COMMON SHARES ISSUABLE, EXERCISE PRICE, EXPIRATION DATE AND
                             EXERCISE OF WARRANTS

     SECTION 2.01 Warrant Shares Issuable; Exercise Price; Expiration Date. Each
                  --------------------------------------------------------
Warrant Certificate shall entitle the registered holder thereof, subject to the
provisions thereof and of this Agreement, to purchase from the Company at any
time from the closing date of the Offering (the "Closing Date"), until the close
of business on the fifth anniversary of the Closing Date (or, if such date is
not a Business Day (as defined below), the first following Business Day) the
number of Common Shares stated therein, adjusted as provided in Article III,
upon payment of $_________ per share (which price is equal to the initial public
offering price), adjusted as provided in Article III. Such price, as in effect
from time to time as provided in Article III, is referred to as the "Exercise
Price." Each Common Share issuable upon exercise of a Warrant is referred to as
a "Warrant Share." Each Warrant not exercised during the period set forth above
shall become void, and all rights thereunder and all rights in respect thereof
under this Agreement shall cease, at the end of such period. For purposes of
this Agreement, the term "Business Day" means any day of the week other than a
Saturday, Sunday or a day which in The City of New York or in the city in which
the principal office of the Warrant Agent is located shall be a legal holiday or
a day on which banking institutions are authorized or required by law to close.

     SECTION 2.02 Exercise of Warrants. (a) Warrants may be exercised by
                  -------------------- 
surrendering the Warrant Certificate evidencing such Warrants at the office or
agency maintained in The City of New York for such purpose or at the principal
office of the Warrant Agent (or successor Warrant Agent), with the Election to
Exercise form set forth on the reverse of the Warrant Certificate duly completed
and signed, and by paying in full to the Warrant Agent for the account of the
Company (i) in cash, or (ii) by certified or official bank check, or (iii) by
any combination of the foregoing, the Exercise Price for each Warrant Share as
to which Warrants are exercised and any applicable taxes, other than taxes that
the Company is required to pay hereunder. A Warrantholder may exercise such
holder's Warrant for the full number of Warrant Shares issuable upon exercise
thereof or any lesser number of whole Warrant Shares.

     (b) As soon as practicable after the exercise of any Warrants and payment
by the Warrantholder of the full Exercise Price for the Warrant Shares as to
which such Warrants are 

                                       3
<PAGE>
 
then being exercised, the Warrant Agent shall requisition from the transfer
agent of the Common Shares and deliver to or upon the order of such
Warrantholder a certificate or certificates for the number of full Warrant
Shares to which such Warrantholder is entitled, registered in the name of such
Warrantholder or as such Warrantholder shall direct. Fractional Warrant Shares
that otherwise would be issuable in respect of such exercise shall be paid in
cash as provided in Section 2.03, and the number of Warrant Shares issuable to
such Warrantholder shall be rounded down to the next nearest whole number. If
such Warrant Certificate shall not have been exercised in full, the Warrant
Agent on behalf of the Company will issue to such Warrantholder a new Warrant
Certificate exercisable for the number of Common Shares as to which such Warrant
shall not have been exercised. The Warrant Agent on behalf of the Company will
cancel all Warrants so surrendered.

     (c) Each person in whose name any such certificate for Warrant Shares is
issued shall for all purposes be deemed to have become the holder of record of
such Warrant Shares on the date on which the Warrant Certificate was surrendered
to the Warrant Agent and payment of the Exercise Price and any applicable taxes
was made to the Warrant Agent for the account of the Company, irrespective of
the date of delivery of such certificate for Warrant Shares.

     (d) All Warrant Shares will be duly authorized, validly issued, fully paid
and nonassessable. The Company will pay all documentary stamp taxes attributable
to the initial issuance of Warrant Shares. The Company will not be required,
however, to pay any tax imposed in connection with any transfer involved in the
issue of the Warrant Shares in a name other than that of the Warrantholder. In
such case, the Company will not be required to issue any certificate for Warrant
Shares until the person or persons requesting the same shall have paid to the
Company the amount of any such tax or shall have established to the Company's
satisfaction that the tax has been paid or that no tax is due.

     (e) Promptly after the Warrant Agent shall have taken the action required
in Section 2.02(b) or at such later time as may be mutually agreeable to the
Company and the Warrant Agent, the Warrant Agent shall account to the Company
with respect to any Warrants exercised and shall pay to the Company the amount
of money received by it upon the exercise of Warrants.

     SECTION 2.03 No Fractional Shares to Be Issued. If more than one Warrant
                  ---------------------------------
Certificate shall be surrendered for exercise at one time by the same holder,
the number of full Warrant Shares which shall be issuable upon exercise thereof
shall be computed on the basis of the aggregate number of Warrants so
surrendered. The Warrantholders, by their acceptance of the Warrant
Certificates, expressly waive their right to receive any fraction of a Warrant
Share or a share certificate representing a fraction of a Warrant Share. In lieu
thereof, the Company will purchase such fractional interest for an amount in
cash equal to the current market value of such fractional interest, as
reasonably determined by the Board of Trustees of the Company and the number of
Warrant Shares issuable to such Warrantholder shall be rounded down to the
nearest whole number.

                                       4
<PAGE>
 
     SECTION 2.04 Cancellation of Warrants. The Warrant Agent shall cancel any
                  ------------------------
Warrant Certificate delivered to it for exercise, in whole or in part, or
delivered to it for transfer, exchange or substitution, and no Warrant
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. On request of the Company, the Warrant
Agent shall destroy canceled Warrant Certificates held by it and shall deliver
its certificates of destruction to the Company, subject to record retention
requirements applicable to the Warrant Agent pursuant to the Securities Exchange
Act of 1934 (the "Exchange Act"). If the Company shall acquire any of the
Warrants, such acquisition shall not operate as a redemption or termination of
the right represented by such Warrants unless and until the Warrant Certificates
evidencing such Warrants are surrendered to the Warrant Agent for cancellation.

                                  ARTICLE III

           ADJUSTMENT OF EXERCISE PRICE; MERGER, ACQUISITION, ETC.;
                RESERVATION OF COMMON SHARES; PAYMENT OF TAXES

     SECTION 3.01 Adjustment of Exercise Price and Number of Warrant Shares. (a)
                  ---------------------------------------------------------
The Exercise Price shall be subject to adjustment from time to time as provided
in this Article III. After each adjustment of the Exercise Price, each
Warrantholder shall at any time thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of Warrant Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant to the
provisions of such Warrant immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment.

     (b) For purposes of making adjustments of the Exercise Price pursuant to
this Article III, the "Current Market Price" shall be determined as of the date
of the grant, issuance or sale, whichever is earlier, as the case may be, giving
rise to the adjustment and shall be equal to the last sale price with respect to
Common Shares as reported on the Nasdaq Stock Market on such date. If there are
no reported transactions on the Nasdaq Stock Market on such date, the "Current
Market Price" shall be the average of the highest current independent bid and
lowest current independent offer for the shares.

     (c) Notwithstanding anything herein to the contrary, the Exercise Price and
Number of Warrant Shares shall not be adjusted if (i) the sale or issuance price
of any Common Shares is equal to or greater than the Current Market Price as of
the date of issuance or sale, whichever is earlier, as the case may be, (ii) the
exercise price (determined as described in Sections 3.03(a) of any Options (as
defined in Section 3.03(a)) is equal to or greater than the Current Market Price
as of the date of grant, issuance or sale, whichever is earlier, as the case may
be, (iii) the sale or issuance price (determined as described in Section
3.03(b)) of any Convertible Securities (as defined in Section 3.03(b)) is equal
to or greater than the Current Market Price as of the date of issuance or sale,
whichever is earlier, as the case may be, or (iv) notwithstanding clause (i) and
(iii) any Common Shares or Convertible Securities are issued or sold in a firm
commitment underwritten registered public offering.


                                       5
<PAGE>
 
     SECTION 3.02 Exercise Price Adjustment Formula. Subject to Section 3.01, if
                  ---------------------------------
the Company issues or sells any Common Shares for a price per share that is less
than the Current Market Price in effect at the time of such issuance or sale,
the Exercise Price immediately shall be adjusted by multiplying the Exercise
Price by (a) an amount equal to the sum of (i) the number of Common Shares
outstanding and deemed (in accordance with the provisions of Section 3.03) to be
outstanding immediately prior to such issuance and sale multiplied by the
Current Market Price at the time of such issuance or sale and (ii) the total
consideration received and deemed (in accordance with the provisions of Section
3.03) to be received by the Company upon such issuance and sale and (b) dividing
the result by an amount equal to (i) the sum of (A) the amount determined in (a)
and (B) the product of the number of shares issued or sold multiplied by the
Current Market Price, minus (ii) the consideration received.

     SECTION 3.03 Constructive Issuance of Shares. (a) Subject to Section 3.01,
                  -------------------------------
if the Company grants any rights, warrants or options (collectively referred to
as "Options") to subscribe for or purchase any Common Shares or any securities
(collectively referred to as "Convertible Securities") convertible into or
exchangeable for Common Shares, whether or not any such Options or the right to
convert or exchange any such Convertible Securities are immediately exercisable,
and the price per share for which Common Shares are issuable upon the exercise
of such Options or upon conversion or exchange of such Convertible Securities
(determined by dividing (i) the total consideration received or receivable by
the Company for the granting of such Options, plus any additional consideration
payable to the Company upon the exercise of such Options, plus in the case of
any such Options which relate to Convertible Securities, any additional
consideration payable to the Company upon the conversion or exchange thereof by
(ii) the maximum number of Common Shares issuable upon the exercise of such
Options or upon the conversion or exchange of such Convertible Securities) shall
be less than the Current Market Price in effect as of the time of granting such
Options, the maximum number of Common Shares issuable upon the exercise of such
Options or upon conversion or exchange of all Convertible Securities issuable
upon the exercise of such Options shall be deemed, upon the granting of such
Options, to be outstanding and to have been issued for such price per share.
Except as provided in Section 3.03(c), no further adjustment of the Exercise
Price shall be made upon the issue or sale of Common Shares upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.

     (b) Subject to Section 3.01, if the Company issues or sells any Convertible
Securities (other than securities referred to in Section 3.03(a)), whether or
not the right to convert or exchange any such Convertible Securities is
immediately exercisable, and the price per share for which the Common Shares are
issuable upon such conversion or exchange (determined by dividing (i) the total
consideration received or receivable by the Company for the issue or sale of
such Convertible Securities, plus any additional consideration payable to the
Company upon the conversion or exchange of such Convertible Securities by (ii)
the maximum number of Common Shares issuable upon the conversion or exchange of
such Convertible Securities) shall be less than the Current Market Price in
effect as of the time of such issue or sale of the Convertible Securities, the
maximum number of Common Shares issuable upon conversion or exchange of all such
Convertible Securities shall be deemed, upon the issue or sale of such
Convertible 


                                       6
<PAGE>
 
Securities, to be outstanding and to have been issued for such price per share.
Except as provided in Section 3.03(c), no further adjustment of the Exercise
Price shall be made upon the issue or sale of Common Shares upon conversion or
exchange of any such Convertible Securities.

     (c) Subject to Section 3.01, if the exercise price provided for in any
Option referred to in Section 3.03(a), or the rate at which any Convertible
Security referred to in Section 3.03(a) or 3.03(b) is convertible into or
exchangeable for Common Shares, shall change or a different exercise price or
rate shall become effective at any time or from time to time, the Exercise Price
immediately shall be adjusted to the Exercise Price that would have obtained had
the adjustments made and required to be made under this Section 3.03 upon the
grant, issuance or sale of such Options or such Convertible Securities been made
upon the basis of (i) the issuance of the number of Common Shares theretofore
delivered upon the exercise of such Options or upon the conversion or exchange
of such Convertible Securities and the total consideration received therefor,
(ii) the issuance of all Common Shares and all other Options or Convertible
Securities and the total consideration received therefor and (iii) the original
issuance at the time of such change of exercise price or rate of any such
Options or Convertible Securities then outstanding and the total consideration
received therefor. On the expiration of any such Option or the termination of
any such right to convert or exchange any such Convertible Securities, the
Exercise Price immediately shall be adjusted to the Exercise Price that would
have obtained (iv) had the adjustments made upon the issuance of such Options or
such Convertible Securities been made upon the issuance of only the number of
Common Shares actually delivered and the total consideration received therefor
upon the exercise of such Options or upon the conversion or exchange of such
Convertible Securities and (v) had adjustments been made on the basis of the
Exercise Price as adjusted under clause (iv) of this Section 3.03(c) for all
issues or sales of Common Shares, Options or Convertible Securities made after
the issuance of such Options or Convertible Securities. If the exercise price
provided for in any Option referred to in Section 3.03(a), or the rate at which
any Convertible Security referred to in Section 3.03(a) or 3.03(b) is
convertible or exchangeable for Common Shares, shall decrease at any time
pursuant to applicable provisions thereof designed to protect against dilution,
the Exercise Price immediately shall be decreased in the case of delivery of
Common Shares upon the exercise of any such Option or upon the conversion or
exchange of any such Convertible Securities, to the Exercise Price that would
have obtained had the adjustments made upon the issue or sale of such Option (as
defined in 3.03(a)) or such Convertible Security (as defined in 3.03(b)) been
made upon the basis of the issuance of the Common Shares so delivered and the
total consideration received therefor.

     (d) If any Common Shares or any Convertible Securities or any Option shall
be issued or sold for cash, the consideration received by the Company shall be
deemed to be the amount payable to the Company therefor without deduction of any
expense incurred or any underwriting commission, concession or discount paid or
allowed by the Company in connection therewith. If any Common Shares or any
Convertible Securities or any Option shall be issued or sold for a consideration
other than cash, the consideration received by the Company shall be deemed to be
the fair value of such consideration as determined by the Board of Trustees of
the Company without deduction of any expense incurred or any underwriting
commission, 


                                       7
<PAGE>
 
concession or discount paid or allowed by the Company in connection therewith.
If any Common Shares or any Convertible Securities or any Option shall be issued
in connection with a merger of another corporation into the Company, the
consideration received by the Company shall be deemed to be the fair value as
determined by the Board of Trustees of the Company of such portion of the assets
of such merged corporation as the Board of Trustees shall reasonably determine
to be attributable to such Common Shares or such Option or Convertible
Securities, as the case may be.

     SECTION 3.04 Stock Dividends. If the Company shall declare a dividend or
                  ---------------
any other distribution upon any capital stock which is payable in Common Shares,
the Exercise Price shall be reduced to the quotient obtained by dividing (i) the
number of Common Shares outstanding and deemed (in accordance with the
provisions of Section 3.03(c)) to be outstanding immediately prior to such
declaration multiplied by the then effective Exercise Price by (ii) the total
number of Common Shares outstanding and deemed (in accordance with the
provisions of Section 3.03(c)) to be outstanding immediately after such
declaration. All Common Shares and all Convertible Securities issuable in
payment of any dividend or other distribution upon the capital stock of the
Company shall be deemed to have been issued or sold without consideration.

     SECTION 3.05 Extraordinary Dividends and Distributions. If the Company
                  -----------------------------------------
shall declare a dividend or any other distribution upon the Common Shares
payable otherwise than out of current earnings, retained earnings or earned
surplus and otherwise than in Common Shares or Convertible Securities, the
Exercise Price shall be reduced by an amount equal, in the case of a dividend or
distribution in cash, to the amount thereof payable per Common Share or, in the
case of any other dividend or other distribution, to the fair value thereof per
Common Share at the time such dividend or other distribution was declared, as
reasonably determined by the Board of Trustees of the Company. A dividend or
distribution other than in cash shall be considered payable out of current
earnings, retained earnings or earned surplus only to the extent that such
current earnings, retained earnings or earned surplus are charged an amount
equal to the fair value of such dividend or distribution as reasonably
determined by the Board of Trustees of the Company.

     SECTION 3.06 Stock Splits and Reverse Stock Splits. If the Company shall
                  -------------------------------------
subdivide its outstanding Common Shares into a greater number of shares, the
Exercise Price shall be proportionately reduced and the number of Warrant Shares
issuable upon exercise of each Warrant shall be proportionately increased. If
the Company shall combine the outstanding Common Shares into a smaller number of
shares, the Exercise Price shall be proportionately increased and the number of
Warrant Shares issuable upon exercise of each Warrant shall be proportionately
decreased.

     SECTION 3.07 Reorganizations and Asset Sales. If any capital reorganization
                  -------------------------------
or reclassification of the Company, or any consolidation or merger of the
Company with another corporation, or the sale of all or substantially all of the
assets of the Company shall be effected in such a way that the holders of the
Common Shares shall be entitled to receive securities or assets with respect to
or in exchange for Common Shares, adequate provision shall be made, prior to and
as a condition of such reorganization, reclassification, consolidation, merger
or sale, whereby 

                                       8
<PAGE>
 
each Warrantholder shall have the right to receive, upon the terms and
conditions specified herein and in lieu of the Warrant Shares otherwise
receivable upon the exercise of such Warrants, such securities or assets as may
be issued or payable with respect to or in exchange for the number of
outstanding Common Shares equal to the number of Warrant Shares otherwise
receivable had such reorganization, reclassification, consolidation, merger or
sale not taken place. In any such case, appropriate provision shall be made with
respect to the rights and interests of such Warrantholder so that the provisions
of this Agreement shall be applicable with respect to any securities or assets
thereafter deliverable upon exercise of the Warrants. The Company shall not
effect any such consolidation, merger or sale unless prior to or simultaneously
with the consummation thereof, the survivor or successor corporation resulting
from such consolidation or merger or the purchaser of such assets shall assume
by written instrument delivered to each holder of Warrants the obligation to
deliver to such holder such securities or assets as such holder may be entitled
to receive.

     SECTION 3.08 Covenant to Reserve Shares for Issuance on Exercise. (a) The
                  ---------------------------------------------------
Company will cause an appropriate number of Common Shares to be duly and validly
authorized and reserved and will keep available out of its authorized Common
Shares, solely for the purpose of issue upon exercise of Warrants as herein
provided, the full number of Common Shares, if any, then issuable if all
outstanding Warrants then exercisable were to be exercised. The Company
covenants that all Common Shares that shall be so issuable shall be duly and
validly issued and, upon payment of the Exercise Price, fully paid and
non-assessable.

     (b) The Company hereby authorizes and directs its current and future
transfer agents for the Common Shares at all times to reserve such number of
authorized shares as shall be requisite for such purpose. The Warrant Agent is
hereby authorized to requisition from time to time from any such transfer
agents' share certificates required to honor outstanding Warrants upon exercise
thereof in accordance with the terms of this Agreement, and the Company hereby
authorizes and directs such transfer agents to comply with all such requests of
the Warrant Agent. The Company will supply such transfer agents with duly
executed stock certificates for such purposes. Promptly after the date of
expiration of the Warrants, the Warrant Agent shall certify to the Company the
aggregate number of Warrants then outstanding, and thereafter no shares shall be
reserved in respect of such Warrants.

     SECTION 3.09 Warrant Agent Not Responsible for Validity of Shares. The
                  ----------------------------------------------------
Warrant Agent shall not be accountable with respect to the validity or value (or
the kind or amount) of any Common Shares or of any securities or property that
at any time may be issued or delivered upon the exercise of any Warrant or upon
any adjustment pursuant to Article III, and it makes no representation with
respect thereto. The Warrant Agent shall not be responsible for any failure of
the Company to make any cash payment or to issue, transfer or deliver any Common
Shares or share certificates or other securities or property upon the surrender
of any Warrant for the purpose of exercise or upon any adjustment pursuant to
Article III, or to comply with any of the covenants of the Company contained in
this Article III.

     SECTION 3.10 Statements on Warrants. The form of Warrant Certificate need
                  ----------------------
not be changed because of any adjustment made pursuant to this Article III, and
Warrant 


                                       9
<PAGE>
 
Certificates issued after such adjustment may state the same Exercise Price and
the same number of Common Shares as are stated in the Warrant Certificates
initially issued pursuant to this Agreement. The Company, however, may at any
time in its sole discretion (which shall be conclusive) make any change in the
form of Warrant Certificate that it may deem appropriate and that does not
affect the substance thereof; and any Warrant Certificates thereafter issued or
countersigned, whether in exchange or substitution for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.

     SECTION 3.11 Notice of Change in Securities Issuable, etc. Whenever the
                  ---------------------------------------------
securities issuable or deliverable in exchange for Warrants are changed pursuant
to this Article III, the Company promptly shall file with the Warrant Agent a
certificate executed by its chief financial officer, setting forth in reasonable
detail the facts requiring the change and specifying the effective date of such
change and the number or amount of, and describing the shares or other
securities issuable or deliverable in exchange for, each Warrant as so changed.
The Company also shall mail such a notice to each Warrantholder. Failure to file
such statement or to publish such notice, or any defect in such statement or
notice, shall not affect the legality or validity of any such change.

                  SECTION 3.12 References to Common Shares. Unless the context
                               ---------------------------
otherwise indicates, all references to Common Shares in this Agreement and in
the Warrant Certificates, in the event of a change under this Article III, shall
be deemed to refer also to any other securities issuable or deliverable in
exchange for Warrants pursuant to such change.

                                  ARTICLE IV

          OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS

     SECTION 4.01 No Rights as Shareholders. Nothing contained in this Agreement
                  -------------------------
or in any Warrant Certificate shall be construed as conferring on any
Warrantholder any rights whatsoever as a shareholder of the Company, including
the right to vote at, or to receive notice of, any meeting of shareholders of
the Company; nor shall the consent of any such holder be required with respect
to any action or proceeding of the Company; nor shall any such holder, by reason
of the ownership or possession of a Warrant or the Warrant Certificate
representing the same, either at, before or after exercising such Warrant, have
any right to receive any cash dividends, stock dividends, allotments or rights,
or other distributions (except as specifically provided herein), paid, allotted
or distributed or distributable to the shareholders of the Company prior to the
date of the exercise of such Warrant; nor shall such holder have any right not
expressly conferred by such holder's Warrant or Warrant Certificate.

     SECTION 4.02 Mutilated or Missing Warrant Certificates. If any Warrant
                  -----------------------------------------
Certificate is lost, stolen, mutilated or destroyed, the Company in its
discretion may issue and the Warrant Agent may countersign, in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and substitution for the Warrant Certificate lost, stolen or
destroyed, upon receipt of a proper affidavit or other evidence satisfactory to
the Company and the Warrant Agent (and surrender of any mutilated Warrant
Certificate) and bond of



                                      10
<PAGE>
 
indemnity in form and amount and with corporate surety satisfactory to the
Company and the Warrant Agent in each instance protecting the Company and the
Warrant Agent, a new Warrant Certificate of like tenor and exercisable for an
equivalent number of Common Shares as the Warrant Certificate so lost, stolen,
mutilated or destroyed. Any such new Warrant Certificate shall constitute an
original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant Certificate at any time shall be
enforceable by anyone. An applicant for such a substitute Warrant Certificate
also shall comply with such other reasonable regulations and pay such other
reasonable charges as the Company or the Warrant Agent may prescribe. All
Warrant Certificates shall be held and owned upon the express condition that the
foregoing provisions are exclusive with respect to the replacement of lost,
stolen, mutilated or destroyed Warrant Certificates, and shall preclude any and
all other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without their surrender.

     SECTION 4.03   Liquidation, Merger, etc.; Notice to Warrantholders. If:
                    ---------------------------------------------------  
     (a) the Company shall authorize the issuance to all holders of Common
Shares of rights or warrants to subscribe for or purchase capital stock of the
Company or of any other subscription rights or warrants; or

     (b) the Company shall authorize the distribution to all holders of Common
Shares of evidences of its indebtedness or assets (other than cash dividends or
cash distributions payable out of current earnings, retained earnings or earned
surplus or dividends payable in Common Shares); or

     (c) there shall be proposed any consolidation or merger to which the
Company is to be a party and for which approval of the holders of Common Shares
is required, or the conveyance or transfer of the properties and assets of the
Company substantially as an entirety; or

     (d) there shall be proposed the voluntary or involuntary dissolution,
liquidation or winding up of the Company; the Company shall cause to be filed
with the Warrant Agent and shall cause to be given to each Warrantholder, by
first-class mail, postage prepaid, a written notice stating (i) the date as of
which the holders of record of Common Shares to be entitled to receive any such
rights, warrants or distribution are to be determined or (ii) the date on which
any consolidation, merger, conveyance, transfer, reorganization,
reclassification, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of record of
Common Shares shall be entitled to exchange the shares for securities or other
property, if any, deliverable upon the consolidation, merger, conveyance,
transfer, reorganization, reclassification, dissolution, liquidation or winding
up. Such notice shall be filed and mailed in the case of a notice pursuant to
(i) above, at least ten calendar days before the record date specified and in
the case of a notice pursuant to clause (ii) above, at least 20 calendar days
before the earlier of the dates specified. From the time notice is required to
be given pursuant to this Section 4.03, the holders of Warrants shall be
entitled to exercise such Warrants regardless of the provisions of Section 2.01.

                                      11
<PAGE>
 
                                    ARTICLE V

                          CONCERNING THE WARRANT AGENT

     SECTION 5.01   Change of Warrant Agent. (a) The Warrant Agent, or any
                    -----------------------
successor to it hereafter appointed, may resign its duties and be discharged
from all further duties and liabilities hereunder after giving 60 days' notice
in writing to the Company, except that such shorter notice may be given as the
Company, in writing, shall accept as sufficient. If the office of the Warrant
Agent becomes vacant by resignation or incapacity to act or otherwise, the
Company shall appoint a successor Warrant Agent in place of the Warrant Agent.
If the Company shall fail to make such appointment within a period of 60 days
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent or by any holder of Warrants (who, with
such notice, shall submit such holder's Warrant Certificate for inspection by
the Company), then the holder of any Warrants may apply to any court of
competent jurisdiction for the appointment of a successor Warrant Agent.

     (b)  The Warrant Agent may be removed by the Company at any time upon 30
days' written notice to the Warrant Agent; provided, however, that the Company
                                           --------  -------
shall not remove the Warrant Agent until a successor Warrant Agent meeting the
requirements hereof shall have been appointed.

     (c)  Any successor Warrant Agent, whether appointed by the Company or by a
court of competent jurisdiction, shall be a corporation or association
(including the Company) organized, in good standing and doing business under the
laws of the United States of America or any state thereof or the District of
Columbia. After appointment, any successor Warrant Agent shall be vested with
all the authority, powers, rights, immunities, duties and obligations of its
predecessor Warrant Agent with like effect as if originally named as Warrant
Agent hereunder, without any further act or deed; but if for any reason it
becomes necessary or appropriate, the predecessor Warrant Agent shall execute
and deliver, at the expense of the Company, an instrument transferring to such
successor Warrant Agent all the authority, powers and rights of such predecessor
Warrant Agent hereunder; and upon request of any successor Warrant Agent, the
Company shall make, execute, acknowledge and deliver any and all instruments in
writing to more fully and effectually vest in and confirm to such successor
Warrant Agent all such authority, powers, rights, immunities, duties and
obligations. Upon assumption by a successor Warrant Agent of the duties and
responsibilities hereunder, the predecessor Warrant Agent shall deliver and
transfer, at the expense of the Company, to the successor Warrant Agent any
property at the time held by it hereunder. As soon as practicable after such
appointment, the Company shall give notice thereof to the predecessor Warrant
Agent, the Warrantholders and each transfer agent for the Common Shares. Failure
to give such notice, or any defect therein, shall not affect the validity of the
appointment of the successor Warrant Agent.

     (d)  Any corporation or association into which the Warrant Agent may be
merged or with which it may be consolidated, or any corporation or association
resulting from any merger or consolidation to which the Warrant Agent shall be a
party, shall be the successor 


                                      12
<PAGE>
 
Warrant Agent under this Agreement without any further act. In case at the time
such successor to the Warrant Agent shall succeed to the agency created by this
Agreement, any of the Warrant Certificates shall have been countersigned but not
delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrant
Certificates so countersigned, and in case at that time any of the Warrant
Certificates shall not have been countersigned, any successor to the Warrant
Agent may countersign such Warrant Certificates either in the name of the
predecessor Warrant Agent or in the name of the successor Warrant Agent; and in
all such cases, such Warrant Certificates shall have the full force provided in
the Warrant Certificates and in this Agreement.

     (e)  In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrant Certificates shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignatures under its prior
name and deliver such Warrant Certificates so countersigned; and in case at that
time any of the Warrant Certificates shall not have been countersigned, the
Warrant Agent may countersign such Warrant Certificates either in its prior name
or in its changed name; and in all such cases, such Warrant Certificates shall
have the full force provided in the Warrant Certificates and in this Agreement.

     SECTION 5.02   Compensation; Further Assurances. The Company agrees (i)
                    -------------------------------- 
that it will pay the Warrant Agent reasonable compensation for its services as
Warrant Agent hereunder and, except as otherwise expressly provided, will pay or
reimburse the Warrant Agent upon demand for all reasonable expenses,
disbursements and advances incurred or made by the Warrant Agent in accordance
with any of the provisions of this Agreement (including the reasonable
compensation, expenses and disbursements of its agents and counsel), except any
such expense, disbursement or advance as may arise from its or any of their
negligence or bad faith; and (ii) that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as reasonably may be required
by the Warrant Agent for the carrying out or performing of the provisions of
this Agreement.

     SECTION 5.03   Reliance on Counsel. The Warrant Agent may consult with
                    -------------------
legal counsel (who may be legal counsel for the Company), and the written
opinion of such counsel or any advice of legal counsel subsequently confirmed by
a written opinion of such counsel shall be full and complete authorization and
protection to the Warrant Agent as to any action taken or omitted by it in good
faith and in accordance with such written opinion or advice.

     SECTION 5.04   Proof of Actions Taken. Whenever in the performance of its
                    ----------------------
duties under this Agreement the Warrant Agent shall deem it necessary or
desirable that any matter be proved or established by the Company prior to
taking or suffering or omitting any action hereunder, such matter (unless other
evidence in respect thereof be herein specifically prescribed), in the absence
of bad faith on the part of the Warrant Agent, may be deemed to be conclusively
proved and established by an Officers' Certificate delivered to the Warrant
Agent; and such Officers' Certificate, in the absence of bad faith on the part
of the Warrant Agent, shall be full warrant to the Warrant Agent for any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such certificate; but in its discretion, the 


                                      13
<PAGE>
 
Warrant Agent in lieu thereof may accept other evidence of such fact or matter
or may require such further or additional evidence as to it may seem reasonable.

     SECTION 5.05   Correctness of Statements. The Warrant Agent shall not be
                    -------------------------
liable for or by reason of any of the statements of fact or recitals contained
in this Agreement or in the Warrant Certificates (except its countersignature
thereon) or be required to verify the same, and all such statements and recitals
are and shall be deemed to have been made by the Company only.

     SECTION 5.06   Validity of Agreement. The Warrant Agent shall not be under
                    ---------------------
any responsibility in respect of the validity of this Agreement or the execution
and delivery hereof or in respect of the validity or execution of any Warrant
Certificates (except its countersignature thereon); nor shall it be responsible
for any breach by the Company of any covenant or condition contained in this
Agreement or in any Warrant Certificate; nor shall it by any act hereunder be
deemed to make any representation or warranty as to the authorization or
reservation of any Common Shares to be issued pursuant to this Agreement or any
Warrants or as to whether any Common Shares, when issued, will be validly issued
and fully paid and nonassessable.

     SECTION 5.07   Use of Agents. The Warrant Agent may execute and exercise
                    -------------
any of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents and the Warrant Agent
shall not be responsible for the misconduct or negligence of any agent or
attorney, provided due care had been exercised in the appointment and continued
employment thereof.

     SECTION 5.08   Liability of Warrant Agent. The Warrant Agent shall incur no
                    -------------------------- 
liability or responsibility to the Company or to any holder of Warrants for any
action taken in reliance on any notice, resolution, waiver, consent, order,
certificate, or other paper, document or instrument believed by it to be genuine
and to have been signed, sent or presented by the proper party or parties. The
Company agrees to indemnify the Warrant Agent and save it harmless against any
and all liabilities, including judgments, costs and reasonable counsel fees, for
anything done or omitted in good faith by the Warrant Agent in the execution of
this Warrant Agreement, except as a result of the Warrant Agent's gross
negligence or willful misconduct or bad faith.

     SECTION 5.09   Legal Proceedings. The Warrant Agent shall be under no
                    -----------------
obligation to institute any action, suit or legal proceeding or to take any
other action likely to involve expense unless the Company or one or more holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses that may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity.

     SECTION 5.10   Other Transactions in Shares of the Company. The Warrant
                    -------------------------------------------
Agent, in its individual or any other capacity, may become the owner of the
Warrants or other securities of the Company, or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as 


                                      14
<PAGE>
 
fully and freely as though it were not the Warrant Agent under this Warrant
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.

     SECTION 5.11   Actions as Agent. The Warrant Agent shall act hereunder
                    ----------------
solely as agent and not in a ministerial capacity, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not be
liable for anything which it may do or refrain from doing in good faith in
connection with this Agreement, except for its own negligence or willful
misconduct or bad faith.

     SECTION 5.12   Appointment and Acceptance of Agency. The Company hereby
                    ------------------------------------ 
appoints the Warrant Agent to act as agent for the Company in accordance with
the instructions set forth in this Agreement, and the Warrant Agent hereby
accepts the agency established by this Agreement and agrees to perform the same
upon the terms and conditions herein set forth.

                                   ARTICLE VI

                                  MISCELLANEOUS

     SECTION 6.01   Reservation of Shares. The Company at all times shall
                    ---------------------
reserve and keep available such number of shares of its authorized but unissued
Common Shares as from time to time shall be sufficient to permit the exercise of
all outstanding Warrants. If at any time the number of authorized but unissued
Common Shares shall not be sufficient for such purpose, the Company will take
such action as, in the opinion of its counsel, may be necessary to increase its
authorized but unissued Common Shares to such number of shares as shall be
sufficient for such purpose. Prior to the issuance of any Warrant Shares, the
Company shall secure the listing of such Warrant Shares upon any securities
exchange or market upon which Common Shares are then listed, if any.

     SECTION 6.02   Registration of Warrant Shares. The Company has registered
                    ------------------------------  
the Warrant Shares under the Securities Act.

     SECTION 6.03   Enforcement of Warrant Rights. All rights of action are
                    -----------------------------
vested in the respective Warrantholders. Any holder of any Warrant, in his own
behalf and for his own benefit, may enforce, and may institute and maintain any
suit, action or proceeding against the Company or the Warrant Agent suitable to
enforce, or otherwise in respect of, his right to exercise his Warrant for the
purchase of the number of Warrant Shares issuable or deliverable in exchange
therefor, in the manner provided in the Warrant Certificate and in this
Agreement.

     SECTION 6.04   Negotiability and Ownership. Neither the Warrants nor the
                    ---------------------------
Warrant Shares shall, for a period of one year following the Closing Date, be
sold, transferred, assigned, pledged or hypothecated by the holders thereof,
except (a) to persons who are officers of FBR, (b) members of the selling group
or (c) in the case of an individual, pursuant to such individual's last will and
testament or the laws of descent and distribution and, in any case, only in
compliance with the Securities Act and Rule 2710 of the National Association of
Securities Dealers, Inc. Manual, or any successor rule. For the purposes of this
Section 6.04, the term 

                                      15
<PAGE>
 
"officers" shall refer to those persons who are officers of FBR or who become
officers of FBR at any time before the expiration of the Warrants regardless of
whether such persons are officers of FBR at the time they sell, transfer, assign
or hypothecate a Warrant. Any attempt to sell, transfer, assign or hypothecate
in contravention of this Section shall be null and void.

     SECTION 6.05   Warrant Legend. (a) Each Warrant shall contain a legend in
                    --------------
substantially the following form:

          "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
     WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT,
     DATED ______________, 1998, BETWEEN CAPITAL AUTOMOTIVE REIT AND AMERICAN
     STOCK TRANSFER & TRUST COMPANY. ANY ATTEMPT TO SELL, TRANSFER, ASSIGN, OR
     HYPOTHECATE THIS WARRANT OR ANY COMMON SHARE ISSUED UPON EXERCISE OF THIS
     WARRANT, PRIOR TO ______________, 1999, SHALL BE NULL AND VOID, EXCEPT
     TRANSFERS TO PERSONS WHO ARE OFFICERS OF FRIEDMAN, BILLINGS, RAMSEY & CO.,
     INC., MEMBERS OF THE SELLING GROUP OR PURSUANT TO AN INDIVIDUAL'S LAST WILL
     AND TESTAMENT OR THE LAW OF DESCENT AND DISTRIBUTION. NO TRANSFER IN
     VIOLATION OF SUCH AGREEMENT SHALL BE EFFECTIVE.

          THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
     EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST EFFECTIVE AMENDMENT
     THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR AN
     APPLICABLE EXEMPTION UNDER THE ACT.

     (b)  Each certificate representing Warrant Shares, issued prior to
_________, 1999, shall contain a legend substantially in the following form:

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
     CONDITIONS SPECIFIED IN THE AGREEMENT, DATED ________________, 1998,
     BETWEEN CAPITAL AUTOMOTIVE REIT AND AMERICAN STOCK TRANSFER & TRUST
     COMPANY. ANY ATTEMPT TO SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THE
     SHARES REPRESENTED BY THIS CERTIFICATE, PRIOR TO _______________, 1999,
     SHALL BE NULL AND VOID, EXCEPT TRANSFERS TO PERSONS WHO ARE OFFICERS OF
     FBR, MEMBERS OF THE SELLING GROUP OR PURSUANT TO AN INDIVIDUAL'S LAST WILL
     AND TESTAMENT OR THE LAW OF DESCENT AND DISTRIBUTION. NO TRANSFER IN
     VIOLATION OF SUCH AGREEMENT SHALL BE EFFECTIVE."

     SECTION 6.06   Supplements and Amendments. (a) Notwithstanding the
                    --------------------------
provisions of Section 6.06(b), the Warrant Agent, without the consent or
concurrence of the registered holders of the Warrants, may enter into one or
more supplemental agreements or amendments with the Company for the purpose of
evidencing the rights of Warrantholders upon

                                      16
<PAGE>
 
consolidation, merger, sale, transfer or reclassification pursuant to Section
3.07, making any changes or corrections in this Agreement that are required to
cure any ambiguity, to correct or supplement any provision contained herein that
may be defective or inconsistent with any other provision herein or any clerical
omission or mistake or manifest error herein contained, or making such other
provisions in regard to matters or questions arising under this Agreement as
shall not adversely affect the interests of the holders of the Warrants or be
inconsistent with this Agreement or any supplemental agreement or amendment.

          (b)  With the consent of the registered holders of at least a majority
in number of the Warrants at the time outstanding, the Company and the Warrant
Agent at any time and from time to time by supplemental agreement or amendment
may add any provisions to or change in any manner or eliminate any of the
provisions of this Agreement or of any supplemental agreement or modify in any
manner the rights and obligations of the Warrantholders and of the Company;
provided, however, that no such supplemental agreement or amendment, without the
- --------  -------
consent of the registered holder of each outstanding Warrant affected thereby,
shall:

          (1) alter the provisions of this Agreement so as to affect adversely
     the terms upon which the Warrants are exercisable; or

          (2) reduce the number of Warrants outstanding the consent of whose
     holders is required for any such supplemental agreement or amendment.

          SECTION 6.07  Covenant as to Status as a Real Estate Investment Trust.
                        -------------------------------------------------------
The Company shall use its best efforts, until the fifth anniversary of the
Expiration Date, to maintain its status as a "real estate investment trust"
within the meaning of the Internal Revenue Code of 1986, as amended.
Notwithstanding the foregoing, the Company may change the nature of its business
so as to cease to be, or to withdraw its election as, a real estate investment
trust with the approval of the board of trustees and a vote of shareholders as
required by the Company's Amended and Restated Declaration of Trust.

          SECTION 6.08  Successors and Assigns. All the covenants and provisions
                        ---------------------- 
of this Agreement by or for the benefit of the Company or the Warrant Agent
shall bind and inure to the benefit of their respective successors and assigns
hereunder.

          SECTION 6.09  Notices. Any notice or demand authorized by this
                        -------
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant to or on the Company shall be sufficiently given or made if sent by mail
first-class, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:

              Capital Automotive REIT
              1925 North Lynn Street, Suite 306
              Arlington, Virginia 22209
              Attention:  David S. Kay


                                      17
<PAGE>
 
     Any notice or demand authorized by this Agreement to be given or made by
the holder of any Warrant or by the Company to or on the Warrant Agent shall be
sufficiently given or made if sent by mail first-class, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company), as follows:

             AMERICAN STOCK TRANSFER & TRUST COMPANY
             40 Wall Street
             New York, New York 10005
             Attention:   Susan Silber


     Any notice or demand authorized by this Agreement to be given or made to
the holder of any Warrants shall be sufficiently given or made if sent by
first-class mail, postage prepaid to the last address of such holder as it shall
appear on the Warrant Register.

     SECTION 6.10   Applicable Law. The validity, interpretation and performance
                    --------------
of this Agreement and of the Warrant Certificate shall be governed by the law of
the State of New York without giving effect to the principles of conflicts of
laws thereof.

     SECTION 6.11   Benefits of this Agreement. Nothing in this Agreement
                    --------------------------
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the parties hereto and the holders of the Warrants any
right, remedy or claim under or by reason of this Agreement or of any covenant,
condition, stipulation, promise or agreement hereof, and all covenants,
conditions, stipulations, promises and agreements in this Agreement contained
shall be for the sole and exclusive benefit of the parties hereto and their
successors and of the holders of the Warrants.

     SECTION 6.12   Registered Warrantholders. Prior to due presentment for
                    -------------------------
registration of transfer, the Company and the Warrant Agent may deem and treat
the person in whose name any Warrants are registered in the Warrant Register as
the absolute owner thereof for all purposes whatsoever (notwithstanding any
notation of ownership or other writing thereon made by anyone other than the
Company or the Warrant Agent) and neither the Company nor the Warrant Agent
shall be affected by any notice to the contrary or be bound to recognize any
equitable or other claim to or interest in any Warrants on the part of any other
person and shall not be liable for any registration of transfer of Warrants that
are registered or to be registered in the name of a fiduciary or the nominee of
a fiduciary unless made with actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration of transfer or with
such knowledge of such facts that its participation therein amounts to bad
faith.

     SECTION 6.13   Inspection of Agreement. A copy of this Agreement shall be
                    -----------------------
available at all reasonable times for inspection by any Warrantholder at the
principal office of the Warrant Agent(or successor Warrant Agent). The Warrant
Agent may require any such Warrantholder to submit his Warrant Certificate for
inspection by it before allowing such Warrantholder to inspect a copy of this
Agreement.


                                      18
<PAGE>
 
     SECTION 6.14   Headings. The Article and Section headings herein are for
                    --------
convenience only and are not a part of this Agreement and shall not affect the
interpretation thereof.

     SECTION 6.15   Counterparts. The Agreement may be executed in any number of
                    ------------  
counterparts, each of which so executed shall be deemed to be an original.

     IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto under their respective seals as of the day and year first above written.


                                       CAPITAL AUTOMOTIVE REIT

[CORPORATE SEAL]

                                       By:
                                          ---------------------------------
                                       Name:
                                            -------------------------------
                                       Title:
                                             ------------------------------

Attest:
       ---------------------------
Name:
     -----------------------------
Title:
      ----------------------------

                                       AMERICAN STOCK TRANSFER & 
                                       TRUST COMPANY, as Warrant Agent

[CORPORATE SEAL]

                                       By:
                                          ---------------------------------
                                       Name:
                                            -------------------------------
                                       Title:
                                             ------------------------------

Attest:
       ---------------------------
Name:
     -----------------------------
Title:
      ----------------------------

                                      19
<PAGE>
 
                                                                       EXHIBIT A


                              [WARRANT CERTIFICATE]

NO. ___                                                       1,277,794 Warrants


                                    WARRANTS

                          TO PURCHASE COMMON SHARES OF

                             CAPITAL AUTOMOTIVE REIT

     CAPITAL AUTOMOTIVE REIT, a Maryland real estate investment trust (the
"Company"), for value received, hereby certifies that

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

     or registered assigns, is the owner of the number of Warrants, set forth
above, each of which represents the right, subject to the terms and conditions
hereof and of the Warrant Agreement (as defined below), to purchase from the
Company at any time or from time to time, from the date of the closing of the
initial public offering of the Company's Common Shares (as defined below),
registered with the Securities and Exchange Commission on Form S-11 (33-41183)
until the close of business on the fifth anniversary of such date (or, if such
date is not a Business Day (as defined below), the first following Business Day)
(the "Exercise Period"), the number of common shares of beneficial interest, par
value $.01 per share, of the Company (the "Common Shares") described in the
Warrant Agreement (each Common Share issuable upon exercise of a Warrant is
referred to as a "Warrant Share"). Subject to the terms and conditions of the
Warrant Agreement, the exercise price per Warrant represented by this Warrant
Certificate shall be $_____ per share, adjusted as provided in Article III of
the Warrant Agreement, payable in full as to each Warrant exercised at the time
of purchase. The term "Underwriting Agreement" as used herein refers to the
Underwriting Agreement, dated ____________, 1998, between the Company and
Friedman, Billings, Ramsey & Co., Inc., as Representative of the several
underwriters. The term "Exercise Price" as used herein refers to the foregoing
price per share in effect at any time. The term "Business Day" as used herein
shall mean any days of the week other than a Saturday, Sunday or a day which the
City of New York or in a city in which the principal office of the Warrant
Agreement is located shall be a legal holiday or which banking institutions are
authorized by law to close.

     This Warrant may be exercised in whole or in part at any time or from time
to time during the Exercise Period. The portion of any Warrant not exercised
during the Exercise Period shall become void, and all rights hereunder and all
rights in respect hereof and under the Warrant Agreement shall cease at the end
of the Exercise Period.

                                      A-1
<PAGE>
 
     Each such purchase of Warrant Shares shall be made, and shall be deemed
effective for the purpose of determining the date of exercise, only upon
surrender hereof to the Company at the office or agency maintained for such
purpose in The City of New York or the principal office of American Stock
Transfer & Trust Company, Warrant Agent (or any successor Warrant Agent), with
the form of Election to Exercise on the reverse hereof duly completed and
signed, and upon payment in full to the Warrant Agent for the account of the
Company of the Exercise Price (i) in cash or (ii) by certified or official bank
check or (iii) by any combination of the foregoing, all as provided in the
Warrant Agreement and upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement.

     This Warrant Certificate is issued under and in accordance with the Warrant
Agreement, dated as of __________, 1998 (the "Warrant Agreement"), between the
Company and the Warrant Agent and is subject to the terms and provisions of the
Warrant Agreement, which terms and provisions are hereby incorporated by
reference herein and made a part hereof. Copies of the Warrant Agreement and of
the Underwriting Agreement are available for inspection by the registered holder
at the principal office of the Warrant Agent (or successor Warrant Agent).

     The Company shall not be required upon the exercise of the Warrants
represented hereby to issue fractions of Warrant Shares or to distribute share
certificates that evidence fractional Warrant Shares. Every holder of this
Warrant Certificate expressly waives its right to receive any fraction of a
Warrant Share or a share certificate representing a fraction of a Warrant Share.
Fractional Warrant Shares that otherwise would be issuable in respect of such
exercise shall be paid in cash as provided in the Warrant Agreement, and the
number of Warrant Shares issuable to such Warrantholder shall be rounded down to
the next nearest whole number. If such Warrant Certificate shall not have been
exercised in full, the Warrant Agent on behalf of the Company will issue to such
Warrantholder a new Warrant Certificate exercisable for the number of Common
Shares as to which such Warrant shall not have been exercised.

     This Warrant Certificate may be exchanged either separately or in
combination with other Warrant Certificates at the office or agency maintained
in The City of New York for such purpose or at the principal office of the
Warrant Agent (or successor Warrant Agent) for new Warrant Certificates
representing the same aggregate number of Warrants as were evidenced by the
Warrant Certificate or Warrant Certificates exchanged, upon surrender of this
Warrant Certificate and upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement.

     This Warrant Certificate is transferable (subject to restrictions set forth
in the Warrant Agreement) at the office or agency maintained in The City of New
York for such purpose or at the principal office of the Warrant Agent (or
successor Warrant Agent) by the registered holder hereof in person or by his
attorney duly authorized in writing, upon (i) surrender of this Warrant
Certificate and (ii) upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement. Upon any such transfer, a new Warrant
Certificate or new Warrant Certificates of different denominations, representing
in the aggregate a like number of Warrants, will be issued to the transferee.
Every holder of Warrants, by 

                                      A-2
<PAGE>
 
accepting this Warrant Certificate, consents and agrees with the Company, the
Warrant Agent and with every subsequent holder of this Warrant Certificate that
until due presentation for the registration of transfer of this Warrant
Certificate on the Warrant Register maintained by the Warrant Agent, the Company
and the Warrant Agent may deem and treat the person in whose name this Warrant
Certificate is registered as the absolute and lawful owner for all purposes
whatsoever and neither the Company nor the Warrant Agent shall be affected by
any notice to the contrary.

     Nothing contained in the Warrant Agreement or in this Warrant Certificate
shall be construed as conferring on the holder of any Warrants or his transferee
any rights whatsoever as a shareholder of the Company.

     This Warrant Certificate shall not be valid unless countersigned manually
by the Warrant Agent.

     The Warrant Agreement and each Warrant Certificate, including this Warrant
Certificate, shall be deemed a contract made under the laws of the State of New
York and for all purposes shall be construed in accordance with the laws of the
State of New York without giving effect to the principles of conflicts of law
thereof.

          "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
     WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT,
     DATED ____________, 1998, BETWEEN CAPITAL AUTOMOTIVE REIT AND AMERICAN
     STOCK TRANSFER & TRUST COMPANY. ANY ATTEMPT TO SELL, TRANSFER, ASSIGN, OR
     HYPOTHECATE THIS WARRANT OR ANY COMMON SHARE ISSUED UPON EXERCISE OF THIS
     WARRANT, PRIOR TO ________________, 1999, SHALL BE NULL AND VOID, EXCEPT
     TRANSFERS TO PERSONS WHO ARE OFFICERS OF FRIEDMAN, BILLINGS, RAMSEY & CO.,
     INC., MEMBERS OF THE SELLING GROUP OR PURSUANT TO AN INDIVIDUAL'S LAST WILL
     AND TESTAMENT OR THE LAW OF DESCENT AND DISTRIBUTION. NO TRANSFER IN
     VIOLATION OF SUCH AGREEMENT SHALL BE EFFECTIVE.

          THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
     EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST EFFECTIVE AMENDMENT
     THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR AN
     APPLICABLE EXEMPTION UNDER THE ACT.

                                      A-3
<PAGE>
 
     IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.


Dated:

                                            CAPITAL AUTOMOTIVE REIT


(CORPORATE SEAL)                            By:
                                               -------------------------------
                                            Name:
                                                 -----------------------------
                                            Title:
                                                  ---------------------------- 

                                            By:
                                               -------------------------------
                                            Name:
                                                 -----------------------------
                                            Title:
                                                  ----------------------------

                                      A-4
<PAGE>
 
                                            ATTEST:


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

COUNTERSIGNED:                              AMERICAN STOCK TRANSFER & 
                                            TRUST COMPANY,
                                            as Warrant Agent


                                            By:
                                               -------------------------------
                                            Name:
                                                 -----------------------------
                                            Title:
                                                  ----------------------------

                                      A-5
<PAGE>
 
                              ELECTION TO EXERCISE

                    (To be executed upon exercise of Warrant)

TO CAPITAL AUTOMOTIVE REIT:

     The Undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
_________________ Common Shares, as provided for therein, and tenders herewith
payment of the purchase price in full in the form of cash or a certified or
official bank check (or combination thereof) in the amount of
$_________________________.

     Please issue a certificate or certificates for such Common Shares in the
name of:

PLEASE INSERT SOCIAL SECURITY OR        Name
OTHER IDENTIFYING NUMBER OF                 -------------------------------
ASSIGNEE


                                        Address
- ------------------------                       ----------------------------

                                        Signature
- ------------------------                         --------------------------

                                        -----------------------------------
                                        Note:The above signature should
                                             correspond exactly with the
                                             name on the face of this
                                             Warrant Certificate or with
                                             the name of assignee appearing
                                             in the assignment form below.

Dated: 
      ------------------
<PAGE>
 
                                   ASSIGNMENT

          (To be executed only upon assignment of Warrant Certificate)

For value received, _________________________ hereby sells, assigns and transfer
unto ____________________________ the within Warrant Certificate, together with
all right, title and interest therein, and does hereby irrevocably constitute
and appoint ______________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company, with full power of
substitution in the premises.

Dated: 
      ------------------

                                        ---------------------------------
                                        Note: The above signature should
                                              correspond exactly with the
                                              name on the face of this
                                              Warrant Certificate

<PAGE>
 
                                 EXHIBIT 10.23
                           (FORM OF DEALER WARRANT)

THESE SECURITIES HAVE BEEN ISSUED PURSUANT TO EXEMPTIONS FOR NONPUBLIC OFFERINGS
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, THESE SECURITIES MAY NOT
BE RESOLD OR OTHERWISE DISPOSED OF UNLESS, IN THE OPINION OF COUNSEL FOR OR
REASONABLY SATISFACTORY TO THE ISSUER, REGISTRATION UNDER THE APPLICABLE FEDERAL
OR STATE SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH
REGISTRATION REQUIREMENTS.  THIS LEGEND SHALL BE ENDORSED UPON ANY WARRANT
ISSUED IN EXCHANGE FOR THIS WARRANT.

                 WARRANT TO PURCHASE UP TO _________ UNITS OF
                        LIMITED PARTNERSHIP INTEREST OF

                            CAPITAL AUTOMOTIVE L.P.


No.: ___                                                       February __, 1998

     THIS CERTIFIES THAT, ____________ ("Holder"), for value received, or its
registered assigns, is entitled to purchase, on the terms and subject to the
conditions hereinafter set forth, from Capital Automotive L.P., a Delaware
limited partnership (the "Partnership"), at any time, and from time to time,
during the period beginning on the date hereof and ending on the fifth
anniversary of the date hereof, that number of units (the "Warrant Units") of
limited partnership interest of the Partnership (the "Units"), as determined in
accordance with the provisions of Section 2 hereof.

     SECTION 1. EXERCISE PRICE.  The exercise price per Warrant Unit at which
                --------------                                               
this Warrant (the "Warrant") may be exercised shall be equal to ____ Dollars
($__.00) per Unit (the "Exercise Price"), as adjusted from time to time in
accordance with the provisions of Section 4 hereof in consideration for services
rendered in connection with the formation of the Partnership.

     SECTION 2. EXERCISE OF WARRANT.
                ------------------- 
    
     2.1. Number of Warrant Units for Which Warrant is Exercisable.  The number
          --------------------------------------------------------             
of Warrant Units for which this Warrant may be exercised at any time prior to
its expiration shall be determined by (a) multiplying ______________ by the
Exercise Price and (b) dividing the result by the reference price (the
"Reference Price") initially equal to the Exercise Price or, in case an
adjustment of the Reference Price has taken place pursuant to the provisions of
Section 4 of this Warrant, then by the Reference Price as last adjusted and in
effect at the date of any partial or full exercise of this Warrant.     

     2.2. Procedure for Exercise of Warrant.  To exercise this Warrant in whole
          ---------------------------------                                    
or in part, the Holder shall deliver to the Partnership, at its principal
executive office (or such other office of the 

                                       1
<PAGE>
 
Partnership in the United States as the Partnership may designate by notice in
writing to the Holder), (i) the Warrant Certificate attached hereto completed to
specify the fraction of the Warrant which the Holder is electing to exercise,
(ii) consideration in an amount equal to the aggregate Exercise Price of the
Warrant Units being purchased, consisting of (A) cash or a certified or official
bank check, payable to the order of the Partnership, (B) cancellation by the
Holder of indebtedness of the Partnership to the Holder, or (C) a combination of
(A) and (B) above, and (iii) if this Warrant is being exercised in whole or the
last fraction of this Warrant is being exercised, this Warrant. Notwithstanding
anything herein to the contrary, this Warrant may not be exercised, in whole or
in part, if such exercise would cause, in the opinion of legal counsel for the
Partnership, the Partnership to be treated as an association taxable as a
corporation (other than a qualified REIT subsidiary within the meaning of
Section 856(i) of the Internal Revenue Code of 1986, as amended). If exercise of
the Warrant is prohibited by reason of the previous sentence, the expiration of
the Warrant will be extended to such a time as the Warrant may be exercised
without causing, in the opinion of legal counsel to the Partnership, the tax
treatment referenced in the previous sentence to occur. Upon exercise of the
Warrant, the Holder shall execute the Agreement of Limited Partnership of the
Partnership, as amended and restated from time to time (the "Partnership
Agreement").
    
     In the sole and absolute discretion of the Partnership, the Partnership may
adopt a procedure for exercise of the Warrant pursuant to which the Partnership
shall distribute an amount of cash to the Holder who has delivered the Warrant
equal to the excess of the aggregate amount to be credited to such Holder's
capital account in connection with the exercise of the Warrant over the
aggregate Exercise Price to be paid by the Holder, subject to the requirement
that such cash plus the Exercise Price be immediately contributed to the
Partnership in exchange for the number of Warrant Units to which the Holder is
entitled upon exercise.     

     2.3. Transfer Restriction Legend.  This Warrant and each certificate for
          ---------------------------                                        
Warrant Units initially issued upon exercise of this Warrant, unless at the time
of exercise such Warrant Units are registered under the Securities Act of 1933,
as amended (the "Act"), shall bear the following legends (and any additional
legend required by any securities exchange upon which such Warrant Units may, at
the time of such exercise, be listed and any applicable state securities
administration or commission) on the face thereof:

     THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
     AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD
     OR TRANSFERRED UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF SUCH LAWS,
     OR IF, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO CAPITAL
     AUTOMOTIVE REIT, THE GENERAL PARTNER OF THE PARTNERSHIP, AN EXEMPTION FROM
     SUCH REGISTRATION IS AVAILABLE AND SUCH TRANSFER WOULD NOT CAUSE THE
     PARTNERSHIP TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION (OTHER
     THAN A QUALIFIED REIT SUBSIDIARY WITHIN THE MEANING OF SECTION 856(i) OF
     THE INTERNAL REVENUE CODE OF 1986, AS AMENDED) IF THE WARRANTS WERE TREATED
     AS EXERCISED.

     THE UNITS ISSUABLE UPON EXERCISE OF THIS WARRANT ARE SUBJECT TO
     RESTRICTIONS ON TRANSFER AND RIGHTS OF REDEMPTION AS SET FORTH IN THE
     AGREEMENT OF LIMITED PARTNERSHIP OF THE PARTNERSHIP, AS AMENDED OR RESTATED
     FROM TIME TO TIME. A COPY OF THE AGREEMENT OF LIMITED PARTNERSHIP MAY BE
     OBTAINED FROM THE SECRETARY OF THE CAPITAL AUTOMOTIVE REIT, THE GENERAL
     PARTNER OF THE PARTNERSHIP.

     2.4. Acknowledgment of Continuing Obligation.  The Partnership will, at the
          ---------------------------------------                               
time of the exercise of this Warrant, in whole or in part, upon request of the
Holder, acknowledge in writing its continuing obligation to the Holder in
respect of any rights to which the Holder shall continue to be entitled after
such exercise in accordance with this Warrant, provided, that the failure of the
Holder 

                                       2
<PAGE>
 
to make any such request shall not affect the continuing obligation of the
Partnership to the Holder in respect of such rights.

     2.5. Investment Representation.  The Holder of this Warrant, by acceptance
          -------------------------                                            
hereof, acknowledges that this Warrant and, upon exercise, the Warrant Units,
are being acquired solely for the Holder's own account and not as a nominee for
any other party and for investment, and that the Holder will not offer, sell,
transfer, assign or otherwise dispose of this Warrant or the Warrant Units
issued upon exercise hereof, unless registered under the Act and applicable
state securities laws or pursuant to an opinion of counsel reasonably
satisfactory to the Partnership that an exemption from registration under such
laws is available.  Upon exercise of this Warrant, the Holder shall, if
requested by the Partnership, confirm, in writing, in a form reasonably
satisfactory to the Partnership, that the Warrant Units so purchased are being
acquired solely for the Holder's own account and not as a nominee for any party
and for investment.

     2.6. Fractional Units.  No fractional Units or scrip representing
          ----------------                                            
fractional Units shall be issued upon the exercise of this Warrant.  With
respect to any fraction of a Unit called for upon any exercise hereof, upon
payment of the proportionate exercise price therefor, the Partnership shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
fair market value ("FMV") of a Unit, determined in accordance with the
provisions of Section 2.7 hereof.

     2.7  Fair Market Value.
          ------------------

          (a) The fair market value ("FMV") of one Unit shall be equal to the
FMV of one common share of beneficial interest, par value $.01 per share, of
Capital Automotive REIT, a Maryland real estate investment trust (a "Share").
The FMV of  a Share shall be determined in accordance with the provisions of
Section 2.7(b) hereof.  Notwithstanding the foregoing, where there exists a
public market for Shares at the time of such exercise, the FMV per Unit shall be
equal to the average of the closing bid and asked prices of the Common Stock
quoted in the Over-The-Counter Market Summary or the average of the last
reported sale price of the Common Stock or the closing price quoted on The
Nasdaq Stock Market National Market System or on any national exchange on which
the Common Stock is listed, whichever is applicable, as published in The Wall
Street Journal for the twenty consecutive trading days immediately preceding the
five trading days prior to the date of determination of the FMV.

          (b) If no public market for the Shares shall exist on the Exercise
Date, FMV of one Unit shall be determined as follows:

          (i) Agreement of the Partnership and the Holder.  If the Partnership
              -------------------------------------------                     
and the Holder can agree in writing as to the FMV, such agreed value shall be
the FMV. If no agreement on the FMV can be reached within five (5) days from the
date of the exercise of this Warrant, then the FMV shall be determined pursuant
to subsection (ii) below.

                                       3
<PAGE>
 
          (ii) Third Party Appraisal.  If the FMV is not agreed upon as provided
               ---------------------                                            
in subsection (i) above within the period therein stated, then five (5) days
thereafter, an appraiser or appraisers shall be jointly selected by the
Partnership and the Holder, and the determination of such jointly selected
appraiser or appraisers as to the FMV shall be binding and conclusive upon all
parties.  If the Partnership and the Holder are unable to reach an agreement as
to an appraiser, the provisions of subsection (iii) below shall apply.

          For purposes of this subsection (ii), the FMV shall take into account,
among other things, earnings of the Partnership, but shall not take into account
any minority ownership, marketability or other such discount.

          (iii) Additional Appraiser.  If the Partnership and the Holder do not
                --------------------                             
agree upon the selection of an appraiser or appraisers, as provided in
subsection (ii) within the period therein stated, then, within three (3) days
after the expiration of the five (5) day period provided for in subsection (ii)
above, each of the Partnership and the Holder shall deliver, by written notice
to the other, a list of three appraisers and each of the Partnership and the
Holder shall select one (1) appraiser from the list delivered by the other. In
the event either party falls to deliver a list of appraisers or to select an
appraiser from such list within said three (3) day period, the other party may
select an appraiser from its list and such appraiser shall serve as the sole
appraiser. Each of the appraisers so selected shall, within ten (10) days of
being selected, determine the FMV. In the event the lower of the two (2)
appraisals is at least ninety percent (90%) of the higher appraisal, then the
FMV shall be equal to the average of the two (2) appraisals. In the event that
the lower of the two (2) appraisals is less than ninety percent (90%) of the
higher appraisal, then the two (2) appraisers shall appoint a third appraiser
within three (3) days after the end of said ten (10) day period, and such third
appraiser shall, within ten (10) days of being selected, determine the FMV.

          The FMV shall be equal to the average of (x) the third appraisal and
(y) whichever of the first two appraisals is closest in dollars to the third
appraisal or equal to the third appraisal if such appraisal is mid-way between
the first two appraisals.  The determination of such appraisals shall be
determinative of the FMV and shall be binding, final and conclusive on the
Partnership and the Holder.

                    (iv) Costs of Appraisals.  The parties shall share equally
                         -------------------                                  
the entire cost of any appraisals hereunder.

                    (v)  Fair Market Value Per Unit.  FMV in reference to one
                         --------------------------                         
Unit shall mean the FMV allocable to the issued Units divided by the number of
Units that would have been outstanding had (1) all warrants exercisable for
Units, (2) all options to purchase Units, and (3) all securities convertible
into Units, been exercised or converted on the date as of which the FMV is
determined (with appropriate adjustment by appraisal to reflect the proceeds of
the assumed exercise or conversion).

                                       4
<PAGE>
 
     2.8       Exercise of Warrant, Delivery of Units.  Upon receipt of the
               ---------------------------------------                     
Warrant Certificate, the Warrant, or both, as applicable, the Holder shall be
deemed to be the holder of record of the Warrant Units issuable upon such
exercise, notwithstanding that the partnership books of the Partnership shall
then be closed or that certificates representing such Warrant Units shall not
then be actually delivered to the Holder, and the Partnership shall, as promptly
as practicable, and in any event within five (5) business days thereafter, cause
to be reflected on the books and records of the Partnership, ownership of the
aggregate number of Units by Holder specified in said Warrant Certificate.  If
this Warrant shall have been exercised only in part, the Partnership shall
deliver to the Holder a certificate evidencing the fraction of this Warrant
which remains exercisable.  The Partnership shall pay all expenses, taxes and
other charges payable (excluding income taxes payable by the Holder) in
connection with the issuance of Units pursuant to this Section 2.8, except that,
in case such Units shall be registered in a name or names other than the name of
the Holder, funds sufficient to pay all transfer taxes, which shall be payable
upon the issuance of the Units, shall be paid by the Holder to the Partnership
at the time of delivering this Warrant to the Partnership as mentioned above.

     2.9  Accredited Investor; Experience; Risk.  The Holder is an accredited
          -------------------------------------                              
investor within the definition of Regulation D of the Act.  The Holder has such
knowledge and experience in financial and business matters that its capable of
evaluating the merits and risks of purchase of the Warrants and the Warrant
Units.

     SECTION 3. OWNERSHIP, TRANSFER.
                ------------------- 

     3.1. Ownership of this Warrant.  The Partnership may deem and treat the
          -------------------------                                         
person in whose name this Warrant is registered as the Holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Partnership) for all purposes and shall not be affected by any
notice to the contrary, until presentation of this Warrant for registration of
transfer as provided in this Section 3.

     3.2. Exchange, Transfer and Replacement.  Subject to the restrictions on
          ----------------------------------                                 
transfer set forth in Section 2 of this Warrant, this Warrant is exchangeable
upon the surrender hereof by the Holder to the Partnership at its office or
agency for new Warrants of like tenor and date representing in the aggregate the
right to purchase the number of Warrant Units purchasable hereunder, each of
such new Warrants to represent the portion of this Warrant exchanged as shall be
designated by the Holder at the time of such surrender.  Subject to the terms of
this Warrant and the restrictions on transfer, this Warrant and all rights
hereunder are transferable in whole or in part upon the books of the Partnership
by the Holder in person or by duly authorized attorney, and a new Warrant shall
be made and delivered by the Partnership, of the same tenor as this Warrant but
registered in the name of the transferee, upon surrender of this Warrant duly
endorsed at said office or agency of the Partnership.  Upon receipt by the
Partnership of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of this Warrant, if mutilated, the Partnership will
make and deliver a

                                       5
<PAGE>
 
new Warrant of like tenor, in lieu of this Warrant. This Warrant shall be
promptly canceled by the Partnership upon the surrender hereof in connection
with any exchange, transfer or replacement. The Partnership shall pay all
expenses, taxes (other than transfer taxes and income taxes) and other charges
payable in connection with the preparation, execution and delivery of Warrant
Units pursuant to this Section 3.

     3.3. Restricted Transfer of Securities.  The Holder agrees that the Units
          ---------------------------------                                   
issued or to be issued pursuant to this Warrant (collectively, the "Issued
Securities") shall also be subject to all of the terms and conditions set forth
in the Agreement of Limited Partnership of the Partnership, as amended or
restated from time to time, including the restrictions on redemption or
transfer.

     SECTION 4. ADJUSTMENT OF REFERENCE PRICE, NUMBER OF WARRANT UNITS.
                ------------------------------------------------------ 

     4.1  Subdivision or Combination of Units.  If the Partnership, at any time
          ------------------------------------                                 
while this Warrant is outstanding, shall subdivide or combine its Units, the
Reference Price shall be proportionately reduced, in case of subdivision of
Units, to reflect the increase in the total number of Units outstanding as a
result of such subdivision, as at the effective date of such subdivision, or
shall be proportionately increased, in the case of combination of Units, to
reflect the reduction in the total number of Units outstanding as a result of
such combination, as at the effective date of such combination.

     4.2  Dividends.     If the Partnership, at any time while this Warrant is
          ----------                                                          
outstanding, shall pay a dividend in, or make any other distribution of, Units
on account of outstanding Units, the Reference Price shall be adjusted, (as at
the date of such payment or other distribution), to that price determined by
multiplying the Reference Price in effect immediately prior to such payment or
other distribution, by a fraction (i) the numerator of which shall be the total
number of Units outstanding immediately prior to such dividend or distribution,
and (ii) the denominator of which shall be the total number of Units outstanding
immediately after such dividend or distribution (plus in the event that the
Partnership paid cash for fractional Units, the number of additional Units which
would have been outstanding had the Partnership issued fractional Units in
connection with said dividends).

     4.3  Reorganization, Reclassification, Recapitalization Consolidation,
          -----------------------------------------------------------------
Merger or Sale. If any capital reorganization, reclassification or
- ---------------                                                   
recapitalization of the Partnership, or consolidation or merger of the
Partnership, or sales of all or substantially all of its assets to another
entity, shall be effected in such a way that holders of Units shall be entitled
to receive stock, securities, cash or assets with respect to or in exchange for
Units, then, as a condition of such reorganization, reclassification,
recapitalization, consolidation, sale or merger, lawful and adequate provisions
shall be made whereby each Holder of Warrants shall thereupon have the right and
option to receive, upon the basis and upon the terms and conditions specified
herein and in lieu of the Warrant Units, such shares of stock, securities, cash
or assets as may be issued or payable with respect to or in exchange for a
number of outstanding Units equal to the number 

                                       6
<PAGE>
 
of Warrant Units as would have been received upon exercise of this Warrant at
the Reference Price then in effect immediately before such reorganization,
reclassification, recapitalization, consolidation, sale or merger, and in any
such case appropriate provisions shall be made with respect to the rights and
interests of the Holders to the end that the provisions hereof (including
without limitation provisions for adjustments of the applicable Reference Price)
shall thereafter be applicable, as nearly as may be practicable, in relation to
any rights to acquire or shares of stock or securities delivered in connection
with such reorganization, reclassification, recapitalization, consolidation,
sale or merger. Prior to the consummation of any consolidation or merger or sale
of assets of the Partnership, the successor entity resulting from such
consolidation or merger, or the purchaser of such assets, shall agree in writing
to be bound by the provisions hereof.

     4.4  Minimum Level for Adjustments.  Notwithstanding any provision to the
          -----------------------------                                       
contrary contained herein, no adjustment of the Reference Price shall be made if
the amount of said adjustment shall aggregate less than ten cents ($.10);
provided however, that in such case any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall aggregate at least ten cents ($.10).

     SECTION 5.     COVENANTS OF THE PARTNERSHIP.  The Partnership hereby
                    ----------------------------                         
covenants and agrees that:

     5.1. Reservation of  Units.  The Partnership will reserve and set apart and
          ---------------------                                                 
have at all times, free from pre-emptive rights, a number of Units deliverable
upon the exercise of this Warrant or of any other rights or privileges provided
for herein sufficient to enable it at any time to fulfill all its obligations
hereunder.

     5.2. Avoidance of Certain Actions. The Partnership will not, by amendment
          ----------------------------
of its organizational documents or through any reorganization, transfer of
assets, consolidation, merger, issue or sale of securities or otherwise, avoid
or take any action which would have the effect of avoiding the observance or
performance of any of the terms to be observed or performed hereunder by the
Partnership, but will at all times in good faith assist in carrying out all of
the provisions of this Warrant and in taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder of this
Warrant hereunder.

     5.3. Governmental Approvals.  If any Units required to be reserved for the
          ----------------------                                               
purposes of exercise of this Warrant require the consent or approval of any
governmental authority under any Federal law (other than registration under the
Act or the Securities Exchange Act of 1934, as amended) or under any state law
(other than registration or qualification under state securities or blue sky
laws) before such Units may be issued upon exercise of this Warrant, the
Partnership will, at its expense, as expeditiously as possible, use its best
efforts to obtain such consent or approval, as the case may be.

                                       7
<PAGE>
 
     5.4. Binding on Successors.  This Warrant shall be binding upon any
          ---------------------                                         
corporation succeeding to the Partnership by merger, consolidation, exchange,
reorganization or acquisition of all or substantially all of the Partnership's
assets.

                                       8
<PAGE>
 
    SECTION 6. REGISTRATION.
               ------------ 

     6.1  Right to Registration.    Upon exercise of this Warrant, the Units
          ---------------------                                             
issued pursuant thereto shall have the registration rights included in the
Partnership Agreement with respect to Shares issued, at the option of Capital
Automotive REIT, upon redemption of Units.

    SECTION 7. NOTIFICATIONS BY THE PARTNERSHIP.  In case at any time:
               --------------------------------                       

               (a) the Partnership shall declare any dividend payable in 
securities upon the Units or make any distribution (other than in cash) to the
holders of Units;

               (b) there shall be proposed any other transaction of a type
referred to in Section 4 hereof; and

               (c) there shall be proposed a voluntary or involuntary 
dissolution, liquidation or winding-up of the Partnership;

then, in any one or more of such cases, the Partnership shall give written
- ----                                                                      
notice to the Holder of the date on which (i) the books of the Partnership shall
close or a record shall be taken for such dividend, distribution, subscription
rights, or other transaction, and (ii) such reorganization, reclassification,
consolidation, merger, sale, dissolution, other transaction, liquidation or
winding-up shall take place, as the case may be.  Such notice shall also specify
the date as of which the holders of Units of record shall participate in such
dividend, distribution or subscription rights, or shall be entitled to exchange
their Units for, or receive in respect of their Units, securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, other transaction, liquidation, or winding-up, as the
case may be.  Such written notice shall be given not less than five (5) business
days prior to the taking of the action in question.

    SECTION 8. NOTICES.  Any notice or other document required or permitted to
               -------                                                        
be given or delivered to the Holder shall be delivered at, or sent by certified
or registered mail to each Holder at the address listed in the records of the
Partnership or to such other address as shall have been furnished to the
Partnership in writing by such Holder.  Any notice or other document required or
permitted to be given or delivered to the Partnership shall be delivered at, or
sent by certified or registered mail to, the principal office of the
Partnership, at 1925 North Lynn Street, Suite 306, Arlington, Virginia 22209,
Attention: Thomas D. Eckert or such other name or address as shall have been
furnished to the Holder by the Partnership.

    SECTION 9. LIMITATION OF LIABILITY.  No provision hereof, in the absence of
               -----------------------                                         
affirmative action by the Holder to purchase Units, and no mere enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder for the Exercise Price or as a partner of the
Partnership, whether such liability is asserted by the Partnership or by
creditors of the Partnership.

                                       9
<PAGE>
 
    
     SECTION 10.  GOVERNING LAW.  This Warrant shall be governed by, and
                  -------------                                         
construed and enforced in accordance with, the laws of the Commonwealth of
Virginia, without giving effect to its conflicts of laws provisions.     

     SECTION 11.  MISCELLANEOUS.  No term of this Warrant may be amended, except
                  -------------                                                 
with the joint written consent of the Holder and the Partnership.  The headings
in this Warrant are for purposes of reference only and shall not affect the
meaning or construction of any of the provisions hereof.

                                       10
<PAGE>
 
     IN WITNESS WHEREOF, the Partnership has caused this Warrant to be signed by
its General Partner on the date first above written.

                                    CAPITAL AUTOMOTIVE, L.P.

                                    By:  CAPITAL AUTOMOTIVE REIT, as
                                         General Partner


                                    By:
                                       ---------------------------------
                                    Name:        Thomas D. Eckert
                                        --------------------------------
                                    Title: Chief Executive Officer and President
                                           -------------------------------------

                                       11
<PAGE>
 
                                  ASSIGNMENT

           TO BE EXECUTED BY THE REGISTERED HOLDER IF IT DESIRES AND
                IS PERMITTED TO TRANSFER THE WITHIN WARRANT OF
                                        
                            CAPITAL AUTOMOTIVE L.P.

        FOR VALUE RECEIVED__________________ hereby sells, assigns and transfers
unto ______________________ the right to purchase ________ of the number of
Units covered by the  within Warrant, and does hereby irrevocably constitute and
appoint  ________________ Attorney to transfer the said Warrant on the books of
the Partnership (as defined in said Warrant) with full power of substitution.


                                Signature:                                (SEAL)
                                          --------------------------------
                                Address: 
                                        ----------------------------------  
                                       
                                        ----------------------------------


Dated:
       -----------------

In the presence of:                 [Name of Institution]

- ------------------                  By:
                                       ------------------------


                                     NOTICE

     The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.

                                       12
<PAGE>
 
                              WARRANT CERTIFICATE

                    TO BE EXECUTED BY THE REGISTERED HOLDER
                IF IT DESIRES TO EXERCISE THE WITHIN WARRANT OF

                            CAPITAL AUTOMOTIVE L. P.

    The undersigned hereby irrevocably exercises the right to purchase units of
limited partnership interest ("Units") obtainable by exercise of ___________ %
of the within Warrant, according to the conditions thereof and herewith makes
payment of the Exercise Price for such Units in full.


 
                                    Signature:                  (SEAL)
                                              ------------------
                                    Address:
                                            ---------------------------
                                
                                            ---------------------------

Dated:
      -------------------


In the presence of :
                                    [Name of Institution]


- ---------------------------         By:
                                        ----------------------------

                                       13

<PAGE>
 
                                  EXHIBIT 10.26

                        AMENDMENT NO. 1 TO LOAN AGREEMENT
                        ---------------------------------

     THIS AMENDMENT NO. 1 dated as of January 30, 1998 ("Amendment No. 1 to the
Loan Agreement"), to the Loan Agreement dated as of October 26, 1997 (the "Loan
Agreement"), by and among Capital Automotive REIT, a Maryland real estate
investment trust (the "Trust"), Capital Automotive L.P., a Delaware limited
partnership (the "Operating Partnership") (the "Trust and the Operating
Partnership" on a joint and several basis are hereinafter collectively referred
to as the "Borrower") and Friedman, Billings, Ramsey Group, Inc., a Delaware
corporation ("FBR"), recites and provides as follows:

                               W I T N E S S E T H
                               - - - - - - - - - -

     WHEREAS, pursuant to the Loan Agreement FBR has agreed to make a revolving
loan (the "Loan") to the Trust for the purposes described in the Loan Agreement,
such Loan to be evidenced by a promissory note payable to the order of FBR as
provided in the Loan Agreement (the "Note"); and

     WHEREAS, the Trust and the Operating Partnership each desire that the
Operating Partnership becomes a "Borrower" pursuant to Amendment No. 1 to the
Loan Agreement and the amended and restated Note of even date herewith; and

     WHEREAS, FBR desires that the Operating Partnership become a "Borrower"
pursuant to Amendment No. 1 to the Loan Agreement and the amended and restated
Note of even date herewith; and

     WHEREAS, the Borrower desires to increase the size of the Loan and FBR has
agreed to increase the size of the Loan to the aggregate amount of Two Million
Five Hundred Twenty-Five Thousand Dollars ($2,525,000).

     NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto agree as follows:

     1. Preamble. The Borrower. The defined term "Borrower" throughout the Loan
        ----------------------
Agreement is hereby amended to mean "the Trust and the Operating Partnership, on
a joint and several basis." The singular shall include the plural.

     2. Section 1(a). Loan Funding. Subparagraph (a) of Section 1 of the Loan
        --------------------------
Agreement be and hereby is amended in its entirety to read:


        "(a)  Subject to the terms and upon the conditions set forth in
              this Agreement, Lender agrees to establish a revolving
              facility (the "Loan") in favor of Borrower on a full
              recourse basis in the 

                                       1
<PAGE>
 
              principal amount of up to Two Million Five Hundred
              Twenty-Five Thousand Dollars ($2,525,000) (the "Principal
              Sum"), or so much thereof as may be advanced or readvanced
              to or for the account of any Borrower pursuant to the terms
              and conditions of the Agreement (such foregoing amounts up
              to the Principal Sum, shall be hereinafter referred to as
              the "Loan Amount"), except that the outstanding principal
              balance hereunder shall never exceed the Principal Sum. The
              Principal Sum, together with interest thereon and all other
              obligations hereunder, shall be secured as provided in the
              Security Agreement between the parties dated as of the date
              hereof (the "Security Agreement").

     3. The Loan Agreement. Except as amended hereby, the Loan Agreement shall
        ------------------
continue in full force and effect and shall apply with equal force and effect to
the Operating Partnership until termination or expiration in accordance with the
terms thereof.










                        [Signatures Appear on Next Page]

                                       2
<PAGE>
 
     IN WITNESS WHEREOF, the Trust, the Operating Partnership and FBR have
caused this Amendment No. 1 to the Loan Agreement to be executed by their
respective duly authorized officer as of the date first written above.

                                CAPITAL AUTOMOTIVE REIT


                                By:
                                   --------------------------
                                Title:
                                      -----------------------

                                CAPITAL AUTOMOTIVE L.P.

                                By:  Capital Automotive REIT, as General Partner


                                By:
                                   --------------------------
                                Title:
                                      -----------------------

                                FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.


                                By:
                                   --------------------------
                                Title:
                                      -----------------------

                                       3
<PAGE>
 
                                  EXHIBIT 10.26

                      AMENDED AND RESTATED PROMISSORY NOTE
                      ------------------------------------

$2,525,000                                                   Arlington, Virginia
                                                                January 30, 1998

     FOR VALUE RECEIVED, Capital Automotive REIT, a Maryland real estate
investment trust (the "Trust") and Capital Automotive L.P., a Delaware Limited
Partnership (the "Operating Partnership") (the Trust and the Operating
Partnership shall be hereinafter collectively referred to as the "Maker"),
jointly and severally promises to pay to the order of Friedman, Billings, Ramsey
Group, Inc., a Delaware corporation (which together with any successor, assignee
or endorsee shall be hereinafter collectively referred to as the "Holder"),
without offset and in immediately available funds, at 1001 19th Street North,
Potomac Tower, 10th Floor, Arlington, Virginia 22209, or at such other place as
the Holder may designate in writing, Two Million Five Hundred Twenty-Five
Thousand and No/100 Dollars ($2,525,000) or so much thereof as shall be advanced
to Maker together with interest on the outstanding principal balance thereof at
the rate of 10% per annum, calculated based on the actual number of days elapsed
and a 360-day year.

     So long as Maker is not in default under the terms of Amendment No. 1 dated
even date herewith to the Loan Agreement dated as of October 26, 1997 (the "Loan
Agreement"), among Holder and Maker, unless sooner paid, any unpaid principal
and accrued interest on this Note shall be due and payable in full upon demand
(subject to Holder providing 48 hours prior written notice thereof to Maker) or
the closing of the Company's Initial Public Offering. All payments received by
the Holder shall be applied first to accrued but unpaid interest and then to
principal.

     This Note may be prepaid in whole or in part at any time without penalty.

     Upon the occurrence of an Event of Default (as defined in the Loan
Agreement), the entire unpaid principal balance hereof, all accrued interest
hereon and any other amounts payable hereunder shall become immediately due and
payable without notice or demand.

     Maker hereby waives presentment, demand, protest, notice of protest and
notice of dishonor and all other exemptions to the extent permitted by
applicable law. To the extent permitted by applicable law, Maker further waives
all rights and benefits of any statute of limitations, moratorium,
reinstatement, forbearance, valuation, stay, extension, redemption, appraisement
and exemption now provided or which may hereafter be provided by law, both as to
them and all of their property, real and personal, against the enforcement and
collection of the indebtedness evidenced hereby. Acceptance by the Holder of all
or any portion of any sum payable hereunder whether before, on or after the due
date of such payment shall not be a waiver of the Holder's right either to
require prompt payment when due of all other sums payable hereunder or to
exercise any of the Holder's rights, powers or remedies hereunder. A waiver of
any right on one occasion shall not be construed as a waiver of the Holder's
right to insist


                                       1
<PAGE>
 
thereafter upon strict compliance with the terms hereof without previous notice
of such intention being given to Maker, and no exercise of any right by the
Holder shall constitute or be deemed to constitute an election of remedies by
the Holder precluding the subsequent exercise by the Holder of any or all of the
rights, powers and remedies available to it hereunder or at law or in equity.

     Maker consents to any and all renewals and extensions in the time of
payment hereof without in any way affecting the liability of Maker or any person
liable or to become liable with respect to any indebtedness evidenced hereby. No
extension of the time for the payment of this Note or any installment due
hereunder made by agreement with any person now or hereafter liable for the
payment of this Note shall operate to release, discharge, modify, change or
affect the liability of Maker or any other person liable under this Note, either
in whole or in part, under the Holder agrees otherwise in writing.

     Maker shall pay all costs, fees and all expenses, including, without
limitation, any and all court or reasonable collection costs and reasonable
attorney's fees whether suit be brought or not, incurred in collecting this Note
or in preserving or disposing of any collateral granted as security for the
payment of this Note, or in defending any claim arising out of the execution of
this Note or obligations which it evidences, or otherwise involving the
employment by the Holder of attorneys with respect to this Note and the
obligations it evidences.

     Any notice to Maker or the Holder shall be conclusively deemed to have been
received by either party and be effective on the day on which delivered
personally to such party at the address set forth below (or at such other
address as such party shall specify to the other party in writing) or if sent by
registered or certified United States mail, postage prepaid, on the third
business day after the day on which mailed, addressed to such party at such
address: (i) if to the Holder, at 1001 19th Street North, Potomac Tower, 10th
Floor, Arlington, Virginia 22209-1709, and (ii) if to the Company, at 1925 North
Lynn Street, Suite 306, Arlington, Virginia 22209.

                        [Signatures Appear on Next Page]


                                       2
<PAGE>
 
     IN WITNESS WHEREOF, Maker has caused this Note to be duly executed as of
the day and year first above written.


                               CAPITAL AUTOMOTIVE REIT


                               By:
                                  -----------------------
                               Title:
                                     --------------------

                               CAPITAL AUTOMOTIVE L.P.

                               By:  Capital Automotive REIT, as General Partner


                               By:
                                  -----------------------
                               Title:
                                     --------------------


                                       3

<PAGE>
 
                                 EXHIBIT 10.27

                      AMENDMENT NO. 1 TO SECURITY AGREEMENT
                      -------------------------------------

     THIS AMENDMENT NO. 1 dated as of January 30, 1998 ("Amendment No. 1 to the
Security Agreement"), to the Security Agreement dated as of October 26, 1997
(the "Security Agreement"), by and among Capital Automotive REIT, a Maryland
real estate investment trust (the "Trust"), Capital Automotive L.P., a Delaware
limited partnership (the "Operating Partnership") and Friedman, Billings, Ramsey
Group, Inc., a Delaware corporation ("FBR"), pursuant to Amendment No. 1 dated
as of January 30, 1998 ("Amendment No. 1 to the Loan Agreement"), to the Loan
Agreement dated as of October 26, 1997 (the "Loan Agreement"), among the
Company, the Operating Partnership and FBR, recites and provides as follows:

                               W I T N E S S E T H
                               - - - - - - - - - - 

     WHEREAS, pursuant to the Loan Agreement, as amended, FBR has agreed to make
a revolving loan (the "Loan") to the Trust for the purposes described in the
Loan Agreement, such Loan to be evidenced by a promissory note payable to the
order of FBR as provided in the Loan Agreement (the "Note"); and

     WHEREAS, the Trust and the Operating Partnership each desire that the
Operating Partnership becomes a "Borrower" pursuant to Amendment No. 1
to the Loan Agreement and the amended and restated Note of even date herewith;
and

     WHEREAS, FBR desires that the Operating Partnership become a "Borrower"
pursuant to Amendment No. 1 to the Loan Agreement and the amended and restated
Note of even date herewith; and

     WHEREAS, FBR is willing to made the Loan to the Operating Partnership but
only upon the condition, among others, that the Operating Partnership execute
and deliver to FBR this Amendment No. 1 to the Security Agreement.

     NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto agree as follows:

     1.     Section 1. Defined Terms. is hereby amended to add the following
                       -------------
definition:

     "Company" means the Trust and the Operating Partnership, on a joint and
several basis.

     2.     The Security Agreement. Except as amended hereby, the Security
            ----------------------
Agreement shall continue in full force and effect until termination or
expiration in accordance with the terms thereof.

                                       1
<PAGE>
 
     IN WITNESS WHEREOF, the Trust, the Operating Partnership and FBR have
caused this Amendment No. 1 to the Security Agreement to be executed by their
respective duly authorized officer as of the date first written above.

                               CAPITAL AUTOMOTIVE REIT


                               By:
                                  ---------------------------
                               Title:
                                     ------------------------

                               CAPITAL AUTOMOTIVE L.P.

                               By:  Capital Automotive REIT, as General Partner


                               By:
                                  ---------------------------
                               Title:
                                     ------------------------

                               FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.


                               By:
                                  ---------------------------
                               Title:
                                     ------------------------

                                       2

<PAGE>
 
                                 EXHIBIT 10.28
     (Form of Guaranty Agreement with Cross-Continent Auto Retailers, Inc.)

                      Guaranty and Subordination Agreement
                      ------------------------------------


          THIS GUARANTY AND SUBORDINATION AGREEMENT (this "Agreement"), made as
of the  ______ day of _________, 19__, by  ______________ , a _______________
corporation ("Guarantor"), in favor of Capital Automotive, L.P., a Delaware
limited partnership ("Landlord").

                                  WITNESSETH:
                                  ---------- 

          WHEREAS, Landlord has this day entered into a lease (the "Lease") of
certain Properties identified on Schedule A hereto (individually a "Property"
and collectively the "Properties") with    ____________, a ________________
corporation ("Tenant"), this Agreement being attached to the Lease;

          WHEREAS, Tenant is a subsidiary [affilate] of Guarantor; and

          WHEREAS, Landlord has required, as a condition to entering into the
Lease, Guarantor to be a guarantor of each and every obligation imposed upon
Tenant by the Lease.

          NOW, THEREFORE, to induce Landlord to enter into the Lease and in
consideration of the foregoing premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor, for itself, its successors and assigns, hereby covenants and agrees
for the benefit of Landlord, as follows:

          1.   Guaranty.  Guarantor does hereby unconditionally and irrevocably
               --------                                                        
guarantee to Landlord the full, complete and timely performance of all
obligations imposed on Tenant by the terms of the Lease, including, but  not
limited to, the full, complete and timely payment of rent and all other sums due
by Tenant under the Lease, and the payment as required by the Lease of all
damages to Landlord which may result from Tenant's breach of any provision of
the Lease, including, but not limited to, those relating to damage to any
Property or the leased premises.

          2.   Guaranty of Payment and Performance.  Guarantor acknowledges and
               -----------------------------------                             
agrees that this is a guaranty of payment and performance and not mere
collection.  The liability of Guarantor under this Agreement shall be direct and
immediate and not conditional or contingent upon the pursuit of any remedies
against Tenant or any other person or entity. Guarantor waives any right to
require that an action be brought against Tenant or any other person or entity.
In the event, on account of the Bankruptcy Reform Act of 1978, as amended, or
any other debtor relief law (whether statutory, common law, case law or
otherwise) of any jurisdiction whatsoever, now or hereafter in effect, which may
be or become applicable, Tenant shall be relieved of the Lease or any debt,
obligation or liability as provided in the Lease, 
<PAGE>
 
Guarantor shall nevertheless be fully liable for the complete and timely
performance of all obligations imposed on Tenant by the Lease throughout the
entire term of the Lease, all to the same extent as if Guarantor had been the
original tenant thereunder and the Lease shall be deemed unaffected by any such
relief granted to Tenant. In the event of a default under the Lease which is not
cured within any applicable grace or cure period, Landlord shall have the right
to enforce its rights, powers and remedies thereunder or hereunder, in any order
to the maximum extent permitted by law, and all rights, powers and remedies
provided thereunder or hereunder or by law or in equity. If the obligations
guaranteed hereby are partially performed, paid or discharged by reason of the
exercise of any of the remedies available to Landlord, this Agreement shall
nevertheless remain in full force and effect, and Guarantor shall continue to be
liable for all remaining obligations guaranteed hereby, even though any rights
which Guarantor may have against Tenant may be destroyed or dismissed by the
exercise of any such remedy.

          3.   Waivers by Guarantor.  To the extent permitted by law, Guarantor
               --------------------                                            
hereby waives and agrees not to assert or take advantage of:

               (a) Any right to require Landlord to proceed against Tenant or
any other person or entity or to proceed against or exhaust any security held by
Landlord at any time or to pursue any other remedy in Landlord's power or under
any other agreement before proceeding against Guarantor;

               (b) Any defense that may arise by reason of the incapacity, lack
of authority, death or disability of any other person or persons or the failure
of Landlord to file or enforce a claim against the estate (in administration,
bankruptcy or any other proceeding) of any other person or persons:

               (c) Any defense based upon an election of remedies by Landlord;

               (d) Any right or claim or right to cause a marshaling of the
assets of Tenant or Guarantor;

               (e) Any invalidity, irregularity or unenforceability, in whole or
in part, of any one or more provisions of the Lease;

               (f) Any modification of the Lease or of any obligation of Tenant
thereunder by amendments to the Lease, by waivers granted by Landlord or by
operation of law or by action of any court, whether pursuant to the Bankruptcy
Reform Act of 1978, as amended, or any other debtor relief law (whether
statutory, common law, case law or otherwise) of any jurisdiction whatsoever,
now or hereafter in effect, or otherwise.

          4.   Subordination.  Guarantor and those parties signing below for the
               -------------                                                    
purpose of being bound by this Section 4 (collectively, "Section 4 Signers)
hereby unconditionally and irrevocably subordinate (i) all payments due or to
become due by Tenant to the Section 4 

                                      -2-
<PAGE>
 
Signers, or any of them, by reason of any and all debts or other obligations,
including the obligation to pay salaries or other compensation (collectively
"Debt Payments") and (ii) the receipt of all dividends or other distributions of
any kind or nature (collectively, "Distributions") to the payment of all sums
due or to become due by Tenant to Landlord under the Lease, including the
payment of Rent and all damages due by reason of Tenant's breach of the Lease;
provided, however, that for so long as there shall be no existing Event of
Default under the Lease, after the payment of each monthly installment of Rent,
the Section 4 Signers shall be entitled to receive Debt Payments due for such
month.
 
          5.   General Provisions.
               ------------------ 

               (a) Survival.  This Agreement shall be deemed to be continuing in
                   --------                                                     
nature and shall remain in full force and effect and shall survive the exercise
of any remedy by Landlord under the Lease;

               (b) No Subrogation; No Recourse Against Landlord.  
                   --------------------------------------------    
Notwithstanding the satisfaction by Guarantor of any liability hereunder,
Guarantor's rights of subrogation, contribution, reimbursement or indemnity, if
any, or any right of recourse to or with respect to the assets or property of
Tenant, shall be subject and subordinate to the rights of Landlord. Guarantor
expressly agrees not to exercise any and all rights of subrogation against
Landlord.

               (c) Entire Agreement; Amendment; Severability.  This Agreement
                   -----------------------------------------                 
contains the entire agreement between the parties respecting the matters herein
set forth and supersedes all prior agreements, whether written or oral, between
the parties respecting such matters.  Any amendments or modifications hereto, in
order to be effective, shall be in writing and executed by Landlord and
Guarantor.  A determination that any provision of this Agreement is
unenforceable or invalid shall not affect the enforceability or validity of any
other provision, and any determination that the application of any provision of
this Agreement to any person or circumstance is illegal or unenforceable shall
not affect the enforceability or validity of such provision as it may apply to
any other persons or circumstances.

               (d) Governing Law: Binding Effect; Waiver of Acceptance.  This
                   ---------------------------------------------------       
Agreement shall be governed by and construed in accordance with the laws of the
State of Virginia without regard to conflicts of laws principles thereof.  This
Agreement shall bind Guarantor, it successors and assigns (but in the event of
an assignment, Guarantor shall not be relieved of its obligations hereunder),
and shall inure to the benefit of Landlord, its successors and assigns.
Guarantor hereby waives any acceptance of this Agreement by Landlord and this
Agreement shall immediately be binding upon Guarantor.

               (e) Notice.  All notices, demands, requests or other 
                   ------     
communications to be sent by one party to the other hereunder or required by law
shall be in writing and shall be deemed to have been validly given or served by
delivery of the same in person to the intended addressee, or certified mail or
by depositing the same with Federal Express or another reputable 

                                      -3-
<PAGE>
 
private courier service for next business day delivery to the intended addressee
at its address set forth in the last section of this Agreement or at such other
address as may be designated by such party as herein provided. All notices,
demands and requests shall be effective upon such personal delivery, or one (1)
business day after being deposited with the private courier service, or two (2)
business days after being deposited in the United States mail as required above.
Rejection or other refusal to accept or the inability to deliver because of
changed address of which no notice was given as herein required shall be deemed
to be receipt of the notice, demand or request sent. By giving to the other
party hereto at least seven (7) days' prior written notice thereof in accordance
with the provisions hereof, each party shall have the right from time to time to
change their respective addresses and each shall have the right to specify as
its address any other address within the United States of America.

               (f) No Waiver; Time of Essence.  The failure of either party to
                   --------------------------                                 
enforce any of the respective rights or remedies hereunder, or to promptly
enforce any such rights or remedies, shall not constitute a waiver thereof nor
give rise to any estoppel against such party nor excuse any of the parties
hereto from their respective obligations hereunder.  Any waiver of such right or
remedy must be in writing and signed by the party to be bound and must expressly
state that such right or remedy has been or thereby is waived.  This Agreement
is subject to enforcement at law or in equity, including actions for damages or
specific performance.  Time is of the essence hereof.

               (g) Captions for Convenience.  The captions and headings of the
                   ------------------------                                   
section and paragraphs of this Agreement are for convenience of reference only
and shall not be construed in interpreting the provisions hereof.

               (h) Attorney's Fees.  In the event it is necessary for Landlord 
                   ---------------    
to retain the services of an attorney or any other consultants in order to
enforce this Agreement, or any portion hereof, Guarantor shall promptly pay to
Landlord any and all costs and expenses, including, without limitation,
attorney's fees, incurred by Landlord as a result thereof and such costs, fees
and expenses shall be included in the costs of the case to the extent the
Landlord wins the issue under contest.

               (i) Successive Actions.  Separate and successive actions may be
                   ------------------                                         
brought hereunder to enforce any of the provisions hereof at any time and from
time to time.  No action hereunder shall preclude any subsequent action, and
Guarantor hereby waives any covenants to the maximum extent permitted by law not
to assert any defense in the nature of splitting of causes of action or merger
of judgments.

               (j) Reliance.  Landlord would not enter into the Lease without 
                   -------- 
this Agreement.  Accordingly, Guarantor intentionally, irrevocably and
unconditionally enters into the covenants and agreements as set forth above and
understand that, in reliance upon and in consideration of such covenants and
agreements, the Lease has been made.

                                      -4-
<PAGE>
 
          4.   Notices:  The following addresses shall be used for notice
               -------                                                   
purposes:

               If to Landlord:
 
               Capital Automotive L.P.
               1925North Lynn Street, Suite 306
               Arlington, Virginia  22209

               With copies to:

               Wilmer, Cutler & Pickering
               2445 M Street, N.W.
               Washington, D.C. 20037-1420
               attn: George P. Stamas

          IN WITNESS WHEREOF, Guarantor has executed this Agreement under seal
as of the day and year first above written:

                                    GUARANTOR:

ATTEST/WITNESS:                     -----------------------------------
                                    By:  
- ----------------------------------       ------------------------------
Name:                               Name:  
       ---------------------------       ------------------------------
Title:                              Title:
        --------------------------          ---------------------------

<PAGE>
 
                                 EXHIBIT 10.29
                          


                            CAPITAL AUTOMOTIVE L.P.
                            -----------------------

                        REAL PROPERTY PURCHASE AGREEMENT
                        --------------------------------


                       Meyers Family Limited Partnership



                                January 10, 1998
                                       -
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>                                                                 
<CAPTION>
                                                                         Page
<S>    <C>                                                               <C>
I.     PURCHASE AND SALE                                                 - 1 -
            1.1  Certain Definitions...................................  - 1 -
            1.2  Agreement to Purchase and Sell........................  - 2 -
            1.3  Encumbrances..........................................  - 2 -
            1.4  Purchase Price........................................  - 3 -
            1.5  Capitalized Terms.....................................  - 3 -

II.    OPERATION OF PROPERTY THROUGH CLOSING...........................  - 3 -
            2.1  Business Practice.....................................  - 3 -
            2.2  No Sale or Encumbrance................................  - 3 -
            2.3  Leases, Service Contracts and Management Contracts....  - 4 -
            2.4  Property Subject to Lease.............................  - 4 -
            2.5  Compliance............................................  - 5 -
            2.6  Notice of Inaccuracy or Incompleteness................  - 5 -
            2.7  Access................................................  - 5 -
            2.8  Insurance.............................................  - 5 -
            2.9  Fulfillment of Obligation.............................  - 5 -
            2.10 Financial Statements and Reports......................  - 5 -

III.   STATUS OF TITLE TO PROPERTY.....................................  - 6 -
            3.1  State of Title........................................  - 6 -
            3.2  Preliminary Evidence of Title.........................  - 6 -
            3.3  Title Defects.........................................  - 8 -

IV.    CLOSING PRORATIONS AND ADJUSTMENTS..............................  - 9 -
            4.1  Prorations and Adjustments............................  - 9 -

V.     CLOSING......................................................... - 10 -
            5.1  Closing Date.......................................... - 10 -
            5.2  Closing Documents..................................... - 10 -
            5.3  Conditions to the Partnership's Obligation to Close... - 14 -
            5.4  Conditions to the Seller's Obligation to Close........ - 15 -
            5.5  Transaction Costs..................................... - 16 -

VI.    CASUALTY LOSS AND CONDEMNATION.................................. - 17 -
            6.1  Casualty.............................................. - 17 -
            6.2  Condemnation or Taking................................ - 17 -
</TABLE>
                                     -ii-
<PAGE>
 
<TABLE>

<C>    <S>                                                              <C>
VII.   REPRESENTATIONS AND WARRANTIES OF THE SELLERS................... - 18 -
            7.1   Organization......................................... - 18 -
            7.2   Authority............................................ - 18 -
            7.3   Interest in Contributed Properties................... - 18 -
            7.4   No Defaults.......................................... - 19 -
            7.5   No Litigation; No Condemnation....................... - 19 -
            7.6   No Violation......................................... - 19 -
            7.7   Required Obligations................................. - 20 -
            7.8   Condition of Properties.............................. - 20 -
            7.9   Warranties........................................... - 20 -
            7.10  Utilities............................................ - 20 -
            7.11  Zoning............................................... - 21 -
            7.12  Improvements......................................... - 21 -
            7.13  Environmental Matters................................ - 21 -
            7.14  Insurance............................................ - 24 -
            7.15  Compliance........................................... - 24 -
            7.16  Leases............................................... - 24 -
            7.17  Service Contracts; Management Contracts.............. - 25 -
            7.18  Permits.............................................. - 26 -
            7.19  Other Liabilities.................................... - 26 -
            7.20  Tax Matters.......................................... - 26 -
            7.21  Taxes................................................ - 26 -
            7.22  Special Filings...................................... - 26 -
            7.23  Books and Records.................................... - 26 -
            7.24  No Brokers........................................... - 26 -
            7.25  All Material Information............................. - 27 -
            7.26  Survival of Warranties............................... - 27 -

VIII.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
PARTNERSHIP............................................................ - 27 -
            8.1  Organization, Good Standing and Qualification......... - 27 -
            8.2  Authorization......................................... - 28 -
            8.3  No Violation.......................................... - 28 -
            8.4  Tax Status............................................ - 28 -
            8.5  No Litigation......................................... - 28 -
            8.6  No Brokers............................................ - 28 -
            8.7  Survival.............................................. - 29 -

IX.    COVENANTS....................................................... - 29 -
            9.1  Covenants of the Company and the Partnership.......... - 29 -
            9.2  Covenants of the Sellers.............................. - 30 -
            9.3  No Claim Against Property............................. - 31 -
</TABLE>
                                     -iii-
<PAGE>
 
<TABLE>

<C>    <S>                                                               <C>

X.     DUE DILIGENCE PERIOD............................................. - 32 -
            10.1  Due Diligence Period.................................. - 32 -
            10.2  Access to Properties and Materials.................... - 32 -
            10.3  Adjustment Following Due Diligence.................... - 32 -

XI.    DEFAULTS AND REMEDIES............................................ - 32 -
            11.1  Indemnification by Sellers............................ - 32 -
            11.2  Remedies.............................................. - 33 -
            11.3  Indemnification by the Company and the Partnership.... - 35 -
            11.4  Indemnification Procedures............................ - 36 -

XII.   MISCELLANEOUS.................................................... - 39 -
            12.1  Assignment............................................ - 39 -
            12.2  Entire Agreement...................................... - 39 -
            12.3  Notices............................................... - 39 -
            12.4  Governing Law......................................... - 40 -
            12.5  Litigation Costs...................................... - 41 -
            12.6  Counterparts.......................................... - 41 -
            12.7  Offer and Acceptance.................................. - 41 -
</TABLE>
                                     -iv-
<PAGE>
 
                                   EXHIBITS

     2.4(a)    Form of  Company Lease
     5.2.1(m)  Opinion of Seller's Counsel
     5.2.2(d)  Opinion of Company Counsel
 
                                   SCHEDULES

     1.2       Schedule of Properties; Ownership Interests in Properties and
               Purchase Price
     2.1       Prior Occupants
     7.4       Material Defaults
     7.8       Condition of Properties
     7.11      Zoning
     7.13.4    Known Environmental Circumstances
     7.13.5(a) The Treatment, Storage and Disposal Locations for Substances of
               Concern
     7.13.5(b) Storage Tanks
     7.13.5(c) Existence of Asbestos
     7.13.5(f) Environmental Permits and Authorizations
     7.14      Insurance
     7.17      Service Contracts and Management Contracts
     7.19      Other Liabilities

                                      -v-
<PAGE>
 
                            CAPITAL AUTOMOTIVE L.P.

                       REAL PROPERTY PURCHASE AGREEMENT
                       --------------------------------

     THIS REAL PROPERTY PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of this 10th day of January 1998, by and among the MEYERS FAMILY LIMITED
PARTNERSHIP, a Maryland limited partnership, having offices at c/o Good News
Salisbury, Inc., 2013 N. Salisbury Blvd., Salisbury, Maryland 21801 (sometimes
referred to as "Seller"), and CAPITAL AUTOMOTIVE L.P., a Delaware limited
partnership (the "Partnership"), having offices at 1925 North Lynn Street, Suite
306, Arlington, Virginia 22209, and CAPITAL AUTOMOTIVE REIT, a Maryland real
estate investment trust (the "Company"), having offices at 1925 North Lynn
Street, Suite 306, Arlington, Virginia 22209 on its own behalf and as the
general partner of the Partnership.


                                   RECITALS
                                   --------

     A.   The Sellers are the legal and beneficial owners of all of the
interests in fee simple title to all of the real property and improvements set
forth on such Schedule 1.2 hereto (including the residual interests in any
              ------------                                                
tenant improvements thereon), which are individually referred to as a "Property"
and collectively, the "Properties."  Such Properties are identified on Schedule
                                                                       --------
1.2  by street address and property tax identification number, or if such
- ----                                                                     
Properties constitute more than one parcel, by the several applicable property
tax identification numbers.

     B.   Each Seller desires to sell all of its interest in each of the
Properties to the Partnership and the Partnership desires to purchase all of the
Sellers' interests in such Properties.

     NOW THEREFORE, in consideration of and in reliance upon the above Recitals,
the terms, covenants and conditions contained in this Agreement, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:


     I.   PURCHASE AND SALE
          -----------------

          1.1  Certain Definitions. For purposes of this Agreement:
               -------------------                                        

               1.1.1     "Mortgage Debt" means the aggregate amount of mortgage
                         indebtedness, if any, encumbering the Propteries as set
                         forth opposite the description of each Property on
                         Schedule 1.2.
                         ------------ 

               1.1.2     "Purchase Price" means the amount, in U.S. dollars,
                         that is the purchase price of each Property, as
                         identified on Schedule 1.2 for each such Property.
                                       ------------
                         
<PAGE>
 
               1.1.3     "Affiliate" means with respect to any Person, (i) any
                         Person that holds direct or indirect beneficial
                         ownership (as defined in Rule 13d-3 under the
                         Securities Exchange Act of 1934, as amended) of voting
                         securities or other voting interests representing at
                         least five percent (5%) of the outstanding voting power
                         of a Person or equity securities or other equity
                         interests representing at least five percent (5%) of
                         the outstanding equity securities or interests in a
                         Person, or (ii) any Person that directly, or indirectly
                         through one or more intermediaries, controls, or is
                         controlled by, or is under common control with such
                         Person.

               1.1.4     A "Person" shall mean and include natural persons,
                         corporations, limited partnerships, general
                         partnerships, joint stock companies, joint ventures,
                         associations, companies, trusts, banks, trust
                         companies, land trusts, business trusts, Indian tribes
                         or other organizations, whether or not legal entities,
                         and governments and agencies and political subdivisions
                         thereof.

               1.1.5     For purposes of this Agreement, the "knowledge" of a
                         Person shall mean the actual knowledge of such Person's
                         officers, senior executives, managing partners, general
                         partners, majority shareholders, key employees or their
                         equivalents.

          1.2  Agreement to Purchase and Sell.  Subject to the terms and
               ------------------------------                           
conditions of this Agreement, at the Closing (as hereinafter defined), each
Seller shall sell, transfer and convey to the Partnership, and the Partnership
shall purchase and accept from the Sellers, all of the Sellers' right, title and
interest in and to the Properties identified on Schedule 1.2, excluding items of
                                                ------------                    
movable personal property attached to such Properties that relate to the
business conducted on such Properties and may readily be removed from such
Properties without material damage whether or not such items are "fixtures,"
("Excluded Personal Property").

          1.3  Encumbrances.  The Partnership shall acquire each Property free
               ------------                                                   
and clear of all liabilities, obligations and commitments of Sellers and free
and clear of all liens and encumbrances other than Permitted Exceptions.

                                      -2-
<PAGE>
 
          1.4  Purchase Price.   On the terms and subject to the conditions of
               --------------                                                 
this Agreement, at the Closing Sellers shall sell, transfer, convey, assign and
deliver to the Partnership, and the Partnership shall purchase and accept from
Sellers all the right, title and interest of Sellers to and under the Properties
for an aggregate purchase price (the "Aggregate Purchase Price") in an amount
equal to:

               ONE MILLION THREE HUNDRED THIRTY NINE THOUSAND EIGHT HUNDRED
               TWENTY-SIX U.S. DOLLARS ($1,339,826)
 
The Aggregate Purchase Price will be adjusted pursuant to Sections 3.3,
5.2.1(k), 5.2.1(l), 6.1, 6.2, 10.3 as applicable. [Within three (3) business
days of the date hereof, the Partnership shall deposit into an interest bearing
escrow account acceptable to Seller an earnest money deposit of $100,000 in
readily available funds, which shall be refundable in full without deduction of
any kind if, for any reason, this Agreement is terminated prior to Closing.

          1.5  Capitalized Terms.  Capitalized terms used in this Agreement that
               -----------------                                                
are not otherwise defined herein shall have the meanings required by context.


     II.  OPERATION OF PROPERTY THROUGH CLOSING
          -------------------------------------

          Through the Closing Date:

          2.1  Business Practice.  Except as otherwise provided in this Article
               -----------------                                               
2, the Sellers shall continue, or shall cause any Affiliate, tenant, or third
party managing, maintaining or occupying, as the case may be, any of the
Properties (referred to herein individually as a "Prior Occupant" and
collectively as the "Prior Occupants") to continue, to manage, to maintain and
to operate the Properties in accordance with sound and prudent business
practices and keep the Properties and the tangible personal property thereon in
good condition and repair, ordinary wear and tear excepted.  The Sellers shall
instruct such Prior Occupant not to make any change in its management,
maintenance or operation of the Properties or in its normal and customary other
practices.  The Prior Occupants are identified on Schedule 2.1 to this
                                                  ------------        
Agreement.

          2.2  No Sale or Encumbrance.  None of the Sellers shall sell,
               ----------------------                                  
mortgage, pledge, hypothecate or otherwise transfer or dispose of all, or any
part of any Property or any interest therein, nor shall any Seller initiate,
consent to, approve or otherwise take any action with respect to zoning or any
other governmental rules or regulations presently applicable to all or any part
of any Property, nor shall any Seller permit any new limited or general
partners, shareholders or members to be admitted to any Seller.  Notwithstanding
the foregoing, Sellers shall have, with the written consent of the Partnership
(which consent shall not be unreasonably withheld): (a) the right to admit new
partners to the Meyers Family Limited Partnership between the date hereof and
the Closing Date; and (b) the right prior to Closing to convert the Meyers
Family Limited Partnership from a limited partnership into another form of
entity and to transfer the Properties from the Meyers

                                      -3-
<PAGE>
 
Family Limited Partnership to such converted entity; provided that such
converted entity shall be in a form approved by the Partnership; and further
provided that such converted entity executes this Agreement and agrees to be
bound by its terms and conditions and to assume all of Sellers' obligations
hereunder, including, but not limited to, the covenant under Section 11.2.3
hereto to maintain a net worth of no less than two million dollars ($2,000,000)
(U.S.) for a period of no less than two (2) years following the Closing of the
transactions contemplated by this Agreement; and further provided that the
members, shareholders, partners, or other owners of such converted entity shall
include Roy L. Meyers, Jr. and Charlotte Meyers (the general partners of the
Meyers Family Limited Partnership).

          2.3  Leases, Service Contracts and Management Contracts.  Except as
               --------------------------------------------------            
provided in Section 2.4, the Sellers shall not, nor shall they cause or permit
any Prior Occupant to, terminate, modify, extend, amend or renew any Lease (as
defined in Section 4.1.3 hereof), Service Contract (as defined in Section 7.17
hereof), or Management Contract (as defined in Section 7.17 hereof) or enter
into any new Lease (other than the Company Lease pursuant to Section 2.4 of this
Agreement) or Service Contract without the prior written consent of the Company
or the Partnership; provided, however, that the failure of the Company or the
Partnership to object to any such action within thirty (30) days after written
notice to it by Seller shall be deemed to reflect the Company's or the
Partnership's consent thereto.  Notwithstanding the foregoing, all Service
Contracts and Management Contracts relating to the respective Properties shall
remain in effect after the Closing Date, except for those Service Contracts and
Management Contracts that the Partnership requires, in writing, to be terminated
as of the Closing Date.

          2.4  Property Subject to Lease. Notwithstanding any provision of this
               -------------------------                                       
Agreement to the contrary, the Partnership and the Sellers acknowledge and agree
that they have entered into this Agreement with the intention that the
Partnership is purchasing the Property subject to that certain Lease by and
between Meyers and Rose, a Maryland general partnership, and Price Buick-
Pontiac, Inc., and The Price Organization dated December 10, 1991 (the "Price
Lease") and subject to the right of first refusal contained therein.  It is
agreed that Good News Salisbury, Inc. shall guaranty the performance of Price
Buick-Pontiac, Inc. and The Price Organization under the Price Lease using a
Guaranty and Subordination Agreement substantially in the form attached hereto
as Exhibit 2.4(c).  No later than five (5) days before the Closing Date, Good
   --------------                                                            
News Salisbury, Inc. shall execute a standby lease for the Property in the form
substantially attached hereto as Exhibit 2.4(a) (the "Company Lease").  The
                                 --------------                            
Company Lease shall become effective upon the termination of the Price Lease for
any reason during the term of the Price Lease.  Notwithstanding provisions to
the contrary in this agreement, to the extent that obligations, indemnities or
liabilities that an owner of real property would ordinarily bear have become
obligations of the tenant under the Price Lease, such obligations, indemnities
and liabilities shall herein be the obligations of the tenant under the Price
Lease, and Good News Salisbury, Inc. hereby covenants that if the tenant under
the Price Lease fails to perform any of such obligations, honor such
indemnities, or discharge such liabilities, Good News Salisbury, Inc. shall
perform any of such obligations, honor each of such indemnities, and discharge
all of such liabilities, and this covenant shall survive the Closing of the
transactions contemplated herein and continue for the remainder of the term of
the Price Lease.  The Seller

                                      -4-
<PAGE>
 
hereby agrees to take all steps necessary to present this Agreement to the
tenant under the Price Lease, in conformity therewith, and to notify the
Partnership promptly if (a) the tenant under the Price Lease exercises its right
to purchase the Property and if such tenant in fact purchases the Property, then
all of the Partnership's obligations hereunder shall cease and determine, or (b)
if the tenant under the Price Lease fails to exercise its right of first
refusal, then Seller shall (i) notify the partnership, and (ii) warrant in
writing to the Partnership that Seller has in fact taken all steps necessary
under the Price Lease to present this Agreement to such tenant under the Price
Lease in accordance with its terms and that all rights of such tenant to
purchase the Property under the right of first refusal have ceased and
determined.

          2.5  Compliance.  None of the Sellers shall knowingly take or fail to
               ----------                                                      
take any action that will cause the Properties to fail to comply with any
federal, state, municipal and other governmental laws, ordinances, requirements,
rules, regulations, notices, codes and orders, or any agreements, covenants,
conditions, easements and restrictions currently in effect relating to the
Properties.

          2.6  Notice of Inaccuracy or Incompleteness.  The Sellers shall
               --------------------------------------                    
promptly give written notice to the Company of the occurrence of any event of
which Sellers have knowledge and which may adversely affect the completeness or
accuracy of any representation or warranty made or to be made by Sellers under
or pursuant to this Agreement.

          2.7  Access.  The Sellers shall cause the Company and the Partnership
               ------                                                          
and its representatives to have reasonable access to the Properties, subject to
the prior rights, if any, of any Prior Occupant; provided, however, that without
the consent of the Seller, the representatives of the Partnership shall not
disclose to any Prior Occupant the existence of this Agreement or the
transactions contemplated hereby.

          2.8  Insurance.  The Sellers shall cause the existing insurance
               ---------                                                 
coverages on the Properties and the business of the Sellers to be maintained in
full force and effect through the Closing Date.

          2.9  Fulfillment of Obligation.  To the extent any Seller is
               -------------------------                              
obligated, pursuant to any contract, agreement, covenant, lease, including any
Lease, or other understanding entered into prior to the date hereof with any
Prior Occupant, governmental subdivision or any other third party, to effect any
construction, make any improvements or take any action, the Sellers shall cause
any such construction, improvements and/or action to be taken, completed and
fully paid for by such Seller, at its expense, prior to the Closing Date.  No
such obligation shall be unfulfilled, and no liability for or payment in respect
of any such obligation shall be unsatisfied as of the Closing Date.

          2.10 Financial Statements and Reports.  The Sellers shall provide to
               --------------------------------                               
the Company financial statements, agings of accounts receivable, and other
financial, operating or statistical information for each Property upon any
reasonable request of the Company (provided that

                                      -5-
<PAGE>
 
such such statements, reports or information are produced in the ordinary course
of any Seller's business), and the general partner or chief financial officer,
as the case may be, of each Seller shall certify that, to the best of his or its
knowledge, such financial statements and other reports are true, accurate and
complete in all material respects.


     III. STATUS OF TITLE TO PROPERTY
          ---------------------------

          3.1  State of Title.  At Closing, the Sellers shall own, beneficially
               --------------                                                  
and of record, good and marketable fee simple title to the Properties, subject
only to the Price Lease, the mortgages creating the Mortgage Debt listed on
Schedule 1.2 hereto and those covenants, conditions and restrictions set forth
- ------------                                                                  
on Schedule 3.1 hereto (the "Scheduled Exceptions").  The Mortgage Debt, the
   ------------                                                             
Price Lease and Scheduled Exceptions are referred to collectively herein as the
"Permitted Exceptions."

          3.2  Preliminary Evidence of Title.  Within no more than 30 days after
               -----------------------------                                    
the date hereof, the Sellers and the Partnership shall obtain, in a form
acceptable to the Partnership, the following documents to evidence the condition
of the title to each of the Properties:

               3.2.1     Commitments (the "Title Commitments") to the
                         Partnership for ALTA Form B (1987) Owner's Title
                         Insurance Policies committing to insure, at standard
                         rates, title to each Property as being good and
                         marketable, subject only to the Permitted Exceptions,
                         in the amount of the fair market value of each such
                         Property, issued by a title company acceptable to the
                         Company and the Partnership (the "Title Insurer"). The
                         Title Commitments shall be effective as of the Closing
                         Date, and shall reflect that fee simple title is held
                         by the respective Seller. Each Owner's Title Insurance
                         Policy to be issued to the Partnership at Closing
                         pursuant to Section 7.2.2 below ("Title Insurance
                         Policies") shall contain an extended coverage
                         endorsement over the general or standard exceptions
                         which are a part of the printed form of the policy and
                         subject only to the Permitted Exceptions. Each Title
                         Insurance Policy shall, in addition, (a) include
                         provisions for co-insurance, in such amounts of
                         liability acceptable to the Partnership and the
                         Company; (b) not contain any survey exception, (c) not
                         contain any exceptions for (i) liens for labor or
                         material, whether or not of record, (ii) parties in
                         possession (other than Prior

                                      -6-
<PAGE>
 
                         Occupants under the Leases, solely as such Prior
                         Occupants), (iii) unrecorded easements, and (iv) taxes
                         and special assessments not shown on the public
                         records, (d) provide for the following endorsements:
                         (i) an access endorsement insuring that there is direct
                         and unencumbered access to the land from all adjacent
                         public streets and roads, (ii) a survey endorsement
                         insuring that all foundations in place as of the date
                         of such policy are within the lot lines and applicable
                         setback lines, that the improvements do not encroach on
                         adjoining land or any easements, and that there are no
                         encroachments of improvements from adjoining land on
                         any or the Properties or any part thereof, (iii) an
                         ALTA Form 3.1 zoning endorsement insuring that the
                         Properties are zoned for the buildings and the
                         operation thereof as contemplated by the terms and
                         provisions of this Agreement, (iv) a non-imputation
                         endorsement, by which the Title Insurer waives any
                         defense based upon knowledge of any person or entity
                         (other than the knowledge of the Partnership or its
                         designees), (v) a statement that each Property
                         constitutes a separate lot of record and is separately
                         assessed for real estate tax purposes, (vi) an
                         endorsement commonly referred to as a "Fairway
                         endorsement," providing among other things, that the
                         Title Insurer waives any defense based on a dissolution
                         or termination of the insured partnership or the
                         formation of a new partnership solely by reason of one
                         or more transfers of all or any part of the partnership
                         interests of any one or more of the general partners of
                         the insured to the Company or the Partnership and/or
                         any one or more of the limited partners of the insured,
                         and/or the transfer of any one or more of the limited
                         partner's interests to the current general partner, the
                         Company or the Partnership, and (vii) such other
                         endorsements as the Partnership and the Company may
                         reasonably require.

               3.2.2     Written results of searches reflecting any liens,
                         judgements, tax liens, bankruptcies, and open dockets
                         (the "UCC Searches"), conducted by a

                                      -7-
<PAGE>
 
                         company reasonably acceptable to the Partnership. The
                         UCC Searches shall name each Seller, Prior Occupant,
                         and Property, and shall search the appropriate land
                         records and central filing office for Uniform
                         Commercial Code financing statements.

               3.2.3     Legible copies of all documents of record referred to
                         in any Title Commitment or disclosed by the UCC
                         Searches, and all other documents evidencing or, to the
                         extent in the possession or control of the Sellers,
                         relating to, matters reflected in any Title Commitment
                         or the UCC Searches.

               3.2.4     Current ALTA/ACSM land title surveys of each of the
                         Properties (the "Surveys") dated on or after the date
                         of this Agreement, certified to the Partnership and the
                         Title Insurer (and such other persons or entities as
                         the Partnership may designate) by a surveyor registered
                         in the State where the Property is located. Each Survey
                         shall be in form and substance acceptable to the
                         Partnership and the Title Insurer.

          3.3  Title Defects.  The Partnership shall have the right to review
               -------------                                                 
the Title Commitments, UCC Searches or Surveys (or any revision or update of any
of them) and to require the Seller to remove, correct, and cure any defects in
the title or other such matters relating to the title that the Partnership
determines, in its sole discretion, are unacceptable.  The Partnership shall
notify the Sellers of those matters listed on Schedule 3.1 that are acceptable,
                                              ------------                     
which shall be referred to as the "Scheduled Exceptions."  The Partnership shall
notify the Sellers within ten (10) business days after the Partnership receives
the last of the Title Commitments, UCC Searches or Surveys, as the case may be,
of any such defects or matters that the Partnership finds to be unacceptable,
and, prior to the Closing Date, such Sellers shall, (i) as to any such exception
or other matter of a nonmonetary nature, use reasonable efforts to remove,
correct and cure such defects or such other matters, and (ii) as to any such
defect or other matter of a monetary nature, cause such lien or encumbrance or
other matter to be discharged and released, in each case to the reasonable
satisfaction of the Partnership, except that such Seller shall not be required
to expend more than $100,000 with respect thereto.  If such Seller fails to
remove, correct and cure such defects or such other matters, the Partnership
may, at its option and as its exclusive remedy, (x) terminate this Agreement, in
which event this Agreement, without further action of the parties, shall become
null and void and neither party shall have any further rights or obligations
under this Agreement, (y) terminate this Agreement with respect to such Property
and reduce the Aggregate Purchase Price by the Purchase Price for such Property
with respect to which the Seller fails to correct and cure such defects or other
such matters, or (z) elect to accept title to such Property and discharge or
release any

                                      -8-
<PAGE>
 
liens, encumbrances or other matters of a monetary nature or which may otherwise
be discharged, released or removed by the payment of a monetary sum and reduce
the Aggregate Purchase Price by the lesser of (a) the amount necessary to
correct or cure such monetary liens, encumbrances or other matters or (b)
$100,000.  If the Partnership fails to make any such election, the Partnership
shall be deemed to have elected the option contained in clause (y).

     IV.  CLOSING PRORATIONS AND ADJUSTMENTS
          ----------------------------------

          4.1  Prorations and Adjustments.  All prorations and adjustments (the
               --------------------------                                      
"Prorations") with respect to each Property, for the period up to and through
the Closing Date, shall be the responsibility of or belong to the Sellers and
all Prorations for the period after the Closing Date shall be the responsibility
of or belong to the tenant under the applicable Company Lease.  The Company and
the Partnership shall have no responsibility for, and will receive no benefit
from, the Prorations, and the Seller shall have liability for such Prorations.
Such Prorations shall include, but not be limited to, the following:

               4.1.1     real estate and personal property taxes and
                         assessments;

               4.1.2     common area maintenance fees and reimbursements for
                         prior years property taxes payable by Prior Occupants;

               4.1.3     the rent payable by Prior Occupants under leases in
                         effect immediately prior to the Closing Date (the
                         "Leases") as set forth on Schedule 2.1 hereto;
                                                   ------------        

               4.1.4     the full amount of security deposits paid under the
                         Leases, together with interest thereon if required by
                         law or otherwise;

               4.1.5     water, electric, telephone and all other utility and
                         fuel charges (those that are meter read will be read by
                         the appropriate utility and service transferred as of
                         the Closing Date);

               4.1.6     amounts due and prepayments under the Service
                         Contracts;

               4.1.7     assignable license and permit fees;

               4.1.8     other expenses of operation and similar items; and

                                      -9-
<PAGE>
 
               4.1.9    all or any other disbursements, payments, and
                        obligations relating to the Property.

               4.1.10   notwithstanding the foregoing, any refunds of real or
                        personal property taxes for tax years beginning prior to
                        the Closing Date shall belong to Sellers, and if paid to
                        the Partnership shall be promptly refunded by the
                        Partnership to Sellers in cash.

               4.1.11   with respect to Mortgage Debt, at the time of Closing,
                        all obligations accrued up to the Closing Date, whether
                        the same shall constitute principal, interest, or other
                        payments, shall be paid by the Seller by way of a
                        reduction of the Aggregate Purchase Price in the amount
                        of such obligations.


     V.   CLOSING
          -------

          5.1  Closing Date.  The closing of the transactions contemplated by
               ------------                                                  
this Agreement (the "Closing") shall occur at the offices of Wilmer, Cutler &
Pickering, 2445 M Street, N.W. Washington, D.C. 20037-1420, at 10:00 a.m. on
February 27, 1998, or such other time or place as shall follow the closing of
the initial public offering of Initial Shares of the Company pursuant to the
Registration Statement (but in no event later than [the earlier of (i) thirty
days after the closing of the public offering or (ii)] May 29, 1998), provided
that all conditions to Closing have been satisfied or waived, or at such other
time and place as the Sellers and the Company shall agree in writing.  The
"Closing Date" shall be the date of the Closing.  If the Closing Date is to be a
date other than February 27, 1998, the Partnership shall deliver to Sellers
facsimile notice of such Closing Date no later than five (5) business days prior
to such Closing Date.

          5.2  Closing Documents
               -----------------

               5.2.1     Sellers.  Not later than five (5) business days prior
                         -------                                              
                         to the Closing Date, the Sellers shall deliver to the
                         Company and the Partnership the following:

                     a.  deeds and assignments for the Properties;

                     b.  executed copies of all Company Leases, effective at
                         Closing;

                     c.  any affidavits, certificates and other documents
                         (including without limitation non-imputation

                                     -10-
<PAGE>
 
                         affidavits and/or certificates) that are reasonably
                         necessary for the Title Insurer to issue the Owner's
                         Title Insurance Policies in the form and condition
                         required by this Agreement;
 
                     d.  evidence satisfactory to the Partnership that all
                         mortgages and other indebtedness secured by the
                         Properties have been paid in full;

                     e.  for each Seller that is a corporation, a corporate
                         resolution authorizing the transactions contemplated by
                         this Agreement, a certificate of good standing, a
                         certified copy of its articles or certificate of
                         incorporation and bylaws, and a certificate of
                         incumbency certifying the titles and signatures of the
                         corporate officers authorized to consummate the
                         transactions contemplated hereunder on behalf of Seller
                         and such other evidence of such Seller's power and
                         authority as the Company or Partnership reasonably
                         requests;

                     f.  for each Seller that is a partnership or a limited
                         liability company, a partnership resolution authorizing
                         the transactions contemplated by this Agreement, a
                         certificate of good standing, a certified copy of the
                         partnership or operating agreement governing such
                         Seller, and a certificate of incumbency certifying the
                         titles and signatures of the general partners or
                         members authorized to consummate the transactions
                         contemplated hereunder on behalf of such Seller and
                         such other evidence of power and authority of such
                         Seller as the Company or Partnership reasonably
                         requests;

                     g.  for each Seller, an affidavit stating, under penalty of
                         perjury, its U.S. taxpayer identification number and
                         that it is not a foreign person within the meaning of
                         Section 1445 of the Internal Revenue Code of 1986, as
                         amended (the "Code");

                     h.  agreements from each Prior Occupant who leases any
                         Property terminating its Leases with Sellers and

                                     -11-
<PAGE>
 
                         an estoppel certificate from such Prior Occupant
                         stating that it has no claims under the Lease;

                     i.  all of the original Leases, written Service Contracts
                         and Management Contracts and any and all building
                         plans, surveys, site plans, engineering plans and
                         studies, utility plans, landscaping plans, development
                         plans, specifications drawings, marketing artwork,
                         construction drawings, soil tests, complete warranty
                         book including all contractors and subcontractors and
                         other documentation concerning all or any part of each
                         Property to the extent that any of the foregoing
                         documents are in the possession or control of Sellers;

                     j.  any bonds, warranties or guaranties which are in any
                         way applicable to any Property or any part thereof to
                         the extent any of the foregoing are in the possession
                         or control of Sellers;

                     k.  If the Company or Partnership shall so request, each
                         Seller shall deliver to the Company a letter (an
                         "Estoppel Letter") in a form acceptable to the Company,
                         dated not more than thirty (30) days prior to the
                         Closing Date, from each Prior Occupant under each
                         Lease. The Estoppel Letter shall be fully completed in
                         a manner reasonably satisfactory to the Company, and
                         with no modifications other than those reasonably
                         acceptable to the Company. In the event Estoppel
                         Letters in form and content reasonably satisfactory to
                         the Company are not received by the Company and the
                         Partnership within the time prescribed herein, then the
                         Partnership and the Company, at their option and as a
                         non-exclusive remedy, upon notice to the Sellers, may
                         immediately terminate this Agreement, or may terminate
                         this Agreement with respect to the relevant Property,
                         in which case the Aggregate Purchase Price shall be
                         reduced by the Purchase Price of such Property.

                     l.  [Intentionally Omitted]

                                     -12-
<PAGE>
 
                     m.  an opinion of Seller's counsel substantially in the
                         form attached hereto as Exhibit 5.2.1(m); and
                                                 ----------------     

                    n.   all other documents reasonably required by the
                         Partnership or the Company in connection with the
                         transactions contemplated by this Agreement.

                    o.   an assignment and assumption agreement satisfactory to
                         counsel of both sides executed by Sellers and the
                         Partnership by which the Sellers agree to assign and
                         the Partnership agrees to assume the Leases and
                         promises to indemnify the Sellers for all claims
                         arising out of the Price Lease that are based on
                         occurrences after the Closing of the transactions
                         contemplated by this Agreement and by which the Sellers
                         jointly and severally agree to indemnify the
                         Partnership and the Company for claims arising out of
                         the Price Lease that are based on occurrences before
                         the Closing of the transactions contemplated by this
                         Agreement.

          5.2.2  Partnership.  At the Closing, the Partnership shall deliver the
                 -----------                                        
                 following:

                     a.  [Intentionally Omitted]

                     b.  for the Company, a resolution of its Board of Trustees
                         authorizing the transactions contemplated hereby and a
                         certificate of good standing from the State Department
                         of Assessments and Taxation of the State of Maryland;

                     c.  for the Partnership, evidence of the Partnership's
                         authorization of the transactions contemplated hereby
                         and a certified copy of the Partnership Agreement and a
                         Certificate of Limited Partnership certified by the
                         Secretary of State of Delaware; and

                     d.  an opinion of Wilmer, Cutler & Pickering, substantially
                         in the form attached hereto as Exhibit 5.2.2(d).
                                                        ---------------- 

                                     -13-
<PAGE>
 
                     e.  an assignment and assumption agreement satisfactory to
                         counsel of both sides executed by Sellers and the
                         Partnership by which the Sellers agree to assign and
                         the Partnership agrees to assume the Leases and
                         promises to indemnify the Sellers for all claims
                         arising out of the Price Lease that are based on
                         occurrences after the Closing of the transactions
                         contemplated by this Agreement and by which the Seller
                         agrees to indemnify the Partnership and the Company for
                         claims arising out of the Price Lease that are based on
                         occurrences before the Closing of the transactions
                         contemplated by this Agreement.

          5.3  Conditions to the Partnership's Obligation to Close.  At the
               ---------------------------------------------------         
option of the Partnership, the obligations of the Company and the Partnership
under this Agreement are subject to the satisfaction of the following conditions
(unless explicitly waived in writing):

               5.3.1     Each Seller shall have terminated such existing
                         Management Contracts that Partnership has required, in
                         writing, to be terminated prior to the Closing Date.

               5.3.2     [Intentionally Omitted]

               5.3.3     Each Seller shall have terminated such existing Service
                         Contracts that the Partnership has required, in
                         writing, to be terminated prior to the Closing Date.

               5.3.4     Each and every representation and warranty of the
                         Sellers contained in this Agreement is true, correct
                         and complete in all material respects as of the date
                         hereof and at all times through the Closing Date.

               5.3.5     The Sellers shall have fully performed and satisfied
                         each and every material obligation, term and condition
                         to be performed and satisfied by them under this
                         Agreement.

               5.3.6     All consents, authorizations, certificates, Estoppel
                         Letters, Lender's Estoppel Certificates and approvals
                         required to be obtained by the Sellers in

                                     -14-
<PAGE>
 
                         connection with the Agreement shall have been obtained,
                         including but not limited to all consents, approvals
                         and authorizations (without any conditions or
                         requirements) required to be obtained under any
                         Mortgage, deed of trust or other instrument relating to
                         any of the Properties or pursuant to which any of the
                         Sellers are bound in order to complete the transactions
                         contemplated under this Agreement.

               5.3.7     The Company shall have closed its initial public
                         offering according to the Registration Statement.

               5.3.8     The Sellers shall have paid in full such Mortgage Debt
                         and other indebtedness secured by the Properties as
                         required by the Company and Partnership and shall have
                         provided the Company and Partnership with satisfactory
                         evidence thereof, and to the extent that such Mortgage
                         Debt is to be paid off following Closing, the mortgagee
                         shall deliver pay-off letters to the Company and the
                         Partnership.

               5.3.9     The condition of the Property shall not have materially
                         changed.

               5.3.10    The Partnership shall have received an Owner's Title
                         Insurance Policy (or marked-up commitment therefor) for
                         each Property insuring fee simple title to such
                         Property in the amount of the Purchase Price of such
                         Property subject only to Permitted Exceptions, and
                         otherwise in the form and condition required by this
                         Agreement.

               5.3.11    If the Sellers do not deliver completed Schedules to
                                                                 ---------   
                         the Company and Partnership at the time of the
                         execution of this Agreement, the Sellers shall deliver
                         to the Company and Partnership, in substantially
                         completed form, all Schedules required by this 
                                             ---------         
                         Agreement within five (5) business days after the date
                         of the execution of this Agreement.

                                     -15-
<PAGE>
 
               5.3.12    The Sellers shall have delivered to the Company all
                         closing documents required by Section 5.2.1 hereof.

          5.4  Conditions to the Seller's Obligation to Close.  The obligations
               ----------------------------------------------                  
of the Seller under this Agreement are subject to the satisfaction of the
following conditions (unless explicitly waived in writing):

               5.4.1     Each of the representations and warranties of the
                         Partnership contained in this Agreement is true,
                         correct and complete as of the date hereof and at all
                         times through the Closing Date.

               5.4.2     The Partnership and the Company shall have fully
                         performed and satisfied each and every obligation, term
                         and condition to be performed and satisfied by them
                         under this Agreement.

               5.4.3     The Company shall have completed its initial public
                         offering pursuant to the Registration Statement.

               5.4.4     All consents, authorizations and approvals required to
                         have been obtained by the Company and the Partnership
                         in connection with this Agreement shall have been
                         obtained.

           5.5       Transaction Costs.
                     ----------------- 

               5.5.1     The Sellers shall pay all costs (including, but not
                         limited to, any recordation and transfer taxes,
                         surveys, title insurance (including all special
                         endorsements), searches made pursuant to Section 3.2.2
                         hereof, fees and expenses of going to record) in
                         connection with the transfer by the Sellers of the
                         Properties (collectively referred to as the "Closing
                         Costs"). The Company and the Partnership shall bear the
                         cost of their due diligence activities.
 
               5.5.2     The Sellers shall pay all assumption fees, prepayment
                         penalties, premiums, lender's consent fees or other
                         such charges ("Consent Fees") imposed in connection
                         with the transactions contemplated hereby, and all
                         Consent Fees imposed

                                     -16-
<PAGE>
 
                         by all other lenders in connection with the
                         transactions contemplated hereby.

               5.5.3     Except as specified above and elsewhere in this
                         Agreement, each party shall bear and pay its expenses
                         in connection with this Agreement and the transactions
                         contemplated herein, including the fees of their
                         respective professional advisors.


     VI.  CASUALTY LOSS AND CONDEMNATION
          ------------------------------

          6.1  Casualty.  Prior to Closing, all risk of loss shall belong to the
               --------                                                         
Sellers. If, prior to Closing, the Properties or any part thereof shall be
destroyed or materially damaged by fire or other casualty, the Partnership (a)
shall first offer the Seller the option not to rebuild; Seller may exercise this
option if such Property is insured to the full amount of the Purchase Price of
the Improvements; and if Seller exercises this option, the Partnership may
terminate this Agreement with respect to such Property upon notice to the
Seller, and reduce the Aggregate Purchase Price by the Purchase Price of such
Property, except that if the tenant under the Price Lease or the Tenant elects
to pay the Base Annual Rent under the Company Lease for the entire term of the
Company Lease on such Property despite the election not to rebuild, the
Partnership shall not terminate this Agreement with respect to such Property;
and (b) if the Seller does not exercise its option under (a), may, at its
option, either (i) require the appropriate Sellers to repair such damage prior
to Closing to the reasonable satisfaction of the Partnership, at no cost or
expense to the Company or the Partnership, in which event the proceeds of any
insurance applicable thereto shall be paid to the Seller, or (ii) itself settle
the loss under all policies of insurance applicable to the destruction or damage
and receive the proceeds of insurance applicable thereto, and the Seller shall,
at Closing and thereafter, execute and deliver to the Partnership all required
proofs of loss, assignments of claims and other similar items.  Notwithstanding
anything in this Section 6.1 to the contrary, in the event such loss or casualty
shall constitute a total or substantial loss or casualty or, in the opinion of
the Company, in its sole discretion, shall render the Property unsuitable for
its intended purpose for a period of ninety (90) days or longer, then the
Company and the Partnership, at their option, may terminate this Agreement with
respect to such Property upon notice to the Seller, and reduce the Aggregate
Purchase Price by the Purchase Price of such Property, except that if the tenant
under the Price Lease or the Tenant nevertheless elects to pay the Base Annual
Rent under the Company Lease for the entire term of the Company Lease on such
Property, the Partnership shall not terminate this Agreement with respect to
such Property.

          6.2  Condemnation or Taking.  If, prior to Closing, any Property or
               ----------------------                                        
any part thereof shall be condemned or taken and such condemnation or taking
materially interferes with the existing business use of the Property, the
Company and the Partnership may (i) terminate this Agreement either as to all
the Properties or solely as to such Property, in the discretion of the
Partnership and the Company, or (ii) complete the transactions contemplated by
this Agreement

                                     -17-
<PAGE>
 
notwithstanding such condemnation.  If the Company and the Partnership elect to
complete the transactions contemplated hereby, the Partnership shall be entitled
to receive the condemnation proceeds and the appropriate Seller shall, at
Closing and thereafter, execute and deliver to the Partnership and the Company
all required assignments of claims and other similar items.  If the Partnership
and the Company elect to terminate this Agreement, then upon written notice to
the Sellers and without further action of the parties, this Agreement shall
become null and void and no party shall have any rights or obligations under
this Agreement.  If the Partnership and the Company elect to terminate this
Agreement solely with respect to the affected Property, the Aggregate Purchase
Price shall be reduced by the Purchase Price of such Property.


     VII. REPRESENTATIONS AND WARRANTIES OF THE SELLERS
          ---------------------------------------------

          The Sellers, represent[s] and warrant[s] to the Company and the
Partnership that, except as described on the Schedules attached hereto and
                                             ---------         
incorporated by reference herein, the following are true, complete and correct
as of the date of this Agreement and as of the Closing Date:

          7.1  Organization.  Each Seller is duly organized and validly existing
               ------------                                                     
and in good standing under the laws of the state of its organization and the
State of Maryland, and has all requisite power and authority to own or lease and
operate its properties (including the Properties) and assets and conduct its
business in the manner in which they are being owned or leased and operated and
conducted, as the case may be.  Each Seller is duly qualified and authorized and
is in good standing in all jurisdictions where its ownership, lease or operation
of assets and properties (including the Properties) or the conduct of its
business requires such qualification or authorization.

          7.2  Authority.  The execution and delivery of this Agreement and all
               ---------                                                       
agreements, documents and instruments contemplated hereby and the performance of
all transactions contemplated herein or therein, have been duly and validly
authorized by all requisite partnership, corporate or trust action, as the case
may be, and by the general partners, board of directors, stockholders, or
trustees of each Seller, as the case may be.  This Agreement and the agreements,
documents and instruments executed and delivered in connection herewith
constitute the legal, valid and binding obligations of the Sellers, enforceable
in accordance with their respective terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity) and except to the
extent that rights to indemnification and sale and purchase under or
contemplated by this Agreement or such other agreements may be limited by
federal or state securities laws or public policy relating thereto.  To the
knowledge of the Sellers, none of the Sellers are required to obtain any
consent, authorization, approval or waiver from any governmental agency or
authority or from any third party in connection with the execution and delivery
of, and the performance of the obligations to be

                                     -18-
<PAGE>
 
performed under, this Agreement and the documents and instruments executed and
delivered in connection herewith, or if any of the foregoing is required, it has
been obtained.

          7.3  Interest in Contributed Properties.  Each Seller is the record
               ----------------------------------                            
and beneficial owner of, and has good and marketable and insurable fee simple
title to, the interests in the Properties set forth opposite such Seller's name
on Schedule 1.2, free and clear of all liens, options, adverse claims or
   ------------                                                         
encumbrances, except the Permitted Exceptions, and Schedule 1.2 is true,
                                                   ------------         
accurate and complete in all material respects as to each seller.  Between the
date hereof and the Closing Date, no liens, claims or encumbrances will be
created or permitted to be created on any Property other than the Permitted
Exceptions.  Prior to or at the Closing all monetary encumbrances on any
Property, other than the Permitted Exceptions, shall be duly canceled, removed
and discharged of record, and proof thereof satisfactory to the Title Insurer,
the Company and the Partnership shall be delivered to the Company and the
Partnership.  Except for  Prior Occupants, there are no parties in possession of
any part of the Properties as of the Closing Date, and there are no other rights
of possession, or agreements providing for the sale, assignment or transfer of
title to any Property or portion thereof (other than this Agreement),  which
have been granted to any third parties.  Such Seller has the full power,
capacity and authority to sell, transfer and assign the legal and equitable
ownership of his/her or its interest to the Partnership as provided in this
Agreement, and the Sellers have not entered into any agreement and have no
knowledge of any agreement or understanding to issue any additional interests in
any Seller to any other person or entity.

          7.4  No Defaults.  (a) No Seller is in default of any of its material
               -----------                                            
obligations under any agreement, franchise, license, contract, deed, mortgage,
lease, instrument, certificate, affidavit or covenant affecting title to the
Properties; (b) there are no contracts or agreements, such as maintenance,
service, or utility contracts affecting the Properties other than the Service
Contracts, and no party to such contracts is in material default or breach under
the terms and conditions thereof; and (c) there are no contracts or agreements,
and there will be no contract or agreement in effect, between Seller and any
third party for the management or leasing of any Property other than the
Management Contracts and no such contract is in material default or breach under
the terms and conditions thereof, and there will be no leasing commission due
and owing, or to become due and owing, in connection with any of the Leases; and
(d) except for the Permitted Exceptions, the Service Contracts and the
Management Contracts, there are no contracts, agreements, liabilities, claims or
obligations of any kind or nature relating to the Properties and to which any
Seller will be bound or the Properties will be subject after the Closing except
as expressly described in Schedule 7.4 attached hereto.
                          ------------                 

          7.5  No Litigation; No Condemnation.  There are no actions, suits,
               ------------------------------                               
proceedings or claims pending, or to the knowledge of any Seller, threatened or
contemplated, with respect to or in any manner affecting the Properties, or any
Seller's interest therein; or the ability of any Sellers to complete the
transactions contemplated by this Agreement or which could prevent any Seller
from satisfying its obligations under this Agreement. No Seller has received
notice of any pending or threatened condemnation or similar proceedings or
special assessments affecting the Properties, or any part thereof.

                                     -19-
<PAGE>
 
          7.6  No Violation.  The execution and delivery of this Agreement and
               ------------                                                   
the agreements, documents and instruments executed and delivered in connection
herewith, the consummation of the transactions contemplated hereby or thereby,
and the operation of any Property shall not: (a) conflict with, or result in a
breach of, the terms, conditions or provisions of, or constitute a default
under, any agreement, contract, mortgage, deed, lease, license, franchise or
instrument to which any Seller is a party or is subject or to which any Property
is subject; (b) to Sellers' knowledge, violate any agreement, contract,
mortgage, deed, lease, license, franchise, restriction, easement, restrictive
covenant, or instrument to which any Seller or any Property is subject; (c) to
Sellers' knowledge, constitute a violation of any applicable code, resolution,
law, statute, regulation, ordinance, rule, judgment, decree or order; (d) with
respect to each Seller that is an entity, violate any provision of its charter,
bylaws or other organizational document; (e) except as to any indebtedness in
respect of which the consent of the lender shall have been obtained prior to the
Closing Date, result in the acceleration of any indebtedness or any encumbrance
pertaining to any Seller or any Property, or the cancellation of any contract,
agreement, franchise, license, instrument or lease pertaining to any Property
(other than as specifically requested by the Company or the Partnership pursuant
to this Agreement); except that, if any Seller discovers during the Due
Diligence period that an approval to such Seller's execution, delivery, or
performance of this Agreement is required from any third party, such Seller
shall have a period of fifteen (15) business days or until five (5) days before
the Closing Date, whichever period is shorter, to obtain such approval; or (f)
except as to any Permitted Exceptions, result in the creation of any lien,
encumbrance or security interest upon any Property.  None of the Sellers have
received any written notice of any violation (both as to condition of the
Property and use) of any applicable laws, statutes, ordinances, codes
(including, but not limited to, zoning, building, subdivision, pollution,
environmental protection, water disposal, health, fire and safety engineering
codes, and laws and regulations with respect to the submetering of any utilities
serving any Property), and the rules and regulations of, by governmental
authority having jurisdiction over the Properties.

          7.7  Required Obligations.  The Sellers have paid and performed all
               --------------------                                          
material obligations relating to the Properties required to have been paid or
performed prior to the date hereof and will have paid and performed all such
material obligations prior to the Closing Date, including but not limited to all
principal installments, interest payments, taxes, penalties and other charges in
connection with all indebtedness relating to or secured by any of the Properties
or an interest in any of the Properties.

          7.8  Condition of Properties.  Except as disclosed on Schedule 7.8, no
               -----------------------                          ------------    
Seller has been notified that the structural, mechanical, electrical, plumbing,
roofing and other major systems on any Property and items of equipment and
components located thereon, require to be replaced or are in need of material
repair.

          7.9  Warranties.  To the Sellers' present knowledge, the Sellers have
               ----------                                                      
not released or modified any warranties of builders, contractors, manufacturers
or other tradespersons that have been given to any Seller without the consent of
the Company or the Partnership.

                                     -20-
<PAGE>
 
          7.10 Utilities.  None of the Properties are connected to sanitary
               ---------                                                   
sewers or public water. Usable storm sewers and electrical utilities
(collectively, the "Utilities") of adequate capacity required for the operation
of the Properties, are installed in, and are duly connected to, the Properties
and can be used without any charge except the normal user charges for the normal
and usual charges imposed for gas and electric utilities.

          7.11 Zoning.  Each Property is currently located in the areas zoned
               ------                                                        
for its current use (including by variance), as indicated on the Schedule 7.11
                                                                 -------------
hereto, which classification permits the development, use and operation of the
improvements on such Property as such improvements currently are being used
without special exception or permit.  The Sellers have no knowledge of any
threat of, and have not received written notice of, any proceeding to change
adversely or down-zone the existing zoning classification as to any portion of
any Property.

          7.12 Improvements.  To Sellers' knowledge, all improvements on the
               ------------                                                 
Properties have been constructed in accordance with, and substantially comply
with, all requirements of all applicable laws, ordinances, regulations and
orders, including without limitation applicable zoning, building and fire safety
codes and all restrictive covenants, if any, and other easements, encumbrances
or agreements affecting title to any Properties or improvements.  For purposes
of this Section 7.12, "substantially" means that Sellers shall not be permitted
to engage in even de minimis non-compliance with applicable laws, ordinance,
regulations and orders if such de minimis non-compliance could result in any
governmental, administrative or other authority executing any penalty, fine,
remedy or other disciplinary action against such Seller or such Seller's
Business (as defined in the Company Lease).

          7.13 Environmental Matters.
               --------------------- 

               7.13.1         For purposes of this Agreement:

                         a.   "Environmental Claim" means any claim, action,
                              cause of action, investigation, or notice (written
                              or oral) by any person or entity alleging
                              potential liability (including, without
                              limitation, potential liability for investigatory
                              costs, cleanup costs, governmental response costs,
                              natural resource damages, property damages,
                              personal injuries, or civil or criminal penalties)
                              arising out of or resulting from (i) the actual or
                              alleged presence or release into the environment
                              of any Substance of Concern at any location,
                              whether or not owned or operated by the Seller, or
                              (ii) circumstances forming the basis of any actual
                              or alleged violation of any Environmental Law.

                                     -21-
<PAGE>
 
                              b.   "Environmental Laws" means all federal,
                                   state, local, and foreign laws and
                                   regulations relating to pollution or
                                   protection of human health or the environment
                                   (including, without limitation, ambient air,
                                   surface water, ground water, wetlands, land
                                   surface, subsurface strata, and indoor and
                                   outdoor workplace), including, without
                                   limitation, (i) laws and regulations relating
                                   to emissions, discharges, releases, or
                                   threatened releases of Substances of Concern,
                                   and (ii) common law principles of tort
                                   liability.

                              c.   "Substances of Concern" means chemicals,
                                   pollutants, contaminants, wastes, toxic
                                   substances, hazardous substances, radioactive
                                   materials or genetically modified organisms,
                                   which are, have been or become regulated by
                                   any federal, state or local government
                                   authority including, without limitation, (i)
                                   petroleum or any fraction thereof, (ii)
                                   asbestos, (iii) any substance or material
                                   defined as a "hazardous substance" pursuant
                                   to (S) 101 of the Comprehensive Environmental
                                   Response, Compensation, and Liability Act (42
                                   U.S.C. (S) 9601), or (iv) any substance or
                                   material defined as a "hazardous chemical"
                                   pursuant to the federal Hazard Communication
                                   Standard (29 C.F.R. (S) 1910.1200) .

                         7.13.2    To the Sellers' knowledge, each Seller and
                                   Property are in full compliance with all
                                   applicable Environmental Laws, which
                                   compliance includes, but is not limited to,
                                   possession by each Seller of all permits and
                                   other governmental authorizations required
                                   under applicable Environmental Laws, and
                                   compliance with the terms and conditions
                                   thereof. No Seller has received any
                                   communication (written or oral), whether from
                                   a governmental authority, citizens group,
                                   employee or otherwise, that alleges that such
                                   Seller or Property is not in full compliance
                                   with the Environmental Laws, and, to the
                                   Sellers' best knowledge after due inquiry,
                                   there are no circumstances that may prevent
                                   or interfere with such full compliance in the
                                   future.

                                     -22-
<PAGE>
 
                    7.13.3         There is no Environmental Claim pending
                                   against any Seller or, to each Seller's best
                                   knowledge after due inquiry, against any
                                   person or entity whose liability for any
                                   Environmental Claim any Seller has retained
                                   or assumed either contractually or by
                                   operation of law, and no Seller has been
                                   notified by the appropriate authorities of
                                   the State of Maryland or the United States
                                   that any Environmental Claim may be brought
                                   against any Seller.

                    7.13.4         To the Sellers' knowledge, there are no past
                                   or present actions, activities,
                                   circumstances, conditions, events or
                                   incidents, including, without limitation, the
                                   release, emission, discharge, presence, or
                                   disposal of any Substance of Concern, at or
                                   relating to any of the Properties that could
                                   form the basis of any Environmental Claim
                                   against any Seller or, to each Seller's best
                                   knowledge after due inquiry, against any
                                   person or entity whose liability for any
                                   Environmental Claim any Seller has retained
                                   or assumed either contractually or by
                                   operation of law. In addition to the
                                   foregoing, Sellers are aware of the
                                   circumstances listed on Schedule 7.13.4 
                                                           ---------------
                                   that might have resulted in an Environmental
                                   Claim but for which Sellers have obtained a
                                   no action letter from the approptiate
                                   authority of State of Maryland.

                    7.13.5         Without in any way limiting the generality of
                                   the foregoing, to the best of any Seller's
                                   knowledge, (a) all on-site and off-site
                                   locations where any Seller has treated,
                                   disposed, or arranged for the disposal of
                                   Substances of Concern or stored hazardous
                                   wastes (as defined under the Resource
                                   Conservation and Recovery Act or analogous
                                   state laws) are identified in Schedule
                                                                 -------- 
                                   7.13.5(a); (b) all underground and
                                   ---------
                                   aboveground storage tanks, whether or not
                                   currently in use, and the capacity and
                                   contents of such tanks, located on any of the
                                   Properties are identified in Schedule
                                                                --------
                                   7.13.5(b), and, except as set forth in
                                   ---------
                                   Schedule 7.13.5(b), no underground or above
                                   ------------------
                                   ground storage tank that has been removed
                                   from any

                                     -23-
<PAGE>
 
                                   Property, or that is currently located at any
                                   Property, has leaked or is leaking; (c)
                                   except as set forth on Schedule 7.13.5(c),
                                                          ------------------
                                   there is no asbestos contained in or forming
                                   part of any building, building component,
                                   structure or office space on any Property;
                                   (d) no polychlorinated biphenyls (PCBs) are
                                   used or stored on any Property; (e) the
                                   Sellers have previously provided to the
                                   Company copies of all environmental audit
                                   reports, Phase I and Phase II investigation
                                   reports, technical reports regarding
                                   environmental sampling results, and similar
                                   environmental reports in the possession of
                                   the Sellers or their contractors or agents
                                   relating to any Property; and (f) all permits
                                   and other governmental authorizations
                                   currently held by any Seller for any Property
                                   pursuant to the Environmental Laws are
                                   identified in Schedule 7.13.5(f).
                                                 ------------------

               7.14   Insurance. Schedule 7.14 contains a complete and correct
                      ---------  ------------- 
description of all policies of insurance presently maintained by the Sellers
with respect to all Properties and the operations thereof. To the knowledge of
the Sellers, each Seller and Property is in compliance with the requirements of
each such policy, there is no violation of any of the provisions thereof, and
each such policy is in full force and effect. No Seller has received from any
insurance company which carries underwriters insurance on any Property, or any
Board of Fire Underwriters, any notice of any defect or inadequacy in connection
with any Property or its operation which, since the date of such notice, has not
been corrected.

               7.15   Compliance.  To each Seller's knowledge, each Seller, and 
                      ----------    
each Affiliate or Tenant of Seller, has complied in all material respects with
all laws, ordinances, rules, regulations and orders of all governmental
authorities applicable to the ownership, management, operation, construction,
maintenance and repair of any Property.

               7.16   Leases.
                      ------ 

                      7.16.1       Copies of all Leases for each of the
                                   Properties and all parts thereof, as amended
                                   through the date hereof have been made
                                   available to the Company and the Partnership;
                                   such copies are and shall be, in all material
                                   respects, true, accurate and complete records
                                   of all agreements and understandings with
                                   respect to the use or lease of all or any
                                   portion of any of the Properties or otherwise
                                   constituting

                                     -24-
<PAGE>
 
                                   Leases that are currently outstanding
                                   including all amendments and modifications
                                   thereto.

                    7.16.2         Schedule 2.1 contains a true, complete and
                                   ------------
                                   correct list of all current Leases for the
                                   Properties or any part thereof.

                    7.16.3         No Prior Occupant has an option or right of
                                   refusal to purchase any Property or any part
                                   thereof, except the tenant under the Price
                                   Lease.

                    7.16.4         Except as specified in the Estoppel Letter
                                   approved by the Company and sent to a Prior
                                   Occupant, no Prior Occupant is entitled to
                                   any rebate, concession, deduction or offset.

                    7.16.5         Except as specified in the Estoppel Letter
                                   approved by the Company and sent to a Prior
                                   Occupant, no Prior Occupant has paid any
                                   rent, additional rent or other charge of any
                                   nature for a period of more than thirty (30)
                                   days in advance.

                    7.16.6         No Prior Occupant has any claim or basis for
                                   any claim for reduction, deduction or set-off
                                   against the landlord or the rent under such
                                   Lease.

                    7.16.7         [Intentionally Omitted]

                    7.16.8         Except as set forth on Schedule 2.1, the
                                                          ------------        
                                   Seller is the landlord under the
                                   Leases.

               7.17 Service Contracts; Management Contracts.  Schedule 7.17 is 
                    ---------------------------------------   -------------
a list of all contracts affecting or pertaining to the Properties or the
business conducted on the Properties that have a monetary obligation of at least
$50,000 per year and are not cancellable without penalty by Sellers, or an
Affiliate or Tenant of Seller, upon notice of one year or less, including all
employment, union, purchase, service and maintenance agreements, leasing
agreements, listing agreements, equipment leases and any other agreements,
contracts, licenses and permits affecting or pertaining to the Properties or any
part thereof (the "Service Contracts"), and of all management contracts relating
to the Properties (the "Management Contracts"). No Seller is a party to any
licenses or leases of personal property or any other contracts or agreements,
written or oral, of any kind or character, relating to the management,
operation, maintenance or repair of any Property, or otherwise, except for the
Leases, the Service Contracts and the Management Contracts. The Sellers have
performed all obligations required to be performed by them and are not in
default under any

                                     -25-
<PAGE>
 
of the Service Contracts.  Each of the Service Contracts is in full force and
effect and constitutes the legal, valid and binding obligation of the respective
parties thereto, enforceable in accordance with its terms, and has not been
modified, amended or extended.  Each of the Management Contracts is in full
force and effect and constitutes the legal, valid and binding obligation of the
respective parties thereto, enforceable in accordance with its terms, and has
not been modified, amended or extended.

          7.18  Permits.  All permits, licenses, inspections and other approvals
                -------                                                         
from all applicable governmental authorities having jurisdiction over each
Seller and Property that are necessary in connection with the operation of the
use, ownership and operation of each Property as it is currently used, have been
obtained and are in full force and effect.

          7.19  Other Liabilities.  Schedule 7.19 hereto is a true, complete and
                -----------------   -------------                           
accurate description of all debts, liabilities and obligations of the Seller
relating to each of the Properties, but not including any Mortgage Debt.  Other
than the Mortgage Debt, there are no debts, liabilities or obligations (whether
known or unknown, disputed or undisputed, fixed, contingent or otherwise)
associated with or relating to any of the Properties, or secured by any of the
Properties, other than those specified and described on Schedule 7.19 hereto.
                                                        -------------        

          7.20  Tax Matters.  The Sellers have relied solely on their own 
                ----------- 
counsel for advice on any and all federal, state and local tax matters relating
to this Agreement and the transactions contemplated herein and have not relied
on any advice or representations of the Company, the Partnership, or their
counsel with respect to any federal, state and local tax matters relating to
this Agreement or the transactions contemplated herein.

          7.21  Taxes.  The Sellers have filed all federal, state and local tax
                -----                                                          
returns required to be filed by the Sellers.  With respect to any periods prior
to the Closing Date, each Seller (i) has no knowledge of any unpaid taxes that
would create a lien on any Property, and (ii) has paid in full all taxes and
assessments payable or is diligently pursing with the appropriate authority any
dispute such Seller has regarding any unpaid taxes or assessments as of the
Closing Date.

          7.22  Special Filings.  No Seller is required to submit any notice,
                ---------------                                              
report or other filing to any governmental or regulatory authority in connection
with the execution, delivery or performance of this Agreement or any document or
instrument executed and delivered in connection herewith or the consummation of
the transactions contemplated hereby other than the filing of the tax returns
required by the terms of this Agreement; and no consent, approval or
authorization of any governmental or regulatory authority is required to be
obtained by any Seller in connection with the execution, delivery or performance
of this Agreement or the consummation of the transactions contemplated hereby.

          7.23  Books and Records.  The books and records of each Seller with
                -----------------                                            
respect to each Property, all of which have been or will be made available to
the Company and the Partnership, are, and will be at all times until Closing,
complete and correct in all material respects. All of such books and records
shall be delivered to the Company prior to the Closing.

                                     -26-
<PAGE>
 
          7.24  No Brokers.  No Seller has dealt with any agent, broker or other
                ----------                                                      
person acting pursuant to express or implied authority of any Seller (each a
"Broker"), and no person or entity is entitled to a commission or finder's fee
in connection with the sale and purchase described by this Agreement or will be
entitled to make any claim against the Company, or the Partnership for a
commission or finder's fee by reason of any Seller having engaged such Broker.

          7.25  All Material Information.  With respect to all information,
                ------------------------                                   
statements, representations and warranties made herein, any agreements or
documents contemplated hereby, any schedules or exhibits hereto, and any
certificates or instruments delivered in connection herewith, the Sellers hereby
represent and warrant that no information, statement, representation or warranty
herein or therein contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances in which made, not misleading; or
necessary in order to provide the Partnership or the Company with true, accurate
and complete information. No Seller has knowledge or information of any facts,
circumstances or conditions which do or could (whether by the passage of time or
the giving of notice or both) materially and adversely affect any Property or
the operation of the business conducted thereon.

          7.26  Survival of Warranties, Representations and Covenants. The
                ----------------------  -----------------------------     
representations, warranties and covenants of Sellers made in this Agreement
shall survive the Closing and consummation of the transactions contemplated
hereby for a period of twenty-four (24) months from the date of this Agreement,
except that in the case of any claim arising out of the representantions or
warranties herein relating to Section 7.13 (Environmental Matters) and Section
7.21 (Taxes) they shall survive the closing in each case until the expiration of
the applicable statute of limitations. Nevertheless, so long as the Partnership
or the Company provides the Seller with written  notice of any breach, violation
or right to indemnification thereunder with the period ending twenty-four (24)
months after the date of this Agreement the representations, warranties and
covenants of the Seller relating to such notice shall remain in full force and
effect as to the matters covered in such notice.  After Closing, neither the
Company nor the Partnership shall prosecute any claim against any Seller for a
breach of the foregoing representations and warranties if the Company or the
Partnership obtained knowledge of such breach prior to Closing. The foregoing
representations and warranties shall not be affected by any investigation or
verification made by or on behalf of the Company or the Partnership.

          VIII. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE 
                -----------------------------------------------------    
PARTNERSHIP
- -----------

          The Partnership and the Company, jointly and severally, represent and
warrant to the Seller that the following are true, complete and correct as of
the date of this Agreement and as of the Closing:

                                     -27-
<PAGE>
 
               8.1  Organization, Good Standing and Qualification.  Each of the
                    ---------------------------------------------              
Company and the Partnership (i) is an entity duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization,
(ii) has all requisite power and authority to carry on its business and own or
lease and operate its assets and properties in the manner in which it is being
conducted and owned or leased and operated, as the case may be, and (ii) is duly
qualified to transact business and is in good standing in all jurisdictions
where its ownership, lease or operation of its properties or assets or the
conduct of its business requires such qualification.

               8.2  Authorization.  The execution and delivery of this Agreement
                    -------------                                         
and all agreements, documents and instruments contemplated hereby and the
performance of all transactions contemplated herein or therein, have been duly
and validly authorized by all requisite action by the Company and its board of
trustees; and by all requisite action of the Partnership. This Agreement and the
agreements, documents and instruments executed and delivered in connection
herewith constitute the legal, valid and binding obligation of each of the
Company and the Partnership, enforceable in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity) and except to the extent that rights to indemnification and sale and
purchase under or contemplated by this Agreement or such other agreements may be
limited by federal or state securities laws or public policy relating thereto.
To the knowledge of the Partnership, the Partnership is not required to obtain
any consent, authorization, approval or waiver from any governmental agency or
authority or from any third party in connection with the execution and delivery
of, and the performance of the obligations to be performed under, this Agreement
and the documents and instruments executed and delivered in connection herewith,
or if any of the foregoing is required, it has been obtained.

               8.3  No Violation.  The execution and delivery of this Agreement
                    ------------        
and the agreements, documents and instruments executed and delivered in
connection herewith, the consummation of the transactions hereby or thereby, and
the operation of any Property shall not: (i) conflict with, violate, or result
in a breach of, the terms, conditions or provisions of, or constitute a default
under, any agreement, contract, Mortgage, deed, lease, license, franchise or
instrument to which the Company or the Partnership is a party or is subject;
(ii) constitute a violation of any applicable code, resolution, law, statute,
regulation, ordinance, rule, judgment, decree or order to the Company or the
Partnership; or (iii) violate any provision of the organizational documents of
the Company or the Partnership.

               8.4  Tax Status.  As of the Closing, the Partnership will be 
                    ---------- 
qualified as a partnership for Federal income tax purposes, and the Company will
be qualified as a real estate investment trust organized under the laws of the
State of Maryland.

               8.5  No Litigation.  Neither the Partnership nor the Company is
                    -------------                                             
involved in any pending or, to its knowledge, threatened litigation that would
materially or adversely effect

                                     -28-
<PAGE>
 
its operations or financial condition or the ability to perform under this
Agreement or the Partnership Agreement.

               8.6  No Brokers.  Neither the Partnership nor the Company has 
                    ----------  
dealt with any agent, broker or other person acting pursuant to express or
implied authority of either such party, and no person or entity is entitled to a
commission or finder's fee in connection with the transactions contemplated by
this Agreement or will be entitled to make any claim against any Seller for a
commission or finder's fee by reason of the Company or the Partnership having
engaged him/her/it.

               8.7  Survival. The representations and warranties of the Company 
                    --------
and the Partnership made in this Section 8 shall survive the Closing and
consummation of the transactions contemplated hereby, for a period of twenty-
four (24) months from the date of this Agreement. Nevertheless, so long as the
Seller provides the Partnership or the Company with written notice of any
breach, violation or right to indemnification thereunder within the period
ending twenty-four (24) months after the date of this Agreement the
representations, warranties and covenants of the Partnership or the Company
relating to such notice shall remain in full force and effect as to the matters
covered in such notice. After Closing, the Seller shall not prosecute any claim
against the Company or the Partnership for a breach of the foregoing
representations and warranties if the Seller obtained knowledge of such breach
prior to Closing.


     IX.  COVENANTS
          ---------

               9.1  Covenants of the Company and the Partnership.  Each of the
                    --------------------------------------------              
Company and the Partnership hereby covenants as follows:

                    9.1.1     If this Agreement is terminated for any reason,
                              (a) the Partnership and the Company shall promptly
                              return to Sellers all materials furnished by
                              Sellers to the Partnership and the Company
                              pursuant to this Agreement, and (b) the
                              Partnership and the Company shall promptly restore
                              the Properties to substantially the same condition
                              in which they existed immediately before any
                              physical tests conducted by or on behalf of the
                              Partnership and the Company pursuant to the
                              purposes of this Agreement.

                    9.1.2     Prior to the Closing Date, except as may be
                              required to be disclosed by law (including federal
                              and state securities laws, and the rules and
                              regulations thereunder), regulation or legal
                              process, or unless otherwise consented to in
                              writing by the Sellers, 

                                     -29-
<PAGE>
 
                              which consent shall not be unreasonably withheld,
                              the Partnership and the Company shall keep all
                              information learned by the Partnership and the
                              Company in connection with the Properties or any
                              operation thereof confidential.

                    9.1.3     In connection with inspection of the Properties,
                              the Partnership and the Company shall not
                              unreasonably interfere with any Prior Occupants or
                              any Seller's business operations.

                    9.1.4     [Intentionally Omitted]

                    9.1.5     [Intentionally Omitted]

                    9.1.6     The parties acknowledge and agree that the Sellers
                              and their affiliates are required under this
                              Agreement and the Company Leases to provide to the
                              Company certain confidential financial information
                              (the "Confidential Information") with respect to
                              the business conducted on the Leased Properties.
                              The Company agrees to use the Confidential
                              Information solely for the purposes of monitoring
                              compliance with the terms of this Agreement and
                              the Company Leases, and the Confidential
                              Information shall be disclosed only to those of
                              the Company's employees, advisors and consultants
                              to whom it is necessary for such purposes.
                              Moreover, the Company will use its best efforts to
                              implement policies and procedures at the Board of
                              Trustees level so as to minimize the disclosure of
                              Confidential Information to Trustees having
                              interest in businesses that compete with the
                              Sellers and their affiliates.

                    9.1.7     Between the date of this Agreement and the Closing
                              Date, the Partnership and the Company will use
                              their best efforts to cause the conditions in this
                              Agreement to be satisfied.

               9.2  Covenants of the Sellers.  The Sellers hereby covenant and 
                    ------------------------
agree as follows:


                                     -30-
<PAGE>
 
                    9.2.1     If this Agreement is terminated as to all
                              Properties for any reason, the Sellers shall
                              promptly return to the Company or the Partnership,
                              as the case may be, all materials furnished by the
                              Company or the Partnership, to such Sellers
                              pursuant to this Agreement.

                    9.2.2     Each Seller shall keep all information relating to
                              the Partnership or the Company or any operation
                              thereof confidential; except that each Seller
                              shall not be required to keep confidential any
                              information (i) learned from public sources or
                              other third parties not bound to keep such
                              information about the Company or Partnership
                              confidential or (ii) that becomes public through
                              no disclosure of any Seller, its partners,
                              employees, agents or representatives.

                    9.2.3     In the event that facts or circumstances are
                              discovered or develop that could form the basis of
                              an Environmental Claim with respect to a specific
                              Property or Properties, the Seller(s) of such
                              Property or Properties shall take all actions
                              necessary to fully address such circumstances,
                              including, without limitation, providing notice to
                              appropriate governmental authorities; conducting
                              environmental studies, sampling and testing
                              procedures; taking remedial action; and modifying
                              operations or physical facilities to otherwise
                              eliminate potential liability and ensure full
                              compliance with the Environmental Laws. Without
                              limiting the foregoing, each Seller shall ensure
                              that it has identified any underground storage
                              tanks ("USTs") used in conjunction with its
                              operations and that all registration,
                              investigation, remedial action and technical
                              upgrade requirements have been complied with fully
                              in respect of each such UST.

                    9.2.4     Between the date of this Agreement and the Closing
                              Date, Sellers shall use their best efforts to
                              cause the conditions in this Agreement to be
                              satisfied.

               9.3  No Claim Against Property.  Each Seller hereby represents,
                    -------------------------                                 
warrants, covenants and agrees that, as of the Closing Date, each Seller: (i)
will have no claim of any kind or

                                     -31-
<PAGE>
 
nature against any Property by reason of the execution of this Agreement; (ii)
hereby waives, releases and discharges any claim it has or may have; and (iii)
shall not make any claim or bring any action against any Property or the Company
or the Partnership for or in respect thereof. Notwithstanding Section 7.26, this
representation, warranty, covenant and agreement shall survive the closing of
the transactions contemplated hereby and shall continue in effect.


          X.   DUE DILIGENCE PERIOD
               --------------------

               10.1  Due Diligence Period.  The period ending at the close of 
                     -------------------- 
the first business day after the date that is thirty (30) days from the date
hereof is referred to herein as the "Due Diligence Period." Notwithstanding the
foregoing, the Due Diligence Period (for purposes of the Title Commitments, UCC
Searches and Surveys) shall not end earlier than fifteen (15) business days
after Partnership receives the last of the Title Commitments, UCC Searches and
Surveys.

               10.2  Access to Properties and Materials. During the Due
                     ----------------------------------
Diligence Period and upon twenty-four (24) hours prior notice, the Company and
the Partnership and their agents, engineers, surveyors, appraisers, auditors,
counsel and other representatives shall have the right to enter upon the
Properties to inspect, examine, survey, obtain engineering inspections and
environmental studies, appraise, and otherwise do that which, in the opinion of
the Partnership and the Company, is necessary to determine the boundaries,
acreage and condition of the Properties and to determine the suitability of the
Properties for the uses intended by the Partnership (including, without
limitation, inspect, review and copy any and all documents in the possession or
control of Sellers, or their respective agents, contractors or employees, and
which pertain to the construction, ownership, title, use, occupancy or operation
of the Properties or any part thereof). During the Due Diligence Period, the
Sellers, at their expense and at such times as will not unreasonably interfere
with the business being conducted on the Property or hinder the Partnership's
due diligence review, shall make available to the Company and the Partnership
copies or originals of all of their respective books, files and records relating
in any way to the Properties, complete copies (or originals when requested) of
all title information and title insurance policies, easements, leases, brokerage
agreements, licenses, permits, surveys, zoning information, environmental
reports, structural reports, violation or default notices, contracts, tax bills
and assessments, information regarding pending or threatened claims, suits or
proceedings, and all consents and other documents required to be obtained for
the completion of the transactions contemplated hereunder.

               10.3  Adjustment Following Due Diligence.  If the Company or
                     ----------------------------------                    
Partnership reasonably determines that one or more representations or warranties
or any information included on any Schedule relating to any Property is
                                   --------                            
incomplete or inaccurate in any material respect (the "Non-Conforming
Property"), the Company shall have the option to: (a) proceed with the
transactions contemplated hereby, (b) declare this Agreement null and void in
which case no party shall have any rights or obligations under this Agreement,
or (c) terminate this Agreement with respect to such Non-Conforming Property and
proceed with the transactions hereby with respect to

                                     -32-
<PAGE>
 
the other Properties, in which case the Aggregate Purchase Price shall be
reduced by the Purchase Price of such Non-Conforming Property.


          XI.  DEFAULTS AND REMEDIES
               ---------------------

               11.1 Indemnification by Sellers.  The Sellers, jointly and 
                    --------------------------
severally (each, for purposes of Sections 11.1 and 11.2, a "Seller Indemnifying
Party"), shall indemnify, defend and hold harmless the Partnership, the Company
and their respective shareholders, partners, trustees, officers, agents,
representatives, employees, Affiliates, successors and assigns (collectively,
for purposes of this paragraph, the "Company Indemnified Parties") from and
against any and all losses, damages, claims, liabilities, actions, suits,
proceedings and costs and expenses of investigation or defense thereof,
including attorneys' fees payable as incurred, arising out of or relating to any
(a) misrepresentation or breach of warranty by any Seller or nonfulfillment of
any covenant or agreement to be performed or complied with by such Seller under
this Agreement and any agreement, document, instrument, certificate, schedule or
exhibit contemplated hereby; (b) untrue or incomplete statement of a material
fact contained in any statement or information provided by any Seller or based
on any omission to state therein a material fact required to be stated therein
or other information necessary to make the statements therein not misleading;
(c) any debts, liabilities or obligations (whether known or unknown, disputed or
undisputed, fixed, contingent or otherwise) associated with or relating to any
of the Sellers, their officers, directors, partners, trustees or Affiliates or
the Properties, or secured by any of the Sellers, or by any of the Properties,
except those specified on Schedule 7.19 hereto, including any obligations under
                          -------------                                        
any of the Leases, Service Contracts and Management Contracts, to the extent any
such obligation was to be performed prior to the Closing Date, or was to be
performed after the Closing Date as a result of a breach or default under any of
the Leases or Service Contracts by any Seller or its Affiliates prior to the
Closing Date; (d) any action taken, or any failure to act, by any Seller in
connection with this transaction and the transactions contemplated herein
constituting a breach of this Agreement or any agreement, document or instrument
contemplated hereby or a breach of a duty owed to any person, including, without
limitation, any action taken to redeem or otherwise liquidate the interest of
certain holders in anticipation of the transactions contemplated herein, to the
extent such action or failure to act results in a violation (or alleged
violation) of applicable laws or of the fiduciary duties owed to such holders;
(e) pollution or threat to human health or the environment, or any Environmental
Claim against any person or entity whose liability for such Environmental Claim
any Seller has assumed or retained either contractually or by operation of law,
that is related in any way to any of the Properties, including, without
limitation, all on-site and off-site activities relating to any of the
Properties involving Substances of Concern, and that occurred, existed, arises
out of conditions or circumstances that occurred or existed, or was caused, in
whole or in part, on or before the Closing Date, whether or not the pollution or
threat to human health or the environment, or the existence of any Environmental
Claim, is known to any Seller; (f) regardless of whether it arises as a breach
of any representation or warranty, any debts, liabilities or obligations of any
Seller (whether known or unknown, disputed or undisputed, fixed, contingent or
otherwise) of, associated with or relating to any asset or property other than
the Properties, except those specified on Schedule 7.19 hereto; and
                                          -------------            

                                     -33-
<PAGE>
 
(g) any and all damages and expenses incident to any of the foregoing or to the
enforcement of this Section 11.1.  Subject to Section 11.2.3 and notwithstanding
any other provision of this Agreement, neither the general partners nor the
limited partners of the Meyers Family Limited Partnership shall have any
liability under this Agreement beyond their [capital] interests in Seller.

                    11.2 Remedies.
                         -------- 

                         11.2.1    [Intentionally Omitted]

                         11.2.2    Each Seller Indemnifying Party shall be fully
                                   responsible and jointly and severally liable
                                   for any of the following and any and all
                                   losses, damages, claims, liabilities,
                                   actions, suits, proceedings and costs and
                                   expenses of defense thereof, including
                                   attorneys' fees payable as incurred, arising
                                   out of or relating to: (a) each
                                   representation and warranty made by each
                                   Seller hereunder relating to or associated
                                   with title such Seller's interest in any
                                   Property and such Seller's ability to convey
                                   such Seller's interest as contemplated by
                                   this Agreement; (b) regardless of whether it
                                   arises as a breach of any representation or
                                   warranty, any debts, liabilities or
                                   obligations (whether known or unknown,
                                   disputed or undisputed, fixed, contingent or
                                   otherwise) of, associated with or relating to
                                   any of the Sellers, or the Properties, or
                                   secured by any of the Sellers or by any of
                                   the Properties, except those specified on
                                   Schedule 7.19 hereto, and (c) regardless of
                                   -------------
                                   whether it arises as a breach of any
                                   representation or warranty, any debts,
                                   liabilities or obligations of the Sellers
                                   (whether known or unknown, disputed or
                                   undisputed, fixed, contingent or otherwise)
                                   of, associated with or relating to any other
                                   asset or property other than the Properties,
                                   except those specified on Schedule 7.19
                                                             -------------
                                   hereto.

                         11.2.3    Each Seller hereby represents, warrants,
                                   covenants and agrees that it presently has, a
                                   tangible net worth (such term meaning net
                                   worth exclusive of the value (if any) of
                                   goodwill, going concern value and similar
                                   assets, but inclusive of the value of shares
                                   of stock, interests in partnerships and other
                                   business enterprises and similar assets) of
                                   not less than the 

                                     -34-
<PAGE>
 
                                  Aggregate Purchase Price, minus all Mortgage
                                   Debt for all Properties being acquired by the
                                   Partnership pursuant to this Agreement; and
                                   each Seller, on behalf of itself and its
                                   successors, further covenants that it shall
                                   maintain a tangible net worth of no less than
                                   two million dollars ($2,000,000) (U.S.) for a
                                   period of no less than two (2) years
                                   following the Closing of the transactions
                                   contemplated herein; and Roy L. Meyers, Jr.
                                   and Charlotte Meyers, jointly and severally
                                   covenant that they shall personally cause the
                                   Sellers and their successors to maintain a
                                   tangible net worth of no less than two
                                   million dollars ($2,000,000) (U.S.) for a
                                   period of no less than two (2) years
                                   following the Closing of the transactions
                                   contemplated herein, and shall (to the extent
                                   of two million dollars ($2,000,000) (U.S.))
                                   jointly and severally indemnify the Company
                                   and the Partnership (according to Section
                                   11.1 hereto) for any and all breaches of the
                                   Sellers' representations, warranties and
                                   covenants hereunder for such two (2) year
                                   period if (i) the Sellers and/or their
                                   successors fail to maintain such tangible net
                                   worth or (ii) the Sellers and/or their
                                   successors file for bankruptcy (voluntarily
                                   or involuntarily), make an assignment for the
                                   benefit of creditors, or otherwise become
                                   insolvent; provided that, with respect only
                                   to the joint and several indemnity of Roy L.
                                   Meyers, Jr. and Charlotte Meyers, the
                                   combined recovery from Roy L. Meyers, Jr. and
                                   Charlotte Meyers and the Sellers shall not
                                   exceed two million dollars ($2,000,000 )
                                   (U.S.). The covenants contained in this
                                   Section 11.2.3 shall survive the Closing of
                                   the transactions contemplated by this
                                   Agreement.

                         11.3 Indemnification by the Company and the 
                              --------------------------------------     
Partnership. The Company and the Partnership (each, for purposes of this Section
- -----------
11.3, a "Company Indemnifying Party") shall indemnify, defend and hold harmless
each Seller and their respective shareholders, partners, directors, officers,
partners, agents, employees, Affiliates, successors and assigns (collectively,
for purposes of this paragraph, "Seller Indemnified Parties") from and against
any and all losses, damages, claims, liabilities, actions, suits, proceeds and
costs and expenses of defense therefore, including attorneys' fees payable as
incurred, arising out of or relating to any (a) misrepresentation or breach of
warranty by such Company Indemnifying Party or nonfulfillment of any covenant or

                                     -35-
<PAGE>
 
agreement to be performed or complied with by such Company Indemnifying Party
under this Agreement; (b) untrue or incomplete statement (or allegation by a
third party of an untrue or incomplete statement) of a material fact contained
in any statement or information provided by such Company Indemnifying Party or
based on any omission (or allegation by a third party of an untrue or incomplete
statement) to state therein a material fact required to be stated therein or
other information necessary to make the statements therein not misleading, to
the extent such alleged untrue or incomplete statement or omission was made with
the Company's or the Partnership's knowledge that the statement was untrue or
incomplete or omitted to state a material fact;  (c) any debts, liabilities or
obligations (whether known or unknown, disputed or undisputed, fixed, contingent
or otherwise) specified on Schedule 7.19 hereto or arising and incurred after
                           -------------                                     
the Closing Date (other than as a result of a breach by any Seller of any
representation, warranty, covenant or agreement hereunder), including the
obligations under any Service Contracts that survive the Closing Date, to the
extent any such obligation is to be performed after the Closing Date, except to
the extent any such obligation is to be performed after the Closing Date as a
result of a breach or default under any of the Leases or Service Contracts by
the Seller prior to the Closing Date; and (d) any and all damages and expenses
incident to any of the foregoing or to the enforcement of this Section 11.3.

