CAPITAL LEASE FUNDING INC, S-11, 1998-03-27

CAPITAL LEASE FUNDING INC
S-11, 1998-03-27

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1998
REGISTRATION NO.
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAPITAL LEASE FUNDING, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
------------------------------

85 JOHN STREET, 12TH FLOOR
NEW YORK, NEW YORK 10038
TELEPHONE: (212) 587-7676
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------

WILLIAM R. POLLERT, PRESIDENT,
PAUL H. MCDOWELL, ESQ., GENERAL COUNSEL
CAPITAL LEASE FUNDING, INC.
85 JOHN STREET, 12TH FLOOR
NEW YORK, NEW YORK 10038
TELEPHONE: (212) 587-7676
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agents for Service)
------------------------------

COPIES TO:

<TABLE>
<S> <C>
KARSTEN GIESECKE, ESQ. RICHARD F. KADLICK, ESQ.
ALLEN CURTIS GREER, II, ESQ. MARY SUE BUTCH, ESQ.
CADWALADER, WICKERSHAM & TAFT SKADDEN, ARPS, SLATE,
100 MAIDEN LANE MEAGHER & FLOM
NEW YORK, NEW YORK 10038 919 THIRD AVENUE
TELEPHONE: (212) 504-6000 NEW YORK, NEW YORK 10022
FACSIMILE: (212) 504-6666 TELEPHONE: (212) 753-2716
FACSIMILE: (212) 753-3744
</TABLE>

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

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Common Stock....................... par value $.01 7,762,500 $16.00 $124,200,000 $36,639
</TABLE>

(1) Includes shares of Common Stock which may be purchased by the Underwriters
to cover over-allotments, if any.

(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933.

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

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<PAGE>
CAPITAL LEASE FUNDING, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OR REGISTRATION STATEMENT OF INFORMATION
REQUIRED BY ITEMS 1-30

<TABLE>
<CAPTION>
FORM S-11 ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS OR PAGE REFERENCE
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Forepart of Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors
4. Determination of Offering Price...................... Underwriting
5. Dilution............................................. Dilution
6. Selling Security Holders............................. *
7. Plan of Distribution................................. Underwriting
8. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
9. Selected Financial Information....................... Selected Financial Information
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ Management's Discussion and Analysis of Financial
Condition and Results of Operations
11. General Information as to Registrant................. Prospectus Summary; The Company
12. Policy with Respect to Certain Activities............ The Company; Yield Considerations Related to the
Company's Investments; Description of Real
Estate/Targeted Investments
13. Investment Policies of Registrant.................... Yield Considerations Related to The Company's
Investments
14. Description of Real Estate........................... *
15. Operating Data....................................... *
16. Tax Treatment of Registrant and Its Security
Holders............................................ Prospectus Summary; Risk Factors; Federal Income Tax
Considerations
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters...... Risk Factors; Dividend and Distribution Policy;
Principal Stockholders
18. Description of Registrant's Securities............... Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of Common Stock; Federal
Income Tax Considerations
19. Legal Proceedings.................................... The Company
20. Security Ownership of Certain Beneficial Owners and
Management......................................... Principal Stockholders
21. Directors and Executive Officers..................... Directors and Executive Officers
22. Executive Compensation............................... Directors and Executive Officers
23. Certain Relationships and Related Transactions....... Certain Relationships and Related Transactions
24. Selection, Management and Custody of Registrant's
Investments........................................ Risk Factors; Description of Real Estate/ Targeted
Investments
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-11 ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS OR PAGE REFERENCE
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
25. Policies with Respect to Certain Transactions........ The Company
26. Limitations of Liability............................. The Company
27. Financial Statements and Information................. Index to Financial Statements
28. Interests of Named Experts and Counsel............... Experts
29. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
30. Quantitative and Qualitative Disclosures About Market
Risk............................................... *
</TABLE>

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* Not Applicable
<PAGE>
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED , 1998

PROSPECTUS
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
SOLICIATION 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.
<PAGE>
6,750,000 SHARES

CAPITAL LEASE FUNDING, INC.

COMMON STOCK

Capital Lease Funding, Inc. (the "Company") is a Maryland corporation created to
continue and expand the business of Capital Lease Funding, L.P. which, since
1995, has been engaged in originating and securitizing mortgage loans secured by
first liens on commercial properties supported by long-term net leases to
tenants meeting established credit rating standards. The Company's objective is
to generate income for distribution to stockholders by continuing and expanding
such activities, and to extend them to related real estate lines of business
which the Company's management believes will generate attractive risk-adjusted
returns on invested capital. The Company intends to elect to be taxed as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"), and generally will not be subject to federal taxes on its
income to the extent that it distributes 95% of its Adjusted Taxable Income to
stockholders and maintains its qualification as a REIT.

All of the 6,750,000 shares of common stock, par value $.01 per share (the
"Common Stock") of the Company offered hereby are being sold by the Company (the
"Offering"). Prior to the Offering, there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
for the Common Stock will be between $14 and $16 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. Application has been made to list the Common Stock on the
New York Stock Exchange (the "NYSE") under the symbol " ."

SEE "RISK FACTORS" COMMENCING ON PAGE 17 TO 30 FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY, INCLUDING:

- The Company and its predecessor have been in operation since 1995, have
not had profitable operations in the past, and may not be able to execute
successfully the Company's business plan and its planned expansion into
related real estate lines of business.

- The Company's revenues and profitability depend upon its ability to
continue to originate and securitize Mortgage Loans.

- The Company's operations rely upon the Company's ability to maintain
third-party debt financing.

- The Company intends to hold significant amounts of Mortgage Loans pending
securitization, the market value of which could be adversely affected by
market or credit events.

- The Company expects to retain or invest in certain Mortgage Loans or
interests in certain classes of mortgage securities or other real estate
assets which are subordinate in right of payment to other classes of
interest and which will be subject to a higher risk of loss.

- The Company's investments and income will be sensitive to changes in
prevailing interest rates, reshaping of the yield curve and CMBS yields,
which may hinder the Company's ability to securitize its loans on
favorable terms.

- The Company intends to use hedging strategies to protect itself against
interest rate risk which may not be successful in insulating the Company
from such risk.

- The Company will be taxed as a corporation if it fails to maintain its
qualification as a REIT.

- Following the Offering, the Company will be highly-leveraged.

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

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
PER SHARE.......................................
TOTAL (3).......................................
</TABLE>

(1) The Company has agreed to indemnify the several 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 $1,112,500.

(3) The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to 1,012,500 additional shares of Common Stock on the same
terms and conditions as set forth here. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be , the
total Underwriting Discounts and Commissions will be , and the total
Proceeds to the Company will be $ . See "Underwriting."
------------------------------

The shares of Common Stock are being offered by the several Underwriters subject
to delivery by the Company and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares of Common Stock to the Underwriters will be made through
the facilities of The Depository Trust Company in New York, New York on or about
, 1998.
------------------------------

PRUDENTIAL SECURITIES INCORPORATED

, 1998
<PAGE>
----------------

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF COMMON
STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY
THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
------------------------
<PAGE>
TABLE OF CONTENTS

<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY......................................................................................... 1
The Company.............................................................................................. 1
General................................................................................................ 1
Credit Tenant Loan Business............................................................................ 2
Related Businesses..................................................................................... 4
Competitive Advantages................................................................................. 5
Business Strategy...................................................................................... 6
Existing Loans and Pipeline for Future Originations.................................................... 7
Management............................................................................................. 9
Loan Origination Capability and Correspondent Network.................................................. 9
Credit Facilities...................................................................................... 10
Industry Overview...................................................................................... 10
Summary Risk Factors..................................................................................... 11
Formation Transactions................................................................................... 13
REIT and Investment Company Act Compliance............................................................... 13
Dividend Policy and Distributions........................................................................ 14
Summary Selected Historical and Pro Forma Financial Information.......................................... 14
The Offering............................................................................................. 16
RISK FACTORS............................................................................................... 17
General................................................................................................ 17
Operating.............................................................................................. 18
Dilution, Tax, Legal and Other Risks................................................................... 27
USE OF PROCEEDS............................................................................................ 31
DIVIDEND AND DISTRIBUTION POLICY........................................................................... 31
CAPITALIZATION............................................................................................. 32
DILUTION................................................................................................... 33
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION.................................................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 36
Overview............................................................................................... 36
Historical Results--January 1997 Securitization........................................................ 36
Current Loans.......................................................................................... 37
Certain Accounting Policies............................................................................ 37
Historical Results of Operations--1997 to 1996......................................................... 38
Pro Forma Results of Operations--1997.................................................................. 39
Liquidity and Capital Resources........................................................................ 39
Leverage............................................................................................... 40
Hedging................................................................................................ 40
Funds from Operations.................................................................................. 40
Interest Rates and Inflation........................................................................... 41
Year 2000 Issues....................................................................................... 41
THE COMPANY................................................................................................ 42
General................................................................................................ 42
Credit Tenant Loan Business............................................................................ 43
Related Businesses..................................................................................... 45
Competitive Advantages................................................................................. 46
Business Strategy...................................................................................... 47
</TABLE>

i
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<TABLE>
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PAGE
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<S> <C>
Existing Loans and Pipeline for Future Originations.................................................... 48
Management............................................................................................. 50
Loan Origination Capability and Correspondent Network.................................................. 50
Credit Facilities...................................................................................... 51
Loan Process........................................................................................... 52
Hedging Strategy....................................................................................... 52
Securitization......................................................................................... 52
Company Policies....................................................................................... 53
Industry Overview...................................................................................... 57
Employees.............................................................................................. 58
Competition............................................................................................ 58
Certain Key Relationships.............................................................................. 58
Facilities............................................................................................. 58
Legal Proceedings...................................................................................... 58
FORMATION TRANSACTIONS..................................................................................... 59
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS.................................................. 60
Mortgage Loans......................................................................................... 60
Commercial Mortgage-Backed Securities.................................................................. 60
DESCRIPTION OF REAL ESTATE/TARGETED INVESTMENTS............................................................ 62
Credit Tenant and Other Mortgage Loans................................................................. 62
Net Leased Real Estate................................................................................. 62
Commercial Mortgage-Backed Securities.................................................................. 62
Other Investments...................................................................................... 63
Investment in Other Entities........................................................................... 63
Foreign Investments.................................................................................... 64
Initial Investments; Existing Loans, Commitments and Properties........................................ 64
DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 68
Board of Directors..................................................................................... 70
Committees of the Board................................................................................ 70
Compensation of Directors.............................................................................. 71
Employment Agreements.................................................................................. 71
Executive Compensation................................................................................. 71
Stock Options.......................................................................................... 71
Management Stockholders' Agreement..................................................................... 72
Expenses............................................................................................... 72
Limitation of Liability and Indemnification............................................................ 72
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 74
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 74
DIVIDEND REINVESTMENT AND DIRECT PURCHASE PLAN............................................................. 76
FEDERAL INCOME TAX CONSIDERATIONS.......................................................................... 78
Taxation of the Company................................................................................ 78
Requirements for Qualification......................................................................... 79
Proposed Legislation................................................................................... 86
Failure to Qualify..................................................................................... 86
Taxation of Taxable U.S. Stockholders.................................................................. 86
Taxation of Stockholders on the Disposition of the Common Stock........................................ 88
Capital Gains and Losses............................................................................... 88
Information Reporting Requirements and Backup Withholding.............................................. 89
Taxation of Tax-Exempt Stockholders.................................................................... 89
Taxation of Non-U.S. Stockholders...................................................................... 90
</TABLE>

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<TABLE>
<CAPTION>
PAGE
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<S> <C>
State and Local Taxes.................................................................................. 91
ERISA CONSIDERATIONS....................................................................................... 92
DESCRIPTION OF CAPITAL STOCK............................................................................... 92
General................................................................................................ 92
Registration Rights of Certain Holders................................................................. 93
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER.......................................................... 93
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS................................. 94
Number of Directors; Classification of the Board of Directors.......................................... 94
Removal; Filling Vacancies............................................................................. 95
Business Combinations.................................................................................. 95
Control Share Acquisition Statute...................................................................... 96
Amendment to the Charter............................................................................... 96
Dissolution of the Company............................................................................. 97
Advance Notice of Director Nominations and New Business................................................ 97
Meetings of Stockholders............................................................................... 97
Operations............................................................................................. 97
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Charter
and Bylaws........................................................................................... 97
Transfer Agent and Registrar........................................................................... 97
Reports to Stockholders................................................................................ 97
Amendment to the Articles of Incorporation............................................................. 98
SHARES ELIGIBLE FOR FUTURE SALE............................................................................ 98
UNDERWRITING............................................................................................... 99
LEGAL MATTERS.............................................................................................. 100
EXPERTS.................................................................................................... 101
ADDITIONAL INFORMATION..................................................................................... 101
GLOSSARY................................................................................................... 102
FINANCIAL STATEMENTS AND INFORMATION....................................................................... F-1
</TABLE>

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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED
ELSEWHERE AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT (I) THE FORMATION
TRANSACTIONS ARE CONSUMMATED, (II) THE INITIAL PUBLIC OFFERING PRICE IS $15 PER
SHARE (THE MID-POINT OF THE ANTICIPATED RANGE OF THE INITIAL PUBLIC OFFERING
PRICES SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS), AND (III) THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. UNLESS THE CONTEXT
OTHERWISE REQUIRES, AS USED HEREIN THE TERM "COMPANY" INCLUDES (A) CAPITAL LEASE
FUNDING, INC., A MARYLAND CORPORATION ("CLF, INC."), AND ANY SUBSIDIARIES WHICH
IT MAY HAVE, FROM TIME TO TIME, AND (B) CAPITAL LEASE FUNDING, L.P., A DELAWARE
LIMITED PARTNERSHIP ("CLF"), THE PREDECESSOR ENTITY TO CLF, INC.

SEE "GLOSSARY" FOR THE DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS.

THE COMPANY

GENERAL

The Company was formed on March 6, 1998, to continue the growth of CLF as a
specialty lender. Since 1995, the Company has been primarily engaged in the
business of originating, underwriting and securitizing mortgage loans secured by
first liens on commercial properties which are long-term net leased to
Investment Grade and Near Investment Grade credit tenants ("Credit Tenants," and
loans to owners of real property subject to Credit Tenant Leases, "Credit Tenant
Loans"). The Company's financing strategy is to accumulate Credit Tenant Loans
and periodically securitize them with the intention of matching the terms of its
assets with the terms of its long-term liabilities. The Company believes that
its national loan origination network of correspondents, underwriting and loan
processing systems, securitization experience and loan product innovations have
established the Company as a leading originator and securitizer of
Credit Tenant Loans and that its continued innovation will permit the Company to
expand into other related real estate investment activities.

Since 1995, the Company has closed over 100 Credit Tenant Loans with an
aggregate principal amount exceeding $425 million. The Company expects to
continue to fund all of its loans through warehouse and other lines of credit
which, upon closing of this Offering, will aggregate approximately $930 million
and will be provided by NationsBank, N.A. ("NationsBank"), and Prudential
Securities Credit Corporation ("Prudential Credit"). The Company is currently
negotiating the terms of these credit facilities which are expected to consist
of an increase in the size of its existing warehouse credit facility with
NationsBank and new warehouse and other lines of credit with Prudential Credit.

In 1997, CLF completed the first ever securitization of a pool of Credit
Tenant Loans involving a variety of Credit Tenants and multiple net leased
properties. This transaction involved a private placement of approximately $130
million of various classes of securities backed by a pool of 30 Credit Tenant
Loans with 13 Credit Tenants. As of March 15, 1998, CLF held 84 Credit Tenant
Loans with an aggregate principal balance exceeding $306 million (the "Existing
Loans"). In addition, CLF has issued 62 commitments to fund further Credit
Tenant Loans with an aggregate committed principal balance of approximately $225
million (the "Committed Loans"). Furthermore, the Company has purchased or
committed to purchase real property net leased to tenants with an aggregate
purchase price of $ (the "Purchase Commitments"). In connection with the
Formation Transactions, the Company will acquire all of the existing business of
CLF, including the Existing Loans, the Committed Loans and the Purchase
Commitments, as well as its pipeline of outstanding loan applications and term
sheets (which, as of March 15, 1998, totaled $856 million), and the business
which may be generated therefrom. See "Existing Loans, Commitments and
Properties." The Company intends to engage in a transaction to securitize all or
a portion of the Existing Loans and certain of the Committed Loans following
completion of the Offering, and expects to securitize the remaining Committed
Loans in future transactions. Upon completion of the Formation Transactions, the
Company will operate as a self-administered and self-managed real estate

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<PAGE>
company and expects to qualify as a real estate investment trust ("REIT") for
United States federal income tax purposes.

The Company's objective is to maximize stockholder value by creating an
on-going and increasing cash flow stream available for distribution through
originating and securitizing Credit Tenant Loans and by investing in related net
leased real estate assets. Upon completion of the Offering, the Company intends
to continue to expand its Credit Tenant Loan business and to expand into related
real estate lines of business. The Company expects that its expansion into
related real estate lines of business will enhance the growth of its existing
Credit Tenant Loan business. These related lines of business include Mezzanine
Construction Lending, the purchase of real estate net leased to Credit Tenants
(generally in conjunction with a Credit Tenant Loan), investment in the
Subordinate Interests in securitized pools of the Company's Credit Tenant Loans,
and selective investments in Subordinate Interests in other CMBS (particularly
those which include, as a component thereof, Credit Tenant Loans).

The Company's principal executive offices are located at 85 John Street,
12th Floor, New York, New York 10038, telephone number (212) 587-7676. The
Company is a Maryland corporation.

CREDIT TENANT LOAN BUSINESS

Financing Credit Tenant Loans through securitizations of pools of
diversified credits in the capital markets is a new financing technique and was
pioneered by the Company. Credit Tenant Loans are mortgage loans made by the
Company to owners of commercial properties net leased to Credit Tenants under
Credit Tenant Leases. Each Credit Tenant Loan is secured by a first mortgage on
a commercial real property subject to a long-term net lease to a Credit Tenant,
and by a collateral assignment of the Credit Tenant Lease and all rents due
under the lease.

The Company primarily focuses on making loans on properties net leased to
Credit Tenants. This focus is what differentiates the Company from conventional
real estate lenders. The typical Credit Tenant Loan (other than the Company's
Extended Term Loans) made by the Company is fully amortized by scheduled rent
payments under the Credit Tenant Lease (or payments under insurance policies and
other mechanisms designed to protect against defaults in certain events where
sufficient rent might not otherwise be payable or to replace other required
payments under the applicable loan). Furthermore, under the Company's Credit
Tenant Loans, prepayments are available only after a period of time (generally
eight years) and then only with a yield maintenance premium. As a result, the
Credit Tenant Loans originated by the Company are analyzed principally on the
basis of the credit of the applicable Credit Tenant and whether the stream of
rental payments under the applicable Credit Tenant Lease and such insurance
policies and other mechanisms (rather than liquidation value of the property)
will be sufficient to pay all amounts due under the loan. Consequently, the
Company's Credit Tenant Loans tend to have debt service coverage ratios lower
than conventional mortgage loans (approaching a ratio of scheduled rent payments
to debt service under the loan of 1.0) and higher loan-to-value ratios
(95-100%).

The credit underwriting analysis for conventional real estate lending relies
heavily on the liquidation value of collateral securing the loan and therefore
loan proceeds are generally limited to amounts significantly lower than the
appraised value of the applicable real property. Even where the mortgaged
property is net leased to a Credit Tenant, the underwriting of such Mortgage
Loans has nevertheless typically been done largely on the basis of an assessment
of the liquidation value of the mortgaged property (taking into account the
anticipated cash flows from the lease as appropriate) so long as (i) the lease
payments are insufficient to pay interest on and fully amortize the loan (if,
for example, a portion of the loan balance remains outstanding at the end of the
lease term) or (ii) the tenant has significant rights to terminate the lease or
abate rent. Consequently, the original principal balance of such loans is
limited by a requirement to maintain a property liquidation value significantly
in excess of the loan balance.

Historically, Credit Tenant Loans of the type made by the Company were only
available when the applicable Credit Tenant Lease was a "bond" lease. In a
"bond" lease the Credit Tenant is responsible for

2
<PAGE>
every monetary obligation associated with managing, owning, developing and
operating the leased premises including, but not limited to the costs associated
with utilities, taxes, insurance, maintenance, repairs and losses due to
casualty and condemnation. As a result, the Credit Tenant's ability to terminate
a lease or abate rent on a "bond" lease (other than as a result of bankruptcy)
is non-existent or available under extremely limited circumstances.

In contrast, a net lease (often referred to as a double- or triple-net
lease) generally is a lease on a long-term basis (ten years or more) to tenants
who are responsible for paying all or many of the costs of owning, operating,
and maintaining the leased property during the term of the lease, in addition to
the payment of a monthly net rent to the landlord for the use and occupancy of
the premises. However, under many net leases, a tenant has the right to
terminate the applicable lease or abate rent in certain circumstances, such as
if the property becomes subject to significant casualty loss or condemnation, if
the landlord fails to maintain or repair the property, provide adequate parking,
maintain common areas or comply with affirmative covenants of the lease, or if
the landlord engages in or promotes a competing property within a specified
radius of the property or otherwise violates negative covenants in the lease.

Properties subject to net leases which did not qualify as "bond" leases have
been financed as conventional real estate loans. The use of the Company's
specialized Lease Enhancement mechanisms substantially mitigates the risk of a
potential interruption in the rental stream so that such Credit Tenant Leases
can be evaluated as if they were "bond" leases. Upon securitization, a properly
structured Credit Tenant Loan and Credit Tenant Lease with the appropriate Lease
Enhancements can be expected to receive a rating from one or more of the Rating
Agencies equivalent to the unsecured debt rating of the applicable Credit
Tenant. The expected receipt of such a rating increases the amount which may be
borrowed against the collateral of the Credit Tenant Loan and Lease (as compared
to a conventional real estate loan), enabling the Company to compete
successfully for loan originations, while preserving the profits available to
the Company in the securitization of Credit Tenant Loans.

The Company pioneered the development of many of these Lease Enhancement
mechanisms. In addition, the Company continues to design creative and new
financing programs which enable the Company to offer borrowers a wide array of
Credit Tenant Loan programs to best meet their needs. The Company believes that
by offering these financing programs in addition to increasing the number of
currently available programs, it will continue to be a leader in the Credit
Tenant Loan business and increase its market penetration. The Company expects
that proceeds from the Offering will enable the Company to continue to develop
and aggressively promote these programs.

CONSTRUCTION/PERMANENT LOANS. In conjunction with NationsBank, the Company
has developed a program under which a developer/borrower may obtain both a
construction loan from NationsBank and a permanent loan from the Company with
one set of documents in one integrated closing process. The program has been
marketed under the name "1TC" for "One Time Close." This program enables a
borrower (provided that a pre-construction Credit Tenant Lease is in place) to
enter into a commitment and final documentation for permanent financing at an
early stage without additional transaction costs, and also allows the borrower
to "lock in" an interest rate for the permanent loan at the time the
construction loan is made. The 1TC program (introduced in August 1997) enables
the Company to build and manage its loan pipeline by arranging for permanent
financing earlier in the borrowing cycle. As of March 15, 1998, the Company had
committed to fund $88.4 million in the aggregate of 1TC loans, including $60
million for which NationsBank has commenced advances under the construction loan
portion. In addition, in March 1998, the first 1TC loan completed the
construction phase and the permanent loan was funded by the Company. The Company
is developing similar programs with other selected banks that make construction
loans on net leased properties.

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the amortization period, loan proceeds can be increased or debt service can be
reduced (making more cash flow available to the borrower), enhancing certain tax
benefits that may be made available to borrowers. As of March 15, 1998, the
Company had funded approximately $46 million in additional aggregate principal
amount of extended-term loans and has committed to fund approximately $53
million in aggregate principal of extended-term loans. This program has been
marketed under the name the "Extended Amortization Program."

CONSUMER PRICE INDEXED LOANS. The Company is a discounted cash flow lender
and its Credit Tenant Loans typically depend upon repayment from the fixed
rental stream under the Credit Tenant Lease. The Company's consumer price index
("CPI") program (introduced in March 1998) makes available additional loan
proceeds based upon a portion of expected Credit Tenant Lease rental increases
as a result of contractual CPI adjustments (typically up to two percent per
annum) as if they were fixed and determinable at the time of execution of the
Credit Tenant Lease.

RELATED BUSINESSES

As part of the Company's growth plans, the Company intends to expand into
real estate lines of business which are related to, but do not consist solely
of, Credit Tenant Loans. These additional activities are an outgrowth of the
Credit Tenant Loan business, and their development uses many of the same product
innovations and personnel skills that have permitted the Company to develop and
grow its Credit Tenant Loan business. The related real estate lines of business
to which the Company has devoted management attention and development efforts to
date are:

MEZZANINE CONSTRUCTION LOANS. Under the Company's "Mezzanine Construction"
Loan program, the Company will lend to a developer (provided that an executed
Credit Tenant Lease is in place) up to the difference between a developer's
project costs and the proceeds (generally 75% to 90% of the project costs) of
the available construction loan. The Company will only make Mezzanine
Construction Loans to developers who will qualify for a permanent Credit Tenant
Loan with the Company (based on the level of rent payments under the Credit
Tenant Lease) in an amount significantly in excess of the amounts required to
pay the senior construction loan and Mezzanine Construction Loan and return the
borrower's invested capital. The Company expects these transactions to generate
yields superior to conventional bank construction loan yields and significantly
better than Credit Tenant Loans. Furthermore, one of the design features of this
product is to enable the Company to develop relationships with borrowers earlier
in the construction and borrowing cycle. The Company has a dedicated credit
facility with one of its lenders for making Mezzanine Construction Loans. These
loans will be secured by second mortgages and/or pledges of ownership interests
in the borrower. In addition, based upon an analysis of the creditworthiness of
the borrower, these loans will be full recourse to a creditworthy borrower or
personally guaranteed by the principals of the borrower during the construction
period.

EQUITY INVESTMENTS IN REAL ESTATE. In connection with its Credit Tenant
Loan business, the Company frequently is presented with opportunities to
purchase net leased properties from developers, other owners or tenants of such
properties. From time to time, the Company intends to purchase such a property,
make its usual Credit Tenant Loan upon such property (to be securitized later)
and retain ownership of the property. Because net leased properties are
generally required to be maintained by tenants, the Company does not expect to
incur significant management costs with respect to such properties.

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analyze the risks associated with investing in the Subordinate Interests in its
own pools, management believes that the Company is well-positioned to analyze
and invest in interests in CMBS issued by unrelated third parties (particularly
those which include, as a component thereof, Credit Tenant Loans). The Company
intends to invest primarily in (i) Subordinate Interests in CMBS pools
originated by the Company and others, including Investment Grade, Non-Investment
Grade and, in the case of those originated by the Company, unrated interests,
and (ii) interest-only classes in some of such CMBS pools. Subordinate Interests
and interest-only classes generally afford a higher yield and entail greater
risk than more senior investment grade securities.

OTHER INVESTMENTS. The Company intends to engage in other real estate
related businesses from time to time, which management believes are
complementary to its Credit Tenant Loan business. These investments may include
making equity investments in, and/or Credit Tenant Loans on, real properties net
leased to Credit Tenants in selected international markets. The Company may also
invest in interests in other REITs, registered investment companies,
partnerships and other investment funds and real estate operating companies.

COMPETITIVE ADVANTAGES

There are several companies engaged in the business of providing Credit
Tenant Loans as an adjunct to their other lending businesses. The Company
believes, however, that it enjoys competitive advantages over such companies.

FOCUS AND EXPERIENCE. The Company believes that it has the largest
organization in the U.S. dedicated to originating, underwriting and securitizing
Credit Tenant Loans. In addition, because management was instrumental in
developing a wide array of Lease Enhancements for Credit Tenant Loans and Credit
Tenant Leases, and in securitizing these instruments for the first time,
management has developed a level of expertise which is not easily matched by
competitors not possessing the Company's specific Credit Tenant Loan focus and
experience. The Company's focus and expertise are essential to competing
effectively in the specialized Credit Tenant Loan market, in enabling the
Company to attract borrowers and correspondent mortgage brokers and efficiently
identifying and processing loans. In addition, the Company believes that its
experience in working with the Rating Agencies in developing new products and in
securitizing its first loan portfolio have given management valuable insight
into the methodologies and criteria the Rating Agencies employ in reviewing and
rating Credit Tenant Loans individually and on a pool basis.

INNOVATIVE PROGRAMS. The Company believes that it has been continuously
able to develop innovative lending programs that have provided borrowers with an
increasing number of attractive financing options, largely unavailable from
traditional mortgage lenders, while simultaneously strengthening and expanding
its Credit Tenant Loan business. Many of these programs have been designed to
enable the Company to develop relationships with borrowers earlier in the
construction and borrowing cycle.

RELATIONSHIPS WITH CORRESPONDENTS. The Company believes that it has
established strong working relationships with its correspondent mortgage
brokers. Through its emphasis on training, process simplification, new product
development, ongoing communications, marketing support and service, the Company
believes that it will continue to retain, expand and continually improve the
origination capabilities of its correspondents.

RELATIONSHIPS WITH CREDIT TENANTS. As of March 15, 1998, the Company had
closed over 100 Credit Tenant Loans backed by leases with 34 different Credit
Tenants. The Company believes that through this contact it has developed good
working relationships with a number of Credit Tenants. The Company believes that
a good working relationship with Credit Tenants enables the Company to structure
and close its Credit Tenant Loans in an efficient and timely manner, that these
relationships will lead to referrals of business with new borrowers and are
expected, in the future, to lead to the development of financing programs
directly with Credit Tenants.

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EFFICIENT OPERATIONS. The Company has continuously engineered its loan
underwriting and closing process with the intent of eliminating redundant
procedures and speedily approving loans to prospective borrowers. Management
believes that its current process is one of the most streamlined and
comprehensive in the commercial mortgage lending industry. The Company believes
that this process appeals to correspondent mortgage brokers, Rating Agencies and
borrowers by permitting timely funding in a cost-efficient manner, while
simultaneously reducing the Company's costs. The Company has established a
target of closing loans within 45 days from receipt of an application.

BUSINESS STRATEGY

The Company's principal business objective is to continue to focus on and
expand its lending and securitization business while at the same time
selectively expanding into related, value-added real estate lines of business in
a manner that generates attractive investment returns on a risk adjusted basis.

Management believes that the real estate industry has been undergoing a
significant restructuring which has, to some degree, been led by the increased
prominence of publicly held real estate companies (such as REITs). The Company
believes that this industry restructuring offers the Company significant
opportunities to expand its existing business, offer new products and expand
into related businesses.

The Company plans to build on its streamlined underwriting and processing
organization, national correspondent origination network, expertise in Credit
Tenant Leases and Credit Tenant Loans, product innovations and increased capital
as a result of the Offering to achieve its growth and profit objectives, through
the following:

- EXPANDING EXISTING BUSINESS. The Company intends to continue to build on
its growing market presence and increasing borrower base to expand
origination volume in existing business lines.

- INTRODUCING VALUE-ADDED, INNOVATIVE PRODUCTS. Over the past twelve months
the Company has introduced a number of value-added products that it
expects will enhance its returns. These products include
Construction/Permanent Loans, Extended-Term Loans, Consumer Price Indexed
Loans and Mezzanine Construction Loans. The Company continuously works to
develop new financing products and investment opportunities and expects to
commit to invest in such products or investments from time to time. The
Company believes that its strategy of continuing product innovation will
permit it to differentiate itself and anticipate opportunities to provide
greater services and to remain efficient and competitive in its areas of
focus and expertise. As part of its product development strategy, the
Company designs these products to develop relationships with borrowers and
Credit Tenants earlier in the construction and borrowing cycle as a means
of expanding and better controlling loan origination.

- EXPANDING THE COMPANY'S MARKET REACH. In the past, the Company's strategy
has been to finance properties net leased to Investment Grade tenants
only. The Company believes that it can utilize its existing credit tenant
financing programs to make and securitize Credit Tenant Loans on favorable
terms on properties net leased to Near Investment Grade tenants.
Management believes that the market for financing properties net leased to
tenants with Near Investment Grade ratings represents a large and
attractive business opportunity. In addition, the Company plans to
continue to build on its relationships with Credit Tenants to develop
innovative financing alternatives directly with Credit Tenants.

- ACQUIRING SELECTED PROPERTY LEASED TO A CREDIT TENANT. From time to time,
the Company is presented with the opportunity to purchase real property
net leased to a Credit Tenant. The Company intends to purchase selected
properties and generally will simultaneously finance such properties with
Credit Tenant Loans. The Company would then seek to securitize the Credit
Tenant Loans, while retaining the ownership of the properties.

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Although the Company presently outsources servicing, the Company may explore
acting as a primary or special servicer in the future if economically
beneficial. In addition, the Company believes that many of the technologies that
have supported the growth of the capital markets in U.S. commercial real estate
are readily exportable to offshore markets. As these offshore markets continue
to develop, the Company believes that U.S. firms will play an important role
(primarily in the early stages of development of such markets). Management
believes that the Company will be well positioned to expand into selected
international markets as a result of its position as a market innovator and its
expertise in Credit Tenant Loans. For example, the Company has established a
relationship with a leading United Kingdom real estate law firm and real estate
services companies who could act as advisors and have the ability to direct the
Company to sources of origination. The Company may explore such opportunities as
they arise.

The Company believes that its standardized procedures and integrated systems
enable the Company and its employees efficiently to manage a large and
increasing volume of transactions while maintaining underwriting quality and
high levels of service to borrowers. In addition, by coordinating the Company's
automated loan tracking and document production systems with those of its
outside legal counsel, the Company has been able to improve efficiency and
reduce the legal costs associated with closing loans.

As its loan volume grows, the Company expects to continue to improve cost
efficiency by expanding its internal loan closing support staff and relying less
on outside service providers. The Company also plans to continue to refine and
upgrade its systems and loan processing infrastructure to reduce costs and
improve efficiency and to support its growth strategy by selectively adding
employees and expanding its marketing and sales effort.

In 1997, the Company completed, the first securitization of a pool of Credit
Tenant Loans with a variety of Credit Tenants and multiple properties with the
sale of approximately $130 million of mortgage-backed pass-through certificates.
In connection with this securitization, the Company successfully demonstrated to
Duff & Phelps Credit Rating Co. ("DCR") and Fitch IBCA, Inc. ("Fitch") that the
Company's Lease Enhancement mechanisms eliminate or mitigate the risk that a
Credit Tenant could terminate a lease or abate rent in certain circumstances.
The effectiveness of the Company's underwriting practices is reflected in the
fact that of approximately $345 million of Company-underwritten Credit Tenant
Loans reviewed to date (including those included in the Company's securitization
and certain Credit Tenant Loans since made by the Company) by DCR, Fitch or S&P,
none were rejected as not meeting Rating Agency requirements for Credit Tenant
Loans. Furthermore, at March 15, 1998, of the 84 outstanding loans owned by the
Company with outstanding principal balances, none were delinquent more than 30
days.

Exposure to changes in underlying interest rates can have a great effect on
the value and profitability of the Company's Credit Tenant Loans, prior to
securitization. The Company has accordingly employed a hedging strategy designed
to mitigate the effect that movements in market rates have on its Credit Tenant
Loans prior to securitization. See "The Company--Hedging."

EXISTING LOANS AND PIPELINE FOR FUTURE ORIGINATIONS

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Company's previous securitization. Consequently, the post-Offering
securitization (based upon a preliminary review by the Rating Agencies of a
large portion of this loan pool) is expected to result in subordination levels
more favorable to the Company than were obtained in the first securitization. In
addition, the Company will assume commitments by CLF to purchase Net Leased Real
Estate in the amount of $ . In each case, the amount of the loans and
commitments listed above are as of March 15, 1998 and are expected to increase
between such date and the closing of the Offering.

The Company's pipeline includes potential loans in various stages of
development. The Company receives requests for Credit Tenant Lease financing on
a daily basis. At any given time, the Company may have hundreds of potential
transactions in different stages in the Company's loan qualification, pricing
and due diligence process. Once a lease has been reviewed by the Company and is
determined to be financeable under the Company's Credit Tenant Loan program, the
Company will, at a borrower's request, issue a term sheet (a "Term Sheet") which
briefly outlines the pricing and terms under which the Company proposes to
finance the property (such potential loan, after delivery of the Term Sheet,
being at the "Term Sheet Stage"). Upon acceptance of the Term Sheet by a
borrower, the Company issues a form of application which sets forth the detailed
terms of the transaction (the potential loan then being at the "Application
Stage"). Once a borrower signs an application and delivers it to the Company
with a deposit and the application is accepted, subject to the underwriting
process by the Company's loan committee, the Company considers such loans to be
Committed Loans, and the formal due diligence process begins. The Company
generally closes a Committed Loan in four to eight weeks. At any time from the
date of acceptance of the application until closing, the borrower may lock in
the interest rate on the loan by payment of an additional fee. While an
application may be declined by the Company upon completion of the Company's
underwriting process, or the prospective borrower may forfeit its deposit and
withdraw the application prior to closing, management believes, based on the
Company's historical operating experience, that approximately 98% of these
Committee Loans result in closed loans. Furthermore, it has been the Company's
experience, that once the Company has committed to make a Credit Tenant Loan and
has locked in an interest rate (receiving a rate-lock fee), closing of that loan
is relatively assured and accordingly the Company considers loan transactions as
effectively completed when rate-locked (whether before actual loan closing or at
the time of closing) ("Rate-Locked Loans"). Management believes, based on the
Company's operating experience, that approximately 40% to 50% of loans in the
Application Stage and approximately 15% to 20% of loans in the Term Sheet Stage,
respectively, will move into the category of Committed Loans. Since the Company
receives requests for loan financing daily, the Company's loan pipeline
frequently changes as new transactions are added and others are removed.

Since commencing operations in 1995, the volume of closed and Rate-Locked
Loans increased from $22.7 million in calendar year 1995 to $145.7 million in
calendar year 1996 to $351.1 million in calendar year 1997. In the first quarter
(historically the slowest quarter of the year) of 1998, the Company estimates
that it will have generated closed and Rate-Locked Loans totaling approximately
$120 million, as compared with $49 million during the same period in 1997.

Management believes that loan originations will continue to grow throughout
1998 as a result of the following factors:

- As of March 15, 1998, the Company's total pipeline of loans either under
various stages of negotiation or under due diligence totaled approximately
$1.1 billion. Of this pipeline, the Company had Committed Loans (potential
loans as to which the Company had accepted signed loan applications and
commenced due diligence) with respect to approximately $225 million in
Credit Tenant Loans. In addition, at such date the Company had potential
loans in the Application Stage and Term Sheet Stage in the amount of
$393.5 million, and $468 million, respectively.

- The Company believes that its Extended Amortization and the
Construction/Permanent loan programs, which were introduced between May
and July of 1997, are gaining greater market

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awareness and acceptance, resulting in increased year-over-year loan
origination. Furthermore, the Company expects to increase its volume of
these loans through the year.

- New financing and property acquisition programs introduced in the first
quarter of 1998 are expected to generate additional loans throughout 1998.
These programs include expanding the Company's loan programs to include
Near Investment Grade Tenants (which management believes is a large
potential market for its programs), Mezzanine Construction Loans and
Consumer Product Index financing. In addition, the Company anticipates
acquiring properties net leased to Credit Tenants on which it expects to
place its Credit Tenant Loans.

Management believes, based on the foregoing factors, the volume of Credit
Tenant Loans closed since January 1, 1998 and management's estimate of the
additional loans it expects to originate and close through the remainder of 1998
(based on a review of the daily flow of leases received by the Company,
outstanding term sheets and applications, discussions with correspondents about
market conditions and future potential transactions, expected completion of
construction projects in which the Company is providing a permanent loan
takeout, and other factors), that, if current market conditions continue and if
historical percentages of potential loans in the Term Sheet Stage, Application
Stage, Committed Loans and Rate-Locked converting to closed loans continue, it
can achieve loan originations of approximately $800 million during calendar year
1998. There can be no assurance, however, that the Company will actually
originate such volume of loans.

MANAGEMENT

The Company will be internally managed and self-administered, and CLF's
entire staff is expected to be employed by the Company upon completion of the
Offering. The Company will be subject to the direction and oversight of a Board
of Directors composed of 5 persons. Mr. William R. Pollert, President and Chief
Executive Officer, who will serve as Chairman of the Board of Directors, will be
the only member of the Company's management to serve on the Board of Directors.
See "Directors and Executive Officers."

The Company has a specialized and experienced staff (many of the members of
which have been previously employed by the real estate departments from major
financial institutions and law firms) which is focused principally on
structuring, underwriting and making Credit Tenant Loans which meet Rating
Agency criteria for such loans and on making the transactional and credit
judgments required to make Credit Tenant Loans. The principal executive officers
of the Company will consist of Mr. William R. Pollert, President, Mr. Edwin J.
Glickman, Executive Vice President, Product Development, Mr. Steven L. Maloy,
Senior Vice President, Marketing and Sales, Mr. Paul H. McDowell, Senior Vice
President and General Counsel, and Mr. Shawn P. Seale, Senior Vice President and
Chief Financial Officer. Upon completion of the Offering, the Company will have
in place a complement of executive and investment officers with established
expertise in the business activities the Company intends to undertake. All the
members of senior management of the Company have worked together at CLF since
its inception. See "Directors and Executive Officers."

LOAN ORIGINATION CAPABILITY AND CORRESPONDENT NETWORK

The principal source of origination for the Company's business is its
national network of independent correspondent mortgage brokers. The Company has
established relationships with over 500 individual mortgage brokers at over
fifty correspondent mortgage brokerage companies. These correspondents operate
offices in more than 100 locations throughout the United States and maintain
close working relationships with the borrowers they represent.

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routinely presents on-site training seminars throughout the United States.
Training seminars are supplemented with bimonthly newsletters, brochures and
other written material intended to keep correspondents up to date on the latest
underwriting requirements for Credit Tenant Loans and Credit Tenant Leases,
Lease Enhancements, and changes in tenant credit ratings, as well as providing
up-to-date information on the Company's latest innovative financing programs.

A comprehensive marketing, advertising and public relations program supports
correspondent loan origination efforts. The objective of the program has been to
build the Company's name recognition and credibility as a specialty lender and
to promote the Company's specialized Credit Tenant financing programs. The
Company believes it has been successful in achieving its objectives of market
awareness and prominence in the Credit Tenant Loan market.

In addition to the Company's training and marketing support to
correspondents, the Company's executives and staff periodically assist
correspondents in originating loans by meeting with potential borrowers to
explain various aspects of the Credit Tenant Loan program, and by assisting in
structuring transactions to best meet the borrower's requirements.

The Company believes that its ongoing marketing efforts combined with
comprehensive training programs are key factors not only in attracting and
retaining productive correspondent mortgage brokers but also in improving their
productivity. Furthermore, the Company believes that it has streamlined its loan
approval processes and centralized loan underwriting as well as many
transactional and structuring matters to make the origination of Credit Tenant
Loans with the Company efficient for its correspondents. As a result, the
Company believes its correspondents can focus on identifying possible additional
Credit Tenant Loans and facilitating the loan closing process rather than solely
on underwriting each loan. The Company constantly reviews correspondent
performance and has been able to attract experienced mortgage brokers to replace
correspondents the Company believes have been under-performing.

In addition to its ability to originate loans for its principal business
lines, the Company believes that its correspondent network can be utilized
without significant further training to find opportunities that will be eligible
for the related business lines described above.

CREDIT FACILITIES

The Company is expected to enter into the Prudential Warehouse in the amount
of $100,000,000 in March 1998 which amount will be increased to $350,000,000
upon closing of the Offering. Like the NationsBank Warehouse, the Company
intends to utilize the Prudential Warehouse for purposes of funding and holding
the Company's loans prior to securitization. In addition, the Company expects to
enter into a Mezzanine Construction Loan financing facility (the "Mezzanine
Construction Facility") with Prudential Credit in the initial amount of
$30,000,000 in March 1998. The Mezzanine Construction Facility will be used by
the Company to fund its Mezzanine Construction Loans.

The Company is currently negotiating the terms of the increase in the
NationsBank Warehouse and the terms of the Prudential Warehouse and Mezzanine
Construction Facility.

INDUSTRY OVERVIEW

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lease properties in which they operate rather than own the underlying real
estate. These types of properties are generally owned by developers who have
built the properties or individual or corporate owners who purchase them after
construction is complete and who have the ability to own and operate the
properties as a relatively stable investment opportunity. Management's
experience has been that these properties are typically financed shortly after
completion of construction.

Management believes that traditionally owners of properties net leased to
credit tenants have financed these properties through banks, insurance companies
and other lenders seeking to invest in long-term assets. The Company believes
that these institutions have traditionally financed these properties based more
upon real estate liquidation values than on the underlying strength of the
Credit Tenant (other than in the case of bond leases), with resulting lower
amounts of leverage available to borrowers.

As the CMBS market has grown, the Company believes that the specialty nature
of underwriting and securitizing Credit Tenant Loans has deterred expansion by
capital markets-oriented lenders into the Credit Tenant Loan market (the "CTL
Market") except with respect to properties subject to bond leases. The Company
believes it was instrumental in establishing a viable capital markets-oriented
Credit Tenant lending program through its innovative lease enhancement
mechanisms and by successfully securitizing, in 1997, the first pool of Credit
Tenant Loans with a variety of Credit Tenants involving multiple properties.

The ability of the Company to underwrite and securitize high-leverage Credit
Tenant Loans has provided owners of these properties with an attractive
alternative to traditional forms of borrowing on these properties. Management
believes that the securitization market for Credit Tenant Loans is in its early
stages of development and is under served by capital markets oriented lenders
whose primary focus has been to make conventional real estate loans.

The size of the CTL Market in relation to the overall commercial real estate
market is difficult to estimate for several reasons. Management believes that
there is no published data on the size of the CTL Market. In addition, while all
properties that are subject to net leases to Credit Tenants could potentially be
financed by the Company or its capital markets oriented competitors, the Company
is unaware of any published data that indicates which properties are subject to
net leases which would be financeable as Credit Tenant Loans.

However, based on the data available to the Company and its experience in
the CTL Market, the Company believes this market is substantial and growing. One
indication of size is the number of companies that carry Investment Grade or
Near Investment Grade ratings. For example, taking the narrow segment of U.S.
Industrial, parent company issuers (which includes retail companies but excludes
such industry segments as insurance companies, non-profit institutions,
municipalities, etc.). S&P rates over 500 companies as Investment Grade and 360
as Near Investment Grade. Properties net leased to any of these companies would
qualify for financing or purchase under the Company's programs.

A significant component of the Company's business is in financing properties
net leased to Credit Tenants who operate freestanding retail locations. A
sampling of almost 200 retailers, by an independent third party, indicated that
1997 construction starts totaled over 3,070 individual freestanding locations
ranging in size from under 7,500 square feet to over 100,000 square feet. The
Company believes that many of these properties will be net leased and will thus
potentially be available to the Company as both purchase and financing
opportunities.

SUMMARY RISK FACTORS

Each prospective purchaser of the Common Stock should carefully consider all
of the information set forth in this Prospectus and in particular the risk
factors set forth in "Risk Factors" on page 17 to 30, including the following:

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- The Company and its predecessor have only been in operation since 1995,
have not had profitable operations in the past, and will engage in a
business that has many competitors and that may become increasingly
competitive in the future.

- The Company may not be able successfully to execute its business plan and
its planned expansion into related real estate lines of business.

- The Company's revenues and profitability are highly dependent on its
ability to continue to originate and securitize Mortgage Loans. There can
be no assurance that the Company will be able to do so on acceptable
terms.

- In a high interest rate environment, or should the economy generally
deteriorate, the volume of the Company's business could significantly
decline and the value of the Company's Invested Portfolio (including
Credit Tenant Loans, CMBS and Subordinate Interests) could significantly
decrease.

- The Company's operations rely upon the Company's ability to obtain and
maintain third-party debt financing. An inability to obtain debt financing
on favorable terms would adversely affect the Company.

- The Company intends to hold significant amounts of Mortgage Loans pending
securitization, which loans are subject to risk of loss of principal and
credit downgrades that could hinder the ability of the Company to
securitize its loans on favorable terms.

- The Company intends to use hedging strategies to protect itself against
interest rate risk. Such hedging itself involves risk, and may not be
successful in insulating the Company from such interest rate risk,
including changes in spreads between CMBS yields and U.S. Treasury yields.
In particular, to the extent the Company risks hedging strategies based on
U.S. Treasury yields, such strategy may not protect against changes in
yields between CMBS and treasuries. In addition, there will be many market
risks against which the Company may not be able to effectively hedge,
including changes in the spreads of corporate bonds or CMBS over the
underlying treasury rates. Furthermore, the Company does not intend to
hedge any market risks with respect to CMBS which it purchases or retains
for investment.

- The value of the Company's Credit Tenant Loans and CMBS, while held in
portfolio, and the value of any interest retained following a
securitization, is dependent upon various market factors including changes
in CMBS yields and interest rates.

- The Company will be taxed as a corporation if it fails to maintain its
qualification as a REIT. In February 1998, the Clinton Administration
announced certain legislative tax proposals which, if adopted, could
adversely affect the Company's financial results. In addition, tax rules
governing REITs may impose limitations on the Company's business
operations.

- Following the Offering, the Company will be highly leveraged.

- Stockholders will be subject to significant potential dilution from future
equity offerings.

12
<PAGE>
- Ownership of Common Stock by each stockholder is limited to 9.8% of the
outstanding Common Stock, which may deter third parties from seeking to
control or acquire the Company.

- Future revisions in policies and strategies may be made at the discretion
of the Board of Directors.

- Future offerings of debt and equity may have an adverse effect on the
Market Price of the Common Stock.

- To maintain its exemption from regulation under the Investment Company
Act, the Company, among other things, must maintain certain percentages of
its investments in assets that qualify for exemption from such regulation,
which may restrict the Company's ability to invest in various types of
assets.

- The Company may need to modify or replace source code applications and/or
computers to avoid any material adverse effect on the Company's operations
due to "Year 2000" issues.

FORMATION TRANSACTIONS

The assets, liabilities and equity of CLF will be contributed to CLF, Inc.,
on the date of issuance of the shares offered hereby. The assets of the Company
will include the Existing Loans and Committed Loans (which, as of March 15,
1998, approximated $306 million and $225 million, respectively), subject to the
existing indebtedness, as well as all of the operating assets of CLF.

A series of integrated transactions (the "Formation Transactions") will be
entered into initially to establish the structure of CLF, Inc. and its business.
The Formation Transactions include the following transactions, which will have
occurred or will occur prior to or upon closing of the Offering:

A. The limited partners of CLF will transfer their limited partnership
interests to CLF, Inc. in exchange for Common Stock of CLF, Inc. and cash.
More specifically, Hyperion Partners II L.P., South Ferry #2, L.P., CLF
Investors LLC, and the Class C limited partners will transfer their limited
partnership interests in CLF for shares of Common Stock of CLF, Inc.
Hyperion Partners II L.P. and South Ferry #2, L.P. will transfer their
preferred limited partnership interests in CLF to CLF, Inc. for an amount
projected to be approximately $20.9 million.

B. CLF Holdings, Inc., one of the two general partners of CLF, will
transfer its general partnership interest in CLF for Common Stock of CLF,
Inc. CLFC HPII Inc. (the other general partner of CLF), will transfer its
general partnership interest in CLF to CLF, Inc. in exchange for Common
Stock of CLF, Inc. and cash of approximately $436,055.

C. Upon the completion of these transfers, CLF, Inc. will own all of
the interests in CLF and CLF will automatically liquidate in accordance with
applicable law.

As a result of the Formation Transactions, upon completion of the Offering,
CLF, Inc. will succeed to all of the assets and liabilities of CLF. See
"Formation Transactions."

As a result of the Formation Transactions, including the Offering, the
existing investors in CLF, as a group (including substantially all of the
Company's employees), and purchasers in the Offering, as a group, will own 33%
and 67%, respectively, of the then outstanding Common Stock of CLF, Inc.

REIT AND INVESTMENT COMPANY ACT COMPLIANCE

The Company will regularly monitor its portfolio of assets and the income
from such assets, including income from its hedging strategies, to maintain its
qualifications as a REIT and its exempt status under the Investment Company Act.
The Company has engaged professionals to assist in developing appropriate
systems and testing procedures and to conduct quarterly compliance reviews
designed to determine compliance with sections 856 through 860 of the Code (the
"REIT Provisions of the Code"). See "Federal Income Tax Considerations--Taxation
of the Company."

13
<PAGE>
DIVIDEND POLICY AND DISTRIBUTIONS

To maintain its qualification as a REIT under the Code, the Company must
make distributions to its stockholders at least 95% of its annual REIT Taxable
Income (which does not necessarily equal net income as determined in accordance
with GAAP), excluding any net capital gains and subject to certain adjustments
for noncash income, such as original issue discount ("OID"). All distributions
will be made by the Company at the discretion of the Board of Directors and will
depend on the taxable earnings of the Company, its financial condition and such
other factors as the Board of Directors deems relevant, including considerations
pertaining to continued qualification as a REIT.

SUMMARY SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The summary selected historical financial information set forth below as of
and for the years ended December 31, 1997 and 1996, and for the period September
29 (commencement of operations) through December 31, 1995, have been derived
from the financial statements of Capital Lease Funding, L.P. included elsewhere
herein, which have been audited by Ernst & Young LLP, independent auditors, and
should be read in conjunction with those financial statements (including the
notes thereto) and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all appearing elsewhere in this
Prospectus.

The results shown below reflect significant investments in the future growth
of its business, including the development of its lending and securitization
programs, from which the Company expects to reap an ongoing benefit. For
example, the Company's operating losses to date reflect the substantial
investments the Company has made to enable the Company to achieve its growth
plans, including investments in personnel, product development, securitization
related documents and the development and training of a national correspondent
network. As a result of these investments, management believes that its staff is
largely sufficient in terms of size, expertise and training to achieve the
Company's projected growth, and that its innovative programs provide it with
competitive advantages.

The Company made a strategic decision to securitize a small developmental
pool of Credit Tenant Loans in January 1997. This initial pool's smaller size
and characteristics, as well as associated non-recurring expenses of
approximately $700,000, resulted in an economically inefficient transaction.
However, this initial securitization resulted in a number of benefits for the
Company. The Company received preliminary subordination levels from the Rating
Agencies in connection with a proposed second securitization during the fourth
quarter of 1997. These preliminary subordination levels were significantly more
favorable than those obtained in the first securitization, reflecting the
increased size and diversity of the proposed pool. Management believes that
pools of Credit Tenant Loans greater than $200 million can be efficiently and
profitably securitized. Management estimates that the value of the Company's
loans exceeded their carrying value by $10 million at December 31, 1997, and by
$12 million at March 15, 1998, after giving effect to the value of associated
hedge positions.

The summary selected unaudited pro forma balance sheet as of December 31,
1997 set forth below is presented as if the transactions contemplated by this
Prospectus, including the Offering and the application of the proceeds
therefrom, had occurred on December 31, 1997. The summary selected unaudited pro
forma statement of operations data for the year ended December 31, 1997 are
presented as if the transactions contemplated by this Prospectus, including the
Offering and the application of the estimated net proceeds therefrom, had
occurred on January 1, 1997. See "Use of Proceeds." The pro forma financial
information set forth below is not necessarily indicative of what the actual
results of operations or financial position of the Company would have been, nor
do they purport to represent the Company's results of operations or financial
position for future periods. The pro forma financial information should be read
in conjunction with the Company's pro forma financial statements and related
notes and historical financial statements and related notes included elsewhere
in this Prospectus. See "Selected Historical and Pro Forma Financial
Information" and "Financial Statements and Information."

14
<PAGE>

<TABLE>
<CAPTION>
(FROM INCEPTION)
SEPTEMBER 29-
DECEMBER 31,
YEAR ENDED DECEMBER 31, ------------------
---------------------------------------------
HISTORICAL CLF,
PRO FORMA COMPANY HISTORICAL CLF, L.P. L.P.
------------------- ------------------------ ------------------
1997 1997 1996 1995
------------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

REVENUE:
Interest income from mortgage loans............ $ 9,859,768 $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of mortgage loans................ (160,782) (160,782) (923,611) --
Other revenue from mortgage loans.............. 43,326 43,326 16,520 --
------------------- ----------- ----------- ------------------
Total Revenues............................. 9,742,312 9,742,312 4,153,585 224,313

LOAN EXPENSES:
Interest on repurchase agreements.............. 4,027,104 8,829,548 4,048,601 221,400
Loss on loan in default........................ -- -- -- 717,359
Servicer fees.................................. 76,328 76,328 50,320 --
------------------- ----------- ----------- ------------------
Total Loan Expenses........................ 4,103,432 8,905,876 4,098,921 938,759

OPERATING EXPENSES............................... 4,359,040 4,109,040 3,805,230 1,087,320
------------------- ----------- ----------- ------------------

OPERATING INCOME................................. 1,279,840 (3,272,604) (3,750,566) (1,801,766)

OTHER INCOME (EXPENSE)........................... 169,889 (122,938) 86,900 136,789
------------------- ----------- ----------- ------------------
NET INCOME (LOSS)................................ $ 1,449,729 $(3,395,542) $(3,663,666) $ (1,664,977)
------------------- ----------- ----------- ------------------
------------------- ----------- ----------- ------------------
PRO FORMA NET INCOME PER SHARE................... $ 0.14 $ -- $ -- $ --

OTHER DATA:
Cash flows from operating activities........... -- (2,704,304) (13,630,639) (4,411,903)
Cash flows from investing activities........... -- (60,612) (77,581) --
Cash flows from financing activities........... -- 5,032,880 7,546,214 12,714,139
Number of loans funded......................... -- 60 26 6
Original principal amount of loans funded...... -- $224,866,628 $137,940,791 $ 22,735,140
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
HISTORICAL CLF, L.P.
PRO FORMA COMPANY ------------------------
1997 1997 1996
------------------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 9,183,194 $ 4,408,194 $ 2,140,230
Mortgage loans held for sale................... 263,473,373 263,473,373 157,719,912
Total assets................................... 279,153,058 274,378,058 168,349,353
Notes payable.................................. -- 12,274,318 487,559
Total liabilities.......................... 205,871,412 272,815,884 154,671,846
Total partners' capital/stockholders'
equity................................... 73,281,646 1,562,174 13,677,507
</TABLE>

15
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered Hereby.................. 6,750,000 shares (1)

Common Stock to be Outstanding 10,083,333 shares (1)(2)
After the Offering.......................

Use of Proceeds.............................. To pay down a portion of the outstanding
balance under the NationsBank Warehouse,
retire preferred interest issued by CLF,
repay notes payable to one of its limited
partners, and for general working capital
purposes. See "Use of Proceeds."

Proposed NYSE Symbol......................... " "
</TABLE>

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

(1) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 1,012,500 shares will not be exercised. See "Underwriting."

(2) Includes 3,333,333 shares of Common Stock issued to the general and limited
partners of CLF, in connection with the Formation Transactions (assuming an
initial public offering price of $15.00). Excludes 1,210,000 shares of
Common Stock reserved for issuance under the Company's 1998 Stock Option
Plan. As of the closing of the Offering, the Company expects to grant
options to acquire shares of Common Stock pursuant to such plan on
terms to be determined. See "Directors and Executive Officers--Stock Options
Outstanding."

16
<PAGE>
RISK FACTORS

AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO
THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS, IN CONNECTION WITH AN
INVESTMENT IN THE SHARES OF THE COMMON STOCK OFFERED HEREBY. WHEN USED IN THIS
PROSPECTUS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE,"
"ESTIMATE," "PROJECT," "INTEND" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS REGARDING AMONG OTHER THINGS: CHANGES IN INTEREST
RATES; DOMESTIC AND FOREIGN BUSINESS, MARKET, FINANCIAL OR LEGAL CONDITIONS;
DIFFERENCES IN THE ACTUAL ALLOCATION OF THE ASSETS OF THE COMPANY FROM THOSE
ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE HEDGED AND THE EFFECTIVENESS OF THE
HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE OF RISK WILL BE INCREASED BY THE
COMPANY'S LEVERAGING OF ITS ASSETS. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT
ANY ESTIMATED RETURNS OR PROJECTIONS CAN BE REALIZED OR THAT ACTUAL RETURNS OR
RESULTS WILL NOT BE MATERIALLY LOWER THAN THOSE THAT MAY BE ESTIMATED.

Prospective investors are cautioned that any forward-looking statements are
not assurances or guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below, and under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Prospectus.

GENERAL

The results of the Company's operations will depend on various factors, many
of which are beyond the control of the Company, which may adversely affect the
profitability of the Company's business of originating, holding in inventory and
securitizing Credit Tenant Loans, and the profitability of the Company's holding
of Mortgage Assets for longer-term investment.

The Company's profitability in originating and securitizing Credit Tenant
Loans is principally dependent on its ability to generate loans and to finance
such loans during the holding period pending securitization, the level of
interest rates payable on such financing during such holding period, and the
proceeds of any securitization as compared with the cost of generating the
related loans and the loss or gain on any investments made to hedge against
changes in interest rates. The price at which securities can be sold is
principally dependent on (a) market conditions, including yields on U.S.
Treasury securities with comparable maturities and differences between yields on
commercial mortgage backed-securities and U.S. Treasury securities ("CMBS
Spreads"), and (b) the terms of the particular securities, including the
interest rates payable on such securities, the maturities thereof and timing of
return of principal (including the likelihood of prepayment and degree of
protection from prepayment through payment of yield maintenance prepayment
premiums) and the ratings of such securities. The Company engages in hedging
activities designed to protect itself against changes in yields on U.S. Treasury
securities, but does not currently hedge to protect itself against changes in
CMBS Spreads. Further, although the Company sets interest rates on loans
originated by it to some extent in anticipation of each loan's impact on the
final pool of such loans to be used for securitization, the percentage of the
principal balance of securities in any securitization which may receive any
given rating level is dependent upon, among other things, the number of loans in
the final pool, the diversity of tenants, property types and geographic location
of the mortgaged properties and other factors which may not be known until the
time the final pool is presented to the Rating Agencies in anticipation of
securitization. Accordingly, the ability to include all originated loans in a
securitization, and the final characteristics of the securities to be offered,
will not be known until the final pool is aggregated and presented to the Rating
Agencies.

Prospectively, the Company's profitability in holding Mortgage Assets for
investment is primarily dependent on whether there are credit losses on such
assets, the interest rates earned on such assets, the interest rates paid on any
borrowing made to carry such assets and, to the extent the Company must dispose
of assets or, as an accounting matter, is required to adjust the value of such
assets to current market value, the market value of such Mortgage Assets as they
may be affected by changes in interest

17
<PAGE>
rates (including CMBS Spreads), changes in ratings of the assets or other
factors affecting expectations of repayment, and changes in expectations as to
timing of return of principal. The Company does not currently hedge against
changes in interest rates which may affect the market value of Mortgage Assets
it holds for investment. Interest rates and borrowing costs depend on the nature
and terms of the Mortgage Assets, the geographic location of the real estate
securing the Mortgage Loans included in or underlying the Mortgage Assets,
conditions in financial markets, the fiscal and monetary policies of the
countries in which the Company presently invests or may invest in the future
(particularly the United States government and the Federal Reserve Board) and
competition and other factors, none of which can be predicted with any
certainty. Because changes in interest rates may significantly affect the
Company's activities, the operating results of the Company will depend, in large
part, upon the ability of the Company to manage its interest rate risk
effectively while simultaneously maintaining its status as a REIT.

Furthermore, real property investments are subject to varying degrees of
risk. Real property values and cash flows of the properties which the Company
may acquire or for which the Company will originate loans will be affected by a
number of factors, including changes in the general economic climate, local
conditions (such as a reduction in rental demand in an area), competition from
other available properties, and the continued ability of Credit Tenants to make
all lease payments, to provide adequate maintenance and insurance and to control
operating costs. Real estate values and cash flows are also affected by such
factors as government regulations, including, without limitation, environmental,
public access, zoning and tax laws, interest rate levels and the availability of
financing. Each of such general risks will affect the value of the Existing
Loans, any additional loans or properties that the Company may originate or
acquire and the revenues and expenses relating to any such assets. 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.

OPERATING

DEPENDENCE ON CREDIT TENANT LOAN AND SECURITIZATION BUSINESS. The Company
is highly dependent for its revenues and profitability on its ability to
continue to originate and securitize Credit Tenant Loans. There can be no
assurance that the Company will be able to continue to originate and securitize
such loans, or that it will be able to do so on acceptable terms. The Company
may not be able successfully to execute its business plan and its planned
expansion into related real estate lines of business. The Company's failure to
continue originating and securitizing such loans would likely have a material
adverse effect on the Company's business, financial condition and results of
operations, and its ability to satisfy either short or long-term capital
requirements, and such failure could cause the Company to limit its operations
significantly. The Company intends to hold significant amounts of Mortgage Loans
pending securitization, which are subject to risk of loss of principal and
credit downgrades that could hinder the ability of the Company to securitize its
loans on favorable terms.

The value of the Company's Credit Tenant Loans and CMBS, while held in
portfolio, and the value of any interest retained following a securitization, is
dependent upon various market factors including changes in CMBS yields and
interest rates.

RISKS ASSOCIATED WITH BUSINESS STRATEGY. The Company's business strategy
includes entering into related but new business areas. No assurance can be given
that the Company will be successful in its attempts to enter, or that if
entered, the Company will be successful in any new businesses. The Company's
prospects should be considered in light of the risks, expenses, and difficulties
frequently encountered in the establishment of new business lines and the
development and commercialization of new products and services based on
innovative ideas. Expansion of the Company's business may require capital
resources greater than the proceeds of the Offering, and there can be no
assurance that additional financing to fund these activities will be available.

MANAGING GROWTH. As of March 15, 1998, the Company had 20 employees. If the
Company grows rapidly, it may experience a significant strain on its management,
operational, financial and other

18
<PAGE>
resources. The Company's ability to manage growth effectively will require it to
continue to improve its operational and financial systems, to expand, train, and
manage its employee base and to develop additional management expertise.
Management of growth is especially challenging for the Company due to its short
operating history and limited financial resources. The Company's failure to
increase its business and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations.

LACK OF OPERATING HISTORY; ABSENCE OF PROFITABLE OPERATIONS. The Company
has been recently organized and its predecessor, CLF, has been in operation only
since 1995. There can be no assurance that the Company will be able to generate
sufficient revenue from operations to make anticipated distributions. The
Company also will be subject to the risks generally associated with the
formation of any new business. The Company's management has no experience
operating in accordance with the requirements for maintaining its qualification
as a REIT.

As a start-up company, the Company has incurred significant losses and has
had substantial negative cash flow since its inception. The Company has been,
and expects to continue to be, subject to the risks customarily associated with
any new business. In addition, the Company's ability to achieve profitability is
dependent in large part on the expansion of its business of originating and
securitizing Credit Tenant Loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The ability of the Company to
expand its operations, and the success of the Company's business strategy in
general are subject to uncertainties and contingencies beyond the Company's
control, and there can be no assurance that the Company's results of operations
will improve or that its business strategy will be successful. The Company may
continue to have operating losses at least through the securitization of the
Existing Loans.

AVAILABILITY OF FINANCING; LEVERAGING STRATEGY. The Company expects to rely
upon its ability to borrow money to fund its origination of Credit Tenant Loans
and to purchase CMBS. The inability of the Company to obtain such financing or
to borrow money on advantageous terms could materially adversely affect the
Company's business, operations and results.

The Company expects to employ significant leverage consistent with the type
of assets acquired and the desired level of interest rate risk in various
investment environments (in particular under the Company's warehouse lines of
credit). The Company's Charter and By-laws do not limit the amount of
indebtedness the Company may incur.

Leverage can reduce the net income available for distributions to
stockholders. If the interest income on the assets financed with borrowed funds
fails to cover the cost of the borrowings, the Company will experience net
interest losses and may experience less profits or net losses and erosion or
elimination of its equity.

The ability of the Company to achieve its investment objectives depends to a
significant extent on its ability to borrow money in sufficient amounts (in
particular under the Warehouse Credit Facilities) and on sufficiently favorable
terms to earn incremental returns. The Company may not be able to achieve the
degree of leverage it believes to be optimal due to decreases in the proportion
of the value of its assets that it can borrow against, decreases in the market
value of the Company's assets, increases in interest rates, changes in the
availability of financing in the market, conditions in the lending market and
other factors. This may cause the Company to experience losses or less profits
than would otherwise be the case.

A substantial portion of the Company's borrowings are expected to be in the
form of collateralized borrowings, in particular the Warehouse Credit
Facilities. If the value of the assets pledged to secure such borrowings were to
decline, the Company may be required to post additional collateral, to reduce
the amount borrowed or to suffer forced sales of the collateral. If the Company
is forced to liquidate Qualified REIT Real Estate Assets to repay borrowings,
there can be no assurance that it will be able to maintain compliance with the
REIT Provisions of the Code regarding asset and source of income requirements.

19
<PAGE>
To create yields commensurate with its investment objectives and to reduce
the risks set forth above, the Company may leverage its assets through the
issuance of CMOs and other borrowing arrangements, pledging its assets as
collateral security for its repayment obligations on a non-recourse basis. The
Company intends to use the proceeds from securitizations and other borrowings to
originate and invest in additional Mortgage Loans, CMBS and other assets and, in
turn, to borrow against such assets and to repeat this process of borrowing and
investing until it has significantly leveraged its portfolio of assets.

A substantial portion of the Company's cash flow is expected to consist of
the difference between the interest income generated by its Mortgage Loans and
the interest expense incurred with respect to such borrowings, net of hedging
and other costs. The Company may hedge all or a portion of the interest rate
risk associated with its borrowings. The Company also may engage in a variety of
interest rate risk management techniques for the purpose of managing the
effective maturity or interest rate of its assets. These techniques also may be
used to attempt to protect against declines in the market value of the Company's
assets resulting from general economic and market trends. Any such hedging and
other interest rate risk management techniques are subject to risks and may
affect adversely the Company's earnings. No assurances can be made that the
Company's investment and leverage strategy can be implemented or that it will be
successful.

The organizational documents of the Company do not limit the level of debt
the Company may incur. However, the Board of Directors has adopted certain
policies which the Company must adhere to before increasing its level of
indebtedness above those available under the Warehouse Facilities, although such
policies may be altered by the Board of Directors in its sole discretion. The
Company could become highly leveraged, which could adversely affect the ability
of the Company to make distributions to stockholders and increase the risk of
default under its indebtedness. After application of the net proceeds of the
Offering, the Company expects to have outstanding indebtedness of approximately
$201 million under its Warehouse Credit Facilities (calculated based upon the
outstanding balance under such facilities as of December 31, 1997). The Company
may, from time to time, seek to reduce the size of its Warehouse Credit
Facilities in order to reduce the cost of maintaining the availability of the
entire amounts of such facilities. There can be no assurance that the Company
will be able to increase the amount of availability under such facilities, if
necessary, once so reduced.

The Company will rely on its repurchase agreement with NationsBank to
provide the majority of its cash for loan fundings. A deterioration in the
financial condition of NationsBank could have a negative ability on the
Company's ability to fund its loans. However, management is confident that
alternative funding sources could be obtained with substantially similar terms.
As of December 31, 1997, NationsBank carried an A+ rating from S&P.

LOSS ON MORTGAGE LOANS AND SUBORDINATE INTERESTS. The Company intends to
originate, acquire, accumulate and securitize Mortgage Loans (in particular,
Credit Tenant Loans) as part of its investment strategy. While holding Mortgage
Loans (generally until a securitization), the Company will be subject to risks
of borrower defaults, Credit Tenant defaults, bankruptcies, fraud, losses and
special hazard losses that may not be covered by standard hazard insurance.
Also, the costs of originating, financing and hedging the Mortgage Loans could
exceed the interest income on the Mortgage Loans and/or the income from
securitizing such loans. In the event of any default under Mortgage Loans held
by the Company, the Company will bear the risk of loss of principal to the
extent of any deficiency between the value of the mortgage collateral and the
principal amount of the Mortgage Loan. It may not be possible or economical for
the Company to securitize all of the Mortgage Loans which it acquires, in which
case the Company will continue to hold the Mortgage Loans and bear the risks of
borrower defaults, bankruptcies, fraud losses and special hazard losses.
Furthermore, the Company expects to retain a Subordinate Interest in at least
some of the securitizations, in which case it would retain substantially all of
these risks in a more concentrated form up to the amount of its investment in
its Subordinate Interests.