               11.4  Indemnification Procedures. All claims for indemnification 
                     --------------------------     
under this Article 11 shall be asserted and resolved as follows:

                     11.4.1    In the event that any Seller Indemnified Party or
                               Company Indemnified Party (the "Indemnified
                               Party") has a Claim against any Seller
                               Indemnifying Party or Company Indemnifying Party
                               obligated to provide indemnification pursuant to
                               Sections 11.1 or 11.2 hereof, on the one hand, or
                               Section 11.3 hereof, on the other hand (the
                               "Indemnifying Party"), which does not involve a
                               claim being asserted against or sought to be
                               collected by a third party, the Indemnified Party
                               shall with reasonable promptness send a written
                               notice (the "Claim Notice") with respect to such
                               claim to the Indemnifying Party. If the
                               Indemnifying Party does not notify the
                               Indemnified Party within the fifteen days
                               thereafter (the "Notice Period") that the
                               Indemnifying Party disputes such claim, the
                               amount of such claim shall be deemed a liability
                               of the Indemnifying Party hereunder. In case an
                               objection is made in writing in accordance with
                               this Section 11.4.1, the Indemnified Party shall
                               have thirty (30) days to respond in a written
                               statement to the objection. If after such thirty
                               (30) day period there remains a dispute as to any
                               claims, the parties shall

                                     -36-
<PAGE>
 
                                   attempt in good faith for sixty (60) days to
                                   agree upon the rights of the respective
                                   parties with respect to each of such claims.
                                   If the parties should so agree, a memorandum
                                   setting forth such agreement shall be
                                   prepared and signed by both parties.

                         11.4.2    In the event that any claim for which the
                                   Indemnifying Party would be liable to an
                                   Indemnified Party hereunder is asserted, or
                                   any action or proceeding commenced, against
                                   an Indemnified Party by a third party, the
                                   Indemnified Party shall with reasonable
                                   promptness notify the Indemnifying Party of
                                   such claim, specifying the nature of such
                                   claim and the amount or the estimated amount
                                   thereof to the extent then feasible (which
                                   estimate shall not be conclusive of the final
                                   amount of such Claim) (the "Third Party Claim
                                   Notice"). The Indemnifying Party shall have
                                   30 days from the receipt of the Claim Notice
                                   (the "Third Party Notice Period") to notify
                                   the Indemnified Party (a) whether or not such
                                   party disputes the liability to the
                                   Indemnified Party hereunder with respect to
                                   such claim and (b) if such party does not
                                   dispute such liability, whether or not the
                                   Indemnifying Party desires, at the sole cost
                                   and expense of the Indemnifying Party, to
                                   defend against such claim, provided that such
                                   party is hereby authorized (but not
                                   obligated) prior to and during the Third
                                   Party Notice Period to file any motion,
                                   answer or other pleading and to take any
                                   other action which the Indemnifying Party
                                   shall deem necessary or appropriate to
                                   protect the Indemnifying Party's interests.
                                   In the event that the Indemnifying Party
                                   notifies the Indemnified Party within the
                                   Third Party Notice Period that the
                                   Indemnifying Party does not dispute the
                                   Indemnifying Party's obligation to indemnify
                                   hereunder and desires to defend the
                                   Indemnified Party against such claim, except
                                   as hereinafter provided, such party shall
                                   have the right to defend by appropriate
                                   proceedings. No non-monetary settlement of
                                   any such matter shall be entered into without
                                   the written consent of the Indemnified 

                                     -37-
<PAGE>
 
                                   Party, which consent shall not be
                                   unreasonably withheld; provided that, unless
                                   the Indemnified Party otherwise agrees in
                                   writing, such party may not settle any matter
                                   (in whole or in part) unless such settlement
                                   includes a complete and unconditional release
                                   of the Indemnified Party. If the Indemnified
                                   Party desires to participate in, but not
                                   control, any such defense or settlement the
                                   Indemnified Party may do so at its sole cost
                                   and expense. If the Indemnifying Party elects
                                   not to defend the Indemnified Party against
                                   such claim, whether by failure of such party
                                   to give the Indemnified Party timely notice
                                   as provided above or otherwise, then the
                                   Indemnified Party, without waiving any rights
                                   against such party, may settle or defend
                                   against any such claim in the Indemnified
                                   Party's sole discretion and the Indemnified
                                   Party shall be entitled to recover from the
                                   Indemnifying Party the amount of any
                                   settlement or judgment to the extent the
                                   Indemnified Party is entitled to
                                   indemnification and, on an ongoing basis, all
                                   indemnifiable costs and expenses of the
                                   Indemnified Party with respect thereto,
                                   including interest from the date such costs
                                   and expenses were incurred.

                         11.4.3    If at any time, in the reasonable opinion of
                                   the Indemnified Party, notice of which shall
                                   be given in writing to the Indemnifying
                                   Party, any such claim seeks material
                                   prospective or other relief which could have
                                   a materially adverse effect on the assets,
                                   liabilities, financial condition, results of
                                   operations or business prospects of any
                                   Indemnified Party or in the reasonable
                                   opinion of counsel for the Indemnified Party
                                   a conflict exists, the Indemnified Party
                                   shall have the right to control or assume (as
                                   the case may be) the defense of any such
                                   claim and the amount of any judgment or
                                   settlement and the reasonable costs and
                                   expenses of defense shall be included as part
                                   of the indemnification obligations of the
                                   Indemnifying Party hereunder. If the
                                   Indemnified Party should elect to exercise
                                   such right, the Indemnifying Party shall have
                                   the right to participate in, but not control,
                                   the defense of such

                                     -38-
<PAGE>
 
                                   claim or demand at the sole cost and expense
                                   of the Indemnifying Party.

                         11.4.4    Nothing herein shall be deemed to prevent the
                                   Indemnified Party from making a claim, and an
                                   Indemnified Party may make a claim hereunder,
                                   for potential or contingent claims or demands
                                   provided the Claim Notice or Third Party
                                   Claim Notice, as the case may be, sets forth
                                   the specific basis for any such potential or
                                   contingent claim or demand to the extent then
                                   feasible and the Indemnified Party has
                                   reasonable grounds to believe that such a
                                   claim or demand may be made.

                         11.4.5    The Indemnified Party's failure to give
                                   reasonably prompt notice as required by this
                                   Section 11.4 of any actual, threatened or
                                   possible claim, demand, action or proceeding
                                   which may give rise to a right of
                                   indemnification hereunder shall not relieve
                                   the Indemnifying Party of any liability which
                                   the Indemnifying Party may have to the
                                   Indemnified Party unless the failure to give
                                   such notice materially and adversely
                                   prejudiced the Indemnifying Party or
                                   increases the amount of indemnification which
                                   the Indemnifying Party is obligated to pay
                                   hereunder. In any such event, the amount of
                                   indemnification which the Indemnified Party
                                   will be entitled to receive hereunder shall
                                   be reduced to an amount which the Indemnified
                                   Party would have been entitled to receive had
                                   such notice been timely.


          XII. MISCELLANEOUS
               -------------

               12.1 Assignment.  Neither this Agreement nor any interest 
                    ----------
hereunder may be assigned or transferred by any Seller without the prior written
consent of the Company or the Partnership. As of the Closing Date, theCompany or
the Partnership may assign, transfer or demise any or all of its interest in any
Property to any Affiliate (the "Permitted Transferees") without the prior
consent of the Sellers.

               12.2 Entire Agreement.  Any prior agreement or understanding 
                    ----------------
among the parties concerning the subject matter hereof is hereby superseded.
This Agreement constitutes the

                                     -39-
<PAGE>
 
entire agreement among the parties with respect to the subject matter hereof and
the transactions contemplated herein and shall not be modified or amended except
in a written document signed by all of the parties hereto.

          12.3 Notices.  All notices or other communications required or
               -------                                                  
permitted under this Agreement shall be in writing and delivered personally or
by registered or certified mail, return receipt requested, postage prepaid, or
by a nationally recognized overnight courier (such as Federal Express) with
receipted delivery.  Notices to the parties shall be addressed as follows:

     If to the Sellers:

     Meyers Family Limited Partnership
     c/o Good News Salisbury, Inc.
     2013 N. Salisbury Blvd.
     Salisbury, Maryland 21801
     Attention: Roy L. Meyers, Jr.

with a copy to:

     Webb, Burnett, Jackson, Cornbrooks, Wilbur, Vorhis & Douse
     115 Broad Street
     P.O. Box 910
     Salisbury, Maryland  21803-0910
     Attention: David A. Vorhis, Esq.
 
If to the Partnership or to the Company:

     Capital Automotive REIT
     1925 North Lynn Street
     Suite 306
     Arlington, Virginia 22209
     Attention: Thomas D. Eckert, President and Chief Executive Officer

With a copy to:

     Wilmer, Cutler & Pickering
     2445 M Street, N.W.
     Washington, DC  20037
     Attention: George P. Stamas, Esq.

     All notices given in accordance with the terms hereof shall be deemed
effective (a) if delivered in person or by overnight courier, on the business
day it is delivered, and (b if sent by registered or certified mail, three (3)
business days after deposit with the U.S. mail.  Any party hereto

                                     -40-
<PAGE>
 
may change its address by written notice to all parties hereto sent in
accordance with the terms of this Section and any such Notice of change of
address shall be effective five (5) days after delivery.

          12.4 Governing Law.  This Agreement shall be governed and interpreted
               -------------                                                   
in accordance with the laws of the Commonwealth of Virginia without regard to
its principles of conflicts of laws, and any action brought under or arising out
of this Agreement or the matters relating hereto shall be submitted to the
jurisdiction of the United States District Court for the Eastern District of
Virginia.  Each party acknowledges and agrees to such jurisdiction.

          12.5 Litigation Costs.  If there is any legal action or proceeding
               ----------------                                             
between the parties hereto arising from or based upon this Agreement, the
unsuccessful party to such action or proceeding shall pay to the prevailing
party all litigation costs and expenses, including reasonable attorneys' fees,
incurred by such prevailing party in such action or proceeding and in any appeal
in connection therewith, and if such prevailing party recovers a judgment in any
such action, proceeding or appeal, such costs, expenses and attorneys' fees
shall be included in as part of such judgment.

          12.6 Counterparts.  This Agreement may be executed in any number of
               ------------                                                  
identical counterparts, any or all of which may contain the signatures of fewer
than all of the parties but all of which shall be taken together as a single
instrument.

          12.7 Offer and Acceptance.  This Agreement constitutes an offer by the
               --------------------                                             
Company and the Partnership which must be accepted, by delivery to the Company
of a duly signed and completed signature page hereof, by all of the Sellers
within five (5) days after the date this Agreement is signed by the Company and
the Partnership.  If, within such time period, less than all of the persons
owning any interest in a Seller shall have signed this Agreement, then the
Seller and the Property owned by such Seller shall, at the sole option of the
Company, be excluded from the sale and purchase hereunder, this Agreement shall
remain in full force and effect as to the other Sellers and Properties, and an
appropriate adjustment shall be made with respect to the relevant Property, in
which case the Aggregate Purchase Price shall be reduced by the Purchase Price
of such Property as provided in this Agreement; if after the expiration of such
time period all of the Sellers execute this Agreement, the Company, at its sole
option, may elect to re-include, or may continue to exclude, any such Seller and
Property.



               [Remainder of this page left intentionally blank]

                                     -41-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal, with the intention that it be a sea ed instrument, as of the date
set forth above.

WITNESS                                 CAPITAL AUTOMOTIVE REIT
 
 
By:    /s/ David S. Kay                 By:    /s/ Thomas D. Eckert (SEAL)
Name:  David S.Kay                      Name:  Thomas D. Eckert
Title: Vice President and Chief         Title: President and Chief Executive 
       Financial Officer                       Officer
   
                                        CAPITAL AUTOMOTIVE L.P.
 
WITNESS                                 By: Capital Automotive REIT, as General
                                            Partner       
  
By:    /s/ David S. Kay                 By:    /s/ Thomas D. Eckert (SEAL)
Name:  David S.Kay                      Name:  Thomas D. Eckert
Title: Vice President and Chief         Title: President and Chief Executive 
       Financial Officer                       Officer 
WITNESS                                 SELLER:   MEYERS FAMILY LIMITED
                                                  PARTNERSHIP, a Maryland
                                                  limited partnership
 
By:    /s/ David A. Vorhis              By:    /s/ Roy L. Meyers, Jr. (SEAL)
Name:  David A. Vorhis                  Name:  Roy L. Meyers, Jr.
Title: Counsel                          Title: General Partner
                                        Address: 2013 N. Salisbury Blvd.
                                                 Salisbury, Maryland 21801
                                        Telephone #: 410-749-3215
                                        Facsimile #: 410-749-3195
                                        Social Security # or TIN: 52-1915371



                    [SIGNATURES CONTINUED ON FOLLOWING PAGE]

                                     -42-
<PAGE>
 
WITNESS                            SELLER:   MEYERS FAMILY LIMITED 
                                             PARTNERSHIP, a Maryland limited 
                                             partnership

 
By:    /s/ David A. Vorhis         By:    /s/ Charlotte Meyers (SEAL) 
Name:  David A. Vorhis             Name:  Charlotte Meyers            
Title: Counsel                     Title: General Partner              
                                   Address: 2013 N. Salisbury Blvd.
                                            Salisbury, Maryland 21801
                                   Telephone #: 410-749-3215
                                   Facsimile #: 410-749-3195
                                   Social Security # or TIN: 52-1915371


                                   SIGNING INDIVIDUALLY AS TO SECTION 11.2.3


                                   By: /s/ Roy L. Meyers, Jr.
                                   Name: Roy L. Meyers, Jr.


                                   By: /s/ Charlotte Meyers
                                   Name: Charlotte Meyers

                                     -43-
<PAGE>
 
                                 EXHIBIT 2.4(A)
                      (FORM OF GOOD NEWS LEASE AGREEMENT)



                                LEASE AGREEMENT
                                ---------------

                                    BETWEEN
                                    -------

                       CAPITAL AUTOMOTIVE L.P., LANDLORD
                       ---------------------------------

                                      AND
                                      ---

                       GOOD NEWS SALISBURY, INC., TENANT
                       ---------------------------------


                            DATED: JANUARY 10, 1998

                                     -45-
<PAGE>
 
<TABLE>
<S>                                                                                     <C> 
ARTICLE I
          LEASE AGREEMENT, LEASED PROPERTY AND TERM..................................    1
          1.01  Lease Agreement......................................................    1
          1.02  Contingent Upon Acquisition of the Leased Property...................    2
          1.03  Term.................................................................    2
          1.04  Holding Over.........................................................    3
          1.05  Surrender............................................................    3

ARTICLE II
          RENT.......................................................................    4
          2.01  Base Rent............................................................    4
          2.02  Payment..............................................................    4
          2.03  Security Deposit.....................................................    4
          2.04  Base Annual Rent Adjustment..........................................    5
          2.05  Additional Rent......................................................    5
          2.06  Place(s) of Payment of Rent; Direct Payment of Additional Rent.......    5
          2.07  Net Lease............................................................    5
          2.08  No Termination, Abatement, Etc.......................................    5

ARTICLE III
          IMPOSITIONS AND UTILITIES..................................................    6
          3.01  Payment of Impositions...............................................    6
          3.02  Definition of Impositions............................................    7
          3.03  Utilities............................................................    8
          3.04  Escrow of Impositions................................................    8
          3.05  Discontinuance of Utilities..........................................    9
          3.06  Liens................................................................    9

ARTICLE IV
          INSURANCE..................................................................    9
          4.01  Insurance............................................................    9
          4.02  Insurance Limits.....................................................   11
          4.03  Insurance Requirements...............................................   11
          4.04  Replacement Cost.....................................................   12
          4.05  Blanket Policy.......................................................   12
          4.06  No Separate Insurance................................................   12
          4.07  Waiver of Subrogation................................................   12
          4.08  Mortgages............................................................   13
          4.09  Other Insurance Requirements.........................................   13
</TABLE>
<PAGE>
 
<TABLE>
<S>                                                                                <C>
   ARTICLE V
   INDEMNITY; SUBSTANCES OF CONCERN............................................... 13
         5.01             Tenant's Indemnification................................ 13
         5.02             Substances of Concern................................... 14
         5.03             Audits.................................................. 16
         5.04             Landlord's Option Re: Compliance........................ 17
         5.05             Environmental Indemnification........................... 17
         5.06             Tenant's Cleanup Obligation............................. 17
         5.07             Existing Environmental Conditions....................... 18
         5.08             Survival of Tenant's Obligations........................ 18

ARTICLE VI
         USE AND ACCEPTANCE OF PREMISES........................................... 18
         6.01             Use of Leased Properties................................ 18
         6.02             Acceptance of Leased Properties......................... 19
         6.03             Conditions of Use and Occupancy......................... 19
         6.04             Financial Statements and Other Information.............. 19

ARTICLE VII
         REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS...................... 20
         7.01             Maintenance............................................. 20
         7.02             Compliance with Laws.................................... 20
         7.03             Required Alterations.................................... 21
         7.04             Mechanics' Liens........................................ 21
         7.05             Replacements of Fixtures................................ 21
         7.06             Encroachments; Restrictions............................. 22

ARTICLE VIII
         ALTERATIONS AND SIGNS; TENANT'S PROPERTY;CAPITAL ADDITIONS
         TO THE LEASED PROPERTIES................................................. 22
         8.01             Tenant's Right to Construct............................. 22
         8.02             Scope of Right.......................................... 23
         8.03             Cooperation of Landlord................................. 23
         8.04             Commencement of Construction............................ 23
         8.05             Rights in Tenant Improvements........................... 24
         8.06             Personal Property....................................... 25
         8.07             Requirements for the Tenant's Personal Property......... 25
         8.08             Financings of Capital Additions to a Leased Property.... 26

ARTICLE IX
         DEFAULTS AND REMEDIES.................................................... 27
         9.01             Events of Default....................................... 27
</TABLE>

                                     -ii-
<PAGE>
 
<TABLE>
<S>                                                                                <C>
          9.02                Remedies............................................ 29
          9.03                Right of Set-Off.................................... 32
          9.04                Performance of Tenant's Covenants................... 32
          9.05                Late Charge......................................... 32
          9.06                Litigation; Attorneys' Fees......................... 32
          9.07                Remedies Cumulative................................. 33
          9.08                Escrows and Application of Payments................. 33
          9.09                Power of Attorney................................... 33

ARTICLE X
          DAMAGE AND DESTRUCTION.................................................. 34
          10.01               General............................................. 34
          10.02               Landlord's Inspection............................... 35
          10.03               Landlord's Costs.................................... 35
          10.04               Rent Abatement...................................... 35
          10.05               [Intentionally Omitted]............................. 35
          10.06               Damage Near End of Term............................. 36
          10.07               Risk of Loss........................................ 36

ARTICLE XI
          CONDEMNATION............................................................ 36
          11.01               Total Taking........................................ 36
          11.02               Partial Taking...................................... 36
          11.03               Restoration......................................... 37
          11.04               Landlord's Inspection............................... 37
          11.05               Award Distribution.................................. 37
          11.06               Temporary Taking.................................... 38

ARTICLE XII
          ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS.......... 38
          12.01               Organization and Qualification...................... 38
          12.02               Material Agreements................................. 39
          12.03               Changes in Condition................................ 40
          12.04               Franchises, Licenses, etc........................... 40
          12.05               Litigation.......................................... 40
          12.06               Authorization and Enforceability.................... 40
          12.07               No Legal Obstacle to Lease.......................... 41
          12.08               Certain Business Representations.................... 41
          12.09               Certain Financial Covenants......................... 42
          12.10               Cash Flow Coverage Ratio Covenant................... 42
          12.11               Disclosure.......................................... 43
          12.12               Covenant Not to Acquire............................. 43
</TABLE>
 
                                     -iii-
<PAGE>
 
<TABLE>
<S>                                                                                    <C>
ARTICLE XIII
          ASSIGNMENT AND SUBLETTING; ATTORNMENT....................................... 43
          13.01               Prohibition Against Subletting and Assignment........... 43
          13.02               Changes of Control...................................... 44
          13.03               Operating/Service Agreements............................ 44
          13.04               Assignment.............................................. 45
          13.05               REIT Limitations........................................ 45
          13.06               Attornment.............................................. 46
          13.07               Severance and Spin-Off.................................. 47

ARTICLE XIV
          ARBITRATION................................................................. 47
          14.01               Controversies........................................... 47
          14.02               Appointment of Arbitrators.............................. 47
          14.03               Arbitration Procedure................................... 48
          14.04               Expenses................................................ 48
          14.05               Enforcement of the Arbitration Award.................... 48

ARTICLE XV
          QUIET ENJOYMENT, SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATES...........  48
          15.01               Quiet Enjoyment.........................................  48
          15.02               Landlord Mortgages; Subordination.......................  48
          15.03               Attornment..............................................  49
          15.04               Estoppel Certificates...................................  49
          15.05               Waiver of Landlord's Lien...............................  50

ARTICLE XVI
          RIGHT OF FIRST OFFER........................................................  51
          16.01               Right of First Offer During Lease Term or
                              Extension Term..........................................  51
          16.02               Right to Purchase at End of an Extension Term...........  52

ARTICLE XVII
          MISCELLANEOUS...............................................................  53
          17.01               Notices.................................................  53
          17.02               Advertisement of a Leased Property......................  54
          17.03               Landlord's Access.......................................  54
          17.04               Entire Agreement........................................  54
          17.05               Severability............................................  55
          17.06               Captions and Headings...................................  55
          17.07               Governing Law...........................................  55
</TABLE>

                                     -iv-
<PAGE>
 
<TABLE>
          <S>                                                                                  <C>
          17.08             Memorandum of Lease or Certain Rights Under the Lease............  55
          17.09             Waiver...........................................................  55
          17.10             Assignment; Binding Effect.......................................  55
          17.11  Consents and Approvals......................................................  55
          17.12  Single Property.............................................................  56
          17.13             Modification.....................................................  56
          17.14  Incorporation by Reference..................................................  56
          17.15             No Merger........................................................  56
          17.16             Force Majeure....................................................  56
          17.17             Laches...........................................................  56
          17.18             Waiver of Jury Trial.............................................  56
          17.19             Permitted Contests...............................................  57
          17.20             Construction of Lease............................................  57
          17.21             Counterparts.....................................................  58
          17.22             Relationship of Landlord and Tenant..............................  58
</TABLE>

                                      -v-
<PAGE>
 
                                   SCHEDULES

     A              Leased Properties and Initial Base Rent
     B              Permitted Liens
     12.02          Material Agreements
     12.03          Changes in Condition


                                    EXHIBITS

     2.02           Payment Account Information
     2.04           Base Annual Rent Adjustment
     5.07           Environmental Reports
     15.02          Form of Subordination and Non-Disturbance Agreement

                                     -vi-
<PAGE>
 
                                LEASE AGREEMENT

     This Lease Agreement ("Lease") dated as of the 10th day of January,
1998 by and between CAPITAL AUTOMOTIVE L.P., a Delaware limited partnership
("Landlord"), having its principal office at 1925 North Lynn, Suite 306,
Arlington, Virginia 22209 and Good News Salisbury, Inc., a Maryland corporation,
having its principal office at 2013 N. Salisbury Blvd., Salisbury, Maryland
21801 ("Tenant").

                                    RECITALS

     WHEREAS, Tenant or an Affiliate (as hereafter defined) has conveyed or will
convey to Landlord certain parcels of real estate and improvements thereon upon
which Tenant engages in motor vehicle retail and/or motor vehicle related
businesses (the "Business"), which parcels of real estate and improvements
thereon are described on Schedule A attached hereto and incorporated herein by
                         ----------                                           
reference (each hereinafter a "Leased Property" or collectively, the "Leased
Properties"), and Landlord and Tenant desire to provide for the lease by
Landlord to Tenant of the Leased Properties; and

     WHEREAS, Landlord and Tenant desire that each of the Leased Properties
shall be the subject of this Lease and be used by Tenant in its operation of the
Business; and

     WHEREAS, this Lease provides that additional real estate and improvements
thereon may be made subject to the operation and effect of this Lease, upon
execution by Landlord and Tenant of a Lease Supplement designating each such
additional property as a Leased Property hereunder.

     NOW, THEREFORE, in consideration of the foregoing premises and of their
respective agreements and undertakings herein, and of other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged,
Landlord and Tenant agree as follows:

                                   ARTICLE I
                   LEASE AGREEMENT, LEASED PROPERTY AND TERM

     1.01     Lease Agreement.  Landlord does hereby let and lease unto Tenant,
              ---------------                                                  
and Tenant does hereby take and hire from Landlord, the Leased Properties, which
shall respectively consist of:

     (a)      The parcels of land described and located at the addresses listed
              in Schedule A hereto, as more particularly described therein,
                 ----------
              together with any additional parcels of real estate and
              improvements thereon subsequently designated as a Leased Property
              by the parties pursuant to a Lease Supplement as provided for
              herein, together with all rights, titles, appurtenant interests,
              covenants, licenses, privileges and benefits thereto belonging,
              and any easements, rights-of-way, rights of ingress or egress or
              other interests in, on, or to any land, highway, street, road or
              avenue, open or proposed, in, on, across, in
<PAGE>
 
                    front of, abutting or adjoining such real property
                    including, without limitation, any strips and gores adjacent
                    to or lying between such real estate and any adjacent real
                    estate (the "Land");

          (b)       All buildings, improvements, structures and Fixtures (as
                    hereinafter defined) now located or to be located or to be
                    constructed on the Land, including, without limitation,
                    sidewalks, landscaping, parking lots and structures, roads,
                    drainage and all above ground and underground utility
                    structures and conduits (on-site or off-site), equipment
                    systems and other so-called "infrastructure" improvements
                    (the "Improvements");

          (c)       All equipment, machinery, fixtures, and other items of real
                    and/or personal property, including all components thereof,
                    located in, on or used in connection with, and permanently
                    affixed to or incorporated into, the Improvements,
                    including, without limitation, all furnaces, boilers,
                    heaters, electrical equipment, heating, plumbing, lighting,
                    ventilating, refrigerating, incineration, air and water
                    pollution control, waste disposal, air-cooling and air-
                    conditioning systems and apparatus, sprinkler systems and
                    fire and theft protection equipment, and similar systems,
                    all of which, to the greatest extent permitted by law, are
                    hereby deemed to constitute real estate, together with all
                    replacements, modifications, alterations and additions
                    thereto (collectively the "Fixtures"); and

          (d)       All easements, rights and appurtenances relating to the Land
                    and the Improvements.

          SUBJECT, HOWEVER, to the liens, encumbrances, restrictions,
agreements, and other title matters listed or specifically referred to in
Schedule B ("Permitted Exceptions").
- ----------

          The Leased Properties shall however exclude all furniture, equipment,
inventory and items of moveable personal property attached to the Land or
Improvements that relate to the business being conducted on the Leased Property
which items may readily be removed without material damage to the Land and
Improvements whether or not such items might legally be considered to be
"fixtures" (all of which are owned by Tenant and shall hereinafter be defined as
the "Excluded Personal Property").

          1.02     Contingent Upon Acquisition of the Leased Property. In the
                   --------------------------------------------------   
event this Lease is executed prior to the conveyance by Tenant or an Affiliate
of the Leased Property to Landlord, the parties acknowledge that the
effectiveness of this Lease in respect of such Leased Property is contingent
upon the closing of such conveyance (the "Commencement Date").

          1.03     Term. The initial term of this Lease (the "Term") shall be
                   ----
for a fixed term of One Hundred and Twenty (120) months commencing on the
Commencement Date. The initial term

                                      -2-
<PAGE>
 
for any Leased Property designated in a Lease Supplement shall begin on the date
of such Lease Supplement and expire at the end of the Term or then current
Extension Term (as hereafter defined), as the case may be.  Tenant shall have
the right to extend this Lease for the Leased Properties as a group, at Tenant's
option, for one One Hundred and Twenty (120) month renewal term from the
expiration of the Term (the "First Extension Term"), provided that no Event of
Default (as defined in Section 9.01 hereof) shall exist and be continuing.  In
addition, Tenant shall have the right to extend this Lease for the Leased
Properties as a group at Tenant's option, for a second One Hundred and Twenty
(120) month renewal term from the expiration of the First Extension Term (the
"Second Extension Term", each an "Extension Term", and collectively with the
First Extension Term, the "Extension Terms") provided that no Event of Default
(as defined in Section 9.01 hereof) shall exist and be continuing.  Tenant shall
exercise the First Extension Term by written notice to Landlord no later than
twelve months prior to the end of the Term.  Tenant shall exercise the Second
Extension Term by written notice to Landlord no later than twelve (12) months
prior to the end of the First Extension Term.  Notwithstanding anything else to
the contrary in this Agreement, the Rent during the Second Extension Term shall
be the Fair Market Rent (as hereafter defined) for the Leased Property.  Fair
Market Rent shall be determined as soon as possible after receipt by Landlord of
Tenant's notice of option exercise, on the basis of appraisals of independent
appraisers selected in accordance with the provisions of Section 16.02(b).
Tenant shall have the right, in its sole discretion, to rescind the exercise of
Tenant's option to extend the Lease for the Second Extension Term during a
period of five (5) business days after the determination of the Fair Market
Rent.  If Tenant shall fail to exercise the right to rescind within such five
(5) day period, the election to extend shall be irrevocable and the Fair Market
Rent so determined shall be the Base Annual Rent during the Second Extension
Term notwithstanding any changes in the market rental rates, whether upward or
downward, which may occur after such determination.  However, notwithstanding
anything else in this Agreement, Fair Market Rent shall become the Base Annual
Rent for the Second Extension Term (as defined hereafter) and shall be subject
to Base Annual Rent Adjustments as set forth in Section 2.04.

      1.04     Holding Over.  Should Tenant, without the express consent of
               ------------                                                
Landlord, continue to hold and occupy any Leased Property after the expiration
or earlier termination of the Term or any Extension Term, as the case may be,
such holding over beyond the Term and the acceptance or collection of Rent (as
defined hereinafter) by Landlord shall operate and be construed as creating a
tenancy from month-to-month and not for any other term whatsoever.  During any
such holdover period Tenant shall pay to Landlord for each month (or portion
thereof) Tenant remains in such Leased Property, in lieu of the Base Annual Rent
(as defined hereafter) for such Leased Property, an amount equal to the sum of
one-twelfth (1/12) of (i) one hundred seven percent (107%) of such Base Annual
Rent (the "Holdover Rate"), and (ii) as applicable, one hundred percent (100%)
of the Additional Rent (as defined hereinafter) for such Leased Property and
Other Additional Rent (as defined hereinafter) for such Leased Property, each as
in effect on the expiration date.  Said month-to-month tenancy may be terminated
by Landlord by giving Tenant thirty (30) days written notice, and at any time
thereafter Landlord may re-enter and take possession of such Leased Property.

                                      -3-
<PAGE>
 
      1.05     Surrender.  Except as a result of (a) Tenant Improvements and
               ---------                                                    
Capital Additions (as defined hereinafter); (b) normal and reasonable wear and
tear (subject to the obligation of Tenant to maintain each Leased Property in
good order and repair during the Term); and (c) casualty, taking or other damage
and destruction not required to be repaired by Tenant, Tenant shall surrender
and deliver up each Leased Property at the expiration or termination of the Term
or the Extension Term therefor, as the case may be, broom clean, in good order
and repair, free of the Excluded Personal Property and any additional items of
Tenant's personal property (together with the Excluded Personal Property, the
"Tenant's Personal Property"), all of which Tenant shall remove prior to such
surrender and delivery.


                                   ARTICLE II
                                      RENT

      2.01     Base Rent.  Tenant shall pay Landlord annual base rent (the "Base
               ---------                                                        
Annual Rent") as to the Leased Property for each year during the Term or the
Extension Term (each such year a "Lease Year"), which Base Annual Rent shall be
subject to upward adjustment pursuant to Section 2.04.  In the first Lease Year,
Base Annual Rent shall be in the amount set forth on Schedule A (the "Initial
                                                     ----------              
Base Annual Rent"), paid to Landlord in twelve equal monthly installments.

      2.02     Payment.  Tenant shall pay Landlord the Base Annual Rent as to
               -------                                                       
the Leased Property for each Lease Year, without notice, demand, set-off or
counterclaim in advance, in lawful money of the United States of America and
payable in consecutive monthly installments commencing on the Commencement Date
and thereafter on the first day of each month during the Term.  Tenant will, to
the extent that such method of payment is compatible with its business
practices, make such payments by direct deposit of immediately available funds
to the account set forth in Exhibit 2.02 (which Exhibit 2.02 may be modified by
                            ------------        ------------                   
Landlord from time to time upon Notice (as hereafter defined) to Tenant).

      2.03     Security Deposit.  Prior to the Commencement Date, Tenant shall
               ----------------                                               
deliver to Landlord an amount equal to one-twelfth (1/12th) of the Base Annual
Rent, which amount shall be held by Landlord as security (the "Security
Deposit") for the performance of Tenant's payment and other obligations under
this Lease.  Upon an Event of Default and the continuance thereof, Landlord
shall have the right, but not the obligation, to apply the Security Deposit as
set forth in Section 9.08. Landlord shall return the Security Deposit, without
interest, after expiration of this Lease, if Tenant has fully and faithfully
carried out all of the terms, covenants and conditions hereof.  In the event
that Landlord eliminates its standard business policy of requiring security
deposits from tenants, then Landlord shall refund the Security Deposit to Tenant
within thirty (30) days of such policy change.

                                      -4-
<PAGE>
 
      2.04     Base Annual Rent Adjustment.
               --------------------------- 

               (a)  The Base Annual Rent shall be adjusted during the Lease Term
                    or the Extension Terms under the procedures set forth in
                    Exhibit 2.04 (the "Base Annual Rent Adjustment").
                    ------------ 

               (b)  As used in Exhibit 2.04, the "Index" shall mean the CPI-U
                               ------------
                    published by the United States Department of Labor, Bureau
                    of Labor Statistics Consumer Price Index for All Urban
                    Consumers, U.S. City Average. If at any time during the Term
                    or the Extension Term, as the case may be, the Index shall
                    be discontinued, Landlord shall select a substitute index,
                    being an existing official index published by the Bureau of
                    Labor Statistics or its successor or another, similar
                    governmental agency, which index is most nearly equivalent
                    to the Index.

      2.05     Additional Rent. As to each Leased Property, in addition to the
               ---------------
Base Annual Rent, Tenant shall pay all other amounts, liabilities, obligations
and Impositions (as hereinafter defined) which Tenant assumes or agrees to pay
under this Lease and any fine, penalty, interest, charge and cost which may be
added for nonpayment or late payment of such items (collectively, the
"Additional Rent").

      2.06     Place(s) of Payment of Rent; Direct Payment of Additional Rent.
               --------------------------------------------------------------
The Base Annual Rent and Additional Rent are hereinafter referred to as "Rent."
Landlord shall have all legal, equitable and contractual rights, powers and
remedies provided in this Lease or by statute or otherwise in the case of
nonpayment of the Rent for each Leased Property. Tenant shall make all payments
of Rent at Landlord's address set forth in Section 17.01 or as Landlord may
otherwise from time to time direct in writing, or, if Landlord shall direct
Tenant (if compatible with Tenant's business practices), directly to a bank
account specified by Landlord to Tenant in writing. At the direction of the
Landlord, Tenant shall make payments of Additional Rent directly to the person
or persons to whom such amount is owing at the time and times when such payments
are due, and Tenant shall give to Landlord such evidence of such direct payments
as Landlord shall reasonably request.

      2.07     Net Lease. This Lease shall be deemed and construed to be an
               ---------
"absolute net lease" or "triple net lease," (i.e. that Tenant shall pay all
costs and expenses related to the ownership and operations of each Leased
Property, thereby leaving all Rent as an absolutely net return to Landlord) and
as to each Leased Property, Tenant shall pay all Rent, Impositions, and other
charges and expenses in connection with such Leased Property throughout the Term
and any Extension Term, without abatement, deduction or set-off.

      2.08     No Termination, Abatement, Etc.  Except as otherwise
               -------------------------------                     
specifically provided herein, Tenant shall remain bound by this Lease in
accordance with its terms. Except as otherwise specifically provided herein,
Tenant shall not, without the prior written consent of Landlord, modify,

                                      -5-
<PAGE>
 
surrender or terminate this Lease as to any Leased Property, nor seek nor be
entitled to any abatement, deduction, deferment or reduction of Rent, or set-off
against the Rent as to any Leased Property for any reason whatsoever.  Except as
specifically provided herein, the obligations of Landlord and Tenant shall not
be affected by reason of:  (a) the lawful or unlawful prohibition of, or
restriction upon, Tenant's use of any Leased Property, or any part thereof, the
interference with such use by any person, corporation, partnership or other
entity, or by reason of eviction by paramount title; (b) any claim which Tenant
has or might have against Landlord or by reason of any default or breach of any
warranty by Landlord under this Lease or any other agreement between Landlord
and Tenant, or to which Landlord and Tenant are parties; (c) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceeding affecting Landlord or any assignee or transferee
of Landlord; (d) any damage to, or destruction of, any Leased Property or any
portion thereof for whatever cause, or any taking of the Leased Property or any
portion thereof; or (e) any other cause, whether similar or dissimilar to any of
the foregoing, other than a discharge of Tenant from any such obligations as a
matter of law.  Except as otherwise specifically provided herein, and to the
maximum extent permitted by law, Tenant hereby specifically waives all rights,
including but not limited to any rights under any statute relating to rights of
tenants in the jurisdictions where the Leased Properties are located, which may
now be conferred upon it by law, relating to:  (a) the modification, surrender
or termination of this Lease, or the quitting or surrender of any Leased
Property or any portion thereof; (b) any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Tenant hereunder; or (c) any
rights of redemption.  As to each Leased Property, the obligations of Landlord
and Tenant hereunder shall be separate and the Rent and all other sums shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated pursuant to the express provisions of this Lease or by
termination of this Lease other than by reason of an Event of Default.


                                  ARTICLE III
                           IMPOSITIONS AND UTILITIES

      3.01     Payment of Impositions. Subject to the adjustments set forth
               ----------------------                                 
herein, Tenant shall pay, in the manner set forth in Section 3.04, as Additional
Rent, to the Landlord an amount equal to the amount necessary to pay all
Impositions (as hereinafter defined) that may be levied or become a lien on any
Leased Property or any part thereof at any time (whether prior to or during the
Term), without regard to prior ownership of said Leased Property, before the
same becomes delinquent. Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon any
Leased Property or any part thereof. Tenant, at its expense, shall prepare and
file all tax returns and reports in respect of any Imposition as may be required
by governmental authorities, provided, however, that Tenant shall provide to
Landlord copies of all filings of such tax returns or reports in respect of any
real or personal property owned by Landlord. Tenant shall be entitled to any
refund due in respect of such Impositions from any taxing authority if no Event
of Default shall have occurred hereunder and be continuing. Any refunds in
respect of such Impositions retained by Landlord due to an Event of Default
shall be applied as provided in Section 9.08. Landlord and Tenant shall, upon
request of the other, provide

                                      -6-
<PAGE>
 
such data as is maintained by the party to whom the request is made with respect
to a Leased Property as may be necessary to prepare any required tax returns and
reports.  In the event governmental authorities classify any property covered by
this Lease as personal property, Landlord and Tenant shall file all personal
property tax returns in such jurisdictions where it may legally so file with
respect to their respective owned personal property.  Landlord, to the extent it
possesses the same, and Tenant, to the extent it possesses the same, will
provide the other party, upon request, with cost and depreciation records
necessary for filing such returns or reports for any property so classified as
personal property.  To the extent that Landlord is legally required to file
personal property tax returns, Tenant will be provided with copies of assessment
notices indicating a value in excess of the reported value in sufficient time
for Tenant to file a protest.  Tenant may, upon notice to Landlord, at Tenant's
option and at Tenant's sole cost and expense, protest, appeal, or institute such
other proceedings as Tenant may deem appropriate to effect a reduction of real
estate or personal property assessments and Landlord, at Tenant's expense as
aforesaid, shall fully cooperate with Tenant in such protest, appeal, or other
action.  Tenant shall provide Landlord copies of all materials filed or
presented in connection with any such proceeding.  Tenant shall promptly
reimburse Landlord for all taxes paid by Landlord, which were not paid with
deposits received from Tenant, upon receipt of billings accompanied by copies of
a bill therefor and payments thereof which identify the property with respect to
which such payments are made.  Impositions imposed with respect to the tax-
fiscal period during which the Term commences and terminates as to each Leased
Property shall be adjusted and prorated between Landlord and Tenant on a per
diem basis, with Tenant being obligated to pay its pro rata share from and
including the Commencement Date to and including the expiration or termination
date of the Term or Extension Term, as the case may be, whether or not such
Imposition is imposed before or after such commencement or termination, and
Tenant's obligation to pay its prorated share thereof shall survive such
termination.  Tenant shall also pay to Landlord a sum equal to the amount which
Landlord may be caused to pay of any privilege tax, sales tax, gross receipts
tax, rent tax, occupancy tax or like tax (excluding any tax based on net
income), hereinafter levied, assessed, or imposed by any federal, state, city,
county or municipal or other local governmental authority, or any subdivision
thereof, upon or measured by rent or other consideration required to be paid by
Tenant under this Lease.

      3.02     Definition of Impositions. "Impositions" means, collectively: (a)
               -------------------------                       
taxes (including without limitation, all real estate and personal property ad
valorem (whether assessed as part of the real estate or separately assessed as
unsecured personal property), sales and use, business or occupation, single
business, gross receipts, transaction, privilege, rent or similar taxes, but not
including income or franchise or excise taxes payable with respect to Landlord's
receipt of Rent); (b) assessments, whether in the nature of a special assessment
or otherwise (including, without limitation, all assessments for public
improvements or benefits, whether or not commenced or completed prior to the
date hereof and whether or not to be completed within the Term or any Extension
Term, as the case may be); (c) ground rents, water, sewer or other rents and
charges, excises, tax levies, and fees (including, without limitation, license,
permit, inspection, authorization and similar fees); (d) to the extent they may
become a lien on a Leased Property, all taxes imposed on Tenant's operations of
such Leased Property including without limitation, employee withholding taxes,
income taxes and intangible taxes; and (e) all other governmental charges, in
each case

                                      -7-
<PAGE>
 
whether general or special, ordinary or extraordinary, or foreseen or unforseen,
of every character in respect of each Leased Property or any part thereof, the
Business conducted by Tenant thereon, and/or the Rent (including all interest
and penalties thereon due to any failure in payment by Tenant), which at any
time prior to, during or in respect of the Term or any Extension Term, as the
case may be, hereof may be assessed or imposed on or in respect of or be a lien
upon (i) Landlord or Landlord's interest in any Leased Property or any part
thereof; (ii) any Leased Property or any part thereof or any rent therefrom or
any estate, right, title or interest therein; or (iii) any occupancy, operation,
use or possession of, or sales from, or activity conducted on, or in connection
with any Leased Property or the leasing or use of any Leased Property or any
part thereof.  Tenant shall not, however, be required to pay:  (x) any tax based
on net income (whether denominated as a franchise or capital stock or other tax)
imposed on Landlord or (y) except as provided in Section 13.01, any tax imposed
with respect to the sale, exchange or other disposition by Landlord of a Leased
Property or the proceeds thereof; provided, however, that if any tax,
assessment, tax levy or charge which Tenant is obligated to pay pursuant to the
first sentence of this definition and which is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (x) or (y) immediately above is levied, assessed or
imposed expressly in lieu thereof Tenant shall then pay such tax, levy, or
charge set forth in said clause (x) or (y).

      3.03     Utilities. Tenant shall contract for, in its own name, and will
               ---------                                              
pay, as Additional Rent all taxes, assessments, charges/deposits, and bills for
utilities, including without limitation charges for water, gas, oil, sanitary
and storm sewer, electricity, telephone service, trash collection, and all other
utilities which may be charged against the occupant of the Improvements during
the Term. Tenant shall at all times maintain that amount of heat necessary to
ensure against the freezing of water lines. Tenant hereby agrees to indemnify
and hold Landlord harmless from and against any liability or damages to the
utility systems of each Leased Property that may result from Tenant's failure to
maintain sufficient heat in the Improvements therefor.

      3.04     Escrow of Impositions. Unless waived by written notice from
               ---------------------                                 
Landlord to Tenant, Tenant shall thereafter deposit with Landlord on the first
day of each month during the Term hereof and any Extension Term, as the case may
be, a sum equal to one-twelfth (1/12th) of the Impositions assessed against such
Leased Property which sums shall be used by Landlord toward payment of such
Impositions. If, at the end of any applicable tax year, any such funds held by
Landlord are insufficient to make full payment of taxes or other Impositions for
which such funds are held, Tenant, on demand, shall pay to Landlord any
additional funds necessary to pay and discharge in full the obligations of
Tenant pursuant to the provisions of this Section. If, however, at the end of
any applicable tax year, such funds held by Landlord are in excess of the total
payment required to satisfy taxes or other Impositions for which such funds are
held, Landlord shall apply such excess amounts to a tax and Imposition escrow
fund for the next tax year. With respect to each Leased Property, if any such
excess exists following the expiration or earlier termination of this Lease, and
subject to Section 8.08 below, Landlord shall promptly refund such excess
amounts to Tenant. The receipt by Landlord of the payment of such Impositions by
and from Tenant shall only be as an accommodation to Tenant and the taxing
authorities, and shall not be construed as rent or income to Landlord, Landlord
serving, if at all, only as a conduit for delivery purposes.

                                      -8-
<PAGE>
 
          3.05   Discontinuance of Utilities. Landlord will not be liable for
                 ---------------------------                       
damages to person or property or for injury to, or interruption of, business for
any discontinuance of utilities at any Leased Property nor will such
discontinuance in any way be construed as an eviction of Tenant from such Leased
Property or cause an abatement of Rent as to such Leased Property or operate to
release Tenant from any of Tenant's obligations as to such Leased Property under
this Lease. Notwithstanding the forgoing, however, Landlord shall be liable for
damages to person or property or for injury to, or interruption of business, for
any discontinuance of utilities at any Leased Property, in the event and to the
extent, such damages or injury are caused by the wilful misconduct or gross
negligence of the Landlord.

          3.06   Liens.  Subject to Section 17.19 relating to contests, Tenant
                 -----                                                 
 shall not directly or indirectly create or allow to remain, and will promptly
discharge at its expense, any lien, encumbrance, attachment, title retention
agreement or claim upon any Leased Property or any attachment, levy, claim or
encumbrance in respect of any Rent provided under this Lease, not including,
however: (a) this Lease; (b) utility easements and road rights-of-way in the
customary form (i) provided the same do not adversely affect the intended use of
the Leased Properties (including the Improvements) and do not create a material
adverse effect on the value of the Leased Properties or (ii) which result solely
from the action or inaction of Landlord; (c) zoning and building laws or
ordinances, provided they do not prohibit the use of the Leased Properties for
the Business and so long as the Leased Properties are in compliance with same;
(d) such encumbrances as are subsequently consented to in writing by Landlord,
but excluding liens in respect of Impositions required to be paid under Section
3.01; (e) liens for Impositions so long as (i) the same are not yet payable or
are payable without the addition of any fine or penalty or (ii) such liens are
being contested as permitted under Section 17.19; and (f) other encumbrances,
easements, rights of way or liens (i) provided the same do not adversely affect
the intended use of the Leased Properties (including the Improvements) and do
not create a material adverse effect on the value of the Leased properties, or
(ii) which result solely from the action or inaction of Landlord.


                                  ARTICLE IV
                                   INSURANCE

          4.01   Insurance.  Tenant shall, at Tenant's expense, keep the
                 ---------                                              
Improvements, Fixtures, and other components of each Leased Property insured
against the following risks:

                 (a)  Loss or damage by fire with extended coverage (including
                      windstorm and subsidence), vandalism and malicious
                      mischief, sprinkler leakage and all other physical loss
                      perils commonly covered by "All Risk" insurance in an
                      amount not less than one hundred percent (100%) of the
                      then full replacement cost thereof (as hereinafter
                      defined). Such policy shall include an agreed amount
                      endorsement if available at a reasonable cost. Such policy
                      shall also include endorsements for

                                      -9-
<PAGE>
 
                      contingent liability for operation of building laws,
                      demolition costs, and increased cost of construction.

                 (b)  Loss or damage by explosion of steam boilers, pressure
                      vessels, or similar apparatus, now or hereafter installed
                      on any Leased Property, in commercially reasonable amounts
                      acceptable to Landlord.

                 (c)  Loss of rent under a rental value or Business interruption
                      insurance policy covering risk of loss during the first
                      twelve (12) months of reconstruction necessitated by the
                      occurrence of any hazards described in Sections 4.01(a) or
                      4.01(b), above, and which causes an abatement of Rent as
                      provided in Article X hereof, in an amount sufficient to
                      prevent Landlord or Tenant from becoming a co-insurer,
                      containing endorsements for extended period of indemnity
                      and premium adjustment, and written with an agreed amount
                      clause, if the insurance provided for in this clause (c)
                      is available.

                 (d)  If the Land or any portion thereof related to a Leased
                      Property is located in whole or in part within a
                      designated flood plain area, loss or damage caused by
                      flood in commercially reasonable amounts acceptable to
                      Landlord.

                 (e)  Loss or damage commonly covered by blanket crime insurance
                      including employee dishonesty, loss of money orders or
                      paper currency, depositor's forgery, and loss of property
                      accepted by Tenant for safekeeping, in commercially
                      reasonable amounts acceptable to Landlord.

                 (f)  Workers' compensation insurance as required by statute in
                      respect of any work or other operations on or about each
                      Leased Property.

                 (g)  Comprehensive liability insurance as to each Leased
                      Property in amounts equal to the greater of (i) One
                      Million Dollars ($1,000,000) for each occurrence and Two
                      Million Dollars ($2,000,000) in the aggregate, or (ii) the
                      limits of liability generally required under the franchise
                      agreements or other agreements pursuant to which Tenant
                      operates the Businesses conducted on or about each Leased
                      Property.

                 (h)  Commercial comprehensive catastrophic liability insurance
                      with limits of liability of not less than the greater of
                      (i) Five Million ($5,000,000) and (ii) the limits of
                      liability generally required under the franchise
                      agreements or other agreements pursuant to which

                                     -10-
<PAGE>
 
                      Tenant operates the Businesses conducted on or about each
                      Leased Property.

                 (i)  upon Landlord's request, earthquake insurance in an amount
                      not less than the full insurable value of each Leased
                      Property.

                 (j)  During the period when any addition, alteration,
                      construction, installation or demolition is being made or
                      performed to any part of the Leased Property, contingent
                      liability, public liability, completed value, builder's
                      risk (non-reporting form) workers' compensation and other
                      insurance as is deemed prudent by Landlord.

          4.02   Insurance Limits.  Deductible provisions for the insurance
                 ----------------                                
required under Section 4.01(a) shall not exceed Twenty-Five Thousand Dollars
($25,000) per location per occurrence and One Hundred Thousand Dollars
($100,000) aggregate per occurrence; under clause(d), Twenty-Five Thousand
Dollars ($25,000) per occurrence, except that if federal flood insurance is
available then such deductible shall not be greater than the lowest deductible
available with respect to such federal flood insurance; under clause (g), 
Twenty-Five Thousand Dollars ($25,000) per occurrence; under clause (h), Twenty-
Five Thousand Dollars ($25,000) per occurrence; and under clause (j), Twenty-
Five Thousand Dollars ($25,000) per occurrence.

          4.03   Insurance Requirements.  The following provisions shall apply
                 -----------------------                                
to all insurance coverages required hereunder:

                 (a)  The carriers of all policies shall have a Best's Rating of
                      "A-" or better and a Best's Financial Category of XII or
                      larger and shall be authorized to do insurance business in
                      the jurisdiction in which the Leased Property is located.

                 (b)  Tenant shall be the "named insured" and Landlord and any
                      mortgagee of Landlord shall be an "additional named
                      insured" on each policy.

                 (c)  Tenant shall deliver to Landlord certificates or policies
                      showing the required coverages and endorsements. Each
                      policy or certificate of insurance shall provide that such
                      policy or certificate (i) may not be canceled, (ii) may
                      not lapse for failure to renew, and (iii) no material
                      change or reduction in coverage may be made, without at
                      least thirty (30) days' prior written notice to Landlord.

                 (d)  The policies shall contain a severability of interest
                      and/or cross-liability endorsement, provide that the acts
                      or omissions of Tenant will not invalidate Landlord's
                      coverage, and provide that Landlord shall not be
                      responsible for payment of premiums.

                                     -11-
<PAGE>
 
                 (e)  All loss adjustment shall require the written consent of
                      Landlord and Tenant, as their interests may appear.

                 (f)  At least (30) thirty days prior to the expiration of each
                      policy, Tenant shall deliver to Landlord a certificate
                      showing renewal of such policy and payment of the annual
                      premium therefor.

          Landlord shall have the right to review the insurance coverages
required hereunder with Tenant from time to time, to obtain the input of third
party professional insurance advisors (at Landlord's expense) with respect to
such insurance coverages, and to consult with Tenant in Tenant's annual review
and renewal of such insurance coverages. All insurance coverages hereunder shall
be in such form, substance and amounts as are customary or standard in Tenant's
industry, but at a minimum shall comply with the requirements set forth herein.

          4.04   Replacement Cost.  The term "full replacement cost" means the
                 ----------------                                   
 actual replacement cost of the Improvements from time to time including
increased cost of construction, with no reductions or deductions. Tenant shall,
not later than thirty (30) days after the anniversary of each policy of
insurance, increase the amount of the replacement cost endorsement for the
Improvements to the extent necessary to reflect increased costs of construction.
If Tenant makes any Permitted Alterations (as hereinafter defined) to any Leased
Property, Landlord may have such full replacement cost redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement cost was last determined.

          4.05   Blanket Policy.  Tenant may carry the insurance required by
                 --------------                                 
this Article under a blanket policy of insurance, provided that the coverage
afforded Tenant will not be reduced or diminished or otherwise be different from
that which would exist under a separate policy meeting all of the requirements
of this Lease and the Landlord approves the form of the policy.

          4.06   No Separate Insurance.  Tenant shall not take out separate
                 ----------------------                           
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing insurance
by securing an additional policy or additional policies, unless all parties
having an insurable interest in the subject matter of the insurance, including
Landlord and any mortgagees, are included therein as additional named insureds
or loss payees, the loss is payable under said insurance in the same manner as
losses are payable under this Lease, and such additional insurance is not
prohibited by the existing policies of insurance required pursuant to this
Article. Tenant shall immediately notify Landlord of the taking out of such
separate insurance or the increasing of any of the amounts of the existing
insurance by securing an additional policy or additional policies. The term
"mortgages" as used in this Lease includes, but is not limited to, Deeds of
Trust and the term "mortgagees" includes, but is not limited to, trustees and
beneficiaries under a Deed of Trust.

          4.07   Waiver of Subrogation.  Each party hereto hereby waives any and
                 ---------------------                                  
every claim which arises or may arise in its favor and against the other party
hereto during the Term or any

                                     -12-
<PAGE>
 
Extension Term or renewal thereof, for any and all loss of, or damage to, any of
its property located within or upon, or constituting a part of, any Leased
Property, which loss or damage is covered by valid and collectible insurance
policies, to the extent that such loss or damage is recoverable in full under
such policies. Said mutual waiver shall be in addition to, and not in limitation
or derogation of, any other waiver or release contained in this Lease with
respect to any loss or damage to property of the parties hereto. Inasmuch as the
said waivers will preclude the assignment of any aforesaid claim by way of
subrogation (or otherwise) to an insurance company (or any other person), each
party hereto agrees immediately to give each insurance company which has issued
to it policies of insurance, written notice of the terms of said mutual waivers,
and to have such insurance policies properly endorsed, if necessary, to prevent
the invalidation of said insurance coverage by reason of said waivers, so long
as such endorsement is available at a reasonable cost.

          4.08   Mortgages.  The following provisions shall apply if Landlord
                 ---------                                          
now or hereafter places a mortgage on any Leased Property or any part thereof:
(a) Tenant shall obtain a standard form of mortgage clause insuring the interest
of the mortgagee; (b) Tenant shall deliver evidence of insurance to such
mortgagee; (c) loss adjustment shall require the consent of the mortgagee but
such consent shall not be unreasonably withheld and may not include any
requirement that the funds be paid to mortgagee in lieu of reconstruction; and
(d) Tenant shall obtain such other coverages and provide such other information
and documents as may be reasonably required by the mortgagee.

          4.09   Other Insurance Requirements.  Notwithstanding anything in this
                 ----------------------------                           
Lease to the contrary and not by way of limitation, in addition to the types and
amounts of insurance required to be carried by Tenant herein, Tenant covenants
to insure and continue in effect such types and amounts of insurance as the
Tenant shall be required to carry pursuant to any contract or agreement to which
Tenant is a party, instrument, statute, law, rule or regulation relating to the
use of the Leased Property and the operations of any Business or other
activities thereon, including noncancellable written notice to mortgagee.

                                  ARTICLE V 
                       INDEMNITY; SUBSTANCES OF CONCERN

          5.01   Tenant's Indemnification.  Subject to Section 4.07, Tenant 
                 ------------------------                           
hereby agrees to indemnify and hold harmless Landlord, its agents, and employees
from and against any and all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, costs and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) (the "Claims") incurred in connection with or arising
from: (a) the use, condition, operation or occupancy of the Leased Properties
during the Term of the Lease; (b) any activity, work, or thing done, or
permitted or suffered by Tenant in, on or about the Leased Properties; (c) any
acts, omissions, or negligence of Tenant or any person claiming under Tenant, or
the contractors, agents, employees, invitees, or visitors of Tenant or any such
person; (d) any breach, violation, or nonperformance by Tenant or any person
claiming under Tenant or the employees, agents, contractors, invitees, or
visitors of Tenant

                                     -13-
<PAGE>
 
or of any such person, of any term, representation, warranty, covenant, or
provision of this Lease or any law, ordinance, or governmental requirement of
any kind; (e) any injury or damage to the person, property or Business of
Tenant, its employees, agents, contractors, invitees, visitors, or any other
person entering upon any Leased Property during the Term of the Lease; (f) any
accident, injury to or death of persons or loss or damage to any item of
property occurring on or about any Leased Property during the Term of the Lease;
(g) any Environmental Law or any pollution or other threat to human health or
the environment at, arising out of or relating to any Leased Property during the
Term of the Lease as set forth in Section 5.05, and (h) any brokers' or agents'
fees and commissions attributable to Tenant; except as may be caused by the
negligence or wilful misconduct of Landlord. If any action or proceeding is
brought against Landlord, its employees, or agents by reason of any such demand,
claim, or cause of action, Tenant, upon notice from Landlord, will defend the
same at Tenant's expense with counsel reasonably satisfactory to Landlord. In
the event Landlord reasonably determines that its interests and the interests of
Tenant in any such action or proceeding are not substantially the same and that
Tenant's counsel cannot adequately represent the interests of Landlord therein,
Landlord shall have the right to hire separate counsel in any such action or
proceeding and the reasonable costs thereof shall be paid for by Tenant.
Tenant's indemnification obligations with respect to a Claim shall survive the
expiration or earlier termination of this Lease until the later of (i) two (2)
years from the date hereof, or (ii) the expiration of the period ninety (90)
days after the date on which Landlord has actual knowledge of the existence of
such Claim, provided, however, that Tenant's indemnification obligations shall
survive the expiration or earlier termination of this Lease until ninety (90)
days after the expiration of the applicable statute of limitations for Claims
incurred in connection with, arising out of, or related to (i) Section 5.01(g)
or (ii) the failure to pay, as provided for in this Agreement, any Imposition.

          5.02   Substances of Concern.
                 --------------------- 

                 (a)  For purposes of this Section 5:

                      (i)  "Substances of Concern" means, without limitation,
                           chemicals, pollutants, contaminants, wastes, toxic
                           substances, radioactive materials or genetically
                           modified organisms, which are, have been or become
                           regulated by any federal, state or local government
                           authority including, without limitation, (1)
                           petroleum or any fraction thereof, (2) asbestos, (3)
                           any substance or material defined as a "hazardous
                           substance" pursuant to (S) 101 of the Comprehensive
                           Environmental Response Compensation and Liability Act
                           (42 U.S.C. (S) 9601), or (4) any substance or
                           material defined as a "hazardous chemical" pursuant
                           to the federal Hazard Communication Standard (29
                           C.F.R. (S) 1910.1200).

                      (ii) "Environmental Laws" means all federal, state, local,
                           and foreign laws and regulations relating to
                           pollution or protection

                                     -14-
<PAGE>
 
                           of human health or the environment (including,
                           without limitation, ambient air, surface water,
                           ground water, wetlands, land surface, subsurface
                           strata, and indoor and outdoor workplace), including,
                           without limitation, (1) laws and regulations relating
                           to emissions, discharges, releases, or threatened
                           releases of Substances of Concern, and (2) common law
                           principles of tort liability.

                 (b)  Tenant shall not, either with or without negligence,
                      injure, overload, deface, damage or otherwise harm any
                      Leased Property or any part or component thereof; commit
                      any nuisance; permit the emission of any Substances of
                      Concern; allow the release or other escape of any
                      biologically or chemically active substances or materials
                      or other Substances of Concern so as to impregnate, impair
                      or in any manner affect, even temporarily, any element or
                      part of any Leased Property or neighboring property, or
                      allow the storage or use of such substances or materials
                      in any manner not sanctioned by law and by reasonable
                      standards prevailing in the automobile retail and related
                      industries for the storage and use of such substances or
                      materials; nor shall Tenant permit the occurrence of noise
                      or odors which could make any of the Leased Properties or
                      the Tenant subject to a civil nuisance lawsuit or to
                      disciplinary action of any kind under any nuisance laws,
                      ordinances or regulations; or make, allow or suffer any
                      waste whatsoever to any Leased Property. Landlord may
                      inspect each Leased Property from time to time, and Tenant
                      will cooperate with such inspections.

                 (c)  Notwithstanding the foregoing, Tenant anticipates using,
                      storing and disposing of certain Substances of Concern in
                      connection with operation of its Business. Such Substances
                      of Concern include, but are not limited to, the following:
                      motor oil, waste motor oil and filters, transmission
                      fluid, antifreeze, refrigerants, waste paint and lacquer
                      thinner, batteries, solvents, lubricants, degreasing
                      agents, gasoline and diesel fuels. Tenant shall ascertain
                      and comply fully with all applicable Environmental Laws
                      and environmental standards and requirements set by
                      federal, state or local laws, rules, regulations or
                      governmental directives related to the Leased Properties
                      or Tenant's use or occupancy of the Leased Property
                      ("Environmental Standards"), including but not limited to
                      any laws or standards (a) regulating the use, storage,
                      generation or disposal of Substances of Concern, (b)
                      regulating the monitoring or use of any underground or
                      aboveground storage tanks at the Leased Properties, or (c)
                      establishing any permitting, notification or reporting
                      requirements.

                                     -15-
<PAGE>
 
                      As promptly as practicable after the Commencement Date
                      (but in no event later than 120 days thereafter), Tenant
                      shall establish and implement a program of compliance with
                      all applicable Environmental Laws and Environmental
                      Standards ("Environmental Compliance Program"). Tenant
                      shall update such Environmental Compliance Program every
                      three (3) years during the Term. Tenant shall submit its
                      Environmental Compliance Program and each update thereto
                      to Landlord; provided, however, such submittal shall not
                      relieve Tenant of its obligations pursuant to this Section
                      5. Tenant's Environmental Compliance Program shall include
                      a program for monitoring Tenant's compliance with
                      Environmental Laws and Environmental Standards and a plan
                      for correcting immediately any incident of noncompliance.
                      Tenant shall comply with its Environmental Compliance
                      Program.

                 (d)  In the event of any noncompliance with any Environmental
                      Laws or Environmental Standards or any spill, release or
                      discharge of Substances of Concern in a reportable
                      quantity under federal, state or local law, Tenant shall:

                      (i)   give Landlord immediate notice of the incident by
                            telephone or facsimile, providing as much detail as
                            possible. Such notice shall be provided to
                            Landlord's National Dealership Real Estate Manager
                            or to such other person as Landlord shall designate
                            in accordance with Section 16.01 below;

                      (ii)  as soon as possible, but no later than seventy-two
                            (72) hours, after discovery of an incident of
                            noncompliance, submit a written report to Landlord,
                            identifying the source or case of the noncompliance
                            or spill, release or discharge (including the names
                            and quantities of any Substances of Concern
                            involved) and the method or action required to
                            correct the problem; and

                      (iii) cooperate with Landlord or its designated agents or
                            contractors with respect to the investigation and
                            correction of such problem.

                 Tenant shall also be solely responsible for providing any
notice to any federal, state or local governmental authority required by
applicable laws and regulations as a result of such incident.

          5.03   Audits.  Landlord shall have the right to conduct, at its
                 ------                                                   
expense, periodic audits of Tenant's compliance with the Environmental
Compliance Program and management of

                                     -16-
<PAGE>
 
Substances of Concern at the Leased Properties and/or periodic tests of air,
soil, surface water or groundwater at or near the Leased Properties.  Landlord
shall not be obligated to provide Tenant with the results of any audit or tests
unless such results are the basis for a claim by Landlord that Tenant has
breached its obligations under this Lease or a demand by Landlord that Tenant
modify its Environmental Compliance Program or operations or remediate or remove
a spill, release or discharge of Substances of Concern in accordance with
Section 5.06 below.  Tenant agrees promptly to modify its Environmental
Compliance Program or the conduct of its operations in accordance with
Landlord's reasonable recommendations directed at improvement of Tenant's
handling, use and disposal of Substances of Concern  in, on or from any Leased
Property.  If, as a result of an environmental audit performed by Landlord with
respect to any Leased Property, Landlord reasonably determines in its judgment
that alterations or improvements of equipment or buildings located on the Leased
Property are necessary to comply with applicable environmental laws and
regulations, Tenant shall perform such alterations or improvements as are
reasonable under the circumstances and pay all costs and expenses relating
thereto.   If Tenant shall fail to pay any such costs or expenses, Tenant shall
deposit with Landlord the full amount necessary to pay such costs in full within
ten (10) days of Landlord's demand.  Nothing contained herein shall be construed
to obligate or require Landlord to perform any audits, tests, inquiry or
investigation.  Should Landlord elect or be required to disclose to Tenant the
results of any audit or tests, Landlord shall not be liable in any way for the
truth or accuracy of such information.

          5.04   Landlord's Option Re: Compliance.  If Tenant, after notice from
                 --------------------------------                               
Landlord, fails to comply with or perform any of its obligations pursuant to
this Section 5, including, but not limited to, obligations to clean up spills,
releases or discharges, Landlord may, but shall not be obligated to, perform
such obligations and Tenant shall pay Landlord within ten (10) days of demand
Landlord's costs therefor, including any overhead and administrative costs.

          5.05   Environmental Indemnification.  Tenant shall indemnify and hold
                 -----------------------------                                  
harmless Landlord from and against all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, and expenses (including,
without limitation, attorneys' fees, court costs, and the costs set forth in
Section 9.06) imposed upon or asserted against Tenant, Landlord or any Leased
Property on account of any Environmental Law (irrespective of whether there has
occurred any violation of any Environmental Law) relating to any Leased
Property, including (a) response costs and costs of removal and remedial action
incurred by the United States Government or any state or local governmental unit
to any other person or entity, or damages from injury to or destruction or loss
of natural resources, including the reasonable costs of assessing such injury,
destruction or loss, incurred pursuant to any Environmental Law, (b) costs and
expenses of abatement, investigation, removal, remediation, correction or
cleanup, fines, damages, response costs or penalties which arise from the
provisions of any Environmental Law, (c) liability for personal injury or
property damage arising under any statutory or common-law tort theory, including
damages assessed for the maintenance of a public or private nuisance or for
carrying on of a dangerous activity, (d) liability by reason of a breach of an
environmental representation or warranty by Tenant, and (e) failure of Tenant to
complete in a timely manner alterations or improvements of equipment or
buildings located on the Leased Property

                                     -17-
<PAGE>
 
deemed necessary or advisable by Landlord pursuant to Section 5.03 in a manner
acceptable to Landlord.

          5.06   Tenant's Cleanup Obligation. If any spill, release or discharge
                 ---------------------------
of Substances of Concern occurs on, at or from the Leased Properties during the
Term, Tenant shall promptly take all actions, at its sole expense, as are
necessary to remove or remediate such spill, release or discharge and to return
the Leased Property to the condition existing prior to the introduction of any
such Substances of Concern to the Leased Property, provided that Landlord's
approval of such action shall first be obtained, which approval shall not be
unreasonably withheld so long as such actions would not potentially have any
material adverse effect on the Leased Property.

          5.07   Existing Environmental Conditions.  Tenant acknowledges that it
                 ---------------------------------                              
has had the opportunity to review the Environmental Reports (which shall mean
Phase I, Phase II and consultants' reports) attached hereto as Exhibit 5.07.
                                                               ------------  
Tenant hereby represents that it has reviewed and is aware of the matters
disclosed in the Environmental Reports.

                 As a material consideration for Landlord's willingness to enter
into this Lease, Tenant, for itself and its Affiliates, and each of their
shareholders, directors, officers, employees, agents, contractors,
representatives, insurers, successors and assigns hereby waives and releases
Landlord and its Affiliates and each of their shareholders, directors, officers,
employees, representatives, agents, contractors, representatives, insurers,
successors and assigns from any and all claims, demands, liabilities, costs,
expenses, causes of action and rights of action whatsoever, past, present or
future, known or unknown, suspected or unsuspected, which arise out of or relate
in any way to the violation of Environmental Laws or the use, storage,
treatment, disposal, presence, spill, release, or discharge of Substances of
Concern at, on or from the Leased Properties before the Commencement Date
(collectively, the "Released Claims").

                 In the event that Landlord is ordered by a governmental agency,
or reasonably determines that it is in its best interest, to remedy any
violation of Environmental Laws or to remove or remediate any Substances of
Concern present on, under or about the Leased Properties on the Commencement
Date, or spilled, released or discharged on, at or from the Leased Properties
before the Commencement Date, Tenant shall immediately upon notice from Landlord
take all actions, at Tenant's sole expense, to promptly complete such removal or
remediation.

          5.08   Survival of Tenant's Obligations.  Tenant's obligations under
                 --------------------------------                             
this Section 5 shall survive the expiration or earlier termination of this
Lease.  During any period of time employed by Tenant after the termination of
this Lease to complete the removal from the Leased Property of any Substances of
Concern, if the premises are not rentable for uses contemplated under this
Lease, Tenant shall continue to pay the full amount of  Rent due under this
Lease, which Rent shall be prorated daily for the final month of such period of
time.


                                   ARTICLE VI

                                     -18-
<PAGE>
 
                                 USE AND ACCEPTANCE OF PREMISES

          6.01   Use of Leased Properties. For so long as this Lease is in
                 ------------------------ 
effect (including following any sublease or assignment thereof), Tenant shall
use and occupy each Leased Property exclusively for the purpose of conducting
the Business or for any other legal purpose for which such Leased Property is
being used as of the Commencement Date, and for no other purpose without the
prior written consent of Landlord. Tenant shall obtain and maintain all
approvals, licenses, and consents needed to use and operate the Leased
Properties for such purposes. Tenant shall promptly deliver to Landlord complete
copies of surveys, examinations, certification and licensure inspections,
compliance certificates, and other similar reports issued to Tenant by any
governmental agency.

          6.02   Acceptance of Leased Properties.  Except as otherwise
                 -------------------------------                      
specifically provided in this Lease, Tenant acknowledges (i) Tenant and its
agents have had an opportunity to inspect each Leased Property; (ii) Tenant has
found each Leased Property fit for Tenant's use; (iii) delivery of each Leased
Property to Tenant is in an "as-is" condition; (iv) Landlord is not obligated to
make any improvements or repairs to any Leased Property; and (v) the roof,
walls, foundation, heating, ventilating, air conditioning, telephone, sewer,
electrical, mechanical, utility, plumbing, and other portions of each Leased
Property are in good working order.  Tenant waives any claim or action against
Landlord with respect to the condition of any  Leased Property.  LANDLORD MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTIES OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION OR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO QUALITY OR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY TENANT.

          6.03   Conditions of Use and Occupancy.  Tenant agrees that during the
                 -------------------------------                                
Term it shall use and keep each Leased Property in a careful, safe and proper
manner; not commit or suffer waste thereon; not use or occupy any Leased
Property for any unlawful purposes; not use or occupy any Leased Property or
permit the same to be used or occupied, for any purpose or business deemed extra
hazardous on account of fire or otherwise; keep each Leased Property in such
repair and condition as may be required by the local board of health, or other
city, state or federal authorities, free of all cost to Landlord; not permit any
acts to be done which will cause the cancellation, invalidation, or suspension
of any insurance policy; and permit Landlord and its agents to enter upon each
Leased Property at all reasonable times after notice to Tenant to examine the
condition thereof.  In addition, at any time and from time to time upon not less
than fifteen (15) days prior written notice, Tenant shall permit Landlord and
any mortgagee or lender and their authorized representatives, to inspect the
Leased Properties during normal Business hours, provided that such inspections
shall not unreasonably interfere with Business of Tenant.

          6.04   Financial Statements and Other Information. Tenant shall
                 ------------------------------------------ 
provide Landlord and any mortgagee or lender regularly (or more often as may be
reasonably requested by Landlord in writing), the following financial
information: (a) as to each Leased Property within thirty (30) days after each
fiscal quarter during the Term or any Extension Term, as the case may be,
(except

                                     -19-
<PAGE>
 
the fourth quarter), Tenant-prepared financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") consistently applied; and
(b) as to each Leased Property and itself, Tenant shall use its best efforts to
provide Landlord within ninety (90) days after the end of each fiscal year of
Tenant during the Term or any Extension Term, as the case may be, and in no
event later than one hundred and twenty (120) days after the end of each fiscal
year of Tenant during the Term or any Extension Term, as the case may be,
financial statements, audited, reviewed or compiled by a certified public
accountant  (the "Annual Financial Statements").  Tenant shall also deliver to
Landlord such additional financial information as Landlord may reasonably
request, provided the same is of a type normally maintained by Tenant or can be
obtained without undue cost or burden on Tenant's personnel and does not
constitute information which Tenant reasonably determines to be proprietary or
confidential.  Additionally, upon Landlord's request, Tenant shall provide
Landlord with copies of Tenant's annual capital expenditure budgets for each
Leased Property and any reports generated by Tenant regarding maintenance and
repairs of each Leased Property.


                                  ARTICLE VII
              REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS

          7.01   Maintenance. Tenant shall maintain each Leased Property in good
                 ----------- 
order, repair and appearance, and repair each Leased Property, including without
limitation, all interior and exterior, structural and nonstructural repairs and
replacements to the roof, foundations, exterior walls, building systems, HVAC
systems, parking areas, sidewalks, water, sewer and gas connections, pipes, and
mains. Tenant shall pay as Additional Rent the full cost of such maintenance,
repairs, and replacements. Tenant shall maintain all drives, sidewalks, parking
areas, and lawns on or about each Leased Property in a clean and orderly
condition, free of accumulations of dirt, rubbish, snow and ice. Tenant shall
permit Landlord to inspect each Leased Property at all reasonable times, and
shall implement all reasonable suggestions of Landlord as to the maintenance and
repair of each Leased Property, provided that Landlord give Tenant no less than
two (2) business days prior notice and such inspection shall not unreasonably
interefere with Business of Tenant.

          7.02   Compliance with Laws.  Tenant shall comply with all laws,
                 --------------------                                     
ordinances, orders, rules, regulations, and other governmental requirements
relating to the use, condition, or occupancy of each Leased Property, whether
now or hereafter enacted and in force including without limitation:  (a)
licensure requirements for operation of the Business; (b) requirements of any
board of casualty insurance underwriters or insurance service office for any
other similar body having jurisdiction over any Leased Property; (c) all zoning
and building codes; and (d) Environmental Laws.  At Landlord's request, from
time to time, Tenant shall deliver to Landlord copies of certificates or permits
evidencing compliance with such laws, including without limitation, copies of
any applicable licenses, certificates of occupancy and building permits.  Tenant
shall provide Landlord with copies of any notice from any governmental authority
alleging any non-compliance by Tenant or any Leased Property with any of the
foregoing requirements and such evidence as

                                     -20-
<PAGE>
 
Landlord may reasonably require of Tenant's remediation thereof.  Tenant hereby
agrees to defend, indemnify and hold Landlord, its agents, and employees from
and against any and all demands, claims, causes of action, fines, penalties,
damages (including punitive and consequential damages), losses, liabilities
(including strict liability), judgments, costs and expenses (including, without
limitation, attorneys' fees, court costs, and the costs set forth in Section
9.06) resulting from any failure by Tenant to comply with any laws, ordinances,
rules, regulations, and other governmental requirements.

          7.03   Required Alterations.  Tenant shall, at Tenant's sole cost and
                 --------------------                                          
expense, make any additions, changes, improvements or alterations to each Leased
Property, including structural alterations, which may be required by any
governmental authorities, including those required to continue to satisfy any
licensure requirements related to the operation of the Business, whether such
changes are required by Tenant's use, changes in the law, ordinances, or
governmental regulations, defects existing as of the date of this Lease, or any
other cause whatsoever.  Tenant shall provide thirty (30) days prior written
notice to Landlord of any changes to a Leased Property pursuant to this Section
7.03 which involve changes to the structural integrity thereof or materially
affect the operational capabilities thereof.  All such additions, changes,
improvements or alterations shall be deemed to be a Tenant Improvement and shall
comply with all laws relating to such alterations and with the provisions of
Section 8.01.

          7.04   Mechanics' Liens.  Tenant shall have no authority to permit or
                 ----------------                                              
create a lien against Landlord's interest in any Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in each Leased Property against liens. Tenant hereby agrees
to defend, indemnify, and hold Landlord harmless from and against any mechanics'
liens against any Leased Property by reason of work, labor services or materials
supplied or claimed to have been supplied on or to such Leased Property.  Tenant
shall immediately remove, bond-off, or otherwise obtain the release of any
mechanics' lien filed against any Leased Property. Tenant shall pay all expenses
in connection therewith, including without limitation, damages, interest, court
costs and reasonable attorneys' fees.

          7.05   Replacements of Fixtures. Tenant shall not remove Fixtures from
                 ------------------------
any Leased Property except to replace such Fixtures with other items used for
similar or analogous purposes, which replacement items are of equal or greater
quality and value. Items being replaced by Tenant may be removed and shall
become the property of Tenant and items replacing the same shall be and remain
the property of Landlord. Tenant shall execute, upon written request from
Landlord, any and all documents necessary to evidence Landlord's ownership of
the Fixtures and replacements therefor. Tenant may not finance replacements by
security agreement or equipment lease unless: (a) Landlord has consented to the
terms and conditions of the equipment lease or security agreement; (b) the
equipment lessor or lender has entered into a non-disturbance agreement with
Landlord upon terms and conditions acceptable to Landlord, including without
limitation (i) Landlord shall have the right (but not the obligation) to assume
such security agreement or equipment lease upon the occurrence of an Event of
Default by Tenant hereunder; (ii) the equipment lessor or lender shall promptly
notify Landlord of any default by Tenant under the equipment lease or security
agreement and give

                                     -21-
<PAGE>
 
Landlord a reasonable opportunity to cure such default; and (iii) Landlord shall
have the right to assign its rights under the equipment lease, security
agreement, or non-disturbance agreement; (c) the equipment lessor or lender
shall subordinate its security interest to the security interest of any of
Landlord's lessors, mortgagors or lenders, whether now created or hereafter
existing, and (d) Tenant shall, within ten (10) days after receipt of an invoice
from Landlord, reimburse Landlord for all costs and expenses incurred in
reviewing and approving the equipment lease, security agreement, and non-
disturbance agreement, including without limitation, reasonable attorneys' fees
and costs.

          7.06   Encroachments; Restrictions.  If any of the Improvements shall,
                 ---------------------------                                    
at any time, encroach upon any property, street or right-of-way adjacent to a
Leased Property, or shall violate the agreements or conditions contained in any
restrictive covenant or other agreement affecting a Leased Property, other than
one which is created or consented to by Landlord without Tenant's consent, or
shall impair the rights of others under an easement or right-of-way to which a
Leased Property is subject, other than one which is created or consented to by
Landlord without Tenant's consent, then promptly upon the request of Landlord or
at the request of any person affected by any such encroachment, violation or
impairment, Tenant shall, at its expense, subject to its right to contest the
existence of any encroachment, violation or impairment and in such case, in the
event of an adverse final determination, either (a) obtain valid and effective
waivers or settlements of all claims, liabilities and damages resulting from
each such encroachment, violation or impairment, whether the same shall affect
Landlord or Tenant or (b) make such changes in the Improvements and take such
other actions as shall be necessary to remove such encroachment and to end such
violation or impairment, including, if necessary, the alteration of
improvements.  Any such alteration shall be made in conformity with the
requirements of Article VIII.


                                  ARTICLE VIII
                   ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
                   CAPITAL ADDITIONS TO THE LEASED PROPERTIES

          8.01   Tenant's Right to Construct. As to each Leased Property, during
                 ---------------------------  
the Term of this Lease or any Extension Term, as the case may be, so long as no
Event of Default shall have occurred and be continuing as to such Leased
Property, Tenant may make Capital Additions (as defined herein), or other
alterations, additions, changes and/or improvements to such Leased Property as
deemed necessary or useful to operate such Leased Property for Tenant's Business
(individually, a "Tenant Improvement," or collectively, the "Tenant
Improvements"). "Capital Additions" shall mean the construction of one or more
new buildings or one or more additional structures annexed to any portion of any
of the Improvements on a Leased Property, which are constructed on any parcel or
portion of the Land comprising a Leased Property, including the construction of
a new floor, or the repair, replacement, restoration, remodeling or rebuilding
of the Improvements or any portion thereof on a Leased Property which are not
normal, ordinary or recurring to maintain such Leased Property. Except as
otherwise agreed to by Landlord herein or otherwise in writing, any such Tenant
Improvement or Capital Addition shall be made at Tenant's sole expense and shall
become the property of Landlord upon termination of this Lease. Unless

                                     -22-
<PAGE>
 
made on an emergency basis to prevent injury to person or property, as to each
Leased Property, Tenant must obtain Landlord's prior written approval, such
approval not to be unreasonably withheld or delayed, for any Capital Addition or
for any Tenant Improvement which is not a Capital Addition and which has a cost
of more than One Hundred Thousand Dollars ($100,000) or a cost which, when
aggregated with the costs of all such Tenant Improvements on such Leased
Property in a given Lease Year, would cause the total costs of all such Tenant
Improvements on such Leased Property to exceed Two Hundred Fifty Thousand
Dollars ($250,000).  Additionally, in connection with any Tenant Improvement,
including any Capital Addition, Tenant shall provide Landlord with copies of any
plans and specification therefor, Tenant's budget relating thereto, any required
governmental permits or approvals, any construction contracts or agreements
relating thereto, and any other information relating to such Tenant Improvement
as Landlord shall reasonably request.

          8.02   Scope of Right. Subject to Section 8.01 herein and Section 7.03
                 --------------     
concerning required alterations, at Tenant's cost and expense, Tenant shall have
the right to:

                 (a)  seek any governmental approvals, including building
                      permits, licenses, conditional use permits and any
                      certificates of need that Tenant requires to construct any
                      Tenant Improvement;

                 (b)  erect upon each Leased Property such Tenant Improvements
                      as Tenant deems desirable;

                 (c)  make additions, alterations, changes and improvements in
                      any Tenant Improvement so erected; and

                 (d)  engage in any other lawful activities that Tenant
                      determines are necessary or desirable for the development
                      of each Leased Property in accordance with the Tenant's
                      Business;

provided, however, Tenant shall not make any Tenant Improvement which would, in
Landlord's reasonable judgment, impair the value of the Leased Property or the
Tenant's Business without Landlord's prior written consent and provided, further
that Tenant shall not be permitted to create a mortgage, lien or any other
encumbrance on any Leased Property without Landlord's prior written consent.

          8.03   Cooperation of Landlord. Landlord shall cooperate with Tenant
                 -----------------------
and take such actions, including the execution and delivery to Tenant of any
applications or other documents, reasonably requested by Tenant in order to
obtain any governmental permits, licenses or approvals sought by Tenant to
construct any Tenant Improvement within fifteen (15) business days following the
later of: (a) the date Landlord receives Tenant's request or (b) the date of
delivery of any such application or document to Landlord; provided, the taking
of such action by Landlord, including the execution of said applications or
documents, shall be without cost to Landlord (or if there is a cost to Landlord,
such cost shall be reimbursed by Tenant), shall not cause Landlord to be in
violation

                                     -23-
<PAGE>
 
of any law, ordinance or regulation, and shall not be deemed a waiver by
Landlord of any of its rights or of any of Tenant's obligations, including but
not limited to indemnification.

                 8.04  Commencement of Construction.  Tenant agrees that:
                       ----------------------------                      

                       (a) Tenant shall diligently seek all governmental
                           approvals relating to the construction of any Tenant
                           Improvement;

                       (b) Once Tenant begins the construction of any Tenant
                           Improvement, Tenant shall diligently oversee any such
                           construction to completion in accordance with
                           applicable insurance requirements and the laws, rules
                           and regulations of all governmental bodies or
                           agencies having jurisdiction over the subject Leased
                           Property;

                       (c) Landlord shall have the right at any time and from
                           time to time to post and maintain upon each Leased
                           Property such notices as may be necessary to protect
                           Landlord's interest from mechanics' liens,
                           materialmen's liens or liens of a similar nature;

                       (d) Tenant shall not suffer or permit any mechanics'
                           liens or any other claims or demands arising from the
                           work of construction of any Tenant Improvement to be
                           enforced against any Leased Property or any part
                           thereof, and Tenant agrees to hold Landlord, its
                           agents and employees and said Leased Property free
                           and harmless from all demands, claims, causes of
                           action, fines, penalties, damages (including punitive
                           and consequential damages), losses, liabilities
                           (including strict liability), judgments, costs and
                           expenses (including, without limitation, attorneys'
                           fees, court costs, and the costs set forth in Section
                           9.06) incurred in connection with or arising
                           therefrom;

                       (e) All work shall be performed in a satisfactory and
                           workmanlike manner consistent with standards in the
                           industry; and

                       (f) Subject to Section 8.08 in the case of Capital
                           Additions, Tenant shall not secure any construction
                           or other financing for the Tenant Improvements which
                           is secured by a portion of any Leased Property
                           without Landlord's prior written consent, and any
                           such financing (i) shall not exceed the cost of the
                           Tenant Improvements, (ii) shall be subordinate to any
                           mortgage or encumbrance now existing or hereinafter
                           created with respect to such Leased Property, and
                           (iii) shall be limited solely to Tenant's interest in
                           the subject Leased Property.

                                     -24-
<PAGE>
 
          8.05   Rights in Tenant Improvements.  Notwithstanding anything to the
                 ------------------------------                                 
contrary in this Lease, all Tenant Improvements existing on the Leased Property
or constructed upon each Leased Property pursuant to Section 8.01, any and all
subsequent additions thereto and alterations and replacements thereof shall be
the sole and absolute property of Tenant during the Term and any Extension Term,
as the case may be, of this Lease (in respect of such Leased Property).  Upon
the expiration or early termination of this Lease in respect of a Leased
Property, all such Tenant Improvements located thereon shall become the property
of Landlord.  Without limiting the generality of the foregoing, prior to the
expiration or early termination of this Lease in respect of a Leased Property,
Tenant shall be entitled to all federal and state income tax benefits associated
with all Tenant Improvements located on such Leased Property.

          8.06   Personal Property. Tenant shall install, place, and use on each
                 ----------------- 
Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures as may be required or as Tenant
may, from time to time, deem necessary or useful to operate such Leased Property
in the operation of the Business.

          8.07   Requirements for the Tenant's Personal Property. Tenant shall
                 -----------------------------------------------               
comply with all of the following requirements in connection with the Tenant's
Personal Property:

                 (a)  RESERVED.

                 (b)  The Tenant's Personal Property shall be installed in a
                      good and workmanlike manner, in compliance with all
                      governmental laws, ordinances, rules, and regulations and
                      all insurance requirements, and be installed free and
                      clear of any mechanics' liens.

                 (c)  Tenant shall, at Tenant's sole cost and expense, maintain,
                      repair, and replace the Tenant's Personal Property.

                 (d)  Tenant shall, at Tenant's sole cost and expense, keep the
                      Tenant's Personal Property insured against loss or damage
                      by fire, vandalism and malicious mischief, sprinkler
                      leakage, and other physical loss perils commonly covered
                      by fire and extended coverage, boiler and machinery, and
                      difference in conditions insurance (which insurance shall
                      meet the requirements of Section 4.03 hereof) in an amount
                      not less than the full replacement cost thereof or such
                      other amount as appears on a schedule submitted by Tenant
                      to Landlord, which schedule shall be subject to Landlord's
                      approval, and Tenant shall use the proceeds from any such
                      policy for the repair and replacement of such items of
                      Tenant's Personal Property; provided, however, that if
                      Landlord fails to object to the schedule so submitted by
                      Tenant within five (5) business days of Landlord's receipt
                      of such schedule, Landlord's approval of such schedule
                      shall be deemed given.

                                     -25-
<PAGE>
 
                 (e)  Tenant shall pay all Impositions and other taxes
                      applicable to Tenant's Personal Property.

                 (f)  If Tenant's Personal Property is damaged or destroyed by
                      fire or otherwise, Tenant shall promptly repair or replace
                      Tenant's Personal Property unless Tenant is entitled to
                      and elects to terminate the Lease pursuant to Section
                      10.05.

                 (g)  As to each Leased Property, unless an Event of Default (or
                      any event which, with the giving of notice or lapse of
                      time, or both, would constitute an Event of Default) has
                      occurred and remains uncured beyond any applicable grace
                      period, Tenant may remove Tenant's Personal Property from
                      such Leased Property from time to time provided that: (i)
                      the items removed are not required or necessary to operate
                      the Business on such Leased Property (unless such items
                      are being replaced by Tenant) and (ii) Tenant promptly
                      repairs any damage to such Leased Property resulting from
                      the removal of Tenant's Personal Property.

                 (h)  As to each Leased Property, Tenant shall remove all of
                      Tenant's Personal Property upon the termination or
                      expiration of the Lease and shall promptly repair any
                      damage to such Leased Property resulting from the removal
                      thereof to the reasonable satisfaction of Landlord;
                      provided, however, if Tenant fails to remove Tenant's
                      Personal Property from such Leased Property within thirty
                      (30) days after the termination or expiration of this
                      Lease with respect thereto, then Tenant shall be deemed to
                      have abandoned such items of Tenant's Personal Property,
                      all of which shall become the property of Landlord, and
                      Landlord may remove, store and dispose of such property
                      and Tenant shall have no claim or right against Landlord
                      for such property or the value thereof regardless of the
                      disposition thereof by Landlord. Tenant shall pay
                      Landlord, upon demand, all expenses incurred by Landlord
                      in removing, storing, and disposing of such items of
                      Tenant's Personal Property and repairing any damage caused
                      by such removal. Tenant's obligations hereunder shall
                      survive the termination or expiration of this Lease as to
                      such Leased Property.

                 (i)  Tenant shall perform its obligations under any equipment
                      lease or security agreement for Tenant's Personal
                      Property.

          8.08   Financings of Capital Additions to a Leased Property.  Landlord
                 -----------------------------------------------------          
may, but shall be under no obligation to, provide or arrange construction,
permanent or other financing for any Capital Addition proposed to be made to a
Leased Property by Tenant.  Any financing so

                                     -26-
<PAGE>
 
provided by Landlord shall be made in accordance with, and subject to, a written
Addendum to this Lease.


                                   ARTICLE IX
                             DEFAULTS AND REMEDIES

          9.01   Events of Default.  The occurrence of any one or more of the
                 -----------------                                           
following shall be an event of default ("Event of Default") hereunder:

                 (a)  Tenant fails to pay in full any installment of Rent, or
                      any other monetary obligation payable by Tenant to
                      Landlord hereunder, within ten (10) days after the due
                      date thereof and after written notice thereof and an
                      opportunity to cure within a ten (10) day period after
                      such notice is given to Tenant by Landlord. In the event
                      of Tenant's failure to make timely payment of such
                      obligations two (2) times during any twelve (12) month
                      period, each subsequent such failure within the twelve
                      (12) months immediately following such second failure
                      shall immediately constitute an Event of Default, and
                      Landlord shall not be required to provide notice thereof,
                      nor shall Tenant have any further opportunity to cure such
                      failure;

                 (b)  Tenant fails to observe and perform any covenant (other
                      than the covenant in respect of insurance set forth in
                      Article IV), condition or agreement hereunder to be
                      performed by Tenant (except those described in Section
                      9.01(a) of this Lease) and such failure continues for a
                      period of twenty (20) days after written notice thereof is
                      given to Tenant by Landlord; or if, by reason of the
                      nature of such default, the same cannot with due diligence
                      be remedied within said twenty (20) days, such failure
                      will not be deemed to continue if Tenant proceeds promptly
                      and with due diligence to remedy the failure and
                      diligently completes the remedy thereof; provided,
                      however, said cure period will not extend beyond forty
                      (40) days if the facts or circumstances giving rise to the
                      default are creating a further harm to Landlord or the
                      subject Leased Property and Landlord makes a good faith
                      determination that Tenant is not undertaking remedial
                      steps that Landlord would cause to be taken if this Lease
                      were then to terminate;

                 (c)  If Tenant: (i) admits in writing its inability to pay its
                      debts generally as they become due; (ii) files a petition
                      in bankruptcy or a petition to take advantage of any
                      insolvency act; (iii) makes an assignment for the benefit
                      of its creditors; (iv) is unable to pay its debts as they

                                     -27-
<PAGE>
 
                      mature; (v) consents to the appointment of a receiver of
                      itself or of the whole or any substantial part of its
                      property; or (vi) files a petition or answer seeking
                      reorganization or arrangement under the federal bankruptcy
                      laws or any other applicable law or statute of the United
                      States of America or any state thereof;

                 (d)  If Tenant, on insolvency proceedings or on a petition in
                      bankruptcy filed against it, is adjudicated as bankrupt or
                      a court of competent jurisdiction enters an order or
                      decree appointing, without the consent of Tenant, a
                      receiver of Tenant of the whole or substantially all of
                      its property, or approving a petition filed against it
                      seeking reorganization or arrangement of Tenant under the
                      federal bankruptcy laws or any other applicable law or
                      statute of the United States of America or any state
                      thereof, and such judgment, order or decree is not
                      vacated, dismissed or set aside within sixty (60) days
                      from the date of the entry thereof;

                 (e)  If the estate or interest of Tenant in a Leased Property
                      or any part thereof is levied upon or attached in any
                      proceeding and the same is not vacated or discharged
                      within fifteen (15) days after commencement thereof
                      (unless Tenant is contesting such lien or attachment in
                      accordance with this Lease) or if such estate or interest
                      of Tenant is assigned, conveyed or involuntarily
                      transferred in violation of this Lease;

                 (f)  Any representation, warranty or covenant made by Tenant on
                      behalf of itself or an Affiliate in this Lease or in any
                      certificate, demand or request made pursuant hereto proves
                      to be incorrect, in any material respect, as of the date
                      of issuance or making thereof;

                 (g)  Conviction of Tenant or an Affiliate of a crime or offense
                      constituting a felony in the jurisdiction in which
                      committed or under federal law which conviction results in
                      the termination of the franchise or the license pursuant
                      to which Tenant or an Affiliate of Tenant conducts
                      business on or from the Leased Property.

                 (h)  Termination or relinquishment of the franchise or license
                      pursuant to which Tenant or an Affiliate conducts business
                      on or from any Leased Property, provided that such event
                      shall not constitute an Event of Default if (i) no other
                      Event of Default enumerated in this Section 9.01 shall
                      occur and be continuing, and (ii) at a date no later than
                      twenty-four (24) months following such date of termination
                      or relinquishment, Tenant or an Affiliate has entered into
                      written new or

                                     -28-
<PAGE>
 
                      amended franchises or licenses for operation of motor
                      vehicle retail or motor vehicle related businesses at such
                      Leased Property satisfactory to Landlord in its discretion
                      applying commercially reasonable standards;

                 (i)  Default under any franchise or license pursuant to which
                      Tenant or an Affiliate conducts business at a Leased
                      Property, if in the Landlord's judgment such default in
                      light of commercially reasonable standards and industry
                      practice would have a material adverse effect on the
                      Leased Property;

                 (j)  A final, non-appealable judgment or judgments for the
                      payment of money not fully covered (excluding deductibles)
                      by insurance is rendered against Tenant and the same
                      remains undischarged, unvacated, unbonded, unappealed or
                      unstayed for a period of thirty (30) consecutive days;
                      except for de minimus judgments of not greater than $2,000
                      dollars per judgment or $15,000 in the aggregate, which
                      shall not constitute an Event of Default unless the same
                      remain undischarged, unvacated, unbonded, unappealed or
                      unstayed for a period of thirty (30) consecutive days and
                      thereafter are not cured by Tenant within three (3)
                      business days notice from Landlord;

                 (k)  Tenant shall fail to observe the covenant in respect to
                      insurance under Article IV provided Landlord shall have
                      provided notice of such failure to Tenant and Tenant shall
                      have failed to cure such failure within three (3) business
                      days of such notice; or

                 (l)  Except after the effective date of a permitted assignment
                      meeting the requirements of Article XIII, if Tenant is
                      liquidated or dissolved, or begins proceedings toward
                      liquidation or dissolution, or in any manner permits the
                      sale or divestiture of substantially all of its assets.

          9.02   Remedies.  To the extent an Event of Default is applicable only
                 --------                                                       
to a specific Leased Property or specific Leased Properties (in accordance with
Section 9.01 above), the remedies set forth herein shall be exercisable solely
with respect to such Leased Property or Leased Properties, and shall not be
exercisable with respect to any other Leased Property.  To the extent an Event
of Default constitutes an Event of Default as to all of the Leased Properties
(in accordance with Section 9.01 above), the remedies set forth herein shall be
exercisable with respect to all of the Leased Properties.  Subject to the
foregoing provisions, Landlord may exercise any one or more of the following
remedies upon the occurrence of an Event of Default:

                 (a)  Landlord may terminate this Lease, exclude Tenant from
                      possession of the subject Leased Property and use
                      reasonable efforts to lease the

                                     -29-
                                        
<PAGE>
 
                      subject Leased Property to others. If this Lease is
                      terminated pursuant to the provisions of this subparagraph
                      (a) with respect to one or more, but less than all, of the
                      Leased Properties identified on Schedule A hereto, Tenant
                                                      ----------
                      will remain liable to Landlord for the Rent for all of the
                      Leased Properties identified on Schedule A and other sums
                                                      ---------- 
                      then due and for the balance of the Term as if the Lease
                      had not been terminated with respect to the subject Leased
                      Property, less the net proceeds, if any, of any re-letting
                      of the subject Leased Property by Landlord subsequent to
                      such termination, after deducting all Landlord's expenses
                      in connection with such re-letting, including without
                      limitation, the expenses set forth in Section 9.02(b)(ii)
                      below. Notwithstanding the termination of this Lease with
                      respect to a subject Leased Property, Tenant shall pay to
                      Landlord all amounts due as Rent, and such other amounts
                      then due, under this Lease on the days that such Rent and
                      such other amounts become due and payable as required by
                      this Lease.

                 (b)  Without demand or notice, Landlord may re-enter and take
                      possession of the subject Leased Property or any part
                      thereof; and repossess such Leased Property as of
                      Landlord's former estate; and expel Tenant and those
                      claiming through or under Tenant from such Leased
                      Property; and, remove the effects of both or either,
                      without being deemed guilty of any manner of trespass and
                      without prejudice to any remedies for arrears of Rent or
                      preceding breach of covenants or conditions. If Landlord
                      elects to re-enter, as provided in this paragraph (b) or
                      if Landlord takes possession of such Leased Property
                      pursuant to legal proceedings or pursuant to any notice
                      provided by law, Landlord may, from time to time, without
                      terminating any portion of this Lease, re-let such Leased
                      Property or any part of such Leased Property, either alone
                      or in conjunction with other portions of the Improvements
                      of which such Leased Property are a part, in Landlord's
                      name but for the account of Tenant, for such term or terms
                      (which may be greater or less than the period which would
                      otherwise have constituted the balance of the Term of this
                      Lease) and on such terms and conditions (which may include
                      concessions of free rent, and the alteration and repair of
                      such Leased Property) as Landlord, in its uncontrolled
                      discretion, may determine. Landlord may collect and
                      receive the Rents for such Leased Property. Landlord will
                      not be responsible or liable for any failure to re-let
                      such Leased Property, or any part of such Leased Property,
                      or for any failure to collect any Rent due upon such re-
                      letting. No such re-entry or taking possession of such
                      Leased Property by Landlord will be construed as an
                      election on Landlord's part to terminate this Lease unless
                      a written notice of

                                     -30-
<PAGE>
 
                      such intention is given to Tenant. No notice from Landlord
                      under this Lease or under a forcible entry and detainer
                      statute or similar law will constitute an election by
                      Landlord to terminate this Lease unless such notice
                      specifically says so. Landlord reserves the right
                      following any such re-entry or re-letting, or both, to
                      exercise its right to terminate this Lease by giving
                      Tenant such written notice, and, in that event such Lease
                      will terminate as specified in such notice.

                 (c)  If Landlord elects to take possession of a Leased Property
                      according to subparagraph (b) of this Section 9.02 without
                      terminating this Lease, Tenant will pay Landlord (A) the
                      Rent and other sums which would be payable under this
                      Lease with respect to such Leased Property if such
                      repossession had not occurred, less (B) the net proceeds,
                      if any, of any re-letting of such Leased Property after
                      deducting all of Landlord's expenses incurred in
                      connection with such re-letting, including without
                      limitation, all repossession costs, brokerage commissions,
                      legal expense, attorneys' fees, expense of employees,
                      alteration, remodeling, repair costs, and expense of
                      preparation for such re-letting. If, in connection with
                      any re-letting, any resulting lease term for the subject
                      Leased Property extends beyond the existing Term or
                      Extension Term, as the case may be, or such Leased
                      Property covered by such re-letting includes areas which
                      are not part of such Leased Property, a fair apportionment
                      of the Rent received from such re-letting and the expenses
                      incurred in connection with such re-letting will be made
                      in determining the net proceeds received from such re-
                      letting. In addition, in determining the net proceeds from
                      such re-letting, any rent concessions will be apportioned
                      over the term of the new lease. Tenant will pay such
                      amounts to Landlord monthly on the days on which the Rent
                      and all other amounts owing under this Lease would have
                      been payable if possession had not been retaken, and
                      Landlord will be entitled to receive the rent and other
                      amounts from Tenant on each such day. Notwithstanding
                      anything herein to the contrary, Landlord, at its option,
                      may collect and apply any Rent received from such re-
                      letting in accordance herewith and in such case shall
                      remit any balance thereof to Tenant. Landlord shall incur
                      no liability or obligation to Tenant arising out of the
                      collection or application of Rent by Landlord hereunder.

                 (d)  Landlord may re-enter the applicable Leased Property and
                      have, repossess and enjoy such Leased Property as if this
                      Lease had not been made, and in such event, Tenant and its
                      successors and assigns 

                                     -31-
<PAGE>
 
                      shall remain liable for any contingent or unliquidated
                      obligations or sums owing at the time of such
                      repossession.

                 (e)  Landlord may take whatever action at law or in equity as
                      may appear necessary or desirable to collect the Rent and
                      other amounts payable hereunder with respect to the
                      subject Leased Property then due and thereafter to become
                      due, or to enforce performance and observance of any
                      obligations, agreements or covenants of Tenant under this
                      Lease.

          9.03   Right of Set-Off.  Landlord may, and is hereby authorized by
                 -----------------                                           
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord in respect of a Leased
Property, including all sums held in any escrow for Impositions, any
indebtedness of Landlord to Tenant, and any claims by Tenant against Landlord,
against any obligations of Tenant under this Lease in respect of such Leased
Property and against any claims by Landlord against Tenant, whether or not
Landlord has exercised any other remedies hereunder. Landlord shall set-off and
apply such sums first, to delinquent real estate taxes, unless such taxes are
being protested in good faith and no lien has attached to any Leased Property
with respect thereto, second, to currently due and owing real estate taxes, and
next, to other Tenant's obligations in the order which Landlord may determine.
The rights of Landlord under this Section are in addition to any other rights
and remedies Landlord may have against Tenant.

          9.04   Performance of Tenant's Covenants.  Landlord may, without
                 ---------------------------------
waiving or releasing any obligation of Tenant, and without waiving or releasing
any obligation or default, perform any obligation of Tenant which Tenant has
failed to perform within five (5) business days after Landlord has sent a
written notice to Tenant informing it of its specific failure (provided no such
notice shall be required if Landlord has previously notified Tenant of such
failure under the provisions of Section 9.01). In the event Landlord deems, in
its discretion, that Tenant's failure to perform such obligation has given rise
to an emergency situation, Landlord may perform such obligation without waiving
or releasing any obligation of Tenant, and without waiving or releasing any
obligation or default; provided, however, that Landlord shall notify Tenant of
such performance as soon as it is reasonably practicable to do so. Tenant shall
reimburse Landlord on demand, as Additional Rent, for any expenditures thus
incurred by Landlord and shall pay interest thereon at the New York Prime Rate.

          9.05   Late Charge.  Any payment not made by Tenant for more than five
                 -----------                                                    
(5) business days after the due date shall be subject to a late charge payable
by Tenant as Rent of four percent (4%) of the amount of such overdue payment,
except that in the case of the first late payment within any twelve month period
the Tenant shall have three (3) business days after notice to cure without
incurring a late charge.  Notwithstanding the foregoing, in the event that
Tenant's payment is not made more than five (5) business days after the due date
more than two (2) times during any twelve (12) month period, any such subsequent
overdue payments within the twelve (12) months

                                     -32-
                
<PAGE>
 
immediately following such second failure shall be subject to a late charge
payable by Tenant as Rent of seven percent (7%) of the amount of such overdue
payment.

          9.06   Litigation; Attorneys' Fees.  Within ten (10) days after Tenant
                 ----------------------------                                   
has knowledge of any litigation or other proceeding related to or arising out of
this Agreement or the Leased Property in which claims are asserted in an amount
in excess of $50,000, that (1) may be instituted against Tenant, (2) may be
instituted against any Leased Property to secure or recover possession thereof,
or (3) may affect the title to or the interest of Landlord in any Leased
Property, Tenant shall give written notice thereof to Landlord.  In the event
that Landlord reasonably determines that Tenant has failed to give adequate
cooperation or information with respect to any such litigation, investigation,
receivership, administrative, bankruptcy, insolvency or other similar
proceeding, Landlord may, after notice to Tenant, undertake such investigation
or proceeding and Tenant shall pay all reasonable costs and expenses (the
"Costs") related thereto that are incurred by Landlord, whether or not Landlord
has received notice from Tenant of such investigation or proceeding, and whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, which Costs shall include, without limitation:  (a) the
reasonable fees, expenses, and costs of any litigation, investigation,
receivership, administrative, bankruptcy, insolvency or other similar
proceeding; (b) reasonable attorney, paralegal, consulting and witness fees and
disbursements; and (c) the reasonable expenses, including, without limitation,
lodging, meals, and transportation, of Landlord and its employees, agents,
attorneys, and witnesses in investigating or preparing for litigation,
administrative, bankruptcy, insolvency or other similar proceedings and
attendance at hearings, depositions, and trials in connection therewith. Within
ten (10) days of Landlord's presentation of an invoice of Costs incurred by
Landlord pursuant to the preceding sentence or otherwise reasonably incurred by
Landlord in enforcing or preserving Landlord's rights under this Lease, whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, Tenant shall pay all such Costs. All such Costs as incurred
shall be deemed to be Additional Rent under this Lease.

          9.07   Remedies Cumulative.  The remedies of Landlord herein are
                 -------------------                                      
cumulative to and not in lieu of any other remedies available to Landlord at law
or in equity.  The use of, or failure to use, any one remedy shall not be taken
to exclude or waive the right to use any other remedy.

          9.08   Escrows and Application of Payments.  As security for the
                 -----------------------------------                      
performance of its obligations hereunder, Tenant hereby assigns to Landlord all
its right, title and interest in and to all monies escrowed with Landlord under
this Lease and all deposits with utility companies, taxing authorities, and
insurance companies; provided, however, that Landlord shall not exercise its
rights hereunder with respect to any Leased Property until an Event of Default
has occurred in respect of such Leased Property.  Any payments received by
Landlord under any provisions of this Lease during the existence, or continuance
of an Event of Default shall be applied to Tenant's obligations, first, to
delinquent real estate taxes, unless such taxes are being protested in good
faith and no lien has attached to any Leased Property with respect thereto,
second, to currently due and owing real estate taxes, and next, to other
Tenant's obligations in the order which Landlord may determine.

                                     -33-
<PAGE>
 
          9.09   Power of Attorney.  Tenant hereby irrevocably and
                 -----------------
unconditionally appoints Landlord, or Landlord's authorized officer, agent,
employee or designee, as Tenant's true and lawful attorney-in-fact, to act,
after an Event of Default, for Tenant in Tenant's name, place, and stead, and
for Tenant's and Landlord's use and benefit, to execute, deliver and file all
applications and any and all other necessary documents or things, to effect a
transfer, reinstatement, renewal and/or extension of any and all licenses and
other governmental authorizations issued to Tenant in connection with Tenant's
operation of the Leased Properties, and to do any and all other acts incidental
to any of the foregoing. Tenant irrevocably and unconditionally grants to
Landlord as its attorney-in-fact full power and authority to do and perform,
after an Event of Default, every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of Tenant's obligations hereunder.


                                   ARTICLE X
                            DAMAGE AND DESTRUCTION

          10.01  General.  Tenant shall notify Landlord if any Leased Property
                 -------
is damaged or destroyed by reason of fire or any other cause. Tenant shall
promptly repair, rebuild, or restore such Leased Property, at Tenant's expense,
so as to make such Leased Property at least equal in value to such Leased
Property existing immediately prior to such occurrence and as nearly similar to
it in character as is practicable and reasonable. Before beginning such repairs
or rebuilding, or executing any contracts in connection with such repairs or
rebuilding, Tenant will submit for Landlord's approval, which approval Landlord
will not unreasonably withhold or delay, complete and detailed plans and
specifications for such repairs or rebuilding. Promptly after receiving
Landlord's approval of the plans and specifications, Tenant will begin such
repairs or rebuilding and will oversee the repairs and rebuilding to completion
with diligence, subject, however, to strikes, lockouts, acts of God, embargoes,
governmental restrictions, and other causes beyond Tenant's reasonable control.
Landlord will make available to Tenant the net proceeds of any fire or other
casualty insurance paid to Landlord for such repair or rebuilding as the same
progresses, after deduction of any costs of collection, including attorneys'
fees. Payment will be made against properly certified vouchers of a competent
architect in charge of the work and approved by Landlord. Prior to commencing
the repairing or rebuilding, Tenant shall deliver to Landlord for Landlord's
approval a schedule setting forth the estimated monthly draws for such work.
Landlord will contribute to such payments out of the insurance proceeds an
amount equal to the proportion that the total net amount received by Landlord
from insurers bears to the total estimated cost of the rebuilding or repairing,
multiplied by the payment by Tenant on account of such work. Landlord may,
however, withhold ten percent (10%) from each such payment and shall disburse
such amount after: (a) the work of repairing or rebuilding is completed and
proof has been furnished to Landlord that no lien or liability has attached or
will attach to such Leased Property or to Landlord in connection with such
repairing or rebuilding and (b) Tenant has obtained a certificate of use and
occupancy (or its functional

                                     -34-
                                                    
<PAGE>
 
equivalent) for the portion of such Leased Property being repaired or rebuilt.
Upon the completion of rebuilding or repairing and the furnishing of such proof,
the balance of the net proceeds of such insurance payable to Tenant on account
of such repairs or rebuilding will be paid to Tenant.  Tenant will obtain and
deliver to Landlord a temporary or final certificate of occupancy before such
Leased Property is reoccupied for any purpose.  Tenant shall complete such
repairs or rebuilding free and clear of mechanic's or other liens, and in
accordance with the building codes and all applicable laws, ordinances,
regulations, or orders of any state, municipal, or other public authority
affecting the repairs or rebuilding, and also in accordance with all
requirements of the insurance rating organization, or similar body.  Any
remaining proceeds of insurance after such restoration will be Tenant's
property.

          10.02  Landlord's Inspection.  During the progress of such repairs or
                 ---------------------                                       
rebuilding, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
repairs or rebuilding.  Tenant will keep all plans, shop drawings, and
specifications available, and Landlord and its architects and engineers may
examine them at all reasonable times. If, during such repairs or rebuilding,
Landlord and its architects and engineers determine that the repairs or
rebuilding are not being done in accordance with the approved plans and
specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such repairs or rebuilding do not accord with the approved
plans and specifications.  Upon the receipt of any such notice, Tenant will
cause corrections to be made to any deficiencies, omissions, or such other
respect.  Tenant's obligations to supply insurance, according to Article IV,
will be applicable to any repairs or rebuilding under this Section 10.02.

          10.03  Landlord's Costs.  Tenant shall, within fifteen (15) days after
                 ----------------                                               
receipt of an invoice from Landlord, pay the reasonable costs, expenses, and
fees of any architect or engineer employed by Landlord to review any plans and
specifications and to supervise and approve any construction, or for any
services rendered by such architect or engineer to Landlord as contemplated by
any of the provisions of this Lease, or for any services performed by Landlord's
attorneys in connection therewith; provided, however, that Landlord will consult
with Tenant and notify Tenant of the estimated amount of such expenses.

          10.04  Rent Abatement.  In the event that the provisions of Section
                 --------------                                              
10.01 above shall become applicable as to any Leased Property, and subject to
the last sentence of this Section 10.04, the applicable Base Annual Rent shall
be abated or reduced proportionately during any period in which, by reason of
such damage or destruction, there is substantial interference with the operation
of the Business of Tenant in such Leased Property, having regard to the extent
to which Tenant may be required to discontinue any Business on such Leased
Property, and such abatement or reduction shall continue for the period
commencing with such destruction or damage and ending with the substantial
completion by Tenant of such work or repair and/or reconstruction.  In the event
that only a portion of any Leased Property is rendered untenantable or incapable
of such use, the Base Annual Rent payable hereunder in respect thereof shall be
reduced proportionately considering the extent

                                     -35-
<PAGE>
 
to which the Tenant is unable to practicably use the Leased Property for
Business.  Tenant shall use reasonably diligent efforts to make the Leased
Property tenantable and capable of such use. Notwithstanding any other provision
hereof, such rental abatement shall be limited to the amount of any rental or
Business interruption insurance proceeds actually received by Landlord under
Article IV.

          10.05  [Intentionally Omitted]

          10.06  Damage Near End of Term.  Notwithstanding any provisions of
                 -----------------------                                    
Sections 10.01 or 10.05 to the contrary, if damage to or destruction of any
Leased Property occurs during the last twenty-four (24) months of the Term, and
if such damage or destruction renders the Leased Property Completely Destroyed
or Partially Destroyed, either party shall have the right to terminate this
Lease as to such Leased Property by giving notice to the other within ten (10)
days after the date of damage or destruction, in which event Landlord shall be
entitled to retain the insurance proceeds and Tenant shall pay to Landlord on
demand the amount of any deductible or uninsured loss arising in connection
therewith; provided, however, that any such notice given by Landlord shall be
void and of no force and effect if Tenant exercises an available option for an
Extension Term with respect to such Leased Property pursuant to provisions of
this Lease within ten (10) business days following receipt of such termination
notice.

          10.07  Risk of Loss.  Notwithstanding anything herein to the contrary,
                 ------------                                                   
during the Term or any Extension Term, as the case may be, the risk of loss of
or decrease in the enjoyment and beneficial use of the Leased Properties in
consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise is assumed by Tenant, and Landlord
shall in no event be answerable or accountable therefor except in the case of
gross negligence, willful misconduct or breach of this Lease by Landlord
resulting in such damage or destruction.  In addition, all risk of loss or
decrease in enjoyment and beneficial use in consequence of foreclosures,
attachments, levies or executions is assumed by Tenant except for foreclosure
due to Landlord's indebtedness.


                                  ARTICLE XI
                                 CONDEMNATION

          11.01  Total Taking.  If at any time during the Term or any Extension
                 ------------                                                  
Term, as the case may be, any Leased Property is totally and permanently taken
by right of eminent domain or by conveyance made in response to the threat of
the exercise of such right ("Condemnation"), this Lease shall terminate as to
such Leased Property on the Date of Taking (which shall mean the date the
condemning authority has the right to possession of the property being
condemned), and Tenant shall promptly pay all outstanding applicable Rent and
other charges through the date of termination, provided, however, this Lease
shall not so terminate if the Condemnation occurred due to the failure of Tenant
to maintain such Leased Property as required by Article VII hereof or other
applicable

                                     -36-
<PAGE>
 
provisions hereof, whether or not such failure on the part of Tenant constituted
an Event of Default hereunder at the time of the Condemnation.
 
          11.02  Partial Taking.  If a portion of a Leased Property is taken by
                 --------------                                                
Condemnation, this Lease shall remain in effect as to such Leased Property if
such Leased Property is not thereby rendered Unsuitable for the continuation of
Tenant's Business on that Leased Property (which shall mean that such Leased
Property is in such a state or condition such that in the good faith judgment of
Tenant, reasonably exercised, it cannot be used on a commercially practicable
basis in the operation of the Business), but if such Leased Property is thereby
rendered Unsuitable for the continuation of Tenant's Business on that Leased
Property, this Lease shall terminate as to such Leased Property on the Date of
Taking, provided such Condemnation was not as a result of Tenant's failure to
maintain such  Leased Property as provided for in Section 11.01.

          11.03  Restoration.  If there is a partial taking of any Leased
                 -----------
Property and this Lease remains in full force and effect pursuant to Section
11.02, Landlord shall retain the amount of any Landlord Award (as hereafter
defined) received by Landlord, Landlord shall make available such Landlord Award
to accomplish all necessary restoration to the Leased Property, and any excess
after such application shall be retained by Landlord. If there is a partial
taking of any Leased Property and this Lease remains in full force and effect
pursuant to Section 11.02, Tenant shall retain the amount of any Tenant Award
(as hereafter defined) received by Tenant, Tenant shall apply such Tenant Award
to accomplish all necessary restoration of Tenant's property, and any excess
after such application shall be retained by Tenant. Notwithstanding anything in
this Section to the contrary, in the event that there is a partial taking of any
Leased Property and this Lease remains in full force and effect pursuant to
Section 11.02, and there is a single Award with respect to such partial taking,
then the Landlord and Tenant shall use their good faith efforts to determine the
proper apportionment of such Award (as hereafter defined) to restoration of
Landlord's and Tenant's respective properties. In the event that the parties are
unable to agree on such apportionment within thirty (30) days, the parties shall
submit to arbitration of an apportionment subject to the arbitration provisions
set forth in Article XIV.

          11.04  Landlord's Inspection.  During the progress of such
                 ---------------------
restoration, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
restoration. Tenant will keep all plans, shop drawings, and specifications
available, and Landlord and its architects and engineers may examine them at all
reasonable times. If, during such restoration, Landlord and its architects and
engineers determine that the restoration is not being done in accordance with
the approved plans and specifications, Landlord will give prompt notice in
writing to Tenant, specifying in detail the particular deficiency, omission, or
other respect in which Landlord claims such restoration does not accord with the
approved plans and specifications. Upon the receipt of any such notice, Tenant
will cause corrections to be made to any deficiencies, omissions, or such other
respect. Tenant's obligations to supply insurance, according to Article IV, will
be applicable to any restoration under this Section.

                                     -37-
<PAGE>
 
          11.05  Award Distribution.  The entire compensation, sums or anything
                 ------------------
of value awarded, paid or received on a total or partial Condemnation of a
Leased Property that is awarded to Landlord shall belong to Landlord (the
"Landlord Award"). The entire compensation, sums or anything of value awarded,
paid or received on a total or partial Condemnation of a Leased Property that is
awarded to Tenant shall belong to Tenant (the "Tenant Award", collectively with
the Landlord Award, the "Awards", and each, individually, an "Award").
Notwithstanding anything in this Section to the contrary, in the event that
there is a total or partial Condemnation of a Leased Property and there is a
single Award with respect to such Condemnation, then the Landlord and Tenant
shall use their good faith efforts to determine the proper apportionment of such
Award to Landlord's and Tenant's respective properties. In the event that the
parties are unable to agree on such apportionment within thirty (30) days, the
parties shall submit to arbitration of an apportionment subject to the
arbitration provisions set forth in Article XIV.

          11.06  Temporary Taking.  The taking of any Leased Property, or any
                 ----------------
part thereof, by military or other public authority shall constitute a taking by
Condemnation only when the use and occupancy by the taking authority has
continued for longer than twenty four (24) months. During any such twenty-four
(24) month period, which shall be a temporary taking, all the provisions of this
Lease shall remain in full force and effect as to such Leased Property with no
abatement of rent payable by Tenant hereunder. In the event of any such
temporary taking, the entire amount of any such Award made for such temporary
taking allocable to the Term hereof, whether paid by way of damages, Rent or
otherwise, shall be paid to Tenant.


                                  ARTICLE XII
        ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS

          Tenant hereby represents, warrants and covenants to Landlord as
follows:

          12.01  Organization and Qualification.
                 ------------------------------ 

          (a)    Tenant is a Maryland corporation duly organized, validly
                 existing and in good standing under the laws of its state of
                 incorporation or organization and the State of Maryland, with
                 all power and authority, corporate or otherwise, necessary to:
                 (i) enter into and perform this Lease and (ii) own and lease
                 its assets and properties, and conduct its Business, as it is
                 now being conducted or proposed to be conducted. Tenant is duly
                 qualified as a foreign corporation or other entity, as the case
                 may be, to conduct its Business and own and lease its assets
                 and properties, and is in good standing, in each jurisdiction
                 where the character of its assets and properties owned or held
                 under lease or the nature of its Business makes such
                 qualification necessary, and is duly qualified and licensed
                 under all laws, regulations, ordinances or orders of public or
                 governmental authorities, or otherwise to carry on its Business
                 and own or lease its assets and properties in the places and in
                 the

                                     -38-
<PAGE>
 
                 manner in which they are owned, leased or conducted or proposed
                 to be owned, leased or conducted, except where the failure to
                 be so organized, qualified and in good standing or to have such
                 authority, qualification or licensing could not result in a
                 Material Adverse Change. Complete and correct copies of
                 Tenant's Charter, as in effect on the date hereof, and Tenant's
                 by-laws, also as in effect on the date hereof, have been
                 delivered to Landlord.

          (b)    Each Affiliate that conducts operations or business on or from
                 any Leased Property, whether now or at any time in the future,
                 is duly organized, validly existing and in good standing under
                 the laws of its organization, with all power and authority,
                 corporate or otherwise, necessary to own and lease its assets
                 and properties, and conduct its business, as it is now being
                 conducted or proposed to be conducted. Each Affiliate is duly
                 qualified as a foreign corporation or other entity, as the case
                 may be, to do business and own and lease its assets and
                 properties, and is in good standing, in each jurisdiction where
                 the character of its assets and properties owned or held under
                 lease or the nature of its activities or business makes such
                 qualification necessary or advisable, and is duly qualified and
                 licensed under all laws, regulations, ordinances or orders or
                 public or governmental authorities or otherwise to carry on its
                 business and own or lease its assets and properties in the
                 places and in the manner in which they are owned, leased or is
                 conducted or proposed to be owned, leased or conducted, except
                 where the failure to be so organized, qualified and in good
                 standing or to have such authority, qualification or licensing
                 could not result in a Material Adverse Change.

          "Material Adverse Change" since a particular specified date, or a date
which may be specified from the circumstances existing immediately prior to the
happening of a specified event or occurrence, or, if no date or event is
specified, with reference to the most recent Annual Financial Statements
delivered pursuant to this Lease, means a material adverse change in the
Business, assets, properties, franchises, financial condition or income of
Tenant or the operations, business, assets, properties, franchises, financial
condition, income or prospects of any Affiliate, whether or not such event or
occurrence is an Event of Default.  Nothing that would otherwise be a breach of
any representation, warranty, covenant or obligation herein by any Affiliate
shall be a breach of this Agreement, unless such breach constitutes or causes a
material adverse effect on the Business.

          "Affiliate" means with respect to any Person, (i) any Person that
holds direct or indirect beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of voting securities or other
voting interests representing at least five percent (5%) of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least five percent (5%) of the outstanding equity securities or
interests in a Person, or (ii) any Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such Person.

                                     -39-
<PAGE>
 
          A "Person" shall mean and include natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations, whether or not legal
entities, and governments and agencies and political subdivisions thereof.

          12.02  Material Agreements.  Schedule 12.02 is a complete list of all
                 -------------------   --------------                          
agreements to which Tenant is a party that are material to the ownership and use
of the Leased Property or the operation of Tenant's Business, and Tenant will
make available to Landlord a copy of each of these agreements (including all
exhibits, schedules and amendments thereto).

          12.03  Changes in Condition.  Since the date of the latest Annual
                 --------------------                                     
Financial Statements, no Material Adverse Change has occurred between such date
and the date hereof, and neither Tenant nor any Affiliate has entered into any
material transaction outside the ordinary course of its or their operations or
business, including the Business, except as set forth in Schedule 12.03 and the
                                                         --------------        
matters contemplated by this Lease.

          12.04  Franchises, Licenses, etc.  Tenant and its subsidiaries own, or
                 -------------------------                                     
have sufficient interests in, all franchises, trademarks, trademark rights,
trade names, trade name rights, copyrights, licenses, permits, authorizations
and other rights as are necessary for the conduct of Tenant's Business and its
subsidiaries' businesses as now conducted or proposed to be conducted by Tenant
or any Affiliate, as well as rights under any agreement under which Tenant or
its subsidiaries has access to confidential information used by Tenant or its
subsidiaries in Tenants' Business or the businesses of its subsidiaries, as the
case may be (collectively, the "Intellectual Property").  All Intellectual
Property is in full force and effect in all material respects, and Tenant and
its subsidiaries are in substantial compliance with the foregoing without any
conflict with the valid rights of others, which has resulted, or could be
reasonably likely to result in any Material Adverse Change.  Neither Tenant nor
any Affiliate has violated, or received any communication that by conducting its
Business or any Affiliate's businesses, it or any Affiliate would violate any
franchises, licenses, patents, trademarks, service marks, trade names,
copyrights, trade secrets, proprietary rights or processes of any other Person
(as hereafter defined) nor is Tenant or any Affiliate aware of any such
violations.  No event has occurred which permits, or after notice or lapse of
time or both would permit, the revocation or termination of any such license,
franchise or other right or affect the rights of Tenant or any Affiliate so as
to result in or reasonably be likely to result in any Material Adverse Change.
There is no litigation or other proceeding or dispute or, to the knowledge of
Tenant or any Affiliate, threat thereof with respect to the validity or, where
applicable, the extension or renewal, of any of the foregoing which has
resulted, or could result, in any Material Adverse Change.

          12.05  Litigation.  No litigation, at law or in equity, or any
                 ----------                                            
proceeding before any court, board or other governmental or administrative
agency or any arbitrator or other forum of alternative dispute resolution is
pending or, to the knowledge of Tenant or any Affiliate, threatened which
involves any risk of any final judgment, order or liability which, after giving
effect to any applicable insurance, has resulted, or could result, in any
Material Adverse Change or which seeks to enjoin the execution and consummation
of this Lease and the performance of Tenant's obligations

                                     -40-
<PAGE>
 
hereunder.  No judgment, decree or order of any court, board or other
governmental or administrative agency or any arbitrator has been issued against
or binds Tenant or any Affiliate, which has resulted, or could result, in any
Material Adverse Change.

          12.06  Authorization and Enforceability.  Tenant has taken all
                 --------------------------------
corporate or other action required to execute, deliver and perform this Lease.
This Lease constitutes the legal, valid and binding obligation of Tenant and is
enforceable against Tenant in accordance with its terms.

          12.07  No Legal Obstacle to Lease.  Neither the execution and delivery
                 --------------------------
of this Lease nor the performance of any obligation hereunder has constituted or
resulted in or will constitute or result in:

                 (a)  any breach, violation of, conflict with, default under or
                      termination of any agreement, contract, mortgage,
                      instrument, deed or lease to which Tenant or any Affiliate
                      is a party or by which it or they are bound;

                 (b)  the violation of or conflict with any law, statute,
                      ordinance, judgment, decree, order, rule or regulation
                      applicable to Tenant, any Affiliate, any Improvements or
                      any Leased Property; or

                 (c)  any violation of or conflict with Tenant's or any
                      Affiliate's Charter or By-Laws or other organizational
                      documents, as the case may be.

          No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other Person is
required to be obtained or made by Tenant in connection with the execution,
delivery and performance of this Lease.
 
          12.08  Certain Business Representations:
                 -------------------------------- 

                 (a)  Labor Relations.  No dispute or controversy between Tenant
                      --------------- 
                      or any Affiliate and its or their employees has resulted
                      in, or is reasonably likely to result in, any Material
                      Adverse Change, and neither Tenant nor any Affiliate
                      anticipates that its relationships with its unions or
                      employees will result, or are reasonably likely to result,
                      in any Material Adverse Change. Tenant and each Affiliate
                      is in compliance in all material respects with all federal
                      and state laws relating to employees and labor relations,
                      including, but not limited to, laws relating to health and
                      safety in the workplace, non-discrimination in employment
                      and the payment of wages.

                 (b)  Antitrust.  Tenant and each Affiliate is in compliance in
                      ---------
                      all material respects with all federal and state antitrust
                      laws relating to Tenant's

                                     -41-
<PAGE>
 
                      Business and the subsidiaries' businesses and the
                      geographic concentration thereof.

                 (c)  Consumer Protection.  Neither Tenant nor any Affiliate is
                      -------------------
                      in violation of any rule, regulation, order, or
                      interpretation of any rule, regulation or order of the
                      Federal Trade Commission (including truth-in-lending) or
                      other federal, state or local public or governmental
                      authority or agency, with which the failure to comply, in
                      the aggregate, has resulted in, could result in, a
                      Material Adverse Change.

                 (d)  Future Expenditures.  Neither Tenant nor any Affiliate,
                      -------------------                                     
                      anticipates that further expenditures, if any, by Tenant
                      or any Affiliate needed to meet the provisions of any
                      federal, state or foreign governmental statutes, orders,
                      rules or regulation could result in any Material Adverse
                      Change.

                 (e)  Benefit Liabilities.  Neither Tenant nor any ERISA
                      -------------------
                      Affiliate maintains, contributes to, or is obligated to
                      contribute to, nor has Tenant or any ERISA Affiliate
                      maintained, contributed to, been obligated to contribute
                      to, or had any direct, indirect, or contingent liability
                      with respect to, any Title IV Plan (as hereafter defined).
                      Each Tenant Benefit Plan has been maintained in compliance
                      with its terms and with applicable laws (including
                      specifically the Code and the Employee Retirement Income
                      Security Act of 1974 ("ERISA"). "Tenant Benefit Plan"
                      means any plan, fund, or other similar program described
                      in Section 3(2) of ERISA and established or maintained or
                      with respect to which Tenant and/or any ERISA Affiliate
                      has an obligation to contribute for the benefit of its
                      employees (or for which Tenant could be directly or
                      contingently liable). "Title IV Plan" means an "employee
                      benefit plan" (as defined in Section 3(3) of ERISA) that
                      is subject to Title IV of ERISA and is or has been
                      established or maintained, by Tenant or any ERISA
                      Affiliate, or to which contributions are, have been, or
                      should have been made. "ERISA Affiliate" means any trade
                      or business, whether or not incorporated, that, together
                      with Tenant, is or has been under common control, within
                      the meaning of Section 414(b), (c), (m), or (o) of the
                      Code or Section 4001 of ERISA.

          12.09  Certain Financial Covenants.  Tenant or an Affiliate, as
                 ---------------------------
applicable, is in compliance in all material respects with all financial
covenants required to be maintained pursuant to any franchise or other agreement
pursuant to which Tenant or such Affiliate operates its business, except in such
respects as shall not result in any franchisor under any franchise or operating

                                     -42-
<PAGE>
 
agreement to which Tenant is a party taking any action that could result in a
Material Adverse Change.

          12.10  Cash Flow Coverage Ratio Covenant.  On the date of this Lease
                 ---------------------------------
and measured at a date that is twenty-four (24) months following such date (each
a "Cash Flow Measurement Date"), and on each anniversary date that is twenty-
four (24) months following a prior Cash Flow Measurement Date, Tenant shall have
maintained a Cash Flow Coverage Ratio of not less than 1.5 to 1.0 based on the
Annual Financial Statements to be delivered to Landlord in accordance with
Section 6.04 hereof. "Cash Flow Coverage Ratio" means the aggregate of net
income before taxes plus mortgage interest, rent expense, depreciation,
compensation of principals of the Business, management fees plus the annual LIFO
adjustment and other non-cash expenses, less recurring capital expenditures and
gain (loss) on sale of real estate, dividends and/or profits taken out of Tenant
divided by the aggregate of the Tenant's obligations under this Lease.
Notwithstanding anything herein to the contrary, in the event that Tenant shall
not be in compliance with this covenant at a Cash Flow Measurement Date or
Tenant shall have knowledge of such non-compliance prior to any Cash Flow
Measurement Date, the Tenant shall have the right to cure such breach through
any reasonable commercial means, including, but not limited to, providing
guarantees acceptable to Landlord, increasing capital, or cross collateralizing
with any other property of Tenant or an Affiliate, provided that such breach is
cured within one hundred and eighty (180) days after Notice by Landlord to
Tenant of the existence of such breach.

          12.11  Disclosure.  This Lease does not contain any untrue statement
                 ----------
of a material fact or omit to state a material fact necessary in order to make
any statement contained herein not misleading in light of the circumstances
under which it was made. To Tenant's knowledge, there is no event, fact or
occurrence that has resulted, or in the future (so far as Tenant can reasonably
foresee) could result, in any Material Adverse Change, except to the extent that
present or future general and sector-specific economic conditions may result in
a Material Adverse Change.

          12.12  Covenant Not to Acquire.  Tenant covenants and agrees that
                 -----------------------
during the Term and any Extension Term, as the case may be, Tenant and its
controlling shareholders or its or their Affiliates will not acquire, directly
or indirectly, more that 9.90% of the outstanding common shares of beneficial
interest of Capital Automotive REIT. Tenant covenants and agrees that it will
divest itself of such shares of Capital Automotive REIT as may be necessary to
satisfy the limitations of this Section 12.12.

                                     -43-
<PAGE>
 
                                 ARTICLE XIII
                     ASSIGNMENT AND SUBLETTING; ATTORNMENT

          13.01  Prohibition Against Subletting and Assignment.  Subject to
                 ---------------------------------------------
Section 13.03, Tenant shall not, without the prior written consent of Landlord,
or upon compliance with any conditions established by Landlord, in its
reasonable discretion, assign, mortgage, pledge, hypothecate, encumber or
otherwise transfer (except to an Affiliate) this Lease or any interest herein,
or all or any part of any Leased Property, or suffer or permit this Lease or the
leasehold estate created hereby or any other rights arising hereunder to be
assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole
or in part, whether voluntarily, involuntarily or by operation of law. For
purposes of this Section 13.01, an assignment of this Lease shall be deemed to
include any Change of Control of Tenant, as if such Change of Control were an
assignment of the Lease. In the event that (i) Landlord shall withhold any
consent to any assignment or transfer of this Lease or any interest herein, and
(ii) such assignee or transferee is approved by the relevant manufacturer for
continuation as a franchisee, there shall be a presumption that such assignment
or transfer was reasonable and Landlord shall have the burden of rebutting such
presumption and of proving that such consent was in fact reasonably withheld (or
that such conditions were reasonable).

          13.02  Changes of Control.  A Change of Control requiring the consent
                 ------------------
of Landlord shall mean:

                 (a)  the issuance and/or sale by Tenant or the sale by any
                      shareholder or equity holder of Tenant of a Controlling
                      (which shall mean, as applied to any Person, the
                      possession, directly or indirectly, of the power to direct
                      or cause the direction of the management and policies of
                      such Person, whether through the ownership of voting
                      securities, by contract or otherwise) interest in Tenant
                      to a Person other than an Affiliate of Tenant, other than
                      in either case a distribution to the public pursuant to an
                      effective registration statement under the Securities Act
                      of 1933, as amended (a "Registered Offering");

                 (b)  the sale, conveyance or other transfer of all or
                      substantially all of the assets of Tenant (whether by
                      operation of law or otherwise) provided, however, that no
                      Change of Control shall be deemed to have occurred in the
                      event of the transfer of assets as a result of the death
                      of a person involved in the Business, so long as the
                      transferee is approved by the manufacturer for the
                      continuation of the Business; or

                 (c)  any transaction pursuant to which Tenant is merged with or
                      consolidated into another entity (other than an entity
                      owned and Controlled by an Affiliate), and Tenant is not
                      the surviving entity.
                                      
                                     -44-
<PAGE>
 
          13.03  Operating/Service Agreements.
                 ----------------------------

                 (a)  Permitted Agreements. Tenant shall, without Landlord's
                      --------------------
                      prior approval, be permitted to enter into such
                      operating/service agreements for portions of each Leased
                      Property to various licensees in connection with Tenant's
                      Business as are customarily associated with or incidental
                      to the operation of such Leased Property, which agreements
                      may be in the nature of a sublease agreement.

                 (b)  Terms of Agreements.  Each operating/service agreement
                      -------------------                                   
                      concerning a Leased Property shall be subject and
                      subordinate to the provisions hereof. No agreement made as
                      permitted by Section 13.03(a) shall affect or reduce any
                      of the obligations of Tenant hereunder, and all such
                      obligations shall continue in full force and effect as if
                      no agreement had been made. No agreement shall impose any
                      additional obligations on Landlord hereunder.

                 (c)  Copies.  Tenant shall, within ten (10) days after the
                      ------
                     execution and delivery of any operating/service agreement
                     permitted by Section 13.03(a), deliver a duplicate original
                     thereof to Landlord.

                 (d)  Assignment of Rights in Agreements.  As security for
                      ----------------------------------                  
                      performance of its obligations hereunder, Tenant hereby
                      grants, conveys and assigns to Landlord all right, title
                      and interest of Tenant in and to all operating/service
                      agreements now in existence or hereinafter entered into
                      for each Leased Property, and all extensions,
                      modifications and renewals thereof and all rents, issues
                      and profits therefrom, to the extent the same are
                      assignable by Tenant. Landlord hereby grants to Tenant a
                      license to collect and enjoy all rents and other sums of
                      money payable under any such agreement; provided, however,
                      that Landlord shall have the absolute right at any time
                      after the occurrence and continuance of an Event of
                      Default upon notice to Tenant and any vendors or licensees
                      to revoke said license and to collect such rents and sums
                      of money and to retain the same. Tenant shall not (i)
                      after the occurrence and continuance of an Event of
                      Default, consent to, cause, or allow, any material
                      modification or alteration of any of the terms, conditions
                      or covenants of any of the agreements or the termination
                      thereof, without the prior written approval of Landlord
                      nor (ii) accept any rents (other than customary security
                      deposits) more than thirty (30) days in advance of the
                      accrual thereof nor permit anything to be done, the doing
                      of which, nor omit or refrain from doing anything, the
                      omission of which, will or could be a breach of or default
                      in the terms of any of the agreements.

                                     -45-
<PAGE>
 
                 (e)  Licenses, Etc.  For purposes of Section 13.03, the
                      -------------                                     
                      operating/service agreements shall mean any licenses,
                      concession arrangements, or other arrangements relating to
                      the possession or use of all or any part of any Leased
                      Property.

          13.04  Assignment.  If Landlord shall withhold its consent to any
                 ----------
assignment or if Landlord shall have established conditions to approval of any
assignment but such conditions shall not have been complied with, to the
reasonable satisfaction of Landlord, such assignment shall not in any way impair
the continuing primary liability of Tenant hereunder. No consent to any
assignment in a particular instance shall be deemed to be a general waiver of
the prohibition set forth in Article XIII. Any assignment shall be solely of
Tenant's entire interest in this Lease with respect to the subject Leased
Property or Leased Properties. Any assignment or other transfer of all or any
portion of Tenant's interest in this Lease in contravention of Article XIII
hereof shall be voidable at Landlord's option.

          13.05  REIT Limitations.
                 ---------------- 

                 (a)  Anything contained herein to the contrary notwithstanding,
                      Tenant shall not: (a) sublet or assign a Leased Property
                      or this Lease on any basis such that the rental or other
                      amounts to be paid by the sublessee or assignee thereunder
                      would be based, in whole or in part, on the income or
                      profits derived by the business activities of the
                      sublessee or assignee; (b) sublet or assign a Leased
                      Property or this Lease to any Person that, under Section
                      856(d)(2)(B) of the Internal Revenue Code of 1986, as
                      amended (the "Code"), Landlord or its general partner
                      owns, directly or indirectly (by applying constructive
                      ownership rules set forth in Section 856(d) (5) of the
                      Code, a ten percent (10%) or greater interest; or (c)
                      sublet or assign a Leased Property or this Lease in any
                      other manner or otherwise derive any income which could
                      cause any portion of the amounts received by Landlord
                      pursuant hereto or any sublease to fail to qualify as
                      "rents from real property" within the meaning of Section
                      856(d) of the Code, or which could cause any other income
                      received by Landlord to fail to qualify as income
                      described in Section 856(c) (2) of the Code. The
                      requirements of this Section 13.05 shall likewise apply to
                      any further subleasing by any subtenant.

                 (b)  Tenant acknowledges that Capital Automotive REIT, a
                      Maryland real estate investment trust and the general
                      partner of Landlord (the "Company"), intends to elect to
                      be taxed as a real estate investment trust (a "REIT")
                      under the Code. Tenant shall not do anything which would
                      adversely affect the Company's status as a REIT. Tenant
                      hereby agrees to modifications of this Lease which do not
                      materially

                                     -46-
<PAGE>
 
                      adversely affect Tenant's rights and liabilities if such
                      modifications are required to retain or clarify the
                      Company's status as a REIT.

          13.06  Attornment.  Tenant shall insert in each sublease permitted
                 ----------
under Section 13.03(a) provisions to the effect that: (a) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and to
the rights of Landlord hereunder; (b) in the event this Lease shall terminate
before the expiration of such sublease, the sublessee thereunder will, at
Landlords' option, attorn to Landlord and waive any right the sublessee may have
to terminate the sublease or to surrender possession thereunder, as a result of
the termination hereof; and (c) in the event the sublessee receives a written
notice from Landlord or Landlord's assignees, if any, stating that Tenant is in
default under this Lease, the sublessee shall thereafter be obligated to pay all
rentals accruing under said sublease directly to the party giving such notice,
or as such party may direct. All rentals received from the sublessee by Landlord
or Landlord's assignees in respect of a Leased Property, if any, as the case may
be, shall be credited against the amounts owing by Tenant hereunder with respect
to such Leased Property.

          13.07  Severance and Spin-Off.  During the Term or any Extension Term
                 ----------------------
of this Lease and provided that there is no existing Event of Default and there
exists no condition which, with the passage of time, could become an Event of
Default, Tenant shall have the right (the "Spin-Off Right"), with the consent of
Landlord (which consent shall not be unreasonably withheld), to sever and spin-
off from this Lease (which shall mean that Tenant shall no longer have any
obligation under this Lease with respect to the Spin-Off Property) one or more
of the Leased Properties (each a "Spin-Off Property") to a new tenant ("New
Tenant") upon the following conditions: (a) Tenant shall assign the automobile
franchise being conducted on the Spin-Off Property to the New Tenant and shall
obtain all necessary approvals from third parties to accomplish such assignment;
(b) Tenant shall include in the agreement by which the assignment of the
automobile franchise is to be accomplished the requirement that the New Tenant
shall take the assignment subject to this Lease (c) the New Tenant shall agree
to be bound by the terms and conditions of this Lease (and assume all of the
obligations hereof) and shall execute a counterpart to this Lease in all
respects identical to this Lease that applies to the Spin-Off Property; and (d)
if Tenant desires to exercise the Spin-Off Right with respect to less than all
parcels of a Leased Property, then such spin-off shall be subject to compliance
with the requirements of Section 13.08.

          13.08  Assignment of Non-Subdivided Parcels.  If the Leased Property
                 ------------------------------------   
is not a separate subdivided lot, Landlord may condition its approval of an
assignment upon Tenant showing that there are appropriate provisions (such as a
condominium regime, subdivision, and/or reciprocal easements, lender and/or
franchisor consents if necessary, and separate tax lots) which allow the Leased
Property to be separately owned and operated without interference from or
dependence upon, another person as to items such as access, real estate taxes,
or utilities.

                                     -47-
<PAGE>
 
                                  ARTICLE XIV
                                  ARBITRATION

          14.01  Controversies.  Except with respect to the payment of Rent
                 -------------                                             
hereunder, which shall be subject to the provisions of Section 9.02, in the
event a controversy arises between the parties as to any of the requirements of
this Lease or the performance hereunder, which the parties are unable to
resolve, the parties agree to waive the remedy of litigation (except for
extraordinary relief in an emergency situation) and agree that such controversy
or controversies shall be determined by arbitration as hereafter provided in
this Article.

          14.02  Appointment of Arbitrators.  The party or parties requesting
                 --------------------------                                  
arbitration shall serve upon the other a demand therefor, in writing, specifying
in detail the controversy and matter(s) to be submitted to arbitration before
the American Arbitration Association.  The selection of arbitrators shall be
conducted pursuant to the rules for resolution of commercial disputes
promulgated by the American Arbitration Association.  The party or parties
giving notice shall request a listing of available arbitrators from the American
Arbitration Association, and each party shall respond in the selection process
within fifteen (15) days after each receipt of such listings until a panel of
three (3) arbitrators has been designated.  If either party fails to respond
within fifteen (15) days, it is agreed that the American Arbitration Association
may make such selections as are necessary to complete the panel of three (3)
arbitrators.

          14.03  Arbitration Procedure.  Within five (5) business days after the
                 ---------------------                                          
selection of the arbitration panel, the arbitrators shall give written notice to
each party as to the time and the place of each meeting, which shall be held in
Washington, D.C., at which the parties may appear and be heard, which shall be
no later than fifteen (15) days after certification of the arbitration panel.
The parties specifically waive discovery, and further waive the applicability of
rules of evidence or rules of procedure in the proceedings. The applicable rules
shall be those in effect at the time for the resolution of commercial disputes
promulgated by the American Arbitration Association. Notwithstanding the
foregoing, the substantive law governing the arbitration shall be the laws of
the State of Delaware (without application of choice of law provisions).  The
arbitrators shall take such testimony and make such examination and
investigations as the arbitrators reasonably deem necessary.  The decision of
the arbitrators shall be in writing signed by a majority of the panel which
decision shall be final and binding upon the parties to the controversy.
Provided, however, in rendering their decisions and making awards, the
arbitrators shall not add to, subtract from or otherwise modify the provisions
of this Lease.

          14.04  Expenses.  The expenses of the arbitration shall be assessed by
                 --------                                                       
the arbitrators and specified in the written decision.  In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally between
Landlord and Tenant.  Each party in interest shall be responsible for and pay
the fees, costs and expenses of its own counsel, unless the arbitration award
provides for an assessment of reasonable attorneys' fees and costs.

                                     -48-
<PAGE>
 
          14.05  Enforcement of the Arbitration Award.  There shall be no appeal
                 ------------------------------------                           
from the decision of the arbitrators, and upon the rendering of an award, any
party thereto may file the arbitrators' decision in the United States District
Court for the Eastern District of Virginia for enforcement as provided by
applicable law.


                                  ARTICLE XV
                        QUIET ENJOYMENT, SUBORDINATION,
                       ATTORNMENT, ESTOPPEL CERTIFICATES

          15.01  Quiet Enjoyment.  So long as Tenant performs all of its
                 ---------------                                        
obligations under this Lease, Tenant's possession of the Leased Properties will
not be disturbed by or through Landlord.

          15.02  Landlord Mortgages; Subordination.  Subject to Section 15.03,
                 ---------------------------------                            
without the consent of Tenant, Landlord may, from time to time, directly or
indirectly, create or otherwise cause to exist any liens, encumbrances, security
interests or title retention agreements on any  Leased Property, or any portion
thereof or any interest therein, whether to secure any borrowing or other means
of financing or refinancing.  Tenant shall execute, acknowledge and deliver to
Landlord, at any time and from time to time upon demand by Landlord or any
mortgagee or any holder of any mortgage or other instrument described in this
Section, without cost to Landlord, a Subordination and Non-Disturbance Agreement
in the form attached hereto as Exhibit 15.02, which provides that (i) Tenant's
                               -------------                                  
rights hereunder are subordinate to any ground lease or underlying lease, first
mortgage, first deed of trust, or other first lien against any Leased Property,
together with any renewal, consolidation, extension, modification, or
replacement thereof, which now or at any subsequent time affects any Leased
Property or any interest of Landlord in any Leased Property, except to the
extent that any such instrument expressly provides that this Lease is superior;
and (ii) in the event such party succeeds to Landlord's interest under the Lease
and provided that no Event of Default by Tenant exists, such party will not
disturb Tenant's possession, use or occupancy of the subject Leased Property.
If Tenant fails or refuses to execute, acknowledge, and deliver such
Subordination and Non-Disclosure Agreement within ten (10) business days after
written demand, then Landlord shall send to Tenant a second written demand.  If
Tenant fails or refuses to execute, acknowledge and deliver such Subordination
and Non-Disclosure Agreement within ten (10) days after such second written
demand, then Landlord or such successor in interest may execute, acknowledge and
deliver such Subordination and Non-Disclosure Agreement on behalf of Tenant as
Tenant's attorney-in-fact.  Tenant hereby constitutes and irrevocably appoints
Landlord, its successors and assigns, as Tenant's attorney-in-fact to execute,
acknowledge, and deliver on behalf of Tenant the Subordination and Non-
Disclosure Agreement.  This power of attorney is coupled with an interest and is
irrevocable.

          15.03  Attornment.  If any holder of any mortgage, indenture, deed of
                 ----------                                                    
trust, or other similar instrument described in Section 15.02 succeeds to
Landlord's interest in any Leased Property, Tenant will pay to such holder all
Rent subsequently payable hereunder as to such Leased Property. Tenant shall,
upon request of anyone succeeding to the interest of Landlord, automatically
become

                                     -49-
<PAGE>
 
the tenant of, and attorn to, such successor in interest without changing this
Lease.  The successor in interest will not be bound by:  (a) any payment of Rent
for more than one (1) month in advance; (b) any amendment or modification hereof
made without its written consent; (c) any claim against Landlord arising prior
to the date on which the successor succeeded to Landlord's interest; or (d) any
claim or offset of Rent against Landlord.

          15.04  Estoppel Certificates.  At the request of Landlord or any
                 ---------------------                                    
mortgagee or purchaser of a Leased Property, Tenant shall execute, acknowledge,
and deliver an estoppel certificate, in recordable form, in favor of Landlord or
any mortgagee or purchaser of any Leased Property certifying the following as to
such Leased Property:  (a) that this Lease is unmodified and in full force and
effect, or if there have been modifications that the same is in full force and
effect as modified and stating the modifications; (b) the date to which Rent and
other charges have been paid; (c) that neither Tenant nor Landlord is in default
nor is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default, if that be the case, or specifying any existing
default; (d) that Tenant has accepted and occupies such Leased Property; (e)
that Tenant has no defenses, set-offs, deductions, credits, or counterclaims
against Landlord, if that be the case, or specifying such that exist; (f) that
Landlord has no outstanding construction or repair obligations; and (g) such
other information as may reasonably be requested by Landlord or any mortgagee or
purchaser.  Any purchaser or mortgagee may rely on this estoppel certificate.
If Tenant fails to deliver the estoppel certificates to Landlord within ten (10)
business days after the request of Landlord, then Landlord shall request such
delivery a second time.  If Tenant fails to deliver the estoppel certificates to
Landlord within ten (10) days after such second request by Landlord, then Tenant
shall be deemed to have certified that: (a) this Lease is in full force and
effect and has not been modified, or that this Lease has been modified as set
forth in the certificate delivered to Tenant; (b) Tenant has not prepaid any
Rent or other charges except for the current month; (c) Tenant has accepted and
occupies such Leased Property; (d) neither Tenant nor Landlord is in default nor
is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default; (e) Landlord has no outstanding construction or
repair obligation; and (f) Tenant has no defenses, set-offs, deductions,
credits, or counterclaims against Landlord.  Tenant hereby irrevocably appoints
Landlord as Tenant's attorney-in-fact to execute, acknowledge and deliver on
Tenant's behalf any estoppel certificate which Tenant does not object to within
twenty (20) days after Landlord sends the certificate to Tenant.  This power of
attorney is coupled with an interest and is irrevocable.

          15.05  Waiver of Landlord's Lien.  Landlord agrees to and does hereby
                 -------------------------                                     
waive its Landlord's lien and any other rights that it may have with respect to
property or assets representing the security or collateral under Tenant's
"floor-plan" or similar financing arrangements, during the Term or any Extension
Term.  Landlord shall, upon request by any such lender, execute an
acknowledgment of such waiver.


               [remainder of this page left intentionally blank]

                                     -50-
<PAGE>
 
                                  ARTICLE XVI
                             RIGHT OF FIRST OFFER

          16.01  Right of First Offer During Lease Term or Extension Term.
                 --------------------------------------------------------

                 (a)  If and when during the Term or Extension Term, as the case
                      may be, Landlord shall decide to sell the Leased
                      Properties to a Person who is not an Affiliate of Landlord
                      (the "Decision to Sell"), provided that no Event of
                      Default has occurred and is continuing under the Lease,
                      Landlord shall notify Tenant in writing within ten (10)
                      business days after Landlord makes a Decision to Sell.
                      Tenant shall have ten (10) business days thereafter in
                      which to notify Landlord in writing of its desire to
                      purchase the Leased Properties. If Tenant shall give such
                      notice, Tenant shall have a period of thirty (30) days
                      within which to make a written offer to purchase the
                      property (the "First Offer"). The First Offer must set
                      forth the purchase price, deposit amounts and closing date
                      and any and all other terms and conditions being proposed
                      by Tenant.

                 (b)  Within thirty (30) days of receipt of the First Offer,
                      Landlord shall give Tenant written notice of its
                      acceptance or rejection thereof. If accepted, Tenant
                      shall, within five (5) days after receipt of the
                      acceptance notice, make the deposit called for in the
                      First Offer and the parties shall proceed to contract and
                      closing upon the terms thereof. If the First Offer is
                      rejected, then, subject to the provisions of subsections
                      (c) and (d) of this Section 16.01, Tenant shall have no
                      further rights with respect to the purchase of the Leased
                      Properties during the Term or Extension Term, as the case
                      may be.

                 (c)  If Landlord shall reject the First Offer, for a one year
                      period thereafter it may proceed to sell the Leased
                      Properties, subject to the Lease and the remaining Term or
                      Extension Term thereof, as the case may be, to any third
                      party, provided (i) the purchase price of such sale shall
                      exceed that specified in the First Offer, or (ii) if the
                      purchase price of such sale does not exceed that specified
                      in the First Offer, the terms of such sale, taken
                      together, are more favorable to Landlord, in Landlord's
                      reasonable judgement, than those of the First Offer. There
                      shall be a presumption that Landlord's judgment was
                      reasonable and Tenant shall have the burden of rebutting
                      such presumption and of proving that such judgment was in
                      fact unreasonable.

                 (d)  If no sale is effected by Landlord within the period
                      specified in subsection (c) above, then if Landlord
                      thereafter desires to sell the

                                     -51-
<PAGE>
 
                      Leased Properties, the procedure set forth in subsections
                      (a), (b) and (c) shall be followed.

                 (e)  This option shall terminate in any event twenty (20) years
                      after the death of the last descendant of Roy L. Meyers,
                      Jr. living at the time of execution of this Lease.
                      
          16.02  Right to Purchase at End of an Extension Term.
                 ----------------------------------------------
 
                 (a)  Landlord hereby grants the Tenant the right and option to
                      purchase the Leased Properties (the "Option to Purchase")
                      at an amount equal to the Property Consideration (as
                      hereafter defined) upon termination of either Extension
                      Term of this Lease. The Option to Purchase shall not be
                      granted if Tenant does not extend the Term of this Lease
                      pursuant to Section 1.03 or if on the Option Exercise Date
                      (as hereafter defined) an Event of Default with respect to
                      any Leased Property exists and has not been cured. The
                      Tenant shall notify Landlord in writing of its intent to
                      exercise this Option to Purchase, thirty (30) days prior
                      to the end of an Extension Term of this Lease (the "Option
                      Exercise Date").

                 (b)  The consideration to be paid for the Leased Properties
                      upon exercise of the Option to Purchase (the "Property
                      Consideration") shall be the Appraised Value (as hereafter
                      defined) determined by (1) an independent appraiser, who
                      is a member of the Appraisal Institute, and will be
                      selected by Landlord, (the "Landlord MAI Appraiser"), (2)
                      a second appraiser, who is a member of the Appraisal
                      Institute, and will be selected by the Tenant (the "Tenant
                      MAI Appraiser"), and (3) a third MAI Appraiser selected by
                      agreement of the Landlord MAI Appraiser and the Tenant MAI
                      Appraiser (the "Third MAI Appraiser") (each an "Appraiser"
                      and, collectively, the "Appraisers"). Landlord and Tenant
                      shall, as promptly as possible, but in no event later than
                      ten (10) days following the Option Exercise Date, select
                      its respective Appraiser. The Third MAI Appraiser shall be
                      selected no later than five (5) days after the selection
                      of the other Appraisers. The costs of the Appraisers'
                      appraisals shall be shared equally by the parties. As
                      promptly as possible but in no event later than fifteen
                      (15) days after selection of the Third Appraiser, each
                      Appraiser shall deliver his or her written report of the
                      Appraisers' determination of the fair market value of the
                      Leased Property, which determination shall be based, for
                      each Leased Property, upon the highest and best use of
                      such Leased Property, taking into consideration the
                      location of such Leased Property and other properties
                      comparable thereto. The

                                     -52-
<PAGE>
 
                      "Appraised Value" of the Real Property shall be equal to
                      the arithmetic mean of the two (2) fair market value
                      determinations of the Appraisers that are closest in
                      value. In the event that the values of (i) the difference
                      between the highest appraisal value and the next lower
                      appraisal value, and (ii) the difference between the
                      lowest appraisal value and the next higher appraisal
                      value, are equal, then the "Appraised Value" shall be
                      equal to the arithmetic mean of the fair market value
                      determinations of all Appraisers.

                 (c)  Upon determination of the Property Consideration, Landlord
                      and Tenant agree to cooperate to close the sale and
                      purchase of the Leased Property entirely for cash on an
                      "as is, where as basis" and with no warranties by Landlord
                      other than in a special warranty deed, within forty-five
                      (45) days after the date of determination of the Property
                      Consideration (the "Option Closing Period"). If the sale
                      and purchase of the Leased Property does not close within
                      the Option Closing Period due to Tenant's default,
                      Landlord shall have no further obligations to Tenant
                      pursuant to this Section 16.02 (a).


                                 ARTICLE XVII
                                 MISCELLANEOUS

          17.01  Notices.  Landlord and Tenant hereby agree that all notices,
                 -------                                                     
demands, requests, and consents (hereinafter "Notices") required to be given
pursuant to the terms of this Lease shall be in writing and shall be addressed
as follows:

          If to Tenant:

          Good News Salisbury, Inc.
          2013 N. Salisbury Blvd.
          Salisbury, Maryland  21801
          Attention:  Roy L. Meyers, Jr.

          With a copy to:

          Webb, Burnett, Jackson, Cornbrooks, Wilber, Vorhis & Douse

          115 Broad Street
          P.O. Box 910
          Salisbury, Maryland  21801-0910
          Attention: David A. Vorhis, Esq.

                                     -53-
<PAGE>
 
          If to Landlord:

          Capital Automotive L.P.
          1925 North Lynn
          Suite 306
          Arlington, Virginia 22209
          Attention: Thomas D. Eckert, President and Chief Executive Officer

          With a copy to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037
          Attention:  George P. Stamas, Esq.

and shall be served by:  (a) personal delivery; (b) certified mail, return
receipt requested, postage prepaid; or (c) nationally recognized overnight
courier.  All notices shall be deemed to be given upon the earlier of actual
receipt or three (3) days after mailing, or one (1) business day after deposit
with the overnight courier.  Any Notices meeting the requirements of this
Section shall be effective, regardless of whether or not actually received.
Landlord or Tenant may change its notice address at any time by giving the other
party Notice of such change.  Any such Notice of change of address shall be
effective five (5) days after delivery.

          17.02  Advertisement of a Leased Property.  In the event the parties
                 ----------------------------------                   
hereto have not executed a renewal lease, or agreed to the Extension Term, as to
the Leased Property within twelve (12) months prior to the expiration of the
Term or an Extension Term, as the case may be, then Landlord or its agent shall
have the right to enter such Leased Property at all reasonable times for the
purpose of exhibiting such Leased Property to others and to place upon such
Leased Property for and during the period commencing two-hundred seventy (270)
days prior to the expiration of the Term or an Extension Term, as the case may
be, "for sale" or "for rent" notices or signs.

          17.03  Landlord's Access.  Landlord, or its designated agents or
                 -----------------                                     
contractors, shall have the right to enter upon each Leased Property, upon
reasonable prior notice to Tenant, for purposes of inspecting the same and
assuring Tenant's compliance with this Lease provided, any such entry by
Landlord shall be subject to all rules, guidelines and procedures prescribed by
Tenant in connection therewith. Landlord shall not be allowed entry to a Leased
Property unless accompanied by such of Tenant's personnel as Tenant shall
require and which Tenant shall promptly provide.

          17.04  Entire Agreement.  This Lease contains the entire agreement
                 ----------------                                 
between Landlord and Tenant with respect to the subject matter hereof. No
representations, warranties, and agreements have been made by Landlord or Tenant
except as set forth in this Lease.

                                     -54-
<PAGE>
 
          17.05  Severability. If any term or provision of this Lease is held by
                 ------------ 
Landlord to be invalid or unenforceable as to a Leased Property, such holding
shall not affect the remainder of this Lease as to such Leased Property, or the
validity or enforceability of this Lease as to any other Leased Property, and
the same shall remain in full force and effect, unless such holding
substantially deprives Tenant of the use of such Leased Property or Landlord of
the Rents therefor, in which case this Lease shall forthwith terminate as to
such Leased Property as if by expiration of the Term or an Extension Term, as
the case may be, but shall remain in full force and effect with respect to each
other Leased Property.

          17.06  Captions and Headings.  The captions and headings are inserted
                 ----------------------                               
only as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Lease or the intent of any provision hereof.

          17.07  Governing Law.  This Lease shall be construed under the laws of
                 -------------                                          
the State of Virginia (without application of choice of law provisions).

          17.08  Memorandum of Lease or Certain Rights Under the Lease. Landlord
                 -----------------------------------------------------  
and Tenant agree that a record of this Lease or of certain rights under this
Lease may be recorded by either party in a memorandum of lease approved by
Landlord and Tenant with respect to each Leased Property. The party recording
such memorandum must bear all costs of such recording.

          17.09  Waiver.  No waiver by Landlord of any condition or covenant
                 ------                                            
herein contained, or of any breach of any such condition or covenant, shall be
held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach thereof
or of any condition or covenant, nor shall the acceptance of Rent by Landlord at
any time when Tenant is in default in the performance or observance of any
condition or covenant herein be construed as a waiver of such default, or of
Landlord's right to terminate this Lease or exercise any other remedy granted
herein on account of such default.

          17.10  Assignment; Binding Effect.  Except as otherwise set forth 
                 --------------------------                          
herein, this Lease shall not be assignable by Tenant, without the prior written
consent of Landlord. This Lease will be binding upon and inure to the benefit of
the heirs, successors, personal representatives, and permitted assigns of
Landlord and Tenant.

          17.11  Consents and Approvals.   In each instance in this Lease where
                 ----------------------                                        
the Landlord is required or permitted to give a consent or approval, or to make
a determination, the Landlord's decision and any conditions thereon must be
reasonable under the circumstances.  Except as provided in Sections 8.07(d),
13.01 and 13.07, there shall be a presumption that each such decision and any
conditions thereon by Landlord was in fact reasonable, and Tenant shall have the
burden of proof in any attempt to rebut that presumption.  With respect to
Sections 8.07(d), 13.01 and 13.07, there shall be a presumption that each such
decision and any conditions thereon by Landlord was in fact unreasonable, and
Landlord shall have the burden of proof in any attempt to rebut that
presumption.

                                     -55-
<PAGE>
 
          17.12  Single Property.  Throughout the form of this Lease there are
                 ---------------                                              
references to "Leased Properties."  If, in fact, there is only one Leased
Property being leased hereunder, all such references shall, without further
action, be deemed amended to refer solely to such Leased Property and all
provisions relating to Leased Properties, including remedies applicable to only
one Leased Property, shall likewise be amended to the extent necessary, but only
to the extent necessary, to give effect to the fact that there is only one
Leased Property.

          17.13  Modification.  This Lease may only be modified by a writing
                 ------------                                       
signed by both Landlord and Tenant.

          17.14  Incorporation by Reference. All schedules and exhibits referred
                 ---------------------------
to in this Lease are incorporated herein by reference.

          17.15  No Merger.  As to each Leased Property, the surrender of this
                 ---------                                            
Lease by Tenant or the cancellation of this Lease by agreement of Tenant and
Landlord or the termination of this Lease on account of Tenant's default will
not work a merger, and will, at Landlord's option, terminate any subleases or
operate as an assignment to Landlord of any subleases. Landlord's option under
this paragraph will be exercised by notice to Tenant and all known subtenants of
such Leased Property.

          17.16  Force Majeure.  Landlord, its agents and employees, will not 
                 -------------                                      
be liable for any loss, injury, death, or damage (including consequential
damages) to persons, property, or Tenant's Business occasioned by theft, act of
God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition, order of governmental body or authority, fire, explosion, falling
objects, steam, water, rain or snow, leak or flow of water (including water from
the elevator system), rain or snow from any Leased Property or into any Leased
Property or from the roof, street, subsurface or from any other place, or by
dampness or from the breakage, leakage, obstruction, or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning, or lighting
fixtures of any Leased Property, or from construction, repair, or alteration of
any Leased Property or from any acts or omissions of any other occupant or
visitor of any Leased Property, or from the release, emission, discharge,
presence or disposal of any hazardous substance or material on or from any
Leased Property, or from any other cause beyond Landlord's control.

          17.17  Laches.  No delay or omission by either party hereto to
                 -------                                                
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such right
or power or be construed to be a waiver thereof.

          17.18  Waiver of Jury Trial.  To the extent that there is any claim by
                 --------------------                                  
one party against the other that is not to be settled by arbitration as provided
in Article XIV hereof, Landlord and Tenant waive trial by jury in any action,
proceeding or counterclaim brought by either of them against the other on all
matters arising out of this Lease or the use and occupancy of any Leased
Property (except claims for personal injury or property damage). If Landlord
commences any

                                     -56-
<PAGE>
 
summary proceeding for nonpayment of Rent, Tenant will not interpose, and waives
the right to interpose, any counterclaim in any such proceeding.

          17.19  Permitted Contests.  Tenant, on its own or on Landlord's behalf
                 -------------------                          
(or in Landlord's name), but at Tenant's expense, may contest, by appropriate
legal proceedings conducted in good faith and with due diligence, the amount or
validity or application, in whole or in part, of any Imposition or any legal
requirement or insurance requirement or any lien, attachment, levy, encumbrance,
charge or claim provided that: (a) in the case of an unpaid Imposition, lien,
attachment, levy, encumbrance, charge or claim, the commencement and
continuation of such proceedings shall suspend the collection thereof from
Landlord and from the subject Leased Property; (b) neither the subject Leased
Property nor any Rent therefrom nor any part thereof or interest therein would
be in any immediate danger of being sold, forfeited, attached or lost; (c) in
the case of a legal requirement, Landlord would not be in any immediate danger
of civil or criminal liability for failure to comply therewith pending the
outcome of such proceedings; (d) in the event that any such contest shall
involve a sum of money or potential loss in excess of Twenty Five Thousand
Dollars ($25,000), Tenant shall deliver to Landlord and its counsel an opinion
of Tenant's counsel to the effect set forth in clauses (a), (b) and (c), to the
extent applicable; (e) in the case of a legal requirement and/or an Imposition,
lien, encumbrance, or charge, Tenant shall give such reasonable security as may
be demanded by Landlord to insure ultimate payment of the same and to prevent
any sale or forfeiture of a subject Leased Property or the Rent in respect
thereof by reason of such nonpayment or noncompliance; provided, however, the
provisions of this Section shall not be construed to permit Tenant to contest
the payment of Rent (except as to contests concerning the method of computation
or the basis of levy of any Imposition or the basis for the assertion of any
other claim) or any other sums payable by Tenant to Landlord hereunder; (f) in
the case of an insurance requirement, the coverage required by Article IV shall
be maintained; and (g) if such contest be finally resolved against Landlord or
Tenant, Tenant shall, as Additional Rent due hereunder, promptly pay the amount
required to be paid, together with all interest and penalties accrued thereon,
or comply with the applicable legal requirement or insurance requirement.
Landlord, at Tenant's expense, shall execute and deliver to Tenant such
authorizations and other documents as may be reasonably required in any such
contest, and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein. Tenant hereby agrees to indemnify and
hold harmless Landlord, its officers, trustees, employees, shareholders,
affiliates and agents from and against any and all demands, claims, causes of
action, fines, penalties, damages (including punitive and consequential
damages), losses, liabilities (including strict liability), judgments, costs and
expenses (including, without limitation, attorneys' fees, court costs, and the
costs set forth in Section 9.06) that may be incurred in connection with or
arise from any such contest.

          17.20  Construction of Lease.  This Lease has been reviewed by
                 ---------------------                                  
Landlord and Tenant and their respective professional advisors.  Landlord and
Tenant believe that this Lease is the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in favor
of either Landlord or Tenant or against either Landlord or Tenant merely because
of any party's efforts in preparing such documents.  This lease is intended to
function as a master lease of severals

                                     -57-
<PAGE>
 
Leased Properies, and, as the circumstances require, the singular shall mean the
plural and the plural shall mean the singular.

          17.21  Counterparts. This Lease may be executed in duplicate
                 -------------
counterparts, each of which shall be deemed an original hereof or thereof.

          17.22  Relationship of Landlord and Tenant.  The relationship of
                 -----------------------------------      
Landlord and Tenant is the relationship of lessor and lessee. Landlord and
Tenant are not partners, joint venturers, or associates.

               {remainder of this page left intentionally blank}

                                     -58-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Lease or
caused the same to be executed by their respective duly authorized officers as
of the date first set forth above.

                            CAPITAL AUTOMOTIVE L.P.
                            a Delaware limited partnership

                            By:  Capital Automotive REIT,
                                 a Maryland real estate investment trust,
                                 its General Partner

                                 By: /s/ Thomas D. Eckert
                                 Name:   Thomas D. Eckert
                                 Title:  President and Chief Executive Officer

                            GOOD NEWS SALISBURY, INC.
 
 
                            By: /s/ Roy L. Meyers, Jr.
                            Name:   Roy L. Meyers, Jr.
                            Title:  President

                                     -59-
<PAGE>
 
SCHEDULE A (PAGE 1 OF 2)


          Seller-Defined Reference
- -------------------------------------------------------

<TABLE>
<CAPTION>
Property                                                                                  Tax Account #
Number                   Name                          Street Address           Tax Map, Grip, Parcel, Lots
- ------         --------------------------         ------------------------      ----------------------------
<S>            <C>                                <C>                           <C> 
 1             Oldsmobile/Cadillac/               2007 N. Salisbury Blvd.       05-029953
               GMC sales center                   Salisbury, MD 21801           TM 29, G 23, P 12, Lots 1-2

 2             Olds/Cad/GMC lots                  2007 N. Salisbury Blvd.       05-080525
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lots 26-28

 3             Olds/Cad/GMC lots                  2007 N. Salisbury Blvd.       05-080517
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lot 29
                                          
 4             Olds/Cad/GMC lots                  2007 N. Salisbury Blvd.       05-080533
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lot 29
                                          
 5             Honda                              2013 N. Salisbury Blvd.       05-807783
                                                  Salisbury, MD 21801           TM 29, G 23, P 267 Par-A
                                          
 6             Toyota/Mercedes/A                  2015 N. Salisbury Blvd.       05-074835
                                                  Salisbury, MD 21801           TM 29, G 23, P 267 Par-A
                                          
 7             Toyota/Mercedes I                  2015 N. Salisbury Blvd.       05-074843
                                                  Salisbury, MD 21801           TM 29, G 23, P 267
                                          
 8             Toyota/Mercedes II                 2015 N. Salisbury Blvd.       05-067642
                                                  Salisbury, MD 21801           TM 29, G 23, P 404
                                          
 9             Mazda-Hyundai                      2010 N. Salisbury Blvd.       09-025828
                                                  Salisbury, MD 21801           TM 29, G 22, P 385
                                          
 10            Nissan                             2012 N. Salisbury Blvd.       09-018441
                                                  Salisbury, MD 21801           TM 29, G 23, P 386
                                          
 11            Used Car Sales Center I            2011 N. Salisbury Blvd.       05-062721
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lots 7-8
                                          
 12            Used Car Sales Center II           2011 N. Salisbury Blvd.       05-062748
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lots 24-25
                                          
 13            Body Shop - I                      2010A N. Salisbury Blvd.      09-025901
                                                  Salisbury, MD 21801           TM 29, G 22, P 385
                                          
 14            Body Shop - II                     2010B N. Salisbury Blvd.      09-070443
                                                  Salisbury, MD 21801           TM 29, G 16, P 113
</TABLE>

                                     -60-
<PAGE>
 
SCHEDULE A (PAGE 2 OF 2)


            Base
           Annual
            Rent
           Amount
           ------

          469,920
          =======


NOTE:  In the event the Base Annual Rent must be adjusted pursuant to this Lease
- ----                                                                            
       because of its termination as to a Property, the parties shall attempt in
       good faith to agree upon the adjustment. If after thirty (30) days they
       are unable to agree upon such adjustment, it shall be determined by
       valuing the terminated Property and all of the Properties pursuant to the
       provisions of Section 16.02(b) and pro rating the Base Annual Rent in
       proportion to such values. In the event the termination is pursuant to
       Section 13.07, Tenant shall pay all of the costs of appraisals.

                                     -61-
<PAGE>
 
SCHEDULE A (PAGE 1 OF 2)


          Seller-Defined Reference
- -------------------------------------------------------

<TABLE>
<CAPTION>
Property                                                                             Tax Account #
Number                   Name                          Street Address           Tax Map, Grip, Parcel, Lots
- ------         --------------------------         ------------------------      -----------------------------
<S>            <C>                                <C>                           <C>    
 1             Oldsmobile/Cadillac/               2007 N. Salisbury Blvd.       05-029953                              
               GMC sales center                   Salisbury, MD 21801           TM 29, G 23, P 12, Lots 1-2            
                                                                                                                       
 2             Olds/Cad/GMC lots                  2007 N. Salisbury Blvd.       05-080525                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lots 26-28          
                                                                                                                       
 3             Olds/Cad/GMC lots                  2007 N. Salisbury Blvd.       05-080517                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lot 29              
                                                                                                                       
 4             Olds/Cad/GMC lots                  2007 N. Salisbury Blvd.       05-080533                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lot 29              
                                                                                                                       
 5             Honda                              2013 N. Salisbury Blvd.       05-807783                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 267 Par-A               
                                                                                                                       
 6             Toyota/Mercedes/A                  2015 N. Salisbury Blvd.       05-074835                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 267 Par-A               
                                                                                                                       
 7             Toyota/Mercedes I                  2015 N. Salisbury Blvd.       05-074843                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 267                     
                                                                                                                       
 8             Toyota/Mercedes II                 2015 N. Salisbury Blvd.       05-067642                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 404                     
                                                                                                                       
 9             Mazda-Hyundai                      2010 N. Salisbury Blvd.       09-025828                              
                                                  Salisbury, MD 21801           TM 29, G 22, P 385                     
                                                                                                                       
 10            Nissan                             2012 N. Salisbury Blvd.       09-018441                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 386                     
                                                                                                                       
 11            Used Car Sales Center I            2011 N. Salisbury Blvd.       05-062721                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lots 7-8            
                                                                                                                       
 12            Used Car Sales Center II           2011 N. Salisbury Blvd.       05-062748                              
                                                  Salisbury, MD 21801           TM 29, G 23, P 13, Lots 24-25          
                                                                                                                       
 13            Body Shop - I                      2010A N. Salisbury Blvd.      09-025901                              
                                                  Salisbury, MD 21801           TM 29, G 22, P 385                     
                                                                                                                       
 14            Body Shop - II                     2010B N. Salisbury Blvd.      09-070443                              
                                                  Salisbury, MD 21801           TM 29, G 16, P 113                      
</TABLE>

                                     -62-
<PAGE>
 
SCHEDULE A (PAGE 2 OF 2)


              Base
             Annual
              Rent
             Amount
             ------

             469,920
             =======


NOTE:  In the event the Base Annual Rent must be adjusted pursuant to this Lease
- ----                                                                            
       because of its termination as to a Property, the parties shall attempt in
       good faith to agree upon the adjustment. If after thirty (30) days they
       are unable to agree upon such adjustment, it shall be determined by
       valuing the terminated Property and all of the Properties pursuant to the
       provisions of Section 16.02(b) and pro rating the Base Annual Rent in
       proportion to such values. In the event the termination is pursuant to
       Section 13.07, Tenant shall pay all of the costs of appraisals.

                                     -63-
<PAGE>
 
SCHEDULE A


     Seller-Defined Reference
- ----------------------------------

<TABLE>
<CAPTION> 
Property                                                     Tax Account #
 Number         Name           Street Address       Tax Map, Grid, Parcel, Lots
- ----------  -------------  -----------------------  ---------------------------
<S>         <C>            <C>                      <C>
  P1        Pontiac-Buick  2016 N. Salisbury Blvd.   09-014985
                           Salisbury, MD 21801       TM 29, G 22, P 195
</TABLE>

                                     -64-
<PAGE>
 
SCHEDULE B


[ Scheduled Exceptions as agreed upon in Real Property Purchase Agreement ]

                                     -65-
<PAGE>
 
SCHEDULE B


[ Scheduled Exceptions as agreed upon in Real Property Purchase Agreement ]

                                     -66-
<PAGE>
 
SCHEDULE 12.02


1.   Computer services and maintenance contract with Reynolds & Reynolds
     (approx. $120,000 per year).
2.   Buy-out agreement of former Good News Salisbury, Inc. shareholder (approx.
     $300,000 left to pay). 

                                     -67-
<PAGE>
 
SCHEDULE 12.03


1.   Agreement letter from Evans Builders, Inc. dated July 14, 1997 for
     renovations to the Toyota/Mercedes facility.

                                     -68-
<PAGE>
 
EXHIBIT 5.07



1. Phase I and II report on Leased Properties 6, 7, and 8 (Toyota/Mercedes)
   prepared by John Hynes & Associates dated January 24, 1997.

2. Phase I and II report on Leased Properties 9 and 14 (Mazda-Hyundai and Body
   Shop I) prepared by John Hynes & Associates dated January 19, 1995.

                                     -69-
<PAGE>
 
SCHEDULE B


[ Scheduled Exceptions as agreed upon in Real Property Purchase Agreement ]
<PAGE>
 
SCHEDULE 12.02


1. Computer services and maintenance contract with Reynolds & Reynolds (approx.
   $120,000 per year).
2. Buy-out agreement of former Good News Salisbury, Inc. shareholder (approx.
   $300,000 left to pay).
<PAGE>
 
SCHEDULE 12.03


1. Agreement letter from Evans Builders, Inc. dated July 14, 1997 for
   renovations to the Toyota/Mercedes facility.
<PAGE>
 
EXHIBIT 5.07


1. Phase I and II report on Leased Properties 6, 7, and 8 (Toyota/Mercedes)
   prepared by John Hynes & Associates dated January 24, 1997.

2. Phase I and II report on Leased Properties 9 and 14 (Mazda-Hyundai and Body
   Shop I) prepared by John Hynes & Associates dated January 19, 1995.
<PAGE>
 
                                 EXHIBIT 2.02
                                 ------------


                          PAYMENT ACCOUNT INFORMATION

     Wiring instructions for the Landlord's operating account are as follows:

     FIRST UNION NATIONAL BANK OF VIRGINIA
     CHARLOTTE, NC
     ABA# 051400549

     For Credit to:  CAPITAL AUTOMOTIVE REIT, Operating Account
               Account # 2050000478240
<PAGE>
 
                                 EXHIBIT 2.04
                                 ------------

                          BASE ANNUAL RENT ADJUSTMENT

     The Base Annual Rent shall be increased, effective as of the commencement
of the second Lease Year and as of each subsequent Lease Year by an amount equal
to the Initial Base Rent multiplied by one hundred percent (100%) of the change
in the Index during the immediately preceding one (1) year period; provided,
however, that, in the event that the above-calculated adjustment is greater than
two percent (2%), such adjustment shall be equal to two percent (2%).
<PAGE>
 
                                 EXHIBIT 15.02
                                 -------------
                                        
                  SUBORDINATION AND NON-DISTURBANCE AGREEMENT
                  -------------------------------------------


          THIS AGREEMENT is made as of this ___ day of __________, 1997, among
_____________, a ___________ organized under the laws of the State of
_____________ ("Lender"), __________________ ("Tenant"), and CAPITAL AUTOMOTIVE
L.P., a Delaware limited partnership ("Landlord").

                                  WITNESSETH:
                                  -----------

          WHEREAS, Landlord and Tenant have entered into a certain Lease, dated
___________________ ,  which lease and all amendments, modifications,
assignments, subleases and other agreements related thereto are attached hereto
as Exhibit A and incorporated herein by this reference (collectively, the
   ---------                                                             
"Lease"), which Lease relates to the premises described therein (the
"Premises"), and

          WHEREAS, Lender has made or has committed to make a first mortgage
loan to Landlord in the principal amount not to exceed $_________ (the "Loan"),
the Loan being secured by a mortgage, deed of trust or security deed
(collectively, the "Mortgage") and an assignment(s) of leases and rents from
Landlord to Lender covering the Premises; and

          WHEREAS, Tenant has agreed that the Lease shall be subject and
subordinate to the Mortgage held by Lender, provided Tenant is assured of
continued occupancy of the Premises under the terms of the Lease;

          NOW, THEREFORE, for and in consideration of the mutual covenants
herein contained, the sum of Ten Dollars ($10.00) and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
and notwithstanding anything in the Lease to the contrary, it is hereby agreed
as follows:

          1.   SUBORDINATION OF LEASE.  Lender, Tenant and Landlord do hereby
               ----------------------                                        
covenant and agree that the Lease with all rights, options, liens and charges
created thereby, is and shall continue to be subject and subordinate in all
respects to the Mortgage and to any renewals, modifications, consolidations,
replacements and extensions thereof and to all advancements made thereunder.

          2.   NONDISTURBANCE OF TENANT. Lender does hereby agree with Tenant
               ------------------------ 
that, in the event Lender becomes the owner of the Premises by foreclosure,
conveyance in lieu of foreclosure or otherwise, so long as Tenant complies with
and performs its obligations under the Lease, (a) Lender will take no action
which will interfere with or disturb Tenant's possession or use of the Premises
or other rights under the Lease, and (b) the Premises shall be subject to the
Lease and Lender shall recognize Tenant as the tenant of the Premises for the
remainder of the terms of the Lease in accordance with the provisions thereof,
provided, however, that Lender shall not be subject
<PAGE>
 
to any offsets or defenses which Tenant might have against any prior landlord
except those which arose under the provisions of the Lease out of such
landlord's default and accrued after Tenant had notified Lender and given Lender
the opportunity to cure same as hereinbelow provided, nor shall Lender be liable
for any act or omission of any prior landlord, nor shall Lender be bound by any
rent or additional rent which Tenant might have paid for more than the current
month to any prior landlord nor shall it be bound by any amendment or
modification of the Lease made without its consent.

          3.   ATTORNMENT BY TENANT. Tenant does hereby agree with Lender that,
               -------------------- 
in the event Lender becomes the owner of the Premises by foreclosure, conveyance
in lieu of foreclosure or otherwise, then Tenant shall attorn to and recognize
Lender as the landlord under the Lease for the remainder of the term thereof,
and Tenant shall perform and observe its obligations thereunder, subject only to
the terms and conditions of the Lease. In such event, Lender shall not be liable
for any act or omission of any prior landlord, liable for return of the security
deposit unless same was actually delivered to Lender, bound by any amendment to
or assignment of the Lease made without its consent, bound by any rent paid more
than thirty (30) days in advance, or be subject to any set-off or defense Tenant
might have had against any prior landlord. Tenant further covenants and agrees
to execute and deliver upon request of Lender or its assigns, an appropriate
Agreement of Attornment to Lender and any subsequent titleholder of the
Premises.

          4.   ACKNOWLEDGMENT OF ACQUISITION RIGHTS. Lender acknowledges that
               ------------------------------------  
Tenant has certain purchase rights under the lease. So long as Tenant complies
with the provisions of the Lease, Lender acknowledges that Tenant may exercise
such rights and Lender will honor such rights so long as Tenant pays the
acquisition price to Lender or otherwise obtains a release from Lender.

          5.   CURATIVE RIGHTS, MODIFICATION OF LEASE, AND ADVANCE PAYMENT OF
               --------------------------------------------------------------
RENT. So long as the Mortgage remains outstanding and unsatisfied:
- ----
          (a)  Tenant will mail or deliver to Lender, at the address and in the
manner hereinbelow provided, a copy of all notices permitted or required to be
given to the Landlord by Tenant under and pursuant to the terms and provisions
of the Lease. At any time before the rights of the Landlord shall have been
forfeited or adversely affected because of any default of the Landlord, or
within the time permitted the Landlord for curing any default under the Lease as
therein provided, Lender may, but shall have no obligation to, pay any taxes and
assessments, make any repairs and improvements, make any deposits or do any
other act or thing required of the Landlord by the terms of the Lease; and all
payments so made and all things so done and performed by Lender shall be as
effective to prevent the rights of the Landlord from being forfeited or
adversely affected because of any default under the Lease as the same would have
been if done and performed by the Landlord.