The typical Credit Tenant Lease requires casualty insurance (which may be
through self insurance) to be maintained on the underlying property (generally
by the borrower or the tenant), with such coverages

20
<PAGE>
and in such amounts as are or shall customarily be insured against with respect
to similar properties, for fire, vandalism and malicious mischief, extended
coverage perils, all physical loss perils, commercial general liability, flood
(when the underlying property is located in whole or in material part in a
designated flood plain area) and workers' compensation insurance. There are,
however, certain types of losses (such as from hurricanes, floods, earthquakes
or wars) that may be either uninsurable or not economically insurable. As part
of its Lease Enhancement mechanisms, the Company has obtained specialized
insurance policies that cover some of these risks, but do not eliminate all of
these risks. Should an uninsured loss occur, the Company could lose both its
capital invested in, and anticipated profits from, one or more Credit Tenant
Loan properties.

OWNERSHIP OF NON-INVESTMENT GRADE CMBS. The Company intends to retain or
acquire a significant amount of Non-Investment Grade CMBS (particularly those
which include as a component thereof Credit Tenant Loans). This Non-Investment
Grade CMBS is expected to be rated securities (for purchased CMBS) and may
include rated or "first loss" credit support Subordinate Interests (for retained
CMBS). A first loss security is the most subordinated class in a structure and
accordingly is the first to bear the loss upon a default on, restructuring or
liquidation of the underlying collateral and the last to receive payment of
interest and principal. Such classes are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest than
the more senior, rated classes. The market values of Subordinate Interests tend
to be more sensitive to changes in economic conditions and less sensitive to
changes in interest rates than the more senior, rated classes. As a result of
these and other factors, Subordinate Interests generally may not be actively
traded and may not provide holders thereof with liquidity of investment.

The yield to maturity on Subordinate Interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying Mortgage Loans and the timing of any such defaults
or losses. Furthermore, to the extent that underlying Mortgage Loans relating to
CMBS (unless insured) require balloon payments at maturity, the failure of the
applicable borrower to obtain refinancing of any such loan or loans in order to
make such balloon payment could result in the loss of all or a portion of the
Company's investment therein. Because the Subordinate Interests of the type the
Company intends to retain or acquire may have little credit support, to the
extent there are realized losses on the underlying Mortgage Loans, the Company
may not recover the full amount or, in extreme cases, any of its initial
investment in such Subordinate Interests.

NONRECOURSE COMMERCIAL MORTGAGE LENDING. Credit Tenant Loans are generally
non-recourse to the owner and in the event of default the lender thereunder is
entirely dependent on the loan collateral. The timely repayment of loans secured
by leased properties subject to Credit Tenant Leases is typically dependent upon
certain specified performance by the lessees under the related leases, rather
than upon the liquidation value of the underlying real estate. However, to the
extent the timely repayment of the loan is in any way dependent upon the
liquidation value of the underlying real property, risks generally incident to
interests in real property may adversely impact the value of the property. The
liquidation value of a commercial property may be adversely affected by risks
generally incident to interests in real property, including changes in general
or local economic conditions and/or specific industry segments, declines in real
estate values, increases in interest rates, real estate tax rates and other
operating expenses including energy costs, changes in governmental rules,
regulations and fiscal policies, including environmental legislation, acts of
God, and other factors which are beyond the Company's or the applicable
borrower's control. There can be no assurance that a lender's remedies with
respect to the loan collateral will provide the Company with a recovery adequate
to repay the underlying Credit Tenant Loan.

LIMITED ASSETS AND OBLIGATIONS OF THE BORROWERS. The borrowers under all of
the Company's Credit Tenant Loans are entities created solely to own, lease or
purchase the applicable underlying property, in part to isolate such properties
from the other debts and liabilities, if any, of the owners or affiliates of
such borrowers. Except with respect to the consequences of any breach of
covenants restricting use of nearby properties owned by the borrower or its
affiliates and with respect to other limited circumstances, each

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Credit Tenant Loan represents a nonrecourse obligation of the related borrower.
The borrowers will not have any significant assets other than the applicable
underlying property, the applicable Credit Tenant Lease, including any related
guaranty, and the right to receive payments thereon. Payment of amounts due on
the Credit Tenant Loans will depend significantly on the payments by the tenants
on the Credit Tenant Leases.

CREDIT QUALITY OF TENANTS. The credit of each tenant or, if applicable, the
related guarantor, will generally be rated Investment Grade or Near Investment
Grade. A change in the credit rating of the tenants or, the assignment by the
Company in its underwriting process of an inaccurate credit rating or any
related mispricing of a Credit Tenant Loan may have a related adverse effect on
the rating of the Credit Tenant Loan and the ability to securitize the loan on
terms favorable to the Company.

LEASE ENHANCEMENT MECHANISMS. The Company has developed certain Lease
Enhancement mechanisms which are designed to increase the ability of the Company
to securitize Credit Tenant Loans. These include insurance policies, agreements
with third party service providers and certain other mechanisms designed by the
Company. The Company may be adversely affected by any failure by any third party
insurer or servicer provider or of other enhancement mechanisms to adequately
ensure against loss.

LIMITED NUMBER OF INSURANCE CARRIERS. The Company obtains specialized Lease
Enhancement insurance policies from a limited number of carriers (presently
three), as part of its Lease Enhancements. A deterioration in the relationship
of the Company with one or all of these carriers (or a deterioration in the
credit quality or performance of any such carrier) may have a material adverse
effect on the Company's business, financial condition and results of operations,
as the economic benefit to the Company of the securitizations performed by the
Company could be greatly decreased by any inability of the Company to obtain
such policies, should they not be replaced by comparable policies from other
carriers.

MEZZANINE CONSTRUCTION LOANS INVOLVE GREATER RISK OF LOSS THAN LOANS SECURED
BY INCOME PRODUCING PROPERTIES. The Company expects to originate Mezzanine
Construction Loans. These types of loans involve a higher degree of risk than
long-term senior mortgage loans secured by income-producing real property, due
to a variety of factors, including, dependency on successful completion and
operation of the project for repayment, difficulties in estimating construction
or rehabilitation costs, loan terms that often require little or no
amortization, and that a foreclosure by the holder of the senior loan could
result in a Mezzanine Construction Loan becoming unsecured. Accordingly, in the
event of a borrower default, the Company may not recover some or all of its
investment in such Mezzanine Construction Loans.

INVESTMENTS IN REAL PROPERTY NET LEASED TO TENANTS. The Company intends to
invest in net leased real property from time to time. The value of the Company's
investments in such real property and the Company's income and ability to make
distributions to its stockholders will depend upon the ability of the applicable
tenant to meet its obligations to maintain the property under the terms of the
net lease. If a tenant fails or becomes unable to so maintain such property, the
Company will be subject to all risks associated with owning real estate. In
addition, under many net leases the owner of the property retains certain
obligations with respect to the property, including among other things, the
responsibility for maintenance and repair of the property, to provide adequate
parking, maintenance of common areas and compliance with other affirmative
covenants in the lease. If the Company were to fail to meet such obligations,
the applicable tenant could abate rent or terminate the applicable lease.

INVESTMENTS IN REAL PROPERTY WHERE A NET LEASE HAS TERMINATED. If a net
lease upon real property owned by the Company is terminated or expires for any
reason, the Company will become subject to all risks related to owning such real
property. The risks related to owning real property include those listed below.

Revenues from real property may be affected adversely by changes in national
or local economic conditions, competition from other properties offering the
same or similar attributes, changes in interest

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rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements (particularly in older
structures), changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes, hurricanes and other natural disasters (which may
result in uninsured or underinsured losses), acts of war, adverse changes in
zoning laws, and other factors which will be beyond the control of the Company.
In addition, real estate investments are relatively illiquid, and the ability of
the Company to vary its portfolio in response to changes in economic or other
conditions will be limited.

Although the Company's insurance will not cover all losses, the Company
intends to maintain, or cause to be maintained, comprehensive casualty insurance
on its real property, including liability, fire and extended coverage, in
amounts sufficient to permit replacement in the event of a total loss, subject
to applicable deductibles.

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

The operating costs and values of real property owned by the Company may be
affected by the obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the cost of complying
with future legislation. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be liable for the costs of removal or remediation of hazardous
or toxic substances in, on, under or in the vicinity of such real property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. The
Company's assets, income and ability to make distributions to its stockholders
could be affected adversely by the existence of an environmental liability with
respect to its properties.

COMPETITION. The Company's net income depends, in large part, on the
Company's ability to originate or acquire Mortgage Assets at favorable spreads
over the Company's borrowing costs and to securitize such assets. In originating
or acquiring Mortgage Assets, the Company competes with other specialty finance
companies, insurance companies, investment banks, savings and loan associations,
banks, mortgage bankers, mutual funds, institutional investors, other lenders,
governmental bodies and other entities, including other REITs. Many of the
Company's competitors for Mortgage Assets may have greater access to capital and
other resources and may have other advantages over the Company.

FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Company's Board of
Directors has established the investment policies, the operating policies, and
the strategies set forth in this Prospectus as the investment policies,
operating policies and strategies of the Company. However, such policies and
strategies may be modified or waived by the Board of Directors of the Company
without stockholder consent, subject, in certain cases, to approval by a
majority of the Unaffiliated Directors. Accordingly, stockholders of the Company
will have limited control over changes in policies of the Company.

DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL. The Company will rely on the
Company's officers and key employees to manage the Company properly. The failure
by such employees to manage the Company properly could have a material adverse
effect on the viability of the Company's operations. The Company will be wholly
dependent on the diligence and skill of the Company's employees for the
selection, structuring and monitoring of its Mortgage Assets and associated
borrowings. The Company is highly dependent on the efforts of the Company's
officers, all of whom have extensive experience in Credit Tenant lending but
have no experience in managing a REIT. Although the Company will enter into
employment agreements with certain senior officers, there can be no assurance
that such agreements will prevent key personnel from terminating their
employment with the Company. The loss of key personnel and/or the retention of
their services by competitors could have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.

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INTEREST RATE AND BASIS RISK. The Company's operating results will depend
greatly on differences between the income from its assets (net of credit losses)
and its borrowing costs and upon the ability of the Company to securitize its
portfolio of Mortgage Loans on favorable terms. Unless effectively hedged,
interest rate changes between the date the Company commits a rate to a borrower
and the date a Mortgage Loan is included in a securitization or is otherwise
sold may have a positive or negative effect on the value of such Mortgage Loan.
Also, the cost of originating, financing and hedging the Mortgage Loans could
exceed the interest income on the Mortgage Loans and/or the income from
securitizing such loans. The Company expects to hedge certain interest rate
risks on its Mortgage Loans during the warehousing period prior to
securitization, but there can be no assurance that such hedging will be
successful or adequately reimburse the Company for any loss. Moreover the
Company does not currently expect to hedge credit risk. The Company intends to
fund a substantial portion of its assets with borrowings having interest rates
that are floating rate or otherwise reset relatively rapidly, such as monthly or
quarterly. The Company anticipates that, in most cases, the income from its
assets that do not have match funding in place under a collateralized mortgage
obligation structure will respond more slowly to interest rate fluctuations than
the cost of its borrowings, creating a potential mismatch between asset yields
and borrowing rates. Consequently, changes in interest rates, particularly
short-term interest rates, may significantly influence the net income. Increases
in these rates will tend to decrease the net income and market value of the
Company's net assets. Interest rate fluctuations resulting in the Company's
interest expense exceeding interest income would result in the Company incurring
operating losses.

PREPAYMENTS. Commercial Mortgage Loans originated by the Company generally
prohibit prepayment for a period of years (a "Lockout Period"), and thereafter
permit prepayment only in conjunction with payment of a prepayment premium
designed to maintain the yield to investors. Such premiums are intended to
discourage prepayments and also compensate investors in the event a loan is
nevertheless voluntarily prepaid. Such mortgage loans are typically prepayable,
however, during or after the Lockout Period, without payment of any prepayment
premium, in the event of certain events of casualty or condemnation with respect
to the related mortgaged property. Further, a Mortgage Loan may effectively
prepay in the event of a default, in which event a prepayment premium may not be
recovered.

Prepayment of a Mortgage Loan held by the Company pending securitization may
adversely affect the Company to the extent that changes in interest rates or
other factors have increased the value of the Mortgage Loan to greater than its
principal balance but such premium is not recovered upon such prepayment. In
such event, the Company may have incurred hedging losses on such Mortgage Loan
which are not then offset by sale proceeds above the principal balance of the
loan.

Further, to the extent the Company invests in CMBS acquired at a premium it
may be adversely affected by prepayment to the extent a prepayment premium is
not received on the underlying Mortgage Loan, or any prepayment premium which is
received is not allocated to the CMBS held by the Company in an amount
sufficient to offset any loss in yield realized due to the prepayment. Classes
of CMBS entitled to little or no principal (including in particular any IOs)
will be particularly sensitive to the rate of prepayments on the underlying
Mortgage Loans absent receipt of sufficient prepayment premiums to protect their
yield, and in such event the Company may not recover its full investment.
Furthermore, the market value of a class of CMBS may be adversely affected by
changes in interest rates to the extent such changes create expectations of
different prepayment experience. While the Company's Credit Tenant Loans
currently all have yield maintenance-based prepayment premiums, and accordingly
CMBS issued by the Company, including classes retained by the Company, will have
the benefit of such provisions, subject to the limitations set forth above, the
Company may invest in CMBS issued by third parties which may be backed by
Mortgage Loans which do not have yield maintenance prepayment premiums. Further,
there can be no assurance that future Mortgage Loans originated by the Company
will continue to have such provisions.

HEDGING TRANSACTIONS. The Company intends to enter into hedging
transactions primarily to protect itself from the effect of interest rate
fluctuations on its portfolio of Credit Tenant Loans from the date on

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which the Company commits a rate to a borrower and the date such Mortgage Loan
is included is a securitization or is otherwise sold. The Company may determine,
from time to time, to hedge certain other risks associated with its portfolio of
assets. There can be no assurance that the Company's hedging activities will
have the desired beneficial impact on the Company's results of operations or
financial condition. In addition, there will be many market risks against which
the Company may not be able to effectively hedge, including changes in the
spreads of corporate bonds or CMBS over the underlying U.S. Treasury rates.
Furthermore, the Company does not intend to hedge any risks with respect to CMBS
which it purchases or retains for investment. Moreover, no hedging activity can
completely insulate the Company from the risks associated with changes in
interest rates.

Hedging involves risk and typically involves costs. Such costs increase as
the period covered by the hedging increases and during periods of rising and
volatile interest rates. The Company may increase its hedging activity and thus
increase its hedging costs during such periods when interest rates are volatile
or rising and hedging costs have increased. The Company intends generally to
hedge as much of the interest rate risk as the Company determines is in the best
interests of the stockholders of the Company, given the cost of such hedging
transactions and the need to maintain the Company's status as a REIT.

Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect
to record keeping, financial responsibility or segregation of customer funds and
positions. The business failure of a hedging Counterparty with which the Company
has entered into a hedging transaction will most likely result in a default.
Default by a party with which the Company has entered into a hedging transaction
may result in the loss of unrealized profits and force the Company to cover its
resale commitments, if any, at the then current market price. Although generally
the Company will seek to reserve for itself the right to terminate its hedging
positions, it may not always be possible to dispose of or close out a hedging
position without the consent of the hedging Counterparty, and the Company may
not be able to enter into an offsetting contract in order to cover its risk.
There can be no assurance that a liquid secondary market will exist for hedging
instruments purchased or sold, and the Company may be required to maintain a
position until exercise or expiration, which could result in losses.

The Company will enter into hedging transactions in accordance with Company
policies, which may be changed by the Board of Directors in its sole discretion.

TEMPORARY INVESTMENT IN SHORT-TERM INVESTMENTS. The Company's results of
operations may be adversely affected during the period in which the Company is
implementing its investment, leveraging and hedging strategies (or during any
period after which it has received the proceeds of a securitization but has yet
to invest such proceeds) since during this time the Company will be primarily
invested in short-term investments.

EFFECT OF FUTURE OFFERINGS OF DEBT AND EQUITY ON MARKET PRICE OF THE COMMON
STOCK. The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, common stock, commercial paper, medium-term notes, CMOs and
senior or subordinated notes. All debt securities and other borrowings, as well
as all classes of preferred stock, will be senior to the Common Stock in a
liquidation of the Company. The effect of additional equity offerings will be
substantial dilution of the equity of stockholders of the Company or the
reduction of the price of shares of the Common Stock, or both. The Company is
unable to estimate the amount, timing or nature of additional offerings as they
will depend upon market conditions and other factors.

CONCENTRATION OF OWNERSHIP AND OWNERSHIP LIMITATION. Upon completion of
this Offering, the current owners of CLF will own approximately 33% in the
aggregate of the outstanding shares of Common Stock. Accordingly, such current
owners will collectively have significant influence over the Company. Such
influence may result in Company decisions which may not fully serve the best
interests of all stockholders. The Articles of Incorporation prohibits ownership
of more than 9.8% of the shares of Common Stock by

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any stockholder or affiliated group of stockholders, except for Hyperion
Partners II, L.P., William R. Pollert and certain other persons or entities (the
"Ownership Limitation"). The Ownership Limitation may (i) have the effect of
precluding acquisition of control of the Company by a third party without the
consent of the Board of Directors, even if a change in control were in the
interests of stockholders of the Company, and (ii) limit the opportunity for
stockholders to receive a premium for their shares of Common Stock that might
otherwise exist if an investor were attempting to assemble a block of shares in
excess of 9.8% of the outstanding shares of Common Stock or otherwise to effect
a change in control of the Company. A transfer of shares to a person who
violates the Ownership Limitation as a result of the transfer may be void under
some circumstances. The Articles of Incorporation and Bylaws each also contain
provisions that may make it difficult to acquire control of the Company by means
of a tender offer, an open market purchase, a proxy fight or otherwise, if such
acquisition is not approved by the Company's Board of Directors.

EFFECT OF BANKRUPTCY ON LEASES. To the extent that any of the tenants of
properties which are subject to Credit Tenant Loans with the Company or which
may be owned by the Company were to become a debtor in a bankruptcy proceeding
under the United States Bankruptcy Code (the "Bankruptcy Code"), such lessee or
its bankruptcy trustee could reject the lease. If a lease were rejected, rental
payments thereunder would terminate as to the related property, thereby leaving
the owner without a source of rental payments to support its debt servicing and
other obligations under the applicable Credit Tenant Loans and with a claim for
damages as a source of payment of amounts due under such lease under section
502(b)(6) of the Bankruptcy Code. A claim by a lessor for damages resulting from
the rejection by a debtor of a lease of real property (or rejection of a
guarantee of a lease upon the bankruptcy of the guarantor) is limited to an
amount equal to the rent reserved under the lease, without acceleration, for the
greater of one year or 15 percent (but not more than three years) of the
remaining term of the lease, plus rent already due but unpaid. There can be no
assurance that any such claim for damages (or any recovery on the underlying
mortgaged real estate) would be sufficient to provide for the repayment of
amounts then due under the lease.

ENVIRONMENTAL MATTERS. Under various environmental laws, the Company may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under, in or emanating from such property or other liabilities arising under
environmental laws. Based on Phase I environmental reports (which may not reveal
all potential environmental liabilities), the Company is aware of certain
environmental issues affecting the properties underlying the Existing Loans;
however, the Company does not believe that these issues will have a material
adverse effect on the Existing Loans that have environmental issues or the
Company's business or results of operations. In addition, the Company cannot
predict whether modifications of existing laws or regulations or the adoption of
new laws or regulations or changes in the known conditions of the properties
underlying the Existing Loans (or of other properties the Company may have an
interest in, from time to time) may have a material adverse effect on the
Company's business or results of operations in the future. In general,
environmental concerns are of greater concern from an economic standpoint to
owners of property than they are to mortgage lenders.

INVESTMENTS IN FOREIGN REAL ESTATE ASSETS. To the extent that the Company
determines to make Credit Tenant Loans outside of the United States or directly
invest in real estate properties outside of the United States, it will be
subject to certain risks associated with such loans or investments (including
sovereign, political, legal, credit and currency risk), which at this time,
because no such program has yet been developed, cannot adequately be assessed or
described.

YEAR 2000. The Company relies upon a significant number of computer
software programs and operating systems in conducting its operations. To the
extent that these software applications contain source code that is unable to
appropriately interpret the upcoming calendar "Year 2000," some level of
modification or even possibly replacement of such source code or applications
will be necessary. The Company's computers have all been purchased within the
last 24 months and management believes them to be "Year 2000" compliant, and
thus it is currently not anticipated that these "Year 2000" costs will have

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any material adverse impact on the Company's business, financial condition or
results of operations, although this cannot be assured. In addition, there can
be no assurance that "Year 2000" problems will not adversely affect the
Company's suppliers and borrowers and their ability to perform their obligations
to the Company and the ability of borrowers under Credit Tenant Loans and
tenants under Credit Tenant Leases to perform their obligations thereunder.

DILUTION, TAX, LEGAL AND OTHER RISKS

DILUTION. Purchasers of shares of Common Stock in the Offering will
experience an immediate and substantial dilution of $7.71 per share of Common
Stock in the net tangible book value of shares of Common Stock based upon an
assumed initial public offering price of $15.00 per share. See "Dilution."

FAILURE TO MAINTAIN REIT STATUS. In order to maintain its qualification as
a REIT for federal income tax purposes, the Company must continually satisfy
certain tests with respect to the sources of its income, the nature of its
assets, the amount of its distributions to stockholders and the ownership of its
stock. If the Company fails to qualify as a REIT in any tax year, it would be
taxed as a regular domestic corporation. In such a case, the Company would be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates, and distributions to the
Company's stockholders would not be deductible by the Company in computing its
taxable income. Any such corporate tax liability could be substantial and would
reduce the amount of cash available for distribution to the Company's
stockholders, which in turn could have an adverse impact on the value of and
trading prices for the Common Stock. In addition, the unremedied failure of the
Company to be taxed as a REIT for any one year would disqualify the Company from
being taxed as a REIT for four subsequent years.

The REIT Provisions of the Code may limit the ability of the Company to
hedge its assets and the related Company borrowings. Under the REIT provisions,
the Company must limit its income in each year from Qualified Hedges (together
with any other income generated from other than qualifying real estate assets)
to less than 25% of the Company's gross income. As a result, the Company may
have to limit its use of certain hedging techniques that might otherwise be
advantageous. Any limitation on the Company's use of hedging techniques may
result in greater interest rate risk. If the Company were to receive income from
Qualified Hedges in excess of the 25% limitation, it could incur payment of a
penalty tax equal to the amount of income in excess of those limitations, or in
the case of a willful violation, loss of REIT status for federal tax purposes.

The Company must also ensure that at the end of each calendar quarter at
least 75% of the value of its assets consists of cash, cash items, government
securities and qualifying real estate assets, and with respect to investments in
securities not included in the foregoing, the Company does not hold more than
10% of the outstanding voting securities of any one issuer and no more than 5%
by value of the Company's assets consists of the securities of any one issuer.
Failure to comply with any of the foregoing tests would require the Company to
dispose of a portion of its assets within 30 days after the end of the calendar
quarter or face loss of its REIT status and adverse tax consequences.

The Company must generally distribute at least 95% of its Adjusted Taxable
Income each year. The Company's operations may from time to time generate
Adjusted Taxable Income in excess of cash flows. To the extent that the Company
does not otherwise have funds available, the Company may need to borrow money,
receive additional capital or sell assets to obtain the cash needed for
distribution to its stockholders.

RISK OF ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME. In general,
dividend income that a Tax-Exempt Entity receives from the Company should not
constitute unrelated trade or business income as defined in Section 512 of the
Code ("UBTI"). If, however, Excess Inclusion income (which includes a portion or
all of the income on a REMIC Residual Interest and most likely includes a
portion or all of the income on a Non-REMIC Residual Interest, including the
Company's equity in a Non-REMIC CMO offering) were realized by the Company and
allocated to stockholders, such income could not be offset by

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net operating losses and, if the stockholder is a Tax-Exempt Entity, would be
fully taxable as UBTI under Section 512 of the Code and, as to foreign
stockholders, would be subject to federal income tax withholding without
reduction pursuant to any otherwise applicable income tax treaty. In the case of
a REMIC, Excess Inclusion ("noneconomic" or "phantom" income) is statutorily
defined and arises when the REMIC's deductions for the average yield on
sequential pay classes is lower than the REMIC's income on the REMIC's Mortgage
Loans. In the case of a Non-REMIC Residual Interest, the "taxable mortgage pool"
rules of the Code require that, if the Company were to issue debt obligations
with two or more maturities and the terms of the payments on such obligations
bore a relationship to the payments that the Company received on its assets
securing those debt obligations, "Excess Inclusion" income would be required to
be computed and reported to stockholders as if REMIC status had been elected,
under Treasury Regulations to be issued. Even though such Treasury Regulations
have not yet been issued, they may be issued and apply to the Company and its
stockholders on a retroactive basis.

PROPOSED LEGISLATION. In February 1998, the Clinton Administration
announced certain legislative proposals (the "Administration Proposals").
Included in the Administration Proposals are several changes to the REIT
qualification and taxation rules that could be relevant to the Company if
ultimately enacted into law. First, the Administration Proposals would prohibit
a REIT from owning more than 10 percent, by value, of all classes of stock of
any issuer (other than an interest in a partnership or a Qualified REIT
Subsidiary). Second, the Administration Proposals would add a new REIT
qualification test providing that no person may own (directly, or indirectly
after attribution of stock from related persons) more than 50 percent of the
total vote or value of a REIT's stock. Third, the Administration Proposals would
eliminate the ability of a REIT to elect under IRS Notice 88-19 to have
"built-in-gains" inherited from certain C corporations (i.e., those whose stock
is valued at over five million dollars) in a carryover basis transaction, taxed
at the maximum corporate tax rate to the REIT only as and if the associated
assets are disposed of by the REIT within the 10-year period beginning on the
date of their acquisition. No prediction can be made as to when or if the
Administration Proposals will be considered by Congress, whether Congress will
ultimately include some or all of the Administration Proposals in legislation,
or whether such legislation will be enacted into law.

RESTRICTIONS ON OWNERSHIP OF THE COMMON STOCK. In order for the Company to
meet the requirements for qualification as a REIT at all times, the Articles of
Incorporation prohibit any person from acquiring or holding, directly or
indirectly, Excess Shares. The Articles of Incorporation further prohibit (i)
any person from beneficially or constructively owning shares of capital stock
that would result in the Company being "closely held" under Section 856(h) of
the Code or would otherwise cause the Company to fail to qualify as a REIT, and
(ii) any person from transferring shares of capital stock if such transfer would
result in shares of capital stock being owned by fewer than 100 persons. If any
transfer of shares of capital stock occurs which, if effective, would result in
any transfer or ownership limitations, then that number of shares of capital
stock, the beneficial or constructive ownership of which otherwise would cause
such person to violate such limitations (rounded to the nearest whole number of
shares) shall be automatically transferred to a Trustee of a Trust for the
exclusive benefit of one or more Charitable Beneficiaries, and the Intended
Transferee may not acquire any rights in such shares; provided, however, that if
any transfer occurs which, if effective, would result in shares of capital stock
being owned by fewer than 100 persons, the transfer shall be null and void and
the Intended Transferee shall acquire no rights to the stock. Subject to certain
limitations, the Company's Board of Directors may increase or decrease the
ownership limitations or waive the limitations for certain investors.

Every owner of more than 5% (or such lower percentage as required by the
Code or the Regulations promulgated thereunder) of the outstanding shares of any
class or series of the Company's capital stock, within 30 days after the end of
each taxable year, is required to give written notice to the Company stating the
name and address of such owner, the number of shares of each class and series of
stock beneficially owned and a description of the manner in which such shares
are held. Each such owner shall provide to the Company such additional
information as the Company may request in order to determine the effect, if any,

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of such ownership on the Company's status as a REIT and to ensure compliance
with the ownership limitations.

The authorized capital stock of the Company includes preferred stock
issuable in one or more series. The issuance of preferred stock could have the
effect of making an attempt to gain control of the Company more difficult by
means of a merger, tender offer, proxy contest or otherwise. The preferred
stock, if issued, would have a preference on dividend payments that could affect
the ability of the Company to make dividend distributions to the common
stockholders.

The provisions of the Company's Articles of Incorporation or relevant
Maryland law may inhibit market activity and the resulting opportunity for the
holders of the Common Stock to receive a premium for their Common Stock that
might otherwise exist in the absence of such provisions. Such provisions also
may make the Company an unsuitable investment vehicle for any person seeking to
obtain ownership of more than 9.8% of the outstanding shares of the Company's
Common Stock.

Certain provisions of the Maryland General Corporation Law, as amended
("MGCL") relating to "business combinations" and a "Control Share Acquisition"
and of the Articles of Incorporation and Bylaws of the Company may also have the
effect of delaying, deterring or preventing a takeover attempt or other change
in control of the Company that would be beneficial to stockholders and might
otherwise result in a premium over then prevailing market prices. Although the
Bylaws of the Company contain a provision exempting the acquisition of Common
Stock by any person from the Control Share Acquisition statute, there can be no
assurance that such provision will not be amended or eliminated at any time in
the future.

ACCOUNTING RULE CHANGES. To the extent that accounting rules with respect
to the treatment of leases change, it may affect the origination volume of the
Company's Credit Tenant Loans.

EFFECT OF MARKET INTEREST RATE ON SHARE PRICES. One of the factors that may
influence the price of the Common Stock in the public markets will be the annual
yield on the Common Stock from distributions by the Company. An increase in
market interest rates may lead purchasers of Common Stock to expect a higher
annual yield, which could adversely affect the market price of the Common Stock.

ABSENCE OF PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior
to the Offering, there has been no public market for the Common Stock and there
can be no assurance that an active trading market will develop, or if developed,
will be sustained. The initial public offering price will be determined by
negotiations between the Company and the Representative of the Underwriters, and
may not be indicative of the prices that will prevail in the open market. See
"Underwriting."

STAGGERED BOARD. The Board has been divided into three classes of
directors. The terms of the classes will expire in 1999, 2000 and 2001
respectively. Beginning in 1999, as the term of a class expires, directors in
that class will be elected for a three-year term and the directors in the other
two classes will continue in office. Such staggered board provision will make it
more difficult for a potential acquiror to remove directors or elect a majority
of new directors.

SHARES AND PREFERRED SHARES. The Company's Articles of Incorporation
authorize the Board to issue additional shares or preferred shares of beneficial
interest, par value $.01 per share ("Preferred Shares"), or classify any
unissued shares or Preferred Shares and to reclassify any previously classified
but unissued shares or Preferred Shares of any series from time to time. No such
shares or Preferred Shares have been so classified or reclassified to date. The
issuance of Preferred Shares or other Shares with voting rights different from
the shares could make it more difficult for a potential acquiror to obtain
sufficient votes to approve proposed transactions. Furthermore, Preferred Shares
or other shares may be issued with rights senior to the Common Stock with
respect to dividends, payments upon liquidation, voting or other matters.

29
<PAGE>
FAILURE TO MAINTAIN EXCLUSION FROM THE INVESTMENT COMPANY ACT. The Company
at all times intends to conduct its business so as not to become regulated as an
investment company under the Investment Company Act. Accordingly, the Company
does not expect to be subject to the restrictive provisions of the Investment
Company Act. The Investment Company Act excludes from regulation entities that
are primarily engaged in the business of purchasing or otherwise acquiring
"mortgages and other liens on and interests in real estate." Under the current
interpretations of the staff of the Commission, in order to qualify for this
exception, the Company must, among other things, maintain at least 55% of its
assets directly in mortgage loans, qualifying pass-through certificates and
certain other qualifying interests in real estate. In addition, unless certain
mortgage-backed securities represent all the certificates issued with respect to
an underlying pool of mortgage loans, such securities may be treated as
securities separate from the underlying mortgage loans and thus may not qualify
as qualifying interests in real estate for purposes of the 55% requirement. The
Company's ownership of certain mortgage and other assets, therefore, will be
limited by the provisions of the Investment Company Act. If the Company fails to
qualify for exception from registration as an investment company, its ability to
use leverage would be substantially reduced, and it would be unable to conduct
its business as described herein. Any such failure to qualify for such exemption
would have a material adverse effect on the Company.

ERISA CONSIDERATIONS. Generally, ERISA applies to investments made by
employee benefit plans and transactions involving the assets of such plans. Due
to the complexity of regulations which govern such plans, prospective purchasers
that are subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of the acquisition, ownership and disposition of the
Certificates. See "ERISA Considerations" herein.

SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have a total of 10,083,333 shares of Common Stock outstanding. Of
these shares, all 6,750,000 shares of Common Stock offered hereby (7,762,500
shares if the Underwriters' over-allotment options are exercised in full) will
be freely tradeable without restriction or registration under the Securities Act
by persons other than "affiliates" of the Company, as defined under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining shares
of Common Stock outstanding (3,333,333 shares) will be "restricted securities"
as defined by Rule 144 promulgated under the Securities Act.

All investors holding equity interests in the Company on the date hereof
(including Hyperion Partners II, L.P., South Ferry II, L.P., all of the
Company's officers and substantially all of the Company's employees) have agreed
not, directly or indirectly, to offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock directly or indirectly, for a period of one year, after the date of this
Prospectus without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters. After such one-year period, this
restriction will expire and such shares would be eligible for sale under Rule
144, provided that the Company shall have been subject to the reporting
requirements of the Exchange Act for at least 90 days and the relevant holding
period under Rule 144 shall have expired (which period will expire on the first
anniversary of the closing of the Offering). Prudential Securities Incorporated
may, in its sole discretion, at any time and without prior notice, release all
or any portion of the shares of Common Stock subject to such agreements. No
predictions can be made of the effect, if any, that the sale or availability for
sale of additional shares of Common Stock will have on the market price of the
Common Stock. Nevertheless, sales of substantial amounts of such shares in the
public market, or the perception that such sales could occur, could materially
and adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities. See "Shares Eligible for Future Sale."

30
<PAGE>
USE OF PROCEEDS

The net proceeds from the Offering are estimated to be approximately
$93,050,000 ($107,174,375 if the Underwriters' overallotment option is exercised
in full), assuming an initial public offering price of $15.00 per share. Of the
net proceeds of the Offering, the Company will initially apply approximately $55
million to pay down a portion of the outstanding balance under the NationsBank
Warehouse, approximately $21 million to retire the preferred interest issued by
CLF, approximately $12 million to repay notes payable to one of CLF's limited
partners, with the remainder (approximately $5 million) to be retained by the
Company for working capital purposes. Following the Offering, the Company
expects to draw down upon its Warehouse Credit Facilities, as necessary. The
proceeds of the NationsBank Warehouse and the notes payable were used to finance
the Company's Credit Tenant Loans and certain of its hedging expense. The
portion of the NationsBank Warehouse to be repaid bears interest at rates
ranging from LIBOR plus 1% to LIBOR plus 6% (in each case per annum) and matures
on July 30, 1998. The notes payable to CLF's limited partners bear interest at
20% per annum and are payable on demand.

The Company intends temporarily to invest some of the net proceeds of the
Offering in readily marketable interest bearing short-term investment grade
securities or guaranteed obligations of the U.S. government, until appropriate
real estate assets are identified and acquired. The Company may require up to 15
months to fully implement the leveraging strategy to increase its Mortgage Asset
investments to its desired level. Pending full investment in the desired mix of
assets, funds may be invested in interest-bearing short-term investment grade
securities or guaranteed obligations of the U.S. government or to reduce the
Warehouse Credit Facilities that are expected to provide a lower net return than
the Company hopes to achieve from its Credit Tenant Loans and other intended
primary investments.

DIVIDEND AND DISTRIBUTION POLICY

The Company has never paid any cash dividends. The Company intends to
distribute substantially all of its Adjusted Taxable Income (which does not
ordinarily equal net income as calculated in accordance with GAAP) to
stockholders in each year. The Company intends to declare four regular quarterly
dividends. The Company's dividend policy is subject to revision at the
discretion of the Board of Directors. All distributions will be made by the
Company at the discretion of the Board of Directors and will depend on the
earnings and financial condition of the Company, maintenance of REIT status and
such other factors as the Board of Directors deems relevant.