          (b)  Tenant will not consent to the modification of the Lease, nor to
the termination thereof, without the prior written consent of Lender, such
consent not to be unreasonably

                                      -2-
<PAGE>
 
withheld or delayed, nor will Tenant pay any rent under the Lease more than
thirty (30) days in advance.

          6.   CONSENT TO ASSIGNMENT. Tenant acknowledges that Landlord will
               ---------------------  
execute and deliver to Lender an assignment of the Lease as security for the
Loan, and Tenant hereby expressly consents to such assignment.

          7.   LIMITATION OF LIABILITY. Lender shall have no liability
               -----------------------  
whatsoever hereunder prior to becoming the owner of the Premises; and Tenant
agrees that if Lender becomes the owner of the Premises, Tenant shall look
solely to the estate or interest of Lender in the Premises for satisfaction of
any obligation which may be or become owing by Lender to Tenant hereunder or
under the Lease.

          8.   LANDLORD AND TENANT CERTIFICATIONS.  Landlord and Tenant hereby
               ----------------------------------                             
certify to Lender that the Lease has been duly executed by Landlord and Tenant
and is in full force and effect, that the Lease and any modifications and
amendments specified herein are a complete statement of the agreement between
Landlord and Tenant with respect to the leasing of the Premises, and the Lease
has not been modified or amended except as specified herein; that to the
knowledge of Landlord and Tenant, no party to the Lease is in default
thereunder; that no rent under the Lease has been paid more than thirty (30)
days in advance of its due date; and that Tenant, as of this date, has no
charge, lien or claim of offset under the Lease, or otherwise, against the rents
or other charges due or to become due thereunder.

          9.   TENANT ESTOPPEL CERTIFICATIONS. With the knowledge that Lender,
               ------------------------------   
as beneficiary of the mortgage encumbering the premises, will place substantial
reliance thereon in connection with the closing and funding of the Loan, Tenant
hereby makes the following certifications:

          (a)  The term of the Lease commenced on ________, 19__, and will
terminate on ______________.

          (b)  The Lease, as described above, has not been modified, amended,
assigned or subleased except as set forth in Exhibit A attached hereto, and is
                                             --------- 
in good standing and in full force and effect.

          (c)  The Lease provides for rental payments over the term of the
Lease, all as specifically provided in the Lease. No rent under the Lease has
been paid more than thirty (30) days in advance of the due date of same. For the
year ____, monthly payments, which are due on the first (1st) day of each month,
are as follows:


Basic Rent -   $________

                                      -3-
<PAGE>
 
          Payment of the above amount was timely made for the months of ______,
___and _____, ____, and the next payment of the above amount will be due on
________, ____.  In addition to the above amount, certain additional sums are
due to Landlord from Tenant under the Lease, all as specifically set forth in
the Lease.

          (d)  Tenant has paid a security deposit under the Lease.

          (e)  To Tenant's knowledge there are no defaults by Landlord under the
Lease and there are no existing circumstances which, with the passage of time,
or notice, or both, would give rise to a default under the Lease.

          (f)  Tenant has accepted and is occupying the Premises, and Landlord
has no unperformed obligation under the Lease to construct any improvements for
the Tenant related to the Premises.

          (g)  Tenant has no charge, lien, claim of set-off or defense against
rents or other charges due or to become due under the Lease or otherwise under
any of the terms, conditions, or covenants contained therein.

          (h)  Tenant has received no notice from any insurance company of any
defects or inadequacies in the Premises or in any part thereof which would
adversely affect the insurability of the Premises.

          (i)  Except as provided in the Lease, Tenant does not have any right
or option to purchase the Premises.

          (j)  Except as provided in the Lease, Tenant does not have any rights
or options to renew the Lease or to lease additional space in any building owned
by the Landlord.

          10.  TENANT COVENANTS.
               ---------------- 

          (a)  From and after the date hereof, Tenant will not pay any rent
under the Lease more than thirty (30) days in advance of its due date.

          (b)  From and after the date hereof, so long as there shall be any
assignment of Landlord's interest in the Lease to Lender, or any successor
thereto, Tenant will not:  consent to the modification of the Lease nor to the
termination thereof without the prior written consent of the Lender or any
successor holder of the Loan or the Mortgage which consent shall not be
unreasonably withheld or delayed (either of them being called "Mortgagee"), nor
seek to terminate the Lease by reason of any act or omission of Landlord until
Tenant shall have given written notice of such act or omission to such
Mortgagee's last address furnished Tenant) and until a reasonable period of time

                                      -4-
<PAGE>
 
shall have elapsed following the giving of such notice, during which period the
Mortgagee shall have the right, but not the obligation, to remedy such act or
omission.

          (c)  Upon written notice of the default by Landlord under any of the
loan documents held by Mortgagee and assignment of the Landlord's interest under
the Lease by Landlord to Mortgagee, Tenant, if Mortgagee so requests, will
recognize such Mortgagee as the Landlord under the Lease and will thereafter pay
rent and other sums to Mortgagee (or to the party designated by the Mortgagee in
writing) in accordance with the terms of the Lease, and, in such event, such
Mortgagee will not be liable for any act or omission of any prior lessor, liable
for return of the security deposit unless same was actually delivered to
Mortgagee, bound by any amendment to or assignment of the Lease made without its
consent, bound by any rent paid more than thirty (30) days in advance, or be
subject to any set-off or defense Tenant might have had against any prior
lessor.

          11.  NOTICES. Unless and except as otherwise specifically provided
               -------
herein, any and all notices, elections, approvals, consents, demands, requests
and responses thereto ("Communications") permitted or required to be given under
this Agreement shall be in writing, signed by or on behalf of the party giving
the same, and shall be deemed to have been properly given and shall be effective
upon the earlier of receipt thereof or three (3) days after deposit thereof in
the United States mail, postage prepaid, certified with return receipt
requested, to the other party at the address of such other party set forth
hereinbelow or at such other address within the continental United States as
such other party may designate by notice specifically designated as a notice of
change of address and given in accordance herewith; provided, however, that the
time period in which a response to any Communication must be given shall
commence on the date of receipt thereof, and provided further that no notice of
change of address shall be effective with respect to Communications sent prior
to the time of receipt of such change. Receipt of Communications hereunder shall
occur upon actual delivery (whether by mail, facsimile transmission, messenger,
courier service, or otherwise) to an individual party or to an officer, member,
or general or limited partner of a party or to any agent or employee of such
party at the address of such party set forth hereinbelow, subject to change as
provided hereinabove. An attempted delivery in accordance with the foregoing,
acceptance of which is refused or rejected, shall be deemed to be and shall
constitute receipt; and an attempted delivery in accordance with the foregoing
by mail, messenger, or courier service (whichever is chosen by the sender) which
is not completed because of changed address of which no notice was received by
the sender in accordance with this provision prior to the sending of the
Communication shall also be deemed to be and constitute receipt. Any
Communication, if given to Lender, must be addressed as follows, subject to
change as provided hereinabove:

                           _____________________________ 
                           _____________________________ 

and, if given to Tenant, must be addressed as follows, subject to change as
provided hereinabove:

                                      -5-
<PAGE>
 
                            _____________________________ 
                            _____________________________ 
                            _____________________________ 

and, if given to Landlord, must be addressed as follows, subject to change as
provided hereinabove:

                            Capital Automotive, L.P.

                            _____________________________ 
                            _____________________________ 

          12.  MISCELLANEOUS. This Agreement shall be binding upon and inure to
               -------------   
the benefit of the parties hereto and their respective heirs, legal
representatives, successors, successors-in-title and assigns. When used herein,
the term "Landlord" or "landlord" refers to Landlord and to any successor to the
interest of Landlord under the Lease.


                     [THIS SPACE INTENTIONALLY LEFT BLANK]

                                      -6-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first above written.

                                         LENDER:

Signed, sealed and delivered
in the presence of:                      By:
                                         Title:

________________________________         _______________________________
Witness                                  (CORPORATE SEAL)



                                         TENANT:

Signed, sealed and delivered
in the presence of:                      By:
                                         Title:

________________________________         _______________________________
Witness                                  (CORPORATE SEAL)

                                         LANDLORD:

Signed, sealed and delivered
in the presence of:                      By:
                                         Title:

________________________________         _______________________________
Witness                                  (PARTNERSHIP SEAL)

                                      -7-
<PAGE>
 
                                   EXHIBIT A

Lease Dated __________ from ________________ to _______________ with Exhibit A
attached, all in the form attached hereto as Attachment to Exhibit A.
                                             ------------------------

                                      -8-
<PAGE>
 
County of ______________________:
                                    SS:
State of _______________________:

          This is to certify that on this ____ day of ________, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Lender in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Lender.


                              _________________________________
                              Notary Public

                              My commission expires:

                                      -9-
<PAGE>
 
County of  ______________________:
                                    SS:
State of ________________________:

          This is to certify that on this ____ day of _________, 1997,
personally appeared before me, a notary public of the County (City) aforesaid,
known to me (or satisfactorily identified to me) to be the individual signing on
behalf of Tenant in the capacity stated by his signature, and that he
acknowledged the within document to be the act and deed of the Tenant.


                              __________________________________
                              Notary Public

                              My commission expires:

                                     -10-
<PAGE>
 
County of ___________________
                                 SS:
State of ____________________

          This is to certify that on this ____ day of _______, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Landlord in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Landlord.



                              _______________________________
                              Notary Public

                              My commission expires:

                                     -11-
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
                         1925 North Lynn Street, #306
                          Arlington, Virginia  22209


                               January 10, 1998


Good News Salisbury, Inc.
Attention: Roy L. Meyers, Jr.
2013 N. Salisbury Blvd.
Salisbury, Maryland 21801

Dear Mr. Meyers:

          We hereby agree that the escrow of Impositions pursuant to Section
3.04 of the Lease Agreement is irrevocably waived.

          We hereby further agree that the joint and several indemnity to be
provided by Roy L. Meyers, Jr. and Charlotte Meyers in Section 11.2.3(ii) under
each of the Real Property Purchase Agreements shall not exceed, in the aggregate
under both Agreements together, $2,000,000, less the amounts, if any, paid by
the Sellers that counts against the obligation of Roy L. Meyers, Jr. and
Charlotte Meyers under Section 11.2.3 of both Agreements together.

          We acknowledge that you would not enter into the Real Property
Purchase Agreement if we had not agreed to the waiver of the escrow of
Impositions and the agreement to aggregate the joint and several indemnity set
forth above. The waiver pursuant to this letter shall be binding upon us and our
successors and assigns.


                                    Capital Automotive L.P.


                                    By:    Capital Automotive REIT,
                                           its General Partner


                                    By:/s/ Thomas D. Eckert
                                           Thomas D. Eckert,
                                           President and Chief Executive 
Officer

                                     -12-
<PAGE>
 
                               EXHIBIT 5.2.1(M)



Capital Automotive REIT
1925 North Lynn Street
Suite 306
Arlington, VA 22209

Attention: Thomas D. Eckert, President and
                     Chief Executive Officer

RE:        Purchase Agreement ("Agreement") made as of __________ __, 1998
           between _____________________, ____________________ and
           ___________________ (individually a "Seller" and collectively the
           "Sellers"), Capital Automotive REIT, on its own behalf and as sole
           general partner of Capital Automotive L.P. (the "Landlord")

Ladies and Gentlemen:

We have acted as special counsel to the Sellers, in connection with the entering
into of the Agreement.  You have asked for our opinion concerning certain
matters relating to the Agreement.

We have examined the original (or photostatic copies) of the executed
counterparts of the Agreement.

We have also examined the following organizational documents related to the
Sellers (the "Organizational Documents"):

(i)        The certificate of incorporation or certificate of limited
           partnership, as the case may be, of each of the corporate or
           partnership Sellers, certified by the Secretary of State of ________
           on _______________;

(ii)       The bylaws or limited partnership agreement, as the case may be, of
           each of the corporate or partnership Sellers, certified to be true
           and correct by an authorized signing officer of each of the corporate
           or partnership Sellers as of ________________;

(iii)      Certificates from the Secretary of State of the States of _______,
           _________ and __________ indicating that each of the REIT,
           partnership and Sellers is in good standing in the State of its
           organization or formation; and

                                     -13-

<PAGE>
 
(iv)      A certified copy of resolutions adopted by the unanimous written
consent of the board of directors of each of the corporate Sellers or the board
of directors of the general partner of each of the partnership Sellers
authorizing the execution and delivery by each of the corporate or partnership
Sellers of the Agreement.

The opinions in paragraphs 1 and 7 below are based solely on our review of the
Organizational Documents.

In reaching the opinions set forth below, we have assumed that (i) each entity
that is a party to the Agreement (other than one of the Sellers) is a duly
organized or duly formed entity and is validly existing and in good standing,
(ii) each party to the Agreements (other than one of the Sellers) has duly and
validly executed and delivered each instrument, document and agreement to which
it is a signatory and that its obligations are its legal, valid and binding
obligations, enforceable in accordance with their respective terms, (iii) each
person executing any instrument, document or agreement on behalf of any party
(other than one of the Sellers) is duly authorized to do so, and (iv) each
natural person executing any instrument, document or agreement referred to in
this letter is legally competent to do so.

In our examination of Agreement for purposes of this letter, we have assumed
that (i) all signatures on the Agreement submitted to us for examination are
genuine, (ii) any original Agreement submitted to us for examination is
authentic, and (iii) all copies of the Agreement submitted to us for examination
conform to the original.

The opinions expressed in this letter concern only the effect of the laws of the
States of _______, _______ and _______ it being understood, however, that we are
not admitted to practice law in such States.  We express no opinion on the
applicability of the law of any other jurisdiction.  We assume no obligation to
supplement or modify this opinion if any applicable law changes in any manner.

Based on, and in reliance upon, the foregoing, and subject to the qualifications
stated herein, it is our opinion that:

          1.   Each of the Sellers is a corporation or limited partnership duly
organized or formed, validly existing and in good standing under the laws of the
State of its organization or formation.

          2.   Each of the corporate Sellers has the requisite corporate power
to execute and deliver, and to perform its obligations under, the Agreement.

          3.   The general partner of each of the partnership Sellers has the
requisite corporate power and authority to own its properties and carry on its
business and to execute and deliver, and to perform its obligations under, the
Agreement, and to execute and deliver on behalf of such partnership Seller, and
to bind such partnership Seller to, the Agreement.

                                     -14-
<PAGE>
 
          4.   The execution and delivery by each corporate Seller of the
Agreement have been duly authorized by all necessary corporate actions of such
Seller.

          5.   The execution, delivery and performance of the Agreement by the
general partner of each partnership Seller on behalf of such partnership Seller
have been duly authorized by all necessary corporate actions, and the
individuals executing the Agreement on behalf of such general partner have been
duly authorized to do so.

          6.   The execution, delivery, and performance by each corporate Seller
of the Agreement will not violate the charter or bylaws of such Seller.

          7.   The execution and delivery by the general partner of each
partnership Seller, and such general partner's performance of its obligations
under, the Agreement on behalf of each partnership Seller will not violate such
partnership Seller's Organizational Documents.

          8.   The Agreement has been duly executed and delivered by each Seller
and is the legal, valid and binding obligation of each Seller, enforceable
against each Seller in accordance with its terms.

          The opinions set forth above are subject to the following
qualifications:

          (a)  The validity, binding nature and enforceability of the Agreement
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other laws or equitable principles relating to or affecting the
rights of creditors or other obligees generally.

          (b)  The validity, binding nature and enforceability of the Agreement
may be limited by applicable principles of equity, whether such principles are
applied by a court of equity or a court of law, and we express no opinion on
whether a court would grant specific performance, injunctive relief or any other
equitable remedy.

          (c)  A court could refuse to enforce the Landlord's remedies under the
Agreement by reason of (i) a waiver by the Landlord, (ii) unconscionable conduct
by the Landlord, (iii) the exercise of remedies by the Landlord without
providing adequate notice to one of the Sellers or its default and a reasonable
opportunity to cure the default, (iv) the court's determination that one of the
Contributors is entitled to an opportunity to be heard by the court before the
Landlord is entitled to exercise any remedies, (v) the court's determination
that a remedy is a penalty or is unconscionable, (vi) the court's determination
that the Landlord is seeking to exercise remedies with respect to a breach that
is immaterial or that does not adversely affect the Landlord or the Landlord's
security, (vii) defenses arising from the Landlord's failure to act in
accordance with the terms and conditions of the Agreement, (viii) defenses
arising as a consequence of the passage of time (e.g., laches or statutes of
limitation), (ix) defenses arising as a result of the Landlord's failure to act
in a commercially reasonable manner or in good faith, or (x) public policy
considerations.

                                     -15-
<PAGE>
 
          (d)  We express no opinion with respect to any of the following
provisions if they are contained in the Agreement: (i) any provisions under
which any of the Sellers waives any of their legal or equitable rights except to
the extent the waived rights are expressly waivable pursuant to a statute or
constitutional provision, (ii) any provisions entitling the Landlord to obtain
reimbursement for attorneys' fees and other costs incurred by the Landlord,
(iii) any severability provision, (iv) any provision to the effect that rights
or remedies are not exclusive, that every right or remedy is cumulative and may
be exercised in addition to or with any other right or remedy or that the
election of a particular remedy does not preclude recourse to one or more other
remedies, (v) any provision which purports to affect jurisdiction or venue of
any specified court or courts, or which purports to establish evidentiary
standards, or (vi) any provision that purports to grant the Landlord relief from
any provisions of the Bankruptcy Code.

The opinions expressed in this letter are solely for the use of the parties to
whom this letter is addressed (or the successors or assigns of the Landlord
under the Agreement).  These opinions may not be relied on by any other persons,
may not be quoted in whole or in part, and may not be filed with any
governmental agency, in each case without our express prior written approval.
The opinions expressed in this letter are limited to the matters set forth in
this opinion, and no other opinions should be inferred beyond the matters
expressly stated.

                              Very truly yours,

                                     -16-
<PAGE>
 
EXHIBIT 5.2.1(M)
- ----------------


            OPINION OF SELLER'S COUNSEL TO BE DELIVERED AT CLOSING

          I.    The Sellers are duly organized or formed, validly existing and
in good standing under the laws of their respective State's of organization or
formation.

          II.   Each of the Sellers has the requisite corporate, partnership or
other entity power and authority to execute and deliver, and to perform its
obligations under the Agreement and to carry on its business.

          III.  The execution and delivery by each of the Sellers has been duly
authorized by all necessary corporate, partnership or other entity actions and
the persons executing the Agreement have been duly authorized to do so.

          IV.   The execution, delivery and performance by the Company will not
violate the charter, organizational documents, bylaws, operating agreements or
partnership agreements of any of the Sellers.

          V.    The Agreement has been duly executed and delivered by each of
the Sellers in compliance with the laws of the State of Texas, and is the legal,
valid and binding obligation of each, enforceable against each in accordance
with its terms, except that enforcement may be limited by bankruptcy,
insolvency, reorganization, arrangement, moratorium, or similar laws, or by
equitable principles, relating to or limiting the rights of creditors generally.

          VI.   To the undersigned's knowledge, without investigation, the
execution and delivery of the Agreement will not breach or otherwise violate the
provisions of or cause an event of default under any agreement, contract,
mortgage or other binding commitment or existing obligation of any of the
Sellers and will not breach or otherwise violate any permit, license, court
judgment, decree or order of any Court or any law, rule or regulation of any
governmental body to which any of Sellers are subject to or bound.

          VII.  To the undersigned's knowledge, without investigation, there are
no actions, suits or proceedings pending or threatened against any of the
Sellers or the Properties that affect the Properties or would materially affect
the Sellers ability to perform under the Agreement or which seeks to affect the
enforceability of the Agreement.

          VIII. To the undersigned's knowledge, without investigation, no
Seller is in default or has received any notice of default with respect to any
judgment, order, writ, injunction or decree or any lease, contract, agreement,
commitment, instrument or obligation to which it is a party or by which the
Property is bound or may be subject that affects the Property or could
materially affect any Seller's ability to perform its obligations under the
Agreement.

                                     -17-
<PAGE>
 
          IX.   To the undersigned's knowledge, all consents, approvals, or
authorization required by any third party or governmental authority in
connection with the Sellers' obligations under the Agreement have been properly
obtained and Sellers have complied with all applicable provisions of law
requiring any filing, registration or qualification with any governmental
authority in connection with the execution and delivery of the deeds to the
Properties.
<PAGE>
 
SCHEDULE 1.2 (PAGE 1 OF 3)


     Seller-Defined Reference
- -------------------------------

<TABLE>
<CAPTION>
Property                                                                Tax Account #
Number             Name                     Street Address       Tax Map, Grip, Parcel, Lots
- --------  ---------------------       ------------------------   -----------------------------
<S>       <C>                         <C>                        <C> 
  1       Oldsmobile/Cadillac/        2007 N. Salisbury Blvd.    05-029953
          GMC sales center            Salisbury, MD 21801        TM 29, G 23, P 12, Lots 1-2

  2       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080525
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 26-28

  3       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080517
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lot 29

  4       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080533
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lot 29

  5       Honda                       2013 N. Salisbury Blvd.    05-807783
                                      Salisbury, MD 21801        TM 29, G 23, P 267 Par-A

  6       Toyota/Mercedes/A           2015 N. Salisbury Blvd.    05-074835
                                      Salisbury, MD 21801        TM 29, G 23, P 267 Par-A

  7       Toyota/Mercedes I           2015 N. Salisbury Blvd.    05-074843
                                      Salisbury, MD 21801        TM 29, G 23, P 267

  8       Toyota/Mercedes II          2015 N. Salisbury Blvd.    05-067642
                                      Salisbury, MD 21801        TM 29, G 23, P 404

  9       Mazda-Hyundai               2010 N. Salisbury Blvd.    09-025828
                                      Salisbury, MD 21801        TM 29, G 22, P 385

  10      Nissan                      2012 N. Salisbury Blvd.    09-018441
                                      Salisbury, MD 21801        TM 29, G 23, P 386

  11      Used Car Sales Center I     2011 N. Salisbury Blvd.    05-062721
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 7-8

  12      Used Car Sales Center II    2011 N. Salisbury Blvd.    05-062748
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 24-25

  13      Body Shop - I               2010A N. Salisbury Blvd.   09-025901
                                      Salisbury, MD 21801        TM 29, G 22, P 385

  14      Body Shop - II              2010B N. Salisbury Blvd.   09-070443
                                      Salisbury, MD 21801        TM 29, G 16, P 113
</TABLE>

                                      -2-
<PAGE>
 
SCHEDULE 1.2 (PAGE 2 OF 3)



<TABLE>
<CAPTION>
               Initial
               Base                                                     
               Annual      Capital-    Purchase       
               Rent        ization     Price for      
               Amount       Rate       Property       
               -------     -------     ---------      
               <S>         <C>         <C>     
               469,920       11.50%    4,086,260      
               -------                 ---------      
               469,920                 4,086,260      
               =======                 =========      
</TABLE>


NOTE:     In the event the Purchase Price is to be adjusted pursuant to any of
- ----                                                                          
          Sections 3.3, 5.2.1(k), 6.1, 6.2, or 10.3 due to the deletion of a
          Property, the parties shall attempt in good faith to agree upon the
          adjustment.  If after thirty (30) days they are unable to agree upon
          such adjustment, it shall be determined pursuant to the provisions of
          Section 16.02(b) of the Company Lease.

                                      -3-
<PAGE>
 
SCHEDULE 1.2 (PAGE 3 OF 3)

<TABLE>
<CAPTION>
                                                                    Principal
                                                                    Balance
     Properties Encumbered                                  Outstanding
- ------------------------------
Number               Name               Lender              @ 12-31-97
- ------         ---------------     --------------           -----------
<S>            <C>                 <C>                      <C>
9 and 13       Mazda-Hyundai       Peninsula Bank           303,699.89
               and Body Shop-I
 
6, 7, and 8    Toyota/Mercedes     William Torrey           417,420.95
                                                            ----------
               IA, I, and II
                                                            721,120.84
                                                            ==========
</TABLE> 


SCHEDULE 1.2 (PAGE 1 OF 3)


     Seller-Defined Reference
- -------------------------------

<TABLE>
<CAPTION>
Property                                                                Tax Account #
Number             Name                   Street Address         Tax Map, Grip, Parcel, Lots
- --------  ---------------------       ------------------------   -----------------------------
<S>       <C>                         <C>                        <C> 
  1       Oldsmobile/Cadillac/        2007 N. Salisbury Blvd.    05-029953
          GMC sales center            Salisbury, MD 21801        TM 29, G 23, P 12, Lots 1-2

  2       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080525
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 26-28

  3       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080517
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lot 29

  4       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080533
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lot 29

  5       Honda                       2013 N. Salisbury Blvd.    05-807783
                                      Salisbury, MD 21801        TM 29, G 23, P 267 Par-A

  6       Toyota/Mercedes/A           2015 N. Salisbury Blvd.    05-074835
                                      Salisbury, MD 21801        TM 29, G 23, P 267 Par-A

  7       Toyota/Mercedes I           2015 N. Salisbury Blvd.    05-074843
                                      Salisbury, MD 21801        TM 29, G 23, P 267
</TABLE> 

                                      -4-
<PAGE>
 
<TABLE> 
<S>       <C>                         <C>                        <C>        
  8       Toyota/Mercedes II          2015 N. Salisbury Blvd.    05-067642
                                      Salisbury, MD 21801        TM 29, G 23, P 404

  9       Mazda-Hyundai               2010 N. Salisbury Blvd.    09-025828
                                      Salisbury, MD 21801        TM 29, G 22, P 385

  10      Nissan                      2012 N. Salisbury Blvd.    09-018441
                                      Salisbury, MD 21801        TM 29, G 23, P 386

  11      Used Car Sales Center I     2011 N. Salisbury Blvd.    05-062721
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 7-8

  12      Used Car Sales Center II    2011 N. Salisbury Blvd.    05-062748
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 24-25

  13      Body Shop - I               2010A N. Salisbury Blvd.   09-025901
                                      Salisbury, MD 21801        TM 29, G 22, P 385

  14      Body Shop - II              2010B N. Salisbury Blvd.   09-070443
                                      Salisbury, MD 21801        TM 29, G 16, P 113
</TABLE>

                                      -5-
<PAGE>
 
SCHEDULE 1.2 (PAGE 2 OF 3)

<TABLE>
<CAPTION>
               Initial                          
               Base                             
               Annual    Capital-    Purchase   
               Rent       ization    Price for  
               Amount      Rate      Property   
               -------   ---------   ---------  
               <S>       <C>        
               469,920      11.50%   4,086,260  
               -------               ---------  
               469,920               4,086,260  
               =======               =========  
</TABLE>


NOTE:     In the event the Purchase Price is to be adjusted pursuant to any of
- ----                                                                          
          Sections 3.3, 5.2.1(k), 6.1, 6.2, or 10.3 due to the deletion of a
          Property, the parties shall attempt in good faith to agree upon the
          adjustment.  If after thirty (30) days they are unable to agree upon
          such adjustment, it shall be determined pursuant to the provisions of
          Section 16.02(b) of the Company Lease.

                                      -6-
<PAGE>
 
SCHEDULE 1.2 (PAGE 3 OF 3)

<TABLE>
<CAPTION>
                                                                    Principal
                                                                    Balance
     Properties Encumbered                                  Outstanding
- ------------------------------
Number               Name               Lender              @ 12-31-97
- ------         ---------------     --------------           -----------
<S>            <C>                 <C>                      <C>
9 and 13       Mazda-Hyundai       Peninsula Bank           303,699.89
               and Body Shop-I
 
6, 7, and 8    Toyota/Mercedes     William Torrey           417,420.95
                                                            ----------
               IA, I, and II
                                                            721,120.84
                                                            ==========
</TABLE> 

                                      -7-
<PAGE>
 
SCHEDULE 2.1



<TABLE>
<CAPTION>
                              Property
                              Numbers        Present                                 Manage?
                             of Leased       Annual          Lease                   Maintain?
Tenant Name & Address        Properties       Rent           Term                    Occupy?
- ---------------------        ----------      ---------      -------                  ---------
<S>                          <C>             <C>            <C>                      <C>
Good News Salisbury, Inc.    1 thru 14       $ 429,480      no existing written      Occupy
P.O. Box 2557                                               leases
Salisbury, MD  21802                               
                                             --------- 
 
                                               429,480
                                             =========
</TABLE>

                                      -8-
<PAGE>
 
SCHEDULE 2.11 (A) & (B)
 
 
 
(A)  Letter of understanding from Evans Builders, Inc. to a Tenant affiliate
     dated July 14, 1997 for renovations to Toyota/Mercedes facility (Property
     Numbers 6, 7, and 8) on a time and materials basis, not to exceed $225,343.
 
(B)  Renovations based upon drawings by Andrew W. Booth & Associates dated June
     18, 1997.
 
                                     -9-
<PAGE>
 
SCHEDULE 7.4


<TABLE>
<CAPTION> 
                                                          Outstanding
                                                          Balance with
                                                             Accrued
                                                          Interest as of
          Seller's Liabilities and Agreements                12-31-97
- -------------------------------------------------------   --------------
<S>                                                       <C>
1.        Unsecured payable to Good News Salisbury, 
          Inc. for leasehold improvements constructed 
          on some of the Properties by Good News 
          Salisbury, Inc.
                                                             493,595.36
                                                             ==========
</TABLE>


NOTE:     This listing of contracts, agreements, liabilities, claims and
- ----                                                                    
          obligations of the Seller omits the secured debt shown in Schedule
          1.2, which is contemplated to be paid off at Closing.

                                     -10-
<PAGE>
 
SCHEDULE 7.8



[ None ]

                                     -11-
<PAGE>
 
SCHEDULE 7.11

Statement:    Seller represents that all Properties are zoned C-2, which permits
- ---------                                                                       
use of the Properties for the operation of vehicle dealerships and related
operations as they are currently used.


          Seller-Defined Reference
- ------------------------------------

<TABLE>
<CAPTION>
Property                                                                Tax Account #                   Zoning
Number               Name                  Street Address        Tax Map, Grip, Parcel, Lots        Classification
- --------  --------------------------  ------------------------   -----------------------------      --------------
<S>       <C>                         <C>                        <C>                                <C> 
  1       Oldsmobile/Cadillac/        2007 N. Salisbury Blvd.    05-029953                          C-2
          GMC sales center            Salisbury, MD 21801        TM 29, G 23, P 12, Lots 1-2

  2       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080525                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 26-28

  3       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080517                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lot 29

  4       Olds/Cad/GMC lots           2007 N. Salisbury Blvd.    05-080533                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lot 29

  5       Honda                       2013 N. Salisbury Blvd.    05-807783                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 267 Par-A

  6       Toyota/Mercedes/A           2015 N. Salisbury Blvd.    05-074835                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 267 Par-A

  7       Toyota/Mercedes I           2015 N. Salisbury Blvd.    05-074843                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 267

  8       Toyota/Mercedes II          2015 N. Salisbury Blvd.    05-067642                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 404

  9       Mazda-Hyundai               2010 N. Salisbury Blvd.    09-025828                          C-2
                                      Salisbury, MD 21801        TM 29, G 22, P 385

  10      Nissan                      2012 N. Salisbury Blvd.    09-018441                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 386

  11      Used Car Sales Center I     2011 N. Salisbury Blvd.    05-062721                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 7-8

  12      Used Car Sales Center II    2011 N. Salisbury Blvd.    05-062748                          C-2
                                      Salisbury, MD 21801        TM 29, G 23, P 13, Lots 24-25

  13      Body Shop - I               2010A N. Salisbury Blvd.   09-025901                          C-2
                                      Salisbury, MD 21801        TM 29, G 22, P 385

  14      Body Shop - II              2010B N. Salisbury Blvd.   09-070443                          C-2
                                      Salisbury, MD 21801        TM 29, G 16, P 113
</TABLE>

                                     -12-
<PAGE>
 
SCHEDULE 7.13.4



<TABLE>
<CAPTION>
                                                              Date Resolved
                                                             w/Maryland Dept.
               Circumstances                                  of Environment
- ------------------------------------------------             ----------------
<S>                                                          <C>     
1.        Above ground oil tank leak at Nissan.  
          Remediation successfully complete.                 03-Nov-97
          
2.        Underground soil contamination at                  19-Mar-97
          Toyota/Mercedes discovered pursuant to             
          Phase II study conducted by John Hynes 
          & Associates.  Due to low levels, no
          corrective action required.

3.        Surface soil contamination at Honda                15-Dec-92
          discovered during underground storage 
          tank removal.  Remediation successfully 
          completed.
</TABLE>

                                     -13-
<PAGE>
 
SCHEDULE 7.13.5(A)



To the best of the Seller's knowledge, the Seller has not treated, disposed of,
or arranged for the disposal of hazardous wastes or materials on or from the
Properties.

To the best of the Seller's knowledge, Good News Salisbury, Inc. and its
affiliates, as tenants of the Seller, have not treated or disposed of hazardous
wastes or materials on the Properties.  Using third party vendors, Good News
Salisbury, Inc. and its affiliates have arranged for the disposal of certain
wastes and materials used in the ordinary course of business.  A list of such
wastes and materials and the responsible vendors are listed below.  Good News
Salisbury, Inc. is not certain as to how or where these third party vendors
dispose of these wastes and materials.  At the request of the Company or
Partnership, vendor manifests documenting the removal of such wastes and
materials from the Properties shall be available for inspection by the Company
and/or Partnership.  Good News Salisbury, Inc. and its affiliates store certain
wastes and materials in above ground storage tanks as listed in Schedule
7.13.5(b).


Wastes & Materials                           Vendor
- ------------------                           ------

Waste oil, antifreeze                        International Petroleum Corp.
                                                   (Wilmington, DE)

Paints, brake fluids, parts cleaner          Safety-Kleen Corp.
               and other spent solvents            (Glen Burnie, MD)

Tires                                        Anderson Tire Co., Inc.
                                                   (Salisbury, MD)

                                     -14-
<PAGE>
 
SCHEDULE 7.13.5(B)


Statement 1:   To the best of the Seller's knowledge, all underground storage
- -----------                                                                  
tanks on the Properties have been removed.

The following is a list of all above ground storage tanks on the Properties.

<TABLE>
<CAPTION>
                                   Seller's
Property                           Tank                               Capacity
Numbers             Name            Ref. #          Contents          (in gallons)
- ----------  ---------------------  --------  ----------------------   ------------
<S>         <C>                    <C>       <C>                      <C>
11-12       Used Car Sales Center   T1       10W-30 motor oil                275

                                    T2       automatic trans. fluid          275

                                    T3       waste oil                       275

5           Honda                   T4       10W-30 motor oil                500

                                    T5       waste oil                       275

6 - 8       Toyota/Mercedes         T6       motor oil                       275

                                    T7       motor oil                       275

                                    T8       waste oil                       500

                                    T9       automatic trans. fluid          125

9           Mazda - Hyundai         T10      10W-30 motor oil                275

                                    T11      5W-30 motor oil                 275

                                    T12      waste oil                       275

14          Body Shop - II          T13      contaminated fuel               275

10          Nissan                  T14      10W-30 motor oil                275

                                   T15       waste oil                       275
</TABLE>

Statement 2:   Two storage tanks are known to have leaked on the Properties.
- -----------                                                                  
Above ground tank T14 was discovered to have leaked on 07-31-97.  The tank was
repaired and the site was successfully remediated with oversight by the Maryland
Department of Environment.  Also, a Phase II study of the Toyota/Mercedes
Properties (prepared by John Hynes & Associates, dated 01-24-97) revealed low-
level hydrocarbon contamination, possibly caused by leakage of an underground
storage tank previously removed.  The Maryland Department of Environment closed
this matter by letter stating that no corrective action was required based upon
the low level of contamination and the absence of contamination at the
groundwater interface.

Statement 3:   During the removal of an underground storage tank at the rear of
- -----------                                                                    
the Honda Property in August of 1992, low levels of hydrocarbon contamination
were discovered in the surface soil, apparently due to spill-overs when
accessing the tank.  Tank excavation and soil remediation was conducted with the
oversight of the Maryland Department of Environment.

                                     -15-
<PAGE>
 
SCHEDULE 7.13.5(C)



The Seller is not aware of asbestos inside or a part of any buildings on the
Properties.  The Seller has not conducted investigations designed to identify
the presence of asbestos.

                                     -16-
<PAGE>
 
SCHEDULE 7.13.5(F)



State Water Appropriation Permit (# W184G024[02])

                                     -17-
<PAGE>
 
SCHEDULE 7.14



All insurance is covered under a single policy (# 133660M) with Universal
Underwriters Insurance Company.

                                     -18-
<PAGE>
 
SCHEDULE 7.17



1.        Computer services and maintenance contract with Reynolds & Reynolds
          (approx. $120,000 per year).
2.        Buy-out agreement of former Good News Salisbury, Inc. shareholder
          (approx. $300,000 left to pay).

                                     -19-
<PAGE>
 
SCHEDULE 7.19



<TABLE>
<CAPTION> 
                                                                            Outstanding
                                                                           Balance as of
          Seller's Liabilities other than Mortgages                          12-31-97
- ------------------------------------------------------------------         -------------
<S>                                                                        <C>
Unsecured payable to Good News Salisbury, Inc. for leasehold
improvements constructed on some of the Properties by Good News
Salisbury, Inc.
          Principal                                                             465,656
          Accrued Interest                                                       27,939
                                                                                -------
 Total Seller Liabilities other than Mortgages                                  493,595
                                                                                =======
</TABLE>

                                     -20-

<PAGE>
 
                                 EXHIBIT 10.30
                      (Form of Good News Lease Agreement)



                                LEASE AGREEMENT
                                ---------------

                                    BETWEEN
                                    -------

                       CAPITAL AUTOMOTIVE L.P., LANDLORD
                       ---------------------------------

                                      AND
                                      ---

                       GOOD NEWS SALISBURY, INC., TENANT
                       ---------------------------------


                            DATED: JANUARY 10, 1998
<PAGE>
 
<TABLE>
<S>                                                                                  <C> 
ARTICLE I 
     LEASE AGREEMENT, LEASED PROPERTY AND TERM...................................    1
     1.01  Lease Agreement.......................................................    1
     1.02  Contingent Upon Acquisition of the Leased Property....................    2
     1.03  Term..................................................................    2
     1.04  Holding Over..........................................................    3
     1.05  Surrender.............................................................    3

ARTICLE II
     RENT........................................................................    4
     2.01  Base Rent.............................................................    4
     2.02  Payment...............................................................    4
     2.03  Security Deposit......................................................    4
     2.04  Base Annual Rent Adjustment...........................................    5
     2.05  Additional Rent.......................................................    5
     2.06  Place(s) of Payment of Rent; Direct Payment of Additional Rent........    5
     2.07  Net Lease.............................................................    5
     2.08  No Termination, Abatement, Etc........................................    5

ARTICLE III
     IMPOSITIONS AND UTILITIES...................................................    6
     3.01  Payment of Impositions................................................    6
     3.02  Definition of Impositions.............................................    7
     3.03  Utilities.............................................................    8
     3.04  Escrow of Impositions.................................................    8
     3.05  Discontinuance of Utilities...........................................    9
     3.06  Liens.................................................................    9

ARTICLE IV
     INSURANCE...................................................................    9
     4.01  Insurance.............................................................    9
     4.02  Insurance Limits......................................................   11
     4.03  Insurance Requirements................................................   11
     4.04  Replacement Cost......................................................   12
     4.05  Blanket Policy........................................................   12
     4.06  No Separate Insurance.................................................   12
     4.07  Waiver of Subrogation.................................................   12
     4.08  Mortgages.............................................................   13
     4.09  Other Insurance Requirements..........................................   13
</TABLE>
<PAGE>
 
<TABLE>
<S>                                                                                                  <C> 
ARTICLE V           
      INDEMNITY; SUBSTANCES OF CONCERN..........................................................     13
      5.01  Tenant's Indemnification............................................................     13
      5.02  Substances of Concern...............................................................     14
      5.03  Audits..............................................................................     16
      5.04  Landlord's Option Re: Compliance....................................................     17
      5.05  Environmental Indemnification.......................................................     17
      5.06  Tenant's Cleanup Obligation.........................................................     17
      5.07  Existing Environmental Conditions...................................................     18
      5.08  Survival of Tenant's Obligations....................................................     18

ARTICLE VI
      USE AND ACCEPTANCE OF PREMISES ...........................................................     18
      6.01  Use of Leased Properties............................................................     18
      6.02  Acceptance of Leased Properties.....................................................     19
      6.03  Conditions of Use and Occupancy.....................................................     19
      6.04  Financial Statements and Other Information..........................................     19

ARTICLE VII
      REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS ......................................     20
      7.01  Maintenance.........................................................................     20
      7.02  Compliance with Laws................................................................     20
      7.03  Required Alterations................................................................     21
      7.04  Mechanics' Liens....................................................................     21
      7.05  Replacements of Fixtures............................................................     21
      7.06  Encroachments; Restrictions.........................................................     22

ARTICLE VIII
      ALTERATIONS AND SIGNS; TENANT'S PROPERTY; CAPITAL ADDITIONS TO THE LEASED PROPERTIES......     22
      8.01  Tenant's Right to Construct.........................................................     22
      8.02  Scope of Right......................................................................     23
      8.03  Cooperation of Landlord.............................................................     23
      8.04  Commencement of Construction........................................................     23
      8.05  Rights in Tenant Improvements.......................................................     24
      8.06  Personal Property...................................................................     25
      8.07  Requirements for the Tenant's Personal Property.....................................     25
      8.08  Financings of Capital Additions to a Leased Property................................     26

ARTICLE IX
      DEFAULTS AND REMEDIES  ...................................................................     27
      9.01  Events of Default...................................................................     27
      9.02  Remedies............................................................................     29
</TABLE> 

                                      ii
<PAGE>
 
<TABLE> 
<S>                                                                                                 <C>                      
     9.03   Right of Set-Off...................................................................     32
     9.04   Performance of Tenant's Covenants..................................................     32
     9.05   Late Charge........................................................................     32
     9.06   Litigation; Attorneys' Fees........................................................     32
     9.07   Remedies Cumulative................................................................     33
     9.08   Escrows and Application of Payments................................................     33
     9.09   Power of Attorney..................................................................     33

ARTICLE X
     DAMAGE AND DESTRUCTION....................................................................     34
     10.01  General............................................................................     34
     10.02  Landlord's Inspection..............................................................     35
     10.03  Landlord's Costs...................................................................     35
     10.04  Rent Abatement.....................................................................     35
     10.05  [Intentionally Omitted]............................................................     35
     10.06  Damage Near End of Term............................................................     36
     10.07  Risk of Loss.......................................................................     36

ARTICLE XI
     CONDEMNATION..............................................................................     36
     11.01  Total Taking.......................................................................     36
     11.02  Partial Taking.....................................................................     36
     11.03  Restoration........................................................................     37
     11.04  Landlord's Inspection..............................................................     37
     11.05  Award Distribution.................................................................     37
     11.06  Temporary Taking...................................................................     38

ARTICLE XII
     ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS............................     38
     12.01  Organization and Qualification.....................................................     38
     12.02  Material Agreements................................................................     39
     12.03  Changes in Condition...............................................................     40
     12.04  Franchises, Licenses, etc..........................................................     40
     12.05  Litigation.........................................................................     40
     12.06  Authorization and Enforceability...................................................     40
     12.07  No Legal Obstacle to Lease.........................................................     41
     12.08  Certain Business Representations...................................................     41
     12.09  Certain Financial Covenants........................................................     42
     12.10  Cash Flow Coverage Ratio Covenant..................................................     42
     12.11  Disclosure.........................................................................     43
     12.12  Covenant Not to Acquire............................................................     43
</TABLE> 
 
                                      iii
<PAGE>
 
<TABLE>
<S>                                                                                                 <C>
ARTICLE XIII 
     ASSIGNMENT AND SUBLETTING; ATTORNMENT.....................................................     43
     13.01  Prohibition Against Subletting and Assignment......................................     43
     13.02  Changes of Control.................................................................     44
     13.03  Operating/Service Agreements.......................................................     44
     13.04  Assignment.........................................................................     45
     13.05  REIT Limitations...................................................................     45
     13.06  Attornment.........................................................................     46
     13.07  Severance and Spin-Off.............................................................     47

ARTICLE XIV
     ARBITRATION...............................................................................     47
     14.01  Controversies......................................................................     47
     14.02  Appointment of Arbitrators.........................................................     47
     14.03  Arbitration Procedure..............................................................     48
     14.04  Expenses...........................................................................     48
     14.05  Enforcement of the Arbitration Award...............................................     48

ARTICLE XV
     QUIET ENJOYMENT, SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATES.........................     48
     15.01  Quiet Enjoyment....................................................................     48
     15.02  Landlord Mortgages; Subordination..................................................     48
     15.03  Attornment.........................................................................     49
     15.04  Estoppel Certificates..............................................................     49
     15.05  Waiver of Landlord's Lien..........................................................     50

ARTICLE XVI
     RIGHT OF FIRST OFFER......................................................................     51
     16.01  Right of First Offer During Lease Term or Extension Term...........................     51
     16.02  Right to Purchase at End of an Extension Term......................................     52

ARTICLE XVII
     MISCELLANEOUS.............................................................................     53
     17.01  Notices............................................................................     53
     17.02  Advertisement of a Leased Property.................................................     54
     17.03  Landlord's Access..................................................................     54
     17.04  Entire Agreement...................................................................     54
     17.05  Severability.......................................................................     55
     17.06  Captions and Headings..............................................................     55
     17.07  Governing Law......................................................................     55
     17.08  Memorandum of Lease or Certain Rights Under the Lease..............................     55
     17.09  Waiver.............................................................................     55
</TABLE> 

                                      iv
<PAGE>
 
<TABLE> 
<S>                                                                                                 <C>                     
     17.10  Assignment; Binding Effect..........................................................    55
     17.11  Consents and Approvals..............................................................    55
     17.12  Single Property.....................................................................    56
     17.13  Modification........................................................................    56
     17.14  Incorporation by Reference..........................................................    56
     17.15  No Merger...........................................................................    56
     17.16  Force Majeure.......................................................................    56
     17.17  Laches..............................................................................    56
     17.18  Waiver of Jury Trial................................................................    56
     17.19  Permitted Contests..................................................................    57
     17.20  Construction of Lease...............................................................    57
     17.21  Counterparts........................................................................    58
     17.22  Relationship of Landlord and Tenant.................................................    58
 </TABLE> 

                                       v
<PAGE>
 
                                   SCHEDULES

A         Leased Properties and Initial Base Rent
B         Permitted Liens
12.02     Material Agreements
12.03     Changes in Condition


                                   EXHIBITS

2.02      Payment Account Information
2.04      Base Annual Rent Adjustment
5.07      Environmental Reports
15.02     Form of Subordination and Non-Disturbance Agreement

                                      vi
<PAGE>
 
                                LEASE AGREEMENT

          This Lease Agreement ("Lease") dated as of the 10th day of January,
1998 by and between CAPITAL AUTOMOTIVE L.P., a Delaware limited partnership
("Landlord"), having its principal office at 1925 North Lynn, Suite 306,
Arlington, Virginia 22209 and Good News Salisbury, Inc., a Maryland corporation,
having its principal office at 2013 N. Salisbury Blvd., Salisbury, Maryland
21801 ("Tenant").

                                   RECITALS

          WHEREAS, Tenant or an Affiliate (as hereafter defined) has conveyed or
will convey to Landlord certain parcels of real estate and improvements thereon
upon which Tenant engages in motor vehicle retail and/or motor vehicle related
businesses (the "Business"), which parcels of real estate and improvements
thereon are described on Schedule A attached hereto and incorporated herein by
                         ----------                                           
reference (each hereinafter a "Leased Property" or collectively, the "Leased
Properties"), and Landlord and Tenant desire to provide for the lease by
Landlord to Tenant of the Leased Properties; and

          WHEREAS, Landlord and Tenant desire that each of the Leased Properties
shall be the subject of this Lease and be used by Tenant in its operation of the
Business; and

          WHEREAS, this Lease provides that additional real estate and
improvements thereon may be made subject to the operation and effect of this
Lease, upon execution by Landlord and Tenant of a Lease Supplement designating
each such additional property as a Leased Property hereunder.

          NOW, THEREFORE, in consideration of the foregoing premises and of
their respective agreements and undertakings herein, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:

                                   ARTICLE I
                   LEASE AGREEMENT, LEASED PROPERTY AND TERM

          1.01  Lease Agreement.  Landlord does hereby let and lease unto
                ---------------                                          
Tenant, and Tenant does hereby take and hire from Landlord, the Leased
Properties, which shall respectively consist of:

          (a)  The parcels of land described and located at the addresses 
               listed in Schedule A hereto, as more particularly described 
                         ----------
               therein, together with any additional parcels of real estate and
               improvements thereon subsequently designated as a Leased Property
               by the parties pursuant to a Lease Supplement as provided for
               herein, together with all rights, titles, appurtenant interests,
               covenants, licenses, privileges and benefits thereto belonging,
               and any easements, rights-of-way, rights of ingress or egress or
               other interests in, on, or to any land, highway, street, road or
               avenue, open or proposed, in, on, across, in
<PAGE>
 
               front of, abutting or adjoining such real property including,
               without limitation, any strips and gores adjacent to or lying
               between such real estate and any adjacent real estate (the
               "Land");

          (b)  All buildings, improvements, structures and Fixtures (as
               hereinafter defined) now located or to be located or to be
               constructed on the Land, including, without limitation,
               sidewalks, landscaping, parking lots and structures, roads,
               drainage and all above ground and underground utility structures
               and conduits (on-site or off-site), equipment systems and other
               so-called "infrastructure" improvements (the "Improvements");

          (c)  All equipment, machinery, fixtures, and other items of real
               and/or personal property, including all components thereof,
               located in, on or used in connection with, and permanently
               affixed to or incorporated into, the Improvements, including,
               without limitation, all furnaces, boilers, heaters, electrical
               equipment, heating, plumbing, lighting, ventilating,
               refrigerating, incineration, air and water pollution control,
               waste disposal, air-cooling and air-conditioning systems and
               apparatus, sprinkler systems and fire and theft protection
               equipment, and similar systems, all of which, to the greatest
               extent permitted by law, are hereby deemed to constitute real
               estate, together with all replacements, modifications,
               alterations and additions thereto (collectively the "Fixtures");
               and

          (d)  All easements, rights and appurtenances relating to the Land and
               the Improvements.

          SUBJECT, HOWEVER, to the liens, encumbrances, restrictions,
agreements, and other title matters listed or specifically referred to in
Schedule B ("Permitted Exceptions").
- ----------                          

          The Leased Properties shall however exclude all furniture, equipment,
inventory and items of moveable personal property attached to the Land or
Improvements that relate to the business being conducted on the Leased Property
which items may readily be removed without material damage to the Land and
Improvements whether or not such items might legally be considered to be
"fixtures" (all of which are owned by Tenant and shall hereinafter be defined as
the "Excluded Personal Property").

          1.02 Contingent Upon Acquisition of the Leased Property.  In the event
               --------------------------------------------------         
this Lease is executed prior to the conveyance by Tenant or an Affiliate of the
Leased Property to Landlord, the parties acknowledge that the effectiveness of
this Lease in respect of such Leased Property is contingent upon the closing of
such conveyance (the "Commencement Date").

          1.03 Term.  The initial term of this Lease (the "Term") shall be for
               ----                                                           
a fixed term of One Hundred and Twenty (120) months commencing on the
Commencement Date.  The initial term

                                       2
<PAGE>
 
for any Leased Property designated in a Lease Supplement shall begin on the date
of such Lease Supplement and expire at the end of the Term or then current
Extension Term (as hereafter defined), as the case may be. Tenant shall have the
right to extend this Lease for the Leased Properties as a group, at Tenant's
option, for one One Hundred and Twenty (120) month renewal term from the
expiration of the Term (the "First Extension Term"), provided that no Event of
Default (as defined in Section 9.01 hereof) shall exist and be continuing. In
addition, Tenant shall have the right to extend this Lease for the Leased
Properties as a group at Tenant's option, for a second One Hundred and Twenty
(120) month renewal term from the expiration of the First Extension Term (the
"Second Extension Term", each an "Extension Term", and collectively with the
First Extension Term, the "Extension Terms") provided that no Event of Default
(as defined in Section 9.01 hereof) shall exist and be continuing. Tenant shall
exercise the First Extension Term by written notice to Landlord no later than
twelve months prior to the end of the Term. Tenant shall exercise the Second
Extension Term by written notice to Landlord no later than twelve (12) months
prior to the end of the First Extension Term. Notwithstanding anything else to
the contrary in this Agreement, the Rent during the Second Extension Term shall
be the Fair Market Rent (as hereafter defined) for the Leased Property. Fair
Market Rent shall be determined as soon as possible after receipt by Landlord of
Tenant's notice of option exercise, on the basis of appraisals of independent
appraisers selected in accordance with the provisions of Section 16.02(b).
Tenant shall have the right, in its sole discretion, to rescind the exercise of
Tenant's option to extend the Lease for the Second Extension Term during a
period of five (5) business days after the determination of the Fair Market
Rent. If Tenant shall fail to exercise the right to rescind within such five (5)
day period, the election to extend shall be irrevocable and the Fair Market Rent
so determined shall be the Base Annual Rent during the Second Extension Term
notwithstanding any changes in the market rental rates, whether upward or
downward, which may occur after such determination. However, notwithstanding
anything else in this Agreement, Fair Market Rent shall become the Base Annual
Rent for the Second Extension Term (as defined hereafter) and shall be subject
to Base Annual Rent Adjustments as set forth in Section 2.04.

          1.04  Holding Over.  Should Tenant, without the express consent of
                ------------                                                
Landlord, continue to hold and occupy any Leased Property after the expiration
or earlier termination of the Term or any Extension Term, as the case may be,
such holding over beyond the Term and the acceptance or collection of Rent (as
defined hereinafter) by Landlord shall operate and be construed as creating a
tenancy from month-to-month and not for any other term whatsoever.  During any
such holdover period Tenant shall pay to Landlord for each month (or portion
thereof) Tenant remains in such Leased Property, in lieu of the Base Annual Rent
(as defined hereafter) for such Leased Property, an amount equal to the sum of
one-twelfth (1/12) of (i) one hundred seven percent (107%) of such Base Annual
Rent (the "Holdover Rate"), and (ii) as applicable, one hundred percent (100%)
of the Additional Rent (as defined hereinafter) for such Leased Property and
Other Additional Rent (as defined hereinafter) for such Leased Property, each as
in effect on the expiration date.  Said month-to-month tenancy may be terminated
by Landlord by giving Tenant thirty (30) days written notice, and at any time
thereafter Landlord may re-enter and take possession of such Leased Property.

                                       3
<PAGE>
 
          1.05 Surrender.  Except as a result of (a) Tenant Improvements and
               ---------                                                    
Capital Additions (as defined hereinafter); (b) normal and reasonable wear and
tear (subject to the obligation of Tenant to maintain each Leased Property in
good order and repair during the Term); and (c) casualty, taking or other damage
and destruction not required to be repaired by Tenant, Tenant shall surrender
and deliver up each Leased Property at the expiration or termination of the Term
or the Extension Term therefor, as the case may be, broom clean, in good order
and repair, free of the Excluded Personal Property and any additional items of
Tenant's personal property (together with the Excluded Personal Property, the
"Tenant's Personal Property"), all of which Tenant shall remove prior to such
surrender and delivery.


                                  ARTICLE II
                                     RENT

          2.01 Base Rent.  Tenant shall pay Landlord annual base rent (the "Base
               ---------                                                  
Annual Rent") as to the Leased Property for each year during the Term or the
Extension Term (each such year a "Lease Year"), which Base Annual Rent shall be
subject to upward adjustment pursuant to Section 2.04. In the first Lease Year,
Base Annual Rent shall be in the amount set forth on Schedule A (the "Initial
                                                     ----------     
Base Annual Rent"), paid to Landlord in twelve equal monthly installments.

          2.02 Payment.  Tenant shall pay Landlord the Base Annual Rent as to
               -------                                                       
the Leased Property for each Lease Year, without notice, demand, set-off or
counterclaim in advance, in lawful money of the United States of America and
payable in consecutive monthly installments commencing on the Commencement Date
and thereafter on the first day of each month during the Term.  Tenant will, to
the extent that such method of payment is compatible with its business
practices, make such payments by direct deposit of immediately available funds
to the account set forth in Exhibit 2.02 (which Exhibit 2.02 may be modified by
                            ------------        ------------                   
Landlord from time to time upon Notice (as hereafter defined) to Tenant).

          2.03 Security Deposit.  Prior to the Commencement Date, Tenant shall
               ----------------                                               
deliver to Landlord an amount equal to one-twelfth (1/12th) of the Base Annual
Rent, which amount shall be held by Landlord as security (the "Security
Deposit") for the performance of Tenant's payment and other obligations under
this Lease.  Upon an Event of Default and the continuance thereof, Landlord
shall have the right, but not the obligation, to apply the Security Deposit as
set forth in Section 9.08.  Landlord shall return the Security Deposit, without
interest, after expiration of this Lease, if Tenant has fully and faithfully
carried out all of the terms, covenants and conditions hereof.  In the event
that Landlord eliminates its standard business policy of requiring security
deposits from tenants, then Landlord shall refund the Security Deposit to Tenant
within thirty (30) days of such policy change.

                                       4
<PAGE>
 
          2.04 Base Annual Rent Adjustment.
               --------------------------- 

               (a)  The Base Annual Rent shall be adjusted during the Lease 
                    Term or the Extension Terms under the procedures set forth
                    in Exhibit 2.04 (the "Base Annual Rent Adjustment").
                       ------------

               (b)  As used in Exhibit 2.04, the "Index" shall mean the CPI-U 
                               ------------
                    published by the United States Department of Labor, Bureau
                    of Labor Statistics Consumer Price Index for All Urban
                    Consumers, U.S. City Average. If at any time during the Term
                    or the Extension Term, as the case may be, the Index shall
                    be discontinued, Landlord shall select a substitute index,
                    being an existing official index published by the Bureau of
                    Labor Statistics or its successor or another, similar
                    governmental agency, which index is most nearly equivalent
                    to the Index.

          2.05 Additional Rent.  As to each Leased Property, in addition to the
               ---------------                                                 
Base Annual Rent, Tenant shall pay all other amounts, liabilities, obligations
and Impositions (as hereinafter defined) which Tenant assumes or agrees to pay
under this Lease and any fine, penalty, interest, charge and cost which may be
added for nonpayment or late payment of such items (collectively, the
"Additional Rent").

          2.06 Place(s) of Payment of Rent; Direct Payment of Additional Rent.
               --------------------------------------------------------------- 
The Base Annual Rent and Additional Rent are hereinafter referred to as "Rent."
Landlord shall have all legal, equitable and contractual rights, powers and
remedies provided in this Lease or by statute or otherwise in the case of
nonpayment of the Rent for each Leased Property. Tenant shall make all payments
of Rent at Landlord's address set forth in Section 17.01 or as Landlord may
otherwise from time to time direct in writing, or, if Landlord shall direct
Tenant (if compatible with Tenant's business practices), directly to a bank
account specified by Landlord to Tenant in writing.  At the direction of the
Landlord, Tenant shall make payments of Additional Rent directly to the person
or persons to whom such amount is owing at the time and times when such payments
are due, and Tenant shall give to Landlord such evidence of such direct payments
as Landlord shall reasonably request.

          2.07 Net Lease.  This Lease shall be deemed and construed to be an
               ----------                                                   
"absolute net lease" or "triple net lease," (i.e. that Tenant shall pay all
costs and expenses related to the ownership and operations of each Leased
Property, thereby leaving all Rent as an absolutely net return to Landlord) and
as to each Leased Property, Tenant shall pay all Rent, Impositions, and other
charges and expenses in connection with such Leased Property throughout the Term
and any Extension Term, without abatement, deduction or set-off.

          2.08 No Termination, Abatement, Etc.  Except as otherwise specifically
               -------------------------------                                  
provided herein, Tenant shall remain bound by this Lease in accordance with its
terms. Except as otherwise specifically provided herein, Tenant shall not,
without the prior written consent of Landlord, modify,

                                       5
<PAGE>
 
surrender or terminate this Lease as to any Leased Property, nor seek nor be
entitled to any abatement, deduction, deferment or reduction of Rent, or set-off
against the Rent as to any Leased Property for any reason whatsoever. Except as
specifically provided herein, the obligations of Landlord and Tenant shall not
be affected by reason of: (a) the lawful or unlawful prohibition of, or
restriction upon, Tenant's use of any Leased Property, or any part thereof, the
interference with such use by any person, corporation, partnership or other
entity, or by reason of eviction by paramount title; (b) any claim which Tenant
has or might have against Landlord or by reason of any default or breach of any
warranty by Landlord under this Lease or any other agreement between Landlord
and Tenant, or to which Landlord and Tenant are parties; (c) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceeding affecting Landlord or any assignee or transferee
of Landlord; (d) any damage to, or destruction of, any Leased Property or any
portion thereof for whatever cause, or any taking of the Leased Property or any
portion thereof; or (e) any other cause, whether similar or dissimilar to any of
the foregoing, other than a discharge of Tenant from any such obligations as a
matter of law. Except as otherwise specifically provided herein, and to the
maximum extent permitted by law, Tenant hereby specifically waives all rights,
including but not limited to any rights under any statute relating to rights of
tenants in the jurisdictions where the Leased Properties are located, which may
now be conferred upon it by law, relating to: (a) the modification, surrender or
termination of this Lease, or the quitting or surrender of any Leased Property
or any portion thereof; (b) any abatement, reduction, suspension or deferment of
the Rent or other sums payable by Tenant hereunder; or (c) any rights of
redemption. As to each Leased Property, the obligations of Landlord and Tenant
hereunder shall be separate and the Rent and all other sums shall continue to be
payable in all events unless the obligations to pay the same shall be terminated
pursuant to the express provisions of this Lease or by termination of this Lease
other than by reason of an Event of Default.


                                  ARTICLE III
                           IMPOSITIONS AND UTILITIES

          3.01 Payment of Impositions.  Subject to the adjustments set forth
               ----------------------                                       
herein, Tenant shall pay, in the manner set forth in Section 3.04, as Additional
Rent, to the Landlord an amount equal to the amount necessary to pay all
Impositions (as hereinafter defined) that may be levied or become a lien on any
Leased Property or any part thereof at any time (whether prior to or during the
Term), without regard to prior ownership of said Leased Property, before the
same becomes delinquent.  Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon any
Leased Property or any part thereof.  Tenant, at its expense, shall prepare and
file all tax returns and reports in respect of any Imposition as may be required
by governmental authorities, provided, however, that Tenant shall provide to
Landlord copies of all filings of such tax returns or reports in respect of any
real or personal property owned by Landlord.  Tenant shall be entitled to any
refund due in respect of such Impositions from any taxing authority if no Event
of Default shall have occurred hereunder and be continuing.  Any refunds in
respect of such Impositions retained by Landlord due to an Event of Default
shall be applied as provided in Section 9.08.  Landlord and Tenant shall, upon
request of the other, provide

                                       6
<PAGE>
 
such data as is maintained by the party to whom the request is made with respect
to a Leased Property as may be necessary to prepare any required tax returns and
reports. In the event governmental authorities classify any property covered by
this Lease as personal property, Landlord and Tenant shall file all personal
property tax returns in such jurisdictions where it may legally so file with
respect to their respective owned personal property. Landlord, to the extent it
possesses the same, and Tenant, to the extent it possesses the same, will
provide the other party, upon request, with cost and depreciation records
necessary for filing such returns or reports for any property so classified as
personal property. To the extent that Landlord is legally required to file
personal property tax returns, Tenant will be provided with copies of assessment
notices indicating a value in excess of the reported value in sufficient time
for Tenant to file a protest. Tenant may, upon notice to Landlord, at Tenant's
option and at Tenant's sole cost and expense, protest, appeal, or institute such
other proceedings as Tenant may deem appropriate to effect a reduction of real
estate or personal property assessments and Landlord, at Tenant's expense as
aforesaid, shall fully cooperate with Tenant in such protest, appeal, or other
action. Tenant shall provide Landlord copies of all materials filed or presented
in connection with any such proceeding. Tenant shall promptly reimburse Landlord
for all taxes paid by Landlord, which were not paid with deposits received from
Tenant, upon receipt of billings accompanied by copies of a bill therefor and
payments thereof which identify the property with respect to which such payments
are made. Impositions imposed with respect to the tax-fiscal period during which
the Term commences and terminates as to each Leased Property shall be adjusted
and prorated between Landlord and Tenant on a per diem basis, with Tenant being
obligated to pay its pro rata share from and including the Commencement Date to
and including the expiration or termination date of the Term or Extension Term,
as the case may be, whether or not such Imposition is imposed before or after
such commencement or termination, and Tenant's obligation to pay its prorated
share thereof shall survive such termination. Tenant shall also pay to Landlord
a sum equal to the amount which Landlord may be caused to pay of any privilege
tax, sales tax, gross receipts tax, rent tax, occupancy tax or like tax
(excluding any tax based on net income), hereinafter levied, assessed, or
imposed by any federal, state, city, county or municipal or other local
governmental authority, or any subdivision thereof, upon or measured by rent or
other consideration required to be paid by Tenant under this Lease.

          3.02 Definition of Impositions.  "Impositions" means,
               -------------------------                       
collectively:  (a) taxes (including without limitation, all real estate and
personal property ad valorem (whether assessed as part of the real estate or
separately assessed as unsecured personal property), sales and use, business or
occupation, single business, gross receipts, transaction, privilege, rent or
similar taxes, but not including income or franchise or excise taxes payable
with respect to Landlord's receipt of Rent); (b) assessments, whether in the
nature of a special assessment or otherwise (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term or any Extension Term, as the case may be); (c) ground rents, water, sewer
or other rents and charges, excises, tax levies, and fees (including, without
limitation, license, permit, inspection, authorization and similar fees); (d) to
the extent they may become a lien on a Leased Property, all taxes imposed on
Tenant's operations of such Leased Property including without limitation,
employee withholding taxes, income taxes and intangible taxes; and (e) all other
governmental charges, in each case 

                                       7
<PAGE>
 
whether general or special, ordinary or extraordinary, or foreseen or unforseen,
of every character in respect of each Leased Property or any part thereof, the
Business conducted by Tenant thereon, and/or the Rent (including all interest
and penalties thereon due to any failure in payment by Tenant), which at any
time prior to, during or in respect of the Term or any Extension Term, as the
case may be, hereof may be assessed or imposed on or in respect of or be a lien
upon (i) Landlord or Landlord's interest in any Leased Property or any part
thereof; (ii) any Leased Property or any part thereof or any rent therefrom or
any estate, right, title or interest therein; or (iii) any occupancy, operation,
use or possession of, or sales from, or activity conducted on, or in connection
with any Leased Property or the leasing or use of any Leased Property or any
part thereof. Tenant shall not, however, be required to pay: (x) any tax based
on net income (whether denominated as a franchise or capital stock or other tax)
imposed on Landlord or (y) except as provided in Section 13.01, any tax imposed
with respect to the sale, exchange or other disposition by Landlord of a Leased
Property or the proceeds thereof; provided, however, that if any tax,
assessment, tax levy or charge which Tenant is obligated to pay pursuant to the
first sentence of this definition and which is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (x) or (y) immediately above is levied, assessed or
imposed expressly in lieu thereof Tenant shall then pay such tax, levy, or
charge set forth in said clause (x) or (y).

          3.03 Utilities.  Tenant shall contract for, in its own name, and will
               ---------                                                       
pay, as Additional Rent all taxes, assessments, charges/deposits, and bills for
utilities, including without limitation charges for water, gas, oil, sanitary
and storm sewer, electricity, telephone service, trash collection, and all other
utilities which may be charged against the occupant of the  Improvements during
the Term.  Tenant shall at all times maintain that amount of heat necessary to
ensure against the freezing of water lines.  Tenant hereby agrees to indemnify
and hold Landlord harmless from and against any liability or damages to the
utility systems of each  Leased Property that may result from Tenant's failure
to maintain sufficient heat in the Improvements therefor.

          3.04 Escrow of Impositions. Unless waived by written notice from
               ---------------------                                      
Landlord to Tenant, Tenant shall thereafter deposit with Landlord on the first
day of each month during the  Term hereof and any Extension Term, as the case
may be, a sum equal to one-twelfth (1/12th) of the Impositions assessed against
such Leased Property which sums shall be used by Landlord toward payment of such
Impositions.  If, at the end of any applicable tax year, any such funds held by
Landlord are insufficient to make full payment of taxes or other Impositions for
which such funds are held, Tenant, on demand, shall pay to Landlord any
additional funds necessary to pay and discharge in full the obligations of
Tenant pursuant to the provisions of this Section.  If, however, at the end of
any applicable tax year, such funds held by Landlord are in excess of the total
payment required to satisfy taxes or other Impositions for which such funds are
held, Landlord shall apply such excess amounts to a tax and Imposition escrow
fund for the next tax year.  With respect to each Leased Property, if any such
excess exists following the expiration or earlier termination of this Lease, and
subject to Section 8.08 below, Landlord shall promptly refund such excess
amounts to Tenant.  The receipt by Landlord of the payment of such Impositions
by and from Tenant shall only be as an accommodation to Tenant and the taxing
authorities, and shall not be construed as rent or income to Landlord, Landlord
serving, if at all, only as a conduit for delivery purposes.

                                       8
<PAGE>
 
          3.05 Discontinuance of Utilities.  Landlord will not be liable for
               ---------------------------                              
damages to person or property or for injury to, or interruption of, business for
any discontinuance of utilities at any Leased Property nor will such
discontinuance in any way be construed as an eviction of Tenant from such Leased
Property or cause an abatement of Rent as to such Leased Property or operate to
release Tenant from any of Tenant's obligations as to such Leased Property under
this Lease. Notwithstanding the forgoing, however, Landlord shall be liable for
damages to person or property or for injury to, or interruption of business, for
any discontinuance of utilities at any Leased Property, in the event and to the
extent, such damages or injury are caused by the wilful misconduct or gross
negligence of the Landlord.

          3.06 Liens.  Subject to Section 17.19 relating to contests, Tenant
               -----                                                        
shall not directly or indirectly create or allow to remain, and will promptly
discharge at its expense, any lien, encumbrance, attachment, title retention
agreement or claim upon any Leased Property or any attachment, levy, claim or
encumbrance in respect of any Rent provided under this Lease, not including,
however:  (a) this Lease; (b) utility easements and road rights-of-way in the
customary form (i) provided the same do not adversely affect the intended use of
the Leased Properties (including the Improvements) and do not create a material
adverse effect on the value of the Leased Properties or (ii) which result solely
from the action or inaction of Landlord; (c) zoning and building laws or
ordinances, provided they do not prohibit the use of the Leased Properties for
the Business and so long as the Leased Properties are in compliance with same;
(d) such encumbrances as are subsequently consented to in writing by Landlord,
but excluding liens in respect of Impositions required to be paid under Section
3.01;  (e) liens for Impositions so long as (i) the same are not yet payable or
are payable without the addition of any fine or penalty or (ii) such liens are
being contested as permitted under Section 17.19; and (f) other encumbrances,
easements, rights of way or liens (i) provided the same do not adversely affect
the intended use of the Leased Properties (including the Improvements) and do
not create a material adverse effect on the value of the Leased properties, or
(ii) which result solely from the action or inaction of Landlord.


                                  ARTICLE IV
                                   INSURANCE

          4.01 Insurance.  Tenant shall, at Tenant's expense, keep the
               ---------                                              
Improvements, Fixtures, and other components of each Leased Property insured
against the following risks:

               (a)  Loss or damage by fire with extended coverage (including
                    windstorm and subsidence), vandalism and malicious mischief,
                    sprinkler leakage and all other physical loss perils
                    commonly covered by "All Risk" insurance in an amount not
                    less than one hundred percent (100%) of the then full
                    replacement cost thereof (as hereinafter defined). Such
                    policy shall include an agreed amount endorsement if
                    available at a reasonable cost. Such policy shall also
                    include endorsements for

                                       9
<PAGE>
 
                    contingent liability for operation of building laws,
                    demolition costs, and increased cost of construction.

               (b)  Loss or damage by explosion of steam boilers, pressure
                    vessels, or similar apparatus, now or hereafter installed on
                    any Leased Property, in commercially reasonable amounts
                    acceptable to Landlord.

               (c)  Loss of rent under a rental value or Business interruption
                    insurance policy covering risk of loss during the first
                    twelve (12) months of reconstruction necessitated by the
                    occurrence of any hazards described in Sections 4.01(a) or
                    4.01(b), above, and which causes an abatement of Rent as
                    provided in Article X hereof, in an amount sufficient to
                    prevent Landlord or Tenant from becoming a co-insurer,
                    containing endorsements for extended period of indemnity and
                    premium adjustment, and written with an agreed amount
                    clause, if the insurance provided for in this clause (c) is
                    available.

               (d)  If the Land or any portion thereof related to a Leased
                    Property is located in whole or in part within a designated
                    flood plain area, loss or damage caused by flood in
                    commercially reasonable amounts acceptable to Landlord.

               (e)  Loss or damage commonly covered by blanket crime insurance
                    including employee dishonesty, loss of money orders or paper
                    currency, depositor's forgery, and loss of property accepted
                    by Tenant for safekeeping, in commercially reasonable
                    amounts acceptable to Landlord.

               (f)  Workers' compensation insurance as required by statute in
                    respect of any work or other operations on or about each
                    Leased Property.

               (g)  Comprehensive liability insurance as to each Leased Property
                    in amounts equal to the greater of (i) One Million Dollars
                    ($1,000,000) for each occurrence and Two Million Dollars
                    ($2,000,000) in the aggregate, or (ii) the limits of
                    liability generally required under the franchise agreements
                    or other agreements pursuant to which Tenant operates the
                    Businesses conducted on or about each Leased Property.

               (h)  Commercial comprehensive catastrophic liability insurance
                    with limits of liability of not less than the greater of (i)
                    Five Million ($5,000,000) and (ii) the limits of liability
                    generally required under the franchise agreements or other
                    agreements pursuant to which

                                       10
<PAGE>
 
                    Tenant operates the Businesses conducted on or about each
                    Leased Property.

               (i)  upon Landlord's request, earthquake insurance in an amount
                    not less than the full insurable value of each Leased
                    Property.

               (j)  During the period when any addition, alteration,
                    construction, installation or demolition is being made or
                    performed to any part of the Leased Property, contingent
                    liability, public liability, completed value, builder's risk
                    (non-reporting form) workers' compensation and other
                    insurance as is deemed prudent by Landlord.

          4.02 Insurance Limits.  Deductible provisions for the insurance
               ----------------                                          
required under Section 4.01(a) shall not exceed Twenty-Five Thousand Dollars
($25,000) per location per occurrence and One Hundred Thousand Dollars
($100,000) aggregate per occurrence; under clause(d), Twenty-Five Thousand
Dollars ($25,000) per occurrence, except that if federal flood insurance is
available then such deductible shall not be greater than the lowest deductible
available with respect to such federal flood insurance; under clause (g), 
Twenty-Five Thousand Dollars ($25,000) per occurrence; under clause (h), 
Twenty-Five Thousand Dollars ($25,000) per occurrence; and under clause (j), 
Twenty-Five Thousand Dollars ($25,000) per occurrence.

          4.03 Insurance Requirements.  The following provisions shall apply to
               -----------------------                                         
all insurance coverages required hereunder:

               (a)  The carriers of all policies shall have a Best's Rating of
                    "A-" or better and a Best's Financial Category of XII or
                    larger and shall be authorized to do insurance business in
                    the jurisdiction in which the Leased Property is located.

               (b)  Tenant shall be the "named insured" and Landlord and any
                    mortgagee of Landlord shall be an "additional named insured"
                    on each policy.

               (c)  Tenant shall deliver to Landlord certificates or policies
                    showing the required coverages and endorsements. Each policy
                    or certificate of insurance shall provide that such policy
                    or certificate (i) may not be canceled, (ii) may not lapse
                    for failure to renew, and (iii) no material change or
                    reduction in coverage may be made, without at least thirty
                    (30) days' prior written notice to Landlord.

               (d)  The policies shall contain a severability of interest and/or
                    cross-liability endorsement, provide that the acts or
                    omissions of Tenant will not invalidate Landlord's coverage,
                    and provide that Landlord shall not be responsible for
                    payment of premiums.

                                       11
<PAGE>
 
               (e)  All loss adjustment shall require the written consent of
                    Landlord and Tenant, as their interests may appear.

               (f)  At least (30) thirty days prior to the expiration of each
                    policy, Tenant shall deliver to Landlord a certificate
                    showing renewal of such policy and payment of the annual
                    premium therefor.

          Landlord shall have the right to review the insurance coverages
required hereunder with Tenant from time to time, to obtain the input of third
party professional insurance advisors (at Landlord's expense) with respect to
such insurance coverages, and to consult with Tenant in Tenant's annual review
and renewal of such insurance coverages.  All insurance coverages hereunder
shall be in such form, substance and amounts as are customary or standard in
Tenant's industry, but at a minimum shall comply with the requirements set forth
herein.

          4.04 Replacement Cost.  The term "full replacement cost" means the
               ----------------                                             
actual replacement cost of the Improvements from time to time including
increased cost of construction, with no reductions or deductions.  Tenant shall,
not later than thirty (30) days after the anniversary of each policy of
insurance, increase the amount of the replacement cost endorsement for the
Improvements to the extent necessary to reflect increased costs of construction.
If Tenant makes any Permitted Alterations (as hereinafter defined) to any Leased
Property, Landlord may have such full replacement cost redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement cost was last determined.

          4.05 Blanket Policy.  Tenant may carry the insurance required by this
               --------------                                                  
Article under a blanket policy of insurance, provided that the coverage afforded
Tenant will not be reduced or diminished or otherwise be different from that
which would exist under a separate policy meeting all of the requirements of
this Lease and the Landlord approves the form of the policy.

          4.06 No Separate Insurance.  Tenant shall not take out separate
               ----------------------                                    
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing insurance
by securing an additional policy or additional policies, unless all parties
having an insurable interest in the subject matter of the insurance, including
Landlord and any mortgagees, are included therein as additional named insureds
or loss payees, the loss is payable under said insurance in the same manner as
losses are payable under this Lease, and such additional insurance is not
prohibited by the existing policies of insurance required pursuant to this
Article.  Tenant shall immediately notify Landlord of the taking out of such
separate insurance or the increasing of any of the amounts of the existing
insurance by securing an additional policy or additional policies.  The term
"mortgages" as used in this Lease includes, but is not limited to, Deeds of
Trust and the term "mortgagees" includes, but is not limited to, trustees and
beneficiaries under a Deed of Trust.

          4.07 Waiver of Subrogation.  Each party hereto hereby waives any and
               ---------------------                                          
every claim which arises or may arise in its favor and against the other party
hereto during the Term or any

                                       12
<PAGE>
 
Extension Term or renewal thereof, for any and all loss of, or damage to, any of
its property located within or upon, or constituting a part of, any Leased
Property, which loss or damage is covered by valid and collectible insurance
policies, to the extent that such loss or damage is recoverable in full under
such policies. Said mutual waiver shall be in addition to, and not in limitation
or derogation of, any other waiver or release contained in this Lease with
respect to any loss or damage to property of the parties hereto. Inasmuch as the
said waivers will preclude the assignment of any aforesaid claim by way of
subrogation (or otherwise) to an insurance company (or any other person), each
party hereto agrees immediately to give each insurance company which has issued
to it policies of insurance, written notice of the terms of said mutual waivers,
and to have such insurance policies properly endorsed, if necessary, to prevent
the invalidation of said insurance coverage by reason of said waivers, so long
as such endorsement is available at a reasonable cost.

          4.08 Mortgages.  The following provisions shall apply if Landlord now
               ---------                                                       
or hereafter places a mortgage on any Leased Property or any part thereof: (a)
Tenant shall obtain a standard form of mortgage clause insuring the interest of
the mortgagee; (b) Tenant shall deliver evidence of insurance to such mortgagee;
(c) loss adjustment shall require the consent of the mortgagee but such consent
shall not be unreasonably withheld and may not include any requirement that the
funds be paid to mortgagee in lieu of reconstruction; and (d) Tenant shall
obtain such other coverages and provide such other information and documents as
may be reasonably required by the mortgagee.

          4.09 Other Insurance Requirements.  Notwithstanding anything in this
               ----------------------------                                   
Lease to the contrary and not by way of limitation, in addition to the types and
amounts of insurance required to be carried by Tenant herein, Tenant covenants
to insure and continue in effect such types and amounts of insurance as the
Tenant shall be required to carry pursuant to any contract or agreement to which
Tenant is a party, instrument, statute, law, rule or regulation relating to the
use of the Leased Property and the operations of any Business or other
activities thereon, including noncancellable written notice to mortgagee.


                                   ARTICLE V
                       INDEMNITY; SUBSTANCES OF CONCERN

          5.01 Tenant's Indemnification.  Subject to Section 4.07, Tenant hereby
               ------------------------                                         
agrees to indemnify and hold harmless Landlord, its agents, and employees from
and against any and all demands, claims, causes of action, fines, penalties,
damages (including punitive and consequential damages), losses, liabilities
(including strict liability), judgments, costs and expenses (including, without
limitation, attorneys' fees, court costs, and the costs set forth in Section
9.06) (the "Claims") incurred in connection with or arising from: (a) the use,
condition, operation or occupancy of the Leased Properties during the Term of
the Lease; (b) any activity, work, or thing done, or permitted or suffered by
Tenant in, on or about the Leased Properties; (c) any acts, omissions, or
negligence of Tenant or any person claiming under Tenant, or the contractors,
agents, employees, invitees, or visitors of Tenant or any such person; (d) any
breach, violation, or nonperformance by Tenant or any person claiming under
Tenant or the employees, agents, contractors, invitees, or visitors of Tenant

                                       13
<PAGE>
 
or of any such person, of any term, representation, warranty, covenant, or
provision of this Lease or any law, ordinance, or governmental requirement of
any kind; (e) any injury or damage to the person, property or Business of
Tenant, its employees, agents, contractors, invitees, visitors, or any other
person entering upon any Leased Property during the Term of the Lease; (f) any
accident, injury to or death of persons or loss or damage to any item of
property occurring on or about any Leased Property during the Term of the Lease;
(g) any Environmental Law or any pollution or other threat to human health or
the environment at, arising out of or relating to any Leased Property during the
Term of the Lease as set forth in Section 5.05, and (h) any brokers' or agents'
fees and commissions attributable to Tenant; except as may be caused by the
negligence or wilful misconduct of Landlord. If any action or proceeding is
brought against Landlord, its employees, or agents by reason of any such demand,
claim, or cause of action, Tenant, upon notice from Landlord, will defend the
same at Tenant's expense with counsel reasonably satisfactory to Landlord. In
the event Landlord reasonably determines that its interests and the interests of
Tenant in any such action or proceeding are not substantially the same and that
Tenant's counsel cannot adequately represent the interests of Landlord therein,
Landlord shall have the right to hire separate counsel in any such action or
proceeding and the reasonable costs thereof shall be paid for by Tenant.
Tenant's indemnification obligations with respect to a Claim shall survive the
expiration or earlier termination of this Lease until the later of (i) two (2)
years from the date hereof, or (ii) the expiration of the period ninety (90)
days after the date on which Landlord has actual knowledge of the existence of
such Claim, provided, however, that Tenant's indemnification obligations shall
survive the expiration or earlier termination of this Lease until ninety (90)
days after the expiration of the applicable statute of limitations for Claims
incurred in connection with, arising out of, or related to (i) Section 5.01(g)
or (ii) the failure to pay, as provided for in this Agreement, any Imposition.

          5.02 Substances of Concern.
               --------------------- 

               (a)  For purposes of this Section 5:

                    (i)  "Substances of Concern" means, without limitation,
                         chemicals, pollutants, contaminants, wastes, toxic
                         substances, radioactive materials or genetically
                         modified organisms, which are, have been or become
                         regulated by any federal, state or local government
                         authority including, without limitation, (1) petroleum
                         or any fraction thereof, (2) asbestos, (3) any
                         substance or material defined as a "hazardous
                         substance" pursuant to (S) 101 of the Comprehensive
                         Environmental Response Compensation and Liability Act
                         (42 U.S.C. (S) 9601), or (4) any substance or material
                         defined as a "hazardous chemical" pursuant to the
                         federal Hazard Communication Standard (29 C.F.R. (S)
                         1910.1200).

                    (ii) "Environmental Laws" means all federal, state, local,
                         and foreign laws and regulations relating to pollution
                         or protection 

                                       14
<PAGE>
 
                         of human health or the environment (including, without
                         limitation, ambient air, surface water, ground water,
                         wetlands, land surface, subsurface strata, and indoor
                         and outdoor workplace), including, without limitation,
                         (1) laws and regulations relating to emissions,
                         discharges, releases, or threatened releases of
                         Substances of Concern, and (2) common law principles of
                         tort liability.

               (b)  Tenant shall not, either with or without negligence, injure,
                    overload, deface, damage or otherwise harm any Leased
                    Property or any part or component thereof; commit any
                    nuisance; permit the emission of any Substances of Concern;
                    allow the release or other escape of any biologically or
                    chemically active substances or materials or other
                    Substances of Concern so as to impregnate, impair or in any
                    manner affect, even temporarily, any element or part of any
                    Leased Property or neighboring property, or allow the
                    storage or use of such substances or materials in any manner
                    not sanctioned by law and by reasonable standards prevailing
                    in the automobile retail and related industries for the
                    storage and use of such substances or materials; nor shall
                    Tenant permit the occurrence of noise or odors which could
                    make any of the Leased Properties or the Tenant subject to a
                    civil nuisance lawsuit or to disciplinary action of any kind
                    under any nuisance laws, ordinances or regulations; or make,
                    allow or suffer any waste whatsoever to any Leased Property.
                    Landlord may inspect each Leased Property from time to time,
                    and Tenant will cooperate with such inspections.

               (c)  Notwithstanding the foregoing, Tenant anticipates using,
                    storing and disposing of certain Substances of Concern in
                    connection with operation of its Business. Such Substances
                    of Concern include, but are not limited to, the following:
                    motor oil, waste motor oil and filters, transmission fluid,
                    antifreeze, refrigerants, waste paint and lacquer thinner,
                    batteries, solvents, lubricants, degreasing agents, gasoline
                    and diesel fuels. Tenant shall ascertain and comply fully
                    with all applicable Environmental Laws and environmental
                    standards and requirements set by federal, state or local
                    laws, rules, regulations or governmental directives related
                    to the Leased Properties or Tenant's use or occupancy of the
                    Leased Property ("Environmental Standards"), including but
                    not limited to any laws or standards (a) regulating the use,
                    storage, generation or disposal of Substances of Concern,
                    (b) regulating the monitoring or use of any underground or
                    aboveground storage tanks at the Leased Properties, or (c)
                    establishing any permitting, notification or reporting
                    requirements. 

                                       15
<PAGE>
 
                    As promptly as practicable after the Commencement Date (but
                    in no event later than 120 days thereafter), Tenant shall
                    establish and implement a program of compliance with all
                    applicable Environmental Laws and Environmental Standards
                    ("Environmental Compliance Program"). Tenant shall update
                    such Environmental Compliance Program every three (3) years
                    during the Term. Tenant shall submit its Environmental
                    Compliance Program and each update thereto to Landlord;
                    provided, however, such submittal shall not relieve Tenant
                    of its obligations pursuant to this Section 5. Tenant's
                    Environmental Compliance Program shall include a program for
                    monitoring Tenant's compliance with Environmental Laws and
                    Environmental Standards and a plan for correcting
                    immediately any incident of noncompliance. Tenant shall
                    comply with its Environmental Compliance Program.

               (d)  In the event of any noncompliance with any Environmental
                    Laws or Environmental Standards or any spill, release or
                    discharge of Substances of Concern in a reportable quantity
                    under federal, state or local law, Tenant shall:

                    (i)   give Landlord immediate notice of the incident by
                          telephone or facsimile, providing as much detail as
                          possible. Such notice shall be provided to Landlord's
                          National Dealership Real Estate Manager or to such
                          other person as Landlord shall designate in accordance
                          with Section 16.01 below;

                    (ii)  as soon as possible, but no later than seventy-two
                          (72) hours, after discovery of an incident of
                          noncompliance, submit a written report to Landlord,
                          identifying the source or case of the noncompliance or
                          spill, release or discharge (including the names and
                          quantities of any Substances of Concern involved) and
                          the method or action required to correct the problem;
                          and

                    (iii) cooperate with Landlord or its designated agents or
                          contractors with respect to the investigation and
                          correction of such problem.

               Tenant shall also be solely responsible for providing any notice
to any federal, state or local governmental authority required by applicable
laws and regulations as a result of such incident.

          5.03 Audits.  Landlord shall have the right to conduct, at its
               ------                                                   
expense, periodic audits of Tenant's compliance with the Environmental
Compliance Program and management of

                                       16
<PAGE>
 
Substances of Concern at the Leased Properties and/or periodic tests of air,
soil, surface water or groundwater at or near the Leased Properties. Landlord
shall not be obligated to provide Tenant with the results of any audit or tests
unless such results are the basis for a claim by Landlord that Tenant has
breached its obligations under this Lease or a demand by Landlord that Tenant
modify its Environmental Compliance Program or operations or remediate or remove
a spill, release or discharge of Substances of Concern in accordance with
Section 5.06 below. Tenant agrees promptly to modify its Environmental
Compliance Program or the conduct of its operations in accordance with
Landlord's reasonable recommendations directed at improvement of Tenant's
handling, use and disposal of Substances of Concern in, on or from any Leased
Property. If, as a result of an environmental audit performed by Landlord with
respect to any Leased Property, Landlord reasonably determines in its judgment
that alterations or improvements of equipment or buildings located on the Leased
Property are necessary to comply with applicable environmental laws and
regulations, Tenant shall perform such alterations or improvements as are
reasonable under the circumstances and pay all costs and expenses relating
thereto. If Tenant shall fail to pay any such costs or expenses, Tenant shall
deposit with Landlord the full amount necessary to pay such costs in full within
ten (10) days of Landlord's demand. Nothing contained herein shall be construed
to obligate or require Landlord to perform any audits, tests, inquiry or
investigation. Should Landlord elect or be required to disclose to Tenant the
results of any audit or tests, Landlord shall not be liable in any way for the
truth or accuracy of such information.

          5.04 Landlord's Option Re: Compliance.  If Tenant, after notice from
               --------------------------------                               
Landlord, fails to comply with or perform any of its obligations pursuant to
this Section 5, including, but not limited to, obligations to clean up spills,
releases or discharges, Landlord may, but shall not be obligated to, perform
such obligations and Tenant shall pay Landlord within ten (10) days of demand
Landlord's costs therefor, including any overhead and administrative costs.

          5.05 Environmental Indemnification.  Tenant shall indemnify and hold
               -----------------------------                                  
harmless Landlord from and against all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, and expenses (including,
without limitation, attorneys' fees, court costs, and the costs set forth in
Section 9.06) imposed upon or asserted against Tenant, Landlord or any Leased
Property on account of any Environmental Law (irrespective of whether there has
occurred any violation of any Environmental Law) relating to any Leased
Property, including (a) response costs and costs of removal and remedial action
incurred by the United States Government or any state or local governmental unit
to any other person or entity, or damages from injury to or destruction or loss
of natural resources, including the reasonable costs of assessing such injury,
destruction or loss, incurred pursuant to any Environmental Law, (b) costs and
expenses of abatement, investigation, removal, remediation, correction or
cleanup, fines, damages, response costs or penalties which arise from the
provisions of any Environmental Law, (c) liability for personal injury or
property damage arising under any statutory or common-law tort theory, including
damages assessed for the maintenance of a public or private nuisance or for
carrying on of a dangerous activity, (d) liability by reason of a breach of an
environmental representation or warranty by Tenant, and (e) failure of Tenant to
complete in a timely manner alterations or improvements of equipment or
buildings located on the Leased Property

                                       17
<PAGE>
 
deemed necessary or advisable by Landlord pursuant to Section 5.03 in a manner
acceptable to Landlord.

          5.06 Tenant's Cleanup Obligation.  If any spill, release or discharge
               ---------------------------                                     
of Substances of Concern occurs on, at or from the Leased Properties during the
Term, Tenant shall promptly take all actions, at its sole expense, as are
necessary to remove or remediate such spill, release or discharge and to return
the Leased Property to the condition existing prior to the introduction of any
such Substances of Concern to the Leased Property, provided that Landlord's
approval of such action shall first be obtained, which approval shall not be
unreasonably withheld so long as such actions would not potentially have any
material adverse effect on the Leased
Property.

          5.07 Existing Environmental Conditions.  Tenant acknowledges that it
               ---------------------------------                              
has had the opportunity to review the Environmental Reports (which shall mean
Phase I, Phase II and consultants' reports) attached hereto as Exhibit 5.07.
                                                               ------------  
Tenant hereby represents that it has reviewed and is aware of the matters
disclosed in the Environmental Reports.

               As a material consideration for Landlord's willingness to enter
into this Lease, Tenant, for itself and its Affiliates, and each of their
shareholders, directors, officers, employees, agents, contractors,
representatives, insurers, successors and assigns hereby waives and releases
Landlord and its Affiliates and each of their shareholders, directors, officers,
employees, representatives, agents, contractors, representatives, insurers,
successors and assigns from any and all claims, demands, liabilities, costs,
expenses, causes of action and rights of action whatsoever, past, present or
future, known or unknown, suspected or unsuspected, which arise out of or relate
in any way to the violation of Environmental Laws or the use, storage,
treatment, disposal, presence, spill, release, or discharge of Substances of
Concern at, on or from the Leased Properties before the Commencement Date
(collectively, the "Released Claims").

               In the event that Landlord is ordered by a governmental agency,
or reasonably determines that it is in its best interest, to remedy any
violation of Environmental Laws or to remove or remediate any Substances of
Concern present on, under or about the Leased Properties on the Commencement
Date, or spilled, released or discharged on, at or from the Leased Properties
before the Commencement Date, Tenant shall immediately upon notice from Landlord
take all actions, at Tenant's sole expense, to promptly complete such removal or
remediation.
 
          5.08 Survival of Tenant's Obligations.  Tenant's obligations under
               --------------------------------                             
this Section 5 shall survive the expiration or earlier termination of this
Lease.  During any period of time employed by Tenant after the termination of
this Lease to complete the removal from the Leased Property of any Substances of
Concern, if the premises are not rentable for uses contemplated under this
Lease, Tenant shall continue to pay the full amount of  Rent due under this
Lease, which Rent shall be prorated daily for the final month of such period of
time.


                                  ARTICLE VI

                                       18
<PAGE>
 
                        USE AND ACCEPTANCE OF PREMISES

          6.01 Use of Leased Properties.  For so long as this Lease is in effect
               ------------------------                                         
(including following any sublease or assignment thereof), Tenant shall use and
occupy each Leased Property exclusively for the purpose of conducting the
Business or for any other legal purpose for which such Leased Property is being
used as of the Commencement Date, and for no other purpose without the prior
written consent of Landlord. Tenant shall obtain and maintain all approvals,
licenses, and consents needed to use and operate the Leased Properties for such
purposes. Tenant shall promptly deliver to Landlord complete copies of surveys,
examinations, certification and licensure inspections, compliance certificates,
and other similar reports issued to Tenant by any governmental agency.

          6.02 Acceptance of Leased Properties.  Except as otherwise
               -------------------------------                      
specifically provided in this Lease, Tenant acknowledges (i) Tenant and its
agents have had an opportunity to inspect each Leased Property; (ii) Tenant has
found each Leased Property fit for Tenant's use; (iii) delivery of each Leased
Property to Tenant is in an "as-is" condition; (iv) Landlord is not obligated to
make any improvements or repairs to any Leased Property; and (v) the roof,
walls, foundation, heating, ventilating, air conditioning, telephone, sewer,
electrical, mechanical, utility, plumbing, and other portions of each Leased
Property are in good working order.  Tenant waives any claim or action against
Landlord with respect to the condition of any  Leased Property.  LANDLORD MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTIES OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION OR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO QUALITY OR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY TENANT.

          6.03 Conditions of Use and Occupancy.  Tenant agrees that during the
               -------------------------------                                
Term it shall use and keep each Leased Property in a careful, safe and proper
manner; not commit or suffer waste thereon; not use or occupy any Leased
Property for any unlawful purposes; not use or occupy any Leased Property or
permit the same to be used or occupied, for any purpose or business deemed extra
hazardous on account of fire or otherwise; keep each Leased Property in such
repair and condition as may be required by the local board of health, or other
city, state or federal authorities, free of all cost to Landlord; not permit any
acts to be done which will cause the cancellation, invalidation, or suspension
of any insurance policy; and permit Landlord and its agents to enter upon each
Leased Property at all reasonable times after notice to Tenant to examine the
condition thereof.  In addition, at any time and from time to time upon not less
than fifteen (15) days prior written notice, Tenant shall permit Landlord and
any mortgagee or lender and their authorized representatives, to inspect the
Leased Properties during normal Business hours, provided that such inspections
shall not unreasonably interfere with Business of Tenant.

          6.04 Financial Statements and Other Information.  Tenant shall provide
               ------------------------------------------                       
Landlord and any mortgagee or lender regularly (or more often as may be
reasonably requested by Landlord in writing), the following financial
information: (a) as to each Leased Property within thirty (30) days after each
fiscal quarter during the Term or any Extension Term, as the case may be,
(except

                                       19
<PAGE>
 
the fourth quarter), Tenant-prepared financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") consistently applied; and
(b) as to each Leased Property and itself, Tenant shall use its best efforts to
provide Landlord within ninety (90) days after the end of each fiscal year of
Tenant during the Term or any Extension Term, as the case may be, and in no
event later than one hundred and twenty (120) days after the end of each fiscal
year of Tenant during the Term or any Extension Term, as the case may be,
financial statements, audited, reviewed or compiled by a certified public
accountant (the "Annual Financial Statements"). Tenant shall also deliver to
Landlord such additional financial information as Landlord may reasonably
request, provided the same is of a type normally maintained by Tenant or can be
obtained without undue cost or burden on Tenant's personnel and does not
constitute information which Tenant reasonably determines to be proprietary or
confidential. Additionally, upon Landlord's request, Tenant shall provide
Landlord with copies of Tenant's annual capital expenditure budgets for each
Leased Property and any reports generated by Tenant regarding maintenance and
repairs of each Leased Property.



                                  ARTICLE VII
              REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS

          7.01 Maintenance.  Tenant shall maintain each Leased Property in good
               -----------                                                     
order, repair and appearance, and repair each Leased Property, including without
limitation, all interior and exterior, structural and nonstructural repairs and
replacements to the roof, foundations, exterior walls, building systems, HVAC
systems, parking areas, sidewalks, water, sewer and gas connections, pipes, and
mains.  Tenant shall pay as Additional Rent the full cost of such maintenance,
repairs, and replacements.  Tenant shall maintain all drives, sidewalks, parking
areas, and lawns on or about each Leased Property in a clean and orderly
condition, free of accumulations of dirt, rubbish, snow and ice.  Tenant shall
permit Landlord to inspect each Leased Property at all reasonable times, and
shall implement all reasonable suggestions of Landlord as to the maintenance and
repair of each Leased Property, provided that Landlord give Tenant no less than
two (2) business days prior notice and such inspection shall not unreasonably
interefere with Business of Tenant.

          7.02 Compliance with Laws.  Tenant shall comply with all laws,
               --------------------                                     
ordinances, orders, rules, regulations, and other governmental requirements
relating to the use, condition, or occupancy of each Leased Property, whether
now or hereafter enacted and in force including without limitation:  (a)
licensure requirements for operation of the Business; (b) requirements of any
board of casualty insurance underwriters or insurance service office for any
other similar body having jurisdiction over any Leased Property; (c) all zoning
and building codes; and (d) Environmental Laws.  At Landlord's request, from
time to time, Tenant shall deliver to Landlord copies of certificates or permits
evidencing compliance with such laws, including without limitation, copies of
any applicable licenses, certificates of occupancy and building permits.  Tenant
shall provide Landlord with copies of any notice from any governmental authority
alleging any non-compliance by Tenant or any Leased Property with any of the
foregoing requirements and such evidence as

                                       20
<PAGE>
 
Landlord may reasonably require of Tenant's remediation thereof. Tenant hereby
agrees to defend, indemnify and hold Landlord, its agents, and employees from
and against any and all demands, claims, causes of action, fines, penalties,
damages (including punitive and consequential damages), losses, liabilities
(including strict liability), judgments, costs and expenses (including, without
limitation, attorneys' fees, court costs, and the costs set forth in Section
9.06) resulting from any failure by Tenant to comply with any laws, ordinances,
rules, regulations, and other governmental requirements.

          7.03  Required Alterations.  Tenant shall, at Tenant's sole cost and
                --------------------                                          
expense, make any additions, changes, improvements or alterations to each Leased
Property, including structural alterations, which may be required by any
governmental authorities, including those required to continue to satisfy any
licensure requirements related to the operation of the Business, whether such
changes are required by Tenant's use, changes in the law, ordinances, or
governmental regulations, defects existing as of the date of this Lease, or any
other cause whatsoever.  Tenant shall provide thirty (30) days prior written
notice to Landlord of any changes to a Leased Property pursuant to this Section
7.03 which involve changes to the structural integrity thereof or materially
affect the operational capabilities thereof.  All such additions, changes,
improvements or alterations shall be deemed to be a Tenant Improvement and shall
comply with all laws relating to such alterations and with the provisions of
Section 8.01.

          7.04  Mechanics' Liens.  Tenant shall have no authority to permit or
                ----------------                                           
create a lien against Landlord's interest in any Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in each Leased Property against liens. Tenant hereby agrees
to defend, indemnify, and hold Landlord harmless from and against any mechanics'
liens against any Leased Property by reason of work, labor services or materials
supplied or claimed to have been supplied on or to such Leased Property. Tenant
shall immediately remove, bond-off, or otherwise obtain the release of any
mechanics' lien filed against any Leased Property. Tenant shall pay all expenses
in connection therewith, including without limitation, damages, interest, court
costs and reasonable attorneys' fees.

          7.05  Replacements of Fixtures.  Tenant shall not remove Fixtures from
                -------------------------                                       
any  Leased Property except to replace such Fixtures with other items used for
similar or analogous purposes, which replacement items are of equal or greater
quality and value.  Items being replaced by Tenant may be removed and shall
become the property of Tenant and items replacing the same shall be and remain
the property of Landlord.  Tenant shall execute, upon written request from
Landlord, any and all documents necessary to evidence Landlord's ownership of
the Fixtures and replacements therefor.  Tenant may not finance replacements by
security agreement or equipment lease unless:  (a) Landlord has consented to the
terms and conditions of the equipment lease or security agreement; (b) the
equipment lessor or lender has entered into a non-disturbance agreement with
Landlord upon terms and conditions acceptable to Landlord, including without
limitation (i) Landlord shall have the right (but not the obligation) to assume
such security agreement or equipment lease upon the occurrence of an Event of
Default by Tenant hereunder; (ii) the equipment lessor or lender shall promptly
notify Landlord of any default by Tenant under the equipment lease or security
agreement and give 

                                       21
<PAGE>
 
Landlord a reasonable opportunity to cure such default; and (iii) Landlord shall
have the right to assign its rights under the equipment lease, security
agreement, or non-disturbance agreement; (c) the equipment lessor or lender
shall subordinate its security interest to the security interest of any of
Landlord's lessors, mortgagors or lenders, whether now created or hereafter
existing, and (d) Tenant shall, within ten (10) days after receipt of an invoice
from Landlord, reimburse Landlord for all costs and expenses incurred in
reviewing and approving the equipment lease, security agreement, and non-
disturbance agreement, including without limitation, reasonable attorneys' fees
and costs.

          7.06  Encroachments; Restrictions.  If any of the Improvements shall,
                ---------------------------                             
at any time, encroach upon any property, street or right-of-way adjacent to a
Leased Property, or shall violate the agreements or conditions contained in any
restrictive covenant or other agreement affecting a Leased Property, other than
one which is created or consented to by Landlord without Tenant's consent, or
shall impair the rights of others under an easement or right-of-way to which a
Leased Property is subject, other than one which is created or consented to by
Landlord without Tenant's consent, then promptly upon the request of Landlord or
at the request of any person affected by any such encroachment, violation or
impairment, Tenant shall, at its expense, subject to its right to contest the
existence of any encroachment, violation or impairment and in such case, in the
event of an adverse final determination, either (a) obtain valid and effective
waivers or settlements of all claims, liabilities and damages resulting from
each such encroachment, violation or impairment, whether the same shall affect
Landlord or Tenant or (b) make such changes in the Improvements and take such
other actions as shall be necessary to remove such encroachment and to end such
violation or impairment, including, if necessary, the alteration of
improvements. Any such alteration shall be made in conformity with the
requirements of Article VIII.


                                 ARTICLE VIII
                   ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
                  CAPITAL ADDITIONS TO THE LEASED PROPERTIES

          8.01  Tenant's Right to Construct.  As to each Leased Property, during
                ---------------------------                                     
the Term of this Lease or any Extension Term, as the case may be, so long as no
Event of Default shall have occurred and be continuing as to such Leased
Property, Tenant may make Capital Additions (as defined herein), or other
alterations, additions, changes and/or improvements to such Leased Property as
deemed necessary or useful to operate such Leased Property for Tenant's Business
(individually, a "Tenant Improvement," or collectively, the "Tenant
Improvements").  "Capital Additions" shall mean the construction of one or more
new buildings or one or more additional structures annexed to any portion of any
of the Improvements on a Leased Property, which are constructed on any parcel
or portion of the Land comprising a Leased Property, including the construction
of a new floor, or the repair, replacement, restoration, remodeling or
rebuilding of the Improvements or any portion thereof on a Leased Property which
are not normal, ordinary or recurring to maintain such Leased Property.  Except
as otherwise agreed to by Landlord herein or otherwise in writing, any such
Tenant Improvement or Capital Addition shall be made at Tenant's sole expense
and shall become the property of Landlord upon termination of this Lease.
Unless 

                                       22
<PAGE>
 
made on an emergency basis to prevent injury to person or property, as to each
Leased Property, Tenant must obtain Landlord's prior written approval, such
approval not to be unreasonably withheld or delayed, for any Capital Addition or
for any Tenant Improvement which is not a Capital Addition and which has a cost
of more than One Hundred Thousand Dollars ($100,000) or a cost which, when
aggregated with the costs of all such Tenant Improvements on such Leased
Property in a given Lease Year, would cause the total costs of all such Tenant
Improvements on such Leased Property to exceed Two Hundred Fifty Thousand
Dollars ($250,000). Additionally, in connection with any Tenant Improvement,
including any Capital Addition, Tenant shall provide Landlord with copies of any
plans and specification therefor, Tenant's budget relating thereto, any required
governmental permits or approvals, any construction contracts or agreements
relating thereto, and any other information relating to such Tenant Improvement
as Landlord shall reasonably request.

          8.02  Scope of Right.  Subject to Section 8.01 herein and Section 7.03
                --------------                                                  
concerning required alterations, at Tenant's cost and expense, Tenant shall have
the right to:

                (a)  seek any governmental approvals, including building
                     permits, licenses, conditional use permits and any
                     certificates of need that Tenant requires to construct any
                     Tenant Improvement;

                (b)  erect upon each Leased Property such Tenant Improvements as
                     Tenant deems desirable;

                (c)  make additions, alterations, changes and improvements in
                     any Tenant Improvement so erected; and

                (d)  engage in any other lawful activities that Tenant
                     determines are necessary or desirable for the development
                     of each Leased Property in accordance with the Tenant's
                     Business;

provided, however, Tenant shall not make any Tenant Improvement which would, in
Landlord's reasonable judgment, impair the value of the Leased Property or the
Tenant's Business without Landlord's prior written consent and provided, further
that Tenant shall not be permitted to create a mortgage, lien or any other
encumbrance on any Leased Property without Landlord's prior written consent.

          8.03  Cooperation of Landlord.  Landlord shall cooperate with Tenant
                -----------------------                                       
and take such actions, including the execution and delivery to Tenant of any
applications or other documents, reasonably requested by Tenant in order to
obtain any governmental permits, licenses or approvals sought by Tenant to
construct any Tenant Improvement within fifteen (15) business days following the
later of:  (a) the date Landlord receives Tenant's request or (b) the date of
delivery of any such application or document to Landlord; provided, the taking
of such action by Landlord, including the execution of said applications or
documents, shall be without cost to Landlord (or if there is a cost to Landlord,
such cost shall be reimbursed by Tenant), shall not cause Landlord to be in
violation 

                                       23
<PAGE>
 
of any law, ordinance or regulation, and shall not be deemed a waiver by
Landlord of any of its rights or of any of Tenant's obligations, including but
not limited to indemnification.

          8.04  Commencement of Construction.  Tenant agrees that:
                ----------------------------                      

                (a)  Tenant shall diligently seek all governmental approvals
                     relating to the construction of any Tenant Improvement;

                (b)  Once Tenant begins the construction of any Tenant
                     Improvement, Tenant shall diligently oversee any such
                     construction to completion in accordance with applicable
                     insurance requirements and the laws, rules and regulations
                     of all governmental bodies or agencies having jurisdiction
                     over the subject Leased Property;

                (c)  Landlord shall have the right at any time and from time to
                     time to post and maintain upon each Leased Property such
                     notices as may be necessary to protect Landlord's interest
                     from mechanics' liens, materialmen's liens or liens of a
                     similar nature;

                (d)  Tenant shall not suffer or permit any mechanics' liens or
                     any other claims or demands arising from the work of
                     construction of any Tenant Improvement to be enforced
                     against any Leased Property or any part thereof, and Tenant
                     agrees to hold Landlord, its agents and employees and said
                     Leased Property free and harmless from all demands, claims,
                     causes of action, fines, penalties, damages (including
                     punitive and consequential damages), losses, liabilities
                     (including strict liability), judgments, costs and expenses
                     (including, without limitation, attorneys' fees, court
                     costs, and the costs set forth in Section 9.06) incurred in
                     connection with or arising therefrom;

                (e)  All work shall be performed in a satisfactory and
                     workmanlike manner consistent with standards in the
                     industry; and

                (f)  Subject to Section 8.08 in the case of Capital Additions,
                     Tenant shall not secure any construction or other financing
                     for the Tenant Improvements which is secured by a portion
                     of any Leased Property without Landlord's prior written
                     consent, and any such financing (i) shall not exceed the
                     cost of the Tenant Improvements, (ii) shall be subordinate
                     to any mortgage or encumbrance now existing or hereinafter
                     created with respect to such Leased Property, and (iii)
                     shall be limited solely to Tenant's interest in the subject
                     Leased Property.

                                       24
<PAGE>
 
          8.05  Rights in Tenant Improvements.  Notwithstanding anything to the
                ------------------------------                                 
contrary in this Lease, all Tenant Improvements existing on the Leased Property
or constructed upon each Leased Property pursuant to Section 8.01, any and all
subsequent additions thereto and alterations and replacements thereof shall be
the sole and absolute property of Tenant during the Term and any Extension Term,
as the case may be, of this Lease (in respect of such Leased Property).  Upon
the expiration or early termination of this Lease in respect of a Leased
Property, all such Tenant Improvements located thereon shall become the property
of Landlord. Without limiting the generality of the foregoing, prior to the
expiration or early termination of this Lease in respect of a Leased Property,
Tenant shall be entitled to all federal and state income tax benefits associated
with all Tenant Improvements located on such Leased Property.

          8.06  Personal Property.  Tenant shall install, place, and use on each
                -----------------                                               
Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures as may be required or as Tenant
may, from time to time, deem necessary or useful to operate such Leased Property
in the operation of the Business.

          8.07  Requirements for the Tenant's Personal Property.  Tenant shall
                -----------------------------------------------               
comply with all of the following requirements in connection with the Tenant's
Personal Property:

                (a)  RESERVED.

                (b)  The Tenant's Personal Property shall be installed in a good
                     and workmanlike manner, in compliance with all governmental
                     laws, ordinances, rules, and regulations and all insurance
                     requirements, and be installed free and clear of any
                     mechanics' liens.

                (c)  Tenant shall, at Tenant's sole cost and expense, maintain,
                     repair, and replace the Tenant's Personal Property.

                (d)  Tenant shall, at Tenant's sole cost and expense, keep the
                     Tenant's Personal Property insured against loss or damage
                     by fire, vandalism and malicious mischief, sprinkler
                     leakage, and other physical loss perils commonly covered by
                     fire and extended coverage, boiler and machinery, and
                     difference in conditions insurance (which insurance shall
                     meet the requirements of Section 4.03 hereof) in an amount
                     not less than the full replacement cost thereof or such
                     other amount as appears on a schedule submitted by Tenant
                     to Landlord, which schedule shall be subject to Landlord's
                     approval, and Tenant shall use the proceeds from any such
                     policy for the repair and replacement of such items of
                     Tenant's Personal Property; provided, however, that if
                     Landlord fails to object to the schedule so submitted by
                     Tenant within five (5) business days of Landlord's receipt
                     of such schedule, Landlord's approval of such schedule
                     shall be deemed given.

                                       25
<PAGE>
 
                (e)  Tenant shall pay all Impositions and other taxes applicable
                     to Tenant's Personal Property.

                (f)  If Tenant's Personal Property is damaged or destroyed by
                     fire or otherwise, Tenant shall promptly repair or replace
                     Tenant's Personal Property unless Tenant is entitled to and
                     elects to terminate the Lease pursuant to Section 10.05.

                (g)  As to each Leased Property, unless an Event of Default (or
                     any event which, with the giving of notice or lapse of
                     time, or both, would constitute an Event of Default) has
                     occurred and remains uncured beyond any applicable grace
                     period, Tenant may remove Tenant's Personal Property from
                     such Leased Property from time to time provided that: (i)
                     the items removed are not required or necessary to operate
                     the Business on such Leased Property (unless such items are
                     being replaced by Tenant) and (ii) Tenant promptly repairs
                     any damage to such Leased Property resulting from the
                     removal of Tenant's Personal Property.

                (h)  As to each Leased Property, Tenant shall remove all of
                     Tenant's Personal Property upon the termination or
                     expiration of the Lease and shall promptly repair any
                     damage to such Leased Property resulting from the removal
                     thereof to the reasonable satisfaction of Landlord;
                     provided, however, if Tenant fails to remove Tenant's
                     Personal Property from such Leased Property within thirty
                     (30) days after the termination or expiration of this Lease
                     with respect thereto, then Tenant shall be deemed to have
                     abandoned such items of Tenant's Personal Property, all of
                     which shall become the property of Landlord, and Landlord
                     may remove, store and dispose of such property and Tenant
                     shall have no claim or right against Landlord for such
                     property or the value thereof regardless of the disposition
                     thereof by Landlord. Tenant shall pay Landlord, upon
                     demand, all expenses incurred by Landlord in removing,
                     storing, and disposing of such items of Tenant's Personal
                     Property and repairing any damage caused by such removal.
                     Tenant's obligations hereunder shall survive the
                     termination or expiration of this Lease as to such Leased
                     Property.

                (i)  Tenant shall perform its obligations under any equipment
                     lease or security agreement for Tenant's Personal Property.

          8.08  Financings of Capital Additions to a Leased Property.  Landlord
                -----------------------------------------------------          
may, but shall be under no obligation to, provide or arrange construction,
permanent or other financing for any Capital Addition proposed to be made to a
Leased Property by Tenant.  Any financing so 

                                       26
<PAGE>
 
provided by Landlord shall be made in accordance with, and subject to, a written
Addendum to this Lease.

                                  ARTICLE IX
                             DEFAULTS AND REMEDIES

          9.01  Events of Default.  The occurrence of any one or more of the
                -----------------                                           
following shall be an event of default ("Event of Default") hereunder:

                (a)  Tenant fails to pay in full any installment of Rent, or any
                     other monetary obligation payable by Tenant to Landlord
                     hereunder, within ten (10) days after the due date thereof
                     and after written notice thereof and an opportunity to cure
                     within a ten (10) day period after such notice is given to
                     Tenant by Landlord. In the event of Tenant's failure to
                     make timely payment of such obligations two (2) times
                     during any twelve (12) month period, each subsequent such
                     failure within the twelve (12) months immediately following
                     such second failure shall immediately constitute an Event
                     of Default, and Landlord shall not be required to provide
                     notice thereof, nor shall Tenant have any further
                     opportunity to cure such failure;

                (b)  Tenant fails to observe and perform any covenant (other
                     than the covenant in respect of insurance set forth in
                     Article IV), condition or agreement hereunder to be
                     performed by Tenant (except those described in Section
                     9.01(a) of this Lease) and such failure continues for a
                     period of twenty (20) days after written notice thereof is
                     given to Tenant by Landlord; or if, by reason of the nature
                     of such default, the same cannot with due diligence be
                     remedied within said twenty (20) days, such failure will
                     not be deemed to continue if Tenant proceeds promptly and
                     with due diligence to remedy the failure and diligently
                     completes the remedy thereof; provided, however, said cure
                     period will not extend beyond forty (40) days if the facts
                     or circumstances giving rise to the default are creating a
                     further harm to Landlord or the subject Leased Property and
                     Landlord makes a good faith determination that Tenant is
                     not undertaking remedial steps that Landlord would cause to
                     be taken if this Lease were then to terminate;

                (c)  If Tenant: (i) admits in writing its inability to pay its
                     debts generally as they become due; (ii) files a petition
                     in bankruptcy or a petition to take advantage of any
                     insolvency act; (iii) makes an assignment for the benefit
                     of its creditors; (iv) is unable to pay its debts as they

                                       27
<PAGE>
 
                     mature; (v) consents to the appointment of a receiver of
                     itself or of the whole or any substantial part of its
                     property; or (vi) files a petition or answer seeking
                     reorganization or arrangement under the federal bankruptcy
                     laws or any other applicable law or statute of the United
                     States of America or any state thereof;

                (d)  If Tenant, on insolvency proceedings or on a petition in
                     bankruptcy filed against it, is adjudicated as bankrupt or
                     a court of competent jurisdiction enters an order or decree
                     appointing, without the consent of Tenant, a receiver of
                     Tenant of the whole or substantially all of its property,
                     or approving a petition filed against it seeking
                     reorganization or arrangement of Tenant under the federal
                     bankruptcy laws or any other applicable law or statute of
                     the United States of America or any state thereof, and such
                     judgment, order or decree is not vacated, dismissed or set
                     aside within sixty (60) days from the date of the entry
                     thereof;

                (e)  If the estate or interest of Tenant in a Leased Property or
                     any part thereof is levied upon or attached in any
                     proceeding and the same is not vacated or discharged within
                     fifteen (15) days after commencement thereof (unless Tenant
                     is contesting such lien or attachment in accordance with
                     this Lease) or if such estate or interest of Tenant is
                     assigned, conveyed or involuntarily transferred in
                     violation of this Lease;

                (f)  Any representation, warranty or covenant made by Tenant on
                     behalf of itself or an Affiliate in this Lease or in any
                     certificate, demand or request made pursuant hereto proves
                     to be incorrect, in any material respect, as of the date of
                     issuance or making thereof;

                (g)  Conviction of Tenant or an Affiliate of a crime or offense
                     constituting a felony in the jurisdiction in which
                     committed or under federal law which conviction results in
                     the termination of the franchise or the license pursuant to
                     which Tenant or an Affiliate of Tenant conducts business on
                     or from the Leased Property.

                (h)  Termination or relinquishment of the franchise or license
                     pursuant to which Tenant or an Affiliate conducts business
                     on or from any Leased Property, provided that such event
                     shall not constitute an Event of Default if (i) no other
                     Event of Default enumerated in this Section 9.01 shall
                     occur and be continuing, and (ii) at a date no later than
                     twenty-four (24) months following such date of termination
                     or relinquishment, Tenant or an Affiliate has entered into
                     written new or 

                                       28
<PAGE>
 
                      amended franchises or licenses for operation of motor
                      vehicle retail or motor vehicle related businesses at such
                      Leased Property satisfactory to Landlord in its discretion
                      applying commercially reasonable standards;

             (i)      Default under any franchise or license pursuant to which
                      Tenant or an Affiliate conducts business at a Leased
                      Property, if in the Landlord's judgment such default in
                      light of commercially reasonable standards and industry
                      practice would have a material adverse effect on the
                      Leased Property;

             (j)      A final, non-appealable judgment or judgments for the
                      payment of money not fully covered (excluding deductibles)
                      by insurance is rendered against Tenant and the same
                      remains undischarged, unvacated, unbonded, unappealed or
                      unstayed for a period of thirty (30) consecutive days;
                      except for de minimus judgments of not greater than $2,000
                      dollars per judgment or $15,000 in the aggregate, which
                      shall not constitute an Event of Default unless the same
                      remain undischarged, unvacated, unbonded, unappealed or
                      unstayed for a period of thirty (30) consecutive days and
                      thereafter are not cured by Tenant within three (3)
                      business days notice from Landlord;

             (k)      Tenant shall fail to observe the covenant in respect to
                      insurance under Article IV provided Landlord shall have
                      provided notice of such failure to Tenant and Tenant shall
                      have failed to cure such failure within three (3) business
                      days of such notice; or

             (l)      Except after the effective date of a permitted assignment
                      meeting the requirements of Article XIII, if Tenant is
                      liquidated or dissolved, or begins proceedings toward
                      liquidation or dissolution, or in any manner permits the
                      sale or divestiture of substantially all of its assets.

       9.02  Remedies. To the extent an Event of Default is applicable only to a
             --------                                                       
specific Leased Property or specific Leased Properties (in accordance with
Section 9.01 above), the remedies set forth herein shall be exercisable solely
with respect to such Leased Property or Leased Properties, and shall not be
exercisable with respect to any other Leased Property. To the extent an Event of
Default constitutes an Event of Default as to all of the Leased Properties (in
accordance with Section 9.01 above), the remedies set forth herein shall be
exercisable with respect to all of the Leased Properties. Subject to the
foregoing provisions, Landlord may exercise any one or more of the following
remedies upon the occurrence of an Event of Default:

             (a)      Landlord may terminate this Lease, exclude Tenant from
                      possession of the subject Leased Property and use
                      reasonable efforts to lease the

                                       29
<PAGE>
 
                      subject Leased Property to others. If this Lease is
                      terminated pursuant to the provisions of this subparagraph
                      (a) with respect to one or more, but less than all, of the
                      Leased Properties identified on Schedule A hereto, Tenant
                                                      ----------
                      will remain liable to Landlord for the Rent for all of the
                      Leased Properties identified on Schedule A and other sums
                                                      ----------    
                      then due and for the balance of the Term as if the Lease
                      had not been terminated with respect to the subject Leased
                      Property, less the net proceeds, if any, of any re-letting
                      of the subject Leased Property by Landlord subsequent to
                      such termination, after deducting all Landlord's expenses
                      in connection with such re-letting, including without
                      limitation, the expenses set forth in Section 9.02(b)(ii)
                      below. Notwithstanding the termination of this Lease with
                      respect to a subject Leased Property, Tenant shall pay to
                      Landlord all amounts due as Rent, and such other amounts
                      then due, under this Lease on the days that such Rent and
                      such other amounts become due and payable as required by
                      this Lease.

               (b)    Without demand or notice, Landlord may re-enter and take
                      possession of the subject Leased Property or any part
                      thereof; and repossess such Leased Property as of
                      Landlord's former estate; and expel Tenant and those
                      claiming through or under Tenant from such Leased
                      Property; and, remove the effects of both or either,
                      without being deemed guilty of any manner of trespass and
                      without prejudice to any remedies for arrears of Rent or
                      preceding breach of covenants or conditions. If Landlord
                      elects to re-enter, as provided in this paragraph (b) or
                      if Landlord takes possession of such Leased Property
                      pursuant to legal proceedings or pursuant to any notice
                      provided by law, Landlord may, from time to time, without
                      terminating any portion of this Lease, re-let such Leased
                      Property or any part of such Leased Property, either alone
                      or in conjunction with other portions of the Improvements
                      of which such Leased Property are a part, in Landlord's
                      name but for the account of Tenant, for such term or terms
                      (which may be greater or less than the period which would
                      otherwise have constituted the balance of the Term of this
                      Lease) and on such terms and conditions (which may include
                      concessions of free rent, and the alteration and repair of
                      such Leased Property) as Landlord, in its uncontrolled
                      discretion, may determine. Landlord may collect and
                      receive the Rents for such Leased Property. Landlord will
                      not be responsible or liable for any failure to re-let
                      such Leased Property, or any part of such Leased Property,
                      or for any failure to collect any Rent due upon such re-
                      letting. No such re-entry or taking possession of such
                      Leased Property by Landlord will be construed as an
                      election on Landlord's part to terminate this Lease unless
                      a written notice of

                                       30
<PAGE>
 
                      such intention is given to Tenant. No notice from Landlord
                      under this Lease or under a forcible entry and detainer
                      statute or similar law will constitute an election by
                      Landlord to terminate this Lease unless such notice
                      specifically says so. Landlord reserves the right
                      following any such re-entry or re-letting, or both, to
                      exercise its right to terminate this Lease by giving
                      Tenant such written notice, and, in that event such Lease
                      will terminate as specified in such notice.

               (c)    If Landlord elects to take possession of a Leased Property
                      according to subparagraph (b) of this Section 9.02 without
                      terminating this Lease, Tenant will pay Landlord (A) the
                      Rent and other sums which would be payable under this
                      Lease with respect to such Leased Property if such
                      repossession had not occurred, less (B) the net proceeds,
                      if any, of any re-letting of such Leased Property after
                      deducting all of Landlord's expenses incurred in
                      connection with such re-letting, including without
                      limitation, all repossession costs, brokerage commissions,
                      legal expense, attorneys' fees, expense of employees,
                      alteration, remodeling, repair costs, and expense of
                      preparation for such re-letting. If, in connection with
                      any re-letting, any resulting lease term for the subject
                      Leased Property extends beyond the existing Term or
                      Extension Term, as the case may be, or such Leased
                      Property covered by such re-letting includes areas which
                      are not part of such Leased Property, a fair apportionment
                      of the Rent received from such re-letting and the expenses
                      incurred in connection with such re-letting will be made
                      in determining the net proceeds received from such re-
                      letting. In addition, in determining the net proceeds from
                      such re-letting, any rent concessions will be apportioned
                      over the term of the new lease. Tenant will pay such
                      amounts to Landlord monthly on the days on which the Rent
                      and all other amounts owing under this Lease would have
                      been payable if possession had not been retaken, and
                      Landlord will be entitled to receive the rent and other
                      amounts from Tenant on each such day. Notwithstanding
                      anything herein to the contrary, Landlord, at its option,
                      may collect and apply any Rent received from such re-
                      letting in accordance herewith and in such case shall
                      remit any balance thereof to Tenant. Landlord shall incur
                      no liability or obligation to Tenant arising out of the
                      collection or application of Rent by Landlord hereunder.

               (d)    Landlord may re-enter the applicable Leased Property and
                      have, repossess and enjoy such Leased Property as if this
                      Lease had not been made, and in such event, Tenant and its
                      successors and assigns

                                       31
<PAGE>
 
                      shall remain liable for any contingent or unliquidated
                      obligations or sums owing at the time of such
                      repossession.

              (e)     Landlord may take whatever action at law or in equity as
                      may appear necessary or desirable to collect the Rent and
                      other amounts payable hereunder with respect to the
                      subject Leased Property then due and thereafter to become
                      due, or to enforce performance and observance of any
                      obligations, agreements or covenants of Tenant under this
                      Lease.

        9.03  Right of Set-Off. Landlord may, and is hereby authorized by
              -----------------                                           
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord in respect of a Leased
Property, including all sums held in any escrow for Impositions, any
indebtedness of Landlord to Tenant, and any claims by Tenant against Landlord,
against any obligations of Tenant under this Lease in respect of such Leased
Property and against any claims by Landlord against Tenant, whether or not
Landlord has exercised any other remedies hereunder. Landlord shall set-off and
apply such sums first, to delinquent real estate taxes, unless such taxes are
being protested in good faith and no lien has attached to any Leased Property
with respect thereto, second, to currently due and owing real estate taxes, and
next, to other Tenant's obligations in the order which Landlord may determine.
The rights of Landlord under this Section are in addition to any other rights
and remedies Landlord may have against Tenant.

        9.04  Performance of Tenant's Covenants.  Landlord may, without waiving
              ---------------------------------                                
or releasing any obligation of Tenant, and without waiving or releasing any
obligation or default, perform any obligation of Tenant which Tenant has failed
to perform within five (5) business days after Landlord has sent a written
notice to Tenant informing it of its specific failure (provided no such notice
shall be required if Landlord has previously notified Tenant of such failure
under the provisions of Section 9.01).  In the event Landlord deems, in its
discretion, that Tenant's failure to perform such obligation has given rise to
an emergency situation, Landlord may perform such obligation without waiving or
releasing any obligation of Tenant, and without waiving or releasing any
obligation or default; provided, however, that Landlord shall notify Tenant of
such performance as soon as it is reasonably practicable to do so.  Tenant shall
reimburse Landlord on demand, as Additional Rent, for any expenditures thus
incurred by Landlord and shall pay interest thereon at the New York Prime Rate.

        9.05  Late Charge.  Any payment not made by Tenant for more than five
              -----------                                                    
(5) business days after the due date shall be subject to a late charge payable
by Tenant as Rent of four percent (4%) of the amount of such overdue payment,
except that in the case of the first late payment within any twelve month period
the Tenant shall have three (3) business days after notice to cure without
incurring a late charge.  Notwithstanding the foregoing, in the event that
Tenant's payment is not made more than five (5) business days after the due date
more than two (2) times during any twelve (12) month period, any such subsequent
overdue payments within the twelve (12) months

                                       32
<PAGE>
 
immediately following such second failure shall be subject to a late charge
payable by Tenant as Rent of seven percent (7%) of the amount of such overdue
payment.

        9.06  Litigation; Attorneys' Fees. Within ten (10) days after Tenant
              ----------------------------                                   
has knowledge of any litigation or other proceeding related to or arising out of
this Agreement or the Leased Property in which claims are asserted in an amount
in excess of $50,000, that (1) may be instituted against Tenant, (2) may be
instituted against any Leased Property to secure or recover possession thereof,
or (3) may affect the title to or the interest of Landlord in any Leased
Property, Tenant shall give written notice thereof to Landlord.  In the event
that Landlord reasonably determines that Tenant has failed to give adequate
cooperation or information with respect to any such litigation, investigation,
receivership, administrative, bankruptcy, insolvency or other similar
proceeding, Landlord may, after notice to Tenant, undertake such investigation
or proceeding and Tenant shall pay all reasonable costs and expenses (the
"Costs") related thereto that are incurred by Landlord, whether or not Landlord
has received notice from Tenant of such investigation or proceeding, and whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, which Costs shall include, without limitation:  (a) the
reasonable fees, expenses, and costs of any litigation, investigation,
receivership, administrative, bankruptcy, insolvency or other similar proceding;
(b) reasonable attorney, paralegal, consulting and witness fees and
disbursements; and (c) the reasonable expenses, including, without limitation,
lodging, meals, and transportation, of Landlord and its employees, agents,
attorneys, and witnesses in investigating or preparing for litigation,
administrative, bankruptcy, insolvency or other similar proceedings and
attendance at hearings, depositions, and trials in connection therewith.  Within
ten (10) days of Landlord's presentation of an invoice of Costs incurred by
Landlord pursuant to the preceding sentence or otherwise reasonably incurred by
Landlord in enforcing or preserving Landlord's rights under this Lease, whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, Tenant shall pay all such Costs.  All such Costs as incurred
shall be deemed to be Additional Rent under this Lease.

        9.07  Remedies Cumulative.  The remedies of Landlord herein are
              -------------------                                      
cumulative to and not in lieu of any other remedies available to Landlord at law
or in equity.  The use of, or failure to use, any one remedy shall not be taken
to exclude or waive the right to use any other remedy.

        9.08  Escrows and Application of Payments.  As security for the
              -----------------------------------                      
performance of its obligations hereunder, Tenant hereby assigns to Landlord all
its right, title and interest in and to all monies escrowed with Landlord under
this Lease and all deposits with utility companies, taxing authorities, and
insurance companies; provided, however, that Landlord shall not exercise its
rights hereunder with respect to any Leased Property until an Event of Default
has occurred in respect of such Leased Property.  Any payments received by
Landlord under any provisions of this Lease during the existence, or continuance
of an Event of Default shall be applied to Tenant's obligations, first, to
delinquent real estate taxes, unless such taxes are being protested in good
faith and no lien has attached to any Leased Property with respect thereto,
second, to currently due and owing real estate taxes, and next, to other
Tenant's obligations in the order which Landlord may determine.

                                       33
<PAGE>
 
        9.09  Power of Attorney.  Tenant hereby irrevocably and unconditionally
              -----------------                                                
appoints Landlord, or Landlord's authorized officer, agent, employee or
designee, as Tenant's true and lawful attorney-in-fact, to act, after an Event
of Default, for Tenant in Tenant's name, place, and stead, and for Tenant's and
Landlord's use and benefit, to execute, deliver and file all applications and
any and all other necessary documents or things, to effect a transfer,
reinstatement, renewal and/or extension of any and all licenses and other
governmental authorizations issued to Tenant in connection with Tenant's
operation of the Leased Properties, and to do any and all other acts incidental
to any of the foregoing.  Tenant irrevocably and unconditionally grants to
Landlord as its attorney-in-fact full power and authority to do and perform,
after an Event of Default, every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof.  This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of Tenant's obligations hereunder.


                                   ARTICLE X
                            DAMAGE AND DESTRUCTION

        10.01 General.  Tenant shall notify Landlord if any Leased Property is
              -------                                                         
damaged or destroyed by reason of fire or any other cause.  Tenant shall
promptly repair, rebuild, or restore such Leased Property, at Tenant's expense,
so as to make such Leased Property at least equal in value to such Leased
Property existing immediately prior to such occurrence and as nearly similar to
it in character as is practicable and reasonable.  Before beginning such repairs
or rebuilding, or executing any contracts in connection with such repairs or
rebuilding, Tenant will submit for Landlord's approval, which approval Landlord
will not unreasonably withhold or delay, complete and detailed plans and
specifications for such repairs or rebuilding.  Promptly after receiving
Landlord's approval of the plans and specifications, Tenant will begin such
repairs or rebuilding and will oversee the repairs and rebuilding to completion
with diligence, subject, however, to strikes, lockouts, acts of God, embargoes,
governmental restrictions, and other causes beyond Tenant's reasonable control.
Landlord will make available to Tenant the net proceeds of any fire or other
casualty insurance paid to Landlord for such repair or rebuilding as the same
progresses, after deduction of any costs of collection, including attorneys'
fees.  Payment will be made against properly certified vouchers of a competent
architect in charge of the work and approved by Landlord.  Prior to commencing
the repairing or rebuilding, Tenant shall deliver to Landlord for Landlord's
approval a schedule setting forth the estimated monthly draws for such work.
Landlord will contribute to such payments out of the insurance proceeds an
amount equal to the proportion that the total net amount received by Landlord
from insurers bears to the total estimated cost of the rebuilding or repairing,
multiplied by the payment by Tenant on account of such work.  Landlord may,
however, withhold ten percent (10%) from each such payment and shall disburse
such amount after:  (a) the work of repairing or rebuilding is completed and
proof has been furnished to Landlord that no lien or liability has attached or
will attach to such Leased Property or to Landlord in connection with such
repairing or rebuilding and (b) Tenant has obtained a certificate of use and
occupancy (or its functional

                                       34
<PAGE>
 
equivalent) for the portion of such Leased Property being repaired or rebuilt.
Upon the completion of rebuilding or repairing and the furnishing of such proof,
the balance of the net proceeds of such insurance payable to Tenant on account
of such repairs or rebuilding will be paid to Tenant. Tenant will obtain and
deliver to Landlord a temporary or final certificate of occupancy before such
Leased Property is reoccupied for any purpose. Tenant shall complete such
repairs or rebuilding free and clear of mechanic's or other liens, and in
accordance with the building codes and all applicable laws, ordinances,
regulations, or orders of any state, municipal, or other public authority
affecting the repairs or rebuilding, and also in accordance with all
requirements of the insurance rating organization, or similar body. Any
remaining proceeds of insurance after such restoration will be Tenant's
property.

          10.02  Landlord's Inspection.  During the progress of such repairs or
                 ----------------------                                     
rebuilding, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
repairs or rebuilding. Tenant will keep all plans, shop drawings, and
specifications available, and Landlord and its architects and engineers may
examine them at all reasonable times. If, during such repairs or rebuilding,
Landlord and its architects and engineers determine that the repairs or
rebuilding are not being done in accordance with the approved plans and
specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such repairs or rebuilding do not accord with the approved
plans and specifications. Upon the receipt of any such notice, Tenant will cause
corrections to be made to any deficiencies, omissions, or such other respect.
Tenant's obligations to supply insurance, according to Article IV, will be
applicable to any repairs or rebuilding under this Section 10.02.

          10.03  Landlord's Costs.  Tenant shall, within fifteen (15) days after
                 ----------------                                         
receipt of an invoice from Landlord, pay the reasonable costs, expenses, and
fees of any architect or engineer employed by Landlord to review any plans and
specifications and to supervise and approve any construction, or for any
services rendered by such architect or engineer to Landlord as contemplated by
any of the provisions of this Lease, or for any services performed by Landlord's
attorneys in connection therewith; provided, however, that Landlord will consult
with Tenant and notify Tenant of the estimated amount of such expenses.

          10.04  Rent Abatement.  In the event that the provisions of Section
                 --------------                                              
10.01 above shall become applicable as to any Leased Property, and subject to
the last sentence of this Section 10.04, the applicable Base Annual Rent shall
be abated or reduced proportionately during any period in which, by reason of
such damage or destruction, there is substantial interference with the operation
of the Business of Tenant in such Leased Property, having regard to the extent
to which Tenant may be required to discontinue any Business on such Leased
Property, and such abatement or reduction shall continue for the period
commencing with such destruction or damage and ending with the substantial
completion by Tenant of such work or repair and/or reconstruction.  In the event
that only a portion of any Leased Property is rendered untenantable or incapable
of such use, the Base Annual Rent payable hereunder in respect thereof shall be
reduced proportionately considering the extent 

                                       35
<PAGE>
 
to which the Tenant is unable to practicably use the Leased Property for
Business. Tenant shall use reasonably diligent efforts to make the Leased
Property tenantable and capable of such use. Notwithstanding any other provision
hereof, such rental abatement shall be limited to the amount of any rental or
Business interruption insurance proceeds actually received by Landlord under
Article IV.

          10.05  [Intentionally Omitted]

          10.06  Damage Near End of Term.  Notwithstanding any provisions of
                 -----------------------                                    
Sections 10.01 or 10.05 to the contrary, if damage to or destruction of any
Leased Property occurs during the last twenty-four (24) months of the Term, and
if such damage or destruction renders the Leased Property Completely Destroyed
or Partially Destroyed, either party shall have the right to terminate this
Lease as to such Leased Property by giving notice to the other within ten (10)
days after the date of damage or destruction, in which event Landlord shall be
entitled to retain the insurance proceeds and Tenant shall pay to Landlord on
demand the amount of any deductible or uninsured loss arising in connection
therewith; provided, however, that any such notice given by Landlord shall be
void and of no force and effect if Tenant exercises an available option for an
Extension Term with respect to such Leased Property pursuant to provisions of
this Lease within ten (10) business days following receipt of such termination
notice.

          10.07  Risk of Loss.  Notwithstanding anything herein to the contrary,
                 ------------                                         
during the Term or any Extension Term, as the case may be, the risk of loss of
or decrease in the enjoyment and beneficial use of the Leased Properties in
consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise is assumed by Tenant, and Landlord
shall in no event be answerable or accountable therefor except in the case of
gross negligence, willful misconduct or breach of this Lease by Landlord
resulting in such damage or destruction. In addition, all risk of loss or
decrease in enjoyment and beneficial use in consequence of foreclosures,
attachments, levies or executions is assumed by Tenant except for foreclosure
due to Landlord's indebtedness.


                                  ARTICLE XI
                                 CONDEMNATION

          11.01  Total Taking.  If at any time during the Term or any Extension
                 ------------                                        
Term, as the case may be, any Leased Property is totally and permanently taken
by right of eminent domain or by conveyance made in response to the threat of
the exercise of such right ("Condemnation"), this Lease shall terminate as to
such Leased Property on the Date of Taking (which shall mean the date the
condemning authority has the right to possession of the property being
condemned), and Tenant shall promptly pay all outstanding applicable Rent and
other charges through the date of termination, provided, however, this Lease
shall not so terminate if the Condemnation occurred due to the failure of Tenant
to maintain such Leased Property as required by Article VII hereof or other
applicable 

                                       36
<PAGE>
 
provisions hereof, whether or not such failure on the part of Tenant constituted
an Event of Default hereunder at the time of the Condemnation.
 
          11.02  Partial Taking.  If a portion of a Leased Property is taken by
                 --------------                                             
Condemnation, this Lease shall remain in effect as to such Leased Property if
such Leased Property is not thereby rendered Unsuitable for the continuation of
Tenant's Business on that Leased Property (which shall mean that such Leased
Property is in such a state or condition such that in the good faith judgment of
Tenant, reasonably exercised, it cannot be used on a commercially practicable
basis in the operation of the Business), but if such Leased Property is thereby
rendered Unsuitable for the continuation of Tenant's Business on that Leased
Property, this Lease shall terminate as to such Leased Property on the Date of
Taking, provided such Condemnation was not as a result of Tenant's failure to
maintain such Leased Property as provided for in Section 11.01.

          11.03  Restoration.  If there is a partial taking of any Leased
                 -----------                                             
Property and this Lease remains in full force and effect pursuant to Section
11.02, Landlord shall retain the amount of any Landlord Award (as hereafter
defined) received by Landlord, Landlord shall make available such Landlord Award
to accomplish all necessary restoration to the Leased Property, and any excess
after such application shall be retained by Landlord.  If there is a partial
taking of any Leased Property and this Lease remains in full force and effect
pursuant to Section 11.02, Tenant shall retain the amount of any Tenant Award
(as hereafter defined) received by Tenant, Tenant shall apply such Tenant Award
to accomplish all necessary restoration of Tenant's property, and any excess
after such application shall be retained by Tenant.  Notwithstanding anything in
this Section to the contrary, in the event that there is a partial taking of any
Leased Property and this Lease remains in full force and effect pursuant to
Section 11.02, and there is a single Award with respect to such partial taking,
then the Landlord and Tenant shall use their good faith efforts to determine the
proper apportionment of such Award (as hereafter defined) to restoration of
Landlord's and Tenant's respective properties.  In the event that the parties
are unable to agree on such apportionment within thirty (30) days, the parties
shall submit to arbitration of an apportionment subject to the arbitration
provisions set forth in Article XIV.

          11.04  Landlord's Inspection. During the progress of such restoration,
                 ---------------------
Landlord and its architects and engineers may, from time to time, inspect the
subject Leased Property and will be furnished, if required by them, with copies
of all plans, shop drawings, and specifications relating to such restoration.
Tenant will keep all plans, shop drawings, and specifications available, and
Landlord and its architects and engineers may examine them at all reasonable
times. If, during such restoration, Landlord and its architects and engineers
determine that the restoration is not being done in accordance with the approved
plans and specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such restoration does not accord with the approved plans
and specifications. Upon the receipt of any such notice, Tenant will cause
corrections to be made to any deficiencies, omissions, or such other respect.
Tenant's obligations to supply insurance, according to Article IV, will be
applicable to any restoration under this Section.

                                       37
<PAGE>
 
          11.05  Award Distribution.  The entire compensation, sums or anything
                 ------------------                                   
of value awarded, paid or received on a total or partial Condemnation of a
Leased Property that is awarded to Landlord shall belong to Landlord (the
"Landlord Award"). The entire compensation, sums or anything of value awarded,
paid or received on a total or partial Condemnation of a Leased Property that is
awarded to Tenant shall belong to Tenant (the "Tenant Award", collectively with
the Landlord Award, the "Awards", and each, individually, an "Award").
Notwithstanding anything in this Section to the contrary, in the event that
there is a total or partial Condemnation of a Leased Property and there is a
single Award with respect to such Condemnation, then the Landlord and Tenant
shall use their good faith efforts to determine the proper apportionment of such
Award to Landlord's and Tenant's respective properties. In the event that the
parties are unable to agree on such apportionment within thirty (30) days, the
parties shall submit to arbitration of an apportionment subject to the
arbitration provisions set forth in Article XIV.

          11.06  Temporary Taking.  The taking of any Leased Property, or any
                 ----------------                                            
part thereof, by military or other public authority shall constitute a taking by
Condemnation only when the use and occupancy by the taking authority has
continued for longer than twenty four (24) months.  During any such twenty-four
(24) month period, which shall be a temporary taking, all the provisions of this
Lease shall remain in full force and effect as to such Leased Property with no
abatement of rent payable by Tenant hereunder.  In the event of any such
temporary taking, the entire amount of any such Award made for such temporary
taking allocable to the Term hereof, whether paid by way of damages, Rent or
otherwise, shall be paid to Tenant.


                                  ARTICLE XII
        ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS

          Tenant hereby represents, warrants and covenants to Landlord as
follows:

          12.01  Organization and Qualification.
                 ------------------------------ 

          (a)    Tenant is a Maryland corporation duly organized, validly
                 existing and in good standing under the laws of its state of
                 incorporation or organization and the State of Maryland, with
                 all power and authority, corporate or otherwise, necessary to:
                 (i) enter into and perform this Lease and (ii) own and lease
                 its assets and properties, and conduct its Business, as it is
                 now being conducted or proposed to be conducted. Tenant is duly
                 qualified as a foreign corporation or other entity, as the case
                 may be, to conduct its Business and own and lease its assets
                 and properties, and is in good standing, in each jurisdiction
                 where the character of its assets and properties owned or held
                 under lease or the nature of its Business makes such
                 qualification necessary, and is duly qualified and licensed
                 under all laws, regulations, ordinances or orders of public or
                 governmental authorities, or otherwise to carry on its Business
                 and own or lease its assets and properties in the places and in
                 the

                                      38
<PAGE>
 
               manner in which they are owned, leased or conducted or proposed
               to be owned, leased or conducted, except where the failure to be
               so organized, qualified and in good standing or to have such
               authority, qualification or licensing could not result in a
               Material Adverse Change. Complete and correct copies of Tenant's
               Charter, as in effect on the date hereof, and Tenant's by-laws,
               also as in effect on the date hereof, have been delivered to
               Landlord.

          (b)  Each Affiliate that conducts operations or business on or from
               any Leased Property, whether now or at any time in the future, is
               duly organized, validly existing and in good standing under the
               laws of its organization, with all power and authority, corporate
               or otherwise, necessary to own and lease its assets and
               properties, and conduct its business, as it is now being
               conducted or proposed to be conducted. Each Affiliate is duly
               qualified as a foreign corporation or other entity, as the case
               may be, to do business and own and lease its assets and
               properties, and is in good standing, in each jurisdiction where
               the character of its assets and properties owned or held under
               lease or the nature of its activities or business makes such
               qualification necessary or advisable, and is duly qualified and
               licensed under all laws, regulations, ordinances or orders or
               public or governmental authorities or otherwise to carry on its
               business and own or lease its assets and properties in the places
               and in the manner in which they are owned, leased or is conducted
               or proposed to be owned, leased or conducted, except where the
               failure to be so organized, qualified and in good standing or to
               have such authority, qualification or licensing could not result
               in a Material Adverse Change.

          "Material Adverse Change" since a particular specified date, or a date
which may be specified from the circumstances existing immediately prior to the
happening of a specified event or occurrence, or, if no date or event is
specified, with reference to the most recent Annual Financial Statements
delivered pursuant to this Lease, means a material adverse change in the
Business, assets, properties, franchises, financial condition or income of
Tenant or the operations, business, assets, properties, franchises, financial
condition, income or prospects of any Affiliate, whether or not such event or
occurrence is an Event of Default.  Nothing that would otherwise be a breach of
any representation, warranty, covenant or obligation herein by any Affiliate
shall be a breach of this Agreement, unless such breach constitutes or causes a
material adverse effect on the Business.

          "Affiliate" means with respect to any Person, (i) any Person that
holds direct or indirect beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of voting securities or other
voting interests representing at least five percent (5%) of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least five percent (5%) of the outstanding equity securities or
interests in a Person, or (ii) any Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such Person.

                                       39
<PAGE>
 
          A "Person" shall mean and include natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations, whether or not legal
entities, and governments and agencies and political subdivisions thereof.

          12.02  Material Agreements.  Schedule 12.02 is a complete list of all
                 -------------------   --------------                      
agreements to which Tenant is a party that are material to the ownership and use
of the Leased Property or the operation of Tenant's Business, and Tenant will
make available to Landlord a copy of each of these agreements (including all
exhibits, schedules and amendments thereto).

          12.03  Changes in Condition.  Since the date of the latest Annual
                 ---------------------                                     
Financial Statements, no Material Adverse Change has occurred between such date
and the date hereof, and neither Tenant nor any Affiliate has entered into any
material transaction outside the ordinary course of its or their operations or
business, including the Business, except as set forth in Schedule 12.03 and the
                                                         --------------        
matters contemplated by this Lease.

          12.04  Franchises, Licenses, etc.  Tenant and its subsidiaries own, or
                 --------------------------                                  
have sufficient interests in, all franchises, trademarks, trademark rights,
trade names, trade name rights, copyrights, licenses, permits, authorizations
and other rights as are necessary for the conduct of Tenant's Business and its
subsidiaries' businesses as now conducted or proposed to be conducted by Tenant
or any Affiliate, as well as rights under any agreement under which Tenant or
its subsidiaries has access to confidential information used by Tenant or its
subsidiaries in Tenants' Business or the businesses of its subsidiaries, as the
case may be (collectively, the "Intellectual Property"). All Intellectual
Property is in full force and effect in all material respects, and Tenant and
its subsidiaries are in substantial compliance with the foregoing without any
conflict with the valid rights of others, which has resulted, or could be
reasonably likely to result in any Material Adverse Change. Neither Tenant nor
any Affiliate has violated, or received any communication that by conducting its
Business or any Affiliate's businesses, it or any Affiliate would violate any
franchises, licenses, patents, trademarks, service marks, trade names,
copyrights, trade secrets, proprietary rights or processes of any other Person
(as hereafter defined) nor is Tenant or any Affiliate aware of any such
violations. No event has occurred which permits, or after notice or lapse of
time or both would permit, the revocation or termination of any such license,
franchise or other right or affect the rights of Tenant or any Affiliate so as
to result in or reasonably be likely to result in any Material Adverse Change.
There is no litigation or other proceeding or dispute or, to the knowledge of
Tenant or any Affiliate, threat thereof with respect to the validity or, where
applicable, the extension or renewal, of any of the foregoing which has
resulted, or could result, in any Material Adverse Change.

          12.05  Litigation.  No litigation, at law or in equity, or any 
                 -----------                                            
proceeding before any court, board or other governmental or administrative
agency or any arbitrator or other forum of alternative dispute resolution is
pending or, to the knowledge of Tenant or any Affiliate, threatened which
involves any risk of any final judgment, order or liability which, after giving
effect to any applicable insurance, has resulted, or could result, in any
Material Adverse Change or which seeks to enjoin the execution and consummation
of this Lease and the performance of Tenant's obligations 

                                       40
<PAGE>
 
hereunder. No judgment, decree or order of any court, board or other
governmental or administrative agency or any arbitrator has been issued against
or binds Tenant or any Affiliate, which has resulted, or could result, in any
Material Adverse Change.

          12.06  Authorization and Enforceability.  Tenant has taken all
                 ---------------------------------                      
corporate or other action required to execute, deliver and perform this Lease.
This Lease constitutes the legal, valid and binding obligation of Tenant and is
enforceable against Tenant in accordance with its terms.

          12.07  No Legal Obstacle to Lease.  Neither the execution and delivery
                 ---------------------------                                    
of this Lease nor the performance of any obligation hereunder has constituted or
resulted in or will constitute or result in:

                 (a) any breach, violation of, conflict with, default under or
                     termination of any agreement, contract, mortgage,
                     instrument, deed or lease to which Tenant or any Affiliate
                     is a party or by which it or they are bound;

                 (b) the violation of or conflict with any law, statute,
                     ordinance, judgment, decree, order, rule or regulation
                     applicable to Tenant, any Affiliate, any Improvements or
                     any Leased Property; or

                 (c) any violation of or conflict with Tenant's or any
                     Affiliate's Charter or By-Laws or other organizational
                     documents, as the case may be.

          No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other Person is
required to be obtained or made by Tenant in connection with the execution,
delivery and performance of this Lease.
 
          12.08  Certain Business Representations:
                 -------------------------------- 

                 (a) Labor Relations.  No dispute or controversy between Tenant
                     ---------------
                     or any Affiliate and its or their employees has resulted
                     in, or is reasonably likely to result in, any Material
                     Adverse Change, and neither Tenant nor any Affiliate
                     anticipates that its relationships with its unions or
                     employees will result, or are reasonably likely to result,
                     in any Material Adverse Change. Tenant and each Affiliate
                     is in compliance in all material respects with all federal
                     and state laws relating to employees and labor relations,
                     including, but not limited to, laws relating to health and
                     safety in the workplace, non-discrimination in employment
                     and the payment of wages.

                 (b) Antitrust.  Tenant and each Affiliate is in compliance in
                     ---------- 
                     all material respects with all federal and state antitrust
                     laws relating to Tenant's 

                                       41
<PAGE>
 
                     Business and the subsidiaries' businesses and the
                     geographic concentration thereof.

                 (c) Consumer Protection.  Neither Tenant nor any Affiliate is
                     --------------------      
                     in violation of any rule, regulation, order, or
                     interpretation of any rule, regulation or order of the
                     Federal Trade Commission (including truth-in-lending) or
                     other federal, state or local public or governmental
                     authority or agency, with which the failure to comply, in
                     the aggregate, has resulted in, could result in, a Material
                     Adverse Change.

                 (d) Future Expenditures.  Neither Tenant nor any Affiliate,
                     -------------------                                     
                     anticipates that further expenditures, if any, by Tenant or
                     any Affiliate needed to meet the provisions of any federal,
                     state or foreign governmental statutes, orders, rules or
                     regulation could result in any Material Adverse Change.

                 (e) Benefit Liabilities.  Neither Tenant nor any ERISA
                     -------------------       
                     Affiliate maintains, contributes to, or is obligated to
                     contribute to, nor has Tenant or any ERISA Affiliate
                     maintained, contributed to, been obligated to contribute
                     to, or had any direct, indirect, or contingent liability
                     with respect to, any Title IV Plan (as hereafter defined).
                     Each Tenant Benefit Plan has been maintained in compliance
                     with its terms and with applicable laws (including
                     specifically the Code and the Employee Retirement Income
                     Security Act of 1974 ("ERISA"). "Tenant Benefit Plan" means
                     any plan, fund, or other similar program described in
                     Section 3(2) of ERISA and established or maintained or with
                     respect to which Tenant and/or any ERISA Affiliate has an
                     obligation to contribute for the benefit of its employees
                     (or for which Tenant could be directly or contingently
                     liable). "Title IV Plan" means an "employee benefit plan"
                     (as defined in Section 3(3) of ERISA) that is subject to
                     Title IV of ERISA and is or has been established or
                     maintained, by Tenant or any ERISA Affiliate, or to which
                     contributions are, have been, or should have been made.
                     "ERISA Affiliate" means any trade or business, whether or
                     not incorporated, that, together with Tenant, is or has
                     been under common control, within the meaning of Section
                     414(b), (c), (m), or (o) of the Code or Section 4001 of
                     ERISA.

          12.09  Certain Financial Covenants.  Tenant or an Affiliate, as
                 ----------------------------                            
applicable, is in compliance in all material respects with all financial
covenants required to be maintained pursuant to any franchise or other agreement
pursuant to which Tenant or such Affiliate operates its business, except in such
respects as shall not result in any franchisor under any franchise or operating

                                       42
<PAGE>
 
agreement to which Tenant is a party taking any action that could result in a
Material Adverse Change.

          12.10  Cash Flow Coverage Ratio Covenant.  On the date of this Lease
                 ---------------------------------                      
and measured at a date that is twenty-four (24) months following such date (each
a "Cash Flow Measurement Date"), and on each anniversary date that is twenty-
four (24) months following a prior Cash Flow Measurement Date, Tenant shall have
maintained a Cash Flow Coverage Ratio of not less than 1.5 to 1.0 based on the
Annual Financial Statements to be delivered to Landlord in accordance with
Section 6.04 hereof. "Cash Flow Coverage Ratio" means the aggregate of net
income before taxes plus mortgage interest, rent expense, depreciation,
compensation of principals of the Business, management fees plus the annual LIFO
adjustment and other non-cash expenses, less recurring capital expenditures and
gain (loss) on sale of real estate, dividends and/or profits taken out of Tenant
divided by the aggregate of the Tenant's obligations under this Lease.
Notwithstanding anything herein to the contrary, in the event that Tenant shall
not be in compliance with this covenant at a Cash Flow Measurement Date or
Tenant shall have knowledge of such non-compliance prior to any Cash Flow
Measurement Date, the Tenant shall have the right to cure such breach through
any reasonable commercial means, including, but not limited to, providing
guarantees acceptable to Landlord, increasing capital, or cross collateralizing
with any other property of Tenant or an Affiliate, provided that such breach is
cured within one hundred and eighty (180) days after Notice by Landlord to
Tenant of the existence of such breach.

          12.11  Disclosure.  This Lease does not contain any untrue statement 
                 ----------                                         
of a material fact or omit to state a material fact necessary in order to make
any statement contained herein not misleading in light of the circumstances
under which it was made. To Tenant's knowledge, there is no event, fact or
occurrence that has resulted, or in the future (so far as Tenant can reasonably
foresee) could result, in any Material Adverse Change, except to the extent that
present or future general and sector-specific economic conditions may result in
a Material Adverse Change.

          12.12  Covenant Not to Acquire.  Tenant covenants and agrees that
                 -----------------------                              
during the Term and any Extension Term, as the case may be, Tenant and its
controlling shareholders or its or their Affiliates will not acquire, directly
or indirectly, more that 9.90% of the outstanding common shares of beneficial
interest of Capital Automotive REIT. Tenant covenants and agrees that it will
divest itself of such shares of Capital Automotive REIT as may be necessary to
satisfy the limitations of this Section 12.12.

                                       43
<PAGE>
 
                                 ARTICLE XIII
                     ASSIGNMENT AND SUBLETTING; ATTORNMENT

          13.01  Prohibition Against Subletting and Assignment.  Subject to
                 ---------------------------------------------          
Section 13.03, Tenant shall not, without the prior written consent of Landlord,
or upon compliance with any conditions established by Landlord, in its
reasonable discretion, assign, mortgage, pledge, hypothecate, encumber or
otherwise transfer (except to an Affiliate) this Lease or any interest herein,
or all or any part of any Leased Property, or suffer or permit this Lease or the
leasehold estate created hereby or any other rights arising hereunder to be
assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole
or in part, whether voluntarily, involuntarily or by operation of law. For
purposes of this Section 13.01, an assignment of this Lease shall be deemed to
include any Change of Control of Tenant, as if such Change of Control were an
assignment of the Lease. In the event that (i) Landlord shall withhold any
consent to any assignment or transfer of this Lease or any interest herein, and
(ii) such assignee or transferee is approved by the relevant manufacturer for
continuation as a franchisee, there shall be a presumption that such assignment
or transfer was reasonable and Landlord shall have the burden of rebutting such
presumption and of proving that such consent was in fact reasonably withheld (or
that such conditions were reasonable).

          13.02  Changes of Control.  A Change of Control requiring the consent
                 ------------------                                    
of Landlord shall mean:

                 (a) the issuance and/or sale by Tenant or the sale by any
                     shareholder or equity holder of Tenant of a Controlling
                     (which shall mean, as applied to any Person, the
                     possession, directly or indirectly, of the power to direct
                     or cause the direction of the management and policies of
                     such Person, whether through the ownership of voting
                     securities, by contract or otherwise) interest in Tenant to
                     a Person other than an Affiliate of Tenant, other than in
                     either case a distribution to the public pursuant to an
                     effective registration statement under the Securities Act
                     of 1933, as amended (a "Registered Offering");

                 (b) the sale, conveyance or other transfer of all or
                     substantially all of the assets of Tenant (whether by
                     operation of law or otherwise) provided, however, that no
                     Change of Control shall be deemed to have occurred in the
                     event of the transfer of assets as a result of the death of
                     a person involved in the Business, so long as the
                     transferee is approved by the manufacturer for the
                     continuation of the Business; or

                 (c) any transaction pursuant to which Tenant is merged with or
                     consolidated into another entity (other than an entity
                     owned and Controlled by an Affiliate), and Tenant is not
                     the surviving entity.

                                       44
<PAGE>
 
          13.03  Operating/Service Agreements.
                 -----------------------------

                 (a) Permitted Agreements.  Tenant shall, without Landlord's 
                     --------------------  
                     prior approval, be permitted to enter into such
                     operating/service agreements for portions of each Leased
                     Property to various licensees in connection with Tenant's
                     Business as are customarily associated with or incidental
                     to the operation of such Leased Property, which agreements
                     may be in the nature of a sublease agreement.

                 (b) Terms of Agreements.  Each operating/service agreement 
                     -------------------                                    
                     concerning a Leased Property shall be subject and
                     subordinate to the provisions hereof. No agreement made as
                     permitted by Section 13.03(a) shall affect or reduce any of
                     the obligations of Tenant hereunder, and all such
                     obligations shall continue in full force and effect as if
                     no agreement had been made. No agreement shall impose any
                     additional obligations on Landlord hereunder.

                 (c) Copies.  Tenant shall, within ten (10) days after the 
                     ------                                                
                     execution and delivery of any operating/service agreement
                     permitted by Section 13.03(a), deliver a duplicate original
                     thereof to Landlord.

                 (d) Assignment of Rights in Agreements.  As security for 
                     ----------------------------------            
                     performance of its obligations hereunder, Tenant hereby
                     grants, conveys and assigns to Landlord all right, title
                     and interest of Tenant in and to all operating/service
                     agreements now in existence or hereinafter entered into for
                     each Leased Property, and all extensions, modifications and
                     renewals thereof and all rents, issues and profits
                     therefrom, to the extent the same are assignable by Tenant.
                     Landlord hereby grants to Tenant a license to collect and
                     enjoy all rents and other sums of money payable under any
                     such agreement; provided, however, that Landlord shall have
                     the absolute right at any time after the occurrence and
                     continuance of an Event of Default upon notice to Tenant
                     and any vendors or licensees to revoke said license and to
                     collect such rents and sums of money and to retain the
                     same. Tenant shall not (i) after the occurrence and
                     continuance of an Event of Default, consent to, cause, or
                     allow, any material modification or alteration of any of
                     the terms, conditions or covenants of any of the agreements
                     or the termination thereof, without the prior written
                     approval of Landlord nor (ii) accept any rents (other than
                     customary security deposits) more than thirty (30) days in
                     advance of the accrual thereof nor permit anything to be
                     done, the doing of which, nor omit or refrain from doing
                     anything, the omission of which, will or could be a breach
                     of or default in the terms of any of the agreements.

                                       45
<PAGE>
 
                 (e) Licenses, Etc.  For purposes of Section 13.03, the
                     -------------                                     
                     operating/service agreements shall mean any licenses,
                     concession arrangements, or other arrangements relating to
                     the possession or use of all or any part of any Leased
                     Property.

          13.04  Assignment.  If Landlord shall withhold its consent to any
                 ----------                                            
assignment or if Landlord shall have established conditions to approval of any
assignment but such conditions shall not have been complied with, to the
reasonable satisfaction of Landlord, such assignment shall not in any way impair
the continuing primary liability of Tenant hereunder. No consent to any
assignment in a particular instance shall be deemed to be a general waiver of
the prohibition set forth in Article XIII. Any assignment shall be solely of
Tenant's entire interest in this Lease with respect to the subject Leased
Property or Leased Properties. Any assignment or other transfer of all or any
portion of Tenant's interest in this Lease in contravention of Article XIII
hereof shall be voidable at Landlord's option.

          13.05  REIT Limitations.
                 ---------------- 

                 (a) Anything contained herein to the contrary notwithstanding,
                     Tenant shall not: (a) sublet or assign a Leased Property or
                     this Lease on any basis such that the rental or other
                     amounts to be paid by the sublessee or assignee thereunder
                     would be based, in whole or in part, on the income or
                     profits derived by the business activities of the sublessee
                     or assignee; (b) sublet or assign a Leased Property or this
                     Lease to any Person that, under Section 856(d)(2)(B) of the
                     Internal Revenue Code of 1986, as amended (the "Code"),
                     Landlord or its general partner owns, directly or
                     indirectly (by applying constructive ownership rules set
                     forth in Section 856(d) (5) of the Code, a ten percent
                     (10%) or greater interest; or (c) sublet or assign a Leased
                     Property or this Lease in any other manner or otherwise
                     derive any income which could cause any portion of the
                     amounts received by Landlord pursuant hereto or any
                     sublease to fail to qualify as "rents from real property"
                     within the meaning of Section 856(d) of the Code, or which
                     could cause any other income received by Landlord to fail
                     to qualify as income described in Section 856(c) (2) of the
                     Code. The requirements of this Section 13.05 shall likewise
                     apply to any further subleasing by any subtenant.

                 (b) Tenant acknowledges that Capital Automotive REIT, a
                     Maryland real estate investment trust and the general
                     partner of Landlord (the "Company"), intends to elect to be
                     taxed as a real estate investment trust (a "REIT") under
                     the Code. Tenant shall not do anything which would
                     adversely affect the Company's status as a REIT. Tenant
                     hereby agrees to modifications of this Lease which do not
                     materially

                                       46
<PAGE>
 
                     adversely affect Tenant's rights and liabilities if such
                     modifications are required to retain or clarify the
                     Company's status as a REIT.

          13.06  Attornment.  Tenant shall insert in each sublease permitted
                 ----------                                       
under Section 13.03(a) provisions to the effect that: (a) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and to
the rights of Landlord hereunder; (b) in the event this Lease shall terminate
before the expiration of such sublease, the sublessee thereunder will, at
Landlords' option, attorn to Landlord and waive any right the sublessee may have
to terminate the sublease or to surrender possession thereunder, as a result of
the termination hereof; and (c) in the event the sublessee receives a written
notice from Landlord or Landlord's assignees, if any, stating that Tenant is in
default under this Lease, the sublessee shall thereafter be obligated to pay all
rentals accruing under said sublease directly to the party giving such notice,
or as such party may direct. All rentals received from the sublessee by Landlord
or Landlord's assignees in respect of a Leased Property, if any, as the case may
be, shall be credited against the amounts owing by Tenant hereunder with respect
to such Leased Property.

          13.07  Severance and Spin-Off.  During the Term or any Extension Term
                 ----------------------                                        
of this Lease and provided that there is no existing Event of Default and there
exists no condition which, with the passage of time, could become an Event of
Default, Tenant shall have the right (the "Spin-Off Right"), with the consent of
Landlord (which consent shall not be unreasonably withheld), to sever and spin-
off from this Lease (which shall mean that Tenant shall no longer have any
obligation under this Lease with respect to the Spin-Off Property) one or more
of the Leased Properties (each a "Spin-Off Property") to a new tenant ("New
Tenant") upon the following conditions: (a) Tenant shall assign the automobile
franchise being conducted on the Spin-Off Property to the New Tenant and shall
obtain all necessary approvals from third parties to accomplish such assignment;
(b) Tenant shall include in the agreement by which the assignment of the
automobile franchise is to be accomplished the requirement that the New Tenant
shall take the assignment subject to this Lease (c) the New Tenant shall agree
to be bound by the terms and conditions of this Lease (and assume all of the
obligations hereof) and shall execute a counterpart to this Lease in all
respects identical to this Lease that applies to the Spin-Off Property; and (d)
if Tenant desires to exercise the Spin-Off Right with respect to less than all
parcels of a Leased Property, then such spin-off shall be subject to compliance
with the requirements of Section 13.08.

          13.08  Assignment of Non-Subdivided Parcels.  If the Leased Property
                 ------------------------------------                
is not a separate subdivided lot, Landlord may condition its approval of an
assignment upon Tenant showing that there are appropriate provisions (such as a
condominium regime, subdivision, and/or reciprocal easements, lender and/or
franchisor consents if necessary, and separate tax lots) which allow the Leased
Property to be separately owned and operated without interference from or
dependence upon, another person as to items such as access, real estate taxes,
or utilities.

                                       47
<PAGE>
 
                                  ARTICLE XIV
                                  ARBITRATION

          14.01  Controversies.  Except with respect to the payment of Rent
                 -------------                                        
hereunder, which shall be subject to the provisions of Section 9.02, in the
event a controversy arises between the parties as to any of the requirements of
this Lease or the performance hereunder, which the parties are unable to
resolve, the parties agree to waive the remedy of litigation (except for
extraordinary relief in an emergency situation) and agree that such controversy
or controversies shall be determined by arbitration as hereafter provided in
this Article.

          14.02  Appointment of Arbitrators.  The party or parties requesting
                 --------------------------                       
arbitration shall serve upon the other a demand therefor, in writing, specifying
in detail the controversy and matter(s) to be submitted to arbitration before
the American Arbitration Association. The selection of arbitrators shall be
conducted pursuant to the rules for resolution of commercial disputes
promulgated by the American Arbitration Association. The party or parties giving
notice shall request a listing of available arbitrators from the American
Arbitration Association, and each party shall respond in the selection process
within fifteen (15) days after each receipt of such listings until a panel of
three (3) arbitrators has been designated. If either party fails to respond
within fifteen (15) days, it is agreed that the American Arbitration Association
may make such selections as are necessary to complete the panel of three (3)
arbitrators.

          14.03  Arbitration Procedure.  Within five (5) business days after 
                 ---------------------                                
the selection of the arbitration panel, the arbitrators shall give written
notice to each party as to the time and the place of each meeting, which shall
be held in Washington, D.C., at which the parties may appear and be heard, which
shall be no later than fifteen (15) days after certification of the arbitration
panel. The parties specifically waive discovery, and further waive the
applicability of rules of evidence or rules of procedure in the proceedings. The
applicable rules shall be those in effect at the time for the resolution of
commercial disputes promulgated by the American Arbitration Association.
Notwithstanding the foregoing, the substantive law governing the arbitration
shall be the laws of the State of Delaware (without application of choice of law
provisions). The arbitrators shall take such testimony and make such examination
and investigations as the arbitrators reasonably deem necessary. The decision of
the arbitrators shall be in writing signed by a majority of the panel which
decision shall be final and binding upon the parties to the controversy.
Provided, however, in rendering their decisions and making awards, the
arbitrators shall not add to, subtract from or otherwise modify the provisions
of this Lease.

          14.04  Expenses.  The expenses of the arbitration shall be assessed by
                 --------                                           
the arbitrators and specified in the written decision. In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally between
Landlord and Tenant. Each party in interest shall be responsible for and pay the
fees, costs and expenses of its own counsel, unless the arbitration award
provides for an assessment of reasonable attorneys' fees and costs.

                                       48
<PAGE>
 
          14.05  Enforcement of the Arbitration Award.  There shall be no appeal
                 ------------------------------------                    
from the decision of the arbitrators, and upon the rendering of an award, any
party thereto may file the arbitrators' decision in the United States District
Court for the Eastern District of Virginia for enforcement as provided by
applicable law.


                                  ARTICLE XV 
                        QUIET ENJOYMENT, SUBORDINATION,
                       ATTORNMENT, ESTOPPEL CERTIFICATES

          15.01  Quiet Enjoyment.  So long as Tenant performs all of its
                 ---------------                                        
obligations under this Lease, Tenant's possession of the Leased Properties will
not be disturbed by or through Landlord.

          15.02  Landlord Mortgages; Subordination.  Subject to Section 15.03,
                 ---------------------------------                     
without the consent of Tenant, Landlord may, from time to time, directly or
indirectly, create or otherwise cause to exist any liens, encumbrances, security
interests or title retention agreements on any Leased Property, or any portion
thereof or any interest therein, whether to secure any borrowing or other means
of financing or refinancing. Tenant shall execute, acknowledge and deliver to
Landlord, at any time and from time to time upon demand by Landlord or any
mortgagee or any holder of any mortgage or other instrument described in this
Section, without cost to Landlord, a Subordination and Non-Disturbance Agreement
in the form attached hereto as Exhibit 15.02, which provides that (i) Tenant's 
                               -------------      
rights hereunder are subordinate to any ground lease or underlying lease, first
mortgage, first deed of trust, or other first lien against any Leased Property,
together with any renewal, consolidation, extension, modification, or
replacement thereof, which now or at any subsequent time affects any Leased
Property or any interest of Landlord in any Leased Property, except to the
extent that any such instrument expressly provides that this Lease is superior;
and (ii) in the event such party succeeds to Landlord's interest under the Lease
and provided that no Event of Default by Tenant exists, such party will not
disturb Tenant's possession, use or occupancy of the subject Leased Property.
If Tenant fails or refuses to execute, acknowledge, and deliver such
Subordination and Non-Disclosure Agreement within ten (10) business days after
written demand, then Landlord shall send to Tenant a second written demand.  If
Tenant fails or refuses to execute, acknowledge and deliver such Subordination
and Non-Disclosure Agreement within ten (10) days after such second written
demand, then Landlord or such successor in interest may execute, acknowledge and
deliver such Subordination and Non-Disclosure Agreement on behalf of Tenant as
Tenant's attorney-in-fact.  Tenant hereby constitutes and irrevocably appoints
Landlord, its successors and assigns, as Tenant's attorney-in-fact to execute,
acknowledge, and deliver on behalf of Tenant the Subordination and Non-
Disclosure Agreement.  This power of attorney is coupled with an interest and is
irrevocable.

          15.03  Attornment.  If any holder of any mortgage, indenture, deed of
                 ----------                                            
trust, or other similar instrument described in Section 15.02 succeeds to
Landlord's interest in any Leased Property, Tenant will pay to such holder all
Rent subsequently payable hereunder as to such Leased Property. Tenant shall,
upon request of anyone succeeding to the interest of Landlord, automatically
become

                                       49
<PAGE>
 
the tenant of, and attorn to, such successor in interest without changing this
Lease. The successor in interest will not be bound by: (a) any payment of Rent
for more than one (1) month in advance; (b) any amendment or modification hereof
made without its written consent; (c) any claim against Landlord arising prior
to the date on which the successor succeeded to Landlord's interest; or (d) any
claim or offset of Rent against Landlord.

          15.04  Estoppel Certificates.  At the request of Landlord or any
                 ---------------------                                    
mortgagee or purchaser of a Leased Property, Tenant shall execute, acknowledge,
and deliver an estoppel certificate, in recordable form, in favor of Landlord or
any mortgagee or purchaser of any Leased Property certifying the following as to
such Leased Property:  (a) that this Lease is unmodified and in full force and
effect, or if there have been modifications that the same is in full force and
effect as modified and stating the modifications; (b) the date to which Rent and
other charges have been paid; (c) that neither Tenant nor Landlord is in default
nor is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default, if that be the case, or specifying any existing
default; (d) that Tenant has accepted and occupies such Leased Property; (e)
that Tenant has no defenses, set-offs, deductions, credits, or counterclaims
against Landlord, if that be the case, or specifying such that exist; (f) that
Landlord has no outstanding construction or repair obligations; and (g) such
other information as may reasonably be requested by Landlord or any mortgagee or
purchaser.  Any purchaser or mortgagee may rely on this estoppel certificate.
If Tenant fails to deliver the estoppel certificates to Landlord within ten (10)
business days after the request of Landlord, then Landlord shall request such
delivery a second time. If Tenant fails to deliver the estoppel certificates to
Landlord within ten (10) days after such second request by Landlord, then Tenant
shall be deemed to have certified that: (a) this Lease is in full force and
effect and has not been modified, or that this Lease has been modified as set
forth in the certificate delivered to Tenant; (b) Tenant has not prepaid any
Rent or other charges except for the current month; (c) Tenant has accepted and
occupies such Leased Property; (d) neither Tenant nor Landlord is in default nor
is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default; (e) Landlord has no outstanding construction or
repair obligation; and (f) Tenant has no defenses, set-offs, deductions,
credits, or counterclaims against Landlord. Tenant hereby irrevocably appoints
Landlord as Tenant's attorney-in-fact to execute, acknowledge and deliver on
Tenant's behalf any estoppel certificate which Tenant does not object to within
twenty (20) days after Landlord sends the certificate to Tenant. This power of
attorney is coupled with an interest and is irrevocable.

          15.05  Waiver of Landlord's Lien.  Landlord agrees to and does hereby
                 -------------------------                              
waive its Landlord's lien and any other rights that it may have with respect to
property or assets representing the security or collateral under Tenant's 
"floor-plan" or similar financing arrangements, during the Term or any Extension
Term. Landlord shall, upon request by any such lender, execute an acknowledgment
of such waiver.


               [remainder of this page left intentionally blank]

                                       50
<PAGE>
 
                                 ARTICLE XVI 
                             RIGHT OF FIRST OFFER

          16.01  Right of First Offer During Lease Term or Extension Term.
                 ---------------------------------------------------------

                 (a) If and when during the Term or Extension Term, as the case
                     may be, Landlord shall decide to sell the Leased Properties
                     to a Person who is not an Affiliate of Landlord (the
                     "Decision to Sell"), provided that no Event of Default has
                     occurred and is continuing under the Lease, Landlord shall
                     notify Tenant in writing within ten (10) business days
                     after Landlord makes a Decision to Sell. Tenant shall have
                     ten (10) business days thereafter in which to notify
                     Landlord in writing of its desire to purchase the Leased
                     Properties. If Tenant shall give such notice, Tenant shall
                     have a period of thirty (30) days within which to make a
                     written offer to purchase the property (the "First Offer").
                     The First Offer must set forth the purchase price, deposit
                     amounts and closing date and any and all other terms and
                     conditions being proposed by Tenant.

                 (b) Within thirty (30) days of receipt of the First Offer,
                     Landlord shall give Tenant written notice of its acceptance
                     or rejection thereof. If accepted, Tenant shall, within
                     five (5) days after receipt of the acceptance notice, make
                     the deposit called for in the First Offer and the parties
                     shall proceed to contract and closing upon the terms
                     thereof. If the First Offer is rejected, then, subject to
                     the provisions of subsections (c) and (d) of this Section
                     16.01, Tenant shall have no further rights with respect to
                     the purchase of the Leased Properties during the Term or
                     Extension Term, as the case may be.

                 (c) If Landlord shall reject the First Offer, for a one year
                     period thereafter it may proceed to sell the Leased
                     Properties, subject to the Lease and the remaining Term or
                     Extension Term thereof, as the case may be, to any third
                     party, provided (i) the purchase price of such sale shall
                     exceed that specified in the First Offer, or (ii) if the
                     purchase price of such sale does not exceed that specified
                     in the First Offer, the terms of such sale, taken together,
                     are more favorable to Landlord, in Landlord's reasonable
                     judgement, than those of the First Offer. There shall be a
                     presumption that Landlord's judgment was reasonable and
                     Tenant shall have the burden of rebutting such presumption
                     and of proving that such judgment was in fact unreasonable.

                 (d) If no sale is effected by Landlord within the period
                     specified in subsection (c) above, then if Landlord
                     thereafter desires to sell the 

                                       51
<PAGE>
 
                     Leased Properties, the procedure set forth in subsections
                     (a), (b) and (c) shall be followed.

                 (e) This option shall terminate in any event twenty (20) years
                     after the death of the last descendant of Roy L. Meyers,
                     Jr. living at the time of execution of this Lease.
 
          16.02  Right to Purchase at End of an Extension Term.
                 ----------------------------------------------
 
                 (a) Landlord hereby grants the Tenant the right and option to
                     purchase the Leased Properties (the "Option to Purchase")
                     at an amount equal to the Property Consideration (as
                     hereafter defined) upon termination of either Extension
                     Term of this Lease. The Option to Purchase shall not be
                     granted if Tenant does not extend the Term of this Lease
                     pursuant to Section 1.03 or if on the Option Exercise Date
                     (as hereafter defined) an Event of Default with respect to
                     any Leased Property exists and has not been cured. The
                     Tenant shall notify Landlord in writing of its intent to
                     exercise this Option to Purchase, thirty (30) days prior to
                     the end of an Extension Term of this Lease (the "Option
                     Exercise Date").

                 (b) The consideration to be paid for the Leased Properties upon
                     exercise of the Option to Purchase (the "Property
                     Consideration") shall be the Appraised Value (as hereafter
                     defined) determined by (1) an independent appraiser, who is
                     a member of the Appraisal Institute, and will be selected
                     by Landlord, (the "Landlord MAI Appraiser"), (2) a second
                     appraiser, who is a member of the Appraisal Institute, and
                     will be selected by the Tenant (the "Tenant MAI
                     Appraiser"), and (3) a third MAI Appraiser selected by
                     agreement of the Landlord MAI Appraiser and the Tenant MAI
                     Appraiser (the "Third MAI Appraiser") (each an "Appraiser"
                     and, collectively, the "Appraisers"). Landlord and Tenant
                     shall, as promptly as possible, but in no event later than
                     ten (10) days following the Option Exercise Date, select
                     its respective Appraiser. The Third MAI Appraiser shall be
                     selected no later than five (5) days after the selection of
                     the other Appraisers. The costs of the Appraisers'
                     appraisals shall be shared equally by the parties. As
                     promptly as possible but in no event later than fifteen
                     (15) days after selection of the Third Appraiser, each
                     Appraiser shall deliver his or her written report of the
                     Appraisers' determination of the fair market value of the
                     Leased Property, which determination shall be based, for
                     each Leased Property, upon the highest and best use of such
                     Leased Property, taking into consideration the location of
                     such Leased Property and other properties comparable
                     thereto. The

                                       52
<PAGE>
 
                     "Appraised Value" of the Real Property shall be equal to
                     the arithmetic mean of the two (2) fair market value
                     determinations of the Appraisers that are closest in value.
                     In the event that the values of (i) the difference between
                     the highest appraisal value and the next lower appraisal
                     value, and (ii) the difference between the lowest appraisal
                     value and the next higher appraisal value, are equal, then
                     the "Appraised Value" shall be equal to the arithmetic mean
                     of the fair market value determinations of all Appraisers.

                 (c) Upon determination of the Property Consideration, Landlord
                     and Tenant agree to cooperate to close the sale and
                     purchase of the Leased Property entirely for cash on an "as
                     is, where as basis" and with no warranties by Landlord
                     other than in a special warranty deed, within forty-five
                     (45) days after the date of determination of the Property
                     Consideration (the "Option Closing Period"). If the sale
                     and purchase of the Leased Property does not close within
                     the Option Closing Period due to Tenant's default, Landlord
                     shall have no further obligations to Tenant pursuant to
                     this Section 16.02 (a).


                                 ARTICLE XVII
                                 MISCELLANEOUS

          17.01  Notices.  Landlord and Tenant hereby agree that all notices,
                 -------                                                     
demands, requests, and consents (hereinafter "Notices") required to be given
pursuant to the terms of this Lease shall be in writing and shall be addressed
as follows:

          If to Tenant:

          Good News Salisbury, Inc.
          2013 N. Salisbury Blvd.
          Salisbury, Maryland  21801
          Attention:  Roy L. Meyers, Jr.

          With a copy to:

          Webb, Burnett, Jackson, Cornbrooks, Wilber, Vorhis & Douse

          115 Broad Street
          P.O. Box 910
          Salisbury, Maryland  21801-0910
          Attention: David A. Vorhis, Esq.

                                       53
<PAGE>
 
          If to Landlord:

          Capital Automotive L.P.
          1925 North Lynn
          Suite 306
          Arlington, Virginia 22209
          Attention: Thomas D. Eckert, President and Chief Executive Officer

          With a copy to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037
          Attention:  George P. Stamas, Esq.

and shall be served by: (a) personal delivery; (b) certified mail, return
receipt requested, postage prepaid; or (c) nationally recognized overnight
courier.  All notices shall be deemed to be given upon the earlier of actual
receipt or three (3) days after mailing, or one (1) business day after deposit
with the overnight courier.  Any Notices meeting the requirements of this
Section shall be effective, regardless of whether or not actually received.
Landlord or Tenant may change its notice address at any time by giving the other
party Notice of such change.  Any such Notice of change of address shall be
effective five (5) days after delivery.

          17.02  Advertisement of a Leased Property.  In the event the parties
                 ----------------------------------                   
hereto have not executed a renewal lease, or agreed to the Extension Term, as to
the Leased Property within twelve (12) months prior to the expiration of the
Term or an Extension Term, as the case may be, then Landlord or its agent shall
have the right to enter such Leased Property at all reasonable times for the
purpose of exhibiting such Leased Property to others and to place upon such
Leased Property for and during the period commencing two-hundred seventy (270)
days prior to the expiration of the Term or an Extension Term, as the case may
be, "for sale" or "for rent" notices or signs.

          17.03  Landlord's Access.  Landlord, or its designated agents or
                 -----------------                                        
contractors, shall have the right to enter upon each  Leased Property, upon
reasonable prior notice to Tenant, for purposes of inspecting the same and
assuring Tenant's compliance with this Lease provided, any such entry by
Landlord shall be subject to all rules, guidelines and procedures prescribed by
Tenant in connection therewith.  Landlord shall not be allowed entry to a Leased
Property unless accompanied by such of Tenant's personnel as Tenant shall
require and which Tenant shall promptly provide.

          17.04  Entire Agreement.  This Lease contains the entire agreement
                 ----------------                                 
between Landlord and Tenant with respect to the subject matter hereof. No
representations, warranties, and agreements have been made by Landlord or Tenant
except as set forth in this Lease.

                                       54
<PAGE>
 
          17.05  Severability.  If any term or provision of this Lease is held
                 ------------                                                 
by Landlord to be invalid or unenforceable as to a Leased Property, such holding
shall not affect the remainder of this Lease as to such Leased Property, or the
validity or enforceability of this Lease as to any other Leased Property, and
the same shall remain in full force and effect, unless such holding
substantially deprives Tenant of the use of such Leased Property or Landlord of
the Rents therefor, in which case this Lease shall forthwith terminate as to
such Leased Property as if by expiration of the Term or an Extension Term, as
the case may be, but shall remain in full force and effect with respect to each
other Leased Property.