In order to qualify as a REIT under the Code, the Company must make
distributions to its stockholders each year in an amount ("Adjusted Taxable
Income") at least equal to (i) 95% of its REIT Taxable Income (before deduction
of dividends paid less any net capital gain), plus (ii) 95% of the excess of the
net income from Foreclosure Property over the tax imposed on such income by the
Code, minus (iii) any excess noncash income as defined in the Code.

It is anticipated that distributions generally will be taxable as ordinary
income to stockholders of the Company, although a portion of such distributions
may be designated by the Company as capital gain or may constitute a return of
capital. All or a portion of the dividend income with respect to the Company's
net income from REMIC Residual Interests and, to the extent provided in
applicable Treasury Regulations, from non-REMIC Residual Interests ("Excess
Inclusion") will be subject to special treatment to recipient stockholders. The
Company will furnish annually to each of its stockholders a statement setting
forth distributions paid during the preceding year and their characterization as
ordinary income, Excess Inclusion, return of capital or capital gains. For a
discussion of the federal income tax treatment of distributions by the Company,
see "Federal Income Tax Considerations--Requirements for Qualification," "--
Taxation of Taxable U.S. Stockholders," "-- Taxation of Tax-Exempt Stockholders"
and "Taxation of Non-U.S. Stockholders."

31
<PAGE>
CAPITALIZATION

The capitalization of the Company, as of December 31, 1997, and as adjusted
to reflect the sale of the shares of the Common Stock offered hereby at an
assumed per share price at the mid-point of the offering range set forth on the
cover page of this Prospectus, is as follows:

<TABLE>
<CAPTION>
ADJUSTMENTS FOR
HISTORICAL CONTRIBUTIONS
CLF AS OF AND THE PRO FORMA
DECEMBER 31, 1997 OFFERING COMPANY
----------------- --------------- --------------
<S> <C> <C> <C>
DEBT:
Repurchase agreement obligations(1)........................ $ 255,770,693 $ (54,670,154) $ 201,100,539
Notes payable to partner(2)................................ 12,274,318 (12,274,318) --
----------------- --------------- --------------
268,045,011 (66,944,472) 201,100,539
PARTNERS'/STOCKHOLDERS' EQUITY:
Partners' Capital.......................................... 1,562,174 (1,562,174) --
Common Stock, $.01 par value; 50,000,000 shares
authorized; 10,083,333 issued and outstanding on a
pro forma basis(3)(4) -- 100,833 100,833
Additional paid-in capital................................. -- 73,180,813 73,180,813
----------------- --------------- --------------
Total Partners'/Stockholders' Equity....................... 1,562,174 71,719,472 73,281,646
----------------- --------------- --------------
Total Capitalization................................... $ 269,607,185 $ 4,775,000 $ 274,382,185
----------------- --------------- --------------
----------------- --------------- --------------
</TABLE>

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

(1) Upon completion of the Offering and the application of the proceeds to the
repayment of a portion of the principal and accrued interest outstanding
under the repurchase obligations, the Company will have approximately $201
million of such repurchase obligations outstanding. The Company's credit
facilities are expected to total $930 million upon completion of the
Offering and to be available for funding loans at specified advance rates.

(2) Represents notes payable made by CLF, to a limited partner of CLF, which
notes payable will be retired upon completion of the Offering.

(3) After deducting underwriting discounts and commissions and estimated
expenses of the Offering of approximately $8.2 million, and assuming no
exercise of the Underwriters' over-allotment option to purchase up to an
additional 1,012,500 shares of Common Stock.

(4) Does not include 1,210,000 shares of Common Stock reserved for issuance upon
exercise of options granted under the Company's 1998 Stock Option Plan. See
"Directors and Executive Officers--Stock Options Outstanding."

32
<PAGE>
DILUTION

Purchasers of shares of Common Stock sold in the Offering will realize an
immediate and substantial dilution in the net tangible book value of their
shares. The initial public offering price per share exceeds the net tangible
book value per share. Net tangible book value per share of Common Stock is
determined by subtracting total liabilities from total tangible assets and
dividing the remainder by the number of shares of Common Stock that will be
outstanding after the Offering. The following table illustrates the dilution to
purchasers of shares of Common Stock sold in the Offering based on the assumed
initial public offering price and assuming no exercise of the Underwriters'
over-allotment option.

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1)........... $ 15.00
Pro forma net tangible book value per share before the
Offering................................................. $ 0.47
Increase per share attributable to new investors........... 6.82
---------
Pro forma net tangible book value per share after the
Offering(2)................................................ 7.29
---------
Dilution of net tangible book value of Common Stock to new
investors(3)............................................... $ 7.71
---------
---------
</TABLE>

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

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

(2) Pro forma net tangible book value after the Offering and the Formation
Transactions are determined by dividing the Company's consolidated net
tangible book value of approximately $73.5 million at December 31, 1997 by
10,083,333 Common Shares outstanding.

(3) Dilution is determined by subtracting pro forma net tangible book value
after giving effect to the Offering and the Formation Transactions from the
assumed initial public offering price paid by a new investor for a share of
Common Stock.

The following table sets forth the number of shares of Common Stock to be
sold by the Company in the Offering, the total amount to be paid to the Company
by purchasers of Common Stock sold in the Offering, the number of shares of
Common Stock outstanding immediately prior to the Offering and the total
consideration paid and average price per share paid for such shares by the
existing shareholders.

<TABLE>
<CAPTION>
SHARES ISSUED
----------------------- TOTAL AVERAGE CONSIDERATION
SHARES PERCENT CONSIDERATION PER SHARE
------------ --------- -------------- ---------------------
<S> <C> <C> <C> <C>
Existing Stockholders....... 3,333,333 33.06% $ 8,000,000(4) $ 2.40
New Investors............... 6,750,000 66.94% 101,250,000 $ 15.00
------------ --------- --------------
Total................. 10,083,333 100.00% $ 109,250,000
------------ --------- --------------
------------ --------- --------------
</TABLE>

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

(4) The total consideration from the existing stockholders consists of the
capital contributed by the existing stockholders to the common capital of
the predecessor entity, CLF.

33
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The selected historical financial information set forth below as of and for
the years ended December 31, 1997 and 1996, and for the period September 29
(commencement of operations) through December 31, 1995, have been derived from
the financial statements of Capital Lease Funding, L.P. included elsewhere
herein, which have been audited by Ernst & Young LLP, independent auditors, and
should be read in conjunction with those financial statements (including the
notes thereto) and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all appearing elsewhere in this
Prospectus.

The results shown below reflect significant investment in the future growth
of its business such as the development of its lending and securitization
programs, from which the Company expects to reap an ongoing benefit. For
example, the Company's operating losses to date reflect the substantial
investments the Company has made to enable the Company to achieve its growth
plans, including investments in personnel, product development, securitization
related documents and the development and training of a national correspondent
network. As a result of these investments, management believes that its staff is
largely sufficient in terms of size, expertise and training to achieve the
Company's projected growth, and that its innovative programs provide it with
competitive advantages.

The selected unaudited pro forma balance sheet as of December 31, 1997 set
forth below is presented as if the transactions contemplated by this Prospectus,
including the Offering and the application of the proceeds therefrom, had
occurred on December 31, 1997. The selected unaudited pro forma statement of
operations data for the year ended December 31, 1997 are presented as if the
transactions contemplated by this Prospectus, including the Offering and the
application of the estimated net proceeds therefrom, had occurred on January 1,
1997. See "Use of Proceeds." The pro forma financial information set forth below
is not necessarily indicative of what the actual results of operations or
financial position of the Company would have been, nor do they purport to
represent the Company's results of operations or financial position for future
periods. The pro forma financial information should be read in conjunction with
the Company's pro forma financial statements and related notes and historical
financial statements and related notes included elsewhere in this Prospectus.
See "Summary--Summary Selected Historical and Pro Forma Financial Information"
and "Financial Statements and Information."

34
<PAGE>

<TABLE>
<CAPTION>
(FROM INCEPTION)
SEPTEMBER 29 -
DECEMBER 31,
YEAR ENDED DECEMBER 31, ------------------
---------------------------------------------------
HISTORICAL CLF,
PRO FORMA COMPANY HISTORICAL CLF, L.P. L.P.
------------------- ------------------------------ ------------------
1997 1997 1996 1995
------------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Interest income from mortgage loans.... $ 9,859,768 $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of mortgage loans........ (160,782) (160,782) (923,611) --
Other revenue from mortgage loans...... 43,326 43,326 16,520 --
------------------- -------------- -------------- ------------------
Total Revenues......................... 9,742,312 9,742,312 4,153,585 224,313
LOAN EXPENSES:
Interest on repurchase agreements...... 4,027,104 8,829,548 4,048,601 221,400
Loss on loan in default................ -- -- -- 717,359
Servicer fees.......................... 76,328 76,328 50,320 --
------------------- -------------- -------------- ------------------
Total Loan Expenses...................... 4,103,432 8,905,876 4,098,921 938,759
OPERATING EXPENSES:
Personnel expense...................... 2,880,307 2,880,307 2,100,932 313,916
General and administrative expense..... 977,642 727,642 1,298,368 736,461
Marketing and advertising expense...... 501,091 501,091 405,930 36,943
------------------- -------------- -------------- ------------------
Total Operating Expenses................. 4,359,040 4,109,040 3,805,230 1,087,320
------------------- -------------- -------------- ------------------
OPERATING INCOME......................... 1,279,840 (3,272,604) (3,750,566) (1,801,766)
OTHER INCOME (EXPENSE):
Other interest income.................. 169,889 169,889 155,781 136,789
Interest expense on notes payable...... -- (292,827) (68,881) --
------------------- -------------- -------------- ------------------
Net other income (expense)............. 169,889 (122,938) 86,900 136,789
------------------- -------------- -------------- ------------------
NET INCOME (LOSS)........................ $ 1,449,729 $ (3,395,542) $ (3,663,666) $ (1,664,977)
------------------- -------------- -------------- ------------------
------------------- -------------- -------------- ------------------
PRO FORMA NET INCOME PER SHARE........... $ 0.14 $ -- $ -- $ --
OTHER DATA:
Cash flows from operating activities... -- (2,704,304) (13,630,639) (4,411,903)
Cash flows from investing activities... -- (60,612) (77,581) --
Cash flows from financing activities... -- 5,032,880 7,546,214 12,714,139
Number of loans funded................. -- 60 26 6
Original principal amount of loans
funded............................... -- $ 224,866,628 $ 137,940,791 $ 22,735,140
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C>
PRO FORMA COMPANY HISTORICAL CLF, L.P.
------------------- ----------------------------

<CAPTION>
1997 1997 1996
------------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 9,183,194 $ 4,408,194 $ 2,140,230
Mortgage loans held for sale................................ 263,473,373 263,473,373 157,719,912
Total assets................................................ 279,153,058 274,378,058 168,349,353
Notes payable............................................... -- 12,274,318 487,559
Total liabilities........................................... 205,871,412 272,815,884 154,671,846
Total partners' capital/shareholders' equity................ 73,281,646 1,562,174 13,677,507
</TABLE>

35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE SELECTED CONSOLIDATED
FINANCIAL AND OTHER INFORMATION, THE COMPANY'S PRO FORMA AND HISTORICAL
FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

The Company has been organized as a self-administered, self-managed real
estate company and intends to elect to be taxed as a REIT under the Code and, as
such, anticipates distributing annually at least 95% of its Adjusted Taxable
Income. Cash for such distributions is expected to be generated from the
Company's operations, although the Company may also borrow funds to make
distributions. The Company currently operates principally as a specialty lender
originating Credit Tenant Loans. The Company's revenues and cash flows will be
derived from interest paid on mortgage loans, fee income from Mortgage Loans,
rents received from Real Estate Assets, the proceeds from any sales or
securitizations of loans or sales of properties, and interest and revenues from
other investments. The Offering will significantly increase the Company's
capital resources. Subsequent to the Offering, the Company will continue its
existing business, and intends to make investments in other real estate related
assets. The Company's operating results subsequent to the Offering are
anticipated to be significantly different from its operating results prior to
the Offering.

The Company's operating losses to date reflect substantial investments
intended to position and enable the Company to achieve its growth plans. These
investments include costs associated with: attracting and retaining qualified
employees; product development; non-recurring legal fees for drafting,
structuring and implementing lease enhancement mechanisms, form loan
documentation, disclosure documents, warehouse agreements, rating agency
negotiation, and various other organizational matters; establishing and training
the Company's national correspondent network; the purchase and development of
information systems; the creation of underwriting standards; and the creation of
associated infrastructure. Management believes that these costs will be largely
non-recurring.

A significant component of the Company's operating expenses to date are
attributable to an increase in the number of its employees. Management believes
that its current staff of 20 is largely sufficient in terms of size, expertise
and training to achieve the Company's projected growth including the
origination, underwriting and processing of expected increased loan volume.
These personnel investments are consistent with the Company's strategy of
strengthening its position as a leading lender in the Credit Tenant Loan market.

HISTORICAL RESULTS--JANUARY 1997 SECURITIZATION

In January 1997, the Company made a strategic decision to securitize a
developmental pool of Credit Tenant Loans. This initial pool's smaller size and
characteristics resulted in a less economically efficient transaction than the
Company believes would have been obtained with a larger, more diverse pool.
Management believes that securitizing this developmental pool allowed the
Company to gain a number of important benefits. These benefits included
establishing valuable relationships with the Rating Agencies, understanding and
participating in the development of Rating Agency methodologies and criteria,
establishing the Company as a market leader in credit tenant lending, and
validating the Company's lease enhancement mechanisms. Management believes that
these benefits offset the inefficiencies and costs associated with securitizing
a small pool. The Company expects that future securitizations will gain the
benefits of the initial costs incurred by the Company in securitizing its first
pool and will also benefit from gains in efficiency, execution, subordination
levels, geographic and tenant diversity, and fixed cost

36
<PAGE>
reductions realized by securitizing a larger pool of assets. The Company
believes that pools of Credit Tenant Loans greater than $200 million can be
securitized in an efficient and profitable manner.

Management believes that the costs associated with the Company's first
securitization will not be indicative of costs for future securitizations. A
significant portion of the costs associated with the January 1997 securitization
were for legal expenses related to drafting various disclosure and other
operative documents, the models of which can be used for future transactions, as
well as certain other costs and expenses which management believes will be
largely non-recurring. Management estimates that the non-recurring expenses
allocated to the January 1997 securitization were at least $700,000. Management
believes that certain other expenses will be lower (on a percentage basis) on
future transactions, including routine placement agent, legal and rating agency
fees. Further, these increased expenses have been charged against a
securitization that was significantly smaller than the Company expects to
conduct in the future. In addition, the loss of approximately $1.1 million
attributable to this securitization does not reflect interest income in the
amount of approximately $1.0 million received by the Company during 1996 while
it held the loans in portfolio.

CURRENT LOANS

As of March 15, 1998, the Company held 84 Credit Tenant Loans with an
aggregate principal balance of $306 million, backed by 30 different Credit
Tenants. The Company currently carries these loans at the lower of cost or
market. Management estimates, however, that the market value of these loans in a
securitization exceeds cost by approximately $12 million, after giving effect to
the value of the associated hedge position. At year end, the market value of the
Company's loans exceeded their carrying value of $244 million by approximately
$10 million. Following the Offering, the Company intends to securitize these
loans (along with additional loans acquired prior to closing of the Offering).
In contrast to this larger pool to be securitized, the Company's first
developmental securitization in January 1997 had only 30 Credit Tenant Loans
with an aggregate principal balance of approximately $130 million, backed by 13
different Credit Tenants. The number and diversity of Credit Tenants in a
securitization directly affects the ratings and, thus, the value of such
securitization.

During the fourth quarter of 1997, the Company had intended to securitize a
pool of approximately $212 million, consisting of a portion of the Existing
Loans. The Company received preliminary subordination levels from the Rating
Agencies in connection with this proposed securitization that were significantly
more favorable than those obtained on the first securitization, reflecting the
increased size and diversity of this pool. The Company decided not to securitize
this pool in contemplation of the Offering.

CERTAIN ACCOUNTING POLICIES

The Company has historically derived the majority of its revenues from
interest and fee income from Credit Tenant Loans originated by the Company, and
from the securitization of such loans. The Company generally defers certain fee
income and costs associated with its Credit Tenant Loans until such loans are
securitized. Prior to securitization, fee income and costs associated with
Credit Tenant Loans are recorded as deferred income and costs on the Company's
balance sheet. Such costs include, among other items, loan fee costs net of
related revenues, legal fees incurred in the loan closing process, insurance
costs, legal fees with respect to securitization, rating agency fees, hedging
related gains and losses (including realized and unrealized gains and losses)
and other loan related costs.

To date, the Company has held all of its Mortgage Loans for sale or
securitization. Accordingly, such loans have been recorded at the lower of cost
or fair value. To the extent the Company may in the future hold some or all of
such Mortgage Loans for investment, such Mortgage Loans will generally be
recorded at cost and interest on such loans will be recognized as revenue when
earned. Additionally, with respect to such Mortgage Loans which are originated
at a discount and held for investment, the Company will

37
<PAGE>
amortize into income over the estimated life of such loans the difference
between its cost basis and the face amount of such loans.

For such securitizations which are treated as financings for accounting
purposes, the Company will recognize income and expenses over time as interest
income is received and interest expense is incurred. For securitizations which
are accounted for as sales for accounting purposes, the Company will recognize
income and expenses in the period in which the transaction occurs.

HISTORICAL RESULTS OF OPERATIONS--1997 TO 1996

REVENUES. Total revenue consists predominantly of interest income from
Mortgage Loans. Total revenue increased to $9.7 million for the year ended
December 31, 1997 from $4.2 million for the year ended December 31, 1996.

Loss on sales of mortgages reflects the losses incurred by the Company in
the securitization of a pool of mortgage loans in January 1997. With respect to
such securitization, a provision for loss on sale of $923,611 was recorded
during 1996, and an additional loss of $160,782 was recognized during 1997.

Interest income from mortgages increased to $9.9 million for the year ended
December 31, 1997 from $5.1 million for the year ended December 31, 1996,
primarily due to the increased volume of mortgage loans originated and held by
the Company compared to the preceding period.

LOAN EXPENSES. Loan expenses include interest expense on repurchase
agreement obligations and servicer fees on Mortgage Loans. With the exception of
interest expense and servicer fees which are treated as period expenses, other
costs incurred by the Company related to Mortgage Loans are recorded as deferred
costs and recognized upon the sale or securitization of the related loans. Loan
expenses increased to $8.9 million for the year ended December 31, 1997 from
$4.1 million for the year ended December 31, 1996.

Interest on repurchase agreement obligations increased to $8.8 million for
the year ended December 31, 1997 from $4.0 million for the year ended December
31, 1996, primarily due to the increased volume of Mortgage Loans originated and
held by the Company compared to the preceding period.

OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense, general and administrative expense (including professional fees), and
marketing and advertising expense. Operating expenses increased to $4.1 million
for the year ended December 31, 1997 from $3.8 million for the year ended
December 31, 1996.

Personnel expense increased to $2.9 million for the year ended December 31,
1997 from $2.1 million for the year ended December 31, 1996. The Company added
several additional personnel during 1997 in support of loan origination and
processing activities.

General and administrative expense decreased to $727,642 for the year ended
December 31, 1997 from $1,298,368 for the year ended December 31, 1996,
primarily due to decreased legal expenses.

Marketing and advertising increased to $501,091 for the year ended December
31, 1997 from $405,930 for the year ended December 31, 1996, due to increased
marketing and advertising activities.

OTHER INCOME (EXPENSE). Other Income (expense) includes interest income and
interest expense not related to mortgage loans. Other interest income increased
to $169,889 for the year ended December 31, 1997 from $155,781 for the year
ended December 31, 1996. Interest expense on notes payable increased to $292,827
for the year ended December 31, 1997 from $68,881 for the year ended December
31, 1996, due to increased notes payable issued in support of hedging
requirements and operating capital requirements.

CASH FLOW DATA. Cash flows from operating activities increased to
($2,704,304) for the year ended December 31, 1997 from ($13,630,639) for the
year ended December 31, 1996, primarily due to increased

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levels of borrowings under the Company's repurchase agreements versus mortgage
assets originated. Cash flows from financing activities increased to ($60,612)
for the year ended December 31, 1997 from ($77,581) for the year ended December
31, 1996 due to lower levels of fixed asset purchases by the Company. Cash flows
from financing activities decreased to $5,032,880 for the year ended December
31, 1997 from $7,546,214 for the year ended December 31, 1996, due to lower net
levels of capital additions to the Company.

PRO FORMA RESULTS OF OPERATIONS--1997

Pro forma net income was $1.4 million for the year ended December 31, 1997,
compared to a historical net loss of $3.4 million for the same period. Pro forma
interest expense on repurchase agreements declined by $4.8 million as a result
of the elimination of interest expense based on repayment of a portion of the
amounts outstanding under the NationsBank Warehouse. Pro forma interest expense
on notes payable was eliminated based on repayment of the outstanding notes
payable from the proceeds of the Offering. Pro forma general and administrative
expense increased by $250,000 to reflect increased general and administrative
expenses associated with operating the Company as a REIT. The pro forma
adjustments were assumed to have occurred on January 1, 1997.

LIQUIDITY AND CAPITAL RESOURCES

At March 15, 1998, CLF had $2.7 million in cash and cash equivalents. The
Company's sources of funds historically have been operating cash from its
limited partners, and borrowings with respect to loan fundings from NationsBank.
Upon the closing of this Offering and the application of the net proceeds as
contemplated herein, the Company will have Warehouse Credit Facilities with
NationsBank and Prudential Credit totaling $930 million, with an outstanding
balance under these facilities of approximately $201 million. Under the terms of
the Warehouse Credit Facilities, NationsBank will advance up to 100% of the
funded balance on a Credit Tenant Loan. The NationsBank Warehouse was initially
established in July 1996 with a commitment of $350 million, and is expected to
be expanded to $550 million in March 1998. The NationsBank Warehouse is
scheduled to expire in July 1998, and is expected to be renewed. The Company
expects to enter into the Prudential Warehouse in March 1998 in the amount of
$100 million and the commitment is expected to be expanded to $350 million upon
the completion of the Offering; it is expected that Prudential Credit will
advance up to 98% of the funded balance on a Credit Tenant Loan.

The Company expects to establish a separate additional warehouse facility
from Prudential Credit with a commitment of $30 million, the purpose of which
will be for warehousing loans financed under its Mezzanine Construction loan
program.

The Company is currently negotiating the terms of the increase in the
NationsBank Warehouse and the terms of the Prudential Warehouse and Mezzanine
Construction Facility.

The Company intends to pursue establishing a line of credit following the
closing of the Offering, for working capital purposes.

The Company intends to repay a portion of the balance outstanding under the
Warehouse Credit Facilities with the net proceeds from the Offering. Management
does not expect any discretionary repayment on the Warehouse Credit Facilities
to reduce the amounts available to the Company under the terms of the Warehouse
Credit Facilities. Any discretionary repayment toward the Warehouse Credit
Facilities will be done to maximize the efficiency of cash management and
earnings of the Company. Management believes that the net proceeds of the
Offering, combined with the cash flow from operations and borrowings, will be
sufficient to enable the Company to meet its anticipated liquidity and capital
requirements. See "Use of Proceeds" and "The Company."

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LEVERAGE

The Company intends to employ a leveraging strategy of borrowing against
Credit Tenant Loans to originate or acquire additional assets, generally through
the use of repurchase agreements under its Warehouse Credit Facilities, dollar
roll agreements, mortgage loan securitizations, loan agreements, lines of
credit, commercial paper borrowings, and other credit facilities. The Company
may also issue debt in the public market to the extent that management deems
appropriate. Leverage can reduce the net income available for distributions to
stockholders. To the extent that changes in market conditions cause the cost of
such financing to increase relative to the income that can be derived from the
assets held by the Company, the Company may reduce the amount of leverage it
utilizes. The Company also intends to securitize the majority of the Mortgage
Assets that it originates or acquires. It may do so by selling such Mortgage
Assets, or may retain such Mortgage Assets and pledge them to secure structured
debt. Because any such debt would be nonrecourse debt (recourse being limited to
the pledged Mortgage Assets) and such debt would be structured to have, in the
aggregate, fixed interest rates corresponding to the interest rates on the
Mortgage Assets, and would pay down principal as principal on the underlying
Mortgage Assets is paid, the economic impact to the Company will be
substantially equivalent to a sale in which a Subordinate Interest is retained.

HEDGING

To the extent consistent with its REIT election, the Company intends to
enter into hedging transactions to protect its portfolio of Mortgage Assets and
related debt from interest rate fluctuations prior to securitization. The
Company has historically hedged a substantial portion of its exposure to
long-term interest rate fluctuations to insulate the Company from significant
value changes in its assets prior to securitization. These hedging transactions
may include (i) interest rate swaps, (ii) the purchase or sale of interest rate
futures, U.S. Treasuries, collars, caps, floors or options, and (iii) other
hedging instruments. The Company will generally not hedge Mortgage Assets and
related debt from interest rate fluctuations after securitization.

The Company's hedging strategies typically require initial margin deposits
and margin calls depending on changes in interest rates. At December 31, 1997,
the Company had short positions in futures on U.S. Treasuries of approximately
$362 million related to its loan portfolio hedging.

FUNDS FROM OPERATIONS

Industry analysts frequently consider funds from operations ("FFO") to be an
important measure of the performance of a REIT. The White Paper on Funds from
Operations approved by the Board of Governors of NAREIT in March 1995 defines
FFO as net income or loss (computed in accordance with GAAP), excluding gains or
losses from debt restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that FFO is helpful to
investors as a measure of the performance of a REIT because, along with cash
flow from operating activities, financing activities and investing activities,
it provides investors with an indication of the ability of the Company to incur
and service debt, to make capital expenditures and to fund other cash needs. The
Company computes FFO in accordance with standards established by NAREIT, which
may not be comparable to FFO reported by other REITs that do not define the term
in accordance with the current NAREIT definition, or that interpret the current
NAREIT definition differently than the Company. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions,
because of certain capital expenditures, scheduled mortgage loan principal
payments and other items. The Company believes that FFO is a useful alternative

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measure of the performance of a REIT because it provides investors with an
understanding of the Company's ability to incur and service debt and make
capital expenditures. See "Dividend and Distribution Policy."

INTEREST RATES AND INFLATION

Interest rates will be expected to have a potentially significant effect on
the Company's financial condition and results of operations, because the value
of the Company's assets prior to securitization will be sensitive to changes in
general long-term interest rates, and the cost of funds for the Company will be
sensitive to changes in general short-term interest rates.

In light of these valuation and interest rate exposures, interest rates will
be expected to have a much greater effect on the Company's financial condition
and results of operations than will inflation. Changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates.

YEAR 2000 ISSUES

Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus, the programs were unable to properly distinguish between the year 1900 and
the year 2000. This is frequently referred to as the "Year 2000 Problem." The
Company has initiated a company-wide review of its business applications and
equipment to address any exposure to the Year 2000 Problem. The Company uses
mainstream business and database software in its operations. The Company has
made due inquiries with its software vendors to assure that its critical
software applications are Year 2000 compliant. The Company is also identifying
and prioritizing critical suppliers and customers and will follow up with them
concerning their plans and progress addressing the Year 2000 problem. The
Company is not expected to incur any significant expenditures with respect to
the Year 2000 problem related to its software and business applications.

The Company is currently evaluating the Year 2000 readiness of its equipment
with a comprehensive review to assure that critical equipment is Year 2000
compliant. The Company does not expect to incur any significant expenditures
with respect to the Year 2000 problem related to its equipment.

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THE COMPANY

GENERAL

The Company was formed on March 6, 1998, to continue the growth of CLF as a
specialty lender. Since 1995, the Company has been primarily engaged in the
business of originating, underwriting and securitizing mortgage loans secured by
first liens on commercial properties which are long-term net leased to
Investment Grade and Near Investment Grade credit tenants ("Credit Tenants," and
loans to owners of real property subject to Credit Tenant Leases, "Credit Tenant
Loans"). The Company's financing strategy is to accumulate Credit Tenant Loans
and periodically securitize them with the intention of matching the terms of its
assets with the terms of its long-term liabilities. The Company believes that
its national loan origination network of correspondents, underwriting and loan
processing systems, securitization experience and loan product innovations have
established the Company as a leading originator and securitizer of Credit Tenant
Loans and that its continued innovation will permit the Company to expand into
other related real estate investment activities.

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The Company's principal executive offices are located at 85 John Street,
12th Floor, New York, New York 10038, telephone number (212) 587-7676. The
Company is a Maryland corporation.

CREDIT TENANT LOAN BUSINESS

Historically, Credit Tenant Loans of the type made by the Company were only
available when the applicable Credit Tenant Lease was a "bond" lease. In a
"bond" lease, the Credit Tenant is responsible for every monetary obligation
associated with managing, owning, developing and operating the leased premises
including, but not limited to the costs associated with utilities, taxes,
insurance, maintenance, repairs and losses due to casualty and condemnation. As
a result, the Credit Tenant's ability to terminate a lease or abate rent on a
"bond" lease (other than as a result of bankruptcy) is non-existent or available
under extremely limited circumstances.

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comply with affirmative covenants of the lease, or if the landlord engages in or
promotes a competing property within a specified radius of the property or
otherwise violates negative covenants in the lease.

EXTENDED-TERM LOANS. Although Credit Tenant Loans depend on Credit Tenant
Lease payments and generally are fully amortized over the initial term of the
Credit Tenant Lease, the Company's "Extended-Term Loan" program (introduced in
May 1997) allows a borrower to extend the amortization period of the Credit
Tenant Loan beyond the initial term of the associated Credit Tenant Lease. As a
result of extending the amortization period, loan proceeds can be increased or
debt service can be reduced (making more cash flow available to the borrower),
enhancing certain tax benefits that may be made available to borrowers. As of
March 15, 1998, the Company had funded approximately $46 million in additional
aggregate principal amount of extended-term loans and has committed to fund
approximately $53 million in aggregate principal of extended-term loans. This
program has been marketed under the name the "Extended Amortization Program."

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contractual CPI adjustments (typically up to two percent per annum) as if they
were fixed and determinable at the time of execution of the Credit Tenant Lease.

RELATED BUSINESSES

COMMERCIAL MORTGAGE-BACKED SECURITIES. In its Credit Tenant Loan business,
the Company issues collateralized, commercial mortgage-backed securities, or
CMBS, backed by pools of Credit Tenant Loans. The Company anticipates that it
will retain the Subordinate Interests of its Credit Tenant Loans depending upon
the then current market condition and business needs. Management believes that
the Company is in a unique position to analyze whether the subordinate tranches
of its CMBS provide an attractive investment on an adjusted risk/return basis,
because the Company originates and underwrites each Credit Tenant Loan and is
familiar with the applicable Lease Enhancements. Having developed the skills to
analyze the risks associated with investing in the Subordinate Interests in its
own pools, management believes that the Company is well-positioned to analyze
and invest in interests in CMBS issued by unrelated third parties (particularly
those which include, as a component thereof, Credit Tenant Loans). The Company
intends to invest primarily in (i) Subordinate Interests in CMBS pools
originated by the Company and others, including Investment Grade, Non-Investment
Grade and, in the case of those originated by the Company, unrated interests,
and (ii) interest-only classes in some of such CMBS pools. Subordinate Interests
and interest-only classes generally afford a higher yield and entail greater
risk than more senior investment grade securities.

OTHER INVESTMENTS. The Company intends to engage in other real estate
related businesses from time to time, which management believes are
complementary to its Credit Tenant Loan business. These

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investments may include making equity investments in, and/or Credit Tenant Loans
on, real properties net leased to Credit Tenants in selected international
markets. The Company may also invest in interests in other REITs, registered
investment companies, partnerships and other investment funds and real estate
operating companies.

COMPETITIVE ADVANTAGES

EFFICIENT OPERATIONS. The Company has continuously engineered its loan
underwriting and closing process with the intent of eliminating redundant
procedures and speedily approving loans to prospective borrowers. Management
believes that its current process is one of the most streamlined and
comprehensive in the commercial mortgage lending industry. The Company believes
that this process appeals to correspondent mortgage brokers, Rating Agencies and
borrowers by permitting timely funding in a cost-efficient manner, while
simultaneously reducing the Company's costs. The Company has established a
target of closing loans within 45 days from receipt of an application.

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BUSINESS STRATEGY

- EXPANDING EXISTING BUSINESS. The Company intends to continue to build on
its growing market presence and increasing borrower base to expand
origination volume in existing business lines.

Although the Company presently outsources servicing, the Company may explore
acting as a primary or special servicer in the future if economically
beneficial. In addition, the Company believes that many of the technologies that
have supported the growth of the capital markets in U.S. commercial real estate
are readily exportable to offshore markets. As these offshore markets continue
to develop, the Company believes that U.S. firms will play an important role
(primarily in the early stages of development of such markets). Management
believes that the Company will be well positioned to expand into selected
international markets as a result of its position as a market innovator and its
expertise in Credit Tenant Loans. For example, the Company has established a
relationship with a leading United Kingdom real

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estate law firm and real estate services companies who could act as advisors and
have the ability to direct the Company to sources of origination. The Company
may explore such opportunities as they arise.

In 1997, the Company completed the first securitization of a pool of Credit
Tenant Loans with a variety of Credit Tenants and multiple properties with the
sale of approximately $130 million of mortgage-backed pass-through certificates.
In connection with this securitization, the Company successfully demonstrated to
Duff & Phelps Credit Rating Co. ("DCR") and Fitch IBCA, Inc. ("Fitch") that the
Company's Lease Enhancement mechanisms eliminate or mitigate the risk that a
Credit Tenant could terminate a lease or abate rent in certain circumstances.
The effectiveness of the Company's underwriting practices is reflected in the
fact that of approximately $345 million of Company-underwritten Credit Tenant
Loans reviewed to date (including those included in the Company's securitization
and certain Credit Tenant Loans since made by the Company) by DCR, Fitch or S&P,
none were rejected as not meeting Rating Agency requirements for Credit Tenant
Loans. Furthermore, at March 15, 1998, of the 84 outstanding loans owned by the
Company with outstanding principal balances, none were delinquent more than 30
days.

Exposure to changes in underlying interest rates can have a great effect on
the value and profitability of the Company's Credit Tenant Loans, prior to
securitization.

The Company has accordingly employed a hedging strategy designed to mitigate
the effect that movements in market rates have on its Credit Tenant Loans prior
to securitization. See "The Company-- Hedging."

EXISTING LOANS AND PIPELINE FOR FUTURE ORIGINATIONS

In the Formation Transactions, the Company will acquire CLF's portfolio of
Existing Loans having an aggregate outstanding principal balance at March 15,
1998, of approximately $306 million. In addition, the Company will assume
commitments made by CLF to fund approximately $225 million of Credit Tenant
Loans (subject to completion of the Company's underwriting process). These
commitments generally are expected to fund within the next twelve months.
Management believes that the Credit Tenants underlying approximately 91% in
aggregate principal amount of the Existing Loans are rated Investment Grade
(with the remaining 9% being rated Near Investment Grade) and the Credit Tenants
underlying substantially all of the Committed Loans are rated Investment Grade.
The Company expects to securitize all or part of these loans in 1998. The
Company's current loan pool is larger and more diversified than the pool for the
Company's previous securitization. Consequently, the post-Offering
securitization (based upon a preliminary review by the Rating Agencies of a
large portion of this loan pool) is expected to result in subordination levels
more favorable to the Company than were obtained in the first securitization. In
addition, the Company will assume commitments by CLF to purchase Net Leased Real
Estate in the amount of $ . In each case, the amount of the loans and
commitments listed above are as of March 15, 1998 and are expected to increase
between such date and the closing of the Offering.