          17.06  Captions and Headings.  The captions and headings are inserted
                 ----------------------                               
only as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Lease or the intent of any provision hereof.

          17.07  Governing Law.  This Lease shall be construed under the laws of
                 -------------                                          
the State of Virginia (without application of choice of law provisions).

          17.08  Memorandum of Lease or Certain Rights Under the Lease.         
                 -----------------------------------------------------  
Landlord and Tenant agree that a record of this Lease or of certain rights under
this Lease may be recorded by either party in a memorandum of lease approved by
Landlord and Tenant with respect to each Leased Property. The party recording
such memorandum must bear all costs of such recording.

          17.09  Waiver.  No waiver by Landlord of any condition or covenant
                 ------                                            
herein contained, or of any breach of any such condition or covenant, shall be
held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach thereof
or of any condition or covenant, nor shall the acceptance of Rent by Landlord at
any time when Tenant is in default in the performance or observance of any
condition or covenant herein be construed as a waiver of such default, or of
Landlord's right to terminate this Lease or exercise any other remedy granted
herein on account of such default.

          17.10  Assignment; Binding Effect.  Except as otherwise set forth
                 --------------------------                          
herein, this Lease shall not be assignable by Tenant, without the prior written
consent of Landlord. This Lease will be binding upon and inure to the benefit of
the heirs, successors, personal representatives, and permitted assigns of
Landlord and Tenant.

          17.11  Consents and Approvals.  In each instance in this Lease where
                 ----------------------                                        
the Landlord is required or permitted to give a consent or approval, or to make
a determination, the Landlord's decision and any conditions thereon must be
reasonable under the circumstances. Except as provided in Sections 8.07(d),
13.01 and 13.07, there shall be a presumption that each such decision and any
conditions thereon by Landlord was in fact reasonable, and Tenant shall have the
burden of proof in any attempt to rebut that presumption. With respect to
Sections 8.07(d), 13.01 and 13.07, there shall be a presumption that each such
decision and any conditions thereon by Landlord was in fact unreasonable, and
Landlord shall have the burden of proof in any attempt to rebut that
presumption.

                                       55
<PAGE>
 
          17.12  Single Property.  Throughout the form of this Lease there are
                 ---------------                                              
references to "Leased Properties."  If, in fact, there is only one Leased
Property being leased hereunder, all such references shall, without further
action, be deemed amended to refer solely to such Leased Property and all
provisions relating to Leased Properties, including remedies applicable to only
one Leased Property, shall likewise be amended to the extent necessary, but only
to the extent necessary, to give effect to the fact that there is only one
Leased Property.

          17.13  Modification.  This Lease may only be modified by a writing
                 ------------                                       
signed by both Landlord and Tenant.

          17.14  Incorporation by Reference.  All schedules and exhibits        
                 --------------------------
referred to in this Lease are incorporated herein by reference.

          17.15  No Merger.  As to each Leased Property, the surrender of this
                 ---------                                               
Lease by Tenant or the cancellation of this Lease by agreement of Tenant and
Landlord or the termination of this Lease on account of Tenant's default will
not work a merger, and will, at Landlord's option, terminate any subleases or
operate as an assignment to Landlord of any subleases. Landlord's option under
this paragraph will be exercised by notice to Tenant and all known subtenants of
such Leased Property.

          17.16  Force Majeure.  Landlord, its agents and employees, will not
                 -------------                                           
be liable for any loss, injury, death, or damage (including consequential
damages) to persons, property, or Tenant's Business occasioned by theft, act of
God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition, order of governmental body or authority, fire, explosion, falling
objects, steam, water, rain or snow, leak or flow of water (including water from
the elevator system), rain or snow from any Leased Property or into any Leased
Property or from the roof, street, subsurface or from any other place, or by
dampness or from the breakage, leakage, obstruction, or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning, or lighting
fixtures of any Leased Property, or from construction, repair, or alteration of
any Leased Property or from any acts or omissions of any other occupant or
visitor of any Leased Property, or from the release, emission, discharge,
presence or disposal of any hazardous substance or material on or from any
Leased Property, or from any other cause beyond Landlord's control.

          17.17  Laches.  No delay or omission by either party hereto to 
                 -------                                                
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such right
or power or be construed to be a waiver thereof.

          17.18  Waiver of Jury Trial.  To the extent that there is any claim by
                 --------------------                                  
one party against the other that is not to be settled by arbitration as provided
in Article XIV hereof, Landlord and Tenant waive trial by jury in any action,
proceeding or counterclaim brought by either of them against the other on all
matters arising out of this Lease or the use and occupancy of any Leased
Property (except claims for personal injury or property damage). If Landlord
commences any

                                       56
<PAGE>
 
summary proceeding for nonpayment of Rent, Tenant will not interpose, and waives
the right to interpose, any counterclaim in any such proceeding.

          17.19  Permitted Contests.  Tenant, on its own or on Landlord's behalf
                 -------------------                                     
(or in Landlord's name), but at Tenant's expense, may contest, by appropriate
legal proceedings conducted in good faith and with due diligence, the amount or
validity or application, in whole or in part, of any Imposition or any legal
requirement or insurance requirement or any lien, attachment, levy, encumbrance,
charge or claim provided that: (a) in the case of an unpaid Imposition, lien,
attachment, levy, encumbrance, charge or claim, the commencement and
continuation of such proceedings shall suspend the collection thereof from
Landlord and from the subject Leased Property; (b) neither the subject Leased
Property nor any Rent therefrom nor any part thereof or interest therein would
be in any immediate danger of being sold, forfeited, attached or lost; (c) in
the case of a legal requirement, Landlord would not be in any immediate danger
of civil or criminal liability for failure to comply therewith pending the
outcome of such proceedings; (d) in the event that any such contest shall
involve a sum of money or potential loss in excess of Twenty Five Thousand
Dollars ($25,000), Tenant shall deliver to Landlord and its counsel an opinion
of Tenant's counsel to the effect set forth in clauses (a), (b) and (c), to the
extent applicable; (e) in the case of a legal requirement and/or an Imposition,
lien, encumbrance, or charge, Tenant shall give such reasonable security as may
be demanded by Landlord to insure ultimate payment of the same and to prevent
any sale or forfeiture of a subject Leased Property or the Rent in respect
thereof by reason of such nonpayment or noncompliance; provided, however, the
provisions of this Section shall not be construed to permit Tenant to contest
the payment of Rent (except as to contests concerning the method of computation
or the basis of levy of any Imposition or the basis for the assertion of any
other claim) or any other sums payable by Tenant to Landlord hereunder; (f) in
the case of an insurance requirement, the coverage required by Article IV shall
be maintained; and (g) if such contest be finally resolved against Landlord or
Tenant, Tenant shall, as Additional Rent due hereunder, promptly pay the amount
required to be paid, together with all interest and penalties accrued thereon,
or comply with the applicable legal requirement or insurance requirement.
Landlord, at Tenant's expense, shall execute and deliver to Tenant such
authorizations and other documents as may be reasonably required in any such
contest, and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein. Tenant hereby agrees to indemnify and
hold harmless Landlord, its officers, trustees, employees, shareholders,
affiliates and agents from and against any and all demands, claims, causes of
action, fines, penalties, damages (including punitive and consequential
damages), losses, liabilities (including strict liability), judgments, costs and
expenses (including, without limitation, attorneys' fees, court costs, and the
costs set forth in Section 9.06) that may be incurred in connection with or
arise from any such contest.

          17.20  Construction of Lease.  This Lease has been reviewed by 
                 ---------------------                                  
Landlord and Tenant and their respective professional advisors.  Landlord and
Tenant believe that this Lease is the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in favor
of either Landlord or Tenant or against either Landlord or Tenant merely because
of any party's efforts in preparing such documents.  This lease is intended to
function as a master lease of severals

                                       57
<PAGE>
 
Leased Properies, and, as the circumstances require, the singular shall mean the
plural and the plural shall mean the singular.

          17.21  Counterparts.  This Lease may be executed in duplicate
                 -------------                                         
counterparts, each of which shall be deemed an original hereof or thereof.

          17.22  Relationship of Landlord and Tenant.  The relationship of
                 -----------------------------------                      
Landlord and Tenant is the relationship of lessor and lessee.  Landlord and
Tenant are not partners, joint venturers, or associates.

               {remainder of this page left intentionally blank}

                                       58
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Lease or
caused the same to be executed by their respective duly authorized officers as
of the date first set forth above.

                       CAPITAL AUTOMOTIVE L.P.
                       a Delaware limited partnership

                       By:    Capital Automotive REIT,
                              a Maryland real estate investment trust,
                              its General Partner

                              By: /s/ Thomas D. Eckert
                              Name:   Thomas D. Eckert
                              Title:  President and Chief Executive Officer

                       GOOD NEWS SALISBURY, INC.
 
 

                       By: /s/ Roy L. Meyers, Jr.
                       Name:   Roy L. Meyers, Jr.
                       Title:  President

                                       59
<PAGE>
 
SCHEDULE A (PAGE 1 OF 2)


     Seller-Defined Reference
- -------------------------------------

<TABLE>
<CAPTION>
Property                                                                    Tax Account #           
 Number            Name                      Street Address          Tax Map, Grip, Parcel, Lots    
- --------  --------------------------    ------------------------    -----------------------------   
<C>       <S>                           <C>                         <C>                             
   1      Oldsmobile/Cadillac/          2007 N. Salisbury Blvd.     05-029953                       
          GMC sales center              Salisbury, MD 21801         TM 29, G 23, P 12, Lots 1-2     
                                                                                                    
   2      Olds/Cad/GMC lots             2007 N. Salisbury Blvd.     05-080525                       
                                        Salisbury, MD 21801         TM 29, G 23, P 13, Lots 26-28   
                                                                                                    
   3      Olds/Cad/GMC lots             2007 N. Salisbury Blvd.     05-080517                       
                                        Salisbury, MD 21801         TM 29, G 23, P 13, Lot 29       
                                                                                                    
   4      Olds/Cad/GMC lots             2007 N. Salisbury Blvd.     05-080533                       
                                        Salisbury, MD 21801         TM 29, G 23, P 13, Lot 29       
                                                                                                    
   5      Honda                         2013 N. Salisbury Blvd.     05-807783                       
                                        Salisbury, MD 21801         TM 29, G 23, P 267 Par-A        
                                                                                                    
   6      Toyota/Mercedes/A             2015 N. Salisbury Blvd.     05-074835                       
                                        Salisbury, MD 21801         TM 29, G 23, P 267 Par-A        
                                                                                                    
   7      Toyota/Mercedes I             2015 N. Salisbury Blvd.     05-074843                       
                                        Salisbury, MD 21801         TM 29, G 23, P 267              
                                                                                                    
   8      Toyota/Mercedes II            2015 N. Salisbury Blvd.     05-067642                       
                                        Salisbury, MD 21801         TM 29, G 23, P 404              
                                                                                                    
   9      Mazda-Hyundai                 2010 N. Salisbury Blvd.     09-025828                       
                                        Salisbury, MD 21801         TM 29, G 22, P 385              
                                                                                                    
   10     Nissan                        2012 N. Salisbury Blvd.     09-018441                       
                                        Salisbury, MD 21801         TM 29, G 23, P 386              
                                                                                                    
   11     Used Car Sales Center I       2011 N. Salisbury Blvd.     05-062721                       
                                        Salisbury, MD 21801         TM 29, G 23, P 13, Lots 7-8     
                                                                                                    
   12     Used Car Sales Center II      2011 N. Salisbury Blvd.     05-062748                       
                                        Salisbury, MD 21801         TM 29, G 23, P 13, Lots 24-25   
                                                                                                    
   13     Body Shop - I                 2010A N. Salisbury Blvd.    09-025901                       
                                        Salisbury, MD 21801         TM 29, G 22, P 385               

   14     Body Shop - II                2010B N. Salisbury Blvd.    09-070443
                                        Salisbury, MD 21801         TM 29, G 16, P 113
</TABLE>

                                       60
<PAGE>
 
SCHEDULE A (PAGE 2 OF 2)



             Base
            Annual
             Rent
            Amount
            ------

            469,920
            =======


NOTE: In the event the Base Annual Rent must be adjusted pursuant to this Lease
- ----                                                                          
      because of its termination as to a Property, the parties shall attempt in
      good faith to agree upon the adjustment. If after thirty (30) days they
      are unable to agree upon such adjustment, it shall be determined by
      valuing the terminated Property and all of the Properties pursuant to the
      provisions of Section 16.02(b) and pro rating the Base Annual Rent in
      proportion to such values. In the event the termination is pursuant to
      Section 13.07, Tenant shall pay all of the costs of appraisals.

                                       61
<PAGE>
 
SCHEDULE A

 

     Seller-Defined Reference
- -----------------------------------
 
Property                                                   Tax Account #
 Number        Name           Street Address       Tax Map, Grid, Parcel, Lots
 ------    -----------    --------------------     ---------------------------
 
  P1       Pontiac-Buick  2016 N. Salisbury Blvd.  09-014985
                          Salisbury, MD 21801      TM 29, G 22, P 195

                                       62
<PAGE>
 
SCHEDULE B



[ Scheduled Exceptions as agreed upon in Real Property Purchase Agreement ]

                                       63
<PAGE>
 
SCHEDULE B



[ Scheduled Exceptions as agreed upon in Real Property Purchase Agreement ]

                                       64
<PAGE>
 
SCHEDULE 12.02


1.   Computer services and maintenance contract with Reynolds & Reynolds
     (approx. $120,000 per year).
2.   Buy-out agreement of former Good News Salisbury, Inc. shareholder (approx.
     $300,000 left to pay).

                                       65
<PAGE>
 
SCHEDULE 12.03


1.   Agreement letter from Evans Builders, Inc. dated July 14, 1997 for
     renovations to the Toyota/Mercedes facility.

                                       66
<PAGE>
 
EXHIBIT 5.07

1.   Phase I and II report on Leased Properties 6, 7, and 8 (Toyota/Mercedes)
     prepared by John Hynes & Associates dated January 24, 1997.

2.   Phase I and II report on Leased Properties 9 and 14 (Mazda-Hyundai and Body
     Shop I) prepared by John Hynes & Associates dated January 19, 1995.

                                       67
<PAGE>
 
                                 EXHIBIT 2.02
                                 ------------


                          PAYMENT ACCOUNT INFORMATION

     Wiring instructions for the Landlord's operating account are as follows:

     FIRST UNION NATIONAL BANK OF VIRGINIA
     CHARLOTTE, NC
     ABA# 051400549

     For Credit to:  CAPITAL AUTOMOTIVE REIT, Operating Account
            Account # 2050000478240

<PAGE>
 
                                 EXHIBIT 2.04
                                 ------------

                          BASE ANNUAL RENT ADJUSTMENT

     The Base Annual Rent shall be increased, effective as of the commencement
of the second Lease Year and as of each subsequent Lease Year by an amount equal
to the Initial Base Rent multiplied by one hundred percent (100%) of the change
in the Index during the immediately preceding one (1) year period; provided,
however, that, in the event that the above-calculated adjustment is greater than
two percent (2%), such adjustment shall be equal to two percent (2%).
<PAGE>
 
                                 EXHIBIT 15.02
                                 -------------

                  SUBORDINATION AND NON-DISTURBANCE AGREEMENT
                  -------------------------------------------

     THIS AGREEMENT is made as of this ___ day of __________, 1997, among
_____________, a ___________ organized under the laws of the State of
_____________ ("Lender"), __________________ ("Tenant"), and CAPITAL AUTOMOTIVE
L.P., a Delaware limited partnership ("Landlord").

                                  WITNESSETH:
                                  -----------

     WHEREAS, Landlord and Tenant have entered into a certain Lease, dated
____________________ , which lease and all amendments, modifications,
assignments, subleases and other agreements related thereto are attached hereto
as Exhibit A and incorporated herein by this reference (collectively, the
   ---------
"Lease"), which Lease relates to the premises described therein (the
"Premises"), and

     WHEREAS, Lender has made or has committed to make a first mortgage loan to
Landlord in the principal amount not to exceed $_________ (the "Loan"), the Loan
being secured by a mortgage, deed of  trust or security deed (collectively, the
"Mortgage") and an assignment(s) of leases and rents from Landlord to Lender
covering the Premises; and

     WHEREAS, Tenant has agreed that the Lease shall be subject and subordinate
to the Mortgage held by Lender, provided Tenant is assured of continued
occupancy of the Premises under the terms of the Lease;

     NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, the sum of Ten Dollars ($10.00) and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
and notwithstanding anything in the Lease to the contrary, it is hereby agreed
as follows:

     1.   SUBORDINATION OF LEASE. Lender, Tenant and Landlord do hereby covenant
          ----------------------                                        
and agree that the Lease with all rights, options, liens and charges created
thereby, is and shall continue to be subject and subordinate in all respects to
the Mortgage and to any renewals, modifications, consolidations, replacements
and extensions thereof and to all advancements made thereunder.

     2.   NONDISTURBANCE OF TENANT. Lender does hereby agree with Tenant that,
          ------------------------                                        
in the event Lender becomes the owner of the Premises by foreclosure, conveyance
in lieu of foreclosure or otherwise, so long as Tenant complies with and
performs its obligations under the Lease, (a) Lender will take no action which
will interfere with or disturb Tenant's possession or use of the Premises or
other rights under the Lease, and (b) the Premises shall be subject to the Lease
and Lender shall recognize Tenant as the tenant of the Premises for the
remainder of the terms of the Lease in accordance with the provisions thereof,
provided, however, that Lender shall not be subject to any offsets or defenses
which Tenant might have against any prior landlord except those which arose
under the provisions 
<PAGE>
 
of the Lease out of such landlord's default and accrued after Tenant had
notified Lender and given Lender the opportunity to cure same as hereinbelow
provided, nor shall Lender be liable for any act or omission of any prior
landlord, nor shall Lender be bound by any rent or additional rent which Tenant
might have paid for more than the current month to any prior landlord nor shall
it be bound by any amendment or modification of the Lease made without its
consent.

     3.   ATTORNMENT BY TENANT.  Tenant does hereby agree with Lender that, in
          --------------------                                                
the event Lender becomes the owner of the Premises by foreclosure, conveyance in
lieu of foreclosure or otherwise, then Tenant shall attorn to and recognize
Lender as the landlord under the Lease for the remainder of the term thereof,
and Tenant shall perform and observe its obligations thereunder, subject only to
the terms and conditions of the Lease.  In such event, Lender shall not be
liable for any act or omission of any prior landlord, liable for return of the
security deposit unless same was actually delivered to Lender, bound by any
amendment to or assignment of the Lease made without its consent, bound by any
rent paid more than thirty (30) days in advance, or be subject to any set-off or
defense Tenant might have had against any prior landlord.  Tenant further
covenants and agrees to execute and deliver upon request of Lender or its
assigns, an appropriate Agreement of Attornment to Lender and any subsequent
titleholder of the Premises.

     4.   ACKNOWLEDGMENT OF ACQUISITION RIGHTS. Lender acknowledges that Tenant
          ------------------------------------                          
has certain purchase rights under the lease. So long as Tenant complies with the
provisions of the Lease, Lender acknowledges that Tenant may exercise such
rights and Lender will honor such rights so long as Tenant pays the acquisition
price to Lender or otherwise obtains a release from Lender.

     5.   CURATIVE RIGHTS, MODIFICATION OF LEASE, AND ADVANCE PAYMENT OF RENT.
          -------------------------------------------------------------------  
So long as the Mortgage remains outstanding and unsatisfied:

     (a)       Tenant will mail or deliver to Lender, at the address and in the
manner hereinbelow provided, a copy of all notices permitted or required to be
given to the Landlord by Tenant under and pursuant to the terms and provisions
of the Lease. At any time before the rights of the Landlord shall have been
forfeited or adversely affected because of any default of the Landlord, or
within the time permitted the Landlord for curing any default under the Lease as
therein provided, Lender may, but shall have no obligation to, pay any taxes and
assessments, make any repairs and improvements, make any deposits or do any
other act or thing required of the Landlord by the terms of the Lease; and all
payments so made and all things so done and performed by Lender shall be as
effective to prevent the rights of the Landlord from being forfeited or
adversely affected because of any default under the Lease as the same would have
been if done and performed by the Landlord.

     (b)       Tenant will not consent to the modification of the Lease, nor to
the termination thereof, without the prior written consent of Lender, such
consent not to be unreasonably withheld or delayed, nor will Tenant pay any rent
under the Lease more than thirty (30) days in advance.

                                      -2-
<PAGE>
 
     6.   CONSENT TO ASSIGNMENT. Tenant acknowledges that Landlord will execute
          ---------------------                                         
and deliver to Lender an assignment of the Lease as security for the Loan, and
Tenant hereby expressly consents to such assignment.

     7.   LIMITATION OF LIABILITY.  Lender shall have no liability whatsoever
          -----------------------                                            
hereunder prior to becoming the owner of the Premises; and Tenant agrees that if
Lender becomes the owner of the Premises, Tenant shall look solely to the estate
or interest of Lender in the Premises for satisfaction of  any obligation which
may be or become owing by Lender to Tenant hereunder or under the Lease.

     8.   LANDLORD AND TENANT CERTIFICATIONS. Landlord and Tenant hereby certify
          ----------------------------------                             
to Lender that the Lease has been duly executed by Landlord and Tenant and is in
full force and effect, that the Lease and any modifications and amendments
specified herein are a complete statement of the agreement between Landlord and
Tenant with respect to the leasing of the Premises, and the Lease has not been
modified or amended except as specified herein; that to the knowledge of
Landlord and Tenant, no party to the Lease is in default thereunder; that no
rent under the Lease has been paid more than thirty (30) days in advance of its
due date; and that Tenant, as of this date, has no charge, lien or claim of
offset under the Lease, or otherwise, against the rents or other charges due or
to become due thereunder.

     9.   TENANT ESTOPPEL CERTIFICATIONS.  With the knowledge that Lender, as
          ------------------------------                                     
beneficiary of the mortgage encumbering the premises, will place substantial
reliance thereon in connection with the closing and funding of the Loan, Tenant
hereby makes the following certifications:

     (a)       The term of the Lease commenced on ________, 19__, and will
terminate on ______________.

     (b)       The Lease, as described above, has not been modified, amended,
assigned or subleased except as set forth in Exhibit A attached hereto, and is
                                             ---------
in good standing and in full force and effect.

     (c)       The Lease provides for rental payments over the term of the
Lease, all as specifically provided in the Lease. No rent under the Lease has
been paid more than thirty (30) days in advance of the due date of same. For the
year ____, monthly payments, which are due on the first (1st) day of each month,
are as follows:


Basic Rent -      $________

     Payment of the above amount was timely made for the months of ______,
___and _____, ____, and the next payment of the above amount will be due on
________, ____.  In addition to the above

                                      -3-
<PAGE>
 
amount, certain additional sums are due to Landlord from Tenant under the Lease,
all as specifically set forth in the Lease.

     (d)    Tenant has paid a security deposit under the Lease.

     (e)    To Tenant's knowledge there are no defaults by Landlord under the
Lease and there are no existing circumstances which, with the passage of time,
or notice, or both, would give rise to a default under the Lease.

     (f)    Tenant has accepted and is occupying the Premises, and Landlord has
no unperformed obligation under the Lease to construct any improvements for the
Tenant related to the Premises.

     (g)    Tenant has no charge, lien, claim of set-off or defense against
rents or other charges due or to become due under the Lease or otherwise under
any of the terms, conditions, or covenants contained therein.

     (h)    Tenant has received no notice from any insurance company of any
defects or inadequacies in the Premises or in any part thereof which would
adversely affect the insurability of the Premises.

     (i)    Except as provided in the Lease, Tenant does not have any right or
option to purchase the Premises.

     (j)    Except as provided in the Lease, Tenant does not have any rights or
options to renew the Lease or to lease additional space in any building owned by
the Landlord.

     10.    TENANT COVENANTS.
            ---------------- 

     (a)    From and after the date hereof, Tenant will not pay any rent under
the Lease more than thirty (30) days in advance of its due date.

     (b)    From and after the date hereof, so long as there shall be any
assignment of Landlord's interest in the Lease to Lender, or any successor
thereto, Tenant will not: consent to the modification of the Lease nor to the
termination thereof without the prior written consent of the Lender or any
successor holder of the Loan or the Mortgage which consent shall not be
unreasonably withheld or delayed (either of them being called "Mortgagee"), nor
seek to terminate the Lease by reason of any act or omission of Landlord until
Tenant shall have given written notice of such act or omission to such
Mortgagee's last address furnished Tenant) and until a reasonable period of time
shall have elapsed following the giving of such notice, during which period the
Mortgagee shall have the right, but not the obligation, to remedy such act or
omission.

                                      -4-
<PAGE>
 
     (c)    Upon written notice of the default by Landlord under any of the loan
documents held by Mortgagee and assignment of the Landlord's interest under the
Lease by Landlord to Mortgagee, Tenant, if Mortgagee so requests, will recognize
such Mortgagee as the Landlord under the Lease and will thereafter pay rent and
other sums to Mortgagee (or to the party designated by the Mortgagee in writing)
in accordance with the terms of the Lease, and, in such event, such Mortgagee
will not be liable for any act or omission of any prior lessor, liable for
return of the security deposit unless same was actually delivered to Mortgagee,
bound by any amendment to or assignment of the Lease made without its consent,
bound by any rent paid more than thirty (30) days in advance, or be subject to
any set-off or defense Tenant might have had against any prior lessor.

     11.    NOTICES.  Unless and except as otherwise specifically provided
            -------                                                       
herein, any and all notices, elections, approvals, consents, demands, requests
and responses thereto ("Communications") permitted or required to be given under
this Agreement shall be in writing, signed by or on behalf of the party giving
the same, and shall be deemed to have been properly given and shall be effective
upon the earlier of receipt thereof or three (3) days after deposit thereof in
the United States mail, postage prepaid, certified with return receipt
requested, to the other party at the address of such other party set forth
hereinbelow or at such other address within the continental United States as
such other party may designate by notice specifically designated as a notice of
change of address and given in accordance herewith; provided, however, that the
time period in which a response to any Communication must be given shall
commence on the date of receipt thereof, and provided further that no notice of
change of address shall be effective with respect to Communications sent prior
to the time of receipt of such change.  Receipt of Communications hereunder
shall occur upon actual delivery (whether by mail, facsimile transmission,
messenger, courier service, or otherwise) to an individual party or to an
officer, member, or general or limited partner of a party or to any agent or
employee of such party at the address of such party set forth hereinbelow,
subject to change as provided hereinabove.  An attempted delivery in accordance
with  the foregoing, acceptance of which is refused or rejected, shall be deemed
to be and shall constitute receipt; and an attempted delivery in accordance with
the foregoing by mail, messenger, or courier service (whichever is chosen by the
sender) which is not completed because of changed address of which no notice was
received by the sender in accordance with this provision prior to the sending of
the Communication shall also be deemed to be and constitute receipt.  Any
Communication, if given to Lender, must be addressed as follows, subject to
change as provided hereinabove:

 
            __________________________
            __________________________

and, if given to Tenant, must be addressed as follows, subject to change as
provided hereinabove:

            __________________________
            __________________________
            __________________________

                                      -5-
<PAGE>
 
and, if given to Landlord, must be addressed as follows, subject to change as
provided hereinabove:

                  Capital Automotive, L.P.

                  _________________________
                  _________________________

     12.    MISCELLANEOUS.  This Agreement shall be binding upon and inure to
            -------------                                                    
the benefit of the parties hereto and their respective heirs, legal
representatives, successors, successors-in-title and assigns.  When used herein,
the term "Landlord" or "landlord" refers to Landlord and to any successor to the
interest of Landlord under the Lease.

                     [THIS SPACE INTENTIONALLY LEFT BLANK]

                                      -6-
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first above written.

                                    LENDER:

Signed, sealed and delivered
in the presence of:                        By:
                              Title: 
                                    
________________________                   ____________________________ 
Witness                                    (CORPORATE SEAL)
                                    
                                    
                                    
                                    
                TENANT:             
                                    
Signed, sealed and delivered        
in the presence of:                        By:
                              Title:
                                    
________________________                   ____________________________ 
Witness                                    (CORPORATE SEAL)
                                    
                LANDLORD:           
                                    
Signed, sealed and delivered        
in the presence of:                        By:
                              Title: 

________________________                   ____________________________ 
Witness                                    (PARTNERSHIP SEAL)

                                      -7-
<PAGE>
 
                                   EXHIBIT A

Lease Dated __________ from ________________ to _______________ with Exhibit A
attached, all in the form attached hereto as Attachment to Exhibit A.
                                             ------------------------

                                      -8-
<PAGE>
 
County of  ________________________:
                                 SS:
State of __________________________:

     This is to certify that on this ____ day of ________, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Lender in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Lender.


                            ____________________________
                            Notary Public

                            My commission expires:

                                      -9-
<PAGE>
 
County of  ________________________:
                                 SS:
State of __________________________:

     This is to certify that on this ____ day of _________, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Tenant in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Tenant.

                            ____________________________
                            Notary Public

                            My commission expires:

                                     -10-
<PAGE>
 
County of ______________________
                             SS:
State of _______________________

     This is to certify that on this ____ day of _______, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Landlord in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Landlord.

                            _____________________________
                            Notary Public

                            My commission expires:

                                     -11-
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
                         1925 North Lynn Street, #306
                          Arlington, Virginia  22209


                               January 10, 1998


Good News Salisbury, Inc.
Attention: Roy L. Meyers, Jr.
2013 N. Salisbury Blvd.
Salisbury, Maryland 21801

Dear Mr. Meyers:

     We hereby agree that the escrow of Impositions pursuant to Section 3.04 of
the Lease Agreement is irrevocably waived.

     We hereby further agree that the joint and several indemnity to be provided
by Roy L. Meyers, Jr. and Charlotte Meyers in Section 11.2.3(ii) under each of
the Real Property Purchase Agreements shall not exceed, in the aggregate under
both Agreements together, $2,000,000, less the amounts, if any, paid by the
Sellers that counts against the obligation of Roy L. Meyers, Jr. and Charlotte
Meyers under Section 11.2.3 of both Agreements together.

     We acknowledge that you would not enter into the Real Property Purchase
Agreement if we had not agreed to the waiver of the escrow of Impositions and
the agreement to aggregate the joint and several indemnity set forth above.  The
waiver pursuant to this letter shall be binding upon us and our successors and
assigns.


                                 Capital Automotive L.P.


                                 By:  Capital Automotive REIT,
                                      its General Partner


                                 By: /s/ Thomas D. Eckert
                                         Thomas D. Eckert,
                                         President and Chief Executive Officer

                                     -12-

<PAGE>
 
                                 EXHIBIT 10.31
                    (Form of Good News Guaranty Agreement)

                     GUARANTY AND SUBORDINATION AGREEMENT


     THIS GUARANTY AND SUBORDINATION AGREEMENT (this "Agreement"), effective as
of the [10th] day of [January], 1998, by Good News Salisbury, Inc., a Maryland
corporation ("Guarantor"), in favor of Capital Automotive, L.P., a Delaware
limited partnership ("Landlord").

                                  WITNESSETH:
                                  ---------- 

     WHEREAS, Landlord has this day accepted the assignment of and has assumed a
lease (the "Lease") of certain Properties identified on Schedule A hereto
(individually a "Property" and collectively the "Properties") with Price Buick-
Pontiac, Inc. and The Price Organization ("Tenant"), this Agreement being
attached to the Lease;

     WHEREAS, in a related transaction Landlord is leasing certain other real
estate to Guarantor; and

     WHEREAS, Landlord has required, as a condition to its leasing certain other
real estate to Guarantor and to its accepting the assignment and assumption of
the Lease, Guarantor to be a guarantor of each and every obligation imposed upon
Tenant by the Lease.

     NOW, THEREFORE, to induce Landlord to accept the assignment and to assume
the Lease and in consideration of the foregoing premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Guarantor, for itself, its successors and assigns, hereby
covenants and agrees for the benefit of Landlord, as follows:

     1.  Guaranty.  Guarantor does hereby unconditionally and irrevocably
         --------                                                        
guarantee to Landlord the full, complete and timely performance of all
obligations imposed on Tenant by the terms of the Lease, including, but  not
limited to, the full, complete and timely payment of rent and all other sums due
by Tenant under the Lease, and the payment as required by the Lease of all
damages to Landlord which may result from Tenant's breach of any provision of
the Lease, including, but not limited to, those relating to damage to any
Property or the leased premises.

     2.  Guaranty of Payment and Performance.  Guarantor acknowledges and agrees
         -----------------------------------                                    
that this is a guaranty of payment and performance and not mere collection.  The
liability of Guarantor under this Agreement shall be direct and immediate and
not conditional or contingent upon the pursuit of any remedies against Tenant or
any other person or entity. Guarantor waives any right to require that an action
be brought against Tenant or any other person or entity.  In the event, on
account of the Bankruptcy Reform Act of 1978, as amended, or
<PAGE>
 
any other debtor relief law (whether statutory, common law, case law or
otherwise) of any jurisdiction whatsoever, now or hereafter in effect, which may
be or become applicable, Tenant shall be relieved of the Lease or any debt,
obligation or liability as provided in the Lease, Guarantor shall nevertheless
be fully liable for the complete and timely performance of all obligations
imposed on Tenant by the Lease throughout the entire term of the Lease, all to
the same extent as if Guarantor had been the original tenant thereunder and the
Lease shall be deemed unaffected by any such relief granted to Tenant.  In the
event of a default under the Lease which is not cured within any applicable
grace or cure period, Landlord shall have the right to enforce its rights,
powers and remedies thereunder or hereunder, in any order to the maximum extent
permitted by law, and all rights, powers and remedies provided thereunder or
hereunder or by law or in equity.  If the obligations guaranteed hereby are
partially performed, paid or discharged by reason of the exercise of any of the
remedies available to Landlord, this Agreement shall nevertheless remain in full
force and effect, and Guarantor shall continue to be liable for all remaining
obligations guaranteed hereby, even though any rights which Guarantor may have
against Tenant may be destroyed or dismissed by the exercise of any such remedy.

     3.  Waivers by Guarantor.  To the extent permitted by law, Guarantor hereby
         --------------------                                                   
waives and agrees not to assert or take advantage of:

         (a)   Any right to require Landlord to proceed against Tenant or any
other person or entity or to proceed against or exhaust any security held by
Landlord at any time or to pursue any other remedy in Landlord's power or under
any other agreement before proceeding against Guarantor;

         (b)   Any defense that may arise by reason of the incapacity, lack of
authority, death or disability of any other person or persons or the failure of
Landlord to file or enforce a claim against the estate (in administration,
bankruptcy or any other proceeding) of any other person or persons:

         (c)   Any defense based upon an election of remedies by Landlord;

         (d)   Any right or claim or right to cause a marshaling of the assets
of Tenant or Guarantor;

         (e)   Any invalidity, irregularity or unenforceability, in whole or in
part, of any one or more provisions of the Lease;

         (f)   Any modification of the Lease or of any obligation of Tenant
thereunder by amendments to the Lease, by waivers granted by Landlord or by
operation of law or by action of any court, whether pursuant to the Bankruptcy
Reform Act of 1978, as amended, or any other debtor relief law (whether
statutory, common law, case law or otherwise) of any jurisdiction whatsoever,
now or hereafter in effect, or otherwise, except for modifications of the

                                      -2-
<PAGE>
 
Lease made by Landlord relating to an extension of the Lease term (including
permitting the Tenant to holdover), the increase of the Minimum Rent or an
assignment of the Lease.

     4.  Subordination.  Guarantor and those parties signing below for the
         -------------                                                    
purpose of being bound by this Section 4 (collectively, "Section 4 Signers")
hereby unconditionally and irrevocably subordinate (i) all payments due or to
become due by Tenant to the Section 4 Signers, or any of them, by reason of any
and all debts or other obligations, including the obligation to pay salaries or
other compensation (collectively "Debt Payments") and (ii) the receipt of all
dividends or other distributions of any kind or nature (collectively,
"Distributions") to the payment of all sums due or to become due by Tenant to
Landlord under the Lease, including the payment of Rent and all damages due by
reason of Tenant's breach of the Lease; provided, however, that for so long as
there shall be no existing Event of Default under the Lease, after the payment
of each monthly installment of Rent, the Section 4 Signers shall be entitled to
receive Debt Payments due for such month.
 
     5.  Default by Tenant.  Landlord agrees to delive to Guarantor any notice
         -----------------                                                    
of default delivered to Tenant.  Guarantor shall have the rights given to Tenant
under the Lease to cure such default.  In the event Guarantor so cures,
Guarantor shall have the right to proceed against Tenant to collect for any such
cure.  Landlord agrees that if it is entitled to trigger the commencement of
that certain lease by and between Capital Automotive, L.P. and Good News
Salisbury, Inc. dated January 10, 1998 referred to in Section 1.02 of such lease
as a standby lease, Landlord will take such actions as will permit Guarantor to
pursue Tenant for any liability that Tenant would have to Guarantor if Guarantor
were the landlord under the Lease, provided that no such actions to be
undertaken by Landlord will impair Landlord's rights under the Lease to pursue
such remedies against the Tenant as Landlord may have under the Lease.

     6.  Covenants of Landlord.  Landlord hereby covenants that it shall not
         ---------------------                                              

         (a)   increase the Minimum Rent under the Lease;

         (b)   agree to an extension of the Lease term (including permitting the
Tenant to holdover); or

         (c)   permit Tenant to assign its rights and obligations under the
Lease.

     7.  General Provisions.
         ------------------ 

         (a)   Survival. This Agreement shall be deemed to be continuing in
               --------                                                      
nature and shall remain in full force and effect and shall survive the exercise
of any remedy by Landlord under the Lease;

         (b)   No Subrogation; No Recourse Against Landlord. Notwithstanding the
               --------------------------------------------
satisfaction by Guarantor of any liability hereunder, Guarantor's rights of
subrogation,

                                      -3-
<PAGE>
 
contribution, reimbursement or indemnity, if any, or any right of recourse to or
with respect to the assets or property of Tenant, shall be subject and
subordinate to the rights of Landlord. Guarantor expressly agrees not to
exercise any and all rights of subrogation against Landlord.

         (c)   Entire Agreement; Amendment; Severability. This Agreement
               -----------------------------------------
contains the entire agreement between the parties respecting the matters herein
set forth and supersedes all prior agreements, whether written or oral, between
the parties respecting such matters. Any amendments or modifications hereto, in
order to be effective, shall be in writing and executed by Landlord and
Guarantor. A determination that any provision of this Agreement is unenforceable
or invalid shall not affect the enforceability or validity of any other
provision, and any determination that the application of any provision of this
Agreement to any person or circumstance is illegal or unenforceable shall not
affect the enforceability or validity of such provision as it may apply to any
other persons or circumstances.

         (d)   Governing Law: Binding Effect; Waiver of Acceptance. This
               ---------------------------------------------------           
Agreement shall be governed by and construed in accordance with the laws of the
State of Virginia without regard to conflicts of laws principles thereof. This
Agreement shall bind Guarantor, it successors and assigns (but in the event of
an assignment, Guarantor shall not be relieved of its obligations hereunder),
and shall inure to the benefit of Landlord, its successors and assigns.
Guarantor hereby waives any acceptance of this Agreement by Landlord and this
Agreement shall immediately be binding upon Guarantor.

         (e)   Notice. All notices, demands, requests or other communications to
               ------                                                         
be sent by one party to the other hereunder or required by law shall be in
writing and shall be deemed to have been validly given or served by delivery of
the same in person to the intended addressee, or certified mail or by depositing
the same with Federal Express or another reputable private courier service for
next business day delivery to the intended addressee at its address set forth in
the last section of this Agreement or at such other address as may be designated
by such party as herein provided. All notices, demands and requests shall be
effective upon such personal delivery, or one (1) business day after being
deposited with the private courier service, or two (2) business days after being
deposited in the United States mail as required above. Rejection or other
refusal to accept or the inability to deliver because of changed address of
which no notice was given as herein required shall be deemed to be receipt of
the notice, demand or request sent. By giving to the other party hereto at least
seven (7) days' prior written notice thereof in accordance with the provisions
hereof, each party shall have the right from time to time to change their
respective addresses and each shall have the right to specify as its address any
other address within the United States of America.

         (f)   No Waiver; Time of Essence. The failure of either party to
               --------------------------
enforce any of the respective rights or remedies hereunder, or to promptly
enforce any such rights or remedies, shall not constitute a waiver thereof nor
give rise to any estoppel against such party nor excuse any of the parties
hereto from their respective obligations hereunder. Any waiver of such right or
remedy must be in writing and signed by the party to be bound and must expressly
state

                                      -4-
<PAGE>
 
that such right or remedy has been or thereby is waived.  This Agreement is
subject to enforcement at law or in equity, including actions for damages or
specific performance.  Time is of the essence hereof.

         (g)   Captions for Convenience. The captions and headings of the
               ------------------------
section and paragraphs of this Agreement are for convenience of reference only
and shall not be construed in interpreting the provisions hereof.

         (h)   Attorney's Fees. In the event it is necessary for Landlord to
               ---------------
retain the services of an attorney or any other consultants in order to enforce
this Agreement, or any portion hereof, Guarantor shall promptly pay to Landlord
any and all costs and expenses, including, without limitation, attorney's fees,
incurred by Landlord as a result thereof and such costs, fees and expenses shall
be included in the costs of the case to the extent the Landlord wins the issue
under contest.

         (i)   Successive Actions. Separate and successive actions may be
               ------------------
brought hereunder to enforce any of the provisions hereof at any time and from
time to time. No action hereunder shall preclude any subsequent action, and
Guarantor hereby waives any covenants to the maximum extent permitted by law not
to assert any defense in the nature of splitting of causes of action or merger
of judgments.

         (j)   Reliance.  Landlord would not enter into the Lease without this
               --------                                                       
Agreement. Accordingly, Guarantor intentionally, irrevocably and unconditionally
enters into the covenants and agreements as set forth above and understand that,
in reliance upon and in consideration of such covenants and agreements, the
Lease has been made.

 
     IN WITNESS WHEREOF, Guarantor has executed this Agreement under seal as of
the day and year first above written.

                                             GUARANTOR:

ATTEST/WITNESS:                              GOOD NEWS SALISBURY, INC.

/s/ David A. Vorhis                          By: /s/ Roy L. Meyers, Jr.
Name:  David A. Vorhis                       Name:  Roy L. Meyers, Jr.
                                             Title:  President

                                      -5-

<PAGE>
 
                                 EXHIBIT 10.32


                            CAPITAL AUTOMOTIVE L.P.
                            -----------------------

                        REAL PROPERTY PURCHASE AGREEMENT
                        --------------------------------



                       Kline Chevrolet Sales Corporation



                                January 12, 1998
<PAGE>
 
                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                           Page 
 
<C>     <S>                                                              <C>
I.      PURCHASE AND SALE................................................  -1-
            1.1   Certain Definitions....................................  -1-
            1.2   Agreement to Purchase and Sell.........................  -2-
            1.3   Encumbrances...........................................  -2-
            1.4   Purchase Price.........................................  -2-
            1.5   Capitalized Terms......................................  -3-
                                                                             
II.     OPERATION OF PROPERTY THROUGH CLOSING............................  -3-
            2.1   Business Practice......................................  -3-
            2.2   No Sale or Encumbrance.................................  -3-
            2.3   Leases, Service Contracts and Management Contracts.....  -3-
            2.4   Termination of Leases; New Company Leases..............  -4-
            2.5   Compliance.............................................  -4-
            2.6   Notice of Inaccuracy or Incompleteness.................  -4-
            2.7   Access.................................................  -4-
            2.8   Insurance..............................................  -4-
            2.9   Fulfillment of Obligation..............................  -4-
            2.10  Financial Statements and Reports.......................  -5-
                                                                             
III.    STATUS OF TITLE TO PROPERTY......................................  -5-
            3.1   State of Title.........................................  -5-
            3.2   Preliminary Evidence of Title..........................  -5-
            3.3   Title Defects..........................................  -7-
                                                                             
IV.     CLOSING PRORATIONS AND ADJUSTMENTS...............................  -7-
            4.1   Prorations and Adjustments.............................  -7-
                                                                             
V.      CLOSING..........................................................  -8-
            5.1   Closing Date...........................................  -9-
            5.2   Closing Documents......................................  -9-
            5.3   Conditions to the Partnership's Obligation to Close.... -12-
            5.4   Conditions to the Seller's Obligation to Close......... -13-
            5.5   Transaction Costs...................................... -14-
                                                                             
VI.     CASUALTY LOSS AND CONDEMNATION................................... -14-
            6.1   Casualty............................................... -15-
            6.2   Condemnation or Taking................................. -15-

</TABLE> 
                                     -ii-
<PAGE>
 
<TABLE> 

<C>     <S>                                                               <C> 
VII.    REPRESENTATIONS AND WARRANTIES OF THE SELLERS.................... -15-
             7.1  Organization........................................... -15-
             7.2  Authority.............................................. -15-
             7.3  Interest in Properties................................. -16-
             7.4  No Defaults............................................ -16-
             7.5  No Litigation; No Condemnation......................... -17-
             7.6  No Violation........................................... -17-
             7.7  Required Obligations................................... -18-
             7.8  Condition of Properties................................ -18-
             7.9  Warranties............................................. -18-
             7.10 Utilities.............................................. -18-
             7.11 Zoning................................................. -18-
             7.12 Improvements........................................... -18-
             7.13 Environmental Matters.................................. -18-
             7.14 Insurance.............................................. -21-
             7.15 Compliance............................................. -21-
             7.16 Leases................................................. -21-
             7.17 Service Contracts; Management Contracts................ -22-
             7.18 Permits................................................ -23-
             7.19 [Intentionally Omitted]................................ -23-
             7.20 Tax Matters............................................ -23-
             7.21 Taxes.................................................. -23-
             7.22 Special Filings........................................ -23-
             7.23 Books and Records...................................... -23-
             7.24 No Brokers............................................. -23-
             7.25 All Material Information............................... -23-
             7.26 Survival of Warranties................................. -24-
                                                                             
VIII.   REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE                
        PARTNERSHIP ..................................................... -24-
             8.1  Organization, Good Standing and Qualification.......... -24-
             8.2  Authorization.......................................... -24-
             8.3  No Violation........................................... -25-
             8.4  Tax Status............................................. -25-
             8.5  No Litigation.......................................... -25-
             8.6  No Brokers............................................. -25-
             8.7  Survival............................................... -25-
                                                                             
IX.     COVENANTS........................................................ -26-
             9.1  Covenants of the Company and the Partnership........... -26-
             9.2  Covenants of the Sellers and the Contributing Entities. -27-
             9.3  [Intentionally Omitted]................................ -28-

</TABLE> 
                                     -iii-
<PAGE>
 
<TABLE> 

<C>     <S>                                                               <C> 
X.      DUE DILIGENCE PERIOD............................................. -28-
            10.1  Due Diligence Period................................... -28-
            10.2  Access to Properties and Materials..................... -28-
            10.3  Adjustment Following Due Diligence..................... -28-
                                                                             
XI.     DEFAULTS AND REMEDIES............................................ -29-
            11.1  Indemnification by Sellers............................. -29-
            11.2  Remedies............................................... -30-
            11.3  Indemnification by the Company and the Partnership..... -31-
            11.4  Indemnification Procedures............................. -32-
                                                                             
XII.    MISCELLANEOUS.................................................... -34-
            12.1  Assignment............................................. -34-
            12.2  Entire Agreement....................................... -35-
            12.3  Notices................................................ -35-
            12.4  Governing Law.......................................... -36-
            12.5  Litigation Costs....................................... -36-
            12.6  Counterparts........................................... -36-
            12.7  Offer and Acceptance................................... -36-
</TABLE>

                                     - iv -
<PAGE>
 
                                    EXHIBITS

     2.4(a)         Form of  Company Lease
     2.4(c)         Guaranty and Subordination Agreement
     5.2.1(m)       Opinion of Seller's Counsel
     5.2.2(d)       Opinion of Company Counsel
 
                                   SCHEDULES

     1.2            Schedule of Properties; Ownership Interests in Properties
                    and Purchase Price
     2.1            Prior Occupants
     7.4            Other Agreements
     7.8            Condition of Properties
     7.13.5(a)      The Treatment, Storage and Disposal Locations for Substances
                    of Concern
     7.13.5(b)      Storage Tanks
     7.13.5(c)      Existence of Asbestos
     7.13.5(f)      Environmental Permits and Authorizations
     7.14           Insurance
     7.17           Service Contracts and Management Contracts
 

                                      -v-
<PAGE>
 
                            CAPITAL AUTOMOTIVE L.P.

                        REAL PROPERTY PURCHASE AGREEMENT
                        --------------------------------

          THIS REAL PROPERTY PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of this 12th day of January 1998, by and among KLINE CHEVROLET
SALES CORPORATION, a Virginia corporation, ("Seller," sometimes referred to
herein as "Sellers"), and CAPITAL AUTOMOTIVE L.P., a Delaware limited
partnership (the "Partnership"), having offices at 1925 North Lynn Street, Suite
306, Arlington, Virginia 22209, and CAPITAL AUTOMOTIVE REIT, a Maryland real
estate investment trust (the "Company"), having offices at 1925 North Lynn
Street, Suite 306, Arlington, Virginia 22209 on its own behalf and as the
general partner of the Partnership.


                                    RECITALS
                                    --------

          A.   The Sellers are the legal and beneficial owners of all of the
interests in fee simple title to all of the real property and improvements set
forth on such Schedule 1.2 hereto (including the residual interests in any
              ------------                                                
tenant improvements thereon), which are individually referred to as a "Property"
and collectively, the "Properties."  Such Properties are identified on Schedule
                                                                       --------
1.2  by street address and property tax identification number, or if such
- ----                                                                     
Properties constitute more than one parcel, by the several applicable property
tax identification numbers.

          B.   Each Seller desires to sell all of its interest in each of the
Properties to the Partnership and the Partnership desires to purchase all of the
Sellers' interests in such Properties.

          NOW THEREFORE, in consideration of and in reliance upon the above
Recitals, the terms, covenants and conditions contained in this Agreement, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:


          1.   PURCHASE AND SALE
               -----------------

               1.1  Certain Definitions.  For purposes of this Agreement:
                    -------------------                                      

               1.1.1    "Mortgage Debt" means the aggregate amount of mortgage
                        indebtedness, if any, encumbering the Propteries as set
                        forth opposite the description of each Property on
                        Schedule 1.2.
                        ------------ 

               1.1.2    "Purchase Price" means the amount, in U.S. dollars, that
                        is the purchase price of each Property, as identified on
                        Schedule 1.2 for each such Property.
                        -------------                        
<PAGE>
 
               1.1.3    "Affiliate" means with respect to any Person, (i) any
                        Person that holds direct or indirect beneficial
                        ownership (as defined in Rule 13d-3 under the Securities
                        Exchange Act of 1934, as amended) of voting securities
                        or other voting interests representing at least five
                        percent (5%) of the outstanding voting power of a Person
                        or equity securities or other equity interests
                        representing at least five percent (5%) of the
                        outstanding equity securities or interests in a Person,
                        or (ii) any Person that directly, or indirectly through
                        one or more intermediaries, controls, or is controlled
                        by, or is under common control with such Person.

               1.1.4    A "Person" shall mean and include natural persons,
                        corporations, limited partnerships, general
                        partnerships, joint stock companies, joint ventures,
                        associations, companies, trusts, banks, trust companies,
                        land trusts, business trusts, Indian tribes or other
                        organizations, whether or not legal entities, and
                        governments and agencies and political subdivisions
                        thereof.

               1.1.5    For purposes of this Agreement, the "knowledge" of a
                        Person shall mean the actual knowledge of such Person's
                        officers, senior executives, managing partners, general
                        partners, majority shareholders, key employees or their
                        equivalents.

               1.2  Agreement to Purchase and Sell.  Subject to the terms 
                    ------------------------------           
and conditions of this Agreement, at the Closing (as hereinafter defined), each
Seller shall sell, transfer and convey to the Partnership, and the Partnership
shall purchase and accept from the Sellers, all of the Sellers' right, title and
interest in and to the Properties identified on Schedule 1.2, excluding items of
                                                ------------                    
movable personal property attached to such Properties that relate to the
business conducted on such Properties and may readily be removed from such
Properties without material damage whether or not such items are "fixtures,"
("Excluded Personal Property").

               1.3  Encumbrances.  The Partnership shall acquire each
                    ------------                                     
Property free and clear of all liabilities, obligations and commitments of
Sellers and free and clear of all liens and encumbrances other than Permitted
Exceptions.

               1.4  Purchase Price.   On the terms and subject to the
                    --------------                                   
conditions of this Agreement, at the Closing Sellers shall sell, transfer,
convey, assign and deliver to the Partnership, and the Partnership shall
purchase and accept from Sellers all the right, title and interest of Sellers to
and under the Properties for an aggregate purchase price (the "Aggregate
Purchase Price") in an amount equal to:

                                      -2-
<PAGE>
 
                    EIGHT MILLION FIVE HUNDRED THOUSAND AND 00/100 U.S. Dollars
                    ($8,500,000).

The Aggregate Purchase Price will be adjusted pursuant to Sections 3.3, 
5.2.1(k), 5.2.1(l), 6.1, 6.2, 10.3 as applicable.

               1.5  Capitalized Terms.  Capitalized terms used in this Agreement
                    -----------------                                           
that are not otherwise defined herein shall have the meanings required by
context.

          II.  OPERATION OF PROPERTY THROUGH CLOSING
               -------------------------------------

               Through the Closing Date:

               2.1  Business Practice.  Except as otherwise provided in this
                    -----------------                                       
Article 2, the Sellers shall continue, or shall cause any Affiliate, tenant, or
third party managing, maintaining or occupying, as the case may be, any of the
Properties (referred to herein individually as a "Prior Occupant" and
collectively as the "Prior Occupants") to continue, to manage, to maintain and
to operate the Properties in accordance with sound and prudent business
practices and keep the Properties and the tangible personal property thereon in
good condition and repair, ordinary wear and tear excepted.  The Sellers shall
instruct such Prior Occupant not to make any change in its management,
maintenance or operation of the Properties or in its normal and customary other
practices.  The Prior Occupants are identified on Schedule 2.1 to this
                                                  ------------        
Agreement.

               2.2  No Sale or Encumbrance.  None of the Sellers shall sell,
                    ----------------------                                  
mortgage, pledge, hypothecate or otherwise transfer or dispose of all, or any
part of any Property or any interest therein, nor shall any Seller initiate,
consent to, approve or otherwise take any action with respect to zoning or any
other governmental rules or regulations presently applicable to all or any part
of any Property, nor shall any Seller permit any new limited or general
partners, shareholders or members to be admitted to any Seller.

               2.3  Leases, Service Contracts and Management Contracts.
                    -------------------------------------------------- 
Except as provided in Section 2.4, the Sellers shall not, nor shall they cause
or permit any Prior Occupant to, terminate, modify, extend, amend or renew any
Lease (as defined in Section 4.1.3 hereof), Service Contract (as defined in
Section 7.17 hereof), or Management Contract (as defined in Section 7.17 hereof)
or enter into any new Lease (other than the Company Lease pursuant to Section
2.4 of this Agreement) or Service Contract without the prior written consent of
the Company or the Partnership; provided, however, that the failure of the
Company or the Partnership to object to any such action within thirty (30) days
after written notice to it by Seller shall be deemed to reflect the Company's or
the Partnership's consent thereto. Notwithstanding the foregoing, all Service
Contracts and Management Contracts relating to the respective Properties shall
remain in effect after the Closing Date, except for those Service Contracts and
Management Contracts that the Partnership requires, in writing, to be terminated
as of the Closing Date.

                                      -3-
<PAGE>
 
               2.4  Termination of Leases; New Company Leases.  On or prior
                    -----------------------------------------            
to the Closing Date, the Sellers shall cause the termination of all Leases.  In
consideration for the termination of that certain lease by and between Kline
Chevrolet Sales Corporation and James M. Kline dated June 1, 1991, the
Partnership shall, at the Closing, pay Two Million Dollars ($2,000,000) of the
Aggregate Purchase Price to James M. Kline (the "Kline Lease Termination
Payment") and pay the remaining Six Million Five Hundred Thousand Dollars
($6,500,000) to the Seller.  Not later than five (5) days  before the Closing
Date (as defined herafter), the Sellers shall cause the Prior Occupant of each
Property, or an Affiliate thereof, to execute and deliver to the Partnership an
occupancy lease with the Partnership for each of the Properties substantially in
the form attached hereto as Exhibit 2.4(a) (referred to hereafter individually
                            --------------                                    
as a "Company Lease" and collectively as the "Company Leases"), on terms and
conditions (including Rent (as defined in such Company Lease)) acceptable to the
Partnership. The Base Annual Rent (as defined in the Company Lease) called for
under the Company Lease for each Property shall be eleven and three-tenths
percent (11.3%) of the Purchase Price for such Property (the "Rate of Return").
The effective date of such Company Leases shall be the Closing Date.  The
Company Leases shall be guaranteed by Kline Imports Chesapeake, Inc., a Virginia
corporation, using a Guaranty and Subordination Agreement substantially in the
form attached hereto as Exhibit 2.4(c).
                        -------------- 

               2.5  Compliance.  None of the Sellers shall knowingly take or
                    ----------                                              
fail to take any action that will cause the Properties to fail to comply with
any federal, state, municipal and other governmental laws, ordinances,
requirements, rules, regulations, notices, codes and orders, or any agreements,
covenants, conditions, easements and restrictions currently in effect relating
to the Properties.

               2.6  Notice of Inaccuracy or Incompleteness.  The Sellers 
                    --------------------------------------     
shall promptly give written notice to the Company of the occurrence of any event
of which Sellers have knowledge and which may materially and adversely affect
the completeness or accuracy of any representation or warranty made or to be
made by Sellers under or pursuant to this Agreement.

               2.7  Access.  The Sellers shall cause the Company and the
                    ------                                              
Partnership and its representatives to have reasonable access to the Properties,
subject to the prior rights, if any, of any Prior Occupant; provided, however,
that without the consent of the Seller, the representatives of the Partnership
shall not disclose to any Prior Occupant the existence of this Agreement or the
transactions contemplated hereby.

               2.8  Insurance.  The Sellers shall cause the existing 
                    ---------                                      
insurance coverages on the Properties and the business of the Sellers to be
maintained in full force and effect through the Closing Date.

               2.9  Fulfillment of Obligation.  To the extent any Seller is
                    -------------------------                              
obligated, pursuant to any contract, agreement, covenant, lease, including any
Lease, or other understanding entered into prior to the date hereof with any
Prior Occupant, governmental subdivision or any other

                                      -4-
<PAGE>
 
third party, to effect any construction, make any improvements or take any
action, the Sellers shall cause any such construction, improvements and/or
action to be taken, completed and fully paid for by such Seller, at its expense,
prior to the Closing Date. No such obligation shall be unfulfilled, and no
liability for or payment in respect of any such obligation shall be unsatisfied
as of the Closing Date.

               2.10 Financial Statements and Reports.  The Sellers shall
                    --------------------------------      
provide to the Company financial statements, agings of accounts receivable, and
other financial, operating or statistical information for each Property upon any
reasonable request of the Company, and the general partner or chief financial
officer, as the case may be, of each Seller shall certify that, to the best of
his or its knowledge, such financial statements and other reports are true,
accurate and complete in all material respects.


          III. STATUS OF TITLE TO PROPERTY
               ---------------------------

               3.1  State of Title. At Closing, the Sellers shall own,
                    --------------                                    
beneficially and of record, good and marketable fee simple title to the
Properties, subject only to the mortgages creating the Mortgage Debt listed on
Schedule 1.2 hereto and those easements, covenants, conditions, restrictions and
- ------------                                                                    
other matters affecting title as set forth in the land Title Commitments, UCC
Searches and/or Surveys to be delivered to the Partnership hereunder and found
to be acceptable to the Partnership under Section 3.3 hereto (the "Scheduled
Exceptions").  The Mortgage Debt and Scheduled Exceptions are referred to
collectively herein as the "Permitted Exceptions."

               3.2  Preliminary Evidence of Title.  Within no more than 30
                    -----------------------------       
days after the date hereof, the Sellers and the Partnership shall obtain, in a
form acceptable to the Partnership, the following documents to evidence the
condition of the title to each of the Properties:

               3.2.1    Commitments (the "Title Commitments") to the Partnership
                        for ALTA Form B (1987) Owner's Title Insurance Policies
                        committing to insure, at standard rates, title to each
                        Property as being good and marketable, subject only to
                        the Permitted Exceptions, in the amount of the Purchase
                        Price of each such Property, issued by a title company
                        acceptable to the Company and the Partnership (the
                        "Title Insurer"). The Title Commitments shall be
                        effective as of the Closing Date, and shall reflect that
                        fee simple title is held by the respective Seller. Each
                        Owner's Title Insurance Policy to be issued to the
                        Partnership at Closing pursuant to Section 7.2.2 below
                        ("Title Insurance Policies") shall contain an extended
                        coverage endorsement over the general or standard
                        exceptions which are a part of the printed form of the
                        policy and subject only to the Permitted Exceptions.
                        Each Title Insurance Policy

                                      -5-
<PAGE>
 
                        shall, in addition, (a) include provisions for co-
                        insurance, in such amounts of liability acceptable to
                        the Partnership and the Company; (b) not contain any
                        survey exception, (c) not contain any exceptions for (i)
                        liens for labor or material, whether or not of record,
                        (ii) parties in possession (other than Prior Occupants
                        under the Leases, solely as such Prior Occupants), (iii)
                        unrecorded easements, and (iv) taxes and special
                        assessments not shown on the public records, (d) provide
                        for the following endorsements: (i) an access
                        endorsement insuring that there is direct and
                        unencumbered access to the land from all adjacent public
                        streets and roads, (ii) a survey endorsement insuring
                        that all foundations in place as of the date of such
                        policy are within the lot lines and applicable setback
                        lines, that the improvements do not encroach on
                        adjoining land or any easements, and that there are no
                        encroachments of improvements from adjoining land on any
                        or the Properties or any part thereof, (iii) an ALTA
                        Form 3.1 zoning endorsement insuring that the Properties
                        are zoned for the buildings and the operation thereof as
                        contemplated by the terms and provisions of this
                        Agreement, (iv) [intentionally omitted], (v) a statement
                        that each Property constitutes a separate lot of record
                        and is separately assessed for real estate tax purposes,
                        (vi) an endorsement commonly referred to as a "Fairway
                        endorsement," providing among other things, that the
                        Title Insurer waives any defense based on a dissolution
                        or termination of the insured partnership or the
                        formation of a new partnership solely by reason of one
                        or more transfers of all or any part of the partnership
                        interests of any one or more of the general partners of
                        the insured to the Company or the Partnership and/or any
                        one or more of the limited partners of the insured,
                        and/or the transfer of any one or more of the limited
                        partner's interests to the current general partner, the
                        Company or the Partnership, and (vii) such other
                        endorsements as the Partnership and the Company may
                        reasonably require.

               3.2.2    Written results of searches reflecting any liens,
                        judgements, tax liens, bankruptcies, and open dockets
                        (the "UCC Searches"), conducted by a company reasonably
                        acceptable to the Partnership. The UCC Searches shall
                        name each Seller, Prior Occupant, and Property, and
                        shall search the appropriate land records and central
                        filing office for Uniform Commercial Code financing
                        statements.

                                      -6-
<PAGE>
 
               3.2.3    Legible copies of all documents of record referred to in
                        any Title Commitment or disclosed by the UCC Searches,
                        and all other documents evidencing or, to the extent in
                        the possession or control of the Sellers, relating to,
                        matters reflected in any Title Commitment or the UCC
                        Searches.

               3.2.4    Current ALTA/ACSM land title surveys of each of the
                        Properties (the "Surveys") dated on or after the date of
                        this Agreement, certified to the Partnership and the
                        Title Insurer (and such other persons or entities as the
                        Partnership may designate) by a surveyor registered in
                        the State where the Property is located. Each Survey
                        shall be in form and substance acceptable to the
                        Partnership and the Title Insurer.

               3.3  Title Defects.  The Partnership shall have the right to
                    -------------                                          
review the Title Commitments, UCC Searches and Surveys (or any revision or
update of any of them) and to require the Seller to remove, correct, and cure
any defects in the title or other such matters relating to the title that the
Partnership determines, in its sole discretion, are unacceptable. The
Partnership shall notify the Sellers in writing within ten (10) business days
after the Partnership receives the last of the Title Commitments, UCC Searches
or Surveys, as the case may be, of any such defects or matters that the
Partnership finds to be unacceptable, and, within sixty (60) days from the
receipt of notice, such Sellers shall, (i) as to any such exception or other
matter of a nonmonetary nature, use reasonable efforts to remove, correct and
cure such defects or such other matters, and (ii) as to any such defect or other
matter of a monetary nature, cause such lien or encumbrance or other matter to
be discharged and released, in each case to the reasonable satisfaction of the
Partnership. If such Seller fails to remove, correct and cure such defects or
such other matters, the Partnership may (within ten (10) business days), at its
option and as its exclusive remedy, (x) terminate this Agreement, in which event
this Agreement, without further action of the parties, shall become null and
void and neither party shall have any further rights or obligations under this
Agreement, or (y) terminate this Agreement with respect to such Property and
reduce the Aggregate Purchase Price by the Purchase Price for such Property with
respect to which the Seller fails to correct and cure such defects or other such
matters. If the Partnership fails to make any such election within the ten (10)
business day period, the Partnership shall be deemed to have elected the option
contained in clause (y).

          IV.  CLOSING PRORATIONS AND ADJUSTMENTS
               ----------------------------------

               4.1  Prorations and Adjustments.  All prorations and 
                    --------------------------                  
adjustments (the "Prorations") with respect to each Property, for the period up
to and through the Closing Date, shall be the responsibility of or belong to the
Sellers and all Prorations for the period after the Closing Date shall be the
responsibility of or belong to the tenant under the applicable Company Lease.
The Company and the Partnership shall have no responsibility for, and will
receive no benefit from, the

                                      -7-

<PAGE>
 
Prorations, and the Seller shall have liability for such Prorations. Such
Prorations shall include, but not be limited to, the following:

               4.1.1    real estate and personal property taxes and assessments;

               4.1.2    common area maintenance fees and reimbursements for
                        prior years property taxes payable by Prior Occupants;

               4.1.3    the rent payable by Prior Occupants under leases in
                        effect immediately prior to the Closing Date (the
                        "Leases") as set forth on Schedule 2.1 hereto;
                                                  ------------        

               4.1.4    the full amount of security deposits paid under the
                        Leases, together with interest thereon if required by
                        law or otherwise;

               4.1.5    water, electric, telephone and all other utility and
                        fuel charges (those that are meter read will be read by
                        the appropriate utility and service transferred as of
                        the Closing Date);

               4.1.6    amounts due and prepayments under the Service Contracts;

               4.1.7    assignable license and permit fees;

               4.1.8    other expenses of operation and similar items; and

               4.1.9    all or any other disbursements, payments, and
                        obligations relating to the Property.

               4.1.10   notwithstanding the foregoing, any refunds of real or
                        personal property taxes for tax years beginning prior to
                        the Closing Date shall belong to Sellers, and if paid to
                        the Partnership shall be promptly refunded by the
                        Partnership to Sellers in cash.

               4.1.11   with respect to Mortgage Debt, at the time of Closing,
                        all obligations accrued up to the Closing Date, whether
                        the same shall constitute principal, interest, or other
                        payments, shall be paid by the Seller by way of a
                        reduction to the Aggregate Purchase Price in the amount
                        of such obligations.


          V.   CLOSING
               -------
                                      -8-
<PAGE>
 
               5.1  Closing Date.  The closing of the transactions contemplated
                    ------------                                               
by this Agreement (the "Closing") shall occur at the offices of Wilmer, Cutler &
Pickering, 2445 M Street, N.W. Washington, D.C. 20037-1420, at 10:00 a.m. on
March 13, 1998, or such other time or place as shall follow the closing of the
initial public offering of Initial Shares of the Company pursuant to the
Registration Statement, provided that all conditions to Closing have been
satisfied or waived, or at such other time and place as the Sellers and the
Company shall agree in writing, provided however, that under no circumstances
shall the Closing occur later than May 31, 1998 (and if Closing does not occur
by such date, Seller shall have the option to terminate this Agreement).  The
"Closing Date" shall be the date of the Closing.

               5.2  Closing Documents
                    -----------------

               5.2.1    Sellers.  Not later than five (5) business days
                        -------                                        
                        prior to the Closing Date, the Sellers shall deliver to
                        the Company and the Partnership the following:

                        a.     deeds and assignments for the Properties;

                        b.     executed copies of all Company Leases, effective
                               at Closing;

                        c.     any affidavits, certificates and other documents
                               (including without limitation non-imputation
                               affidavits and/or certificates) that are
                               reasonably necessary for the Title Insurer to
                               issue the Owner's Title Insurance Policies in the
                               form and condition required by this Agreement;
 
                        d.     evidence satisfactory to the Partnership that all
                               mortgages and other indebtedness secured by the
                               Properties that are not being specifically
                               assumed by the Partnership have been paid in full
                               or arrangements to pay off the Mortgage Debt have
                               been made that are satisfactory to the
                               Partnership and the Title Insurer;

                        e.     for each Seller that is a corporation, a
                               corporate resolution authorizing the transactions
                               contemplated by this Agreement, a certificate of
                               good standing, a certified copy of its articles
                               or certificate of incorporation and bylaws, and a
                               certificate of incumbency certifying the titles
                               and signatures of the corporate officers
                               authorized to consummate the

                                      -9-
<PAGE>
 
                      transactions contemplated hereunder on behalf of Seller
                      and such other evidence of such Seller's power and
                      authority as the Company or Partnership reasonably
                      requests;

                  f.  for each Seller that is a partnership or a limited
                      liability company, a partnership resolution authorizing
                      the transactions contemplated by this Agreement, a
                      certificate of good standing, a certified copy of the
                      partnership or operating agreement governing such Seller,
                      and a certificate of incumbency certifying the titles and
                      signatures of the general partners or members authorized
                      to consummate the transactions contemplated hereunder on
                      behalf of such Seller and such other evidence of power and
                      authority of such Seller as the Company or Partnership
                      reasonably requests;

                  g.  for each Seller, an affidavit stating, under penalty of
                      perjury, its U.S. taxpayer identification number and that
                      it is not a foreign person within the meaning of Section
                      1445 of the Internal Revenue Code of 1986, as amended (the
                      "Code");

                  h.  [Intentionally Omitted]

                  i.  copies certified by the Sellers to be, to Sellers'
                      knowledge, complete and accurate in all respects of all of
                      the original Leases, written Service Contracts and
                      Management Contracts and any and all building plans,
                      surveys, site plans, engineering plans and studies,
                      utility plans, landscaping plans, development plans,
                      specifications drawings, marketing artwork, construction
                      drawings, soil tests, complete warranty book including all
                      contractors and subcontractors and other documentation
                      concerning all or any part of each Property to the extent
                      that any of the foregoing documents are in the possession
                      or control of Sellers;

                  j.  any bonds, warranties or guaranties which are in any way
                      applicable to any Property or any part thereof 

                                     -10-
<PAGE>
 
                      to the extent any of the foregoing are in the possession
                      or control of Sellers;

                  k.  If the Company or Partnership shall so request, each
                      Seller shall deliver to the Company a letter (an "Estoppel
                      Letter") in a form acceptable to the Company, dated not
                      more than thirty (30) days prior to the Closing Date, from
                      each Prior Occupant under each Lease. The Estoppel Letter
                      shall be fully completed in a manner reasonably
                      satisfactory to the Company, and with no modifications
                      other than those reasonably acceptable to the Company. In
                      the event Estoppel Letters in form and content reasonably
                      satisfactory to the Company are not received by the
                      Company and the Partnership within the time prescribed
                      herein, then the Partnership and the Company, at their
                      option and as a non-exclusive remedy, upon notice to the
                      Sellers, may immediately terminate this Agreement.

                  l.  [Intentionally Omitted]

                  m.  an opinion of Seller's counsel substantially in the form
                      attached hereto as Exhibit 5.2.1(m); and
                                         ----------------     

                  n.  all other documents reasonably required by the Partnership
                      or the Company in connection with the transactions
                      contemplated by this Agreement, provided that such
                      documents do not require Sellers to make representations,
                      warranties and covenants additional to those required by
                      this Agreement.

        5.2.2  Partnership.  At the Closing, the Partnership shall deliver
               -----------                                        
               the following:

                  a.  The Aggregate Purchase Price and the Kline Lease
                      Termination Payment in immediately available funds;

                  b.  for the Company, a resolution of its Board of Trustees
                      authorizing the transactions contemplated hereby and a
                      certificate of good standing from the 

                                     -11-
<PAGE>
 
                      State Department of Assessments and Taxation of the State
                      of Maryland;

                  c.  for the Partnership, evidence of the Partnership's
                      authorization of the transactions contemplated hereby and
                      a certified copy of the Partnership Agreement and a
                      Certificate of Limited Partnership certified by the
                      Secretary of State of Delaware; and

                  d.  an opinion of Wilmer, Cutler & Pickering, substantially in
                      the form attached hereto as Exhibit 5.2.2(d);
                                                  ---------------- 

                  e.  all other documents reasonably required by the Sellers in
                      connection with the transactions contemplated by this
                      Agreement, provided that such documents do not require the
                      Partnership or the Company to make representations,
                      warranties and covenants additional to those required by
                      this Agreement.

        5.3    Conditions to the Partnership's Obligation to Close.  At the
               ---------------------------------------------------         
option of the Partnership, the obligations of the Company and the Partnership
under this Agreement are subject to the satisfaction of the following conditions
(unless explicitly waived in writing):

        5.3.1     Each Seller shall have terminated such existing Management
                  Contracts that Partnership has required, in writing, to be
                  terminated prior to the Closing Date.

        5.3.2     Each Seller shall have terminated all Leases prior to the
                  Closing Date.

        5.3.3     Each Seller shall have terminated such existing Service
                  Contracts that the Partnership has required, in writing, to be
                  terminated prior to the Closing Date.

        5.3.4     Each and every representation and warranty of the Sellers
                  contained in this Agreement is true, correct and complete in
                  all material respects as of the date hereof and at all times
                  through the Closing Date.

                                     -12-
<PAGE>
 
        5.3.5     The Sellers shall have fully performed and satisfied each and
                  every material obligation, term and condition to be performed
                  and satisfied by them under this Agreement.

        5.3.6     All consents, authorizations, certificates, Estoppel Letters,
                  Lender's Estoppel Certificates and approvals required to be
                  obtained by the Sellers in connection with the Agreement shall
                  have been obtained, including but not limited to all consents,
                  approvals and authorizations (without any conditions or
                  requirements) required to be obtained under any Mortgage, deed
                  of trust or other instrument relating to any of the Properties
                  or pursuant to which any of the Sellers are bound in order to
                  complete the transactions contemplated under this Agreement.

        5.3.7     The Company shall have previously closed its initial public
                  offering.

        5.3.8     The Sellers shall have paid in full such Mortgage Debt and
                  other indebtedness secured by the Properties as required by
                  the Company and Partnership and shall have provided the
                  Company and Partnership with satisfactory evidence thereof,
                  and to the extent that such Mortgage Debt is to be paid off
                  following Closing, the mortgagee shall deliver pay-off letters
                  to the Company and the Partnership.

        5.3.9     The condition of the Property shall not have materially
                  changed.

        5.3.10    The Partnership shall have received an Owner's Title Insurance
                  Policy (or marked-up commitment therefor) for each Property
                  insuring fee simple title to such Property in the amount of
                  the fair market value of such Property subject only to
                  Permitted Exceptions, and otherwise in the form and condition
                  required by this Agreement.

        5.3.11    Delivery by Sellers of a "bring-down" certificate stating that
                  the representations and warranties continue to be true as of
                  the Closing Date.

        5.3.12    The Sellers shall have delivered to the Company all closing
                  documents required by Section 5.2.1 hereof.

                                     -13-
<PAGE>
 
        5.4    Conditions to the Seller's Obligation to Close.  The
               ----------------------------------------------      
obligations of the Seller under this Agreement are subject to the satisfaction
of the following conditions (unless explicitly waived in writing):

        5.4.1     Each of the representations and warranties of the Partnership
                  contained in this Agreement is true, correct and complete as
                  of the date hereof and at all times through the Closing Date.

        5.4.2     The Partnership and the Company shall have fully performed and
                  satisfied each and every obligation, term and condition to be
                  performed and satisfied by them under this Agreement.

        5.4.3     The Company shall have completed its initial public offering
                  pursuant to the Registration Statement.

        5.4.4     All consents, authorizations and approvals required to have
                  been obtained by the Seller, the Company and the Partnership
                  in connection with this Agreement shall have been obtained.

        5.5    Transaction Costs.
               ----------------- 

        5.5.1     The Sellers shall pay all costs (including, but not limited
                  to, any recordation and transfer taxes, surveys, title
                  insurance (including all special endorsements reasonably
                  required), searches made pursuant to Section 3.2.2 hereof,
                  fees and expenses of going to record) in connection with the
                  transfer by the Sellers of the Properties (collectively
                  referred to as the "Closing Costs"). The Company and the
                  Partnership shall bear the cost of their due diligence
                  activities and shall pay their own attorneys' fees.
 
        5.5.2     The Sellers shall pay all assumption fees, prepayment
                  penalties, premiums, lender's consent fees or other such
                  charges ("Consent Fees") imposed in connection with the
                  transactions contemplated hereby, and all Consent Fees imposed
                  by all other lenders in connection with the transactions
                  contemplated hereby.

        5.5.3     Except as specified above and elsewhere in this Agreement,
                  each party shall bear and pay its expenses in connection with
                  this Agreement and the transactions contemplated herein,
                  including the fees of their respective professional advisors.

                                     -14-
<PAGE>
 
     VI.  CASUALTY LOSS AND CONDEMNATION
          ------------------------------

          6.1       Casualty.  Prior to Closing, all risk of loss shall belong
                    --------                                                  
to the Sellers. If, prior to Closing, the Properties be destroyed or materially
damaged by fire or other casualty, the Partnership may, at its option, either
(i) require the appropriate Sellers to repair such damage prior to Closing to
the reasonable satisfaction of the Partnership, at no cost or expense to the
Company or the Partnership, in which event the proceeds of any insurance
applicable thereto shall be paid to the Seller and the Seller shall have the
right to postpone the Closing until such repairs are completed, or (ii) itself
settle the loss under all policies of insurance applicable to the destruction or
damage and receive the proceeds of insurance applicable thereto, and the Seller
shall, at Closing and thereafter, execute and deliver to the Partnership all
required proofs of loss, assignments of claims and other similar items.
Notwithstanding anything herein to the contrary, in the event such loss or
casualty shall constitute a total or substantial loss or casualty or, in the
opinion of the Company, in its sole discretion, shall render the Property
unsuitable for its intended purpose for a period of ninety (90) days or longer,
then the Company and the Partnership, at their option, may terminate this
Agreement.

          6.2       Condemnation or Taking.  If, prior to Closing, any Property
                    ----------------------                                     
or any part thereof shall be condemned or taken and such condemnation or taking
materially interferes with the existing business use of the Property, the
Company and the Partnership may (i) terminate this Agreement as to all the
Properties or (ii) complete the transactions contemplated by this Agreement
notwithstanding such condemnation.  If the Company and the Partnership elect to
complete the transactions contemplated hereby, the Partnership shall be entitled
to receive the condemnation proceeds and the appropriate Seller shall, at
Closing and thereafter, execute and deliver to the Partnership and the Company
all required assignments of claims and other similar items.  If the Partnership
and the Company elect to terminate this Agreement, then upon written notice to
the Sellers and without further action of the parties, this Agreement shall
become null and void and no party shall have any rights or obligations under
this Agreement.


     VII. REPRESENTATIONS AND WARRANTIES OF THE SELLERS
          ---------------------------------------------

          The Sellers, jointly and severally, represent and warrant to the
Company and the Partnership that, except as described on the Schedules attached
                                                             ---------         
hereto and incorporated by reference herein, the following are true, complete
and correct as of the date of this Agreement.

          7.1       Organization.  Each Seller is duly organized and validly
                    ------------                                            
existing and in good standing under the laws of the Commonwealth of Virginia,
and has all requisite power and authority to own or lease and operate its
properties (including the Properties) and assets and conduct its business in the
manner in which they are being owned or leased and operated and conducted, as
the case may be.  Each Seller is duly qualified and authorized and is in good
standing in all jurisdictions where its ownership, lease or operation of assets
and properties (including the Properties) or the conduct of its business
requires such qualification or authorization.

                                     -15-
<PAGE>
 
          7.2       Authority.  The execution and delivery of this Agreement and
                    ---------                                                   
all agreements, documents and instruments contemplated hereby and the
performance of all transactions contemplated herein or therein, have been duly
and validly authorized by all requisite partnership, corporate or trust action,
as the case may be, and by the general partners, board of directors,
stockholders, or trustees of each Seller, as the case may be.  This Agreement
and the agreements, documents and instruments executed and delivered in
connection herewith constitute the legal, valid and binding obligations of the
Sellers, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity) and except
to the extent that rights to indemnification and sale and purchase under or
contemplated by this Agreement or such other agreements may be limited by
federal or state securities laws or public policy relating thereto.  To the
knowledge of the Sellers, none of the Sellers are required to obtain any
consent, authorization, approval or waiver from any governmental agency or
authority or from any third party (except for consent of franchisors or holders
of any Mortgage Debt) in connection with the execution and delivery of, and the
performance of the obligations to be performed under, this Agreement and the
documents and instruments executed and delivered in connection herewith, or if
any of the foregoing is required, it has been obtained.

          7.3       Interest in Properties.  Each Seller is the record and
                    ----------------------                                
beneficial owner of, and has good and marketable and insurable fee simple title
to, the interests in the Properties set forth opposite such Seller's name on
Schedule 1.2, free and clear of all liens, options, adverse claims or
- ------------                                                         
encumbrances, except the Permitted Exceptions and the Kline Lease and the sub-
lease by and between Kline Chevrolet Sales Corporation and Kline Imports
Chesapeake, Inc., dated June 1, 1991, and Schedule 1.2 is true, accurate and
                                          ------------                      
complete in all material respects as to each Seller.  Between the date hereof
and the Closing Date, no liens, claims or encumbrances will be created by Seller
or permitted to be created by Seller on any Property other than the Permitted
Exceptions.  Prior to or at the Closing all monetary encumbrances on any
Property, other than the Permitted Exceptions, shall be duly canceled, removed
and discharged of record (or satisfactory provisions are made therefor), and
proof thereof satisfactory to the Title Insurer, the Company and the Partnership
shall be delivered to the Company and the Partnership.  Except for  Prior
Occupants, there are no parties in possession of any part of the Properties as
of the Closing Date, and there are no other rights of possession, or agreements
providing for the sale, assignment or transfer of title to any Property or
portion thereof (other than this Agreement),  which have been granted to any
third parties.  Such Seller has the full power, capacity and authority to sell,
transfer and assign the legal and equitable ownership of his/her or its interest
to the Partnership as provided in this Agreement, and the Sellers have not
entered into any agreement and have no knowledge of any agreement or
understanding to issue any additional interests in any Seller to any other
person or entity.

          7.4       No Defaults.  (a) No Seller is in default of any of its
                    -----------                                            
material obligations under any agreement, franchise, license, contract, deed,
mortgage, lease, instrument, certificate, affidavit or covenant affecting title
to the Properties; (b) there are no contracts or 

                                     -16-
<PAGE>
 
agreements, such as maintenance, service, or utility contracts affecting title
to the Properties other than the Service Contracts, and no party to such
contracts is in material default or breach under the terms and conditions
thereof; and (c) there are no contracts or agreements between Seller and any
third party for the management or leasing of any Property other than the
Management Contracts and no such contract is in material default or breach under
the terms and conditions thereof, and there will be no leasing commission due
and owing, or to become due and owing, in connection with any of the Leases; and
(d) except for the Permitted Exceptions, the Service Contracts and the
Management Contracts, there are no contracts, agreements, liabilities, claims or
obligations of any kind or nature relating to title to the Properties and to
which any Seller will be bound or the Properties will be subject after the
Closing except as expressly described in Schedule 7.4 attached hereto.
                                         ------------                 

          7.5       No Litigation; No Condemnation.  There are no actions,
                    ------------------------------                        
suits, proceedings or claims pending, or to the knowledge of any Seller,
threatened or contemplated, with respect to or in any manner affecting the
Properties, or any Seller's interest therein; or the ability of any Sellers to
complete the transactions contemplated by this Agreement or which could prevent
any Seller from satisfying its obligations under this Agreement. No Seller has
received written notice of any pending or threatened condemnation or similar
proceedings or special assessments affecting the Properties, or any part
thereof.

          7.6       No Violation.  The execution and delivery of this Agreement
                    ------------                                               
and the agreements, documents and instruments executed and delivered in
connection herewith, the consummation of the transactions contemplated hereby or
thereby, and the operation of any Property shall not: (a) except for the consent
of franchisors or holders of any Mortgage Debt that may be required, conflict
with, or result in a breach of, the terms, conditions or provisions of, or
constitute a default under, any agreement, contract, mortgage, deed, lease,
license, franchise or instrument to which any Seller is a party or is subject or
to which any Property is subject; (b) to Sellers' knowledge, violate any
agreement, contract, mortgage, deed, lease, license, franchise, restriction,
easement, restrictive covenant, or instrument to which any Seller or any
Property is subject; (c) to Sellers' knowledge, constitute a violation of any
applicable code, resolution, law, statute, regulation, ordinance, rule,
judgment, decree or order applicable to Seller; (d) with respect to each Seller
that is an entity, violate any provision of its charter, bylaws or other
organizational document; (e) except as to any indebtedness in respect of which
the consent of the lender shall have been obtained prior to the Closing Date or
that will be paid-off at the Closing, result in the acceleration of any
indebtedness or any encumbrance pertaining to any Seller or any Property, or the
cancellation of any contract, agreement, franchise, license, instrument or lease
pertaining to any Property (other than as specifically requested by the Company
or the Partnership pursuant to this Agreement); or (f) except as to any
Permitted Exceptions, result in the creation of any lien, encumbrance or
security interest upon any Property.  None of the Sellers have received any
written notice of any material violation (both as to condition of the Property
and use) of any applicable laws, statutes, ordinances, codes (including, but not
limited to, zoning, building, subdivision, pollution, environmental protection,
water disposal, health, fire and safety engineering codes, and laws and
regulations with respect to 

                                     -17-
<PAGE>
 
the submetering of any utilities serving any Property), and the rules and
regulations of, by governmental authority having jurisdiction over the
Properties.

          7.7       Required Obligations.  The Sellers have paid and performed
                    --------------------                                      
all material obligations relating to the Properties required to have been paid
or performed prior to the date hereof and prior to the Closing Date, including
but not limited to all principal installments, interest payments, taxes,
penalties and other charges in connection with all indebtedness relating to or
secured by any of the Properties or an interest in any of the Properties.

          7.8       Condition of Properties.  Except as disclosed on Schedule
                    -----------------------                          --------
7.8, no officer or general manager of Seller has been notified that the
- ---                                                                    
structural, mechanical, electrical, plumbing, roofing and other major systems on
any Property and items of equipment and components located thereon, require to
be replaced or are in need of material repair.

          7.9       Warranties.  The Sellers have not released or modified any
                    ----------                                                
warranties of builders, contractors, manufacturers or other tradespersons that
have been given to any Seller without the consent of the Company or the
Partnership.

          7.10       Utilities.  Usable sanitary and storm sewers and public
                    ---------                                              
water, and electrical utilities (collectively, the "Utilities") of adequate
capacity required for the operation of the Properties as presently operated, are
installed in, and are duly connected to, the Properties and can be used without
any charge except the normal user charges for sanitary sewers and the normal and
usual charges imposed for public water, gas and electric utilities.

          7.11       Zoning.  To Sellers knowledge, each Property is currently
                    ------                                                   
located in areas zoned for its current use, which classification permits the
development, use and operation of the improvements on such Property as such
improvements currently are being used.  The Sellers have no knowledge of any
threat of, and have not received written notice of, any proceeding to change
adversely or down-zone the existing zoning classification as to any portion of
any Property.

          7.12       Improvements.  To Sellers' knowledge, all improvements on
                    ------------                                             
the Properties have been constructed in accordance with, and substantially
comply with, all requirements of all applicable laws, ordinances, regulations
and orders, including without limitation applicable zoning, building and fire
safety codes and all restrictive covenants, if any, and other easements,
encumbrances or agreements affecting title to any Properties or improvements.
For purposes of this Section 7.12, "substantially" means that Sellers shall not
be permitted to engage in even de minimis non-compliance with applicable laws,
ordinance, regulations and orders if such de minimis non-compliance could result
in any governmental, administrative or other authority executing any penalty,
fine, remedy or other disciplinary action against such Seller or such Seller's
Business (as defined in the Company Lease).

               7.13  Environmental Matters.
                     --------------------- 

                                     -18-
<PAGE>
 
               7.13.1   For purposes of this Agreement:

                        a.   "Environmental Claim" means any claim, action,
                             cause of action, investigation, or notice (written
                             or oral) by any person or entity alleging potential
                             liability (including, without limitation, potential
                             liability for investigatory costs, cleanup costs,
                             governmental response costs, natural resource
                             damages, property damages, personal injuries, or
                             civil or criminal penalties) arising out of or
                             resulting from (i) the actual or alleged presence
                             or release into the environment of any Substance of
                             Concern at any location, whether or not owned or
                             operated by the Seller, or (ii) circumstances
                             forming the basis of any actual or alleged
                             violation of any Environmental Law.

                        b.   "Environmental Laws" means all federal, state,
                             local, and foreign laws and regulations relating to
                             pollution or protection of human health or the
                             environment (including, without limitation, ambient
                             air, surface water, ground water, wetlands, land
                             surface, subsurface strata, and indoor and outdoor
                             workplace), including, without limitation, (i) laws
                             and regulations relating to emissions, discharges,
                             releases, or threatened releases of Substances of
                             Concern, and (ii) common law principles of tort
                             liability.

                        c.   "Substances of Concern" means chemicals,
                             pollutants, contaminants, wastes, toxic substances,
                             hazardous substances, radioactive materials or
                             genetically modified organisms, which are, have
                             been or become regulated by any federal, state or
                             local government authority including, without
                             limitation, (i) petroleum or any fraction thereof,
                             (ii) asbestos, (iii) any substance or material
                             defined as a "hazardous substance" pursuant to (S)
                             101 of the Comprehensive Environmental Response,
                             Compensation, and Liability Act (42 U.S.C. (S)
                             9601), or (iv) any substance or material defined as
                             a "hazardous chemical" pursuant to the federal

                                     -19-
<PAGE>
 
                             Hazard Communication Standard (29 C.F.R. (S)
                             1910.1200).

               7.13.2   To the Sellers' knowledge, each Seller and Property are
                        in full compliance with all applicable Environmental
                        Laws, which compliance includes, but is not limited to,
                        possession by each Seller of all permits and other
                        governmental authorizations required under applicable
                        Environmental Laws, and compliance with the terms and
                        conditions thereof. No Seller has received any
                        communication (written or oral), whether from a
                        governmental authority, citizens group, employee or
                        otherwise, that alleges that such Seller or Property is
                        not in full compliance with the Environmental Laws, and,
                        to the Sellers' best knowledge after review of the
                        records of the corporation, there are no circumstances
                        that may prevent or interfere with such full compliance
                        in the future.

               7.13.3   There is no Environmental Claim pending or threatened
                        against any Seller or, to each Seller's best knowledge
                        after  review of the records of the corporation,
                        against any person or entity whose liability for any
                        Environmental Claim any Seller has retained or assumed
                        either contractually or by operation of law.

               7.13.4   To the Sellers' knowledge, there are no past or present
                        actions, activities, circumstances, conditions, events
                        or incidents, including, without limitation, the
                        release, emission, discharge, presence, or disposal of
                        any Substance of Concern, at or relating to any of the
                        Properties that could form the basis of any
                        Environmental Claim against any Seller or, to each
                        Seller's best knowledge after due inquiry, against any
                        person or entity whose liability for any Environmental
                        Claim any Seller has retained or assumed either
                        contractually or by operation of law.

               7.13.5   Without in any way limiting the generality of the
                        foregoing, to the best of any Seller's knowledge, (a)
                        all on-site and off-site locations where any Seller has
                        treated, disposed, or arranged for the disposal of
                        Substances of Concern or stored hazardous wastes (as
                        defined under the Resource Conservation and Recovery Act
                        or analogous state laws) are identified in Schedule
                                                                   --------
                        7.13.5(a); (b) all underground and aboveground storage
                        ---------
                        tanks, whether or not currently in use, 

                                     -20-
<PAGE>
 
                        and the capacity and contents of such tanks, located on
                        any of the Properties are identified in Schedule
                                                                --------
                        7.13.5(b), and, except as set forth in Schedule 
                        ---------                              --------
                        7.13.5(b), no underground or above ground storage tank
                        ---------
                        that has been removed from any Property, or that is
                        currently located at any Property, has leaked or is
                        leaking; (c) except as set forth on Schedule 7.13.5(c),
                                                            ------------------
                        there is no asbestos contained in or forming part of any
                        building, building component, structure or office space
                        on any Property; (d) no polychlorinated biphenyls (PCBs)
                        are used or stored on any Property; (e) the Sellers have
                        previously provided to the Company copies of all
                        environmental audit reports, Phase I and Phase II
                        investigation reports, technical reports regarding
                        environmental sampling results, and similar
                        environmental reports in the possession of the Sellers
                        or their contractors or agents relating to any Property;
                        and (f) all permits and other governmental
                        authorizations currently held by any Seller for any
                        Property pursuant to the Environmental Laws are
                        identified in Schedule 7.13.5(f).
                                      ------------------ 

               7.14     Insurance.  Schedule 7.14 contains a complete and 
                        ---------   -------------
correct description of all policies of insurance presently maintained by the
Sellers with respect to all Properties and the operations thereof. To the
knowledge of the Sellers, each Seller and Property is in compliance with the
requirements of each such policy, there is no violation of any of the provisions
thereof, and each such policy is in full force and effect. No Seller has
received from any insurance company which carries underwriters insurance on any
Property, or any Board of Fire Underwriters, any notice of any defect or
inadequacy in connection with any Property or its operation which, since the
date of such notice, has not been corrected.

               7.15     Compliance.  To each Seller's knowledge, each Seller has
                        ----------                                              
complied in all material respects with all laws, ordinances, rules, regulations
and orders of all governmental authorities applicable to the ownership,
management, operation, construction, maintenance and repair of any Property.

               7.16     Leases.
                        ------ 

               7.16.1   Copies of all Leases for each of the Properties and all
                        parts thereof, as amended through the date hereof have
                        been made available to the Company and the Partnership;
                        such copies are and shall be, in all material respects,
                        true, accurate and complete records of all agreements
                        and understandings with respect to the use or lease of
                        all or any portion of any of the Properties or otherwise
                        constituting Leases that are currently 

                                     -21-
<PAGE>
 
                        outstanding including all amendments and modifications
                        thereto.

               7.16.2   Schedule 2.1 contains a true, complete and correct list
                        ------------                              
                        of all current Leases for the Properties or any part
                        thereof.

               7.16.3   No Prior Occupant has an option or right of refusal to
                        purchase any Property or any part thereof.

               7.16.4   Except as specified in the Estoppel Letter approved by
                        the Company and sent to a Prior Occupant, no Prior
                        Occupant is entitled to any rebate, concession,
                        deduction or offset.

               7.16.5   [Intentionally Omitted]

               7.16.6   No Prior Occupant has any claim or basis for any claim
                        for reduction, deduction or set-off against the landlord
                        or the rent under such Lease.

               7.16.7   No Prior Occupant has refused to execute and deliver the
                        Company Lease at Closing, or no Prior Occupant has
                        refused to vacate its premises or such Property, or
                        otherwise to cease occupancy of its premises or such
                        Property.

               7.16.8   Except as set forth on Schedule 2.1, the Seller is the
                                               ------------            
                        landlord under the Leases.

               7.17     Service Contracts; Management Contracts.  Schedule 7.17
                        ---------------------------------------   -------------
is a list of all contracts affecting or pertaining to the Properties or Sellers'
Business that have a monetary obligation of at least $50,000 per year and are
not cancellable without penalty by Sellers upon notice of one year or less,
including union, purchase, service and maintenance agreements, leasing
agreements, listing agreements, equipment leases and any other agreements,
contracts, licenses and permits affecting or pertaining to the Properties or any
part thereof and of employment contracts in excess of $100,000 per year (the
"Service Contracts"), and of all management contracts relating to the Properties
(the "Management Contracts"). No Seller is a party to any licenses or leases of
personal property or any other contracts or agreements, written or oral, of any
kind or character, relating to the management, operation, maintenance or repair
of any Property, or otherwise, except for the Leases, the Service Contracts and
the Management Contracts. The Sellers have performed all obligations required to
be performed by them and are not in default under any of the Service Contracts.
Each of the Service Contracts is in full force and effect and constitutes the
legal, valid and binding obligation of the respective parties thereto,
enforceable in accordance with its terms, and has not been modified, amended or
extended. Each of the Management Contracts is in full force and 

                                     -22-
<PAGE>
 
effect and constitutes the legal, valid and binding obligation of the respective
parties thereto, enforceable in accordance with its terms, and has not been
modified, amended or extended.

               7.18     Permits.  All permits, licenses, inspections and other
                        -------                                               
approvals from all applicable governmental authorities having jurisdiction over
each Seller and Property that are necessary in connection with the operation of
the use, ownership and operation of each Property as it is currently used, have
been obtained and are in full force and effect.

               7.19     [Intentionally Omitted]

               7.20     Tax Matters.  The Sellers have relied solely on their 
                        -----------
own counsel for advice on any and all federal, state and local tax matters
relating to this Agreement and the transactions contemplated herein and have not
relied on any advice or representations of the Company, the Partnership, or
their counsel with respect to any federal, state and local tax matters relating
to this Agreement or the transactions contemplated herein.

               7.21     Taxes.  The Sellers have filed all federal, state and 
                        ----- 
local tax returns required to be filed by the Sellers. With respect to any
periods prior to the Closing Date, each Seller (i) has no knowledge of any
unpaid taxes that would create a lien on any Property, and (ii) has paid in full
all taxes and assessments payable or is diligently pursing with the appropriate
authority any dispute such Seller has regarding any unpaid taxes or assessments
as of the Closing Date.

               7.22     Special Filings.  No Seller is required to submit any
                        ---------------                                      
notice, report or other filing to any governmental or regulatory authority in
connection with the execution, delivery or performance of this Agreement or any
document or instrument executed and delivered in connection herewith or the
consummation of the transactions contemplated hereby other than the filing of
the tax returns required by the terms of this Agreement; and no consent,
approval or authorization of any governmental or regulatory authority is
required to be obtained by any Seller in connection with the execution, delivery
or performance of this Agreement or the consummation of the transactions
contemplated hereby.

               7.23     Books and Records.  The books and records of each Seller
                        -----------------                                       
with respect to each Property, all of which have been or will be made available
to the Company and the Partnership, are, and will be at all times until Closing,
complete and correct in all material respects. All of such books and records
shall be delivered to the Company prior to the Closing.

               7.24     No Brokers.  No Seller has dealt with any agent, 
                        ---------- 
broker or other person acting pursuant to express or implied authority of any
Seller (each a "Broker"), and no person or entity is entitled to a commission or
finder's fee in connection with the sale and purchase described by this
Agreement or will be entitled to make any claim against the Company, or the
Partnership for a commission or finder's fee by reason of any Seller having
engaged such Broker.

                                     -23-
<PAGE>
 
               7.25  All Material Information.  With respect to all information,
                     ------------------------                                   
statements, representations and warranties made herein, any agreements or
documents contemplated hereby, any schedules or exhibits hereto, and any
certificates or instruments delivered in connection herewith, the Sellers hereby
represent and warrant that, to Sellers' knowledge, no information, statement,
representation or warranty herein or therein contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances in which
made, not misleading; or necessary in order to provide the Partnership or the
Company with true, accurate and complete information.

               7.26  Survival of Warranties, Representations and Covenants.  The
                     -----------------------------------------------------      
representations, warranties and covenants of Sellers made in this Agreement
shall survive the Closing and consummation of the transactions contemplated
hereby, and shall remain in full force and effect thereafter only to the extent
that the Partnership or the Company provides the Seller with written notice of
any breach, violation or right to indemnification thereunder within a period
ending twenty-four (24) months from the date of this Agreement, except that in
the case of any claim arising out of the representantions or warranties herein
relating to Section 7.13 (Environmental Matters) and Section 7.21 (Taxes) shall
survive the closing in each case until the applicable statute of limitations has
run.  After Closing, neither the Company nor the Partnership shall prosecute any
claim against any Seller for a breach of the foregoing representations and
warranties if the Company or the Partnership obtained knowledge of such breach
prior to Closing.


        VIII.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PARTNERSHIP
               -----------------------------------------------------------------

        The Partnership and the Company, jointly and severally, represent and
warrant to the Seller that the following are true, complete and correct as of
the date of this Agreement and as of the Closing:

               8.1   Organization, Good Standing and Qualification.  Each of the
                     ---------------------------------------------              
Company and the Partnership (i) is an entity duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization,
(ii) has all requisite power and authority to carry on its business and own or
lease and operate its assets and properties in the manner in which it is being
conducted and owned or leased and operated, as the case may be, and (ii) is duly
qualified to transact business and is in good standing in all jurisdictions
where its ownership, lease or operation of its properties or assets or the
conduct of its business requires such qualification.

               8.2   Authorization. The execution and delivery of this Agreement
                     -------------
and all agreements, documents and instruments contemplated hereby and the
performance of all transactions contemplated herein or therein, have been duly
and validly authorized by all requisite action by the Company and its board of
trustees; and by all requisite action of the Partnership. This Agreement and the
agreements, documents and instruments executed and delivered in connection
herewith constitute the legal, valid and binding obligation of each of the
Company and the 


                                    - 24 -
<PAGE>
 
Partnership, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity) and except
to the extent that rights to indemnification and sale and purchase under or
contemplated by this Agreement or such other agreements may be limited by
federal or state securities laws or public policy relating thereto. To the
knowledge of the Partnership, the Partnership is not required to obtain any
consent, authorization, approval or waiver from any governmental agency or
authority or from any third party in connection with the execution and delivery
of, and the performance of the obligations to be performed under, this Agreement
and the documents and instruments executed and delivered in connection herewith,
or if any of the foregoing is required, it has been obtained.

          8.3       No Violation.   The execution and delivery of this Agreement
                    -------------                                               
and the agreements, documents and instruments executed and delivered in
connection herewith, the consummation of the transactions hereby or thereby, and
the operation of any Property shall not: (i) conflict with, violate, or result
in a breach of, the terms, conditions or provisions of, or constitute a default
under, any agreement, contract, Mortgage, deed, lease, license, franchise or
instrument to which the Company or the Partnership is a party or is subject;
(ii) constitute a violation of any applicable code, resolution, law, statute,
regulation, ordinance, rule, judgment, decree or order to the Company or the
Partnership; or (iii) violate any provision of the organizational documents of
the Company or the Partnership.

          8.4       Tax Status.  As of the Closing, the Partnership will be
                    ----------                                             
qualified as a partnership for Federal income tax purposes, and the Company will
be qualified as a real estate investment trust organized under the laws of the
State of Maryland.

          8.5       No Litigation.  Neither the Partnership nor the Company is
                    -------------                                             
involved in any pending or, to its knowledge, threatened litigation that would
materially or adversely effect its operations or financial condition or the
ability to perform under this Agreement or the Partnership Agreement.

          8.6       No Brokers.  Neither the Partnership nor the Company has
                    ----------                                              
dealt with any agent, broker or other person acting pursuant to express or
implied authority of either such party, and no person or entity is entitled to a
commission or finder's fee in connection with the transactions contemplated by
this Agreement or will be entitled to make any claim against any Seller for a
commission or finder's fee by reason of the Company or the Partnership having
engaged him/her/it.

          8.7       Survival.  The representations and warranties of the Company
                    --------                                                    
and the Partnership made in this Section 11 shall survive the Closing and
consummation of the transactions contemplated hereby, and shall remain in full
force and effect so long as the Seller provides the Company or the Partnership
with written notice of any breach, violation or right to indemnification
thereunder within a period ending twenty-four (24) months from the date of this
Agreement.  After 


                                    - 25 -
<PAGE>
 
Closing, the Seller shall not prosecute any claim against the Company or the
Partnership for a breach of the foregoing representations and warranties if the
Seller obtained knowledge of such breach prior to Closing.


          IX.  COVENANTS
               ---------

               9.1  Covenants of the Company and the Partnership.  Each of the
                    --------------------------------------------              
Company and the Partnership hereby covenants as follows:

               9.1.1    If this Agreement is terminated for any reason, (a)
                        the Partnership and the Company shall promptly
                        return to Sellers all materials furnished by
                        Sellers to the Partnership and the Company pursuant
                        to this Agreement, and (b) the Partnership and the
                        Company shall promptly restore the Properties to
                        substantially the same condition in which they
                        existed immediately before any physical tests
                        conducted by or on behalf of the Partnership and
                        the Company pursuant to the purposes of this
                        Agreement.
               
               9.1.2    Prior to the Closing Date, except as may be
                        required to be disclosed by law (including federal
                        and state securities laws, and the rules and
                        regulations thereunder), regulation or legal
                        process, or unless otherwise consented to in
                        writing by the Sellers, which consent shall not be
                        unreasonably withheld, the Partnership and the
                        Company shall keep all information learned by the
                        Partnership and the Company in connection with the
                        Properties or any operation thereof confidential.
               
               9.1.3    In connection with inspection of the Properties,
                        the Partnership and the Company shall not
                        unreasonably interfere with any Prior Occupants or
                        any Seller's business operations.
               
               9.1.4    [Intentionally Omitted]
               
               9.1.5    [Intentionally Omitted]
               
               9.1.6    The parties acknowledge and agree that the Sellers
                        and their affiliates are required under this
                        Agreement and the Company Leases to provide to the
                        Company certain confidential financial information
                        (the "Confidential Information") with respect to
                        the business conducted on the Leased Properties.
                        The Company agrees to use the Confidential
                        Information 


                                    - 26 -
<PAGE>
 
                             solely for the purposes of monitoring compliance
                             with the terms of this Agreement and the Company
                             Leases, and the Confidential Information shall be
                             disclosed only to those of the Company's employees,
                             advisors and consultants to whom it is necessary
                             for such purposes. Moreover, the Company will use
                             its best efforts to implement policies and
                             procedures at the Board of Trustees level so as to
                             minimize the disclosure of Confidential Information
                             to Trustees having interest in businesses that
                             compete with the Sellers and their affiliates.

                    9.1.7    Between the date of this Agreement and the Closing
                             Date, the Partnership and the Company will use
                             their best efforts to cause the conditions in this
                             Agreement to be satisfied.

                    9.2   Covenants of the Sellers and the Contributing
                          ---------------------------------------------
Entities. The Sellers hereby covenant and agree as follows:
- --------

                    9.2.1    If this Agreement is terminated as to all
                             Properties for any reason, the Sellers shall
                             promptly return to the Company or the Partnership,
                             as the case may be, all materials furnished by the
                             Company or the Partnership, to such Sellers
                             pursuant to this Agreement.

                    9.2.2    Each Seller shall keep all information relating to
                             the Partnership or the Company or any operation
                             thereof confidential.

                    9.2.3    In the event that facts or circumstances are
                             discovered or develop that could form the basis of
                             an Environmental Claim with respect to a specific
                             Property or Properties, the Seller(s) of such
                             Property or Properties shall take all actions
                             necessary to fully address such circumstances,
                             including, without limitation, providing notice to
                             appropriate governmental authorities; conducting
                             environmental studies, sampling and testing
                             procedures; taking remedial action; and modifying
                             operations or physical facilities to otherwise
                             eliminate potential liability and ensure full
                             compliance with the Environmental Laws. Without
                             limiting the foregoing, each Seller shall ensure
                             that it has identified any underground storage
                             tanks ("USTs") used in conjunction with its
                             operations and that all registration,
                             investigation, remedial action and technical
                             upgrade requirements have been complied with fully
                             in respect of each such UST, provided 


                                    - 27 -
<PAGE>
 
                             that if the cost to Seller to remediate any
                             environmental problem pursuant to this Section
                             9.2.3 exceeds Three Hundred Fifty Thousand Dollars
                             ($350,000), Seller shall have the option to
                             terminate this Agreement and this Agreement shall
                             become null and void.

                    9.2.4    Between the date of this Agreement and the Closing
                             Date, Sellers shall use their best efforts to cause
                             the conditions in this Agreement to be satisfied.

                    9.3   [Intentionally Omitted]


               X.   DUE DILIGENCE PERIOD
                    --------------------

                    10.1  Due Diligence Period. The period from the date hereof
                          --------------------
until the Closing Date is referred to herein as the "Due Diligence Period."

                    10.2  Access to Properties and Materials.  During the Due
                          ----------------------------------                 
Diligence Period and upon twenty-four (24) hours prior notice, the Company and
the Partnership and their agents, engineers, surveyors, appraisers, auditors,
counsel and other representatives shall have the right to enter upon the
Properties to inspect, examine, survey, obtain engineering inspections and
environmental studies, appraise, and otherwise do that which, in the opinion of
the Partnership and the Company, is necessary to determine the boundaries,
acreage and condition of the Properties and to determine the suitability of the
Properties for the uses intended by the Partnership (including, without
limitation, inspect, review and copy any and all documents in the possession or
control of Sellers, or their respective agents, contractors or employees, and
which pertain to the construction, ownership, title, use, occupancy or operation
of the Properties or any part thereof).  During the Due Diligence Period, the
Sellers, at their expense and at such times as will not unreasonably interfere
with the business being conducted on the Property or hinder the Partnership's
due diligence review, shall make available to the Company and the Partnership
copies or originals of all of their respective books, files and records relating
in any way to the Properties, complete copies (or originals when requested) of
all title information and title insurance policies, easements, leases, brokerage
agreements, licenses, permits, surveys, zoning information, environmental
reports, structural reports, violation or default notices, contracts, tax bills
and assessments, information regarding pending or threatened claims, suits or
proceedings, and all consents and other documents required to be obtained for
the completion of the transactions contemplated hereunder.  The Company and
Partnership shall indemnify and hold harmless Sellers for any injury to any
person or to property or damage to the Property arising out of an conduct of the
Company's or the Partnership's representatives, agents or employees while
conducting due diligence activities on any of the Properties and this indemnity
shall survive this Agreement.


                                    - 28 -
<PAGE>
 
          10.3   Adjustment Following Due Diligence. Notwithstanding anything to
                 ----------------------------------
the contrary contained in this Agreement, if the Company or Partnership
determines that one or more representations or warranties or any information
included on any Schedule relating to any Property is incomplete or
                -------- 
inaccurate in any material respect the Company shall have as its exclusive
remedy for such incompleteness or inaccuracies the option to: (a) proceed with
the transactions contemplated hereby, or (b) declare this Agreement null and
void in which case no party shall have any rights or obligations under this
Agreement.


     XI.  DEFAULTS AND REMEDIES
          ---------------------

          11.1   Indemnification by Sellers. The Sellers, jointly and severally
                 --------------------------   
(each, for purposes of Sections 11.1 and 11.2, a "Seller Indemnifying Party"),
shall indemnify, defend and hold harmless the Partnership, the Company and their
respective shareholders, partners, trustees, officers, agents, representatives,
employees, Affiliates, successors and assigns (collectively, for purposes of
this paragraph, the "Company Indemnified Parties") from and against any and all
losses, damages, claims, liabilities, actions, suits, proceedings and costs and
expenses of investigation or defense thereof, including attorneys' fees payable
as incurred, arising out of or relating to any (a) misrepresentation or breach
of warranty by any Seller or nonfulfillment of any covenant or agreement to be
performed or complied with by such Seller under this Agreement and any
agreement, document, instrument, certificate, schedule or exhibit contemplated
hereby; (b) [intentionally omitted] (c) any debts, liabilities or obligations
(whether known or unknown, disputed or undisputed, fixed, contingent or
otherwise) associated with or relating to any of the Sellers, their officers,
directors, partners, trustees or Affiliates or the Properties, or secured by any
of the Sellers, or by any of the Properties, except those specified on Schedule
                                                                       --------
7.19 hereto, including any obligations under any of the Leases, Service
- ----
Contracts and Management Contracts, to the extent any such obligation was to be
performed prior to the Closing Date, or was to be performed after the Closing
Date as a result of a breach or default under any of the Leases or Service
Contracts by any Seller or its Affiliates prior to the Closing Date; (d) to the
extent the remedies of the Partnership or the Company are not othewise limited
by this Agreement, any action taken, or any failure to act, by any Seller in
connection with this transaction and the transactions contemplated herein
constituting a breach of this Agreement or any agreement, document or instrument
contemplated hereby or a breach of a duty owed to any person, including, without
limitation, any action taken to redeem or otherwise liquidate the interest of
certain holders in anticipation of the transactions contemplated herein, to the
extent such action or failure to act results in a violation (or alleged
violation) of applicable laws or of the fiduciary duties owed to such holders;
(e) pollution or threat to human health or the environment, or any Environmental
Claim against any person or entity whose liability for such Environmental Claim
any Seller has assumed or retained either contractually or by operation of law,
that is related in any way to any of the Properties, including, without
limitation, all on-site and off-site activities relating to any of the
Properties involving Substances of Concern, and that occurred, existed, arises
out of conditions or circumstances that occurred or existed, or was caused, in
whole or in part, on or before the Closing Date, whether or not the pollution or
threat to human health or the environment, or the existence of any Environmental
Claim, is known to any 


                                    - 29 -
<PAGE>
 
Seller; (f) regardless of whether it arises as a breach of any representation or
warranty, any debts, liabilities or obligations of any Seller (whether known or
unknown, disputed or undisputed, fixed, contingent or otherwise) of, associated
with or relating to any asset or property other than the Properties, except
those specified on Schedule 7.19 hereto; and (g) any and all damages and
                   -------------
expenses incident to any of the foregoing or to the enforcement of this Section
11.1. Notwithstanding the foregoing, if there is any breach of Sellers'
representations, warranties or covenants contained in this Agreement that the
Tenant under the Company Lease would have the obligation to cure or remedy
pursuant to terms and conditions of the Company Lease, Sellers shall not be
required to indemnify the Company or the Partnership for such breaches under
this Agreement.

               11.2  Remedies.
                     -------- 

               11.2.1     [Intentionally Omitted]

               11.2.2     Each Seller Indemnifying Party shall be fully
                          responsible and jointly and severally liable for any
                          of the following and any and all losses, damages,
                          claims, liabilities, actions, suits, proceedings and
                          costs and expenses of defense thereof, including
                          attorneys' fees payable as incurred, arising out of or
                          relating to: (a) each representation and warranty made
                          by each Seller hereunder relating to or associated
                          with title such Seller's interest in any Property and
                          such Seller's ability to convey such Seller's interest
                          as contemplated by this Agreement; (b) regardless of
                          whether it arises as a breach of any representation or
                          warranty, any debts, liabilities or obligations
                          (whether known or unknown, disputed or undisputed,
                          fixed, contingent or otherwise) of, associated with or
                          relating to any of the Sellers, or the Properties, or
                          secured by any of the Sellers or by any of the
                          Properties, except those specified on Schedule 7.19
                                                                -------------
                          hereto, and (c) regardless of whether it arises as a
                          breach of any representation or warranty, any debts,
                          liabilities or obligations of the Sellers (whether
                          known or unknown, disputed or undisputed, fixed,
                          contingent or otherwise) of, associated with or
                          relating to any other asset or property other than the
                          Properties, except those specified on Schedule 7.19
                                                                -------------
                          hereto.

          11.2.3          Each Seller hereby represents, warrants, covenants and
                          agrees that it presently has, a tangible net worth
                          (such term meaning net worth exclusive of the value
                          (if any) of goodwill, going concern value and similar
                          assets, but inclusive of the value of shares of stock,
                          interests in partnerships and other business
                          

                                     -30-
<PAGE>
 
                          enterprises and similar assets) of not less than the
                          Aggregate Purchase Price, minus all Mortgage Debt for
                          all Properties being acquired by the Partnership
                          pursuant to this Agreement; and Seller, on behalf of
                          itself and its successors, further covenants that it
                          shall maintain a tangible net worth of no less than
                          two million dollars ($2,000,000) (U.S.) for a period
                          of no less than two (2) years following the Closing of
                          the transactions contemplated herein; and James M.
                          Kline covenants that he shall personally cause the
                          Sellers and their successors to maintain a tangible
                          net worth of no less than two million dollars
                          ($2,000,000) (U.S.) for a period of no less than two
                          (2) years following the Closing of the transactions
                          contemplated herein, and shall (to the extent of two
                          million dollars ($2,000,000) (U.S.)) jointly and
                          severally indemnify the Company and the Partnership
                          (according to Section 11.1 hereto) for any and all
                          breaches of the Sellers' representations, warranties
                          and covenants hereunder for such two (2) year period
                          if (i) the Sellers and/or their successors fail to
                          maintain such tangible net worth or (ii) the Sellers
                          and/or their successors file for bankruptcy
                          (voluntarily or involuntarily), make an assignment for
                          the benefit of creditors, or otherwise become
                          insolvent; provided that, with respect only to the
                          joint and several indemnity of James M. Kline, the
                          recovery from James M. Kline shall not exceed the
                          difference between two million dollars ($2,000,000)
                          (U.S.) and the actual tangible net worth of Seller if
                          less than $2,000,000. The covenants contained in this
                          Section 11.2.3 shall survive the Closing of the
                          transactions contemplated by this Agreement.

          11.3       Indemnification by the Company and the Partnership.  The
                     --------------------------------------------------      
Company and the Partnership (each, for purposes of this Section 11.3, a "Company
Indemnifying Party") shall indemnify, defend and hold harmless each Seller and
their respective shareholders, partners, directors, officers, partners, agents,
employees, Affiliates, successors and assigns (collectively, for purposes of
this paragraph, "Seller Indemnified Parties") from and against any and all
losses, damages, claims, liabilities, actions, suits, proceeds and costs and
expenses of defense therefore, including attorneys' fees payable as incurred,
arising out of or relating to any (a) misrepresentation or breach of warranty by
such Company Indemnifying Party or nonfulfillment of any covenant or agreement
to be performed or complied with by such Company Indemnifying Party under this
Agreement; (b) untrue or incomplete statement (or allegation by a third party of
an untrue or incomplete statement) of a material fact contained in any statement
or information provided by such Company Indemnifying Party or based on any
omission (or allegation by a third party of an untrue or incomplete statement)
to state therein a material fact required to be stated therein or other
information necessary to make the statements therein not misleading, to the
extent such alleged 


                                     -31-
<PAGE>
 
untrue or incomplete statement or omission was made with the Company's or the
Partnership's knowledge that the statement was untrue or incomplete or omitted
to state a material fact; (c) any debts, liabilities or obligations (whether
known or unknown, disputed or undisputed, fixed, contingent or otherwise)
specified on Schedule 7.19 hereto or arising and incurred after the Closing Date
             -------------
(other than as a result of a breach by any Seller of any representation,
warranty, covenant or agreement hereunder), including the obligations under any
Service Contracts that survive the Closing Date, to the extent any such
obligation is to be performed after the Closing Date, except to the extent any
such obligation is to be performed after the Closing Date as a result of a
breach or default under any of the Leases or Service Contracts by the Seller
prior to the Closing Date; and (d) any and all damages and expenses incident to
any of the foregoing or to the enforcement of this Section 11.3.

          11.4       Indemnification Procedures. All claims for indemnification
                     --------------------------                                
under this Article 14 shall be asserted and resolved as follows:

          11.4.1           In the event that any Seller Indemnified Party or
                           Company Indemnified Party (the "Indemnified Party")
                           has a Claim against any Seller Indemnifying Party or
                           Company Indemnifying Party obligated to provide
                           indemnification pursuant to Sections 11.1 or 11.2
                           hereof, on the one hand, or Section 11.3 hereof, on
                           the other hand (the "Indemnifying Party"), which does
                           not involve a claim being asserted against or sought
                           to be collected by a third party, the Indemnified
                           Party shall with reasonable promptness send a written
                           notice (the "Claim Notice") with respect to such
                           claim to the Indemnifying Party. If the Indemnifying
                           Party does not notify the Indemnified Party within
                           the fifteen days thereafter (the "Notice Period")
                           that the Indemnifying Party disputes such claim, the
                           amount of such claim shall be conclusively deemed a
                           liability of the Indemnifying Party hereunder. In
                           case an objection is made in writing in accordance
                           with this Section 11.4.1, the Indemnified Party shall
                           have thirty (30) days to respond in a written
                           statement to the objection. If after such thirty (30)
                           day period there remains a dispute as to any claims,
                           the parties shall attempt in good faith for sixty
                           (60) days to agree upon the rights of the respective
                           parties with respect to each of such claims. If the
                           parties should so agree, a memorandum setting forth
                           such agreement shall be prepared and signed by both
                           parties.
          
          11.4.2           In the event that any claim for which the
                           Indemnifying Party would be liable to an Indemnified
                           Party hereunder is asserted, or any action or
                           proceeding commenced, against an Indemnified Party by
                           a third party, the Indemnified Party 


                                     -32-
<PAGE>
 
                           shall with reasonable promptness notify the 
                           Indemnifying Party of such claim, specifying the
                           nature of such claim and the amount or the estimated
                           amount thereof to the extent then feasible (which
                           estimate shall not be conclusive of the final amount
                           of such Claim) (the "Third Party Claim Notice"). The
                           Indemnifying Party shall have 30 days from the
                           receipt of the Claim Notice (the "Third Party Notice
                           Period") to notify the Indemnified Party (a) whether
                           or not such party disputes the liability to the
                           Indemnified Party hereunder with respect to such
                           claim and (b) if such party does not dispute such
                           liability, whether or not the Indemnifying Party
                           desires, at the sole cost and expense of the
                           Indemnifying Party, to defend against such claim,
                           provided that such party is hereby authorized (but
                           not obligated) prior to and during Third Party Notice
                           Period to file any motion, answer or other pleading
                           and to take any other action which the Indemnifying
                           Party shall deem necessary or appropriate to protect
                           the Indemnifying Party's interests. In the event that
                           the Indemnifying Party notifies the Indemnified Party
                           within the Third Party Notice Period that the
                           Indemnifying Party does not dispute the Indemnifying
                           Party's obligation to indemnify hereunder and desires
                           to defend the Indemnified Party against such claim,
                           except as hereinafter provided, such party shall have
                           the right to defend by appropriate proceedings. No
                           non-monetary settlement of any such matter shall be
                           entered into without the written consent of the
                           Indemnified Party, which consent shall not be
                           unreasonably withheld; provided that, unless the
                           Indemnified Party otherwise agrees in writing, such
                           party may not settle any matter (in whole or in part)
                           unless such settlement includes a complete and
                           unconditional release of the Indemnified Party. If
                           the Indemnified Party desires to participate in, but
                           not control, any such defense or settlement the
                           Indemnified Party may do so at its sole cost and
                           expense. If the Indemnifying Party elects not to
                           defend the Indemnified Party against claim, whether
                           by failure of such party to give the Indemnified
                           Party timely notice as provided above or otherwise,
                           then the Indemnified Party, without any rights
                           against such party, may settle or defend against any
                           such claim in the Indemnified Party's sole discretion
                           and the Indemnified Party shall be entitled to
                           recover from the Indemnifying Party the amount of any
                           settlement or judgment to the extent the Indemnified
                           Party is entitled to indemnification and, on an on-
                           going basis, all indemnifiable 

                                     -33-
<PAGE>
 
                           costs and expenses of the Indemnified Party with
                           respect thereto, including interest from the date
                           such costs and expenses were incurred.

          11.4.3           If at any time, in the reasonable opinion of the
                           Indemnified Party, notice of which shall be given in
                           writing to the Indemnifying Party, any such claim
                           seeks material prospective or other relief which
                           could have a materially adverse effect on the assets,
                           liabilities, financial condition, results of
                           operations or business prospects of any Indemnified
                           Party or in the reasonable opinion of counsel for the
                           Indemnified Party a conflict exists, the Indemnified
                           Party shall have the right to control or assume (as
                           the case may be) the defense of any such claim and
                           the amount of any judgment or settlement and the
                           reasonable costs and expenses of defense shall be
                           included as part of the indemnification obligations
                           of the Indemnifying Party hereunder. If the
                           Indemnified Party should elect to exercise such
                           right, the Indemnifying Party shall have the right to
                           participate in, but not control, the defense of such
                           claim or demand at the sole cost and expense of the
                           Indemnifying Party.

          11.4.4           Nothing herein shall be deemed to prevent the
                           Indemnified Party from making a claim, and an
                           Indemnified Party may make a claim hereunder, for
                           potential or contingent claims or demands provided
                           the Claim Notice or Third Party Claim Notice, as the
                           case may be, sets forth the specific basis for any
                           such potential or contingent claim or demand to the
                           extent then feasible and the Indemnified Party has
                           reasonable grounds to believe that such a claim or
                           demand may be made.

          11.4.5           The Indemnified Party's failure to give reasonably
                           prompt notice as required by this Section 11.4 of any
                           actual, threatened or possible claim, demand, action
                           or proceeding which may give rise to a right of
                           indemnification hereunder shall not relieve the
                           Indemnifying Party of any liability which the
                           Indemnifying Party may have to the Indemnified Party
                           unless the failure to give such notice materially and
                           adversely prejudiced the Indemnifying Party or
                           increases the amount of indemnification which the
                           Indemnifying Party is obligated to pay hereunder. In
                           any such event, the amount of indemnification which
                           the Indemnified Party will be entitled to receive
                           hereunder shall be reduced to an amount which the

                                     -34-
<PAGE>
 
                           Indemnified Party would have been entitled to receive
                           had such notice been timely.


         XII.  MISCELLANEOUS
               -------------

                12.1 Assignment.  Neither this Agreement nor any interest
                     ----------                                          
hereunder may be assigned or transferred by any Seller without the prior written
consent of the Company or the Partnership.  As of the Closing Date, the Company
or the Partnership may assign, transfer or demise any or all of its interest in
any Property to any Affiliate (the "Permitted Transferees") without the prior
consent of the Sellers.

                12.2 Entire Agreement.  Any prior agreement or understanding
                     ----------------                                       
among the parties concerning the subject matter hereof is hereby superseded.
This Agreement constitutes the entire agreement among the parties with respect
to the subject matter hereof and the transactions contemplated herein and shall
not be modified or amended except in a written document signed by all of the
parties hereto.  This Agreement shall be for the benefit of and shall be binding
on the parties hereto, their heirs, successors, personal representatives, and
assigns.

                12.3 Notices.  All notices or other communications required or
                     -------                                                  
permitted under this Agreement shall be in writing and delivered personally or
by registered or certified mail, return receipt requested, postage prepaid, or
by a nationally recognized overnight courier (such as Federal Express) with
receipted delivery.  Notices to the parties shall be addressed as follows:

     If to the Sellers:

     Kline Chevrolet Sales Corporation
     c/o Magnus Group Ltd.
     1350 Connecticut Avenue, N.W.
     Suite 1225
     Washington, D.C.  20036

with a copy to:

     Kaufman & Conoles, A Professional Corporation
     2000 Nations Bank Center
     One Commercial Place
     Norfolk, Virginia  23514-3037
     Attention: William R. Van Buren, III, Esq.
 
If to the Partnership or to the Company:

     Capital Automotive REIT

                                     -35-
<PAGE>
 
     1925 North Lynn Street
     Suite 306
     Arlington, Virginia 22209
     Attention: Thomas D. Eckert, President and Chief Executive Officer

With a copy to:

     Wilmer, Cutler & Pickering
     2445 M Street, N.W.
     Washington, DC  20037
     Attention: George P. Stamas, Esq.

     All notices given in accordance with the terms hereof shall be deemed
effective (a) if delivered in person or by overnight courier, on the business
day it is delivered, and (b if sent by registered or certified mail, three (3)
business days after deposit with the U.S. mail.  Any party hereto may change its
address by written notice to all parties hereto sent in accordance with the
terms of this Section and any such Notice of change of address shall be
effective five (5) days after delivery.

          12.4  Governing Law.  This Agreement shall be governed and interpreted
                -------------                                                   
in accordance with the laws of the Commonwealth of Virginia without regard to
its principles of conflicts of laws, and any action brought under or arising out
of this Agreement or the matters relating hereto shall be submitted to the
jurisdiction of the United States District Court for the Eastern District of
Virginia.  Each party acknowledges and agrees to such jurisdiction.

          12.5  Litigation Costs.  If there is any legal action or proceeding
                ----------------                                             
between the parties hereto arising from or based upon this Agreement, the
unsuccessful party to such action or proceeding shall pay to the prevailing
party all litigation costs and expenses, including reasonable attorneys' fees,
incurred by such prevailing party in such action or proceeding and in any appeal
in connection therewith, and if such prevailing party recovers a judgment in any
such action, proceeding or appeal, such costs, expenses and attorneys' fees
shall be included in as part of such judgment.

          12.6  Counterparts.  This Agreement may be executed in any number of
                ------------                                                  
identical counterparts, any or all of which may contain the signatures of fewer
than all of the parties but all of which shall be taken together as a single
instrument.

          12.7  Offer and Acceptance. This Agreement constitutes an offer by the
                --------------------  
Company and the Partnership which must be accepted, by delivery to the Company
of a duly signed and completed signature page hereof, by all of the Sellers
within five (5) days after the date this Agreement is signed by the Company and
the Partnership.  If, within such time period, less than all of the persons
owning any interest in a Seller shall have signed this Agreement, then the
Seller and the Property owned by such Seller shall, at the sole option of the
Company, be excluded from the sale and purchase hereunder, this Agreement shall
remain in full force and effect as to the other 

                                     -36-
<PAGE>
 
Sellers and Properties, and an appropriate adjustment shall be made with respect
to the relevant Property, in which case the Aggregate Purchase Price shall be
reduced by the Purchase Price of such Property as provided in this Agreement; if
after the expiration of such time period all of the Sellers execute this
Agreement, the Company, at its sole option, may elect to re-include, or may
continue to exclude, any such Seller and Property.

 
           [THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK]



                                     -37-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal, with the intention that it be a sea ed instrument, as of the date
set forth above.

WITNESS                          CAPITAL AUTOMOTIVE REIT


By:  /s/ J.B. Watkins            By:  /s/ Thomas D. Eckert            (SEAL)
     --------------------------      ---------------------------------

Name: J. B. Watkins              Name:  Thomas D. Eckert
                                 Title:President and Chief Executive Officer

                                 CAPITAL AUTOMOTIVE L.P.

WITNESS                          By: Capital Automotive REIT, as General Partner
 

By:  /s/ J.B. Watkins            By: /s/ Thomas D. Eckert             (SEAL)
     --------------------------      ---------------------------------
Name: J. B. Watkins                 Name:  Thomas D. Eckert
                                    Title: President and Chief Executive Officer
 

WITNESS                          SELLER:
                                 KLINE CHEVROLET SALES CORPORATION

 
By:   /s/ Stacy Cummings         By:     /s/ James M. Kline           (SEAL)
     --------------------------          -----------------------------
Name:     Stacy Cummings         Name:     James M. Kline
Title:    Vice President         Title:    Chairman of the Board
                                 Address:  c/o The Magnus Group Ltd.
                                           1350 Connecticut Avenue, N.W.
                                           Suite 1225
                                           Washington, D.C. 20036
                                 Telephone #: (202) 828-1000
                                 Facsimile #: (202) 296-8092
                                 Social Security # or TIN:________________
 

     EXECUTING INDIVIDUALLY AS TO SECTION 11.2.3



     By: /s/ James M. Kline
         ----------------------------
     Name:  James M. Kline


                                     -38-
<PAGE>
 
                                EXHIBIT 2.4(a)
                        (Form of Kline Lease Agreement)




                                LEASE AGREEMENT
                                ---------------

                                    BETWEEN
                                    -------

                       CAPITAL AUTOMOTIVE L.P., LANDLORD
                       ---------------------------------

                                      AND
                                      ---

                   KLINE CHEVROLET SALES CORPORATION, TENANT
                   -----------------------------------------


                          DATED: ______________, 1998
<PAGE>
 
<TABLE>
<C>           <S>                                                            <C>
ARTICLE I    
              LEASE AGREEMENT, LEASED PROPERTY AND TERM........................1
              1.01                Lease Agreement..............................1
              1.02                Contingent Upon Acquisition of the Leased 
                                  Property.....................................2
              1.03                Term.........................................3
              1.04                Holding Over.................................3
              1.05                Surrender....................................4
                                 
ARTICLE II    RENT.............................................................4
              2.01                Base Rent....................................4
              2.02                Payment......................................4
              2.03                Security Deposit.............................4
              2.04                Base Annual Rent Adjustment..................5
              2.05                Additional Rent..............................5
              2.06                Place(s) of Payment of Rent; Direct Payment 
                                  of Additional Rent...........................5
                                                                               5
              2.07                Net Lease....................................5
              2.08                No Termination, Abatement, Etc...............5
 
ARTICLE III   IMPOSITIONS AND UTILITIES........................................6
              3.01                Payment of Impositions.......................6
              3.02                Definition of Impositions....................7
              3.03                Utilities....................................8
              3.04                Escrow of Impositions........................8
              3.05                Discontinuance of Utilities..................9
              3.06                Liens........................................9
 
ARTICLE IV    INSURANCE........................................................9
              4.01                Insurance....................................9
              4.02                Insurance Limits............................11
              4.03                Insurance Requirements......................11
              4.04                Replacement Cost............................12
              4.05                Blanket Policy..............................12
              4.06                No Separate Insurance.......................12
              4.07                Waiver of Subrogation.......................12
              4.08                Mortgages...................................13
              4.09                Other Insurance Requirements................13
</TABLE> 
<PAGE>
 
<TABLE> 
<S>           <C>                                                           <C> 
ARTICLE V     INDEMNITY; SUBSTANCES OF CONCERN................................13
              5.01                Tenant's Indemnification....................13
              5.02                Substances of Concern.......................14
              5.03                Audits......................................16
              5.04                Landlord's Option Re: Compliance............17
              5.05                Environmental Indemnification...............17
              5.06                Tenant's Cleanup Obligation.................18
              5.07                Existing Environmental Conditions...........18
              5.08                Survival of Tenant's Obligations ...........18
 
ARTICLE VI    USE AND ACCEPTANCE OF PREMISES..................................18
              6.01                Use of Leased Properties....................18
              6.02                Acceptance of Leased Properties.............19
              6.03                Conditions of Use and Occupancy.............19
              6.04                Financial Statements and Other Information..19
 
ARTICLE VII   REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS.............22
              7.01                Maintenance.................................20
              7.02                Compliance with Laws........................21
              7.03                Required Alterations........................21
              7.04                Mechanics' Liens............................21
              7.05                Replacements of Fixtures....................21
              7.06                Encroachments; Restrictions.................22
 
ARTICLE VIII  ALTERATIONS AND SIGNS; TENANT'S PROPERTY;CAPITAL ADDITIONS TO
              THE LEASED PROPERTIES ..........................................22
              8.01                Tenant's Right to Construct.................22
              8.02                Scope of Right..............................23
              8.03                Cooperation of Landlord.....................24
              8.04                Commencement of Construction................24
              8.05                Rights in Tenant Improvements...............25
              8.06                Personal Property...........................25
              8.07                Requirements for the Tenant's Personal 
                                  Property....................................25
              8.08                Financings of Capital Additions to a Leased
                                  Property....................................27
 
ARTICLE IX    DEFAULTS AND REMEDIES...........................................27
              9.01                Events of Default...........................27
</TABLE> 

                                     -ii-
<PAGE>
 
<TABLE> 
<S>         <C>                   <C>                                        <C>
            9.02                  Remedies....................................29
            9.03                  Right of Set-Off............................32
            9.04                  Performance of Tenant's Covenants...........32
            9.05                  Late Charge.................................32
            9.06                  Litigation; Attorneys' Fees.................33
            9.07                  Remedies Cumulative.........................33
            9.08                  Escrows and Application of Payments.........33
            9.09                  Power of Attorney...........................34

ARTICLE X                                                                     
            DAMAGE AND DESTRUCTION............................................34
            10.01                 General.....................................34
            10.02                 Landlord's Inspection.......................35
            10.03                 Landlord's Costs............................35
            10.04                 Rent Abatement..............................35
            10.05                 Substantial Damage During Lease Term........36
            10.06                 Damage Near End of Term.....................36
            10.07                 Risk of Loss................................37

ARTICLE XI
            CONDEMNATION......................................................37
            11.01                 Total Taking................................37
            11.02                 Partial Taking..............................37
            11.03                 Restoration.................................37
            11.04                 Landlord's Inspection.......................38
            11.05                 Award Distribution..........................38
            11.06                 Temporary Taking............................38

ARTICLE XII
            REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS...............39
            12.01                  Organization and Qualification.............39
            12.02                  Material Agreements........................40
            12.03                  Changes in Condition.......................40
            12.04                  Franchises, Licenses, etc..................40
            12.05                  Litigation.................................41
            12.06                  Authorization and Enforceability...........41
            12.07                  No Legal Obstacle to Lease.................41
            12.08                  Certain Business Representations...........42
            12.09                  Certain Financial Covenants................43
            12.10                  Cash Flow Coverage Ratio Covenant..........43
            12.11                  Disclosure.................................44
            12.12                  Covenant Not to Acquire....................44

</TABLE> 

                                     -iii-
<PAGE>
 
<TABLE> 
<CAPTION> 

ARTICLE XIII               
<S>           <C>                 <C>                                        <C>
              ASSIGNMENT AND SUBLETTING; ATTORNMENT...........................44
              13.01               Prohibition Against
                                  Subletting and Assignment...................44
              13.02               Changes of Control..........................44
              13.03               Operating/Service Agreements................45
              13.04               Assignment..................................46
              13.05               REIT Limitations............................46
              13.06               Attornment..................................47
              13.07               Severance and Spin-Off......................47

ARTICLE XIV
              ARBITRATION.....................................................48
              14.01               Controversies...............................48
              14.02               Appointment of Arbitrators..................48
              14.03               Arbitration Procedure.......................48
              14.04               Expenses....................................48
              14.05               Enforcement of the Arbitration Award........49

ARTICLE XV
              QUIET ENJOYMENT, SUBORDINATION,
              ATTORNMENT, ESTOPPEL CERTIFICATES...............................49
              15.01               Quiet Enjoyment.............................49
              15.02               Landlord Mortgages; Subordination...........49
              15.03               Attornment..................................50
              15.04               Estoppel Certificates.......................50
              15.05               Waiver of Landlord's Lien...................51

ARTICLE XVI
              RIGHT OF FIRST OFFER............................................51
              16.01               Right of First Offer During Lease Term or
                                  Extension Term..............................51
              16.02               Right to Purchase at End of an
                                  Extension Term..............................52
              16.03               Option to Purchase Vacant Lot...............53

ARTICLE XVII
              MISCELLANEOUS...................................................53
              17.01               Notices.....................................53
              17.02               Advertisement of a Leased Property..........54
              17.03               Landlord's Access...........................55
              17.04               Entire Agreement............................55
              17.05               Severability................................55
              17.06               Captions and Headings.......................55
              17.07               Governing Law...............................55

</TABLE> 

                                     -iv-
<PAGE>
 
<TABLE> 
              <S>                 <C>                                        <C>
              17.08               Memorandum of Lease or Certain
                                  Rights Under the Lease......................55
              17.09               Waiver......................................55
              17.10               Assignment; Binding Effect..................56
              17.11               Consents and Approvals......................56
              17.12               Single Property.............................56
              17.13               Modification................................56
              17.14               Incorporation by Reference..................56
              17.15               No Merger...................................56
              17.16               Force Majeure...............................56
              17.17               Laches......................................57
              17.18               Waiver of Jury Trial........................57
              17.19               Permitted Contests..........................57
              17.20               Construction of Lease.......................58
              17.21               Counterparts................................58
              17.22               Relationship of Landlord and Tenant.........58

</TABLE> 

                                      -v-
 
<PAGE>
 
                                   SCHEDULES

     A                        Leased Properties and Initial Base Rent
     B                        Permitted Liens
     12.02                          Material Agreements
     12.03                          Changes in Condition


                                   EXHIBITS

     2.02                           Payment Account Information
     2.04                           Base Annual Rent Adjustment
     5.07                           Environmental Reports
     15.02                          Form of Subordination and Non-Disturbance
Agreement

                                     -vi-
<PAGE>
 
                                LEASE AGREEMENT

          This Lease Agreement ("Lease") dated as of the ___ day of ___________,
1998 by and between CAPITAL AUTOMOTIVE L.P., a Delaware limited partnership
("Landlord"), having its principal office at 1925 North Lynn, Suite 306,
Arlington, Virginia, and KLINE CHEVROLET SALES CORPORATION, a Virginia
corporation, having its principal office at c/o Magnus Group, Ltd. 1350
Connecticut Avenue, Suite 1225, Washington, D.C. 20036 ("Tenant").

                                    RECITALS

          WHEREAS, Tenant or an Affiliate (as hereafter defined) has conveyed or
will convey to Landlord certain parcels of real estate and improvements thereon
upon which Tenant engages or will engage in motor vehicle retail and/or motor
vehicle related businesses (the "Business"), which parcels of real estate and
improvements thereon are described on Schedule A attached hereto and
incorporated herein by reference (each hereinafter a "Leased Property" or
collectively, the "Leased Properties"), and Landlord and Tenant desire to
provide for the lease by Landlord to Tenant of the Leased Properties; and

          WHEREAS, Landlord and Tenant desire that each of the Leased Properties
shall be the subject of this Lease and be used by Tenant in its operation of the
Business; and

          WHEREAS, this Lease provides that additional real estate and
improvements thereon may be made subject to the operation and effect of this
Lease, upon execution by Landlord and Tenant of a Lease Supplement designating
each such additional property as a Leased Property hereunder.

          NOW, THEREFORE, in consideration of the foregoing premises and of
their respective agreements and undertakings herein, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:

                                   ARTICLE I
                   LEASE AGREEMENT, LEASED PROPERTY AND TERM

          1.01      Lease Agreement.  Landlord does hereby let and lease unto
                    ---------------                                          
Tenant, and Tenant does hereby take and hire from Landlord, the Leased
Properties, which shall respectively consist of:

          (a)       The parcels of land described and located at the addresses
                    listed in Schedule A hereto, as more particularly described
                    therein, together with any additional parcels of real estate
                    and improvements thereon subsequently designated as a Leased
                    Property by the parties pursuant to a Lease Supplement as
                    provided for herein, together with all rights, titles,
                    appurtenant interests, covenants, licenses, privileges and
                    benefits thereto belonging, and any easements, rights-of-
                    way, rights of ingress or egress or other interests in, on,
                    or to any land, highway, street, road or avenue, open or
                    proposed, in, on, across, in 
<PAGE>
 
                    front of, abutting or adjoining such real property
                    including, without limitation, any strips and gores adjacent
                    to or lying between such real estate and any adjacent real
                    estate (the "Land");

          (b)       All buildings, improvements, structures and Fixtures (as
                    hereinafter defined) now located or to be located or to be
                    constructed on the Land, including, without limitation,
                    sidewalks, landscaping, parking lots and structures, roads,
                    drainage and all above ground and underground utility
                    structures and conduits (on-site or off-site), equipment
                    systems and other so-called "infrastructure" improvements
                    (the "Improvements");

          (c)       All equipment, machinery, fixtures, and other items of real
                    and/or personal property, including all components thereof,
                    located in, on or used in connection with, and permanently
                    affixed to or incorporated into, the Improvements,
                    including, without limitation, all furnaces, boilers,
                    heaters, electrical equipment, heating, plumbing, lighting,
                    ventilating, refrigerating, incineration, air and water
                    pollution control, waste disposal, air-cooling and air-
                    conditioning systems and apparatus, sprinkler systems and
                    fire and theft protection equipment, and similar systems,
                    all of which, to the greatest extent permitted by law, are
                    hereby deemed to constitute real estate, together with all
                    replacements, modifications, alterations and additions
                    thereto (collectively the "Fixtures"); and

          (d)       All easements, rights and appurtenances relating to the Land
                    and the Improvements.

          SUBJECT, HOWEVER, to the liens, encumbrances, restrictions,
agreements, and other title matters listed or specifically referred to in
Schedule B ("Permitted Exceptions").

          The Leased Properties shall however exclude all furniture, equipment,
inventory and items of moveable personal property attached to the Land or
Improvements that relate to the business being conducted on the Leased Property
which items may readily be removed without material damage to the Land and
Improvements whether or not such items might legally be considered to be
"fixtures" (all of which are owned by Tenant and shall hereinafter be defined as
the "Excluded Personal Property").

          1.02      Contingent Upon Acquisition of the Leased Property.  In the
                    --------------------------------------------------         
event this Lease is executed prior to the conveyance by Tenant or an Affiliate
of the Leased Property to Landlord, the parties acknowledge that the
effectiveness of this Lease in respect of such Leased Property is contingent
upon the closing of such conveyance (the "Commencement Date").  The Commencement
Date shall be the date of conveyance of the Leased Property and the parties
agree to execute an addendum to this Lease stating the Commencement Date.

                                      -2-
<PAGE>
 
          1.03      Term.  The initial term of this Lease (the "Term") shall be
                    ----                                                       
for a fixed term of One Hundred and Twenty (120) months commencing on the
Commencement Date.  The initial term for any Leased Property designated in a
Lease Supplement shall begin on the date of such Lease Supplement and expire at
the end of the Term or then current Extension Term (as hereafter defined), as
the case may be.  Provided that no Event of Default (as defined in Section 9.01
hereof) shall exist and be continuing, Tenant shall have the right to extend
this Lease for the Leased Properties as a group, at Tenant's option, for one One
Hundred and Twenty (120) month renewal term from the expiration of the Term (the
"First Extension Term") and such renewal shall be automatic unless notice from
Tenant to the contrary is given to Landlord no later than twelve (12) months
prior to the end of the Term.  In addition, Tenant shall have the right to
extend this Lease for the Leased Properties as a group at Tenant's option, for a
second One Hundred and Twenty (120) month renewal term from the expiration of
the First Extension Term (the "Second Extension Term", each an "Extension Term",
and collectively with the First Extension Term, the "Extension Terms"), and such
renewal shall be automatic unless notice from Tenant to the contrary is given to
Landlord no later than twelve (12) months prior to the end of the First
Extension Term, provided that no Event of Default (as defined in Section 9.01
hereof) shall exist and be continuing.  Notwithstanding anything else to the
contrary in this Agreement, the Rent during the Second Extension Term shall be
the Fair Market Rent (as hereafter defined) for the Leased Property.  Fair
Market Rent shall be determined as soon as possible after the expiration of the
period during which Tenant could elect not to renew after the First Extension
Term, on the basis of appraisals of independent appraisers selected in
accordance with the provisions of Section 16.02(b).  Tenant shall have the
right, in its sole discretion, to rescind the exercise of Tenant's option to
extend the Lease for the Second Extension Term during a period of five (5)
business days after the determination of the Fair Market Rent.  If Tenant shall
fail to exercise the right to rescind within such five (5) day period, the
election to extend shall be irrevocable and the Fair Market Rent so determined
shall be the Base Annual Rent during the Second Extension Term notwithstanding
any changes in the market rental rates, whether upward or downward, which may
occur after such determination.  However, notwithstanding anything else in this
Agreement, Fair Market Rent shall become the Base Annual Rent (as defined
hereafter) and shall be subject to Base Annual Rent Adjustments as set forth in
Section 2.04.

          1.04      Holding Over.  Should Tenant, without the express consent of
                    ------------                                                
Landlord, continue to hold and occupy any Leased Property after the expiration
or earlier termination of the Term or any Extension Term, as the case may be,
such holding over beyond the Term and the acceptance or collection of Rent (as
defined hereinafter) by Landlord shall operate and be construed as creating a
tenancy from month-to-month and not for any other term whatsoever.  During any
such holdover period Tenant shall pay to Landlord for each month (or portion
thereof) Tenant remains in such Leased Property, in lieu of the Base Annual Rent
(as defined hereafter) for such Leased Property, an amount equal to the sum of
one-twelfth (1/12) of (i) one hundred seven percent (107%) of such Base Annual
Rent (the "Holdover Rate"), and (ii) as applicable, one hundred percent (100%)
of the Additional Rent (as defined hereinafter) for such Leased Property and
Other Additional Rent (as defined hereinafter) for such Leased Property, each as
in effect on the expiration date.  Said month-to-month tenancy may be terminated
by Landlord by giving Tenant thirty (30) days written 

                                      -3-
<PAGE>
 
notice, and at any time thereafter Landlord may re-enter and take possession of
such Leased Property.

          1.05      Surrender.  Except as a result of (a) Tenant Improvements
                    ---------                                                
and Capital Additions (as defined hereinafter); (b) normal and reasonable wear
and tear (subject to the obligation of Tenant to maintain each Leased Property
in good order and repair during the Term); and (c) casualty, taking or other
damage and destruction not required to be repaired by Tenant, Tenant shall
surrender and deliver up each Leased Property at the expiration or termination
of the Term or the Extension Term therefor (Tenant shall not be in breach of
this Lease if, at the termination of the Lease, it is diligently pursuing
repairs that the Lease requires Tenant to make but cannot be completed prior to
the expiration of the Lease, provided however, that Tenant hereby shall have the
continuing obligation to complete such repairs), as the case may be, broom
clean, in good order and repair, free of the Excluded Personal Property and any
additional items of Tenant's personal property (together with the Excluded
Personal Property, the "Tenant's Personal Property"), all of which Tenant shall
remove prior to such surrender and delivery, and in as good order and condition
as of the Commencement Date.


                                   ARTICLE II
                                      RENT

          2.01      Base Rent.  Tenant shall pay Landlord annual base rent (the
                    ---------                                                  
"Base Annual Rent") as to the Leased Property for each year during the Term or
the Extension Term (each such year a "Lease Year"), which Base Annual Rent shall
be subject to upward adjustment pursuant to Section 2.04.  In the first Lease
Year, Base Annual Rent shall be in the amount set forth on Schedule A (the
"Initial Base Annual Rent"), paid to Landlord in twelve equal monthly
installments.

          2.02      Payment.  Tenant shall pay Landlord the Base Annual Rent as
                    -------                                                    
to the Leased Property for each Lease Year, without notice, demand, set-off or
counterclaim in advance, in lawful money of the United States of America and
payable in consecutive monthly installments commencing on the Commencement Date
and thereafter on the first day of each month during the Term.  Tenant will, to
the extent that such method of payment is compatible with its business
practices, make such payments by direct deposit of immediately available funds
to the account set forth in Exhibit 2.02 (which Exhibit 2.02 may be modified by
Landlord from time to time upon Notice (as hereafter defined) to Tenant).

          2.03      Security Deposit.  Prior to the Commencement Date, Tenant
                    ----------------                                         
shall deliver to Landlord an amount equal to one-twelfth (1/12th) of the Base
Annual Rent, which amount shall be held by Landlord as security (the "Security
Deposit") for the performance of Tenant's payment and other obligations under
this Lease.  At Tenant's option, Tenant may deliver one-half of the Security
Deposit in immediately available funds and one-half of the Security Deposit in
the form of a letter of credit, provided that such letter of credit is in form
and substance acceptable to Landlord.  Upon an Event of Default and the
continuance thereof, Landlord shall have the right, but not the obligation, 

                                      -4-
<PAGE>
 
to apply the Security Deposit as set forth in Section 9.08. Landlord shall
return the Security Deposit, without interest, after expiration of this Lease,
if Tenant has fully and faithfully carried out all of the terms, covenants and
conditions hereof. In the event that Landlord eliminates its standard business
policy of requiring security deposits from tenants, then Landlord shall refund
the Security Deposit to Tenant within thirty (30) days of such policy change.

           2.04   Base Annual Rent Adjustment.
                  --------------------------- 

                  (a)  The Base Annual Rent shall be adjusted during the Lease
                       Term or the Extension Terms under the procedures set
                       forth in Exhibit 2.04 (the "Base Annual Rent
                       Adjustment").
 
                  (b)  As used in Exhibit 2.04, the "Index" shall mean the CPI-U
                       published by the United States Department of Labor,
                       Bureau of Labor Statistics Consumer Price Index for All
                       Urban Consumers, U.S. City Average. If at any time during
                       the Term or the Extension Term, as the case may be, the
                       Index shall be discontinued, Landlord shall select a
                       substitute index, being an existing official index
                       published by the Bureau of Labor Statistics or its
                       successor or another, similar governmental agency, which
                       index is most nearly equivalent to the Index.

           2.05   Additional Rent.  As to each Leased Property, in addition to
                  ---------------                                             
the Base Annual Rent, Tenant shall pay all other amounts, liabilities,
obligations and Impositions (as hereinafter defined) which Tenant assumes or
agrees to pay under this Lease and any fine, penalty, interest, charge, expense
and cost which may be added for nonpayment or late payment of such items
(collectively, the "Additional Rent").

           2.06   Place(s) of Payment of Rent; Direct Payment of Additional
                  ---------------------------------------------------------
Rent.  The Base Annual Rent and Additional Rent are hereinafter referred to as
- -----                                                                         
"Rent."  Landlord shall have all legal, equitable and contractual rights, powers
and remedies provided in this Lease or by statute or otherwise in the case of
nonpayment of the Rent for each Leased Property. Tenant shall make all payments
of Rent at Landlord's address set forth in Section 17.01 or as Landlord may
otherwise from time to time direct in writing, or, if Landlord shall direct
Tenant, directly to a bank account specified by Landlord to Tenant in writing.
At the direction of the Landlord, Tenant shall make payments of Additional Rent
directly to the person or persons to whom such amount is owing at the time and
times when such payments are due, and Tenant shall give to Landlord such
evidence of such direct payments as Landlord shall reasonably request.

           2.07   Net Lease.  This Lease shall be deemed and construed to be
                  ----------                                                
an "absolute net lease" or "triple net lease," (i.e. that Tenant shall pay all
costs and expenses related to the ownership and operations of each Leased
Property, thereby leaving all Rent as an absolutely net return to Landlord) and
as to each Leased Property, Tenant shall pay all Rent in connection with such
Leased Property throughout the Term and any Extension Term, without abatement,
deduction or set-off.

                                      -5-
<PAGE>
 
          2.08      No Termination, Abatement, Etc.  Except as otherwise
                    -------------------------------                     
specifically provided herein, Tenant shall remain bound by this Lease in
accordance with its terms. Except as otherwise specifically provided herein,
Tenant shall not, without the prior written consent of Landlord, modify,
surrender or terminate this Lease as to any Leased Property, nor seek nor be
entitled to any abatement, deduction, deferment or reduction of Rent, or set-off
against the Rent as to any Leased Property for any reason whatsoever.  Except as
specifically provided herein, the obligations of Landlord and Tenant shall not
be affected by reason of:  (a) the lawful or unlawful prohibition of, or
restriction upon, Tenant's use of any Leased Property, or any part thereof, the
interference with such use by any person, corporation, partnership or other
entity, or by reason of eviction by paramount title; (b) any claim which Tenant
has or might have against Landlord or by reason of any default or breach of any
warranty by Landlord under this Lease or any other agreement between Landlord
and Tenant, or to which Landlord and Tenant are parties; (c) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceeding affecting Landlord or any assignee or transferee
of Landlord; (d) any damage to, or destruction of, any Leased Property or any
portion thereof for whatever cause, or any taking of the Leased Property or any
portion thereof; or (e) any other cause, whether similar or dissimilar to any of
the foregoing, other than a discharge of Tenant from any such obligations as a
matter of law.  Except as otherwise specifically provided herein, and to the
maximum extent permitted by law, Tenant hereby specifically waives all rights,
including but not limited to any rights under any statute relating to rights of
tenants in the jurisdictions where the Leased Properties are located, which may
now be conferred upon it by law, relating to:  (a) the modification, surrender
or termination of this Lease, or the quitting or surrender of any Leased
Property or any portion thereof; (b) any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Tenant hereunder; or (c) any
rights of redemption.  As to each Leased Property, the obligations of Landlord
and Tenant hereunder shall be separate and the Rent and all other sums shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated pursuant to the express provisions of this Lease or by
termination of this Lease other than by reason of an Event of Default.


                                  ARTICLE III
                           IMPOSITIONS AND UTILITIES

          3.01      Payment of Impositions.  Subject to the adjustments set
                    ----------------------                                 
forth herein, Tenant shall pay, in the manner set forth in Section 3.04, as
Additional Rent, to the Landlord an amount equal to the amount necessary to pay
all Impositions (as hereinafter defined) that may be levied or become a lien on
any Leased Property or any part thereof at any time (whether prior to or during
the Term, but not that arise and are assessed after the end of the Term of the
Lease), without regard to prior ownership of said Leased Property, before the
same becomes delinquent.  Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon any
Leased Property or any part thereof.  Tenant, at its expense, shall prepare and
file all tax returns and reports in respect of any Imposition as may be required
by governmental authorities, provided, however, that Tenant shall provide to
Landlord copies of all filings of such tax returns or reports in respect of any
real or personal property owned by Landlord.  Tenant shall be 

                                      -6-
<PAGE>
 
entitled to any refund due in respect of such Impositions from any taxing
authority if no Event of Default shall have occurred hereunder and be
continuing. Any refunds in respect of such Impositions retained by Landlord due
to an Event of Default shall be applied as provided in Section 9.08. Landlord
and Tenant shall, upon request of the other, provide such data as is maintained
by the party to whom the request is made with respect to a Leased Property as
may be necessary to prepare any required tax returns and reports. In the event
governmental authorities classify any property covered by this Lease as personal
property, Landlord and Tenant shall file all personal property tax returns in
such jurisdictions where it may legally so file with respect to their respective
owned personal property. Landlord, to the extent it possesses the same, and
Tenant, to the extent it possesses the same, will provide the other party, upon
request, with cost and depreciation records necessary for filing such returns or
reports for any property so classified as personal property. To the extent that
Landlord is legally required to file personal property tax returns, Tenant will
be provided with copies of assessment notices indicating a value in excess of
the reported value in sufficient time for Tenant to file a protest. Tenant may,
upon notice to Landlord, at Tenant's option and at Tenant's sole cost and
expense, protest, appeal, or institute such other proceedings as Tenant may deem
appropriate to effect a reduction of real estate or personal property
assessments and Landlord, at Tenant's expense as aforesaid, shall fully
cooperate with Tenant in such protest, appeal, or other action. Tenant shall
provide Landlord copies of all materials filed or presented in connection with
any such proceeding. Tenant shall promptly reimburse Landlord for all taxes paid
by Landlord, which were not paid with deposits received from Tenant, upon
receipt of billings accompanied by copies of a bill therefor and payments
thereof which identify the property with respect to which such payments are
made. Impositions imposed with respect to the tax-fiscal period during which the
Term commences and terminates as to each Leased Property shall be adjusted and
prorated between Landlord and Tenant on a per diem basis, with Tenant being
obligated to pay its pro rata share from and including the Commencement Date to
and including the expiration or termination date of the Term or Extension Term,
as the case may be, whether or not such Imposition is imposed before or after
such commencement or termination, and Tenant's obligation to pay its prorated
share thereof shall survive such termination. Tenant shall also pay to Landlord
a sum equal to the amount which Landlord may be caused to pay of any privilege
tax, sales tax, gross receipts tax, rent tax, occupancy tax or like tax
(excluding any tax based on net income), hereinafter levied, assessed, or
imposed by any federal, state, city, county or municipal or other local
governmental authority, or any subdivision thereof, upon or measured by rent or
other consideration required to be paid by Tenant under this Lease.

          3.02      Definition of Impositions.  "Impositions" means,
                    -------------------------                       
collectively:  (a) taxes (including without limitation, all real estate and
personal property ad valorem (whether assessed as part of the real estate or
separately assessed as unsecured personal property), sales and use, business or
occupation, single business, gross receipts, transaction, privilege, rent or
similar taxes, but not including income or franchise or excise taxes payable
with respect to Landlord's receipt of Rent); (b) assessments, whether in the
nature of a special assessment or otherwise (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term or any Extension Term, as the case may be); (c) water, sewer or other rents
and charges, excises, tax levies, 

                                      -7-
<PAGE>
 
and fees (including, without limitation, license, permit, inspection,
authorization and similar fees); (d) to the extent they may become a lien on a
Leased Property, all taxes imposed on Tenant's operations of such Leased
Property including without limitation, employee withholding taxes, income taxes
and intangible taxes; and (e) all other governmental charges, in each case
whether general or special, ordinary or extraordinary, or foreseen or unforseen,
of every character in respect of each Leased Property or any part thereof, the
Business conducted by Tenant thereon, and/or the Rent (including all interest
and penalties thereon due to any failure in payment by Tenant), which at any
time prior to, during or in respect of the Term or any Extension Term, as the
case may be, hereof may be assessed or imposed on or in respect of or be a lien
upon (i) Landlord or Landlord's interest in any Leased Property or any part
thereof; (ii) any Leased Property or any part thereof or any rent therefrom or
any estate, right, title or interest therein; or (iii) any occupancy, operation,
use or possession of, or sales from, or activity conducted on, or in connection
with any Leased Property or the leasing or use of any Leased Property or any
part thereof. Tenant shall not, however, be required to pay: (x) any tax based
on net income (whether denominated as a franchise or capital stock or other tax)
imposed on Landlord or (y) except as provided in Section 13.01, any tax imposed
with respect to the sale, exchange or other disposition by Landlord of a Leased
Property or the proceeds thereof; provided, however, that if any tax,
assessment, tax levy or charge which Tenant is obligated to pay pursuant to the
first sentence of this definition and which is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (x) or (y) immediately above is levied, assessed or
imposed expressly in lieu thereof Tenant shall then pay such tax, levy, or
charge set forth in said clause (x) or (y).

          3.03      Utilities.  Tenant shall contract for, in its own name, and
                    ---------                                                  
will pay, as Additional Rent all taxes, assessments, charges/deposits, and bills
for utilities, including without limitation charges for water, gas, oil,
sanitary and storm sewer, electricity, telephone service, trash collection, and
all other utilities which may be charged against the occupant of the
Improvements during the Term.

          3.04      Escrow of Impositions. Unless waived by written notice from
                    ---------------------                                      
Landlord to Tenant, Tenant shall thereafter deposit with Landlord on the first
day of each month during the Term hereof and any Extension Term, as the case may
be, a sum equal to one-twelfth (1/12th) of the Impositions annually assessed
against such Leased Property which sums shall be used by Landlord toward payment
of such Impositions.  If, at the end of any applicable tax year, any such funds
held by Landlord are insufficient to make full payment of taxes or other
Impositions for which such funds are held, Tenant, on demand, shall pay to
Landlord any additional funds necessary to pay and discharge in full the
obligations of Tenant pursuant to the provisions of this Section.  If, however,
at the end of any applicable tax year, such funds held by Landlord are in excess
of the total payment required to satisfy taxes or other Impositions for which
such funds are held, Landlord shall apply such excess amounts to a tax and
Imposition escrow fund for the next tax year.  With respect to each Leased
Property, if any such excess exists following the expiration or earlier
termination of this Lease, and subject to Section 8.08 below, Landlord shall
promptly refund such excess amounts to Tenant.  The receipt by Landlord of the
payment of such Impositions by and from Tenant shall only 

                                      -8-
<PAGE>
 
be as an accommodation to Tenant and the taxing authorities, and shall not be
construed as rent or income to Landlord, Landlord serving, if at all, only as a
conduit for delivery purposes.

          3.05      Discontinuance of Utilities.  Landlord will not be liable
                    ---------------------------                              
for damages to person or property or for injury to, or interruption of, business
for any discontinuance of utilities at any Leased Property nor will such
discontinuance in any way be construed as an eviction of Tenant from such Leased
Property or cause an abatement of Rent as to such Leased Property or operate to
release Tenant from any of Tenant's obligations as to such Leased Property under
this Lease. Notwithstanding the forgoing, however, Landlord shall be liable for
damages to person or property or for injury to, or interruption of business, for
any discontinuance of utilities at any Leased Property, in the event and to the
extent, such damages or injury are caused by the wilful misconduct of the
Landlord.

          3.06      Liens.  Subject to Section 17.19 relating to contests,
                    -----                                                 
Tenant shall not directly or indirectly create or allow to remain, and will
promptly discharge at its expense, any lien, encumbrance, attachment, title
retention agreement or claim upon any Leased Property or any attachment, levy,
claim or encumbrance in respect of any Rent provided under this Lease, not
including, however:  (a) this Lease; (b) utility easements and road rights-of-
way in the customary form (i) provided the same do not adversely affect the
intended use of the Leased Properties (including the Improvements) and do not
create a material adverse effect on the value of the Leased Properties or (ii)
which result solely from the action or inaction of Landlord; (c) zoning and
building laws or ordinances, provided they do not prohibit the use of the Leased
Properties for the Business and so long as the Leased Properties are in
compliance with same; (d) such encumbrances as are subsequently consented to in
writing by Landlord, but excluding liens in respect of Impositions required to
be paid under Section 3.01;  (e) liens for Impositions so long as (i) the same
are not yet payable or are payable without the addition of any fine or penalty
or (ii) such liens are being contested as permitted under Section 17.19; and (f)
other encumbrances, easements, rights of way or liens (i) provided the same do
not adversely affect the intended use of the Leased Properties (including the
Improvements) and do not create a material adverse effect on the value of the
Leased properties, or (ii) which result solely from the action or inaction of
Landlord.


                                   ARTICLE IV
                                   INSURANCE

          4.01      Insurance.  Tenant shall, at Tenant's expense, keep the
                    ---------                                              
Improvements, Fixtures, and other components of each Leased Property insured
against the following risks:

                    (a)  Loss or damage by fire with extended coverage
                         (including windstorm and subsidence), vandalism and
                         malicious mischief, sprinkler leakage and all other
                         physical loss perils commonly covered by "All Risk" (or
                         equivalent coverage) insurance in an amount not less
                         than one hundred percent (100%) of the then full
                         replacement cost thereof (as 

                                      -9-
<PAGE>
 
                    hereinafter defined). Such policy shall include an agreed
                    amount endorsement if available at a reasonable cost. Such
                    policy shall also include endorsements for contingent
                    liability for operation of building laws, demolition costs,
                    and increased cost of construction.

               (b)  Loss or damage by explosion of steam boilers, pressure
                    vessels, or similar apparatus, now or hereafter installed on
                    any Leased Property, in commercially reasonable amounts
                    acceptable to Landlord.

               (c)  Loss of rent under a rental income or Business interruption
                    insurance policy covering risk of loss during the first
                    twelve (12) months of reconstruction necessitated by the
                    occurrence of any hazards described in Sections 4.01(a) or
                    4.01(b), above, and which causes an abatement of Rent as
                    provided in Article X hereof, in an amount sufficient to
                    prevent Landlord or Tenant from becoming a co-insurer, and
                    containing endorsements for extended period of indemnity and
                    premium adjustment, and written with an agreed amount
                    clause, if the insurance provided for in this clause (c) is
                    available.

               (d)  If the Land or any portion thereof related to a Leased
                    Property is located in whole or in part within a designated
                    flood plain area, loss or damage caused by flood in
                    commercially reasonable amounts acceptable to Landlord.

               (e)  Loss or damage commonly covered by blanket crime insurance
                    including employee dishonesty, loss of money orders or paper
                    currency, depositor's forgery, and loss of property accepted
                    by Tenant for safekeeping, in commercially reasonable
                    amounts acceptable to Landlord.

               (f)  Workers' compensation insurance as required by statute in
                    respect of any work or other operations on or about each
                    Leased Property.

               (g)  Comprehensive liability insurance as to each Leased Property
                    in amounts equal to the greater of (i) One Million Dollars
                    ($1,000,000) for each occurrence and Two Million Dollars
                    ($2,000,000) in the aggregate, or (ii) the limits of
                    liability generally required under the franchise agreements
                    or other agreements pursuant to which Tenant operates the
                    Businesses conducted on or about each Leased Property.

               (h)  Commercial comprehensive catastrophic liability insurance
                    with limits of liability of not less than the greater of (i)
                    Five Million ($5,000,000) and (ii) the limits of liability
                    generally required under 

                                     -10-
<PAGE>
 
                        the franchise agreements or other agreements pursuant to
                        which Tenant operates the Businesses conducted on or
                        about each Leased Property.

                    (i) upon Landlord's request, earthquake insurance in an
                        amount not less than the full insurable value of each
                        Leased Property.

                    (j) During the period when any addition, alteration,
                        construction, installation or demolition is being made
                        or performed to any part of the Leased Property,
                        contingent liability, public liability, completed value,
                        builder's risk (non-reporting form) workers'
                        compensation and other insurance as is deemed prudent by
                        Landlord.

          4.02      Insurance Limits.  Deductible provisions for the insurance
                    ----------------                                          
required under Section 4.01(a) shall not exceed Twenty-Five Thousand Dollars
($25,000) per location per occurrence and One Hundred Thousand Dollars
($100,000) aggregate per occurrence; under clause(d),  Twenty-Five Thousand
Dollars ($25,000) per occurrence, except that if federal flood insurance is
available then such deductible shall not be greater than the lowest deductible
available with respect to such federal flood insurance; under clause (g),
Twenty-Five Thousand Dollars ($25,000) per occurrence; under clause (h), Twenty-
Five Thousand Dollars ($25,000) per occurrence; and under clause (j), Twenty-
Five Thousand Dollars ($25,000) per occurrence.

           4.03     Insurance Requirements.  The following provisions shall
                    -----------------------                                
apply to all insurance coverages required hereunder:

                    (a) The carriers of all policies shall have a Best's Rating
                        of "A-" or better and a Best's Financial Category of XII
                        or larger and shall be authorized to do insurance
                        business in the jurisdiction in which the Leased
                        Property is located.

                    (b) Tenant shall be the "named insured" and Landlord and any
                        mortgagee of Landlord shall be an "additional named
                        insured" on each policy, except for the insurance
                        required in Section 4.01(e) and 4.01(f) hereof.

                    (c) Tenant shall deliver to Landlord certificates or
                        policies showing the required coverages and
                        endorsements. Each policy or certificate of insurance
                        shall provide that such policy or certificate (i) may
                        not be canceled, (ii) may not lapse for failure to
                        renew, and (iii) no material change or reduction in
                        coverage may be made, without at least thirty (30) days'
                        prior written notice to Landlord.

                                     -11-
<PAGE>
 
                    (d) The policies shall contain a severability of interest
                        and/or cross-liability endorsement, provide that the
                        acts or omissions of Tenant will not invalidate
                        Landlord's coverage, and provide that Landlord shall not
                        be responsible for payment of premiums.

                    (e) All loss adjustment shall require the written consent of
                        Landlord and Tenant, as their interests may appear.

                    (f) At least (30) thirty days prior to the expiration of
                        each policy, Tenant shall deliver to Landlord a
                        certificate showing renewal of such policy and payment
                        of the annual premium therefor.

          Landlord shall have the right to review the insurance coverages
required hereunder with Tenant from time to time, to obtain the input of third
party professional insurance advisors (at Landlord's expense) with respect to
such insurance coverages, and to consult with Tenant in Tenant's annual review
and renewal of such insurance coverages.  All insurance coverages hereunder
shall be in such form, substance and amounts as are customary or standard in
Tenant's industry, but at a minimum shall comply with the requirements set forth
herein.

          4.04      Replacement Cost.  The term "full replacement cost" means
                    ----------------                                         
the actual replacement cost of the Improvements from time to time including
increased cost of construction, with no reductions or deductions.  Tenant shall,
not later than thirty (30) days after the anniversary of each policy of
insurance, increase the amount of the replacement cost endorsement for the
Improvements to the extent necessary to reflect increased costs of construction.
If Tenant makes any Permitted Alterations (as hereinafter defined) to any Leased
Property, Landlord may have such full replacement cost redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement cost was last determined.

          4.05      Blanket Policy.  Tenant may carry the insurance required by
                    --------------                                             
this Article under a blanket policy of insurance, provided that the coverage
afforded Tenant will not be reduced or diminished or otherwise be different from
that which would exist under a separate policy meeting all of the requirements
of this Lease and the Landlord approves the form of the policy.

          4.06      No Separate Insurance.  Tenant shall not take out separate
                    ----------------------                                    
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing insurance
by securing an additional policy or additional policies, unless all parties
having an insurable interest in the subject matter of the insurance, including
Landlord and any mortgagees, are included therein as additional named insureds
or loss payees, the loss is payable under said insurance in the same manner as
losses are payable under this Lease, and such additional insurance is not
prohibited by the existing policies of insurance required pursuant to this
Article.  Tenant shall immediately notify Landlord of the taking out of such
separate insurance or the increasing of any of the amounts of the existing
insurance by securing an additional policy or additional policies.  The term
"mortgages" as used in this Lease includes, but is not limited 

                                     -12-
<PAGE>
 
to, Deeds of Trust and the term "mortgagees" includes, but is not limited to,
trustees and beneficiaries under a Deed of Trust.

          4.07      Waiver of Subrogation.  Each party hereto hereby waives any
                    ---------------------                                      
and every claim which arises or may arise in its favor and against the other
party hereto during the Term or any Extension Term or renewal thereof, for any
and all loss of, or damage to, any of its property located within or upon, or
constituting a part of, any Leased Property, which loss or damage is covered by
valid and collectible insurance policies, to the extent that the insurance
company covers the loss and makes payment under the applicable insurance policy.
Said mutual waiver shall be in addition to, and not in limitation or derogation
of, any other waiver or release contained in this Lease with respect to any loss
or damage to property of the parties hereto.  Inasmuch as the said waivers will
preclude the assignment of any aforesaid claim by way of subrogation (or
otherwise) to an insurance company (or any other person), each party hereto
agrees to obtain insurance policies that permit claims thereunder to be waived
in advance, so long as such endorsement is available at a reasonable cost.

          4.08      Mortgages.  The following provisions shall apply if Landlord
                    ---------                                                   
now or hereafter places a mortgage on any Leased Property or any part thereof:
(a) Tenant shall obtain a standard form of mortgage clause insuring the interest
of the mortgagee; (b) Tenant shall deliver evidence of insurance to such
mortgagee; (c) loss adjustment shall require the consent of the mortgagee but
such consent shall not be unreasonably withheld and may not include any
requirement that the funds be paid to mortgagee in lieu of reconstruction; and
(d) Tenant shall obtain such other coverages and provide such other information
and documents as may be reasonably required by the mortgagee.

          4.09      Other Insurance Requirements.  Notwithstanding anything in
                    ----------------------------                              
this Lease to the contrary and not by way of limitation, in addition to the
types and amounts of insurance required to be carried by Tenant herein, Tenant
covenants to insure and continue in effect such types and amounts of insurance
as the Tenant shall be required to carry pursuant to any contract, agreement,
instrument, statute, law, rule or regulation relating to the use of the Leased
Property and the operations of any Business or other activities thereon,
including noncancellable written notice to mortgagee.

                                   ARTICLE V
                        INDEMNITY; SUBSTANCES OF CONCERN

          5.01      Tenant's Indemnification.  Subject to Section 4.07, Tenant
                    ------------------------                                  
hereby agrees to indemnify and hold harmless Landlord, its agents, and employees
from and against any and all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, costs and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) (the "Claims") incurred during the Term of the Lease and
in connection with or arising from: (a) the use, condition, operation or
occupancy of the Leased Properties; (b) any activity, work, or thing done, or
permitted or suffered by Tenant in, on or about the Leased Properties; (c) any
acts, omissions, or negligence 

                                     -13-
<PAGE>
 
of Tenant or any person claiming under Tenant, or the contractors, agents,
employees, invitees, or visitors of Tenant or any such person; (d) any breach,
violation, or nonperformance by Tenant or any person claiming under Tenant or
the employees, agents, contractors, invitees, or visitors of Tenant or of any
such person, of any term, representation, warranty, covenant, or provision of
this Lease or any law, ordinance, or governmental requirement of any kind; (e)
any injury or damage to the person, property or Business of Tenant, its
employees, agents, contractors, invitees, visitors, or any other person entering
upon any Leased Property; (f) any accident, injury to or death of persons or
loss or damage to any item of property occurring on or about any Leased
Property; (g) any Environmental Law or any pollution or other threat to human
health or the environment at, arising out of or relating to any Leased Property
as set forth in Section 5.05, and (h) any brokers' or agents' fees and
commissions that Tenant incurs. If any action or proceeding is brought against
Landlord, its employees, or agents by reason of any such demand, claim, or cause
of action, Tenant, upon notice from Landlord, will defend the same at Tenant's
expense with counsel reasonably satisfactory to Landlord. In the event Landlord
reasonably determines that its interests and the interests of Tenant in any such
action or proceeding are not substantially the same and that Tenant's counsel
cannot adequately represent the interests of Landlord therein, Landlord shall
have the right to hire separate counsel in any such action or proceeding and the
reasonable costs thereof shall be paid for by Tenant. Tenant's indemnification
obligations with respect to a Claim shall survive the expiration or earlier
termination of this Lease until the later of (i) two (2) years from the date
hereof, or (ii) the expiration of the period ninety (90) days after the date on
which Landlord has actual knowledge of the existence of such Claim, provided,
however, that Tenant's indemnification obligations shall survive the expiration
or earlier termination of this Lease until ninety (90) days after the expiration
of the applicable statute of limitations for Claims incurred in connection with,
arising out of, or related to (i) Section 5.01(g) or (ii) the failure to pay, as
provided for in this Agreement, any Imposition. Notwithstanding the foregoing
provisions of this Section 5.01, Tenant shall have no obligation to indemnify
Landlord for any Claims arising out of the actions or omissions of Landlord, or
Landlord's agents, employees or representatives.

           5.02     Substances of Concern.
                    --------------------- 

                    (a)  For purposes of this Section 5:

                         (i) "Substances of Concern" means, without limitation,
                             chemicals, pollutants, contaminants, wastes, toxic
                             substances, radioactive materials or genetically
                             modified organisms, which are, have been or become
                             regulated by any federal, state or local government
                             authority including, without limitation, (1)
                             petroleum or any fraction thereof, (2) asbestos,
                             (3) any substance or material defined as a
                             "hazardous substance" pursuant to (S) 101 of the
                             Comprehensive Environmental Response Compensation
                             and Liability Act (42 U.S.C. (S) 9601), or (4) any
                             substance or material defined as a 

                                     -14-
<PAGE>
 
                        "hazardous chemical" pursuant to the federal Hazard
                        Communication Standard (29 C.F.R. (S) 1910.1200).

                   (ii) "Environmental Laws" means all federal, state, local,
                        and foreign laws and regulations relating to pollution
                        or protection of human health or the environment
                        (including, without limitation, ambient air, surface
                        water, ground water, wetlands, land surface, subsurface
                        strata, and indoor and outdoor workplace), including,
                        without limitation, (1) laws and regulations relating to
                        emissions, discharges, releases, or threatened releases
                        of Substances of Concern, and (2) common law principles
                        of tort liability.

               (b) Tenant shall not, either with or without negligence, injure,
                   overload, deface, damage or otherwise harm any Leased
                   Property or any part or component thereof; commit any
                   nuisance; permit the emission of any Substances of Concern;
                   allow the release or other escape of any biologically or
                   chemically active substances or materials or other Substances
                   of Concern so as to impregnate, impair or in any manner
                   affect, even temporarily, any element or part of any Leased
                   Property or neighboring property, or allow the storage or use
                   of such substances or materials in any manner not sanctioned
                   by law and by reasonable standards prevailing in the
                   automobile retail and related industries for the storage and
                   use of such substances or materials; nor shall Tenant permit
                   the occurrence of objectionable noise or odors; or make,
                   allow or suffer any waste whatsoever to any Leased Property.
                   Landlord may inspect each Leased Property from time to time,
                   and Tenant will cooperate with such inspections.

               (c) Notwithstanding the foregoing, Tenant anticipates using,
                   storing and disposing of certain Substances of Concern in
                   connection with operation of its Business. Such Substances of
                   Concern include, but are not limited to, the following: motor
                   oil, waste motor oil and filters, transmission fluid,
                   antifreeze, refrigerants, waste paint and lacquer thinner,
                   batteries, solvents, lubricants, degreasing agents, gasoline
                   and diesel fuels. Tenant shall ascertain and comply fully
                   with all applicable Environmental Laws and environmental
                   standards and requirements set by federal, state or local
                   laws, rules, regulations or governmental directives related
                   to the Leased Properties or Tenant's use or occupancy of the
                   Leased Property ("Environmental Standards"), including but
                   not limited to any laws or standards (a) regulating the use,
                   storage, generation or disposal of Substances of Concern, (b)
                   regulating the monitoring or use of any underground or

                                     -15-
<PAGE>
 
                   aboveground storage tanks at the Leased Properties, or (c)
                   establishing any permitting, notification or reporting
                   requirements. As promptly as practicable after the
                   Commencement Date (but in no event later than 120 days
                   thereafter), Tenant shall establish and implement a program
                   of compliance with all applicable Environmental Laws and
                   Environmental Standards ("Environmental Compliance Program").
                   Tenant shall update such Environmental Compliance Program
                   every three (3) years during the Term. Tenant shall submit
                   its Environmental Compliance Program and each update thereto
                   to Landlord; provided, however, such submittal shall not
                   relieve Tenant of its obligations pursuant to this Section 5.
                   Tenant's Environmental Compliance Program shall include a
                   program for monitoring Tenant's compliance with Environmental
                   Laws and Environmental Standards and a plan for correcting
                   immediately any incident of noncompliance. Tenant shall
                   comply with its Environmental Compliance Program.

               (d) In the event of any noncompliance with any Environmental Laws
                   or Environmental Standards or any spill, release or discharge
                   of Substances of Concern in a reportable quantity under
                   federal, state or local law, Tenant shall:

                   (i)   give Landlord immediate notice of the incident by
                         telephone or facsimile, providing as much detail as
                         possible. Such notice shall be provided to Landlord's
                         National Dealership Real Estate Manager or to such
                         other person as Landlord shall designate in accordance
                         with Section 16.01 below;

                   (ii)  as soon as possible, but no later than seventy-two (72)
                         hours, after discovery of an incident of noncompliance,
                         submit a written report to Landlord, identifying the
                         source or case of the noncompliance or spill, release
                         or discharge (including the names and quantities of any
                         Substances of Concern involved) and the method or
                         action required to correct the problem; and

                   (iii) cooperate with Landlord or its designated agents or
                         contractors with respect to the investigation and
                         correction of such problem.

               Tenant shall also be solely responsible for providing any notice
to any federal, state or local governmental authority required by applicable
laws and regulations as a result of such incident.

                                     -16-
<PAGE>
 
          5.03      Audits.  Landlord shall have the right to conduct, at its
                    ------                                                   
expense, periodic audits of Tenant's compliance with the Environmental
Compliance Program and management of Substances of Concern at the Leased
Properties and/or periodic tests of air, soil, surface water or groundwater at
or near the Leased Properties.  Landlord shall not be obligated to provide
Tenant with the results of any audit or tests unless Tenant requests them in
writing or such results are the basis for a claim by Landlord that Tenant has
breached its obligations under this Lease or a demand by Landlord that Tenant
modify its Environmental Compliance Program or operations or remediate or remove
a spill, release or discharge of Substances of Concern in accordance with
Section 5.06 below. Tenant agrees promptly to modify its Environmental
Compliance Program or the conduct of its operations in accordance with
Landlord's reasonable recommendations directed at improvement of Tenant's
handling, use and disposal of Substances of Concern  in, on or from any Leased
Property. If, as a result of an environmental audit performed by Landlord with
respect to any Leased Property, Landlord reasonably determines in its judgment
that alterations or improvements of equipment or buildings located on the Leased
Property are necessary, Tenant shall perform such alterations or improvements as
are reasonable under the circumstances and pay all costs and expenses relating
thereto.   If Tenant shall fail to pay any such costs or expenses, Tenant shall
deposit with Landlord the full amount necessary to pay such costs in full within
ten (10) days of Landlord's demand. Nothing contained herein shall be construed
to obligate or require Landlord to perform any audits, tests, inquiry or
investigation.  Should Landlord elect or be required to disclose to Tenant the
results of any audit or tests, Landlord shall not be liable in any way for the
truth or accuracy of such information.

          5.04      Landlord's Option Re: Compliance.  If Tenant, after notice
                    --------------------------------                          
from Landlord, fails to comply with or perform any of its obligations pursuant
to this Section 5, including, but not limited to, obligations to clean up
spills, releases or discharges, Landlord may, but shall not be obligated to,
perform such obligations and Tenant shall pay Landlord within ten (10) days of
demand Landlord's costs therefor, including any overhead and administrative
costs.

          5.05      Environmental Indemnification.  Tenant shall indemnify and
                    -----------------------------                             
hold harmless Landlord from and against all demands, claims, causes of action,
fines, penalties, damages (including punitive and consequential damages),
losses, liabilities (including strict liability), judgments, and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) imposed upon or asserted against Tenant, Landlord or any
Leased Property on account of any Environmental Law (irrespective of whether
there has occurred any violation of any Environmental Law) relating to any
Leased Property, including (a) response costs and costs of removal and remedial
action incurred by the United States Government or any state or local
governmental unit to any other person or entity, or damages from injury to or
destruction or loss of natural resources, including the reasonable costs of
assessing such injury, destruction or loss, incurred pursuant to any
Environmental Law, (b) costs and expenses of abatement, investigation, removal,
remediation, correction or cleanup, fines, damages, response costs or penalties
which arise from the provisions of any Environmental Law, (c) liability for
personal injury or property damage arising under any statutory or common-law
tort theory, including damages assessed for the maintenance of a public or
private nuisance or for carrying on of a dangerous activity, (d) liability by
reason of a breach of 

                                     -17-
<PAGE>
 
an environmental representation or warranty by Tenant, and (e) failure of Tenant
to complete in a timely manner alterations or improvements of equipment or
buildings located on the Leased Property deemed necessary or advisable by
Landlord pursuant to Section 5.03 in a manner acceptable to Landlord.
Notwithstanding anything to the contrary contained in this Lease, Tenant shall
have no obligation to indemnify Landlord for any releases of Substances of
Concern, or remove or remediate any Substances of Concern released by, the
actions of Landlord, or Landlord's agents, employees or representatives.