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The Company's pipeline includes potential loans in various stages of
development. The Company receives requests for Credit Tenant Lease financing on
a daily basis. At any given time, the Company may have hundreds of potential
transactions in different stages in the Company's loan qualification, pricing
and due diligence process. Once a lease has been reviewed by the Company and is
determined to be financeable under the Company's Credit Tenant Loan program, the
Company will, at a borrower's request, issue a term sheet (a "Term Sheet") which
briefly outlines the pricing and terms under which the Company proposes to
finance the property (such potential loan, after delivery of the Term Sheet,
being at the "Term Sheet Stage"). Upon acceptance of the Term Sheet by a
borrower, the Company issues a form of application which sets forth the detailed
terms of the transaction (the potential loan then being at the "Application
Stage"). Once a borrower signs an application and delivers it to the Company
with a deposit and the application is accepted, subject to the underwriting
process by the Company's loan committee, the Company considers such loans to be
Committed Loans, and the formal due diligence process begins. The Company
generally closes a Committed Loan in four to eight weeks. At any time from the
date of acceptance of the application until closing, the borrower may lock in
the interest rate on the loan by payment of an additional fee. While an
application may be declined by the Company upon completion of the Company's
underwriting process, or the prospective borrower may forfeit its deposit and
withdraw the application prior to closing, management believes, based on the
Company's historical operating experience, that approximately 98% of these
Committee Loans result in closed loans. Furthermore, it has been the Company's
experience, that once the Company has committed to make a Credit Tenant Loan and
has locked in an interest rate (receiving a rate-lock fee), closing of that loan
is relatively assured and accordingly the Company considers loan transactions as
effectively completed when rate-locked (whether before actual loan closing or at
the time of closing) ("Rate-Locked Loans"). Management believes, based on the
Company's operating experience, that approximately 40% to 50% of loans in the
Application Stage and approximately 15% to 20% of loans in the Term Sheet Stage,
respectively, will move into the category of Committed Loans. Since the Company
receives requests for loan financing daily, the Company's loan pipeline
frequently changes as new transactions are added and others are removed.

Management believes that loan originations will continue to grow throughout
1998 as a result of the following factors:

- The Company believes that its Extended Amortization and the
Construction/Permanent loan programs, which were introduced between May
and July of 1997, are gaining greater market awareness and acceptance,
resulting in increased year-over-year loan origination. Furthermore, the
Company expects to increase its volume of these loans through the year.

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Index financing. In addition, the Company anticipates acquiring properties
net leased to Credit Tenants on which it expects to place its Credit
Tenant Loans.

MANAGEMENT

The Company will be internally managed and self-administered, and CLF's entire
staff is expected to be employed by the Company upon completion of the Offering.
The Company will be subject to the direction and oversight of a Board of
Directors composed of 5 persons. Mr. William R. Pollert, President and Chief
Executive Officer, who will serve as Chairman of the Board of Directors, will be
the only member of the Company's management to serve on the Board of Directors.
See "Directors and Executive Officers."

LOAN ORIGINATION CAPABILITY AND CORRESPONDENT NETWORK

Credit Tenant Lease financing demands of mortgage brokers specialized
knowledge and skills not generally required for traditional real estate
financing activities. The Company dedicates significant resources to training
correspondent mortgage brokers in all aspects of Credit Tenant Lease financing
and routinely presents on-site training seminars throughout the United States.
Training seminars are supplemented with bimonthly newsletters, brochures and
other written material intended to keep correspondents up to date on the latest
underwriting requirements for Credit Tenant Loans and Credit Tenant Leases,
Lease Enhancements, and changes in tenant credit ratings, as well as providing
up-to-date information on the Company's latest innovative financing programs.

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In addition to the Company's training and marketing support to
correspondents, the Company's executives and staff periodically assist
correspondents in originating loans by meeting with potential borrowers to
explain various aspects of the Credit Tenant Loan program, and by assisting in
structuring transactions to best meet the borrower's requirements.

CREDIT FACILITIES

The Company has warehouse credit facilities provided by NationsBank (the
"NationsBank Warehouse") and Prudential Credit (the "Prudential Warehouse"). CLF
entered into the NationsBank Warehouse in the initial amount of $350,000,000 in
July, 1996. The facility is expected to be expanded to $550,000,000 in March,
1998. The NationsBank facility is used primarily to fund and hold the Company's
loans prior to securitization as well as certain other functions directly
related thereto. These other functions include: $20,000,000 available for use by
the Company to replace the "equity" that would otherwise be required to be
posted by the Company under the agreement when it makes Credit Tenant Loans; and
$20,000,000 to support margin requirements under the Company's interest rate
hedging program. The Company pledges its Credit Tenant Loans as collateral under
the NationsBank Warehouse. NationsBank is one of the Company's correspondents
and an affiliate of NationsBank was the lead manager with respect to the
Company's January 1997 securitization of Credit Tenant Loans.

The Company is expected to enter into the Prudential Warehouse in the amount
of $100,000,000 in March 1998, which amount will be increased to $350,000,000
upon closing of the Offering. Like the NationsBank Warehouse, the Company
intends to utilize the Prudential Warehouse for purposes of funding and holding
the Company's loans prior to securitization. In addition, the Company expects to
enter into a Mezzanine Construction Loan financing facility (the "Mezzanine
Construction Facility") with Prudential Credit in the initial amount of
$30,000,000 in March 1998. The Mezzanine Construction Facility will be used by
the Company to fund its Mezzanine Construction Loans.

The NationsBank Warehouse and the Prudential Warehouse are secured
facilities and are evidenced by warehouse agreements pursuant to which the
Company may obtain financing for the origination of Mortgage Loans and the
purchase of Mortgage Backed Securities. These agreements provide that the lender
thereunder makes a loan in an amount equal to a percentage of the market value
of the pledged collateral. At maturity (or upon an earlier securitization), the
Company is required to repay the loan and the pledged collateral is released.
The pledged assets continue to pay principal and interest to the Company prior
to securitization.

The Company is currently negotiating the terms of the increase in the
NationsBank Warehouse and the terms of the Prudential Warehouse and Mezzanine
Construction Facility.

Additionally, the warehouse agreements require the Company to deposit
additional collateral or reduce its borrowings thereunder, if the market value
of the pledged collateral declines. This may require the Company to sell a
portion of its Invested Portfolio to provide such additional collateral or to
reduce its borrowings.

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LOAN PROCESS

From the time an application for a Credit Tenant Loan is submitted to the
Company until the time such a loan is closed, the prospective loan undergoes
several steps and procedures, many of which involve third-parties which, while
meeting the Company's quality standards, are not under the control of the
Company, including correspondent brokers, outside counsel, insurance companies,
and other product or service providers. The Company has worked closely with
these third-party providers to set quality standards and to develop a
streamlined process for originating and closing Credit Tenant Loans. The Company
has established a target of closing loans within 45 days from receipt of an
application.

HEDGING STRATEGY

Management believes that exposure to changes in underlying interest rates
can have a profound effect on the value (and hence profitability) of its Credit
Tenant Loans while they are held in the Company's portfolio prior to
securitization. Accordingly, the Company has employed a hedging strategy to
mitigate the effects of movements in underlying interest rates on the value of
its Credit Tenant Loans. The Company has done so by having hedge positions that
react in a corresponding but opposite manner to offset declines or increases in
the value of the Company's fixed rate loans due to changes in underlying
interest rates. For example, as underlying interest rates fall, the value of the
Company's fixed rate loans increases while the value of the Company's hedge
position declines. Conversely, as underlying interest rates rise, the value of
the Company's fixed rate loans falls while simultaneously the value of the
Company's hedge position increases.

The Company intends generally to continue to seek to manage its interest
rate exposure, in coordination with the Company's financial advisors, as the
Company determines is in the best interests of the Company's stockholders, given
the cost of such hedging transactions and the need to maintain the Company's
status as a REIT (which status places certain limitations on the use of
hedging).

SECURITIZATION

The Company completed the first securitization of a pool of multi-tenant
Credit Tenant Loans in 1997 with the sale of approximately $130 million of
mortgage pass-through certificates. The transaction was rated by DCR and Fitch
and was underwritten by NationsBanc Capital Markets, Inc. (the predecessor to
NationsBanc Montgomery Securities LLC) and Goldman, Sachs & Co.

In connection with the securitization, the Company successfully demonstrated
to DCR and Fitch how the Company's Lease Enhancement mechanisms eliminate or
mitigate significantly the risk that a Credit Tenant could terminate a lease or
abate rent due to a condemnation, casualty or failure of a landlord to maintain
a property. In the process, the Company gained valuable insight into how these
Rating Agencies evaluate and rate Credit Tenant Loan pools.

In September and October of 1997, the Company worked with all four national
Rating Agencies-- S&P, Moody's Investors Service, Fitch and DCR--to rate its
second Credit Tenant Loan pool of approximately $215 million. While the Company
chose to delay securitizing this pool until the completion of the Offering, it
had received preliminary subordination levels substantially more favorable than
it received for its first securitization. This result reflected both an
increased familiarity by the Rating Agencies with the Company's Lease
Enhancement mechanisms and the greater credit diversity in the pool. Reduced
subordination levels permit more of the securities to be rated "AAA" and results
in the Company receiving more proceeds from securitization, lowering the
Company's overall cost of funds.

In the future, the Company intends to securitize its loans, either directly
or through one or more wholly owned subsidiaries, through the issuance of CMBS
in the form of collateralized mortgage obligations ("CMOs") in debt
securitizations or through other arrangements, pledging its assets (including
mortgage loans and interests in mortgage-backed securities) as collateral
security for its repayment

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obligations. Such CMO and other borrowing arrangements will be structured as
debt, with the Company (or a wholly owned subsidiary) retaining an equity
interest in the associated collateral. In such a debt transaction, the principal
balance of the collateral will exceed the principal balance of the debt. Thus,
once the debt is repaid in full, the issuer will own the collateral free of the
lien of the debt. Economically, such a transaction is similar to selling the
Mortgage Loan to an issuing vehicle and acquiring Subordinate Interests as part
of the consideration. Other borrowing arrangements may include a pledge of
assets by the Company to a wholly owned subsidiary to secure the issuance of a
debt instrument to an investment banking company or other third party that
intends to contribute such debt instrument to a financial asset securitization
investment trust ("FASIT").

The Company may also securitize its Credit Tenant Loans by transferring them
to a special purpose trust or a corporation that elects to be treated as a real
estate mortgage investment conduit ("REMIC"). The REMIC would issue
mortgage-backed pass-through certificates to the Company, which would sell some
or all of the various classes of such certificates, to the extent such activity
does not constitute a sale of Credit Tenant Loans to customers in the ordinary
course of the Company's trade or business (i.e., "dealer" activity). In order to
avoid such "dealer" status, with its concomitant 100% tax on any profit to the
Company from such sales, the Company may transfer the Credit Tenant Loans to a
taxable subsidiary (one in which the Company owns substantially all of the
economic interest but less than 10% of the voting interest), which would form
such REMIC and distribute the proceeds thereof to the Company. It is probable
that the Company would retain certain classes of the REMIC certificates. The
Company intends to use the proceeds from such REMIC securitizations and CMO and
other borrowings to invest in additional mortgage loans, mortgage-backed
securities, and other assets and, in turn, to borrow against such newly acquired
assets, primarily through additional securitizations and borrowings. The
Company's strategy is to repeat this process to the extent opportunities to use
leverage are available and the Company determines that using additional leverage
is prudent and consistent with maintaining an acceptable level of risk.

The Company expects that it will retain interests in the underlying Credit
Tenant Loans which will be subordinated with respect to payments of principal
and interest on the underlying Credit Tenant Loans to the classes of securities
issued to investors in such securitizations. Accordingly, any losses incurred on
the underlying Credit Tenant Loans will be applied first to reduce the remaining
amount of the Company's retained interest, until reduced to zero. Thereafter,
the Company expects to have no further exposure to losses.

Typically, in connection with the creation of a new Credit Tenant Loan
securitization, the issuer or trustee for such securitization generally will be
required to enter into a master servicing agreement with respect to such series
of mortgage securities with a Master Servicer. Currently, the Company does not
engage in this business. In order to assist the Company in maintaining its
exclusion from regulation under the Investment Company Act, the Company expects
that it will retain the right to initiate, direct or forbear foreclosure
proceedings in connection with defaults on any of the underlying Credit Tenant
Loans and may retain special Servicers to maintain borrower performance and to
exercise available remedies, including foreclosure, at the direction of the
Company. Exercise of such rights may require the Company to be responsible for
advancing payments to investors in such securitizations as if such default has
not occurred.

The Company intends to structure its securitizations so as to minimize the
attribution of any Excess Inclusion income to the Company's stockholders. See
"Risk Factors--Tax, Legal and Other Risks--Risk of Adverse Tax Treatment of
Excess Inclusion Income" and "Federal Income Tax Considerations--Taxation of
Taxable U.S. Stockholders" and -- "Taxation of Tax-Exempt Stockholders."

COMPANY POLICIES

LOAN UNDERWRITING GUIDELINES. The Company has adopted underwriting
guidelines for making Credit Tenant Loans. Such guidelines and the compliance
therewith is monitored by the Company's Loan

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Committee which consists of the Company's President, Executive Vice President,
General Counsel, Associate General Counsel and Chief Financial Officer. Pursuant
to these guidelines, each proposed loan is required to be submitted to the Loan
Committee prior to the execution of the applicable application and again prior
to funding of such loan.

OPERATING POLICIES. The Board of Directors has established certain
operating policies for the Company. Except as specifically prohibited by the
Company's Charter or Bylaws, the Board of Directors may, in its sole discretion
and without stockholder approval, revise the guidelines from time to time in
response to changes in market conditions or opportunities.

The Company also has adopted compliance guidelines, including restrictions
on acquiring, holding and selling assets, to ensure that the Company continues
to qualify as a REIT and is excluded from regulation as an investment company.
Before acquiring or originating any asset or class of assets, the Company will
determine whether such asset would constitute a Qualified REIT Real Estate Asset
under the REIT Provisions of the Code. Substantially all of the assets that the
Company intends to acquire or originate are expected to be Qualified REIT Real
Estate Assets. The Company will regularly monitor its Mortgage Assets and other
assets (and its commitments to fund or purchase such Mortgage Assets or other
assets) and the income generated from such assets, including income from its
hedging activities, in an effort to ensure that at all times the Company
maintains its qualification as a REIT and its exemption from regulation under
the Investment Company Act. REIT rules limit the ability to engage in
transactions that are tax sales of assets.

CAPITAL, LEVERAGE AND FINANCING POLICIES. There is no limit on the maximum
indebtedness which the Company may incur on an individual property and the
Company's organizational documents do not limit the amount of indebtedness that
the Company may incur. The Board of Directors has adopted certain policies which
the Company must adhere to before increasing its level of indebtedness, although
such policies may be altered by the Board of Directors in its sole discretion.
When appropriate, the Company intends to utilize various sources of capital,
including the Warehouse Credit Facilities and the issuance of debt or equity
securities in public or private capital markets for future acquisitions, capital
improvements and development. See "Risk Factors--Operating--Availability of
Financing; Leveraging Strategy."

The Company intends to increase its portfolio of Mortgage Loans, direct
investments in real estate, securities owned and other assets through the use of
leverage. Initially, the Company intends to finance its Mortgage Loan
origination business and the acquisition of other assets with the net proceeds
of this Offering, and with funds available under its Warehouse Credit
Facilities. In the future, the Company intends to continue to borrow against or
"leverage" its portfolio of Mortgage Loans and other assets and use the proceeds
to make additional Credit Tenant Loans and to acquire additional investments.
Such financings are expected to include, among other things, reverse repurchase
agreements (pursuant to its Warehouse Credit Facilities), securitizations of its
Credit Tenant Loans and secured and unsecured loans. The Company may also borrow
on a long-term basis and issue additional shares as a source of longer-term
capital, including Preferred Shares or additional Shares of Common Stock. See
"Risk Factors--Availability of Financing; Leveraging Policy." However, neither
the Articles of Incorporation nor the Bylaws limit the amount of indebtedness
the Company can incur, and the Board of Directors has discretion to deviate from
or change the Company's indebtedness policy at any time, without the consent of
the Company's stockholders. The Company intends to maintain an adequate capital
base to protect against various business environments in which the Company's
financing and hedging costs might exceed interest income (net of credit losses)
from its portfolio of assets. These conditions could occur, for example, due to
credit losses or when, due to interest rate fluctuations, interest income on the
Company's portfolio of assets lags behind interest rate increases in the
Company's borrowings, some of which are expected to be at a variable rate. See
"Risk Factors--Interest Rate Risk." The Company may enter into hedging
transactions in an effort to protect its Invested Portfolio and related debt
from interest rate fluctuations. See "--Asset/ Liability Management" and "Risk
Factors--Risks Associated with Hedging Transactions"

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CREDIT RISK MANAGEMENT. With respect to its assets, the Company will be
exposed to various levels of credit and special hazard risk, depending on the
nature of the underlying assets and the nature and level of enhancements, if
any, supporting such assets. The Company will originate or purchase Mortgage
Loans which meet minimum debt service coverage standards established by the
Company. The Company will review and monitor credit risk and other risks of loss
associated with each investment. In addition, the Company will seek to diversify
the Company's portfolio of assets to avoid undue tenant, geographic, borrower,
issuer, industry and certain other types of concentrations. The Board of
Directors will monitor the overall portfolio risk and review levels of provision
for loss.

ASSET/LIABILITY MANAGEMENT. To the extent consistent with its election to
qualify as a REIT, the Company will follow an interest rate risk management
policy intended to mitigate the negative effects of major interest rate changes.
The Company intends to minimize its interest rate risk from borrowings both
through hedging activities and by attempting to structure the key terms of its
borrowings to generally correspond (in the aggregate for the entire portfolio,
and not on an asset-by-asset basis) to the interest rate and maturity parameters
of its assets.

HEDGING ACTIVITIES. The Company intends to enter into hedging transactions,
generally in consultation with its financial advisors, to protect its Invested
Portfolio from interest rate fluctuations and other changes in market
conditions. These transactions may include interest rate swaps, the purchase or
sale of Treasury bonds and notes, Treasury futures, interest rate collars, caps
or floors, options, Mortgage Derivative Securities and other hedging
instruments. These instruments may be used to hedge as much of the interest rate
risk as the Company determines is in the best interest of the Company's
stockholders, given the cost of such hedges and the need to maintain the
Company's status as a REIT. The Company may elect to have the Company bear a
level of interest rate risk that could otherwise be hedged when the Company
believes, based on all relevant facts, that bearing such risk is advisable. The
Company has substantial experience in hedging the interest rate risk associated
with real estate assets.

Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there may be no requirements with
respect to record keeping, financial responsibility or segregation of customer
funds and positions. The business failure of a hedging Counterparty with which
the Company has entered into a hedging transaction could result in a default,
which may result in the loss of unrealized profits and force the Company to
cover its resale commitments, if any, at the then current market price. In
addition, although generally the Company will seek to reserve for itself the
right to terminate its hedging positions, it may not always be possible to
dispose of or close out a hedging position without the consent of the hedging
Counterparty, and the Company may not be able to enter into an offsetting
contract in order to cover its risk. There can be no assurance that a liquid
secondary market will exist for hedging instruments purchased or sold, and the
Company may be required to maintain a position until exercise or expiration,
which could result in losses.

The Company intends to protect its Invested Portfolio against the effects of
significant interest rate fluctuations and to preserve the net income flows and
capital value of the Company. Specifically, the Company's asset acquisition and
borrowing strategies are intended to offset the potential adverse effects
resulting from the differences between fixed rates associated with its mortgage
assets and the shorter term predominantly variable nature of the Company's
related short-term borrowings.

The Company's hedging activities are intended to address both income and
capital preservation. Income preservation refers to maintaining a stable spread
between yields from Mortgage Assets and the Company's borrowing costs across a
reasonable range of adverse interest rate environments. Capital preservation
refers to maintaining a relatively steady level in the market value of the
Company's capital across a reasonable range of adverse interest rate scenarios.
To monitor and manage capital preservation risk, the Company will model and
measure the sensitivity of the market value of its capital (i.e., the
combination of its assets, liabilities and hedging positions) to various changes
in interest rates under

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various economic scenarios. The Company will not enter into these types of the
transactions for speculative purposes.

The Company believes its hedging activities will provide a level of income
and capital protection against reasonable interest rate risks. However, no
strategy can insulate the Company completely from changes in interest rates.

The Company will enter into hedging transactions in accordance with Company
policies, which may be changed by the Board of Directors in its sole discretion.

OTHER POLICIES. The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act. The Company may (i)
underwrite securities of other issuers, particularly in the course of disposing
of its assets, (ii) originate loans and (iii) issue securities in exchange for
real property or other assets.

FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Company's Board of
Directors has approved the investment policies, the operating policies and the
strategies set forth in this Prospectus. The Board of Directors has the power to
modify or waive such policies and strategies without the consent of the
stockholders to the extent that the Board of Directors (including a majority of
the Unaffiliated Directors) determines that such modification or waiver is in
the best interest of the Company or its stockholders. Among other factors,
developments in the market that affect the policies and strategies mentioned
herein or which change the Company's assessment of the market may cause the
Company's Board of Directors to revise its policies and strategies. However, if
such modification or waiver relates to the relationship of, or any transaction
between, the Company and any Affiliate of the Company, the approval of a
majority of the Unaffiliated Directors is also required.

To create yields commensurate with its investment objectives, the Company
intends to borrow funds through the issuance of CMOs in debt securitizations or
other borrowing arrangements, pledging its assets (including Credit Tenant Loans
and MBS interests) as collateral security for its repayment obligations. Other
borrowing arrangements may include a pledge of assets by the Company to a wholly
owned subsidiary to secure the issuance of a debt instrument to an investment
banking company or other third party that intends to contribute such debt
instrument to a financial asset securitization investment trust ("FASIT"). The
Company may also, to the extent that it believes that such activity does not
constitute a sale of Credit Tenant Loans to customers in the ordinary course of
the Company's trade or business, securitize Credit Tenant Loans by transferring
them to a special purpose trust or corporation which elects to be treated as a
REMIC or a FASIT. The special purpose entity would issue CMBS pass-through
certificates ("Pass-Through Certificates") to the Company, which would sell
certain classes and which may retain certain Investment Grade, Non-Investment
Grade and IO classes. Alternatively, the Company may transfer such Credit Tenant
Loans to a taxable subsidiary (one in which the Company owns substantially all
of the economic interest but less than 10% of the voting interest) which would
form such a REMIC or a FASIT and distribute the proceeds thereof (including such
retained classes) to the Company.

The Company intends to use the proceeds from securitizations and borrowings
to originate and invest in additional Credit Tenant Loans, CMBS, real property
and other assets and, in turn, to borrow against those newly acquired assets,
primarily through additional securitizations. The Company's strategy is to
repeat this process to the extent opportunities to use leverage are available
and management determines and advises that using leverage is prudent and
consistent with maintaining acceptable levels of risk until the Company has
significantly leveraged its portfolio of Credit Tenant Loans and other assets.
Furthermore, the Company may determine to sell one or more of its Credit Tenant
Loans or other Mortgage Assets to third parties from time to time, to the extent
such activity does not constitute a sale of such Credit Tenant Loans or other
Mortgage Assets to customers in the ordinary course of the Company's trade or
business. There can be no assurance that the Company will be able to originate
or acquire appropriate assets other than the existing Credit Tenant Loans, that
the terms or results of the Company's acquisitions will be beneficial to it, or
that the Company will achieve its objectives. See "Risk Factors."

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In addition, the Company may decide to pursue other strategies and other
available acquisition opportunities it deems suitable for the Company's
portfolio. The Company also may acquire real property. See "The
Company--Business Strategy."

INDUSTRY OVERVIEW

Properties that are net leased to Credit Tenants are an important subset of
the overall commercial real estate market. For a variety of strategic,
competitive and accounting reasons, many corporations choose to lease properties
in which they operate rather than own the underlying real estate. These types of
properties are generally owned by developers who have built the properties or
individual or corporate owners who purchase them after construction is complete
and who have the ability to own and operate the properties as a relatively
stable investment opportunity. Management's experience has been that these
properties are typically financed shortly after completion of construction.

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EMPLOYEES

At the closing of the Offering, the Company initially expects to have 20
employees, each of whom will be full-time employees of the Company. The Company
is not party to any collective bargaining agreements and believes its
relationship with its employees is good.

COMPETITION

The businesses in which the Company expects to engage are highly competitive
with numerous companies competing for borrowers, investments and financing
sources. Companies typically compete for borrowers on the basis of the interest
rates and amount of loan proceeds offered as well as payment terms and services
provided. The Company believes that it and its loan products compete effectively
on these bases. Despite the competitive position of the Company and its
products, many of the Company's competitors (including other specialty finance
companies, savings and loan associations, banks, mortgage bankers, insurance
companies, mutual funds, institutional investors, investment banking firms,
other lenders and other entities, including other REITs) have been in existence
significantly longer and have substantially greater financial and other
resources than the Company and may be better established in the markets in which
the Company currently operates.

CERTAIN KEY RELATIONSHIPS

The Company has worked closely with insurance companies and other product or
service providers to develop certain of its key Lease Enhancements and loan
processing procedures. The Company believes that its relationships with these
providers is good and that if any such relationship were to deteriorate, the
Company could replace a provider with another provider of similar services.
There can be no assurance, however, that such relationships will not deteriorate
or if such relationships do deteriorate, that the Company could establish a
relationship with a replacement provider or establish such a relationship on
favorable terms.

FACILITIES

The Company subleases office space at 85 John Street, 12th Floor, New York,
New York 10038 for use as its executive offices. On March , 1998, the
Company executed a sublease for 12,000 square feet of office space at 80 Pine
Street, New York, New York 10038. The Company expects to move to these new
executive offices within the next several months.

LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company is a party or to
which any property of the Company is subject.

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FORMATION TRANSACTIONS

C. Upon the completion of these transfers, CLF, Inc. will own all of
the interests in CLF and CLF will automatically liquidate in accordance with
applicable law.

As a result of the Formation Transactions, upon completion of the Offering,
CLF, Inc. will succeed to all of the assets and liabilities of CLF.

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YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS

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

MORTGAGE LOANS

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

The yield to maturity on all Credit Tenant Loans will be sensitive to
defaults by the borrowers and the severity of the losses that might result from
such defaults. Mezzanine Construction Loans will be particularly sensitive to
defaults because they are subordinate to the senior construction financing. The
borrower generally will have an equity investment in the project, but if the
borrower defaults there can be no assurance that losses will not exceed such
amount. Because the borrower's equity may be insufficient to protect the
Company's investment, the Company's yield on Mezzanine Construction Loans may be
directly and adversely affected by defaults.

Whether and when there are any principal prepayments on the Credit Tenant
Loans will be affected by a variety of factors, including, without limitation,
the credit liquidity and other attributes of the borrower, the terms of the
Credit Tenant Loans, the level of prevailing interest rates, the availability of
mortgage credit and economic, tax, legal and other factors. Principal
prepayments on Credit Tenant Loans secured by commercial properties are likely
to be affected by lock-out periods and prepayment premium provisions applicable
to each of the Credit Tenant Loans, and by the extent to which the Servicer is
able to enforce such prepayment premium provisions. The Company's Credit Tenant
Loans are generally protected from prepayment as a result of program
requirements that generally require eight year lockout periods followed by "make
whole" prepayment provisions.

COMMERCIAL MORTGAGE-BACKED SECURITIES

The Company expects that in connection with securitizations of its Credit
Tenant Loans it will retain certain classes of CMBS issued by the Company. In
addition, the Company expects that, from time to time, it will acquire CMBS
issued directly by third parties (particularly those which include, as a
component thereof, Credit Tenant Loans). The yield to maturity on any class of
CMBS will depend upon, among other things, the price at which such class is
purchased, the interest rate for such class, and the timing and aggregate amount
of distributions on the securities of such class, which in turn will depend
primarily on (i) whether there are any losses on the underlying loans allocated
to such class, (ii) whether and when there are any prepayments of the underlying
Mortgage Loans (which include both voluntary prepayments by the obligors on the
underlying Mortgage Loans and prepayments resulting from liquidations due to
defaults and foreclosures), and (iii) whether there are any early redemptions of
such securities.

The yield on the CMBS retained or acquired by the Company will be extremely
sensitive to defaults on the Mortgage Loans comprising the collateral for such
securities and the severity of losses resulting from such defaults, as well as
the timing of such defaults and actual net losses. The Company's right as a
holder of subordinated classes of CMBS to distributions of principal and
interest will generally be

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subordinated to all of the more senior classes of securities although the timing
and extent of such subordination will depend upon the particular terms of a
security. Actual losses on the underlying Mortgage Loans (after default, where
the proceeds from the foreclosure sale of the real property securing the
underlying Mortgage Loans are less than the unpaid balance of the Mortgage Loan
plus accrued interest thereon and disposition costs) will be allocated first to
the subordinated classes of CMBS prior to being allocated to the more senior
classes of securities. The subordinated classes of CMBS the Company expects to
retain or acquire from time to time are subject to substantially greater risk of
loss of principal and non-payment of interest than the more senior classes of
such securities.

If the Company retains or acquires CMBS with an anticipated yield as of the
securitization or acquisition date based on an assumed rate of default and
severity of loss on the underlying Mortgage Loans that is lower than the actual
default rate and severity of loss, the yield on such CMBS will be lower than the
Company initially anticipated. In the event of substantial losses, the Company
may not recover the full amount (or, indeed, any) of its investment. The timing
of actual losses and the timing of the recognition of such losses provided for
in the underlying securitization transaction also will affect the Company's
yield, even if the rate of default and severity of loss are consistent with the
Company's expectations. In general, the earlier a loss occurs, the greater the
adverse effect on the Company's yield. There can be no assurance as to the rate
of default, severity of loss or the limiting of any such losses on mortgage
loans underlying CMBS and thus as to the actual yield received by the Company.

The aggregate amount of distributions on the Company's CMBS and their yield
also will be affected by the amount and timing of principal prepayments on the
underlying Mortgage Loans. CMBS issued and retained by the Company will
generally be backed by Credit Tenant Loans with yield maintenance features that
reduce the likelihood of prepayment. To the extent that more senior classes are
outstanding, all prepayments of principal on the underlying Mortgage Loans
typically will be paid to the holders of the more senior classes, and typically
none (or very little) will be paid to the Company as a holder of the CMBS during
the first five years, and in some cases a longer period, after the original
issue date of the CMBS. This subordination of the CMBS to more senior classes
may adversely affect the yield on the CMBS acquired by the Company. Even if
there are no actual losses on the Mortgage Loans, interest and principal
payments are made on the more senior classes before interest and principal are
paid with respect to subordinated classes of CMBS. Typically, interest deferred
on CMBS is payable on subsequent payment dates to the extent funds are
available, but such deferral does not itself bear interest. Such deferral of
interest will reduce the actual yield on the Company's CMBS.

Because the Company will acquire CMBS at a significant discount from their
outstanding principal balance, if the Company estimates the yield on a security
based on a faster rate of payment of principal than actually occurs, the
Company's yield on that security will be lower than the Company anticipated. In
addition, the Company will be required to accrue taxable OID income on the basis
of a constant yield to maturity on any CMBS that were both issued and acquired
at a significant discount, and will be required to accrue taxable market
discount income on the basis of a constant yield method or pro rata method on
REMIC CMBS acquired at a significant discount. Whether and when there are any
principal prepayments on the underlying mortgage loans will be affected by a
variety of factors, including, without limitation, the terms of the Mortgage
Loans, the level of prevailing interest rates, the availability of mortgage
credit and economic, tax, legal and other factors. Principal prepayments on
Mortgage Loans secured by commercial properties are likely to be affected by
lock-out periods and prepayment premium provisions applicable to each of the
Mortgage Loans, and by the extent to which the Servicer is able to enforce such
prepayment premium provisions. Moreover, the yield to maturity on such CMBS also
may be affected by any extension of the scheduled maturity dates of the Mortgage
Loans as a result of modifications of the Mortgage Loans by the Servicer, if
permitted.

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DESCRIPTION OF REAL ESTATE/TARGETED INVESTMENTS

The Company intends to originate and invest principally in the following
types of Mortgage Assets, subject to the operating restrictions described in
"The Company--Company Policies" above and the additional policies described
below.

CREDIT TENANT AND OTHER MORTGAGE LOANS

The Company intends to originate and accumulate fixed-rate Credit Tenant
Loans and Mezzanine Construction Loans secured by first or second liens on
commercial real property subject to a Credit Tenant Lease as a significant part
of its investment strategy.

Such loans will primarily be originated through the Company's existing
correspondent network. The Board of Directors of the Company has not established
any concentration limits upon loans to be acquired by the Company. See "The
Company--Company Policies--Credit Risk Management."

In addition, the Company may purchase, from time to time, Near Investment
Grade Credit Tenant Loans which the Company will hold in its portfolio. The
Company may or may not securitize such purchased loans.

NET LEASED REAL ESTATE

The Company intends to invest in Net Leased Real Estate. Such investment may
be made directly by the Company or through partnerships or other entities formed
with other parties. The Company may also form one or more partnerships, the
limited partnership interests in which would be convertible into Common Stock,
for the purpose of enabling the Company to acquire real estate or interests
therein from real estate owners on a tax deferred basis in exchange for such
real estate or interests therein.

Net Leased Real Estate is generally defined as real estate that is net
leased on a long-term basis (i.e., ten years or more) to tenants who are
customarily responsible for paying all costs of owning, operating, and
maintaining the leased property during the term of the lease, in addition to the
payment of monthly rent to the landlord for the use and occupancy of the
premises.

The Company expects to acquire Net Leased Real Estate on a leveraged basis
by utilizing its Credit Tenant Loans to provide an attractive return on its
investment therein. Although the time during which the Company will hold Net
Leased Real Estate will vary, the Company anticipates holding most Net Leased
Real Estate for more than ten years, although there are no assurances that it
will do so. The Company will focus on Net Leased Real Estate that is either
leased to Credit Tenants or is real estate that can be leased to other tenants
in the event of a default of the initial tenant. In particular, the Company
expects to invest in Net Leased Real Estate that is subject to (or will become
subject to) a Credit Tenant Loan originated by the Company. See "Risk
Factors--Dependence on Credit Tenant Loan and Securitization Business."

COMMERCIAL MORTGAGE-BACKED SECURITIES

The Company intends to retain certain subordinated classes of CMBS in
connection with securitizations of its Credit Tenant Loans and to acquire other
CMBS, primarily Non-Investment Grade classes (including IO's), from various
sources (particularly those which include, as a component thereof, Credit Tenant
Loans). CMBS typically are divided into two or more interests, sometimes called
"tranches" or "classes." The senior classes are often securities which, if
rated, would have ratings ranging from low Investment Grade "BBB" to higher
Investment Grades "A," "AA" or "AAA." The junior, subordinated classes typically
would include one or more classes which, if rated, would have ratings below
Investment Grade. Such subordinated classes also typically include an unrated
higher-yielding, credit support class (which generally is required to absorb the
first losses on the underlying Mortgage Loans).

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The mortgage collateral supporting CMBS may be pools, single-property whole
loans or other CMBS, or any combination thereof. Of the interests in CMBS that
the Company acquires, most will be subordinated or IO classes of CMBS, but the
Company may also acquire more senior classes or combined classes of first-loss
CMBS.

Unlike residential MBS, which typically are collateralized by thousands of
single family Mortgage Loans, CMBS are collateralized generally by a more
limited number of commercial or multifamily Mortgage Loans with larger principal
balances than those of single family Mortgage Loans. As a result, a loss on a
single Mortgage Loan underlying a CMBS will have a greater negative effect on
the yield of such CMBS, especially the subordinated classes in such CMBS.

With respect to CMBS purchased from a third-party, the Company will use
sampling and other appropriate analytical techniques to determine on a
loan-by-loan basis which loans will undergo a full-scope review and which loans
will undergo a more streamlined review process. Although the choice is a
subjective one, considerations that influence the choice for scope of review
often include loan size, debt service coverage ratio, loan to value ratio, loan
maturity, lease rollover, property type and geographic location. A full-scope
review may include, among other factors, a property site inspection,
tenant-by-tenant rent roll analysis, review of historical income and expenses
for each property securing the loan, a review of major leases for each property
(if available); recent appraisals (if available), engineering and environmental
reports (if available), and the price paid for similar CMBS by unrelated third
parties in arm's length purchases and sales (if available) or a review of broker
price opinions (if the price paid by a bona fide third party for similar CMBS is
not available and such price opinions are available). For those loans that are
selected for the more streamlined review process, the Company's evaluation may
include a review of the property operating statements, summary loan level data,
third party reports, and a review of prices paid for similar CMBS by bona fide
third parties or broker price opinions, each as available. If the Company's
review of such information does not reveal any unusual or unexpected
characteristics or factors, no further due diligence is performed. The Company
expects to hold its CMBS in book-entry form, to the extent possible.