          5.06      Tenant's Cleanup Obligation.  If any spill, release or
                    ---------------------------                           
discharge of Substances of Concern occurs on, at or from the Leased Properties
during the Term, Tenant shall promptly take all actions, at its sole expense, as
are necessary to remove or remediate such spill, release or discharge and to
bring the Leased Property into compliance with the Environmental Laws, provided
that Landlord's approval of such action shall first be obtained, which approval
shall not be unreasonably withheld so long as such actions would not potentially
have any material adverse effect on the Leased Property.

          5.07      Existing Environmental Conditions.  Tenant acknowledges that
                    ---------------------------------                           
it has had the opportunity to review the Environmental Reports attached hereto
as Exhibit 5.07.  Tenant hereby represents that it has reviewed and is aware of
the matters disclosed in the Environmental Reports.

                    As a material consideration for Landlord's willingness to
enter into this Lease, Tenant, for itself and its Affiliates, and each of their
shareholders, directors, officers, employees, agents, contractors,
representatives, insurers, successors and assigns hereby waives and releases
Landlord and its Affiliates and each of their shareholders, directors, officers,
employees, representatives, agents, contractors, representatives, insurers,
successors and assigns from any and all claims, demands, liabilities, costs,
expenses, causes of action and rights of action whatsoever, past, present or
future, known or unknown, suspected or unsuspected, which arise out of or relate
in any way to the violation of Environmental Laws or the use, storage,
treatment, disposal, presence, spill, release, or discharge of Substances of
Concern at, on or from the Leased Properties before the Commencement Date
(collectively, the "Released Claims").

                    In the event that Landlord is ordered by a governmental
agency, or determines that it is in its best interest, to remedy any violation
of Environmental Laws or to remove or remediate any Substances of Concern
present on, under or about the Leased Properties on the Commencement Date, or
spilled, released or discharged on, at or from the Leased Properties before the
Commencement Date, Tenant shall immediately upon notice from Landlord take all
actions, at Tenant's sole expense, to promptly complete such removal or
remediation.

         5.08       Survival of Tenant's Obligations.  Tenant's obligations
                    --------------------------------                       
under this Section 5 shall survive the expiration or earlier termination of this
Lease.  During any period of time employed by Tenant after the termination of
this Lease to complete the removal from the Leased Property of any Substances of
Concern, if the premises are not rentable for uses contemplated under this
Lease, 

                                     -18-
<PAGE>
 
Tenant shall continue to pay the full amount of Rent due under this Lease, which
Rent shall be prorated daily for the final month of such period of time.


                                   ARTICLE VI
                         USE AND ACCEPTANCE OF PREMISES

          6.01      Use of Leased Properties.  For so long as this Lease is in
                    ------------------------                                  
effect (including following any sublease or assignment thereof), Tenant shall
use and occupy each Leased Property exclusively for the purpose of conducting
the Business or for any other legal purpose for which such Leased Property is
being used as of the Commencement Date, and for no other purpose without the
prior written consent of Landlord.  Tenant shall obtain and maintain all
approvals, licenses, and consents needed to use and operate the Leased
Properties for such purposes. Tenant shall promptly deliver to Landlord complete
copies of surveys, examinations, certification and licensure inspections,
compliance certificates, and other similar reports issued to Tenant by any
governmental agency.

          6.02      Acceptance of Leased Properties.  Except as otherwise
                    -------------------------------                      
specifically provided in this Lease, Tenant acknowledges (i) Tenant and its
agents have had an opportunity to inspect each Leased Property; (ii) Tenant has
found each Leased Property fit for Tenant's use; (iii) delivery of each Leased
Property to Tenant is in an "as-is" condition; (iv) Landlord is not obligated to
make any improvements or repairs to any Leased Property; and (v) the roof,
walls, foundation, heating, ventilating, air conditioning, telephone, sewer,
electrical, mechanical, utility, plumbing, and other portions of each Leased
Property are in good working order.  Tenant waives any claim or action against
Landlord with respect to the condition of any  Leased Property.  LANDLORD MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTIES OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION OR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO QUALITY OR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY TENANT.

          6.03      Conditions of Use and Occupancy.  Tenant agrees that during
                    -------------------------------                            
the Term it shall use and keep each Leased Property in a careful, safe and
proper manner; not commit or suffer waste thereon; not use or occupy any Leased
Property for any unlawful purposes; not use or occupy any Leased Property or
permit the same to be used or occupied, for any purpose or business deemed extra
hazardous on account of fire or otherwise; keep each Leased Property in such
repair and condition as may be required by the local board of health, or other
city, state or federal authorities, free of all cost to Landlord; not permit any
acts to be done which will cause the cancellation, invalidation, or suspension
of any insurance policy; and permit Landlord and its agents to enter upon each
Leased Property at all reasonable times after notice to Tenant to examine the
condition thereof.  In addition, at any time and from time to time upon not less
than fifteen (15) days prior written notice, Tenant shall permit Landlord and
any mortgagee or lender and their authorized representatives, to inspect the
Leased Properties during normal Business hours, provided that such inspections
shall not unreasonably interfere with Business of Tenant.

                                     -19-
<PAGE>
 
          6.04      Financial Statements and Other Information.  Tenant shall
                    ------------------------------------------               
provide Landlord and any mortgagee or lender regularly (or more often as may be
reasonably requested by Landlord in writing), the following financial
information: (a) as to each Leased Property within thirty (30) days after each
fiscal quarter during the Term or any Extension Term, as the case may be,
(except the fourth quarter), Tenant-prepared financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"), excluding
lifo provisions and income tax provisions, consistently applied; and (b) as to
each Leased Property and itself, Tenant shall use its best efforts to provide
Landlord within ninety (90) days after the end of each fiscal year of Tenant
during the Term or any Extension Term, as the case may be, and in no event later
than one hundred and twenty (120) days after the end of each fiscal year of
Tenant during the Term or any Extension Term, as the case may be, financial
statements, audited, reviewed or compiled by a certified public accountant (the
"Annual Financial Statements").  Tenant shall also deliver to Landlord such
additional financial information as Landlord may reasonably request, provided
the same is of a type normally maintained by Tenant or can be obtained without
undue cost or burden on Tenant's personnel and does not constitute information
which Tenant reasonably determines to be proprietary or confidential.
Additionally, upon Landlord's request, Tenant shall provide Landlord with copies
of Tenant's annual capital expenditure budgets for each Leased Property and any
reports generated by Tenant regarding maintenance and repairs of each Leased
Property. The parties acknowledge and agree that the Sellers and their
affiliates are required under this Agreement and the Company Leases to provide
to the Company certain confidential financial information (the "Confidential
Information") with respect to the business conducted on the Leased Properties.
The Company agrees to use the Confidential Information solely for the purposes
of monitoring compliance with the terms of this Agreement and the Company
Leases, and the Confidential Information shall be disclosed only to those of the
Company's employees, advisors and consultants to whom it is necessary for such
purposes. Moreover, the Company will use its best efforts to implement policies
and procedures at the Board of Trustees level so as to minimize the disclosure
of Confidential Information to Trustees having interest in businesses that
compete with the Sellers and their affiliates.


                                  ARTICLE VII
              REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS

          7.01      Maintenance.  Tenant shall maintain each Leased Property in
                    -----------                                                
good order, repair and appearance, and repair each Leased Property, including
without limitation, all interior and exterior, structural and nonstructural
repairs and replacements to the roof, foundations, exterior walls, building
systems, HVAC systems, parking areas, sidewalks, water, sewer and gas
connections, pipes, and mains.  Tenant shall pay as Additional Rent the full
cost of such maintenance, repairs, and replacements, however the Tenant shall
have the right to require Landlord to pay for repairs, maintenance or
replacements that would cost in excess of $50,000 and have Landlord adjust the
Base Annual Rent upwards by multiplying such amount expended by eleven and
30/100 percent (11.3%); provided that if the Tenant exercises this right within
one year of the end of the Term or any Extension Term, Tenant shall renew this
Lease for the upcoming Extension Term (if Tenant exercises this right within one
year of the end of the Second Extension Term, Tenant shall renew this 

                                    - 20 -
<PAGE>
 
Lease for a Third Extension Term at a rental rate determined by the procedures
for determining the rental rate for the Second Extension Term). Tenant shall
maintain all drives, sidewalks, parking areas, and lawns on or about each Leased
Property in a clean and orderly condition, free of accumulations of dirt,
rubbish, snow and ice. Tenant shall permit Landlord to inspect each Leased
Property at all reasonable times, and shall implement all reasonable suggestions
of Landlord as to the maintenance and repair of each Leased Property.

          7.02      Compliance with Laws.  Tenant shall comply with all laws,
                    --------------------                                     
ordinances, orders, rules, regulations, and other governmental requirements
relating to the use, condition, or occupancy of each Leased Property, whether
now or hereafter enacted and in force including without limitation:  (a)
licensure requirements for operation of the Business; (b) requirements of any
board of casualty insurance underwriters or insurance service office for any
other similar body having jurisdiction over any Leased Property; (c) all zoning
and building codes; and (d) Environmental Laws.  At Landlord's request, from
time to time, Tenant shall deliver to Landlord copies of certificates or permits
evidencing compliance with such laws, including without limitation, copies of
any applicable licenses, certificates of occupancy and building permits.  Tenant
shall provide Landlord with copies of any notice from any governmental authority
alleging any non-compliance by Tenant or any Leased Property with any of the
foregoing requirements and such evidence as Landlord may reasonably require of
Tenant's remediation thereof.  Tenant hereby agrees to defend, indemnify and
hold Landlord, its agents, and employees from and against any and all demands,
claims, causes of action, fines, penalties, liabilities (including strict
liability), judgments, costs and expenses (including, without limitation,
attorneys' fees, court costs, and the costs set forth in Section 9.06) resulting
from any failure by Tenant to comply with any laws, ordinances, rules,
regulations, and other governmental requirements.

          7.03      Required Alterations.  Tenant shall, at Tenant's sole cost
                    --------------------                                      
and expense, make any additions, changes, improvements or alterations to each
Leased Property, including structural alterations, which may be required by any
governmental authorities, including those required to continue to satisfy any
licensure requirements related to the operation of the Business, whether such
changes are required by Tenant's use, changes in the law, ordinances, or
governmental regulations, defects existing as of the date of this Lease, or any
other cause whatsoever.  Tenant shall provide thirty (30) days prior written
notice to Landlord of any changes to a Leased Property pursuant to this Section
7.03 which involve changes to the structural integrity thereof or materially
affect the operational capabilities thereof.  All such additions, changes,
improvements or alterations shall be deemed to be a Tenant Improvement and shall
comply with all laws relating to such alterations and with the provisions of
Section 8.01.

          7.04      Mechanics' Liens.  Tenant shall have no authority to permit
                    ----------------                                           
or create a lien against Landlord's interest in any Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in each Leased Property against liens. Tenant hereby agrees
to defend, indemnify, and hold Landlord harmless from and against any mechanics'
liens against any Leased Property by reason of work, labor services or materials
supplied or claimed to have been supplied on or to such Leased Property.  Tenant
shall immediately remove, 

                                    - 21 -
<PAGE>
 
bond-off, or otherwise obtain the release of any mechanics' lien filed against
any Leased Property. Tenant shall pay all expenses in connection therewith,
including without limitation, damages, interest, court costs and reasonable
attorneys' fees.

          7.05      Replacements of Fixtures.  Tenant shall not remove Fixtures
                    -------------------------                                  
from any  Leased Property except to replace such Fixtures with other items used
for similar or analogous purposes, which replacement items are of equal or
greater quality and value.  Items being replaced by Tenant may be removed and
shall become the property of Tenant and items replacing the same shall be and
remain the property of Landlord.  Tenant shall execute, upon written request
from Landlord, any and all documents necessary to evidence Landlord's ownership
of the Fixtures and replacements therefor. Tenant may not finance replacements
by security agreement or equipment lease unless:  (a) Landlord has consented to
the terms and conditions of the equipment lease or security agreement; (b) the
equipment lessor or lender has entered into a non-disturbance agreement with
Landlord upon terms and conditions acceptable to Landlord, including without
limitation (i) Landlord shall have the right (but not the obligation) to assume
such security agreement or equipment lease upon the occurrence of an Event of
Default by Tenant hereunder; (ii) the equipment lessor or lender shall promptly
notify Landlord of any default by Tenant under the equipment lease or security
agreement and give Landlord a reasonable opportunity to cure such default; and
(iii) Landlord shall have the right to assign its rights under the equipment
lease, security agreement, or non-disturbance agreement; (c) the equipment
lessor or lender shall subordinate its security interest to the security
interest of any of Landlord's lessors, mortgagors or lenders, whether now
created or hereafter existing, and (d) Tenant shall, within ten (10) days after
receipt of an invoice from Landlord, reimburse Landlord for all costs and
expenses incurred in reviewing and approving the equipment lease, security
agreement, and non-disturbance agreement, including without limitation,
reasonable attorneys' fees and costs.

          7.06      Encroachments; Restrictions.  If any of the Improvements
                    ---------------------------                             
shall, at any time, encroach upon any property, street or right-of-way adjacent
to a Leased Property, or shall violate the agreements or conditions contained in
any restrictive covenant or other agreement affecting a Leased Property, other
than one which is created or consented to by Landlord without Tenant's consent,
or shall impair the rights of others under an easement or right-of-way to which
a Leased Property is subject, other than one which is created or consented to by
Landlord without Tenant's consent, then promptly upon the request of Landlord or
at the request of any person affected by any such encroachment, violation or
impairment, Tenant shall, at its expense, subject to its right to contest the
existence of any encroachment, violation or impairment and in such case, in the
event of an adverse final determination, either (a) obtain valid and effective
waivers or settlements of all claims, liabilities and damages resulting from
each such encroachment, violation or impairment, whether the same shall affect
Landlord or Tenant or (b) make such changes in the Improvements and take such
other actions as shall be necessary to remove such encroachment and to end such
violation or impairment, including, if necessary, the alteration of
improvements.  Any such alteration shall be made in conformity with the
requirements of Article VIII.

                                    - 22 -
<PAGE>
 
                                 ARTICLE VIII
                   ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
                  CAPITAL ADDITIONS TO THE LEASED PROPERTIES

          8.01      Tenant's Right to Construct.  As to each Leased Property,
                    ---------------------------                              
during the Term of this Lease or any Extension Term, as the case may be, so long
as no Event of Default shall have occurred and be continuing as to such Leased
Property, Tenant may make Capital Additions (as defined herein), or other
alterations, additions, changes and/or improvements to such Leased Property as
deemed necessary or useful to operate such Leased Property for Tenant's Business
(individually, a "Tenant Improvement," or collectively, the "Tenant
Improvements").  "Capital Additions" shall mean the construction of one or more
new buildings or one or more additional structures annexed to any portion of any
of the Improvements on a Leased Property, which are constructed on any parcel
or portion of the Land comprising a Leased Property, including the construction
of a new floor, or the repair, replacement, restoration, remodeling or
rebuilding of the Improvements or any portion thereof on a Leased Property which
are not normal, ordinary or recurring to maintain such Leased Property.  Except
as otherwise agreed to by Landlord herein or otherwise in writing, any such
Tenant Improvement or Capital Addition shall be made at Tenant's sole expense
and shall become the property of Landlord upon termination of this Lease.
Unless made on an emergency basis to prevent injury to person or property, as to
each Leased Property, Tenant must obtain Landlord's prior written approval, such
approval not to be unreasonably withheld or delayed, for any Capital Addition or
for any Tenant Improvement which is not a Capital Addition and which has a cost
of more than One Hundred Thousand Dollars ($100,000) or a cost which, when
aggregated with the costs of all such Tenant Improvements on such Leased
Property in a given Lease Year, would cause the total costs of all such Tenant
Improvements on such Leased Property to exceed Two Hundred Fifty Thousand
Dollars ($250,000).  Additionally, in connection with any Tenant Improvement,
including any Capital Addition, Tenant shall provide Landlord with copies of any
plans and specification therefor, Tenant's budget relating thereto, any required
governmental permits or approvals, any construction contracts or agreements
relating thereto, and any other information relating to such Tenant Improvement
as Landlord shall reasonably request.

          8.02      Scope of Right.  Subject to Section 8.01 herein and Section
                    --------------                                             
7.03 concerning required alterations, at Tenant's cost and expense, Tenant shall
have the right to:

               (a)  seek any governmental approvals, including building permits,
                    licenses, conditional use permits and any certificates of
                    need that Tenant requires to construct any Tenant
                    Improvement;

               (b)  erect upon each Leased Property such Tenant Improvements as
                    Tenant deems desirable;

                                    - 23 -
<PAGE>
 
               (c)  make additions, alterations, changes and improvements in any
                    Tenant Improvement so erected; and

               (d)  engage in any other lawful activities that Tenant determines
                    are necessary or desirable for the development of each
                    Leased Property in accordance with the Tenant's Business;

provided, however, Tenant shall not make any Tenant Improvement which would, in
Landlord's reasonable judgment, impair the value of the Leased Property or the
Tenant's Business without Landlord's prior written consent and provided, further
that Tenant shall not be permitted to create a mortgage, lien or any other
encumbrance on any Leased Property without Landlord's prior written consent.

          8.03      Cooperation of Landlord.  Landlord shall cooperate with
                    -----------------------                                
Tenant and take such actions, including the execution and delivery to Tenant of
any applications or other documents, reasonably requested by Tenant in order to
obtain any governmental permits, licenses or approvals sought by Tenant to
construct any Tenant Improvement within fifteen (15) business days following the
later of:  (a) the date Landlord receives Tenant's request or (b) the date of
delivery of any such application or document to Landlord; provided, the taking
of such action by Landlord, including the execution of said applications or
documents, shall be without cost to Landlord (or if there is a cost to Landlord,
such cost shall be reimbursed by Tenant), shall not cause Landlord to be in
violation of any law, ordinance or regulation, and shall not be deemed a waiver
by Landlord of any of its rights or of any of Tenant's obligations, including
but not limited to indemnification.

           8.04     Commencement of Construction.  Tenant agrees that:
                    ----------------------------                      

               (a)  Tenant shall diligently seek all governmental approvals
                    relating to the construction of any Tenant Improvement;

               (b)  Once Tenant begins the construction of any Tenant
                    Improvement, Tenant shall diligently oversee any such
                    construction to completion in accordance with applicable
                    insurance requirements and the laws, rules and regulations
                    of all governmental bodies or agencies having jurisdiction
                    over the subject Leased Property;

               (c)  Landlord shall have the right at any time and from time to
                    time to post and maintain upon each Leased Property such
                    notices as may be necessary to protect Landlord's interest
                    from mechanics' liens, materialmen's liens or liens of a
                    similar nature;

               (d)  Tenant shall not suffer or permit any mechanics' liens or
                    any other claims or demands arising from the work of
                    construction of any Tenant Improvement to be enforced
                    against any Leased Property or 

                                    - 24 -
<PAGE>
 
                    any part thereof, and Tenant agrees to hold Landlord, its
                    agents and employees and said Leased Property free and
                    harmless from all demands, claims, causes of action, fines,
                    penalties, damages (including punitive and consequential
                    damages), losses, liabilities (including strict liability),
                    judgments, costs and expenses (including, without
                    limitation, attorneys' fees, court costs, and the costs set
                    forth in Section 9.06) incurred in connection with or
                    arising therefrom;

               (e)  All work shall be performed in a satisfactory and
                    workmanlike manner consistent with standards in the
                    industry; and

               (f)  Subject to Section 8.08 in the case of Capital Additions,
                    Tenant shall not secure any construction or other financing
                    for the Tenant Improvements which is secured by a portion of
                    any Leased Property without Landlord's prior written
                    consent, and any such financing (i) shall not exceed the
                    cost of the Tenant Improvements, (ii) [intentionally
                    omitted] (iii) shall be limited solely to Tenant's interest
                    in the subject Leased Property.

          8.05      Rights in Tenant Improvements.  Notwithstanding anything to
                    ------------------------------                             
the contrary in this Lease, all Tenant Improvements existing on the Leased
Property or constructed upon each Leased Property pursuant to Section 8.01, any
and all subsequent additions thereto and alterations and replacements thereof
shall be the sole and absolute property of Tenant during the Term and any
Extension Term, as the case may be, of this Lease (in respect of such Leased
Property).  Upon the expiration or early termination of this Lease in respect of
a Leased Property, all such Tenant Improvements located thereon shall become the
property of Landlord.  Without limiting the generality of the foregoing, prior
to the expiration or early termination of this Lease in respect of a Leased
Property, Tenant shall be entitled to all federal and state income tax benefits
associated with all Tenant Improvements located on such Leased Property.

          8.06      Personal Property.  Tenant shall install, place, and use on
                    -----------------                                          
each Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures as may be required or as Tenant
may, from time to time, deem necessary or useful to operate such Leased Property
in the operation of the Business.

          8.07      Requirements for the Tenant's Personal Property.  Tenant
                    -----------------------------------------------         
shall comply with all of the following requirements in connection with the
Tenant's Personal Property:

               (a)  RESERVED.

               (b)  The Tenant's Personal Property shall be installed in a good
                    and workmanlike manner, in compliance with all governmental
                    laws, 

                                    - 25 -
<PAGE>
 
                    ordinances, rules, and regulations and all insurance
                    requirements, and be installed free and clear of any
                    mechanics' liens.

               (c)  Tenant shall, at Tenant's sole cost and expense, maintain,
                    repair, and replace the Tenant's Personal Property.

               (d)  Tenant shall, at Tenant's sole cost and expense, keep the
                    Tenant's Personal Property insured against loss or damage by
                    fire, vandalism and malicious mischief, sprinkler leakage,
                    and other physical loss perils commonly covered by fire and
                    extended coverage, boiler and machinery, and difference in
                    conditions insurance (which insurance shall meet the
                    requirements of Section 4.03 hereof) in an amount not less
                    than the full replacement cost thereof or such other amount
                    as appears on a schedule submitted by Tenant to Landlord,
                    which schedule shall be subject to Landlord's approval, and
                    Tenant shall use the proceeds from any such policy for the
                    repair and replacement of such items of Tenant's Personal
                    Property; provided, however, that if Landlord fails to
                    object to the schedule so submitted by Tenant within five
                    (5) business days of Landlord's receipt of such schedule,
                    Landlord's approval of such schedule shall be deemed given.

               (e)  Tenant shall pay all Impositions and other taxes applicable
                    to Tenant's Personal Property.

               (f)  If Tenant's Personal Property is damaged or destroyed by
                    fire or otherwise, Tenant shall promptly repair or replace
                    Tenant's Personal Property unless Tenant is entitled to and
                    elects to terminate the Lease pursuant to Section 10.05.

               (g)  As to each Leased Property, unless an Event of Default (or
                    any event which, with the giving of notice or lapse of time,
                    or both, would constitute an Event of Default) has occurred
                    and remains uncured beyond any applicable grace period,
                    Tenant may remove Tenant's Personal Property from such
                    Leased Property from time to time provided that:  (i) the
                    items removed are not required or necessary to operate the
                    Business on such Leased Property (unless such items are
                    being replaced by Tenant) and (ii) Tenant promptly repairs
                    any damage to such Leased Property resulting from the
                    removal of Tenant's Personal Property.

               (h)  As to each Leased Property, Tenant shall remove all of
                    Tenant's Personal Property upon the termination or
                    expiration of the Lease and shall promptly repair any damage
                    to such Leased Property resulting 

                                    - 26 -
<PAGE>
 
                    from the removal thereof to the reasonable satisfaction of
                    Landlord; provided, however, if Tenant fails to remove
                    Tenant's Personal Property from such Leased Property within
                    thirty (30) days after the termination or expiration of this
                    Lease with respect thereto, then Tenant shall be deemed to
                    have abandoned such items of Tenant's Personal Property, all
                    of which shall become the property of Landlord, and Landlord
                    may remove, store and dispose of such property and Tenant
                    shall have no claim or right against Landlord for such
                    property or the value thereof regardless of the disposition
                    thereof by Landlord. Tenant shall pay Landlord, upon demand,
                    all expenses incurred by Landlord in removing, storing, and
                    disposing of such items of Tenant's Personal Property and
                    repairing any damage caused by such removal. Tenant's
                    obligations hereunder shall survive the termination or
                    expiration of this Lease as to such Leased Property.

               (i)  Tenant shall perform its obligations under any equipment
                    lease or security agreement for Tenant's Personal Property.

          8.08      Financings of Capital Additions to a Leased Property.
                    ----------------------------------------------------- 
Landlord may, but shall be under no obligation to, provide or arrange
construction, permanent or other financing for any Capital Addition proposed to
be made to a Leased Property by Tenant.  Any financing so provided by Landlord
shall be made in accordance with, and subject to, a written Addendum to this
Lease.


                                  ARTICLE IX
                             DEFAULTS AND REMEDIES

          9.01      Events of Default.  The occurrence of any one or more of the
                    -----------------                                           
following shall be an event of default ("Event of Default") hereunder:

               (a)  Tenant fails to pay in full any installment of Rent, or any
                    other monetary obligation payable by Tenant to Landlord
                    hereunder, within ten (10) days after the due date thereof
                    and after written notice thereof and an opportunity to cure
                    within a ten (10) day period after such notice is given to
                    Tenant by Landlord.  In the event of Tenant's failure to
                    make timely payment of such obligations two (2) times during
                    any twelve (12) month period, each subsequent such failure
                    within the twelve (12) months immediately following such
                    second failure shall immediately constitute an Event of
                    Default, and Landlord shall not be required to provide
                    notice thereof, nor shall Tenant have any further
                    opportunity to cure such failure;

                                    - 27 -
<PAGE>
 
               (b)  Tenant fails to observe and perform any covenant (other than
                    the covenant in respect of insurance set forth in Article
                    IV), condition or agreement hereunder to be performed by
                    Tenant (except those described in Section 9.01(a) of this
                    Lease) and such failure continues for a period of twenty
                    (20) days after written notice thereof is given to Tenant by
                    Landlord; or if, by reason of the nature of such default,
                    the same cannot with due diligence be remedied within said
                    twenty (20) days, such failure will not be deemed to
                    continue if Tenant proceeds promptly and with due diligence
                    to remedy the failure and diligently completes the remedy
                    thereof; provided, however, said cure period will not extend
                    beyond forty (40) days if the facts or circumstances giving
                    rise to the default are creating a further harm to Landlord
                    or the subject Leased Property and Landlord makes a good
                    faith determination that Tenant is not undertaking remedial
                    steps under the terms of this Lease;

               (c)  If Tenant:  (i) admits in writing its inability to pay its
                    debts generally as they become due; (ii) files a petition in
                    bankruptcy or a petition to take advantage of any insolvency
                    act; (iii) makes an assignment for the benefit of its
                    creditors; (iv) is unable to pay its debts as they mature;
                    (v) consents to the appointment of a receiver of itself or
                    of the whole or any substantial part of its property; or
                    (vi) files a petition or answer seeking reorganization or
                    arrangement under the federal bankruptcy laws or any other
                    applicable law or statute of the United States of America or
                    any state thereof;

               (d)  If Tenant, on insolvency proceedings or on a petition in
                    bankruptcy filed against it, is adjudicated as bankrupt or a
                    court of competent jurisdiction enters an order or decree
                    appointing, without the consent of Tenant, a receiver of
                    Tenant of the whole or substantially all of its property, or
                    approving a petition filed against it seeking reorganization
                    or arrangement of Tenant under the federal bankruptcy laws
                    or any other applicable law or statute of the United States
                    of America or any state thereof, and such judgment, order or
                    decree is not vacated, dismissed or set aside within sixty
                    (60) days from the date of the entry thereof;

               (e)  If the estate or interest of Tenant in a Leased Property or
                    any part thereof is levied upon or attached in any
                    proceeding and the same is not vacated or discharged within
                    fifteen (15) days after commencement thereof (unless Tenant
                    is contesting such lien or attachment in accordance with
                    this Lease) or if such estate or interest 

                                    - 28 -
<PAGE>
 
                    of Tenant is assigned, conveyed or involuntarily transferred
                    in violation of this Lease;

               (f)  Any representation or warranty of a material nature made by
                    Tenant on behalf of itself or an Affiliate in this Lease or
                    in any certificate, demand or request made pursuant hereto
                    proves to be incorrect, in any material respect and is not
                    cured within the time specified in Section 9.01(b) hereto,
                    as of the date of issuance or making thereof and Landlord
                    notifies Tenant of its knowledge of such incorrectness
                    within six months of discovery.  Tenant shall not be deemed
                    to be in breach of such represention or warranty if the
                    representation or warranty has been made true by Tenant's
                    cure as of the time of the cure;

               (g)  Conviction of Tenant or an Affiliate of a crime or offense
                    constituting a felony in the jurisdiction in which committed
                    or under federal law which conviction results in the
                    termination of the franchise.

               (h)  Termination or relinquishment of the franchise or license
                    pursuant to which Tenant or an Affiliate conducts business
                    on or from any Leased Property, provided that such event
                    shall not constitute an Event of Default if (i) no other
                    Event of Default enumerated in this Section 9.01 shall occur
                    and be continuing, and (ii) at a date no later than twenty-
                    four (24) months following such date of termination or
                    relinquishment, Tenant or an Affiliate has entered into
                    written new or amended franchises or licenses for operation
                    of motor vehicle retail or motor vehicle related businesses
                    at such Leased Property satisfactory to Landlord in its
                    discretion applying commercially reasonable standards;

               (i)  [Intentionally Omitted]

               (j)  A final, non-appealable judgment or judgments for the
                    payment of money not fully covered (excluding deductibles)
                    by insurance is rendered against Tenant and the same remains
                    undischarged, unvacated, unbonded, unappealed or unstayed
                    for a period of thirty (30) consecutive days;

               (k)  Tenant shall fail to observe the covenant in respect to
                    insurance under Article IV provided Landlord shall have
                    provided notice of such failure to Tenant and Tenant shall
                    have failed to cure such failure within three (3) business
                    days of such notice; or

                                    - 29 -
<PAGE>
 
               (l)  Except contemporaneously with or after the effective date of
                    a permitted assignment meeting the requirements of Article
                    XIII, if Tenant is liquidated or dissolved, or begins
                    proceedings toward liquidation or dissolution, or in any
                    manner permits the sale or divestiture of substantially all
                    of its assets.

          9.02      Remedies.  To the extent an Event of Default is applicable
                    --------                                                  
only to a specific Leased Property or specific Leased Properties (in accordance
with Section 9.01 above), the remedies set forth herein shall be exercisable
solely with respect to such Leased Property or Leased Properties, and shall not
be exercisable with respect to any other Leased Property.  To the extent an
Event of Default constitutes an Event of Default as to all of the Leased
Properties (in accordance with Section 9.01 above), the remedies set forth
herein shall be exercisable with respect to all of the Leased Properties.
Subject to the foregoing provisions, Landlord may exercise any one or more of
the following remedies upon the occurrence of an Event of Default:

               (a)  Landlord may terminate this Lease, exclude Tenant from
                    possession of the subject Leased Property and use reasonable
                    efforts to lease the subject Leased Property to others.  If
                    this Lease is terminated pursuant to the provisions of this
                    subparagraph (a) with respect to one or more, but less than
                    all, of the Leased Properties identified on Schedule A
                    hereto, Tenant will remain liable to Landlord for the Rent
                    for all of the Leased Properties identified on Schedule A
                    and other sums then due and for the balance of the Term as
                    if the Lease had not been terminated with respect to the
                    subject Leased Property, less the net proceeds, if any, of
                    any re-letting of the subject Leased Property by Landlord
                    subsequent to such termination, after deducting all
                    Landlord's expenses in connection with such re-letting,
                    including without limitation, the expenses set forth in this
                    Section 9.02. Notwithstanding the termination of this Lease
                    with respect to a subject Leased Property, Tenant shall pay
                    to Landlord all amounts due as Rent, and such other amounts
                    then due, under this Lease on the days that such Rent and
                    such other amounts become due and payable as required by
                    this Lease.

               (b)  Without demand or notice, Landlord may re-enter and take
                    possession of the subject Leased Property or any part
                    thereof; and repossess such Leased Property as of Landlord's
                    former estate; and expel Tenant and those claiming through
                    or under Tenant from such Leased Property; and, remove the
                    effects of both or either, without being deemed guilty of
                    any manner of trespass and without prejudice to any remedies
                    for arrears of Rent or preceding breach of covenants or
                    conditions.  If Landlord elects to re-enter, as provided in
                    this paragraph (b) or if Landlord takes possession of such
                    Leased Property 

                                    - 30 -
<PAGE>
 
                    pursuant to legal proceedings or pursuant to any notice
                    provided by law, Landlord may, from time to time, without
                    terminating any portion of this Lease, re-let such Leased
                    Property or any part of such Leased Property, either alone
                    or in conjunction with other portions of the Improvements of
                    which such Leased Property are a part, in Landlord's name
                    but for the account of Tenant, for such term or terms (which
                    may be greater or less than the period which would otherwise
                    have constituted the balance of the Term of this Lease) and
                    on such terms and conditions (which may include concessions
                    of free rent, and the alteration and repair of such Leased
                    Property) as Landlord, in its uncontrolled discretion, may
                    determine. Landlord may collect and receive the Rents for
                    such Leased Property. Landlord will not be responsible or
                    liable for any failure to re-let such Leased Property, or
                    any part of such Leased Property, or for any failure to
                    collect any Rent due upon such re-letting; provided that
                    Landlord has used reasonable efforts to re-let. No such re-
                    entry or taking possession of such Leased Property by
                    Landlord will be construed as an election on Landlord's part
                    to terminate this Lease unless a written notice of such
                    intention is given to Tenant. No notice from Landlord under
                    this Lease or under a forcible entry and detainer statute or
                    similar law will constitute an election by Landlord to
                    terminate this Lease unless such notice specifically says
                    so. Landlord reserves the right following any such re-entry
                    or re-letting, or both, to exercise its right to terminate
                    this Lease by giving Tenant such written notice, and, in
                    that event such Lease will terminate as specified in such
                    notice.

               (c)  If Landlord elects to take possession of a Leased Property
                    according to subparagraph (b) of this Section 9.02 without
                    terminating this Lease, Tenant will pay Landlord (A) the
                    Rent and other sums which would be payable under this Lease
                    with respect to such Leased Property if such repossession
                    had not occurred, less (B) the net proceeds, if any, of any
                    re-letting of such Leased Property after deducting all of
                    Landlord's expenses incurred in connection with such re-
                    letting, including without limitation, all repossession
                    costs, brokerage commissions, legal expense, attorneys'
                    fees, expense of employees, alteration, remodeling, repair
                    costs, and expense of preparation for such re-letting. If,
                    in connection with any re-letting, any resulting lease term
                    for the subject Leased Property extends beyond the existing
                    Term or Extension Term, as the case may be, or such Leased
                    Property covered by such re-letting includes areas which are
                    not part of such Leased Property, a fair apportionment of
                    the Rent received from such re-letting and the expenses
                    incurred in connection with such re-letting will be made in
                    determining the net proceeds 

                                    - 31 -
<PAGE>
 
                    received from such re-letting. In addition, in determining
                    the net proceeds from such re-letting, any rent concessions
                    will be apportioned over the term of the new lease. Tenant
                    will pay such amounts to Landlord monthly on the days on
                    which the Rent and all other amounts owing under this Lease
                    would have been payable if possession had not been retaken,
                    and Landlord will be entitled to receive the rent and other
                    amounts from Tenant on each such day. Notwithstanding
                    anything herein to the contrary, Landlord, at its option,
                    may collect and apply any Rent received from such re-letting
                    in accordance herewith and in such case shall remit any
                    balance thereof to Tenant. Landlord shall incur no liability
                    or obligation to Tenant arising out of the collection or
                    application of Rent by Landlord hereunder. Landlord shall
                    use reasonable efforts to re-let.

               (d)  Landlord may re-enter the applicable Leased Property and
                    have, repossess and enjoy such Leased Property as if this
                    Lease had not been made, and in such event, Tenant and its
                    successors and assigns shall remain liable for any
                    contingent or unliquidated obligations or sums owing at the
                    time of such repossession.

               (e)  Landlord may take whatever action at law or in equity as may
                    appear necessary or desirable to collect the Rent and other
                    amounts payable hereunder with respect to the subject Leased
                    Property then due and thereafter to become due, or to
                    enforce performance and observance of any obligations,
                    agreements or covenants of Tenant under this Lease.

          9.03      Right of Set-Off.  Landlord may, and is hereby authorized by
                    -----------------                                           
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord in respect of a Leased
Property, including all sums held in any escrow for Impositions, any
indebtedness of Landlord to Tenant, and any claims by Tenant against Landlord,
against any obligations of Tenant under this Lease in respect of such Leased
Property and against any claims by Landlord against Tenant, whether or not
Landlord has exercised any other remedies hereunder. Landlord shall set-off and
apply such sums first, to delinquent real estate taxes, unless such taxes are
being protested in good faith and no lien has attached to any Leased Property
with respect thereto, second, to currently due and owing real estate taxes, and
next, to other Tenant's obligations in the order which Landlord may determine.
The rights of Landlord under this Section are in addition to any other rights
and remedies Landlord may have against Tenant.

          9.04      Performance of Tenant's Covenants.  Landlord may, without
                    ---------------------------------                        
waiving or releasing any obligation of Tenant, and without waiving or releasing
any obligation or default, perform any obligation of Tenant which Tenant has
failed to perform within fifteen (15) business days after Landlord has sent a
written notice to Tenant informing it of its specific failure (provided 

                                    - 32 -
<PAGE>
 
no such notice shall be required if Landlord has previously notified Tenant of
such failure under the provisions of Section 9.01). In the event Landlord deems,
in its discretion, that Tenant's failure to perform such obligation has given
rise to an emergency situation, Landlord may perform such obligation without
waiving or releasing any obligation of Tenant, and without waiving or releasing
any obligation or default; provided, however, that Landlord shall notify Tenant
of such performance as soon as it is reasonably practicable to do so. Tenant
shall reimburse Landlord on demand, as Additional Rent, for any expenditures
thus incurred by Landlord and shall pay interest thereon at the New York Prime
Rate.

          9.05      Late Charge.  Any payment not made by Tenant for more than
                    -----------                                               
five (5) business days after the due date shall be subject to a late charge
payable by Tenant as Rent of four percent (2%) of the amount of such overdue
payment.   Notwithstanding the foregoing, in the event that Tenant's payment is
not made more than five (5) business days after the due date more than two (2)
times during any twelve (12) month period, any such subsequent overdue payments
within the twelve (12) months immediately following such second failure shall be
subject to a late charge payable by Tenant as Rent of seven percent (7%) of the
amount of such overdue payment.

          9.06      Litigation; Attorneys' Fees.  Within ten (10) days after
                    ----------------------------                            
Tenant has knowledge of any litigation or other proceeding related to or arising
out of this Agreement or the Leased Property in which claims are asserted in an
amount in excess of $50,000, that (1) may be instituted against Tenant, (2) may
be instituted against any Leased Property to secure or recover possession
thereof, or (3) may affect the title to or the interest of Landlord in any
Leased Property, Tenant shall give written notice thereof to Landlord.  In the
event that Landlord determines that Tenant has failed to give adequate
cooperation or information with respect to any such litigation, investigation,
receivership, administrative, bankruptcy, insolvency or other similar
proceeding, Landlord may, after notice to Tenant, undertake such investigation
or proceeding and Tenant shall pay all reasonable costs and expenses (the
"Costs") related thereto that are incurred by Landlord, whether or not Landlord
has received notice from Tenant of such investigation or proceeding, and whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, which Costs shall include, without limitation:  (a) the fees,
expenses, and costs of any litigation, investigation, receivership,
administrative, bankruptcy, insolvency or other similar proceeding; (b)
reasonable attorney, paralegal, consulting and witness fees and disbursements;
and (c) the expenses, including, without limitation, lodging, meals, and
transportation, of Landlord and its employees, agents, attorneys, and witnesses
in investigating or preparing for litigation, administrative, bankruptcy,
insolvency or other similar proceedings and attendance at hearings, depositions,
and trials in connection therewith.  Within ten (10) days of Landlord's
presentation of an invoice of Costs incurred by Landlord pursuant to the
preceeding sentence or otherwise incurred by Landlord in enforcing or preserving
Landlord's rights under this Lease, whether or not an Event of Default has
actually occurred or has been declared and thereafter cured, Tenant shall pay
all such Costs.  All such Costs as incurred shall be deemed to be Additional
Rent under this Lease.

                                    - 33 -
<PAGE>
 
          9.07      Remedies Cumulative.  The remedies of Landlord herein are
                    -------------------                                      
cumulative to and not in lieu of any other remedies available to Landlord at law
or in equity.  The use of, or failure to use, any one remedy shall not be taken
to exclude or waive the right to use any other remedy.

          9.08      Escrows and Application of Payments.  As security for the
                    -----------------------------------                      
performance of its obligations hereunder, Tenant hereby assigns to Landlord all
its right, title and interest in and to all monies escrowed with Landlord under
this Lease and all deposits with utility companies, taxing authorities, and
insurance companies; provided, however, that Landlord shall not exercise its
rights hereunder with respect to any Leased Property until an Event of Default
has occurred in respect of such Leased Property.  Any payments received by
Landlord under any provisions of this Lease during the existence, or continuance
of an Event of Default shall be applied to Tenant's obligations, first, to
delinquent real estate taxes, unless such taxes are being protested in good
faith and no lien has attached to any Leased Property with respect thereto,
second, to currently due and owing real estate taxes, and next, to other
Tenant's obligations in the order which Landlord may determine.

          9.09      Power of Attorney.  Tenant hereby irrevocably and
                    -----------------                                
unconditionally appoints Landlord, or Landlord's authorized officer, agent,
employee or designee, as Tenant's true and lawful attorney-in-fact, to act,
after an Event of Default, for Tenant in Tenant's name, place, and stead, and
for Tenant's and Landlord's use and benefit, to execute, deliver and file all
applications and any and all other necessary documents or things, to effect a
transfer, reinstatement, renewal and/or extension of any and all licenses and
other governmental authorizations issued to Tenant in connection with Tenant's
operation of the Leased Properties, and to do any and all other acts incidental
to any of the foregoing.  Tenant irrevocably and unconditionally grants to
Landlord as its attorney-in-fact full power and authority to do and perform,
after an Event of Default, every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof.  This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of Tenant's obligations hereunder.


                                   ARTICLE X
                            DAMAGE AND DESTRUCTION

          10.01     General.  Tenant shall notify Landlord if any Leased
                    -------                                             
Property is damaged or destroyed by reason of fire or any other cause.  Tenant
shall promptly repair, rebuild, or restore such Leased Property, at Tenant's
expense, so as to make such Leased Property at least equal in value to such
Leased Property existing immediately prior to such occurrence and as nearly
similar to it in character as is practicable and reasonable.  Before beginning
such repairs or rebuilding, or executing any contracts in connection with such
repairs or rebuilding, Tenant will submit for Landlord's approval, which
approval Landlord will not unreasonably withhold or delay, complete and detailed
plans and specifications for such repairs or rebuilding.  Promptly after
receiving Landlord's approval of the plans and specifications, Tenant will begin
such repairs or rebuilding and will oversee the 

                                    - 34 -
<PAGE>
 
repairs and rebuilding to completion with diligence, subject, however, to
strikes, lockouts, acts of God, embargoes, governmental restrictions, and other
causes beyond Tenant's reasonable control. Landlord will make available to
Tenant the net proceeds of any fire or other casualty insurance paid to Landlord
for such repair or rebuilding as the same progresses, after deduction of any
costs of collection, including attorneys' fees. Payment will be made against
properly certified vouchers of a competent architect in charge of the work and
approved by Landlord. Prior to commencing the repairing or rebuilding, Tenant
shall deliver to Landlord for Landlord's approval a schedule setting forth the
estimated monthly draws for such work. Landlord will contribute to such payments
out of the insurance proceeds an amount equal to the proportion that the total
net amount received by Landlord from insurers bears to the total estimated cost
of the rebuilding or repairing, multiplied by the payment by Tenant on account
of such work. Landlord may, however, withhold ten percent (10%) from each such
payment and shall disburse such amount after: (a) the work of repairing or
rebuilding is completed and proof has been furnished to Landlord that no lien or
liability has attached or will attach to such Leased Property or to Landlord in
connection with such repairing or rebuilding and (b) Tenant has obtained a
certificate of use and occupancy (or its functional equivalent) for the portion
of such Leased Property being repaired or rebuilt. Upon the completion of
rebuilding or repairing and the furnishing of such proof, the balance of the net
proceeds of such insurance payable to Tenant on account of such repairs or
rebuilding will be paid to Tenant. Tenant will obtain and deliver to Landlord a
temporary or final certificate of occupancy before such Leased Property is
reoccupied for any purpose. Tenant shall complete such repairs or rebuilding
free and clear of mechanic's or other liens, and in accordance with the building
codes and all applicable laws, ordinances, regulations, or orders of any state,
municipal, or other public authority affecting the repairs or rebuilding, and
also in accordance with all requirements of the insurance rating organization,
or similar body. Any remaining proceeds of insurance after such restoration will
be Tenant's property.

          10.02     Landlord's Inspection.  During the progress of such repairs
                    ----------------------                                     
or rebuilding, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
repairs or rebuilding.  Tenant will keep all plans, shop drawings, and
specifications available, and Landlord and its architects and engineers may
examine them at all reasonable times. If, during such repairs or rebuilding,
Landlord and its architects and engineers determine that the repairs or
rebuilding are not being done in accordance with the approved plans and
specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such repairs or rebuilding do not accord with the approved
plans and specifications.  Upon the receipt of any such notice, Tenant will
cause corrections to be made to any deficiencies, omissions, or such other
respect.  Tenant's obligations to supply insurance, according to Article IV,
will be applicable to any repairs or rebuilding under this Section 10.02.

          10.03     Landlord's Costs.  Tenant shall, within fifteen (15) days
                    ----------------                                         
after receipt of an invoice from Landlord, pay the reasonable costs, expenses,
and fees of any architect or engineer employed by Landlord to review any plans
and specifications and to supervise and approve any 

                                    - 35 -
<PAGE>
 
construction, or for any services rendered by such architect or engineer to
Landlord as contemplated by any of the provisions of this Lease, or for any
services performed by Landlord's attorneys in connection therewith; provided,
however, that Landlord will consult with Tenant and notify Tenant of the
estimated amount of such expenses.

          10.04     Rent Abatement.  In the event that the provisions of Section
                    --------------                                              
10.01 above shall become applicable as to any Leased Property, and subject to
the last sentence of this Section 10.04, the applicable Base Annual Rent shall
be abated or reduced proportionately during any period in which, by reason of
such damage or destruction, there is substantial interference with the operation
of the Business of Tenant in such Leased Property, having regard to the extent
to which Tenant may be required to discontinue any Business on such Leased
Property, and such abatement or reduction shall continue for the period
commencing with such destruction or damage and ending with the substantial
completion by Tenant of such work or repair and/or reconstruction.  In the event
that only a portion of any Leased Property is rendered untenantable or incapable
of such use, the Base Annual Rent payable hereunder in respect thereof shall be
reduced proportionately considering the extent to which the Tenant is unable to
practicably use the Leased Property for Business.  Tenant shall use reasonably
diligent efforts to make the Leased Property tenantable and capable of such use.
Notwithstanding any other provision hereof, such rental abatement shall be
limited to the amount of any rental or Business interruption insurance proceeds
actually received by Landlord under Article IV.

          10.05     Substantial Damage During Lease Term.  Provided Tenant has
                    ------------------------------------                      
fully complied with Section 4.01 hereof (including actually maintaining in
effect rental value insurance or Business interruption insurance provided for in
clause (c) thereof) and has satisfied the conditions of the last sentence of
this Section 10.05, if, at any time during the Term or any Extension Term, as
the case may be, of this  Lease, any Leased Property is so damaged by fire or
otherwise that it is Completely Destroyed or Partially Destroyed (as such terms
are hereafter defined), Tenant may, within one hundred and eighty (180) days
after such damage, give notice of its election to terminate this Lease with
respect to such Leased Property and, subject to the further provisions of this
Section, this Lease will cease with respect to such Leased Property on the
thirtieth (30th) day after the delivery of such notice.  If the Lease is so
terminated, Tenant will have no obligation to repair, rebuild or replace such
Leased Property, and the entire insurance proceeds will belong to Landlord.  If
the Lease is not so terminated, Tenant shall rebuild such Leased Property in
accordance with Section 10.01.  If Tenant elects to terminate this Lease
pursuant to this Section 10.05, Tenant will pay (or cause to be paid) to
Landlord, an amount equal to the excess amount, if any, of the book value of the
damaged property as shown in Landlord's financial statements as of the date of
such termination, over the amount of all insurance proceeds received by
Landlord.  A Leased Property shall be deemed to be "Completely Destroyed" if
there is sufficient damage to such Leased Property that Landlord and Tenant
agree to its classification as such.  A Leased Property shall be deemed to be
"Partially Destroyed" if, as a result of damages to it, a substantial part of
the Business (as determined by a reasonable dealer in the trade, in light of
standard trade practices) cannot be conducted on it within one hundred and
eighty (180) days of the occurrence of such damages.  In the event that Landlord
and Tenant are unable to agree to a determination of whether any Leased Property
is Completely 

                                    - 36 -
<PAGE>
 
Destroyed, Partially Destroyed or otherwise, such determination shall be made
pursuant to the Arbitration provisions set forth in Article XIV.

          10.06     Damage Near End of Term.  Notwithstanding any provisions of
                    -----------------------                                    
Sections 10.01 or 10.05 to the contrary, if damage to or destruction of any
Leased Property occurs during the last twenty-four (24) months of the Term, and
if such damage or destruction renders the Leased Property Completely Destroyed
or Partially Destroyed, either party shall have the right to terminate this
Lease as to such Leased Property by giving notice to the other within thirty
(30) days after the date of damage or destruction, in which event Landlord shall
be entitled to retain the insurance proceeds and Tenant shall pay to Landlord on
demand the amount of any deductible or uninsured loss arising in connection
therewith; provided, however, that any such notice given by Landlord shall be
void and of no force and effect if Tenant exercises an available option for an
Extension Term with respect to such Leased Property pursuant to provisions of
this Lease within ten (10) business days following receipt of such termination
notice.

          10.07     Risk of Loss.  Notwithstanding anything herein to the
                    ------------                                         
contrary, during the Term or any Extension Term, as the case may be, the risk of
loss of or decrease in the enjoyment and beneficial use of the Leased Properties
in consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise is assumed by Tenant, and Landlord
shall in no event be answerable or accountable therefor except in the case of
gross negligence, willful misconduct or breach of this Lease by Landlord
resulting in such damage or destruction.  In addition, all risk of loss or
decrease in enjoyment and beneficial use in consequence of foreclosures,
attachments, levies or executions is assumed by Tenant except for foreclosure
due to Landlord's indebtedness.


                                  ARTICLE XI
                                 CONDEMNATION

          11.01     Total Taking.  If at any time during the Term or any
                    ------------                                        
Extension Term, as the case may be, any Leased Property is totally and
permanently taken by right of eminent domain or by conveyance made in response
to the threat of the exercise of such right ("Condemnation"), this Lease shall
terminate as to such Leased Property on the Date of Taking (which shall mean the
date the condemning authority has the right to possession of the property being
condemned), and Tenant shall promptly pay all outstanding applicable Rent and
other charges through the date of termination, provided, however, this Lease
shall not so terminate if the Condemnation occurred due to the failure of Tenant
to maintain such Leased Property as required by Article VII hereof or other
applicable provisions hereof, whether or not such failure on the part of Tenant
constituted an Event of Default hereunder at the time of the Condemnation.
Landlord shall reimburse to Tenant any Rent paid in advance for any period after
the Condemnation.
 
          11.02     Partial Taking.  If a portion of a Leased Property is taken
                    --------------                                             
by Condemnation, this Lease shall remain in effect as to such Leased Property if
such Leased Property is not thereby 

                                    - 37 -
<PAGE>
 
rendered Unsuitable for the continuation of Tenant's Business on that Leased
Property (which shall mean that such Leased Property is in such a state or
condition such that in the good faith judgment of Tenant, reasonably exercised,
it cannot be used on a commercially practicable basis in the operation of the
Business), but if such Leased Property is thereby rendered Unsuitable for the
continuation of Tenant's Business on that Leased Property, this Lease shall
terminate as to such Leased Property on the Date of Taking, provided such
Condemnation was not as a result of Tenant's failure to maintain such Leased
Property as provided for in Section 11.01.

          11.03     Restoration.  If there is a partial taking of any Leased
                    -----------                                             
Property and this  Lease remains in full force and effect pursuant to Section
11.02, Landlord shall retain the amount of any Landlord Award (as hereafter
defined) received by Landlord, Landlord shall apply such Landlord Award to
accomplish all necessary restoration to the Leased Property, and any excess
after such application shall be retained by Landlord.  If there is a partial
taking of any Leased Property and this Lease remains in full force and effect
pursuant to Section 11.02, Tenant shall retain the amount of any Tenant Award
(as hereafter defined) received by Tenant, Tenant shall apply such Tenant Award
to accomplish all necessary restoration of Tenant's property, and any excess
after such application shall be retained by Tenant.  Notwithstanding anything in
this Section to the contrary, in the event that there is a partial taking of any
Leased Property and this  Lease remains in full force and effect pursuant to
Section 11.02, and there is a single Award with respect to such partial taking,
then the Landlord and Tenant shall use their good faith efforts to determine the
proper apportionment of such Award (as hereafter defined) to restoration of
Landlord's and Tenant's respective properties.  In the event that the parties
are unable to agree on such apportionment within thirty (30) days, the parties
shall submit to arbitration of an apportionment subject to the arbitration
provisions set forth in Article XIV.

          11.04     Landlord's Inspection.  During the progress of such
                    ---------------------                              
restoration, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
restoration.  Tenant will keep all plans, shop drawings, and specifications
available, and Landlord and its architects and engineers may examine them at all
reasonable times.  If, during such restoration, Landlord and its architects and
engineers determine that the restoration is not being done in accordance with
the approved plans and specifications, Landlord will give prompt notice in
writing to Tenant, specifying in detail the particular deficiency, omission, or
other respect in which Landlord claims such restoration does not accord with the
approved plans and specifications.  Upon the receipt of any such notice, Tenant
will cause corrections to be made to any deficiencies, omissions, or such other
respect.  Tenant's obligations to supply insurance, according to Article IV,
will be applicable to any restoration under this Section.

          11.05     Award Distribution.  In the event that there is a total or
                    ------------------                                        
partial Condemnation of a Leased Property then the Landlord and Tenant shall use
their good faith efforts to determine the proper apportionment of such Award to
Landlord's and Tenant's respective properties.  In the event that the parties
are unable to agree on such apportionment within thirty (30) days, the parties
shall submit to arbitration of an apportionment subject to the arbitration
provisions set forth in Article 

                                    - 38 -
<PAGE>
 
XIV. If there is a Condemnation which results in the termination of this Lease,
then only for purposes of determining an apportionment of the condemnation
proceeds, Tenant's leasehold interest shall not be construed to have terminated.

          11.06     Temporary Taking.  The taking of any Leased Property, or any
                    ----------------                                            
part thereof, by military or other public authority shall constitute a taking by
Condemnation only when the use and occupancy by the taking authority has
continued for longer than twenty four (24) months. During any such twenty-four
(24) month period, which shall be a temporary taking, all the provisions of this
Lease shall remain in full force and effect as to such Leased Property with no
abatement of rent payable by Tenant hereunder.  In the event of any such
temporary taking, the entire amount of any such Award made for such temporary
taking allocable to the Term hereof, whether paid by way of damages, Rent or
otherwise, shall be paid to Tenant.


                                  ARTICLE XII
              REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS

          Tenant hereby represents, warrants and covenants to Landlord as
follows:

          12.01     Organization and Qualification.
                    ------------------------------ 

          (a)       Tenant is a Virginia corporation duly organized, validly
                    existing and in good standing under the laws of its state of
                    incorporation or organization, with all power and authority,
                    corporate or otherwise, necessary to:  (i) enter into and
                    perform this Lease and (ii) own and lease its assets and
                    properties, and conduct its Business, as it is now being
                    conducted or proposed to be conducted.  Tenant is duly
                    qualified as a foreign corporation or other entity, as the
                    case may be, to conduct its Business and own and lease its
                    assets and properties, and is in good standing, in each
                    jurisdiction where the character of its assets and
                    properties owned or held under lease or the nature of its
                    Business makes such qualification necessary or advisable,
                    and is duly qualified and licensed under all laws,
                    regulations, ordinances or orders of public or governmental
                    authorities, or otherwise to carry on its Business and own
                    or lease its assets and properties in the places and in the
                    manner in which they are owned, leased or conducted or
                    proposed to be owned, leased or conducted, except where the
                    failure to be so organized, qualified and in good standing
                    or to have such authority, qualification or licensing could
                    not result in a Material Adverse Change.  Complete and
                    correct copies of Tenant's Charter, as in effect on the date
                    hereof, and Tenant's by-laws, also as in effect on the date
                    hereof, have been delivered to Landlord.

          (b)       Each Affiliate that conducts operations or business on or
                    from any Leased Property, whether now or at any time in the
                    future, is duly organized, validly 

                                    - 39 -
<PAGE>
 
                    existing and in good standing under the laws of its
                    organization, with all power and authority, corporate or
                    otherwise, necessary to own and lease its assets and
                    properties, and conduct its business, as it is now being
                    conducted or proposed to be conducted. Each Affiliate is
                    duly qualified as a foreign corporation or other entity, as
                    the case may be, to do business and own and lease its assets
                    and properties, and is in good standing, in each
                    jurisdiction where the character of its assets and
                    properties owned or held under lease or the nature of its
                    activities or business makes such qualification necessary or
                    advisable, and is duly qualified and licensed under all
                    laws, regulations, ordinances or orders or public or
                    governmental authorities or otherwise to carry on its
                    business and own or lease its assets and properties in the
                    places and in the manner in which they are owned, leased or
                    is conducted or proposed to be owned, leased or conducted,
                    except where the failure to be so organized, qualified and
                    in good standing or to have such authority, qualification or
                    licensing could not result in a Material Adverse Change.

          "Material Adverse Change" since a particular specified date, or a date
which may be specified from the circumstances existing immediately prior to the
happening of a specified event or occurrence, or, if no date or event is
specified, with reference to the most recent Annual Financial Statements
delivered pursuant to this Lease, means a material adverse change in the
Business, assets, properties, franchises, financial condition or income of
Tenant or the operations,  business, assets, properties, franchises, financial
condition, income or prospects of any Affiliate, whether or not such event or
occurrence is an Event of Default.

          "Affiliate" means with respect to any Person, (i) any Person that
holds direct or indirect beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of voting securities or other
voting interests representing at least five percent (5%) of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least five percent (5%) of the outstanding equity securities or
interests in a Person, or (ii) any Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such Person.

          A "Person" shall mean and include natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations, whether or not legal
entities, and governments and agencies and political subdivisions thereof.

          12.02     Material Agreements.  Schedule 12.02 is a complete list of
                    -------------------                                       
all agreements to which Tenant is a party that are material to the ownership and
use of the Leased Property or the operation of Tenant's Business (meaning (i)
those agreements that have a monetary obligation of at least $50,000 per year
and are not cancellable without penalty by Sellers upon notice of one year or
less  and (ii) employment contracts of $100,000 or more per annum), and Tenant
has delivered to 

                                    - 40 -
<PAGE>
 
Landlord a copy of each of these agreements (including all exhibits, schedules
and amendments thereto).

          12.03     Changes in Condition.  Since the date of the latest Annual
                    ---------------------                                     
Financial Statements, no Material Adverse Change has occurred between such date
and the date hereof, and neither Tenant nor any Affiliate has entered into any
material transaction outside the ordinary course of its or their operations or
business, including the Business, except as set forth in Schedule 12.03 and the
matters contemplated by this Lease.

          12.04     Franchises, Licenses, etc.  Tenant and its subsidiaries own,
                    --------------------------                                  
or have sufficient interests in, all franchises, trademarks, trademark rights,
trade names, trade name rights, copyrights, licenses, permits, authorizations
and other rights as are necessary for the conduct of Tenant's Business and its
subsidiaries' businesses as now conducted or proposed to be conducted by Tenant
or any Affiliate, as well as rights under any agreement under which Tenant or
its subsidiaries has access to confidential information used by Tenant or its
subsidiaries in Tenants' Business or the businesses of its subsidiaries, as the
case may be (collectively, the "Intellectual Property").  All Intellectual
Property is in full force and effect in all material respects, and Tenant and
its subsidiaries are in substantial compliance with the foregoing without any
conflict with the valid rights of others, which has resulted, or could be
reasonably likely to result in any Material Adverse Change.  Neither Tenant nor
any Affiliate has violated, or received any communication that by conducting its
Business or any Affiliate's businesses, it or any Affiliate would violate any
franchises, licenses, patents, trademarks, service marks, trade names,
copyrights, trade secrets, proprietary rights or processes of any other Person
(as hereafter defined) nor is Tenant or any Affiliate aware of any such
violations.  No event has occurred which permits, or after notice or lapse of
time or both would permit, the revocation or termination of any such license,
franchise or other right or affect the rights of Tenant or any Affiliate so as
to result in or reasonably be likely to result in any Material Adverse Change.
There is no litigation or other proceeding or dispute or, to the knowledge of
Tenant or any Affiliate, threat thereof with respect to the validity or, where
applicable, the extension or renewal, of any of the foregoing which has
resulted, or could result, in any Material Adverse Change.

          12.05     Litigation.  No litigation, at law or in equity, or any
                    -----------                                            
proceeding before any court, board or other governmental or administrative
agency or any arbitrator or other forum of alternative dispute resolution is
pending or, to the knowledge of Tenant or any Affiliate, threatened which
involves any risk of any final judgment, order or liability which, after giving
effect to any applicable insurance, has resulted, or could result, in any
Material Adverse Change or which seeks to enjoin the execution and consummation
of this Lease and the performance of Tenant's obligations hereunder.  No
judgment, decree or order of any court, board or other governmental or
administrative agency or any arbitrator has been issued against or binds Tenant
or any Affiliate, which has resulted, or could result, in any Material Adverse
Change.

          12.06     Authorization and Enforceability.  Tenant has taken all
                    ---------------------------------                      
corporate or other action required to execute, deliver and perform this Lease.
This Lease constitutes the legal, valid and binding obligation of Tenant and is
enforceable against Tenant in accordance with its terms.


                                    - 41 -
<PAGE>
 
          12.07     No Legal Obstacle to Lease. Neither the execution and
                    --------------------------
delivery of this Lease nor the performance of any obligation hereunder has
constituted or resulted in or will constitute or result in:

                    (a) any breach, violation of, conflict with, default under
                        or termination of any agreement, contract, mortgage,
                        instrument, deed or lease to which Tenant or any
                        Affiliate is a party or by which it or they are bound;

                    (b) the violation of or conflict with any law, statute,
                        ordinance, judgment, decree, order, rule or regulation
                        applicable to Tenant, any Affiliate, any Improvements or
                        any Leased Property; or

                    (c) any violation of or conflict with Tenant's or any
                        Affiliate's Charter or By-Laws or other organizational
                        documents, as the case may be.

          No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other Person is
required to be obtained or made by Tenant in connection with the execution,
delivery and performance of this Lease.
 
          12.08     Certain Business Representations:
                    -------------------------------- 

                    (a) Labor Relations. No dispute or controversy between
                        ---------------
                        Tenant or any Affiliate and its or their employees has
                        resulted in, or is reasonably likely to result in, any
                        Material Adverse Change, and neither Tenant nor any
                        Affiliate anticipates that its relationships with its
                        unions or employees will result, or are reasonably
                        likely to result, in any Material Adverse Change. Tenant
                        and each Affiliate is in compliance in all material
                        respects with all federal and state laws relating to
                        employees and labor relations, including, but not
                        limited to, laws relating to health and safety in the
                        workplace, non-discrimination in employment and the
                        payment of wages.

                    (b) Antitrust. Tenant and each Affiliate is in compliance in
                        ---------
                        all material respects with all federal and state
                        antitrust laws relating to Tenant's Business and the
                        subsidiaries' businesses and the geographic
                        concentration thereof.

                    (c) Consumer Protection. Neither Tenant nor any Affiliate is
                        -------------------
                        in violation of any rule, regulation, order, or
                        interpretation of any rule, regulation or order of the
                        Federal Trade Commission (including truth-in-lending) or
                        other federal, state or local public or governmental

                                    - 42 -
<PAGE>
 
                        authority or agency, with which the failure to comply,
                        in the aggregate, has resulted in, could result in, a
                        Material Adverse Change.

                    (d) Future Expenditures. Neither Tenant nor any Affiliate,
                        -------------------
                        anticipates that further expenditures, if any, by Tenant
                        or any Affiliate needed to meet the provisions of any
                        federal, state or foreign governmental statutes, orders,
                        rules or regulation could result in any Material Adverse
                        Change.

                    (e) Benefit Liabilities. Neither Tenant nor any ERISA
                        ------------------- 
                        Affiliate maintains, contributes to, or is obligated to
                        contribute to, nor has Tenant or any ERISA Affiliate
                        maintained, contributed to, been obligated to contribute
                        to, or had any direct, indirect, or contingent liability
                        with respect to, any Title IV Plan (as hereafter
                        defined). Each Tenant Benefit Plan has been maintained
                        in compliance with its terms and with applicable laws
                        (including specifically the Code and the Employee
                        Retirement Income Security Act of 1974 ("ERISA").
                        "Tenant Benefit Plan" means any plan, fund, or other
                        similar program described in Section 3(2) of ERISA and
                        established or maintained or with respect to which
                        Tenant and/or any ERISA Affiliate has an obligation to
                        contribute for the benefit of its employees (or for
                        which Tenant could be directly or contingently liable).
                        "Title IV Plan" means an "employee benefit plan" (as
                        defined in Section 3(3) of ERISA) that is subject to
                        Title IV of ERISA and is or has been established or
                        maintained, by Tenant or any ERISA Affiliate, or to
                        which contributions are, have been, or should have been
                        made. "ERISA Affiliate" means any trade or business,
                        whether or not incorporated, that, together with Tenant,
                        is or has been under common control, within the meaning
                        of Section 414(b), (c), (m), or (o) of the Code or
                        Section 4001 of ERISA.

          12.09     Certain Financial Covenants.  Tenant or an Affiliate, as
                    ---------------------------
applicable, is in compliance in all material respects with all financial
covenants required to be maintained pursuant to any franchise or other agreement
pursuant to which Tenant or such Affiliate operates its business, except in such
respects as shall not result in any franchisor under any franchise or operating
agreement to which Tenant is a party taking any action that could result in a
Material Adverse Change.

          12.10     Cash Flow Coverage Ratio Covenant.  On the date of this
                    ---------------------------------                      
Lease and measured at a date that is twenty-four (24) months following such date
(each a "Cash Flow Measurement Date"), and on each anniversary date  that is
twenty-four (24) months following a prior Cash Flow Measurement Date, Tenant
shall have maintained a Cash Flow Coverage Ratio of not less than 1.5 to 1.0
based on the Annual Financial Statements to be delivered to Landlord in
accordance with 

                                    - 43 -
<PAGE>
 
Section 6.04 hereof. "Cash Flow Coverage Ratio" means the aggregate of net
income before taxes plus mortgage interest, rent expense, depreciation,
compensation of principals of the Business, management fees plus the annual LIFO
adjustment and other non-cash expenses, less recurring capital expenditures and
gain (loss) on sale of real estate, dividends and/or profits taken out of Tenant
divided by the aggregate of the Tenant's obligations under this Lease.
Notwithstanding anything herein to the contrary, in the event that Tenant shall
not be in compliance with this covenant at a Cash Flow Measurement Date or
Tenant shall have knowledge of such non-compliance prior to any Cash Flow
Measurement Date, the Tenant shall have the right to cure such breach through
any reasonable commercial means, including, but not limited to, providing
guarantees acceptable to Landlord, increasing capital, or cross collateralizing
with any other property of Tenant or an Affiliate, provided that such breach is
cured within one hundred and eighty (180) days after Notice by Landlord to
Tenant of the existence of such breach.

          12.11     Disclosure.  To Tenant's knowledge, this Lease does not
                    ----------                                             
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make any statement contained herein not misleading in
light of the circumstances under which it was made.  To Tenant's knowledge,
there is no event, fact or occurrence that has resulted in any Material Adverse
Change.

          12.12     Covenant Not to Acquire.  Tenant covenants and agrees that
                    -----------------------                                   
during the Term and any Extension Term, as the case may be, Tenant and its
controlling shareholders or its or their Affiliates will not acquire, directly
or indirectly, more that 9.90% of the outstanding common shares of beneficial
interest of Capital Automotive REIT.  Tenant covenants and agrees that it will
divest itself of such shares of Capital Automotive REIT as may be necessary to
satisfy the limitations of this Section 12.12.



                                 ARTICLE XIII
                     ASSIGNMENT AND SUBLETTING; ATTORNMENT

          13.01     Prohibition Against Subletting and Assignment.  Subject to
                    ---------------------------------------------             
Section 13.03, Tenant shall not, without the prior written consent of Landlord,
or upon compliance with any conditions established by Landlord, in its sole
discretion, assign, mortgage, pledge, hypothecate, encumber or otherwise
transfer (except to an Affiliate) this Lease or any interest herein, or sublease
all or any part of any Leased Property (except to an Affiliate, including, but
not limited to, Kline Imports Chesapeake, Inc.), or suffer or permit this Lease
or the leasehold estate created hereby or any other rights arising hereunder to
be assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in
whole or in part, whether voluntarily, involuntarily or by operation of law.
For purposes of this Section 13.01, an assignment of this Lease shall be deemed
to include any Change of Control of Tenant, as if such Change of Control were an
assignment of the Lease.  In the event that (i) Landlord shall withhold any
consent to any assignment or transfer of this Lease or any interest herein, and
(ii) such assignee or transferee is approved by the relevant manufacturer for
continuation as a franchisee, there shall be a presumption that such assignment
or transfer was 

                                    - 44 -
<PAGE>
 
reasonable and Landlord shall have the burden of rebutting such presumption and
of proving that such consent was in fact reasonably withheld (or that such
conditions were reasonable).

          13.02     Changes of Control.  A Change of Control requiring the
                    ------------------                                    
consent of Landlord shall mean:

                    (a) the issuance and/or sale by Tenant or the sale by any
                        shareholder or equity holder of Tenant of a Controlling
                        (which shall mean, as applied to any Person, the
                        possession, directly or indirectly, of the power to
                        direct or cause the direction of the management and
                        policies of such Person, whether through the ownership
                        of voting securities, by contract or otherwise) interest
                        in Tenant to a Person other than an Affiliate of Tenant,
                        other than in either case a distribution to the public
                        pursuant to an effective registration statement under
                        the Securities Act of 1933, as amended (a "Registered
                        Offering");but not including a transfer upon death of
                        any shareholder to any family member of such
                        shareholder, trust created for the benefit of family
                        members, or the personal representative of such
                        shareholder;

                    (b) the sale, conveyance or other transfer of all or
                        substantially all of the assets of Tenant (whether by
                        operation of law or otherwise) provided, however, that
                        no Change of Control shall be deemed to have occurred in
                        the event of the transfer of assets as a result of the
                        death of a person involved in the Business, so long as
                        the transferee is approved by the manufacturer for the
                        continuation of the Business (any sale of all or
                        substantially all of the assets of Tenant within two (2)
                        years after the death of a person involved in the
                        Business shall be deemed to have occured as a result of
                        the death of such person); or

                    (c) any transaction pursuant to which Tenant is merged with
                        or consolidated into another entity (other than an
                        entity owned and Controlled by an Affiliate), and Tenant
                        is not the surviving entity.

          13.03     Operating/Service Agreements.
                    -----------------------------

                    (a) Permitted Agreements. Tenant shall, without Landlord's
                        prior approval, be permitted to enter into such
                        operating/service agreements for portions of each Leased
                        Property to various licensees in connection with
                        Tenant's Business as are customarily associated with or
                        incidental to the operation of such Leased Property,
                        which agreements may be in the nature of a sublease
                        agreement.

                                    - 45 -
<PAGE>
 
                    (b) Terms of Agreements. Each operating/service agreement
                        -------------------
                        concerning a Leased Property shall be subject and
                        subordinate to the provisions hereof. No agreement made
                        as permitted by Section 13.03(a) shall affect or reduce
                        any of the obligations of Tenant hereunder, and all such
                        obligations shall continue in full force and effect as
                        if no agreement had been made. No agreement shall impose
                        any additional obligations on Landlord hereunder.

                    (c) Copies. Tenant shall, within ten (10) days after the
                        ------
                        execution and delivery of any operating/service
                        agreement permitted by Section 13.03(a), deliver a
                        duplicate original thereof to Landlord.

                    (d) Assignment of Rights in Agreements.  As security for
                        ----------------------------------                  
                        performance of its obligations hereunder, Tenant hereby
                        grants, conveys and assigns to Landlord all right, title
                        and interest of Tenant in and to all operating/service
                        agreements now in existence or hereinafter entered into
                        for each Leased Property, and all extensions,
                        modifications and renewals thereof and all rents, issues
                        and profits therefrom, to the extent the same are
                        assignable by Tenant. Landlord hereby grants to Tenant a
                        license to collect and enjoy all rents and other sums of
                        money payable under any such agreement; provided,
                        however, that Landlord shall have the absolute right at
                        any time after the occurrence and continuance of an
                        Event of Default upon notice to Tenant and any vendors
                        or licensees to revoke said license and to collect such
                        rents and sums of money and to retain the same. Tenant
                        shall not (i) after the occurrence and continuance of an
                        Event of Default, consent to, cause, or allow, any
                        material modification or alteration of any of the terms,
                        conditions or covenants of any of the agreements or the
                        termination thereof, without the prior written approval
                        of Landlord nor (ii) accept any rents (other than
                        customary security deposits) more than thirty (30) days
                        in advance of the accrual thereof nor permit anything to
                        be done, the doing of which, nor omit or refrain from
                        doing anything, the omission of which, will or could be
                        a breach of or default in the terms of any of the
                        agreements.

                    (e) Licenses, Etc.  For purposes of Section 13.03, the
                        -------------                                     
                        operating/service agreements shall mean any licenses,
                        concession arrangements, or other arrangements relating
                        to the possession or use of all or any part of any
                        Leased Property.

          13.04     Assignment.  If Landlord shall withhold its consent to any
                    ----------                                                
assignment or if Landlord shall have established conditions to approval of any
assignment but such conditions shall not have been complied with, to the
satisfaction of  Landlord, such assignment shall not in any way 

                                    - 46 -
<PAGE>
 
impair the continuing primary liability of Tenant hereunder. No consent to any
assignment in a particular instance shall be deemed to be a general waiver of
the prohibition set forth in Article XIII. Any assignment shall be solely of
Tenant's entire interest in this Lease with respect to the subject Leased
Property or Leased Properties. Any assignment or other transfer of all or any
portion of Tenant's interest in this Lease in contravention of Article XIII
shall be voidable at Landlord's option.

          13.05     REIT Limitations.
                    ---------------- 

                    (a) Anything contained herein to the contrary
                        notwithstanding, Tenant shall not: (a) sublet or assign
                        a Leased Property or this Lease on any basis such that
                        the rental or other amounts to be paid by the sublessee
                        or assignee thereunder would be based, in whole or in
                        part, on the income or profits derived by the business
                        activities of the sublessee or assignee; (b) sublet or
                        assign a Leased Property or this Lease to any Person
                        that, under Section 856(d)(2)(B) of the Internal Revenue
                        Code of 1986, as amended (the "Code"), Landlord or its
                        general partner owns, directly or indirectly (by
                        applying constructive ownership rules set forth in
                        Section 856(d) (5) of the Code, a ten percent (10%) or
                        greater interest; or (c) sublet or assign a Leased
                        Property or this Lease in any other manner or otherwise
                        derive any income which could cause any portion of the
                        amounts received by Landlord pursuant hereto or any
                        sublease to fail to qualify as "rents from real
                        property" within the meaning of Section 856(d) of the
                        Code, or which could cause any other income received by
                        Landlord to fail to qualify as income described in
                        Section 856(c) (2) of the Code. The requirements of this
                        Section 13.05 shall likewise apply to any further
                        subleasing by any subtenant.

                    (b) Tenant acknowledges that Capital Automotive REIT, a
                        Maryland real estate investment trust and the general
                        partner of Landlord (the "Company"), intends to elect to
                        be taxed as a real estate investment trust (a "REIT")
                        under the Code. Tenant shall not do anything which would
                        adversely affect the Company's status as a REIT. Tenant
                        hereby agrees to modifications of this Lease which do
                        not materially adversely affect Tenant's rights and
                        liabilities if such modifications are required to retain
                        or clarify the Company's status as a REIT.

          13.06     Attornment.  Tenant shall insert in each sublease permitted
                    ----------                                                 
under Section 13.03(a) provisions to the effect that:  (a) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and to
the rights of Landlord hereunder; (b) [intentionally omitted] and (c) in the
event the sublessee receives a written notice from Landlord or Landlord's
assignees, if any, stating that Tenant is in default under this Lease, the
sublessee shall thereafter be obligated to pay all rentals accruing under said
sublease directly to the party giving such notice, or as such party may 

                                     -47-
<PAGE>
 
direct. All rentals received from the sublessee by Landlord or Landlord's
assignees in respect of a Leased Property, if any, as the case may be, shall be
credit against the amounts owing by Tenant hereunder with respect to such Leased
Property.

          13.07     Severance and Spin-Off.  If at any time while this Lease is
                    ----------------------                                     
in effect any Leased Property shall be utilized by Tenant in the operation of
more than one automobile franchise, then provided that there is no existing
Event of Default and there exists no condition which, with the passage of time,
could become an Event of Default, Tenant shall have the right (the "Spin-Off
Right") to sever and spin-off one or more parcels (each referred to as a
"Spin-Off Parcel") of the Leased Property from this Lease, subject to compliance
with the requirements of Section 13.08.

          13.08     Assignment.  If the Leased Property is not a separate
                    ----------                                           
subdivided lot, Landlord may condition its approval of an assignment upon Tenant
showing that there are appropriate provisions (such as a condominium regime,
subdivision, and/or reciprocal easements, lender and/or franchisor consents if
necessary, and separate tax lots) which allow the Leased Property to be
separately owned and operated without interference from or dependence upon,
another person as to items such as access, real estate taxes, or utilities.


                                  ARTICLE XIV
                                  ARBITRATION

          14.01     Controversies.  Except with respect to the payment of Rent
                    -------------                                             
hereunder, which shall be subject to the provisions of Section 9.02, in the
event a controversy arises between the parties as to any of the requirements of
this Lease or the performance hereunder, which the parties are unable to
resolve, the parties agree to waive the remedy of litigation (except for
extraordinary relief in an emergency situation) and agree that such controversy
or controversies shall be determined by arbitration as hereafter provided in
this Article.

          14.02     Appointment of Arbitrators.  The party or parties requesting
                    --------------------------                                  
arbitration shall serve upon the other a demand therefor, in writing, specifying
in detail the controversy and matter(s) to be submitted to arbitration before
the American Arbitration Association.  The selection of arbitrators shall be
conducted pursuant to the rules for resolution of commercial disputes
promulgated by the American Arbitration Association.  The party or parties
giving notice shall request a listing of available arbitrators from the American
Arbitration Association, and each party shall respond in the selection process
within fifteen (15) days after each receipt of such listings until a panel of
three (3) arbitrators has been designated.  If either party fails to respond
within fifteen (15) days, it is agreed that the American Arbitration Association
may make such selections as are necessary to complete the panel of three (3)
arbitrators.

          14.03     Arbitration Procedure.  Within five (5) business days after
                    ---------------------                                      
the selection of the arbitration panel, the arbitrators shall give written
notice to each party as to the time and the place of each meeting, which shall
be held in Washington, D.C., at which the parties may appear and be 


                                     -48-
<PAGE>
 
heard, which shall be no later than fifteen (15) days after certification of the
arbitration panel. The parties specifically waive discovery, and further waive
the applicability of rules of evidence or rules of procedure in the proceedings.
The applicable rules shall be those in effect at the time for the resolution of
commercial disputes promulgated by the American Arbitration Association. The
arbitrators shall take such testimony and make such examination and
investigations as the arbitrators reasonably deem necessary. The decision of the
arbitrators shall be in writing signed by a majority of the panel which decision
shall be final and binding upon the parties to the controversy. Provided,
however, in rendering their decisions and making awards, the arbitrators shall
not add to, subtract from or otherwise modify the provisions of this Lease.

          14.04     Expenses.  The expenses of the arbitration shall be assessed
                    --------                                                    
by the arbitrators and specified in the written decision. In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally between
Landlord and Tenant. Each party in interest shall be responsible for and pay the
fees, costs and expenses of its own counsel, unless the arbitration award
provides for an assessment of reasonable attorneys' fees and costs.

          14.05     Enforcement of the Arbitration Award.  There shall be no
                    ------------------------------------                    
appeal from the decision of the arbitrators, and upon the rendering of an award,
any party thereto may file the arbitrators' decision in the United States
District Court for the Eastern District of Virginia for enforcement as provided
by applicable law.


                                  ARTICLE XV
                        QUIET ENJOYMENT, SUBORDINATION,
                       ATTORNMENT, ESTOPPEL CERTIFICATES

          15.01     Quiet Enjoyment.  So long as Tenant performs all of its
                    ---------------                                        
obligations under this Lease, Tenant's possession of the Leased Properties will
not be disturbed by or through Landlord.

          15.02     Landlord Mortgages; Subordination.  Subject to Section
                    ---------------------------------                     
15.03, without the consent of Tenant, Landlord may, from time to time, directly
or indirectly, create or otherwise cause to exist any liens, encumbrances,
security interests or title retention agreements on any Leased Property, or any
portion thereof or any interest therein, whether to secure any borrowing or
other means of financing or refinancing. Tenant shall execute, acknowledge and
deliver to Landlord, at any time and from time to time upon demand by Landlord
or any mortgagee or any holder of any mortgage or other instrument described in
this Section, without cost to Landlord, a Subordination and Non-Disturbance
Agreement in the form attached hereto as Exhibit 15.02, which provides that (i)
Tenant's rights hereunder are subordinate to any ground lease or underlying
lease, first mortgage, first deed of trust, or other first lien against any
Leased Property, together with any renewal, consolidation, extension,
modification, or replacement thereof, which now or at any subsequent time
affects any Leased Property or any interest of Landlord in any Leased Property,
except to the extent that 

                                     -49-
<PAGE>
 
any such instrument expressly provides that this Lease is superior, and except
to the extent that any such instrument provides for a dispostion of insurance or
condemnation proceeds other than as provided in this Lease; and (ii) in the
event such party succeeds to Landlord's interest under the Lease and provided
that no Event of Default by Tenant exists, such party will recognize all of
Tenant's rights under the Lease and will not disturb Tenant's possession, use or
occupancy of the subject Leased Property. If Tenant fails or refuses to execute,
acknowledge, and deliver such Subordination and Non-Disclosure Agreement within
ten (10) business days after written demand, then Landlord shall send to Tenant
a second written demand. If Tenant fails or refuses to execute, acknowledge and
deliver such Subordination and Non-Disturbance Agreement within ten (10) days
after such second written demand, then Landlord or such successor in interest
may execute, acknowledge and deliver such Subordination and Non-Disturbance
Agreement on behalf of Tenant as Tenant's attorney-in-fact. Tenant hereby
constitutes and irrevocably appoints Landlord, its successors and assigns, as
Tenant's attorney-in-fact to execute, acknowledge, and deliver on behalf of
Tenant the Subordination and Non-Disturbance Agreement. This power of attorney
is coupled with an interest and is irrevocable.

          15.03     Attornment.  If any holder of any mortgage, indenture, deed
                    ----------                                                 
of trust, or other similar instrument described in Section 15.02 succeeds to
Landlord's interest in any Leased Property, Tenant will pay to such holder all
Rent subsequently payable hereunder as to such Leased Property. Tenant shall,
upon request of anyone succeeding to the interest of Landlord, automatically
become the tenant of, and attorn to, such successor in interest without changing
this Lease. The successor in interest will not be bound by: (a) any payment of
Rent for more than one (1) month in advance; (b) any amendment or modification
hereof made without its written consent; (c) any claim against Landlord arising
prior to the date on which the successor succeeded to Landlord's interest; or
(d) any claim or offset of Rent against Landlord.

          15.04     Estoppel Certificates.  At the request of either party, or
                    ---------------------                                     
any mortgagee or purchaser of a Leased Property or any interest therein,
Landlord or Tenant, as the case may be, shall execute, acknowledge, and deliver
an estoppel certificate, in recordable form, in favor of the other party or any
mortgagee or purchaser of any Leased Property certifying the following as to
such Leased Property: (a) that this Lease is unmodified and in full force and
effect, or if there have been modifications that the same is in full force and
effect as modified and stating the modifications; (b) the date to which Rent and
other charges have been paid; (c) that neither Tenant nor Landlord is in default
nor is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default, if that be the case, or specifying any existing
default; (d) that Tenant has accepted and occupies such Leased Property; (e)
that Tenant has no defenses, set-offs, deductions, credits, or counterclaims
against Landlord, if that be the case, or specifying such that exist; (f) that
Landlord has no outstanding construction or repair obligations; and (g) such
other information as may reasonably be requested by Landlord or any mortgagee or
purchaser. Any purchaser or mortgagee may rely on this estoppel certificate. If
Landlord or Tenant, as the case may be, fails to deliver the estoppel
certificates to the other party within ten (10) business days after the request
of Landlord or Tenant, as the case may be, then Landlord or Tenant, as the case
may be, shall request such delivery a second time. If Landlord or Tenant, as the
case may be, fails to deliver the estoppel certificates to Landlord within ten
(10) days after such second request by Landlord or Tenant, as the

                                     -50-
<PAGE>
 
case may be, then Landlord or Tenant, as the case may be, shall be deemed to
have certified that: (a) this Lease is in full force and effect and has not been
modified, or that this Lease has been modified as set forth in the certificate
delivered to Landlord or Tenant, as the case may be; (b) Tenant has not prepaid
any Rent or other charges except for the current month; (c) Tenant has accepted
and occupies such Leased Property; (d) neither Tenant nor Landlord is in default
nor is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default; (e) Landlord has no outstanding construction or
repair obligation; and (f) Tenant has no defenses, set-offs, deductions,
credits, or counterclaims against Landlord. Landlord and Tenant each appoints
the other as Landlord's or Tenant's (as the case may be) attorney-in-fact to
execute, acknowledge and deliver on Landlord's or Tenant's (as the case may be)
behalf any estoppel certificate which Landlord or Tenant, as the case may be,
does not object to within twenty (20) days after Landlord or Tenant, as the case
may be, sends the certificate to Landlord or Tenant, as the case may be. This
power of attorney is coupled with an interest and is irrevocable.

          15.05     Waiver of Landlord's Lien.  Landlord agrees to and does
                    -------------------------                              
hereby Waiver its Landlord's lien and any other rights that it may have with
respect to property or assets representing the security or collateral under
Tenant's "floor-plan" or equipment financing or leasing or similar financing
arrangements, during the Term or any Extension Term. Landlord shall, upon
request by any such lender, execute an acknowledgment of such waiver.



                                  ARTICLE XVI
                             RIGHT OF FIRST OFFER

           16.01    Right of First Offer During Lease Term or Extension Term.
                    ---------------------------------------------------------

                    (a)  If and when during the Term or Extension Term, as the
                         case may be, Landlord shall decide to sell the Leased
                         Properties to a Person who is not an Affiliate of
                         Landlord (the "Decision to Sell"), provided that no
                         Event of Default has occurred and is continuing under
                         the Lease, Landlord shall notify Tenant in writing
                         within ten (10) business days after Landlord makes a
                         Decision to Sell. Tenant shall have ten (10) business
                         days thereafter in which to notify Landlord in writing
                         of its desire to purchase the Leased Properties. If
                         Tenant shall give such notice, Tenant shall have a
                         period of thirty (30) days within which to make a
                         written offer to purchase the property (the "First
                         Offer"). The First Offer must set forth the purchase
                         price, deposit amounts and closing date and any and all
                         other terms and conditions being proposed by Tenant.

                    (b)  Within thirty (30) days of receipt of the First Offer,
                         Landlord shall give Tenant written notice of its
                         acceptance or rejection thereof. If 

                                     -51-
<PAGE>
 
                         accepted, Tenant shall, within five (5) days after
                         receipt of the acceptance notice, make the deposit
                         called for in the First Offer and the parties shall
                         proceed to contract and closing upon the terms thereof.
                         If the First Offer is rejected, then, subject to the
                         provisions of subsections (c) and (d) of this Section
                         16.01, Tenant shall have no further rights under this
                         Section 16.01 with respect to the purchase of the
                         Leased Properties during the Term or Extension Term, as
                         the case may be.

                    (c)  If Landlord shall reject the First Offer, for a one
                         year period thereafter it may proceed to sell the
                         Leased Properties, subject to the Lease and the
                         remaining Term or Extension Term thereof, as the case
                         may be, to any third party, provided (i) the purchase
                         price of such sale shall exceed that specified in the
                         First Offer, or (ii) if the purchase price of such sale
                         does not exceed that specified in the First Offer, the
                         terms of such sale, taken together, are more favorable
                         to Landlord, in Landlord's reasonable judgement, than
                         those of the First Offer. There shall be a presumption
                         that Landlord's judgment was reasonable and Tenant
                         shall have the burden of rebutting such presumption and
                         of proving that such judgment was in fact unreasonable.

                    (d)  If no sale is effected by Landlord within the period
                         specified in subsection (c) above, then if Landlord
                         thereafter desires to sell the Leased Properties, the
                         procedure set forth in subsections (a), (b) and (c)
                         shall be followed.

                    (e)  This option shall terminate in any event twenty (20)
                         years after the death of the last descendant of George
                         Herman Walker Bush, former President of the United
                         States, living at the time of execution of this Lease.

                                     -52-
<PAGE>
 
           16.02    Right to Purchase at End of an Extension Term.
                    ----------------------------------------------
 
                    (a)  Landlord hereby grants the Tenant the right and option
                         to purchase the Leased Properties (the "Option to
                         Purchase") at an amount equal to the Property
                         Consideration (as hereafter defined) upon termination
                         of either Extension Term of this Lease. The Option to
                         Purchase shall not be granted if Tenant does not extend
                         the Term of this Lease pursuant to Section 1.03 or if
                         on the Option Exercise Date (as hereafter defined) an
                         Event of Default with respect to any Leased Property
                         exists and has not been cured. The Tenant shall notify
                         Landlord in writing of its intent to exercise this
                         Option to Purchase, at least thirty (30) days prior to
                         the end of an Extension Term of this Lease (the "Option
                         Exercise Date").

                    (b)  The consideration to be paid for the Leased Properties
                         upon exercise of the Option to Purchase (the "Property
                         Consideration") shall be the Appraised Value (as
                         hereafter defined) determined by (1) an independent
                         appraiser, who is a member of the Appraisal Institute,
                         and will be selected by Landlord, (the "Landlord MAI
                         Appraiser"), (2) a second appraiser, who is a member of
                         the Appraisal Institute, and will be selected by the
                         Tenant (the "Tenant MAI Appraiser"), and (3) a third
                         MAI Appraiser selected by agreement of the Landlord MAI
                         Appraiser and the Tenant MAI Appraiser (the "Third MAI
                         Appraiser") (each an "Appraiser" and, collectively, the
                         "Appraisers"). Landlord and Tenant shall, as promptly
                         as possible, but in no event later than ten (10) days
                         following the Option Exercise Date, select its
                         respective Appraiser. The Third MAI Appraiser shall be
                         selected no later than five (5) days after the
                         selection of the other Appraisers. The costs of the
                         Appraisers' appraisals shall be shared equally by the
                         parties. As promptly as possible but in no event later
                         than sixty (60) days after selection of the Third
                         Appraiser, each Appraiser shall deliver his or her
                         written report of the Appraisers' determination of the
                         fair market value of the Leased Property, which
                         determination shall be based, for each Leased Property,
                         upon the highest and best use of such Leased Property,
                         taking into consideration the location of such Leased
                         Property and other properties comparable thereto. The
                         "Appraised Value" of the Real Property shall be equal
                         to the arithmetic mean of the two (2) fair market value
                         determinations of the Appraisers that are closest in
                         value. In the event that the values of (i) the
                         difference between the highest appraisal value and the
                         next lower appraisal value, and (ii) the difference
                         between the lowest appraisal value and the next higher
                         appraisal value, are equal, then the 

                                     -53-
<PAGE>
 
                         "Appraised Value" shall be equal to the arithmetic mean
                         of the fair market value determinations of all
                         Appraisers.

                    (c)  Upon determination of the Property Consideration,
                         Landlord and Tenant agree to cooperate to close the
                         sale and purchase of the Leased Property entirely for
                         cash on an "as is, where as basis" and with no
                         warranties by Landlord other than in a special warranty
                         deed, within forty-five (45) days after the date of
                         determination of the Property Consideration (the
                         "Option Closing Period"). If the sale and purchase of
                         the Leased Property does not close within the Option
                         Closing Period due to Tenant's default, Landlord shall
                         have no further obligations to Tenant pursuant to this
                         Section 16.02 (a).

          16.03     Option to Purchase Vacant Lot.  Beginning at the end of the
                    -----------------------------                              
fifth year of the Term, Tenant shall have the option to purchase from Landlord
the vacant lot at the rear of 1485 and 1501 South Military Highway, Chesapeake,
Virginia, having a property tax identification number of 0200000000031, for the
greater of (i) One Million Five Hundred Fifty-Two Thousand Four Hundred Fifty
and 00/100 U.S. Dollars ($1,552,450) or (ii) the fair market value of such
property as determined according to the procedures of Section 16.02 of this
Agreement.


                                 ARTICLE XVII
                                 MISCELLANEOUS

          17.01     Notices.  Landlord and Tenant hereby agree that all notices,
                    -------                                                     
demands, requests, and consents (hereinafter "Notices") required to be given
pursuant to the terms of this Lease shall be in writing and shall be addressed
as follows:

          If to Tenant:

          Kline Chevrolet Sales Corp.
          c/o Magnus Group, Ltd.
          1350 Connecticut Avenue, N.W.
          Suite 1225
          Washington, D.C.  20036
          Attention: James M. Kline

          With a copy to:

          Kaufman & Canoles, A Professional Corporation
          2000 Nations Bank Center
          One Commercial Place
          Norfolk, Virginia, 23514


                                     -54-
<PAGE>
 
          Attention: William R. Van Buren, III, Esq.

          If to Landlord:

          Capital Automotive L.P.
          1925 North Lynn Street
          Suite 306
          Arlington, Virginia 22209
          Attention: Thomas D. Eckert

          With a copy to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037
          Attention:  George P. Stamas, Esq.

and shall be served by: (a) personal delivery; (b) certified mail, return
receipt requested, postage prepaid; or (c) nationally recognized overnight
courier. All notices shall be deemed to be given upon the earlier of actual
receipt or three (3) days after mailing, or one (1) business day after deposit
with the overnight courier. Any Notices meeting the requirements of this Section
shall be effective, regardless of whether or not actually received. Landlord or
Tenant may change its notice address at any time by giving the other party
Notice of such change. Any such Notice of change of address shall be effective
five (5) days after delivery.

          17.02     Advertisement of a Leased Property.  In the event the
                    ----------------------------------                   
parties hereto have not executed a renewal lease, or agreed to the Extension
Term, as to the Leased Property within twelve (12) months prior to the
expiration of the Term or an Extension Term, as the case may be, then Landlord
or its agent shall have the right to enter such Leased Property at all
reasonable times for the purpose of exhibiting such Leased Property to others
and to place upon such Leased Property for and during the period commencing one-
hundred thirty five (135) days prior to the expiration of the Term or an
Extension Term, as the case may be, "for sale" or "for rent" notices or signs.

          17.03     Landlord's Access.  Landlord, or its designated agents or
                    -----------------                                        
contractors, shall have the right to enter upon each Leased Property, upon
reasonable prior notice to Tenant, for purposes of inspecting the same and
assuring Tenant's compliance with this Lease provided, any such entry by
Landlord shall be subject to all rules, guidelines and procedures prescribed by
Tenant in connection therewith. Landlord shall not be allowed entry to a Leased
Property unless accompanied by such of Tenant's personnel as Tenant shall
require and which Tenant shall promptly provide.

                                     -55-
<PAGE>
 
          17.04     Entire Agreement.  This Lease contains the entire agreement
                    ----------------                                           
between Landlord and Tenant with respect to the subject matter hereof. No
representations, warranties, and agreements have been made by Landlord or Tenant
except as set forth in this Lease.

          17.05     Severability.  If any term or provision of this Lease is
                    ------------                                            
held by Landlord to be invalid or unenforceable as to a Leased Property, such
holding shall not affect the remainder of this Lease as to such Leased Property,
or the validity or enforceability of this Lease as to any other Leased Property,
and the same shall remain in full force and effect, unless such holding
substantially deprives Tenant of the use of such Leased Property or Landlord of
the Rents therefor, in which case this Lease shall forthwith terminate as to
such Leased Property as if by expiration of the Term or an Extension Term, as
the case may be, but shall remain in full force and effect with respect to each
other Leased Property.

          17.06     Captions and Headings.  The captions and headings are
                    ----------------------                               
inserted only as a matter of convenience and for reference and in no way define,
limit or describe the scope of this Lease or the intent of any provision hereof.

          17.07     Governing Law.  This Lease shall be construed under the laws
                    -------------                                               
of the State of Virginia (without application of choice of law provisions).

          17.08     Memorandum of Lease or Certain Rights Under the Lease.
                    -----------------------------------------------------  
Landlord and Tenant agree that a record of this Lease or of certain rights under
this Lease may be recorded by either party in a memorandum of lease approved by
Landlord and Tenant with respect to each Leased Property. The party recording
such memorandum must bear all costs of such recording.

          17.09     Waiver.  No waiver by Landlord of any condition or covenant
                    ------                                                     
herein contained, or of any breach of any such condition or covenant, shall be
held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach thereof
or of any condition or covenant, nor shall the acceptance of Rent by Landlord at
any time when Tenant is in default in the performance or observance of any
condition or covenant herein be construed as a waiver of such default, or of
Landlord's right to terminate this Lease or exercise any other remedy granted
herein on account of such default.

          17.10     Assignment; Binding Effect.  Except as otherwise set forth
                    --------------------------                                
herein, this Lease shall not be assignable by Tenant, without the prior written
consent of Landlord. This Lease will be binding upon and inure to the benefit of
the heirs, successors, personal representatives, and permitted assigns of
Landlord and Tenant.

          17.11     Consents and Approvals.   In each instance in this Lease 
                    ----------------------
where the Landlord is required or permitted to give a consent or approval, or to
make a determination, the Landlord's decision and any conditions thereon must be
reasonable under the circumstances. Except as provided in Sections 8.07(d) and
13.01, there shall be a presumption that each such decision and any conditions
thereon by Landlord was in fact reasonable, and Tenant shall have the burden of
proof

                                     -56-
<PAGE>
 
in any attempt to rebut that presumption. With respect to Sections 8.07(d) and
13.01, there shall be a presumption that each such decision and any conditions
thereon by Landlord was in fact unreasonable, and Landlord shall have the burden
of proof in any attempt to rebut that presumption.

          17.12     Single Property.  Throughout the form of this Lease there 
                    ---------------
are references to "Leased Properties." If, in fact, there is only one Leased
Property being leased hereunder, all such references shall, without further
action, be deemed amended to refer solely to such Leased Property and all
provisions relating to Leased Properties, including remedies applicable to only
one Leased Property, shall likewise be amended to the extent necessary, but only
to the extent necessary, to give effect to the fact that there is only one
Leased Property.

          17.13     Modification.  This Lease may only be modified by a writing
                    ------------                                               
signed by both Landlord and Tenant.

          17.14     Incorporation by Reference.  All schedules and exhibits
                    ---------------------------                             
referred to in this Lease are incorporated herein by reference.

          17.15     No Merger.  As to each Leased Property, the surrender of
                    ---------                                               
this Lease by Tenant or the cancellation of this Lease by agreement of Tenant
and Landlord or the termination of this Lease on account of Tenant's default
will not work a merger, and will, at Landlord's option, terminate any subleases
or operate as an assignment to Landlord of any subleases. Landlord's option
under this paragraph will be exercised by notice to Tenant and all known
subtenants of such Leased Property.

          17.16     Force Majeure.  In the event either of the parties shall be
                    -------------                                              
delayed or hindered in, or prevented from, the performance of any act required
under this Lease by reasons of strikes, lock-outs, labor troubles, inability to
procure materials, fire or other catastrophe, failure of power, an act of the
other party, restrictive governmental laws or regulations, riots, insurrection,
war or other reason of like nature beyond the reasonable control of the party
delayed in performing work or doing any act required under this Lease, then the
performance of such act shall be excused for the period of the delay and the
time for the performance of such act shall be extended for the period of such
delay. Notwithstanding the foregoing sentence, this Section 17.16 shall not
operate to excuse Tenant, nor shall Tenant in any event be excused, from prompt
payment of Rent and other monetary obligations under this Lease due to Landlord
from Tenant or to excuse the Tenant from its obligation to carry insurance as
required under this Lease, nor shall this Section 17.16 operate to excuse Tenant
from performing any act required under any franchise agreement or any other
third party agreement, which failure of performance of such act would cause
Tenant to be in default of such franchise agreement or other third party
agreement.

          17.17     Laches.  No delay or omission by either party hereto to
                    -------                                                
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such right
or power or be construed to be a waiver thereof.

                                     -57-
<PAGE>
 
          17.18     Waiver of Jury Trial.  To the extent that there is any claim
                    --------------------                                        
by one party against the other that is not to be settled by arbitration as
provided in Article XIV hereof, Landlord and Tenant waive trial by jury in any
action, proceeding or counterclaim brought by either of them against the other
on all matters arising out of this Lease or the use and occupancy of any Leased
Property (except claims for personal injury or property damage). If Landlord
commences any summary proceeding for nonpayment of Rent, Tenant will not
interpose, and waives the right to interpose, any counterclaim in any such
proceeding.

          17.19     Permitted Contests.  Tenant, on its own or on Landlord's
                    -------------------                                     
behalf (or in Landlord's name), but at Tenant's expense, may contest, by
appropriate legal proceedings conducted in good faith and with due diligence,
the amount or validity or application, in whole or in part, of any Imposition or
any legal requirement or insurance requirement or any lien, attachment, levy,
encumbrance, charge or claim provided that: (a) in the case of an unpaid
Imposition, lien, attachment, levy, encumbrance, charge or claim, the
commencement and continuation of such proceedings shall suspend the collection
thereof from Landlord and from the subject Leased Property; (b) neither the
subject Leased Property nor any Rent therefrom nor any part thereof or interest
therein would be in any immediate danger of being sold, forfeited, attached or
lost; (c) in the case of a legal requirement, Landlord would not be in any
immediate danger of civil or criminal liability for failure to comply therewith
pending the outcome of such proceedings; (d) in the event that any such contest
shall involve a sum of money or potential loss in excess of Twenty Five Thousand
Dollars ($25,000), Tenant shall deliver to Landlord and its counsel an opinion
of Tenant's counsel to the effect set forth in clauses (a), (b) and (c), to the
extent applicable; (e) in the case of a legal requirement and/or an Imposition,
lien, encumbrance, or charge, Tenant shall give such reasonable security as may
be demanded by Landlord to insure ultimate payment of the same and to prevent
any sale or forfeiture of a subject Leased Property or the Rent in respect
thereof by reason of such nonpayment or noncompliance; provided, however, the
provisions of this Section shall not be construed to permit Tenant to contest
the payment of Rent (except as to contests concerning the method of computation
or the basis of levy of any Imposition or the basis for the assertion of any
other claim) or any other sums payable by Tenant to Landlord hereunder; (f) in
the case of an insurance requirement, the coverage required by Article IV shall
be maintained; and (g) if such contest be finally resolved against Landlord or
Tenant, Tenant shall, as Additional Rent due hereunder, promptly pay the amount
required to be paid, together with all interest and penalties accrued thereon,
or comply with the applicable legal requirement or insurance requirement.
Landlord, at Tenant's expense, shall execute and deliver to Tenant such
authorizations and other documents as may be reasonably required in any such
contest, and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein. Tenant hereby agrees to indemnify and
hold harmless Landlord, its officers, trustees, employees, shareholders,
affiliates and agents from and against any and all demands, claims, causes of
action, fines, penalties, damages (including punitive and consequential
damages), losses, liabilities (including strict liability), judgments, costs and
expenses (including, without limitation, attorneys' fees, court costs, and the
costs set forth in Section 9.06) that may be incurred in connection with or
arise from any such contest.

                                     -58-
<PAGE>
 
          17.20     Construction of Lease.  This Lease has been reviewed by
                    ---------------------                                  
Landlord and Tenant and their respective professional advisors. Landlord and
Tenant believe that this Lease is the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in favor
of either Landlord or Tenant or against either Landlord or Tenant merely because
of any party's efforts in preparing such documents.

          17.21     Counterparts.  This Lease may be executed in duplicate
                    -------------                                         
counterparts, each of which shall be deemed an original hereof or thereof.

          17.22     Relationship of Landlord and Tenant.  The relationship of
                    -----------------------------------                      
Landlord and Tenant is the relationship of lessor and lessee. Landlord and
Tenant are not partners, joint venturers, or associates.








               {remainder of this page left intentionally blank}


                                     -59-
<PAGE>
 
        IN WITNESS WHEREOF, the parties hereto have executed this Lease or
caused the same to be executed by their respective duly authorized officers as
of the date first set forth above.

                    CAPITAL AUTOMOTIVE L.P.

                    By:  Capital Automotive REIT,
                         Its General Partner

                         By:
                            ---------------------------
                         Name:  Thomas D. Eckert
                         Title: President and Chief Executive Officer

                    KLINE CHEVROLET SALES CORP.
 

                    By:
                       --------------------------------
                    Name:  James M. Kline
                    Title: Chairman of the Board
 

                                     -60-
<PAGE>
 
                    LEASE AGREEMENT EXHIBITS AND SCHEDULES

                                   SCHEDULES

     A              Leased Properties
     B              Permitted Liens
     12.02          Material Agreements
     12.03          Changes in Condition

 
                                   EXHIBITS

     2.02           Payment Account Information
     2.04           Base Annual Rent Adjustment
     5.07           Environmental Reports
     15.02          Form of Subordination and Non-Disturbance Agreement
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties


Leased Properties:

Three parcels of land located in the City of Chesapeake, Virginia, comprising
approximately twenty-five (25) acres, together with the buildings and other
improvements constructed on the land. The land fronts on South Military Highway,
Old Greenbrier Road and Providence Road. The property address is 1495 to1501
South Military Highway, Chesapeake, Virginia 23320. The property tax
identification numbers are 0200000000034 and 020000000031.

Initial Base Annual Rent:

$960,000
<PAGE>
 
                                 EXHIBIT 2.02
                                 ------------

                          Payment Account Information

     Wiring instructions for the Landlord's operating account are as follows:

     FIRST UNION NATIONAL BANK OF VIRGINIA
     CHARLOTTE, NC
     ABA# 051400549

     For Credit to:  CAPITAL AUTOMOTIVE REIT, Operating Account
                     Account # 2050000478240
<PAGE>
 
                                 EXHIBIT 2.04
                                 ------------

                          Base Annual Rent Adjustment

     The Base Annual Rent shall be increased, effective as of the commencement
of the second Lease Year and as of each subsequent Lease Year by an amount equal
to the Initial Base Rent multiplied by one hundred percent (100%) of the change
in the Index during the immediately preceding one (1) year period; provided,
however, that, in the event that the above-calculated adjustment is greater than
three percent (3%), such adjustment shall be equal to three percent (3%), and if
the above-calculated adjustment is less than one percent (1%), such adjustment
shall be equal to one percent (1%).
<PAGE>
 
SUBORDINATION AND NON-DISTURBANCE AGREEMENT
- -------------------------------------------


     THIS AGREEMENT is made as of this ___ day of __________, 1997, among
_____________, a ___________ organized under the laws of the State of
_____________ ("Lender"), __________________ ("Tenant"), and CAPITAL AUTOMOTIVE
L.P., a Delaware limited partnership ("Landlord").

                                  WITNESSETH:
                                  -----------

     WHEREAS, Landlord and Tenant have entered into a certain Lease, dated
____________________ , which lease and all amendments, modifications,
assignments, subleases  and other agreements related thereto are attached hereto
as Exhibit A and incorporated herein by this reference (collectively, the
   ---------                                                             
"Lease"), which Lease relates to the premises described therein (the
"Premises"), and

     WHEREAS, Lender has made or has committed to make a first mortgage loan to
Landlord in the principal amount not to exceed $_________ (the "Loan"), the Loan
being secured by a mortgage, deed of  trust or security deed (collectively, the
"Mortgage") and an assignment(s) of leases and rents from Landlord to Lender
covering the Premises; and

     WHEREAS, Tenant has agreed that the Lease shall be subject and subordinate
to the Mortgage held by Lender, provided Tenant is assured of continued
occupancy of the Premises under the terms of the Lease;

     NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, the sum of Ten Dollars ($10.00) and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
and notwithstanding anything in the Lease to the contrary, it is hereby agreed
as follows:

     1.   Subordination of Lease.  Lender, Tenant and Landlord do hereby
          ----------------------                                        
covenant and agree that the Lease with all rights, options, liens and charges
created thereby, is and shall continue to be subject and subordinate in all
respects to the Mortgage and to any renewals, modifications, consolidations,
replacements and extensions thereof and to all advancements made thereunder.

     2.   Nondisturbance of Tenant.  Lender does  hereby agree with Tenant that,
          ------------------------                                              
in the event Lender becomes the owner of the Premises by foreclosure, conveyance
in lieu of foreclosure or otherwise, so long as Tenant complies with and
performs its obligations under the Lease, (a) Lender will take no action which
will interfere with or disturb Tenant's possession or use of the Premises or
other rights under the Lease, and (b) the Premises shall be subject to the Lease
and Lender shall recognize Tenant as the tenant of the Premises for the
remainder of the terms of the Lease in accordance with the provisions thereof,
provided, however, that Lender shall not be subject to any offsets or defenses
which Tenant might have against any prior landlord except those which arose
under the provisions of the Lease out of such landlord's default and accrued
after Tenant had notified Lender and given Lender the opportunity to cure same
as hereinbelow provided, nor shall Lender 
<PAGE>
 
be liable for any act or omission of any prior landlord, nor shall Lender be
bound by any rent or additional rent which Tenant might have paid for more than
the current month to any prior landlord nor shall it be bound by any amendment
or modification of the Lease made without its consent.

     3.   Attornment by Tenant.  Tenant does hereby agree with Lender that, in
          --------------------                                                
the event Lender becomes the owner of the Premises by foreclosure, conveyance in
lieu of foreclosure or otherwise, then Tenant shall attorn to and recognize
Lender as the landlord under the Lease for the remainder of the term thereof,
and Tenant shall perform and observe its obligations thereunder, subject only to
the terms and conditions of the Lease.  In such event, Lender shall not be
liable for any act or omission of any prior landlord, liable for return of the
security deposit unless same was actually delivered to Lender, bound by any
amendment to or assignment of the Lease made without its consent, bound by any
rent paid more than thirty (30) days in advance, or be subject to any set-off or
defense Tenant might have had against any prior landlord.  Tenant further
covenants and agrees to execute and deliver upon request of Lender or its
assigns, an appropriate Agreement of Attornment to Lender and any subsequent
titleholder of the Premises.

     4.   Acknowledgment of Acquisition Rights. Lender acknowledges that Tenant
          ------------------------------------                                 
has certain purchase rights under the lease.  So long as Tenant complies with
the provisions of the Lease, Lender acknowledges that Tenant may exercise such
rights and Lender will honor such rights so long as Tenant pays the acquisition
price to Lender or otherwise obtains a release from Lender.

     5.   Curative Rights, Modification of Lease, and Advance Payment of Rent.
          -------------------------------------------------------------------  
So long as the Mortgage remains outstanding and unsatisfied:

     (a)  Tenant will mail or deliver to Lender, at the address and in the
manner hereinbelow provided, a copy of all notices permitted or required to be
given to the Landlord by Tenant under and pursuant to the terms and provisions
of the Lease. At any time before the rights of the Landlord shall have been
forfeited or adversely affected because of any default of the Landlord, or
within the time permitted the Landlord for curing any default under the Lease as
therein provided, Lender may, but shall have no obligation to, pay any taxes and
assessments, make any repairs and improvements, make any deposits or do any
other act or thing required of the Landlord by the terms of the Lease; and all
payments so made and all things so done and performed by Lender shall be as
effective to prevent the rights of the Landlord from being forfeited or
adversely affected because of any default under the Lease as the same would have
been if done and performed by the Landlord.

     (b)  Tenant will not consent to the modification of the Lease, nor to the
termination thereof, without the prior written consent of Lender, such consent
not to be unreasonably withheld or delayed, nor will Tenant pay any rent under
the Lease more than thirty (30) days in advance.

     6.   Consent to Assignment.  Tenant acknowledges that Landlord will execute
          ---------------------                                                 
and deliver to Lender an assignment of the Lease as security for the Loan, and
Tenant hereby expressly consents to such assignment.

     7.   Limitation of Liability.  Lender shall have no liability whatsoever
          -----------------------                                            
hereunder prior to becoming the owner of the Premises; and Tenant agrees that if
Lender becomes the owner of the
<PAGE>
 
Premises, Tenant shall look solely to the estate or interest of Lender in the
Premises for satisfaction of any obligation which may be or become owing by
Lender to Tenant hereunder or under the Lease.

     8.   Landlord and Tenant Certifications.  Landlord and Tenant hereby
          ----------------------------------                             
certify to Lender that the Lease has been duly executed by Landlord and Tenant
and is in full force and effect, that the Lease and any modifications and
amendments specified herein are a complete statement of the agreement between
Landlord and Tenant with respect to the leasing of the Premises, and the Lease
has not been modified or amended except as specified herein; that to the
knowledge of Landlord and Tenant, no party to the Lease is in default
thereunder; that no rent under the Lease has been paid more than thirty (30)
days in advance of its due date; and that Tenant, as of this date, has no
charge, lien or claim of offset under the Lease, or otherwise, against the rents
or other charges due or to become due thereunder.

     9.   Tenant Estoppel Certifications.  With the knowledge that Lender, as
          ------------------------------                                  
beneficiary of the mortgage encumbering the premises, will place substantial
reliance thereon in connection with the closing and funding of the Loan, Tenant
hereby makes the following certifications:

     (a)  The term of the Lease commenced on ________, 19__, and will terminate
on ______________.

     (b)  The Lease, as described above, has not been modified, amended,
assigned or subleased except as set forth in Exhibit A attached hereto, and is
                                             ---------                        
in good standing and in full force and effect.

     (c)  The Lease provides for rental payments over the term of the Lease, all
as specifically provided in the Lease. No rent under the Lease has been paid
more than thirty (30) days in advance of the due date of same. For the year
____, monthly payments, which are due on the first (1st) day of each month, are
as follows:


Basic Rent -        $________


     Payment of the above amount was timely made for the months of ______,
___and _____, ____, and the next payment of the above amount will be due on
________, ____.  In addition to the above amount, certain additional sums are
due to Landlord from Tenant under the Lease, all as specifically set forth in
the Lease.

     (d)  Tenant has paid a security deposit under the Lease.

     (e)  To Tenant's knowledge there are no defaults by Landlord under the
Lease and there are no existing circumstances which, with the passage of time,
or notice, or both, would give rise to a default under the Lease.
<PAGE>
 
          (f)  Tenant has accepted and is occupying the Premises, and Landlord
has no unperformed obligation under the Lease to construct any improvements for
the Tenant related to the Premises.

          (g)  Tenant has no charge, lien, claim of set-off or defense against
rents or other charges due or to become due under the Lease or otherwise under
any of the terms, conditions, or covenants contained therein.

          (h)  Tenant has received no notice from any insurance company of any
defects or inadequacies in the Premises or in any part thereof which would
adversely affect the insurability of the Premises.

          (i)  Except as provided in the Lease, Tenant does not have any right
or option to purchase the Premises.

          (j)  Except as provided in the Lease, Tenant does not have any rights
or options to renew the Lease or to lease additional space in any building owned
by the Landlord.

          10.  Tenant Covenants.
               ---------------- 

          (a)  From and after the date hereof, Tenant will not pay any rent
under the Lease more than thirty (30) days in advance of its due date.

          (b)  From and after the date hereof, so long as there shall be any
assignment of Landlord's interest in the Lease to Lender, or any successor
thereto, Tenant will not:  consent to the modification of the Lease nor to the
termination thereof without the prior written consent of the Lender or any
successor holder of the Loan or the Mortgage which consent shall not be
unreasonably withheld or delayed (either of them being called "Mortgagee"), nor
seek to terminate the Lease by reason of any act or omission of Landlord until
Tenant shall have given written notice of such act or omission to such
Mortgagee's last address furnished Tenant) and until a reasonable period of time
shall have elapsed following the giving of such notice, during which period the
Mortgagee shall have the right, but not the obligation, to remedy such act or
omission.

          (c)  Upon written notice of the default by Landlord under any of the
loan documents held by Mortgagee and assignment of the Landlord's interest under
the Lease by Landlord to Mortgagee, Tenant, if Mortgagee so requests, will
recognize such Mortgagee as the Landlord under the Lease and will thereafter pay
rent and other sums to Mortgagee (or to the party designated by the Mortgagee in
writing) in accordance with the terms of the Lease, and, in such event, such
Mortgagee will not be liable for any act or omission of any prior lessor, liable
for return of the security deposit unless same was actually delivered to
Mortgagee, bound by any amendment to or assignment of the Lease made without its
consent, bound by any rent paid more than thirty (30) days in advance, or be
subject to any set-off or defense Tenant might have had against any prior
lessor.
<PAGE>
 
          11.  Notices.  Unless and except as otherwise specifically provided
               -------                                                       
herein, any and all notices, elections, approvals, consents, demands, requests
and responses thereto ("Communications") permitted or required to be given under
this Agreement shall be in writing, signed by or on behalf of the party giving
the same, and shall be deemed to have been properly given and shall be effective
upon the earlier of receipt thereof or three (3) days after deposit thereof in
the United States mail, postage prepaid, certified with return receipt
requested, to the other party at the address of such other party set forth
hereinbelow or at such other address within the continental United States as
such other party may designate by notice specifically designated as a notice of
change of address and given in accordance herewith; provided, however, that the
time period in which a response to any Communication must be given shall
commence on the date of receipt thereof, and provided further that no notice of
change of address shall be effective with respect to Communications sent prior
to the time of receipt of such change.  Receipt of Communications hereunder
shall occur upon actual delivery (whether by mail, facsimile transmission,
messenger, courier service, or otherwise) to an individual party or to an
officer, member, or general or limited partner of a party or to any agent or
employee of such party at the address of such party set forth hereinbelow,
subject to change as provided hereinabove.  An attempted delivery in accordance
with the foregoing, acceptance of which is refused or rejected, shall be deemed
to be and shall constitute receipt; and an attempted delivery in accordance with
the foregoing by mail, messenger, or courier service (whichever is chosen by the
sender) which is not completed because of changed address of which no notice was
received by the sender in accordance with this provision prior to the sending of
the Communication shall also be deemed to be and constitute receipt.  Any
Communication, if given to Lender, must be addressed as follows, subject to
change as provided hereinabove:


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

and, if given to Tenant, must be addressed as follows, subject to change as
provided hereinabove:

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

and, if given to Landlord, must be addressed as follows, subject to change as
provided hereinabove:

                                  Capital Automotive, L.P.

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

          12.  Miscellaneous.  This Agreement shall be binding upon and inure to
               -------------                                                    
the benefit of the parties hereto and their respective heirs, legal
representatives, successors, successors-in-title and assigns.  When used herein,
the term "Landlord" or "landlord" refers to Landlord and to any successor to the
interest of Landlord under the Lease.
<PAGE>
 
                     [THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first above written.

                                       LENDER:

Signed, sealed and delivered
in the presence of:                    By:
                                       Title:

- -------------------------------        -----------------------------
Witness                                (CORPORATE SEAL)



                                       TENANT:

Signed, sealed and delivered
in the presence of:                    By:
                                       Title:

- -------------------------------        -----------------------------
Witness                                (CORPORATE SEAL)


                                       LANDLORD:

Signed, sealed and delivered
in the presence of:                    By:
                                       Title:

- -------------------------------        -----------------------------
Witness                                (PARTNERSHIP SEAL)
<PAGE>
 
                                   EXHIBIT A


Lease Dated __________ from ________________ to _______________ with Exhibit A
attached, all in the form attached hereto as Attachment to Exhibit A.
                                             ------------------------
<PAGE>
 
County of  ________________________:
                                         SS:
State of __________________________:

          This is to certify that on this ____ day of ________, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Lender in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Lender.



                                    -------------------------------
                                    Notary Public

                                    My commission expires:
<PAGE>
 
County of  ___________________:
                                         SS:
State of _____________________:

          This is to certify that on this ____ day of _________, 1997,
personally appeared before me, a notary public of the County (City) aforesaid,
known to me (or satisfactorily identified to me) to be the individual signing on
behalf of Tenant in the capacity stated by his signature, and that he
acknowledged the within document to be the act and deed of the Tenant.



                                    --------------------------------
                                    Notary Public

                                    My commission expires:
<PAGE>
 
County of _____________________
                                     SS:
State of ______________________

          This is to certify that on this ____ day of _______, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Landlord in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Landlord.



                                    -------------------------------
                                    Notary Public

                                    My commission expires:
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
                         1925 North Lynn Street, #306
                          Arlington, Virginia 22209


                               January 10, 1998


Good News Salisbury, Inc.
Attention: Roy L. Meyers, Jr.
2013 N. Salisbury Blvd.
Salisbury, Maryland 21801

Dear Mr. Meyers:

          We hereby agree that the escrow of Impositions pursuant to Section
3.04 of the Lease Agreement is irrevocably waived.

          We hereby further agree that the joint and several indemnity to be
provided by Roy L. Meyers, Jr. and Charlotte Meyers in Section 11.2.3(ii) under
each of the Real Property Purchase Agreements shall not exceed, in the aggregate
under both Agreements together, $2,000,000, less the amounts, if any, paid by
the Sellers that counts against the obligation of Roy L. Meyers, Jr. and
Charlotte Meyers under Section 11.2.3 of both Agreements together.

          We acknowledge that you would not enter into the Real Property
Purchase Agreement if we had not agreed to the waiver of the escrow of
Impositions and the agreement to aggregate the joint and several indemnity set
forth above.  The waiver pursuant to this letter shall be binding upon us and
our successors and assigns.


                                         Capital Automotive L.P.


                                         By:  Capital Automotive REIT,
                                              its General Partner


                                         By: /s/ Thomas D. Eckert
                                                 Thomas D. Eckert,
                                                 President and Chief Executive
                                                 Officer
<PAGE>
 
                                EXHIBIT 2.4(c)
                                --------------

                     Guaranty and Subordination Agreement


          THIS GUARANTY AND SUBORDINATION AGREEMENT (this "Agreement"), made as
of the __ day of January, 1998, by  Kline Imports Chesapeake, Inc., a Virginia
corporation ("Guarantor"), in favor of Capital Automotive, L.P., a Delaware
limited partnership ("Landlord").

                                  WITNESSETH:
                                  ---------- 

          WHEREAS, Landlord has this day entered into a lease (the "Lease") of
certain Properties identified on Schedule A hereto (individually a "Property"
and collectively the "Properties") with  Kline Chevrolet Sales Corporation, a
Virginia corporation ("Tenant"), this Agreement being attached to the Lease;

          WHEREAS, Tenant is an affilate of Guarantor; and

          WHEREAS, Landlord has required, as a condition to entering into the
Lease, Guarantor to be a guarantor of each and every obligation imposed upon
Tenant by the Lease.

          NOW, THEREFORE, to induce Landlord to enter into the Lease and in
consideration of the foregoing premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor, for itself, its successors and assigns, hereby covenants and agrees
for the benefit of Landlord, as follows:

          1.   Guaranty.  Guarantor does hereby unconditionally and irrevocably
               --------                                                        
guarantee to Landlord the full, complete and timely performance of all
obligations imposed on Tenant by the terms of the Lease, including, but  not
limited to, the full, complete and timely payment of rent and all other sums due
by Tenant under the Lease, and the payment as required by the Lease of all
damages to Landlord which may result from Tenant's breach of any provision of
the Lease, including, but not limited to, those relating to damage to any
Property or the leased premises.

          2.   Guaranty of Payment and Performance.  Guarantor acknowledges and
               -----------------------------------                             
agrees that this is a guaranty of payment and performance and not mere
collection.  The liability of Guarantor under this Agreement shall be direct and
immediate and not conditional or contingent upon the pursuit of any remedies
against Tenant or any other person or entity.  Guarantor waives any right to
require that an action be brought against Tenant or any other person or entity.
In the event, on account of the Bankruptcy Reform Act of 1978, as amended, or
any other debtor relief law (whether statutory, common law, case law or
otherwise) of any jurisdiction whatsoever, now or hereafter in effect, which may
be or become applicable, Tenant shall be relieved of the Lease or any debt,
obligation or liability as provided in the Lease, Guarantor shall nevertheless
be fully liable for the complete and timely performance of all obligations
imposed on Tenant by the Lease throughout the entire term of the Lease, all to
the same extent as if Guarantor had been the original tenant thereunder and the
Lease shall be deemed unaffected by any such relief granted to Tenant.  In the
<PAGE>
 
event of a default under the Lease which is not cured within any applicable
grace or cure period, Landlord shall have the right to enforce its rights,
powers and remedies thereunder or hereunder, in any order to the maximum extent
permitted by law, and all rights, powers and remedies provided thereunder or
hereunder or by law or in equity.  If the obligations guaranteed hereby are
partially performed, paid or discharged by reason of the exercise of any of the
remedies available to Landlord, this Agreement shall nevertheless remain in full
force and effect, and Guarantor shall continue to be liable for all remaining
obligations guaranteed hereby, even though any rights which Guarantor may have
against Tenant may be destroyed or dismissed by the exercise of any such remedy.

          3.   Waivers by Guarantor.  To the extent permitted by law, Guarantor
               --------------------                                            
hereby waives and agrees not to assert or take advantage of:

       (a) Any right to require Landlord to proceed against Tenant or any other
person or entity or to proceed against or exhaust any security held by Landlord
at any time or to pursue any other remedy in Landlord's power or under any other
agreement before proceeding against Guarantor;

       (b) Any defense that may arise by reason of the incapacity, lack of
authority, death or disability of any other person or persons or the failure of
Landlord to file or enforce a claim against the estate (in administration,
bankruptcy or any other proceeding) of any other person or persons:

       (c) Any defense based upon an election of remedies by Landlord;

       (d) Any right or claim or right to cause a marshaling of the assets of
Tenant or Guarantor;

       (e) Any invalidity, irregularity or unenforceability, in whole or in
part, of any one or more provisions of the Lease;

       (f) Any modification of the Lease or of any obligation of Tenant
thereunder by amendments to the Lease, by waivers granted by Landlord or by
operation of law or by action of any court, whether pursuant to the Bankruptcy
Reform Act of 1978, as amended, or any other debtor relief law (whether
statutory, common law, case law or otherwise) of any jurisdiction whatsoever,
now or hereafter in effect, or otherwise.

     4.  Subordination.  Guarantor and those parties signing below for the
         -------------                                                    
purpose of being bound by this Section 4 (collectively, "Section 4 Signers)
hereby unconditionally and irrevocably subordinate (i) all payments due or to
become due by Tenant to the Section 4 Signers, or any of them, by reason of any
and all debts or other obligations, including the obligation to pay salaries or
other compensation (collectively "Debt Payments") and (ii) the receipt of all
dividends or other distributions of any kind or nature (collectively,
"Distributions") to the payment of all sums due or to become due by Tenant to
Landlord under the Lease, including the payment of Rent and all 

                                     -18-
<PAGE>
 
damages due by reason of Tenant's breach of the Lease; provided, however, that
for so long as there shall be no existing Event of Default under the Lease,
after the payment of each monthly installment of Rent, the Section 4 Signers
shall be entitled to receive Debt Payments due for such month.
 
     5.  Termination of Guaranty.  This Guaranty shall terminate if at any time
         -----------------------                                               
during the term or any extension term of the Lease, Guarantor (having entered
into a sub-lease with Tenant under the Lease) shall assign its sub-lease under
the Lease to an unaffiliated third party (and such assignment shall be consented
to by Landlord).  This termination clause shall not be effective if Guarantor
does not enter into a sub-lease under the Lease.  The termination of this
Guaranty by reason of Guarantor's assignment of its sub-lease under the Lease
shall in no manner effect, nor be construed to effect, Guarantor's obligations
hereunder against any default under the Lease by Tenant that shall have occured
prior to the termination of this Guaranty.
 
     6.  General Provisions.
         ------------------ 

         (a) Survival. This Agreement shall be deemed to be continuing in nature
             --------
and shall remain in full force and effect and shall survive the exercise of any
remedy by Landlord under the Lease;

         (b) No Subrogation; No Recourse Against Landlord.  Notwithstanding the
             --------------------------------------------                      
satisfaction by Guarantor of any liability hereunder, Guarantor's rights of
subrogation, contribution, reimbursement or indemnity, if any, or any right of
recourse to or with respect to the assets or property of Tenant, shall be
subject and subordinate to the rights of Landlord.

         (c) Entire Agreement; Amendment; Severability.  This Agreement contains
             -----------------------------------------                          
the entire agreement between the parties respecting the matters herein set forth
and supersedes all prior agreements, whether written or oral, between the
parties respecting such matters.  Any amendments or modifications hereto, in
order to be effective, shall be in writing and executed by Landlord and
Guarantor.  A determination that any provision of this Agreement is
unenforceable or invalid shall not affect the enforceability or validity of any
other provision, and any determination that the application of any provision of
this Agreement to any person or circumstance is illegal or unenforceable shall
not affect the enforceability or validity of such provision as it may apply to
any other persons or circumstances.

         (d) Governing Law: Binding Effect; Waiver of Acceptance. This Agreement
             ---------------------------------------------------
shall be governed by and construed in accordance with the laws of the State of
Virginia without regard to conflicts of laws principles thereof. This Agreement
shall bind Guarantor, it successors and assigns (but in the event of an
assignment, Guarantor shall not be relieved of its obligations hereunder), and
shall inure to the benefit of Landlord, its successors and assigns. Guarantor
hereby waives any acceptance of this Agreement by Landlord and this Agreement
shall immediately be binding upon Guarantor.

                                     -19-
<PAGE>
 
           (e)   Notice.  All notices, demands, requests or other communications
                 ------
to be sent by one party to the other hereunder or required by law shall be in
writing and shall be deemed to have been validly given or served by delivery of
the same in person to the intended addressee, or certified mail or by depositing
the same with Federal Express or another reputable private courier service for
next business day delivery to the intended addressee at its address set forth in
the last section of this Agreement or at such other address as may be designated
by such party as herein provided. All notices, demands and requests shall be
effective upon such personal delivery, or one (1) business day after being
deposited with the private courier service, or two (2) business days after being
deposited in the United States mail as required above. Rejection or other
refusal to accept or the inability to deliver because of changed address of
which no notice was given as herein required shall be deemed to be receipt of
the notice, demand or request sent. By giving to the other party hereto at least
seven (7) days' prior written notice thereof in accordance with the provisions
hereof, each party shall have the right from time to time to change their
respective addresses and each shall have the right to specify as its address any
other address within the United States of America.

           (f)   No Waiver; Time of Essence.  The failure of either party to
                 --------------------------
enforce any of the respective rights or remedies hereunder, or to promptly
enforce any such rights or remedies, shall not constitute a waiver thereof nor
give rise to any estoppel against such party nor excuse any of the parties
hereto from their respective obligations hereunder. Any waiver of such right or
remedy must be in writing and signed by the party to be bound and must expressly
state that such right or remedy has been or thereby is waived. This Agreement is
subject to enforcement at law or in equity, including actions for damages or
specific performance. Time is of the essence hereof.

           (g)   Captions for Convenience.  The captions and headings of the
                 ------------------------
section and paragraphs of this Agreement are for convenience of reference only
and shall not be construed in interpreting the provisions hereof.

           (h)   Attorney's Fees.  In the event it is necessary for Landlord to
                 ---------------
retain the services of an attorney or any other consultants in order to enforce
this Agreement, or any portion hereof, Guarantor shall promptly pay to Landlord
any and all costs and expenses, including, without limitation, attorney's fees,
incurred by Landlord as a result thereof and such costs, fees and expenses shall
be included in the costs of the case to the extent the Landlord wins the issue
under contest.

           (i)   Successive Actions.  Separate and successive actions may be
                 ------------------
brought hereunder to enforce any of the provisions hereof at any time and from
time to time. No action hereunder shall preclude any subsequent action, and
Guarantor hereby waives any covenants to the maximum extent permitted by law not
to assert any defense in the nature of splitting of causes of action or merger
of judgments.

           (j)   Reliance.  Landlord would not enter into the Lease without this
                 --------                                                       
Agreement. Accordingly, Guarantor intentionally, irrevocably and unconditionally
enters into the covenants and agreements as set forth above and understand that,
in reliance upon and in consideration of such covenants and agreements, the
Lease has been made.

                                     -20-
<PAGE>
 
     4.    Notices:  The following addresses shall be used for notice purposes:
           -------                                                             

           If to Guarantor:

           Kline Imports Chesapeake, Inc.
           c/o The Magnus Group Ltd.
           1350 Connecticut Avenue, N.W.
           Suite 1225
           Washington, D.C. 20036

           with a copy to:

           Kaufman & Canoles, A Professional Corporation
           2000 Nations Bank Center
           One Commercial Place
           Norfolk, Virginia, 23514
           Attention: William R. Van Buren, III, Esq.

           If to Landlord:
 
           Capital Automotive L.P.
           1925 North Lynn Street, Suite 306
           Arlington, Virginia  22209

           With copies to:
 
           Wilmer, Cutler & Pickering
           2445 M Street, N.W.
           Washington, D.C. 20037-1420
           Attention: George P. Stamas

                                     -21-
<PAGE>
 
     IN WITNESS WHEREOF, Guarantor has executed this Agreement under seal as of
the day and year first above written:

                                       GUARANTOR:

ATTEST/WITNESS:
                           
                                       -----------------------------------
- ----------------------------------     By:    James M. Kline
Name:                                  Title: Chairman of the Board
     -----------------------------


                                     -22-
<PAGE>
 
                               EXHIBIT 5.2.1(M)



Capital Automotive REIT
1925 North Lynn Street
Suite 306
Arlington, VA 22209

Attention:   Thomas D. Eckert, President and
                 Chief Executive Officer

RE:  Purchase Agreement ("Agreement") made as of __________ __, 1998 between
     _____________________, ____________________ and ___________________
     (individually a "Seller" and collectively the "Sellers"), Capital
     Automotive REIT, on its own behalf and as sole general partner of Capital
     Automotive L.P. (the "Landlord")

Ladies and Gentlemen:

We have acted as special counsel to the Sellers, in connection with the entering
into of the Agreement. You have asked for our opinion concerning certain matters
relating to the Agreement.

We have examined the original (or photostatic copies) of the executed
counterparts of the Agreement.

We have also examined the following organizational documents related to the
Sellers (the "Organizational Documents"):

(i)   The certificate of incorporation or certificate of limited partnership, as
the case may be, of each of the corporate or partnership Sellers, certified by
the Secretary of State of ________ on _______________;

(ii)  The bylaws or limited partnership agreement, as the case may be, of each
of the corporate or partnership Sellers, certified to be true and correct by an
authorized signing officer of each of the corporate or partnership Sellers as of
________________;

(iii) Certificates from the Secretary of State of the States of _______,
_________ and __________ indicating that each of the REIT, partnership and
Sellers is in good standing in the State of its organization or formation; and

                                     -23-
<PAGE>
 
(iv)  A certified copy of resolutions adopted by the unanimous written consent
of the board of directors of each of the corporate Sellers or the board of
directors of the general partner of each of the partnership Sellers authorizing
the execution and delivery by each of the corporate or partnership Sellers of
the Agreement.

The opinions in paragraphs 1 and 7 below are based solely on our review of the
Organizational Documents.

In reaching the opinions set forth below, we have assumed that (i) each entity
that is a party to the Agreement (other than one of the Sellers) is a duly
organized or duly formed entity and is validly existing and in good standing,
(ii) each party to the Agreements (other than one of the Sellers) has duly and
validly executed and delivered each instrument, document and agreement to which
it is a signatory and that its obligations are its legal, valid and binding
obligations, enforceable in accordance with their respective terms, (iii) each
person executing any instrument, document or agreement on behalf of any party
(other than one of the Sellers) is duly authorized to do so, and (iv) each
natural person executing any instrument, document or agreement referred to in
this letter is legally competent to do so.

In our examination of Agreement for purposes of this letter, we have assumed
that (i) all signatures on the Agreement submitted to us for examination are
genuine, (ii) any original Agreement submitted to us for examination is
authentic, and (iii) all copies of the Agreement submitted to us for examination
conform to the original.

The opinions expressed in this letter concern only the effect of the laws of the
States of _______, _______ and _______ it being understood, however, that we are
not admitted to practice law in such States.  We express no opinion on the
applicability of the law of any other jurisdiction.  We assume no obligation to
supplement or modify this opinion if any applicable law changes in any manner.

Based on, and in reliance upon, the foregoing, and subject to the qualifications
stated herein, it is our opinion that:

     1.    Each of the Sellers is a corporation or limited partnership duly
organized or formed, validly existing and in good standing under the laws of the
State of its organization or formation.

     2.    Each of the corporate Sellers has the requisite corporate power to
execute and deliver, and to perform its obligations under, the Agreement.

     3.    The general partner of each of the partnership Sellers has the
requisite corporate power and authority to own its properties and carry on its
business and to execute and deliver, and to perform its obligations under, the
Agreement, and to execute and deliver on behalf of such partnership Seller, and
to bind such partnership Seller to, the Agreement.

                                     -24-
<PAGE>
 
     4.    The execution and delivery by each corporate Seller of the Agreement
have been duly authorized by all necessary corporate actions of such Seller.

     5.    The execution, delivery and performance of the Agreement by the
general partner of each partnership Seller on behalf of such partnership Seller
have been duly authorized by all necessary corporate actions, and the
individuals executing the Agreement on behalf of such general partner have been
duly authorized to do so.

     6.    The execution, delivery, and performance by each corporate Seller of
the Agreement will not violate the charter or bylaws of such Seller.

     7.    The execution and delivery by the general partner of each partnership
Seller, and such general partner's performance of its obligations under, the
Agreement on behalf of each partnership Seller will not violate such partnership
Seller's Organizational Documents.

     8.    The Agreement has been duly executed and delivered by each Seller and
is the legal, valid and binding obligation of each Seller, enforceable against
each Seller in accordance with its terms.

     The opinions set forth above are subject to the following qualifications:

     (a)   The validity, binding nature and enforceability of the Agreement may
be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other laws or equitable principles relating to or affecting the
rights of creditors or other obligees generally.

     (b)   The validity, binding nature and enforceability of the Agreement may
be limited by applicable principles of equity, whether such principles are
applied by a court of equity or a court of law, and we express no opinion on
whether a court would grant specific performance, injunctive relief or any other
equitable remedy.

     (c)   A court could refuse to enforce the Landlord's remedies under the
Agreement by reason of (i) a waiver by the Landlord, (ii) unconscionable conduct
by the Landlord, (iii) the exercise of remedies by the Landlord without
providing adequate notice to one of the Sellers or its default and a reasonable
opportunity to cure the default, (iv) the court's determination that one of the
Contributors is entitled to an opportunity to be heard by the court before the
Landlord is entitled to exercise any remedies, (v) the court's determination
that a remedy is a penalty or is unconscionable, (vi) the court's determination
that the Landlord is seeking to exercise remedies with respect to a breach that
is immaterial or that does not adversely affect the Landlord or the Landlord's
security, (vii) defenses arising from the Landlord's failure to act in
accordance with the terms and conditions of the Agreement, (viii) defenses
arising as a consequence of the passage of time (e.g., laches or statutes of
limitation), (ix) defenses arising as a result of the Landlord's failure to act
in a commercially reasonable manner or in good faith, or (x) public policy
considerations.

                                     -25-
<PAGE>
 
     (d)   We express no opinion with respect to any of the following provisions
if they are contained in the Agreement: (i) any provisions under which any of
the Sellers waives any of their legal or equitable rights except to the extent
the waived rights are expressly waivable pursuant to a statute or constitutional
provision, (ii) any provisions entitling the Landlord to obtain reimbursement
for attorneys' fees and other costs incurred by the Landlord, (iii) any
severability provision, (iv) any provision to the effect that rights or remedies
are not exclusive, that every right or remedy is cumulative and may be exercised
in addition to or with any other right or remedy or that the election of a
particular remedy does not preclude recourse to one or more other remedies, (v)
any provision which purports to affect jurisdiction or venue of any specified
court or courts, or which purports to establish evidentiary standards, or (vi)
any provision that purports to grant the Landlord relief from any provisions of
the Bankruptcy Code.

The opinions expressed in this letter are solely for the use of the parties to
whom this letter is addressed (or the successors or assigns of the Landlord
under the Agreement). These opinions may not be relied on by any other persons,
may not be quoted in whole or in part, and may not be filed with any
governmental agency, in each case without our express prior written approval.
The opinions expressed in this letter are limited to the matters set forth in
this opinion, and no other opinions should be inferred beyond the matters
expressly stated.

                                       Very truly yours,


                                     -26-
<PAGE>
 
EXHIBIT 5.2.2(d)
- ----------------

       Opinion of Wilmer, Cutler & Pickering to be Delivered at Closing:

1.   The Company is a corporation duly organized or formed, validly existing and
in good standing under the laws of the State of Delaware.

2.   The Partnership is a limited partnership duly organized or formed, validly
existing and in good standing under the laws of the State of Maryland.

3.   Each of the Company and the Partnership has the requisite corporate or
partnership power (respectively) to execute and deliver, and to perform its
obligations under, the Agreement.

4.   The general partner of the Partnership has the requisite partnership power
and authority to carry on its business and to execute an deliver, and to perform
its obligations under, the Agreement and to execute and deliver on behalf of
such Partnership, and to bind the Partnership to, the Agreement.

5.   The execution and delivery by each of the Company and the Partnership has
been duly authorized by all necessary corporate or partnership actions
(respectively).

6.   The execution, delivery and performance of the Agreement by the general
partner of the Partnership on behalf of the Partnership have been duly
authorized by all necessary partnership actions, and the individuals executing
the Agreement on behalf of such general partner have been duly authorized to do
so.

7.   The execution, delivery and performance by the Company will not violate the
charter or bylaws of the Company.

8.   The execution, delivery and performance by the general partner of the
Partnership, and such general partner's performance of its obligations under,
the Agreement on behalf of the Partnership will not violate the Partnerships
Organizational Documents.

9.   The Agreement has been duly executed and delivered by each of the
Partnership and the Company and is the legal, valid and binding obligation of
each, enforceable against each in accordance with its terms, except to the
extent that enforcement may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, arrangement, moratorium or similar laws, or by
equitable principles, relating to or limiting rights or creditors generally.

                                     -27-
<PAGE>
 
                               EXHIBIT 5.2.1(m)
                               ----------------

                          Opinion of Seller's Counsel


     Seller shall deliver at Closing, an opinion of counsel substantially in the
form to be delivered by Wilmer, Cutler & Pickering pursuant to Exhibit 5.2.2(d)
hereto.


                                     -28-
<PAGE>
 
                                  Schedule 1.2
                                       to
                        Real Property Purchase Agreement
                                    between
                   Kline Chevrolet Sales Corporation, Seller,
                                      and
                    Capital Automotive L.P., the Partnership
                                      and
                      Capital Automotive REIT, the Company

Description of Property:
- ----------------------- 

Seller           Kline Chevrolet Sales Corporation
- ------           c/o The Magnus Group, Ltd.
                 1350 Connecticut Avenue, N.W.
                 Suite 1225
                 Washington, D.C.  20036

Property:        a.     Three parcels of land located in the City of Chesapeake,
- --------                Virginia, comprising approximately twenty-five (25)
                        acres, together with the buildings and other
                        improvements constructed on the land. The land fronts on
                        S. Military Highway, Old Greenbrier Road and Providence
                        Road

                 b.     Address:   1495-1501 S. Military Highway, Chesapeake,
                        Virginia 23320

                 c.     Tax parcel numbers:   0200000000034 and 0200000000031

Purchase Price:  Eight Million Five Hundred Thousand Dollars ($8,500,000) (of
- --------------   which $2,000,000 is to be paid to James M. Kline in
                 consideration of the termination of the lease between Kline
                 Chevrolet Sales Corporation, as landlord, and James M. Kline,
                 as tenant, dated June 1, 1991)

Mortgages:              a.    Parcels A & B (together, approximately 11 acres) -
- ---------                     Deed of trust securing $5,560,000 loan from Toyota
                              Motor Credit Corporation ("TMCC"); current balance
                              $2,818,960.55.

                                     -29-
<PAGE>
 
                        b.    Parcel C (approximately 14 acres) - Deed of trust
                              securing $1,234,956 loan from TMCC; current
                              balance $_____________.


                                     -30-
<PAGE>
 
                                 Schedule 2.1
                                      to
                       Real Property Purchase Agreement
                                    between
                  Kline Chevrolet Sales Corporation, Seller,
                                      and
                   Capital Automotive L.P., the Partnership
                                      and
                     Capital Automotive REIT, the Company


Prior Occupants:
- --------------- 

                  1.          Kline Imports Chesapeake, Inc.
                              c/o The Magnus Group, Ltd.
                              1350 Connecticut Avenue, N.W.
                              Suite 1225
                              Washington, D.C.  20036

                  2.          James M. Kline
                              c/o The Magnus Group, Ltd.
                              1350 Connecticut Avenue, N.W.
                              Suite 1225
                              Washington, D.C.  20036
 

                                     -31-
<PAGE>
 
                                 Schedule 7.4
                                      to
                       Real Property Purchase Agreement
                                    between
                  Kline Chevrolet Sales Corporation, Seller,
                                      and
                   Capital Automotive L.P., the Partnership
                                      and
                     Capital Automotive REIT, the Company


Other Agreements:
- ---------------- 

                 None


                                     -32-
<PAGE>
 
                                  Schedule 7.8
                                       to
                        Real Property Purchase Agreement
                                    between
                   Kline Chevrolet Sales Corporation, Seller,
                                      and
                    Capital Automotive L.P., the Partnership
                                      and
                      Capital Automotive REIT, the Company


Condition of Properties:
- ----------------------- 

                   None


                                     -33-
<PAGE>
 
                                Schedule 7.13.5
                                       to
                        Real Property Purchase Agreement
                                    between
                   Kline Chevrolet Sales Corporation, Seller,
                                      and
                    Capital Automotive L.P., the Partnership
                                      and
                      Capital Automotive REIT, the Company


Substances of Concern:
- --------------------- 

(a)  On-site and off-site locations for treatment or disposal of Substances of
     Concern:

          None, except as disclosed on Exhibit A to this Schedule.

(b)  Underground and Aboveground storage tanks:

          None, except as disclosed on Exhibit A to this Schedule.

(c)  Location and description of asbestos within any buildings, structures or
     office space:

          None, except as disclosed on Exhibit A to this Schedule.

(f)  Environmental Permits and Authorizations:

     (i)  Occupancy permits - City of Chesapeake
     (ii) Business licenses - City of Chesapeake
     (iii)  New and Used Car Dealer licenses - Commonwealth of Virginia,
          Division of Motor Vehicles


                                     -34- 

<PAGE>
 
                                 EXHIBIT 10.33
                        (Form of Kline Lease Agreement)








                                LEASE AGREEMENT
                                ---------------

                                    BETWEEN
                                    -------

                       CAPITAL AUTOMOTIVE L.P., LANDLORD
                       ---------------------------------

                                      AND
                                      ---

                   KLINE CHEVROLET SALES CORPORATION, TENANT
                   -----------------------------------------


                          DATED: ______________, 1998
<PAGE>
 
<TABLE>
<S>                                                                           <C> 
ARTICLE I
     LEASE AGREEMENT, LEASED PROPERTY AND TERM................................ 1
     1.01   Lease Agreement................................................... 1
     1.02   Contingent Upon Acquisition of the Leased Property................ 2
     1.03   Term.............................................................. 3
     1.04   Holding Over...................................................... 3
     1.05   Surrender......................................................... 4

ARTICLE II
     RENT..................................................................... 4
     2.01   Base Rent......................................................... 4
     2.02   Payment........................................................... 4
     2.03   Security Deposit.................................................. 4
     2.04   Base Annual Rent Adjustment....................................... 5
     2.05   Additional Rent................................................... 5
     2.06   Place(s) of Payment of Rent; Direct Payment of Additional Rent.... 5
     2.07   Net Lease......................................................... 5
     2.08   No Termination, Abatement, Etc.................................... 5

ARTICLE III
     IMPOSITIONS AND UTILITIES................................................ 6
     3.01   Payment of Impositions............................................ 6
     3.02   Definition of Impositions......................................... 7
     3.03   Utilities......................................................... 8
     3.04   Escrow of Impositions............................................. 8
     3.05   Discontinuance of Utilities....................................... 9
     3.06   Liens............................................................. 9

ARTICLE IV
     INSURANCE................................................................ 9
     4.01   Insurance......................................................... 9
     4.02   Insurance Limits..................................................11
     4.03   Insurance Requirements............................................11
     4.04   Replacement Cost..................................................12
     4.05   Blanket Policy....................................................12
     4.06   No Separate Insurance.............................................12
     4.07   Waiver of Subrogation.............................................12
     4.08   Mortgages.........................................................13
     4.09   Other Insurance Requirements......................................13

ARTICLE V
     INDEMNITY; SUBSTANCES OF CONCERN.........................................13
</TABLE> 
<PAGE>
 
<TABLE> 
<S>                                                                           <C> 
     5.01   Tenant's Indemnification..........................................13
     5.02   Substances of Concern.............................................14
     5.03   Audits............................................................16
     5.04   Landlord's Option Re: Compliance..................................17
     5.05   Environmental Indemnification.....................................17
     5.06   Tenant's Cleanup Obligation.......................................18
     5.07   Existing Environmental Conditions.................................18
     5.08   Survival of Tenant's Obligations..................................18

ARTICLE VI
     USE AND ACCEPTANCE OF PREMISES...........................................18
     6.01   Use of Leased Properties..........................................18
     6.02   Acceptance of Leased Properties...................................19
     6.03   Conditions of Use and Occupancy...................................19
     6.04   Financial Statements and Other Information........................19

ARTICLE VII
     REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS......................20
     7.01   Maintenance.......................................................20
     7.02   Compliance with Laws..............................................21
     7.03   Required Alterations..............................................21
     7.04   Mechanics' Liens..................................................21
     7.05   Replacements of Fixtures..........................................21
     7.06   Encroachments; Restrictions.......................................22

ARTICLE VIII
     ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
     CAPITAL ADDITIONS TO THE LEASED PROPERTIES...............................22
     8.01   Tenant's Right to Construct.......................................22
     8.02   Scope of Right....................................................23
     8.03   Cooperation of Landlord...........................................24
     8.04   Commencement of Construction......................................24
     8.05   Rights in Tenant Improvements.....................................25
     8.06   Personal Property.................................................25
     8.07   Requirements for the Tenant's Personal Property...................25
     8.08   Financings of Capital Additions to a Leased Property..............27

ARTICLE IX
     DEFAULTS AND REMEDIES....................................................27
     9.01   Events of Default.................................................27
     9.02   Remedies..........................................................29
     9.03   Right of Set-Off..................................................32
     9.04   Performance of Tenant's Covenants.................................32
</TABLE> 

                                      ii
<PAGE>
 
<TABLE> 
<S>                                                                           <C> 
     9.05   Late Charge.......................................................32
     9.06   Litigation; Attorneys' Fees.......................................33
     9.07   Remedies Cumulative...............................................33
     9.08   Escrows and Application of Payments...............................33
     9.09   Power of Attorney.................................................34
 
ARTICLE X
     DAMAGE AND DESTRUCTION...................................................34
     10.01  General...........................................................34
     10.02  Landlord's Inspection.............................................35
     10.03  Landlord's Costs..................................................35
     10.04  Rent Abatement....................................................35
     10.05  Substantial Damage During Lease Term..............................36
     10.06  Damage Near End of Term...........................................36
     10.07  Risk of Loss......................................................37

ARTICLE XI
     CONDEMNATION.............................................................37
     11.01  Total Taking......................................................37
     11.02  Partial Taking....................................................37
     11.03  Restoration.......................................................37
     11.04  Landlord's Inspection.............................................38
     11.05  Award Distribution................................................38
     11.06  Temporary Taking..................................................38

ARTICLE XII
REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS...........................39
     12.01  Organization and Qualification....................................39
     12.02  Material Agreements...............................................40
     12.03  Changes in Condition..............................................40
     12.04  Franchises, Licenses, etc.........................................40
     12.05  Litigation........................................................41
     12.06  Authorization and Enforceability..................................41
     12.07  No Legal Obstacle to Lease........................................41
     12.08  Certain Business Representations..................................42
     12.09  Certain Financial Covenants.......................................43
     12.10  Cash Flow Coverage Ratio Covenant.................................43
     12.11  Disclosure........................................................44
     12.12  Covenant Not to Acquire...........................................44

ARTICLE XIII
     ASSIGNMENT AND SUBLETTING; ATTORNMENT....................................44
     13.01  Prohibition Against Subletting and Assignment.....................44
</TABLE> 


                                      iii
<PAGE>
 
<TABLE> 
<S>                                                                           <C> 
     13.02  Changes of Control................................................44
     13.03  Operating/Service Agreements......................................45
     13.04  Assignment........................................................46
     13.05  REIT Limitations..................................................46
     13.06  Attornment........................................................47
     13.07  Severance and Spin-Off............................................47

ARTICLE XIV
     ARBITRATION..............................................................48
     14.01  Controversies.....................................................48
     14.02  Appointment of Arbitrators........................................48
     14.03  Arbitration Procedure.............................................48
     14.04  Expenses..........................................................48
     14.05  Enforcement of the Arbitration Award..............................49
 
ARTICLE XV
     QUIET ENJOYMENT, SUBORDINATION,
     ATTORNMENT, ESTOPPEL CERTIFICATES........................................49
     15.01  Quiet Enjoyment...................................................49
     15.02  Landlord Mortgages; Subordination.................................49
     15.03  Attornment........................................................50
     15.04  Estoppel Certificates.............................................50
     15.05  Waiver of Landlord's Lien.........................................51

ARTICLE XVI
     RIGHT OF FIRST OFFER.....................................................51
     16.01  Right of First Offer During Lease Term or Extension Term..........51
     16.02  Right to Purchase at End of an Extension Term.....................52
     16.03  Option to Purchase Vacant Lot.....................................53

ARTICLE XVII
     MISCELLANEOUS............................................................53
     17.01  Notices...........................................................53
     17.02  Advertisement of a Leased Property................................54
     17.03  Landlord's Access.................................................55
     17.04  Entire Agreement..................................................55
     17.05  Severability......................................................55
     17.06  Captions and Headings.............................................55
     17.07  Governing Law.....................................................55
     17.08  Memorandum of Lease or Certain Rights Under the Lease.............55
     17.09  Waiver............................................................55
     17.10  Assignment; Binding Effect........................................56
     17.11  Consents and Approvals............................................56
</TABLE> 

                                      iv
<PAGE>
 
<TABLE> 
<S>                                                                           <C> 
     17.12  Single Property...................................................56
     17.13  Modification......................................................56
     17.14  Incorporation by Reference........................................56
     17.15  No Merger.........................................................56
     17.16  Force Majeure.....................................................56
     17.17  Laches............................................................57
     17.18  Waiver of Jury Trial..............................................57
     17.19  Permitted Contests................................................57
     17.20  Construction of Lease.............................................58
     17.21  Counterparts......................................................58
     17.22  Relationship of Landlord and Tenant...............................58
</TABLE>


                                       v
<PAGE>
 
                                   SCHEDULES

     A         Leased Properties and Initial Base Rent
     B         Permitted Liens
     12.02     Material Agreements
     12.03     Changes in Condition


                                  EXHIBITS

     2.02      Payment Account Information
     2.04      Base Annual Rent Adjustment
     5.07      Environmental Reports
     15.02     Form of Subordination and Non-Disturbance Agreement


                                      vi
<PAGE>
 
                                LEASE AGREEMENT

          This Lease Agreement ("Lease") dated as of the ___ day of ___________,
1998 by and between CAPITAL AUTOMOTIVE L.P., a Delaware limited partnership
("Landlord"), having its principal office at 1925 North Lynn, Suite 306,
Arlington, Virginia, and KLINE CHEVROLET SALES CORPORATION, a Virginia
corporation, having its principal office at c/o Magnus Group, Ltd. 1350
Connecticut Avenue, Suite 1225, Washington, D.C. 20036 ("Tenant").

                                   RECITALS

          WHEREAS, Tenant or an Affiliate (as hereafter defined) has conveyed or
will convey to Landlord certain parcels of real estate and improvements thereon
upon which Tenant engages or will engage in motor vehicle retail and/or motor
vehicle related businesses (the "Business"), which parcels of real estate and
improvements thereon are described on Schedule A attached hereto and
incorporated herein by reference (each hereinafter a "Leased Property" or
collectively, the "Leased Properties"), and Landlord and Tenant desire to
provide for the lease by Landlord to Tenant of the Leased Properties; and

          WHEREAS, Landlord and Tenant desire that each of the Leased Properties
shall be the subject of this Lease and be used by Tenant in its operation of the
Business; and

          WHEREAS, this Lease provides that additional real estate and
improvements thereon may be made subject to the operation and effect of this
Lease, upon execution by Landlord and Tenant of a Lease Supplement designating
each such additional property as a Leased Property hereunder.

          NOW, THEREFORE, in consideration of the foregoing premises and of
their respective agreements and undertakings herein, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:

                                   ARTICLE I
                   LEASE AGREEMENT, LEASED PROPERTY AND TERM

          1.01   Lease Agreement.  Landlord does hereby let and lease unto
                 ---------------                                          
Tenant, and Tenant does hereby take and hire from Landlord, the Leased
Properties, which shall respectively consist of:

          (a)    The parcels of land described and located at the addresses
                 listed in Schedule A hereto, as more particularly described
                 therein, together with any additional parcels of real estate
                 and improvements thereon subsequently designated as a Leased
                 Property by the parties pursuant to a Lease Supplement as
                 provided for herein, together with all rights, titles,
                 appurtenant interests, covenants, licenses, privileges and
                 benefits thereto belonging, and any easements, rights-of-way,
                 rights of ingress or egress or other interests in, on, or to
                 any land, highway, street, road or avenue, open or proposed,
                 in, on, across, in 
<PAGE>
 
                 front of, abutting or adjoining such real property including,
                 without limitation, any strips and gores adjacent to or lying
                 between such real estate and any adjacent real estate (the
                 "Land");

          (b)    All buildings, improvements, structures and Fixtures (as
                 hereinafter defined) now located or to be located or to be
                 constructed on the Land, including, without limitation,
                 sidewalks, landscaping, parking lots and structures, roads,
                 drainage and all above ground and underground utility
                 structures and conduits (on-site or off-site), equipment
                 systems and other so-called "infrastructure" improvements (the
                 "Improvements");

          (c)    All equipment, machinery, fixtures, and other items of real
                 and/or personal property, including all components thereof,
                 located in, on or used in connection with, and permanently
                 affixed to or incorporated into, the Improvements, including,
                 without limitation, all furnaces, boilers, heaters, electrical
                 equipment, heating, plumbing, lighting, ventilating,
                 refrigerating, incineration, air and water pollution control,
                 waste disposal, air-cooling and air-conditioning systems and
                 apparatus, sprinkler systems and fire and theft protection
                 equipment, and similar systems, all of which, to the greatest
                 extent permitted by law, are hereby deemed to constitute real
                 estate, together with all replacements, modifications,
                 alterations and additions thereto (collectively the
                 "Fixtures"); and

          (d)    All easements, rights and appurtenances relating to the Land
                 and the Improvements.

          SUBJECT, HOWEVER, to the liens, encumbrances, restrictions,
agreements, and other title matters listed or specifically referred to in
Schedule B ("Permitted Exceptions").

          The Leased Properties shall however exclude all furniture, equipment,
inventory and items of moveable personal property attached to the Land or
Improvements that relate to the business being conducted on the Leased Property
which items may readily be removed without material damage to the Land and
Improvements whether or not such items might legally be considered to be
"fixtures" (all of which are owned by Tenant and shall hereinafter be defined as
the "Excluded Personal Property").

          1.02   Contingent Upon Acquisition of the Leased Property.  In the
                 --------------------------------------------------         
event this Lease is executed prior to the conveyance by Tenant or an Affiliate
of the Leased Property to Landlord, the parties acknowledge that the
effectiveness of this Lease in respect of such Leased Property is contingent
upon the closing of such conveyance (the "Commencement Date").  The Commencement
Date shall be the date of conveyance of the Leased Property and the parties
agree to execute an addendum to this Lease stating the Commencement Date.

                                       2
<PAGE>
 
          1.03   Term. The initial term of this Lease (the "Term") shall be for
                 ----
a fixed term of One Hundred and Twenty (120) months commencing on the
Commencement Date. The initial term for any Leased Property designated in a
Lease Supplement shall begin on the date of such Lease Supplement and expire at
the end of the Term or then current Extension Term (as hereafter defined), as
the case may be. Provided that no Event of Default (as defined in Section 9.01
hereof) shall exist and be continuing, Tenant shall have the right to extend
this Lease for the Leased Properties as a group, at Tenant's option, for one One
Hundred and Twenty (120) month renewal term from the expiration of the Term (the
"First Extension Term") and such renewal shall be automatic unless notice from
Tenant to the contrary is given to Landlord no later than twelve (12) months
prior to the end of the Term. In addition, Tenant shall have the right to extend
this Lease for the Leased Properties as a group at Tenant's option, for a second
One Hundred and Twenty (120) month renewal term from the expiration of the First
Extension Term (the "Second Extension Term", each an "Extension Term", and
collectively with the First Extension Term, the "Extension Terms"), and such
renewal shall be automatic unless notice from Tenant to the contrary is given to
Landlord no later than twelve (12) months prior to the end of the First
Extension Term, provided that no Event of Default (as defined in Section 9.01
hereof) shall exist and be continuing. Notwithstanding anything else to the
contrary in this Agreement, the Rent during the Second Extension Term shall be
the Fair Market Rent (as hereafter defined) for the Leased Property. Fair Market
Rent shall be determined as soon as possible after the expiration of the period
during which Tenant could elect not to renew after the First Extension Term, on
the basis of appraisals of independent appraisers selected in accordance with
the provisions of Section 16.02(b). Tenant shall have the right, in its sole
discretion, to rescind the exercise of Tenant's option to extend the Lease for
the Second Extension Term during a period of five (5) business days after the
determination of the Fair Market Rent. If Tenant shall fail to exercise the
right to rescind within such five (5) day period, the election to extend shall
be irrevocable and the Fair Market Rent so determined shall be the Base Annual
Rent during the Second Extension Term notwithstanding any changes in the market
rental rates, whether upward or downward, which may occur after such
determination. However, notwithstanding anything else in this Agreement, Fair
Market Rent shall become the Base Annual Rent (as defined hereafter) and shall
be subject to Base Annual Rent Adjustments as set forth in Section 2.04.

          1.04   Holding Over.  Should Tenant, without the express consent of
                 ------------                                                
Landlord, continue to hold and occupy any Leased Property after the expiration
or earlier termination of the Term or any Extension Term, as the case may be,
such holding over beyond the Term and the acceptance or collection of Rent (as
defined hereinafter) by Landlord shall operate and be construed as creating a
tenancy from month-to-month and not for any other term whatsoever.  During any
such holdover period Tenant shall pay to Landlord for each month (or portion
thereof) Tenant remains in such Leased Property, in lieu of the Base Annual Rent
(as defined hereafter) for such Leased Property, an amount equal to the sum of
one-twelfth (1/12) of (i) one hundred seven percent (107%) of such Base Annual
Rent (the "Holdover Rate"), and (ii) as applicable, one hundred percent (100%)
of the Additional Rent (as defined hereinafter) for such Leased Property and
Other Additional Rent (as defined hereinafter) for such Leased Property, each as
in effect on the expiration date.  Said month-to-month tenancy may be terminated
by Landlord by giving Tenant thirty (30) days written 

                                       3
<PAGE>
 
notice, and at any time thereafter Landlord may re-enter and take possession of
such Leased Property.

          1.05   Surrender. Except as a result of (a) Tenant Improvements and
                 ---------
Capital Additions (as defined hereinafter); (b) normal and reasonable wear and
tear (subject to the obligation of Tenant to maintain each Leased Property in
good order and repair during the Term); and (c) casualty, taking or other damage
and destruction not required to be repaired by Tenant, Tenant shall surrender
and deliver up each Leased Property at the expiration or termination of the Term
or the Extension Term therefor (Tenant shall not be in breach of this Lease if,
at the termination of the Lease, it is diligently pursuing repairs that the
Lease requires Tenant to make but cannot be completed prior to the expiration of
the Lease, provided however, that Tenant hereby shall have the continuing
obligation to complete such repairs), as the case may be, broom clean, in good
order and repair, free of the Excluded Personal Property and any additional
items of Tenant's personal property (together with the Excluded Personal
Property, the "Tenant's Personal Property"), all of which Tenant shall remove
prior to such surrender and delivery, and in as good order and condition as of
the Commencement Date.


                                  ARTICLE II
                                     RENT

          2.01   Base Rent.  Tenant shall pay Landlord annual base rent (the
                 ---------                                                  
"Base Annual Rent") as to the Leased Property for each year during the Term or
the Extension Term (each such year a "Lease Year"), which Base Annual Rent shall
be subject to upward adjustment pursuant to Section 2.04.  In the first Lease
Year, Base Annual Rent shall be in the amount set forth on Schedule A (the
"Initial Base Annual Rent"), paid to Landlord in twelve equal monthly
installments.

          2.02   Payment.  Tenant shall pay Landlord the Base Annual Rent as
                 -------                                                    
to the Leased Property for each Lease Year, without notice, demand, set-off or
counterclaim in advance, in lawful money of the United States of America and
payable in consecutive monthly installments commencing on the Commencement Date
and thereafter on the first day of each month during the Term.  Tenant will, to
the extent that such method of payment is compatible with its business
practices, make such payments by direct deposit of immediately available funds
to the account set forth in Exhibit 2.02 (which Exhibit 2.02 may be modified by
Landlord from time to time upon Notice (as hereafter defined) to Tenant).

          2.03   Security Deposit.  Prior to the Commencement Date, Tenant
                 ----------------                                         
shall deliver to Landlord an amount equal to one-twelfth (1/12th) of the Base
Annual Rent, which amount shall be held by Landlord as security (the "Security
Deposit") for the performance of Tenant's payment and other obligations under
this Lease.  At Tenant's option, Tenant may deliver one-half of the Security
Deposit in immediately available funds and one-half of the Security Deposit in
the form of a letter of credit, provided that such letter of credit is in form
and substance acceptable to Landlord.  Upon an Event of Default and the
continuance thereof, Landlord shall have the right, but not the obligation, 

                                       4
<PAGE>
 
to apply the Security Deposit as set forth in Section 9.08. Landlord shall
return the Security Deposit, without interest, after expiration of this Lease,
if Tenant has fully and faithfully carried out all of the terms, covenants and
conditions hereof. In the event that Landlord eliminates its standard business
policy of requiring security deposits from tenants, then Landlord shall refund
the Security Deposit to Tenant within thirty (30) days of such policy change.


          2.04    Base Annual Rent Adjustment.
                  --------------------------- 

                  (a) The Base Annual Rent shall be adjusted during the Lease
                      Term or the Extension Terms under the procedures set forth
                      in Exhibit 2.04 (the "Base Annual Rent Adjustment").
 
                  (b) As used in Exhibit 2.04, the "Index" shall mean the CPI-U
                      published by the United States Department of Labor, Bureau
                      of Labor Statistics Consumer Price Index for All Urban
                      Consumers, U.S. City Average. If at any time during the
                      Term or the Extension Term, as the case may be, the Index
                      shall be discontinued, Landlord shall select a substitute
                      index, being an existing official index published by the
                      Bureau of Labor Statistics or its successor or another,
                      similar governmental agency, which index is most nearly
                      equivalent to the Index.

          2.05    Additional Rent.  As to each Leased Property, in addition to
                  ---------------                                             
the Base Annual Rent, Tenant shall pay all other amounts, liabilities,
obligations and Impositions (as hereinafter defined) which Tenant assumes or
agrees to pay under this Lease and any fine, penalty, interest, charge, expense
and cost which may be added for nonpayment or late payment of such items
(collectively, the "Additional Rent").

          2.06    Place(s) of Payment of Rent; Direct Payment of Additional
                  ---------------------------------------------------------
Rent.  The Base Annual Rent and Additional Rent are hereinafter referred to as
- -----                                                                         
"Rent."  Landlord shall have all legal, equitable and contractual rights, powers
and remedies provided in this Lease or by statute or otherwise in the case of
nonpayment of the Rent for each Leased Property. Tenant shall make all payments
of Rent at Landlord's address set forth in Section 17.01 or as Landlord may
otherwise from time to time direct in writing, or, if Landlord shall direct
Tenant, directly to a bank account specified by Landlord to Tenant in writing.
At the direction of the Landlord, Tenant shall make payments of Additional Rent
directly to the person or persons to whom such amount is owing at the time and
times when such payments are due, and Tenant shall give to Landlord such
evidence of such direct payments as Landlord shall reasonably request.

          2.07    Net Lease.  This Lease shall be deemed and construed to be
                  ----------                                                
an "absolute net lease" or "triple net lease," (i.e. that Tenant shall pay all
costs and expenses related to the ownership and operations of each Leased
Property, thereby leaving all Rent as an absolutely net return to Landlord) and
as to each Leased Property, Tenant shall pay all Rent in connection with such
Leased Property throughout the Term and any Extension Term, without abatement,
deduction or set-off.

                                       5
<PAGE>
 
          2.08   No Termination, Abatement, Etc.  Except as otherwise
                 -------------------------------                     
specifically provided herein, Tenant shall remain bound by this Lease in
accordance with its terms. Except as otherwise specifically provided herein,
Tenant shall not, without the prior written consent of Landlord, modify,
surrender or terminate this Lease as to any Leased Property, nor seek nor be
entitled to any abatement, deduction, deferment or reduction of Rent, or set-off
against the Rent as to any Leased Property for any reason whatsoever.  Except as
specifically provided herein, the obligations of Landlord and Tenant shall not
be affected by reason of:  (a) the lawful or unlawful prohibition of, or
restriction upon, Tenant's use of any Leased Property, or any part thereof, the
interference with such use by any person, corporation, partnership or other
entity, or by reason of eviction by paramount title; (b) any claim which Tenant
has or might have against Landlord or by reason of any default or breach of any
warranty by Landlord under this Lease or any other agreement between Landlord
and Tenant, or to which Landlord and Tenant are parties; (c) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceeding affecting Landlord or any assignee or transferee
of Landlord; (d) any damage to, or destruction of, any Leased Property or any
portion thereof for whatever cause, or any taking of the Leased Property or any
portion thereof; or (e) any other cause, whether similar or dissimilar to any of
the foregoing, other than a discharge of Tenant from any such obligations as a
matter of law.  Except as otherwise specifically provided herein, and to the
maximum extent permitted by law, Tenant hereby specifically waives all rights,
including but not limited to any rights under any statute relating to rights of
tenants in the jurisdictions where the Leased Properties are located, which may
now be conferred upon it by law, relating to:  (a) the modification, surrender
or termination of this Lease, or the quitting or surrender of any Leased
Property or any portion thereof; (b) any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Tenant hereunder; or (c) any
rights of redemption.  As to each Leased Property, the obligations of Landlord
and Tenant hereunder shall be separate and the Rent and all other sums shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated pursuant to the express provisions of this Lease or by
termination of this Lease other than by reason of an Event of Default.


                                  ARTICLE III
                           IMPOSITIONS AND UTILITIES

          3.01   Payment of Impositions. Subject to the adjustments set forth
                 ----------------------
herein, Tenant shall pay, in the manner set forth in Section 3.04, as Additional
Rent, to the Landlord an amount equal to the amount necessary to pay all
Impositions (as hereinafter defined) that may be levied or become a lien on any
Leased Property or any part thereof at any time (whether prior to or during the
Term, but not that arise and are assessed after the end of the Term of the
Lease), without regard to prior ownership of said Leased Property, before the
same becomes delinquent. Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon any
Leased Property or any part thereof. Tenant, at its expense, shall prepare and
file all tax returns and reports in respect of any Imposition as may be required
by governmental authorities, provided, however, that Tenant shall provide to
Landlord copies of all filings of such tax returns or reports in respect of any
real or personal property owned by Landlord. Tenant shall be 

                                       6
<PAGE>
 
entitled to any refund due in respect of such Impositions from any taxing
authority if no Event of Default shall have occurred hereunder and be
continuing. Any refunds in respect of such Impositions retained by Landlord due
to an Event of Default shall be applied as provided in Section 9.08. Landlord
and Tenant shall, upon request of the other, provide such data as is maintained
by the party to whom the request is made with respect to a Leased Property as
may be necessary to prepare any required tax returns and reports. In the event
governmental authorities classify any property covered by this Lease as personal
property, Landlord and Tenant shall file all personal property tax returns in
such jurisdictions where it may legally so file with respect to their respective
owned personal property. Landlord, to the extent it possesses the same, and
Tenant, to the extent it possesses the same, will provide the other party, upon
request, with cost and depreciation records necessary for filing such returns or
reports for any property so classified as personal property. To the extent that
Landlord is legally required to file personal property tax returns, Tenant will
be provided with copies of assessment notices indicating a value in excess of
the reported value in sufficient time for Tenant to file a protest. Tenant may,
upon notice to Landlord, at Tenant's option and at Tenant's sole cost and
expense, protest, appeal, or institute such other proceedings as Tenant may deem
appropriate to effect a reduction of real estate or personal property
assessments and Landlord, at Tenant's expense as aforesaid, shall fully
cooperate with Tenant in such protest, appeal, or other action. Tenant shall
provide Landlord copies of all materials filed or presented in connection with
any such proceeding. Tenant shall promptly reimburse Landlord for all taxes paid
by Landlord, which were not paid with deposits received from Tenant, upon
receipt of billings accompanied by copies of a bill therefor and payments
thereof which identify the property with respect to which such payments are
made. Impositions imposed with respect to the tax-fiscal period during which the
Term commences and terminates as to each Leased Property shall be adjusted and
prorated between Landlord and Tenant on a per diem basis, with Tenant being
obligated to pay its pro rata share from and including the Commencement Date to
and including the expiration or termination date of the Term or Extension Term,
as the case may be, whether or not such Imposition is imposed before or after
such commencement or termination, and Tenant's obligation to pay its prorated
share thereof shall survive such termination. Tenant shall also pay to Landlord
a sum equal to the amount which Landlord may be caused to pay of any privilege
tax, sales tax, gross receipts tax, rent tax, occupancy tax or like tax
(excluding any tax based on net income), hereinafter levied, assessed, or
imposed by any federal, state, city, county or municipal or other local
governmental authority, or any subdivision thereof, upon or measured by rent or
other consideration required to be paid by Tenant under this Lease.

          3.02   Definition of Impositions.  "Impositions" means,
                 -------------------------                       
collectively:  (a) taxes (including without limitation, all real estate and
personal property ad valorem (whether assessed as part of the real estate or
separately assessed as unsecured personal property), sales and use, business or
occupation, single business, gross receipts, transaction, privilege, rent or
similar taxes, but not including income or franchise or excise taxes payable
with respect to Landlord's receipt of Rent); (b) assessments, whether in the
nature of a special assessment or otherwise (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term or any Extension Term, as the case may be); (c) water, sewer or other rents
and charges, excises, tax levies, 

                                       7
<PAGE>
 
and fees (including, without limitation, license, permit, inspection,
authorization and similar fees); (d) to the extent they may become a lien on a
Leased Property, all taxes imposed on Tenant's operations of such Leased
Property including without limitation, employee withholding taxes, income taxes
and intangible taxes; and (e) all other governmental charges, in each case
whether general or special, ordinary or extraordinary, or foreseen or unforseen,
of every character in respect of each Leased Property or any part thereof, the
Business conducted by Tenant thereon, and/or the Rent (including all interest
and penalties thereon due to any failure in payment by Tenant), which at any
time prior to, during or in respect of the Term or any Extension Term, as the
case may be, hereof may be assessed or imposed on or in respect of or be a lien
upon (i) Landlord or Landlord's interest in any Leased Property or any part
thereof; (ii) any Leased Property or any part thereof or any rent therefrom or
any estate, right, title or interest therein; or (iii) any occupancy, operation,
use or possession of, or sales from, or activity conducted on, or in connection
with any Leased Property or the leasing or use of any Leased Property or any
part thereof. Tenant shall not, however, be required to pay: (x) any tax based
on net income (whether denominated as a franchise or capital stock or other tax)
imposed on Landlord or (y) except as provided in Section 13.01, any tax imposed
with respect to the sale, exchange or other disposition by Landlord of a Leased
Property or the proceeds thereof; provided, however, that if any tax,
assessment, tax levy or charge which Tenant is obligated to pay pursuant to the
first sentence of this definition and which is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (x) or (y) immediately above is levied, assessed or
imposed expressly in lieu thereof Tenant shall then pay such tax, levy, or
charge set forth in said clause (x) or (y).

          3.03   Utilities.  Tenant shall contract for, in its own name, and
                 ---------                                                  
will pay, as Additional Rent all taxes, assessments, charges/deposits, and bills
for utilities, including without limitation charges for water, gas, oil,
sanitary and storm sewer, electricity, telephone service, trash collection, and
all other utilities which may be charged against the occupant of the
Improvements during the Term.

          3.04   Escrow of Impositions. Unless waived by written notice from
                 ---------------------                                      
Landlord to Tenant, Tenant shall thereafter deposit with Landlord on the first
day of each month during the Term hereof and any Extension Term, as the case may
be, a sum equal to one-twelfth (1/12th) of the Impositions annually assessed
against such Leased Property which sums shall be used by Landlord toward payment
of such Impositions.  If, at the end of any applicable tax year, any such funds
held by Landlord are insufficient to make full payment of taxes or other
Impositions for which such funds are held, Tenant, on demand, shall pay to
Landlord any additional funds necessary to pay and discharge in full the
obligations of Tenant pursuant to the provisions of this Section.  If, however,
at the end of any applicable tax year, such funds held by Landlord are in excess
of the total payment required to satisfy taxes or other Impositions for which
such funds are held, Landlord shall apply such excess amounts to a tax and
Imposition escrow fund for the next tax year.  With respect to each Leased
Property, if any such excess exists following the expiration or earlier
termination of this Lease, and subject to Section 8.08 below, Landlord shall
promptly refund such excess amounts to Tenant.  The receipt by Landlord of the
payment of such Impositions by and from Tenant shall only 

                                       8
<PAGE>
 
be as an accommodation to Tenant and the taxing authorities, and shall not be
construed as rent or income to Landlord, Landlord serving, if at all, only as a
conduit for delivery purposes.

          3.05   Discontinuance of Utilities.  Landlord will not be liable for
                 ---------------------------                              
damages to person or property or for injury to, or interruption of, business for
any discontinuance of utilities at any Leased Property nor will such
discontinuance in any way be construed as an eviction of Tenant from such Leased
Property or cause an abatement of Rent as to such Leased Property or operate to
release Tenant from any of Tenant's obligations as to such Leased Property under
this Lease. Notwithstanding the forgoing, however, Landlord shall be liable for
damages to person or property or for injury to, or interruption of business, for
any discontinuance of utilities at any Leased Property, in the event and to the
extent, such damages or injury are caused by the wilful misconduct of the
Landlord.

          3.06   Liens.  Subject to Section 17.19 relating to contests, Tenant
                 -----                                                 
shall not directly or indirectly create or allow to remain, and will promptly
discharge at its expense, any lien, encumbrance, attachment, title retention
agreement or claim upon any Leased Property or any attachment, levy, claim or
encumbrance in respect of any Rent provided under this Lease, not including,
however: (a) this Lease; (b) utility easements and road rights-of-way in the
customary form (i) provided the same do not adversely affect the intended use of
the Leased Properties (including the Improvements) and do not create a material
adverse effect on the value of the Leased Properties or (ii) which result solely
from the action or inaction of Landlord; (c) zoning and building laws or
ordinances, provided they do not prohibit the use of the Leased Properties for
the Business and so long as the Leased Properties are in compliance with same;
(d) such encumbrances as are subsequently consented to in writing by Landlord,
but excluding liens in respect of Impositions required to be paid under Section
3.01; (e) liens for Impositions so long as (i) the same are not yet payable or
are payable without the addition of any fine or penalty or (ii) such liens are
being contested as permitted under Section 17.19; and (f) other encumbrances,
easements, rights of way or liens (i) provided the same do not adversely affect
the intended use of the Leased Properties (including the Improvements) and do
not create a material adverse effect on the value of the Leased properties, or
(ii) which result solely from the action or inaction of Landlord.


                                  ARTICLE IV
                                   INSURANCE

          4.01   Insurance.  Tenant shall, at Tenant's expense, keep the
                 ---------                                              
Improvements, Fixtures, and other components of each Leased Property insured
against the following risks:

                 (a)  Loss or damage by fire with extended coverage (including
                      windstorm and subsidence), vandalism and malicious
                      mischief, sprinkler leakage and all other physical loss
                      perils commonly covered by "All Risk" (or equivalent
                      coverage) insurance in an amount not less than one hundred
                      percent (100%) of the then full replacement cost thereof
                      (as


                                       9
<PAGE>
 
                    hereinafter defined).  Such policy shall include an agreed
                    amount endorsement if available at a reasonable cost.  Such
                    policy shall also include endorsements for contingent
                    liability for operation of building laws, demolition costs,
                    and increased cost of construction.

               (b)  Loss or damage by explosion of steam boilers, pressure
                    vessels, or similar apparatus, now or hereafter installed on
                    any Leased Property, in commercially reasonable amounts
                    acceptable to Landlord.

               (c)  Loss of rent under a rental income or Business interruption
                    insurance policy covering risk of loss during the first
                    twelve (12) months of reconstruction necessitated by the
                    occurrence of any hazards described in Sections 4.01(a) or
                    4.01(b), above, and which causes an abatement of Rent as
                    provided in Article X hereof, in an amount sufficient to
                    prevent Landlord or Tenant from becoming a co-insurer, and
                    containing endorsements for extended period of indemnity and
                    premium adjustment, and written with an agreed amount
                    clause, if the insurance provided for in this clause (c) is
                    available.

               (d)  If the Land or any portion thereof related to a Leased
                    Property is located in whole or in part within a designated
                    flood plain area, loss or damage caused by flood in
                    commercially reasonable amounts acceptable to Landlord.

               (e)  Loss or damage commonly covered by blanket crime insurance
                    including employee dishonesty, loss of money orders or paper
                    currency, depositor's forgery, and loss of property accepted
                    by Tenant for safekeeping, in commercially reasonable
                    amounts acceptable to Landlord.

               (f)  Workers' compensation insurance as required by statute in
                    respect of any work or other operations on or about each
                    Leased Property.

               (g)  Comprehensive liability insurance as to each Leased Property
                    in amounts equal to the greater of (i) One Million Dollars
                    ($1,000,000) for each occurrence and Two Million Dollars
                    ($2,000,000) in the aggregate, or (ii) the limits of
                    liability generally required under the franchise agreements
                    or other agreements pursuant to which Tenant operates the
                    Businesses conducted on or about each Leased Property.

               (h)  Commercial comprehensive catastrophic liability insurance
                    with limits of liability of not less than the greater of (i)
                    Five Million ($5,000,000) and (ii) the limits of liability
                    generally required under 


                                      10
<PAGE>
 
                    the franchise agreements or other agreements pursuant to
                    which Tenant operates the Businesses conducted on or about
                    each Leased Property.

               (i)  upon Landlord's request, earthquake insurance in an amount
                    not less than the full insurable value of each Leased
                    Property.

               (j)  During the period when any addition, alteration,
                    construction, installation or demolition is being made or
                    performed to any part of the Leased Property, contingent
                    liability, public liability, completed value, builder's risk
                    (non-reporting form) workers' compensation and other
                    insurance as is deemed prudent by Landlord.

          4.02      Insurance Limits.  Deductible provisions for the insurance
                    ----------------                                          
required under Section 4.01(a) shall not exceed Twenty-Five Thousand Dollars
($25,000) per location per occurrence and One Hundred Thousand Dollars
($100,000) aggregate per occurrence; under clause(d),  Twenty-Five Thousand
Dollars ($25,000) per occurrence, except that if federal flood insurance is
available then such deductible shall not be greater than the lowest deductible
available with respect to such federal flood insurance; under clause (g),
Twenty-Five Thousand Dollars ($25,000) per occurrence; under clause (h), Twenty-
Five Thousand Dollars ($25,000) per occurrence; and under clause (j), Twenty-
Five Thousand Dollars ($25,000) per occurrence.

           4.03     Insurance Requirements.  The following provisions shall
                    -----------------------                                
apply to all insurance coverages required hereunder:

               (a)  The carriers of all policies shall have a Best's Rating of
                    "A-" or better and a Best's Financial Category of XII or
                    larger and shall be authorized to do insurance business in
                    the jurisdiction in which the Leased Property is located.

               (b)  Tenant shall be the "named insured" and Landlord and any
                    mortgagee of Landlord shall be an "additional named insured"
                    on each policy, except for the insurance required in Section
                    4.01(e) and 4.01(f) hereof.