Subject to market conditions and tax and REIT considerations, the Company
anticipates that it will sell on a regular basis a portion of CMBS that it has
retained or purchased, for the purposes of confirming the market value of its
remaining CMBS interests and managing its portfolio of investments.

OTHER INVESTMENTS

The Company may also pursue a variety of complementary commercial real
estate and finance-related businesses and investments in furtherance of its
investment policies and strategies, including without limitation, purchasing
Credit Tenant Loans originated by third parties. Such activities may include,
but are not limited to, foreign real estate-related asset investments and
investing in (or lending to) other REITs and similar companies. Any lending with
regard to the foregoing may be on a secured or an unsecured basis and may or may
not be subject to risks similar to those attendant to investing in Credit Tenant
Loans, CMBS and commercial real estate. The Company seeks to maximize yield by
managing credit risk through credit underwriting, although there can be no
assurance that the Company will be successful in this regard.

INVESTMENT IN OTHER ENTITIES

The Company may acquire equity interests or make other investments in other
REITs, registered investment companies, partnerships and other investment funds
and real estate operating companies to the extent permitted by the REIT
Provisions of the Code when the Company believes that such purchases or
investments will yield attractive returns on capital. When the stock market
valuations of such companies are low in relation to the market value of their
assets, such stock purchases can be a way for the Company to acquire an interest
in a pool of targeted investments at an attractive price. The Company may also

63
<PAGE>
decide in the future to pursue business acquisition opportunities that it
believes will complement the Company's operations.

FOREIGN INVESTMENTS

The Company may acquire or originate Credit Tenant Loans secured by real
estate located outside the United States or may acquire such real estate.
Investing in real estate related assets located in foreign countries creates
risks associated with the uncertainty of foreign laws and markets and risks
related to currency conversion. The Company may attempt to mitigate such
currency risks, to the extent practicable, depending on the nature of the
investment. For example, the Company may originate Credit Tenant Loans or
acquire Net Leased Real Estate which require payments or are otherwise
denominated in U.S. dollars. The Company may be subject to foreign income tax
with respect to its investments in foreign real estate related assets. However,
any foreign tax credit that otherwise would be available to the Company for
United States federal income tax purposes will not pass through to the Company's
stockholders.

INITIAL INVESTMENTS; EXISTING LOANS, COMMITMENTS AND PROPERTIES

The Existing Loans consist of 84 fixed-rate mortgage loans, and one
participation interest in a fixed-rate mortgage loan. All of the Existing Loans
are secured by (i) absolute assignments of leases and rents on properties net
leased to the Tenants pursuant to the Credit Tenant Leases from one of 30
different Credit Tenants (and in the case of one loan, two Credit Tenants), (ii)
first mortgages on fee or, in the case of 8 Existing Loans, leasehold interests,
and in the case of 3 loans, both fee and leasehold interests, in such commercial
properties, and (iii) a security interest in funds on deposit in certain rent
escrow and reserve accounts, all as described herein. In addition, 77 of the
Existing Loans are further secured by certain non-cancelable credit lease
enhancement insurance policies (the "Lease Enhancement Policies") issued by an
insurer with a claims paying rating of "AAA" rating from S&P (such subsidiaries,
collectively, the "Enhancement Insurer") that protect against losses due to
termination of or abatement of rent under a Credit Tenant Lease as a result of a
casualty or condemnation event at the commercial property. Also, eight of the
Existing Loans have maturities or amortization periods that extend beyond the
initial term of the associated Credit Tenant Loan and are accordingly further
secured by certain credit lease renewal insurance policies or residual value
insurance policies (the "Extended Amortization Policies") issued in the case of
five loans by an insurer with a claims paying rating of "AAA" by S&P and in the
case of three loans by an insurer with a rating of "A" by S&P (the "Extension
Insurers") that protect against losses due to the failure of the Credit Tenant
to renew the Credit Tenant Lease followed by a subsequent default by the
borrower of its obligations under the associated Credit Tenant Loan or the
failure of the borrower to pay a balloon balance at the maturity of the
associated Credit Tenant Loan.

As of March 15, 1998, the aggregate principal balance of the Existing Loans
was $306,356,559 with an average loan size of $3,647,101 (maximum: $20,994,801,
minimum: $901,500). The weighted average gross coupon was 7.608% (maximum: 8.20%
and minimum: 6.92%) with a weighted average original term to maturity of 242
months (maximum: 308 months, minimum 133 months) and a remaining weighted
average term to maturity of 235 months (maximum 303 months, minimum: 120
months). The weighted average debt service coverage was 1.045x (maximum 1.493x,
minimum 1.003x). The appraised weighted average loan amount to leased fee value
of the properties assuming the Credit Tenant Leases were in place was 88.2%
(maximum: 98.9%, minimum: 71.0%) and the appraised weighted average loan amount
to dark value of the properties assuming the properties were not subject to the
Credit Tenant Leases was 126.9% (maximum: 232.2%, minimum 37.1%). All of the
Existing Loans have "call" protection that prohibits prepayments under the loans
for a term generally of eight years with a weighted average remaining lockout
period of 89 months (maximum: 95 months, minimum 79 months). At the conclusion
of the lockout period the Existing Loans are pre-payable provided such
prepayment is accompanied by a yield maintenance payment generally calculated so
that the lender would receive the same yield by investing the prepaid loan

64
<PAGE>
amount in then current U.S. Treasury obligations as would have been received had
the loan been held to maturity.

Unless otherwise indicated, all information set forth in the tables set
forth below is as of March 15, 1998.

<TABLE>
<CAPTION>
# OF % OF
MORTGAGE AGGREGATE AGGREGATE
TENANT/GUARANTOR LOANS BALANCE BALANCE
- --------------------------------------------------------------------------- ------------- -------------- -----------
<S> <C> <C> <C>
CVS Corporation or a subsidiary thereof.................................... 20 $ 42,688,392 13.9%
Rite Aid Corporation....................................................... 18 33,376,308 10.9
BlueCross and Blue Shield of Texas, Inc.................................... 1 20,994,802 6.9
Circuit City Stores, Inc................................................... 3 20,803,263 6.8
The Home Depot, Inc. or a subsidiary thereof............................... 2 20,560,209 6.7
CareGroup, Inc............................................................. 1 20,327,522 6.6
Wal-Mart Stores, Inc....................................................... 2 19,071,305 6.2
Koninklijke Ahold, N.V..................................................... 2 16,191,936 5.3
Walgreen Co................................................................ 6 15,245,193 5.0
Georgia Baptist Health Care System, Inc.................................... 1 12,144,987 4.0
KeyBank National Association............................................... 1 11,288,526 3.7
John H. Harland Company.................................................... 1 9,555,601 3.1
Wegmans Food Markets, Inc.................................................. 1 8,450,489 2.8
Eckerd Corporation......................................................... 4 7,970,763 2.6
The Pep Boys--Manny, Moe & Jack............................................ 3 5,878,664 1.9
MedPartners, Inc........................................................... 1 5,672,698 1.9
The TJX Companies, Inc..................................................... 1 5,663,749 1.8
Riggs Bank N.A............................................................. 1 5,500,148 1.8
State of New Jersey........................................................ 1 4,007,256 1.3
Tandy Corporation.......................................................... 1 3,903,820 1.3
McDonald's Corporation..................................................... 3 3,471,961 1.1
Bridgestone/Firestone, Inc................................................. 2 2,239,552 0.7
The Chase Manhattan Bank................................................... 1 2,029,616 0.7
Hannaford Bros. Co......................................................... 1 1,765,392 0.6
Exxon Corporation.......................................................... 1 1,488,922 0.5
Boston Gas Company......................................................... 1 1,462,838 0.5
Mobil Oil Corporation...................................................... 1 1,372,034 0.4
Sears, Roebuck & Co........................................................ 1 1,349,865 0.4
Amoco Oil Company.......................................................... 1 952,086 0.3
United States Postal Service............................................... 1 928,662 0.3
--
-------------- -----
Total.............................................................. 84 $ 306,356,559 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>

65
<PAGE>

<TABLE>
<CAPTION>
CUMULATIVE
# OF % OF % OF
TENANT/GUARANTOR MORTGAGE AGGREGATE AGGREGATE AGGREGATE
CREDIT RATING LOANS BALANCE BALANCE BALANCE
- ------------------------------------------------------- --------------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
AAA.................................................... 3 $ 3,369,671 1.1% 1.1%
AA+.................................................... 1 4,007,256 1.3 2.4
AA..................................................... 6 23,915,299 7.8 10.2
AA-.................................................... 2 20,560,209 6.7 16.9
A+..................................................... 7 17,274,809 5.6 22.5
A...................................................... 5 31,584,029 10.3 32.8
A-..................................................... 27 82,050,123 26.8 59.6
BBB+................................................... 22 44,918,721 14.7 74.3
BBB.................................................... 1 5,672,698 1.9 76.2
BBB-................................................... 1 5,500,148 1.8 78.0
IC..................................................... 9 67,503,596 22.0 100.0
--
-------------- ----- -----
Total.............................................. 84 $ 306,356,559 100.0% 100.0%
--
--
-------------- ----- -----
-------------- ----- -----
</TABLE>

<TABLE>
<CAPTION>
# OF % OF
MORTGAGE AGGREGATE AGGREGATE
TENANT/GUARANTOR INDUSTRY LOANS BALANCE BALANCE
- --------------------------------------------------------------------------- ------------- -------------- -----------
<S> <C> <C> <C>
Retail Drug................................................................ 48 $ 99,280,656 32.4%
Healthcare Services........................................................ 3 38,145,206 12.5
Grocery.................................................................... 4 26,407,817 8.6
Retail Electronics......................................................... 4 24,707,084 8.1
Insurance.................................................................. 1 20,994,802 6.9
Retail Building Materials.................................................. 2 20,560,209 6.7
Retail Discount & General Merchandise...................................... 2 19,071,305 6.2
Banking.................................................................... 3 18,818,290 6.1
Printing................................................................... 1 9,555,601 3.1
Automotive................................................................. 5 8,118,216 2.7
Retail Apparel............................................................. 1 5,663,749 1.9
Energy..................................................................... 4 5,275,880 1.7
Government................................................................. 2 4,935,919 1.6
Food Service............................................................... 3 3,471,961 1.1
Department Stores.......................................................... 1 1,349,865 0.4
--
-------------- -----
Total.................................................................. 84 $ 306,356,559 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>

66
<PAGE>

<TABLE>
<CAPTION>
# OF % OF
MORTGAGE AGGREGATE AGGREGATE
PROPERTY LOCATION LOANS BALANCE BALANCE
- --------------------------------------------------------------------------- ------------- -------------- -----------
<S> <C> <C> <C>
NY......................................................................... 21 $ 58,518,372 19.1%
TX......................................................................... 5 46,255,187 15.1
MA......................................................................... 9 42,646,086 13.9
GA......................................................................... 2 22,759,231 7.4
PA......................................................................... 7 20,524,999 6.7
VA......................................................................... 9 17,895,721 5.8
FL......................................................................... 3 17,448,707 5.7
MI......................................................................... 8 15,980,932 5.2
MD......................................................................... 2 14,355,483 4.7
NJ......................................................................... 5 13,678,709 4.5
OH......................................................................... 1 5,938,994 1.9
CA......................................................................... 1 5,663,749 1.9
NE......................................................................... 1 5,587,111 1.8
AR......................................................................... 1 4,006,499 1.3
NV......................................................................... 1 2,935,749 1.0
TN......................................................................... 2 2,906,744 1.0
ME......................................................................... 1 2,536,044 0.8
SC......................................................................... 1 2,107,510 0.7
NC......................................................................... 1 1,366,541 0.5
IL......................................................................... 1 1,349,865 0.4
CT......................................................................... 1 965,663 0.3
WA......................................................................... 1 928,662 0.3
--
-------------- -----
84 $ 306,356,559 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>

Total Number of States Represented 22

67
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------------------
<S> <C> <C>

William R. Pollert............................. 54 President, Chief Executive Officer, Director

Edwin J. Glickman.............................. 66 Executive Vice President, Product Development

Steven L. Maloy................................ 40 Sr. Vice President, Marketing and Sales

Paul H. McDowell, Esq.......................... 38 Sr. Vice President, General Counsel, Secretary

Shawn P. Seale................................. 35 Sr. Vice President, Chief Financial Officer, Assistant
Secretary

Scott A. Shay.................................. 40 Director
</TABLE>

WILLIAM R. POLLERT

Mr. Pollert is a founder of Capital Lease Funding, L.P. and a principal
investor. Mr. Pollert has had extensive experience in managing a wide variety of
companies. From 1993 until joining the Company in 1995, Mr. Pollert was the
President and Chief Executive Officer of Equitable Bag Co., Inc., a leading
manufacturer of custom bag products for non-food retailers and specialty
packaging. From 1986 to 1993 Mr. Pollert held a variety of senior management
positions in Triarc Companies, Inc. (Arby's, RC Cola, Graniteville, National
Propane); Trian Group L.P.C.; Avery, Inc. (Uniroyal Chemical Co.); and Triangle
Industries, Inc. (American National Can Co., Brandt, Inc., Triangle Wire &
Cable, Inc., and Rowe International, Inc.). Triarc, Trian, Avery, Triangle and
Equitable Bag Co., Inc. were at one time or are controlled by Nelson Peltz and
Peter May.

From 1973 to 1985, Mr. Pollert held a variety of senior management positions
at International Paper Company, ending as Vice President of the Consumer
Packaging business and a member of the Company's Executive Operating Committee.
Mr. Pollert received a Ph.D. in Management & Organization Sciences from the
University of Florida in 1971, an MBA in Finance from Columbia University in
1967, and a BA from Lehigh University in 1965.

EDWIN J. GLICKMAN

Mr. Glickman is a founder and principal of the Company and has over forty
years of experience in the field of real estate. From 1990 until joining the
Company in 1995, Mr. Glickman acted as a real estate finance consultant
concentrating largely on loan restructuring and tax planning for troubled real
estate. From 1977 to 1990, Mr. Glickman was a principal at Sybedon Corporation,
serving successively as Executive Vice President and President. Sybedon engaged
in the arrangement of real estate debt and equity financing as well as
syndication and development. Prior to 1977, Mr. Glickman acted as a principal in
a variety of partnerships and companies engaged in the development and
syndication of real estate transactions. Mr. Glickman was a development partner
in the Galleria, a 57-story mixed-use building in midtown Manhattan.

In addition to his business activities, Mr. Glickman has lectured widely on
real estate finance and tax matters, and was a lecturer (1985) and Adjunct
Assistant Professor (1986 and 1987) at the Real Estate Institute of New York
University. Mr. Glickman is a Trustee of Atlantic Realty Trust, which is listed
on the Nasdaq National Market. Mr. Glickman served as a First Lieutenant in the
U.S. Army. Mr. Glickman received a BA from Dartmouth College in 1953.

STEVEN L. MALOY

Mr. Maloy is a founder and principal of the Company. From 1990 until joining
the Company in 1995, he was a principal at Liberty Equities, Inc./Richard Brock
Real Estate Investments, a real estate investor, where he was responsible for
the acquisition of apartment properties, office buildings, and retail and

68
<PAGE>
industrial properties. From 1988 to 1990 he was engaged in real estate finance
with Mr. Glickman first at Sybedon Corporation and subsequently at Schoenfeld,
Glickman, Maloy, Inc. From 1982 to 1988 he was a real estate broker at Coldwell
Banker and Cushman & Wakefield, Inc., New York City. In 1981 he began his real
estate career as an office leasing broker of Coldwell Banker. Mr. Maloy received
a BS from the University of Hartford in 1979.

PAUL H. MCDOWELL

Mr. McDowell is a founder and a principal of the Company. From 1991 until
joining the Company in 1995, Mr. McDowell was corporate counsel for Sumitomo
Corporation of America, the principal U.S. subsidiary of one of the world's
largest integrated trading companies. As corporate counsel, Mr. McDowell advised
on a wide range of domestic and international corporate legal matters including
acquisitions, complex financing transactions, power plant development, shipping,
litigation management and real estate. From 1987 to 1990, Mr. McDowell was an
associate in the corporate department at the Boston law firm of Nutter,
McClennen & Fish. Mr. McDowell received a JD with honors from Boston University
School of Law in 1987 and received a BA from Tulane University in 1982.

SHAWN P. SEALE

Mr. Seale is a founder and principal of the Company. From 1988 until joining
the Company in 1995, Mr. Seale was a founder, Vice President and Treasurer of
Taylor Consulting Group, Inc., a corporate consulting group in Atlanta. At the
Taylor Consulting Group, Mr. Seale provided a wide range of financial valuation
and financial analysis services to a diverse mix of public and private
companies, including Coca-Cola. From 1985 to 1988, Mr. Seale was a member of the
Management/Distribution and Management/ Finance consulting group in the Boston
and Atlanta offices of Ernst & Whinney (a predecessor to Ernst & Young). Mr.
Seale is a certified public accountant. Mr. Seale received a BS from the
Massachusetts Institute of Technology in 1985.

SCOTT A. SHAY

Mr. Shay has been a Managing Director of Ranieri & Co. since its formation
in 1988. Mr. Shay is a founder of Hyperion Partners and Hyperion Partners II.
Mr. Shay is currently a member of the board of directors of Bank United Corp.,
Bank United, Hyperion Capital Management, Inc., Transworld Healthcare, Inc. and
Bank Hapoalim B.M., in Tel Aviv, Israel. He is a director of the general partner
of Cardholder Management Services, L.P., an independent credit card servicer, as
well as an officer or director of other direct and indirect subsidiaries of
Hyperion Partners and Hyperion Partners II. Along with Mr. Lewis S. Ranieri, Mr.
Shay controls the general partner of Hyperion Partners II, L.P. Prior to joining
Ranieri & Co., Mr. Shay was a director of Salomon Brothers Inc. where he was
employed from 1980 to 1988. Mr. Shay received a B.A. from Northwestern
University and a Master of Management degree from Northwestern's Kellogg
Graduate School of Management.

In addition to Messrs. Pollert and Shay, upon completion of the Offering,
the Company expects to elect Richard V. Campo and Lawrence Chimerine and one
additional director, which directors will be Unaffiliated Directors.

RICHARD J. CAMPO

Richard J. Campo, age 43, is Chairman of the Board and Chief Executive
Officer of Camden Property Trust (Traded CPT on the NYSE) since May 1993. Mr.
Campo was a co-founder of Camden's predecessor companies in 1982. Camden
Property Trust is a fully integrated real estate operating company organized as
a real estate investment trust (REIT) engaged in the ownership, development,
acquisition, marketing, management and disposition of multifamily apartment
communities in the Sunbelt and Midwestern regions of the United States. Camden
currently operates 100 properties containing 34,669 apartment houses. He has
been involved in development, management, acquisition and disposition of real
estate properties valued in excess of $5 billion. As an active participant in
the real estate industry, Mr. Campo is a frequent speaker on real estate and
development related topics. Mr. Campo is a member of the American

69
<PAGE>
Institute of Certified Public Accountants. He is involved in numerous local
charitable organizations and serves on the Boards of the National Multi Housing
Council, the Oregon State University Foundation, First Sierra Financial (NASDAQ)
and the Harris County-Houston Sports Authority. Mr. Campo began his real estate
career after graduating from Oregon State University in 1976.

LAWRENCE CHIMERINE

Dr. Lawrence Chimerine, age 57, has served as President of his own economic
consulting firm, Radnor Consulting Services, since 1990. He is currently also
the Managing Director and Chief Economist of the Economic Strategy Institute in
Washington, D.C. Dr. Chimerine served as Chairman and Chief Executive Officer of
the WEFA Group from 1987 to 1990 and of Chase Econometrics from 1979 to 1987,
both of which provide economic consulting. He was manager of economic research
for the IBM Corporation from 1965 to 1979. Dr. Chimerine received a B.S. from
Brooklyn College and a Ph.D. from Brown University.

BOARD OF DIRECTORS

Directors will be elected for a term of three years and will hold office
until their successors are elected and qualified. All officers serve at the
discretion of the Board of Directors. The Board of Directors has been divided
into three classes of directors. The terms of the classes will expire in 1999,
2000 and 2001 respectively. Beginning in 1999, as the term of a class expires,
directors in that class will be elected for a three-year term and the directors
in the other two classes will continue in office. Initially, Mr. Pollert's term
will expire in 2001 and Mr. Shay's term will expire in 2000. The remaining
directors terms will expire on dates to be determined.

The Bylaws of the Company provide that the Board of Directors shall have not
less than 3 or more than 9 members, as determined from time to time by the
existing Board of Directors. The Board of Directors will initially have 5
directors.

The Charter of the Company provides for the indemnification of the directors
and officers of the Company and its employees, officers, directors and
controlling persons to the fullest extent permitted by Maryland law. Maryland
law generally permits indemnification of directors and officers against certain
costs, liabilities and expenses that any such person may incur by reason of
serving in such positions unless it is proved that: (i) the act or omission of
the director or officer was material to the cause of action adjudicated in the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the director or officer actually received an
improper personal benefit in money, property or services; or (iii) in the case
of criminal proceedings, the director or officer had reasonable cause to believe
that the act or omission was unlawful. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.

COMMITTEES OF THE BOARD

The Board of Directors expects to establish an Audit Committee consisting of
two non-management directors. The Audit Committee will be responsible for making
recommendations concerning the engagement of independent public accountants,
reviewing the plans and results of the audit engagement with the independent
public accountants, approving professional services provided by the independent
public accountants, reviewing the independence of the independent public
accountants, considering the range of audit and non-audit fees and reviewing the
adequacy of the Company's internal accounting controls.

In addition, the Board of Directors expects to establish a compensation
committee consisting of Mr. Pollert and two non-management directors. The
Compensation Committee will be responsible for recommending to the Board of
Directors the Company's executive compensation policies and for administering
its compensation plans.

70
<PAGE>
COMPENSATION OF DIRECTORS

The Company expects to compensate its Unaffiliated Directors at levels
customary to public companies of its size and nature and to permit such
directors to participate in the Company 1998 Stock Option Plan. Affiliated
directors will not be separately compensated by the Company other than through
the Company's 1998 Stock Option Plan.

EMPLOYMENT AGREEMENTS

The Company anticipates entering into employment agreements with certain key
employees upon terms and conditions to be negotiated, but which employment
agreements are expected to provide that upon the termination of the employee's
employment: by the Company other than for "cause" (as defined in the employment
agreements); by the employee for certain actions of the Company, such as
effecting a material adverse change in the employee's responsibilities; or upon
a "change in control" of the Company (as defined in the employment agreements),
the employee will be entitled to all compensation and benefits payable under the
employment agreement for the remainder of its term. In addition, the Company
expects these agreements to restrict the ability of such employees to compete
with the Company.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
COMPENSATION AWARDS
---------------- -------------------

<S> <C> <C> <C> <C>
RESTRICTED
SHARE AWARDS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($)
- -------------------------------------------------------- --- ------ ------ -------------------

William R. Pollert, $ $
Chief Executive Officer and President

Edwin J. Glickman,
Executive Vice President, Product Development

Steven L. Maloy,
Senior Vice President, Marketing and Sales

Paul H. McDowell,
Senior Vice President, General Counsel and Secretary

Shawn P. Seale,
Senior Vice President, Chief Financial Officer and
Assistant Secretary

<CAPTION>
<S> <C>
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION OPTIONS/SARS (#)
- -------------------------------------------------------- -------------------------
William R. Pollert,
Chief Executive Officer and President
Edwin J. Glickman,
Executive Vice President, Product Development
Steven L. Maloy,
Senior Vice President, Marketing and Sales
Paul H. McDowell,
Senior Vice President, General Counsel and Secretary
Shawn P. Seale,
Senior Vice President, Chief Financial Officer and
Assistant Secretary
</TABLE>

STOCK OPTIONS

The Company anticipates approving the 1998 Stock Option Plan prior to the
closing of this Offering on terms and conditions to be determined. The Company
expects that it will authorize that up to 12% of the Common Stock outstanding
following the Offering will be reserved for issuance pursuant to such 1998 Stock
Option Plan. The Company currently has no stock options outstanding, although at
the closing of this Offering, the Company anticipates that it will have granted
a substantial number of options to purchase shares of Common Stock pursuant to
the 1998 Stock Option Plan.

71
<PAGE>
MANAGEMENT STOCKHOLDERS' AGREEMENT

The Company expects that it and certain management stockholders will enter
into a stockholders' agreement which will provide, among other things, for
certain restrictions on transfer and the grant of registration rights on terms
to be determined.

EXPENSES

The Company will be required to pay all offering expenses (including
accounting, legal, printing, clerical, personnel, filing and other expenses)
incurred by the Company or its Affiliates on behalf of the Company in connection
with the Offering, estimated at approximately $1,112,500. This payment will not
be subject to the limitation on expenses to be borne by the Company. The
expenses that will be paid by the Company also will include (but not necessarily
be limited to) issuance and transaction costs incident to the acquisition,
disposition and financing of investments, legal and auditing fees and expenses,
the costs of printing and mailing proxies and reports to stockholders, costs to
obtain liability insurance to indemnify the Company's directors and officers and
the Underwriters, and the compensation and expenses of the Company's custodian
and transfer agent, if any.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provisions which eliminates such liability to the
maximum extent permitted by Maryland law.

The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, 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 director or officer of
the Company. The Bylaws obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (a) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Charter and Bylaws
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above and
to any employee or agent of the Company or a predecessor of the Company.

The MGCL requires a Maryland corporation (unless its charter provides
otherwise, which the Company' Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a Maryland corporation to indemnify its present and
former directors 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 director 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 director or officer actually
received an

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improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or in any proceeding in which the director was adjudged
to be liable on the bases that personal benefit was improperly received unless
in either case a court orders indemnification and then only for expenses. In
addition, the MGCL permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (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 corporation and (b) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met. Indemnification under the provisions of the MGCL is not deemed
exclusive of any other rights, by indemnification or otherwise, to which an
officer or director may be entitled under the Company's Charter or Bylaws,
resolutions of stockholders or directors, contract or otherwise. However, it is
the position of the Commission that indemnification of directors and officers
for liabilities arising under the Securities Act, is against public policy and
is unenforceable pursuant to Section 14 of the Securities Act.

The Company also has purchased and maintains insurance on behalf of all of
its directors and executive officers against lability asserted against or
incurred by them in their official capacities with the Company, whether or not
the Company is required or has the power to indemnify them against the same
liability.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

From time to time, CLF has relied on advances from its partners to meet
certain capital requirements with respect to loan financing, hedge margin, and
other operating capital needs. In this regard, CLF has engaged in a number of
transactions with Hyperion Partners II, L.P., a limited partner of CLF ("HPII,
L.P."). Mr. Scott A. Shay, a director of the Company, is a principal of HPII,
L.P. At December 31, 1996, the Company had issued $15,345,000 in the aggregate
of preferred capital to HPII, L.P. Such preferred capital accrued at a rate of
30% per annum. In addition, the Company had issued notes to HPII, L.P. that were
payable on demand and bore interest at rates ranging from 20% to 30%. Since
January 1, 1997, CLF has issued unsecured notes payable and made repayments of
notes payable to HPII, L.P., and retired certain preferred capital, in amounts
and on dates as follows:

<TABLE>
<CAPTION>
DATE DESCRIPTION AMOUNT
- ------------------------------- ---------------------------------------------- -------------
<S> <C> <C>
7/10/97........................ Retire portion of preferred capital $ (5,445,000)
7/10/97........................ Distribution on retired preferred capital (1,241,341)
9/17/97........................ Issue notes payable 2,500,000
10/3/97........................ Issue notes payable 4,000,000
10/9/97........................ Retire notes payable (4,013,333)
11/3/97........................ Issue notes payable 1,000,000
11/18/97....................... Issue notes payable 2,000,000
12/12/97....................... Issue notes payable 2,500,000
12/15/97....................... Issue notes payable 2,500,000
12/30/97....................... Issue notes payable 1,500,000
1/6/98......................... Issue notes payable 6,500,000
1/12/98........................ Issue notes payable 2,600,000
1/27/98........................ Retire notes payable (4,145,000)
</TABLE>

At December 31, 1996, the Company had issued $129,098 in aggregate principal
amount of notes payable to William R. Pollert, the Company's Chairman of the
Board and President, which loan bore interest at 10% per annum, was payable on
demand and was repaid in February 1997.

As of December 31, 1997, the common stock of CLF Branson Holdings, Inc. was
distributed to certain of the limited partners of CLF. The principal asset of
such company was a parcel of real property in Branson, Missouri with a carrying
value of approximately $2 million.

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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of March 15, 1998,
relating to the beneficial ownership of the Company's Common Stock by (i) all
persons known by the Company to beneficially own more than 5% of the outstanding
shares of the Company's Common Stock, (ii) each director of the Company, and
(iii) all executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PRIOR
BENEFICIAL OWNERSHIP
TO THE OFFERING AFTER THE OFFERING
--------------------------- ---------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1)(2) SHARES PERCENTAGE SHARES PERCENTAGE
- ------------------------------------------------------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
William R. Pollert (3) (4)................................... % %
Edwin J. Glickman (4)........................................ % %
Paul H. McDowell (4)......................................... % %
Steven L. Maloy (4).......................................... % %
Shawn P. Seale (4)........................................... % %

Scott A. Shay (5)............................................ % %
50 Charles Lindbergh Boulevard
Uniondale, New York 11553

Hyperion Partners II L.P..................................... % %
50 Charles Lindbergh Boulevard
Uniondale, New York 11553

South Ferry #2, L.P. (6)..................................... % %
1 State Street Plaza
New York, New York 10004

Alexander E. Fisher (4) (7).................................. % %
A. Fisher Co. Inc.
101 East 52nd Street
New York, New York 10022

CLF Holdings, Inc. (8)....................................... % %

CLF Investors, LLC (9)....................................... % %

All executive officers and directors as a group (9 persons) % %
(10).......................................................
</TABLE>

- ------------------------
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares of
Common Stock owned by them. Unless otherwise indicated, the address of each
beneficial owner set forth below is c/o the Company at 85 John Street, 12th
Floor, New York, New York 10038.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus upon
the exercise of warrants or options. The Company has no outstanding options
or warrants.
(3) Includes shares owned by CLF Holdings, Inc. of which Mr. Pollert owns
60% of the Common Stock.
(4) Includes , , , , , and , shares,
respectively, held beneficially be Messrs. Pollert, Glickman, McDowell,
Maloy, Seale and Fisher as members of CLF Investors, Inc.
(5) Includes shares of Common Stock owned by Hyperion Partners II L.P. and
shares of Common Stock owned by CLFC HP II, Inc. Mr. Shay disclaims
beneficial ownership of these shares.
(6) Does not include the number of shares of Common Stock which may be
beneficially owned by South Ferry #2, L.P., as a limited partner in Hyperion
Partners II L.P.
(7) Includes shares owned by CLF Holdings, Inc. of which Mr. Fisher owns
40% of the Common Stock.
(8) Includes certain shares held by Messrs. Pollert and Fisher. See notes (3)
and (7).
(9) Includes certain shares held by Messrs. Pollert, Glickman, McDowell, Maloy,
Seale and Fisher. See note (4).
(10) Includes all shares held by Messrs. Pollert, Glickman, McDowell, Maloy,
Seale and Shay.

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<PAGE>
DIVIDEND REINVESTMENT AND DIRECT PURCHASE PLAN

The Company has adopted a Dividend Reinvestment and Direct Purchase Plan
(the "DRP") to provide stockholders of the Company and interested investors who
are not stockholders with a convenient and economical method to automatically
reinvest all or a portion of their cash distributions in, and, subject to the
Board of Directors' determination, make periodic cash subscriptions for, shares
of the Common Stock.

The Plan will be administered by (the "Plan Administrator"). The
Plan Administrator will keep records, send statements of account to each person
who participates in the DRP and provide safekeeping for the shares and perform
other duties relating to the DRP. The Plan Administrator also will act as the
distribution disbursing agent, transfer agent and registrar for the Common
Stock.

All stockholders or interested investors making a minimum optional
subscription of $250 are eligible to participate in the DRP. A stockholder who
owns shares of the Common Stock in his or its own name (a "Stockholder of
Record") may participate directly in the DRP by delivering a completed
authorization form (the "Authorization Form") to the Plan Administrator. A
stockholder who beneficially owns shares of the Company's Common Stock that are
registered in a name other than such stockholder's name (a "Beneficial Owner")
may participate in the plan by instructing its broker, bank or other nominee to
complete and sign the Authorization Form and forward it to its securities
depository, which will provide the Plan Administrator with the information
necessary to allow the Beneficial Owner to participate in the DRP. In addition
to the reinvestment of dividends, the DRP provides current stockholders and non-
stockholders with the opportunity to make monthly investments in the Common
Stock through optional cash purchases ("Cash Purchases"), subject to a minimum
of $250 and a maximum of $5,000 per month (or such larger amount as to which the
Company may consent), after receipt of a prospectus forming part of a
Registration Statement on Form S-11 which has been filed with the Commission
prior to the date of this Prospectus and relates solely to the shares to be sold
pursuant to the DRP.

Shares purchased directly from the Company through distribution reinvestment
under the DRP will be issued without a sales commission and may be issued at a
discount, ranging from 0% to 5%. If the Company should elect that the shares of
the Company's Common Stock to be purchased under the DRP are to be purchased in
the open market instead of directly from the Company, the Company will pay any
brokerage fees or commissions on such purchases. No discount will apply to open
market purchases or to privately negotiated purchases of the Common Stock. A DRP
participant will be subject to a minimal fee in the event the DRP participant
asks the Plan Administrator to sell all or a portion of such DRP participant's
shares.

The Authorization Form provides for the purchase of shares of the Common
Stock through the following participation options: (i) Full Distribution
Reinvestment--the Plan Administrator will apply all cash distributions on all
shares of the Common Stock then or subsequently registered in the DRP
participant's name, including all whole and fractional shares of the Common
Stock, together with any voluntary cash contributions for Cash Purchases towards
the purchase of additional shares of the Common Stock; (ii) Partial Distribution
Reinvestment--the Plan Administrator will apply all cash distributions on the
number of shares of the Common Stock then registered in the DRP participant's
name and designated in the appropriate space on the Authorization Form and all
cash dividends on shares of the Common Stock purchased by the DRP participant
pursuant to the DRP, together with any voluntary cash contributions towards the
purchase of additional shares of the Common Stock; or (iii) Cash Purchases
Only--the Plan Administrator will only apply the voluntary cash contributions
received from the DRP participant towards the purchase of shares of the Common
Stock.

Distributions shall be reinvested (the date of such reinvestment, the
"Distribution Reinvestment Date") as soon as practicable after the date on which
the Company makes a distribution (the "Distribution Record Date"), except where
reinvestment of such funds at a later date is necessary under applicable
securities laws. Under normal market conditions, the funds are expected to be
reinvested on the

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<PAGE>
Distribution Record Date. The "Average Market Price for Distribution
Reinvestments" per share of the Common Stock acquired directly from the Company
under the DRP shall be the average of the daily high and low sales prices,
computed to seven decimal places, of the shares of the Common Stock as reported
on the NYSE on the Distribution Reinvestment Date, or if no trading occurs in
the Common Stock on the Distribution Reinvestment Date, the average of the high
and low sales prices for the first trading day immediately preceding the
Distribution Reinvestment Date for which trades are reported. If the Company
elects to purchase the shares on the open market or in privately negotiated
transactions, the price per share of the Common Stock acquired through such open
market or privately negotiated transactions will be the weighted average
purchase price for all the Common Stock purchased by the Plan Administrator in
connection with such open market purchases, without application of a discount.

The "Average Market Price for Cash Purchases" per share shall be the average
of the daily high and low sales prices, computed to seven decimal places, of the
shares of the Common Stock as reported on the NYSE during the twelve trading
days prior to the date scheduled for investment of Cash Purchases for that
month. No commission shall be paid with respect to purchases of authorized but
unissued shares of the Common Stock directly from the Company. If the Company
elects to purchase the shares on the open market or in privately negotiated
transactions, the price per share of the Common Stock acquired through such open
market or privately negotiated transactions will be the weighted average of the
actual prices paid, computed to seven decimal places, for all the Common Stock
purchased by the Plan Administrator in connection with such open market
purchases, without application of a discount. Cash Purchases in excess of $5,000
may be made only upon acceptance in writing by the Company of a completed
written request for waiver form from the Plan participant. It is solely within
the Company's discretion as to whether any such approval for cash investments in
excess of $5,000 will be granted.

As soon as practical after the purchase of the shares has been completed,
the Plan Administrator will send each DRP participant a statement of account
confirming the transaction and itemizing the previous reinvestment activity for
the calendar year. DRP participants will receive tax information annually for
their personal records and to assist in the preparation of their federal income
tax returns. DRP participants generally will be treated as having received a
distribution equal to the fair market value of the shares of the Common Stock
that are purchased with the DRP participant's reinvested distributions generally
on the date that the Company credits such shares to the DRP participant's
account, plus the brokerage commissions, if any, allocable to the purchase of
such shares, and DRP Participants will have a tax basis in the shares equal to
such value. See "Federal Income Tax Considerations."

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<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Common Stock. Cadwalader,
Wickersham & Taft ("Counsel") has acted as counsel to the Company and has
reviewed this summary and has rendered an opinion that the descriptions of the
law and the legal conclusions contained herein are correct in all material
respects, and the discussions hereunder fairly summarize the federal income tax
considerations that are likely to be material to the Company and a holder of the
Common Stock. The discussion contained herein does not address all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States) subject to special treatment under the federal
income tax laws.

The statements in this discussion and the opinion of Cadwalader, Wickersham
& Taft are based on current provisions of the Code, existing, temporary, and
currently proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, existing administrative rulings and practices
of the Internal Revenue Service (the "IRS"), and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the transactions
entered into or contemplated prior to the effective date of such changes.

PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND SALE OF THE COMMON
STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.

TAXATION OF THE COMPANY

The Company plans to make an election to be taxed as a REIT under sections
856 through 860 of the Code, commencing with its taxable year ending on December
31, 1998.

The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.

Cadwalader, Wickersham & Taft has acted as counsel to the Company in
connection with the Offering and the Company's election to be taxed as a REIT.
In the opinion of Counsel, provided that the elections and other procedural
steps described in this discussion of "Federal Income Tax Considerations" are
completed by the Company in a timely fashion, commencing the Company's taxable
year ending December 31, 1998, the Company will qualify to be taxed as a REIT
pursuant to sections 856 through 860 of the Code, and the Company'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. Investors
should be aware, however, that opinions of counsel are not binding upon the IRS
or any court. It must be emphasized that Counsel's opinion is based on various
assumptions and is conditioned upon certain representations made by the Company
as to factual matters, including representations regarding the nature of the
Company's properties and the future conduct of its business. Such factual
assumptions and representations are described below in this discussion of
"Federal Income Tax Considerations" and are set out in the federal income tax
opinion that will be delivered by Counsel at the closing of the Offering.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet, on a continuing basis, through actual annual operating results,
asset ownership, distribution levels, and stock ownership, the

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<PAGE>
various qualification tests imposed under the Code discussed below. Counsel will
not review the Company's compliance with those tests on a continuing basis.
Accordingly, no assurance can be given that the actual results of the Company's
operations for any particular taxable year will satisfy such requirements. For a
discussion of the tax consequences of failure to qualify as a REIT, see "Federal
Income Tax Considerations--Requirements for Qualification."

If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its stockholders. This treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
that generally results from an investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
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, if any. Third, if the Company has (i)
net income from the sale or other disposition of "foreclosure property" that is
held primarily for sale to customers in the ordinary course of business or (ii)
other nonqualifying income from foreclosure property, it will be subject to tax
at the highest 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), and
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year (as
reduced by any net ordinary loss 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., a corporation generally subject to full corporate-level tax) in a merger
or other transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the 10-year period beginning on the date on which it acquired
such asset, then to the extent of such asset's "built-in-gain" (i.e., the excess
of the fair market value of such asset at the time of acquisition by the Company
over the adjusted basis in such asset at such time), the Company will be subject
to tax at the highest regular corporate rate applicable (as provided in Treasury
Regulations that have not yet been promulgated). The results described above
with respect to the tax on "built-in-gain" assume that the Company will elect
pursuant to IRS Notice 88-19 to be subject to the rules described in the
preceding sentence if it were to make any such acquisition. Finally, the Company
will be subject to tax at the highest marginal corporate rate on the portion of
any Excess Inclusion derived by the Company from REMIC Residual Interests (and,
to the extent provided in applicable Treasury Regulations, certain Non-REMIC
Residual Interests) equal to the percentage of the stock of the Company held by
any Disqualified Organization. Any such tax on the portion of any Excess
Inclusion income allocable to stock of the Company held by a Disqualified
Organization will reduce the cash available for distribution from the Company to
all stockholders.

REQUIREMENTS FOR QUALIFICATION

The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly,

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by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of each taxable year (the "5/50 Rule"); (vii)
that makes an election to be a REIT (or has made such election for a previous
taxable year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met in order to elect and
maintain REIT status; (viii) that uses a calendar year for federal income tax
purposes and, in order to avoid certain monetary penalties, complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. Conditions (i) to (iv), inclusive, must be
met during the entire taxable year and condition (v) must be met during at least
335 days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT. For purposes of determining stock ownership under the
5/50 Rule, a supplemental unemployment compensation benefits plan, a private
foundation, or a portion of a trust permanently set aside or used exclusively
for charitable purposes generally is considered an individual. A trust that is a
qualified trust under Code section 401(a), however, generally is not considered
an individual and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.

Prior to the consummation of the Offering, the Company did not satisfy
conditions (v) and (vi) in the preceding paragraph. The Company anticipates
issuing sufficient Common Stock with sufficient diversity of ownership pursuant
to the Offering to allow it to satisfy requirements (v) and (vi). In addition,
the Charter provides for restrictions regarding the transfer of the Common Stock
that are intended to assist the Company in continuing to satisfy the share
ownership requirements described in clauses (v) and (vi) above. See "Description
of Common Stock."

Code section 856(i) provides that a corporation that is a Qualified REIT
Subsidiary shall not be treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of a Qualified REIT
Subsidiary shall be treated as assets, liabilities, and items of income,
deduction, and credit of the REIT. Thus, in applying the requirements described
herein, any "Qualified REIT Subsidiaries" of the Company will be ignored as
separate entities, and all assets, liabilities, and items of income, deduction,
and credit of such subsidiaries will be treated as assets, liabilities, and
items of income, deduction, and credit of the Company.

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.

INCOME TEST. In order for the Company to qualify and to maintain its
qualification as a REIT, two requirements relating to the Company's gross income
must be satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and interest on obligations secured by mortgages on
real property or on interests in real property) or temporary investment income.
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, mortgages on real property, or temporary investments, and from
dividends, other types of interest, payments under a Qualified Hedge (as defined
below) and gain from the sale or disposition of stock or securities or a
Qualified Hedge, or from any combination of the foregoing.

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
net income or profits of any person. However, an amount received or

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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.

Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular or
residual interest in a REMIC generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the assets
of a REMIC consists of real estate assets (determined as if the Company held
such assets), the Company will be treated as receiving directly its
proportionate share of the income of the REMIC. In addition, if the Company
receives interest income with respect to a mortgage loan that is secured by both
real property and other property and the highest principal amount of the loan
outstanding during a taxable year exceeds the fair market value of the real
property on the date the Company purchased the mortgage loan, the interest
income 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.

Counsel is of the opinion that the interest, original issue discount, and
market discount income that the Company derives from its investments in MBS
Interests, IOs and Inverse IOs generally will be qualifying interest income for
purposes of both the 75% and the 95% gross income tests, except to the extent
that less than 95% of the assets of a REMIC in which the Company holds an
interest consists of real estate assets (determined as if the Company held such
assets), and the Company's proportionate share of the income of the REMIC
includes income that is not qualifying income for purposes of the 75% and 95%
gross income tests. Most of the income that the Company recognizes with respect
to its investments in Mortgage Loans will be qualifying income for purposes of
both the 75% and 95% gross income tests. In some cases, however, the loan amount
of a Mortgage Loan may exceed the value of the real property securing the loan,
which will result in a portion of the income from the loan being classified as
qualifying income for purposes of the 95% gross income test, but not for
purposes of the 75% gross income test.

The Company may acquire Construction Loans or Mezzanine Loans that have
shared appreciation provisions. To the extent interest from a loan that is based
on the cash proceeds from the sale of property constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75% and 95%
gross income tests.

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

The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. The Company will
monitor the amount of nonqualifying income produced by its assets and has
represented that it will manage its portfolio in order to comply at all times
with the gross income tests.

The rent received by the Company from the tenants of its real property
("Rent") will qualify as "rents from real property" in satisfying the gross
income tests 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

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profits of any person. However, an amount received or accrued generally will not
be excluded from the term "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Second, the
Code provides that the Rent received from a Related Party Tenant will not
qualify as "rents from real property" in satisfying the gross income tests.
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." Finally, for the Rent to qualify as
"rents from real property," the Company generally must not operate or manage the
real property or furnish or render services to the tenants of such real
property, other than through an "independent contractor" who is adequately
compensated and from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by the Company are "usually or customarily rendered" in connection with
the rental or space for occupancy only and are not otherwise considered
"rendered to the occupant." In addition, the Company may render a "de minimis"
amount of impermissible services without violating the independent contractor
requirement.

The Company has represented that it will not charge Rent for any portion of
any real property that is based, in whole or in part, on the income or profits
of any person (except by reason of being based on a fixed percentage or
percentages of receipts or sales, as described above) to the extent that the
receipt of such Rent would jeopardize the Company's status as a REIT. In
addition, the Company has represented that, to the extent that it receives Rent
from a Related Party Tenant, such Rent will not cause the Company to fail to
satisfy either the 75% or 95% gross income test. The Company also has
represented that it will not allow the Rent attributable to personal property
leased in connection with any lease of real property to exceed 15% of the total
Rent received under the lease, if the receipt of such Rent would cause the
Company to fail to satisfy either the 75% or 95% gross income test. Furthermore,
as a result of restrictions on the ownership of stock in the Company, no person
may own, directly or indirectly, more than 9.8% of the Company so that the
Related Party Tenant limitation will be avoided. Finally, the Company has
represented that it will not operate or manage its real property or furnish or
render non-customary services to the tenants of its real property other than
through an "independent contractor," to the extent that such operation or the
provision of such services would jeopardize the Company's status as a REIT.

REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purpose of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid 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 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. The Company does
not anticipate that it will receive any income from foreclosure property that is
not qualifying income for purposes of the 75% gross income test, but, if the
Company does receive any such income, the Company will make an election to treat
the related property as foreclosure property. If property is not eligible for
the election to be treated as foreclosure property because the related loan was
acquired by the REIT at a time when default was imminent or anticipated, income
received with respect to such Ineligible Property may not be qualifying income
for purposes of the 75% or 95% gross income test.

The Company will generally be subject to a 100% tax on net income derived
from a prohibited transaction. 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 does not intend to hold any assets for sale to
customers and will monitor its activities to comply with the requirement that no
sale of such assets will be in the ordinary course of the

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Company's business. Whether property is held "primarily for sale to customers in
the ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular property, such as whether the Company is performing a "market-making"
function by modifying the property to facilitate its sale or quoting sale prices
for such property. Prior to selling Credit Tenant Loans or other mortgage loans
or MBS as whole loans or in a REMIC or FASIT transaction, the Company will
develop guidelines to assist in determining whether or when such property will
be considered held primarily for sale to customers in the ordinary course of a
trade or business. Complete assurance cannot be given, however, that the Company
can comply with the safe-harbor provisions of the Code or such guidelines
prescribing when asset sales will not be characterized as prohibited
transactions 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."

It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms, including an interest rate
swap or cap agreement, option, futures contract, forward rate agreement, or
similar financial instrument (collectively, a "Qualified Hedge"). To the extent
that the Company enters into a Qualified Hedge to hedge any interest rate risk
on indebtedness incurred to acquire or carry Real Estate Assets, any periodic
income or gain from the disposition of such Qualified Hedge should be qualifying
income for purposes of the 95% gross income test, but not the 75% gross income
test.

If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and the Company
anticipates that any incorrect information on the schedule will not be 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 such relief
provisions.

As discussed above in "Federal Income Tax Considerations--Taxation of the
Company," even if such relief provisions apply, a 100% tax would be imposed on
the net income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test.

ASSET TESTS. The Company, at the close of each quarter of each taxable
year, also must satisfy, either directly or through partnerships in which it has
an interest, two 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 cash or cash
items (including certain receivables), government securities, "Real Estate
Assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "Real Estate Assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of a
mortgage does not exceed the fair market value of the associated real property,
regular or residual interests in a REMIC (except that, if less than 95% of the
assets of a REMIC consists of "real estate assets" (determined as if the Company
held such assets), the Company will be treated as holding directly its
proportionate share of the assets of such REMIC), and shares of other REITs. For
purposes of the 75% asset test, the term "interest in real property" includes an
interest in mortgage loans or land and improvements thereon, such as buildings
or other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold of real property, and
an option to acquire real property (or a leasehold of real property). An
"interest in real property" also generally includes an interest in mortgage
loans secured by controlling equity interests in entities treated as
partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest.
Second, of the investments not included in the 75% asset class, the value of any
one issuer's securities owned by the Company may not exceed 5% of the value of
the

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Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its interests in any
partnership and any Qualified REIT Subsidiary).

The Company expects that any MBS interests, Real Estate Assets and temporary
investments that it acquires generally will be qualifying assets for purposes of
the 75% asset test, except to the extent that less than 95% of the assets of a
REMIC in which the Company owns an interest consists of "Real Estate Assets" and
the Company's proportionate share of those assets includes assets that are
nonqualifying assets for purposes of the 75% asset test. Mortgage Loans
(including Construction Loans and Mezzanine Loans) also will be qualifying
assets for purposes of the 75% asset test to the extent that the principal
balance of each mortgage loan does not exceed the value of the associated real
property. The Company will monitor the status of the assets that it acquires for
purposes of the various asset tests and has represented that it will manage its
portfolio in order to comply at all times with such tests.

The Company anticipates that it may securitize all or a portion of the
Mortgage Loans which it acquires, in which event the Company will likely retain
certain of the subordinated and IO classes of MBS Interests which may be created
as a result of such securitization. The securitization of the Mortgage Loans may
be accomplished through one or more REMICs established by the Company or, to the
extent necessary to avoid prohibited transactions, through one or more taxable
subsidiaries, or, if a non-REMIC securitization is desired, through one or more
Qualified REIT Subsidiaries established by the Company. The securitization of
the Mortgage Loans through either one or more REMICs or one or more Qualified
REIT Subsidiaries will be structured so as not to affect the qualification of
the Company as a REIT or result in the imposition of corporate income tax under
the taxable mortgage pool rules.

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

DISTRIBUTION REQUIREMENTS. The Company, in order to avoid corporate income
taxation of the earnings that it distributes, is required to distribute with
respect to each taxable year dividends (other than capital gain dividends) to
its stockholders in an aggregate amount ("Adjusted Taxable Income") at least
equal to (i) the sum of (A) 95% of its REIT Taxable Income (computed without
regard to the dividends paid deduction and its net capital gain) and (B) 95% of
the net income (after tax), if any, from foreclosure property, minus (ii) the
sum of certain items of noncash income. 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 federal income tax return for such year and
if paid on or before the first regular dividend payment date 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 REIT
Taxable Income, it will be subject to tax thereon at regular ordinary and
capital gains corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of the January immediately following such year) at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year (as reduced by any net ordinary loss for
such year) and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amounts (i) actually distributed and (ii) on
which tax is imposed under Section 857(b)(1) or (b)(3)(A) of the Code. However,
the Company may elect to retain, rather than distribute all or a portion of its
net long-term capital gains and pay the tax on such undistributed gains, in
which case the Company's stockholders would include their proportionate share of
such undistributed long-term capital gains in income and receive a credit for
their share of the tax paid by the Company. The Company would avoid the above 4%
excise tax to the extent such an election is made.

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The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements.

It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT Taxable Income. For example, the Company will
recognize REIT Taxable Income in excess of its cash receipts when, as frequently
happens, OID accrues with respect to certain of its subordinated MBS Interests,
including POs and certain IOs. OID generally will be accrued using a methodology
that does not allow credit losses to be reflected until they are actually
incurred. In addition, the Company may recognize taxable market discount income
upon the receipt of proceeds from the disposition of, or principal payments on,
MBS that are Market Discount Bonds, but not have any cash because such proceeds
may be used to make non-deductible principal payments on related borrowings.
Market discount income is treated as ordinary income and not as capital gain
and, thus, is subject to the 95% distribution requirement. The Company also may
recognize Excess Inclusion or other REIT Taxable Income in excess of cash flow
from REMIC Residual Interests or its retained interests from non-REMIC
securitization transactions. It is also possible that, from time to time, the
Company may recognize net capital gain attributable to the sale of depreciated
property that exceeds its cash receipts from the sale. In addition, pursuant to
certain Treasury Regulations, the Company may be required to recognize the
amount of any payment to be made pursuant to a shared appreciation provision
over the term of the related loan using the constant yield method. Finally, the
Company may recognize taxable income without receiving a corresponding cash
distribution if it forecloses on or makes a "significant modification" (as
defined in Treasury Regulations section 1.1001-3(e)) to a loan, to the extent
that the fair market value of the underlying property or the principal amount of
the modified loan, as applicable, exceeds the Company's basis in the original
loan. Therefore, the Company may have less cash than is necessary to meet its
annual 95% distribution requirement or to avoid corporate income tax or the
excise tax imposed on certain undistributed income. In such a situation, the
Company may find it necessary to arrange for short-term (or possibly long-term)
borrowings or to raise funds through the issuance of preferred stock or
additional Common Stock, or through the sale of assets.

As a result of securitization or resecuritization of Mortgage Loans or other
debt instruments, and the subsequent sale of the senior (or most secure)
securities created in the securitization, the Company may retain subordinated
securities or a residual interest in the assets being securitized on which
interest or discount income will be accrued without the current payment of cash.
This situation could arise because cash payments received on the assets are
required to be paid to the holders of senior securitized interests. In addition,
the Company would have phantom income to the extent of the market discount
attributable to debt securities held by a REMIC in which the Company holds a
REMIC Residual Interest. In such situations, the income related to such
subordinate debt instruments will be subject to the 95% distribution
requirement. In order to satisfy the REIT distribution requirements, the Company
may need to distribute funds obtained through borrowing, the issuance of
additional capital stock or the sale of assets. As a result, the maintenance of
REIT status could affect the manner in which the Company conducts its business
operations.

Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to it stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the IRS interest based upon the amount of any
deduction taken for deficiency dividends.

RECORDKEEPING REQUIREMENTS. Pursuant to the Taxpayer Relief Act of 1997,
failure to comply with provisions of applicable Treasury Regulations pursuant to
which the Company must maintain certain records and request on an annual basis
certain information from its stockholders designed to disclose the actual
ownership of its outstanding stock is no longer grounds for REIT
disqualification, but may result in the imposition of monetary penalties. The
Company intends to comply with such requirements in order to avoid the
imposition of such monetary penalties or of curative actions required by the
Service.

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PROPOSED LEGISLATION

In February 1998, the Clinton Administration announced certain legislative
proposals (the "Administration Proposals"). Included in the Administration
Proposals are several changes to the REIT qualification and taxation rules that
could be relevant to the Company if ultimately enacted into law. First, the
Administration Proposals would prohibit a REIT from owning more than 10 percent,
by value, of all classes of stock of any issuer (other than an interest in a
partnership or a Qualified REIT Subsidiary). Second, the Administration
Proposals would add a new REIT qualification test providing that no person may
own (directly, or indirectly after attribution of stock from related persons)
more than 50 percent of the total vote or value of a REIT's stock. Third, the
Administration Proposals would eliminate the ability of a REIT to elect under
IRS Notice 88-19 to have "built-in-gains" inherited from certain C corporations
(i.e., those whose stock is valued at over five million dollars) in a carryover
basis transaction, taxed at the maximum corporate tax rate to the REIT only as
and if the associated assets are disposed of by the REIT within the 10-year
period beginning on the date of their acquisition. No prediction can be made as
to when or if the Administration Proposals will be considered by Congress,
whether Congress will ultimately include some or all of the Administration
Proposals in legislation, or whether such legislation will be enacted into law.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable year,
and certain 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 the Company's stockholders in any year
in which the Company fails to qualify as a REIT will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
the Company's current and accumulated earnings and profits, all distributions to
stockholders 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 also will be disqualified from taxation as a REIT for
the four taxable years following the year during which the Company ceased to
qualify as a REIT. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.

TAXATION OF TAXABLE U.S. STOCKHOLDERS

As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. stockholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the U.S., (ii)
a corporation, partnership, or other entity created or organized in or under the
laws of the U.S. or of any political subdivision thereof, (iii) an estate whose
income is subject to U.S. federal income tax regardless of its source, or (iv)
any trust with respect to which (a) a U.S. court is able to exercise primary
supervision over the administration of such trust and (B) one or more persons
described in (i) or (ii) have the authority to control all substantial decisions
of the trust. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the stockholder has held his Common Stock. However, corporate
stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and accumulated
earnings and profits will not be taxable to a stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's Common Stock, but
rather will reduce the adjusted basis of such stock. To the extent that such
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a stockholder's Common Stock, such distributions will be
included in income

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as long-term capital gain (or short-term capital gain if the Common Stock had
been held for one year or less), assuming the Common Stock is a capital asset in
the hands of the stockholder. In addition, any distribution declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated as
both paid by the Company and received by the stockholder on December 31 of such
year, provided that the distribution is actually paid by the Company during
January of the following calendar year.

Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a stockholder is a limited partner) against such income.
Taxable distributions from the Company generally will be treated as investment
income for purposes of the investment interest limitations. Capital gains from
the disposition of Common Stock (or distributions treated as such), however,
will be treated as investment income only if the stockholder so elects, in which
case such capital gains will be taxed at ordinary income rates. The Company will
notify stockholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income or capital gain dividends.

The Company may elect to retain and pay income tax on its net long-term
capital gains. If the Company makes this election, the Company's stockholders
would include in their income as long-term capital gain their proportionate
share of the long-term capital gain as designated by the Company. Each
stockholder will be deemed to have paid the stockholder's share of the tax,
which could be credited or refunded to the stockholder. The basis of the
stockholder's shares is increased by the amount of the undistributed long-term
capital gains (less the amount of capital gains tax paid).

The Company's investment in certain types of MBS, including REMIC Residual
Interests and Non-REMIC Residual Interests, may cause it under certain
circumstances to recognize phantom income and to experience an offsetting excess
of economic income over its REIT Taxable Income in later years. As a result,
stockholders may from time to time be required to pay federal income tax on
distributions that economically represent a return of capital, rather than a
dividend. Such distributions would be offset in later years by distributions
representing economic income that would be treated as returns of capital for
federal income tax purposes. Accordingly, if the Company receives phantom
income, its stockholders may be required to pay federal income tax with respect
to such income on an accelerated basis, i.e., before such income is realized by
the stockholders in an economic sense. Taking into account the time value of
money, such an acceleration of federal income tax liabilities would cause
stockholders to receive an after-tax rate of return on an investment in the
Company that would be less than the after-tax rate of return on an investment
with an identical before-tax rate of return that did not generate phantom
income. For example, if an investor subject to an effective income tax rate of
30% purchased a bond (other than a tax-exempt bond) with an annual interest rate
of 10% for its face value, his before-tax return on his investment would be 10%,
and his after-tax return would be 7%. However, if the same investor purchased
stock of the Company at a time when the before-tax rate of return was 10% his
after-tax rate of return on his stock might be somewhat less than 7% as a result
of the Company's phantom income. In general, as the ratio of the Company's
phantom income to its total income increases, the after-tax rate of return
received by a taxable stockholder of the Company will decrease. The Company will
consider the potential effects of phantom income on its taxable stockholders in
managing its investments.

If the Company owns REMIC Residual Interests, it is possible that
stockholders would not be permitted to offset certain portions of the dividend
income they derive from the Company with their current deductions or net
operating loss carryovers or carrybacks. The portion of a stockholder's
dividends that would be subject to this limitation would equal his allocable
share of any Excess Inclusion income derived by the Company with respect to the
REMIC Residual Interests. The Company's Excess Inclusion

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

TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK

In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a stockholder who has held such
shares 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 from the
Company required to be treated by such stockholder as long-term capital gain.
All or portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of Common Stock are purchased within 30
days before or after the disposition.

CAPITAL GAINS AND LOSSES

The highest marginal individual income tax rate (which applies to ordinary
income and gain from the sale or exchange of capital assets held for one year or
less) is 39.6%. The maximum regular income tax rate on capital gains derived by
non-corporate taxpayers is 28% for sales and exchanges of capital assets held
for more than one year but not more than eighteen months, and 20% for sales and
exchanges of capital assets held for more than eighteen months. However, 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 treated as personal property will be subject to a maximum tax
rate of 25% instead of the 20% maximum rate. For taxable years beginning after
December 31, 2000, the maximum regular capital gains rate for assets which are
held more than 5 years is 18%. This rate will generally only apply to assets for
which the holding period begins after December 31, 2000. Thus, the tax rate
differential between capital gains and ordinary income for non-corporate
taxpayers may be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of capital losses.
Capital losses not offset by capital gains may be deducted against a
non-corporate taxpayer's ordinary income only up to a maximum annual amount of
$3,000. Unused capital losses may be carried forward indefinitely by
non-corporate taxpayers. All net capital gain of a corporate taxpayer is subject
to tax at

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ordinary corporate income tax rates. A corporate taxpayer can deduct capital
losses only to the extent of capital gains, with unused losses being carried
back three years and forward five years.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

The Company will report to its U.S. stockholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distribution to any stockholders
who fail to certify their non-foreign status to the Company.

TAXATION OF TAX-EXEMPT STOCKHOLDERS

Tax-Exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts generally are exempt from federal
income taxation. However, they are subject to taxation on their unrelated
business taxable income ("UBTI"). While many investments in real estate generate
UBTI, the IRS has ruled that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the shares of the
REIT are not otherwise used in an unrelated trade or business of the exempt
employee pension trust. Based on that ruling, amounts distributed by the Company
to Exempt Organizations generally should not constitute UBTI. However, if an
Exempt Organization finances its acquisition of the Common Stock with debt, a
portion of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17) and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Company as UBTI. In addition, in certain circumstances, a
pension trust that owns more than 10% of the Company's stock is required to
treat a percentage of the dividends from the Company as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income derived by the Company
from an unrelated trade or business (determined as if the Company were a pension
trust) divided by the gross income of the Company for the year in which the
dividends are paid. The UBTI rule applies to a pension trust holding more than
10% of the Company's stock only if (i) the UBTI Percentage is at least 5%, (ii)
the Company qualifies as a REIT be reason of the modification of the 5/50 Rule
that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interest in the pension
trust, and (iii) either (A) one pension trust owns more than 25% of the value of
the Company's stock or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's stock collectively owns more than 50% of
the value of the Company's stock. The Company's ownership limitations should
prevent an Exempt Organization from owning more than 10% of the value of the
Company's stock.

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

If the Company derives Excess Inclusion income from REMIC Residual
Interests, a tax similar to the tax on the Company described in the preceding
paragraph may be imposed on stockholders who are

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

The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of multiple-class Mortgage-Backed Securities in non-REMIC
transactions. If such Treasury Regulations are issued in the future allocating
the Company's Excess Inclusion income from non-REMIC transactions pro rata among
its stockholders, some percentage of the dividends paid by the Company would be
treated as UBTI in the hands of stockholders that are Exempt Organizations. See
"Taxation of Taxable U.S. Stockholders."

TAXATION OF NON-U.S. STOCKHOLDERS

The rules governing U.S. federal income taxation of Non-U.S. Stockholders
are complex and no attempt will be made herein to provide more than a summary of
such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS
WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.

Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or
business, the Non-U.S. Stockholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. stockholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Stockholder that is a corporation). The Company
expects to withhold U.S. income tax at the rate of 30% on the gross amount of
any such distributions made to a Non-U.S. Stockholder unless (i) a lower treaty
rate applies and any required form evidencing eligibility for that reduced rate
is filed with the Company or (ii) the Non-U.S. Stockholder files an IRS Form
4224 with the Company claiming that the distribution is effectively connected
income.

Any portion of the dividends paid to Non-U.S. Stockholders that is treated
as Excess Inclusion income will not be eligible for exemption from the 30%
withholding tax or a reduced treaty rate. In addition, if Treasury Regulations
are issued in the future allocating the Company's Excess Inclusion income from
non-REMIC transactions among its stockholders, some percentage of the Company's
dividends would not be eligible for exemption from the 30% withholding tax or a
reduced treaty withholding tax rate in the hands of Non-U.S. Stockholders. See
"Taxation of Taxable U.S. Stockholders."

Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend.

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However, amounts so withheld are refundable to the extent it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company. However, the Small Business Job
Protection Act of 1996 requires the Company to withhold 10% of any distribution
in excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.

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 a U.S. real
property interest (which includes certain interests in Real Property but does
not include Mortgage Loans or MBS) will be taxed to a Non-U.S. Stockholder under
the provisions of FIRPTA. Under FIRPTA, distributions attributable to gain from
sales of U.S. real property interests are taxed to a Non-U.S. Stockholder as if
such gain were effectively connected with a U.S. business. Non-U.S. Stockholders
thus would be taxed at the normal capital gain rates applicable to U.S.
stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the hands of a Non-U.S. corporate stockholder not entitled to treaty
relief or exemption. The Company is required to withhold 35% of any distribution
that is designated by the Company as a U.S. real property capital gains
dividend. The amount withheld is creditable against the Non-U.S. Stockholder's
FIRPTA tax liability.

Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. Because the Common Stock will be publicly
traded, no assurance can be given that the Company will be or remain a
"domestically controlled REIT." In addition, a Non-U.S. Stockholder that owns,
actually or constructively, 5% or less of the Company's stock throughout a
specified "look-back" period will not recognize taxable gain on the sale of his
stock under FIRPTA if the shares are traded on an established securities market.
Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if (i) investment in the Common Stock is effectively connected with
the Non-U.S. Stockholder's U.S. trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders with
respect to such gain, or (ii) the Non-U.S. Stockholder is a nonresident alien
individual who was present in the U.S. for 183 days or more during the taxable
year and certain other conditions apply, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains. If
the gain on the sale of the Common Stock were to be subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S.
stockholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).

STATE AND LOCAL TAXES

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

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ERISA CONSIDERATIONS

In considering an investment in the Common Stock, a fiduciary of a
governmental plan, a profit-sharing, pension, or stock bonus plan, a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the prohibited transaction provisions of the Code, the fiduciary
responsibility provisions of ERISA, or materially similar applicable laws or
regulations, including for this purpose individual retirement accounts
(collectively, "Plans"), should consider (a) whether the ownership of the Common
Stock is in accordance with the documents and instruments governing such Plan,
(b) whether the ownership of the Common Stock is consistent with the fiduciary's
responsibilities and (where applicable) satisfies the requirements of Part 4 of
Subtitle B of Title I of ERISA and, in particular, the diversification, prudence
and liquidity requirements of Section 404 of ERISA, (c) ERISA or other
prohibitions regarding improper delegation of control over, or responsibility
for, "plan assets" and the possible imposition of co-fiduciary liability on a
fiduciary who participates in, permits (by action or inaction) the occurrence
of, or fails to remedy a known breach of duty by another fiduciary and (d) the
need to value the assets of an ERISA Plan annually.

In regard to the "plan assets" issue noted in clause (c) above, the Company
believes that, effective as of the date of the closing of the Offering and the
listing of the shares of the Common Stock on the NYSE, the Common Stock should
qualify as a "publicly offered security," and, therefore, the acquisition of
such Common Stock by ERISA Plans should not cause the Company's assets to be
treated as assets of such investing ERISA Plans for purposes of the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
the Code. Fiduciaries of Plans should consult with and rely upon their own
advisors in evaluating in light of their own circumstances the consequences of
an investment in the Common Stock under the fiduciary responsibility provisions
of ERISA, under the Code, and under any materially similar applicable laws or
regulations.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value, and 5,000,000 shares of preferred stock, $.01 par
value, issuable in one or more series. Each share of Common Stock is entitled to
participate equally in dividends when and as declared by the Board of Directors
and in the distribution of assets of the Company upon liquidation. Each share of
Common Stock is entitled to one vote and will be fully paid and nonassessable by
the Company upon issuance. Shares of the Common Stock of the Company have no
preference, conversion, exchange, preemptive or cumulative voting rights. The
authorized capital stock of the Company may be increased and altered from time
to time as permitted by Maryland law.

Preferred stock may be issued from time to time in one or more classes or
series, with such distinctive designations, rights and preferences as shall be
determined by the Company's Board of Directors. Preferred stock would be
available for possible future financings of, or acquisitions by, the Company and
for general corporate purposes without any legal requirement that stockholder
authorization for issuance be obtained. The issuance of preferred stock could
have the effect of making an attempt to gain control of the Company more
difficult by means of a merger, tender offer, proxy contest or otherwise. The
preferred stock, if issued, would have a preference on dividend payments that
could affect the ability of the Company to make dividend distributions to the
common stockholders.

Meetings of the stockholders of the Company are to be held annually and
special meetings may be called by the Chief Executive Officer, President, or
Board of Directors. The Articles of Incorporation reserve to the Company the
right to amend any provision thereof in the manner prescribed by law.

Presently, there is no established trading market for the Common Stock.
Application has been made to list the Common Stock on the NYSE under the symbol
" ."

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REGISTRATION RIGHTS OF CERTAIN HOLDERS

Prior to consummation of the Offering, the Company expects to enter into
registration rights agreements with each of its existing investors (holding an
aggregate of 3,333,333 shares of Common Stock upon consummation of the Offering)
upon terms to be negotiated.

REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER

Two of the requirements of qualification as a REIT are that (1) during the
last half of each taxable year not more than 50% in value of the outstanding
shares may be owned directly or indirectly by five or fewer individuals (the
"5/50 Rule") and (2) there must be at least 100 stockholders on 335 days of each
taxable year of 12 months.

In order that the Company may meet these requirements at all times, the
Articles of Incorporation prohibit any person from acquiring or holding,
directly or indirectly, shares of Common Stock in excess of 9.8% (in value or in
number of shares, whichever is more restrictive) of the aggregate of the
outstanding shares of Common Stock of the Company. For this purpose, the term
"ownership" is defined in accordance with the REIT Provisions of the Code and
the constructive ownership provisions of section 544 of the Code, as modified by
section 856(h)(1)(B) of the Code. Subject to certain limitations, the Board of
Directors may increase or decrease the ownership limitations or waive the
limitations for individual investors.

For purposes of the 5/50 Rule stockholder test, the constructive ownership
provisions applicable under section 544 of the Code attribute ownership of
securities owned by a corporation, partnership, estate or trust proportionately
to its stockholders, partners or beneficiaries, attribute ownership of
securities owned by family members and partners to other members of the same
family, treat securities with respect to which a person has an option to
purchase as actually owned by that person, and set forth application of such
attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person holds shares of Common Stock in violation of the
ownership limitations set forth in the Articles of Incorporation, many types of
entities may own directly more than the 9.8% limit because such entities' shares
are attributed to its individual stockholders. On the other hand, a person will
be treated as owning not only shares of Common Stock actually or beneficially
owned, but also any shares of Common Stock attributed to such person under the
attribution rules described above. Accordingly, under certain circumstances,
shares of Common Stock owned by a person who individually owns less than 9.8% of
the shares outstanding may nevertheless be in violation of the ownership
limitations set forth in the Articles of Incorporation. Ownership of shares of
Common Stock through such attribution is generally referred to as constructive
ownership. The 100 stockholder test is determined by actual, and not
constructive, ownership. The Company will have greater than 100 stockholders of
record.