               (c)  Tenant shall deliver to Landlord certificates or policies
                    showing the required coverages and endorsements.  Each
                    policy or certificate of insurance shall provide that such
                    policy or certificate (i) may not be canceled, (ii) may not
                    lapse for failure to renew, and (iii) no material change or
                    reduction in coverage may be made, without at least thirty
                    (30) days' prior written notice to Landlord.

                                      11
<PAGE>
 
               (d)  The policies shall contain a severability of interest and/or
                    cross-liability endorsement, provide that the acts or
                    omissions of Tenant will not invalidate Landlord's coverage,
                    and provide that Landlord shall not be responsible for
                    payment of premiums.

               (e)  All loss adjustment shall require the written consent of
                    Landlord and Tenant, as their interests may appear.

               (f)  At least (30) thirty days prior to the expiration of each
                    policy, Tenant shall deliver to Landlord a certificate
                    showing renewal of such policy and payment of the annual
                    premium therefor.

          Landlord shall have the right to review the insurance coverages
required hereunder with Tenant from time to time, to obtain the input of third
party professional insurance advisors (at Landlord's expense) with respect to
such insurance coverages, and to consult with Tenant in Tenant's annual review
and renewal of such insurance coverages.  All insurance coverages hereunder
shall be in such form, substance and amounts as are customary or standard in
Tenant's industry, but at a minimum shall comply with the requirements set forth
herein.

          4.04      Replacement Cost.  The term "full replacement cost" means
                    ----------------                                         
the actual replacement cost of the Improvements from time to time including
increased cost of construction, with no reductions or deductions.  Tenant shall,
not later than thirty (30) days after the anniversary of each policy of
insurance, increase the amount of the replacement cost endorsement for the
Improvements to the extent necessary to reflect increased costs of construction.
If Tenant makes any Permitted Alterations (as hereinafter defined) to any Leased
Property, Landlord may have such full replacement cost redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement cost was last determined.

          4.05      Blanket Policy.  Tenant may carry the insurance required by
                    --------------                                             
this Article under a blanket policy of insurance, provided that the coverage
afforded Tenant will not be reduced or diminished or otherwise be different from
that which would exist under a separate policy meeting all of the requirements
of this Lease and the Landlord approves the form of the policy.

          4.06      No Separate Insurance.  Tenant shall not take out separate
                    ----------------------                                    
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing insurance
by securing an additional policy or additional policies, unless all parties
having an insurable interest in the subject matter of the insurance, including
Landlord and any mortgagees, are included therein as additional named insureds
or loss payees, the loss is payable under said insurance in the same manner as
losses are payable under this Lease, and such additional insurance is not
prohibited by the existing policies of insurance required pursuant to this
Article.  Tenant shall immediately notify Landlord of the taking out of such
separate insurance or the increasing of any of the amounts of the existing
insurance by securing an additional policy or additional policies.  The term
"mortgages" as used in this Lease includes, but is not limited 

                                      12
<PAGE>
 
to, Deeds of Trust and the term "mortgagees" includes, but is not limited to,
trustees and beneficiaries under a Deed of Trust.

          4.07      Waiver of Subrogation.  Each party hereto hereby waives any
                    ---------------------                                      
and every claim which arises or may arise in its favor and against the other
party hereto during the Term or any Extension Term or renewal thereof, for any
and all loss of, or damage to, any of its property located within or upon, or
constituting a part of, any Leased Property, which loss or damage is covered by
valid and collectible insurance policies, to the extent that the insurance
company covers the loss and makes payment under the applicable insurance policy.
Said mutual waiver shall be in addition to, and not in limitation or derogation
of, any other waiver or release contained in this Lease with respect to any loss
or damage to property of the parties hereto.  Inasmuch as the said waivers will
preclude the assignment of any aforesaid claim by way of subrogation (or
otherwise) to an insurance company (or any other person), each party hereto
agrees to obtain insurance policies that permit claims thereunder to be waived
in advance, so long as such endorsement is available at a reasonable cost.

          4.08      Mortgages.  The following provisions shall apply if Landlord
                    ---------                                                   
now or hereafter places a mortgage on any Leased Property or any part thereof:
(a) Tenant shall obtain a standard form of mortgage clause insuring the interest
of the mortgagee; (b) Tenant shall deliver evidence of insurance to such
mortgagee; (c) loss adjustment shall require the consent of the mortgagee but
such consent shall not be unreasonably withheld and may not include any
requirement that the funds be paid to mortgagee in lieu of reconstruction; and
(d) Tenant shall obtain such other coverages and provide such other information
and documents as may be reasonably required by the mortgagee.

          4.09      Other Insurance Requirements.  Notwithstanding anything in
                    ----------------------------                              
this Lease to the contrary and not by way of limitation, in addition to the
types and amounts of insurance required to be carried by Tenant herein, Tenant
covenants to insure and continue in effect such types and amounts of insurance
as the Tenant shall be required to carry pursuant to any contract, agreement,
instrument, statute, law, rule or regulation relating to the use of the Leased
Property and the operations of any Business or other activities thereon,
including noncancellable written notice to mortgagee.

                                   ARTICLE V
                       INDEMNITY; SUBSTANCES OF CONCERN

          5.01      Tenant's Indemnification.  Subject to Section 4.07, Tenant
                    ------------------------                                  
hereby agrees to indemnify and hold harmless Landlord, its agents, and employees
from and against any and all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, costs and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) (the "Claims") incurred during the Term of the Lease and
in connection with or arising from: (a) the use, condition, operation or
occupancy of the Leased Properties; (b) any activity, work, or thing done, or
permitted or suffered by Tenant in, on or about the Leased Properties; (c) any
acts, omissions, or negligence 

                                      13
<PAGE>
 
of Tenant or any person claiming under Tenant, or the contractors, agents,
employees, invitees, or visitors of Tenant or any such person; (d) any breach,
violation, or nonperformance by Tenant or any person claiming under Tenant or
the employees, agents, contractors, invitees, or visitors of Tenant or of any
such person, of any term, representation, warranty, covenant, or provision of
this Lease or any law, ordinance, or governmental requirement of any kind; (e)
any injury or damage to the person, property or Business of Tenant, its
employees, agents, contractors, invitees, visitors, or any other person entering
upon any Leased Property; (f) any accident, injury to or death of persons or
loss or damage to any item of property occurring on or about any Leased
Property; (g) any Environmental Law or any pollution or other threat to human
health or the environment at, arising out of or relating to any Leased Property
as set forth in Section 5.05, and (h) any brokers' or agents' fees and
commissions that Tenant incurs. If any action or proceeding is brought against
Landlord, its employees, or agents by reason of any such demand, claim, or cause
of action, Tenant, upon notice from Landlord, will defend the same at Tenant's
expense with counsel reasonably satisfactory to Landlord. In the event Landlord
reasonably determines that its interests and the interests of Tenant in any such
action or proceeding are not substantially the same and that Tenant's counsel
cannot adequately represent the interests of Landlord therein, Landlord shall
have the right to hire separate counsel in any such action or proceeding and the
reasonable costs thereof shall be paid for by Tenant. Tenant's indemnification
obligations with respect to a Claim shall survive the expiration or earlier
termination of this Lease until the later of (i) two (2) years from the date
hereof, or (ii) the expiration of the period ninety (90) days after the date on
which Landlord has actual knowledge of the existence of such Claim, provided,
however, that Tenant's indemnification obligations shall survive the expiration
or earlier termination of this Lease until ninety (90) days after the expiration
of the applicable statute of limitations for Claims incurred in connection with,
arising out of, or related to (i) Section 5.01(g) or (ii) the failure to pay, as
provided for in this Agreement, any Imposition. Notwithstanding the foregoing
provisions of this Section 5.01, Tenant shall have no obligation to indemnify
Landlord for any Claims arising out of the actions or omissions of Landlord, or
Landlord's agents, employees or representatives.

           5.02     Substances of Concern.
                    --------------------- 

               (a)  For purposes of this Section 5:

                    (i)  "Substances of Concern" means, without limitation,
                         chemicals, pollutants, contaminants, wastes, toxic
                         substances, radioactive materials or genetically
                         modified organisms, which are, have been or become
                         regulated by any federal, state or local government
                         authority including, without limitation, (1) petroleum
                         or any fraction thereof, (2) asbestos, (3) any
                         substance or material defined as a "hazardous
                         substance" pursuant to (S) 101 of the Comprehensive
                         Environmental Response Compensation and Liability Act
                         (42 U.S.C. (S) 9601), or (4) any substance or material
                         defined as a 

                                      14
<PAGE>
 
                         "hazardous chemical" pursuant to the federal Hazard
                         Communication Standard (29 C.F.R. (S) 1910.1200).

                    (ii) "Environmental Laws" means all federal, state, local,
                         and foreign laws and regulations relating to pollution
                         or protection of human health or the environment
                         (including, without limitation, ambient air, surface
                         water, ground water, wetlands, land surface, subsurface
                         strata, and indoor and outdoor workplace), including,
                         without limitation, (1) laws and regulations relating
                         to emissions, discharges, releases, or threatened
                         releases of Substances of Concern, and (2) common law
                         principles of tort liability.

               (b)  Tenant shall not, either with or without negligence, injure,
                    overload, deface, damage or otherwise harm any Leased
                    Property or any part or component thereof; commit any
                    nuisance; permit the emission of any Substances of Concern;
                    allow the release or other escape of any biologically or
                    chemically active substances or materials or other
                    Substances of Concern so as to impregnate, impair or in any
                    manner affect, even temporarily, any element or part of any
                    Leased Property or neighboring property, or allow the
                    storage or use of such substances or materials in any manner
                    not sanctioned by law and by reasonable standards prevailing
                    in the automobile retail and related industries for the
                    storage and use of such substances or materials; nor shall
                    Tenant permit the occurrence of objectionable noise or
                    odors; or make, allow or suffer any waste whatsoever to any
                    Leased Property. Landlord may inspect each Leased Property
                    from time to time, and Tenant will cooperate with such
                    inspections.

               (c)  Notwithstanding the foregoing, Tenant anticipates using,
                    storing and disposing of certain Substances of Concern in
                    connection with operation of its Business. Such Substances
                    of Concern include, but are not limited to, the following:
                    motor oil, waste motor oil and filters, transmission fluid,
                    antifreeze, refrigerants, waste paint and lacquer thinner,
                    batteries, solvents, lubricants, degreasing agents, gasoline
                    and diesel fuels. Tenant shall ascertain and comply fully
                    with all applicable Environmental Laws and environmental
                    standards and requirements set by federal, state or local
                    laws, rules, regulations or governmental directives related
                    to the Leased Properties or Tenant's use or occupancy of the
                    Leased Property ("Environmental Standards"), including but
                    not limited to any laws or standards (a) regulating the use,
                    storage, generation or disposal of Substances of Concern,
                    (b) regulating the monitoring or use of any underground or
                    
                                      15
<PAGE>
 
                    aboveground storage tanks at the Leased Properties, or (c)
                    establishing any permitting, notification or reporting
                    requirements. As promptly as practicable after the
                    Commencement Date (but in no event later than 120 days
                    thereafter), Tenant shall establish and implement a program
                    of compliance with all applicable Environmental Laws and
                    Environmental Standards ("Environmental Compliance
                    Program"). Tenant shall update such Environmental Compliance
                    Program every three (3) years during the Term. Tenant shall
                    submit its Environmental Compliance Program and each update
                    thereto to Landlord; provided, however, such submittal shall
                    not relieve Tenant of its obligations pursuant to this
                    Section 5. Tenant's Environmental Compliance Program shall
                    include a program for monitoring Tenant's compliance with
                    Environmental Laws and Environmental Standards and a plan
                    for correcting immediately any incident of noncompliance.
                    Tenant shall comply with its Environmental Compliance
                    Program.

               (d)  In the event of any noncompliance with any Environmental
                    Laws or Environmental Standards or any spill, release or
                    discharge of Substances of Concern in a reportable quantity
                    under federal, state or local law, Tenant shall:

                    (i)  give Landlord immediate notice of the incident by
                         telephone or facsimile, providing as much detail as
                         possible. Such notice shall be provided to Landlord's
                         National Dealership Real Estate Manager or to such
                         other person as Landlord shall designate in accordance
                         with Section 16.01 below;

                    (ii) as soon as possible, but no later than seventy-two (72)
                         hours, after discovery of an incident of noncompliance,
                         submit a written report to Landlord, identifying the
                         source or case of the noncompliance or spill, release
                         or discharge (including the names and quantities of any
                         Substances of Concern involved) and the method or
                         action required to correct the problem; and

                    (iii)cooperate with Landlord or its designated agents or
                         contractors with respect to the investigation and
                         correction of such problem.

          Tenant shall also be solely responsible for providing any notice to
any federal, state or local governmental authority required by applicable laws
and regulations as a result of such incident.

                                      16
<PAGE>
 
          5.03      Audits.  Landlord shall have the right to conduct, at its
                    ------                                                   
expense, periodic audits of Tenant's compliance with the Environmental
Compliance Program and management of Substances of Concern at the Leased
Properties and/or periodic tests of air, soil, surface water or groundwater at
or near the Leased Properties.  Landlord shall not be obligated to provide
Tenant with the results of any audit or tests unless Tenant requests them in
writing or such results are the basis for a claim by Landlord that Tenant has
breached its obligations under this Lease or a demand by Landlord that Tenant
modify its Environmental Compliance Program or operations or remediate or remove
a spill, release or discharge of Substances of Concern in accordance with
Section 5.06 below. Tenant agrees promptly to modify its Environmental
Compliance Program or the conduct of its operations in accordance with
Landlord's reasonable recommendations directed at improvement of Tenant's
handling, use and disposal of Substances of Concern  in, on or from any Leased
Property. If, as a result of an environmental audit performed by Landlord with
respect to any Leased Property, Landlord reasonably determines in its judgment
that alterations or improvements of equipment or buildings located on the Leased
Property are necessary, Tenant shall perform such alterations or improvements as
are reasonable under the circumstances and pay all costs and expenses relating
thereto.   If Tenant shall fail to pay any such costs or expenses, Tenant shall
deposit with Landlord the full amount necessary to pay such costs in full within
ten (10) days of Landlord's demand. Nothing contained herein shall be construed
to obligate or require Landlord to perform any audits, tests, inquiry or
investigation.  Should Landlord elect or be required to disclose to Tenant the
results of any audit or tests, Landlord shall not be liable in any way for the
truth or accuracy of such information.

          5.04      Landlord's Option Re: Compliance.  If Tenant, after notice
                    --------------------------------                          
from Landlord, fails to comply with or perform any of its obligations pursuant
to this Section 5, including, but not limited to, obligations to clean up
spills, releases or discharges, Landlord may, but shall not be obligated to,
perform such obligations and Tenant shall pay Landlord within ten (10) days of
demand Landlord's costs therefor, including any overhead and administrative
costs.

          5.05      Environmental Indemnification.  Tenant shall indemnify and
                    -----------------------------                             
hold harmless Landlord from and against all demands, claims, causes of action,
fines, penalties, damages (including punitive and consequential damages),
losses, liabilities (including strict liability), judgments, and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) imposed upon or asserted against Tenant, Landlord or any
Leased Property on account of any Environmental Law (irrespective of whether
there has occurred any violation of any Environmental Law) relating to any
Leased Property, including (a) response costs and costs of removal and remedial
action incurred by the United States Government or any state or local
governmental unit to any other person or entity, or damages from injury to or
destruction or loss of natural resources, including the reasonable costs of
assessing such injury, destruction or loss, incurred pursuant to any
Environmental Law, (b) costs and expenses of abatement, investigation, removal,
remediation, correction or cleanup, fines, damages, response costs or penalties
which arise from the provisions of any Environmental Law, (c) liability for
personal injury or property damage arising under any statutory or common-law
tort theory, including damages assessed for the maintenance of a public or
private nuisance or for carrying on of a dangerous activity, (d) liability by
reason of a breach of 

                                      17
<PAGE>
 
an environmental representation or warranty by Tenant, and (e) failure of Tenant
to complete in a timely manner alterations or improvements of equipment or
buildings located on the Leased Property deemed necessary or advisable by
Landlord pursuant to Section 5.03 in a manner acceptable to Landlord.
Notwithstanding anything to the contrary contained in this Lease, Tenant shall
have no obligation to indemnify Landlord for any releases of Substances of
Concern, or remove or remediate any Substances of Concern released by, the
actions of Landlord, or Landlord's agents, employees or representatives.

          5.06      Tenant's Cleanup Obligation.  If any spill, release or
                    ---------------------------                           
discharge of Substances of Concern occurs on, at or from the Leased Properties
during the Term, Tenant shall promptly take all actions, at its sole expense, as
are necessary to remove or remediate such spill, release or discharge and to
bring the Leased Property into compliance with the Environmental Laws, provided
that Landlord's approval of such action shall first be obtained, which approval
shall not be unreasonably withheld so long as such actions would not potentially
have any material adverse effect on the Leased Property.

          5.07      Existing Environmental Conditions.  Tenant acknowledges that
                    ---------------------------------                           
it has had the opportunity to review the Environmental Reports attached hereto
as Exhibit 5.07.  Tenant hereby represents that it has reviewed and is aware of
the matters disclosed in the Environmental Reports.

          As a material consideration for Landlord's willingness to enter into
this Lease, Tenant, for itself and its Affiliates, and each of their
shareholders, directors, officers, employees, agents, contractors,
representatives, insurers, successors and assigns hereby waives and releases
Landlord and its Affiliates and each of their shareholders, directors, officers,
employees, representatives, agents, contractors, representatives, insurers,
successors and assigns from any and all claims, demands, liabilities, costs,
expenses, causes of action and rights of action whatsoever, past, present or
future, known or unknown, suspected or unsuspected, which arise out of or relate
in any way to the violation of Environmental Laws or the use, storage,
treatment, disposal, presence, spill, release, or discharge of Substances of
Concern at, on or from the Leased Properties before the Commencement Date
(collectively, the "Released Claims").

          In the event that Landlord is ordered by a governmental agency, or
determines that it is in its best interest, to remedy any violation of
Environmental Laws or to remove or remediate any Substances of Concern present
on, under or about the Leased Properties on the Commencement Date, or spilled,
released or discharged on, at or from the Leased Properties before the
Commencement Date, Tenant shall immediately upon notice from Landlord take all
actions, at Tenant's sole expense, to promptly complete such removal or
remediation.
 
          5.08      Survival of Tenant's Obligations.  Tenant's obligations
                    --------------------------------                       
under this Section 5 shall survive the expiration or earlier termination of this
Lease.  During any period of time employed by Tenant after the termination of
this Lease to complete the removal from the Leased Property of any Substances of
Concern, if the premises are not rentable for uses contemplated under this
Lease, 

                                      18
<PAGE>
 
Tenant shall continue to pay the full amount of Rent due under this Lease, which
Rent shall be prorated daily for the final month of such period of time.


                                  ARTICLE VI
                        USE AND ACCEPTANCE OF PREMISES

          6.01      Use of Leased Properties.  For so long as this Lease is in
                    ------------------------                                  
effect (including following any sublease or assignment thereof), Tenant shall
use and occupy each Leased Property exclusively for the purpose of conducting
the Business or for any other legal purpose for which such Leased Property is
being used as of the Commencement Date, and for no other purpose without the
prior written consent of Landlord.  Tenant shall obtain and maintain all
approvals, licenses, and consents needed to use and operate the Leased
Properties for such purposes. Tenant shall promptly deliver to Landlord complete
copies of surveys, examinations, certification and licensure inspections,
compliance certificates, and other similar reports issued to Tenant by any
governmental agency.

          6.02      Acceptance of Leased Properties.  Except as otherwise
                    -------------------------------                      
specifically provided in this Lease, Tenant acknowledges (i) Tenant and its
agents have had an opportunity to inspect each Leased Property; (ii) Tenant has
found each Leased Property fit for Tenant's use; (iii) delivery of each Leased
Property to Tenant is in an "as-is" condition; (iv) Landlord is not obligated to
make any improvements or repairs to any Leased Property; and (v) the roof,
walls, foundation, heating, ventilating, air conditioning, telephone, sewer,
electrical, mechanical, utility, plumbing, and other portions of each Leased
Property are in good working order.  Tenant waives any claim or action against
Landlord with respect to the condition of any  Leased Property.  LANDLORD MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTIES OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION OR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO QUALITY OR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY TENANT.

          6.03      Conditions of Use and Occupancy.  Tenant agrees that during
                    -------------------------------                            
the Term it shall use and keep each Leased Property in a careful, safe and
proper manner; not commit or suffer waste thereon; not use or occupy any Leased
Property for any unlawful purposes; not use or occupy any Leased Property or
permit the same to be used or occupied, for any purpose or business deemed extra
hazardous on account of fire or otherwise; keep each Leased Property in such
repair and condition as may be required by the local board of health, or other
city, state or federal authorities, free of all cost to Landlord; not permit any
acts to be done which will cause the cancellation, invalidation, or suspension
of any insurance policy; and permit Landlord and its agents to enter upon each
Leased Property at all reasonable times after notice to Tenant to examine the
condition thereof.  In addition, at any time and from time to time upon not less
than fifteen (15) days prior written notice, Tenant shall permit Landlord and
any mortgagee or lender and their authorized representatives, to inspect the
Leased Properties during normal Business hours, provided that such inspections
shall not unreasonably interfere with Business of Tenant.

                                      19
<PAGE>
 
           6.04  Financial Statements and Other Information.  Tenant shall
                 ------------------------------------------               
provide Landlord and any mortgagee or lender regularly (or more often as may be
reasonably requested by Landlord in writing), the following financial
information: (a) as to each Leased Property within thirty (30) days after each
fiscal quarter during the Term or any Extension Term, as the case may be,
(except the fourth quarter), Tenant-prepared financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"), excluding
lifo provisions and income tax provisions, consistently applied; and (b) as to
each Leased Property and itself, Tenant shall use its best efforts to provide
Landlord within ninety (90) days after the end of each fiscal year of Tenant
during the Term or any Extension Term, as the case may be, and in no event later
than one hundred and twenty (120) days after the end of each fiscal year of
Tenant during the Term or any Extension Term, as the case may be, financial
statements, audited, reviewed or compiled by a certified public accountant (the
"Annual Financial Statements"). Tenant shall also deliver to Landlord such
additional financial information as Landlord may reasonably request, provided
the same is of a type normally maintained by Tenant or can be obtained without
undue cost or burden on Tenant's personnel and does not constitute information
which Tenant reasonably determines to be proprietary or confidential.
Additionally, upon Landlord's request, Tenant shall provide Landlord with copies
of Tenant's annual capital expenditure budgets for each Leased Property and any
reports generated by Tenant regarding maintenance and repairs of each Leased
Property. The parties acknowledge and agree that the Sellers and their
affiliates are required under this Agreement and the Company Leases to provide
to the Company certain confidential financial information (the "Confidential
Information") with respect to the business conducted on the Leased Properties.
The Company agrees to use the Confidential Information solely for the purposes
of monitoring compliance with the terms of this Agreement and the Company
Leases, and the Confidential Information shall be disclosed only to those of the
Company's employees, advisors and consultants to whom it is necessary for such
purposes. Moreover, the Company will use its best efforts to implement policies
and procedures at the Board of Trustees level so as to minimize the disclosure
of Confidential Information to Trustees having interest in businesses that
compete with the Sellers and their affiliates.


                                  ARTICLE VII
              REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS

           7.01  Maintenance.  Tenant shall maintain each Leased Property in
                 -----------                                                
good order, repair and appearance, and repair each Leased Property, including
without limitation, all interior and exterior, structural and nonstructural
repairs and replacements to the roof, foundations, exterior walls, building
systems, HVAC systems, parking areas, sidewalks, water, sewer and gas
connections, pipes, and mains. Tenant shall pay as Additional Rent the full cost
of such maintenance, repairs, and replacements, however the Tenant shall have
the right to require Landlord to pay for repairs, maintenance or replacements
that would cost in excess of $50,000 and have Landlord adjust the Base Annual
Rent upwards by multiplying such amount expended by eleven and 30/100 percent
(11.3%); provided that if the Tenant exercises this right within one year of the
end of the Term or any Extension Term, Tenant shall renew this Lease for the
upcoming Extension Term (if Tenant exercises this right within one year of the
end of the Second Extension Term, Tenant shall renew this 

                                      20
<PAGE>
 
Lease for a Third Extension Term at a rental rate determined by the procedures
for determining the rental rate for the Second Extension Term). Tenant shall
maintain all drives, sidewalks, parking areas, and lawns on or about each Leased
Property in a clean and orderly condition, free of accumulations of dirt,
rubbish, snow and ice. Tenant shall permit Landlord to inspect each Leased
Property at all reasonable times, and shall implement all reasonable suggestions
of Landlord as to the maintenance and repair of each Leased Property.

           7.02  Compliance with Laws.  Tenant shall comply with all laws,
                 --------------------                                     
ordinances, orders, rules, regulations, and other governmental requirements
relating to the use, condition, or occupancy of each Leased Property, whether
now or hereafter enacted and in force including without limitation: (a)
licensure requirements for operation of the Business; (b) requirements of any
board of casualty insurance underwriters or insurance service office for any
other similar body having jurisdiction over any Leased Property; (c) all zoning
and building codes; and (d) Environmental Laws. At Landlord's request, from time
to time, Tenant shall deliver to Landlord copies of certificates or permits
evidencing compliance with such laws, including without limitation, copies of
any applicable licenses, certificates of occupancy and building permits. Tenant
shall provide Landlord with copies of any notice from any governmental authority
alleging any non-compliance by Tenant or any Leased Property with any of the
foregoing requirements and such evidence as Landlord may reasonably require of
Tenant's remediation thereof. Tenant hereby agrees to defend, indemnify and hold
Landlord, its agents, and employees from and against any and all demands,
claims, causes of action, fines, penalties, liabilities (including strict
liability), judgments, costs and expenses (including, without limitation,
attorneys' fees, court costs, and the costs set forth in Section 9.06) resulting
from any failure by Tenant to comply with any laws, ordinances, rules,
regulations, and other governmental requirements.

           7.03  Required Alterations.  Tenant shall, at Tenant's sole cost
                 --------------------                                      
and expense, make any additions, changes, improvements or alterations to each
Leased Property, including structural alterations, which may be required by any
governmental authorities, including those required to continue to satisfy any
licensure requirements related to the operation of the Business, whether such
changes are required by Tenant's use, changes in the law, ordinances, or
governmental regulations, defects existing as of the date of this Lease, or any
other cause whatsoever. Tenant shall provide thirty (30) days prior written
notice to Landlord of any changes to a Leased Property pursuant to this Section
7.03 which involve changes to the structural integrity thereof or materially
affect the operational capabilities thereof. All such additions, changes,
improvements or alterations shall be deemed to be a Tenant Improvement and shall
comply with all laws relating to such alterations and with the provisions of
Section 8.01.

           7.04  Mechanics' Liens.  Tenant shall have no authority to permit
                 ----------------                                           
or create a lien against Landlord's interest in any Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in each Leased Property against liens. Tenant hereby agrees
to defend, indemnify, and hold Landlord harmless from and against any mechanics'
liens against any Leased Property by reason of work, labor services or materials
supplied or claimed to have been supplied on or to such Leased Property. Tenant
shall immediately remove, 

                                      21
<PAGE>
 
bond-off, or otherwise obtain the release of any mechanics' lien filed against
any Leased Property. Tenant shall pay all expenses in connection therewith,
including without limitation, damages, interest, court costs and reasonable
attorneys' fees.

           7.05  Replacements of Fixtures.  Tenant shall not remove Fixtures
                 -------------------------                                  
from any Leased Property except to replace such Fixtures with other items used
for similar or analogous purposes, which replacement items are of equal or
greater quality and value. Items being replaced by Tenant may be removed and
shall become the property of Tenant and items replacing the same shall be and
remain the property of Landlord. Tenant shall execute, upon written request from
Landlord, any and all documents necessary to evidence Landlord's ownership of
the Fixtures and replacements therefor. Tenant may not finance replacements by
security agreement or equipment lease unless: (a) Landlord has consented to the
terms and conditions of the equipment lease or security agreement; (b) the
equipment lessor or lender has entered into a non-disturbance agreement with
Landlord upon terms and conditions acceptable to Landlord, including without
limitation (i) Landlord shall have the right (but not the obligation) to assume
such security agreement or equipment lease upon the occurrence of an Event of
Default by Tenant hereunder; (ii) the equipment lessor or lender shall promptly
notify Landlord of any default by Tenant under the equipment lease or security
agreement and give Landlord a reasonable opportunity to cure such default; and
(iii) Landlord shall have the right to assign its rights under the equipment
lease, security agreement, or non-disturbance agreement; (c) the equipment
lessor or lender shall subordinate its security interest to the security
interest of any of Landlord's lessors, mortgagors or lenders, whether now
created or hereafter existing, and (d) Tenant shall, within ten (10) days after
receipt of an invoice from Landlord, reimburse Landlord for all costs and
expenses incurred in reviewing and approving the equipment lease, security
agreement, and non-disturbance agreement, including without limitation,
reasonable attorneys' fees and costs.

           7.06  Encroachments; Restrictions.  If any of the Improvements shall,
                 ---------------------------
at any time, encroach upon any property, street or right-of-way adjacent to a
Leased Property, or shall violate the agreements or conditions contained in any
restrictive covenant or other agreement affecting a Leased Property, other than
one which is created or consented to by Landlord without Tenant's consent, or
shall impair the rights of others under an easement or right-of-way to which a
Leased Property is subject, other than one which is created or consented to by
Landlord without Tenant's consent, then promptly upon the request of Landlord or
at the request of any person affected by any such encroachment, violation or
impairment, Tenant shall, at its expense, subject to its right to contest the
existence of any encroachment, violation or impairment and in such case, in the
event of an adverse final determination, either (a) obtain valid and effective
waivers or settlements of all claims, liabilities and damages resulting from
each such encroachment, violation or impairment, whether the same shall affect
Landlord or Tenant or (b) make such changes in the Improvements and take such
other actions as shall be necessary to remove such encroachment and to end such
violation or impairment, including, if necessary, the alteration of
improvements. Any such alteration shall be made in conformity with the
requirements of Article VIII.

                                      22
<PAGE>
 
                                 ARTICLE VIII
                   ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
                  CAPITAL ADDITIONS TO THE LEASED PROPERTIES

           8.01  Tenant's Right to Construct.  As to each Leased Property,
                 ---------------------------                              
during the Term of this Lease or any Extension Term, as the case may be, so long
as no Event of Default shall have occurred and be continuing as to such Leased
Property, Tenant may make Capital Additions (as defined herein), or other
alterations, additions, changes and/or improvements to such Leased Property as
deemed necessary or useful to operate such Leased Property for Tenant's Business
(individually, a "Tenant Improvement," or collectively, the "Tenant
Improvements"). "Capital Additions" shall mean the construction of one or more
new buildings or one or more additional structures annexed to any portion of any
of the Improvements on a Leased Property, which are constructed on any parcel or
portion of the Land comprising a Leased Property, including the construction of
a new floor, or the repair, replacement, restoration, remodeling or rebuilding
of the Improvements or any portion thereof on a Leased Property which are not
normal, ordinary or recurring to maintain such Leased Property. Except as
otherwise agreed to by Landlord herein or otherwise in writing, any such Tenant
Improvement or Capital Addition shall be made at Tenant's sole expense and shall
become the property of Landlord upon termination of this Lease. Unless made on
an emergency basis to prevent injury to person or property, as to each Leased
Property, Tenant must obtain Landlord's prior written approval, such approval
not to be unreasonably withheld or delayed, for any Capital Addition or for any
Tenant Improvement which is not a Capital Addition and which has a cost of more
than One Hundred Thousand Dollars ($100,000) or a cost which, when aggregated
with the costs of all such Tenant Improvements on such Leased Property in a
given Lease Year, would cause the total costs of all such Tenant Improvements on
such Leased Property to exceed Two Hundred Fifty Thousand Dollars ($250,000).
Additionally, in connection with any Tenant Improvement, including any Capital
Addition, Tenant shall provide Landlord with copies of any plans and
specification therefor, Tenant's budget relating thereto, any required
governmental permits or approvals, any construction contracts or agreements
relating thereto, and any other information relating to such Tenant Improvement
as Landlord shall reasonably request.

           8.02  Scope of Right.  Subject to Section 8.01 herein and Section
                 --------------                                             
7.03 concerning required alterations, at Tenant's cost and expense, Tenant shall
have the right to:

                 (a)   seek any governmental approvals, including building
                       permits, licenses, conditional use permits and any
                       certificates of need that Tenant requires to construct
                       any Tenant Improvement;

                 (b)   erect upon each Leased Property such Tenant Improvements
                       as Tenant deems desirable;

                                      23
<PAGE>
 
                 (c)   make additions, alterations, changes and improvements in
                       any Tenant Improvement so erected; and

                 (d)   engage in any other lawful activities that Tenant
                       determines are necessary or desirable for the development
                       of each Leased Property in accordance with the Tenant's
                       Business;

provided, however, Tenant shall not make any Tenant Improvement which would, in
Landlord's reasonable judgment, impair the value of the Leased Property or the
Tenant's Business without Landlord's prior written consent and provided, further
that Tenant shall not be permitted to create a mortgage, lien or any other
encumbrance on any Leased Property without Landlord's prior written consent.

           8.03  Cooperation of Landlord.  Landlord shall cooperate with Tenant
                 -----------------------
and take such actions, including the execution and delivery to Tenant of any
applications or other documents, reasonably requested by Tenant in order to
obtain any governmental permits, licenses or approvals sought by Tenant to
construct any Tenant Improvement within fifteen (15) business days following the
later of: (a) the date Landlord receives Tenant's request or (b) the date of
delivery of any such application or document to Landlord; provided, the taking
of such action by Landlord, including the execution of said applications or
documents, shall be without cost to Landlord (or if there is a cost to Landlord,
such cost shall be reimbursed by Tenant), shall not cause Landlord to be in
violation of any law, ordinance or regulation, and shall not be deemed a waiver
by Landlord of any of its rights or of any of Tenant's obligations, including
but not limited to indemnification.

           8.04  Commencement of Construction.  Tenant agrees that:
                 ----------------------------                      

                 (a)   Tenant shall diligently seek all governmental approvals
                       relating to the construction of any Tenant Improvement;

                 (b)   Once Tenant begins the construction of any Tenant
                       Improvement, Tenant shall diligently oversee any such
                       construction to completion in accordance with applicable
                       insurance requirements and the laws, rules and
                       regulations of all governmental bodies or agencies having
                       jurisdiction over the subject Leased Property;

                 (c)   Landlord shall have the right at any time and from time
                       to time to post and maintain upon each Leased Property
                       such notices as may be necessary to protect Landlord's
                       interest from mechanics' liens, materialmen's liens or
                       liens of a similar nature;

                 (d)   Tenant shall not suffer or permit any mechanics' liens or
                       any other claims or demands arising from the work of
                       construction of any Tenant Improvement to be enforced
                       against any Leased Property or 

                                      24
<PAGE>
 
                       any part thereof, and Tenant agrees to hold Landlord, its
                       agents and employees and said Leased Property free and
                       harmless from all demands, claims, causes of action,
                       fines, penalties, damages (including punitive and
                       consequential damages), losses, liabilities (including
                       strict liability), judgments, costs and expenses
                       (including, without limitation, attorneys' fees, court
                       costs, and the costs set forth in Section 9.06) incurred
                       in connection with or arising therefrom;

                 (e)   All work shall be performed in a satisfactory and
                       workmanlike manner consistent with standards in the
                       industry; and

                 (f)   Subject to Section 8.08 in the case of Capital Additions,
                       Tenant shall not secure any construction or other
                       financing for the Tenant Improvements which is secured by
                       a portion of any Leased Property without Landlord's prior
                       written consent, and any such financing (i) shall not
                       exceed the cost of the Tenant Improvements, (ii)
                       [intentionally omitted] (iii) shall be limited solely to
                       Tenant's interest in the subject Leased Property.

           8.05  Rights in Tenant Improvements.  Notwithstanding anything to the
                 -----------------------------
contrary in this Lease, all Tenant Improvements existing on the Leased Property
or constructed upon each Leased Property pursuant to Section 8.01, any and all
subsequent additions thereto and alterations and replacements thereof shall be
the sole and absolute property of Tenant during the Term and any Extension Term,
as the case may be, of this Lease (in respect of such Leased Property). Upon the
expiration or early termination of this Lease in respect of a Leased Property,
all such Tenant Improvements located thereon shall become the property of
Landlord. Without limiting the generality of the foregoing, prior to the
expiration or early termination of this Lease in respect of a Leased Property,
Tenant shall be entitled to all federal and state income tax benefits associated
with all Tenant Improvements located on such Leased Property.

           8.06  Personal Property.  Tenant shall install, place, and use on
                 -----------------                                          
each Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures as may be required or as Tenant
may, from time to time, deem necessary or useful to operate such Leased Property
in the operation of the Business.

           8.07  Requirements for the Tenant's Personal Property.  Tenant shall
                 -----------------------------------------------
comply with all of the following requirements in connection with the Tenant's
Personal Property:

                 (a)   RESERVED.

                 (b)   The Tenant's Personal Property shall be installed in a
                       good and workmanlike manner, in compliance with all
                       governmental laws, 

                                      25
<PAGE>
 
                       ordinances, rules, and regulations and all insurance
                       requirements, and be installed free and clear of any
                       mechanics' liens.

                 (c)   Tenant shall, at Tenant's sole cost and expense,
                       maintain, repair, and replace the Tenant's Personal
                       Property.

                 (d)   Tenant shall, at Tenant's sole cost and expense, keep the
                       Tenant's Personal Property insured against loss or damage
                       by fire, vandalism and malicious mischief, sprinkler
                       leakage, and other physical loss perils commonly covered
                       by fire and extended coverage, boiler and machinery, and
                       difference in conditions insurance (which insurance shall
                       meet the requirements of Section 4.03 hereof) in an
                       amount not less than the full replacement cost thereof or
                       such other amount as appears on a schedule submitted by
                       Tenant to Landlord, which schedule shall be subject to
                       Landlord's approval, and Tenant shall use the proceeds
                       from any such policy for the repair and replacement of
                       such items of Tenant's Personal Property; provided,
                       however, that if Landlord fails to object to the schedule
                       so submitted by Tenant within five (5) business days of
                       Landlord's receipt of such schedule, Landlord's approval
                       of such schedule shall be deemed given.

                 (e)   Tenant shall pay all Impositions and other taxes
                       applicable to Tenant's Personal Property.

                 (f)   If Tenant's Personal Property is damaged or destroyed by
                       fire or otherwise, Tenant shall promptly repair or
                       replace Tenant's Personal Property unless Tenant is
                       entitled to and elects to terminate the Lease pursuant to
                       Section 10.05.

                 (g)   As to each Leased Property, unless an Event of Default
                       (or any event which, with the giving of notice or lapse
                       of time, or both, would constitute an Event of Default)
                       has occurred and remains uncured beyond any applicable
                       grace period, Tenant may remove Tenant's Personal
                       Property from such Leased Property from time to time
                       provided that: (i) the items removed are not required or
                       necessary to operate the Business on such Leased Property
                       (unless such items are being replaced by Tenant) and (ii)
                       Tenant promptly repairs any damage to such Leased
                       Property resulting from the removal of Tenant's Personal
                       Property.

                 (h)   As to each Leased Property, Tenant shall remove all of
                       Tenant's Personal Property upon the termination or
                       expiration of the Lease and shall promptly repair any
                       damage to such Leased Property resulting 

                                      27
<PAGE>
 
                       from the removal thereof to the reasonable satisfaction
                       of Landlord; provided, however, if Tenant fails to remove
                       Tenant's Personal Property from such Leased Property
                       within thirty (30) days after the termination or
                       expiration of this Lease with respect thereto, then
                       Tenant shall be deemed to have abandoned such items of
                       Tenant's Personal Property, all of which shall become the
                       property of Landlord, and Landlord may remove, store and
                       dispose of such property and Tenant shall have no claim
                       or right against Landlord for such property or the value
                       thereof regardless of the disposition thereof by
                       Landlord. Tenant shall pay Landlord, upon demand, all
                       expenses incurred by Landlord in removing, storing, and
                       disposing of such items of Tenant's Personal Property and
                       repairing any damage caused by such removal. Tenant's
                       obligations hereunder shall survive the termination or
                       expiration of this Lease as to such Leased Property.

                 (i)   Tenant shall perform its obligations under any equipment
                       lease or security agreement for Tenant's Personal
                       Property.

           8.08  Financings of Capital Additions to a Leased Property.  Landlord
                 ----------------------------------------------------
may, but shall be under no obligation to, provide or arrange construction,
permanent or other financing for any Capital Addition proposed to be made to a
Leased Property by Tenant. Any financing so provided by Landlord shall be made
in accordance with, and subject to, a written Addendum to this Lease.


                                  ARTICLE IX
                             DEFAULTS AND REMEDIES

           9.01  Events of Default.  The occurrence of any one or more of the
                 -----------------                                           
following shall be an event of default ("Event of Default") hereunder:

                 (a)   Tenant fails to pay in full any installment of Rent, or
                       any other monetary obligation payable by Tenant to
                       Landlord hereunder, within ten (10) days after the due
                       date thereof and after written notice thereof and an
                       opportunity to cure within a ten (10) day period after
                       such notice is given to Tenant by Landlord. In the event
                       of Tenant's failure to make timely payment of such
                       obligations two (2) times during any twelve (12) month
                       period, each subsequent such failure within the twelve
                       (12) months immediately following such second failure
                       shall immediately constitute an Event of Default, and
                       Landlord shall not be required to provide notice thereof,
                       nor shall Tenant have any further opportunity to cure
                       such failure;

                                      27
<PAGE>
 
                 (b)   Tenant fails to observe and perform any covenant (other
                       than the covenant in respect of insurance set forth in
                       Article IV), condition or agreement hereunder to be
                       performed by Tenant (except those described in Section
                       9.01(a) of this Lease) and such failure continues for a
                       period of twenty (20) days after written notice thereof
                       is given to Tenant by Landlord; or if, by reason of the
                       nature of such default, the same cannot with due
                       diligence be remedied within said twenty (20) days, such
                       failure will not be deemed to continue if Tenant proceeds
                       promptly and with due diligence to remedy the failure and
                       diligently completes the remedy thereof; provided,
                       however, said cure period will not extend beyond forty
                       (40) days if the facts or circumstances giving rise to
                       the default are creating a further harm to Landlord or
                       the subject Leased Property and Landlord makes a good
                       faith determination that Tenant is not undertaking
                       remedial steps under the terms of this Lease;

                 (c)   If Tenant: (i) admits in writing its inability to pay its
                       debts generally as they become due; (ii) files a petition
                       in bankruptcy or a petition to take advantage of any
                       insolvency act; (iii) makes an assignment for the benefit
                       of its creditors; (iv) is unable to pay its debts as they
                       mature; (v) consents to the appointment of a receiver of
                       itself or of the whole or any substantial part of its
                       property; or (vi) files a petition or answer seeking
                       reorganization or arrangement under the federal
                       bankruptcy laws or any other applicable law or statute of
                       the United States of America or any state thereof;

                 (d)   If Tenant, on insolvency proceedings or on a petition in
                       bankruptcy filed against it, is adjudicated as bankrupt
                       or a court of competent jurisdiction enters an order or
                       decree appointing, without the consent of Tenant, a
                       receiver of Tenant of the whole or substantially all of
                       its property, or approving a petition filed against it
                       seeking reorganization or arrangement of Tenant under the
                       federal bankruptcy laws or any other applicable law or
                       statute of the United States of America or any state
                       thereof, and such judgment, order or decree is not
                       vacated, dismissed or set aside within sixty (60) days
                       from the date of the entry thereof;

                 (e)   If the estate or interest of Tenant in a Leased Property
                       or any part thereof is levied upon or attached in any
                       proceeding and the same is not vacated or discharged
                       within fifteen (15) days after commencement thereof
                       (unless Tenant is contesting such lien or attachment in
                       accordance with this Lease) or if such estate or interest

                                      28
<PAGE>
 
                       of Tenant is assigned, conveyed or involuntarily
                       transferred in violation of this Lease;

                 (f)   Any representation or warranty of a material nature made
                       by Tenant on behalf of itself or an Affiliate in this
                       Lease or in any certificate, demand or request made
                       pursuant hereto proves to be incorrect, in any material
                       respect and is not cured within the time specified in
                       Section 9.01(b) hereto, as of the date of issuance or
                       making thereof and Landlord notifies Tenant of its
                       knowledge of such incorrectness within six months of
                       discovery. Tenant shall not be deemed to be in breach of
                       such representation or warranty if the representation or
                       warranty has been made true by Tenant's cure as of the
                       time of the cure;

                 (g)   Conviction of Tenant or an Affiliate of a crime or
                       offense constituting a felony in the jurisdiction in
                       which committed or under federal law which conviction
                       results in the termination of the franchise.

                 (h)   Termination or relinquishment of the franchise or license
                       pursuant to which Tenant or an Affiliate conducts
                       business on or from any Leased Property, provided that
                       such event shall not constitute an Event of Default if
                       (i) no other Event of Default enumerated in this Section
                       9.01 shall occur and be continuing, and (ii) at a date no
                       later than twenty-four (24) months following such date of
                       termination or relinquishment, Tenant or an Affiliate has
                       entered into written new or amended franchises or
                       licenses for operation of motor vehicle retail or motor
                       vehicle related businesses at such Leased Property
                       satisfactory to Landlord in its discretion applying
                       commercially reasonable standards;

                 (i)   [Intentionally Omitted]

                 (j)   A final, non-appealable judgment or judgments for the
                       payment of money not fully covered (excluding
                       deductibles) by insurance is rendered against Tenant and
                       the same remains undischarged, unvacated, unbonded,
                       unappealed or unstayed for a period of thirty (30)
                       consecutive days;

                 (k)   Tenant shall fail to observe the covenant in respect to
                       insurance under Article IV provided Landlord shall have
                       provided notice of such failure to Tenant and Tenant
                       shall have failed to cure such failure within three (3)
                       business days of such notice; or

                                      29
<PAGE>
 
                    (l)   Except contemporaneously with or after the effective
                          date of a permitted assignment meeting the
                          requirements of Article XIII, if Tenant is liquidated
                          or dissolved, or begins proceedings toward liquidation
                          or dissolution, or in any manner permits the sale or
                          divestiture of substantially all of its assets.

          9.02      Remedies.  To the extent an Event of Default is applicable
                    --------                                                  
only to a specific Leased Property or specific Leased Properties (in accordance
with Section 9.01 above), the remedies set forth herein shall be exercisable
solely with respect to such Leased Property or Leased Properties, and shall not
be exercisable with respect to any other Leased Property.  To the extent an
Event of Default constitutes an Event of Default as to all of the Leased
Properties (in accordance with Section 9.01 above), the remedies set forth
herein shall be exercisable with respect to all of the Leased Properties.
Subject to the foregoing provisions, Landlord may exercise any one or more of
the following remedies upon the occurrence of an Event of Default:

                    (a)   Landlord may terminate this Lease, exclude Tenant from
                          possession of the subject Leased Property and use
                          reasonable efforts to lease the subject Leased
                          Property to others. If this Lease is terminated
                          pursuant to the provisions of this subparagraph (a)
                          with respect to one or more, but less than all, of the
                          Leased Properties identified on Schedule A hereto,
                          Tenant will remain liable to Landlord for the Rent for
                          all of the Leased Properties identified on Schedule A
                          and other sums then due and for the balance of the
                          Term as if the Lease had not been terminated with
                          respect to the subject Leased Property, less the net
                          proceeds, if any, of any re-letting of the subject
                          Leased Property by Landlord subsequent to such
                          termination, after deducting all Landlord's expenses
                          in connection with such re-letting, including without
                          limitation, the expenses set forth in this Section
                          9.02. Notwithstanding the termination of this Lease
                          with respect to a subject Leased Property, Tenant
                          shall pay to Landlord all amounts due as Rent, and
                          such other amounts then due, under this Lease on the
                          days that such Rent and such other amounts become due
                          and payable as required by this Lease.

                    (b)   Without demand or notice, Landlord may re-enter and
                          take possession of the subject Leased Property or any
                          part thereof; and repossess such Leased Property as of
                          Landlord's former estate; and expel Tenant and those
                          claiming through or under Tenant from such Leased
                          Property; and, remove the effects of both or either,
                          without being deemed guilty of any manner of trespass
                          and without prejudice to any remedies for arrears of
                          Rent or preceding breach of covenants or conditions.
                          If Landlord elects to re-enter, as provided in this
                          paragraph (b) or if Landlord takes possession of such
                          Leased Property 

                                      30
<PAGE>
 
                          pursuant to legal proceedings or pursuant to any
                          notice provided by law, Landlord may, from time to
                          time, without terminating any portion of this Lease,
                          re-let such Leased Property or any part of such Leased
                          Property, either alone or in conjunction with other
                          portions of the Improvements of which such Leased
                          Property are a part, in Landlord's name but for the
                          account of Tenant, for such term or terms (which may
                          be greater or less than the period which would
                          otherwise have constituted the balance of the Term of
                          this Lease) and on such terms and conditions (which
                          may include concessions of free rent, and the
                          alteration and repair of such Leased Property) as
                          Landlord, in its uncontrolled discretion, may
                          determine. Landlord may collect and receive the Rents
                          for such Leased Property. Landlord will not be
                          responsible or liable for any failure to re-let such
                          Leased Property, or any part of such Leased Property,
                          or for any failure to collect any Rent due upon such
                          re-letting; provided that Landlord has used reasonable
                          efforts to re-let. No such re-entry or taking
                          possession of such Leased Property by Landlord will be
                          construed as an election on Landlord's part to
                          terminate this Lease unless a written notice of such
                          intention is given to Tenant. No notice from Landlord
                          under this Lease or under a forcible entry and
                          detainer statute or similar law will constitute an
                          election by Landlord to terminate this Lease unless
                          such notice specifically says so. Landlord reserves
                          the right following any such re-entry or re-letting,
                          or both, to exercise its right to terminate this Lease
                          by giving Tenant such written notice, and, in that
                          event such Lease will terminate as specified in such
                          notice.

                    (c)   If Landlord elects to take possession of a Leased
                          Property according to subparagraph (b) of this Section
                          9.02 without terminating this Lease, Tenant will pay
                          Landlord (A) the Rent and other sums which would be
                          payable under this Lease with respect to such Leased
                          Property if such repossession had not occurred, less
                          (B) the net proceeds, if any, of any re-letting of
                          such Leased Property after deducting all of Landlord's
                          expenses incurred in connection with such re-letting,
                          including without limitation, all repossession costs,
                          brokerage commissions, legal expense, attorneys' fees,
                          expense of employees, alteration, remodeling, repair
                          costs, and expense of preparation for such re-letting.
                          If, in connection with any re-letting, any resulting
                          lease term for the subject Leased Property extends
                          beyond the existing Term or Extension Term, as the
                          case may be, or such Leased Property covered by such
                          re-letting includes areas which are not part of such
                          Leased Property, a fair apportionment of the Rent
                          received from such re-letting and the expenses
                          incurred in connection with such re-letting will be
                          made in determining the net proceeds

                                      31
<PAGE>
 
                          received from such re-letting. In addition, in
                          determining the net proceeds from such re-letting, any
                          rent concessions will be apportioned over the term of
                          the new lease. Tenant will pay such amounts to
                          Landlord monthly on the days on which the Rent and all
                          other amounts owing under this Lease would have been
                          payable if possession had not been retaken, and
                          Landlord will be entitled to receive the rent and
                          other amounts from Tenant on each such day.
                          Notwithstanding anything herein to the contrary,
                          Landlord, at its option, may collect and apply any
                          Rent received from such re-letting in accordance
                          herewith and in such case shall remit any balance
                          thereof to Tenant. Landlord shall incur no liability
                          or obligation to Tenant arising out of the collection
                          or application of Rent by Landlord hereunder. Landlord
                          shall use reasonable efforts to re-let.

                    (d)   Landlord may re-enter the applicable Leased Property
                          and have, repossess and enjoy such Leased Property as
                          if this Lease had not been made, and in such event,
                          Tenant and its successors and assigns shall remain
                          liable for any contingent or unliquidated obligations
                          or sums owing at the time of such repossession.

                    (e)   Landlord may take whatever action at law or in equity
                          as may appear necessary or desirable to collect the
                          Rent and other amounts payable hereunder with respect
                          to the subject Leased Property then due and thereafter
                          to become due, or to enforce performance and
                          observance of any obligations, agreements or covenants
                          of Tenant under this Lease.

          9.03      Right of Set-Off.  Landlord may, and is hereby authorized by
                    -----------------                                           
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord in respect of a Leased
Property, including all sums held in any escrow for Impositions, any
indebtedness of Landlord to Tenant, and any claims by Tenant against Landlord,
against any obligations of Tenant under this Lease in respect of such Leased
Property and against any claims by Landlord against Tenant, whether or not
Landlord has exercised any other remedies hereunder. Landlord shall set-off and
apply such sums first, to delinquent real estate taxes, unless such taxes are
being protested in good faith and no lien has attached to any Leased Property
with respect thereto, second, to currently due and owing real estate taxes, and
next, to other Tenant's obligations in the order which Landlord may determine.
The rights of Landlord under this Section are in addition to any other rights
and remedies Landlord may have against Tenant.

          9.04      Performance of Tenant's Covenants.  Landlord may, without
                    ---------------------------------                        
waiving or releasing any obligation of Tenant, and without waiving or releasing
any obligation or default, perform any obligation of Tenant which Tenant has
failed to perform within fifteen (15) business days after Landlord has sent a
written notice to Tenant informing it of its specific failure (provided 

                                      32
<PAGE>
 
no such notice shall be required if Landlord has previously notified Tenant of
such failure under the provisions of Section 9.01). In the event Landlord deems,
in its discretion, that Tenant's failure to perform such obligation has given
rise to an emergency situation, Landlord may perform such obligation without
waiving or releasing any obligation of Tenant, and without waiving or releasing
any obligation or default; provided, however, that Landlord shall notify Tenant
of such performance as soon as it is reasonably practicable to do so. Tenant
shall reimburse Landlord on demand, as Additional Rent, for any expenditures
thus incurred by Landlord and shall pay interest thereon at the New York Prime
Rate.

          9.05      Late Charge.  Any payment not made by Tenant for more than
                    -----------                                               
five (5) business days after the due date shall be subject to a late charge
payable by Tenant as Rent of four percent (2%) of the amount of such overdue
payment.   Notwithstanding the foregoing, in the event that Tenant's payment is
not made more than five (5) business days after the due date more than two (2)
times during any twelve (12) month period, any such subsequent overdue payments
within the twelve (12) months immediately following such second failure shall be
subject to a late charge payable by Tenant as Rent of seven percent (7%) of the
amount of such overdue payment.

          9.06      Litigation; Attorneys' Fees. Within ten (10) days after
                    ----------------------------                            
Tenant has knowledge of any litigation or other proceeding related to or arising
out of this Agreement or the Leased Property in which claims are asserted in an
amount in excess of $50,000, that (1) may be instituted against Tenant, (2) may
be instituted against any Leased Property to secure or recover possession
thereof, or (3) may affect the title to or the interest of Landlord in any
Leased Property, Tenant shall give written notice thereof to Landlord.  In the
event that Landlord determines that Tenant has failed to give adequate
cooperation or information with respect to any such litigation, investigation,
receivership, administrative, bankruptcy, insolvency or other similar
proceeding, Landlord may, after notice to Tenant, undertake such investigation
or proceeding and Tenant shall pay all reasonable costs and expenses (the
"Costs") related thereto that are incurred by Landlord, whether or not Landlord
has received notice from Tenant of such investigation or proceeding, and whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, which Costs shall include, without limitation:  (a) the fees,
expenses, and costs of any litigation, investigation, receivership,
administrative, bankruptcy, insolvency or other similar proceeding; (b)
reasonable attorney, paralegal, consulting and witness fees and disbursements;
and (c) the expenses, including, without limitation, lodging, meals, and
transportation, of Landlord and its employees, agents, attorneys, and witnesses
in investigating or preparing for litigation, administrative, bankruptcy,
insolvency or other similar proceedings and attendance at hearings, depositions,
and trials in connection therewith.  Within ten (10) days of Landlord's
presentation of an invoice of Costs incurred by Landlord pursuant to the
preceeding sentence or otherwise incurred by Landlord in enforcing or preserving
Landlord's rights under this Lease, whether or not an Event of Default has
actually occurred or has been declared and thereafter cured, Tenant shall pay
all such Costs.  All such Costs as incurred shall be deemed to be Additional
Rent under this Lease.

                                      33
<PAGE>
 
          9.07      Remedies Cumulative.  The remedies of Landlord herein are
                    -------------------                                      
cumulative to and not in lieu of any other remedies available to Landlord at law
or in equity.  The use of, or failure to use, any one remedy shall not be taken
to exclude or waive the right to use any other remedy.

          9.08      Escrows and Application of Payments.  As security for the
                    -----------------------------------                      
performance of its obligations hereunder, Tenant hereby assigns to Landlord all
its right, title and interest in and to all monies escrowed with Landlord under
this Lease and all deposits with utility companies, taxing authorities, and
insurance companies; provided, however, that Landlord shall not exercise its
rights hereunder with respect to any Leased Property until an Event of Default
has occurred in respect of such Leased Property.  Any payments received by
Landlord under any provisions of this Lease during the existence, or continuance
of an Event of Default shall be applied to Tenant's obligations, first, to
delinquent real estate taxes, unless such taxes are being protested in good
faith and no lien has attached to any Leased Property with respect thereto,
second, to currently due and owing real estate taxes, and next, to other
Tenant's obligations in the order which Landlord may determine.

          9.09      Power of Attorney.  Tenant hereby irrevocably and
                    -----------------                                
unconditionally appoints Landlord, or Landlord's authorized officer, agent,
employee or designee, as Tenant's true and lawful attorney-in-fact, to act,
after an Event of Default, for Tenant in Tenant's name, place, and stead, and
for Tenant's and Landlord's use and benefit, to execute, deliver and file all
applications and any and all other necessary documents or things, to effect a
transfer, reinstatement, renewal and/or extension of any and all licenses and
other governmental authorizations issued to Tenant in connection with Tenant's
operation of the Leased Properties, and to do any and all other acts incidental
to any of the foregoing.  Tenant irrevocably and unconditionally grants to
Landlord as its attorney-in-fact full power and authority to do and perform,
after an Event of Default, every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof.  This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of Tenant's obligations hereunder.


                                   ARTICLE X
                            DAMAGE AND DESTRUCTION

          10.01     General.  Tenant shall notify Landlord if any Leased
                    -------                                             
Property is damaged or destroyed by reason of fire or any other cause.  Tenant
shall promptly repair, rebuild, or restore such Leased Property, at Tenant's
expense, so as to make such Leased Property at least equal in value to such
Leased Property existing immediately prior to such occurrence and as nearly
similar to it in character as is practicable and reasonable.  Before beginning
such repairs or rebuilding, or executing any contracts in connection with such
repairs or rebuilding, Tenant will submit for Landlord's approval, which
approval Landlord will not unreasonably withhold or delay, complete and detailed
plans and specifications for such repairs or rebuilding.  Promptly after
receiving Landlord's approval of the plans and specifications, Tenant will begin
such repairs or rebuilding and will oversee the 

                                      34
<PAGE>
 
repairs and rebuilding to completion with diligence, subject, however, to
strikes, lockouts, acts of God, embargoes, governmental restrictions, and other
causes beyond Tenant's reasonable control. Landlord will make available to
Tenant the net proceeds of any fire or other casualty insurance paid to Landlord
for such repair or rebuilding as the same progresses, after deduction of any
costs of collection, including attorneys' fees. Payment will be made against
properly certified vouchers of a competent architect in charge of the work and
approved by Landlord. Prior to commencing the repairing or rebuilding, Tenant
shall deliver to Landlord for Landlord's approval a schedule setting forth the
estimated monthly draws for such work. Landlord will contribute to such payments
out of the insurance proceeds an amount equal to the proportion that the total
net amount received by Landlord from insurers bears to the total estimated cost
of the rebuilding or repairing, multiplied by the payment by Tenant on account
of such work. Landlord may, however, withhold ten percent (10%) from each such
payment and shall disburse such amount after: (a) the work of repairing or
rebuilding is completed and proof has been furnished to Landlord that no lien or
liability has attached or will attach to such Leased Property or to Landlord in
connection with such repairing or rebuilding and (b) Tenant has obtained a
certificate of use and occupancy (or its functional equivalent) for the portion
of such Leased Property being repaired or rebuilt. Upon the completion of
rebuilding or repairing and the furnishing of such proof, the balance of the net
proceeds of such insurance payable to Tenant on account of such repairs or
rebuilding will be paid to Tenant. Tenant will obtain and deliver to Landlord a
temporary or final certificate of occupancy before such Leased Property is
reoccupied for any purpose. Tenant shall complete such repairs or rebuilding
free and clear of mechanic's or other liens, and in accordance with the building
codes and all applicable laws, ordinances, regulations, or orders of any state,
municipal, or other public authority affecting the repairs or rebuilding, and
also in accordance with all requirements of the insurance rating organization,
or similar body. Any remaining proceeds of insurance after such restoration will
be Tenant's property.

          10.02     Landlord's Inspection.  During the progress of such repairs
                    ----------------------                                     
or rebuilding, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
repairs or rebuilding. Tenant will keep all plans, shop drawings, and
specifications available, and Landlord and its architects and engineers may
examine them at all reasonable times. If, during such repairs or rebuilding,
Landlord and its architects and engineers determine that the repairs or
rebuilding are not being done in accordance with the approved plans and
specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such repairs or rebuilding do not accord with the approved
plans and specifications. Upon the receipt of any such notice, Tenant will cause
corrections to be made to any deficiencies, omissions, or such other respect.
Tenant's obligations to supply insurance, according to Article IV, will be
applicable to any repairs or rebuilding under this Section 10.02.

          10.03     Landlord's Costs.  Tenant shall, within fifteen (15) days
                    ----------------                                         
after receipt of an invoice from Landlord, pay the reasonable costs, expenses,
and fees of any architect or engineer employed by Landlord to review any plans
and specifications and to supervise and approve any 

                                      35
<PAGE>
 
construction, or for any services rendered by such architect or engineer to
Landlord as contemplated by any of the provisions of this Lease, or for any
services performed by Landlord's attorneys in connection therewith; provided,
however, that Landlord will consult with Tenant and notify Tenant of the
estimated amount of such expenses.

          10.04     Rent Abatement.  In the event that the provisions of Section
                    --------------                                              
10.01 above shall become applicable as to any Leased Property, and subject to
the last sentence of this Section 10.04, the applicable Base Annual Rent shall
be abated or reduced proportionately during any period in which, by reason of
such damage or destruction, there is substantial interference with the operation
of the Business of Tenant in such Leased Property, having regard to the extent
to which Tenant may be required to discontinue any Business on such Leased
Property, and such abatement or reduction shall continue for the period
commencing with such destruction or damage and ending with the substantial
completion by Tenant of such work or repair and/or reconstruction. In the event
that only a portion of any Leased Property is rendered untenantable or incapable
of such use, the Base Annual Rent payable hereunder in respect thereof shall be
reduced proportionately considering the extent to which the Tenant is unable to
practicably use the Leased Property for Business. Tenant shall use reasonably
diligent efforts to make the Leased Property tenantable and capable of such use.
Notwithstanding any other provision hereof, such rental abatement shall be
limited to the amount of any rental or Business interruption insurance proceeds
actually received by Landlord under Article IV.

          10.05     Substantial Damage During Lease Term.  Provided Tenant has
                    ------------------------------------                      
fully complied with Section 4.01 hereof (including actually maintaining in
effect rental value insurance or Business interruption insurance provided for in
clause (c) thereof) and has satisfied the conditions of the last sentence of
this Section 10.05, if, at any time during the Term or any Extension Term, as
the case may be, of this Lease, any Leased Property is so damaged by fire or
otherwise that it is Completely Destroyed or Partially Destroyed (as such terms
are hereafter defined), Tenant may, within one hundred and eighty (180) days
after such damage, give notice of its election to terminate this Lease with
respect to such Leased Property and, subject to the further provisions of this
Section, this Lease will cease with respect to such Leased Property on the
thirtieth (30th) day after the delivery of such notice. If the Lease is so
terminated, Tenant will have no obligation to repair, rebuild or replace such
Leased Property, and the entire insurance proceeds will belong to Landlord. If
the Lease is not so terminated, Tenant shall rebuild such Leased Property in
accordance with Section 10.01. If Tenant elects to terminate this Lease pursuant
to this Section 10.05, Tenant will pay (or cause to be paid) to Landlord, an
amount equal to the excess amount, if any, of the book value of the damaged
property as shown in Landlord's financial statements as of the date of such
termination, over the amount of all insurance proceeds received by Landlord. A
Leased Property shall be deemed to be "Completely Destroyed" if there is
sufficient damage to such Leased Property that Landlord and Tenant agree to its
classification as such. A Leased Property shall be deemed to be "Partially
Destroyed" if, as a result of damages to it, a substantial part of the Business
(as determined by a reasonable dealer in the trade, in light of standard trade
practices) cannot be conducted on it within one hundred and eighty (180) days of
the occurrence of such damages. In the event that Landlord and Tenant are unable
to agree to a determination of whether any Leased Property is Completely

                                      36
<PAGE>
 
Destroyed, Partially Destroyed or otherwise, such determination shall be made
pursuant to the Arbitration provisions set forth in Article XIV.

          10.06     Damage Near End of Term.  Notwithstanding any provisions of
                    -----------------------                                    
Sections 10.01 or 10.05 to the contrary, if damage to or destruction of any
Leased Property occurs during the last twenty-four (24) months of the Term, and
if such damage or destruction renders the Leased Property Completely Destroyed
or Partially Destroyed, either party shall have the right to terminate this
Lease as to such Leased Property by giving notice to the other within thirty
(30) days after the date of damage or destruction, in which event Landlord shall
be entitled to retain the insurance proceeds and Tenant shall pay to Landlord on
demand the amount of any deductible or uninsured loss arising in connection
therewith; provided, however, that any such notice given by Landlord shall be
void and of no force and effect if Tenant exercises an available option for an
Extension Term with respect to such Leased Property pursuant to provisions of
this Lease within ten (10) business days following receipt of such termination
notice.

          10.07     Risk of Loss.  Notwithstanding anything herein to the
                    ------------                                         
contrary, during the Term or any Extension Term, as the case may be, the risk of
loss of or decrease in the enjoyment and beneficial use of the Leased Properties
in consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise is assumed by Tenant, and Landlord
shall in no event be answerable or accountable therefor except in the case of
gross negligence, willful misconduct or breach of this Lease by Landlord
resulting in such damage or destruction. In addition, all risk of loss or
decrease in enjoyment and beneficial use in consequence of foreclosures,
attachments, levies or executions is assumed by Tenant except for foreclosure
due to Landlord's indebtedness.


                                  ARTICLE XI 
                                 CONDEMNATION

          11.01     Total Taking.  If at any time during the Term or any
                    ------------                                        
Extension Term, as the case may be, any Leased Property is totally and
permanently taken by right of eminent domain or by conveyance made in response
to the threat of the exercise of such right ("Condemnation"), this Lease shall
terminate as to such Leased Property on the Date of Taking (which shall mean the
date the condemning authority has the right to possession of the property being
condemned), and Tenant shall promptly pay all outstanding applicable Rent and
other charges through the date of termination, provided, however, this Lease
shall not so terminate if the Condemnation occurred due to the failure of Tenant
to maintain such Leased Property as required by Article VII hereof or other
applicable provisions hereof, whether or not such failure on the part of Tenant
constituted an Event of Default hereunder at the time of the Condemnation.
Landlord shall reimburse to Tenant any Rent paid in advance for any period after
the Condemnation.
 
          11.02     Partial Taking.  If a portion of a Leased Property is taken
                    --------------                                             
by Condemnation, this Lease shall remain in effect as to such Leased Property if
such Leased Property is not thereby

                                      37
<PAGE>
 
rendered Unsuitable for the continuation of Tenant's Business on that Leased
Property (which shall mean that such Leased Property is in such a state or
condition such that in the good faith judgment of Tenant, reasonably exercised,
it cannot be used on a commercially practicable basis in the operation of the
Business), but if such Leased Property is thereby rendered Unsuitable for the
continuation of Tenant's Business on that Leased Property, this Lease shall
terminate as to such Leased Property on the Date of Taking, provided such
Condemnation was not as a result of Tenant's failure to maintain such Leased
Property as provided for in Section 11.01.

          11.03     Restoration.  If there is a partial taking of any Leased
                    -----------                                             
Property and this Lease remains in full force and effect pursuant to Section
11.02, Landlord shall retain the amount of any Landlord Award (as hereafter
defined) received by Landlord, Landlord shall apply such Landlord Award to
accomplish all necessary restoration to the Leased Property, and any excess
after such application shall be retained by Landlord. If there is a partial
taking of any Leased Property and this Lease remains in full force and effect
pursuant to Section 11.02, Tenant shall retain the amount of any Tenant Award
(as hereafter defined) received by Tenant, Tenant shall apply such Tenant Award
to accomplish all necessary restoration of Tenant's property, and any excess
after such application shall be retained by Tenant. Notwithstanding anything in
this Section to the contrary, in the event that there is a partial taking of any
Leased Property and this Lease remains in full force and effect pursuant to
Section 11.02, and there is a single Award with respect to such partial taking,
then the Landlord and Tenant shall use their good faith efforts to determine the
proper apportionment of such Award (as hereafter defined) to restoration of
Landlord's and Tenant's respective properties. In the event that the parties are
unable to agree on such apportionment within thirty (30) days, the parties shall
submit to arbitration of an apportionment subject to the arbitration provisions
set forth in Article XIV.

          11.04     Landlord's Inspection.  During the progress of such
                    ---------------------                              
restoration, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
restoration. Tenant will keep all plans, shop drawings, and specifications
available, and Landlord and its architects and engineers may examine them at all
reasonable times. If, during such restoration, Landlord and its architects and
engineers determine that the restoration is not being done in accordance with
the approved plans and specifications, Landlord will give prompt notice in
writing to Tenant, specifying in detail the particular deficiency, omission, or
other respect in which Landlord claims such restoration does not accord with the
approved plans and specifications. Upon the receipt of any such notice, Tenant
will cause corrections to be made to any deficiencies, omissions, or such other
respect. Tenant's obligations to supply insurance, according to Article IV, will
be applicable to any restoration under this Section.

          11.05     Award Distribution.  In the event that there is a total or
                    ------------------                                        
partial Condemnation of a Leased Property then the Landlord and Tenant shall use
their good faith efforts to determine the proper apportionment of such Award to
Landlord's and Tenant's respective properties.  In the event that the parties
are unable to agree on such apportionment within thirty (30) days, the parties
shall submit to arbitration of an apportionment subject to the arbitration
provisions set forth in Article 

                                      38
<PAGE>
 
XIV. If there is a Condemnation which results in the termination of this Lease,
then only for purposes of determining an apportionment of the condemnation
proceeds, Tenant's leasehold interest shall not be construed to have terminated.

          11.06     Temporary Taking.  The taking of any Leased Property, or any
                    ----------------                                            
part thereof, by military or other public authority shall constitute a taking by
Condemnation only when the use and occupancy by the taking authority has
continued for longer than twenty four (24) months. During any such twenty-four
(24) month period, which shall be a temporary taking, all the provisions of this
Lease shall remain in full force and effect as to such Leased Property with no
abatement of rent payable by Tenant hereunder. In the event of any such
temporary taking, the entire amount of any such Award made for such temporary
taking allocable to the Term hereof, whether paid by way of damages, Rent or
otherwise, shall be paid to Tenant.


                                  ARTICLE XII
              REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS

          Tenant hereby represents, warrants and covenants to Landlord as
follows:

          12.01  Organization and Qualification.
                 ------------------------------ 

          (a)    Tenant is a Virginia corporation duly organized, validly
                 existing and in good standing under the laws of its state of
                 incorporation or organization, with all power and authority,
                 corporate or otherwise, necessary to: (i) enter into and
                 perform this Lease and (ii) own and lease its assets and
                 properties, and conduct its Business, as it is now being
                 conducted or proposed to be conducted. Tenant is duly qualified
                 as a foreign corporation or other entity, as the case may be,
                 to conduct its Business and own and lease its assets and
                 properties, and is in good standing, in each jurisdiction where
                 the character of its assets and properties owned or held under
                 lease or the nature of its Business makes such qualification
                 necessary or advisable, and is duly qualified and licensed
                 under all laws, regulations, ordinances or orders of public or
                 governmental authorities, or otherwise to carry on its Business
                 and own or lease its assets and properties in the places and in
                 the manner in which they are owned, leased or conducted or
                 proposed to be owned, leased or conducted, except where the
                 failure to be so organized, qualified and in good standing or
                 to have such authority, qualification or licensing could not
                 result in a Material Adverse Change. Complete and correct
                 copies of Tenant's Charter, as in effect on the date hereof,
                 and Tenant's by-laws, also as in effect on the date hereof,
                 have been delivered to Landlord.

          (b)    Each Affiliate that conducts operations or business on or from
                 any Leased Property, whether now or at any time in the future,
                 is duly organized, validly

                                      39
<PAGE>
 
                    existing and in good standing under the laws of its
                    organization, with all power and authority, corporate or
                    otherwise, necessary to own and lease its assets and
                    properties, and conduct its business, as it is now being
                    conducted or proposed to be conducted. Each Affiliate is
                    duly qualified as a foreign corporation or other entity, as
                    the case may be, to do business and own and lease its assets
                    and properties, and is in good standing, in each
                    jurisdiction where the character of its assets and
                    properties owned or held under lease or the nature of its
                    activities or business makes such qualification necessary or
                    advisable, and is duly qualified and licensed under all
                    laws, regulations, ordinances or orders or public or
                    governmental authorities or otherwise to carry on its
                    business and own or lease its assets and properties in the
                    places and in the manner in which they are owned, leased or
                    is conducted or proposed to be owned, leased or conducted,
                    except where the failure to be so organized, qualified and
                    in good standing or to have such authority, qualification or
                    licensing could not result in a Material Adverse Change.

          "Material Adverse Change" since a particular specified date, or a date
which may be specified from the circumstances existing immediately prior to the
happening of a specified event or occurrence, or, if no date or event is
specified, with reference to the most recent Annual Financial Statements
delivered pursuant to this Lease, means a material adverse change in the
Business, assets, properties, franchises, financial condition or income of
Tenant or the operations,  business, assets, properties, franchises, financial
condition, income or prospects of any Affiliate, whether or not such event or
occurrence is an Event of Default.

          "Affiliate" means with respect to any Person, (i) any Person that
holds direct or indirect beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of voting securities or other
voting interests representing at least five percent (5%) of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least five percent (5%) of the outstanding equity securities or
interests in a Person, or (ii) any Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such Person.

          A "Person" shall mean and include natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations, whether or not legal
entities, and governments and agencies and political subdivisions thereof.

          12.02  Material Agreements.  Schedule 12.02 is a complete list of all
                 -------------------                                       
agreements to which Tenant is a party that are material to the ownership and use
of the Leased Property or the operation of Tenant's Business (meaning (i) those
agreements that have a monetary obligation of at least $50,000 per year and are
not cancellable without penalty by Sellers upon notice of one year or less and
(ii) employment contracts of $100,000 or more per annum), and Tenant has
delivered to 

                                      40
<PAGE>

Landlord a copy of each of these agreements (including all exhibits, schedules
and amendments thereto).
 
          12.03  Changes in Condition.  Since the date of the latest Annual
                 ---------------------                                     
Financial Statements, no Material Adverse Change has occurred between such date
and the date hereof, and neither Tenant nor any Affiliate has entered into any
material transaction outside the ordinary course of its or their operations or
business, including the Business, except as set forth in Schedule 12.03 and the
matters contemplated by this Lease.

          12.04  Franchises, Licenses, etc.  Tenant and its subsidiaries own,
                 --------------------------                                  
or have sufficient interests in, all franchises, trademarks, trademark rights,
trade names, trade name rights, copyrights, licenses, permits, authorizations
and other rights as are necessary for the conduct of Tenant's Business and its
subsidiaries' businesses as now conducted or proposed to be conducted by Tenant
or any Affiliate, as well as rights under any agreement under which Tenant or
its subsidiaries has access to confidential information used by Tenant or its
subsidiaries in Tenants' Business or the businesses of its subsidiaries, as the
case may be (collectively, the "Intellectual Property").  All Intellectual
Property is in full force and effect in all material respects, and Tenant and
its subsidiaries are in substantial compliance with the foregoing without any
conflict with the valid rights of others, which has resulted, or could be
reasonably likely to result in any Material Adverse Change.  Neither Tenant nor
any Affiliate has violated, or received any communication that by conducting its
Business or any Affiliate's businesses, it or any Affiliate would violate any
franchises, licenses, patents, trademarks, service marks, trade names,
copyrights, trade secrets, proprietary rights or processes of any other Person
(as hereafter defined) nor is Tenant or any Affiliate aware of any such
violations.  No event has occurred which permits, or after notice or lapse of
time or both would permit, the revocation or termination of any such license,
franchise or other right or affect the rights of Tenant or any Affiliate so as
to result in or reasonably be likely to result in any Material Adverse Change.
There is no litigation or other proceeding or dispute or, to the knowledge of
Tenant or any Affiliate, threat thereof with respect to the validity or, where
applicable, the extension or renewal, of any of the foregoing which has
resulted, or could result, in any Material Adverse Change.

          12.05  Litigation.  No litigation, at law or in equity, or any
                 -----------                                            
proceeding before any court, board or other governmental or administrative
agency or any arbitrator or other forum of alternative dispute resolution is
pending or, to the knowledge of Tenant or any Affiliate, threatened which
involves any risk of any final judgment, order or liability which, after giving
effect to any applicable insurance, has resulted, or could result, in any
Material Adverse Change or which seeks to enjoin the execution and consummation
of this Lease and the performance of Tenant's obligations hereunder.  No
judgment, decree or order of any court, board or other governmental or
administrative agency or any arbitrator has been issued against or binds Tenant
or any Affiliate, which has resulted, or could result, in any Material Adverse
Change.

          12.06  Authorization and Enforceability.  Tenant has taken all
                 ---------------------------------                      
corporate or other action required to execute, deliver and perform this Lease.
This Lease constitutes the legal, valid and binding obligation of Tenant and is
enforceable against Tenant in accordance with its terms.

                                      41
<PAGE>
 
          12.07  No Legal Obstacle to Lease.  Neither the execution and delivery
                 ---------------------------                                    
of this Lease nor the performance of any obligation hereunder has constituted or
resulted in or will constitute or result in:

                 (a)  any breach, violation of, conflict with, default under or
                      termination of any agreement, contract, mortgage,
                      instrument, deed or lease to which Tenant or any Affiliate
                      is a party or by which it or they are bound;

                 (b)  the violation of or conflict with any law, statute,
                      ordinance, judgment, decree, order, rule or regulation
                      applicable to Tenant, any Affiliate, any Improvements or
                      any Leased Property; or

                 (c)  any violation of or conflict with Tenant's or any
                      Affiliate's Charter or By-Laws or other organizational
                      documents, as the case may be.

          No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other Person is
required to be obtained or made by Tenant in connection with the execution,
delivery and performance of this Lease.
 
          12.08  Certain Business Representations:
                 -------------------------------- 

                 (a)  Labor Relations. No dispute or controversy between Tenant
                      ---------------
                      or any Affiliate and its or their employees has resulted
                      in, or is reasonably likely to result in, any Material
                      Adverse Change, and neither Tenant nor any Affiliate
                      anticipates that its relationships with its unions or
                      employees will result, or are reasonably likely to result,
                      in any Material Adverse Change. Tenant and each Affiliate
                      is in compliance in all material respects with all federal
                      and state laws relating to employees and labor relations,
                      including, but not limited to, laws relating to health and
                      safety in the workplace, non-discrimination in employment
                      and the payment of wages.

                 (b)  Antitrust. Tenant and each Affiliate is in compliance in
                      ---------
                      all material respects with all federal and state antitrust
                      laws relating to Tenant's Business and the subsidiaries'
                      businesses and the geographic concentration thereof.

                 (c)  Consumer Protection. Neither Tenant nor any Affiliate is
                      -------------------
                      in violation of any rule, regulation, order, or
                      interpretation of any rule, regulation or order of the
                      Federal Trade Commission (including truth-in-lending) or
                      other federal, state or local public or governmental

                                      42
<PAGE>
 
                      authority or agency, with which the failure to comply, in
                      the aggregate, has resulted in, could result in, a
                      Material Adverse Change.

                 (d)  Future Expenditures.  Neither Tenant nor any Affiliate,
                      -------------------                                     
                      anticipates that further expenditures, if any, by Tenant
                      or any Affiliate needed to meet the provisions of any
                      federal, state or foreign governmental statutes, orders,
                      rules or regulation could result in any Material Adverse
                      Change.

                 (e)  Benefit Liabilities. Neither Tenant nor any ERISA
                      -------------------
                      Affiliate maintains, contributes to, or is obligated to
                      contribute to, nor has Tenant or any ERISA Affiliate
                      maintained, contributed to, been obligated to contribute
                      to, or had any direct, indirect, or contingent liability
                      with respect to, any Title IV Plan (as hereafter defined).
                      Each Tenant Benefit Plan has been maintained in compliance
                      with its terms and with applicable laws (including
                      specifically the Code and the Employee Retirement Income
                      Security Act of 1974 ("ERISA"). "Tenant Benefit Plan"
                      means any plan, fund, or other similar program described
                      in Section 3(2) of ERISA and established or maintained or
                      with respect to which Tenant and/or any ERISA Affiliate
                      has an obligation to contribute for the benefit of its
                      employees (or for which Tenant could be directly or
                      contingently liable). "Title IV Plan" means an "employee
                      benefit plan" (as defined in Section 3(3) of ERISA) that
                      is subject to Title IV of ERISA and is or has been
                      established or maintained, by Tenant or any ERISA
                      Affiliate, or to which contributions are, have been, or
                      should have been made. "ERISA Affiliate" means any trade
                      or business, whether or not incorporated, that, together
                      with Tenant, is or has been under common control, within
                      the meaning of Section 414(b), (c), (m), or (o) of the
                      Code or Section 4001 of ERISA.

          12.09  Certain Financial Covenants.  Tenant or an Affiliate, as
                 --------------------------- 
applicable, is in compliance in all material respects with all financial
covenants required to be maintained pursuant to any franchise or other agreement
pursuant to which Tenant or such Affiliate operates its business, except in such
respects as shall not result in any franchisor under any franchise or operating
agreement to which Tenant is a party taking any action that could result in a
Material Adverse Change.

          12.10  Cash Flow Coverage Ratio Covenant.  On the date of this Lease
                 ---------------------------------                      
and measured at a date that is twenty-four (24) months following such date (each
a "Cash Flow Measurement Date"), and on each anniversary date that is twenty-
four (24) months following a prior Cash Flow Measurement Date, Tenant shall have
maintained a Cash Flow Coverage Ratio of not less than 1.5 to 1.0 based on the
Annual Financial Statements to be delivered to Landlord in accordance with

                                      43
<PAGE>
 
Section 6.04 hereof. "Cash Flow Coverage Ratio" means the aggregate of net
income before taxes plus mortgage interest, rent expense, depreciation,
compensation of principals of the Business, management fees plus the annual LIFO
adjustment and other non-cash expenses, less recurring capital expenditures and
gain (loss) on sale of real estate, dividends and/or profits taken out of Tenant
divided by the aggregate of the Tenant's obligations under this Lease.
Notwithstanding anything herein to the contrary, in the event that Tenant shall
not be in compliance with this covenant at a Cash Flow Measurement Date or
Tenant shall have knowledge of such non-compliance prior to any Cash Flow
Measurement Date, the Tenant shall have the right to cure such breach through
any reasonable commercial means, including, but not limited to, providing
guarantees acceptable to Landlord, increasing capital, or cross collateralizing
with any other property of Tenant or an Affiliate, provided that such breach is
cured within one hundred and eighty (180) days after Notice by Landlord to
Tenant of the existence of such breach.

          12.11  Disclosure.  To Tenant's knowledge, this Lease does not contain
                 ----------                                              
any untrue statement of a material fact or omit to state a material fact
necessary in order to make any statement contained herein not misleading in
light of the circumstances under which it was made. To Tenant's knowledge, there
is no event, fact or occurrence that has resulted in any Material Adverse
Change.

          12.12  Covenant Not to Acquire.  Tenant covenants and agrees that 
                 -----------------------                                   
during the Term and any Extension Term, as the case may be, Tenant and its
controlling shareholders or its or their Affiliates will not acquire, directly
or indirectly, more that 9.90% of the outstanding common shares of beneficial
interest of Capital Automotive REIT.  Tenant covenants and agrees that it will
divest itself of such shares of Capital Automotive REIT as may be necessary to
satisfy the limitations of this Section 12.12.


                                 ARTICLE XIII
                     ASSIGNMENT AND SUBLETTING; ATTORNMENT

          13.01  Prohibition Against Subletting and Assignment.  Subject to
                 ---------------------------------------------             
Section 13.03, Tenant shall not, without the prior written consent of Landlord,
or upon compliance with any conditions established by Landlord, in its sole
discretion, assign, mortgage, pledge, hypothecate, encumber or otherwise
transfer (except to an Affiliate) this Lease or any interest herein, or sublease
all or any part of any Leased Property (except to an Affiliate, including, but
not limited to, Kline Imports Chesapeake, Inc.), or suffer or permit this Lease
or the leasehold estate created hereby or any other rights arising hereunder to
be assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in
whole or in part, whether voluntarily, involuntarily or by operation of law.
For purposes of this Section 13.01, an assignment of this Lease shall be deemed
to include any Change of Control of Tenant, as if such Change of Control were an
assignment of the Lease.  In the event that (i) Landlord shall withhold any
consent to any assignment or transfer of this Lease or any interest herein, and
(ii) such assignee or transferee is approved by the relevant manufacturer for
continuation as a franchisee, there shall be a presumption that such assignment
or transfer was 

                                      44
<PAGE>
 
reasonable and Landlord shall have the burden of rebutting such presumption and
of proving that such consent was in fact reasonably withheld (or that such
conditions were reasonable).

          13.02  Changes of Control.  A Change of Control requiring the consent
                 ------------------                                    
of Landlord shall mean:

                 (a)  the issuance and/or sale by Tenant or the sale by any
                      shareholder or equity holder of Tenant of a Controlling
                      (which shall mean, as applied to any Person, the
                      possession, directly or indirectly, of the power to direct
                      or cause the direction of the management and policies of
                      such Person, whether through the ownership of voting
                      securities, by contract or otherwise) interest in Tenant
                      to a Person other than an Affiliate of Tenant, other than
                      in either case a distribution to the public pursuant to an
                      effective registration statement under the Securities Act
                      of 1933, as amended (a "Registered Offering");but not
                      including a transfer upon death of any shareholder to any
                      family member of such shareholder, trust created for the
                      benefit of family members, or the personal representative
                      of such shareholder;

                 (b)  the sale, conveyance or other transfer of all or
                      substantially all of the assets of Tenant (whether by
                      operation of law or otherwise) provided, however, that no
                      Change of Control shall be deemed to have occurred in the
                      event of the transfer of assets as a result of the death
                      of a person involved in the Business, so long as the
                      transferee is approved by the manufacturer for the
                      continuation of the Business (any sale of all or
                      substantially all of the assets of Tenant within two (2)
                      years after the death of a person involved in the Business
                      shall be deemed to have occurred as a result of the death
                      of such person); or

                 (c)  any transaction pursuant to which Tenant is merged with or
                      consolidated into another entity (other than an entity
                      owned and Controlled by an Affiliate), and Tenant is not
                      the surviving entity.

          13.03  Operating/Service Agreements.
                 ----------------------------

                 (a)  Permitted Agreements. Tenant shall, without Landlord's
                      --------------------
                      prior approval, be permitted to enter into such
                      operating/service agreements for portions of each Leased
                      Property to various licensees in connection with Tenant's
                      Business as are customarily associated with or incidental
                      to the operation of such Leased Property, which agreements
                      may be in the nature of a sublease agreement.

                                      45
<PAGE>
 
                 (b)  Terms of Agreements.  Each operating/service agreement
                      -------------------                                   
                      concerning a Leased Property shall be subject and
                      subordinate to the provisions hereof. No agreement made as
                      permitted by Section 13.03(a) shall affect or reduce any
                      of the obligations of Tenant hereunder, and all such
                      obligations shall continue in full force and effect as if
                      no agreement had been made. No agreement shall impose any
                      additional obligations on Landlord hereunder.

                 (c)  Copies. Tenant shall, within ten (10) days after the
                      ------ 
                      execution and delivery of any operating/service agreement
                      permitted by Section 13.03(a), deliver a duplicate
                      original thereof to Landlord.

                 (d)  Assignment of Rights in Agreements.  As security for
                      ----------------------------------                  
                      performance of its obligations hereunder, Tenant hereby
                      grants, conveys and assigns to Landlord all right, title
                      and interest of Tenant in and to all operating/service
                      agreements now in existence or hereinafter entered into
                      for each Leased Property, and all extensions,
                      modifications and renewals thereof and all rents, issues
                      and profits therefrom, to the extent the same are
                      assignable by Tenant. Landlord hereby grants to Tenant a
                      license to collect and enjoy all rents and other sums of
                      money payable under any such agreement; provided, however,
                      that Landlord shall have the absolute right at any time
                      after the occurrence and continuance of an Event of
                      Default upon notice to Tenant and any vendors or licensees
                      to revoke said license and to collect such rents and sums
                      of money and to retain the same. Tenant shall not (i)
                      after the occurrence and continuance of an Event of
                      Default, consent to, cause, or allow, any material
                      modification or alteration of any of the terms, conditions
                      or covenants of any of the agreements or the termination
                      thereof, without the prior written approval of Landlord
                      nor (ii) accept any rents (other than customary security
                      deposits) more than thirty (30) days in advance of the
                      accrual thereof nor permit anything to be done, the doing
                      of which, nor omit or refrain from doing anything, the
                      omission of which, will or could be a breach of or default
                      in the terms of any of the agreements.

                 (e)  Licenses, Etc.  For purposes of Section 13.03, the
                      -------------                                     
                      operating/service agreements shall mean any licenses,
                      concession arrangements, or other arrangements relating to
                      the possession or use of all or any part of any Leased
                      Property.

          13.04  Assignment.  If Landlord shall withhold its consent to any
                 ----------                                                
assignment or if Landlord shall have established conditions to approval of any
assignment but such conditions shall not have been complied with, to the
satisfaction of  Landlord, such assignment shall not in any way 

                                      46
<PAGE>
 
impair the continuing primary liability of Tenant hereunder. No consent to any
assignment in a particular instance shall be deemed to be a general waiver of
the prohibition set forth in Article XIII. Any assignment shall be solely of
Tenant's entire interest in this Lease with respect to the subject Leased
Property or Leased Properties. Any assignment or other transfer of all or any
portion of Tenant's interest in this Lease in contravention of Article XIII
shall be voidable at Landlord's option.

          13.05  REIT Limitations.
                 ---------------- 

                 (a)  Anything contained herein to the contrary notwithstanding,
                      Tenant shall not: (a) sublet or assign a Leased Property
                      or this Lease on any basis such that the rental or other
                      amounts to be paid by the sublessee or assignee thereunder
                      would be based, in whole or in part, on the income or
                      profits derived by the business activities of the
                      sublessee or assignee; (b) sublet or assign a Leased
                      Property or this Lease to any Person that, under Section
                      856(d)(2)(B) of the Internal Revenue Code of 1986, as
                      amended (the "Code"), Landlord or its general partner
                      owns, directly or indirectly (by applying constructive
                      ownership rules set forth in Section 856(d) (5) of the
                      Code, a ten percent (10%) or greater interest; or (c)
                      sublet or assign a Leased Property or this Lease in any
                      other manner or otherwise derive any income which could
                      cause any portion of the amounts received by Landlord
                      pursuant hereto or any sublease to fail to qualify as
                      "rents from real property" within the meaning of Section
                      856(d) of the Code, or which could cause any other income
                      received by Landlord to fail to qualify as income
                      described in Section 856(c) (2) of the Code. The
                      requirements of this Section 13.05 shall likewise apply to
                      any further subleasing by any subtenant.

                 (b)  Tenant acknowledges that Capital Automotive REIT, a
                      Maryland real estate investment trust and the general
                      partner of Landlord (the "Company"), intends to elect to
                      be taxed as a real estate investment trust (a "REIT")
                      under the Code. Tenant shall not do anything which would
                      adversely affect the Company's status as a REIT. Tenant
                      hereby agrees to modifications of this Lease which do not
                      materially adversely affect Tenant's rights and
                      liabilities if such modifications are required to retain
                      or clarify the Company's status as a REIT.

          13.06  Attornment.  Tenant shall insert in each sublease permitted 
                 ----------                                                 
under Section 13.03(a) provisions to the effect that:  (a) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and to
the rights of Landlord hereunder; (b) [intentionally omitted] and (c) in the
event the sublessee receives a written notice from Landlord or Landlord's
assignees, if any, stating that Tenant is in default under this Lease, the
sublessee shall thereafter be obligated to pay all rentals accruing under said
sublease directly to the party giving such notice, or as such party may 

                                      47
<PAGE>
 
direct. All rentals received from the sublessee by Landlord or Landlord's
assignees in respect of a Leased Property, if any, as the case may be, shall be
credit against the amounts owing by Tenant hereunder with respect to such Leased
Property.

          13.07  Severance and Spin-Off.  If at any time while this Lease is in
                 ----------------------                                     
effect any Leased Property shall be utilized by Tenant in the operation of more
than one automobile franchise, then provided that there is no existing Event of
Default and there exists no condition which, with the passage of time, could
become an Event of Default, Tenant shall have the right (the "Spin-Off Right")
to sever and spin-off one or more parcels (each referred to as a "Spin-Off
Parcel") of the Leased Property from this Lease, subject to compliance with the
requirements of Section 13.08.

          13.08  Assignment.  If the Leased Property is not a separate 
                 ----------                                           
subdivided lot, Landlord may condition its approval of an assignment upon Tenant
showing that there are appropriate provisions (such as a condominium regime,
subdivision, and/or reciprocal easements, lender and/or franchisor consents if
necessary, and separate tax lots) which allow the Leased Property to be
separately owned and operated without interference from or dependence upon,
another person as to items such as access, real estate taxes, or utilities.


                                  ARTICLE XIV
                                  ARBITRATION

          14.01  Controversies.  Except with respect to the payment of Rent
                 -------------                                             
hereunder, which shall be subject to the provisions of Section 9.02, in the
event a controversy arises between the parties as to any of the requirements of
this Lease or the performance hereunder, which the parties are unable to
resolve, the parties agree to waive the remedy of litigation (except for
extraordinary relief in an emergency situation) and agree that such controversy
or controversies shall be determined by arbitration as hereafter provided in
this Article.

          14.02  Appointment of Arbitrators.  The party or parties requesting
                 --------------------------                                  
arbitration shall serve upon the other a demand therefor, in writing, specifying
in detail the controversy and matter(s) to be submitted to arbitration before
the American Arbitration Association.  The selection of arbitrators shall be
conducted pursuant to the rules for resolution of commercial disputes
promulgated by the American Arbitration Association.  The party or parties
giving notice shall request a listing of available arbitrators from the American
Arbitration Association, and each party shall respond in the selection process
within fifteen (15) days after each receipt of such listings until a panel of
three (3) arbitrators has been designated.  If either party fails to respond
within fifteen (15) days, it is agreed that the American Arbitration Association
may make such selections as are necessary to complete the panel of three (3)
arbitrators.

          14.03  Arbitration Procedure.  Within five (5) business days after
                 ---------------------                                      
the selection of the arbitration panel, the arbitrators shall give written
notice to each party as to the time and the place of each meeting, which shall
be held in Washington, D.C., at which the parties may appear and be 

                                      48
<PAGE>
 
heard, which shall be no later than fifteen (15) days after certification of the
arbitration panel. The parties specifically waive discovery, and further waive
the applicability of rules of evidence or rules of procedure in the proceedings.
The applicable rules shall be those in effect at the time for the resolution of
commercial disputes promulgated by the American Arbitration Association. The
arbitrators shall take such testimony and make such examination and
investigations as the arbitrators reasonably deem necessary. The decision of the
arbitrators shall be in writing signed by a majority of the panel which decision
shall be final and binding upon the parties to the controversy. Provided,
however, in rendering their decisions and making awards, the arbitrators shall
not add to, subtract from or otherwise modify the provisions of this Lease.

          14.04  Expenses.  The expenses of the arbitration shall be assessed by
                 --------                                                    
the arbitrators and specified in the written decision. In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally between
Landlord and Tenant. Each party in interest shall be responsible for and pay the
fees, costs and expenses of its own counsel, unless the arbitration award
provides for an assessment of reasonable attorneys' fees and costs.

          14.05  Enforcement of the Arbitration Award.  There shall be no appeal
                 ------------------------------------                    
from the decision of the arbitrators, and upon the rendering of an award, any
party thereto may file the arbitrators' decision in the United States District
Court for the Eastern District of Virginia for enforcement as provided by
applicable law.


                                  ARTICLE XV
                        QUIET ENJOYMENT, SUBORDINATION,
                       ATTORNMENT, ESTOPPEL CERTIFICATES

          15.01  Quiet Enjoyment.  So long as Tenant performs all of its
                 ---------------                                        
obligations under this Lease, Tenant's possession of the Leased Properties will
not be disturbed by or through Landlord.

          15.02  Landlord Mortgages; Subordination.  Subject to Section
                 ---------------------------------                     
15.03, without the consent of Tenant, Landlord may, from time to time, directly
or indirectly, create or otherwise cause to exist any liens, encumbrances,
security interests or title retention agreements on any Leased Property, or any
portion thereof or any interest therein, whether to secure any borrowing or
other means of financing or refinancing.  Tenant shall execute, acknowledge and
deliver to Landlord, at any time and from time to time upon demand by Landlord
or any mortgagee or any holder of any mortgage or other instrument described in
this Section, without cost to Landlord, a Subordination and Non-Disturbance
Agreement in the form attached hereto as Exhibit 15.02, which provides that (i)
Tenant's rights hereunder are subordinate to any ground lease or underlying
lease, first mortgage, first deed of trust, or other first lien against any
Leased Property, together with any renewal, consolidation, extension,
modification, or replacement thereof, which now or at any subsequent time
affects any Leased Property or any interest of Landlord in any Leased Property,
except to the extent that any such instrument expressly provides that this Lease
is superior, and except to the extent that 


                                      49
<PAGE>
 
any such instrument provides for a dispostion of insurance or condemnation
proceeds other than as provided in this Lease; and (ii) in the event such party
succeeds to Landlord's interest under the Lease and provided that no Event of
Default by Tenant exists, such party will recognize all of Tenant's rights under
the Lease and will not disturb Tenant's possession, use or occupancy of the
subject Leased Property. If Tenant fails or refuses to execute, acknowledge, and
deliver such Subordination and Non-Disclosure Agreement within ten (10) business
days after written demand, then Landlord shall send to Tenant a second written
demand. If Tenant fails or refuses to execute, acknowledge and deliver such
Subordination and Non-Disturbance Agreement within ten (10) days after such
second written demand, then Landlord or such successor in interest may execute,
acknowledge and deliver such Subordination and Non-Disturbance Agreement on
behalf of Tenant as Tenant's attorney-in-fact. Tenant hereby constitutes and
irrevocably appoints Landlord, its successors and assigns, as Tenant's attorney-
in-fact to execute, acknowledge, and deliver on behalf of Tenant the
Subordination and Non-Disturbance Agreement. This power of attorney is coupled
with an interest and is irrevocable.

          15.03  Attornment.  If any holder of any mortgage, indenture, deed
                 ----------                                                 
of trust, or other similar instrument described in Section 15.02 succeeds to
Landlord's interest in any Leased Property, Tenant will pay to such holder all
Rent subsequently payable hereunder as to such Leased Property. Tenant shall,
upon request of anyone succeeding to the interest of Landlord, automatically
become the tenant of, and attorn to, such successor in interest without changing
this Lease.  The successor in interest will not be bound by:  (a) any payment of
Rent for more than one (1) month in advance; (b) any amendment or modification
hereof made without its written consent; (c) any claim against Landlord arising
prior to the date on which the successor succeeded to Landlord's interest; or
(d) any claim or offset of Rent against Landlord.

          15.04  Estoppel Certificates.  At the request of either party, or
                 ---------------------                                     
any mortgagee or purchaser of a Leased Property or any interest therein,
Landlord or Tenant, as the case may be, shall execute, acknowledge, and deliver
an estoppel certificate, in recordable form, in favor of the other party or any
mortgagee or purchaser of any Leased Property certifying the following as to
such Leased Property:  (a) that this Lease is unmodified and in full force and
effect, or if there have been modifications that the same is in full force and
effect as modified and stating the modifications; (b) the date to which Rent and
other charges have been paid; (c) that neither Tenant nor Landlord is in default
nor is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default, if that be the case, or specifying any existing
default; (d) that Tenant has accepted and occupies such Leased Property; (e)
that Tenant has no defenses, set-offs, deductions, credits, or counterclaims
against Landlord, if that be the case, or specifying such that exist; (f) that
Landlord has no outstanding construction or repair obligations; and (g) such
other information as may reasonably be requested by Landlord or any mortgagee or
purchaser.  Any purchaser or mortgagee may rely on this estoppel certificate.
If Landlord or Tenant, as the case may be, fails to deliver the estoppel
certificates to the other party within ten (10) business days after the request
of Landlord or Tenant, as the case may be, then Landlord or Tenant, as the case
may be, shall request such delivery a second time.  If Landlord or Tenant, as
the case may be, fails to deliver the estoppel certificates to Landlord within
ten (10) days after such second request by Landlord or Tenant, as the


                                      50
<PAGE>
 
case may be, then Landlord or Tenant, as the case may be, shall be deemed to
have certified that: (a) this Lease is in full force and effect and has not been
modified, or that this Lease has been modified as set forth in the certificate
delivered to Landlord or Tenant, as the case may be; (b) Tenant has not prepaid
any Rent or other charges except for the current month; (c) Tenant has accepted
and occupies such Leased Property; (d) neither Tenant nor Landlord is in default
nor is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default; (e) Landlord has no outstanding construction or
repair obligation; and (f) Tenant has no defenses, set-offs, deductions,
credits, or counterclaims against Landlord. Landlord and Tenant each appoints
the other as Landlord's or Tenant's (as the case may be) attorney-in-fact to
execute, acknowledge and deliver on Landlord's or Tenant's (as the case may be)
behalf any estoppel certificate which Landlord or Tenant, as the case may be,
does not object to within twenty (20) days after Landlord or Tenant, as the case
may be, sends the certificate to Landlord or Tenant, as the case may be. This
power of attorney is coupled with an interest and is irrevocable.

          15.05     Waiver of Landlord's Lien.  Landlord agrees to and does
                    -------------------------                              
hereby Waiver its Landlord's lien and any other rights that it may have with
respect to property or assets representing the security or collateral under
Tenant's "floor-plan" or equipment financing or leasing or similar financing
arrangements, during the Term or any Extension Term.  Landlord shall, upon
request by any such lender, execute an acknowledgment of such waiver.



                                  ARTICLE XVI
                              RIGHT OF FIRST OFFER

          16.01     Right of First Offer During Lease Term or Extension Term.
                    ---------------------------------------------------------

                    (a)  If and when during the Term or Extension Term, as the
                         case may be, Landlord shall decide to sell the Leased
                         Properties to a Person who is not an Affiliate of
                         Landlord (the "Decision to Sell"), provided that no
                         Event of Default has occurred and is continuing under
                         the Lease, Landlord shall notify Tenant in writing
                         within ten (10) business days after Landlord makes a
                         Decision to Sell. Tenant shall have ten (10) business
                         days thereafter in which to notify Landlord in writing
                         of its desire to purchase the Leased Properties. If
                         Tenant shall give such notice, Tenant shall have a
                         period of thirty (30) days within which to make a
                         written offer to purchase the property (the "First
                         Offer"). The First Offer must set forth the purchase
                         price, deposit amounts and closing date and any and all
                         other terms and conditions being proposed by Tenant.

                    (b)  Within thirty (30) days of receipt of the First Offer,
                         Landlord shall give Tenant written notice of its
                         acceptance or rejection thereof. If 

                                      51
<PAGE>
 
                     accepted, Tenant shall, within five (5) days after receipt
                     of the acceptance notice, make the deposit called for in
                     the First Offer and the parties shall proceed to contract
                     and closing upon the terms thereof. If the First Offer is
                     rejected, then, subject to the provisions of subsections
                     (c) and (d) of this Section 16.01, Tenant shall have no
                     further rights under this Section 16.01 with respect to the
                     purchase of the Leased Properties during the Term or
                     Extension Term, as the case may be.

               (c)   If Landlord shall reject the First Offer, for a one year
                     period thereafter it may proceed to sell the Leased
                     Properties, subject to the Lease and the remaining Term or
                     Extension Term thereof, as the case may be, to any third
                     party, provided (i) the purchase price of such sale shall
                     exceed that specified in the First Offer, or (ii) if the
                     purchase price of such sale does not exceed that specified
                     in the First Offer, the terms of such sale, taken together,
                     are more favorable to Landlord, in Landlord's reasonable
                     judgement, than those of the First Offer. There shall be a
                     presumption that Landlord's judgment was reasonable and
                     Tenant shall have the burden of rebutting such presumption
                     and of proving that such judgment was in fact unreasonable.

               (d)   If no sale is effected by Landlord within the period
                     specified in subsection (c) above, then if Landlord
                     thereafter desires to sell the Leased Properties, the
                     procedure set forth in subsections (a), (b) and (c) shall
                     be followed.

               (e)   This option shall terminate in any event twenty (20) years
                     after the death of the last descendant of George Herman
                     Walker Bush, former President of the United States, living
                     at the time of execution of this Lease.
 

                                      52
<PAGE>
 
           16.02    Right to Purchase at End of an Extension Term.
                    ----------------------------------------------
 
                    (a) Landlord hereby grants the Tenant the right and option
                        to purchase the Leased Properties (the "Option to
                        Purchase") at an amount equal to the Property
                        Consideration (as hereafter defined) upon termination of
                        either Extension Term of this Lease. The Option to
                        Purchase shall not be granted if Tenant does not extend
                        the Term of this Lease pursuant to Section 1.03 or if on
                        the Option Exercise Date (as hereafter defined) an Event
                        of Default with respect to any Leased Property exists
                        and has not been cured. The Tenant shall notify Landlord
                        in writing of its intent to exercise this Option to
                        Purchase, at least thirty (30) days prior to the end of
                        an Extension Term of this Lease (the "Option Exercise
                        Date").

                    (b) The consideration to be paid for the Leased Properties
                        upon exercise of the Option to Purchase (the "Property
                        Consideration") shall be the Appraised Value (as
                        hereafter defined) determined by (1) an independent
                        appraiser, who is a member of the Appraisal Institute,
                        and will be selected by Landlord, (the "Landlord MAI
                        Appraiser"), (2) a second appraiser, who is a member of
                        the Appraisal Institute, and will be selected by the
                        Tenant (the "Tenant MAI Appraiser"), and (3) a third MAI
                        Appraiser selected by agreement of the Landlord MAI
                        Appraiser and the Tenant MAI Appraiser (the "Third MAI
                        Appraiser") (each an "Appraiser" and, collectively, the
                        "Appraisers"). Landlord and Tenant shall, as promptly as
                        possible, but in no event later than ten (10) days
                        following the Option Exercise Date, select its
                        respective Appraiser. The Third MAI Appraiser shall be
                        selected no later than five (5) days after the selection
                        of the other Appraisers. The costs of the Appraisers'
                        appraisals shall be shared equally by the parties. As
                        promptly as possible but in no event later than sixty
                        (60) days after selection of the Third Appraiser, each
                        Appraiser shall deliver his or her written report of the
                        Appraisers' determination of the fair market value of
                        the Leased Property, which determination shall be based,
                        for each Leased Property, upon the highest and best use
                        of such Leased Property, taking into consideration the
                        location of such Leased Property and other properties
                        comparable thereto. The "Appraised Value" of the Real
                        Property shall be equal to the arithmetic mean of the
                        two (2) fair market value determinations of the
                        Appraisers that are closest in value. In the event that
                        the values of (i) the difference between the highest
                        appraisal value and the next lower appraisal value, and
                        (ii) the difference between the lowest appraisal value
                        and the next higher appraisal value, are equal, then the



                                      53
<PAGE>
 
                        "Appraised Value" shall be equal to the arithmetic mean
                        of the fair market value determinations of all
                        Appraisers.

                 (c)    Upon determination of the Property Consideration,
                        Landlord and Tenant agree to cooperate to close the sale
                        and purchase of the Leased Property entirely for cash on
                        an "as is, where as basis" and with no warranties by
                        Landlord other than in a special warranty deed, within
                        forty-five (45) days after the date of determination of
                        the Property Consideration (the "Option Closing
                        Period"). If the sale and purchase of the Leased
                        Property does not close within the Option Closing Period
                        due to Tenant's default, Landlord shall have no further
                        obligations to Tenant pursuant to this Section 16.02
                        (a).

          16.03  Option to Purchase Vacant Lot.  Beginning at the end of the
                 -----------------------------                              
fifth year of the Term, Tenant shall have the option to purchase from Landlord
the vacant lot at the rear of 1485 and 1501 South Military Highway, Chesapeake,
Virginia, having a property tax identification number of 0200000000031, for the
greater of (i) One Million Five Hundred Fifty-Two Thousand Four Hundred Fifty
and 00/100 U.S. Dollars ($1,552,450) or (ii) the fair market value of such
property as determined according to the procedures of Section 16.02 of this
Agreement.


                                  ARTICLE XVII
                                 MISCELLANEOUS

          17.01  Notices.  Landlord and Tenant hereby agree that all notices,
                 -------                                                     
demands, requests, and consents (hereinafter "Notices") required to be given
pursuant to the terms of this Lease shall be in writing and shall be addressed
as follows:

          If to Tenant:

          Kline Chevrolet Sales Corp.
          c/o Magnus Group, Ltd.
          1350 Connecticut Avenue, N.W.
          Suite 1225
          Washington, D.C.  20036
          Attention: James M. Kline

          With a copy to:

          Kaufman & Canoles, A Professional Corporation
          2000 Nations Bank Center
          One Commercial Place
          Norfolk, Virginia, 23514


                                      54
<PAGE>
 
          Attention: William R. Van Buren, III, Esq.

          If to Landlord:

          Capital Automotive L.P.
          1925 North Lynn Street
          Suite 306
          Arlington, Virginia 22209
          Attention: Thomas D. Eckert

          With a copy to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037
          Attention:  George P. Stamas, Esq.

and shall be served by:  (a) personal delivery; (b) certified mail, return
receipt requested, postage prepaid; or (c) nationally recognized overnight
courier.  All notices shall be deemed to be given upon the earlier of actual
receipt or three (3) days after mailing, or one (1) business day after deposit
with the overnight courier.  Any Notices meeting the requirements of this
Section shall be effective, regardless of whether or not actually received.
Landlord or Tenant may change its notice address at any time by giving the other
party Notice of such change.  Any such Notice of change of address shall be
effective five (5) days after delivery.

          17.02     Advertisement of a Leased Property.  In the event the
                    ----------------------------------                   
parties hereto have not executed a renewal lease, or agreed to the Extension
Term, as to the Leased Property within twelve (12) months prior to the
expiration of the Term or an Extension Term, as the case may be, then Landlord
or its agent shall have the right to enter such Leased Property at all
reasonable times for the purpose of exhibiting such Leased Property to others
and to place upon such Leased Property for and during the period commencing one-
hundred thirty five (135) days prior to the expiration of the Term or an
Extension Term, as the case may be, "for sale" or "for rent" notices or signs.

          17.03     Landlord's Access.  Landlord, or its designated agents or
                    -----------------                                        
contractors, shall have the right to enter upon each  Leased Property, upon
reasonable prior notice to Tenant, for purposes of inspecting the same and
assuring Tenant's compliance with this Lease provided, any such entry by
Landlord shall be subject to all rules, guidelines and procedures prescribed by
Tenant in connection therewith.  Landlord shall not be allowed entry to a Leased
Property unless accompanied by such of Tenant's personnel as Tenant shall
require and which Tenant shall promptly provide.


                                      55
<PAGE>
 
          17.04     Entire Agreement.  This Lease contains the entire agreement
                    ----------------                                           
between Landlord and Tenant with respect to the subject matter hereof.  No
representations, warranties, and agreements have been made by Landlord or Tenant
except as set forth in this Lease.

          17.05     Severability.  If any term or provision of this Lease is
                    ------------                                            
held by Landlord to be invalid or unenforceable as to a Leased Property, such
holding shall not affect the remainder of this Lease as to such Leased Property,
or the validity or enforceability of this Lease as to any other Leased Property,
and the same shall remain in full force and effect, unless such holding
substantially deprives Tenant of the use of such Leased Property or Landlord of
the Rents therefor, in which case this Lease shall forthwith terminate as to
such Leased Property as if by expiration of the Term or an Extension Term, as
the case may be, but shall remain in full force and effect with respect to each
other Leased Property.

          17.06     Captions and Headings.  The captions and headings are
                    ----------------------                               
inserted only as a matter of convenience and for reference and in no way define,
limit or describe the scope of this Lease or the intent of any provision hereof.

          17.07     Governing Law.  This Lease shall be construed under the laws
                    -------------                                               
of the State of Virginia (without application of choice of law provisions).

          17.08     Memorandum of Lease or Certain Rights Under the Lease.
                    -----------------------------------------------------  
Landlord and Tenant agree that a record of this Lease or of certain rights under
this Lease may be recorded by either party in a memorandum of lease approved by
Landlord and Tenant with respect to each Leased Property.  The party recording
such memorandum must bear all costs of such recording.

          17.09     Waiver.  No waiver by Landlord of any condition or covenant
                    ------                                                     
herein contained, or of any breach of any such condition or covenant, shall be
held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach thereof
or of any condition or covenant, nor shall the acceptance of Rent by Landlord at
any time when Tenant is in default in the performance or observance of any
condition or covenant herein be construed as a waiver of such default, or of
Landlord's right to terminate this Lease or exercise any other remedy granted
herein on account of such default.

          17.10     Assignment; Binding Effect.  Except as otherwise set forth
                    --------------------------                                
herein, this Lease shall not be assignable by Tenant, without the prior written
consent of Landlord.  This Lease will be binding upon and inure to the benefit
of the heirs, successors, personal representatives, and permitted assigns of
Landlord and Tenant.

          17.11     Consents and Approvals. In each instance in this Lease where
                    ----------------------
the Landlord is required or permitted to give a consent or approval, or to make
a determination, the Landlord's decision and any conditions thereon must be
reasonable under the circumstances. Except as provided in Sections 8.07(d) and
13.01, there shall be a presumption that each such decision and any conditions
thereon by Landlord was in fact reasonable, and Tenant shall have the burden of
proof 

                                      56
<PAGE>

in any attempt to rebut that presumption. With respect to Sections 8.07(d)
and 13.01, there shall be a presumption that each such decision and any
conditions thereon by Landlord was in fact unreasonable, and Landlord shall have
the burden of proof in any attempt to rebut that presumption.

          17.12  Single Property.  Throughout the form of this Lease there are
                 ---------------                                              
references to "Leased Properties."  If, in fact, there is only one Leased
Property being leased hereunder, all such references shall, without further
action, be deemed amended to refer solely to such Leased Property and all
provisions relating to Leased Properties, including remedies applicable to only
one Leased Property, shall likewise be amended to the extent necessary, but only
to the extent necessary, to give effect to the fact that there is only one
Leased Property.

          17.13  Modification.  This Lease may only be modified by a writing
                 ------------                                               
signed by both Landlord and Tenant.

          17.14  Incorporation by Reference.  All schedules and exhibits
                 ---------------------------                             
referred to in this Lease are incorporated herein by reference.

          17.15  No Merger.  As to each Leased Property, the surrender of this
                 ---------                                               
Lease by Tenant or the cancellation of this Lease by agreement of Tenant and
Landlord or the termination of this Lease on account of Tenant's default will
not work a merger, and will, at Landlord's option, terminate any subleases or
operate as an assignment to Landlord of any subleases. Landlord's option under
this paragraph will be exercised by notice to Tenant and all known subtenants of
such Leased Property.

          17.16  Force Majeure.  In the event either of the parties shall be
                 -------------                                              
delayed or hindered in, or prevented from, the performance of any act required
under this Lease by reasons of strikes, lock-outs, labor troubles, inability to
procure materials, fire or other catastrophe, failure of power, an act of the
other party, restrictive governmental laws or regulations, riots, insurrection,
war or other reason of like nature beyond the reasonable control of the party
delayed in performing work or doing any act required under this Lease, then the
performance of such act shall be excused for the period of the delay and the
time for the performance of such act shall be extended for the period of such
delay.  Notwithstanding the foregoing sentence, this Section 17.16 shall not
operate to excuse Tenant, nor shall Tenant in any event be excused, from prompt
payment of Rent and other monetary obligations under this Lease due to Landlord
from Tenant or to excuse the Tenant from its obligation to carry insurance as
required under this Lease, nor shall this Section 17.16 operate to excuse Tenant
from performing any act required under any franchise agreement or any other
third party agreement, which failure of performance of such act would cause
Tenant to be in default of such franchise agreement or other third party
agreement.

          17.17  Laches.  No delay or omission by either party hereto to
                 ------                                                
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such right
or power or be construed to be a waiver thereof.


                                      57
<PAGE>
 
          17.18  Waiver of Jury Trial.  To the extent that there is any claim
                 --------------------                                        
by one party against the other that is not to be settled by arbitration as
provided in Article XIV hereof, Landlord and Tenant waive trial by jury in any
action, proceeding or counterclaim brought by either of them against the other
on all matters arising out of this Lease or the use and occupancy of any Leased
Property (except claims for personal injury or property damage).  If Landlord
commences any summary proceeding for nonpayment of Rent, Tenant will not
interpose, and waives the right to interpose, any counterclaim in any such
proceeding.

          17.19  Permitted Contests.  Tenant, on its own or on Landlord's behalf
                 -------------------                                     
(or in Landlord's name), but at Tenant's expense, may contest, by appropriate
legal proceedings conducted in good faith and with due diligence, the amount or
validity or application, in whole or in part, of any Imposition or any legal
requirement or insurance requirement or any lien, attachment, levy, encumbrance,
charge or claim provided that: (a) in the case of an unpaid Imposition, lien,
attachment, levy, encumbrance, charge or claim, the commencement and
continuation of such proceedings shall suspend the collection thereof from
Landlord and from the subject Leased Property; (b) neither the subject Leased
Property nor any Rent therefrom nor any part thereof or interest therein would
be in any immediate danger of being sold, forfeited, attached or lost; (c) in
the case of a legal requirement, Landlord would not be in any immediate danger
of civil or criminal liability for failure to comply therewith pending the
outcome of such proceedings; (d) in the event that any such contest shall
involve a sum of money or potential loss in excess of Twenty Five Thousand
Dollars ($25,000), Tenant shall deliver to Landlord and its counsel an opinion
of Tenant's counsel to the effect set forth in clauses (a), (b) and (c), to the
extent applicable; (e) in the case of a legal requirement and/or an Imposition,
lien, encumbrance, or charge, Tenant shall give such reasonable security as may
be demanded by Landlord to insure ultimate payment of the same and to prevent
any sale or forfeiture of a subject Leased Property or the Rent in respect
thereof by reason of such nonpayment or noncompliance; provided, however, the
provisions of this Section shall not be construed to permit Tenant to contest
the payment of Rent (except as to contests concerning the method of computation
or the basis of levy of any Imposition or the basis for the assertion of any
other claim) or any other sums payable by Tenant to Landlord hereunder; (f) in
the case of an insurance requirement, the coverage required by Article IV shall
be maintained; and (g) if such contest be finally resolved against Landlord or
Tenant, Tenant shall, as Additional Rent due hereunder, promptly pay the amount
required to be paid, together with all interest and penalties accrued thereon,
or comply with the applicable legal requirement or insurance requirement.
Landlord, at Tenant's expense, shall execute and deliver to Tenant such
authorizations and other documents as may be reasonably required in any such
contest, and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein. Tenant hereby agrees to indemnify and
hold harmless Landlord, its officers, trustees, employees, shareholders,
affiliates and agents from and against any and all demands, claims, causes of
action, fines, penalties, damages (including punitive and consequential
damages), losses, liabilities (including strict liability), judgments, costs and
expenses (including, without limitation, attorneys' fees, court costs, and the
costs set forth in Section 9.06) that may be incurred in connection with or
arise from any such contest.


                                      58
<PAGE>
 
          17.20     Construction of Lease.  This Lease has been reviewed by
                    ---------------------                                  
Landlord and Tenant and their respective professional advisors.  Landlord and
Tenant believe that this Lease is the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in favor
of either Landlord or Tenant or against either Landlord or Tenant merely because
of any party's efforts in preparing such documents.

          17.21     Counterparts.  This Lease may be executed in duplicate
                    -------------                                         
counterparts, each of which shall be deemed an original hereof or thereof.

          17.22     Relationship of Landlord and Tenant.  The relationship of
                    -----------------------------------                      
Landlord and Tenant is the relationship of lessor and lessee.  Landlord and
Tenant are not partners, joint venturers, or associates.



                {remainder of this page left intentionally blank}


                                      59
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have executed this Lease or caused
the same to be executed by their respective duly authorized officers as of the
date first set forth above.

                    CAPITAL AUTOMOTIVE L.P.

                    By:  Capital Automotive REIT,
                         Its General Partner

                         By:
                             --------------------------------------
                         Name:    Thomas D. Eckert
                         Title:   President and Chief Executive Officer

                    KLINE CHEVROLET SALES CORP.
 

                    By:
                        -------------------------------------------
                    Name:     James M. Kline
                    Title:    Chairman of the Board
 
                                      60
<PAGE>
 
                    LEASE AGREEMENT EXHIBITS AND SCHEDULES

                                   SCHEDULES

     A         Leased Properties
     B         Permitted Liens
     12.02     Material Agreements
     12.03     Changes in Condition

 
                                   EXHIBITS

     2.02      Payment Account Information
     2.04      Base Annual Rent Adjustment
     5.07      Environmental Reports
     15.02     Form of Subordination and Non-Disturbance Agreement
<PAGE>
 
                                  SCHEDULE A
                                  ----------

                               Leased Properties


Leased Properties:

Three parcels of land located in the City of Chesapeake, Virginia, comprising
approximately twenty-five (25) acres, together with the buildings and other
improvements constructed on the land.  The land fronts on South Military
Highway, Old Greenbrier Road and Providence Road.  The property address is 1495
to1501 South Military Highway, Chesapeake, Virginia 23320.  The property tax
identification numbers are 0200000000034 and 020000000031.

Initial Base Annual Rent:

$960,000
<PAGE>
 
                                 EXHIBIT 2.02
                                 ------------

                          Payment Account Information

     Wiring instructions for the Landlord's operating account are as follows:

     FIRST UNION NATIONAL BANK OF VIRGINIA
     CHARLOTTE, NC
     ABA# 051400549

     For Credit to:  CAPITAL AUTOMOTIVE REIT, Operating Account
               Account # 2050000478240
<PAGE>
 
                                 EXHIBIT 2.04
                                 ------------

                          Base Annual Rent Adjustment

     The Base Annual Rent shall be increased, effective as of the commencement
of the second Lease Year and as of each subsequent Lease Year by an amount equal
to the Initial Base Rent multiplied by one hundred percent (100%) of the change
in the Index during the immediately preceding one (1) year period; provided,
however, that, in the event that the above-calculated adjustment is greater than
three percent (3%), such adjustment shall be equal to three percent (3%), and if
the above-calculated adjustment is less than one percent (1%), such adjustment
shall be equal to one percent (1%).
<PAGE>
 
                                 EXHIBIT 15.02
                                 -------------
                                        
                  SUBORDINATION AND NON-DISTURBANCE AGREEMENT
                  -------------------------------------------


     THIS AGREEMENT is made as of this ___ day of __________, 1997, among
_____________, a ___________ organized under the laws of the State of
_____________ ("Lender"), __________________ ("Tenant"), and CAPITAL AUTOMOTIVE
L.P., a Delaware limited partnership ("Landlord").

                                  WITNESSETH:
                                  -----------

     WHEREAS, Landlord and Tenant have entered into a certain Lease, dated
____________________, which lease and all amendments, modifications,
assignments, subleases  and other agreements related thereto are attached hereto
as Exhibit A and incorporated herein by this reference (collectively, the
   ---------                                                             
"Lease"), which Lease relates to the premises described therein (the
"Premises"), and

     WHEREAS, Lender has made or has committed to make a first mortgage loan to
Landlord in the principal amount not to exceed $_________ (the "Loan"), the Loan
being secured by a mortgage, deed of  trust or security deed (collectively, the
"Mortgage") and an assignment(s) of leases and rents from Landlord to Lender
covering the Premises; and

     WHEREAS, Tenant has agreed that the Lease shall be subject and subordinate
to the Mortgage held by Lender, provided Tenant is assured of continued
occupancy of the Premises under the terms of the Lease;

     NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, the sum of Ten Dollars ($10.00) and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
and notwithstanding anything in the Lease to the contrary, it is hereby agreed
as follows:

     1.   Subordination of Lease.  Lender, Tenant and Landlord do hereby
          ----------------------                                        
covenant and agree that the Lease with all rights, options, liens and charges
created thereby, is and shall continue to be subject and subordinate in all
respects to the Mortgage and to any renewals, modifications, consolidations,
replacements and extensions thereof and to all advancements made thereunder.

     2.   Nondisturbance of Tenant.  Lender does  hereby agree with Tenant that,
          ------------------------                                              
in the event Lender becomes the owner of the Premises by foreclosure, conveyance
in lieu of foreclosure or otherwise, so long as Tenant complies with and
performs its obligations under the Lease, (a) Lender will take no action which
will interfere with or disturb Tenant's possession or use of the Premises or
other rights under the Lease, and (b) the Premises shall be subject to the Lease
and Lender shall recognize Tenant as the tenant of the Premises for the
remainder of the terms of the Lease in 

                                      -5-
<PAGE>
 
accordance with the provisions thereof, provided, however, that Lender shall not
be subject to any offsets or defenses which Tenant might have against any prior
landlord except those which arose under the provisions of the Lease out of such
landlord's default and accrued after Tenant had notified Lender and given Lender
the opportunity to cure same as hereinbelow provided, nor shall Lender be liable
for any act or omission of any prior landlord, nor shall Lender be bound by any
rent or additional rent which Tenant might have paid for more than the current
month to any prior landlord nor shall it be bound by any amendment or
modification of the Lease made without its consent.

     3.   Attornment by Tenant.  Tenant does hereby agree with Lender that, in
          --------------------                                                
the event Lender becomes the owner of the Premises by foreclosure, conveyance in
lieu of foreclosure or otherwise, then Tenant shall attorn to and recognize
Lender as the landlord under the Lease for the remainder of the term thereof,
and Tenant shall perform and observe its obligations thereunder, subject only to
the terms and conditions of the Lease.  In such event, Lender shall not be
liable for any act or omission of any prior landlord, liable for return of the
security deposit unless same was actually delivered to Lender, bound by any
amendment to or assignment of the Lease made without its consent, bound by any
rent paid more than thirty (30) days in advance, or be subject to any set-off or
defense Tenant might have had against any prior landlord.  Tenant further
covenants and agrees to execute and deliver upon request of Lender or its
assigns, an appropriate Agreement of Attornment to Lender and any subsequent
titleholder of the Premises.

     4.   Acknowledgment of Acquisition Rights. Lender acknowledges that Tenant
          ------------------------------------                                 
has certain purchase rights under the lease.  So long as Tenant complies with
the provisions of the Lease, Lender acknowledges that Tenant may exercise such
rights and Lender will honor such rights so long as Tenant pays the acquisition
price to Lender or otherwise obtains a release from Lender.

     5.   Curative Rights, Modification of Lease, and Advance Payment of Rent.
          -------------------------------------------------------------------  
So long as the Mortgage remains outstanding and unsatisfied:

     (a)  Tenant will mail or deliver to Lender, at the address and in the
manner hereinbelow provided, a copy of all notices permitted or required to be
given to the Landlord by Tenant under and pursuant to the terms and provisions
of the Lease. At any time before the rights of the Landlord shall have been
forfeited or adversely affected because of any default of the Landlord, or
within the time permitted the Landlord for curing any default under the Lease as
therein provided, Lender may, but shall have no obligation to, pay any taxes and
assessments, make any repairs and improvements, make any deposits or do any
other act or thing required of the Landlord by the terms of the Lease; and all
payments so made and all things so done and performed by Lender shall be as
effective to prevent the rights of the Landlord from being forfeited or
adversely affected because of any default under the Lease as the same would have
been if done and performed by the Landlord.

     (b)  Tenant will not consent to the modification of the Lease, nor to the
termination thereof, without the prior written consent of Lender, such consent
not to be unreasonably withheld or delayed, nor will Tenant pay any rent under
the Lease more than thirty (30) days in advance.

                                      -6-
<PAGE>
 
     6.   Consent to Assignment.  Tenant acknowledges that Landlord will execute
          ---------------------                                                 
and deliver to Lender an assignment of the Lease as security for the Loan, and
Tenant hereby expressly consents to such assignment.

     7.   Limitation of Liability.  Lender shall have no liability whatsoever
          -----------------------                                            
hereunder prior to becoming the owner of the Premises; and Tenant agrees that if
Lender becomes the owner of the Premises, Tenant shall look solely to the estate
or interest of Lender in the Premises for satisfaction of  any obligation which
may be or become owing by Lender to Tenant hereunder or under the Lease.

     8.   Landlord and Tenant Certifications.  Landlord and Tenant hereby
          ----------------------------------                             
certify to Lender that the Lease has been duly executed by Landlord and Tenant
and is in full force and effect, that the Lease and any modifications and
amendments specified herein are a complete statement of the agreement between
Landlord and Tenant with respect to the leasing of the Premises, and the Lease
has not been modified or amended except as specified herein; that to the
knowledge of Landlord and Tenant, no party to the Lease is in default
thereunder; that no rent under the Lease has been paid more than thirty (30)
days in advance of its due date; and that Tenant, as of this date, has no
charge, lien or claim of offset under the Lease, or otherwise, against the rents
or other charges due or to become due thereunder.

     9.   Tenant Estoppel Certifications.  With the knowledge that Lender, as
          ------------------------------                                     
beneficiary of the mortgage encumbering the premises, will place substantial
reliance thereon in connection with the closing and funding of the Loan, Tenant
hereby makes the following certifications:

     (a)  The term of the Lease commenced on ________, 19__, and will terminate
on ______________.

     (b)  The Lease, as described above, has not been modified, amended,
assigned or subleased except as set forth in Exhibit A attached hereto, and is
                                             ---------
in good standing and in full force and effect.

     (c)  The Lease provides for rental payments over the term of the Lease, all
as specifically provided in the Lease.  No rent under the Lease has been paid
more than thirty (30) days in advance of the due date of same.  For the year
____, monthly payments, which are due on the first (1st) day of each month, are
as follows:


Basic Rent -        $________


     Payment of the above amount was timely made for the months of ______,
___and _____, ____, and the next payment of the above amount will be due on
________, ____.  In addition to the 

                                      -7-
<PAGE>
 
above amount, certain additional sums are due to Landlord from Tenant under the
Lease, all as specifically set forth in the Lease.

     (d)  Tenant has paid a security deposit under the Lease.

     (e)  To Tenant's knowledge there are no defaults by Landlord under the
Lease and there are no existing circumstances which, with the passage of time,
or notice, or both, would give rise to a default under the Lease.

     (f)  Tenant has accepted and is occupying the Premises, and Landlord has no
unperformed obligation under the Lease to construct any improvements for the
Tenant related to the Premises.

     (g)  Tenant has no charge, lien, claim of set-off or defense against rents
or other charges due or to become due under the Lease or otherwise under any of
the terms, conditions, or covenants contained therein.

     (h)  Tenant has received no notice from any insurance company of any
defects or inadequacies in the Premises or in any part thereof which would
adversely affect the insurability of the Premises.

     (i)  Except as provided in the Lease, Tenant does not have any right or
option to purchase the Premises.

     (j)  Except as provided in the Lease, Tenant does not have any rights or
options to renew the Lease or to lease additional space in any building owned by
the Landlord.

     10.  Tenant Covenants.
          ---------------- 

     (a)  From and after the date hereof, Tenant will not pay any rent under the
Lease more than thirty (30) days in advance of its due date.

     (b)  From and after the date hereof, so long as there shall be any
assignment of Landlord's interest in the Lease to Lender, or any successor
thereto, Tenant will not:  consent to the modification of the Lease nor to the
termination thereof without the prior written consent of the Lender or any
successor holder of the Loan or the Mortgage which consent shall not be
unreasonably withheld or delayed (either of them being called "Mortgagee"), nor
seek to terminate the Lease by reason of any act or omission of Landlord until
Tenant shall have given written notice of such act or omission to such
Mortgagee's last address furnished Tenant) and until a reasonable period of time
shall have elapsed following the giving of such notice, during which period the
Mortgagee shall have the right, but not the obligation, to remedy such act or
omission.

                                      -8-
<PAGE>
 
     (c)  Upon written notice of the default by Landlord under any of the loan
documents held by Mortgagee and assignment of the Landlord's interest under the
Lease by Landlord to Mortgagee, Tenant, if Mortgagee so requests, will recognize
such Mortgagee as the Landlord under the Lease and will thereafter pay rent and
other sums to Mortgagee (or to the party designated by the Mortgagee in writing)
in accordance with the terms of the Lease, and, in such event, such Mortgagee
will not be liable for any act or omission of any prior lessor, liable for
return of the security deposit unless same was actually delivered to Mortgagee,
bound by any amendment to or assignment of the Lease made without its consent,
bound by any rent paid more than thirty (30) days in advance, or be subject to
any set-off or defense Tenant might have had against any prior lessor.

     11.  Notices.  Unless and except as otherwise specifically provided herein,
          -------                                                               
any and all notices, elections, approvals, consents, demands, requests and
responses thereto ("Communications") permitted or required to be given under
this Agreement shall be in writing, signed by or on behalf of the party giving
the same, and shall be deemed to have been properly given and shall be effective
upon the earlier of receipt thereof or three (3) days after deposit thereof in
the United States mail, postage prepaid, certified with return receipt
requested, to the other party at the address of such other party set forth
hereinbelow or at such other address within the continental United States as
such other party may designate by notice specifically designated as a notice of
change of address and given in accordance herewith; provided, however, that the
time period in which a response to any Communication must be given shall
commence on the date of receipt thereof, and provided further that no notice of
change of address shall be effective with respect to Communications sent prior
to the time of receipt of such change.  Receipt of Communications hereunder
shall occur upon actual delivery (whether by mail, facsimile transmission,
messenger, courier service, or otherwise) to an individual party or to an
officer, member, or general or limited partner of a party or to any agent or
employee of such party at the address of such party set forth hereinbelow,
subject to change as provided hereinabove.  An attempted delivery in accordance
with  the foregoing, acceptance of which is refused or rejected, shall be deemed
to be and shall constitute receipt; and an attempted delivery in accordance with
the foregoing by mail, messenger, or courier service (whichever is chosen by the
sender) which is not completed because of changed address of which no notice was
received by the sender in accordance with this provision prior to the sending of
the Communication shall also be deemed to be and constitute receipt.  Any
Communication, if given to Lender, must be addressed as follows, subject to
change as provided hereinabove:

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

and, if given to Tenant, must be addressed as follows, subject to change as
provided hereinabove:

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

                                      -9-
<PAGE>
 
and, if given to Landlord, must be addressed as follows, subject to change as
provided hereinabove:

                    Capital Automotive, L.P.


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


     12.  Miscellaneous.  This Agreement shall be binding upon and inure to the
          -------------                                                        
benefit of the parties hereto and their respective heirs, legal representatives,
successors, successors-in-title and assigns.  When used herein, the term
"Landlord" or "landlord" refers to Landlord and to any successor to the interest
of Landlord under the Lease.


                     [THIS SPACE INTENTIONALLY LEFT BLANK]


                                     -10-
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first above written.

                                  LENDER:

Signed, sealed and delivered
in the presence of:                      By:
                                  Title:

- ------------------------------          ----------------------------------
Witness                                 (CORPORATE SEAL)



                      TENANT:

Signed, sealed and delivered
in the presence of:                      By:
                                  Title:

- ------------------------------          ----------------------------------
Witness                                 (CORPORATE SEAL)

                      LANDLORD:

Signed, sealed and delivered
in the presence of:                      By:
                                  Title:

- ------------------------------          ----------------------------------
Witness                                 (PARTNERSHIP SEAL)


                                     -11-
<PAGE>
 
                                   EXHIBIT A


Lease Dated __________ from ________________ to _______________ with Exhibit A
attached, all in the form attached hereto as Attachment to Exhibit A.
                                             ------------------------


                                     -12-
<PAGE>
 
County of  ____________________:
                                    SS:
State of ______________________:

     This is to certify that on this ____ day of ________, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Lender in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Lender.



                              --------------------------------------
                              Notary Public

                              My commission expires:

                                     -13-
<PAGE>
 
County of  __________________:
                                    SS:
State of ____________________:

     This is to certify that on this ____ day of _________, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Tenant in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Tenant.



                              ---------------------------------
                              Notary Public

                              My commission expires:


                                     -14-
<PAGE>
 
County of _________________
                               SS:
State of __________________

     This is to certify that on this ____ day of _______, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Landlord in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Landlord.



                              -------------------------------------------
                              Notary Public

                              My commission expires:


                                     -15-
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
                         1925 North Lynn Street, #306
                          Arlington, Virginia  22209


                               January 10, 1998


Good News Salisbury, Inc.
Attention: Roy L. Meyers, Jr.
2013 N. Salisbury Blvd.
Salisbury, Maryland 21801

Dear Mr. Meyers:

     We hereby agree that the escrow of Impositions pursuant to Section 3.04 of
the Lease Agreement is irrevocably waived.

     We hereby further agree that the joint and several indemnity to be provided
by Roy L. Meyers, Jr. and Charlotte Meyers in Section 11.2.3(ii) under each of
the Real Property Purchase Agreements shall not exceed, in the aggregate under
both Agreements together, $2,000,000, less the amounts, if any, paid by the
Sellers that counts against the obligation of Roy L. Meyers, Jr. and Charlotte
Meyers under Section 11.2.3 of both Agreements together.

     We acknowledge that you would not enter into the Real Property Purchase
Agreement if we had not agreed to the waiver of the escrow of Impositions and
the agreement to aggregate the joint and several indemnity set forth above.  The
waiver pursuant to this letter shall be binding upon us and our successors and
assigns.


                                    Capital Automotive L.P.


                                    By:  Capital Automotive REIT,
                                         its General Partner


                                    By: /s/ Thomas D. Eckert
                                            Thomas D. Eckert,
                                            President and Chief Executive 
                                            Officer


                                     -16-

<PAGE>
 
                                 EXHIBIT 10.34
        (Form of Guaranty Agreement with Kline Imports Chesapeake, Inc.)

                      Guaranty and Subordination Agreement


     THIS GUARANTY AND SUBORDINATION AGREEMENT (this "Agreement"), made as of
the __ day of January, 1998, by  Kline Imports Chesapeake, Inc., a Virginia
corporation ("Guarantor"), in favor of Capital Automotive, L.P., a Delaware
limited partnership ("Landlord").

                                  WITNESSETH:
                                  ---------- 

     WHEREAS, Landlord has this day entered into a lease (the "Lease") of
certain Properties identified on Schedule A hereto (individually a "Property"
and collectively the "Properties") with Kline Chevrolet Sales Corporation, a
Virginia corporation ("Tenant"), this Agreement being attached to the Lease;

     WHEREAS, Tenant is an affilate of Guarantor; and

     WHEREAS, Landlord has required, as a condition to entering into the Lease,
Guarantor to be a guarantor of each and every obligation imposed upon Tenant by
the Lease.

     NOW, THEREFORE, to induce Landlord to enter into the Lease and in
consideration of the foregoing premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor, for itself, its successors and assigns, hereby covenants and agrees
for the benefit of Landlord, as follows:

     1.   Guaranty.  Guarantor does hereby unconditionally and irrevocably
          --------                                                        
guarantee to Landlord the full, complete and timely performance of all
obligations imposed on Tenant by the terms of the Lease, including, but  not
limited to, the full, complete and timely payment of rent and all other sums due
by Tenant under the Lease, and the payment as required by the Lease of all
damages to Landlord which may result from Tenant's breach of any provision of
the Lease, including, but not limited to, those relating to damage to any
Property or the leased premises.

     2.   Guaranty of Payment and Performance.  Guarantor acknowledges and
          -----------------------------------                             
agrees that this is a guaranty of payment and performance and not mere
collection.  The liability of Guarantor under this Agreement shall be direct and
immediate and not conditional or contingent upon the pursuit of any remedies
against Tenant or any other person or entity.  Guarantor waives any right to
require that an action be brought against Tenant or any other person or entity.
In the event, on account of the Bankruptcy Reform Act of 1978, as amended, or
any other debtor relief law (whether statutory, common law, case law or
otherwise) of any jurisdiction whatsoever, now or hereafter in effect, which may
be or become applicable, Tenant shall be relieved of the Lease or any debt,
obligation or liability as provided in the Lease, Guarantor shall nevertheless
be fully liable for the complete and timely performance of all obligations
imposed on Tenant by the Lease throughout the entire term of the Lease, all to
the same extent as if Guarantor had been the original tenant thereunder and the
<PAGE>
 
Lease shall be deemed unaffected by any such relief granted to Tenant.  In the
event of a default under the Lease which is not cured within any applicable
grace or cure period, Landlord shall have the right to enforce its rights,
powers and remedies thereunder or hereunder, in any order to the maximum extent
permitted by law, and all rights, powers and remedies provided thereunder or
hereunder or by law or in equity.  If the obligations guaranteed hereby are
partially performed, paid or discharged by reason of the exercise of any of the
remedies available to Landlord, this Agreement shall nevertheless remain in full
force and effect, and Guarantor shall continue to be liable for all remaining
obligations guaranteed hereby, even though any rights which Guarantor may have
against Tenant may be destroyed or dismissed by the exercise of any such remedy.

     3.   Waivers by Guarantor.  To the extent permitted by law, Guarantor
          --------------------                                            
hereby waives and agrees not to assert or take advantage of:

          (a) Any right to require Landlord to proceed against Tenant or any
other person or entity or to proceed against or exhaust any security held by
Landlord at any time or to pursue any other remedy in Landlord's power or under
any other agreement before proceeding against Guarantor;

          (b) Any defense that may arise by reason of the incapacity, lack of
authority, death or disability of any other person or persons or the failure of
Landlord to file or enforce a claim against the estate (in administration,
bankruptcy or any other proceeding) of any other person or persons:

          (c) Any defense based upon an election of remedies by Landlord;

          (d) Any right or claim or right to cause a marshaling of the assets of
Tenant or Guarantor;

          (e) Any invalidity, irregularity or unenforceability, in whole or in
part, of any one or more provisions of the Lease;

          (f) Any modification of the Lease or of any obligation of Tenant
thereunder by amendments to the Lease, by waivers granted by Landlord or by
operation of law or by action of any court, whether pursuant to the Bankruptcy
Reform Act of 1978, as amended, or any other debtor relief law (whether
statutory, common law, case law or otherwise) of any jurisdiction whatsoever,
now or hereafter in effect, or otherwise.

     4.   Subordination.  Guarantor and those parties signing below for the
          -------------                                                    
purpose of being bound by this Section 4 (collectively, "Section 4 Signers)
hereby unconditionally and irrevocably subordinate (i) all payments due or to
become due by Tenant to the Section 4 Signers, or any of them, by reason of any
and all debts or other obligations, including the obligation to pay salaries or
other compensation (collectively "Debt Payments") and (ii) the receipt of all
dividends or other distributions of any kind or nature (collectively,
"Distributions") to the payment of all sums due or 

                                      -2-
<PAGE>
 
to become due by Tenant to Landlord under the Lease, including the payment of
Rent and all damages due by reason of Tenant's breach of the Lease; provided,
however, that for so long as there shall be no existing Event of Default under
the Lease, after the payment of each monthly installment of Rent, the Section 4
Signers shall be entitled to receive Debt Payments due for such month.
 
     5.   Termination of Guaranty.  This Guaranty shall terminate if at any time
          -----------------------                                               
during the term or any extension term of the Lease, Guarantor (having entered
into a sub-lease with Tenant under the Lease) shall assign its sub-lease under
the Lease to an unaffiliated third party (and such assignment shall be consented
to by Landlord).  This termination clause shall not be effective if Guarantor
does not enter into a sub-lease under the Lease.  The termination of this
Guaranty by reason of Guarantor's assignment of its sub-lease under the Lease
shall in no manner effect, nor be construed to effect, Guarantor's obligations
hereunder against any default under the Lease by Tenant that shall have occured
prior to the termination of this Guaranty.
 
     6.   General Provisions.
          ------------------ 

          (a) Survival.  This Agreement shall be deemed to be continuing in
              --------                                                     
nature and shall remain in full force and effect and shall survive the exercise
of any remedy by Landlord under the Lease;

          (b) No Subrogation; No Recourse Against Landlord.  Notwithstanding the
              --------------------------------------------                      
satisfaction by Guarantor of any liability hereunder, Guarantor's rights of
subrogation, contribution, reimbursement or indemnity, if any, or any right of
recourse to or with respect to the assets or property of Tenant, shall be
subject and subordinate to the rights of Landlord.

          (c) Entire Agreement; Amendment; Severability.  This Agreement
              -----------------------------------------                 
contains the entire agreement between the parties respecting the matters herein
set forth and supersedes all prior agreements, whether written or oral, between
the parties respecting such matters.  Any amendments or modifications hereto, in
order to be effective, shall be in writing and executed by Landlord and
Guarantor.  A determination that any provision of this Agreement is
unenforceable or invalid shall not affect the enforceability or validity of any
other provision, and any determination that the application of any provision of
this Agreement to any person or circumstance is illegal or unenforceable shall
not affect the enforceability or validity of such provision as it may apply to
any other persons or circumstances.

          (d) Governing Law: Binding Effect; Waiver of Acceptance.  This
              ---------------------------------------------------       
Agreement shall be governed by and construed in accordance with the laws of the
State of Virginia without regard to conflicts of laws principles thereof.  This
Agreement shall bind Guarantor, it successors and assigns (but in the event of
an assignment, Guarantor shall not be relieved of its obligations hereunder),
and shall inure to the benefit of Landlord, its successors and assigns.
Guarantor hereby waives any acceptance of this Agreement by Landlord and this
Agreement shall immediately be binding upon Guarantor.

                                      -3-
<PAGE>
 
          (e) Notice.  All notices, demands, requests or other communications to
              ------                                                            
be sent by one party to the other hereunder or required by law shall be in
writing and shall be deemed to have been validly given or served by delivery of
the same in person to the intended addressee, or certified mail or by depositing
the same with Federal Express or another reputable private courier service for
next business day delivery to the intended addressee at its address set forth in
the last section of this Agreement or at such other address as may be designated
by such party as herein provided.  All notices, demands and requests shall be
effective upon such personal delivery, or one (1) business day after being
deposited with the private courier service, or two (2) business days after being
deposited in the United States mail as required above.  Rejection or other
refusal to accept or the inability to deliver because of changed address of
which no notice was given as herein required shall be deemed to be receipt of
the notice, demand or request sent.  By giving to the other party hereto at
least seven (7) days' prior written notice thereof in accordance with the
provisions hereof, each party shall have the right from time to time to change
their respective addresses and each shall have the right to specify as its
address any other address within the United States of America.

          (f) No Waiver; Time of Essence.  The failure of either party to
              --------------------------                                 
enforce any of the respective rights or remedies hereunder, or to promptly
enforce any such rights or remedies, shall not constitute a waiver thereof nor
give rise to any estoppel against such party nor excuse any of the parties
hereto from their respective obligations hereunder.  Any waiver of such right or
remedy must be in writing and signed by the party to be bound and must expressly
state that such right or remedy has been or thereby is waived.  This Agreement
is subject to enforcement at law or in equity, including actions for damages or
specific performance.  Time is of the essence hereof.

          (g) Captions for Convenience.  The captions and headings of the
              ------------------------                                   
section and paragraphs of this Agreement are for convenience of reference only
and shall not be construed in interpreting the provisions hereof.

          (h) Attorney's Fees.  In the event it is necessary for Landlord to
              ---------------                                               
retain the services of an attorney or any other consultants in order to enforce
this Agreement, or any portion hereof, Guarantor shall promptly pay to Landlord
any and all costs and expenses, including, without limitation, attorney's fees,
incurred by Landlord as a result thereof and such costs, fees and expenses shall
be included in the costs of the case to the extent the Landlord wins the issue
under contest.

          (i) Successive Actions.  Separate and successive actions may be
              ------------------                                         
brought hereunder to enforce any of the provisions hereof at any time and from
time to time.  No action hereunder shall preclude any subsequent action, and
Guarantor hereby waives any covenants to the maximum extent permitted by law not
to assert any defense in the nature of splitting of causes of action or merger
of judgments.

          (j) Reliance.  Landlord would not enter into the Lease without this
              --------                                                       
Agreement. Accordingly, Guarantor intentionally, irrevocably and unconditionally
enters into the covenants and agreements as set forth above and understand that,
in reliance upon and in consideration of such covenants and agreements, the
Lease has been made.

                                      -4-
<PAGE>
 
     4.   Notices:  The following addresses shall be used for notice purposes:
          -------                                                             

          If to Guarantor:

          Kline Imports Chesapeake, Inc.
          c/o The Magnus Group Ltd.
          1350 Connecticut Avenue, N.W.
          Suite 1225
          Washington, D.C. 20036

          with a copy to:

          Kaufman & Canoles, A Professional Corporation
          2000 Nations Bank Center
          One Commercial Place
          Norfolk, Virginia, 23514
          Attention: William R. Van Buren, III, Esq.

          If to Landlord:
 
          Capital Automotive L.P.
          1925North Lynn Street, Suite 306
          Arlington, Virginia  22209

          With copies to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037-1420
          Attention: George P. Stamas

     IN WITNESS WHEREOF, Guarantor has executed this Agreement under seal as of
the day and year first above written:

                                    GUARANTOR:

ATTEST/WITNESS:                     
                                    -------------------------------------  
- -------------------------------     By:     James M. Kline
Name:                               Title:  Chairman of the Board
       ------------------------

                                      -5-

<PAGE>
 
                               EXHIBIT 10.35              [_] Employee's Copy
                                                          [_] Partnership's Copy

                            CAPITAL AUTOMOTIVE L.P.
                             Employment Agreement

To Thomas D. Eckert:

     This Agreement establishes the terms of your employment with Capital
Automotive L.P., a Maryland limited partnership (the "Partnership"). It replaces
your prior employment agreement with Capital Automotive REIT, a Maryland real
estate investment trust (the "Company"), under which the Company assigned your
agreement to the Partnership.  You remain an employee of the Company, but your
primary responsibility is as an employee of the Partnership.

Employment and Duties    You and the Partnership agree to your employment with
                         the Partnership and to your services as President and
                         Chief Executive Officer on the terms contained herein.
                         In such position, you will report directly to the
                         Company's Board of Trustees (the "Board") and to the
                         General Partner of the Partnership. You agree to
                         perform whatever duties the Partnership may assign you
                         from time to time, consistent with your position as a
                         senior executive. During your employment, you agree to
                         devote your full business time, attention, and energies
                         to performing those duties (except as the Partnership
                         otherwise agrees from time to time). You agree to
                         faithfully serve the Partnership, to conform to and
                         comply with the lawful and good faith directions and
                         instructions given you by the Partnership, and to use
                         your best efforts to promote and serve the interests of
                         the Partnership. You agree to comply with the
                         noncompetition, secrecy, and other provisions of
                         Exhibit A to this Agreement.

Term of Employment       Your employment under this Agreement begins as of
                         January 1, 1998 (the "Effective Date"). Unless sooner
                         terminated under this Agreement, your employment ends
                         at 6:00 p.m. Eastern Time on

                               June 30, 1998, if the Company has not consummated
                               its initial public offering ("IPO") by that date,
                               or

                               October 19, 2001, if the Company has consummated
                               its IPO on or before June 30, 1998.
<PAGE>
 
                         The period running from the Effective Date to the
                         applicable date in the preceding sentence is the
                         "Term."

                         Termination or expiration of this Agreement ends your
                         employment but does not end your obligation to comply
                         with Exhibit A.

Compensation

     Salary              The Partnership (or, in its discretion, the Company)
                         will pay you an annual salary (the "Salary") from
                         October 27, 1997 at the rate of not less than $350,000
                         in accordance with its payroll practices. The
                         Partnership or its Compensation Committee will review
                         your Salary annually and consider you for increases
                         from the Partnership.

     Bonus               The Partnership or its Compensation Committee will
                         establish annual bonus targets under which you will be
                         eligible for an annual bonus equal to up to 100% of
                         your Salary.

     Employee Benefits   While you are employed under this Agreement, the
                         Partnership will provide you with the same benefits,
                         including medical insurance coverage, as the
                         Partnership makes generally available from time to time
                         to the Partnership's employees, as those benefits are
                         amended or terminated from time to time, and such other
                         benefits as are commensurate with your position as a
                         senior executive of a public company, including either
                         a company automobile or an allowance for an automobile.
                         Your participation in the Partnership's benefit plans
                         will be subject to the terms of the applicable plan
                         documents and the Partnership's generally applied
                         policies, and the Partnership in its sole discretion
                         may from time to time adopt, modify, interpret, or
                         discontinue such plans or policies.
 
Place of Employment      Your principal place of employment will be at the
                         Partnership's headquarters in the Washington
                         metropolitan area (or such other offices as the
                         Partnership may establish from time to time and to
                         which it assigns you in its sole discretion). You
                         understand and agree that you must travel from time to
                         time for business reasons.
 
<PAGE>
 
Indemnification          The Partnership will indemnify you to the fullest
                         extent authorized by law if you are made a party to any
                         action, suit, or proceeding, whether criminal, civil,
                         administrative, or investigative, because you are or
                         were a manager, officer, or employee of the Partnership
                         or serve or served any other entity as a director,
                         officer, or employee at the Partnership's request;
                         provided, however, that you must repay the Partnership
                         --------  -------
                         for any indemnification if the final determination of
                         an arbitrator or a court of competent jurisdiction
                         declares, after the expiration of the time within which
                         judicial review (if permitted) of such determination
                         may be perfected, that indemnification by the
                         Partnership is not permissible under applicable law.

Expenses                 The Partnership will reimburse you for reasonable and
                         necessary travel and other business-related expenses
                         you incur for the Partnership in performing your duties
                         under this Agreement. You must itemize and substantiate
                         all requests for reimbursements. You must submit
                         requests for reimbursement in accordance with the
                         policies and practices of the Partnership and within 60
                         days after incurring the expense.

No Other Employment      For so long as you are employed by the Partnership, you
                         agree that you will not, directly or indirectly,
                         provide services to any person or organization for
                         which you receive compensation or otherwise engage in
                         activities that would conflict or interfere
                         significantly with the faithful performance of your
                         duties to the Partnership without the Partnership's
                         prior written consent. (This prohibition excludes any
                         work performed at the Partnership's direction including
                         any work for the Company.) The Partnership acknowledges
                         that, as of the Effective Date, you serve as a director
                         of The Munder Funds (a family of mutual funds) and The
                         Celotex Corp. and agrees that such directorships do not
                         violate the prohibition on other employment. You may
                         manage your personal investments, as long as the
                         management takes only minimal amounts of time and is
                         consistent with the provisions of the No Competition
                         Section in Exhibit A and is otherwise consistent with
                         the policies and practices of the Partnership.

                         You represent to the Partnership that you are not
                         subject to any agreement, commitment, or policy of any
                         third party that would
<PAGE>
 
                          prevent you from entering into or performing your
                          duties under this Agreement, and you agree that you
                          will not enter into any agreement or commitment or
                          agree to any policy that would prevent or hinder your
                          performance of duties and obligations under this
                          Agreement, including Exhibit A.

No Conflicts of Interest  You confirm that you have fully disclosed to the
                          Partnership and the Company, to the best of your
                          knowledge, all circumstances under which you, your
                          spouse, and your relatives (including their spouses,
                          children, and relatives) have or may have a conflict
                          of interest with the Company or the Partnership. You
                          further agree to fully disclose to the Partnership any
                          such circumstances that might arise during the Term.
                          You agree to fully comply with the Partnership's
                          policy and practices relating to conflicts of
                          interest.

No Payments to            You will neither pay nor permit payment of any
Governmental Officials    remuneration to or on behalf of any governmental
                          official other than payments required or permitted by
                          applicable law.

Termination               Subject to the provisions of this section, the
                          Partnership may terminate your employment, or you may
                          resign, except that, if you voluntarily resign, you
                          must provide the Partnership with 90 days' prior
                          written notice (unless the Partnership has previously
                          waived such notice in writing or authorized a shorter
                          notice period).

     For Cause            The Partnership may terminate your employment for
                          "Cause" if you:

                                 (i)   engage in dishonesty that relates
                                 materially to the performance of services or
                                 any obligations under this Agreement, including
                                 Exhibit A;

                                 (ii)  are convicted of, or plead guilty or no
                                 contest to, any misdemeanor (other than for
                                 minor infractions) involving fraud, breach of
                                 trust, misappropriation, or other similar
                                 activity or any felony;

                                 (iii) perform your duties under this Agreement
                                 in a grossly negligent manner; or
<PAGE>
 
                                 (iv)  willfully breach this Agreement,
                                 including Exhibit A, in a manner materially
                                 injurious to the Partnership. An act or
                                 omission is only "willful" if you acted in bad
                                 faith or without any reasonable belief that the
                                 action or omission was in the interests of the
                                 Partnership and consistent with your duties and
                                 obligations under this Agreement.

                    Your termination for Cause under (i) and (ii) will be
                    effective immediately upon the Partnership's mailing or
                    transmission of such notice. Before terminating your
                    employment for Cause under (iii) or (iv), the Partnership
                    will specify in writing to you the nature of the act,
                    omission, refusal, or failure that it deems to constitute
                    Cause.   The Partnership will give you the opportunity to
                    correct the situation (and thus avoid termination for Cause
                    under (iii) or (iv)).  You must complete the correction
                    within a reasonable period of time after the written notice
                    to you, and the Partnership agrees to provide you no less
                    than 15 days for such correction.

     Without Cause  Subject to the provisions below under Payments on
                    Termination, the Partnership may terminate your employment
                    under this Agreement before the end of the Term without
                    Cause.

     Good Reason    You may resign for Good Reason with 45 days' advance written
                    notice as provided below. "Good Reason" means the
                    occurrence, without your written consent, of any of the
                    following circumstances:

                          the Partnership's failure to perform or observe any of
                          the material terms or provisions of this Agreement,

                          the assignment to you of any duties inconsistent with,
                          or any substantial diminution in, your employment
                          status or responsibilities as in effect on the date of
                          this Agreement or your departure from the Board (other
                          than by your voluntary resignation or your choice not
                          to stand for re-election),

                          the Partnership's relocation of its headquarters to a
                          location that would increase your commuting distance
                          by more than
<PAGE>
 
                          50 miles, based on your residence when this Agreement
                          is executed, or

                          a Change of Control after consummation of an IPO,
                          consisting of any one or more of the following events:

                                a person, entity, or group (other than the
                                Company, the Partnership, any subsidiary of
                                either, any Company Group benefit plan, or any
                                underwriter temporarily holding securities for
                                an offering of such securities) acquires
                                ownership of more than 40% of the undiluted
                                total voting power of the Company's then-
                                outstanding securities eligible to vote to elect
                                members of the Board ("Company Voting
                                Securities");

                                consummation of a merger or consolidation of the
                                Company into any other entity -- unless the
                                holders of the Company Voting Securities
                                outstanding immediately before such
                                consummation, together with any trustee or other
                                fiduciary holding securities under a Company
                                Group benefit plan, hold securities that
                                represent immediately after such merger or
                                consolidation more than 60% of the combined
                                voting power of the then outstanding voting
                                securities of either the Company or the other
                                surviving entity or its parent; or

                                the stockholders of the Company approve (i) a
                                plan of complete liquidation or dissolution of
                                the Company or (ii) an agreement for the
                                Company's sale or disposition of all or
                                substantially all the Company's assets, and such
                                liquidation, dissolution, sale, or disposition
                                is consummated.

                          Even if other tests are met, a Change of Control has
                          not occurred under any circumstance in which the
                          Company files for bankruptcy protection or is
                          reorganized following a bankruptcy filing.
<PAGE>
 
                          You must give notice to the Partnership of your
                          intention to resign for Good Reason within 30 days
                          after the occurrence of the event that you assert
                          entitles you to resign for Good Reason. In that
                          notice, you must specify the condition that you
                          consider provides you with Good Reason and must give
                          the Partnership an opportunity to cure the condition
                          within 30 days after your notice. If the Partnership
                          fails to cure the condition, your resignation will be
                          effective on the 45th day after your notice (unless
                          the Board has previously waived such notice period in
                          writing or agreed to a shorter notice period).

                          You will not be treated as resigning for Good Reason
                          if the Partnership had Cause to terminate your
                          employment as of the date of your notice of
                          resignation.

     Disability           If you become "disabled" (as defined below), the
                          Partnership may terminate your employment. You are
                          "disabled" if you are unable, despite whatever
                          reasonable accommodations the law requires, to render
                          services to the Partnership for more than 90
                          consecutive days because of physical or mental
                          disability, incapacity, or illness. You are also
                          disabled if you are deemed to be disabled within the
                          meaning of the Partnership's long-term disability
                          policy as then in effect.

     Death                If you die during the Term, the Term will end as of
                          the date of your death.

     Payments on          If the Partnership terminates your employment for or
     Termination          without Cause or because of disability or death or
                          because the Company does not consummate its IPO or you
                          resign, the Partnership will pay you any unpaid
                          portion of your Salary pro-rated through the date of
                          actual termination and any annual bonuses already
                          determined by such date but not yet paid, reimburse
                          any substantiated but unreimbursed business expenses,
                          pay any accrued and unused vacation time (to the
                          extent consistent with the Partnership's policies),
                          and provide such other benefits as applicable laws or
                          the terms of the benefits require. Except to the
                          extent the law requires otherwise or as provided in
                          the Severance paragraph or in your option
                          agreement(s), neither you nor your beneficiary or
                          estate will have any rights or claims under this
<PAGE>
 
                          Agreement or otherwise to receive severance or any
                          other compensation, or to participate in any other
                          plan, arrangement, or benefit, after such termination.
                          If your employment is terminated because the Company
                          does not consummate its IPO by June 30, 1998, you
                          agree to waive any rights to severance set forth below
                          in exchange for the benefits provided under your
                          agreement with Friedman, Billings, Ramsey & Co., Inc.
                          dated as of October 27, 1997.

          Severance               In addition to the foregoing payments, if the
                                  Partnership terminates your employment without
                                  Cause or you resign for Good Reason before the
                                  end of the Term, the Partnership will

                                          pay you severance equal to your
                                          Salary, as then in effect, for 24
                                          months in a single lump sum as soon as
                                          practicable but in any event no more
                                          than 90 days after termination;

                                          pay the premium cost for you to
                                          receive any group health coverage the
                                          Partnership must offer you under
                                          Section 4980B of the Internal Revenue
                                          Code of 1986 ("COBRA Coverage") for
                                          the period of such coverage; and

                                          pay you, at the time the Partnership
                                          would otherwise pay your annual bonus,
                                          your pro rata share of the bonus for
                                          the year of your termination, where
                                          the pro rata factor is based on days
                                          elapsed in your year of termination
                                          till date of termination over 365,
                                          less any portion of the bonus for the
                                          year of your termination already paid.

                                  You are not required to mitigate amounts
                                  payable under the Severance paragraph by
                                  seeking other employment or otherwise;
                                  however, you agree to return any payments
                                  under this Severance paragraph if you fail to
                                  comply with Exhibit A. Expiration of this
                                  Agreement, whether because of notice of non-
                                  renewal or otherwise, does not constitute
<PAGE>
 
                                  termination without Cause nor is it grounds
                                  for resignation with Good Reason.

Assignment                 The Partnership may assign or otherwise transfer this
                           Agreement and any and all of its rights, duties,
                           obligations, or interests under it to

                                  the Company or any of the affiliates or
                                  subsidiaries of the Company or the Partnership
                                  or

                                  to any business entity that at any time by
                                  merger, consolidation, or otherwise acquires
                                  all or substantially all of the Company's
                                  stock or assets or the partnership units or
                                  assets of the Partnership or to which the
                                  Company or the Partnership transfers all or
                                  substantially all of its assets.

                           Upon such assignment or transfer, any such business
                           entity will be deemed to be substituted for the
                           Partnership for all purposes. Assignment or transfer
                           does not constitute termination without Cause nor is
                           it grounds for resignation with Good Reason absent
                           the occurrence of a Change of Control. This Agreement
                           binds the Partnership, its successors or assigns, and
                           your heirs and the personal representatives of your
                           estate. Without the Partnership's prior written
                           consent, you may not assign or delegate this
                           Agreement or any or all rights, duties, obligations,
                           or interests under it.

Severability               If the final determination of an arbitrator or a
                           court of competent jurisdiction declares, after the
                           expiration of the time within which judicial review
                           (if permitted) of such determination may be
                           perfected, that any term or provision of this
                           Agreement, including any provision of Exhibit A, is
                           invalid or unenforceable, the remaining terms and
                           provisions will be unimpaired, and the invalid or
                           unenforceable term or provision will be deemed
                           replaced by a term or provision that is valid and
                           enforceable and that comes closest to expressing the
                           intention of the invalid or unenforceable term or
                           provision.

Amendment; Waiver          Neither you nor the Partnership may modify, amend, or
                           waive the terms of this Agreement other than by a
                           written instrument signed 
<PAGE>
 
                           by you and a duly authorized representative of the
                           General Partner of the Partnership. Either party's
                           waiver of the other party's compliance with any
                           provision of this Agreement is not a waiver of any
                           other provision of this Agreement or of any
                           subsequent breach by such party of a provision of
                           this Agreement.

Withholding                The Partnership will reduce its compensatory payments
                           to you for withholding and FICA taxes and any other
                           withholdings and contributions required by law.

Third Party Beneficiary    You understand and agree that the Company is a third
                           party beneficiary of this Agreement.

Governing Law              The laws of the Commonwealth of Virginia (other than
                           its conflict of laws provisions) govern this
                           Agreement.

Notices                    Notices must be given in writing by personal
                           delivery, by certified mail, return receipt
                           requested, by telecopy, or by overnight delivery. You
                           should send or deliver your notices to the
                           Partnership's headquarters. The Partnership will send
                           or deliver any notice given to you at your address as
                           reflected on the Partnership's personnel records. You
                           and the Partnership may change the address for notice
                           by like notice to the others. You and the Partnership
                           agree that notice is received on the date it is
                           personally delivered, the date it is received by
                           certified mail, the date of guaranteed delivery by
                           the overnight service, or the date the fax machine
                           confirms receipt.

Legal Fees                 If a claim is asserted for breach of any provision of
                           this Agreement, you will be entitled to recover your
                           reasonable attorney's fees and expenses if you
                           prevail.

Superseding Effect         This Agreement supersedes any prior oral or written
                           employment, severance, option, or fringe benefit
                           agreements between you and the Company or the
                           Partnership. This Agreement supersedes all prior or
                           contemporaneous negotiations, commitments,
                           agreements, and writings with respect to the subject
                           matter of this Agreement (other than your agreement
                           with Friedman, Billings, Ramsey & Co. dated as of
                           October 27, 1997). All such other negotiations,
                           commitments, agreements, and writings will have no
                           further force 
<PAGE>
 
                           or effect; and the parties to any such other
                           negotiation, commitment, agreement, or writing will
                           have no further rights or obligations thereunder.

If you accept the terms of this Agreement, please sign in the space indicated
below. We encourage you to consult with any advisors of your choosing.


                              CAPITAL AUTOMOTIVE L.P.

                              General Partner:

                              CAPITAL AUTOMOTIVE REIT, a Maryland real
                              estate investment trust

                                    By:
                                       ----------------------------

                                    Its:
                                        ---------------------------
 


I accept and agree to the terms of employment set
forth in this Agreement:


- ---------------------------
      Thomas D. Eckert

Dated:
      ---------------------
<PAGE>
 
                                   Exhibit A
                                   ---------

No Competition      In consideration of your employment by the Partnership and
                    salary and benefits under this Agreement, during the term of
                    your employment, and except as set forth below, until the
                    date one year after your employment with the Company, the
                    Partnership, or their successors, assigns, affiliates, or
                    subsidiaries (collectively, the "Company Group") ends for
                    any reason (the "Restricted Period"), you agree as follows:

                    The Company is a real estate investment trust formed to
                    acquire real properties owned by automobile dealerships and
                    other automotive-related businesses and lease the properties
                    to such businesses. You will not, directly or indirectly,
                    promote, be employed by, lend money to, invest in, or engage
                    in any Competing Business within the Market Area. That
                    prohibition includes, but is not limited to, acting, either
                    singly or jointly or as agent for, or as an employee of or
                    consultant to, any one or more persons, firms, entities, or
                    corporations directly or indirectly (as a director,
                    independent contractor, representative, consultant, member,
                    or otherwise) that constitutes such a Competing Business.
                    You may own up to 3% of the outstanding capital stock of any
                    corporation that is actively publicly traded without
                    violating this No Competition covenant. This covenant does
                    not preclude you from being employed by any automobile
                    dealership or dealership group or other automotive-related
                    business that is a lessee or prospective lessee of
                    properties the Company or the Partnership holds or is
                    actively considering acquiring.

                    If, during the Restricted Period, you are offered and want
                    to accept employment with a business that engages in
                    activities similar to the Company's or the Partnership's,
                    you will inform the Partnership in writing of the identity
                    of the business, your proposed duties with that business,
                    and the proposed starting date of that employment. You will
                    also inform that business of the terms of this Exhibit A.
                    The Partnership will analyze the proposed employment and
                    make a good faith determination as to whether it would
                    threaten the Partnership's legitimate competitive interests.
                    If the Partnership 
<PAGE>
 
                    determines that the proposed employment would not pose an
                    unacceptable threat to its interests, the Partnership will
                    notify you that it does not object to the employment.

                    You acknowledge that, during the portion of the Restricted
                    Period that follows your employment, you may engage in any
                    business activity or gainful employment of any type and in
                    any place except as described above.  You acknowledge that
                    you will be reasonably able to earn a livelihood without
                    violating the terms of this Agreement.

                    You understand and agree that the rights and obligations set
                    forth in this No Competition Section will continue for one
                    year from the date of termination of this Agreement and your
                    employment with the Partnership or the Company Group, unless
                    the Company does not consummate its IPO by June 30, 1998, in
                    which event your obligations under this No Competition
                    Section end when your employment ends.

   Definitions

      Competing     Competing Business means any service or financial product of
      Business      any person or organization other than the Company Group, in
                    existence or then under development, that competes or could
                    potentially compete, directly or indirectly, with any
                    service or financial product of the Company Group upon which
                    or with which you have worked for the Partnership or the
                    Company Group or about which you acquire knowledge while
                    working for the Partnership or the Company Group. Competing
                    Business includes any enterprise engaged in the formation or
                    operation of real estate investment trusts or other entities
                    that invest primarily in automobile dealership or 
                    automotive-related properties or provide real estate
                    financing to automobile dealerships or automotive-related
                    businesses. Competing Business excludes real estate
                    investment trusts and similar entities that do not engage in
                    activities related to automotive dealerships or automotive-
                    related businesses.

      Market Area   The Market Area consists of the United States.

No Interference;    During the Restricted Period, you agree that you will not,
                    directly
<PAGE>
 
No Solicitation     or indirectly, whether for yourself or for any other
                    individual or entity (other than the Partnership or its
                    affiliates or subsidiaries), intentionally solicit or
                    endeavor to entice away from the Company Group:

                         any person whom the Company Group employs (other than
                         as your personal secretary) or otherwise engages to
                         perform services as a consultant or sales
                         representatives; or

                         any person or entity who is, or was, within the
                         Restricted Period, a contractor or subcontractor of the
                         Company Group known to you or a lessee or prospective
                         lessee of properties the Company Group holds or is
                         actively considering acquiring.
Secrecy

    Preserving      Your employment with the Partnership under and, if
    Company         applicable, before this Agreement has given and will give
    Confidences     you Confidential Information (as defined below). You
                    acknowledge and agree that using, disclosing, or publishing
                    any Confidential Information in an unauthorized or improper
                    manner could cause the Partnership or Company Group
                    substantial loss and damages that could not be readily
                    calculated and for which no remedy at law would be adequate.
                    Accordingly, you agree with the Partnership that you will
                    not at any time, except in performing your employment duties
                    to the Partnership or the Company Group under this Agreement
                    (or with the Partnership's prior written consent), directly
                    or indirectly, use, disclose, or publish, or permit others
                    not so authorized to use, disclose, or publish any
                    Confidential Information that you may learn or become aware
                    of, or may have learned or become aware of, because of your
                    prior or continuing employment, ownership, or association
                    with the Partnership or the Company Group or any of their
                    predecessors, or use any such information in a manner
                    detrimental to the interests of the Partnership or the
                    Company Group.
<PAGE>
 
     Preserving     You agree not to use in working for the Company Group and
     Others'        not to disclose to the Company Group any trade secrets or
     Confidences    other information you do not have the right to use or
                    disclose and that the Company Group is not free to use
                    without liability of any kind. You agree to promptly inform
                    the Partnership in writing of any patents, copyrights,
                    trademarks, or other proprietary rights known to you that
                    the Partnership or the Company Group might violate because
                    of information you provide.

     Confidential   "Confidential Information" includes, without limitation,
     Information    information the Partnership or the Company Group has
                    not previously disclosed to the public or to the trade with
                    respect to the Partnership's or the Company Group's present
                    or future business, operations, services, products,
                    research, inventions, discoveries, drawings, designs, plans,
                    processes, models, technical information, facilities,
                    methods, trade secrets, copyrights, software, source code,
                    systems, patents, procedures, manuals, specifications, any
                    other intellectual property, confidential reports, price
                    lists, pricing formulas, customer lists, financial
                    information (including the revenues, costs, or profits
                    associated with any of the Partnership's or the Company
                    Group's products or services), business plans, lease
                    structure, projections, prospects, opportunities or
                    strategies, acquisitions or mergers, advertising or
                    promotions, personnel matters, legal matters, any other
                    confidential and proprietary information, and any other
                    information not generally known outside the Partnership or
                    the Company Group that may be of value to the Partnership or
                    the Company Group but excludes any information already
                    properly in the public domain. "Confidential Information"
                    also includes confidential and proprietary information and
                    trade secrets that third parties entrust to the Partnership
                    or the Company Group in confidence.

                    You understand and agree that the rights and obligations set
                    forth in this Secrecy Section will continue indefinitely and
                    will survive termination of this Agreement and your
                    employment with the Partnership or the Company Group.
<PAGE>
 
Exclusive Property  You confirm that all Confidential Information is and must
                    remain the exclusive property of the Partnership or the
                    relevant member of the Company Group. All business records,
                    business papers, and business documents you keep or make in
                    the course of your employment by the Partnership relating to
                    the Partnership or any member of the Company Group must be
                    and remain the property of the Partnership or the relevant
                    member of the Company Group. Upon the termination of this
                    Agreement with the Partnership or upon the Partnership's
                    request at any time, you must promptly deliver to the
                    Partnership or to the relevant member of the Company Group
                    any Confidential Information or other materials (written or
                    otherwise) not available to the public or made available to
                    the public in a manner you know or reasonably should
                    recognize the Partnership did not authorize, and any copies,
                    excerpts, summaries, compilations, records and documents you
                    made or that came into your possession during your
                    employment. You agree that you will not, without the
                    Partnership's consent, retain copies, excerpts, summaries or
                    compilations of the foregoing information and materials. You
                    understand and agree that the rights and obligations set
                    forth in this Exclusive Property Section will continue
                    indefinitely and will survive termination of this Agreement
                    and your employment with the Company Group.

Maximum Limits      If any of the provisions of Exhibit A are ever deemed to
                    exceed the time, geographic area, or activity limitations
                    the law permits, you and the Partnership agree to reduce the
                    limitations to the maximum permissible limitation, and you
                    and the Partnership authorize a court or arbitrator having
                    jurisdiction to reform the provisions to the maximum time,
                    geographic area, and activity limitations the law permits.

Injunctive Relief   Without limiting the remedies available to the Partnership,
                    you acknowledge

                            that a breach of any of the covenants in this
                            Exhibit A may result in material irreparable injury
                            to the Partnership and Company Group for which there
                            is no adequate remedy at law, and
<PAGE>
 
                            that it will not be possible to measure damages for
                            such injuries precisely.

                    You agree that, if there is a breach or threatened breach,
                    the Partnership or any member of the Company Group will be
                    entitled to obtain a temporary restraining order and/or a
                    preliminary or permanent injunction restraining you from
                    engaging in activities prohibited by any provisions of this
                    Exhibit A or such other relief as may be required to
                    specifically enforce any of the covenants in this Exhibit A.

<PAGE>
 
                                EXHIBIT 10.36        [_]  Employee's Copy
                                                     [_]  Partnership's Copy

                            CAPITAL AUTOMOTIVE L.P.
                             Employment Agreement

To Scott M. Stahr:

     This Agreement establishes the terms of your employment with Capital
Automotive L.P., a Maryland limited partnership (the "Partnership").  It
replaces your prior employment agreement with Capital Automotive REIT, a
Maryland real estate investment trust (the "Company"), under which the Company
assigned your agreement to the Partnership.  You remain an employee of the
Company, but your primary responsibility is as an employee of the Partnership.

Employment and Duties   You and the Partnership agree to your employment as
                        Executive Vice President - Acquisitions on the terms
                        contained herein. In such position, you will report
                        directly to the Company's Chief Executive Officer (the
                        "CEO") and to the General Partner of the Partnership.
                        You agree to perform whatever duties the Partnership may
                        assign you from time to time, consistent with your
                        position as a senior executive. During your employment,
                        you agree to devote your full business time, attention,
                        and energies to performing those duties (except as the
                        CEO otherwise agrees from time to time). You agree to
                        faithfully serve the Partnership, to conform to and
                        comply with the lawful and good faith directions and
                        instructions given you by the Partnership, and to use
                        your best efforts to promote and serve the interests of
                        the Partnership. You agree to comply with the
                        noncompetition, secrecy, and other provisions of Exhibit
                        A to this Agreement.

Term of Employment      Your employment under this Agreement begins as of
                        January 1, 1998 (the "Effective Date"). Unless sooner
                        terminated under this Agreement, your employment ends at
                        6:00 p.m. Eastern Time on

                              June 30, 1998, if the Company has not consummated
                              its initial public offering ("IPO") by that date,
                              or

                              October 19, 2001, if the Company has consummated
                              its IPO on or before June 30, 1998.
<PAGE>
 
                         The period running from the Effective Date to the
                         applicable date in the preceding sentence is the
                         "Term."

                         Termination or expiration of this Agreement ends your
                         employment but does not end your obligation to comply
                         with Exhibit A.

Compensation

     Salary              The Partnership (or, in its discretion, the Company)
                         will pay you an annual salary (the "Salary") from the
                         Effective Date at the rate of not less than $225,000 in
                         accordance with its payroll practices. The Partnership
                         or the Compensation Committee of the General Partner
                         ("Compensation Committee") will review your Salary
                         annually and consider you for increases.

     Bonus               The Partnership or the Compensation Committee will
                         establish annual bonus targets under which you will be
                         eligible for an annual bonus equal to up to 100% of
                         your Salary.
 
     Employee Benefits   While you are employed under this Agreement, the
                         Partnership will provide you with the same benefits,
                         including medical insurance coverage, as the
                         Partnership makes generally available from time to time
                         to the Partnership's employees, as those benefits are
                         amended or terminated from time to time, and such other
                         benefits as are commensurate with your position as a
                         senior executive of a public company , including either
                         a company automobile or an allowance for an automobile.
                         Your participation in the Partnership's benefit plans
                         will be subject to the terms of the applicable plan
                         documents and the Partnership's generally applied
                         policies, and the Partnership in its sole discretion
                         may from time to time adopt, modify, interpret, or
                         discontinue such plans or policies.
 
Place of Employment      Your principal place of employment will be at the
                         Partnership's headquarters in the Washington
                         metropolitan area (or such other offices as the
                         Partnership may establish from time to time and to
                         which it assigns you in its sole discretion). You
                         understand and agree that you must travel from time to
                         time for business reasons.
 
<PAGE>
 
Indemnification          The Partnership will indemnify you to the fullest
                         extent authorized by law if you are made a party to any
                         action, suit, or proceeding, whether criminal, civil,
                         administrative, or investigative, because you are or
                         were a manager, officer, or employee of the Partnership
                         or serve or served any other entity as a director,
                         officer, or employee at the Partnership's request;
                         provided, however, that you must repay the Partnership 
                         --------  ------- 
                         for any indemnification if the final determination of
                         an arbitrator or a court of competent jurisdiction
                         declares, after the expiration of the time within which
                         judicial review (if permitted) of such determination
                         may be perfected, that indemnification by the
                         Partnership is not permissible under applicable law.

Expenses                 The Partnership will reimburse you for reasonable and
                         necessary travel and other business-related expenses
                         you incur for the Partnership in performing your duties
                         under this Agreement. You must itemize and substantiate
                         all requests for reimbursements. You must submit
                         requests for reimbursement in accordance with the
                         policies and practices of the Partnership and within 60
                         days after incurring the expense.

No Other Employment      For so long as you are employed by the Partnership, you
                         agree that you will not, directly or indirectly,
                         provide services to any person or organization for
                         which you receive compensation or otherwise engage in
                         activities that would conflict or interfere
                         significantly with the faithful performance of your
                         duties to the Partnership without the Partnership's
                         prior written consent. (This prohibition excludes any
                         work performed at the Partnership's direction including
                         any work for the Partnership.) You may manage your
                         personal investments, as long as the management takes
                         only minimal amounts of time and is consistent with the
                         provisions of the No Competition Section in Exhibit A
                         and is otherwise consistent with the policies and
                         practices of the Partnership.

                         You represent to the Partnership that you are not
                         subject to any agreement, commitment, or policy of any
                         third party that would prevent you from entering into
                         or performing your duties under
<PAGE>
 
                            this Agreement, and you agree that you will not
                            enter into any agreement or commitment or agree to
                            any policy that would prevent or hinder your
                            performance of duties and obligations under this
                            Agreement, including Exhibit A.

No Conflicts of Interest    You confirm that you have fully disclosed to the
                            Partnership and the Company, to the best of your
                            knowledge, all circumstances under which you, your
                            spouse, and your relatives (including their spouses,
                            children, and relatives) have or may have a conflict
                            of interest with the Partnership or the Company. You
                            further agree to fully disclose to the Partnership
                            any such circumstances that might arise during the
                            Term. You agree to fully comply with the
                            Partnership's policy and practices relating to
                            conflicts of interest.

No Payments to              You will neither pay nor permit payment of any 
Governmental Officials      remuneration to or on behalf of any governmental
                            official other than payments required or permitted
                            by applicable law.

Termination                 Subject to the provisions of this section, the
                            Partnership may terminate your employment, or you
                            may resign, except that, if you voluntarily resign,
                            you must provide the Partnership with 90 days' prior
                            written notice (unless the Partnership has
                            previously waived such notice in writing or
                            authorized a shorter notice period).

     For Cause              The Partnership may terminate your employment for
                            "Cause" if you:

                                 (i) engage in dishonesty that relates
                                 materially to the performance of services or
                                 any obligations under this Agreement, including
                                 Exhibit A;

                                 (ii) are convicted of any misdemeanor (other
                                 than for minor infractions) involving fraud,
                                 breach of trust, misappropriation, or other
                                 similar activity or any felony;

                                 (iii) perform your duties under this Agreement
                                 in a grossly negligent manner; or
<PAGE>
 
                              (iv) willfully breach this Agreement, including
                              Exhibit A, in a manner materially injurious to the
                              Partnership. An act or omission is only "willful"
                              if you acted in bad faith or without any
                              reasonable belief that the action or omission was
                              in the interests of the Partnership and consistent
                              with your duties and obligations under this
                              Agreement.

                         Your termination for Cause under (i) and (ii) will be
                         effective immediately upon the Partnership's mailing or
                         transmission of such notice. Before terminating your
                         employment for Cause under (iii) or (iv), the
                         Partnership will specify in writing to you the nature
                         of the act, omission, refusal, or failure that it deems
                         to constitute Cause. The Partnership will give you the
                         opportunity to correct the situation (and thus avoid
                         termination for Cause under (iii) or (iv)). You must
                         complete the correction within a reasonable period of
                         time after the written notice to you, and the
                         Partnership agrees to provide you no less than 15 days
                         for such correction.

     Without Cause       Subject to the provisions below under Payments on
                         Termination, the Partnership may terminate your
                         employment under this Agreement before the end of the
                         Term without Cause.