The Articles of Incorporation further provide that if any Transfer of shares
of Common Stock which, if effective, would result in any person beneficially or
constructively owning shares of Common Stock in excess or in violation of the
above transfer or ownership limitations, then that number of shares of Common
Stock the beneficial or constructive ownership of which otherwise would cause
such person to violate such limitations (rounded to the nearest whole shares)
shall be automatically transferred to a Trustee of a Trust for the exclusive
benefit of one or more charitable beneficiaries, and the Intended Transferee
shall not acquire any rights in such shares. Shares of Common Stock held by the
Trustee shall be issued and outstanding shares of Common Stock. The Intended
Transferee shall not benefit economically from ownership of any shares held in
the Trust, shall have no rights to dividends, and shall not possess any rights
to vote or other rights attributable to the shares held in the Trust. The
Trustee shall have all voting rights and rights to dividends or other
distributions with respect to shares held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or other distribution paid to the Intended Transferee prior to the discovery by
the Company that shares of Common Stock have been transferred to the Trustee
shall be paid with respect to such shares to the Trustee by the

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Intended Transferee upon demand and any dividend or other distribution
authorized but unpaid shall be paid when due to the Trustee. The Board of
Directors of the Company may, in its discretion, waive these requirements on
owning shares in excess of the ownership limitations.

Within 20 days of receiving notice from the Company that shares of Common
Stock have been transferred to the Trust, the Trustee shall sell the shares held
in the Trust to a person, designated by the Trustee, whose ownership of the
shares will not violate the ownership limitations set forth in the Articles of
Incorporation. Upon such sale, the interest of the Charitable Beneficiary in the
shares sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Intended Transferee and to the Charitable Beneficiary as
follows. The Intended Transferee shall receive the lesser of (1) the price paid
by the Intended Transferee for the shares or, if the Intended Transferee did not
give value for the shares in connection with the event causing the shares to be
held in the Trust (e.g., in the case of a gift, devise or other such
transaction), the Market Price of the shares on the day of the event causing the
shares to be held in the Trust, and (2) the price per share received by the
Trustee from the sale or other disposition of the shares held in the Trust. Any
net sales proceeds in excess of the amount payable to the Intended Transferee
shall be immediately paid to the Charitable Beneficiary. In addition, shares of
Common Stock transferred to the Trustee shall 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 resulted in such transfer to
the Trust (or, in the case of a devise or gift, the Market Price at the time of
such devise or gift), and (ii) the Market Price on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the Trustee has sold shares held in the Trust. Upon such a sale to
the Company, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
Intended Transferee.

Every owner of more than 5% (or such lower percentage as required by the
Code or the Regulations promulgated thereunder) of the outstanding shares of any
class or series of the Company's stock, within 30 days after the end of each
taxable year, is required to give written notice to the Company stating the name
and address of such owner, the number of shares of each class and series of
stock of the Company beneficially owned and a description of the manner in which
such shares are held. Each such owner shall provide to the Company such
additional information as the Company may request in order to determine the
effect, if any, of such beneficial ownership on the Company's status as a REIT
and to ensure compliance with the ownership limitations.

CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS

THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE
COMPANY'S CHARTER AND BYLAWS DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO
AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND TO THE COMPANY'S
CHARTER AND BYLAWS, COPIES OF WHICH ARE EXHIBITS TO THE REGISTRATION STATEMENT
OF WHICH THIS PROSPECTUS IS A PART.

The Charter and the Bylaws of the Company contain certain provisions that
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Board of Directors. The Company believes that the benefits of these
provisions outweigh the potential disadvantages of discouraging such takeover
proposals because, among other things, negotiation of such takeover proposals
might result in an improvement of their terms.

NUMBER OF DIRECTORS; CLASSIFICATION OF THE BOARD OF DIRECTORS

The Charter and Bylaws provide that the number of directors will consist of
not less than three nor more than nine persons, as determined by the affirmative
vote of a majority of the members of the entire

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Board of Directors. The Charter requires that at all times at least a majority
of the directors shall be Unaffiliated Directors, except that upon the death,
removal, incapacity or resignation of an Unaffiliated Director, such requirement
shall not be applicable for 60 days. Following the Offering, there will be five
directors, three of whom will be Unaffiliated Directors. The holders of shares
of Common Stock are entitled to vote on the election or removal of directors,
with each share entitled to one vote. Any vacancy will be filled, at any regular
meeting or at any special meeting called for that purpose, by a majority of the
remaining directors.

Pursuant to the Charter, the Board of Directors is divided into three
classes of directors. The initial terms of the first, second and third classes
will expire in the years 1999, 2000, and 2001, respectively. As the term of each
class expires, directors in that class will be elected by the stockholders of
the Company for a term of three years and until their successors are duty
elected and qualify. Classification of the Board of Directors is intended to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Directors. Because holders of shares of
Common Stock will have no right to cumulative voting in the election of
directors, at each annual meeting of stockholders, the holders of a majority of
the shares of Common Stock will be able to elect all of the successors of the
class of directors whose terms expire at that meeting.

The staggered board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult, which
could delay, defer or prevent an attempt by a third party to obtain control of
the Company or the implementation of another transaction, even though such an
attempt or other transaction might be beneficial to the Company and its
stockholders. At least two annual meetings of stockholders, instead of one, will
generally be required to effect a change in a majority of the Board of
Directors. Thus, the staggered board provision could increase the likelihood
that incumbent directors will retain their positions.

REMOVAL; FILLING VACANCIES

The Bylaws provide that any vacancies on the Board of Directors for any
cause will be filled by the affirmative vote of a majority of the remaining
directors, even if such majority is insufficient to constitute a quorum. Any
director so elected shall hold office until the term of his office expires and
until his successor is elected and qualifies. The Charter provides that
directors may be removed, with cause, only by the affirmative vote of the
holders of shares of at least two-thirds of the votes entitled to be cast in the
election of directors. This provision, when coupled with the provision of the
Bylaws authorizing the remaining members of the Board of Directors to fill
vacant directorships, precludes stockholders from removing incumbent directors
except for cause and filling the vacancies created by such removal with their
own nominees.

BUSINESS COMBINATIONS

Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any Interested Stockholder or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such Business
Combination must be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least (a) 80.0% of the votes entitled
to be cast by holders of outstanding shares of voting stock of such corporation
and (b) two-thirds of the votes entitled to be cast by holders of shares of such
corporation other than shares held by the Interested Stockholder with whom (or
with whose affiliate) the Business Combination is to be effected, unless, among
other conditions, the corporation's stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. These provisions of the MGCL do not apply, however, to Business
Combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the

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Interested Stockholder became an Interested Stockholder. The Board of Directors
has resolved to opt out of the Business Combination provisions of the MGCL. See
"--Control Share Acquisition Statute" below. There can be no assurance that the
Board of Directors will not opt into such provisions at any time in the future.

CONTROL SHARE ACQUISITION STATUTE

The MGCL provides that "Control Shares" of a Maryland corporation acquired
in a "Control Share Acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror, by officers or by directors who are
employees of the corporation.

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

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

The Control Share Acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.

The Bylaws of the Company contain a provision exempting from the Control
Share Acquisition statute any and all acquisitions by any person of the
Company's shares of Common Stock. There can be no assurance that such provision
will not be amended or eliminated at any time in the future. Such provision can
be amended or eliminated by the Board of Directors without consent of the
stockholders of the Company.

AMENDMENT TO THE CHARTER

The Company reserves the right from time to time to make any amendment to
its Articles of Incorporation, now or hereafter authorized by law, including any
amendment which alters the contract rights, as expressly set forth in the
Articles of Incorporation, of any shares of outstanding stock. The Charter of
the Company may be amended only by the Board of Directors in accordance with
Section 2-604 of the MGCL and the Charter and thereafter approved by the
stockholders. In addition to any other vote of the stockholders that is required
by applicable law, the affirmative vote of two-thirds of the outstanding shares
of the capital stock of the Company entitled to vote on such amendment, voting
together as a single class, and the affirmative vote of two-thirds of the
outstanding shares of each class entitled to vote thereon as a class, is
required to amend any provision of the Charter (except to amend any provision of
the Charter relating to the authority of the Company to issue shares of its
capital stock, only a majority rather than two-thirds is required).

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DISSOLUTION OF THE COMPANY

The dissolution of the Company must be approved by the affirmative vote of
the holders of shares entitled to cast not less than two-thirds of all of the
votes entitled to be cast on the matter.

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

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

MEETINGS OF STOCKHOLDERS

The Company's Bylaws provide that annual meetings of stockholders shall be
held on a date and at the time set by the Board of Directors during the month of
May of each year (commencing in May 1999). Special meetings of the stockholders
may be called by (i) the Chief Executive Officer of the Company, (ii) the
President, (iii) the Board of Directors or (iv) a majority of the Unaffiliated
Directors. As permitted by the MGCL, the Bylaws provide that special meetings
must be called by the Secretary of the Company upon the written request of the
holders of shares entitled to cast not less than a majority of all votes
entitled to be cast at the meeting.

OPERATIONS

The Company is generally prohibited by the Charter from holding any assets
or engaging in any activity that would cause the Company to fail to qualify as a
REIT.

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

The Business Combination provisions, if the Board of Directors determines to
opt in to such provisions, and, if the applicable provision in the Bylaws is
rescinded, the Control Share Acquisition provisions of the MGCL, the provisions
of the Charter on classification of the Board of Directors and removal of
directors and the advance notice provisions of the Bylaws could delay, defer or
prevent a transaction or a change in control of the Company that might involve a
premium price for holders of shares of Common Stock or otherwise be in their
best interest.

TRANSFER AGENT AND REGISTRAR

The Company intends to appoint as its transfer agent and
registrar for the Common Stock.

REPORTS TO STOCKHOLDERS

The Company will furnish its stockholders with annual reports containing
audited financial statements and such other periodic reports as it may determine
to furnish or as may be required by law.

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AMENDMENT TO THE ARTICLES OF INCORPORATION

The Articles of Incorporation may be amended only by the affirmative vote of
holders of shares entitled to cast not less than a majority of all of the votes
entitled to be cast on the matter; provided, however, that provisions on removal
of directors may be amended only by the affirmative vote of holders of shares
entitled to cast not less than two-thirds of all of the votes entitled to be
cast in the election of directors.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 10,083,333 shares of
Common Stock outstanding. Of these shares, the 6,750,000 shares offered hereby
(7,762,500 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 described below. The remaining 3,333,333 shares of Common
Stock outstanding upon closing of the Offering are "restricted securities" as
that term is defined in Rule 144. All of the remaining shares are subject to
lock-up agreements.

Upon expiration of the lock-up agreements, an aggregate of 3,333,333 shares
will become immediately eligible for sale subject to the timing, volume, and
manner of sale restrictions of Rule 144.

In general, under Rule 144, as recently amended, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate from whom
such shares were purchased) is entitled to sell in "broker's transactions" or to
market makers, within any three-month period commencing 90 days after the date
of this Prospectus, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
(approximately 100,833 shares immediately after the completion of the Offering)
or (ii) generally, the average weekly trading volume in the Common Stock during
the four calendar weeks preceding the required filing of a Form 144 with respect
to such sale. Sales under Rule 144 are subject to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner other
than an affiliate from whom such shares were purchased), is entitled to sell
such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

Pursuant to the lock-up agreements, all investors holding equity interests
in the Company on the date hereof (including Hyperion Partners II, L.P., South
Ferry II, L.P., all of the Company's officers and substantially all of the
Company's employees) have agreed not, directly or indirectly, to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of, any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for shares of Common Stock directly or indirectly, for a period
of one year after the date of this Prospectus without the prior written consent
of Prudential Securities Incorporated on behalf of the Underwriters. After such
one-year period, this restriction will expire and will be shares would be
eligible for sale under Rule 144, provided that the Company shall have been
subject to the reporting requirements of the Exchange Act for at least 90 days
and the relevant holding period under Rule 144 shall have expired (which period
will expire on the first anniversary of the closing of the Offering). Prudential
Securities Incorporated may, in its sole discretion, at any time and without
prior notice, release all or any portion of the shares of Common Stock subject
to such lock-up agreements.

Pursuant to registration rights agreements to be negotiated it is expected
that the holders of an aggregate of 3,333,333 shares of Common Stock or their
transferees will be entitled to certain rights with

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respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock-- Registration Rights of Certain Holders."

The Company currently intends to file one or more registration statements on
Form S-8 with the Commission in order to register the 1,210,000 shares of Common
Stock subject to the 1998 Stock Option Plan.

Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.

UNDERWRITING

The underwriters named below (the "Underwriters") for whom Prudential
Securities Incorporated is acting as representative (the "Representative"), and
each of the Underwriters has severally agreed to purchase from CLF, Inc., the
number of shares of Common Stock set forth opposite its name below.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Prudential Securities Incorporated.............................................................
-----------------
Total:......................................................................................... 6,750,000
-----------------
-----------------
</TABLE>

CLF, Inc. is obligated to sell and the Underwriters are obligated to
purchase all of the shares of Common Stock being offered hereby.

The Underwriters, through the Representative, have advised CLF, Inc. that
they propose to offer the Common Stock offered hereby to the public initially at
the public offering price set forth on the cover page of this Prospectus; that
the Underwriters may allow to selected dealers a concession of $ per
share, and that such dealers may reallow, a concession of $ per share to
certain other dealers. After the initial public offering, the public offering
price and the concessions may be changed by the Representative.

CLF, Inc. has agreed to indemnify the several Underwriters and contribute to
any losses arising out of certain liabilities, including liabilities under the
Securities Act.

CLF, Inc. has granted the Underwriters an over-allotment option exercisable
for 30 days from the date of this Prospectus to purchase up to 1,012,500
additional shares of Common Stock at the initial public offering price, less
underwriting discounts and commissions as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of shares of Common Stock offered
hereby. To the extent that such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to 6,750,000.

CLF, Inc. has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.

The Representative of the Underwriters has advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.

CLF, Inc. and its officers and directors, all investors holding equity
interests in the Company on the date hereof (including Hyperion Partners II,
L.P., South Ferry II, L.P. and substantially all of the Company's employees)
have agreed not, directly or indirectly, to offer, sell, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of, any shares of

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Common Stock or any securities convertible into or exercisable or exchangeable
for shares of Common Stock directly or indirectly, for a period of 180 days (in
the case of CLF, Inc.) and for a period of one year (in the case of all such
investors therein), after the date of this Prospectus without the prior written
consent of Prudential Securities Incorporated on behalf of the Underwriters,
except pursuant to the Company's 1998 Stock Option Plan. Prudential Securities
Incorporated may at its sole discretion, at any time and without notice, release
all or any portion of the securities subject to such lock up agreement.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representative. Among the factors to be
considered in making such determination will be prevailing market conditions,
are the Company's future prospects, the experience of its management, the
economic condition of the financial services industry in general and the demand
for similar securities of companies considered comparable to the Company. The
initial public offering price set forth on the cover page of this Prospectus
should not, however, be considered an indication of the actual value of the
Common Stock.

Application has been made to list the Common Stock on the NYSE under the
symbol " ".

In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from CLF, Inc., and in such case may purchase
Common Stock in the open market following the closing of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 1,012,500 shares of Common Stock, by
exercising the Underwriters' over-allotment options referred to above. In
addition, Prudential Securities Incorporated, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter or dealer participating in the
Offering for the account of the other Underwriters, the selling concession with
respect to Common Stock that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.

The Company will pay to the Representative advisory fees equal, in the
aggregate, to 0.75% of the gross proceeds received by the Company in the
Offering, for investment banking services relating to, among other things, the
structuring of the Formation Transactions and the Offering.

Certain of the Underwriters have performed, and may continue to perform,
investment banking, broker-dealer and financial advisory services for the
Company and certain of its Affiliates and have received and will receive
customary compensation therefor. Prudential Credit, an affiliate of Prudential
Securities Incorporated, the Representative and lead underwriter in this
Offering, is the lender of the Prudential Warehouse to the Company. In addition,
Prudential Life Insurance Company of America, the parent company of Prudential
Securities Incorporated, is a less than 5% limited partner in Hyperion Partners
II, L.P., an investor in the Company. See "Security Ownership of Certain
Beneficial Owners and Management." NationsBank is the lender of the NationsBank
Warehouse to the Company and one of the Company's correspondent mortgage
brokers. An affiliate of NationsBank was the lead manager for the securitization
completed by the Company in January 1997.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cadwalader, Wickersham & Taft, New York, New York, who
will rely on the opinion of Ballard, Spahr,

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Andrews & Ingersoll, LLP with respect to matters of Maryland law, and certain
legal matters will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York. W. Christopher White, a partner at
Cadwalader, Wickersham & Taft, purchased in 1995 and 1996 a 9% interest in CLF
Investors LLC, a 42.875% limited partner in CLF. Mr. White represents the
Company on an ongoing basis, in his capacity as a partner at Cadwalader,
Wickersham and Taft. Following the Offering, Mr. White will own less than 5% of
the Common Stock. In addition, certain other partners in Cadwalader, Wickersham
& Taft, who also represent the Company, will beneficially own, at the
consummation of the Offering, less than 0.15%, in the aggregate, of the then
outstanding shares of Common Stock. In addition, the description of federal
income tax consequences contained in this Prospectus entitled "Federal Income
Tax Considerations" is based upon the opinion of Cadwalader, Wickersham & Taft.

EXPERTS

The statement of financial condition of Capital Lease Funding, Inc., at
March 15, 1998 and the consolidated financial statements of Capital Lease
Funding L.P., and Subsidiaries (a Limited Partnership) at December 31, 1997 and
1996, and for each of the two years in the period ended December 31, 1997 and
for the period September 29, 1995 (commencement of operations) to December 31,
1995, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C., and may be obtained at rates prescribed by the Commission upon
request to the Commission and inspected, without charge, at the offices of the
Commission. The Company will be subject to the informational requirements of the
Exchange Act, and in accordance therewith, will periodically file reports and
other information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048, and at 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respect by such reference. The Commission
maintains a Website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.

The Company intends to furnish the holders of Common Stock with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.

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GLOSSARY

Here follows an abbreviated definition of certain capitalized terms used in
this Prospectus.

"Adjusted Taxable Income" shall have the meaning given under "Dividend and
Distribution Policy."

"Administration Proposals" means certain legislative proposals announced by
the Clinton Administration in February of 1998. See "Federal Income Tax
Considerations--Proposed Legislation."

"Affiliate" means, when used with reference to a specified person, (i) any
person that directly or indirectly controls or is controlled by or is under
common control with the specified person, (ii) any person that is an officer of,
partner in or trustee of, or serves in a similar capacity with respect to, the
specified person or of which the specified person is an officer, partner or
trustee, or with respect to which the specified person serves in a similar
capacity, and (iii) any person that, directly or indirectly, is the beneficial
owner of 5% or more of any class of equity securities of the specified person or
of which the specified person is directly or indirectly the owner of 5% or more
of any class of equity securities.

"Affiliated Director" means directors of the Company who are Affiliates of
the Company.

"Articles of Incorporation" shall mean the Articles of Incorporation of the
Company.

"Authorization Form" shall have the meaning given under "Dividend
Reinvestment and Direct Purchase Plan."

"Average Market Price for Cash Purchases" shall have the meaning given under
"Dividend Reinvestment and Direct Purchase Plan."

"Average Net Worth" means for any period the arithmetic average of the sum
of the proceeds from the offerings of its equity securities by the Company,
before deducting any underwriting discounts and commissions and other expenses
and costs relating to the Offering, plus the Company's retained earnings
(without taking into account any losses incurred in prior periods) computed by
taking the average of such values at the end of each month during such period.

"Bankruptcy Code" means the United States Bankruptcy Code, as amended.

"Beneficial Owner" shall have the meaning given under "Dividend Reinvestment
and Direct Purchase Plan."

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

"bond lease" means a lease with a Credit Tenant under which the tenant is
responsible for every monetary obligation associated with managing, owning,
developing and operating the leased premises including, but not limited to, the
costs associated with utilities, taxes, insurance, maintenance, repairs and
losses due to casualty or condemnation.

"Business Combinations" shall have the meaning specified in the MGCL.

"Bylaws" shall mean the Bylaws of the Company.

"Cash Purchases" shall have the meaning given under "Dividend Reinvestment
and Direct Purchase Plan."

"Charitable Beneficiary" means a charitable beneficiary of a Trust.

"Charter" has the same meaning as Articles of Incorporation.

"Closing Price" on any date for shares of the Common Stock shall mean the
last sale price for such shares, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
for such shares, in either case as reported on the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock

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Exchange or, if such shares are not listed or admitted to trading on the New
York Stock Exchange, as reported on the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such shares are listed or admitted to trading or,
if such shares are not listed or admitted to trading on any national securities
exchange, the last quoted price, or, if transaction prices are not reported, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System, or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such 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 such shares
selected by the Board of Directors or, in the event that no trading price is
available for such shares, the fair market value of the shares, as determined in
good faith by the Board of Directors.

"CMBS" shall mean commercial or multi-family MBS.

"CMOs" means debt obligations (bonds) that are collateralized by whole
mortgage loans or by mortgage certificates representing pro rata beneficial
interests in a pool of Mortgage Loans and excluding, among other things,
Mortgage Derivative Securities and Subordinate Interests. CMOs are structured so
that principal and interest payments received on the collateral are sufficient
to make principal and interest payments on the bonds. Such bonds may be issued
by United States government agencies or private issuers in one or more classes
with fixed or variable interest rates, maturities and degrees of subordination
that are characteristics designed for the investment objectives of different
bond purchasers.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"Committed Loans" means loans for which the Company has issued funding
commitments, subject to completion of its underwriting procedures.

"Common Stock" means the Company's shares of Common Stock, $.01 par value
per share.

"Company" means Capital Lease Funding, Inc., a Maryland corporation and its
predecessor, Capital Lease Funding, L.P., a Delaware limited partnership.

"Compensation Committee" means the committee of the Board of Directors,
comprised entirely of Unaffiliated Directors, that will perform specified duties
related to compensation issues of the Company.

"Construction Loans" shall mean a loan the proceeds of which are to be used
to finance the costs of construction, expansion or rehabilitation of real
property.

"Control Shares" means voting shares of stock which, if aggregated with all
other shares of stock previously acquired by the acquirer or in respect of which
the acquirer is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquirer to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more but
less than a majority or (iii) a majority or more of all voting power. Control
Shares do not include shares if the acquiring person is then entitled to vote as
a result of having previously obtained stockholder approval.

"Control Share Acquisition" means the acquisition of Control Shares under
the MGCL, subject to certain exceptions.

"Counsel" means Cadwalader, Wickersham & Taft.

"Counterparty" means a third-party financial institution with which the
Company enters into an agreement.

"Credit Tenant" means a tenant whose long-term, senior unsecured debt: (i)
has received an Investment Grade or Near Investment Grade rating from any Rating
Agency (and which has not received a

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Non-Investment Grade rating less than Near Investment Grade from any Rating
Agency); or (ii) has been determined by the Company (generally after
consultation with one or more Rating Agencies) as likely to meet the standards
required to receive the ratings described in clause (i) (an "Internal
Classification").

"Credit Tenant Lease" means a long-term lease made to a Credit Tenant.

"Credit Tenant Loan" means a mortgage loan secured by a first lien on a
commercial property net leased to a Credit Tenant.

"Dark Value" means the liquidation value of real property without a tenant
in place.

"DCR" means Duff & Phelps Credit Rating Company.

"Dealer Property" means real property, real estate mortgage loans,
securities or other property held primarily for sale to customers in the
ordinary course of the Company's trade or business.

"Debt Service Coverage" means the rent from the applicable Mortgaged
Property (net of any applicable ground lease payments) divided by the required
payments of principal and interest on the Underlying Mortgage Loans.

"Disqualified Organization" means the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, or any other tax-exempt
organization (other than a farmer's cooperative described in Section 521 of the
Code) that is exempt from taxation under the UBTI provisions of the Code, or any
rural, electrical or telephone cooperative.

"Distribution Record Date" shall have the meaning given under "Dividend
Reinvestment and Direct Purchase Plan."

"Distribution Reinvestment Date" shall have the meaning given under
"Dividend Reinvestment and Direct Purchase Plan."

"DRP" means the Company's Dividend Reinvestment and Direct Purchase Plan.

"Enhancement Insurer" means, collectively, insurance companies with a claims
paying rating of between AAA and A from S&P, which issue certain non-cancelable
Lease Enhancement insurance policies to secure Existing Loans.

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

"ERISA Plan" means a pension, profit-sharing, retirement or other employee
benefit plan that is subject to ERISA.

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

"Excess Servicing Rights" means contractual rights to receive a portion of
monthly mortgage payments of interest remaining after those payments of interest
have already been applied, to the extent required, to Pass-Through Certificates
and the administration of mortgage servicing.

"Excess Shares" means shares of capital stock in excess of 9.8% (in value or
in number of shares, whichever is more restrictive) of the aggregate of the
outstanding shares of any class of capital stock of the Company (other than the
Company and its Affiliates, with respect to whom such percentages are 9.8% in
the aggregate).

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

"Exempt Organization" shall mean a Tax Exempt Entity.

"Existing Loans" means the loans held by the Company which have closed but
have not yet been securitized.

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"Extended Amortization Policies" are certain Credit Tenant Lease insurance
policies that protect against losses due to the failure of the Credit Tenant to
renew the Credit Tenant Lease followed by a subsequent default by the borrower
of its obligations under the associated Credit Tenant Loan or the failure of the
borrower to pay a balloon balance at the maturity of the associated Credit
Tenant Loan, which policies are issued by an insurer with a claims paying rating
of between AAA and A by S&P.

"Extension Insurers" are certain issuers of Credit Tenant Lease renewal
insurance policies with a claims paying rating of between AAA and A by S&P.

"FASIT" means financial asset securitization investment trust.

"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.

"FFO" means funds from operations, or the net income or loss (computed in
accordance with GAAP), excluding gains or losses from debt restructuring and
sales of properties, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.

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

"Fitch" means Fitch IBCA.

"5/50 Rule" shall have the meaning given under "Repurchase of Shares and
Restrictions on Transfer."

"Foreclosure Property" shall have the meaning given under "Federal Income
Tax Considerations."

"Formation Transactions" means the series of integrated transactions which
will establish the structure of the Company, as more fully described under
"Prospectus Summary-Formation Transactions" and "Formation Transactions."

"GAAP" means generally accepted accounting principles.

"Ineligible Property" means property not eligible to be treated as
foreclosure property.

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

"IO" means Mortgage Derivative Securities representing the right to receive
interest only or a disproportionately large amount of interest in relation to
principal payments.

"Intended Transferee" means, with respect to any purported Transfer, any
Person who, but for any restrictions on the transfer or ownership of Equity
Stock, would own record title to shares of Equity Stock.

"Internal Classification" or "IC" has the meaning set forth in the
definition of Credit Tenant.

"Inverse IOs" means IOs that bear interest at a floating rate that varies
inversely with (and often at a multiple of) changes in a specific index.

"Investment Company Act" means the Investment Company Act of 1940, as
amended.

"Investment Grade" means, respectively: (i) a rating by Standard & Poor's
equal to or higher than BBB-; (ii) a rating by Moody's Investors Service, Inc.
equal to or higher than Baa3; (iii) a rating by Duff & Phelps Credit Rating Co.
equal to or higher than BBB-; or (iv) a rating by Fitch IBCA, Inc. equal to or
higher than BBB-.

"Invested Portfolio" means the investments portfolio of the Company.

"IRAs" means Individual Retirement Accounts.

"IRS" means the Internal Revenue Service.

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"ISOS" means qualified incentive stock options granted under the 1998 Stock
Option Plan that meet the requirements of section 422 of the Code.

"Lease Enhancements" means certain mechanisms, including insurance policies,
agreements with third-party servicer providers, lock-box accounts and other cash
control procedures and certain other mechanisms, procedures or products which
are designed to ensure the continuity of a stream of rental payments under a
Credit Tenant Lease and payment of a Credit Tenant Loan, notwithstanding any
rights of a tenant under a Credit Tenant Lease to abate rent or terminate the
lease under certain circumstances.

"Lease Enhancement Policies" means certain non-cancelable Lease Enhancement
insurance policies which insure against losses on Credit Tenant Loans due to
abatement of rent or cancellation of a Credit Tenant Lease as a result of a
casualty or condemnation, issued by an insurer with a claims paying rating of
AAA from S&P.

"LIBOR" means London-Inter-Bank Offered Rate.

"Lockout Period" means, for commercial mortgage loans originated by the
Company, a period during which prepayment is generally prohibited for a period
of years, and for which prepayment is thereafter permitted only in conjunction
with payment of a prepayment premium designed to maintain the yield to
investors.

"LTV" means the ratio of the principal amount of a loan to the appraised
value of the applicable mortgaged property.

"MGCL" means the Maryland General Corporation Law, as amended.

"Market Discount Bonds" means obligations with a stated redemption price at
maturity that is greater than the Company's tax basis in such obligations.

"Market Price" on any date shall mean, with respect to a class or series of
outstanding shares of the Company's stock, the Closing Price for such stock on
such date.

"Master Servicer" shall mean an entity acceptable to the Rating Agencies
that regularly engages in the business of servicing Mortgage Loans.

"MBS" shall mean Mortgage-Backed Securities (including CMBS and RMBS).

"Mezzanine Construction Loan" or "Mezzanine Construction Lending" means the
Company's "Mezzanine Construction" product as described in "Prospectus
Summary--The Company--Related Business Lines--'Mezzanine Construction Loans" and
"The Company--Related Business Lines--Mezzanine Construction Loans."

"Mezzanine Loan" shall mean a loan secured by a lien on real property that
is subordinate to a lien on such real property securing another loan. The
Company's "Mezzanine Construction" loan product is a Mezzanine Loan.

"Mortgage Assets" means (i) Mortgage Securities and (ii) Mortgage Loans.

"Mortgage-Backed Securities" means securities that are payable from
collections on mortgage loans or mortgage certificates.

"Mortgage Derivative Securities" means mortgage securities that provide for
the holder to receive interest only, principal only, or interest and principal
in amounts that are disproportionate to those payable on the underlying Mortgage
Loans and may include other derivative instruments.

"Mortgage Loans" means loans secured by real property, including without
limitation, Credit Tenant Loans.

106
<PAGE>
"Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs, and
(iii) other securities representing interests in, or obligations backed by pools
of Mortgage Loans.

"NAREIT" means National Association of Real Estate Investment Trusts.

"NationsBank" means NationsBank, N.A.

"NationsBank Warehouse" means the Warehouse Credit Facility between the
Company and NationsBank.

"Near Investment Grade" means a rating less than Investment Grade but,
respectively: (i) a rating by Standard & Poor's equal to or higher than BB-;
(ii) a rating by Moody's Investors Service, Inc. equal to or higher than Ba3;
(iii) a rating by Duff & Phelps Credit Rating Co. equal to or higher than BB-;
or (iv) rating by Fitch IBCA, Inc. higher than BB-.

"Net Income" means the net income of the Company under GAAP.

"Net Leased Real Estate" means real estate that is net leased (including
double- and triple-net leased) on a long-term basis (ten years or more) to
tenants who are customarily responsible for paying all or many of the costs of
owning, operating, and maintaining the leased property during the term of the
lease, in addition to the payment of a monthly net rent to the landlord for the
use and occupancy of the premises.

"95% gross income test" means the 95% income-based test that the Company
must meet to qualify as a REIT described under the heading "Federal Income Tax
Considerations--Requirements for Qualification--Income Test."

"Non-Economic Residual Interest" shall mean REMIC or FASIT residuals that
are required to report taxable income or loss but receive no cash flow from the
Mortgage Loans.

"Non-Investment Grade" means a credit rating from a Rating Agency which is
lower than Investment Grade.

"Non-REMIC CMO Offering" means an offering of CMOs as to which REMIC status
is not elected.

"Non-REMIC Residual Interests" shall mean the Company's ownership in the
residual of a pool of Mortgage Loans used to back CMOs as to which REMIC status
is not elected.

"Non-U.S. Stockholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders.

"NYSE" means the New York Stock Exchange.

"Offering" means the shares of Common Stock offered through the Underwriters
in connection with this Prospectus.

"Offering Price" shall mean the offering price per share of Common Stock
offered hereby.

"OID" shall mean original issue discount.

"Ownership Limitation" means the percentage, 9.8%, by which the Articles of
Incorporation prohibit ownership by any stockholder or affiliated group of
stockholders, subject to certain exceptions.

"Pass-Through Certificates" means securities (or interests therein)
evidencing undivided ownership interests in a pool of mortgage loans, the
holders of which receive a "pass-through" of the principal and interest paid in
connection with the underlying Mortgage Loans in accordance with the holders
respective, undivided interests in the pool. Pass-Through Certificates include
Agency Certificates, as well as other certificates evidencing interests in loans
secured by single family properties.

"Plan Administrator" means the administrator of the Company's DRP.

107
<PAGE>
"PO" means Mortgage Derivative Securities representing the right to receive
principal only or a disproportionate amount of principal.

"Preferred Stock" or "Preferred Shares" shall mean the preferred stock of
the Company.

"Prospectus" means the Prospectus by which the Common Stock is offered
hereby.

"Prudential Credit" means Prudential Securities Credit Corporation.

"Prudential Warehouse" means the Warehouse Credit Facility between the
Company and Prudential Credit.

"Qualified Hedges" means any interest rate swap or cap agreement, option,
futures contract, forward rate agreement, or similar financial instrument
entered into by the Company to reduce interest rate risk with respect to any
indebtedness incurred or to be incurred by the Company to acquire or carry Real
Estate Assets.

"Qualified REIT Real Estate Assets" means Pass-Through Certificates,
Mortgage Loans, Agency Certificates, real property and other assets of the type
described in section 856(c)(4)(B) of the Code.

"Qualified REIT Subsidiary" means a corporation, all of the capital stock of
which is owned by the REIT.

"Rate Locked Loans" has the meaning described in "Summary--The
Company--Existing Loans, Commitments and Properties."

"Rating Agency" means, with respect to securities of U.S. issuers, any
nationally recognized statistical rating organization and, with respect to
non-U.S. issuers, any of the foregoing or any equivalent organization operating
in the jurisdiction where the issuer's principal operations are located,
including Standard & Poor's, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. and Fitch IBCA, Inc.

"Real Estate Asset" shall mean interests in real property, mortgages on real
property to the extent the principal balance of the mortgage does not exceed the
fair market value of the associated real property, regular or residual interests
in a REMIC (except that, if less than 95% of the assets of a REMIC consists of
"real estate assets" (determined as if the Company held such assets), the
Company will be treated as holding directly its proportionate share of the
assets of such REMIC), and shares of other REITs.

"REIT" means a real estate investment trust as defined under Section 856 of
the Code.

"REIT Provisions of the Code" means Sections 856 through 860 of the Code.

"REIT Taxable Income" means for any year, the taxable income of the Company
for such year for the purposes of the Code (excluding any net income derived
either from property held primarily for sale to customers or from Foreclosure
Property), i.e. taxable income subject to certain adjustments provided in the
REIT Provisions of the Code.

"Related Party Tenant" means a tenant in which the Company or a direct or
indirect owner of 10.0% or more of the Company owns directly or constructively a
10.0% or greater interest in the assets or net profits of such tenant.

"REMIC" means a real estate mortgage investment conduit.

"REMIC Residual Interests" shall mean a class of MBS that is designated as
the residual interest in one or more REMICs or the Company's ownership in the
residual of a pool of Mortgage Loans used to back Pass-Through Certificates or
CMOs as to which REMIC status is elected.

"Rent" shall have the meaning given under "Federal Income Tax
Considerations."

"Representative" shall mean each Underwriter that is acting as a
representative for other Underwriters, and with respect to the Offering shall
mean Prudential Securities.

108
<PAGE>
"Residual Interests" shall mean REMIC and Non-REMIC Residual Interests
collectively.

"RMBS" shall mean a series of one- to four-family residential MBS.

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

"securitization" means the process of pooling mortgage loans and other fixed
income assets in a trust or other special purpose vehicle and issuing
securities, such as MBS or other debt securities, from the special purpose
vehicle.

"Service" means the Internal Revenue Service.

"Servicers" means those entities that perform the servicing functions with
respect to Mortgage Loans, Mortgage Securities or Excess Servicing Rights owned
by the Company.

"75% gross income test" means the 75% income-based test that the Company
must meet to qualify as a REIT described under the heading "Federal Income Tax
Considerations--Requirements for Qualification--Income Test."

"S&P" means Standard & Poor's.

"