     Good Reason         You may resign for Good Reason with 45 days' advance
                         written notice as provided below. "Good Reason" means
                         the occurrence, without your written consent, of any of
                         the following circumstances:

                              the Partnership's failure to perform or observe
                              any of the material terms or provisions of this
                              Agreement,

                              the assignment to you of any duties inconsistent
                              with, or any substantial diminution in, your
                              employment status or responsibilities as in effect
                              on the date of this Agreement,

                              the Partnership's relocation of its corporate
                              headquarters to a location that would increase
                              your commuting distance by more than 50 miles,
                              based on your residence when this Agreement is
                              executed, or
<PAGE>
 
                              a Change of Control after consummation of an IPO,
                              consisting of any one or more of the following
                              events:

                                   a person, entity, or group (other than the
                                   Company, the Partnership, any subsidiary of
                                   either, any Company Group benefit plan, or
                                   any underwriter temporarily holding
                                   securities for an offering of such
                                   securities) acquires ownership of more than
                                   40% of the undiluted total voting power of
                                   the Company's then-outstanding securities
                                   eligible to vote to elect members of the
                                   Board ("Company Voting Securities");

                                   consummation of a merger or consolidation of
                                   the Company into any other entity -- unless
                                   the holders of the Company Voting Securities
                                   outstanding immediately before such
                                   consummation, together with any trustee or
                                   other fiduciary holding securities under a
                                   Company Group benefit plan, hold securities
                                   that represent immediately after such merger
                                   or consolidation more than 60% of the
                                   combined voting power of the then outstanding
                                   voting securities of either the Company or
                                   the other surviving entity or its parent; or

                                   the stockholders of the Company approve (i) a
                                   plan of complete liquidation or dissolution
                                   of the Company or (ii) an agreement for the
                                   Company's sale or disposition of all or
                                   substantially all the Company's assets, and
                                   such liquidation, dissolution, sale, or
                                   disposition is consummated.
                              
                         Even if other tests are met, a Change of Control has
                         not occurred under any circumstance in which the
                         Company files for bankruptcy protection or is
                         reorganized following a bankruptcy filing.

                         You must give notice to the Partnership of your
                         intention to resign for Good Reason within 30 days
                         after the occurrence of the event
<PAGE>
 
                         that you assert entitles you to resign for Good Reason.
                         In that notice, you must specify the condition that you
                         consider provides you with Good Reason and must give
                         the Partnership an opportunity to cure the condition
                         within 30 days after your notice. If the Partnership
                         fails to cure the condition, your resignation will be
                         effective on the 45th day after your notice (unless the
                         Partnership has previously waived such notice period in
                         writing or agreed to a shorter notice period).

                         You will not be treated as resigning for Good Reason if
                         the Partnership had Cause to terminate your employment
                         as of the date of your notice of resignation.

     Disability          If you become "disabled" (as defined below), the
                         Partnership may terminate your employment. You are
                         "disabled" if you are unable, despite whatever
                         reasonable accommodations the law requires, to render
                         services to the Partnership for more than 90
                         consecutive days because of physical or mental
                         disability, incapacity, or illness. You are also
                         disabled if you are deemed to be disabled within the
                         meaning of the Partnership's long-term disability
                         policy as then in effect.

     Death               If you die during the Term, the Term will end as of the
                         date of your death.

     Payments on   If the Partnership terminates your employment for or without
     Termination   Cause or because of disability or death or because the
                   Company does not consummate its IPO or you resign, the
                   Partnership will pay you any unpaid portion of your Salary
                   pro-rated through the date of actual termination and any
                   annual bonuses already determined by such date but not yet
                   paid, reimburse any substantiated but unreimbursed business
                   expenses, pay any accrued and unused vacation time (to the
                   extent consistent with the Partnership's policies), and
                   provide such other benefits as applicable laws or the terms
                   of the benefits require. Except to the extent the law
                   requires otherwise or as provided in the Severance paragraph,
                   neither you nor your beneficiary or estate will have any
                   rights or claims under this Agreement or otherwise to receive
                   severance or any 
<PAGE>
 
          other compensation, or to participate in any other plan, arrangement,
          or benefit, after such termination.

     Severance      In addition to the foregoing payments, if the Partnership
                    terminates your employment without Cause or you resign for
                    Good Reason before the end of the Term, the Partnership will

                         pay you severance equal to your Salary, as then in
                         effect, for 24 months in a single lump sum as soon as
                         practicable but in any event no more than 90 days after
                         termination;

                         pay the premium cost for you to receive any group
                         health coverage the Partnership must offer you under
                         Section 4980B of the Internal Revenue Code of 1986
                         ("COBRA Coverage") for the period of such coverage; and

                         pay you, at the time the Partnership would otherwise
                         pay your annual bonus, your pro rata share of the bonus
                         for the year of your termination, where the pro rata
                         factor is based on days elapsed in your year of
                         termination till date of termination over 365, less any
                         portion of the bonus for the year of your termination
                         already paid.

                    You are not required to mitigate amounts payable under the
                    Severance paragraph by seeking other employment or
                    otherwise; however, you agree to return any payments under
                    this Severance paragraph if you fail to comply with Exhibit
                    A. Expiration of this Agreement, whether because of notice
                    of non-renewal or otherwise, does not constitute termination
                    without Cause nor is it grounds for resignation with Good
                    Reason.
<PAGE>
 
Assignment          The Partnership may assign or otherwise transfer this
                    Agreement and any and all of its rights, duties,
                    obligations, or interests under it to

                         the Company or any of the affiliates or subsidiaries of
                         the Company or the Partnership or

                         to any business entity that at any time by merger,
                         consolidation, or otherwise acquires all or
                         substantially all of the Company's stock or assets or
                         the partnership units or assets of the Partnership or
                         to which the Company or the Partnership transfers all
                         or substantially all of its assets.

                    Upon such assignment or transfer, any such business entity
                    will be deemed to be substituted for the Partnership for all
                    purposes. Assignment or transfer does not constitute
                    termination without Cause nor is it grounds for resignation
                    with Good Reason absent the occurrence of a Change of
                    Control.  This Agreement binds the Partnership, its
                    successors or assigns, and your heirs and the personal
                    representatives of your estate.  Without the Partnership's
                    prior written consent, you may not assign or delegate this
                    Agreement or any or all rights, duties, obligations, or
                    interests under it.

Severability        If the final determination of an arbitrator or a court of
                    competent jurisdiction declares, after the expiration of the
                    time within which judicial review (if permitted) of such
                    determination may be perfected, that any term or provision
                    of this Agreement, including any provision of Exhibit A, is
                    invalid or unenforceable, the remaining terms and provisions
                    will be unimpaired, and the invalid or unenforceable term or
                    provision will be deemed replaced by a term or provision
                    that is valid and enforceable and that comes closest to
                    expressing the intention of the invalid or unenforceable
                    term or provision.

Amendment; Waiver   Neither you nor the Partnership may modify, amend, or waive
                    the terms of this Agreement other than by a written
                    instrument signed by you and a duly authorized
                    representative of the General Partner. 
<PAGE>
 
                          Either party's waiver of the other party's compliance
                          with any provision of this Agreement is not a waiver
                          of any other provision of this Agreement or of any
                          subsequent breach by such party of a provision of this
                          Agreement.

Withholding               The Partnership will reduce its compensatory payments
                          to you for withholding and FICA taxes and any other
                          withholdings and contributions required by law.

Third Party Beneficiary   You understand and agree that the Partnership is a
                          third party beneficiary of this Agreement.

Governing Law             The laws of the Commonwealth of Virginia (other than
                          its conflict of laws provisions) govern this
                          Agreement.

Notices                   Notices must be given in writing by personal delivery,
                          by certified mail, return receipt requested, by
                          telecopy, or by overnight delivery. You should send or
                          deliver your notices to the Partnership's
                          headquarters. The Partnership will send or deliver any
                          notice given to you at your address as reflected on
                          the Partnership's personnel records. You and the
                          Partnership may change the address for notice by like
                          notice to the others. You and the Partnership agree
                          that notice is received on the date it is personally
                          delivered, the date it is received by certified mail,
                          the date of guaranteed delivery by the overnight
                          service, or the date the fax machine confirms receipt.

Legal Fees                If a claim is asserted for breach of any provision of
                          this Agreement, you will be entitled to recover your
                          reasonable attorney's fees and expenses if you
                          prevail.

Superseding Effect        This Agreement supersedes any prior oral or written
                          employment, severance, option, or fringe benefit
                          agreements between you and the Company or the
                          Partnership. This Agreement supersedes all prior or
                          contemporaneous negotiations, commitments, agreements,
                          and writings with respect to the subject matter of
                          this Agreement. All such other negotiations,
                          commitments, agreements, and writings will have no
                          further force or effect; and the parties to any 
<PAGE>
 
                         such other negotiation, commitment, agreement, or
                         writing will have no further rights or obligations
                         thereunder.

If you accept the terms of this Agreement, please sign in the space indicated
below. We encourage you to consult with any advisors of your choosing.

                                   CAPITAL AUTOMOTIVE L.P.



                                   General Partner:

                                   CAPITAL AUTOMOTIVE REIT, a Maryland real
                                   estate investment trust

                                        By:
                                           ----------------------------

                                        Its:
                                            ---------------------------
 


I accept and agree to the terms of employment set
forth in this Agreement:


- ------------------------------
      Scott M. Stahr

Dated:
      ------------------------
<PAGE>
 
                                   Exhibit A
                                   ---------

No Competition      In consideration of your employment by the Partnership and
                    salary and benefits under this Agreement, during the term of
                    your employment, and except as set forth below, until the
                    date one year after your employment with the Company, the
                    Partnership, or their successors, assigns, affiliates, or
                    subsidiaries (collectively, the "Company Group") ends for
                    any reason (the "Restricted Period"), you agree as follows:

                    The Company is a real estate investment trust formed to
                    acquire real properties owned by automobile dealerships and
                    other automotive-related businesses and lease the properties
                    to such businesses. You will not, directly or indirectly,
                    promote, be employed by, lend money to, invest in, or engage
                    in any Competing Business within the Market Area. That
                    prohibition includes, but is not limited to, acting, either
                    singly or jointly or as agent for, or as an employee of or
                    consultant to, any one or more persons, firms, entities, or
                    corporations directly or indirectly (as a director,
                    independent contractor, representative, consultant, member,
                    or otherwise) that constitutes such a Competing Business.
                    You may own up to 3% of the outstanding capital stock of any
                    corporation that is actively publicly traded without
                    violating this No Competition covenant. This covenant does
                    not preclude you from being employed by any automobile
                    dealership or dealership group or other automotive-related
                    business that is a lessee or prospective lessee of
                    properties the Company or the Partnership holds or is
                    actively considering acquiring.

                    If, during the Restricted Period, you are offered and want
                    to accept employment with a business that engages in
                    activities similar to the Company's or the Partnership's,
                    you will inform the Partnership in writing of the identity
                    of the business, your proposed duties with that business,
                    and the proposed starting date of that employment. You will
                    also inform that business of the terms of this Exhibit A.
                    The Partnership will analyze the proposed employment and
                    make 
<PAGE>
 
                    a good faith determination as to whether it would threaten
                    the Partnership's legitimate competitive interests. If the
                    Partnership determines that the proposed employment would
                    not pose an unacceptable threat to its interests, the
                    Partnership will notify you that it does not object to the
                    employment.

                    You acknowledge that, during the portion of the Restricted
                    Period that follows your employment, you may engage in any
                    business activity or gainful employment of any type and in
                    any place except as described above.  You acknowledge that
                    you will be reasonably able to earn a livelihood without
                    violating the terms of this Agreement.

                    You understand and agree that the rights and obligations set
                    forth in this No Competition Section will continue for one
                    year from the date of termination of this Agreement and your
                    employment with the Partnership or the Company Group, unless
                    the Company does not consummate its IPO by June 30, 1998, in
                    which event your obligations under this No Competition
                    Section end when your employment ends.

Definitions

       Competing    Competing Business means any service or financial product of
       Business     any person or organization other than the Company Group, in
                    existence or then under development, that competes or could
                    potentially compete, directly or indirectly, with any
                    service or financial product of the Company Group upon which
                    or with which you have worked for the Partnership or the
                    Company Group or about which you acquire knowledge while
                    working for the Partnership or the Company Group. Competing
                    Business includes any enterprise engaged in the formation or
                    operation of real estate investment trusts or other entities
                    that invest primarily in automobile dealership or 
                    automotive-related properties or provide real estate
                    financing to automobile dealerships or automotive-related
                    businesses. Competing Business excludes real estate
                    investment trusts and similar entities that do not engage in
                    activities related to automotive dealerships or automotive-
                    related businesses.
<PAGE>
 
       Market Area  The Market Area consists of the United States.

No Interference;    During the Restricted Period, you agree that you will not,
No Solicitation     directly or indirectly, whether for yourself or for any
                    other individual or entity (other than the Partnership or
                    its affiliates or subsidiaries), intentionally solicit or
                    endeavor to entice away from the Company Group:

                         any person whom the Company Group employs (other than
                         as your personal secretary) or otherwise engages to
                         perform services as a consultant or sales
                         representatives; or

                         any person or entity who is, or was, within the
                         Restricted Period, a contractor or subcontractor of the
                         Company Group known to you or a lessee or prospective
                         lessee of properties the Company Group holds or is
                         actively considering acquiring.

Secrecy

       Preserving   Your employment with the Partnership under and, if
       Partnership  applicable, before this Agreement has given and will give
       Confidences  you Confidential Information (as defined below). You
                    acknowledge and agree that using, disclosing, or publishing
                    any Confidential Information in an unauthorized or improper
                    manner could cause the Partnership or Company Group
                    substantial loss and damages that could not be readily
                    calculated and for which no remedy at law would be adequate.
                    Accordingly, you agree with the Partnership that you will
                    not at any time, except in performing your employment duties
                    to the Partnership or the Company Group under this Agreement
                    (or with the Partnership's prior written consent), directly
                    or indirectly, use, disclose, or publish, or permit others
                    not so authorized to use, disclose, or publish any
                    Confidential Information that you may learn or become aware
                    of, or may have learned or become aware of, because of your
                    prior or continuing employment, ownership, or association
                    with the Partnership or the Company Group or any of their
                    predecessors, or use any such information in a manner
<PAGE>
 
                    detrimental to the interests of the Partnership or the
                    Company Group.

     Preserving     You agree not to use in working for the Company Group and
     Others'        not to disclose to the Company Group any trade secrets or
     Confidences    other information you do not have the right to use or
                    disclose and that the Company Group is not free to use
                    without liability of any kind. You agree to promptly inform
                    the Partnership in writing of any patents, copyrights,
                    trademarks, or other proprietary rights known to you that
                    the Partnership or the Company Group might violate because
                    of information you provide.

     Confidential   "Confidential Information" includes, without limitation,
     Information    information the Partnership or the Company Group has not
                    previously disclosed to the public or to the trade with
                    respect to the Partnership's or the Company Group's present
                    or future business, operations, services, products,
                    research, inventions, discoveries, drawings, designs, plans,
                    processes, models, technical information, facilities,
                    methods, trade secrets, copyrights, software, source code,
                    systems, patents, procedures, manuals, specifications, any
                    other intellectual property, confidential reports, price
                    lists, pricing formulas, customer lists, financial
                    information (including the revenues, costs, or profits
                    associated with any of the Partnership's or the Company
                    Group's products or services), business plans, lease
                    structure, projections, opportunities or strategies,
                    acquisitions or mergers, advertising or promotions,
                    personnel matters, legal matters, any other confidential and
                    proprietary information, and any other information not
                    generally known outside the Partnership or the Company Group
                    that may be of value to the Partnership or the Company Group
                    but excludes any information already properly in the public
                    domain. "Confidential Information" also includes
                    confidential and proprietary information and trade secrets
                    that third parties entrust to the Partnership or the Company
                    Group in confidence.

                    You understand and agree that the rights and obligations set
                    forth in this Secrecy Section will continue indefinitely and
                    will survive 
<PAGE>
 
                    termination of this Agreement and your employment with the
                    Partnership or the Company Group.

Exclusive Property  You confirm that all Confidential Information is and must
                    remain the exclusive property of the Partnership or the
                    relevant member of the Company Group. All business records,
                    business papers, and business documents you keep or make in
                    the course of your employment by the Partnership relating to
                    the Partnership or any member of the Company Group must be
                    and remain the property of the Partnership or the relevant
                    member of the Company Group. Upon the termination of this
                    Agreement with the Partnership or upon the Partnership's
                    request at any time, you must promptly deliver to the
                    Partnership or to the relevant member of the Company Group
                    any Confidential Information or other materials (written or
                    otherwise) not available to the public or made available to
                    the public in a manner you know or reasonably should
                    recognize the Partnership did not authorize, and any copies,
                    excerpts, summaries, compilations, records and documents you
                    made or that came into your possession during your
                    employment. You agree that you will not, without the
                    Partnership's consent, retain copies, excerpts, summaries or
                    compilations of the foregoing information and materials. You
                    understand and agree that the rights and obligations set
                    forth in this Exclusive Property Section will continue
                    indefinitely and will survive termination of this Agreement
                    and your employment with the Company Group.

Maximum Limits      If any of the provisions of Exhibit A are ever deemed to
                    exceed the time, geographic area, or activity limitations
                    the law permits, you and the Partnership agree to reduce the
                    limitations to the maximum permissible limitation, and you
                    and the Partnership authorize a court or arbitrator having
                    jurisdiction to reform the provisions to the maximum time,
                    geographic area, and activity limitations the law permits.

Injunctive Relief   Without limiting the remedies available to the Partnership,
                    you acknowledge
<PAGE>
 
                    that a breach of any of the covenants in this Exhibit A may
                    result in material irreparable injury to the Partnership and
                    Company Group for which there is no adequate remedy at law,
                    and

                    that it will not be possible to measure damages for such
                    injuries precisely.

          You agree that, if there is a breach or threatened breach, the
          Partnership or any member of the Company Group will be entitled to
          obtain a temporary restraining order and/or a preliminary or permanent
          injunction restraining you from engaging in activities prohibited by
          any provisions of this Exhibit A or such other relief as may be
          required to specifically enforce any of the covenants in this Exhibit
          A.

<PAGE>
 
                                   EXHIBIT 10.37   |__| Employee's Copy
                                                   |__| Partnership's Copy


                            CAPITAL AUTOMOTIVE L.P.
                              Employment Agreement

To Donald L. Keithley:

     This Agreement establishes the terms of your employment with Capital
Automotive L.P., a Maryland limited partnership (the "Partnership").  It
replaces your prior employment agreement with Capital Automotive REIT, a
Maryland real estate investment trust (the "Company"), under which the Company
assigned your agreement to the Partnership.  You remain an employee of the
Company, but your primary responsibility is as an employee of the Partnership.

Employment and Duties        You and the Partnership agree to your employment as
                             Executive Vice President - Business Development on
                             the terms contained herein. In such position, you
                             will report directly to the Company's Chief
                             Operating Officer (the "COO") and to the General
                             Partner of the Partnership. You agree to perform
                             whatever duties the Partnership may assign you from
                             time to time, consistent with your position as a
                             senior executive. During your employment, you agree
                             to devote your full business time, attention, and
                             energies to performing those duties (except as the
                             Partnership otherwise agrees from time to time).
                             You agree to faithfully serve the Partnership, to
                             conform to and comply with the lawful and good
                             faith directions and instructions given you by the
                             Partnership, and to use your best efforts to
                             promote and serve the interests of the Partnership.
                             You understand and agree that you must travel from
                             time to time for business reasons. You understand
                             your primary office will be a regional office to be
                             located in the San Fernando / Corejo Valley area of
                             Southern California. You agree to comply with the
                             noncompetition, secrecy, and other provisions of
                             Exhibit A to this Agreement.

Term of Employment           Your employment under this Agreement begins as of
                             January 1, 1998 (the "Effective Date"). Unless
                             sooner terminated under this Agreement, your
                             employment ends at 6:00 p.m. Eastern Time on
<PAGE>
 
                             June 30, 1998, if the Company has not consummated
                             its initial public offering ("IPO") by that date,
                             or

                             October 26, 2001, if the Company has consummated
                             its IPO on or before June 30, 1998.

                         The period running from the Effective Date to the
                         applicable date in the preceding sentence is the
                         "Term."

                         Termination or expiration of this Agreement ends your
                         employment but does not end your obligation to comply
                         with Exhibit A.

Compensation

    Salary               The Partnership (or, in its discretion, the Company)
                         will pay you an annual salary (the "Salary") from the
                         Effective Date at the rate of not less than $200,000 in
                         accordance with its payroll practices. The Partnership
                         or the Compensation Committee of the General Partner
                         ("Compensation Committee") will review your Salary
                         annually and consider you for increases.

    Standard Bonus       The Partnership or the Compensation Committee will
                         establish annual bonus targets under which you will be
                         eligible for an annual bonus equal to up to 100% of
                         your Salary, with a minimum bonus for 1998 (the "1998
                         Minimum Bonus") of $100,000 if you remain employed by
                         the Partnership on December 31, 1998.

    Incentive Bonus      The Partnership will pay you an additional incentive
                         bonus of $200,000 in the first quarter of 1999 (the
                         "1998 Special Incentive") if (i) the Company's proforma
                         assets at the end of 1998 exceed 150% of the greater of
                         1997 fiscal year proforma assets or $770 million and
                         (ii) you remain employed by the Partnership on December
                         31, 1998.

    Employee Benefits    While you are employed under this Agreement, the
                         Partnership will provide you with the same benefits,
                         including medical insurance coverage, as the
                         Partnership makes generally available 



<PAGE>
 
                         from time to time to the Partnership's employees, as
                         those benefits are amended or terminated from time to
                         time, and such other benefits as are commensurate with
                         your position as a senior executive of a public
                         company, including either a company automobile or an
                         allowance for an automobile.

    Indemnification      The Partnership will indemnify you to the fullest
                         extent authorized by law if you are made a party to any
                         action, suit, or proceeding, whether criminal, civil,
                         administrative, or investigative, because you are or
                         were a manager, officer, or employee of the Partnership
                         or serve or served any other entity as a director,
                         officer, or employee at the Partnership's request;
                         provided, however, that you must repay the Partnership
                         --------  -------
                         for any indemnification if the final determination of
                         an arbitrator or a court of competent jurisdiction
                         declares, after the expiration of the time within which
                         judicial review (if permitted) of such determination
                         may be perfected, that indemnification by the
                         Partnership is not permissible under applicable law.

    Expenses             The Partnership will reimburse you for reasonable and
                         necessary travel and other business-related expenses
                         you incur for the Partnership in performing your duties
                         under this Agreement. You must itemize and substantiate
                         all requests for reimbursements. You must submit
                         requests for reimbursement in accordance with the
                         policies and practices of the Partnership and within 60
                         days after incurring the expense.

    No Other Employment  For so long as you are employed by the Partnership, you
                         agree that you will not, directly or indirectly,
                         provide services to any person or organization for
                         which you receive compensation or otherwise engage in
                         activities that would conflict or interfere
                         significantly with the faithful performance of your
                         duties to the Partnership without the Partnership's
                         prior written consent. (This prohibition excludes any
                         work performed at the Partnership's direction including
                         any work for the Company.) You may manage your personal
                         investments, as long as the management takes only
                         minimal amounts of time and is consistent with the
                         provisions of 



<PAGE>
 
                         the No Competition Section in Exhibit A and is
                         otherwise consistent with the policies and practices of
                         the Partnership.

                         You represent to the Partnership that you are not
                         subject to any agreement, commitment, or policy of any
                         third party that would prevent you from entering into
                         or performing your duties under this Agreement, and you
                         agree that you will not enter into any agreement or
                         commitment or agree to any policy that would prevent or
                         hinder your performance of duties and obligations under
                         this Agreement, including Exhibit A.

No Conflicts of Interest You confirm that you have fully disclosed to the
                         Partnership and the Company, to the best of your
                         knowledge, all circumstances under which you, your
                         spouse, and your relatives (including their spouses,
                         children, and relatives) have or may have a conflict of
                         interest with the Partnership or the Company. You
                         further agree to fully disclose to the Partnership any
                         such circumstances that might arise during the Term.
                         You agree to fully comply with the Partnership's policy
                         and practices relating to conflicts of interest.

No Payments to           You will neither pay nor permit payment of any
Governmental Officials   remuneration to or on behalf of any governmental 
                         official other than payments required or permitted by
                         applicable law.

Termination              Subject to the provisions of this section, the
                         Partnership may terminate your employment, or you may
                         resign, except that, if you voluntarily resign, you
                         must provide the Partnership with 90 days' prior
                         written notice (unless the Partnership has previously
                         waived such notice in writing or authorized a shorter
                         notice period).

    For Cause            The Partnership may terminate your employment for
                         "Cause" if you:

                               (i) engage in dishonesty that relates materially
                               to the performance of services or any obligations
                               under this Agreement, including Exhibit A;


<PAGE>
 
                               (ii) are convicted of any misdemeanor (other than
                               for minor infractions) involving fraud, breach of
                               trust, misappropriation, or other similar
                               activity or any felony;

                               (iii) perform your duties under this Agreement in
                               a grossly negligent manner; or

                               (iv) willfully breach this Agreement, including
                               Exhibit A, in a manner materially injurious to
                               the Partnership. An act or omission is only
                               "willful" if you acted in bad faith or without
                               any reasonable belief that the action or omission
                               was in the interests of the Partnership and
                               consistent with your duties and obligations under
                               this Agreement.

                         Your termination for Cause under (i) and (ii) will be
                         effective immediately upon the Partnership's mailing or
                         transmission of such notice. Before terminating your
                         employment for Cause under (iii) or (iv), the
                         Partnership will specify in writing to you the nature
                         of the act, omission, refusal, or failure that it deems
                         to constitute Cause. The Partnership will give you the
                         opportunity to correct the situation (and thus avoid
                         termination for Cause under (iii) or (iv)). You must
                         complete the correction within a reasonable period of
                         time after the written notice to you, and the
                         Partnership agrees to provide you no less than 15 days
                         for such correction.

    Without Cause        Subject to the provisions below under Payments on
                         Termination, the Partnership may terminate your
                         employment under this Agreement before the end of the
                         Term without Cause.

    Good Reason          You may resign for Good Reason with 45 days' advance
                         written notice as provided below. "Good Reason" means
                         the occurrence, without your written consent, of any of
                         the following circumstances:

                               the Partnership's failure to perform or observe
                               any of the material terms or provisions of this
                               Agreement,

<PAGE>
 
                         the assignment to you of any duties inconsistent with,
                         or any substantial diminution in, your employment
                         status or responsibilities as in effect on the date of
                         this Agreement,

                         the Partnership's relocation of the regional office to
                         a location that would increase your commuting distance
                         by more than 50 miles, based on your residence when
                         this Agreement is executed, or

                         a Change of Control after consummation of an IPO,
                         consisting of any one or more of the following events:

                               a person, entity, or group (other than the
                               Partnership, the Company, any subsidiary of
                               either, any Company Group benefit plan, or any
                               underwriter temporarily holding securities for an
                               offering of such securities) acquires ownership
                               of more than 40% of the undiluted total voting
                               power of the Company's then-outstanding
                               securities eligible to vote to elect members of
                               the Board ("Company Voting Securities");

                               consummation of a merger or consolidation of the
                               Company into any other entity -- unless the
                               holders of the Company Voting Securities
                               outstanding immediately before such consummation,
                               together with any trustee or other fiduciary
                               holding securities under a Company Group benefit
                               plan, hold securities that represent immediately
                               after such merger or consolidation more than 60%
                               of the combined voting power of the then
                               outstanding voting securities of either the
                               Company or the other surviving entity or its
                               parent; or

                               the stockholders of the Company approve (i) a
                               plan of complete liquidation or dissolution of
                               the Company or (ii) an agreement for the
                               Company's sale or disposition of all or
                               substantially all the 


<PAGE>
 
                               Company's assets, and such liquidation,
                               dissolution, sale, or disposition is consummated.

                    Even if other tests are met, a Change of Control has not
                    occurred under any circumstance in which the Company files
                    for bankruptcy protection or is reorganized following a
                    bankruptcy filing.

                    You must give notice to the Partnership of your intention to
                    resign for Good Reason within 30 days after the occurrence
                    of the event that you assert entitles you to resign for Good
                    Reason.  In that notice, you must specify the condition that
                    you consider provides you with Good Reason and must give the
                    Partnership an opportunity to cure the condition within 30
                    days after your notice. If the Partnership fails to cure the
                    condition, your resignation will be effective on the 45th
                    day after your notice (unless the Partnership has previously
                    waived such notice period in writing or agreed to a shorter
                    notice period).

                    You will not be treated as resigning for Good Reason if the
                    Partnership had Cause to terminate your employment as of the
                    date of your notice of resignation.

     Disability     If you become "disabled" (as defined below), the Partnership
                    may terminate your employment after you have exhausted your
                    rights, if any, to retention and reemployment under
                    applicable federal or state laws. You are "disabled" if you
                    are unable, despite whatever reasonable accommodations the
                    law requires, to render services to the Partnership for more
                    than 90 consecutive days because of physical or mental
                    disability, incapacity, or illness. You are also disabled if
                    you are deemed to be disabled within the meaning of the
                    Partnership's long-term disability policy as then in effect.

     Death          If you die during the Term, the Term will end as of the date
                    of your death.

     Payments on    If the Partnership terminates your employment for or without
     Termination    Cause or because of disability or death or because the
                    Company does not consummate its IPO or you resign, the
                    Partnership will 


<PAGE>
 
                    pay you any unpaid portion of your Salary pro-rated through
                    the date of actual termination and any annual bonuses
                    already determined by such date but not yet paid, reimburse
                    any substantiated but unreimbursed business expenses, pay
                    any accrued and unused vacation time (to the extent
                    consistent with the Partnership's policies), and provide
                    such other benefits as applicable laws or the terms of the
                    benefits require. Except to the extent the law requires
                    otherwise or as provided in the Severance paragraph, neither
                    you nor your beneficiary or estate will have any rights or
                    claims under this Agreement or otherwise to receive
                    severance or any other compensation, or to participate in
                    any other plan, arrangement, or benefit, after such
                    termination.

     Severance      In addition to the foregoing payments, if the Partnership
                    terminates your employment without Cause or you resign for
                    Good Reason before the end of the Term, the Partnership will

                         pay you severance equal to your Salary, as then in
                         effect, for 24 months in a single lump sum as soon as
                         practicable but in any event no more than 90 days after
                         termination;

                         use its reasonable best efforts to provide you with
                         continued benefits for 24 months under either the
                         Partnership's welfare benefit plans or other comparable
                         coverage and will, to the extent that it is impractical
                         to obtain or extend such coverage or the expense to the
                         Partnership would exceed 200% of the premium expenses
                         the Partnership paid for you during your final year of
                         employment, the Partnership will pay you an amount
                         equal to twice the premiums it paid on your behalf for
                         such coverage in your last 12 months of employment,
                         with such amount paid to you net of any taxes that
                         might apply; provided, however, that any obligations
                                      --------  -------
                         for continued benefits will cease if you become covered
                         under another employer's or your 


<PAGE>
 
                              own policies that provide the same category of
                              coverage; and
 
                              will, at the time the Partnership would otherwise
                              pay your annual bonus, pay you your pro rata share
                              of the standard bonus for the year of your
                              termination, where the pro rata factor is based on
                              days elapsed in your year of termination till date
                              of termination over 365, less any portion of the
                              standard bonus for the year of your termination
                              already paid; provided, however, that for 1998 the
                                            --------  -------
                              foregoing obligation refers to the pro rata share
                              of (i) the greater of the 1998 Minimum Bonus and
                              your actual bonus for 1998 and (ii) if the
                              Partnership meets the proforma asset goals of the
                              1998 Special Incentive Bonus, that bonus.

                         You are not required to mitigate amounts payable under
                         the Severance paragraph by seeking other employment or
                         otherwise; however, you agree to return any payments
                         under this Severance paragraph if you fail to comply
                         with Exhibit A.  Expiration of this Agreement, whether
                         because of notice of non-renewal or otherwise, does not
                         constitute termination without Cause nor is it grounds
                         for resignation with Good Reason.

     Assignment     The Partnership may assign or otherwise transfer this
                    Agreement and any and all of its rights, duties,
                    obligations, or interests under it to

                         the Company or any of the affiliates or subsidiaries of
                         the Partnership or the Company or

                         to any business entity that at any time by merger,
                         consolidation, or otherwise acquires all or
                         substantially all of the Company's stock or assets or
                         the partnership units or assets of the Company or to
                         which the Partnership or the Company transfers all or
                         substantially all of its assets.



<PAGE>
 
                    Upon such assignment or transfer, any such business entity
                    will be deemed to be substituted for the Partnership for all
                    purposes. Assignment or transfer does not constitute
                    termination without Cause nor is it grounds for resignation
                    with Good Reason.  This Agreement binds the Partnership, its
                    successors or assigns, and your heirs and the personal
                    representatives of your estate.  Without the Partnership's
                    prior written consent, you may not assign or delegate this
                    Agreement or any or all rights, duties, obligations, or
                    interests under it.

Severability        If the final determination of an arbitrator or a court of
                    competent jurisdiction declares, after the expiration of the
                    time within which judicial review (if permitted) of such
                    determination may be perfected, that any term or provision
                    of this Agreement, including any provision of Exhibit A, is
                    invalid or unenforceable, the remaining terms and provisions
                    will be unimpaired, and the invalid or unenforceable term or
                    provision will be deemed replaced by a term or provision
                    that is valid and enforceable and that comes closest to
                    expressing the intention of the invalid or unenforceable
                    term or provision.

Amendment; Waiver   Neither you nor the Partnership may modify, amend, or waive
                    the terms of this Agreement other than by a written
                    instrument signed by you and a duly authorized
                    representative of the General Partner of the Partnership.
                    Either party's waiver of the other party's compliance with
                    any provision of this Agreement is not a waiver of any other
                    provision of this Agreement or of any subsequent breach by
                    such party of a provision of this Agreement.

Withholding         The Partnership will reduce its compensatory payments to you
                    for withholding and FICA taxes and any other withholdings
                    and contributions required by law.

Third Party         You understand and agree that the Company is a third party
Beneficiary         beneficiary of this Agreement.

Governing Law       The laws of the Commonwealth of Virginia (other than its
                    conflict of laws provisions) govern this Agreement.


<PAGE>
 
Notices             Notices must be given in writing by personal delivery, by
                    certified mail, return receipt requested, by telecopy, or by
                    overnight delivery. You should send or deliver your notices
                    to the Partnership's headquarters. The Partnership will send
                    or deliver any notice given to you at your address as
                    reflected on the Partnership's personnel records. You and
                    the Partnership may change the address for notice by like
                    notice to the others. You and the Partnership agree that
                    notice is received on the date it is personally delivered,
                    the date it is received by certified mail, the date of
                    guaranteed delivery by the overnight service, or the date
                    the fax machine confirms receipt.

Legal Fees          If a claim is asserted for breach of any provision of this
                    Agreement, you will be entitled to recover your reasonable
                    attorney's fees and expenses if you prevail.

Superseding Effect  This Agreement supersedes any prior oral or written
                    employment, severance, option, or fringe benefit agreements
                    between you and the Company or the Partnership. This
                    Agreement supersedes all prior or contemporaneous
                    negotiations, commitments, agreements, and writings with
                    respect to the subject matter of this Agreement. All such
                    other negotiations, commitments, agreements, and writings
                    will have no further force or effect; and the parties to any
                    such other negotiation, commitment, agreement, or writing
                    will have no further rights or obligations thereunder.

If you accept the terms of this Agreement, please sign in the space indicated
below. We encourage you to consult with any advisors of your choosing.

                              CAPITAL AUTOMOTIVE L.P.

                              General Partner:

                              CAPITAL AUTOMOTIVE REIT, a Maryland real
                              estate investment trust

                                    By:
                                       ----------------------------


<PAGE>
 
                                    Its:
                                        -----------------------------
 
I accept and agree to the terms of employment set forth in this Agreement:


- ---------------------------        ---------------
      Donald L. Keithley                 Date



<PAGE>
 
                                   Exhibit A
                                   ---------


No Competition           In consideration of your employment by the Partnership
                         and salary and benefits under this Agreement, during
                         the term of your employment and, except as set forth
                         below, until the date one year after your employment
                         with the Partnership, the Company, or their successors,
                         assigns, affiliates, or subsidiaries (collectively, the
                         "Company Group") ends for any reason (the "Restricted
                         Period"), you agree as follows:

                         The Partnership is a real estate investment trust
                         formed to acquire real properties owned by automobile
                         dealerships and other automotive-related businesses and
                         lease the properties to such businesses. You will not,
                         directly or indirectly, promote, be employed by, lend
                         money to, invest in, or engage in any Competing
                         Business within the Market Area. That prohibition
                         includes, but is not limited to, acting, either singly
                         or jointly or as agent for, or as an employee of or
                         consultant to, any one or more persons, firms,
                         entities, or corporations directly or indirectly (as a
                         director, independent contractor, representative,
                         consultant, member, or otherwise) that constitutes such
                         a Competing Business. You may own up to 3% of the
                         outstanding capital stock of any corporation that is
                         actively publicly traded without violating this No
                         Competition covenant. This covenant does not preclude
                         you from being employed by any automobile dealership or
                         dealership group or other automotive-related business
                         that is a lessee or prospective lessee of properties
                         the Partnership or the Company holds or is actively
                         considering acquiring.

                         You understand and agree that the rights and
                         obligations set forth in this No Competition Section
                         will continue for one year from the date of termination
                         of this Agreement and your employment with the
                         Partnership or the Company Group, unless the Company
                         does not consummate its IPO by June 30, 1998, in which
                         event your
<PAGE>
 
                         obligations under this No Competition Section end when
                         your employment ends.

Definitions

          Competing      Competing Business means any service or financial
          Business       product of any person or organization other than the
                         Company Group, in existence or then under development,
                         that competes or could potentially compete, directly or
                         indirectly, with any service or financial product of
                         the Company Group upon which or with which you have
                         worked for the Partnership or the Company Group or
                         about which you acquire knowledge while working for the
                         Partnership or the Company Group. Competing Business
                         includes any enterprise engaged in the formation or
                         operation of real estate investment trusts or other
                         entities that invest primarily in automobile dealership
                         or automotive-related properties or provide real estate
                         financing to automobile dealerships or automotive-
                         related businesses. Competing Business excludes real
                         estate investment trusts and similar entities that do
                         not engage in activities related to automotive
                         dealerships or automotive-related businesses, and the
                         Partnership recognizes and agrees that you may engage
                         in any business whose primary focus in the auto
                         industry is other than real estate.

          Market Area    The Market Area consists of the United States.
 
No Interference;         During the Restricted Period, you agree that you will
No Solicitation          not, directly or indirectly, whether for yourself or
                         for any other individual or entity (other than the
                         Partnership or its affiliates or subsidiaries),
                         intentionally solicit or endeavor to entice away from
                         the Company Group:

                              any person whom the Company Group employs (other
                              than as your personal secretary) or otherwise
                              engages to perform services as a consultant or
                              sales representatives; or

                              any person or entity who is, or was, within the
                              Restricted Period, a contractor or subcontractor
                              of the Company 
<PAGE>
 
                              Group known to you or a lessee or prospective
                              lessee of properties the Company Group holds or is
                              actively considering acquiring.
<PAGE>
 
Secrecy

       Preserving             Your employment with the Partnership under and, if
       Partnership            applicable, before this Agreement has given and 
       Confidences            will give you Confidential Information (as defined
                              below). You acknowledge and agree that using,
                              disclosing, or publishing any Confidential
                              Information in an unauthorized or improper manner
                              could cause the Partnership or Company Group
                              substantial loss and damages that could not be
                              readily calculated and for which no remedy at law
                              would be adequate. Accordingly, you agree with the
                              Partnership that you will not at any time, except
                              in performing your employment duties to the
                              Partnership or the Company Group under this
                              Agreement (or with the Partnership's prior written
                              consent), directly or indirectly, use, disclose,
                              or publish, or permit others not so authorized to
                              use, disclose, or publish any Confidential
                              Information that you may learn or become aware of,
                              or may have learned or become aware of, because of
                              your prior or continuing employment, ownership, or
                              association with the Partnership or the Company
                              Group or any of their predecessors, or use any
                              such information in a manner detrimental to the
                              interests of the Partnership or the Company Group.

     Preserving               You agree not to use in working for the Company 
     Others'                  Group and not to disclose to the Company Group 
     Confidences              any trade secrets or other information you do not
                              have the right to use or disclose and that the
                              Company Group is not free to use without liability
                              of any kind. You agree to promptly inform the
                              Partnership in writing of any patents, copyrights,
                              trademarks, or other proprietary rights known to
                              you that the Partnership or the Company Group
                              might violate because of information you provide.

     Confidential             "Confidential Information" includes, without 
     Information              limitation, information the Partnership or the 
                              Company Group has not previously disclosed to the
                              public or to the trade with respect to the
                              Partnership's or the Company Group's present or
                              future business, operations, services, products,
                              research, inventions, discoveries, drawings,
                              designs, plans, processes, models, technical
                              information, facilities, methods, trade secrets,
                              copyrights, software, source code,
<PAGE>
 
                              systems, patents, procedures, manuals,
                              specifications, any other intellectual property,
                              confidential reports, price lists, pricing
                              formulas, customer lists, financial information
                              (including the revenues, costs, or profits
                              associated with any of the Partnership's or the
                              Company Group's products or services), business
                              plans, lease structure, projections, prospects, or
                              opportunities, any other confidential and
                              proprietary information, and any other information
                              not generally known outside the Partnership or the
                              Company Group that may be of value to the
                              Partnership or the Company Group but excludes any
                              information already properly in the public domain.
                              "Confidential Information" also includes
                              confidential and proprietary information and trade
                              secrets that third parties entrust to the
                              Partnership or the Company Group in confidence.

                              You understand and agree that the rights and
                              obligations set forth in this Secrecy Section will
                              continue indefinitely and will survive termination
                              of this Agreement and your employment with the
                              Partnership or the Company Group.

Exclusive Property            You confirm that all Confidential Information is
                              and must remain the exclusive property of the
                              Partnership or the relevant member of the Company
                              Group. All business records, business papers, and
                              business documents you keep or make in the course
                              of your employment by the Partnership relating to
                              the Partnership or any member of the Company Group
                              must be and remain the property of the Partnership
                              or the relevant member of the Company Group. Upon
                              the termination of this Agreement with the
                              Partnership or upon the Partnership's request at
                              any time, you must promptly deliver to the
                              Partnership or to the relevant member of the
                              Company Group any Confidential Information or
                              other materials (written or otherwise) not
                              available to the public or made available to the
                              public in a manner you know the Partnership did
                              not authorize, and any copies, excerpts,
                              summaries, compilations, records and documents you
                              made or that came into your possession during your
                              employment. You agree that you will not, without
                              the Partnership's consent, retain copies,
                              excerpts, summaries or compilations of the
                              foregoing information and materials. You
<PAGE>
 
                              understand and agree that the rights and
                              obligations set forth in this Exclusive Property
                              Section will continue indefinitely and will
                              survive termination of this Agreement and your
                              employment with the Company Group.

Injunctive Relief             Without limiting the remedies available to the
                              Partnership, you acknowledge

                                   that a breach of any of the covenants in this
                                   Exhibit A may result in material irreparable
                                   injury to the Partnership and Company Group
                                   for which there is no adequate remedy at law,
                                   and

                                   that it will not be possible to measure
                                   damages for such injuries precisely.

                              You agree that, if there is a breach or threatened
                              breach, the Partnership or any member of the
                              Company Group will be entitled to obtain a
                              temporary restraining order and/or a preliminary
                              or permanent injunction restraining you from
                              engaging in activities prohibited by any
                              provisions of this Exhibit A or such other relief
                              as may be required to specifically enforce any of
                              the covenants in this Exhibit A.

<PAGE>
 
                                     EXHIBIT 10.38
                                                    |__| Employee's Copy
                                                    |__| Partnership's Copy

                            CAPITAL AUTOMOTIVE L.P.
                             Employment Agreement

To David S. Kay:

     This Agreement establishes the terms of your employment with Capital
Automotive L.P., a Maryland limited partnership (the "Partnership").  It
replaces your prior employment agreement with Capital Automotive REIT, a
Maryland real estate investment trust (the "Company"), under which the Company
assigned your agreement to the Partnership.  You remain an employee of the
Company, but your primary responsibility is as an employee of the Partnership.

Employment     You and the Partnership agree to your employment as Vice 
and Duties     President and Chief Financial Officer on the terms contained
               herein. In such position, you will report directly to the
               Company's Chief Executive Officer (the "CEO") and to the General
               Partner of the Partnership. You agree to perform whatever duties
               the Partnership may assign you from time to time, consistent with
               your position as a senior executive. During your employment, you
               agree to devote your full business time, attention, and energies
               to performing those duties (except as the Partnership otherwise
               agrees from time to time). You agree to faithfully serve the
               Partnership, to conform to and comply with the lawful and good
               faith directions and instructions given you by the Partnership,
               and to use your best efforts to promote and serve the interests
               of the Partnership. You agree to comply with the noncompetition,
               secrecy, and other provisions of Exhibit A to this Agreement.

Term of        Your employment under this Agreement begins as of January 1, 
Employment     1998 (the"Effective Date"). Unless sooner terminated under this
               Agreement, your employment ends at 6:00 p.m. Eastern Time on

                   June 30, 1998, if the Company has not consummated its initial
                   public offering ("IPO") by that date, or

                   October 19, 2001, if the Company has consummated its IPO on
                   or before June 30, 1998.
<PAGE>
 
               The period running from the Effective Date to the applicable date
               in the preceding sentence is the "Term."

               Termination or expiration of this Agreement ends your employment
               but does not end your obligation to comply with Exhibit A.

Compensation

     Salary    The Partnership (or, in its discretion, the Company) will pay you
               an annual salary (the "Salary") from October 27, 1997 at the rate
               of not less than $150,000 in accordance with its payroll
               practices. The Partnership or the Compensation Committee of the
               General Partner ("Compensation Committee") will review your
               Salary annually and consider you for increases.

     Bonus     The Partnership or the Compensation Committee will establish
               annual bonus targets under which you will be eligible for an
               annual bonus equal to up to 100% of your Salary.

     Employee  While you are employed under this Agreement, the Partnership 
     Benefits  will provide you with the same benefits, including medical
               insurance coverage, as the Partnership makes generally available
               from time to time to the Partnership's employees, as those
               benefits are amended or terminated from time to time, and such
               other benefits as are commensurate with your position as a senior
               executive of a public company, including either a company
               automobile or an allowance for an automobile. Your participation
               in the Partnership's benefit plans will be subject to the terms
               of the applicable plan documents and the Partnership's generally
               applied policies, and the Partnership in its sole discretion may
               from time to time adopt, modify, interpret, or discontinue such
               plans or policies.
 
Place of       Your principal place of employment will be at the Partnership's
Employment     headquarters in the Washington metropolitan area (or such other
               offices as the Partnership may establish from time to time and to
               which it assigns you in its sole discretion). You understand and
               agree that you must travel from time to time for business
               reasons.
 
<PAGE>
 
Indemni-       The Partnership will indemnify you to the fullest extent 
fication       authorized by law if you are made a party to any action, suit, or
               proceeding, whether criminal, civil, administrative, or
               investigative, because you are or were a manager, officer, or
               employee of the Partnership or serve or served any other entity
               as a director, officer, or employee at the Partnership's request;
               provided, however, that you must repay the Partnership for any
               --------  -------
               indemnification if the final determination of an arbitrator or a
               court of competent jurisdiction declares, after the expiration of
               the time within which judicial review (if permitted) of such
               determination may be perfected, that indemnification by the
               Partnership is not permissible under applicable law.

Expenses       The Partnership will reimburse you for reasonable and necessary
               travel and other business-related expenses you incur for the
               Partnership in performing your duties under this Agreement. You
               must itemize and substantiate all requests for reimbursements.
               You must submit requests for reimbursement in accordance with the
               policies and practices of the Partnership and within 60 days
               after incurring the expense.

No Other       For so long as you are employed by the Partnership, you agree 
Employment     that you will not, directly or indirectly, provide services to
               any person or organization for which you receive compensation or
               otherwise engage in activities that would conflict or interfere
               significantly with the faithful performance of your duties to the
               Partnership without the Partnership's prior written consent.
               (This prohibition excludes any work performed at the
               Partnership's direction including any work for the Company.) You
               may manage your personal investments, as long as the management
               takes only minimal amounts of time and is consistent with the
               provisions of the No Competition Section in Exhibit A and is
               otherwise consistent with the policies and practices of the
               Partnership.

               You represent to the Partnership that you are not subject to any
               agreement, commitment, or policy of any third party that would
               prevent you from entering into or performing your duties under
               this Agreement, and you agree that you will not enter into any
               agreement or commitment or agree to any policy that would 
<PAGE>
 
               prevent or hinder your performance of duties and obligations
               under this Agreement, including Exhibit A.

No Conflicts   You confirm that you have fully disclosed to the Partnership and
of Interest    the Company, to the best of your knowledge, all circumstances
               under which you, your spouse, and your relatives (including their
               spouses, children, and relatives) have or may have a conflict of
               interest with the Partnership or the Company. You further agree
               to fully disclose to the Partnership any such circumstances that
               might arise during the Term. You agree to fully comply with the
               Partnership's policy and practices relating to conflicts of
               interest.

No Payments    You will neither pay nor permit payment of any remuneration 
to Governmen-  to or on behalf of any governmental official other than payments
tal Officials  required or permitted by applicable law.

Termination    Subject to the provisions of this section, the Partnership may
               terminate your employment, or you may resign, except that, if you
               voluntarily resign, you must provide the Partnership with 90
               days' prior written notice (unless the Partnership has previously
               waived such notice in writing or authorized a shorter notice
               period).

    For Cause  The Partnership may terminate your employment for "Cause" if
               you:

                   (i)   engage in dishonesty that relates materially to the
                   performance of services or any obligations under this
                   Agreement, including Exhibit A;

                   (ii)  are convicted of any misdemeanor (other than for minor
                   infractions) involving fraud, breach of trust,
                   misappropriation, or other similar activity or any felony;

                   (iii) perform your duties under this Agreement in a grossly
                   negligent manner; or

                   (iv)  willfully breach this Agreement, including Exhibit A,
                   in a manner materially injurious to the Partnership. An act
                   or omission is only "willful" if you acted in bad faith or
                   without any reasonable belief that the action or omission 
<PAGE>
 
                   was in the interests of the Partnership and consistent with
                   your duties and obligations under this Agreement.

               Your termination for Cause under (i) and (ii) will be effective
               immediately upon the Partnership's mailing or transmission of
               such notice. Before terminating your employment for Cause under
               (iii) or (iv), the Partnership will specify in writing to you the
               nature of the act, omission, refusal, or failure that it deems to
               constitute Cause. The Partnership will give you the opportunity
               to correct the situation (and thus avoid termination for Cause
               under (iii) or (iv)). You must complete the correction within a
               reasonable period of time after the written notice to you, and
               the Partnership agrees to provide you no less than 15 days for
               such correction.

    Without    Subject to the provisions below under Payments on Termination,
    Cause      the Partnership may terminate your employment under this
               Agreement before the end of the Term without Cause.

    Good       You may resign for Good Reason with 45 days' advance written
    Reason     notice as provided below. "Good Reason" means the occurrence,
               without your written consent, of any of the following
               circumstances:          

                   the Partnership's failure to perform or observe any of the
                   material terms or provisions of this Agreement,

                   the assignment to you of any duties inconsistent with, or any
                   substantial diminution in, your employment status or
                   responsibilities as in effect on the date of this Agreement,

                   the Partnership's relocation of its headquarters to a
                   location that would increase your commuting distance by more
                   than 50 miles, based on your residence when this Agreement is
                   executed, or

                   a Change of Control after consummation of an IPO, consisting
                   of any one or more of the following events:

                         a person, entity, or group (other than the Company, the
                         Partnership, any subsidiary of either, any 
<PAGE>
 
                         Company Group benefit plan, or any underwriter
                         temporarily holding securities for an offering of such
                         securities) acquires ownership of more than 40% of the
                         undiluted total voting power of the Company's then-
                         outstanding securities eligible to vote to elect
                         members of the Board ("Company Voting Securities");

                         consummation of a merger or consolidation of the
                         Company into any other entity -- unless the holders of
                         the Company Voting Securities outstanding immediately
                         before such consummation, together with any trustee or
                         other fiduciary holding securities under a Company
                         Group benefit plan, hold securities that represent
                         immediately after such merger or consolidation more
                         than 60% of the combined voting power of the then
                         outstanding voting securities of either the Company or
                         the other surviving entity or its parent; or

                         the stockholders of the Company approve (i) a plan of
                         complete liquidation or dissolution of the Company or
                         (ii) an agreement for the Company's sale or disposition
                         of all or substantially all the Company's assets, and
                         such liquidation, dissolution, sale, or disposition is
                         consummated.

               Even if other tests are met, a Change of Control has not occurred
               under any circumstance in which the Company files for bankruptcy
               protection or is reorganized following a bankruptcy filing.

               You must give notice to the Partnership of your intention to
               resign for Good Reason within 30 days after the occurrence of the
               event that you assert entitles you to resign for Good Reason. In
               that notice, you must specify the condition that you consider
               provides you with Good Reason and must give the Partnership an
               opportunity to cure the condition within 30 days after your
               notice. If the Partnership fails to cure the condition, your
               resignation will be effective on the 45th day after your notice
               (unless the Board has 
<PAGE>
 
               previously waived such notice period in writing or agreed to a
               shorter notice period).

               You will not be treated as resigning for Good Reason if the
               Partnership had Cause to terminate your employment as of the date
               of your notice of resignation.

   Disability  If you become "disabled" (as defined below), the Partnership may
               terminate your employment. You are "disabled" if you are unable,
               despite whatever reasonable accommodations the law requires, to
               render services to the Partnership for more than 90 consecutive
               days because of physical or mental disability, incapacity, or
               illness. You are also disabled if you are deemed to be disabled
               within the meaning of the Partnership's long-term disability
               policy as then in effect.

   Death       If you die during the Term, the Term will end as of the date of
               your death.

   Payments    If the Partnership terminates your employment for or without 
   on Termin-  Cause or because of disability or death or because the Company
   ation       does not consummate its IPO or you resign, the Partnership will
               pay you any unpaid portion of your Salary pro-rated through the
               date of actual termination and any annual bonuses already
               determined by such date but not yet paid, reimburse any
               substantiated but unreimbursed business expenses, pay any accrued
               and unused vacation time (to the extent consistent with the
               Partnership's policies), and provide such other benefits as
               applicable laws or the terms of the benefits require. Except to
               the extent the law requires otherwise or as provided in the
               Severance paragraph, neither you nor your beneficiary or estate
               will have any rights or claims under this Agreement or otherwise
               to receive severance or any other compensation, or to participate
               in any other plan, arrangement, or benefit, after such
               termination. If your employment is terminated because the
               Partnership does not consummate its IPO by June 30, 1998, you
               agree to waive any rights to severance set forth below in
               exchange for the benefits provided under your agreement with
               Friedman, Billings, Ramsey & Co., Inc. dated as of October 27,
               1997.
<PAGE>
 
     Severance     In addition to the foregoing payments, if the Partnership
                   terminates your employment without Cause or you resign for
                   Good Reason before the end of the Term, the Partnership will

                         pay you severance equal to your Salary, as then in
                         effect, for 24 months in a single lump sum as soon as
                         practicable but in any event no more than 90 days after
                         termination;

                         pay the premium cost for you to receive any group
                         health coverage the Partnership must offer you under
                         Section 4980B of the Internal Revenue Code of 1986
                         ("COBRA Coverage") for the period of such coverage; and

                         pay you, at the time the Partnership would otherwise
                         pay your annual bonus, your pro rata share of the bonus
                         for the year of your termination, where the pro rata
                         factor is based on days elapsed in your year of
                         termination till date of termination over 365, less any
                         portion of the bonus for the year of your termination
                         already paid.

                   You are not required to mitigate amounts payable under the
                   Severance paragraph by seeking other employment or otherwise;
                   however, you agree to return any payments under this
                   Severance paragraph if you fail to comply with Exhibit A.
                   Expiration of this Agreement, whether because of notice of
                   non-renewal or otherwise, does not constitute termination
                   without Cause nor is it grounds for resignation with Good
                   Reason.

Assignment     The Partnership may assign or otherwise transfer this Agreement
               and any and all of its rights, duties, obligations, or interests
               under it to

                   the Company or any of the affiliates or subsidiaries of the
                   Company or the Partnership or
<PAGE>
 
                   to any business entity that at any time by merger,
                   consolidation, or otherwise acquires all or substantially all
                   of the Company's stock or assets or the partnership units or
                   assets of the Partnership or to which the Company or the
                   Partnership transfers all or substantially all of its assets.

               Upon such assignment or transfer, any such business entity will
               be deemed to be substituted for the Partnership for all purposes.
               Assignment or transfer does not constitute termination without
               Cause nor is it grounds for resignation with Good Reason absent
               the occurrence of a Change of Control. This Agreement binds the
               Partnership, its successors or assigns, and your heirs and the
               personal representatives of your estate. Without the
               Partnership's prior written consent, you may not assign or
               delegate this Agreement or any or all rights, duties,
               obligations, or interests under it.

Severability   If the final determination of an arbitrator or a court competent
               jurisdiction declares, after the expiration of the time within
               which judicial review (if permitted) of such determination may be
               perfected, that any term or provision of this Agreement,
               including any provision of Exhibit A, is invalid or
               unenforceable, the remaining terms and provisions will be
               unimpaired, and the invalid or unenforceable term or provision
               will be deemed replaced by a term or provision that is valid and
               enforceable and that comes closest to expressing the intention of
               the invalid or unenforceable term or provision.

Amendment;     Neither you nor the Partnership may modify, amend, or waive
Waiver         the terms of this Agreement other than by a written instrument
               signed by you and a duly authorized representative of the General
               Partner of the Partnership. Either party's waiver of the other
               party's compliance with any provision of this Agreement is not a
               waiver of any other provision of this Agreement or of any
               subsequent breach by such party of a provision of this Agreement.

Withholding    The Partnership will reduce its compensatory payments to you for
               withholding and FICA taxes and any other withholdings and
               contributions required by law.
<PAGE>
 
Third Party    You understand and agree that the Company is a third party 
Beneficiary    beneficiary of this Agreement.

Governing Law  The laws of the Commonwealth of Virginia (other than its conflict
               of laws provisions) govern this Agreement.

Notices        Notices must be given in writing by personal delivery, by
               certified mail, return receipt requested, by telecopy, or by
               overnight delivery. You should send or deliver your notices to
               the Partnership's headquarters.  The Partnership will send or
               deliver any notice given to you at your address as reflected on
               the Partnership's personnel records.  You and the Partnership may
               change the address for notice by like notice to the others.  You
               and the Partnership agree that notice is received on the date it
               is personally delivered, the date it is received by certified
               mail, the date of guaranteed delivery by the overnight service,
               or the date the fax machine confirms receipt.

Legal Fees     If a claim is asserted for breach of any provision of this
               Agreement, you will be entitled to recover your reasonable
               attorney's fees and expenses if you prevail.

Superseding    This Agreement supersedes any prior oral or written employment,
Effect         severance, option, or fringe benefit agreements between you and  
               the Company or the Partnership. This Agreement supersedes all
               prior or contemporaneous negotiations, commitments, agreements,
               and writings with respect to the subject matter of this Agreement
               (other than your agreement with Friedman, Billings, Ramsey & Co.
               dated as of October 27, 1997). All such other negotiations,
               commitments, agreements, and writings will have no further force
               or effect; and the parties to any such other negotiation,
               commitment, agreement, or writing will have no further rights or
               obligations thereunder.

If you accept the terms of this Agreement, please sign in the space indicated
below. We encourage you to consult with any advisors of your choosing.


                              CAPITAL AUTOMOTIVE L.P.
<PAGE>
 
                              General Partner:

                              CAPITAL AUTOMOTIVE REIT, a Maryland real
                              estate investment trust

                                    By:
                                       ------------------------------
                                    Its:
                                        -----------------------------

I accept and agree to the terms of employment set
forth in this Agreement:


- ---------------------------
      David S. Kay

Dated:
      ---------------------
<PAGE>
 
                                   Exhibit A
                                   ---------

No Competition     In consideration of your employment by the Partnership and
                   salary and benefits under this Agreement, during the term of
                   your employment, and except as set forth below, until the
                   date one year after your employment with the Company, the
                   Partnership, or their successors, assigns, affiliates, or
                   subsidiaries (collectively, the "Company Group") ends for any
                   reason (the "Restricted Period"), you agree as follows:

                   The Company is a real estate investment trust formed to
                   acquire real properties owned by automobile dealerships and
                   other automotive-related businesses and lease the properties
                   to such businesses. You will not, directly or indirectly,
                   promote, be employed by, lend money to, invest in, or engage
                   in any Competing Business within the Market Area. That
                   prohibition includes, but is not limited to, acting, either
                   singly or jointly or as agent for, or as an employee of or
                   consultant to, any one or more persons, firms, entities, or
                   corporations directly or indirectly (as a director,
                   independent contractor, representative, consultant, member,
                   or otherwise) that constitutes such a Competing Business. You
                   may own up to 3% of the outstanding capital stock of any
                   corporation that is actively publicly traded without
                   violating this No Competition covenant. This covenant does
                   not preclude you from being employed by any automobile
                   dealership or dealership group or other automotive-related
                   business that is a lessee or prospective lessee of properties
                   the Company or the Partnership holds or is actively
                   considering acquiring.

                   If, during the Restricted Period, you are offered and want to
                   accept employment with a business that engages in activities
                   similar to the Company's or the Partnership's, you will
                   inform the Partnership in writing of the identity of the
                   business, your proposed duties with that business, and the
                   proposed starting date of that employment. You will also
                   inform that business of the terms of this Exhibit A. The
                   Partnership will analyze the proposed employment and make a
                   good faith determination as to whether it would threaten the
                   Partnership's legitimate competitive interests. If the
                   Partnership 
<PAGE>
 
                   determines that the proposed employment would not pose an
                   unacceptable threat to its interests, the Partnership will
                   notify you that it does not object to the employment.

                   You acknowledge that, during the portion of the Restricted
                   Period that follows your employment, you may engage in any
                   business activity or gainful employment of any type and in
                   any place except as described above. You acknowledge that you
                   will be reasonably able to earn a livelihood without
                   violating the terms of this Agreement.

                   You understand and agree that the rights and obligations set
                   forth in this No Competition Section will continue for one
                   year from the date of termination of this Agreement and your
                   employment with the Partnership or the Company Group, unless
                   the Company does not consummate its IPO by June 30, 1998, in
                   which event your obligations under this No Competition
                   Section end when your employment ends.

     Definitions

        Competing  Competing Business means any service or financial product
        Business   of any person or organization other than the Company Group,
                   in existence or then under development, that competes or
                   could potentially compete, directly or indirectly, with any
                   service or financial product of the Company Group upon which
                   or with which you have worked for the Partnership or the
                   Company Group or about which you acquire knowledge while
                   working for the Partnership or the Company Group. Competing
                   Business includes any enterprise engaged in the formation or
                   operation of real estate investment trusts or other entities
                   that invest primarily in automobile dealership or automotive-
                   related properties or provide real estate financing to
                   automobile dealerships or automotive-related businesses.
                   Competing Business excludes real estate investment trusts and
                   similar entities that do not engage in activities related to
                   automotive dealerships or automotive-related businesses.

        Market     The Market Area consists of the United States.
        Area    

No Interference;   During the Restricted Period, you agree that you will not,
                   directly
<PAGE>
 
No Solicitation    or indirectly, whether for yourself or for any other
                   individual or entity (other than the Partnership or its
                   affiliates or subsidiaries), intentionally solicit or
                   endeavor to entice away from the Company Group:

                         any person whom the Company Group employs (other than
                         as your personal secretary) or otherwise engages to
                         perform services as a consultant or sales
                         representatives; or

                         any person or entity who is, or was, within the
                         Restricted Period, a contractor or subcontractor of the
                         Company Group known to you or a lessee or prospective
                         lessee of properties the Company Group holds or is
                         actively considering acquiring.

Secrecy

     Preserving    Your employment with the Partnership under and, if 
     Partnership   applicable, before this Agreement has given and will give 
     Confidences   you Confidential Information (as defined below). You
                   acknowledge and agree that using, disclosing, or publishing
                   any Confidential Information in an unauthorized or improper
                   manner could cause the Partnership or Company Group
                   substantial loss and damages that could not be readily
                   calculated and for which no remedy at law would be adequate.
                   Accordingly, you agree with the Partnership that you will not
                   at any time, except in performing your employment duties to
                   the Partnership or the Company Group under this Agreement (or
                   with the Partnership's prior written consent), directly or
                   indirectly, use, disclose, or publish, or permit others not
                   so authorized to use, disclose, or publish any Confidential
                   Information that you may learn or become aware of, or may
                   have learned or become aware of, because of your prior or
                   continuing employment, ownership, or association with the
                   Partnership or the Company Group or any of their
                   predecessors, or use any such information in a manner
                   detrimental to the interests of the Partnership or the
                   Company Group.
<PAGE>
 
     Preserving    You agree not to use in working for the Company Group and not
     Others'       to disclose to the Company Group any trade secrets or other 
     Confidences   information you do not have the right to use or disclose and
                   that the Company Group is not free to use without liability
                   of any kind. You agree to promptly inform the Partnership in
                   writing of any patents, copyrights, trademarks, or other
                   proprietary rights known to you that the Partnership or the
                   Company Group might violate because of information you
                   provide.

     Confidential  "Confidential Information" includes, without limitation,
     Information   information the Partnership or the Company Group has not
                   previously disclosed to the public or to the trade with
                   respect to the Partnership's or the Company Group's present
                   or future business, operations, services, products, research,
                   inventions, discoveries, drawings, designs, plans, processes,
                   models, technical information, facilities, methods, trade
                   secrets, copyrights, software, source code, systems, patents,
                   procedures, manuals, specifications, any other intellectual
                   property, confidential reports, price lists, pricing
                   formulas, customer lists, financial information (including
                   the revenues, costs, or profits associated with any of the
                   Partnership's or the Company Group's products or services),
                   business plans, lease structure, projections, prospects,
                   opportunities or strategies, acquisitions or mergers,
                   advertising or promotions, personnel matters, legal matters,
                   any other confidential and proprietary information, and any
                   other information not generally known outside the Partnership
                   or the Company Group that may be of value to the Partnership
                   or the Company Group but excludes any information already
                   properly in the public domain. "Confidential Information"
                   also includes confidential and proprietary information and
                   trade secrets that third parties entrust to the Partnership
                   or the Company Group in confidence.

                   You understand and agree that the rights and obligations set
                   forth in this Secrecy Section will continue indefinitely and
                   will survive termination of this Agreement and your
                   employment with the Partnership or the Company Group.

Exclusive          You confirm that all Confidential Information is and must
Property           remain the exclusive property of the Partnership or the
                   relevant member of the Company Group. All business records,
                   business papers, and 
<PAGE>
 
                   business documents you keep or make in the course of your
                   employment by the Partnership relating to the Partnership or
                   any member of the Company Group must be and remain the
                   property of the Partnership or the relevant member of the
                   Company Group. Upon the termination of this Agreement with
                   the Partnership or upon the Partnership's request at any
                   time, you must promptly deliver to the Partnership or to the
                   relevant member of the Company Group any Confidential
                   Information or other materials (written or otherwise) not
                   available to the public or made available to the public in a
                   manner you know or reasonably should recognize the
                   Partnership did not authorize, and any copies, excerpts,
                   summaries, compilations, records and documents you made or
                   that came into your possession during your employment. You
                   agree that you will not, without the Partnership's consent,
                   retain copies, excerpts, summaries or compilations of the
                   foregoing information and materials. You understand and agree
                   that the rights and obligations set forth in this Exclusive
                   Property Section will continue indefinitely and will survive
                   termination of this Agreement and your employment with the
                   Company Group.

Maximum Limits     If any of the provisions of Exhibit A are ever deemed to
                   exceed the time, geographic area, or activity limitations the
                   law permits, you and the Partnership agree to reduce the
                   limitations to the maximum permissible limitation, and you
                   and the Partnership authorize a court or arbitrator having
                   jurisdiction to reform the provisions to the maximum time,
                   geographic area, and activity limitations the law permits.

Injunctive Relief  Without limiting the remedies available to the Partnership,
                   you acknowledge

                         that a breach of any of the covenants in this Exhibit A
                         may result in material irreparable injury to the
                         Partnership and Company Group for which there is no
                         adequate remedy at law, and

                         that it will not be possible to measure damages for
                         such injuries precisely.
<PAGE>
 
                   You agree that, if there is a breach or threatened breach,
                   the Partnership or any member of the Company Group will be
                   entitled to obtain a temporary restraining order and/or a
                   preliminary or permanent injunction restraining you from
                   engaging in activities prohibited by any provisions of this
                   Exhibit A or such other relief as may be required to
                   specifically enforce any of the covenants in this Exhibit A.

<PAGE>
 
                                 EXHIBIT 10.39



                            CAPITAL AUTOMOTIVE L.P.
                            -----------------------

                       REAL PROPERTY PURCHASE AGREEMENT
                       --------------------------------

                       Meyers Family Limited Partnership



                               January 10, 1998
<PAGE>
 
                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                          Page
<S>    <C>                                                                <C>
I.     PURCHASE AND SALE.................................................  - 1 -
             1.1  Certain Definitions....................................  - 1 -
             1.2  Agreement to Purchase and Sell.........................  - 2 -
             1.3  Encumbrances...........................................  - 2 -
             1.4  Purchase Price.........................................  - 3 -
             1.5  Capitalized Terms......................................  - 3 -

II.    OPERATION OF PROPERTY THROUGH CLOSING.............................  - 3 -
             2.1  Business Practice......................................  - 3 -
             2.2  No Sale or Encumbrance.................................  - 3 -
             2.3  Leases, Service Contracts and Management Contracts.....  - 4 -
             2.4  Termination of Leases; New Company Leases..............  - 4 -
             2.5  Compliance.............................................  - 4 -
             2.6  Notice of Inaccuracy or Incompleteness.................  - 4 -
             2.7  Access.................................................  - 4 -
             2.8  Insurance..............................................  - 5 -
             2.9  Fulfillment of Obligation..............................  - 5 -
             2.10 Financial Statements and Reports.......................  - 5 -
             2.11 Under Construction Properties..........................  - 5 -

III.   STATUS OF TITLE TO PROPERTY.......................................  - 8 -
             3.1  State of Title.........................................  - 8 -
             3.2  Preliminary Evidence of Title..........................  - 8 -
             3.3  Title Defects.......................................... - 10 -

IV.    CLOSING PRORATIONS AND ADJUSTMENTS................................ - 11 -
             4.1  Prorations and Adjustments............................. - 11 -

V.     CLOSING........................................................... - 12 -
             5.1  Closing Date........................................... - 12 -
             5.2  Closing Documents...................................... - 12 -
             5.3  Conditions to the Partnership's Obligation to Close.... - 15 -
             5.4  Conditions to the Seller's Obligation to Close......... - 17 -
             5.5  Transaction Costs...................................... - 17 -

VI.    CASUALTY LOSS AND CONDEMNATION.................................... - 18 -
             6.1  Casualty............................................... - 18 -
             6.2  Condemnation or Taking................................. - 19 -
</TABLE> 
                                     -ii-
<PAGE>
 
<TABLE>
<S>    <C>                                                                <C> 
VII.   REPRESENTATIONS AND WARRANTIES OF THE SELLERS....................  - 19 -
             7.1  Organization..........................................  - 19 -
             7.2  Authority.............................................  - 19 -
             7.3  Interest in Contributed Properties....................  - 20 -
             7.4  No Defaults...........................................  - 20 -
             7.5  No Litigation; No Condemnation........................  - 21 -
             7.6  No Violation..........................................  - 21 -
             7.7  Required Obligations..................................  - 21 -
             7.8  Condition of Properties...............................  - 22 -
             7.9  Warranties............................................  - 22 -
            7.10  Utilities.............................................  - 22 -
            7.11  Zoning................................................  - 22 -
            7.12  Improvements..........................................  - 22 -
            7.13  Environmental Matters.................................  - 22 -
            7.14  Insurance.............................................  - 25 -
            7.15  Compliance............................................  - 25 -
            7.16  Leases................................................  - 26 -
            7.17  Service Contracts; Management Contracts...............  - 27 -
            7.18  Permits...............................................  - 27 -
            7.19  Other Liabilities.....................................  - 27 -
            7.20  Tax Matters...........................................  - 27 -
            7.21  Taxes.................................................  - 27 -
            7.22  Special Filings.......................................  - 28 -
            7.23  Books and Records.....................................  - 28 -
            7.24  No Brokers............................................  - 28 -
            7.25  All Material Information..............................  - 28 -
            7.26  Survival of Warranties................................  - 28 -

VIII.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
PARTNERSHIP.............................................................  - 29 -
            8.1   Organization, Good Standing and Qualification.........  - 29 -
            8.2   Authorization.........................................  - 29 -
            8.3   No Violation..........................................  - 30 -
            8.4   Tax Status............................................  - 30 -
            8.5   No Litigation.........................................  - 30 -
            8.6   No Brokers............................................  - 30 -
            8.7   Survival..............................................  - 30 -

IX.    COVENANTS........................................................  - 30 -
            9.1   Covenants of the Company and the Partnership........... - 30 -
            9.2   Covenants of the Sellers............................... - 32 -
            9.3   No Claim Against Property                               - 33 -
</TABLE> 
                                     -iii-
<PAGE>
 
<TABLE>
<S>   <C>                                                                 <C>  
X.    DUE DILIGENCE PERIOD..............................................  - 33 -
            10.1  Due Diligence Period..................................  - 33 -
            10.2  Access to Properties and Materials....................  - 33 -
            10.3  Adjustment Following Due Diligence....................  - 34 -

XI.   DEFAULTS AND REMEDIES.............................................  - 34 -
            11.1  Indemnification by Sellers............................  - 34 -
            11.2  Remedies..............................................  - 35 -
            11.3  Indemnification by the Company and the Partnership....  - 37 -
            11.4  Indemnification Procedures............................  - 37 -

XII.  MISCELLANEOUS.....................................................  - 41 -
            12.1  Assignment............................................  - 41 -
            12.2  Entire Agreement......................................  - 41 -
            12.3  Notices...............................................  - 41 -
            12.4  Governing Law.........................................  - 42 -
            12.5  Litigation Costs......................................  - 42 -
            12.6  Counterparts..........................................  - 42 -
            12.7  Offer and Acceptance..................................  - 42 -
</TABLE>                                  
                                      -iv-
<PAGE>
 
                                   EXHIBITS

2.4(a)       Form of  Company Lease
5.2.1(m)     Opinion of Seller's Counsel
5.2.2(d)     Opinion of Company Counsel

                                   SCHEDULES

1.2          Schedule of Properties; Ownership Interests in Properties and
               Purchase Price
2.1          Prior Occupants
2.11(a)      Construction Contracts
2.11(b)      Plans and Specifications
7.4          Material Defaults
7.8          Condition of Properties
7.11         Zoning
7.13.4       Known Environmental Circumstances
7.13.5(a)    The Treatment, Storage and Disposal Locations for Substances of
               Concern
7.13.5(b)    Storage Tanks
7.13.5(c)    Existence of Asbestos
7.13.5(f)    Environmental Permits and Authorizations
7.14         Insurance
7.17         Service Contracts and Management Contracts
7.19         Other Liabilities

                                      -v-
<PAGE>
 
                           CAPITAL AUTOMOTIVE L.P. 

                       REAL PROPERTY PURCHASE AGREEMENT
                       --------------------------------

     THIS REAL PROPERTY PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of this 10th day of January 1998, by and among the MEYERS FAMILY LIMITED
PARTNERSHIP, a Maryland limited partnership, having offices at c/o Good News
Salisbury, Inc., 2013 N. Salisbury Blvd., Salisbury, Maryland 21801 (sometimes
referred to as "Seller"), and CAPITAL AUTOMOTIVE L.P., a Delaware limited
partnership (the "Partnership"), having offices at 1925 North Lynn Street, Suite
306, Arlington, Virginia 22209, and CAPITAL AUTOMOTIVE REIT, a Maryland real
estate investment trust (the "Company"), having offices at 1925 North Lynn
Street, Suite 306, Arlington, Virginia 22209 on its own behalf and as the
general partner of the Partnership.


                                   RECITALS
                                   --------

     A.   The Sellers are the legal and beneficial owners of all of the
interests in fee simple title to all of the real property and improvements set
forth on such Schedule 1.2 hereto (including the residual interests in any
              ------------                                                
tenant improvements thereon), which are individually referred to as a "Property"
and collectively, the "Properties."  Such Properties are identified on Schedule
                                                                       --------
1.2  by street address and property tax identification number, or if such
- ----                                                                     
Properties constitute more than one parcel, by the several applicable property
tax identification numbers.

     B.   Each Seller desires to sell all of its interest in each of the
Properties to the Partnership and the Partnership desires to purchase all of the
Sellers' interests in such Properties.

     NOW THEREFORE, in consideration of and in reliance upon the above Recitals,
the terms, covenants and conditions contained in this Agreement, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:


     1.   PURCHASE AND SALE
          -----------------

          1.1  Certain Definitions.  For purposes of this Agreement:
               -------------------                                        

               1.1.1     "Mortgage Debt" means the aggregate amount of mortgage
                         indebtedness, if any, encumbering the Properties as set
                         forth opposite the description of each Property on
                         Schedule 1.2.
                         ------------ 

               1.1.2     "Purchase Price" means the amount, in U.S. dollars,
                         that is the purchase price of each Property, as
                         identified on Schedule 1.2 for each such Property.
                                       ------------ 
<PAGE>
 
               1.1.3     "Affiliate" means with respect to any Person, (i) any
                         Person that holds direct or indirect beneficial
                         ownership (as defined in Rule 13d-3 under the
                         Securities Exchange Act of 1934, as amended) of voting
                         securities or other voting interests representing at
                         least five percent (5%) of the outstanding voting power
                         of a Person or equity securities or other equity
                         interests representing at least five percent (5%) of
                         the outstanding equity securities or interests in a
                         Person, or (ii) any Person that directly, or indirectly
                         through one or more intermediaries, controls, or is
                         controlled by, or is under common control with such
                         Person.

               1.1.4     A "Person" shall mean and include natural persons,
                         corporations, limited partnerships, general
                         partnerships, joint stock companies, joint ventures,
                         associations, companies, trusts, banks, trust
                         companies, land trusts, business trusts, Indian tribes
                         or other organizations, whether or not legal entities,
                         and governments and agencies and political subdivisions
                         thereof.

               1.1.5     For purposes of this Agreement, the "knowledge" of a
                         Person shall mean the actual knowledge of such Person's
                         officers, senior executives, managing partners, general
                         partners, majority shareholders, key employees or their
                         equivalents.

          1.2  Agreement to Purchase and Sell.  Subject to the terms and
               ------------------------------                           
conditions of this Agreement, at the Closing (as hereinafter defined), each
Seller shall sell, transfer and convey to the Partnership, and the Partnership
shall purchase and accept from the Sellers, all of the Sellers' right, title and
interest in and to the Properties identified on Schedule 1.2, excluding items of
                                                ------------                    
movable personal property attached to such Properties that relate to the
business conducted on such Properties and may readily be removed from such
Properties without material damage whether or not such items are "fixtures,"
("Excluded Personal Property").

          1.3  Encumbrances.  The Partnership shall acquire each Property free
               ------------                                                   
and clear of all liabilities, obligations and commitments of Sellers and free
and clear of all liens and encumbrances other than Permitted Exceptions.

                                      -2-
<PAGE>
 
          1.4  Purchase Price.  On the terms and subject to the conditions of
               --------------                                         
this Agreement, at the Closing Sellers shall sell, transfer, convey, assign and
deliver to the Partnership, and the Partnership shall purchase and accept from
Sellers all the right, title and interest of Sellers to and under the Properties
for an aggregate purchase price (the "Aggregate Purchase Price") in an amount
equal to:

               FOUR MILLION EIGHTY-SIX THOUSAND TWO HUNDRED SIXTY AND 00/100
               U.S. DOLLARS ($4,086,260)
 
The Aggregate Purchase Price will be adjusted pursuant to Sections 3.3, 
5.2.1(k), 5.2.1(l), 6.1, 6.2, 10.3 as applicable.

          1.5  Capitalized Terms.  Capitalized terms used in this Agreement that
               -----------------                                                
are not otherwise defined herein shall have the meanings required by context.


     II.  OPERATION OF PROPERTY THROUGH CLOSING
          -------------------------------------

          Through the Closing Date:

          2.1  Business Practice.  Except as otherwise provided in this Article
               -----------------                                               
2, the Sellers shall continue, or shall cause any Affiliate, tenant, or third
party managing, maintaining or occupying, as the case may be, any of the
Properties (referred to herein individually as a "Prior Occupant" and
collectively as the "Prior Occupants") to continue, to manage, to maintain and
to operate the Properties in accordance with sound and prudent business
practices and keep the Properties and the tangible personal property thereon in
good condition and repair, ordinary wear and tear excepted. The Sellers shall
instruct such Prior Occupant not to make any change in its management,
maintenance or operation of the Properties or in its normal and customary other
practices. The Prior Occupants are identified on Schedule 2.1 to this Agreement.
                                                 ------------        

          2.2  No Sale or Encumbrance.  None of the Sellers shall sell, 
               ----------------------                                  
mortgage, pledge, hypothecate or otherwise transfer or dispose of all, or any
part of any Property or any interest therein, nor shall any Seller initiate,
consent to, approve or otherwise take any action with respect to zoning or any
other governmental rules or regulations presently applicable to all or any part
of any Property, nor shall any Seller permit any new limited or general
partners, shareholders or members to be admitted to any Seller. Notwithstanding
the foregoing, Sellers shall have, with the written consent of the Partnership
(which consent shall not be unreasonably withheld): (a) the right to admit new
partners to the Meyers Family Limited Partnership between the date hereof and
the Closing Date; and (b) the right prior to Closing to convert the Meyers
Family Limited Partnership from a limited partnership into another form of
entity and to transfer the Properties from the Meyers Family Limited Partnership
to such converted entity; provided that such converted entity shall be in a form
approved by the Partnership; and further provided that such converted entity
executes this Agreement and agrees to be bound by its terms and conditions and
to assume all of Sellers'

                                      -3-
<PAGE>
 
obligations hereunder, including, but not limited to, the covenant under Section
11.2.3 hereto to maintain a net worth of no less than two million dollars
($2,000,000) (U.S.) for a period of no less than two (2) years following the
Closing of the transactions contemplated by this Agreement; and further provided
that the members, shareholders, partners, or other owners of such converted
entity shall include Roy L. Meyers, Jr. and Charlotte Meyers (the general
partners of the Meyers Family Limited Partnership).

          2.3  Leases, Service Contracts and Management Contracts.  Except as
               --------------------------------------------------            
provided in Section 2.4, the Sellers shall not, nor shall they cause or permit
any Prior Occupant to, terminate, modify, extend, amend or renew any Lease (as
defined in Section 4.1.3 hereof), Service Contract (as defined in Section 7.17
hereof), or Management Contract (as defined in Section 7.17 hereof) or enter
into any new Lease (other than the Company Lease pursuant to Section 2.4 of this
Agreement) or Service Contract without the prior written consent of the Company
or the Partnership; provided, however, that the failure of the Company or the
Partnership to object to any such action within thirty (30) days after written
notice to it by Seller shall be deemed to reflect the Company's or the
Partnership's consent thereto.  Notwithstanding the foregoing, all Service
Contracts and Management Contracts relating to the respective Properties shall
remain in effect after the Closing Date, except for those Service Contracts and
Management Contracts that the Partnership requires, in writing, to be terminated
as of the Closing Date.

          2.4  Termination of Leases; New Company Leases.  Prior to the Closing
               -----------------------------------------                       
Date, the Sellers shall cause the termination of all Leases.  Not later than
five (5) days  before the Closing Date (as defined herafter), the Sellers shall
cause the Prior Occupant of each Property, or an Affiliate thereof, to execute
and deliver to the Partnership an occupancy lease with the Partnership for each
of the Properties substantially in the form attached hereto as Exhibit 2.4(a)
                                                               --------------
(referred to hereafter individually as a "Company Lease" and collectively as the
"Company Leases"), on terms and conditions (including Rent (as defined in such
Company Lease)) acceptable to the Partnership. The Base Annual Rent (as defined
in the Company Lease) called for under the Company Lease for each Property shall
be eleven and one-half percent (11.5%) of the Purchase Price (the "Rate of
Return") for such Property.

          2.5  Compliance.  None of the Sellers shall knowingly take or fail to
               ----------                                                      
take any action that will cause the Properties to fail to comply with any
federal, state, municipal and other governmental laws, ordinances, requirements,
rules, regulations, notices, codes and orders, or any agreements, covenants,
conditions, easements and restrictions currently in effect relating to the
Properties.

          2.6  Notice of Inaccuracy or Incompleteness.  The Sellers shall
               --------------------------------------                    
promptly give written notice to the Company of the occurrence of any event of
which Sellers have knowledge and which may adversely affect the completeness or
accuracy of any representation or warranty made or to be made by Sellers under
or pursuant to this Agreement.

                                      -4-
<PAGE>
 
          2.7  Access.  The Sellers shall cause the Company and the Partnership
               ------                                                          
and its representatives to have reasonable access to the Properties, subject to
the prior rights, if any, of any Prior Occupant; provided, however, that without
the consent of the Seller, the representatives of the Partnership shall not
disclose to any Prior Occupant the existence of this Agreement or the
transactions contemplated hereby.

          2.8  Insurance.  The Sellers shall cause the existing insurance
               ---------                                                 
coverages on the Properties and the business of the Sellers to be maintained in
full force and effect through the Closing Date.

          2.9  Fulfillment of Obligation.  To the extent any Seller is
               -------------------------                              
obligated, pursuant to any contract, agreement, covenant, lease, including any
Lease, or other understanding entered into prior to the date hereof with any
Prior Occupant, governmental subdivision or any other third party, to effect any
construction, make any improvements or take any action, the Sellers shall cause
any such construction, improvements and/or action to be taken, completed and
fully paid for by such Seller, at its expense, prior to the Closing Date.  No
such obligation shall be unfulfilled, and no liability for or payment in respect
of any such obligation shall be unsatisfied as of the Closing Date.

          2.10 Financial Statements and Reports.  The Sellers shall provide to
               --------------------------------                               
the Company financial statements, agings of accounts receivable, and other
financial, operating or statistical information for each Property upon any
reasonable request of the Company (provided that such such statements, reports
or information are produced in the ordinary course of any Seller's business),
and the general partner or chief financial officer, as the case may be, of each
Seller shall certify that, to the best of his or its knowledge, such financial
statements and other reports are true, accurate and complete in all material
respects.

          2.11 Under Construction Properties.  Notwithstanding anything to the
               -----------------------------                              
contrary contained in this Agreement, the Partnership and the Company recognize
that the Property identified on Schedule 1.2 to this Agreement as the three
                                ------------                         
parcels compromising the Toyota/Mercedes automobile dealership at 2015 N.
Salisbury Blvd., Salisbury, Maryland 21801, (the "Under Construction Property")
is presently being improved pursuant to the construction contracts listed on
Exhibit 2.11(a) hereto and the plans and specifications listed on Exhibit
- ---------------                                                   -------
2.11(b) hereto.  The contracts, plans and specifications so listed are referred
- -------                                                                        
to herein, collectively, as the "Contract Documents."  With respect to the Under
Construction Property, the parties to this Agreement agree as follows:

               2.11.1    The Purchase Price of each such property, as stated in
                         Schedule 1.2 to this Agreement, is based upon the
                         ------------
                         assumption that each such property will be conveyed to
                         the Partnership at the Closing Date identified in
                         Section 5.1 hereto, but in no event later

                                      -5-
<PAGE>
 
                         than the date to which the Sellers and the Partnership
                         shall agree in writing:

                    a.   with all improvements called for under the Contract
                         Documents complete in all respects and in substantial
                         conformity with all requirements of the Contract
                         Documents;

                    b.   free of all liens and claims of any and all persons,
                         firms, companies, corporations or other entities
                         supplying any labor, services, materials, supplies or
                         other things of value in connection with or in respect
                         of any construction or other improvement to the Under
                         Construction Property or either of them (the
                         "Construction Service/Material Suppliers"); and

                    c.   with certificates of occupancy and/or other
                         certificates issued by all appropriate governmental
                         bodies or agencies attesting to the fact of the
                         completion of all improvements in conformity with all
                         building, zoning and other applicable codes or
                         regulations so as to permit the immediate occupancy of
                         the improvements for the purposes contemplated by the
                         Company Lease.

               2.11.2    The Seller of the Under Construction Property agrees
                         that it will do all things necessary to convey the
                         Under Construction Property as contemplated in Section
                         2.11.1 hereto.

               2.11.3    If the Seller of the Under Construction Property shall
                         have any dispute with any Construction Service/Material
                         Supplier referred to in Section 2.11.1.b above, and
                         that dispute prevents the delivery of the properties or
                         either of them free of any lien or claim, such Seller
                         may deliver the property so affected subject to such
                         lien or claim; provided however that:

                    a.   by such Seller's "bonding off" or posting money with
                         the Partnership's Title Insurer, such Title

                                      -6-
<PAGE>
 
                         Insurer will "insure over" the lien or claim in
                         question; and

                    b.   such Seller diligently pursues the dispute to its
                         conclusion.

               2.11.4    If for any reason (including the resolution of a
                         dispute specified in Section 2.11.3 above) the Seller
                         is required to pay more money (the "Excess") than is
                         specified in the Contract Documents as they exist on
                         the date of this Agreement, then if the Partnership
                         determines that the Excess, when added to the Purchase
                         Price specified in this Agreement, results in an
                         aggregate amount not in excess of fair market value of
                         the property in question, the Purchase Price specified
                         in this Agreement for the property in question will be
                         increased by the amount of the Excess and the Base
                         Annual Rent payable under the applicable Company Lease
                         will be increased by an amount equal to the amount of
                         the Excess times the Rate of Return.

               2.11.5    The Seller of the Under Development Property agrees
                         that nothing in this Section 2.11 shall lessen the
                         Seller's obligations under other provisions of this
                         Agreement or lower the requirements with respect to
                         such Property as specified herein.

               2.11.6    Notwithstanding the foregoing provisions of this
                         Section 2.11, the closing of the conveyance of the
                         Under Construction Property shall occur on the Closing
                         Date provided in Section 5.1 hereto only if the
                         construction project on the Under Construction Property
                         shall be substantially complete. For purposes of this
                         Section 2.11.6, "substantially complete" means
                         completion except for the typical "punch-list" items (a
                         list of which shall be completed by Seller (as the
                         agent for the Partnership) and the contractor), which
                         items are capable of completion within thirty (30) days
                         of the Closing Date. The Seller shall enforce its right
                         to obtain completion of the construction under the
                         Contract Documents by way of hold-back or other

                                      -7-
<PAGE>
 
                         mechanism to guaranty to the Partnership that the 
                         punch-list items are completed within thirty (30) days
                         of the Closing Date. If the construction project on the
                         Under Construction Property is not substantially
                         complete as of the Closing Date, Sellers and the
                         Partnership shall agree to an alternative date to close
                         the conveyance of the Under Construction Property to
                         the Partnership, which date shall be no later than
                         forty-five (45) days following the completion of the
                         construction project.
                         
     III. STATUS OF TITLE TO PROPERTY
          ---------------------------

          3.1  State of Title.  At Closing, the Sellers shall own, beneficially
               --------------                                                  
and of record, good and marketable fee simple title to the Properties, subject
only to the mortgages creating the Mortgage Debt listed on Schedule 1.2 hereto
                                                           ------------       
and those covenants, conditions, restrictions and other matters affecting title
as set forth in the land Title Commitments, UCC Searches and/or Surveys to be
delivered to the Partnership hereunder and found to be acceptable to the
Partnership under Section 3.3 hereto (the "Scheduled Exceptions").  The Mortgage
Debt and Scheduled Exceptions are referred to collectively herein as the
"Permitted Exceptions."

          3.2  Preliminary Evidence of Title.  Within no more than 30 days after
               -----------------------------                                    
the date hereof, the Sellers and the Partnership shall obtain, in a form
acceptable to the Partnership, the following documents to evidence the condition
of the title to each of the Properties:

               3.2.1     Commitments (the "Title Commitments") to the
                         Partnership for ALTA Form B (1987) Owner's Title
                         Insurance Policies committing to insure, at standard
                         rates, title to each Property as being good and
                         marketable, subject only to the Permitted Exceptions,
                         in the amount of the fair market value of each such
                         Property, issued by a title company acceptable to the
                         Company and the Partnership (the "Title Insurer"). The
                         Title Commitments shall be effective as of the Closing
                         Date, and shall reflect that fee simple title is held
                         by the respective Seller. Each Owner's Title Insurance
                         Policy to be issued to the Partnership at Closing
                         pursuant to Section 7.2.2 below ("Title Insurance
                         Policies") shall contain an extended coverage
                         endorsement over the general or standard exceptions
                         which are a part of the printed 

                                      -8-
<PAGE>
 
                         form of the policy and subject only to the Permitted
                         Exceptions. Each Title Insurance Policy shall, in
                         addition, (a) include provisions for co-insurance, in
                         such amounts of liability acceptable to the Partnership
                         and the Company; (b) not contain any survey exception,
                         (c) not contain any exceptions for (i) liens for labor
                         or material, whether or not of record, (ii) parties in
                         possession (other than Prior Occupants under the
                         Leases, solely as such Prior Occupants), (iii)
                         unrecorded easements, and (iv) taxes and special
                         assessments not shown on the public records, (d)
                         provide for the following endorsements: (i) an access
                         endorsement insuring that there is direct and
                         unencumbered access to the land from all adjacent
                         public streets and roads, (ii) a survey endorsement
                         insuring that all foundations in place as of the date
                         of such policy are within the lot lines and applicable
                         setback lines, that the improvements do not encroach on
                         adjoining land or any easements, and that there are no
                         encroachments of improvements from adjoining land on
                         any or the Properties or any part thereof, (iii) an
                         ALTA Form 3.1 zoning endorsement insuring that the
                         Properties are zoned for the buildings and the
                         operation thereof as contemplated by the terms and
                         provisions of this Agreement, (iv) a non-imputation
                         endorsement, by which the Title Insurer waives any
                         defense based upon knowledge of any person or entity
                         (other than the knowledge of the Partnership or its
                         designees), (v) a statement that each Property
                         constitutes a separate lot of record and is separately
                         assessed for real estate tax purposes, (vi) an
                         endorsement commonly referred to as a "Fairway
                         endorsement," providing among other things, that the
                         Title Insurer waives any defense based on a dissolution
                         or termination of the insured partnership or the
                         formation of a new partnership solely by reason of one
                         or more transfers of all or any part of the partnership
                         interests of any one or more of the general partners of
                         the insured to the Company or the Partnership and/or
                         any one or more of the limited partners of the insured,
                         and/or the transfer of any one or more of the limited
                         partner's interests to

                                      -9-
<PAGE>
 
                         the current general partner, the Company or the
                         Partnership, and (vii) such other endorsements as the
                         Partnership and the Company may reasonably require.

               3.2.2     Written results of searches reflecting any liens,
                         judgements, tax liens, bankruptcies, and open dockets
                         (the "UCC Searches"), conducted by a company reasonably
                         acceptable to the Partnership. The UCC Searches shall
                         name each Seller, Prior Occupant, and Property, and
                         shall search the appropriate land records and central
                         filing office for Uniform Commercial Code financing
                         statements.

               3.2.3     Legible copies of all documents of record referred to
                         in any Title Commitment or disclosed by the UCC
                         Searches, and all other documents evidencing or, to the
                         extent in the possession or control of the Sellers,
                         relating to, matters reflected in any Title Commitment
                         or the UCC Searches.

               3.2.4     Current ALTA/ACSM land title surveys of each of the
                         Properties (the "Surveys") dated on or after the date
                         of this Agreement, certified to the Partnership and the
                         Title Insurer (and such other persons or entities as
                         the Partnership may designate) by a surveyor registered
                         in the State where the Property is located. Each Survey
                         shall be in form and substance acceptable to the
                         Partnership and the Title Insurer.

          3.3  Title Defects. The Partnership shall have the right to review the
               -------------                                                    
Title Commitments, UCC Searches or Surveys (or any revision or update of any of
them) and to require the Seller to remove, correct, and cure any defects in the
title or other such matters relating to the title that the Partnership
determines, in its sole discretion, are unacceptable.  The Partnership shall
notify the Sellers in writing within ten (10) business days after the
Partnership receives the Title Commitments, UCC Searches or Surveys, as the case
may be, of any such defects or matters that the Partnership finds to be
unacceptable, and, within sixty (60) days from the receipt of notice, such
Sellers shall, (i) as to any such exception or other matter of a nonmonetary
nature, use reasonable efforts to remove, correct and cure such defects or such
other matters, and (ii) as to any such defect or other matter of a monetary
nature, cause such lien or encumbrance or other matter to be discharged and
released, in each case to the reasonable satisfaction of the Partnership, except
that such Seller shall not be required to expend more than $100,000 with respect
thereto.  If such Seller 

                                     -10-
<PAGE>
 
fails to remove, correct and cure such defects or such other matters, the
Partnership may, at its option and as its exclusive remedy, (x) terminate this
Agreement, in which event this Agreement, without further action of the parties,
shall become null and void and neither party shall have any further rights or
obligations under this Agreement, (y) terminate this Agreement with respect to
such Property and reduce the Aggregate Purchase Price by the Purchase Price for
such Property with respect to which the Seller fails to correct and cure such
defects or other such matters, or (z) elect to accept title to such Property and
discharge or release any liens, encumbrances or other matters of a monetary
nature or which may otherwise be discharged, released or removed by the payment
of a monetary sum and reduce the Aggregate Purchase Price by the lesser of (a)
the amount necessary to correct or cure such monetary liens, encumbrances or
other matters or (b) $100,000. If the Partnership fails to make any such
election, the Partnership shall be deemed to have elected the option contained
in clause (y).

     IV.  CLOSING PRORATIONS AND ADJUSTMENTS
          ----------------------------------

          4.1  Prorations and Adjustments.  All prorations and adjustments (the
               --------------------------                                      
"Prorations") with respect to each Property, for the period up to and through
the Closing Date, shall be the responsibility of or belong to the Sellers and
all Prorations for the period after the Closing Date shall be the responsibility
of or belong to the tenant under the applicable Company Lease.  The Company and
the Partnership shall have no responsibility for, and will receive no benefit
from, the Prorations, and the Seller shall have liability for such Prorations.
Such Prorations shall include, but not be limited to, the following:

               4.1.1     real estate and personal property taxes and
                         assessments;

               4.1.2     common area maintenance fees and reimbursements for
                         prior years property taxes payable by Prior Occupants;

               4.1.3     the rent payable by Prior Occupants under leases in
                         effect immediately prior to the Closing Date (the
                         "Leases") as set forth on Schedule 2.1 hereto;
                                                   ------------ 

               4.1.4     the full amount of security deposits paid under the
                         Leases, together with interest thereon if required by
                         law or otherwise;

               4.1.5     water, electric, telephone and all other utility and
                         fuel charges (those that are meter read will be read by
                         the appropriate utility and service transferred as of
                         the Closing Date);

                                     -11-
<PAGE>
 
               4.1.6     amounts due and prepayments under the Service
                         Contracts;

               4.1.7     assignable license and permit fees;

               4.1.8     other expenses of operation and similar items; and

               4.1.9     all or any other disbursements, payments, and
                         obligations relating to the Property.

               4.1.10    notwithstanding the foregoing, any refunds of real or
                         personal property taxes for tax years beginning prior
                         to the Closing Date shall belong to Sellers, and if
                         paid to the Partnership shall be promptly refunded by
                         the Partnership to Sellers in cash.

               4.1.11    with respect to Mortgage Debt, at the time of Closing,
                         all obligations accrued up to the Closing Date, whether
                         the same shall constitute principal, interest, or other
                         payments, shall be paid by the Seller by way of a
                         reduction of the Aggregate Purchase Price in the amount
                         of such obligations.

     V.   CLOSING
          -------

          5.1  Closing Date.  The closing of the transactions contemplated by
               ------------                                                  
this Agreement (the "Closing") shall occur at the offices of Wilmer, Cutler &
Pickering, 2445 M Street, N.W. Washington, D.C. 20037-1420, at 10:00 a.m. on
February 27, 1998, or such other time or place as shall follow the closing of
the initial public offering of Initial Shares of the Company pursuant to the
Registration Statement (but in no event later [than the earlier of (i) thirty
days after the closing of the public offering or (ii)] May 29, 1998), provided
that all conditions to Closing have been satisfied or waived, or at such other
time and place as the Sellers and the Company shall agree in writing.  The
"Closing Date" shall be the date of the Closing.  If the Closing Date is to be a
date other than February 27, 1998, the Partnership shall deliver to Sellers
facsimile notice of such Closing Date no later than five (5) business days prior
to such Closing Date.

          5.2  Closing Documents
               -----------------

               5.2.1     Sellers.  Not later than five (5) business days prior
                         -------
                         to the Closing Date, the Sellers shall deliver to the
                         Company and the Partnership the following:

                                     -12-
<PAGE>
 
                   a.    deeds and assignments for the Properties;

                   b.    executed copies of all Company Leases, effective at
                         Closing;

                   c.    any affidavits, certificates and other documents
                         (including without limitation non-imputation affidavits
                         and/or certificates) that are reasonably necessary for
                         the Title Insurer to issue the Owner's Title Insurance
                         Policies in the form and condition required by this
                         Agreement;

                   d.    evidence satisfactory to the Partnership that all
                         mortgages and other indebtedness secured by the
                         Properties have been paid in full;

                   e.    for each Seller that is a corporation, a corporate
                         resolution authorizing the transactions contemplated by
                         this Agreement, a certificate of good standing, a
                         certified copy of its articles or certificate of
                         incorporation and bylaws, and a certificate of
                         incumbency certifying the titles and signatures of the
                         corporate officers authorized to consummate the
                         transactions contemplated hereunder on behalf of Seller
                         and such other evidence of such Seller's power and
                         authority as the Company or Partnership reasonably
                         requests;

                   f.    for each Seller that is a partnership or a limited
                         liability company, a partnership resolution authorizing
                         the transactions contemplated by this Agreement, a
                         certificate of good standing, a certified copy of the
                         partnership or operating agreement governing such
                         Seller, and a certificate of incumbency certifying the
                         titles and signatures of the general partners or
                         members authorized to consummate the transactions
                         contemplated hereunder on behalf of such Seller and
                         such other evidence of power and authority of such
                         Seller as the Company or Partnership reasonably
                         requests;

                   g.    for each Seller, an affidavit stating, under penalty of
                         perjury, its U.S. taxpayer identification number and

                                     -13-
<PAGE>
 
                         that it is not a foreign person within the meaning of
                         Section 1445 of the Internal Revenue Code of 1986, as
                         amended (the "Code");

                    h.   agreements from each Prior Occupant who leases any
                         Property terminating its Leases with Sellers and an
                         estoppel certificate from such Prior Occupant stating
                         that it has no claims under the Lease;

                    i.   all of the original Leases, written Service Contracts
                         and Management Contracts and any and all building
                         plans, surveys, site plans, engineering plans and
                         studies, utility plans, landscaping plans, development
                         plans, specifications drawings, marketing artwork,
                         construction drawings, soil tests, complete warranty
                         book including all contractors and subcontractors and
                         other documentation concerning all or any part of each
                         Property to the extent that any of the foregoing
                         documents are in the possession or control of Sellers;

                    j.   any bonds, warranties or guaranties which are in any
                         way applicable to any Property or any part thereof to
                         the extent any of the foregoing are in the possession
                         or control of Sellers;

                    k.   If the Company or Partnership shall so request, each
                         Seller shall deliver to the Company a letter (an
                         "Estoppel Letter") in a form acceptable to the Company,
                         dated not more than thirty (30) days prior to the
                         Closing Date, from each Prior Occupant under each
                         Lease. The Estoppel Letter shall be fully completed in
                         a manner reasonably satisfactory to the Company, and
                         with no modifications other than those reasonably
                         acceptable to the Company. In the event Estoppel
                         Letters in form and content reasonably satisfactory to
                         the Company are not received by the Company and the
                         Partnership within the time prescribed herein, then the
                         Partnership and the Company, at their option and as a
                         non-exclusive remedy, upon notice to the Sellers, may
                         immediately terminate this Agreement, or may terminate
                         this Agreement with respect to the

                                     -14-
<PAGE>
 
                         relevant Property, in which case the Aggregate Purchase
                         Price shall be reduced by the Purchase Price of such
                         Property.

                    l.   [Intentionally Omitted]

                    m.   an opinion of Seller's counsel substantially in the
                         form attached hereto as Exhibit 5.2.1(m); and
                                                 ----------------     

                    n.   all other documents reasonably required by the
                         Partnership or the Company in connection with the
                         transactions contemplated by this Agreement.

          5.2.2  Partnership. At the Closing, the Partnership shall deliver the
                 -----------
                 following:

                    a.    [Intentionally Omitted]

                    b.    for the Company, a resolution of its Board of Trustees
                          authorizing the transactions contemplated hereby and a
                          certificate of good standing from the State Department
                          of Assessments and Taxation of the State of Maryland;

                    c.    for the Partnership, evidence of the Partnership's
                          authorization of the transactions contemplated hereby
                          and a certified copy of the Partnership Agreement and
                          a Certificate of Limited Partnership certified by the
                          Secretary of State of Delaware; and

                    d.    an opinion of Wilmer, Cutler & Pickering,
                          substantially in the form attached hereto as Exhibit
                                                                       -------
                          5.2.2(d).
                          --------

          5.3  Conditions to the Partnership's Obligation to Close.  At the
               ---------------------------------------------------         
option of the Partnership, the obligations of the Company and the Partnership
under this Agreement are subject to the satisfaction of the following conditions
(unless explicitly waived in writing):

               5.3.1     Each Seller shall have terminated such existing
                         Management Contracts that Partnership has required, in
                         writing, to be terminated prior to the Closing Date.

                                     -15-
<PAGE>
 
               5.3.2     Each Seller shall have terminated all Leases prior to
                         the Closing Date.

               5.3.3     Each Seller shall have terminated such existing Service
                         Contracts that the Partnership has required, in
                         writing, to be terminated prior to the Closing Date.

               5.3.4     Each and every representation and warranty of the
                         Sellers contained in this Agreement is true, correct
                         and complete in all material respects as of the date
                         hereof and at all times through the Closing Date.

               5.3.5     The Sellers shall have fully performed and satisfied
                         each and every material obligation, term and condition
                         to be performed and satisfied by them under this
                         Agreement.

               5.3.6     All consents, authorizations, certificates, Estoppel
                         Letters, Lender's Estoppel Certificates and approvals
                         required to be obtained by the Sellers in connection
                         with the Agreement shall have been obtained, including
                         but not limited to all consents, approvals and
                         authorizations (without any conditions or requirements)
                         required to be obtained under any Mortgage, deed of
                         trust or other instrument relating to any of the
                         Properties or pursuant to which any of the Sellers are
                         bound in order to complete the transactions
                         contemplated under this Agreement.

               5.3.7     The Company shall have closed its initial public
                         offering according to the Registration Statement.

               5.3.8     The Sellers shall have paid in full such Mortgage Debt
                         and other indebtedness secured by the Properties as
                         required by the Company and Partnership and shall have
                         provided the Company and Partnership with satisfactory
                         evidence thereof, and to the extent that such Mortgage
                         Debt is to be paid off following Closing, the mortgagee
                         shall deliver pay-off letters to the Company and the
                         Partnership.

                                     -16-
<PAGE>
 
               5.3.9     The condition of the Property shall not have materially
                         changed.

               5.3.10    The Partnership shall have received an Owner's Title
                         Insurance Policy (or marked-up commitment therefor) for
                         each Property insuring fee simple title to such
                         Property in the amount of the Purchase Price of such
                         Property subject only to Permitted Exceptions, and
                         otherwise in the form and condition required by this
                         Agreement.

               5.3.11    If the Sellers do not deliver completed Schedules to
                                                                 ---------
                         the Company and Partnership at the time of the
                         execution of this Agreement, the Sellers shall deliver
                         to the Company and Partnership, in substantially
                         completed form, all Schedules required by this
                                             ---------
                         Agreement within five (5) business days after the date
                         of the execution of this Agreement.

               5.3.12    The Sellers shall have delivered to the Company all
                         closing documents required by Section 5.2.1 hereof.

          5.4  Conditions to the Seller's Obligation to Close.  The obligations
               ----------------------------------------------                  
of the Seller under this Agreement are subject to the satisfaction of the
following conditions (unless explicitly waived in writing):

               5.4.1     Each of the representations and warranties of the
                         Partnership contained in this Agreement is true,
                         correct and complete as of the date hereof and at all
                         times through the Closing Date.

               5.4.2     The Partnership and the Company shall have fully
                         performed and satisfied each and every obligation, term
                         and condition to be performed and satisfied by them
                         under this Agreement.

               5.4.3     The Company shall have completed its initial public
                         offering pursuant to the Registration Statement on or
                         before the earlier of May 29, 1998 or the date that the
                         Company withdraws the Registration Statement.

                                     -17-
<PAGE>
 
               5.4.4     All consents, authorizations and approvals required to
                         have been obtained by the Company and the Partnership
                         in connection with this Agreement shall have been
                         obtained.

          5.5  Transaction Costs.
               ----------------- 

               5.5.1     The Sellers shall pay all costs (including, but not
                         limited to, any recordation and transfer taxes,
                         surveys, title insurance (including all special
                         endorsements), searches made pursuant to Section 3.2.2
                         hereof, fees and expenses of going to record) in
                         connection with the transfer by the Sellers of the
                         Properties (collectively referred to as the "Closing
                         Costs"). The Company and the Partnership shall bear the
                         cost of their due diligence activities.

               5.5.2     The Sellers shall pay all assumption fees, prepayment
                         penalties, premiums, lender's consent fees or other
                         such charges ("Consent Fees") imposed in connection
                         with the transactions contemplated hereby, and all
                         Consent Fees imposed by all other lenders in connection
                         with the transactions contemplated hereby.

               5.5.3     Except as specified above and elsewhere in this
                         Agreement, each party shall bear and pay its expenses
                         in connection with this Agreement and the transactions
                         contemplated herein, including the fees of their
                         respective professional advisors.


     VI.  CASUALTY LOSS AND CONDEMNATION
          ------------------------------

          6.1  Casualty.  Prior to Closing, all risk of loss shall belong to the
               --------                                                         
Sellers. If, prior to Closing, the Properties or any part thereof shall be
destroyed or materially damaged by fire or other casualty, the Partnership (a)
shall first offer the Seller the option not to rebuild; Seller may exercise this
option if such Property is insured to the full amount of the Purchase Price of
the Improvements; and if Seller exercises this option, the Partnership may
terminate this Agreement with respect to such Property upon notice to the
Seller, and reduce the Aggregate Purchase Price by the Purchase Price of such
Property, except that if the tenant under the Price Lease or the Tenant elects
to pay the Base Annual Rent under the Company Lease for the entire term of the
Company Lease on such Property despite the election not to rebuild, the
Partnership shall not terminate this 

                                     -18-
<PAGE>
 
Agreement with respect to such Property; and (b) if the Seller does not exercise
its option under (a), may, at its option, either (i) require the appropriate
Sellers to repair such damage prior to Closing to the reasonable satisfaction of
the Partnership, at no cost or expense to the Company or the Partnership, in
which event the proceeds of any insurance applicable thereto shall be paid to
the Seller, or (ii) itself settle the loss under all policies of insurance
applicable to the destruction or damage and receive the proceeds of insurance
applicable thereto, and the Seller shall, at Closing and thereafter, execute and
deliver to the Partnership all required proofs of loss, assignments of claims
and other similar items. Notwithstanding anything in this Section 6.1 to the
contrary, in the event such loss or casualty shall constitute a total or
substantial loss or casualty or, in the opinion of the Company, in its sole
discretion, shall render the Property unsuitable for its intended purpose for a
period of ninety (90) days or longer, then the Company and the Partnership, at
their option, may terminate this Agreement with respect to such Property upon
notice to the Seller, and reduce the Aggregate Purchase Price by the Purchase
Price of such Property, except that if the Tenant nevertheless elects to pay the
Base Annual Rent under the Company Lease for the entire term of the Company
Lease on such Property, the Partnership shall not terminate this Agreement with
respect to such Property.

          6.2  Condemnation or Taking.  If, prior to Closing, any Property or
               ----------------------                                        
any part thereof shall be condemned or taken and such condemnation or taking
materially interferes with the existing business use of the Property, the
Company and the Partnership may (i) terminate this Agreement either as to all
the Properties or solely as to such Property, in the discretion of the
Partnership and the Company, or (ii) complete the transactions contemplated by
this Agreement notwithstanding such condemnation.  If the Company and the
Partnership elect to complete the transactions contemplated hereby, the
Partnership shall be entitled to receive the condemnation proceeds and the
appropriate Seller shall, at Closing and thereafter, execute and deliver to the
Partnership and the Company all required assignments of claims and other similar
items.  If the Partnership and the Company elect to terminate this Agreement,
then upon written notice to the Sellers and without further action of the
parties, this Agreement shall become null and void and no party shall have any
rights or obligations under this Agreement.  If the Partnership and the Company
elect to terminate this Agreement solely with respect to the affected Property,
the Aggregate Purchase Price shall be reduced by the Purchase Price of such
Property.


     VII. REPRESENTATIONS AND WARRANTIES OF THE SELLERS
          ---------------------------------------------

          The Sellers, jointly and severally, represent[s] and warrant[s] to the
Company and the Partnership that, except as described on the Schedules attached
                                                             ---------         
hereto and incorporated by reference herein, the following are true, complete
and correct as of the date of this Agreement and as of the Closing Date:

          7.1  Organization.  Each Seller is duly organized and validly existing
               ------------                                                     
and in good standing under the laws of the state of its organization and the
State of Maryland, and has all requisite power and authority to own or lease and
operate its properties (including the Properties) 

                                     -19-
<PAGE>
 
and assets and conduct its business in the manner in which they are being owned
or leased and operated and conducted, as the case may be. Each Seller is duly
qualified and authorized and is in good standing in all jurisdictions where its
ownership, lease or operation of assets and properties (including the
Properties) or the conduct of its business requires such qualification or
authorization.

          7.2  Authority.  The execution and delivery of this Agreement and all
               ---------                                                       
agreements, documents and instruments contemplated hereby and the performance of
all transactions contemplated herein or therein, have been duly and validly
authorized by all requisite partnership, corporate or trust action, as the case
may be, and by the general partners, board of directors, stockholders, or
trustees of each Seller, as the case may be. This Agreement and the agreements,
documents and instruments executed and delivered in connection herewith
constitute the legal, valid and binding obligations of the Sellers, enforceable
in accordance with their respective terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity) and except to the
extent that rights to indemnification and sale and purchase under or
contemplated by this Agreement or such other agreements may be limited by
federal or state securities laws or public policy relating thereto. To the
knowledge of the Sellers, none of the Sellers are required to obtain any
consent, authorization, approval or waiver from any governmental agency or
authority or from any third party in connection with the execution and delivery
of, and the performance of the obligations to be performed under, this Agreement
and the documents and instruments executed and delivered in connection herewith,
or if any of the foregoing is required, it has been obtained.

          7.3  Interest in Contributed Properties.  Each Seller is the record
               ----------------------------------                            
and beneficial owner of, and has good and marketable and insurable fee simple
title to, the interests in the Properties set forth opposite such Seller's name
on Schedule 1.2, free and clear of all liens, options, adverse claims or
   ------------                                                         
encumbrances, except the Permitted Exceptions, and Schedule 1.2 is true,
                                                   ------------         
accurate and complete in all material respects as to each seller.  Between the
date hereof and the Closing Date, no liens, claims or encumbrances will be
created or permitted to be created on any Property other than the Permitted
Exceptions.  Prior to or at the Closing all monetary encumbrances on any
Property, other than the Permitted Exceptions, shall be duly canceled, removed
and discharged of record, and proof thereof satisfactory to the Title Insurer,
the Company and the Partnership shall be delivered to the Company and the
Partnership.  Except for  Prior Occupants, there are no parties in possession of
any part of the Properties as of the Closing Date, and there are no other rights
of possession, or agreements providing for the sale, assignment or transfer of
title to any Property or portion thereof (other than this Agreement),  which
have been granted to any third parties.  Such Seller has the full power,
capacity and authority to sell, transfer and assign the legal and equitable
ownership of his/her or its interest to the Partnership as provided in this
Agreement, and the Sellers have not entered into any agreement and have no
knowledge of any agreement or understanding to issue any additional interests in
any Seller to any other person or entity.

                                     -20-
<PAGE>
 
          7.4  No Defaults.  (a) No Seller is in default of any of its material
               -----------                                            
obligations under any agreement, franchise, license, contract, deed, mortgage,
lease, instrument, certificate, affidavit or covenant affecting title to the
Properties; (b) there are no contracts or agreements, such as maintenance,
service, or utility contracts affecting the Properties other than the Service
Contracts, and no party to such contracts is in material default or breach under
the terms and conditions thereof; and (c) there are no contracts or agreements,
and there will be no contract or agreement in effect, between Seller and any
third party for the management or leasing of any Property other than the
Management Contracts and no such contract is in material default or breach under
the terms and conditions thereof, and there will be no leasing commission due
and owing, or to become due and owing, in connection with any of the Leases; and
(d) except for the Permitted Exceptions, the Service Contracts and the
Management Contracts, there are no contracts, agreements, liabilities, claims or
obligations of any kind or nature relating to the Properties and to which any
Seller will be bound or the Properties will be subject after the Closing except
as expressly described in Schedule 7.4 attached hereto.
                          ------------                 

          7.5  No Litigation; No Condemnation.  There are no actions, suits,
               ------------------------------                               
proceedings or claims pending, or to the knowledge of any Seller, threatened or
contemplated, with respect to or in any manner affecting the Properties, or any
Seller's interest therein; or the ability of any Sellers to complete the
transactions contemplated by this Agreement or which could prevent any Seller
from satisfying its obligations under this Agreement. No Seller has received
notice of any pending or threatened condemnation or similar proceedings or
special assessments affecting the Properties, or any part thereof.

          7.6  No Violation.  The execution and delivery of this Agreement and
               ------------                                                   
the agreements, documents and instruments executed and delivered in connection
herewith, the consummation of the transactions contemplated hereby or thereby,
and the operation of any Property shall not: (a) conflict with, or result in a
breach of, the terms, conditions or provisions of, or constitute a default
under, any agreement, contract, mortgage, deed, lease, license, franchise or
instrument to which any Seller is a party or is subject or to which any Property
is subject; (b) to Sellers' knowledge, violate any agreement, contract,
mortgage, deed, lease, license, franchise, restriction, easement, restrictive
covenant, or instrument to which any Seller or any Property is subject; (c) to
Sellers' knowledge, constitute a violation of any applicable code, resolution,
law, statute, regulation, ordinance, rule, judgment, decree or order; (d) with
respect to each Seller that is an entity, violate any provision of its charter,
bylaws or other organizational document; (e) except as to any indebtedness in
respect of which the consent of the lender shall have been obtained prior to the
Closing Date, result in the acceleration of any indebtedness or any encumbrance
pertaining to any Seller or any Property, or the cancellation of any contract,
agreement, franchise, license, instrument or lease pertaining to any Property
(other than as specifically requested by the Company or the Partnership pursuant
to this Agreement); except that, if any Seller discovers during the Due
Diligence period that an approval to such Seller's execution, delivery, or
performance of this Agreement is required from any third party, such Seller
shall have a period of fifteen (15) business days or until five (5) days before
the Closing Date, whichever period is shorter, to obtain such approval; or (f)
except as to any Permitted Exceptions, result in the creation of any lien,

                                     -21-
<PAGE>
 
encumbrance or security interest upon any Property. None of the Sellers have
received any written notice of any violation (both as to condition of the
Property and use) of any applicable laws, statutes, ordinances, codes
(including, but not limited to, zoning, building, subdivision, pollution,
environmental protection, water disposal, health, fire and safety engineering
codes, and laws and regulations with respect to the submetering of any utilities
serving any Property), and the rules and regulations of, by governmental
authority having jurisdiction over the Properties.

          7.7  Required Obligations.  The Sellers have paid and performed all
               --------------------                                          
material obligations relating to the Properties required to have been paid or
performed prior to the date hereof and will have paid and performed all such
material obligations prior to the Closing Date, including but not limited to all
principal installments, interest payments, taxes, penalties and other charges in
connection with all indebtedness relating to or secured by any of the Properties
or an interest in any of the Properties.

          7.8  Condition of Properties.  Except as disclosed on Schedule 7.8, no
               -----------------------                          ------------    
Seller has been notified that the structural, mechanical, electrical, plumbing,
roofing and other major systems on any Property and items of equipment and
components located thereon, require to be replaced or are in need of material
repair.

          7.9  Warranties.  To the Sellers' present knowledge, the Sellers have
               ----------                                                      
not released or modified any warranties of builders, contractors, manufacturers
or other tradespersons that have been given to any Seller without the consent of
the Company or the Partnership.

          7.10 Utilities.  None of the Properties are connected to sanitary
               ---------                                                   
sewers or public water. Usable storm sewers and electrical utilities
(collectively, the "Utilities") of adequate capacity required for the operation
of the Properties, are installed in, and are duly connected to, the Properties
and can be used without any charge except the normal user charges for the normal
and usual charges imposed for gas and electric utilities.

          7.11 Zoning.  Each Property is currently located in the areas zoned
               ------                                                        
for its current use (including by variance), as indicated on the Schedule 7.11
                                                                 -------------
hereto, which classification permits the development, use and operation of the
improvements on such Property as such improvements currently are being used
without special exception or permit. The Sellers have no knowledge of any threat
of, and have not received written notice of, any proceeding to change adversely
or down-zone the existing zoning classification as to any portion of any
Property.

          7.12 Improvements.  To Sellers' knowledge, all improvements on the
               ------------                                                 
Properties have been constructed in accordance with, and substantially comply
with, all requirements of all applicable laws, ordinances, regulations and
orders, including without limitation applicable zoning, building and fire safety
codes and all restrictive covenants, if any, and other easements, encumbrances
or agreements affecting title to any Properties or improvements. For purposes of
this Section 7.12, "substantially" means that Sellers shall not be permitted to
engage in even de minimis non-compliance with applicable laws, ordinance,
regulations and orders if such de minimis non-

                                     -22-
<PAGE>
 
compliance could result in any governmental, administrative or other authority
executing any penalty, fine, remedy or other disciplinary action against such
Seller or such Seller's Business (as defined in the Company Lease).

          7.13 Environmental Matters.
               --------------------- 

               7.13.1         For purposes of this Agreement:

                         a.   "Environmental Claim" means any claim, action,
                              cause of action, investigation, or notice (written
                              or oral) by any person or entity alleging
                              potential liability (including, without
                              limitation, potential liability for investigatory
                              costs, cleanup costs, governmental response costs,
                              natural resource damages, property damages,
                              personal injuries, or civil or criminal penalties)
                              arising out of or resulting from (i) the actual or
                              alleged presence or release into the environment
                              of any Substance of Concern at any location,
                              whether or not owned or operated by the Seller, or
                              (ii) circumstances forming the basis of any actual
                              or alleged violation of any Environmental Law .

                         b.   "Environmental Laws" means all federal, state,
                              local, and foreign laws and regulations relating
                              to pollution or protection of human health or the
                              environment (including, without limitation,
                              ambient air, surface water, ground water,
                              wetlands, land surface, subsurface strata, and
                              indoor and outdoor workplace), including, without
                              limitation, (i) laws and regulations relating to
                              emissions, discharges, releases, or threatened
                              releases of Substances of Concern, and (ii) common
                              law principles of tort liability.

                         c.   "Substances of Concern" means chemicals,
                              pollutants, contaminants, wastes, toxic
                              substances, hazardous substances, radioactive
                              materials or genetically modified organisms, which
                              are, have been or become regulated by any federal,
                              state or local government authority including,
                              without limitation, (i) petroleum or any fraction
                              thereof, (ii) asbestos, (iii) any substance or
                              material defined as 

                                     -23-
<PAGE>
 
                              a "hazardous substance" pursuant to (S) 101 of the
                              Comprehensive Environmental Response,
                              Compensation, and Liability Act (42 U.S.C. (S)
                              9601), or (iv) any substance or material defined
                              as a "hazardous chemical" pursuant to the federal
                              Hazard Communication Standard (29 C.F.R. (S)
                              1910.1200).

               7.13.2         To the Sellers' knowledge, each Seller and
                              Property are in full compliance with all
                              applicable Environmental Laws, which compliance
                              includes, but is not limited to, possession by
                              each Seller of all permits and other governmental
                              authorizations required under applicable
                              Environmental Laws, and compliance with the terms
                              and conditions thereof. No Seller has received any
                              communication (written or oral), whether from a
                              governmental authority, citizens group, employee
                              or otherwise, that alleges that such Seller or
                              Property is not in full compliance with the
                              Environmental Laws, and, to the Sellers' best
                              knowledge after due inquiry, there are no
                              circumstances that may prevent or interfere with
                              such full compliance in the future.

               7.13.3         There is no Environmental Claim pending against
                              any Seller or, to each Seller's best knowledge
                              after due inquiry, against any person or entity
                              whose liability for any Environmental Claim any
                              Seller has retained or assumed either
                              contractually or by operation of law, and no
                              Seller has been notified by the appropriate
                              authorities of the State of Maryland or the United
                              States that any Environmental Claim may be brought
                              against any Seller.

               7.13.4         To the Sellers' knowledge, there are no past or
                              present actions, activities, circumstances,
                              conditions, events or incidents, including,
                              without limitation, the release, emission,
                              discharge, presence, or disposal of any Substance
                              of Concern, at or relating to any of the
                              Properties that could form the basis of any
                              Environmental Claim against any Seller or, to each
                              Seller's best knowledge after due inquiry, against
                              any person or entity whose

                                     -24-
<PAGE>
 
                              liability for any Environmental Claim any Seller
                              has retained or assumed either contractually or by
                              operation of law. In addition to the foregoing,
                              Sellers are aware of the circumstances listed on
                              Schedule 7.13.4 that might have resulted in
                              ---------------    
                              an Environmental Claim but for which Sellers have
                              obtained a no action letter (or a written
                              statement indicating no intent to pursue remedies
                              under the law) from the approptiate authority of
                              State of Maryland.

               7.13.5         Without in any way limiting the generality of the
                              foregoing, to the best of any Seller's knowledge,
                              (a) all on-site and off-site locations where any
                              Seller has treated, disposed, or arranged for the
                              disposal of Substances of Concern or stored
                              hazardous wastes (as defined under the Resource
                              Conservation and Recovery Act or analogous state
                              laws) are identified in Schedule 7.13.5(a); (b)
                                                      ------------------  
                              all underground and aboveground storage tanks,
                              whether or not currently in use, and the capacity
                              and contents of such tanks, located on any of the
                              Properties are identified in Schedule 7.13.5(b),
                                                           ------------------
                              and, except as set forth in Schedule 7.13.5(b), no
                                                          ------------------  
                              underground or above ground storage tank that has
                              been removed from any Property, or that is
                              currently located at any Property, has leaked or
                              is leaking; (c) except as set forth on Schedule
                                                                     --------
                              7.13.5(c), there is no asbestos contained in or
                              ---------
                              forming part of any building, building component,
                              structure or office space on any Property; (d) no
                              polychlorinated biphenyls (PCBs) are used or
                              stored on any Property; (e) the Sellers have
                              previously provided to the Company copies of all
                              environmental audit reports, Phase I and Phase II
                              investigation reports, technical reports regarding
                              environmental sampling results, and similar
                              environmental reports in the possession of the
                              Sellers or their contractors or agents relating to
                              any Property; and (f) all permits and other
                              governmental authorizations currently held by any
                              Seller for any Property pursuant to the
                              Environmental Laws are identified in Schedule
                                                                   --------
                              7.13.5(f).
                              ---------

                                     -25-
<PAGE>
 
          7.14 Insurance.  Schedule 7.14 contains a complete and correct
               ---------   ------------- 
description of all policies of insurance presently maintained by the Sellers
with respect to all Properties and the operations thereof. To the knowledge of
the Sellers, each Seller and Property is in compliance with the requirements of
each such policy, there is no violation of any of the provisions thereof, and
each such policy is in full force and effect. No Seller has received from any
insurance company which carries underwriters insurance on any Property, or any
Board of Fire Underwriters, any notice of any defect or inadequacy in connection
with any Property or its operation which, since the date of such notice, has not
been corrected.

          7.15 Compliance.  To each Seller's knowledge, each Seller, and each
               ----------                             
Affiliate or Tenant of Seller, has complied in all material respects with all
laws, ordinances, rules, regulations and orders of all governmental authorities
applicable to the ownership, management, operation, construction, maintenance
and repair of any Property.

          7.16 Leases.
               ------ 

               7.16.1         Copies of all Leases for each of the Properties
                              and all parts thereof, as amended through the date
                              hereof have been made available to the Company and
                              the Partnership; such copies are and shall be, in
                              all material respects, true, accurate and complete
                              records of all agreements and understandings with
                              respect to the use or lease of all or any portion
                              of any of the Properties or otherwise constituting
                              Leases that are currently outstanding including
                              all amendments and modifications thereto.

               7.16.2         Schedule 2.1 contains a true, complete and correct
                              ------------                              
                              list of all current Leases for the Properties or
                              any part thereof.

               7.16.3         No Prior Occupant has an option or right of
                              refusal to purchase any Property or any part
                              thereof.

               7.16.4         Except as specified in the Estoppel Letter
                              approved by the Company and sent to a Prior
                              Occupant, no Prior Occupant is entitled to any
                              rebate, concession, deduction or offset.

               7.16.5         Except as specified in the Estoppel Letter
                              approved by the Company and sent to a Prior
                              Occupant, no Prior Occupant has paid any rent,
                              additional rent or

                                     -26-
<PAGE>
 
                              other charge of any nature for a period of more
                              than thirty (30) days in advance.

               7.16.6         No Prior Occupant has any claim or basis for any
                              claim for reduction, deduction or set-off against
                              the landlord or the rent under such Lease.

               7.16.7         No Prior Occupant has refused to execute and
                              deliver the Company Lease at Closing, or no Prior
                              Occupant has refused to vacate its premises or
                              such Property, or otherwise to cease occupancy of
                              its premises or such Property.

               7.16.8         Except as set forth on Schedule 2.1, the Seller is
                                                     ------------     
                              the landlord under the Leases.

          7.17 Service Contracts; Management Contracts.  Schedule 7.17 is a list
               ---------------------------------------   -------------          
of all contracts affecting or pertaining to the Properties or the business
conducted on the Properties that have a monetary obligation of at least $50,000
per year and are not cancellable without penalty by Sellers, or an Affiliate or
Tenant of Seller, upon notice of one year or less, including all employment,
union, purchase, service and maintenance agreements, leasing agreements, listing
agreements, equipment leases and any other agreements, contracts, licenses and
permits affecting or pertaining to the Properties or any part thereof (the
"Service Contracts"), and of all management contracts relating to the Properties
(the "Management Contracts"). No Seller is a party to any licenses or leases of
personal property or any other contracts or agreements, written or oral, of any
kind or character, relating to the management, operation, maintenance or repair
of any Property, or otherwise, except for the Leases, the Service Contracts and
the Management Contracts. The Sellers have performed all obligations required to
be performed by them and are not in default under any of the Service Contracts.
Each of the Service Contracts is in full force and effect and constitutes the
legal, valid and binding obligation of the respective parties thereto,
enforceable in accordance with its terms, and has not been modified, amended or
extended. Each of the Management Contracts is in full force and effect and
constitutes the legal, valid and binding obligation of the respective parties
thereto, enforceable in accordance with its terms, and has not been modified,
amended or extended.

          7.18 Permits.  All permits, licenses, inspections and other approvals
               -------                                                         
from all applicable governmental authorities having jurisdiction over each
Seller and Property that are necessary in connection with the operation of the
use, ownership and operation of each Property as it is currently used, have been
obtained and are in full force and effect.

          7.19 Other Liabilities.  Schedule 7.19 hereto is a true, complete and
               -----------------   -------------                           
accurate description of all debts, liabilities and obligations of the Seller
relating to each of the Properties, but not including any Mortgage Debt. Other
than the Mortgage Debt, there are no debts, liabilities or obligations (whether
known or unknown, disputed or undisputed, fixed, contingent or

                                     -27-
<PAGE>
 
otherwise) associated with or relating to any of the Properties, or secured by
any of the Properties, other than those specified and described on Schedule 7.19
                                                                   -------------
hereto.
                                                        
          7.20 Tax Matters.  The Sellers have relied solely on their own counsel
               -----------                                              
for advice on any and all federal, state and local tax matters relating to this
Agreement and the transactions contemplated herein and have not relied on any
advice or representations of the Company, the Partnership, or their counsel with
respect to any federal, state and local tax matters relating to this Agreement
or the transactions contemplated herein.

          7.21 Taxes.  The Sellers have filed all federal, state and local tax
               -----                                                          
returns required to be filed by the Sellers. With respect to any periods prior
to the Closing Date, each Seller (i) has no knowledge of any unpaid taxes that
would create a lien on any Property, and (ii) has paid in full all taxes and
assessments payable or is diligently pursing with the appropriate authority any
dispute such Seller has regarding any unpaid taxes or assessments as of the
Closing Date.

          7.22 Special Filings.  No Seller is required to submit any notice,
               ---------------                                              
report or other filing to any governmental or regulatory authority in connection
with the execution, delivery or performance of this Agreement or any document or
instrument executed and delivered in connection herewith or the consummation of
the transactions contemplated hereby other than the filing of the tax returns
required by the terms of this Agreement; and no consent, approval or
authorization of any governmental or regulatory authority is required to be
obtained by any Seller in connection with the execution, delivery or performance
of this Agreement or the consummation of the transactions contemplated hereby.

          7.23 Books and Records.  The books and records of each Seller with
               -----------------                                            
respect to each Property, all of which have been or will be made available to
the Company and the Partnership, are, and will be at all times until Closing,
complete and correct in all material respects. All of such books and records
shall be delivered to the Company prior to the Closing.

          7.24 No Brokers.  No Seller has dealt with any agent, broker or other
               ----------                                                      
person acting pursuant to express or implied authority of any Seller (each a
"Broker"), and no person or entity is entitled to a commission or finder's fee
in connection with the sale and purchase described by this Agreement or will be
entitled to make any claim against the Company, or the Partnership for a
commission or finder's fee by reason of any Seller having engaged such Broker.

          7.25 All Material Information.  With respect to all information,
               ------------------------                                   
statements, representations and warranties made herein, any agreements or
documents contemplated hereby, any schedules or exhibits hereto, and any
certificates or instruments delivered in connection herewith, the Sellers hereby
represent and warrant that no information, statement, representation or warranty
herein or therein contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances in which made, not misleading; or
necessary in order to provide the Partnership or the Company with true, accurate
and complete information. No Seller has knowledge or information of any facts,

                                     -28-
<PAGE>
 
circumstances or conditions which do or could (whether by the passage of time or
the giving of notice or both) materially and adversely affect any Property or
the operation of the business conducted thereon.

          7.26 Survival of Warranties, Representations and Covenants.  The
               ----------------------  -----------------------------
representations, warranties and covenants of Sellers made in this Agreement
shall survive the Closing and consummation of the transactions contemplated
hereby for a period of twenty-four (24) months from the date of this Agreement,
except that in the case of any claim arising out of the representantions or
warranties herein relating to Section 7.13 (Environmental Matters) and Section
7.21 (Taxes) they shall survive the closing in each case until the expiration of
the applicable statute of limitations. Nevertheless, so long as the Partnership
or the Company provides the Seller with written notice of any breach, violation
or right to indemnification thereunder with the period ending twenty-four (24)
months after the date of this Agreement the representations, warranties and
covenants of the Seller relating to such notice shall remain in full force and
effect as to the matters covered in such notice. After Closing, neither the
Company nor the Partnership shall prosecute any claim against any Seller for a
breach of the foregoing representations and warranties if the Company or the
Partnership obtained knowledge of such breach prior to Closing. The foregoing
representations and warranties shall not be affected by any investigation or
verification made by or on behalf of the Company or the Partnership.

     VIII.     REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PARTNERSHIP
               -----------------------------------------------------------------

     The Partnership and the Company, jointly and severally, represent and
warrant to the Seller that the following are true, complete and correct as of
the date of this Agreement and as of the Closing:

          8.1  Organization, Good Standing and Qualification.  Each of the
               ---------------------------------------------              
Company and the Partnership (i) is an entity duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization,
(ii) has all requisite power and authority to carry on its business and own or
lease and operate its assets and properties in the manner in which it is being
conducted and owned or leased and operated, as the case may be, and (ii) is duly
qualified to transact business and is in good standing in all jurisdictions
where its ownership, lease or operation of its properties or assets or the
conduct of its business requires such qualification.

          8.2  Authorization.  The execution and delivery of this Agreement and 
               --------------                                                   
all agreements, documents and instruments contemplated hereby and the
performance of all transactions contemplated herein or therein, have been duly
and validly authorized by all requisite action by the Company and its board of
trustees; and by all requisite action of the Partnership. This Agreement and the
agreements, documents and instruments executed and delivered in connection
herewith constitute the legal, valid and binding obligation of each of the
Company and the Partnership, enforceable in accordance with their respective
terms, subject to applicable bankruptcy,

                                     -29-
<PAGE>
 
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity) and except to the
extent that rights to indemnification and sale and purchase under or
contemplated by this Agreement or such other agreements may be limited by
federal or state securities laws or public policy relating thereto. To the
knowledge of the Partnership, the Partnership is not required to obtain any
consent, authorization, approval or waiver from any governmental agency or
authority or from any third party in connection with the execution and delivery
of, and the performance of the obligations to be performed under, this Agreement
and the documents and instruments executed and delivered in connection herewith,
or if any of the foregoing is required, it has been obtained.

          8.3  No Violation.  The execution and delivery of this Agreement and 
               -------------                                                   
the agreements, documents and instruments executed and delivered in connection
herewith, the consummation of the transactions hereby or thereby, and the
operation of any Property shall not: (i) conflict with, violate, or result in a
breach of, the terms, conditions or provisions of, or constitute a default
under, any agreement, contract, Mortgage, deed, lease, license, franchise or
instrument to which the Company or the Partnership is a party or is subject;
(ii) constitute a violation of any applicable code, resolution, law, statute,
regulation, ordinance, rule, judgment, decree or order to the Company or the
Partnership; or (iii) violate any provision of the organizational documents of
the Company or the Partnership.

          8.4  Tax Status.  As of the Closing, the Partnership will be qualified
               ----------                                                       
as a partnership for Federal income tax purposes, and the Company will be
qualified as a real estate investment trust organized under the laws of the
State of Maryland.

          8.5  No Litigation.  Neither the Partnership nor the Company is 
               -------------                                             
involved in any pending or, to its knowledge, threatened litigation that would
materially or adversely effect its operations or financial condition or the
ability to perform under this Agreement or the Partnership Agreement.

          8.6  No Brokers.  Neither the Partnership nor the Company has dealt
               ----------                                                    
with any agent, broker or other person acting pursuant to express or implied
authority of either such party, and no person or entity is entitled to a
commission or finder's fee in connection with the transactions contemplated by
this Agreement or will be entitled to make any claim against any Seller for a
commission or finder's fee by reason of the Company or the Partnership having
engaged him/her/it.

          8.7  Survival.  The representations and warranties of the Company and
               --------                                                        
the Partnership made in this Section 8 shall survive the Closing and
consummation of the transactions contemplated hereby, for a period of twenty-
four (24) months from the date of this Agreement. Nevertheless, so long as the
Seller provides the Partnership or the Company with written notice of any
breach, violation or right to indemnification thereunder within the period
ending twenty-four (24) months after the date of this Agreement the
representations, warranties and covenants of the 

                                     -30-
<PAGE>
 
Partnership or the Company relating to such notice shall remain in full force
and effect as to the matters covered in such notice. After Closing, the Seller
shall not prosecute any claim against the Company or the Partnership for a
breach of the foregoing representations and warranties if the Seller obtained
knowledge of such breach prior to Closing.

     IX.  COVENANTS
          ---------

          9.1  Covenants of the Company and the Partnership.  Each of the 
               --------------------------------------------              
Company and the Partnership hereby covenants as follows:

               9.1.1          If this Agreement is terminated for any reason,
                              (a) the Partnership and the Company shall promptly
                              return to Sellers all materials furnished by
                              Sellers to the Partnership and the Company
                              pursuant to this Agreement, and (b) the
                              Partnership and the Company shall promptly restore
                              the Properties to substantially the same condition
                              in which they existed immediately before any
                              physical tests conducted by or on behalf of the
                              Partnership and the Company pursuant to the
                              purposes of this Agreement.

               9.1.2          Prior to the Closing Date, except as may be
                              required to be disclosed by law (including federal
                              and state securities laws, and the rules and
                              regulations thereunder), regulation or legal
                              process, or unless otherwise consented to in
                              writing by the Sellers, which consent shall not be
                              unreasonably withheld, the Partnership and the
                              Company shall keep all information learned by the
                              Partnership and the Company in connection with the
                              Properties or any operation thereof confidential.

               9.1.3          In connection with inspection of the Properties,
                              the Partnership and the Company shall not
                              unreasonably interfere with any Prior Occupants or
                              any Seller's business operations.

               9.1.4          [Intentionally Omitted]

               9.1.5          [Intentionally Omitted]

                                     -31-
<PAGE>
 
               9.1.6          The parties acknowledge and agree that the Sellers
                              and their affiliates are required under this
                              Agreement and the Company Leases to provide to the
                              Company certain confidential financial information
                              (the "Confidential Information") with respect to
                              the business conducted on the Leased Properties.
                              The Company agrees to use the Confidential
                              Information solely for the purposes of monitoring
                              compliance with the terms of this Agreement and
                              the Company Leases, and the Confidential
                              Information shall be disclosed only to those of
                              the Company's employees, advisors and consultants
                              to whom it is necessary for such purposes.
                              Moreover, the Company will use its best efforts to
                              implement policies and procedures at the Board of
                              Trustees level so as to minimize the disclosure of
                              Confidential Information to Trustees having
                              interest in businesses that compete with the
                              Sellers and their affiliates.

               9.1.7          Between the date of this Agreement and the Closing
                              Date, the Partnership and the Company will use
                              their best efforts to cause the conditions in this
                              Agreement to be satisfied.

               9.2            Covenants of the Sellers. The Sellers hereby
                              ------------------------       
covenant and agree as follows:

               9.2.1          If this Agreement is terminated as to all
                              Properties for any reason, the Sellers shall
                              promptly return to the Company or the Partnership,
                              as the case may be, all materials furnished by the
                              Company or the Partnership, to such Sellers
                              pursuant to this Agreement.

               9.2.2          Each Seller shall keep all information relating to
                              the Partnership or the Company or any operation
                              thereof confidential; except that each Seller
                              shall not be required to keep confidential any
                              information (i) learned from public sources or
                              other third parties not bound to keep such
                              information about the Company or Partnership
                              confidential or (ii) that 

                                     -32-
<PAGE>
 
                              becomes public through no disclosure of any
                              Seller, its partners, employees, agents or
                              representatives.

               9.2.3          In the event that facts or circumstances are
                              discovered or develop that could form the basis of
                              an Environmental Claim with respect to a specific
                              Property or Properties, the Seller(s) of such
                              Property or Properties shall take all actions
                              necessary to fully address such circumstances,
                              including, without limitation, providing notice to
                              appropriate governmental authorities; conducting
                              environmental studies, sampling and testing
                              procedures; taking remedial action; and modifying
                              operations or physical facilities to otherwise
                              eliminate potential liability and ensure full
                              compliance with the Environmental Laws. Without
                              limiting the foregoing, each Seller shall ensure
                              that it has identified any underground storage
                              tanks ("USTs") used in conjunction with its
                              operations and that all registration,
                              investigation, remedial action and technical
                              upgrade requirements have been complied with fully
                              in respect of each such UST.

               9.2.4          Between the date of this Agreement and the Closing
                              Date, Sellers shall use their best efforts to
                              cause the conditions in this Agreement to be
                              satisfied.

          9.3  No Claim Against Property.  Each Seller hereby represents, 
               -------------------------                                 
warrants, covenants and agrees that, as of the Closing Date, each Seller: (i)
will have no claim of any kind or nature against any Property by reason of the
execution of this Agreement; (ii) hereby waives, releases and discharges any
claim it has or may have; and (iii) shall not make any claim or bring any action
against any Property or the Company or the Partnership for or in respect
thereof. Notwithstanding Section 7.26, this representation, warranty, covenant
and agreement shall survive the closing of the transactions contemplated hereby
and shall continue in effect.

     X.   DUE DILIGENCE PERIOD
          --------------------

          10.1 Due Diligence Period.  The period ending at the close of the 
               --------------------                                        
first business day after the date that is thirty (30) days from the date hereof
is referred to herein as the "Due Diligence Period." Notwithstanding the
foregoing, the Due Diligence Period (for purposes of the Title Commitments, UCC
Searches and Surveys) shall not end earlier than fifteen (15) business days
after Partnership receives the last of the Title Commitments, UCC Searches and
Surveys.

                                     -33-
<PAGE>
 
          10.2 Access to Properties and Materials.  During the Due Diligence
               ----------------------------------                           
Period and upon twenty-four (24) hours prior notice, the Company and the
Partnership and their agents, engineers, surveyors, appraisers, auditors,
counsel and other representatives shall have the right to enter upon the
Properties to inspect, examine, survey, obtain engineering inspections and
environmental studies, appraise, and otherwise do that which, in the opinion of
the Partnership and the Company, is necessary to determine the boundaries,
acreage and condition of the Properties and to determine the suitability of the
Properties for the uses intended by the Partnership (including, without
limitation, inspect, review and copy any and all documents in the possession or
control of Sellers, or their respective agents, contractors or employees, and
which pertain to the construction, ownership, title, use, occupancy or operation
of the Properties or any part thereof). During the Due Diligence Period, the
Sellers, at their expense and at such times as will not unreasonably interfere
with the business being conducted on the Property or hinder the Partnership's
due diligence review, shall make available to the Company and the Partnership
copies or originals of all of their respective books, files and records relating
in any way to the Properties, complete copies (or originals when requested) of
all title information and title insurance policies, easements, leases, brokerage
agreements, licenses, permits, surveys, zoning information, environmental
reports, structural reports, violation or default notices, contracts, tax bills
and assessments, information regarding pending or threatened claims, suits or
proceedings, and all consents and other documents required to be obtained for
the completion of the transactions contemplated hereunder.

          10.3 Adjustment Following Due Diligence.  If the Company or
               ----------------------------------                    
Partnership reasonably determines that one or more representations or warranties
or any information included on any Schedule relating to any Property is 
                                   --------                            
incomplete or inaccurate in any material respect (the "Non-Conforming
Property"), the Company shall have the option to: (a) proceed with the
transactions contemplated hereby, (b) declare this Agreement null and void in
which case no party shall have any rights or obligations under this Agreement,
or (c) terminate this Agreement with respect to such Non-Conforming Property and
proceed with the transactions hereby with respect to the other Properties, in
which case the Aggregate Purchase Price shall be reduced by the Purchase Price
of such Non-Conforming Property.

     XI.  DEFAULTS AND REMEDIES
          ---------------------

          11.1 Indemnification by Sellers.  The Sellers, jointly and severally
               --------------------------                                     
(each, for purposes of Sections 11.1 and 11.2, a "Seller Indemnifying Party"),
shall indemnify, defend and hold harmless the Partnership, the Company and their
respective shareholders, partners, trustees, officers, agents, representatives,
employees, Affiliates, successors and assigns (collectively, for purposes of
this paragraph, the "Company Indemnified Parties") from and against any and all
losses, damages, claims, liabilities, actions, suits, proceedings and costs and
expenses of investigation or defense thereof, including attorneys' fees payable
as incurred, arising out of or relating to any (a) misrepresentation or breach
of warranty by any Seller or nonfulfillment of any covenant or agreement to be
performed or complied with by such Seller under this Agreement and any

                                     -34-
<PAGE>
 
agreement, document, instrument, certificate, schedule or exhibit contemplated
hereby; (b) untrue or incomplete statement of a material fact contained in any
statement or information provided by any Seller or based on any omission to
state therein a material fact required to be stated therein or other information
necessary to make the statements therein not misleading; (c) any debts,
liabilities or obligations (whether known or unknown, disputed or undisputed,
fixed, contingent or otherwise) associated with or relating to any of the
Sellers, their officers, directors, partners, trustees or Affiliates or the
Properties, or secured by any of the Sellers, or by any of the Properties,
except those specified on Schedule 7.19 hereto, including any obligations under
                          -------------                                        
any of the Leases, Service Contracts and Management Contracts, to the extent any
such obligation was to be performed prior to the Closing Date, or was to be
performed after the Closing Date as a result of a breach or default under any of
the Leases or Service Contracts by any Seller or its Affiliates prior to the
Closing Date; (d) any action taken, or any failure to act, by any Seller in
connection with this transaction and the transactions contemplated herein
constituting a breach of this Agreement or any agreement, document or instrument
contemplated hereby or a breach of a duty owed to any person, including, without
limitation, any action taken to redeem or otherwise liquidate the interest of
certain holders in anticipation of the transactions contemplated herein, to the
extent such action or failure to act results in a violation (or alleged
violation) of applicable laws or of the fiduciary duties owed to such holders;
(e) pollution or threat to human health or the environment, or any Environmental
Claim against any person or entity whose liability for such Environmental Claim
any Seller has assumed or retained either contractually or by operation of law,
that is related in any way to any of the Properties, including, without
limitation, all on-site and off-site activities relating to any of the
Properties involving Substances of Concern, and that occurred, existed, arises
out of conditions or circumstances that occurred or existed, or was caused, in
whole or in part, on or before the Closing Date, whether or not the pollution or
threat to human health or the environment, or the existence of any Environmental
Claim, is known to any Seller; (f) regardless of whether it arises as a breach
of any representation or warranty, any debts, liabilities or obligations of any
Seller (whether known or unknown, disputed or undisputed, fixed, contingent or
otherwise) of, associated with or relating to any asset or property other than
the Properties, except those specified on Schedule 7.19 hereto; and (g) any and
                                          -------------            
all damages and expenses incident to any of the foregoing or to the enforcement
of this Section 11.1. Subject to Section 11.2.3 and notwithstanding any other
provision of this Agreement, neither the general partners nor the limited
partners of the Meyers Family Limited Partnership shall have any liability under
this Agreement beyond their [capital] interests in Seller.

          11.2 Remedies.
               -------- 

               11.2.1         [Intentionally Omitted]

               11.2.2         Each Seller Indemnifying Party shall be fully
                              responsible and jointly and severally liable for
                              any of the following and any and all losses,
                              damages, claims, liabilities, actions, suits,
                              proceedings and costs and expenses of defense
                              thereof, including attorneys' fees payable as
                              incurred, arising out of or 

                                     -35-
<PAGE>
 
                              relating to: (a) each representation and warranty
                              made by each Seller hereunder relating to or
                              associated with title such Seller's interest in
                              any Property and such Seller's ability to convey
                              such Seller's interest as contemplated by this
                              Agreement; (b) regardless of whether it arises as
                              a breach of any representation or warranty, any
                              debts, liabilities or obligations (whether known
                              or unknown, disputed or undisputed, fixed,
                              contingent or otherwise) of, associated with or
                              relating to any of the Sellers, or the Properties,
                              or secured by any of the Sellers or by any of the
                              Properties, except those specified on Schedule
                                                                    --------
                              7.19 hereto, and (c) regardless of whether it
                              ----
                              arises as a breach of any representation or
                              warranty, any debts, liabilities or obligations of
                              the Sellers (whether known or unknown, disputed or
                              undisputed, fixed, contingent or otherwise) of,
                              associated with or relating to any other asset or
                              property other than the Properties, except those
                              specified on Schedule 7.19 hereto.
                                           -------------        

               11.2.3         Each Seller hereby represents, warrants, covenants
                              and agrees that it presently has, a tangible net
                              worth (such term meaning net worth exclusive of
                              the value (if any) of goodwill, going concern
                              value and similar assets, but inclusive of the
                              value of shares of stock, interests in
                              partnerships and other business enterprises and
                              similar assets) of not less than the Aggregate
                              Purchase Price, minus all Mortgage Debt for all
                              Properties being acquired by the Partnership
                              pursuant to this Agreement; and each Seller, on
                              behalf of itself and its successors, further
                              covenants that it shall maintain a tangible net
                              worth of no less than two million dollars
                              ($2,000,000) (U.S.) for a period of no less than
                              two (2) years following the Closing of the
                              transactions contemplated herein; and Roy L.
                              Meyers, Jr. and Charlotte Meyers, jointly and
                              severally covenant that they shall personally
                              cause the Sellers and their successors to maintain
                              a tangible net worth of no less than two million
                              dollars ($2,000,000) (U.S.) for a period of no
                              less than two (2) years following the Closing of
                              the transactions contemplated herein, and shall
                              (to the 

                                     -36-
<PAGE>
 
                              extent of two million dollars ($2,000,000) (U.S.))
                              jointly and severally indemnify the Company and
                              the Partnership (according to Section 11.1 hereto)
                              for any and all breaches of the Sellers'
                              representations, warranties and covenants
                              hereunder for such two (2) year period if (i) the
                              Sellers and/or their successors fail to maintain
                              such tangible net worth or (ii) the Sellers and/or
                              their successors file for bankruptcy (voluntarily
                              or involuntarily), make an assignment for the
                              benefit of creditors, or otherwise become
                              insolvent; provided that, with respect only to the
                              joint and several indemnity of Roy L. Meyers, Jr.
                              and Charlotte Meyers, the combined recovery from
                              Roy L. Meyers, Jr. and Charlotte Meyers and the
                              Sellers shall not exceed two million dollars
                              ($2,000,000 ) (U.S.). The covenants contained in
                              this Section 11.2.3 shall survive the Closing of
                              the transactions contemplated by this Agreement.

          11.3 Indemnification by the Company and the Partnership.  The Company
               --------------------------------------------------              
and the Partnership (each, for purposes of this Section 11.3, a "Company
Indemnifying Party") shall indemnify, defend and hold harmless each Seller and
their respective shareholders, partners, directors, officers, partners, agents,
employees, Affiliates, successors and assigns (collectively, for purposes of
this paragraph, "Seller Indemnified Parties") from and against any and all
losses, damages, claims, liabilities, actions, suits, proceeds and costs and
expenses of defense therefore, including attorneys' fees payable as incurred,
arising out of or relating to any (a) misrepresentation or breach of warranty by
such Company Indemnifying Party or nonfulfillment of any covenant or agreement
to be performed or complied with by such Company Indemnifying Party under this
Agreement; (b) untrue or incomplete statement (or allegation by a third party of
an untrue or incomplete statement) of a material fact contained in any statement
or information provided by such Company Indemnifying Party or based on any
omission (or allegation by a third party of an untrue or incomplete statement)
to state therein a material fact required to be stated therein or other
information necessary to make the statements therein not misleading, to the
extent such alleged untrue or incomplete statement or omission was made with the
Company's or the Partnership's knowledge that the statement was untrue or
incomplete or omitted to state a material fact; (c) any debts, liabilities or
obligations (whether known or unknown, disputed or undisputed, fixed, contingent
or otherwise) specified on Schedule 7.19 hereto or arising and incurred after
                           -------------                                     
the Closing Date (other than as a result of a breach by any Seller of any
representation, warranty, covenant or agreement hereunder), including the
obligations under any Service Contracts that survive the Closing Date, to the
extent any such obligation is to be performed after the Closing Date, except to
the extent any such obligation is to be performed after the Closing Date as a
result of a breach or default under 

                                     -37-
<PAGE>
 
any of the Leases or Service Contracts by the Seller prior to the Closing Date;
and (d) any and all damages and expenses incident to any of the foregoing or to
the enforcement of this Section 11.3.

          11.4 Indemnification Procedures. All claims for indemnification under
               --------------------------                                      
this Article 11 shall be asserted and resolved as follows:

               11.4.1         In the event that any Seller Indemnified Party or
                              Company Indemnified Party (the "Indemnified
                              Party") has a Claim against any Seller
                              Indemnifying Party or Company Indemnifying Party
                              obligated to provide indemnification pursuant to
                              Sections 11.1 or 11.2 hereof, on the one hand, or
                              Section 11.3 hereof, on the other hand (the
                              "Indemnifying Party"), which does not involve a
                              claim being asserted against or sought to be
                              collected by a third party, the Indemnified Party
                              shall with reasonable promptness send a written
                              notice (the "Claim Notice") with respect to such
                              claim to the Indemnifying Party. If the
                              Indemnifying Party does not notify the Indemnified
                              Party within the fifteen days thereafter (the
                              "Notice Period") that the Indemnifying Party
                              disputes such claim, the amount of such claim
                              shall be deemed a liability of the Indemnifying
                              Party hereunder. In case an objection is made in
                              writing in accordance with this Section 11.4.1,
                              the Indemnified Party shall have thirty (30) days
                              to respond in a written statement to the
                              objection. If after such thirty (30) day period
                              there remains a dispute as to any claims, the
                              parties shall attempt in good faith for sixty (60)
                              days to agree upon the rights of the respective
                              parties with respect to each of such claims. If
                              the parties should so agree, a memorandum setting
                              forth such agreement shall be prepared and signed
                              by both parties.

               11.4.2         In the event that any claim for which the
                              Indemnifying Party would be liable to an
                              Indemnified Party hereunder is asserted, or any
                              action or proceeding commenced, against an
                              Indemnified Party by a third party, the
                              Indemnified Party shall with reasonable promptness
                              notify the Indemnifying Party of such claim,
                              specifying the nature of such claim and the amount
                              or the 

                                     -38-
<PAGE>
 
                              estimated amount thereof to the extent then
                              feasible (which estimate shall not be conclusive
                              of the final amount of such Claim) (the "Third
                              Party Claim Notice"). The Indemnifying Party shall
                              have 30 days from the receipt of the Claim Notice
                              (the "Third Party Notice Period") to notify the
                              Indemnified Party (a) whether or not such party
                              disputes the liability to the Indemnified Party
                              hereunder with respect to such claim and (b) if
                              such party does not dispute such liability,
                              whether or not the Indemnifying Party desires, at
                              the sole cost and expense of the Indemnifying
                              Party, to defend against such claim, provided that
                              such party is hereby authorized (but not
                              obligated) prior to and during the Third Party
                              Notice Period to file any motion, answer or other
                              pleading and to take any other action which the
                              Indemnifying Party shall deem necessary or
                              appropriate to protect the Indemnifying Party's
                              interests. In the event that the Indemnifying
                              Party notifies the Indemnified Party within the
                              Third Party Notice Period that the Indemnifying
                              Party does not dispute the Indemnifying Party's
                              obligation to indemnify hereunder and desires to
                              defend the Indemnified Party against such claim,
                              except as hereinafter provided, such party shall
                              have the right to defend by appropriate
                              proceedings. No non-monetary settlement of any
                              such matter shall be entered into without the
                              written consent of the Indemnified Party, which
                              consent shall not be unreasonably withheld;
                              provided that, unless the Indemnified Party
                              otherwise agrees in writing, such party may not
                              settle any matter (in whole or in part) unless
                              such settlement includes a complete and
                              unconditional release of the Indemnified Party. If
                              the Indemnified Party desires to participate in,
                              but not control, any such defense or settlement
                              the Indemnified Party may do so at its sole cost
                              and expense. If the Indemnifying Party elects not
                              to defend the Indemnified Party against such
                              claim, whether by failure of such party to give
                              the Indemnified Party timely notice as provided
                              above or otherwise, then the Indemnified Party,
                              without

                                     -39-
<PAGE>
 
                              waiving any rights against such party, may settle
                              or defend against any such claim in the
                              Indemnified Party's sole discretion and the
                              Indemnified Party shall be entitled to recover
                              from the Indemnifying Party the amount of any
                              settlement or judgment to the extent the
                              Indemnified Party is entitled to indemnification
                              and, on an ongoing basis, all indemnifiable costs
                              and expenses of the Indemnified Party with respect
                              thereto, including interest from the date such
                              costs and expenses were incurred.

               11.4.3         If at any time, in the reasonable opinion of the
                              Indemnified Party, notice of which shall be given
                              in writing to the Indemnifying Party, any such
                              claim seeks material prospective or other relief
                              which could have a materially adverse effect on
                              the assets, liabilities, financial condition,
                              results of operations or business prospects of any
                              Indemnified Party or in the reasonable opinion of
                              counsel for the Indemnified Party a conflict
                              exists, the Indemnified Party shall have the right
                              to control or assume (as the case may be) the
                              defense of any such claim and the amount of any
                              judgment or settlement and the reasonable costs
                              and expenses of defense shall be included as part
                              of the indemnification obligations of the
                              Indemnifying Party hereunder. If the Indemnified
                              Party should elect to exercise such right, the
                              Indemnifying Party shall have the right to
                              participate in, but not control, the defense of
                              such claim or demand at the sole cost and expense
                              of the Indemnifying Party.

               11.4.4         Nothing herein shall be deemed to prevent the
                              Indemnified Party from making a claim, and an
                              Indemnified Party may make a claim hereunder, for
                              potential or contingent claims or demands provided
                              the Claim Notice or Third Party Claim Notice, as
                              the case may be, sets forth the specific basis for
                              any such potential or contingent claim or demand
                              to the extent then feasible and the Indemnified
                              Party has reasonable grounds to believe that such
                              a claim or demand may be made.

                                     -40-
<PAGE>
 
                     11.4.5  The Indemnified Party's failure to give reasonably
                             prompt notice as required by this Section 11.4 of
                             any actual, threatened or possible claim, demand,
                             action or proceeding which may give rise to a right
                             of indemnification hereunder shall not relieve the
                             Indemnifying Party of any liability which the
                             Indemnifying Party may have to the Indemnified
                             Party unless the failure to give such notice
                             materially and adversely prejudiced the
                             Indemnifying Party or increases the amount of
                             indemnification which the Indemnifying Party is
                             obligated to pay hereunder. In any such event, the
                             amount of indemnification which the Indemnified
                             Party will be entitled to receive hereunder shall
                             be reduced to an amount which the Indemnified Party
                             would have been entitled to receive had such notice
                             been timely.


          XII. MISCELLANEOUS
               -------------

               12.1  Assignment. Neither this Agreement nor any interest
                     ----------    
hereunder may be assigned or transferred by any Seller without the prior written
consent of the Company or the Partnership. As of the Closing Date, the Company
or the Partnership may assign, transfer or demise any or all of its interest in
any Property to any Affiliate (the "Permitted Transferees") without the prior
consent of the Sellers.

               12.2  Entire Agreement. Any prior agreement or understanding
                     ----------------   
among the parties concerning the subject matter hereof is hereby superseded.
This Agreement constitutes the entire agreement among the parties with respect
to the subject matter hereof and the transactions contemplated herein and shall
not be modified or amended except in a written document signed by all of the
parties hereto.

               12.3  Notices.  All notices or other communications required or
                     -------                                                  
permitted under this Agreement shall be in writing and delivered personally or
by registered or certified mail, return receipt requested, postage prepaid, or
by a nationally recognized overnight courier (such as Federal Express) with
receipted delivery. Notices to the parties shall be addressed as follows:

                                     -41-
<PAGE>
 
     If to the Sellers:

     Meyers Family Limited Partnership
     c/o Good News Salisbury, Inc.
     2013 N. Salisbury Blvd.
     Salisbury, Maryland 21801
     Attention: Roy L. Meyers, Jr.

with a copy to:

     Webb, Burnett, Jackson, Cornbrooks, Wilbur, Vorhis & Douse
     115 Broad Street
     P.O. Box 910
     Salisbury, Maryland  21803-0910
     Attention: David A. Vorhis, Esq.
 
If to the Partnership or to the Company:

     Capital Automotive REIT
     1925 North Lynn Street
     Suite 306
     Arlington, Virginia 22209
     Attention: Thomas D. Eckert, President and Chief Executive Officer

With a copy to:

     Wilmer, Cutler & Pickering
     2445 M Street, N.W.
     Washington, DC  20037
     Attention: George P. Stamas, Esq.

     All notices given in accordance with the terms hereof shall be deemed
effective (a) if delivered in person or by overnight courier, on the business
day it is delivered, and (b if sent by registered or certified mail, three (3)
business days after deposit with the U.S. mail.  Any party hereto may change its
address by written notice to all parties hereto sent in accordance with the
terms of this Section and any such Notice of change of address shall be
effective five (5) days after delivery.

               12.4  Governing Law. This Agreement shall be governed and
                     -------------       
interpreted in accordance with the laws of the Commonwealth of Virginia without
regard to its principles of conflicts of laws, and any action brought under or
arising out of this Agreement or the matters relating hereto shall be submitted
to the jurisdiction of the United States District Court for the Eastern District
of Virginia. Each party acknowledges and agrees to such jurisdiction.

                                     -42-
<PAGE>
 
               12.5  Litigation Costs. If there is any legal action or
                     ----------------   
proceeding between the parties hereto arising from or based upon this Agreement,
the unsuccessful party to such action or proceeding shall pay to the prevailing
party all litigation costs and expenses, including reasonable attorneys' fees,
incurred by such prevailing party in such action or proceeding and in any appeal
in connection therewith, and if such prevailing party recovers a judgment in any
such action, proceeding or appeal, such costs, expenses and attorneys' fees
shall be included in as part of such judgment.

               12.6  Counterparts. This Agreement may be executed in any number
                     ------------      
of identical counterparts, any or all of which may contain the signatures of
fewer than all of the parties but all of which shall be taken together as a
single instrument.

               12.7  Offer and Acceptance. This Agreement constitutes an offer
                     -------------------- 
by the Company and the Partnership which must be accepted, by delivery to the
Company of a duly signed and completed signature page hereof, by all of the
Sellers within five (5) days after the date this Agreement is signed by the
Company and the Partnership. If, within such time period, less than all of the
persons owning any interest in a Seller shall have signed this Agreement, then
the Seller and the Property owned by such Seller shall, at the sole option of
the Company, be excluded from the sale and purchase hereunder, this Agreement
shall remain in full force and effect as to the other Sellers and Properties,
and an appropriate adjustment shall be made with respect to the relevant
Property, in which case the Aggregate Purchase Price shall be reduced by the
Purchase Price of such Property as provided in this Agreement; if after the
expiration of such time period all of the Sellers execute this Agreement, the
Company, at its sole option, may elect to re-include, or may continue to
exclude, any such Seller and Property.

                                     -43-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal, with the intention that it be a sea ed instrument, as of the date
set forth above.

WITNESS                                 CAPITAL AUTOMOTIVE REIT
 
 
By:    /s/ David S. Kay                 By:    /s/ Thomas D. Eckert (SEAL)
Name:  David S. Kay                     Name:  Thomas D. Eckert
Title: Vice President and Chief         Title: President and Chief 
       Financial Officer                       Executive Officer 

                                        CAPITAL AUTOMOTIVE L.P.
 
WITNESS                                 By: Capital Automotive REIT, as 
                                            General Partner
 
 
By:    /s/ David S. Kay                 By:    /s/ Thomas D. Eckert (SEAL)
Name:  David S. Kay                     Name:  Thomas D. Eckert
Title: Vice President and Chief         Title: President and Chief 
       Financial Officer                       Executive Officer 

 
WITNESS                                 SELLER:  MEYERS FAMILY LIMITED
                                                 PARTNERSHIP, a Maryland limited
                                                 partnership
 
 
By:    /s/ David A. Vorhis              By:    /s/ Roy L. Meyers, Jr. (SEAL)
Name:  David A. Vorhis                  Name:  Roy L. Meyers, Jr.
Title: Counsel                          Title: General Partner
                                        Address:2013 N. Salisbury Blvd.
                                                Salisbury, Maryland 21801
                                        Telephone #: 410-749-3215
                                        Facsimile #: 410-749-3195
                                        Social Security # or TIN: 52-1915371




                   [SIGNATURES CONTINUED ON FOLLOWING PAGE]

                                     -44-
<PAGE>
 
WITNESS                                SELLER:  MEYERS FAMILY LIMITED 
                                                PARTNERSHIP, a Maryland 
                                                limited partnership
 
 
By:    /s/ David A. Vorhis             By:    /s/ Charlotte Meyers (SEAL)
Name:  David A. Vorhis                 Name:  Charlotte Meyers
Title: Counsel                         Title: General Partner
                                       Address:2013 N. Salisbury Blvd.
                                               Salisbury, Maryland 21801
                                       Telephone #: 410-749-3215
                                       Facsimile #: 410-749-3195
                                       Social Security # or TIN: 52-1915371


                                       SIGNING INDIVIDUALLY AS TO SECTION 11.2.3



                                       By: /s/ Roy L. Meyers, Jr.
                                       Name:   Roy L. Meyers, Jr.



                                       By: /s/ Charlotte Meyers
                                       Name:   Charlotte Meyers

                                     -45-
<PAGE>
 
                                EXHIBIT 2.4(A)
                      (FORM OF GOOD NEWS LEASE AGREEMENT)






                                LEASE AGREEMENT
                                ---------------

                                    BETWEEN
                                    -------

                       CAPITAL AUTOMOTIVE L.P., LANDLORD
                       ---------------------------------

                                      AND
                                      ---

                       GOOD NEWS SALISBURY, INC., TENANT
                       ---------------------------------


                            DATED: JANUARY 10, 1998
                                       
                                     -46-
<PAGE>
 
<TABLE>
<S>                                                                                 <C>
ARTICLE I
          LEASE AGREEMENT, LEASED PROPERTY AND TERM................................  1
          1.01      Lease Agreement................................................  1
          1.02      Contingent Upon Acquisition of the Leased Property.............  2
          1.03      Term...........................................................  2
          1.04      Holding Over...................................................  3
          1.05      Surrender......................................................  3

ARTICLE II
          RENT.....................................................................  4
          2.01      Base Rent......................................................  4
          2.02      Payment........................................................  4
          2.03      Security Deposit...............................................  4
          2.04      Base Annual Rent Adjustment....................................  5
          2.05      Additional Rent................................................  5
          2.06      Place(s) of Payment of Rent; Direct Payment of
                    Additional Rent................................................  5
          2.07      Net Lease......................................................  5
          2.08      No Termination, Abatement, Etc.................................  5

ARTICLE III
          IMPOSITIONS AND UTILITIES................................................  6
          3.01      Payment of Impositions.........................................  6
          3.02      Definition of Impositions......................................  7
          3.03      Utilities......................................................  8
          3.04      Escrow of Impositions..........................................  8
          3.05      Discontinuance of Utilities....................................  9
          3.06      Liens..........................................................  9

ARTICLE IV
          INSURANCE................................................................  9
          4.01      Insurance......................................................  9
          4.02      Insurance Limits............................................... 11
          4.03      Insurance Requirements......................................... 11
          4.04      Replacement Cost............................................... 12
          4.05      Blanket Policy................................................. 12
          4.06      No Separate Insurance.......................................... 12
          4.07      Waiver of Subrogation.......................................... 12
          4.08      Mortgages...................................................... 13
          4.09      Other Insurance Requirements................................... 13
</TABLE>
<PAGE>
 
<TABLE>
<S>                                                                                 <C>  
ARTICLE V
          INDEMNITY; SUBSTANCES OF CONCERN......................................... 13
          5.01      Tenant's Indemnification....................................... 13
          5.02      Substances of Concern.......................................... 14
          5.03      Audits......................................................... 16
          5.04      Landlord's Option Re: Compliance............................... 17
          5.05      Environmental Indemnification.................................. 17
          5.06      Tenant's Cleanup Obligation.................................... 17
          5.07      Existing Environmental Conditions.............................. 18
          5.08      Survival of Tenant's Obligations............................... 18

ARTICLE VI
          USE AND ACCEPTANCE OF PREMISES........................................... 18
          6.01      Use of Leased Properties....................................... 18
          6.02      Acceptance of Leased Properties................................ 19
          6.03      Conditions of Use and Occupancy................................ 19
          6.04      Financial Statements and Other Information..................... 19

ARTICLE VII
          REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS...................... 20
          7.01      Maintenance.................................................... 20
          7.02      Compliance with Laws........................................... 20
          7.03      Required Alterations........................................... 21
          7.04      Mechanics' Liens............................................... 21
          7.05      Replacements of Fixtures....................................... 21
          7.06      Encroachments; Restrictions.................................... 22

ARTICLE VIII
          ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
          CAPITAL ADDITIONS TO THE LEASED PROPERTIES............................... 22
          8.01      Tenant's Right to Construct.................................... 22
          8.02      Scope of Right................................................. 23
          8.03      Cooperation of Landlord........................................ 23
          8.04      Commencement of Construction................................... 23
          8.05      Rights in Tenant Improvements.................................. 24
          8.06      Personal Property.............................................. 25
          8.07      Requirements for the Tenant's Personal Property................ 25
          8.08      Financings of Capital Additions to a Leased Property........... 26

ARTICLE IX
          DEFAULTS AND REMEDIES.................................................... 27
          9.01      Events of Default.............................................. 27
</TABLE>

                                     -ii-
<PAGE>
 
<TABLE>
<S>                                                                                 <C>
          9.02      Remedies....................................................... 29
          9.03      Right of Set-Off............................................... 32
          9.04      Performance of Tenant's Covenants.............................. 32
          9.05      Late Charge.................................................... 32
          9.06      Litigation; Attorneys' Fees.................................... 32
          9.07      Remedies Cumulative............................................ 33
          9.08      Escrows and Application of Payments............................ 33
          9.09      Power of Attorney.............................................. 33

ARTICLE X
          DAMAGE AND DESTRUCTION................................................... 34
          10.01     General........................................................ 34
          10.02     Landlord's Inspection.......................................... 35
          10.03     Landlord's Costs............................................... 35
          10.04     Rent Abatement................................................. 35
          10.05     [Intentionally Omitted]........................................ 35
          10.06     Damage Near End of Term........................................ 36
          10.07     Risk of Loss................................................... 36

ARTICLE XI
          CONDEMNATION............................................................. 36
          11.01     Total Taking................................................... 36
          11.02     Partial Taking................................................. 36
          11.03     Restoration.................................................... 37
          11.04     Landlord's Inspection.......................................... 37
          11.05     Award Distribution............................................. 37
          11.06     Temporary Taking............................................... 38

ARTICLE XII
          ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS........... 38
          12.01     Organization and Qualification................................. 38
          12.02     Material Agreements............................................ 39
          12.03     Changes in Condition........................................... 40
          12.04     Franchises, Licenses, etc...................................... 40
          12.05     Litigation..................................................... 40
          12.06     Authorization and Enforceability............................... 40
          12.07     No Legal Obstacle to Lease..................................... 41
          12.08     Certain Business Representations............................... 41
          12.09     Certain Financial Covenants.................................... 42
          12.10     Cash Flow Coverage Ratio Covenant.............................. 42
          12.11     Disclosure..................................................... 43
          12.12     Covenant Not to Acquire........................................ 43
</TABLE>

                                     -iii-
<PAGE>
 
<TABLE>
<S>                                                                                 <C>
ARTICLE XIII
          ASSIGNMENT AND SUBLETTING; ATTORNMENT.................................... 43
          13.01     Prohibition Against Subletting and Assignment.................. 43
          13.02     Changes of Control............................................. 44
          13.03     Operating/Service Agreements................................... 44
          13.04     Assignment..................................................... 45
          13.05     REIT Limitations............................................... 45
          13.06     Attornment..................................................... 46
          13.07     Severance and Spin-Off......................................... 47

ARTICLE XIV
          ARBITRATION.............................................................. 47
          14.01     Controversies.................................................. 47
          14.02     Appointment of Arbitrators..................................... 47
          14.03     Arbitration Procedure.......................................... 48
          14.04     Expenses....................................................... 48
          14.05     Enforcement of the Arbitration Award........................... 48

ARTICLE XV
          QUIET ENJOYMENT, SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATES........ 48
          15.01     Quiet Enjoyment................................................ 48
          15.02     Landlord Mortgages; Subordination.............................. 48
          15.03     Attornment..................................................... 49
          15.04     Estoppel Certificates.......................................... 49
          15.05     Waiver of Landlord's Lien...................................... 50

ARTICLE XVI
          RIGHT OF FIRST OFFER..................................................... 51
          16.01     Right of First Offer During Lease Term or Extension Term....... 51
          16.02     Right to Purchase at End of an Extension Term.................. 52

ARTICLE XVII
          MISCELLANEOUS............................................................ 53
          17.01     Notices........................................................ 53
          17.02     Advertisement of a Leased Property............................. 54
          17.03     Landlord's Access.............................................. 54
          17.04     Entire Agreement............................................... 54
          17.05     Severability................................................... 55
          17.06     Captions and Headings.......................................... 55
          17.07     Governing Law.................................................. 55
</TABLE>

                                     -iv-
<PAGE>
 
<TABLE>
<S>                                                                                 <C>
          17.08     Memorandum of Lease or Certain Rights Under the Lease.......... 55
          17.09     Waiver......................................................... 55
          17.10     Assignment; Binding Effect..................................... 55
          17.11     Consents and Approvals......................................... 55
          17.12     Single Property................................................ 56
          17.13     Modification................................................... 56
          17.14     Incorporation by Reference..................................... 56
          17.15     No Merger...................................................... 56
          17.16     Force Majeure.................................................. 56
          17.17     Laches......................................................... 56
          17.18     Waiver of Jury Trial........................................... 56
          17.19     Permitted Contests............................................. 57
          17.20     Construction of Lease.......................................... 57
          17.21     Counterparts................................................... 58
          17.22     Relationship of Landlord and Tenant............................ 58
</TABLE>

                                      -v-
<PAGE>
 
                                   SCHEDULES

     A                                Leased Properties and Initial Base Rent
     B                                Permitted Liens
     12.02                            Material Agreements
     12.03                            Changes in Condition


                                   EXHIBITS

     2.02                             Payment Account Information
     2.04                             Base Annual Rent Adjustment
     5.07                             Environmental Reports
     15.02                            Form of Subordination and Non-Disturbance
 Agreement

                                     -vi-
<PAGE>
 
                                LEASE AGREEMENT

          This Lease Agreement ("Lease") dated as of the 10th day of January,
1998 by and between CAPITAL AUTOMOTIVE L.P., a Delaware limited partnership
("Landlord"), having its principal office at 1925 North Lynn, Suite 306,
Arlington, Virginia 22209 and Good News Salisbury, Inc., a Maryland corporation,
having its principal office at 2013 N. Salisbury Blvd., Salisbury, Maryland
21801 ("Tenant").


                                   RECITALS

          WHEREAS, Tenant or an Affiliate (as hereafter defined) has conveyed or
will convey to Landlord certain parcels of real estate and improvements thereon
upon which Tenant engages in motor vehicle retail and/or motor vehicle related
businesses (the "Business"), which parcels of real estate and improvements
thereon are described on Schedule A attached hereto and incorporated herein by
                         ----------                                           
reference (each hereinafter a "Leased Property" or collectively, the "Leased
Properties"), and Landlord and Tenant desire to provide for the lease by
Landlord to Tenant of the Leased Properties; and

          WHEREAS, Landlord and Tenant desire that each of the Leased Properties
shall be the subject of this Lease and be used by Tenant in its operation of the
Business; and

          WHEREAS, this Lease provides that additional real estate and
improvements thereon may be made subject to the operation and effect of this
Lease, upon execution by Landlord and Tenant of a Lease Supplement designating
each such additional property as a Leased Property hereunder.

          NOW, THEREFORE, in consideration of the foregoing premises and of
their respective agreements and undertakings herein, and of other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:

                                   ARTICLE I
                   LEASE AGREEMENT, LEASED PROPERTY AND TERM

          1.01  Lease Agreement. Landlord does hereby let and lease unto Tenant,
                ---------------  
and Tenant does hereby take and hire from Landlord, the Leased Properties, which
shall respectively consist of:

          (a)   The parcels of land described and located at the addresses
                listed in Schedule A hereto, as more particularly described
                          ----------                                       
                therein, together with any additional parcels of real estate and
                improvements thereon subsequently designated as a Leased
                Property by the parties pursuant to a Lease Supplement as
                provided for herein, together with all rights, titles,
                appurtenant interests, covenants, licenses, privileges and
                benefits thereto belonging, and any easements, rights-of-way,
                rights of ingress or egress or other interests in, on, or to any
                land, highway, street, road or avenue, open or proposed, in, on,
                across, in
<PAGE>
 
                front of, abutting or adjoining such real property including,
                without limitation, any strips and gores adjacent to or lying
                between such real estate and any adjacent real estate (the
                "Land");

          (b)   All buildings, improvements, structures and Fixtures (as
                hereinafter defined) now located or to be located or to be
                constructed on the Land, including, without limitation,
                sidewalks, landscaping, parking lots and structures, roads,
                drainage and all above ground and underground utility structures
                and conduits (on-site or off-site), equipment systems and other
                so-called "infrastructure" improvements (the "Improvements");

          (c)   All equipment, machinery, fixtures, and other items of real
                and/or personal property, including all components thereof,
                located in, on or used in connection with, and permanently
                affixed to or incorporated into, the Improvements, including,
                without limitation, all furnaces, boilers, heaters, electrical
                equipment, heating, plumbing, lighting, ventilating,
                refrigerating, incineration, air and water pollution control,
                waste disposal, air-cooling and air-conditioning systems and
                apparatus, sprinkler systems and fire and theft protection
                equipment, and similar systems, all of which, to the greatest
                extent permitted by law, are hereby deemed to constitute real
                estate, together with all replacements, modifications,
                alterations and additions thereto (collectively the "Fixtures");
                and

          (d)   All easements, rights and appurtenances relating to the Land and
                the Improvements.

          SUBJECT, HOWEVER, to the liens, encumbrances, restrictions,
agreements, and other title matters listed or specifically referred to in
Schedule B ("Permitted Exceptions").
- ----------            

          The Leased Properties shall however exclude all furniture, equipment,
inventory and items of moveable personal property attached to the Land or
Improvements that relate to the business being conducted on the Leased Property
which items may readily be removed without material damage to the Land and
Improvements whether or not such items might legally be considered to be
"fixtures" (all of which are owned by Tenant and shall hereinafter be defined as
the "Excluded Personal Property").

          1.02  Contingent Upon Acquisition of the Leased Property. In the event
                --------------------------------------------------   
this Lease is executed prior to the conveyance by Tenant or an Affiliate of the
Leased Property to Landlord, the parties acknowledge that the effectiveness of
this Lease in respect of such Leased Property is contingent upon the closing of
such conveyance (the "Commencement Date").

          1.03  Term. The initial term of this Lease (the "Term") shall be for a
                ----    
fixed term of One Hundred and Twenty (120) months commencing on the Commencement
Date. The initial term

                                      -2-
<PAGE>
 
for any Leased Property designated in a Lease Supplement shall begin on the date
of such Lease Supplement and expire at the end of the Term or then current
Extension Term (as hereafter defined), as the case may be. Tenant shall have the
right to extend this Lease for the Leased Properties as a group, at Tenant's
option, for one One Hundred and Twenty (120) month renewal term from the
expiration of the Term (the "First Extension Term"), provided that no Event of
Default (as defined in Section 9.01 hereof) shall exist and be continuing. In
addition, Tenant shall have the right to extend this Lease for the Leased
Properties as a group at Tenant's option, for a second One Hundred and Twenty
(120) month renewal term from the expiration of the First Extension Term (the
"Second Extension Term", each an "Extension Term", and collectively with the
First Extension Term, the "Extension Terms") provided that no Event of Default
(as defined in Section 9.01 hereof) shall exist and be continuing. Tenant shall
exercise the First Extension Term by written notice to Landlord no later than
twelve months prior to the end of the Term. Tenant shall exercise the Second
Extension Term by written notice to Landlord no later than twelve (12) months
prior to the end of the First Extension Term. Notwithstanding anything else to
the contrary in this Agreement, the Rent during the Second Extension Term shall
be the Fair Market Rent (as hereafter defined) for the Leased Property. Fair
Market Rent shall be determined as soon as possible after receipt by Landlord of
Tenant's notice of option exercise, on the basis of appraisals of independent
appraisers selected in accordance with the provisions of Section 16.02(b).
Tenant shall have the right, in its sole discretion, to rescind the exercise of
Tenant's option to extend the Lease for the Second Extension Term during a
period of five (5) business days after the determination of the Fair Market
Rent. If Tenant shall fail to exercise the right to rescind within such five (5)
day period, the election to extend shall be irrevocable and the Fair Market Rent
so determined shall be the Base Annual Rent during the Second Extension Term
notwithstanding any changes in the market rental rates, whether upward or
downward, which may occur after such determination. However, notwithstanding
anything else in this Agreement, Fair Market Rent shall become the Base Annual
Rent for the Second Extension Term (as defined hereafter) and shall be subject
to Base Annual Rent Adjustments as set forth in Section 2.04.

          1.04  Holding Over.  Should Tenant, without the express consent of
                ------------                                                
Landlord, continue to hold and occupy any Leased Property after the expiration
or earlier termination of the Term or any Extension Term, as the case may be,
such holding over beyond the Term and the acceptance or collection of Rent (as
defined hereinafter) by Landlord shall operate and be construed as creating a
tenancy from month-to-month and not for any other term whatsoever.  During any
such holdover period Tenant shall pay to Landlord for each month (or portion
thereof) Tenant remains in such Leased Property, in lieu of the Base Annual Rent
(as defined hereafter) for such Leased Property, an amount equal to the sum of
one-twelfth (1/12) of (i) one hundred seven percent (107%) of such Base Annual
Rent (the "Holdover Rate"), and (ii) as applicable, one hundred percent (100%)
of the Additional Rent (as defined hereinafter) for such Leased Property and
Other Additional Rent (as defined hereinafter) for such Leased Property, each as
in effect on the expiration date.  Said month-to-month tenancy may be terminated
by Landlord by giving Tenant thirty (30) days written notice, and at any time
thereafter Landlord may re-enter and take possession of such Leased Property.

                                      -3-
<PAGE>
 
          1.05  Surrender.  Except as a result of (a) Tenant Improvements and
                ---------                                                    
Capital Additions (as defined hereinafter); (b) normal and reasonable wear and
tear (subject to the obligation of Tenant to maintain each Leased Property in
good order and repair during the Term); and (c) casualty, taking or other damage
and destruction not required to be repaired by Tenant, Tenant shall surrender
and deliver up each Leased Property at the expiration or termination of the Term
or the Extension Term therefor, as the case may be, broom clean, in good order
and repair, free of the Excluded Personal Property and any additional items of
Tenant's personal property (together with the Excluded Personal Property, the
"Tenant's Personal Property"), all of which Tenant shall remove prior to such
surrender and delivery.


                                  ARTICLE II
                                     RENT

          2.01  Base Rent. Tenant shall pay Landlord annual base rent (the "Base
                ---------   
Annual Rent") as to the Leased Property for each year during the Term or the
Extension Term (each such year a "Lease Year"), which Base Annual Rent shall be
subject to upward adjustment pursuant to Section 2.04. In the first Lease Year,
Base Annual Rent shall be in the amount set forth on Schedule A (the "Initial
                                                     ----------              
Base Annual Rent"), paid to Landlord in twelve equal monthly installments.

          2.02  Payment.  Tenant shall pay Landlord the Base Annual Rent as to
                -------                                                       
the Leased Property for each Lease Year, without notice, demand, set-off or
counterclaim in advance, in lawful money of the United States of America and
payable in consecutive monthly installments commencing on the Commencement Date
and thereafter on the first day of each month during the Term.  Tenant will, to
the extent that such method of payment is compatible with its business
practices, make such payments by direct deposit of immediately available funds
to the account set forth in Exhibit 2.02 (which Exhibit 2.02 may be modified by
                            ------------        ------------                   
Landlord from time to time upon Notice (as hereafter defined) to Tenant).

          2.03  Security Deposit.  Prior to the Commencement Date, Tenant shall
                ----------------                                               
deliver to Landlord an amount equal to one-twelfth (1/12th) of the Base Annual
Rent, which amount shall be held by Landlord as security (the "Security
Deposit") for the performance of Tenant's payment and other obligations under
this Lease.  Upon an Event of Default and the continuance thereof, Landlord
shall have the right, but not the obligation, to apply the Security Deposit as
set forth in Section 9.08. Landlord shall return the Security Deposit, without
interest, after expiration of this Lease, if Tenant has fully and faithfully
carried out all of the terms, covenants and conditions hereof.  In the event
that Landlord eliminates its standard business policy of requiring security
deposits from tenants, then Landlord shall refund the Security Deposit to Tenant
within thirty (30) days of such policy change.

                                      -4-
<PAGE>
 
          2.04  Base Annual Rent Adjustment.
                --------------------------- 

                (a)  The Base Annual Rent shall be adjusted during the Lease
                     Term or the Extension Terms under the procedures set forth
                     in Exhibit 2.04 (the "Base Annual Rent Adjustment").
                        ------------
 
                (b)  As used in Exhibit 2.04, the "Index" shall mean the CPI-U
                                ------------                                  
                     published by the United States Department of Labor, Bureau
                     of Labor Statistics Consumer Price Index for All Urban
                     Consumers, U.S. City Average. If at any time during the
                     Term or the Extension Term, as the case may be, the Index
                     shall be discontinued, Landlord shall select a substitute
                     index, being an existing official index published by the
                     Bureau of Labor Statistics or its successor or another,
                     similar governmental agency, which index is most nearly
                     equivalent to the Index.

          2.05  Additional Rent. As to each Leased Property, in addition to the
                ---------------                                 
Base Annual Rent, Tenant shall pay all other amounts, liabilities, obligations
and Impositions (as hereinafter defined) which Tenant assumes or agrees to pay
under this Lease and any fine, penalty, interest, charge and cost which may be
added for nonpayment or late payment of such items (collectively, the
"Additional Rent").

          2.06  Place(s) of Payment of Rent; Direct Payment of Additional Rent.
                --------------------------------------------------------------
The Base Annual Rent and Additional Rent are hereinafter referred to as "Rent."
Landlord shall have all legal, equitable and contractual rights, powers and
remedies provided in this Lease or by statute or otherwise in the case of
nonpayment of the Rent for each Leased Property. Tenant shall make all payments
of Rent at Landlord's address set forth in Section 17.01 or as Landlord may
otherwise from time to time direct in writing, or, if Landlord shall direct
Tenant (if compatible with Tenant's business practices), directly to a bank
account specified by Landlord to Tenant in writing. At the direction of the
Landlord, Tenant shall make payments of Additional Rent directly to the person
or persons to whom such amount is owing at the time and times when such payments
are due, and Tenant shall give to Landlord such evidence of such direct payments
as Landlord shall reasonably request.

          2.07  Net Lease. This Lease shall be deemed and construed to be an
                ----------                                             
"absolute net lease" or "triple net lease," (i.e. that Tenant shall pay all
costs and expenses related to the ownership and operations of each Leased
Property, thereby leaving all Rent as an absolutely net return to Landlord) and
as to each Leased Property, Tenant shall pay all Rent, Impositions, and other
charges and expenses in connection with such Leased Property throughout the Term
and any Extension Term, without abatement, deduction or set-off.

          2.08  No Termination, Abatement, Etc. Except as otherwise specifically
                -------------------------------                     
provided herein, Tenant shall remain bound by this Lease in accordance with its
terms. Except as otherwise specifically provided herein, Tenant shall not,
without the prior written consent of Landlord, modify,

                                      -5-
<PAGE>
 
surrender or terminate this Lease as to any Leased Property, nor seek nor be
entitled to any abatement, deduction, deferment or reduction of Rent, or set-off
against the Rent as to any Leased Property for any reason whatsoever.  Except as
specifically provided herein, the obligations of Landlord and Tenant shall not
be affected by reason of:  (a) the lawful or unlawful prohibition of, or
restriction upon, Tenant's use of any Leased Property, or any part thereof, the
interference with such use by any person, corporation, partnership or other
entity, or by reason of eviction by paramount title; (b) any claim which Tenant
has or might have against Landlord or by reason of any default or breach of any
warranty by Landlord under this Lease or any other agreement between Landlord
and Tenant, or to which Landlord and Tenant are parties; (c) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceeding affecting Landlord or any assignee or transferee
of Landlord; (d) any damage to, or destruction of, any Leased Property or any
portion thereof for whatever cause, or any taking of the Leased Property or any
portion thereof; or (e) any other cause, whether similar or dissimilar to any of
the foregoing, other than a discharge of Tenant from any such obligations as a
matter of law.  Except as otherwise specifically provided herein, and to the
maximum extent permitted by law, Tenant hereby specifically waives all rights,
including but not limited to any rights under any statute relating to rights of
tenants in the jurisdictions where the Leased Properties are located, which may
now be conferred upon it by law, relating to:  (a) the modification, surrender
or termination of this Lease, or the quitting or surrender of any Leased
Property or any portion thereof; (b) any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Tenant hereunder; or (c) any
rights of redemption.  As to each Leased Property, the obligations of Landlord
and Tenant hereunder shall be separate and the Rent and all other sums shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated pursuant to the express provisions of this Lease or by
termination of this Lease other than by reason of an Event of Default.


                                  ARTICLE III
                           IMPOSITIONS AND UTILITIES

          3.01  Payment of Impositions. Subject to the adjustments set forth
                ----------------------                                 
herein, Tenant shall pay, in the manner set forth in Section 3.04, as Additional
Rent, to the Landlord an amount equal to the amount necessary to pay all
Impositions (as hereinafter defined) that may be levied or become a lien on any
Leased Property or any part thereof at any time (whether prior to or during the
Term), without regard to prior ownership of said Leased Property, before the
same becomes delinquent. Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon any
Leased Property or any part thereof. Tenant, at its expense, shall prepare and
file all tax returns and reports in respect of any Imposition as may be required
by governmental authorities, provided, however, that Tenant shall provide to
Landlord copies of all filings of such tax returns or reports in respect of any
real or personal property owned by Landlord. Tenant shall be entitled to any
refund due in respect of such Impositions from any taxing authority if no Event
of Default shall have occurred hereunder and be continuing. Any refunds in
respect of such Impositions retained by Landlord due to an Event of Default
shall be applied as provided in Section 9.08. Landlord and Tenant shall, upon
request of the other, provide

                                      -6-
<PAGE>
 
such data as is maintained by the party to whom the request is made with respect
to a Leased Property as may be necessary to prepare any required tax returns and
reports.  In the event governmental authorities classify any property covered by
this Lease as personal property, Landlord and Tenant shall file all personal
property tax returns in such jurisdictions where it may legally so file with
respect to their respective owned personal property.  Landlord, to the extent it
possesses the same, and Tenant, to the extent it possesses the same, will
provide the other party, upon request, with cost and depreciation records
necessary for filing such returns or reports for any property so classified as
personal property.  To the extent that Landlord is legally required to file
personal property tax returns, Tenant will be provided with copies of assessment
notices indicating a value in excess of the reported value in sufficient time
for Tenant to file a protest.  Tenant may, upon notice to Landlord, at Tenant's
option and at Tenant's sole cost and expense, protest, appeal, or institute such
other proceedings as Tenant may deem appropriate to effect a reduction of real
estate or personal property assessments and Landlord, at Tenant's expense as
aforesaid, shall fully cooperate with Tenant in such protest, appeal, or other
action.  Tenant shall provide Landlord copies of all materials filed or
presented in connection with any such proceeding.  Tenant shall promptly
reimburse Landlord for all taxes paid by Landlord, which were not paid with
deposits received from Tenant, upon receipt of billings accompanied by copies of
a bill therefor and payments thereof which identify the property with respect to
which such payments are made.  Impositions imposed with respect to the tax-
fiscal period during which the Term commences and terminates as to each Leased
Property shall be adjusted and prorated between Landlord and Tenant on a per
diem basis, with Tenant being obligated to pay its pro rata share from and
including the Commencement Date to and including the expiration or termination
date of the Term or Extension Term, as the case may be, whether or not such
Imposition is imposed before or after such commencement or termination, and
Tenant's obligation to pay its prorated share thereof shall survive such
termination.  Tenant shall also pay to Landlord a sum equal to the amount which
Landlord may be caused to pay of any privilege tax, sales tax, gross receipts
tax, rent tax, occupancy tax or like tax (excluding any tax based on net
income), hereinafter levied, assessed, or imposed by any federal, state, city,
county or municipal or other local governmental authority, or any subdivision
thereof, upon or measured by rent or other consideration required to be paid by
Tenant under this Lease.

          3.02  Definition of Impositions. "Impositions" means, collectively:
                -------------------------                       
(a) taxes (including without limitation, all real estate and personal property
ad valorem (whether assessed as part of the real estate or separately assessed
as unsecured personal property), sales and use, business or occupation, single
business, gross receipts, transaction, privilege, rent or similar taxes, but not
including income or franchise or excise taxes payable with respect to Landlord's
receipt of Rent); (b) assessments, whether in the nature of a special assessment
or otherwise (including, without limitation, all assessments for public
improvements or benefits, whether or not commenced or completed prior to the
date hereof and whether or not to be completed within the Term or any Extension
Term, as the case may be); (c) ground rents, water, sewer or other rents and
charges, excises, tax levies, and fees (including, without limitation, license,
permit, inspection, authorization and similar fees); (d) to the extent they may
become a lien on a Leased Property, all taxes imposed on Tenant's operations of
such Leased Property including without limitation, employee withholding taxes,
income taxes and intangible taxes; and (e) all other governmental charges, in
each case

                                      -7-
<PAGE>
 
whether general or special, ordinary or extraordinary, or foreseen or unforseen,
of every character in respect of each Leased Property or any part thereof, the
Business conducted by Tenant thereon, and/or the Rent (including all interest
and penalties thereon due to any failure in payment by Tenant), which at any
time prior to, during or in respect of the Term or any Extension Term, as the
case may be, hereof may be assessed or imposed on or in respect of or be a lien
upon (i) Landlord or Landlord's interest in any Leased Property or any part
thereof; (ii) any Leased Property or any part thereof or any rent therefrom or
any estate, right, title or interest therein; or (iii) any occupancy, operation,
use or possession of, or sales from, or activity conducted on, or in connection
with any Leased Property or the leasing or use of any Leased Property or any
part thereof.  Tenant shall not, however, be required to pay:  (x) any tax based
on net income (whether denominated as a franchise or capital stock or other tax)
imposed on Landlord or (y) except as provided in Section 13.01, any tax imposed
with respect to the sale, exchange or other disposition by Landlord of a Leased
Property or the proceeds thereof; provided, however, that if any tax,
assessment, tax levy or charge which Tenant is obligated to pay pursuant to the
first sentence of this definition and which is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (x) or (y) immediately above is levied, assessed or
imposed expressly in lieu thereof Tenant shall then pay such tax, levy, or
charge set forth in said clause (x) or (y).

          3.03   Utilities.  Tenant shall contract for, in its own name, and
                 ---------
will pay, as Additional Rent all taxes, assessments, charges/deposits, and bills
for utilities, including without limitation charges for water, gas, oil,
sanitary and storm sewer, electricity, telephone service, trash collection, and
all other utilities which may be charged against the occupant of the
Improvements during the Term. Tenant shall at all times maintain that amount of
heat necessary to ensure against the freezing of water lines. Tenant hereby
agrees to indemnify and hold Landlord harmless from and against any liability or
damages to the utility systems of each Leased Property that may result from
Tenant's failure to maintain sufficient heat in the Improvements therefor.

          3.04   Escrow of Impositions.  Unless waived by written notice from
                 ---------------------
Landlord to Tenant, Tenant shall thereafter deposit with Landlord on the first
day of each month during the Term hereof and any Extension Term, as the case may
be, a sum equal to one-twelfth (1/12th) of the Impositions assessed against such
Leased Property which sums shall be used by Landlord toward payment of such
Impositions. If, at the end of any applicable tax year, any such funds held by
Landlord are insufficient to make full payment of taxes or other Impositions for
which such funds are held, Tenant, on demand, shall pay to Landlord any
additional funds necessary to pay and discharge in full the obligations of
Tenant pursuant to the provisions of this Section. If, however, at the end of
any applicable tax year, such funds held by Landlord are in excess of the total
payment required to satisfy taxes or other Impositions for which such funds are
held, Landlord shall apply such excess amounts to a tax and Imposition escrow
fund for the next tax year. With respect to each Leased Property, if any such
excess exists following the expiration or earlier termination of this Lease, and
subject to Section 8.08 below, Landlord shall promptly refund such excess
amounts to Tenant. The receipt by Landlord of the payment of such Impositions by
and from Tenant shall only be as an accommodation to Tenant and the taxing
authorities, and shall not be construed as rent or income to Landlord, Landlord
serving, if at all, only as a conduit for delivery purposes.

                                      -8-
<PAGE>
 
          3.05   Discontinuance of Utilities.  Landlord will not be liable for
                 ---------------------------
damages to person or property or for injury to, or interruption of, business for
any discontinuance of utilities at any Leased Property nor will such
discontinuance in any way be construed as an eviction of Tenant from such Leased
Property or cause an abatement of Rent as to such Leased Property or operate to
release Tenant from any of Tenant's obligations as to such Leased Property under
this Lease. Notwithstanding the forgoing, however, Landlord shall be liable for
damages to person or property or for injury to, or interruption of business, for
any discontinuance of utilities at any Leased Property, in the event and to the
extent, such damages or injury are caused by the wilful misconduct or gross
negligence of the Landlord.

          3.06   Liens.  Subject to Section 17.19 relating to contests, Tenant
                 -----
shall not directly or indirectly create or allow to remain, and will promptly
discharge at its expense, any lien, encumbrance, attachment, title retention
agreement or claim upon any Leased Property or any attachment, levy, claim or
encumbrance in respect of any Rent provided under this Lease, not including,
however: (a) this Lease; (b) utility easements and road rights-of-way in the
customary form (i) provided the same do not adversely affect the intended use of
the Leased Properties (including the Improvements) and do not create a material
adverse effect on the value of the Leased Properties or (ii) which result solely
from the action or inaction of Landlord; (c) zoning and building laws or
ordinances, provided they do not prohibit the use of the Leased Properties for
the Business and so long as the Leased Properties are in compliance with same;
(d) such encumbrances as are subsequently consented to in writing by Landlord,
but excluding liens in respect of Impositions required to be paid under Section
3.01; (e) liens for Impositions so long as (i) the same are not yet payable or
are payable without the addition of any fine or penalty or (ii) such liens are
being contested as permitted under Section 17.19; and (f) other encumbrances,
easements, rights of way or liens (i) provided the same do not adversely affect
the intended use of the Leased Properties (including the Improvements) and do
not create a material adverse effect on the value of the Leased properties, or
(ii) which result solely from the action or inaction of Landlord.

                                  ARTICLE IV
                                   INSURANCE

          4.01   Insurance.  Tenant shall, at Tenant's expense, keep the
                 ---------
Improvements, Fixtures, and other components of each Leased Property insured
against the following risks:

                 (a)  Loss or damage by fire with extended coverage (including
                      windstorm and subsidence), vandalism and malicious
                      mischief, sprinkler leakage and all other physical loss
                      perils commonly covered by "All Risk" insurance in an
                      amount not less than one hundred percent (100%) of the
                      then full replacement cost thereof (as hereinafter
                      defined). Such policy shall include an agreed amount
                      endorsement if available at a reasonable cost. Such policy
                      shall also include endorsements for

                                      -9-
<PAGE>
 
                      contingent liability for operation of building laws,
                      demolition costs, and increased cost of construction.

                 (b)  Loss or damage by explosion of steam boilers, pressure
                      vessels, or similar apparatus, now or hereafter installed
                      on any Leased Property, in commercially reasonable amounts
                      acceptable to Landlord.

                 (c)  Loss of rent under a rental value or Business interruption
                      insurance policy covering risk of loss during the first
                      twelve (12) months of reconstruction necessitated by the
                      occurrence of any hazards described in Sections 4.01(a) or
                      4.01(b), above, and which causes an abatement of Rent as
                      provided in Article X hereof, in an amount sufficient to
                      prevent Landlord or Tenant from becoming a co-insurer,
                      containing endorsements for extended period of indemnity
                      and premium adjustment, and written with an agreed amount
                      clause, if the insurance provided for in this clause (c)
                      is available.

                 (d)  If the Land or any portion thereof related to a Leased
                      Property is located in whole or in part within a
                      designated flood plain area, loss or damage caused by
                      flood in commercially reasonable amounts acceptable to
                      Landlord.

                 (e)  Loss or damage commonly covered by blanket crime insurance
                      including employee dishonesty, loss of money orders or
                      paper currency, depositor's forgery, and loss of property
                      accepted by Tenant for safekeeping, in commercially
                      reasonable amounts acceptable to Landlord.

                 (f)  Workers' compensation insurance as required by statute in
                      respect of any work or other operations on or about each
                      Leased Property.

                 (g)  Comprehensive liability insurance as to each Leased
                      Property in amounts equal to the greater of (i) One
                      Million Dollars ($1,000,000) for each occurrence and Two
                      Million Dollars ($2,000,000) in the aggregate, or (ii) the
                      limits of liability generally required under the franchise
                      agreements or other agreements pursuant to which Tenant
                      operates the Businesses conducted on or about each Leased
                      Property.

                 (h)  Commercial comprehensive catastrophic liability insurance
                      with limits of liability of not less than the greater of
                      (i) Five Million ($5,000,000) and (ii) the limits of
                      liability generally required under the franchise
                      agreements or other agreements pursuant to which

                                     -10-
<PAGE>
 
                      Tenant operates the Businesses conducted on or about each
                      Leased Property.

                 (i)  upon Landlord's request, earthquake insurance in an amount
                      not less than the full insurable value of each Leased
                      Property.

                 (j)  During the period when any addition, alteration,
                      construction, installation or demolition is being made or
                      performed to any part of the Leased Property, contingent
                      liability, public liability, completed value, builder's
                      risk (non-reporting form) workers' compensation and other
                      insurance as is deemed prudent by Landlord.

          4.02   Insurance Limits.  Deductible provisions for the insurance
                 ----------------
required under Section 4.01(a) shall not exceed Twenty-Five Thousand Dollars
($25,000) per location per occurrence and One Hundred Thousand Dollars
($100,000) aggregate per occurrence; under clause(d), Twenty-Five Thousand
Dollars ($25,000) per occurrence, except that if federal flood insurance is
available then such deductible shall not be greater than the lowest deductible
available with respect to such federal flood insurance; under clause (g), 
Twenty-Five Thousand Dollars ($25,000) per occurrence; under clause (h), Twenty-
Five Thousand Dollars ($25,000) per occurrence; and under clause (j), Twenty-
Five Thousand Dollars ($25,000) per occurrence.

          4.03   Insurance Requirements.  The following provisions shall apply
                 ----------------------
to all insurance coverages required hereunder:

                 (a)  The carriers of all policies shall have a Best's Rating of
                      "A-" or better and a Best's Financial Category of XII or
                      larger and shall be authorized to do insurance business in
                      the jurisdiction in which the Leased Property is located.

                 (b)  Tenant shall be the "named insured" and Landlord and any
                      mortgagee of Landlord shall be an "additional named
                      insured" on each policy.

                 (c)  Tenant shall deliver to Landlord certificates or policies
                      showing the required coverages and endorsements. Each
                      policy or certificate of insurance shall provide that such
                      policy or certificate (i) may not be canceled, (ii) may
                      not lapse for failure to renew, and (iii) no material
                      change or reduction in coverage may be made, without at
                      least thirty (30) days' prior written notice to Landlord.

                 (d)  The policies shall contain a severability of interest
                      and/or cross-liability endorsement, provide that the acts
                      or omissions of Tenant will not invalidate Landlord's
                      coverage, and provide that Landlord shall not be
                      responsible for payment of premiums. 

                                     -11-
<PAGE>
 
                 (e)  All loss adjustment shall require the written consent of
                      Landlord and Tenant, as their interests may appear.

                 (f)  At least (30) thirty days prior to the expiration of each
                      policy, Tenant shall deliver to Landlord a certificate
                      showing renewal of such policy and payment of the annual
                      premium therefor.

          Landlord shall have the right to review the insurance coverages
required hereunder with Tenant from time to time, to obtain the input of third
party professional insurance advisors (at Landlord's expense) with respect to
such insurance coverages, and to consult with Tenant in Tenant's annual review
and renewal of such insurance coverages. All insurance coverages hereunder shall
be in such form, substance and amounts as are customary or standard in Tenant's
industry, but at a minimum shall comply with the requirements set forth herein.

          4.04   Replacement Cost.  The term "full replacement cost" means the
                 ----------------
actual replacement cost of the Improvements from time to time including
increased cost of construction, with no reductions or deductions. Tenant shall,
not later than thirty (30) days after the anniversary of each policy of
insurance, increase the amount of the replacement cost endorsement for the
Improvements to the extent necessary to reflect increased costs of construction.
If Tenant makes any Permitted Alterations (as hereinafter defined) to any Leased
Property, Landlord may have such full replacement cost redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement cost was last determined.

          4.05   Blanket Policy.  Tenant may carry the insurance required by
                 --------------
this Article under a blanket policy of insurance, provided that the coverage
afforded Tenant will not be reduced or diminished or otherwise be different from
that which would exist under a separate policy meeting all of the requirements
of this Lease and the Landlord approves the form of the policy.

          4.06   No Separate Insurance.  Tenant shall not take out separate
                 --------------------- 
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing insurance
by securing an additional policy or additional policies, unless all parties
having an insurable interest in the subject matter of the insurance, including
Landlord and any mortgagees, are included therein as additional named insureds
or loss payees, the loss is payable under said insurance in the same manner as
losses are payable under this Lease, and such additional insurance is not
prohibited by the existing policies of insurance required pursuant to this
Article. Tenant shall immediately notify Landlord of the taking out of such
separate insurance or the increasing of any of the amounts of the existing
insurance by securing an additional policy or additional policies. The term
"mortgages" as used in this Lease includes, but is not limited to, Deeds of
Trust and the term "mortgagees" includes, but is not limited to, trustees and
beneficiaries under a Deed of Trust.

          4.07   Waiver of Subrogation.  Each party hereto hereby waives any and
                 --------------------- 
every claim which arises or may arise in its favor and against the other party
hereto during the Term or any

                                     -12-
<PAGE>
 
Extension Term or renewal thereof, for any and all loss of, or damage to, any of
its property located within or upon, or constituting a part of, any Leased
Property, which loss or damage is covered by valid and collectible insurance
policies, to the extent that such loss or damage is recoverable in full under
such policies.  Said mutual waiver shall be in addition to, and not in
limitation or derogation of, any other waiver or release contained in this Lease
with respect to any loss or damage to property of the parties hereto.  Inasmuch
as the said waivers will preclude the assignment of any aforesaid claim by way
of subrogation (or otherwise) to an insurance company (or any other person),
each party hereto agrees immediately to give each insurance company which has
issued to it policies of insurance, written notice of the terms of said mutual
waivers, and to have such insurance policies properly endorsed, if necessary, to
prevent the invalidation of said insurance coverage by reason of said waivers,
so long as such endorsement is available at a reasonable cost.

          4.08   Mortgages.  The following provisions shall apply if Landlord
                 ---------
now or hereafter places a mortgage on any Leased Property or any part thereof:
(a) Tenant shall obtain a standard form of mortgage clause insuring the interest
of the mortgagee; (b) Tenant shall deliver evidence of insurance to such
mortgagee; (c) loss adjustment shall require the consent of the mortgagee but
such consent shall not be unreasonably withheld and may not include any
requirement that the funds be paid to mortgagee in lieu of reconstruction; and
(d) Tenant shall obtain such other coverages and provide such other information
and documents as may be reasonably required by the mortgagee.

          4.09   Other Insurance Requirements.  Notwithstanding anything in this
                 ----------------------------
Lease to the contrary and not by way of limitation, in addition to the types and
amounts of insurance required to be carried by Tenant herein, Tenant covenants
to insure and continue in effect such types and amounts of insurance as the
Tenant shall be required to carry pursuant to any contract or agreement to which
Tenant is a party, instrument, statute, law, rule or regulation relating to the
use of the Leased Property and the operations of any Business or other
activities thereon, including noncancellable written notice to mortgagee.


                                   ARTICLE V
                       INDEMNITY; SUBSTANCES OF CONCERN

          5.01   Tenant's Indemnification.  Subject to Section 4.07, Tenant
                 ------------------------
hereby agrees to indemnify and hold harmless Landlord, its agents, and employees
from and against any and all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, costs and expenses
(including, without limitation, attorneys' fees, court costs, and the costs set
forth in Section 9.06) (the "Claims") incurred in connection with or arising
from: (a) the use, condition, operation or occupancy of the Leased Properties
during the Term of the Lease; (b) any activity, work, or thing done, or
permitted or suffered by Tenant in, on or about the Leased Properties; (c) any
acts, omissions, or negligence of Tenant or any person claiming under Tenant, or
the contractors, agents, employees, invitees, or visitors of Tenant or any such
person; (d) any breach, violation, or nonperformance by Tenant or any person
claiming under Tenant or the employees, agents, contractors, invitees, or
visitors of Tenant

                                     -13-
<PAGE>
 
or of any such person, of any term, representation, warranty, covenant, or
provision of this Lease or any law, ordinance, or governmental requirement of
any kind; (e) any injury or damage to the person, property or Business of
Tenant, its employees, agents, contractors, invitees, visitors, or any other
person entering upon any Leased Property during the Term of the Lease; (f) any
accident, injury to or death of persons or loss or damage to any item of
property occurring on or about any Leased Property during the Term of the Lease;
(g) any Environmental Law or any pollution or other threat to human health or
the environment at, arising out of or relating to any Leased Property during the
Term of the Lease as set forth in Section 5.05, and (h) any brokers' or agents'
fees and commissions attributable to Tenant; except as may be caused by the
negligence or wilful misconduct of Landlord.   If any action or proceeding is
brought against Landlord, its employees, or agents by reason of any such demand,
claim, or cause of action, Tenant, upon notice from Landlord, will defend the
same at Tenant's expense with counsel reasonably satisfactory to Landlord.  In
the event Landlord reasonably determines that its interests and the interests of
Tenant in any such action or proceeding are not substantially the same and that
Tenant's counsel cannot adequately represent the interests of Landlord therein,
Landlord shall have the right to hire separate counsel in any such action or
proceeding and the reasonable costs thereof shall be paid for by Tenant.
Tenant's indemnification obligations with respect to a Claim shall survive the
expiration or earlier termination of this Lease until the later of (i) two (2)
years from the date hereof, or (ii) the expiration of the period ninety (90)
days after the date on which Landlord has actual knowledge of the existence of
such Claim, provided, however, that Tenant's indemnification obligations shall
survive the expiration or earlier termination of this Lease until ninety (90)
days after the expiration of the applicable statute of limitations for Claims
incurred in connection with, arising out of, or related to (i) Section 5.01(g)
or (ii) the failure to pay, as provided for in this Agreement, any Imposition.

          5.02   Substances of Concern.
                 --------------------- 

                 (a)  For purposes of this Section 5:

                      (i)  "Substances of Concern" means, without limitation,
                           chemicals, pollutants, contaminants, wastes, toxic
                           substances, radioactive materials or genetically
                           modified organisms, which are, have been or become
                           regulated by any federal, state or local government
                           authority including, without limitation, (1)
                           petroleum or any fraction thereof, (2) asbestos, (3)
                           any substance or material defined as a "hazardous
                           substance" pursuant to (S) 101 of the Comprehensive
                           Environmental Response Compensation and Liability Act
                           (42 U.S.C. (S) 9601), or (4) any substance or
                           material defined as a "hazardous chemical" pursuant
                           to the federal Hazard Communication Standard (29
                           C.F.R. (S) 1910.1200).

                      (ii) "Environmental Laws" means all federal, state, local,
                           and foreign laws and regulations relating to
                           pollution or protection

                                     -14-
<PAGE>
 
                           of human health or the environment (including,
                           without limitation, ambient air, surface water,
                           ground water, wetlands, land surface, subsurface
                           strata, and indoor and outdoor workplace), including,
                           without limitation, (1) laws and regulations relating
                           to emissions, discharges, releases, or threatened
                           releases of Substances of Concern, and (2) common law
                           principles of tort liability.

                 (b)  Tenant shall not, either with or without negligence,
                      injure, overload, deface, damage or otherwise harm any
                      Leased Property or any part or component thereof; commit
                      any nuisance; permit the emission of any Substances of
                      Concern; allow the release or other escape of any
                      biologically or chemically active substances or materials
                      or other Substances of Concern so as to impregnate, impair
                      or in any manner affect, even temporarily, any element or
                      part of any Leased Property or neighboring property, or
                      allow the storage or use of such substances or materials
                      in any manner not sanctioned by law and by reasonable
                      standards prevailing in the automobile retail and related
                      industries for the storage and use of such substances or
                      materials; nor shall Tenant permit the occurrence of noise
                      or odors which could make any of the Leased Properties or
                      the Tenant subject to a civil nuisance lawsuit or to
                      disciplinary action of any kind under any nuisance laws,
                      ordinances or regulations; or make, allow or suffer any
                      waste whatsoever to any Leased Property. Landlord may
                      inspect each Leased Property from time to time, and Tenant
                      will cooperate with such inspections.

                 (c)  Notwithstanding the foregoing, Tenant anticipates using,
                      storing and disposing of certain Substances of Concern in
                      connection with operation of its Business. Such Substances
                      of Concern include, but are not limited to, the following:
                      motor oil, waste motor oil and filters, transmission
                      fluid, antifreeze, refrigerants, waste paint and lacquer
                      thinner, batteries, solvents, lubricants, degreasing
                      agents, gasoline and diesel fuels. Tenant shall ascertain
                      and comply fully with all applicable Environmental Laws
                      and environmental standards and requirements set by
                      federal, state or local laws, rules, regulations or
                      governmental directives related to the Leased Properties
                      or Tenant's use or occupancy of the Leased Property
                      ("Environmental Standards"), including but not limited to
                      any laws or standards (a) regulating the use, storage,
                      generation or disposal of Substances of Concern, (b)
                      regulating the monitoring or use of any underground or
                      aboveground storage tanks at the Leased Properties, or (c)
                      establishing any permitting, notification or reporting
                      requirements.
                                       
                                     -15-
<PAGE>
 
                      As promptly as practicable after the Commencement Date
                      (but in no event later than 120 days thereafter), Tenant
                      shall establish and implement a program of compliance with
                      all applicable Environmental Laws and Environmental
                      Standards ("Environmental Compliance Program"). Tenant
                      shall update such Environmental Compliance Program every
                      three (3) years during the Term. Tenant shall submit its
                      Environmental Compliance Program and each update thereto
                      to Landlord; provided, however, such submittal shall not
                      relieve Tenant of its obligations pursuant to this Section
                      5. Tenant's Environmental Compliance Program shall include
                      a program for monitoring Tenant's compliance with
                      Environmental Laws and Environmental Standards and a plan
                      for correcting immediately any incident of noncompliance.
                      Tenant shall comply with its Environmental Compliance
                      Program.

                 (d)  In the event of any noncompliance with any Environmental
                      Laws or Environmental Standards or any spill, release or
                      discharge of Substances of Concern in a reportable
                      quantity under federal, state or local law, Tenant shall:

                      (i)   give Landlord immediate notice of the incident by
                            telephone or facsimile, providing as much detail as
                            possible. Such notice shall be provided to
                            Landlord's National Dealership Real Estate Manager
                            or to such other person as Landlord shall designate
                            in accordance with Section 16.01 below;

                      (ii)  as soon as possible, but no later than seventy-two
                            (72) hours, after discovery of an incident of
                            noncompliance, submit a written report to Landlord,
                            identifying the source or case of the noncompliance
                            or spill, release or discharge (including the names
                            and quantities of any Substances of Concern
                            involved) and the method or action required to
                            correct the problem; and

                      (iii) cooperate with Landlord or its designated agents or
                            contractors with respect to the investigation and
                            correction of such problem.

          Tenant shall also be solely responsible for providing any notice to
any federal, state or local governmental authority required by applicable laws
and regulations as a result of such incident.

     5.03 Audits.  Landlord shall have the right to conduct, at its expense,
          ------
periodic audits of Tenant's compliance with the Environmental Compliance Program
and management of

                                     -16-
<PAGE>
 
Substances of Concern at the Leased Properties and/or periodic tests of air,
soil, surface water or groundwater at or near the Leased Properties.  Landlord
shall not be obligated to provide Tenant with the results of any audit or tests
unless such results are the basis for a claim by Landlord that Tenant has
breached its obligations under this Lease or a demand by Landlord that Tenant
modify its Environmental Compliance Program or operations or remediate or remove
a spill, release or discharge of Substances of Concern in accordance with
Section 5.06 below.  Tenant agrees promptly to modify its Environmental
Compliance Program or the conduct of its operations in accordance with
Landlord's reasonable recommendations directed at improvement of Tenant's
handling, use and disposal of Substances of Concern  in, on or from any Leased
Property.  If, as a result of an environmental audit performed by Landlord with
respect to any Leased Property, Landlord reasonably determines in its judgment
that alterations or improvements of equipment or buildings located on the Leased
Property are necessary to comply with applicable environmental laws and
regulations, Tenant shall perform such alterations or improvements as are
reasonable under the circumstances and pay all costs and expenses relating
thereto.   If Tenant shall fail to pay any such costs or expenses, Tenant shall
deposit with Landlord the full amount necessary to pay such costs in full within
ten (10) days of Landlord's demand.  Nothing contained herein shall be construed
to obligate or require Landlord to perform any audits, tests, inquiry or
investigation.  Should Landlord elect or be required to disclose to Tenant the
results of any audit or tests, Landlord shall not be liable in any way for the
truth or accuracy of such information.

          5.04   Landlord's Option Re: Compliance.  If Tenant, after notice from
                 --------------------------------                               
Landlord, fails to comply with or perform any of its obligations pursuant to
this Section 5, including, but not limited to, obligations to clean up spills,
releases or discharges, Landlord may, but shall not be obligated to, perform
such obligations and Tenant shall pay Landlord within ten (10) days of demand
Landlord's costs therefor, including any overhead and administrative costs.

          5.05   Environmental Indemnification.  Tenant shall indemnify and hold
                 -----------------------------                                  
harmless Landlord from and against all demands, claims, causes of action, fines,
penalties, damages (including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, and expenses (including,
without limitation, attorneys' fees, court costs, and the costs set forth in
Section 9.06) imposed upon or asserted against Tenant, Landlord or any Leased
Property on account of any Environmental Law (irrespective of whether there has
occurred any violation of any Environmental Law) relating to any Leased
Property, including (a) response costs and costs of removal and remedial action
incurred by the United States Government or any state or local governmental unit
to any other person or entity, or damages from injury to or destruction or loss
of natural resources, including the reasonable costs of assessing such injury,
destruction or loss, incurred pursuant to any Environmental Law, (b) costs and
expenses of abatement, investigation, removal, remediation, correction or
cleanup, fines, damages, response costs or penalties which arise from the
provisions of any Environmental Law, (c) liability for personal injury or
property damage arising under any statutory or common-law tort theory, including
damages assessed for the maintenance of a public or private nuisance or for
carrying on of a dangerous activity, (d) liability by reason of a breach of an
environmental representation or warranty by Tenant, and (e) failure of Tenant to
complete in a timely manner alterations or improvements of equipment or
buildings located on the Leased Property

                                     -17-
<PAGE>
 
deemed necessary or advisable by Landlord pursuant to Section 5.03 in a manner
acceptable to Landlord.

          5.06   Tenant's Cleanup Obligation.  If any spill, release or
                 ---------------------------
discharge of Substances of Concern occurs on, at or from the Leased Properties
during the Term, Tenant shall promptly take all actions, at its sole expense, as
are necessary to remove or remediate such spill, release or discharge and to
return the Leased Property to the condition existing prior to the introduction
of any such Substances of Concern to the Leased Property, provided that
Landlord's approval of such action shall first be obtained, which approval shall
not be unreasonably withheld so long as such actions would not potentially have
any material adverse effect on the Leased Property.

          5.07   Existing Environmental Conditions.  Tenant acknowledges that it
                 ---------------------------------                              
has had the opportunity to review the Environmental Reports (which shall mean
Phase I, Phase II and consultants' reports) attached hereto as Exhibit 5.07.
                                                               ------------  
Tenant hereby represents that it has reviewed and is aware of the matters
disclosed in the Environmental Reports.

                 As a material consideration for Landlord's willingness to enter
into this Lease, Tenant, for itself and its Affiliates, and each of their
shareholders, directors, officers, employees, agents, contractors,
representatives, insurers, successors and assigns hereby waives and releases
Landlord and its Affiliates and each of their shareholders, directors, officers,
employees, representatives, agents, contractors, representatives, insurers,
successors and assigns from any and all claims, demands, liabilities, costs,
expenses, causes of action and rights of action whatsoever, past, present or
future, known or unknown, suspected or unsuspected, which arise out of or relate
in any way to the violation of Environmental Laws or the use, storage,
treatment, disposal, presence, spill, release, or discharge of Substances of
Concern at, on or from the Leased Properties before the Commencement Date
(collectively, the "Released Claims").

                 In the event that Landlord is ordered by a governmental agency,
or reasonably determines that it is in its best interest, to remedy any
violation of Environmental Laws or to remove or remediate any Substances of
Concern present on, under or about the Leased Properties on the Commencement
Date, or spilled, released or discharged on, at or from the Leased Properties
before the Commencement Date, Tenant shall immediately upon notice from Landlord
take all actions, at Tenant's sole expense, to promptly complete such removal or
remediation.
 
          5.08   Survival of Tenant's Obligations.  Tenant's obligations under
                 --------------------------------                             
this Section 5 shall survive the expiration or earlier termination of this
Lease.  During any period of time employed by Tenant after the termination of
this Lease to complete the removal from the Leased Property of any Substances of
Concern, if the premises are not rentable for uses contemplated under this
Lease, Tenant shall continue to pay the full amount of  Rent due under this
Lease, which Rent shall be prorated daily for the final month of such period of
time.


                                  ARTICLE VI

                                     -18-
<PAGE>
 
                        USE AND ACCEPTANCE OF PREMISES

          6.01   Use of Leased Properties.  For so long as this Lease is in
                 ------------------------ 
effect (including following any sublease or assignment thereof), Tenant shall
use and occupy each Leased Property exclusively for the purpose of conducting
the Business or for any other legal purpose for which such Leased Property is
being used as of the Commencement Date, and for no other purpose without the
prior written consent of Landlord. Tenant shall obtain and maintain all
approvals, licenses, and consents needed to use and operate the Leased
Properties for such purposes. Tenant shall promptly deliver to Landlord complete
copies of surveys, examinations, certification and licensure inspections,
compliance certificates, and other similar reports issued to Tenant by any
governmental agency.

          6.02   Acceptance of Leased Properties.  Except as otherwise
                 ------------------------------- 
specifically provided in this Lease, Tenant acknowledges (i) Tenant and its
agents have had an opportunity to inspect each Leased Property; (ii) Tenant has
found each Leased Property fit for Tenant's use; (iii) delivery of each Leased
Property to Tenant is in an "as-is" condition; (iv) Landlord is not obligated to
make any improvements or repairs to any Leased Property; and (v) the roof,
walls, foundation, heating, ventilating, air conditioning, telephone, sewer,
electrical, mechanical, utility, plumbing, and other portions of each Leased
Property are in good working order. Tenant waives any claim or action against
Landlord with respect to the condition of any Leased Property. LANDLORD MAKES NO
WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTIES OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION OR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO QUALITY OR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY TENANT.

          6.03   Conditions of Use and Occupancy.  Tenant agrees that during the
                 -------------------------------                                
Term it shall use and keep each Leased Property in a careful, safe and proper
manner; not commit or suffer waste thereon; not use or occupy any Leased
Property for any unlawful purposes; not use or occupy any Leased Property or
permit the same to be used or occupied, for any purpose or business deemed extra
hazardous on account of fire or otherwise; keep each Leased Property in such
repair and condition as may be required by the local board of health, or other
city, state or federal authorities, free of all cost to Landlord; not permit any
acts to be done which will cause the cancellation, invalidation, or suspension
of any insurance policy; and permit Landlord and its agents to enter upon each
Leased Property at all reasonable times after notice to Tenant to examine the
condition thereof.  In addition, at any time and from time to time upon not less
than fifteen (15) days prior written notice, Tenant shall permit Landlord and
any mortgagee or lender and their authorized representatives, to inspect the
Leased Properties during normal Business hours, provided that such inspections
shall not unreasonably interfere with Business of Tenant.

          6.04   Financial Statements and Other Information.  Tenant shall
                 ------------------------------------------ 
provide Landlord and any mortgagee or lender regularly (or more often as may be
reasonably requested by Landlord in writing), the following financial
information: (a) as to each Leased Property within thirty (30) days after each
fiscal quarter during the Term or any Extension Term, as the case may be,
(except

                                     -19-
<PAGE>
 
the fourth quarter), Tenant-prepared financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") consistently applied; and
(b) as to each Leased Property and itself, Tenant shall use its best efforts to
provide Landlord within ninety (90) days after the end of each fiscal year of
Tenant during the Term or any Extension Term, as the case may be, and in no
event later than one hundred and twenty (120) days after the end of each fiscal
year of Tenant during the Term or any Extension Term, as the case may be,
financial statements, audited, reviewed or compiled by a certified public
accountant  (the "Annual Financial Statements").  Tenant shall also deliver to
Landlord such additional financial information as Landlord may reasonably
request, provided the same is of a type normally maintained by Tenant or can be
obtained without undue cost or burden on Tenant's personnel and does not
constitute information which Tenant reasonably determines to be proprietary or
confidential.  Additionally, upon Landlord's request, Tenant shall provide
Landlord with copies of Tenant's annual capital expenditure budgets for each
Leased Property and any reports generated by Tenant regarding maintenance and
repairs of each Leased Property.



                                  ARTICLE VII
              REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS

          7.01   Maintenance.  Tenant shall maintain each Leased Property in
                 ----------- 
good order, repair and appearance, and repair each Leased Property, including
without limitation, all interior and exterior, structural and nonstructural
repairs and replacements to the roof, foundations, exterior walls, building
systems, HVAC systems, parking areas, sidewalks, water, sewer and gas
connections, pipes, and mains. Tenant shall pay as Additional Rent the full cost
of such maintenance, repairs, and replacements. Tenant shall maintain all
drives, sidewalks, parking areas, and lawns on or about each Leased Property in
a clean and orderly condition, free of accumulations of dirt, rubbish, snow and
ice. Tenant shall permit Landlord to inspect each Leased Property at all
reasonable times, and shall implement all reasonable suggestions of Landlord as
to the maintenance and repair of each Leased Property, provided that Landlord
give Tenant no less than two (2) business days prior notice and such inspection
shall not unreasonably interefere with Business of Tenant.

          7.02   Compliance with Laws.  Tenant shall comply with all laws,
                 --------------------                                     
ordinances, orders, rules, regulations, and other governmental requirements
relating to the use, condition, or occupancy of each Leased Property, whether
now or hereafter enacted and in force including without limitation:  (a)
licensure requirements for operation of the Business; (b) requirements of any
board of casualty insurance underwriters or insurance service office for any
other similar body having jurisdiction over any Leased Property; (c) all zoning
and building codes; and (d) Environmental Laws.  At Landlord's request, from
time to time, Tenant shall deliver to Landlord copies of certificates or permits
evidencing compliance with such laws, including without limitation, copies of
any applicable licenses, certificates of occupancy and building permits.  Tenant
shall provide Landlord with copies of any notice from any governmental authority
alleging any non-compliance by Tenant or any Leased Property with any of the
foregoing requirements and such evidence as

                                     -20-
<PAGE>
 
Landlord may reasonably require of Tenant's remediation thereof.  Tenant hereby
agrees to defend, indemnify and hold Landlord, its agents, and employees from
and against any and all demands, claims, causes of action, fines, penalties,
damages (including punitive and consequential damages), losses, liabilities
(including strict liability), judgments, costs and expenses (including, without
limitation, attorneys' fees, court costs, and the costs set forth in Section
9.06) resulting from any failure by Tenant to comply with any laws, ordinances,
rules, regulations, and other governmental requirements.

          7.03   Required Alterations.  Tenant shall, at Tenant's sole cost and
                 --------------------                                          
expense, make any additions, changes, improvements or alterations to each Leased
Property, including structural alterations, which may be required by any
governmental authorities, including those required to continue to satisfy any
licensure requirements related to the operation of the Business, whether such
changes are required by Tenant's use, changes in the law, ordinances, or
governmental regulations, defects existing as of the date of this Lease, or any
other cause whatsoever.  Tenant shall provide thirty (30) days prior written
notice to Landlord of any changes to a Leased Property pursuant to this Section
7.03 which involve changes to the structural integrity thereof or materially
affect the operational capabilities thereof.  All such additions, changes,
improvements or alterations shall be deemed to be a Tenant Improvement and shall
comply with all laws relating to such alterations and with the provisions of
Section 8.01.

          7.04   Mechanics' Liens.  Tenant shall have no authority to permit or
                 ----------------                                              
create a lien against Landlord's interest in any Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in each Leased Property against liens. Tenant hereby agrees
to defend, indemnify, and hold Landlord harmless from and against any mechanics'
liens against any Leased Property by reason of work, labor services or materials
supplied or claimed to have been supplied on or to such Leased Property.  Tenant
shall immediately remove, bond-off, or otherwise obtain the release of any
mechanics' lien filed against any Leased Property. Tenant shall pay all expenses
in connection therewith, including without limitation, damages, interest, court
costs and reasonable attorneys' fees.

          7.05   Replacements of Fixtures.  Tenant shall not remove Fixtures
                 ------------------------ 
from any Leased Property except to replace such Fixtures with other items used
for similar or analogous purposes, which replacement items are of equal or
greater quality and value. Items being replaced by Tenant may be removed and
shall become the property of Tenant and items replacing the same shall be and
remain the property of Landlord. Tenant shall execute, upon written request from
Landlord, any and all documents necessary to evidence Landlord's ownership of
the Fixtures and replacements therefor. Tenant may not finance replacements by
security agreement or equipment lease unless: (a) Landlord has consented to the
terms and conditions of the equipment lease or security agreement; (b) the
equipment lessor or lender has entered into a non-disturbance agreement with
Landlord upon terms and conditions acceptable to Landlord, including without
limitation (i) Landlord shall have the right (but not the obligation) to assume
such security agreement or equipment lease upon the occurrence of an Event of
Default by Tenant hereunder; (ii) the equipment lessor or lender shall promptly
notify Landlord of any default by Tenant under the equipment lease or security
agreement and give

                                     -21-
<PAGE>
 
Landlord a reasonable opportunity to cure such default; and (iii) Landlord shall
have the right to assign its rights under the equipment lease, security
agreement, or non-disturbance agreement; (c) the equipment lessor or lender
shall subordinate its security interest to the security interest of any of
Landlord's lessors, mortgagors or lenders, whether now created or hereafter
existing, and (d) Tenant shall, within ten (10) days after receipt of an invoice
from Landlord, reimburse Landlord for all costs and expenses incurred in
reviewing and approving the equipment lease, security agreement, and non-
disturbance agreement, including without limitation, reasonable attorneys' fees
and costs.

          7.06   Encroachments; Restrictions.  If any of the Improvements shall,
                 ---------------------------                                    
at any time, encroach upon any property, street or right-of-way adjacent to a
Leased Property, or shall violate the agreements or conditions contained in any
restrictive covenant or other agreement affecting a Leased Property, other than
one which is created or consented to by Landlord without Tenant's consent, or
shall impair the rights of others under an easement or right-of-way to which a
Leased Property is subject, other than one which is created or consented to by
Landlord without Tenant's consent, then promptly upon the request of Landlord or
at the request of any person affected by any such encroachment, violation or
impairment, Tenant shall, at its expense, subject to its right to contest the
existence of any encroachment, violation or impairment and in such case, in the
event of an adverse final determination, either (a) obtain valid and effective
waivers or settlements of all claims, liabilities and damages resulting from
each such encroachment, violation or impairment, whether the same shall affect
Landlord or Tenant or (b) make such changes in the Improvements and take such
other actions as shall be necessary to remove such encroachment and to end such
violation or impairment, including, if necessary, the alteration of
improvements.  Any such alteration shall be made in conformity with the
requirements of Article VIII.


                                 ARTICLE VIII
                   ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
                  CAPITAL ADDITIONS TO THE LEASED PROPERTIES

          8.01   Tenant's Right to Construct.  As to each Leased Property,
                 --------------------------- 
during the Term of this Lease or any Extension Term, as the case may be, so long
as no Event of Default shall have occurred and be continuing as to such Leased
Property, Tenant may make Capital Additions (as defined herein), or other
alterations, additions, changes and/or improvements to such Leased Property as
deemed necessary or useful to operate such Leased Property for Tenant's Business
(individually, a "Tenant Improvement," or collectively, the "Tenant
Improvements"). "Capital Additions" shall mean the construction of one or more
new buildings or one or more additional structures annexed to any portion of any
of the Improvements on a Leased Property, which are constructed on any parcel or
portion of the Land comprising a Leased Property, including the construction of
a new floor, or the repair, replacement, restoration, remodeling or rebuilding
of the Improvements or any portion thereof on a Leased Property which are not
normal, ordinary or recurring to maintain such Leased Property. Except as
otherwise agreed to by Landlord herein or otherwise in writing, any such Tenant
Improvement or Capital Addition shall be made at Tenant's sole expense and shall
become the property of Landlord upon termination of this Lease. Unless

                                     -22-
<PAGE>
 
made on an emergency basis to prevent injury to person or property, as to each
Leased Property, Tenant must obtain Landlord's prior written approval, such
approval not to be unreasonably withheld or delayed, for any Capital Addition or
for any Tenant Improvement which is not a Capital Addition and which has a cost
of more than One Hundred Thousand Dollars ($100,000) or a cost which, when
aggregated with the costs of all such Tenant Improvements on such Leased
Property in a given Lease Year, would cause the total costs of all such Tenant
Improvements on such Leased Property to exceed Two Hundred Fifty Thousand
Dollars ($250,000).  Additionally, in connection with any Tenant Improvement,
including any Capital Addition, Tenant shall provide Landlord with copies of any
plans and specification therefor, Tenant's budget relating thereto, any required
governmental permits or approvals, any construction contracts or agreements
relating thereto, and any other information relating to such Tenant Improvement
as Landlord shall reasonably request.

          8.02   Scope of Right.  Subject to Section 8.01 herein and Section
                 --------------
7.03 concerning required alterations, at Tenant's cost and expense, Tenant shall
have the right to:

                 (a)  seek any governmental approvals, including building
                      permits, licenses, conditional use permits and any
                      certificates of need that Tenant requires to construct any
                      Tenant Improvement;

                 (b)  erect upon each Leased Property such Tenant Improvements
                      as Tenant deems desirable;

                 (c)  make additions, alterations, changes and improvements in
                      any Tenant Improvement so erected; and

                 (d)  engage in any other lawful activities that Tenant
                      determines are necessary or desirable for the development
                      of each Leased Property in accordance with the Tenant's
                      Business;

provided, however, Tenant shall not make any Tenant Improvement which would, in
Landlord's reasonable judgment, impair the value of the Leased Property or the
Tenant's Business without Landlord's prior written consent and provided, further
that Tenant shall not be permitted to create a mortgage, lien or any other
encumbrance on any Leased Property without Landlord's prior written consent.

          8.03   Cooperation of Landlord.  Landlord shall cooperate with Tenant
                 -----------------------                                       
and take such actions, including the execution and delivery to Tenant of any
applications or other documents, reasonably requested by Tenant in order to
obtain any governmental permits, licenses or approvals sought by Tenant to
construct any Tenant Improvement within fifteen (15) business days following the
later of:  (a) the date Landlord receives Tenant's request or (b) the date of
delivery of any such application or document to Landlord; provided, the taking
of such action by Landlord, including the execution of said applications or
documents, shall be without cost to Landlord (or if there is a cost to Landlord,
such cost shall be reimbursed by Tenant), shall not cause Landlord to be in
violation

                                     -23-
<PAGE>
 
of any law, ordinance or regulation, and shall not be deemed a waiver by
Landlord of any of its rights or of any of Tenant's obligations, including but
not limited to indemnification.

          8.04   Commencement of Construction.  Tenant agrees that:
                 ----------------------------

                 (a)  Tenant shall diligently seek all governmental approvals
                      relating to the construction of any Tenant Improvement;

                 (b)  Once Tenant begins the construction of any Tenant
                      Improvement, Tenant shall diligently oversee any such
                      construction to completion in accordance with applicable
                      insurance requirements and the laws, rules and regulations
                      of all governmental bodies or agencies having jurisdiction
                      over the subject Leased Property;

                 (c)  Landlord shall have the right at any time and from time to
                      time to post and maintain upon each Leased Property such
                      notices as may be necessary to protect Landlord's interest
                      from mechanics' liens, materialmen's liens or liens of a
                      similar nature;

                 (d)  Tenant shall not suffer or permit any mechanics' liens or
                      any other claims or demands arising from the work of
                      construction of any Tenant Improvement to be enforced
                      against any Leased Property or any part thereof, and
                      Tenant agrees to hold Landlord, its agents and employees
                      and said Leased Property free and harmless from all
                      demands, claims, causes of action, fines, penalties,
                      damages (including punitive and consequential damages),
                      losses, liabilities (including strict liability),
                      judgments, costs and expenses (including, without
                      limitation, attorneys' fees, court costs, and the costs
                      set forth in Section 9.06) incurred in connection with or
                      arising therefrom;

                 (e)  All work shall be performed in a satisfactory and
                      workmanlike manner consistent with standards in the
                      industry; and

                 (f)  Subject to Section 8.08 in the case of Capital Additions,
                      Tenant shall not secure any construction or other
                      financing for the Tenant Improvements which is secured by
                      a portion of any Leased Property without Landlord's prior
                      written consent, and any such financing (i) shall not
                      exceed the cost of the Tenant Improvements, (ii) shall be
                      subordinate to any mortgage or encumbrance now existing or
                      hereinafter created with respect to such Leased Property,
                      and (iii) shall be limited solely to Tenant's interest in
                      the subject Leased Property.

                                     -24-
<PAGE>
 
          8.05   Rights in Tenant Improvements.  Notwithstanding anything to the
                 -----------------------------                                 
contrary in this Lease, all Tenant Improvements existing on the Leased Property
or constructed upon each Leased Property pursuant to Section 8.01, any and all
subsequent additions thereto and alterations and replacements thereof shall be
the sole and absolute property of Tenant during the Term and any Extension Term,
as the case may be, of this Lease (in respect of such Leased Property).  Upon
the expiration or early termination of this Lease in respect of a Leased
Property, all such Tenant Improvements located thereon shall become the property
of Landlord.  Without limiting the generality of the foregoing, prior to the
expiration or early termination of this Lease in respect of a Leased Property,
Tenant shall be entitled to all federal and state income tax benefits associated
with all Tenant Improvements located on such Leased Property.

          8.06   Personal Property.  Tenant shall install, place, and use on
                 -----------------
each Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures as may be required or as Tenant
may, from time to time, deem necessary or useful to operate such Leased Property
in the operation of the Business.

          8.07   Requirements for the Tenant's Personal Property.  Tenant shall
                 -----------------------------------------------               
comply with all of the following requirements in connection with the Tenant's
Personal Property:

                 (a)  RESERVED.

                 (b)  The Tenant's Personal Property shall be installed in a
                      good and workmanlike manner, in compliance with all
                      governmental laws, ordinances, rules, and regulations and
                      all insurance requirements, and be installed free and
                      clear of any mechanics' liens.

                 (c)  Tenant shall, at Tenant's sole cost and expense, maintain,
                      repair, and replace the Tenant's Personal Property.

                 (d)  Tenant shall, at Tenant's sole cost and expense, keep the
                      Tenant's Personal Property insured against loss or damage
                      by fire, vandalism and malicious mischief, sprinkler
                      leakage, and other physical loss perils commonly covered
                      by fire and extended coverage, boiler and machinery, and
                      difference in conditions insurance (which insurance shall
                      meet the requirements of Section 4.03 hereof) in an amount
                      not less than the full replacement cost thereof or such
                      other amount as appears on a schedule submitted by Tenant
                      to Landlord, which schedule shall be subject to Landlord's
                      approval, and Tenant shall use the proceeds from any such
                      policy for the repair and replacement of such items of
                      Tenant's Personal Property; provided, however, that if
                      Landlord fails to object to the schedule so submitted by
                      Tenant within five (5) business days of Landlord's receipt
                      of such schedule, Landlord's approval of such schedule
                      shall be deemed given.

                                     -25-
<PAGE>
 
                 (e)  Tenant shall pay all Impositions and other taxes
                      applicable to Tenant's Personal Property.

                 (f)  If Tenant's Personal Property is damaged or destroyed by
                      fire or otherwise, Tenant shall promptly repair or replace
                      Tenant's Personal Property unless Tenant is entitled to
                      and elects to terminate the Lease pursuant to Section
                      10.05.

                 (g)  As to each Leased Property, unless an Event of Default (or
                      any event which, with the giving of notice or lapse of
                      time, or both, would constitute an Event of Default) has
                      occurred and remains uncured beyond any applicable grace
                      period, Tenant may remove Tenant's Personal Property from
                      such Leased Property from time to time provided that: (i)
                      the items removed are not required or necessary to operate
                      the Business on such Leased Property (unless such items
                      are being replaced by Tenant) and (ii) Tenant promptly
                      repairs any damage to such Leased Property resulting from
                      the removal of Tenant's Personal Property.

                 (h)  As to each Leased Property, Tenant shall remove all of
                      Tenant's Personal Property upon the termination or
                      expiration of the Lease and shall promptly repair any
                      damage to such Leased Property resulting from the removal
                      thereof to the reasonable satisfaction of Landlord;
                      provided, however, if Tenant fails to remove Tenant's
                      Personal Property from such Leased Property within thirty
                      (30) days after the termination or expiration of this
                      Lease with respect thereto, then Tenant shall be deemed to
                      have abandoned such items of Tenant's Personal Property,
                      all of which shall become the property of Landlord, and
                      Landlord may remove, store and dispose of such property
                      and Tenant shall have no claim or right against Landlord
                      for such property or the value thereof regardless of the
                      disposition thereof by Landlord. Tenant shall pay
                      Landlord, upon demand, all expenses incurred by Landlord
                      in removing, storing, and disposing of such items of
                      Tenant's Personal Property and repairing any damage caused
                      by such removal. Tenant's obligations hereunder shall
                      survive the termination or expiration of this Lease as to
                      such Leased Property.

                 (i)  Tenant shall perform its obligations under any equipment
                      lease or security agreement for Tenant's Personal
                      Property.

          8.08   Financings of Capital Additions to a Leased Property.  Landlord
                 ----------------------------------------------------          
may, but shall be under no obligation to, provide or arrange construction,
permanent or other financing for any Capital Addition proposed to be made to a
Leased Property by Tenant.  Any financing so

                                     -26-
<PAGE>
 
provided by Landlord shall be made in accordance with, and subject to, a written
Addendum to this Lease.


                                  ARTICLE IX
                             DEFAULTS AND REMEDIES

          9.01   Events of Default.  The occurrence of any one or more of the
                 -----------------                                           
following shall be an event of default ("Event of Default") hereunder:

                 (a)  Tenant fails to pay in full any installment of Rent, or
                      any other monetary obligation payable by Tenant to
                      Landlord hereunder, within ten (10) days after the due
                      date thereof and after written notice thereof and an
                      opportunity to cure within a ten (10) day period after
                      such notice is given to Tenant by Landlord. In the event
                      of Tenant's failure to make timely payment of such
                      obligations two (2) times during any twelve (12) month
                      period, each subsequent such failure within the twelve
                      (12) months immediately following such second failure
                      shall immediately constitute an Event of Default, and
                      Landlord shall not be required to provide notice thereof,
                      nor shall Tenant have any further opportunity to cure such
                      failure;

                 (b)  Tenant fails to observe and perform any covenant (other
                      than the covenant in respect of insurance set forth in
                      Article IV), condition or agreement hereunder to be
                      performed by Tenant (except those described in Section
                      9.01(a) of this Lease) and such failure continues for a
                      period of twenty (20) days after written notice thereof is
                      given to Tenant by Landlord; or if, by reason of the
                      nature of such default, the same cannot with due diligence
                      be remedied within said twenty (20) days, such failure
                      will not be deemed to continue if Tenant proceeds promptly
                      and with due diligence to remedy the failure and
                      diligently completes the remedy thereof; provided,
                      however, said cure period will not extend beyond forty
                      (40) days if the facts or circumstances giving rise to the
                      default are creating a further harm to Landlord or the
                      subject Leased Property and Landlord makes a good faith
                      determination that Tenant is not undertaking remedial
                      steps that Landlord would cause to be taken if this Lease
                      were then to terminate;

                 (c)  If Tenant: (i) admits in writing its inability to pay its
                      debts generally as they become due; (ii) files a petition
                      in bankruptcy or a petition to take advantage of any
                      insolvency act; (iii) makes an assignment for the benefit
                      of its creditors; (iv) is unable to pay its debts as they
                      
                                     -27-
<PAGE>
 
                      mature; (v) consents to the appointment of a receiver of
                      itself or of the whole or any substantial part of its
                      property; or (vi) files a petition or answer seeking
                      reorganization or arrangement under the federal bankruptcy
                      laws or any other applicable law or statute of the United
                      States of America or any state thereof;

                 (d)  If Tenant, on insolvency proceedings or on a petition in
                      bankruptcy filed against it, is adjudicated as bankrupt or
                      a court of competent jurisdiction enters an order or
                      decree appointing, without the consent of Tenant, a
                      receiver of Tenant of the whole or substantially all of
                      its property, or approving a petition filed against it
                      seeking reorganization or arrangement of Tenant under the
                      federal bankruptcy laws or any other applicable law or
                      statute of the United States of America or any state
                      thereof, and such judgment, order or decree is not
                      vacated, dismissed or set aside within sixty (60) days
                      from the date of the entry thereof;

                 (e)  If the estate or interest of Tenant in a Leased Property
                      or any part thereof is levied upon or attached in any
                      proceeding and the same is not vacated or discharged
                      within fifteen (15) days after commencement thereof
                      (unless Tenant is contesting such lien or attachment in
                      accordance with this Lease) or if such estate or interest
                      of Tenant is assigned, conveyed or involuntarily
                      transferred in violation of this Lease;

                 (f)  Any representation, warranty or covenant made by Tenant on
                      behalf of itself or an Affiliate in this Lease or in any
                      certificate, demand or request made pursuant hereto proves
                      to be incorrect, in any material respect, as of the date
                      of issuance or making thereof;

                 (g)  Conviction of Tenant or an Affiliate of a crime or offense
                      constituting a felony in the jurisdiction in which
                      committed or under federal law which conviction results in
                      the termination of the franchise or the license pursuant
                      to which Tenant or an Affiliate of Tenant conducts
                      business on or from the Leased Property.

                 (h)  Termination or relinquishment of the franchise or license
                      pursuant to which Tenant or an Affiliate conducts business
                      on or from any Leased Property, provided that such event
                      shall not constitute an Event of Default if (i) no other
                      Event of Default enumerated in this Section 9.01 shall
                      occur and be continuing, and (ii) at a date no later than
                      twenty-four (24) months following such date of termination
                      or relinquishment, Tenant or an Affiliate has entered into
                      written new or

                                     -28-
<PAGE>
 
                      amended franchises or licenses for operation of motor
                      vehicle retail or motor vehicle related businesses at such
                      Leased Property satisfactory to Landlord in its discretion
                      applying commercially reasonable standards;

                 (i)  Default under any franchise or license pursuant to which
                      Tenant or an Affiliate conducts business at a Leased
                      Property, if in the Landlord's judgment such default in
                      light of commercially reasonable standards and industry
                      practice would have a material adverse effect on the
                      Leased Property;

                 (j)  A final, non-appealable judgment or judgments for the
                      payment of money not fully covered (excluding deductibles)
                      by insurance is rendered against Tenant and the same
                      remains undischarged, unvacated, unbonded, unappealed or
                      unstayed for a period of thirty (30) consecutive days;
                      except for de minimus judgments of not greater than $2,000
                      dollars per judgment or $15,000 in the aggregate, which
                      shall not constitute an Event of Default unless the same
                      remain undischarged, unvacated, unbonded, unappealed or
                      unstayed for a period of thirty (30) consecutive days and
                      thereafter are not cured by Tenant within three (3)
                      business days notice from Landlord;

                 (k)  Tenant shall fail to observe the covenant in respect to
                      insurance under Article IV provided Landlord shall have
                      provided notice of such failure to Tenant and Tenant shall
                      have failed to cure such failure within three (3) business
                      days of such notice; or

                 (l)  Except after the effective date of a permitted assignment
                      meeting the requirements of Article XIII, if Tenant is
                      liquidated or dissolved, or begins proceedings toward
                      liquidation or dissolution, or in any manner permits the
                      sale or divestiture of substantially all of its assets.

          9.02   Remedies.  To the extent an Event of Default is applicable only
                 --------                                                       
to a specific Leased Property or specific Leased Properties (in accordance with
Section 9.01 above), the remedies set forth herein shall be exercisable solely
with respect to such Leased Property or Leased Properties, and shall not be
exercisable with respect to any other Leased Property.  To the extent an Event
of Default constitutes an Event of Default as to all of the Leased Properties
(in accordance with Section 9.01 above), the remedies set forth herein shall be
exercisable with respect to all of the Leased Properties.  Subject to the
foregoing provisions, Landlord may exercise any one or more of the following
remedies upon the occurrence of an Event of Default:

                 (a)  Landlord may terminate this Lease, exclude Tenant from
                      possession of the subject Leased Property and use
                      reasonable efforts to lease the

                                     -29-
<PAGE>
 
                      subject Leased Property to others. If this Lease is
                      terminated pursuant to the provisions of this subparagraph
                      (a) with respect to one or more, but less than all, of the
                      Leased Properties identified on Schedule A hereto, Tenant
                                                      ---------- 
                      will remain liable to Landlord for the Rent for all of the
                      Leased Properties identified on Schedule A and other sums
                                                      ----------
                      then due and for the balance of the Term as if the Lease
                      had not been terminated with respect to the subject Leased
                      Property, less the net proceeds, if any, of any re-letting
                      of the subject Leased Property by Landlord subsequent to
                      such termination, after deducting all Landlord's expenses
                      in connection with such re-letting, including without
                      limitation, the expenses set forth in Section 9.02(b)(ii)
                      below. Notwithstanding the termination of this Lease with
                      respect to a subject Leased Property, Tenant shall pay to
                      Landlord all amounts due as Rent, and such other amounts
                      then due, under this Lease on the days that such Rent and
                      such other amounts become due and payable as required by
                      this Lease.

                 (b)  Without demand or notice, Landlord may re-enter and take
                      possession of the subject Leased Property or any part
                      thereof; and repossess such Leased Property as of
                      Landlord's former estate; and expel Tenant and those
                      claiming through or under Tenant from such Leased
                      Property; and, remove the effects of both or either,
                      without being deemed guilty of any manner of trespass and
                      without prejudice to any remedies for arrears of Rent or
                      preceding breach of covenants or conditions. If Landlord
                      elects to re-enter, as provided in this paragraph (b) or
                      if Landlord takes possession of such Leased Property
                      pursuant to legal proceedings or pursuant to any notice
                      provided by law, Landlord may, from time to time, without
                      terminating any portion of this Lease, re-let such Leased
                      Property or any part of such Leased Property, either alone
                      or in conjunction with other portions of the Improvements
                      of which such Leased Property are a part, in Landlord's
                      name but for the account of Tenant, for such term or terms
                      (which may be greater or less than the period which would
                      otherwise have constituted the balance of the Term of this
                      Lease) and on such terms and conditions (which may include
                      concessions of free rent, and the alteration and repair of
                      such Leased Property) as Landlord, in its uncontrolled
                      discretion, may determine. Landlord may collect and
                      receive the Rents for such Leased Property. Landlord will
                      not be responsible or liable for any failure to re-let
                      such Leased Property, or any part of such Leased Property,
                      or for any failure to collect any Rent due upon such re-
                      letting. No such re-entry or taking possession of such
                      Leased Property by Landlord will be construed as an
                      election on Landlord's part to terminate this Lease unless
                      a written notice of

                                     -30-
<PAGE>
 
                      such intention is given to Tenant. No notice from Landlord
                      under this Lease or under a forcible entry and detainer
                      statute or similar law will constitute an election by
                      Landlord to terminate this Lease unless such notice
                      specifically says so. Landlord reserves the right
                      following any such re-entry or re-letting, or both, to
                      exercise its right to terminate this Lease by giving
                      Tenant such written notice, and, in that event such Lease
                      will terminate as specified in such notice.

                 (c)  If Landlord elects to take possession of a Leased Property
                      according to subparagraph (b) of this Section 9.02 without
                      terminating this Lease, Tenant will pay Landlord (A) the
                      Rent and other sums which would be payable under this
                      Lease with respect to such Leased Property if such
                      repossession had not occurred, less (B) the net proceeds,
                      if any, of any re-letting of such Leased Property after
                      deducting all of Landlord's expenses incurred in
                      connection with such re-letting, including without
                      limitation, all repossession costs, brokerage commissions,
                      legal expense, attorneys' fees, expense of employees,
                      alteration, remodeling, repair costs, and expense of
                      preparation for such re-letting. If, in connection with
                      any re-letting, any resulting lease term for the subject
                      Leased Property extends beyond the existing Term or
                      Extension Term, as the case may be, or such Leased
                      Property covered by such re-letting includes areas which
                      are not part of such Leased Property, a fair apportionment
                      of the Rent received from such re-letting and the expenses
                      incurred in connection with such re-letting will be made
                      in determining the net proceeds received from such re-
                      letting. In addition, in determining the net proceeds from
                      such re-letting, any rent concessions will be apportioned
                      over the term of the new lease. Tenant will pay such
                      amounts to Landlord monthly on the days on which the Rent
                      and all other amounts owing under this Lease would have
                      been payable if possession had not been retaken, and
                      Landlord will be entitled to receive the rent and other
                      amounts from Tenant on each such day. Notwithstanding
                      anything herein to the contrary, Landlord, at its option,
                      may collect and apply any Rent received from such re-
                      letting in accordance herewith and in such case shall
                      remit any balance thereof to Tenant. Landlord shall incur
                      no liability or obligation to Tenant arising out of the
                      collection or application of Rent by Landlord hereunder.

                 (d)  Landlord may re-enter the applicable Leased Property and
                      have, repossess and enjoy such Leased Property as if this
                      Lease had not been made, and in such event, Tenant and its
                      successors and assigns

                                     -31-
<PAGE>
 
                      shall remain liable for any contingent or unliquidated
                      obligations or sums owing at the time of such
                      repossession.

                 (e)  Landlord may take whatever action at law or in equity as
                      may appear necessary or desirable to collect the Rent and
                      other amounts payable hereunder with respect to the
                      subject Leased Property then due and thereafter to become
                      due, or to enforce performance and observance of any
                      obligations, agreements or covenants of Tenant under this
                      Lease.

          9.03   Right of Set-Off.  Landlord may, and is hereby authorized by
                 ----------------
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord in respect of a Leased
Property, including all sums held in any escrow for Impositions, any
indebtedness of Landlord to Tenant, and any claims by Tenant against Landlord,
against any obligations of Tenant under this Lease in respect of such Leased
Property and against any claims by Landlord against Tenant, whether or not
Landlord has exercised any other remedies hereunder. Landlord shall set-off and
apply such sums first, to delinquent real estate taxes, unless such taxes are
being protested in good faith and no lien has attached to any Leased Property
with respect thereto, second, to currently due and owing real estate taxes, and
next, to other Tenant's obligations in the order which Landlord may determine.
The rights of Landlord under this Section are in addition to any other rights
and remedies Landlord may have against Tenant.

          9.04   Performance of Tenant's Covenants. Landlord may, without
                 --------------------------------- 
waiving or releasing any obligation of Tenant, and without waiving or releasing
any obligation or default, perform any obligation of Tenant which Tenant has
failed to perform within five (5) business days after Landlord has sent a
written notice to Tenant informing it of its specific failure (provided no such
notice shall be required if Landlord has previously notified Tenant of such
failure under the provisions of Section 9.01). In the event Landlord deems, in
its discretion, that Tenant's failure to perform such obligation has given rise
to an emergency situation, Landlord may perform such obligation without waiving
or releasing any obligation of Tenant, and without waiving or releasing any
obligation or default; provided, however, that Landlord shall notify Tenant of
such performance as soon as it is reasonably practicable to do so. Tenant shall
reimburse Landlord on demand, as Additional Rent, for any expenditures thus
incurred by Landlord and shall pay interest thereon at the New York Prime Rate.

          9.05   Late Charge.  Any payment not made by Tenant for more than five
                 -----------                                                    
(5) business days after the due date shall be subject to a late charge payable
by Tenant as Rent of four percent (4%) of the amount of such overdue payment,
except that in the case of the first late payment within any twelve month period
the Tenant shall have three (3) business days after notice to cure without
incurring a late charge.  Notwithstanding the foregoing, in the event that
Tenant's payment is not made more than five (5) business days after the due date
more than two (2) times during any twelve (12) month period, any such subsequent
overdue payments within the twelve (12) months

                                     -32-
<PAGE>
 
immediately following such second failure shall be subject to a late charge
payable by Tenant as Rent of seven percent (7%) of the amount of such overdue
payment.

          9.06   Litigation; Attorneys' Fees. Within ten (10) days after Tenant
                 ----------------------------                                   
has knowledge of any litigation or other proceeding related to or arising out of
this Agreement or the Leased Property in which claims are asserted in an amount
in excess of $50,000, that (1) may be instituted against Tenant, (2) may be
instituted against any Leased Property to secure or recover possession thereof,
or (3) may affect the title to or the interest of Landlord in any Leased
Property, Tenant shall give written notice thereof to Landlord.  In the event
that Landlord reasonably determines that Tenant has failed to give adequate
cooperation or information with respect to any such litigation, investigation,
receivership, administrative, bankruptcy, insolvency or other similar
proceeding, Landlord may, after notice to Tenant, undertake such investigation
or proceeding and Tenant shall pay all reasonable costs and expenses (the
"Costs") related thereto that are incurred by Landlord, whether or not Landlord
has received notice from Tenant of such investigation or proceeding, and whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, which Costs shall include, without limitation:  (a) the
reasonable fees, expenses, and costs of any litigation, investigation,
receivership, administrative, bankruptcy, insolvency or other similar proceding;
(b) reasonable attorney, paralegal, consulting and witness fees and
disbursements; and (c) the reasonable expenses, including, without limitation,
lodging, meals, and transportation, of Landlord and its employees, agents,
attorneys, and witnesses in investigating or preparing for litigation,
administrative, bankruptcy, insolvency or other similar proceedings and
attendance at hearings, depositions, and trials in connection therewith.  Within
ten (10) days of Landlord's presentation of an invoice of Costs incurred by
Landlord pursuant to the preceding sentence or otherwise reasonably incurred by
Landlord in enforcing or preserving Landlord's rights under this Lease, whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, Tenant shall pay all such Costs.  All such Costs as incurred
shall be deemed to be Additional Rent under this Lease.

          9.07   Remedies Cumulative.  The remedies of Landlord herein are
                 -------------------                                      
cumulative to and not in lieu of any other remedies available to Landlord at law
or in equity.  The use of, or failure to use, any one remedy shall not be taken
to exclude or waive the right to use any other remedy.

          9.08   Escrows and Application of Payments.  As security for the
                 -----------------------------------                      
performance of its obligations hereunder, Tenant hereby assigns to Landlord all
its right, title and interest in and to all monies escrowed with Landlord under
this Lease and all deposits with utility companies, taxing authorities, and
insurance companies; provided, however, that Landlord shall not exercise its
rights hereunder with respect to any Leased Property until an Event of Default
has occurred in respect of such Leased Property.  Any payments received by
Landlord under any provisions of this Lease during the existence, or continuance
of an Event of Default shall be applied to Tenant's obligations, first, to
delinquent real estate taxes, unless such taxes are being protested in good
faith and no lien has attached to any Leased Property with respect thereto,
second, to currently due and owing real estate taxes, and next, to other
Tenant's obligations in the order which Landlord may determine.

                                     -33-
<PAGE>
 
          9.09   Power of Attorney. Tenant hereby irrevocably and
                 -----------------
unconditionally appoints Landlord, or Landlord's authorized officer, agent,
employee or designee, as Tenant's true and lawful attorney-in-fact, to act,
after an Event of Default, for Tenant in Tenant's name, place, and stead, and
for Tenant's and Landlord's use and benefit, to execute, deliver and file all
applications and any and all other necessary documents or things, to effect a
transfer, reinstatement, renewal and/or extension of any and all licenses and
other governmental authorizations issued to Tenant in connection with Tenant's
operation of the Leased Properties, and to do any and all other acts incidental
to any of the foregoing. Tenant irrevocably and unconditionally grants to
Landlord as its attorney-in-fact full power and authority to do and perform,
after an Event of Default, every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of Tenant's obligations hereunder.


                                   ARTICLE X
                            DAMAGE AND DESTRUCTION

          10.01  General. Tenant shall notify Landlord if any Leased Property is
                 -------   
damaged or destroyed by reason of fire or any other cause. Tenant shall promptly
repair, rebuild, or restore such Leased Property, at Tenant's expense, so as to
make such Leased Property at least equal in value to such Leased Property
existing immediately prior to such occurrence and as nearly similar to it in
character as is practicable and reasonable. Before beginning such repairs or
rebuilding, or executing any contracts in connection with such repairs or
rebuilding, Tenant will submit for Landlord's approval, which approval Landlord
will not unreasonably withhold or delay, complete and detailed plans and
specifications for such repairs or rebuilding. Promptly after receiving
Landlord's approval of the plans and specifications, Tenant will begin such
repairs or rebuilding and will oversee the repairs and rebuilding to completion
with diligence, subject, however, to strikes, lockouts, acts of God, embargoes,
governmental restrictions, and other causes beyond Tenant's reasonable control.
Landlord will make available to Tenant the net proceeds of any fire or other
casualty insurance paid to Landlord for such repair or rebuilding as the same
progresses, after deduction of any costs of collection, including attorneys'
fees. Payment will be made against properly certified vouchers of a competent
architect in charge of the work and approved by Landlord. Prior to commencing
the repairing or rebuilding, Tenant shall deliver to Landlord for Landlord's
approval a schedule setting forth the estimated monthly draws for such work.
Landlord will contribute to such payments out of the insurance proceeds an
amount equal to the proportion that the total net amount received by Landlord
from insurers bears to the total estimated cost of the rebuilding or repairing,
multiplied by the payment by Tenant on account of such work. Landlord may,
however, withhold ten percent (10%) from each such payment and shall disburse
such amount after: (a) the work of repairing or rebuilding is completed and
proof has been furnished to Landlord that no lien or liability has attached or
will attach to such Leased Property or to Landlord in connection with such
repairing or rebuilding and (b) Tenant has obtained a certificate of use and
occupancy (or its functional

                                     -34-
<PAGE>
 
equivalent) for the portion of such Leased Property being repaired or rebuilt.
Upon the completion of rebuilding or repairing and the furnishing of such proof,
the balance of the net proceeds of such insurance payable to Tenant on account
of such repairs or rebuilding will be paid to Tenant.  Tenant will obtain and
deliver to Landlord a temporary or final certificate of occupancy before such
Leased Property is reoccupied for any purpose.  Tenant shall complete such
repairs or rebuilding free and clear of mechanic's or other liens, and in
accordance with the building codes and all applicable laws, ordinances,
regulations, or orders of any state, municipal, or other public authority
affecting the repairs or rebuilding, and also in accordance with all
requirements of the insurance rating organization, or similar body.  Any
remaining proceeds of insurance after such restoration will be Tenant's
property.

          10.02  Landlord's Inspection.  During the progress of such repairs or
                 ---------------------
rebuilding, Landlord and its architects and engineers may, from time to time,
inspect the subject Leased Property and will be furnished, if required by them,
with copies of all plans, shop drawings, and specifications relating to such
repairs or rebuilding.  Tenant will keep all plans, shop drawings, and
specifications available, and Landlord and its architects and engineers may
examine them at all reasonable times. If, during such repairs or rebuilding,
Landlord and its architects and engineers determine that the repairs or
rebuilding are not being done in accordance with the approved plans and
specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such repairs or rebuilding do not accord with the approved
plans and specifications.  Upon the receipt of any such notice, Tenant will
cause corrections to be made to any deficiencies, omissions, or such other
respect.  Tenant's obligations to supply insurance, according to Article IV,
will be applicable to any repairs or rebuilding under this Section 10.02.

          10.03  Landlord's Costs.  Tenant shall, within fifteen (15) days after
                 ----------------                                               
receipt of an invoice from Landlord, pay the reasonable costs, expenses, and
fees of any architect or engineer employed by Landlord to review any plans and
specifications and to supervise and approve any construction, or for any
services rendered by such architect or engineer to Landlord as contemplated by
any of the provisions of this Lease, or for any services performed by Landlord's
attorneys in connection therewith; provided, however, that Landlord will consult
with Tenant and notify Tenant of the estimated amount of such expenses.

          10.04  Rent Abatement.  In the event that the provisions of Section
                 --------------                                              
10.01 above shall become applicable as to any Leased Property, and subject to
the last sentence of this Section 10.04, the applicable Base Annual Rent shall
be abated or reduced proportionately during any period in which, by reason of
such damage or destruction, there is substantial interference with the operation
of the Business of Tenant in such Leased Property, having regard to the extent
to which Tenant may be required to discontinue any Business on such Leased
Property, and such abatement or reduction shall continue for the period
commencing with such destruction or damage and ending with the substantial
completion by Tenant of such work or repair and/or reconstruction.  In the event
that only a portion of any Leased Property is rendered untenantable or incapable
of such use, the Base Annual Rent payable hereunder in respect thereof shall be
reduced proportionately considering the extent

                                     -35-
<PAGE>
 
to which the Tenant is unable to practicably use the Leased Property for
Business.  Tenant shall use reasonably diligent efforts to make the Leased
Property tenantable and capable of such use. Notwithstanding any other provision
hereof, such rental abatement shall be limited to the amount of any rental or
Business interruption insurance proceeds actually received by Landlord under
Article IV.

          10.05  [Intentionally Omitted]

          10.06  Damage Near End of Term.  Notwithstanding any provisions of
                 -----------------------                                    
Sections 10.01 or 10.05 to the contrary, if damage to or destruction of any
Leased Property occurs during the last twenty-four (24) months of the Term, and
if such damage or destruction renders the Leased Property Completely Destroyed
or Partially Destroyed, either party shall have the right to terminate this
Lease as to such Leased Property by giving notice to the other within ten (10)
days after the date of damage or destruction, in which event Landlord shall be
entitled to retain the insurance proceeds and Tenant shall pay to Landlord on
demand the amount of any deductible or uninsured loss arising in connection
therewith; provided, however, that any such notice given by Landlord shall be
void and of no force and effect if Tenant exercises an available option for an
Extension Term with respect to such Leased Property pursuant to provisions of
this Lease within ten (10) business days following receipt of such termination
notice.

          10.07  Risk of Loss.  Notwithstanding anything herein to the contrary,
                 ------------                                                   
during the Term or any Extension Term, as the case may be, the risk of loss of
or decrease in the enjoyment and beneficial use of the Leased Properties in
consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise is assumed by Tenant, and Landlord
shall in no event be answerable or accountable therefor except in the case of
gross negligence, willful misconduct or breach of this Lease by Landlord
resulting in such damage or destruction.  In addition, all risk of loss or
decrease in enjoyment and beneficial use in consequence of foreclosures,
attachments, levies or executions is assumed by Tenant except for foreclosure
due to Landlord's indebtedness.


                                  ARTICLE XI
                                 CONDEMNATION

          11.01  Total Taking.  If at any time during the Term or any Extension
                 ------------                                                  
Term, as the case may be, any Leased Property is totally and permanently taken
by right of eminent domain or by conveyance made in response to the threat of
the exercise of such right ("Condemnation"), this Lease shall terminate as to
such Leased Property on the Date of Taking (which shall mean the date the
condemning authority has the right to possession of the property being
condemned), and Tenant shall promptly pay all outstanding applicable Rent and
other charges through the date of termination, provided, however, this Lease
shall not so terminate if the Condemnation occurred due to the failure of Tenant
to maintain such Leased Property as required by Article VII hereof or other
applicable

                                     -36-
<PAGE>
 
provisions hereof, whether or not such failure on the part of Tenant constituted
an Event of Default hereunder at the time of the Condemnation.
 
          11.02  Partial Taking.  If a portion of a Leased Property is taken by
                 --------------                                                
Condemnation, this Lease shall remain in effect as to such Leased Property if
such Leased Property is not thereby rendered Unsuitable for the continuation of
Tenant's Business on that Leased Property (which shall mean that such Leased
Property is in such a state or condition such that in the good faith judgment of
Tenant, reasonably exercised, it cannot be used on a commercially practicable
basis in the operation of the Business), but if such Leased Property is thereby
rendered Unsuitable for the continuation of Tenant's Business on that Leased
Property, this Lease shall terminate as to such Leased Property on the Date of
Taking, provided such Condemnation was not as a result of Tenant's failure to
maintain such  Leased Property as provided for in Section 11.01.

          11.03  Restoration. If there is a partial taking of any Leased
                 -----------               
Property and this Lease remains in full force and effect pursuant to Section
11.02, Landlord shall retain the amount of any Landlord Award (as hereafter
defined) received by Landlord, Landlord shall make available such Landlord Award
to accomplish all necessary restoration to the Leased Property, and any excess
after such application shall be retained by Landlord. If there is a partial
taking of any Leased Property and this Lease remains in full force and effect
pursuant to Section 11.02, Tenant shall retain the amount of any Tenant Award
(as hereafter defined) received by Tenant, Tenant shall apply such Tenant Award
to accomplish all necessary restoration of Tenant's property, and any excess
after such application shall be retained by Tenant. Notwithstanding anything in
this Section to the contrary, in the event that there is a partial taking of any
Leased Property and this Lease remains in full force and effect pursuant to
Section 11.02, and there is a single Award with respect to such partial taking,
then the Landlord and Tenant shall use their good faith efforts to determine the
proper apportionment of such Award (as hereafter defined) to restoration of
Landlord's and Tenant's respective properties. In the event that the parties are
unable to agree on such apportionment within thirty (30) days, the parties shall
submit to arbitration of an apportionment subject to the arbitration provisions
set forth in Article XIV.

          11.04  Landlord's Inspection. During the progress of such restoration,
                 ---------------------
Landlord and its architects and engineers may, from time to time, inspect the
subject Leased Property and will be furnished, if required by them, with copies
of all plans, shop drawings, and specifications relating to such restoration.
Tenant will keep all plans, shop drawings, and specifications available, and
Landlord and its architects and engineers may examine them at all reasonable
times.  If, during such restoration, Landlord and its architects and engineers
determine that the restoration is not being done in accordance with the approved
plans and specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such restoration does not accord with the approved plans
and specifications.  Upon the receipt of any such notice, Tenant will cause
corrections to be made to any deficiencies, omissions, or such other respect.
Tenant's obligations to supply insurance, according to Article IV, will be
applicable to any restoration under this Section.

                                     -37-
<PAGE>
 
          11.05  Award Distribution. The entire compensation, sums or anything
                 ------------------
of value awarded, paid or received on a total or partial Condemnation of a
Leased Property that is awarded to Landlord shall belong to Landlord (the
"Landlord Award"). The entire compensation, sums or anything of value awarded,
paid or received on a total or partial Condemnation of a Leased Property that is
awarded to Tenant shall belong to Tenant (the "Tenant Award", collectively with
the Landlord Award, the "Awards", and each, individually, an "Award").
Notwithstanding anything in this Section to the contrary, in the event that
there is a total or partial Condemnation of a Leased Property and there is a
single Award with respect to such Condemnation, then the Landlord and Tenant
shall use their good faith efforts to determine the proper apportionment of such
Award to Landlord's and Tenant's respective properties. In the event that the
parties are unable to agree on such apportionment within thirty (30) days, the
parties shall submit to arbitration of an apportionment subject to the
arbitration provisions set forth in Article XIV.

          11.06  Temporary Taking. The taking of any Leased Property, or any
                 ----------------
part thereof, by military or other public authority shall constitute a taking by
Condemnation only when the use and occupancy by the taking authority has
continued for longer than twenty four (24) months. During any such twenty-four
(24) month period, which shall be a temporary taking, all the provisions of this
Lease shall remain in full force and effect as to such Leased Property with no
abatement of rent payable by Tenant hereunder.  In the event of any such
temporary taking, the entire amount of any such Award made for such temporary
taking allocable to the Term hereof, whether paid by way of damages, Rent or
otherwise, shall be paid to Tenant.


                                  ARTICLE XII
        ADDITIONAL REPRESENTATIONS, WARRANTIES AND FINANCIAL COVENANTS

          Tenant hereby represents, warrants and covenants to Landlord as
follows: 

          12.01  Organization and Qualification.
                 ------------------------------ 

          (a)    Tenant is a Maryland corporation duly organized, validly
                 existing and in good standing under the laws of its state of
                 incorporation or organization and the State of Maryland, with
                 all power and authority, corporate or otherwise, necessary to:
                 (i) enter into and perform this Lease and (ii) own and lease
                 its assets and properties, and conduct its Business, as it is
                 now being conducted or proposed to be conducted. Tenant is duly
                 qualified as a foreign corporation or other entity, as the case
                 may be, to conduct its Business and own and lease its assets
                 and properties, and is in good standing, in each jurisdiction
                 where the character of its assets and properties owned or held
                 under lease or the nature of its Business makes such
                 qualification necessary, and is duly qualified and licensed
                 under all laws, regulations, ordinances or orders of public or
                 governmental authorities, or otherwise to carry on its Business
                 and own or lease its assets and properties in the places and in
                 the

                                     -38-
<PAGE>
 
                 manner in which they are owned, leased or conducted or proposed
                 to be owned, leased or conducted, except where the failure to
                 be so organized, qualified and in good standing or to have such
                 authority, qualification or licensing could not result in a
                 Material Adverse Change. Complete and correct copies of
                 Tenant's Charter, as in effect on the date hereof, and Tenant's
                 by-laws, also as in effect on the date hereof, have been
                 delivered to Landlord.

          (b)    Each Affiliate that conducts operations or business on or from
                 any Leased Property, whether now or at any time in the future,
                 is duly organized, validly existing and in good standing under
                 the laws of its organization, with all power and authority,
                 corporate or otherwise, necessary to own and lease its assets
                 and properties, and conduct its business, as it is now being
                 conducted or proposed to be conducted. Each Affiliate is duly
                 qualified as a foreign corporation or other entity, as the case
                 may be, to do business and own and lease its assets and
                 properties, and is in good standing, in each jurisdiction where
                 the character of its assets and properties owned or held under
                 lease or the nature of its activities or business makes such
                 qualification necessary or advisable, and is duly qualified and
                 licensed under all laws, regulations, ordinances or orders or
                 public or governmental authorities or otherwise to carry on its
                 business and own or lease its assets and properties in the
                 places and in the manner in which they are owned, leased or is
                 conducted or proposed to be owned, leased or conducted, except
                 where the failure to be so organized, qualified and in good
                 standing or to have such authority, qualification or licensing
                 could not result in a Material Adverse Change.

          "Material Adverse Change" since a particular specified date, or a date
which may be specified from the circumstances existing immediately prior to the
happening of a specified event or occurrence, or, if no date or event is
specified, with reference to the most recent Annual Financial Statements
delivered pursuant to this Lease, means a material adverse change in the
Business, assets, properties, franchises, financial condition or income of
Tenant or the operations, business, assets, properties, franchises, financial
condition, income or prospects of any Affiliate, whether or not such event or
occurrence is an Event of Default.  Nothing that would otherwise be a breach of
any representation, warranty, covenant or obligation herein by any Affiliate
shall be a breach of this Agreement, unless such breach constitutes or causes a
material adverse effect on the Business.

          "Affiliate" means with respect to any Person, (i) any Person that
holds direct or indirect beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of voting securities or other
voting interests representing at least five percent (5%) of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least five percent (5%) of the outstanding equity securities or
interests in a Person, or (ii) any Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such Person.

                                     -39-
<PAGE>
 
          A "Person" shall mean and include natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations, whether or not legal
entities, and governments and agencies and political subdivisions thereof.

          12.02  Material Agreements.  Schedule 12.02 is a complete list of all
                 -------------------   --------------                          
agreements to which Tenant is a party that are material to the ownership and use
of the Leased Property or the operation of Tenant's Business, and Tenant will
make available to Landlord a copy of each of these agreements (including all
exhibits, schedules and amendments thereto).

          12.03  Changes in Condition.  Since the date of the latest Annual
                 ---------------------                                     
Financial Statements, no Material Adverse Change has occurred between such date
and the date hereof, and neither Tenant nor any Affiliate has entered into any
material transaction outside the ordinary course of its or their operations or
business, including the Business, except as set forth in Schedule 12.03 and the
                                                         --------------        
matters contemplated by this Lease.

          12.04  Franchises, Licenses, etc.  Tenant and its subsidiaries own, or
                 --------------------------                                     
have sufficient interests in, all franchises, trademarks, trademark rights,
trade names, trade name rights, copyrights, licenses, permits, authorizations
and other rights as are necessary for the conduct of Tenant's Business and its
subsidiaries' businesses as now conducted or proposed to be conducted by Tenant
or any Affiliate, as well as rights under any agreement under which Tenant or
its subsidiaries has access to confidential information used by Tenant or its
subsidiaries in Tenants' Business or the businesses of its subsidiaries, as the
case may be (collectively, the "Intellectual Property").  All Intellectual
Property is in full force and effect in all material respects, and Tenant and
its subsidiaries are in substantial compliance with the foregoing without any
conflict with the valid rights of others, which has resulted, or could be
reasonably likely to result in any Material Adverse Change.  Neither Tenant nor
any Affiliate has violated, or received any communication that by conducting its
Business or any Affiliate's businesses, it or any Affiliate would violate any
franchises, licenses, patents, trademarks, service marks, trade names,
copyrights, trade secrets, proprietary rights or processes of any other Person
(as hereafter defined) nor is Tenant or any Affiliate aware of any such
violations.  No event has occurred which permits, or after notice or lapse of
time or both would permit, the revocation or termination of any such license,
franchise or other right or affect the rights of Tenant or any Affiliate so as
to result in or reasonably be likely to result in any Material Adverse Change.
There is no litigation or other proceeding or dispute or, to the knowledge of
Tenant or any Affiliate, threat thereof with respect to the validity or, where
applicable, the extension or renewal, of any of the foregoing which has
resulted, or could result, in any Material Adverse Change.

          12.05  Litigation.  No litigation, at law or in equity, or any
                 -----------                                            
proceeding before any court, board or other governmental or administrative
agency or any arbitrator or other forum of alternative dispute resolution is
pending or, to the knowledge of Tenant or any Affiliate, threatened which
involves any risk of any final judgment, order or liability which, after giving
effect to any applicable insurance, has resulted, or could result, in any
Material Adverse Change or which seeks to enjoin the execution and consummation
of this Lease and the performance of Tenant's obligations

                                     -40-
<PAGE>
 
hereunder.  No judgment, decree or order of any court, board or other
governmental or administrative agency or any arbitrator has been issued against
or binds Tenant or any Affiliate, which has resulted, or could result, in any
Material Adverse Change.

          12.06  Authorization and Enforceability. Tenant has taken all
                 ---------------------------------
corporate or other action required to execute, deliver and perform this Lease.
This Lease constitutes the legal, valid and binding obligation of Tenant and is
enforceable against Tenant in accordance with its terms.

          12.07  No Legal Obstacle to Lease. Neither the execution and delivery
                 ---------------------------
of this Lease nor the performance of any obligation hereunder has constituted or
resulted in or will constitute or result in:

                 (a)  any breach, violation of, conflict with, default under or
                      termination of any agreement, contract, mortgage,
                      instrument, deed or lease to which Tenant or any Affiliate
                      is a party or by which it or they are bound;

                 (b)  the violation of or conflict with any law, statute,
                      ordinance, judgment, decree, order, rule or regulation
                      applicable to Tenant, any Affiliate, any Improvements or
                      any Leased Property; or

                 (c)  any violation of or conflict with Tenant's or any
                      Affiliate's Charter or By-Laws or other organizational
                      documents, as the case may be.

          No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other Person is
required to be obtained or made by Tenant in connection with the execution,
delivery and performance of this Lease.

          12.08  Certain Business Representations:
                 -------------------------------- 

                 (a)  Labor Relations. No dispute or controversy between Tenant
                      ---------------                   
                      or any Affiliate and its or their employees has resulted
                      in, or is reasonably likely to result in, any Material
                      Adverse Change, and neither Tenant nor any Affiliate
                      anticipates that its relationships with its unions or
                      employees will result, or are reasonably likely to result,
                      in any Material Adverse Change. Tenant and each Affiliate
                      is in compliance in all material respects with all federal
                      and state laws relating to employees and labor relations,
                      including, but not limited to, laws relating to health and
                      safety in the workplace, non-discrimination in employment
                      and the payment of wages.

                 (b)  Antitrust. Tenant and each Affiliate is in compliance in
                      ----------                                           
                      all material respects with all federal and state antitrust
                      laws relating to Tenant's

                                     -41-
<PAGE>
 
                      Business and the subsidiaries' businesses and the
                      geographic concentration thereof.

                 (c)  Consumer Protection. Neither Tenant nor any Affiliate is
                      -------------------
                      in violation of any rule, regulation, order, or
                      interpretation of any rule, regulation or order of the
                      Federal Trade Commission (including truth-in-lending) or
                      other federal, state or local public or governmental
                      authority or agency, with which the failure to comply, in
                      the aggregate, has resulted in, could result in, a
                      Material Adverse Change.

                 (d)  Future Expenditures.  Neither Tenant nor any Affiliate,
                      -------------------                                     
                      anticipates that further expenditures, if any, by Tenant
                      or any Affiliate needed to meet the provisions of any
                      federal, state or foreign governmental statutes, orders,
                      rules or regulation could result in any Material Adverse
                      Change.

                 (e)  Benefit Liabilities. Neither Tenant nor any ERISA

                      Affiliate maintains, contributes to, or is obligated to
                      contribute to, nor has Tenant or any ERISA Affiliate
                      maintained, contributed to, been obligated to contribute
                      to, or had any direct, indirect, or contingent liability
                      with respect to, any Title IV Plan (as hereafter defined).
                      Each Tenant Benefit Plan has been maintained in compliance
                      with its terms and with applicable laws (including
                      specifically the Code and the Employee Retirement Income
                      Security Act of 1974 ("ERISA"). "Tenant Benefit Plan"
                      means any plan, fund, or other similar program described
                      in Section 3(2) of ERISA and established or maintained or
                      with respect to which Tenant and/or any ERISA Affiliate
                      has an obligation to contribute for the benefit of its
                      employees (or for which Tenant could be directly or
                      contingently liable). "Title IV Plan" means an "employee
                      benefit plan" (as defined in Section 3(3) of ERISA) that
                      is subject to Title IV of ERISA and is or has been
                      established or maintained, by Tenant or any ERISA
                      Affiliate, or to which contributions are, have been, or
                      should have been made. "ERISA Affiliate" means any trade
                      or business, whether or not incorporated, that, together
                      with Tenant, is or has been under common control, within
                      the meaning of Section 414(b), (c), (m), or (o) of the
                      Code or Section 4001 of ERISA.

          12.09  Certain Financial Covenants.  Tenant or an Affiliate, as
                 ----------------------------                         
applicable, is in compliance in all material respects with all financial
covenants required to be maintained pursuant to any franchise or other agreement
pursuant to which Tenant or such Affiliate operates its business, except in such
respects as shall not result in any franchisor under any franchise or operating

                                     -42-
<PAGE>
 
agreement to which Tenant is a party taking any action that could result in a
Material Adverse Change.

          12.10  Cash Flow Coverage Ratio Covenant.  On the date of this Lease
                 ---------------------------------                      
and measured at a date that is twenty-four (24) months following such date (each
a "Cash Flow Measurement Date"), and on each anniversary date that is twenty-
four (24) months following a prior Cash Flow Measurement Date, Tenant shall have
maintained a Cash Flow Coverage Ratio of not less than 1.5 to 1.0 based on the
Annual Financial Statements to be delivered to Landlord in accordance with
Section 6.04 hereof. "Cash Flow Coverage Ratio" means the aggregate of net
income before taxes plus mortgage interest, rent expense, depreciation,
compensation of principals of the Business, management fees plus the annual LIFO
adjustment and other non-cash expenses, less recurring capital expenditures and
gain (loss) on sale of real estate, dividends and/or profits taken out of Tenant
divided by the aggregate of the Tenant's obligations under this Lease.
Notwithstanding anything herein to the contrary, in the event that Tenant shall
not be in compliance with this covenant at a Cash Flow Measurement Date or
Tenant shall have knowledge of such non-compliance prior to any Cash Flow
Measurement Date, the Tenant shall have the right to cure such breach through
any reasonable commercial means, including, but not limited to, providing
guarantees acceptable to Landlord, increasing capital, or cross collateralizing
with any other property of Tenant or an Affiliate, provided that such breach is
cured within one hundred and eighty (180) days after Notice by Landlord to
Tenant of the existence of such breach.

          12.11  Disclosure.  This Lease does not contain any untrue statement
                 ----------                                         
of a material fact or omit to state a material fact necessary in order to make
any statement contained herein not misleading in light of the circumstances
under which it was made. To Tenant's knowledge, there is no event, fact or
occurrence that has resulted, or in the future (so far as Tenant can reasonably
foresee) could result, in any Material Adverse Change, except to the extent that
present or future general and sector-specific economic conditions may result in
a Material Adverse Change.

          12.12  Covenant Not to Acquire.  Tenant covenants and agrees that
                 -----------------------                              
during the Term and any Extension Term, as the case may be, Tenant and its
controlling shareholders or its or their Affiliates will not acquire, directly
or indirectly, more that 9.90% of the outstanding common shares of beneficial
interest of Capital Automotive REIT. Tenant covenants and agrees that it will
divest itself of such shares of Capital Automotive REIT as may be necessary to
satisfy the limitations of this Section 12.12.

                                     -43-
<PAGE>
 
                                 ARTICLE XIII
                     ASSIGNMENT AND SUBLETTING; ATTORNMENT

          13.01  Prohibition Against Subletting and Assignment.  Subject
                 ---------------------------------------------          
to Section 13.03, Tenant shall not, without the prior written consent of
Landlord, or upon compliance with any conditions established by Landlord, in its
reasonable discretion, assign, mortgage, pledge, hypothecate, encumber or
otherwise transfer (except to an Affiliate) this Lease or any interest herein,
or all or any part of any Leased Property, or suffer or permit this Lease or the
leasehold estate created hereby or any other rights arising hereunder to be
assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole
or in part, whether voluntarily, involuntarily or by operation of law.  For
purposes of this Section 13.01, an assignment of this Lease shall be deemed to
include any Change of Control of Tenant, as if such Change of Control were an
assignment of the Lease. In the event that (i) Landlord shall withhold any
consent to any assignment or transfer of this Lease or any interest herein, and
(ii) such assignee or transferee is approved by the relevant manufacturer for
continuation as a franchisee, there shall be a presumption that such assignment
or transfer was reasonable and Landlord shall have the burden of rebutting such
presumption and of proving that such consent was in fact reasonably withheld (or
that such conditions were reasonable).

          13.02  Changes of Control.  A Change of Control requiring the
                 ------------------                                    
consent of Landlord shall mean:

                 (a)  the issuance and/or sale by Tenant or the sale by any
                      shareholder or equity holder of Tenant of a Controlling
                      (which shall mean, as applied to any Person, the
                      possession, directly or indirectly, of the power to direct
                      or cause the direction of the management and policies of
                      such Person, whether through the ownership of voting
                      securities, by contract or otherwise) interest in Tenant
                      to a Person other than an Affiliate of Tenant, other than
                      in either case a distribution to the public pursuant to an
                      effective registration statement under the Securities Act
                      of 1933, as amended (a "Registered Offering");

                 (b)  the sale, conveyance or other transfer of all or
                      substantially all of the assets of Tenant (whether by
                      operation of law or otherwise) provided, however, that no
                      Change of Control shall be deemed to have occurred in the
                      event of the transfer of assets as a result of the death
                      of a person involved in the Business, so long as the
                      transferee is approved by the manufacturer for the
                      continuation of the Business; or

                 (c)  any transaction pursuant to which Tenant is merged with or
                      consolidated into another entity (other than an entity
                      owned and Controlled by an Affiliate), and Tenant is not
                      the surviving entity.

                                     -44-
<PAGE>
 
          13.03  Operating/Service Agreements.
                 -----------------------------

                 (a)  Permitted Agreements. Tenant shall, without Landlord's
                      --------------------
                      prior approval, be permitted to enter into such
                      operating/service agreements for portions of each Leased
                      Property to various licensees in connection with Tenant's
                      Business as are customarily associated with or incidental
                      to the operation of such Leased Property, which agreements
                      may be in the nature of a sublease agreement.

                 (b)  Terms of Agreements.  Each operating/service agreement
                      -------------------                                   
                      concerning a Leased Property shall be subject and
                      subordinate to the provisions hereof. No agreement made as
                      permitted by Section 13.03(a) shall affect or reduce any
                      of the obligations of Tenant hereunder, and all such
                      obligations shall continue in full force and effect as if
                      no agreement had been made. No agreement shall impose any
                      additional obligations on Landlord hereunder.

                 (c)  Copies. Tenant shall, within ten (10) days after the
                      -------
                      execution and delivery of any operating/service agreement
                      permitted by Section 13.03(a), deliver a duplicate
                      original thereof to Landlord.

                 (d)  Assignment of Rights in Agreements.  As security for
                      ----------------------------------                  
                      performance of its obligations hereunder, Tenant hereby
                      grants, conveys and assigns to Landlord all right, title
                      and interest of Tenant in and to all operating/service
                      agreements now in existence or hereinafter entered into
                      for each Leased Property, and all extensions,
                      modifications and renewals thereof and all rents, issues
                      and profits therefrom, to the extent the same are
                      assignable by Tenant. Landlord hereby grants to Tenant a
                      license to collect and enjoy all rents and other sums of
                      money payable under any such agreement; provided, however,
                      that Landlord shall have the absolute right at any time
                      after the occurrence and continuance of an Event of
                      Default upon notice to Tenant and any vendors or licensees
                      to revoke said license and to collect such rents and sums
                      of money and to retain the same. Tenant shall not (i)
                      after the occurrence and continuance of an Event of
                      Default, consent to, cause, or allow, any material
                      modification or alteration of any of the terms, conditions
                      or covenants of any of the agreements or the termination
                      thereof, without the prior written approval of Landlord
                      nor (ii) accept any rents (other than customary security
                      deposits) more than thirty (30) days in advance of the
                      accrual thereof nor permit anything to be done, the doing
                      of which, nor omit or refrain from doing anything, the
                      omission of which, will or could be a breach of or default
                      in the terms of any of the agreements.

                                     -45-
<PAGE>
 
                 (e)  Licenses, Etc.  For purposes of Section 13.03, the
                      -------------                                     
                      operating/service agreements shall mean any licenses,
                      concession arrangements, or other arrangements relating to
                      the possession or use of all or any part of any Leased
                      Property.

          13.04  Assignment.  If Landlord shall withhold its consent to any
                 ----------                                            
assignment or if Landlord shall have established conditions to approval of any
assignment but such conditions shall not have been complied with, to the
reasonable satisfaction of Landlord, such assignment shall not in any way impair
the continuing primary liability of Tenant hereunder. No consent to any
assignment in a particular instance shall be deemed to be a general waiver of
the prohibition set forth in Article XIII. Any assignment shall be solely of
Tenant's entire interest in this Lease with respect to the subject Leased
Property or Leased Properties. Any assignment or other transfer of all or any
portion of Tenant's interest in this Lease in contravention of Article XIII
hereof shall be voidable at Landlord's option.

          13.05  REIT Limitations.
                 ---------------- 

                 (a)  Anything contained herein to the contrary notwithstanding,
                      Tenant shall not: (a) sublet or assign a Leased Property
                      or this Lease on any basis such that the rental or other
                      amounts to be paid by the sublessee or assignee thereunder
                      would be based, in whole or in part, on the income or
                      profits derived by the business activities of the
                      sublessee or assignee; (b) sublet or assign a Leased
                      Property or this Lease to any Person that, under Section
                      856(d)(2)(B) of the Internal Revenue Code of 1986, as
                      amended (the "Code"), Landlord or its general partner
                      owns, directly or indirectly (by applying constructive
                      ownership rules set forth in Section 856(d) (5) of the
                      Code, a ten percent (10%) or greater interest; or (c)
                      sublet or assign a Leased Property or this Lease in any
                      other manner or otherwise derive any income which could
                      cause any portion of the amounts received by Landlord
                      pursuant hereto or any sublease to fail to qualify as
                      "rents from real property" within the meaning of Section
                      856(d) of the Code, or which could cause any other income
                      received by Landlord to fail to qualify as income
                      described in Section 856(c) (2) of the Code. The
                      requirements of this Section 13.05 shall likewise apply to
                      any further subleasing by any subtenant.

                 (b)  Tenant acknowledges that Capital Automotive REIT, a
                      Maryland real estate investment trust and the general
                      partner of Landlord (the "Company"), intends to elect to
                      be taxed as a real estate investment trust (a "REIT")
                      under the Code. Tenant shall not do anything which would
                      adversely affect the Company's status as a REIT. Tenant
                      hereby agrees to modifications of this Lease which do not
                      materially

                                     -46-
<PAGE>
 
                      adversely affect Tenant's rights and liabilities if such
                      modifications are required to retain or clarify the
                      Company's status as a REIT.

          13.06  Attornment.  Tenant shall insert in each sublease permitted
                 ----------                                       
under Section 13.03(a) provisions to the effect that: (a) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and to
the rights of Landlord hereunder; (b) in the event this Lease shall terminate
before the expiration of such sublease, the sublessee thereunder will, at
Landlords' option, attorn to Landlord and waive any right the sublessee may have
to terminate the sublease or to surrender possession thereunder, as a result of
the termination hereof; and (c) in the event the sublessee receives a written
notice from Landlord or Landlord's assignees, if any, stating that Tenant is in
default under this Lease, the sublessee shall thereafter be obligated to pay all
rentals accruing under said sublease directly to the party giving such notice,
or as such party may direct. All rentals received from the sublessee by Landlord
or Landlord's assignees in respect of a Leased Property, if any, as the case may
be, shall be credited against the amounts owing by Tenant hereunder with respect
to such Leased Property.

          13.07  Severance and Spin-Off.  During the Term or any Extension Term
                 ----------------------                         
of this Lease and provided that there is no existing Event of Default and there
exists no condition which, with the passage of time, could become an Event of
Default, Tenant shall have the right (the "Spin-Off Right"), with the consent of
Landlord (which consent shall not be unreasonably withheld), to sever and spin-
off from this Lease (which shall mean that Tenant shall no longer have any
obligation under this Lease with respect to the Spin-Off Property) one or more
of the Leased Properties (each a "Spin-Off Property") to a new tenant ("New
Tenant") upon the following conditions: (a) Tenant shall assign the automobile
franchise being conducted on the Spin-Off Property to the New Tenant and shall
obtain all necessary approvals from third parties to accomplish such assignment;
(b) Tenant shall include in the agreement by which the assignment of the
automobile franchise is to be accomplished the requirement that the New Tenant
shall take the assignment subject to this Lease (c) the New Tenant shall agree
to be bound by the terms and conditions of this Lease (and assume all of the
obligations hereof) and shall execute a counterpart to this Lease in all
respects identical to this Lease that applies to the Spin-Off Property; and (d)
if Tenant desires to exercise the Spin-Off Right with respect to less than all
parcels of a Leased Property, then such spin-off shall be subject to compliance
with the requirements of Section 13.08.

          13.08  Assignment of Non-Subdivided Parcels.  If the Leased Property
                 ------------------------------------                
is not a separate subdivided lot, Landlord may condition its approval of an
assignment upon Tenant showing that there are appropriate provisions (such as a
condominium regime, subdivision, and/or reciprocal easements, lender and/or
franchisor consents if necessary, and separate tax lots) which allow the Leased
Property to be separately owned and operated without interference from or
dependence upon, another person as to items such as access, real estate taxes,
or utilities.

                                     -47-
<PAGE>
 
                                  ARTICLE XIV
                                  ARBITRATION

          14.01  Controversies.  Except with respect to the payment of Rent
                 -------------                                             
hereunder, which shall be subject to the provisions of Section 9.02, in the
event a controversy arises between the parties as to any of the requirements of
this Lease or the performance hereunder, which the parties are unable to
resolve, the parties agree to waive the remedy of litigation (except for
extraordinary relief in an emergency situation) and agree that such controversy
or controversies shall be determined by arbitration as hereafter provided in
this Article.

          14.02  Appointment of Arbitrators.  The party or parties requesting
                 --------------------------                                  
arbitration shall serve upon the other a demand therefor, in writing, specifying
in detail the controversy and matter(s) to be submitted to arbitration before
the American Arbitration Association.  The selection of arbitrators shall be
conducted pursuant to the rules for resolution of commercial disputes
promulgated by the American Arbitration Association.  The party or parties
giving notice shall request a listing of available arbitrators from the American
Arbitration Association, and each party shall respond in the selection process
within fifteen (15) days after each receipt of such listings until a panel of
three (3) arbitrators has been designated.  If either party fails to respond
within fifteen (15) days, it is agreed that the American Arbitration Association
may make such selections as are necessary to complete the panel of three (3)
arbitrators.

          14.03  Arbitration Procedure.  Within five (5) business days after the
                 ---------------------                                          
selection of the arbitration panel, the arbitrators shall give written notice to
each party as to the time and the place of each meeting, which shall be held in
Washington, D.C., at which the parties may appear and be heard, which shall be
no later than fifteen (15) days after certification of the arbitration panel.
The parties specifically waive discovery, and further waive the applicability of
rules of evidence or rules of procedure in the proceedings. The applicable rules
shall be those in effect at the time for the resolution of commercial disputes
promulgated by the American Arbitration Association. Notwithstanding the
foregoing, the substantive law governing the arbitration shall be the laws of
the State of Delaware (without application of choice of law provisions).  The
arbitrators shall take such testimony and make such examination and
investigations as the arbitrators reasonably deem necessary.  The decision of
the arbitrators shall be in writing signed by a majority of the panel which
decision shall be final and binding upon the parties to the controversy.
Provided, however, in rendering their decisions and making awards, the
arbitrators shall not add to, subtract from or otherwise modify the provisions
of this Lease.

          14.04  Expenses.  The expenses of the arbitration shall be assessed by
                 --------                                                       
the arbitrators and specified in the written decision.  In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally between
Landlord and Tenant.  Each party in interest shall be responsible for and pay
the fees, costs and expenses of its own counsel, unless the arbitration award
provides for an assessment of reasonable attorneys' fees and costs.

                                     -48-
<PAGE>
 
          14.05  Enforcement of the Arbitration Award.  There shall be no appeal
                 ------------------------------------                           
from the decision of the arbitrators, and upon the rendering of an award, any
party thereto may file the arbitrators' decision in the United States District
Court for the Eastern District of Virginia for enforcement as provided by
applicable law.


                                  ARTICLE XV
                        QUIET ENJOYMENT, SUBORDINATION,
                       ATTORNMENT, ESTOPPEL CERTIFICATES

          15.01  Quiet Enjoyment.  So long as Tenant performs all of its
                 ---------------                                        
obligations under this Lease, Tenant's possession of the Leased Properties will
not be disturbed by or through Landlord.

          15.02  Landlord Mortgages; Subordination.  Subject to Section 15.03,
                 ---------------------------------                            
without the consent of Tenant, Landlord may, from time to time, directly or
indirectly, create or otherwise cause to exist any liens, encumbrances, security
interests or title retention agreements on any  Leased Property, or any portion
thereof or any interest therein, whether to secure any borrowing or other means
of financing or refinancing.  Tenant shall execute, acknowledge and deliver to
Landlord, at any time and from time to time upon demand by Landlord or any
mortgagee or any holder of any mortgage or other instrument described in this
Section, without cost to Landlord, a Subordination and Non-Disturbance Agreement
in the form attached hereto as Exhibit 15.02, which provides that (i) Tenant's
                               -------------                                  
rights hereunder are subordinate to any ground lease or underlying lease, first
mortgage, first deed of trust, or other first lien against any Leased Property,
together with any renewal, consolidation, extension, modification, or
replacement thereof, which now or at any subsequent time affects any Leased
Property or any interest of Landlord in any Leased Property, except to the
extent that any such instrument expressly provides that this Lease is superior;
and (ii) in the event such party succeeds to Landlord's interest under the Lease
and provided that no Event of Default by Tenant exists, such party will not
disturb Tenant's possession, use or occupancy of the subject Leased Property.
If Tenant fails or refuses to execute, acknowledge, and deliver such
Subordination and Non-Disclosure Agreement within ten (10) business days after
written demand, then Landlord shall send to Tenant a second written demand.  If
Tenant fails or refuses to execute, acknowledge and deliver such Subordination
and Non-Disclosure Agreement within ten (10) days after such second written
demand, then Landlord or such successor in interest may execute, acknowledge and
deliver such Subordination and Non-Disclosure Agreement on behalf of Tenant as
Tenant's attorney-in-fact.  Tenant hereby constitutes and irrevocably appoints
Landlord, its successors and assigns, as Tenant's attorney-in-fact to execute,
acknowledge, and deliver on behalf of Tenant the Subordination and Non-
Disclosure Agreement.  This power of attorney is coupled with an interest and is
irrevocable.

          15.03  Attornment.  If any holder of any mortgage, indenture, deed of
                 ----------                                                    
trust, or other similar instrument described in Section 15.02 succeeds to
Landlord's interest in any Leased Property, Tenant will pay to such holder all
Rent subsequently payable hereunder as to such Leased Property. Tenant shall,
upon request of anyone succeeding to the interest of Landlord, automatically
become
                                     -49-
<PAGE>
 
the tenant of, and attorn to, such successor in interest without changing this
Lease.  The successor in interest will not be bound by:  (a) any payment of Rent
for more than one (1) month in advance; (b) any amendment or modification hereof
made without its written consent; (c) any claim against Landlord arising prior
to the date on which the successor succeeded to Landlord's interest; or (d) any
claim or offset of Rent against Landlord.

          15.04  Estoppel Certificates.  At the request of Landlord or any
                 ---------------------                                    
mortgagee or purchaser of a Leased Property, Tenant shall execute, acknowledge,
and deliver an estoppel certificate, in recordable form, in favor of Landlord or
any mortgagee or purchaser of any Leased Property certifying the following as to
such Leased Property:  (a) that this Lease is unmodified and in full force and
effect, or if there have been modifications that the same is in full force and
effect as modified and stating the modifications; (b) the date to which Rent and
other charges have been paid; (c) that neither Tenant nor Landlord is in default
nor is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default, if that be the case, or specifying any existing
default; (d) that Tenant has accepted and occupies such Leased Property; (e)
that Tenant has no defenses, set-offs, deductions, credits, or counterclaims
against Landlord, if that be the case, or specifying such that exist; (f) that
Landlord has no outstanding construction or repair obligations; and (g) such
other information as may reasonably be requested by Landlord or any mortgagee or
purchaser.  Any purchaser or mortgagee may rely on this estoppel certificate.
If Tenant fails to deliver the estoppel certificates to Landlord within ten (10)
business days after the request of Landlord, then Landlord shall request such
delivery a second time.  If Tenant fails to deliver the estoppel certificates to
Landlord within ten (10) days after such second request by Landlord, then Tenant
shall be deemed to have certified that: (a) this Lease is in full force and
effect and has not been modified, or that this Lease has been modified as set
forth in the certificate delivered to Tenant; (b) Tenant has not prepaid any
Rent or other charges except for the current month; (c) Tenant has accepted and
occupies such Leased Property; (d) neither Tenant nor Landlord is in default nor
is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default; (e) Landlord has no outstanding construction or
repair obligation; and (f) Tenant has no defenses, set-offs, deductions,
credits, or counterclaims against Landlord.  Tenant hereby irrevocably appoints
Landlord as Tenant's attorney-in-fact to execute, acknowledge and deliver on
Tenant's behalf any estoppel certificate which Tenant does not object to within
twenty (20) days after Landlord sends the certificate to Tenant.  This power of
attorney is coupled with an interest and is irrevocable.

          15.05  Waiver of Landlord's Lien.  Landlord agrees to and does hereby
                 -------------------------                                     
waive its Landlord's lien and any other rights that it may have with respect to
property or assets representing the security or collateral under Tenant's
"floor-plan" or similar financing arrangements, during the Term or any Extension
Term.  Landlord shall, upon request by any such lender, execute an
acknowledgment of such waiver.


               [remainder of this page left intentionally blank]

                                     -50-
<PAGE>
 
                                  ARTICLE XVI
                              RIGHT OF FIRST OFFER

          16.01  Right of First Offer During Lease Term or Extension Term.
                 --------------------------------------------------------

                 (a)     If and when during the Term or Extension Term, as the
                         case may be, Landlord shall decide to sell the Leased
                         Properties to a Person who is not an Affiliate of
                         Landlord (the "Decision to Sell"), provided that no
                         Event of Default has occurred and is continuing under
                         the Lease, Landlord shall notify Tenant in writing
                         within ten (10) business days after Landlord makes a
                         Decision to Sell. Tenant shall have ten (10) business
                         days thereafter in which to notify Landlord in writing
                         of its desire to purchase the Leased Properties. If
                         Tenant shall give such notice, Tenant shall have a
                         period of thirty (30) days within which to make a
                         written offer to purchase the property (the "First
                         Offer"). The First Offer must set forth the purchase
                         price, deposit amounts and closing date and any and all
                         other terms and conditions being proposed by Tenant.

                 (b)     Within thirty (30) days of receipt of the First Offer,
                         Landlord shall give Tenant written notice of its
                         acceptance or rejection thereof. If accepted, Tenant
                         shall, within five (5) days after receipt of the
                         acceptance notice, make the deposit called for in the
                         First Offer and the parties shall proceed to contract
                         and closing upon the terms thereof. If the First Offer
                         is rejected, then, subject to the provisions of
                         subsections (c) and (d) of this Section 16.01, Tenant
                         shall have no further rights with respect to the
                         purchase of the Leased Properties during the Term or
                         Extension Term, as the case may be.

                 (c)     If Landlord shall reject the First Offer, for a one
                         year period thereafter it may proceed to sell the
                         Leased Properties, subject to the Lease and the
                         remaining Term or Extension Term thereof, as the case
                         may be, to any third party, provided (i) the purchase
                         price of such sale shall exceed that specified in the
                         First Offer, or (ii) if the purchase price of such sale
                         does not exceed that specified in the First Offer, the
                         terms of such sale, taken together, are more favorable
                         to Landlord, in Landlord's reasonable judgement, than
                         those of the First Offer. There shall be a presumption
                         that Landlord's judgment was reasonable and Tenant
                         shall have the burden of rebutting such presumption and
                         of proving that such judgment was in fact unreasonable.

                 (d)     If no sale is effected by Landlord within the period
                         specified in subsection (c) above, then if Landlord
                         thereafter desires to sell the

                                     -51-
<PAGE>
 
                         Leased Properties, the procedure set forth in
                         subsections (a), (b) and (c) shall be followed.

                 (e)     This option shall terminate in any event twenty (20)
                         years after the death of the last descendant of Roy L.
                         Meyers, Jr. living at the time of execution of this
                         Lease.
 
          16.02  Right to Purchase at End of an Extension Term.
                 ----------------------------------------------
 
                 (a)     Landlord hereby grants the Tenant the right and option
                         to purchase the Leased Properties (the "Option to
                         Purchase") at an amount equal to the Property
                         Consideration (as hereafter defined) upon termination
                         of either Extension Term of this Lease. The Option to
                         Purchase shall not be granted if Tenant does not extend
                         the Term of this Lease pursuant to Section 1.03 or if
                         on the Option Exercise Date (as hereafter defined) an
                         Event of Default with respect to any Leased Property
                         exists and has not been cured. The Tenant shall notify
                         Landlord in writing of its intent to exercise this
                         Option to Purchase, thirty (30) days prior to the end
                         of an Extension Term of this Lease (the "Option
                         Exercise Date").

                 (b)     The consideration to be paid for the Leased Properties
                         upon exercise of the Option to Purchase (the "Property
                         Consideration") shall be the Appraised Value (as
                         hereafter defined) determined by (1) an independent
                         appraiser, who is a member of the Appraisal Institute,
                         and will be selected by Landlord, (the "Landlord MAI
                         Appraiser"), (2) a second appraiser, who is a member of
                         the Appraisal Institute, and will be selected by the
                         Tenant (the "Tenant MAI Appraiser"), and (3) a third
                         MAI Appraiser selected by agreement of the Landlord MAI
                         Appraiser and the Tenant MAI Appraiser (the "Third MAI
                         Appraiser") (each an "Appraiser" and, collectively, the
                         "Appraisers"). Landlord and Tenant shall, as promptly
                         as possible, but in no event later than ten (10) days
                         following the Option Exercise Date, select its
                         respective Appraiser. The Third MAI Appraiser shall be
                         selected no later than five (5) days after the
                         selection of the other Appraisers. The costs of the
                         Appraisers' appraisals shall be shared equally by the
                         parties. As promptly as possible but in no event later
                         than fifteen (15) days after selection of the Third
                         Appraiser, each Appraiser shall deliver his or her
                         written report of the Appraisers' determination of the
                         fair market value of the Leased Property, which
                         determination shall be based, for each Leased Property,
                         upon the highest and best use of such Leased Property,
                         taking into consideration the location of such Leased
                         Property and other properties comparable thereto. The

                                     -52-
<PAGE>
 
                         "Appraised Value" of the Real Property shall be equal
                         to the arithmetic mean of the two (2) fair market value
                         determinations of the Appraisers that are closest in
                         value. In the event that the values of (i) the
                         difference between the highest appraisal value and the
                         next lower appraisal value, and (ii) the difference
                         between the lowest appraisal value and the next higher
                         appraisal value, are equal, then the "Appraised Value"
                         shall be equal to the arithmetic mean of the fair
                         market value determinations of all Appraisers.

                 (c)     Upon determination of the Property Consideration,
                         Landlord and Tenant agree to cooperate to close the
                         sale and purchase of the Leased Property entirely for
                         cash on an "as is, where as basis" and with no
                         warranties by Landlord other than in a special warranty
                         deed, within forty-five (45) days after the date of
                         determination of the Property Consideration (the
                         "Option Closing Period"). If the sale and purchase of
                         the Leased Property does not close within the Option
                         Closing Period due to Tenant's default, Landlord shall
                         have no further obligations to Tenant pursuant to this
                         Section 16.02 (a).


                                 ARTICLE XVII
                                 MISCELLANEOUS

          17.01  Notices.  Landlord and Tenant hereby agree that all notices,
                 -------                                                     
demands, requests, and consents (hereinafter "Notices") required to be given
pursuant to the terms of this Lease shall be in writing and shall be addressed
as follows:

          If to Tenant:

          Good News Salisbury, Inc.
          2013 N. Salisbury Blvd.
          Salisbury, Maryland  21801
          Attention:  Roy L. Meyers, Jr.

          With a copy to:

          Webb, Burnett, Jackson, Cornbrooks, Wilber, Vorhis & Douse

          115 Broad Street
          P.O. Box 910
          Salisbury, Maryland  21801-0910
          Attention: David A. Vorhis, Esq.

                                     -53-
<PAGE>
 
          If to Landlord:

          Capital Automotive L.P.
          1925 North Lynn
          Suite 306
          Arlington, Virginia 22209
          Attention: Thomas D. Eckert, President and Chief Executive Officer

          With a copy to:

          Wilmer, Cutler & Pickering
          2445 M Street, N.W.
          Washington, D.C. 20037
          Attention:  George P. Stamas, Esq.

and shall be served by:  (a) personal delivery; (b) certified mail, return
receipt requested, postage prepaid; or (c) nationally recognized overnight
courier.  All notices shall be deemed to be given upon the earlier of actual
receipt or three (3) days after mailing, or one (1) business day after deposit
with the overnight courier.  Any Notices meeting the requirements of this
Section shall be effective, regardless of whether or not actually received.
Landlord or Tenant may change its notice address at any time by giving the other
party Notice of such change.  Any such Notice of change of address shall be
effective five (5) days after delivery.

          17.02  Advertisement of a Leased Property.  In the event the parties
                 ----------------------------------                   
hereto have not executed a renewal lease, or agreed to the Extension Term, as to
the Leased Property within twelve (12) months prior to the expiration of the
Term or an Extension Term, as the case may be, then Landlord or its agent shall
have the right to enter such Leased Property at all reasonable times for the
purpose of exhibiting such Leased Property to others and to place upon such
Leased Property for and during the period commencing two-hundred seventy (270)
days prior to the expiration of the Term or an Extension Term, as the case may
be, "for sale" or "for rent" notices or signs.

          17.03  Landlord's Access.  Landlord, or its designated agents or
                 -----------------                                     
contractors, shall have the right to enter upon each  Leased Property, upon
reasonable prior notice to Tenant, for purposes of inspecting the same and
assuring Tenant's compliance with this Lease provided, any such entry by
Landlord shall be subject to all rules, guidelines and procedures prescribed by
Tenant in connection therewith.  Landlord shall not be allowed entry to a Leased
Property unless accompanied by such of Tenant's personnel as Tenant shall
require and which Tenant shall promptly provide.

          17.04  Entire Agreement.  This Lease contains the entire agreement 
                 ----------------                                 
between Landlord and Tenant with respect to the subject matter hereof. No
representations, warranties, and agreements have been made by Landlord or Tenant
except as set forth in this Lease.

                                     -54-
<PAGE>
 
          17.05  Severability.  If any term or provision of this Lease is held 
                 ------------
by Landlord to be invalid or unenforceable as to a Leased Property, such holding
shall not affect the remainder of this Lease as to such Leased Property, or the
validity or enforceability of this Lease as to any other Leased Property, and
the same shall remain in full force and effect, unless such holding
substantially deprives Tenant of the use of such Leased Property or Landlord of
the Rents therefor, in which case this Lease shall forthwith terminate as to
such Leased Property as if by expiration of the Term or an Extension Term, as
the case may be, but shall remain in full force and effect with respect to each
other Leased Property.

          17.06  Captions and Headings.  The captions and headings are inserted
                 ----------------------                               
only as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Lease or the intent of any provision hereof.

          17.07  Governing Law.  This Lease shall be construed under the laws of
                 -------------                                          
the State of Virginia (without application of choice of law provisions).

          17.08  Memorandum of Lease or Certain Rights Under the Lease. Landlord
                 -----------------------------------------------------  
and Tenant agree that a record of this Lease or of certain rights under this
Lease may be recorded by either party in a memorandum of lease approved by
Landlord and Tenant with respect to each Leased Property. The party recording
such memorandum must bear all costs of such recording.

          17.09  Waiver.  No waiver by Landlord of any condition or covenant 
                 ------                                            
herein contained, or of any breach of any such condition or covenant, shall be
held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach thereof
or of any condition or covenant, nor shall the acceptance of Rent by Landlord at
any time when Tenant is in default in the performance or observance of any
condition or covenant herein be construed as a waiver of such default, or of
Landlord's right to terminate this Lease or exercise any other remedy granted
herein on account of such default.

          17.10  Assignment; Binding Effect.  Except as otherwise set forth
                 --------------------------                          
herein, this Lease shall not be assignable by Tenant, without the prior written
consent of Landlord. This Lease will be binding upon and inure to the benefit of
the heirs, successors, personal representatives, and permitted assigns of
Landlord and Tenant.

          17.11  Consents and Approvals.   In each instance in this Lease where
                 ----------------------                                        
the Landlord is required or permitted to give a consent or approval, or to make
a determination, the Landlord's decision and any conditions thereon must be
reasonable under the circumstances.  Except as provided in Sections 8.07(d),
13.01 and 13.07, there shall be a presumption that each such decision and any
conditions thereon by Landlord was in fact reasonable, and Tenant shall have the
burden of proof in any attempt to rebut that presumption.  With respect to
Sections 8.07(d), 13.01 and 13.07, there shall be a presumption that each such
decision and any conditions thereon by Landlord was in fact unreasonable, and
Landlord shall have the burden of proof in any attempt to rebut that
presumption.

                                     -55-
<PAGE>
 
          17.12  Single Property.  Throughout the form of this Lease there are
                 ---------------                                              
references to "Leased Properties."  If, in fact, there is only one Leased
Property being leased hereunder, all such references shall, without further
action, be deemed amended to refer solely to such Leased Property and all
provisions relating to Leased Properties, including remedies applicable to only
one Leased Property, shall likewise be amended to the extent necessary, but only
to the extent necessary, to give effect to the fact that there is only one
Leased Property.

          17.13  Modification.  This Lease may only be modified by a writing
                 ------------                                       
signed by both Landlord and Tenant.

          17.14  Incorporation by Reference.  All schedules and exhibits  
                 ---------------------------                             
referred to in this Lease are incorporated herein by reference.

          17.15  No Merger.  As to each Leased Property, the surrender of this
                 ---------                                            
Lease by Tenant or the cancellation of this Lease by agreement of Tenant and
Landlord or the termination of this Lease on account of Tenant's default will
not work a merger, and will, at Landlord's option, terminate any subleases or
operate as an assignment to Landlord of any subleases. Landlord's option under
this paragraph will be exercised by notice to Tenant and all known subtenants of
such Leased Property.

          17.16  Force Majeure.  Landlord, its agents and employees, will not 
                 -------------                                      
be liable for any loss, injury, death, or damage (including consequential
damages) to persons, property, or Tenant's Business occasioned by theft, act of
God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition, order of governmental body or authority, fire, explosion, falling
objects, steam, water, rain or snow, leak or flow of water (including water from
the elevator system), rain or snow from any Leased Property or into any Leased
Property or from the roof, street, subsurface or from any other place, or by
dampness or from the breakage, leakage, obstruction, or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning, or lighting
fixtures of any Leased Property, or from construction, repair, or alteration of
any Leased Property or from any acts or omissions of any other occupant or
visitor of any Leased Property, or from the release, emission, discharge,
presence or disposal of any hazardous substance or material on or from any
Leased Property, or from any other cause beyond Landlord's control.

          17.17  Laches.  No delay or omission by either party hereto to 
                 -------                                                
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such right
or power or be construed to be a waiver thereof.

          17.18  Waiver of Jury Trial.  To the extent that there is any claim by
                 --------------------                                  
one party against the other that is not to be settled by arbitration as provided
in Article XIV hereof, Landlord and Tenant waive trial by jury in any action,
proceeding or counterclaim brought by either of them against the other on all
matters arising out of this Lease or the use and occupancy of any Leased
Property (except claims for personal injury or property damage). If Landlord
commences any

                                     -56-
<PAGE>
 
summary proceeding for nonpayment of Rent, Tenant will not interpose, and waives
the right to interpose, any counterclaim in any such proceeding.

          17.19  Permitted Contests.  Tenant, on its own or on Landlord's behalf
                 -------------------                          
(or in Landlord's name), but at Tenant's expense, may contest, by appropriate
legal proceedings conducted in good faith and with due diligence, the amount or
validity or application, in whole or in part, of any Imposition or any legal
requirement or insurance requirement or any lien, attachment, levy, encumbrance,
charge or claim provided that: (a) in the case of an unpaid Imposition, lien,
attachment, levy, encumbrance, charge or claim, the commencement and
continuation of such proceedings shall suspend the collection thereof from
Landlord and from the subject Leased Property; (b) neither the subject Leased
Property nor any Rent therefrom nor any part thereof or interest therein would
be in any immediate danger of being sold, forfeited, attached or lost; (c) in
the case of a legal requirement, Landlord would not be in any immediate danger
of civil or criminal liability for failure to comply therewith pending the
outcome of such proceedings; (d) in the event that any such contest shall
involve a sum of money or potential loss in excess of Twenty Five Thousand
Dollars ($25,000), Tenant shall deliver to Landlord and its counsel an opinion
of Tenant's counsel to the effect set forth in clauses (a), (b) and (c), to the
extent applicable; (e) in the case of a legal requirement and/or an Imposition,
lien, encumbrance, or charge, Tenant shall give such reasonable security as may
be demanded by Landlord to insure ultimate payment of the same and to prevent
any sale or forfeiture of a subject Leased Property or the Rent in respect
thereof by reason of such nonpayment or noncompliance; provided, however, the
provisions of this Section shall not be construed to permit Tenant to contest
the payment of Rent (except as to contests concerning the method of computation
or the basis of levy of any Imposition or the basis for the assertion of any
other claim) or any other sums payable by Tenant to Landlord hereunder; (f) in
the case of an insurance requirement, the coverage required by Article IV shall
be maintained; and (g) if such contest be finally resolved against Landlord or
Tenant, Tenant shall, as Additional Rent due hereunder, promptly pay the amount
required to be paid, together with all interest and penalties accrued thereon,
or comply with the applicable legal requirement or insurance requirement.
Landlord, at Tenant's expense, shall execute and deliver to Tenant such
authorizations and other documents as may be reasonably required in any such
contest, and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein. Tenant hereby agrees to indemnify and
hold harmless Landlord, its officers, trustees, employees, shareholders,
affiliates and agents from and against any and all demands, claims, causes of
action, fines, penalties, damages (including punitive and consequential
damages), losses, liabilities (including strict liability), judgments, costs and
expenses (including, without limitation, attorneys' fees, court costs, and the
costs set forth in Section 9.06) that may be incurred in connection with or
arise from any such contest.

          17.20  Construction of Lease.  This Lease has been reviewed by
                 ---------------------                                  
Landlord and Tenant and their respective professional advisors.  Landlord and
Tenant believe that this Lease is the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in favor
of either Landlord or Tenant or against either Landlord or Tenant merely because
of any party's efforts in preparing such documents.  This lease is intended to
function as a master lease of severals

                                     -57-
<PAGE>
 
Leased Properies, and, as the circumstances require, the singular shall mean the
plural and the plural shall mean the singular.

          17.21  Counterparts.  This Lease may be executed in duplicate 
                 -------------                               
counterparts, each of which shall be deemed an original hereof or thereof.

          17.22  Relationship of Landlord and Tenant.  The relationship of
                 -----------------------------------      
Landlord and Tenant is the relationship of lessor and lessee. Landlord and
Tenant are not partners, joint venturers, or associates.

               {remainder of this page left intentionally blank}

                                     -58-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Lease or
caused the same to be executed by their respective duly authorized officers as
of the date first set forth above.

                         CAPITAL AUTOMOTIVE L.P.                            
                         a Delaware limited partnership                     
                                                                            
                         By:  Capital Automotive REIT,                      
                              a Maryland real estate investment trust,      
                              its General Partner                           
                                                                            
                              By: /s/ Thomas D. Eckert                      
                              Name:   Thomas D. Eckert                       
                              Title:  President and Chief Executive Officer  
                                                                            
                         GOOD NEWS SALISBURY, INC.                          
                                                                            
                                                                            
                                                                            
                         By: /s/ Roy L. Meyers, Jr.                         
                         Name:   Roy L. Meyers, Jr.
                         Title:  President        

                                     -59-
<PAGE>
 
SCHEDULE A (PAGE 1 OF 2)



       Seller-Defined Reference
- -----------------------------------------

 
Property
 Number
- --------
          Name
- ---------------------------
       Street Address              Tax Account #
- ---------------------------
Tax Map, Grip, Parcel, Lots
- ---------------------------
    1  Oldsmobile/Cadillac/
GMC sales center                   2007 N. Salisbury Blvd.
Salisbury, MD 21801                05-029953
TM 29, G 23, P 12, Lots 1-2
    2  Olds/Cad/GMC lots           2007 N. Salisbury Blvd.
Salisbury, MD 21801                05-080525
TM 29, G 23, P 13, Lots 26-28
    3  Olds/Cad/GMC lots           2007 N. Salisbury Blvd.
Salisbury, MD 21801                05-080517
TM 29, G 23, P 13, Lot 29
    4  Olds/Cad/GMC lots           2007 N. Salisbury Blvd.
Salisbury, MD 21801                05-080533
TM 29, G 23, P 13, Lot 29
    5  Honda                       2013 N. Salisbury Blvd.
Salisbury, MD 21801                05-807783
TM 29, G 23, P 267 Par-A
    6  Toyota/Mercedes/A           2015 N. Salisbury Blvd.
Salisbury, MD 21801                05-074835
TM 29, G 23, P 267 Par-A
    7  Toyota/Mercedes I           2015 N. Salisbury Blvd.
Salisbury, MD 21801                05-074843
TM 29, G 23, P 267
    8  Toyota/Mercedes II          2015 N. Salisbury Blvd.
Salisbury, MD 21801                05-067642
TM 29, G 23, P 404
    9  Mazda-Hyundai               2010 N. Salisbury Blvd.
Salisbury, MD 21801                09-025828
TM 29, G 22, P 385
    10 Nissan                      2012 N. Salisbury Blvd.
Salisbury, MD 21801                09-018441
TM 29, G 23, P 386
    11 Used Car Sales Center I     2011 N. Salisbury Blvd.
Salisbury, MD 21801                05-062721
TM 29, G 23, P 13, Lots 7-8
    12 Used Car Sales Center II    2011 N. Salisbury Blvd.
Salisbury, MD 21801                05-062748
TM 29, G 23, P 13, Lots 24-25
    13 Body Shop - I               2010A N. Salisbury Blvd.
Salisbury, MD 21801                09-025901
TM 29, G 22, P 385
    14 Body Shop - II              2010B N. Salisbury Blvd.
 
                                     -60-
<PAGE>
 
Salisbury, MD 21801                09-070443
TM 29, G 16, P 113

                                     -61-
<PAGE>
 
SCHEDULE A (PAGE 2 OF 2)



            Base
           Annual
            Rent
           Amount
           ------

           469,920
           =======


NOTE:  In the event the Base Annual Rent must be adjusted pursuant to this Lease
- ----                                                                            
       because of its termination as to a Property, the parties shall attempt in
       good faith to agree upon the adjustment. If after thirty (30) days they
       are unable to agree upon such adjustment, it shall be determined by
       valuing the terminated Property and all of the Properties pursuant to the
       provisions of Section 16.02(b) and pro rating the Base Annual Rent in
       proportion to such values. In the event the termination is pursuant to
       Section 13.07, Tenant shall pay all of the costs of appraisals. 

                                     -62-
<PAGE>
 
SCHEDULE A (PAGE 1 OF 2)


          Seller-Defined Reference
- --------------------------------------------------

 
Property
 Number
- --------
         Name
- ------------------------
      Street Address                    Tax Account #
- ---------------------------
Tax Map, Grip, Parcel, Lots
- ---------------------------
    1   Oldsmobile/Cadillac/
GMC sales center                   2007 N. Salisbury Blvd.
Salisbury, MD 21801                05-029953
TM 29, G 23, P 12, Lots 1-2
    2   Olds/Cad/GMC lots          2007 N. Salisbury Blvd.
Salisbury, MD 21801                05-080525
TM 29, G 23, P 13, Lots 26-28
    3   Olds/Cad/GMC lots          2007 N. Salisbury Blvd.
Salisbury, MD 21801                05-080517
TM 29, G 23, P 13, Lot 29
    4   Olds/Cad/GMC lots          2007 N. Salisbury Blvd.
Salisbury, MD 21801                05-080533
TM 29, G 23, P 13, Lot 29
    5   Honda                      2013 N. Salisbury Blvd.
Salisbury, MD 21801                05-807783
TM 29, G 23, P 267 Par-A
    6   Toyota/Mercedes/A          2015 N. Salisbury Blvd.
Salisbury, MD 21801                05-074835
TM 29, G 23, P 267 Par-A
    7   Toyota/Mercedes I          2015 N. Salisbury Blvd.
Salisbury, MD 21801                05-074843
TM 29, G 23, P 267
    8   Toyota/Mercedes II         2015 N. Salisbury Blvd.
Salisbury, MD 21801                05-067642
TM 29, G 23, P 404
    9   Mazda-Hyundai              2010 N. Salisbury Blvd.
Salisbury, MD 21801                09-025828
TM 29, G 22, P 385
    10  Nissan                     2012 N. Salisbury Blvd.
Salisbury, MD 21801                09-018441
TM 29, G 23, P 386
    11  Used Car Sales Center I    2011 N. Salisbury Blvd.
Salisbury, MD 21801                05-062721
TM 29, G 23, P 13, Lots 7-8
    12  Used Car Sales Center II   2011 N. Salisbury Blvd.
Salisbury, MD 21801                05-062748
TM 29, G 23, P 13, Lots 24-25
    13  Body Shop - I              2010A N. Salisbury Blvd.
Salisbury, MD 21801                09-025901
TM 29, G 22, P 385
    14  Body Shop - II             2010B N. Salisbury Blvd.
 
                                     -63-
<PAGE>
 
Salisbury, MD 21801                 09-070443
TM 29, G 16, P 113

                                     -64-
<PAGE>
 
SCHEDULE A (PAGE 2 OF 2)



                 Base
                Annual
                 Rent
                Amount
                ------

               469,920
               =======


NOTE:  In the event the Base Annual Rent must be adjusted pursuant to this Lease
- ----                                                                            
       because of its termination as to a Property, the parties shall attempt in
       good faith to agree upon the adjustment. If after thirty (30) days they
       are unable to agree upon such adjustment, it shall be determined by
       valuing the terminated Property and all of the Properties pursuant to the
       provisions of Section 16.02(b) and pro rating the Base Annual Rent in
       proportion to such values. In the event the termination is pursuant to
       Section 13.07, Tenant shall pay all of the costs of appraisals. 

                                     -65-
<PAGE>
 
SCHEDULE A

 
       Seller-Defined Reference
- ----------------------------------------

 
Property                                                    Tax Account #
 Number      Name           Street Address          Tax Map, Grid, Parcel, Lots
- --------  ----------      -------------------       ---------------------------
 
  P1      Pontiac-Buick   2016 N. Salisbury Blvd.    09-014985
                          Salisbury, MD 21801        TM 29, G 22, P 195

                                     -66-
<PAGE>
 
SCHEDULE B



  [ Scheduled Exceptions as agreed upon in Real Property Purchase Agreement ]

                                     -67-
<PAGE>
 
SCHEDULE B



[ Scheduled Exceptions as agreed upon in Real Property Purchase Agreement ]

                                     -68-
<PAGE>
 
SCHEDULE 12.02


1. Computer services and maintenance contract with Reynolds & Reynolds (approx.
   $120,000 per year).
2. Buy-out agreement of former Good News Salisbury, Inc. shareholder (approx.
   $300,000 left to pay).

                                     -69-
<PAGE>
 
SCHEDULE 12.03


1. Agreement letter from Evans Builders, Inc. dated July 14, 1997 for
   renovations to the Toyota/Mercedes facility.

                                     -70-
<PAGE>
 
EXHIBIT 5.07


1. Phase I and II report on Leased Properties 6, 7, and 8 (Toyota/Mercedes)
   prepared by John Hynes & Associates dated January 24, 1997.

2. Phase I and II report on Leased Properties 9 and 14 (Mazda-Hyundai and Body
   Shop I) prepared by John Hynes & Associates dated January 19, 1995.

                                     -71-
<PAGE>
 
SCHEDULE B


[ Scheduled Exceptions as agreed upon in Real Property Purchase Agreement ]
<PAGE>
 
SCHEDULE 12.02


1. Computer services and maintenance contract with Reynolds & Reynolds (approx.
   $120,000 per year).
2. Buy-out agreement of former Good News Salisbury, Inc. shareholder (approx.
   $300,000 left to pay).
<PAGE>
 
SCHEDULE 12.03


1. Agreement letter from Evans Builders, Inc. dated July 14, 1997 for
   renovations to the Toyota/Mercedes facility.
<PAGE>
 
EXHIBIT 5.07


1. Phase I and II report on Leased Properties 6, 7, and 8 (Toyota/Mercedes)
   prepared by John Hynes & Associates dated January 24, 1997.

2. Phase I and II report on Leased Properties 9 and 14 (Mazda-Hyundai and Body
   Shop I) prepared by John Hynes & Associates dated January 19, 1995.
<PAGE>
 
                                  EXHIBIT 2.02
                                  ------------


                          PAYMENT ACCOUNT INFORMATION

     Wiring instructions for the Landlord's operating account are as follows:

     FIRST UNION NATIONAL BANK OF VIRGINIA
     CHARLOTTE, NC
     ABA# 051400549

     For Credit to:  CAPITAL AUTOMOTIVE REIT, Operating Account
               Account # 2050000478240
<PAGE>
 
                                  EXHIBIT 2.04
                                  ------------

                          BASE ANNUAL RENT ADJUSTMENT

     The Base Annual Rent shall be increased, effective as of the commencement
of the second Lease Year and as of each subsequent Lease Year by an amount equal
to the Initial Base Rent multiplied by one hundred percent (100%) of the change
in the Index during the immediately preceding one (1) year period; provided,
however, that, in the event that the above-calculated adjustment is greater than
two percent (2%), such adjustment shall be equal to two percent (2%).
<PAGE>
 
                                 EXHIBIT 15.02
                                 -------------
                                        
                  SUBORDINATION AND NON-DISTURBANCE AGREEMENT
                  -------------------------------------------


     THIS AGREEMENT is made as of this ___ day of __________, 1997, among
_____________, a ___________ organized under the laws of the State of
_____________ ("Lender"), __________________ ("Tenant"), and CAPITAL AUTOMOTIVE
L.P., a Delaware limited partnership ("Landlord").

                                  WITNESSETH:
                                  -----------

     WHEREAS, Landlord and Tenant have entered into a certain Lease, dated
___________________ ,  which lease and all amendments, modifications,
assignments, subleases  and other agreements related thereto are attached hereto
as Exhibit A and incorporated herein by this reference (collectively, the
   ---------                                                             
"Lease"), which Lease relates to the premises described therein (the
"Premises"), and

     WHEREAS, Lender has made or has committed to make a first mortgage loan to
Landlord in the principal amount not to exceed $_________ (the "Loan"), the Loan
being secured by a mortgage, deed of  trust or security deed (collectively, the
"Mortgage") and an assignment(s) of leases and rents from Landlord to Lender
covering the Premises; and

     WHEREAS, Tenant has agreed that the Lease shall be subject and subordinate
to the Mortgage held by Lender, provided Tenant is assured of continued
occupancy of the Premises under the terms of the Lease;

     NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, the sum of Ten Dollars ($10.00) and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
and notwithstanding anything in the Lease to the contrary, it is hereby agreed
as follows:

     1.   SUBORDINATION OF LEASE.  Lender, Tenant and Landlord do hereby
          ----------------------                                        
covenant and agree that the Lease with all rights, options, liens and charges
created thereby, is and shall continue to be subject and subordinate in all
respects to the Mortgage and to any renewals, modifications, consolidations,
replacements and extensions thereof and to all advancements made thereunder.

     2.   NONDISTURBANCE OF TENANT.  Lender does  hereby agree with Tenant that,
          ------------------------                                              
in the event Lender becomes the owner of the Premises by foreclosure, conveyance
in lieu of foreclosure or otherwise, so long as Tenant complies with and
performs its obligations under the Lease, (a) Lender will take no action which
will interfere with or disturb Tenant's possession or use of the Premises or
other rights under the Lease, and (b) the Premises shall be subject to the Lease
and Lender shall recognize Tenant as the tenant of the Premises for the
remainder of the terms of the Lease in accordance with the provisions thereof,
provided, however, that Lender shall not be subject
<PAGE>
 
to any offsets or defenses which Tenant might have against any prior landlord
except those which arose under the provisions of the Lease out of such
landlord's default and accrued after Tenant had notified Lender and given Lender
the opportunity to cure same as hereinbelow provided, nor shall Lender be liable
for any act or omission of any prior landlord, nor shall Lender be bound by any
rent or additional rent which Tenant might have paid for more than the current
month to any prior landlord nor shall it be bound by any amendment or
modification of the Lease made without its consent.

     3.   ATTORNMENT BY TENANT.  Tenant does hereby agree with Lender that, in
          --------------------                                                
the event Lender becomes the owner of the Premises by foreclosure, conveyance in
lieu of foreclosure or otherwise, then Tenant shall attorn to and recognize
Lender as the landlord under the Lease for the remainder of the term thereof,
and Tenant shall perform and observe its obligations thereunder, subject only to
the terms and conditions of the Lease.  In such event, Lender shall not be
liable for any act or omission of any prior landlord, liable for return of the
security deposit unless same was actually delivered to Lender, bound by any
amendment to or assignment of the Lease made without its consent, bound by any
rent paid more than thirty (30) days in advance, or be subject to any set-off or
defense Tenant might have had against any prior landlord.  Tenant further
covenants and agrees to execute and deliver upon request of Lender or its
assigns, an appropriate Agreement of Attornment to Lender and any subsequent
titleholder of the Premises.

     4.   ACKNOWLEDGMENT OF ACQUISITION RIGHTS. Lender acknowledges that Tenant
          ------------------------------------                                 
has certain purchase rights under the lease.  So long as Tenant complies with
the provisions of the Lease, Lender acknowledges that Tenant may exercise such
rights and Lender will honor such rights so long as Tenant pays the acquisition
price to Lender or otherwise obtains a release from Lender.

     5.   CURATIVE RIGHTS, MODIFICATION OF LEASE, AND ADVANCE PAYMENT OF RENT.
          ------------------------------------------------------------------- 
So long as the Mortgage remains outstanding and unsatisfied:

     (a)  Tenant will mail or deliver to Lender, at the address and in the
manner hereinbelow provided, a copy of all notices permitted or required to be
given to the Landlord by Tenant under and pursuant to the terms and provisions
of the Lease. At any time before the rights of the Landlord shall have been
forfeited or adversely affected because of any default of the Landlord, or
within the time permitted the Landlord for curing any default under the Lease as
therein provided, Lender may, but shall have no obligation to, pay any taxes and
assessments, make any repairs and improvements, make any deposits or do any
other act or thing required of the Landlord by the terms of the Lease; and all
payments so made and all things so done and performed by Lender shall be as
effective to prevent the rights of the Landlord from being forfeited or
adversely affected because of any default under the Lease as the same would have
been if done and performed by the Landlord.

     (b)  Tenant will not consent to the modification of the Lease, nor to the
termination thereof, without the prior written consent of Lender, such consent
not to be unreasonably

                                      -2-
<PAGE>
 
withheld or delayed, nor will Tenant pay any rent under the Lease more than
thirty (30) days in advance.

     6.   CONSENT TO ASSIGNMENT.  Tenant acknowledges that Landlord will execute
          ---------------------                                                 
and deliver to Lender an assignment of the Lease as security for the Loan, and
Tenant hereby expressly consents to such assignment.

     7.   LIMITATION OF LIABILITY.  Lender shall have no liability whatsoever
          -----------------------                                            
hereunder prior to becoming the owner of the Premises; and Tenant agrees that if
Lender becomes the owner of the Premises, Tenant shall look solely to the estate
or interest of Lender in the Premises for satisfaction of  any obligation which
may be or become owing by Lender to Tenant hereunder or under the Lease.

     8.   LANDLORD AND TENANT CERTIFICATIONS.  Landlord and Tenant hereby
          ----------------------------------                             
certify to Lender that the Lease has been duly executed by Landlord and Tenant
and is in full force and effect, that the Lease and any modifications and
amendments specified herein are a complete statement of the agreement between
Landlord and Tenant with respect to the leasing of the Premises, and the Lease
has not been modified or amended except as specified herein; that to the
knowledge of Landlord and Tenant, no party to the Lease is in default
thereunder; that no rent under the Lease has been paid more than thirty (30)
days in advance of its due date; and that Tenant, as of this date, has no
charge, lien or claim of offset under the Lease, or otherwise, against the rents
or other charges due or to become due thereunder.

     9.   TENANT ESTOPPEL CERTIFICATIONS.  With the knowledge that Lender, as
          ------------------------------                                     
beneficiary of the mortgage encumbering the premises, will place substantial
reliance thereon in connection with the closing and funding of the Loan, Tenant
hereby makes the following certifications:

     (a)  The term of the Lease commenced on ________, 19__, and will terminate
on ______________.

     (b)  The Lease, as described above, has not been modified, amended,
assigned or subleased except as set forth in Exhibit A attached hereto, and is
                                             ---------
in good standing and in full force and effect.

     (c)  The Lease provides for rental payments over the term of the Lease, all
as specifically provided in the Lease.  No rent under the Lease has been paid
more than thirty (30) days in advance of the due date of same.  For the year
____, monthly payments, which are due on the first (1st) day of each month, are
as follows:

Basic Rent -        $________

                                      -3-
<PAGE>
 
     Payment of the above amount was timely made for the months of ______,
___and _____, ____, and the next payment of the above amount will be due on
________, ____.  In addition to the above amount, certain additional sums are
due to Landlord from Tenant under the Lease, all as specifically set forth in
the Lease.

     (d)  Tenant has paid a security deposit under the Lease.

     (e)  To Tenant's knowledge there are no defaults by Landlord under the
Lease and there are no existing circumstances which, with the passage of time,
or notice, or both, would give rise to a default under the Lease.

     (f)  Tenant has accepted and is occupying the Premises, and Landlord has no
unperformed obligation under the Lease to construct any improvements for the
Tenant related to the Premises.

     (g)  Tenant has no charge, lien, claim of set-off or defense against rents
or other charges
due or to become due under the Lease or otherwise under any of the terms,
conditions, or
covenants contained therein.

     (h)  Tenant has received no notice from any insurance company of any
defects or inadequacies in the Premises or in any part thereof which would
adversely affect the insurability of the Premises.

     (i)  Except as provided in the Lease, Tenant does not have any right or
option to purchase the Premises.

     (j)  Except as provided in the Lease, Tenant does not have any rights or
options to renew the Lease or to lease additional space in any building owned by
the Landlord.

     10.  TENANT COVENANTS.
          ---------------- 

     (a)  From and after the date hereof, Tenant will not pay any rent under the
Lease more
than thirty (30) days in advance of its due date.

     (b)  From and after the date hereof, so long as there shall be any
assignment of Landlord's interest in the Lease to Lender, or any successor
thereto, Tenant will not:  consent to the modification of the Lease nor to the
termination thereof without the prior written consent of the Lender or any
successor holder of the Loan or the Mortgage which consent shall not be
unreasonably withheld or delayed (either of them being called "Mortgagee"), nor
seek to terminate the Lease by reason of any act or omission of Landlord until
Tenant shall have given written notice of such act or omission to such
Mortgagee's last address furnished Tenant) and until a reasonable period of time

                                      -4-
<PAGE>
 
shall have elapsed following the giving of such notice, during which period the
Mortgagee shall have the right, but not the obligation, to remedy such act or
omission.

     (c)  Upon written notice of the default by Landlord under any of the loan
documents
held by Mortgagee and assignment of the Landlord's interest under the Lease by
Landlord to Mortgagee, Tenant, if Mortgagee so requests, will recognize such
Mortgagee as the Landlord under the Lease and will thereafter pay rent and other
sums to Mortgagee (or to the party designated by the Mortgagee in writing) in
accordance with the terms of the Lease, and, in such event, such Mortgagee will
not be liable for any act or omission of any prior lessor, liable for return of
the security deposit unless same was actually delivered to Mortgagee, bound by
any amendment to or assignment of the Lease made without its consent, bound by
any rent paid more than thirty (30) days in advance, or be subject to any set-
off or defense Tenant might have had against any prior lessor.

     11.  NOTICES.  Unless and except as otherwise specifically provided herein,
          -------                                                               
any and all notices, elections, approvals, consents, demands, requests and
responses thereto ("Communications") permitted or required to be given under
this Agreement shall be in writing, signed by or on behalf of the party giving
the same, and shall be deemed to have been properly given and shall be effective
upon the earlier of receipt thereof or three (3) days after deposit thereof in
the United States mail, postage prepaid, certified with return receipt
requested, to the other party at the address of such other party set forth
hereinbelow or at such other address within the continental United States as
such other party may designate by notice specifically designated as a notice of
change of address and given in accordance herewith; provided, however, that the
time period in which a response to any Communication must be given shall
commence on the date of receipt thereof, and provided further that no notice of
change of address shall be effective with respect to Communications sent prior
to the time of receipt of such change.  Receipt of Communications hereunder
shall occur upon actual delivery (whether by mail, facsimile transmission,
messenger, courier service, or otherwise) to an individual party or to an
officer, member, or general or limited partner of a party or to any agent or
employee of such party at the address of such party set forth hereinbelow,
subject to change as provided hereinabove.  An attempted delivery in accordance
with the foregoing, acceptance of which is refused or rejected, shall be deemed
to be and shall constitute receipt; and an attempted delivery in accordance with
the foregoing by mail, messenger, or courier service (whichever is chosen by the
sender) which is not completed because of changed address of which no notice was
received by the sender in accordance with this provision prior to the sending of
the Communication shall also be deemed to be and constitute receipt.  Any
Communication, if given to Lender, must be addressed as follows, subject to
change as provided hereinabove:

                       _________________________________
                       _________________________________

and, if given to Tenant, must be addressed as follows, subject to change as
provided hereinabove:

                                      -5-
<PAGE>
 
                          ___________________________
                          ___________________________
                          ___________________________

and, if given to Landlord, must be addressed as follows, subject to change as
provided hereinabove:

                          Capital Automotive, L.P.

                          ___________________________
                          ___________________________

     12.  MISCELLANEOUS.  This Agreement shall be binding upon and inure to the
          -------------                                                        
benefit of the parties hereto and their respective heirs, legal representatives,
successors, successors-in-title and assigns.  When used herein, the term
"Landlord" or "landlord" refers to Landlord and to any successor to the interest
of Landlord under the Lease.


                     [THIS SPACE INTENTIONALLY LEFT BLANK]

                                      -6-
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first above written.

                                        LENDER:

Signed, sealed and delivered
in the presence of:                     By:
                                        Title:

_____________________________           _______________________
Witness                                 (CORPORATE SEAL)



                                        TENANT:

Signed, sealed and delivered
in the presence of:                     By:
                                        Title:


_____________________________           _______________________
Witness                                 (CORPORATE SEAL)

                                        LANDLORD:

Signed, sealed and delivered
in the presence of:                     By:
                                        Title:


_____________________________           _______________________
Witness                                 (PARTNERSHIP SEAL)


                                      -7-
<PAGE>
 
                                   EXHIBIT A

Lease Dated __________ from ________________ to _______________ with Exhibit A
attached, all in the form attached hereto as Attachment to Exhibit A.
                                             ------------------------

                                      -8-
<PAGE>
 
County of  ___________________:
                                       SS:
State of _____________________:

          This is to certify that on this ____ day of ________, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Lender in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Lender.


                                    _________________________________________

                                    Notary Public

                                    My commission expires:

                                      -9-
<PAGE>
 
County of  ______________________:
                                           SS:
State of ________________________:

          This is to certify that on this ____ day of _________, 1997,
personally appeared before me, a notary public of the County (City) aforesaid,
known to me (or satisfactorily identified to me) to be the individual signing on
behalf of Tenant in the capacity stated by his signature, and that he
acknowledged the within document to be the act and deed of the Tenant.


                                                ________________________________

                                                Notary Public

                                                My commission expires:

                                     -10-
<PAGE>
 
County of ________________
                               SS:
State of _________________

          This is to certify that on this ____ day of _______, 1997, personally
appeared before me, a notary public of the County (City) aforesaid, known to me
(or satisfactorily identified to me) to be the individual signing on behalf of
Landlord in the capacity stated by his signature, and that he acknowledged the
within document to be the act and deed of the Landlord.

                              ____________________________________

                              Notary Public

                              My commission expires:

                                     -11-
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
                         1925 North Lynn Street, #306
                          Arlington, Virginia  22209


                               January 10, 1998


Good News Salisbury, Inc.
Attention: Roy L. Meyers, Jr.
2013 N. Salisbury Blvd.
Salisbury, Maryland 21801

Dear Mr. Meyers:

          We hereby agree that the escrow of Impositions pursuant to Section
3.04 of the Lease Agreement is irrevocably waived.

          We hereby further agree that the joint and several indemnity to be
provided by Roy L. Meyers, Jr. and Charlotte Meyers in Section 11.2.3(ii) under
each of the Real Property Purchase Agreements shall not exceed, in the aggregate
under both Agreements together, $2,000,000, less the amounts, if any, paid by
the Sellers that counts against the obligation of Roy L. Meyers, Jr. and
Charlotte Meyers under Section 11.2.3 of both Agreements together.

          We acknowledge that you would not enter into the Real Property
Purchase Agreement if we had not agreed to the waiver of the escrow of
Impositions and the agreement to aggregate the joint and several indemnity set
forth above. The waiver pursuant to this letter shall be binding upon us and our
successors and assigns.


                                    Capital Automotive L.P.


                                    By:    Capital Automotive REIT,
                                           its General Partner


                                    By:/s/ Thomas D. Eckert
                                           Thomas D. Eckert,
                                           President and Chief Executive Officer

                                     -12-
<PAGE>
 
                               EXHIBIT 5.2.1(M)



Capital Automotive REIT
1925 North Lynn Street
Suite 306
Arlington, VA 22209

Attention:   Thomas D. Eckert, President and
                     Chief Executive Officer

RE:       Purchase Agreement ("Agreement") made as of __________ __, 1998
          between _____________________, ____________________ and
          ___________________ (individually a "Seller" and collectively the
          "Sellers"), Capital Automotive REIT, on its own behalf and as sole
          general partner of Capital Automotive L.P. (the "Landlord")

Ladies and Gentlemen:

We have acted as special counsel to the Sellers, in connection with the entering
into of the Agreement.  You have asked for our opinion concerning certain
matters relating to the Agreement.

We have examined the original (or photostatic copies) of the executed
counterparts of the Agreement.

We have also examined the following organizational documents related to the
Sellers (the "Organizational Documents"):

(i)       The certificate of incorporation or certificate of limited
          partnership, as the case may be, of each of the corporate or
          partnership Sellers, certified by the Secretary of State of ________
          on _______________;

(ii)      The bylaws or limited partnership agreement, as the case may be, of
          each of the corporate or partnership Sellers, certified to be true and
          correct by an authorized signing officer of each of the corporate or
          partnership Sellers as of ________________;

(iii)     Certificates from the Secretary of State of the States of _______,
          _________ and __________ indicating that each of the REIT, partnership
          and Sellers is in good standing in the State of its organization or
          formation; and

                                     -13-
<PAGE>
 
(iv)      A certified copy of resolutions adopted by the unanimous written
          consent of the board of directors of each of the corporate Sellers or
          the board of directors of the general partner of each of the
          partnership Sellers authorizing the execution and delivery by each of
          the corporate or partnership Sellers of the Agreement.

The opinions in paragraphs 1 and 7 below are based solely on our review of the
Organizational Documents.

In reaching the opinions set forth below, we have assumed that (i) each entity
that is a party to the Agreement (other than one of the Sellers) is a duly
organized or duly formed entity and is validly existing and in good standing,
(ii) each party to the Agreements (other than one of the Sellers) has duly and
validly executed and delivered each instrument, document and agreement to which
it is a signatory and that its obligations are its legal, valid and binding
obligations, enforceable in accordance with their respective terms, (iii) each
person executing any instrument, document or agreement on behalf of any party
(other than one of the Sellers) is duly authorized to do so, and (iv) each
natural person executing any instrument, document or agreement referred to in
this letter is legally competent to do so.

In our examination of Agreement for purposes of this letter, we have assumed
that (i) all signatures on the Agreement submitted to us for examination are
genuine, (ii) any original Agreement submitted to us for examination is
authentic, and (iii) all copies of the Agreement submitted to us for examination
conform to the original.

The opinions expressed in this letter concern only the effect of the laws of the
States of _______, _______ and _______ it being understood, however, that we are
not admitted to practice law in such States.  We express no opinion on the
applicability of the law of any other jurisdiction.  We assume no obligation to
supplement or modify this opinion if any applicable law changes in any manner.

Based on, and in reliance upon, the foregoing, and subject to the qualifications
stated herein, it is our opinion that:

          1.   Each of the Sellers is a corporation or limited partnership duly
organized or formed, validly existing and in good standing under the laws of the
State of its organization or formation.

          2.   Each of the corporate Sellers has the requisite corporate power
to execute and deliver, and to perform its obligations under, the Agreement.

          3.   The general partner of each of the partnership Sellers has the
requisite corporate power and authority to own its properties and carry on its
business and to execute and deliver, and to perform its obligations under, the
Agreement, and to execute and deliver on behalf of such partnership Seller, and
to bind such partnership Seller to, the Agreement.

                                     -14-
<PAGE>
 
          4.  The execution and delivery by each corporate Seller of the
Agreement have been duly authorized by all necessary corporate actions of such
Seller.

          5.  The execution, delivery and performance of the Agreement by the
general partner of each partnership Seller on behalf of such partnership Seller
have been duly authorized by all necessary corporate actions, and the
individuals executing the Agreement on behalf of such general partner have been
duly authorized to do so.

          6.  The execution, delivery, and performance by each corporate Seller
of the Agreement will not violate the charter or bylaws of such Seller.

          7.  The execution and delivery by the general partner of each
partnership Seller, and such general partner's performance of its obligations
under, the Agreement on behalf of each partnership Seller will not violate such
partnership Seller's Organizational Documents.

          8.  The Agreement has been duly executed and delivered by each Seller
and is the legal, valid and binding obligation of each Seller, enforceable
against each Seller in accordance with its terms.

          The opinions set forth above are subject to the following
qualifications:

          (a) The validity, binding nature and enforceability of the Agreement
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other laws or equitable principles relating to or affecting the
rights of creditors or other obligees generally.

          (b) The validity, binding nature and enforceability of the Agreement
may be limited by applicable principles of equity, whether such principles are
applied by a court of equity or a court of law, and we express no opinion on
whether a court would grant specific performance, injunctive relief or any other
equitable remedy.

          (c) A court could refuse to enforce the Landlord's remedies under the
Agreement by reason of (i) a waiver by the Landlord, (ii) unconscionable conduct
by the Landlord, (iii) the exercise of remedies by the Landlord without
providing adequate notice to one of the Sellers or its default and a reasonable
opportunity to cure the default, (iv) the court's determination that one of the
Contributors is entitled to an opportunity to be heard by the court before the
Landlord is entitled to exercise any remedies, (v) the court's determination
that a remedy is a penalty or is unconscionable, (vi) the court's determination
that the Landlord is seeking to exercise remedies with respect to a breach that
is immaterial or that does not adversely affect the Landlord or the Landlord's
security, (vii) defenses arising from the Landlord's failure to act in
accordance with the terms and conditions of the Agreement, (viii) defenses
arising as a consequence of the passage of time (e.g., laches or statutes of
limitation), (ix) defenses arising as a result of the Landlord's failure to act
in a commercially reasonable manner or in good faith, or (x) public policy
considerations.

                                     -15-
<PAGE>
 
          (d)  We express no opinion with respect to any of the following
provisions if they are contained in the Agreement: (i) any provisions under
which any of the Sellers waives any of their legal or equitable rights except to
the extent the waived rights are expressly waivable pursuant to a statute or
constitutional provision, (ii) any provisions entitling the Landlord to obtain
reimbursement for attorneys' fees and other costs incurred by the Landlord,
(iii) any severability provision, (iv) any provision to the effect that rights
or remedies are not exclusive, that every right or remedy is cumulative and may
be exercised in addition to or with any other right or remedy or that the
election of a particular remedy does not preclude recourse to one or more other
remedies, (v) any provision which purports to affect jurisdiction or venue of
any specified court or courts, or which purports to establish evidentiary
standards, or (vi) any provision that purports to grant the Landlord relief from
any provisions of the Bankruptcy Code.

The opinions expressed in this letter are solely for the use of the parties to
whom this letter is addressed (or the successors or assigns of the Landlord
under the Agreement).  These opinions may not be relied on by any other persons,
may not be quoted in whole or in part, and may not be filed with any
governmental agency, in each case without our express prior written approval.
The opinions expressed in this letter are limited to the matters set forth in
this opinion, and no other opinions should be inferred beyond the matters
expressly stated.

                              Very truly yours,

                                     -16-
<PAGE>
 
EXHIBIT 5.2.1(M)
- ----------------


            OPINION OF SELLER'S COUNSEL TO BE DELIVERED AT CLOSING

          I.     The Sellers are duly organized or formed, validly existing and
in good standing under the laws of their respective State's of organization or
formation.

          II.    Each of the Sellers has the requisite corporate, partnership or
other entity power and authority to execute and deliver, and to perform its
obligations under the Agreement and to carry on its business.

          III.   The execution and delivery by each of the Sellers has been duly
authorized by all necessary corporate, partnership or other entity actions and
the persons executing the Agreement have been duly authorized to do so.

          IV.    The execution, delivery and performance by the Company will not
violate the charter, organizational documents, bylaws, operating agreements or
partnership agreements of any of the Sellers.

          V.     The Agreement has been duly executed and delivered by each of
the Sellers in compliance with the laws of the State of Texas, and is the legal,
valid and binding obligation of each, enforceable against each in accordance
with its terms, except that enforcement may be limited by bankruptcy,
insolvency, reorganization, arrangement, moratorium, or similar laws, or by
equitable principles, relating to or limiting the rights of creditors generally.

          VI.    To the undersigned's knowledge, without investigation, the
execution and delivery of the Agreement will not breach or otherwise violate the
provisions of or cause an event of default under any agreement, contract,
mortgage or other binding commitment or existing obligation of any of the
Sellers and will not breach or otherwise violate any permit, license, court
judgment, decree or order of any Court or any law, rule or regulation of any
governmental body to which any of Sellers are subject to or bound.

          VII.   To the undersigned's knowledge, without investigation, there
are no actions, suits or proceedings pending or threatened against any of the
Sellers or the Properties that affect the Properties or would materially affect
the Sellers ability to perform under the Agreement or which seeks to affect the
enforceability of the Agreement.

          VIII.  To the undersigned's knowledge, without investigation, no
Seller is in default or has received any notice of default with respect to any
judgment, order, writ, injunction or decree or any lease, contract, agreement,
commitment, instrument or obligation to which it is a party or by which the
Property is bound or may be subject that affects the Property or could
materially affect any Seller's ability to perform its obligations under the
Agreement.

                                     -17-
<PAGE>
 
          IX.    To the undersigned's knowledge, all consents, approvals, or
authorization required by any third party or governmental authority in
connection with the Sellers' obligations under the Agreement have been properly
obtained and Sellers have complied with all applicable provisions of law
requiring any filing, registration or qualification with any governmental
authority in connection with the execution and delivery of the deeds to the
Properties.
<PAGE>
 
SCHEDULE 1.2 (PAGE 1 OF 3)


        Seller-Defined Reference
- ----------------------------------------

Property                                                      Tax Account #
 Number         Name            Street Address       Tax Map, Grip, Parcel, Lots
 ------    ---------------  -----------------------  ---------------------------
  P1       Pontiac-Buick    2016 N. Salisbury Blvd.  09-014985
                            Salisbury, MD 21801      TM 29, G 22, P 195
 
                                      -2-
<PAGE>
 
SCHEDULE 1.2 (PAGE 2 OF 3)



<TABLE>
<CAPTION>
                    Initial                           
                    Base                              
                    Annual    Capital-    Purchase    
                    Rent       ization    Price for   
                    Amount      Rate      Property    
                    -------   --------    ---------   
                    <S>       <C>         <C> 
                    154,080   11.50%      1,339,826   
                    -------               ---------   
                    154,080               1,339,826   
                    =======               =========    
</TABLE>

                                      -3-
<PAGE>
 
SCHEDULE 1.2 (PAGE 3 OF 3)


 
 
                                              
                                                     Principal
    Properties Encumbered                              Balance
- ---------------------------------                  
                                                   Outstanding   
Number         Name                 Lender          @ 12-31-97
- ------       ---------          --------------      ----------
 
 P1            Pontiac-Buick          First National Bank
                                          of Maryland   
 $330,355.01

______                                                     ____________

330,355.01
===========
 
                                      -4-
<PAGE>
 
SCHEDULE 2.1


                           Property                               
                           Numbers      Present              Manage?   
                           of Leased     Annual     Lease    Maintain?  
Tenant Name & Address      Properties     Rent      Term      Occupy?   
- ---------------------      ----------   --------  --------   ---------

The Price Organization &     P1          154,080  15 years   Occupy
Price Buick-Pontiac, Inc.                         ending
2016 N. Salisbury Blvd.                           12-31-06
Salisbury, MD 21801

                                         ______

 
                                         154,080
                                         =======

                                      -5-
<PAGE>
 
SCHEDULE 7.4

<TABLE> 
<CAPTION> 
          Seller's Liabilities and Agreements
- -----------------------------------------------------------
<S>                                                                   <C>
1.       Unsecured payable to Good News Salisbury, Inc. for
         leasehold improvements constructed on some of the
         Properties by Good News Salisbury, Inc.
                                                                      201,003
                                                                      =======
2.       Lease with Price Organization dated December 10,        
         1991
</TABLE>



NOTE:     This listing of contracts, agreements, liabilities, claims and
- ----                                                                    
          obligations of the Seller omits the secured debt shown in Schedule
          1.2, which is contemplated to be paid off at Closing.

                                      -6-
<PAGE>
 
SCHEDULE 7.8


[None]

                                      -7-
<PAGE>
 
SCHEDULE 7.11

Statement:    Seller represents that all Properties are zoned C-2, which permits
- ---------                                                                       
use of the Properties for the operation of vehicle dealerships and related
operations as they are currently used.


<TABLE> 
<CAPTION> 
       Seller-Defined Reference
- -------------------------------------
Property                                                                 Tax Account #                     Zoning
Number              Name                  Street Address                Tax Map, Grip, Parcel, Lots        Classification
- ----------      -------------           -----------------------         ---------------------------        --------------
<S>             <C>                     <C>                             <C>                                <C>
  P1            Pontiac-Buick           2016 N. Salisbury Blvd.         09-014985                          C-2
                                        Salisbury, MD 21801             TM 29, G 22, P 195
</TABLE>

                                      -8-
 
<PAGE>
 
SCHEDULE 7.13.4



[None]

                                      -9-
                        
<PAGE>
 
SCHEDULE 7.13.5(A)


To the best of the Seller's knowledge, the Seller has not treated, disposed of,
or arranged for the disposal of hazardous wastes or materials on or from the
Properties.

To the best of the Seller's knowledge, Good News Salisbury, Inc. and its
affiliates, as former tenants of the Seller, have not treated or disposed of
hazardous wastes or materials on the Properties.  Using third party vendors,
Good News Salisbury, Inc. and its affiliates have arranged for the disposal of
certain wastes and materials used in the ordinary course of business.  Good News
Salisbury, Inc. is not certain as to how or where these third party vendors
disposed of these wastes and materials.  At the request of the Company or
Partnership, vendor manifests documenting the removal of such wastes and
materials from the Properties shall be available for inspection by the Company
and/or Partnership.  Good News Salisbury, Inc. and its affiliates stored certain
wastes and materials in both aboveground and underground storage tanks.  All
underground storage tanks have subsequently been removed.  All existing
aboveground storage tanks are listed in Schedule 7.13.5(b).

The Seller is unable to represent how the Price Organization treats or disposes
of its wastes.

                                     -10-
<PAGE>
 
SCHEDULE 7.13.5(B)


Statement 1:   To the best of the Seller's knowledge, all underground storage
- -----------                                                                  
tanks on the Properties have been removed.

To the best of the Seller's knowledge, the following is a listing of all above
ground storage tanks on the Properties.

<TABLE>
<CAPTION>
                           Seller's
Property                     Tank                        Capacity
Numbers         Name        Ref. #       Contents      (in gallons)
- ----------  -------------  --------  ----------------  ------------
<S>         <C>            <C>       <C>               <C>
  P1        Buick-Pontiac    T16     10W-30 motor oil      500
                             T17     waste oil             275
 
</TABLE> 
 
                                     -11-
 
 
<PAGE>
 
SCHEDULE 7.13.5(C)


The Seller is not aware of asbestos inside or a part of any buildings on the
Properties.  The Seller has not conducted investigations designed to identify
the presence of asbestos.

                                     -12-
<PAGE>
 
SCHEDULE 7.13.5(F)


State Water Appropriation Permit (# W184G024[02])

                                     -13-
<PAGE>
 
SCHEDULE 7.14


All insurance is covered under a single policy (# 133660M) with Universal
Underwriters Insurance Company.

                                     -14-
<PAGE>
 
SCHEDULE 7.17



1.        Lease with Price Organization/Price Buick - Pontiac, Inc.


          Note 1:   The Seller is unable to make representations about the
          ------                                                          
          agreements, contracts, licenses and permits of the Price Organization
          and Price Buick-Pontiac, Inc.

                                     -15-
<PAGE>
 
SCHEDULE 7.19

<TABLE> 
<CAPTION> 
                                                                         Outstanding
                                                                         Balance as of
  Seller's Liabilities other than Mortgages                                 12-31-97
- ------------------------------------------------------------------          --------
<S>                                                                      <C>
Unsecured payable to Good News Salisbury, Inc. for leasehold
improvements constructed on some of the Properties by Good News
Salisbury, Inc.
          Principal                                                          189,625
          Accrued Interest                                                    11,378
 
Deposit on Price Organization lease                                           16,000
 
                                                                            -------- 
 
Total Seller Liabilities other than Mortgages                                217,003
                                                                            ========
</TABLE>
                                     -16-

<PAGE>
 
                                 EXHIBIT 23.5

Consent of Trustee Nominee

                          Capital Automotive REIT

    I hereby consent to be named in the Registration Statement on Form S-11 of
Capital Automotive REIT relating to the proposed initial public offering of
common shares of beneficial interest, including in any amendment or supplement
to any prospectus included in such Registration Statement, any amendment to such
Registration Statement or any subsequent Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended.

                                       By: /s/  JOHN J. POHANKA
                                           --------------------
John J. Pohanka
Marlow Heights, Maryland
As of November 26, 1997

<PAGE>
 
                                 EXHIBIT 23.6

Consent of Trustee Nominee

                Capital Automotive REIT

    I hereby consent to be named in the Registration Statement on Form S-11 of
Capital Automotive REIT relating to the proposed initial public offering of
common shares of  beneficial interest, including in any amendment or supplement
to any prospectus included in such Registration Statement, any amendment to such
Registration Statement or any subsequent Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended.

                                     By: /s/ ROBERT M. ROSENTHAL
                                        ------------------------------
Robert M. Rosenthal
Arlington, Virginia
As of November 26, 1997

<PAGE>
 
                                 EXHIBIT 23.7

Consent of Trustee Nominee

               Capital Automotive REIT

    I hereby consent to be named in the Registration Statement on Form S-11 of
Capital Automotive REIT relating to the proposed initial public offering of
common shares of  beneficial interest, including in any amendment or supplement
to any prospectus included in such Registration Statement, any amendment to such
Registration Statement or any subsequent Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended.

                                  By: /s/ JOHN D. REILLY
                                     -----------------------------

John D. Reilly
Whittier, California
As of January 13, 1998

<PAGE>
 
                                 EXHIBIT 23.8

Consent of Trustee Nominee

               Capital Automotive REIT

    I hereby consent to be named in the Registration Statement on Form S-11 of
Capital Automotive REIT relating to the proposed initial public offering of
common shares of  beneficial interest, including in any amendment or supplement
to any prospectus included in such Registration Statement, any amendment to such
Registration Statement or any subsequent Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended.

                                   By: /s/ WILLIAM E. HOGLUND
                                      ---------------------------------

William E. Hoglund
Naples, Florida
As of January 13, 1998

<PAGE>
 
                                                                   Exhibit 23.13

Consent of Trustee Nominee

               Capital Automotive REIT

    I hereby consent to be named in the Registration Statement on Form S-11 of
Capital Automotive REIT relating to the proposed initial public offering of
common shares of  beneficial interest, including in any amendment or supplement
to any prospectus included in such Registration Statement, any amendment to such
Registration Statement or any subsequent Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended.

                                     By: /s/ William R. Swanson
                                        ------------------------------
                                             William R. Swanson

William R. Swanson
Arlington, Virginia
As of February 4, 1998

<PAGE>
 
                                                                   Exhibit 23.14

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the use of our report on
Capital Automotive REIT (and to all references to our firm) included in or made 
a part of this Registration Statement.


Washington, D.C.,
February 3, 1998

<PAGE>
 
                                                                   Exhibit 23.15
 
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
on Genera Enterprises, Inc. and Affiliated Company (and to all references to our
firm) included in or made a part of this Registration Statement.

Baltimore, Maryland
February 3, 1998


© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission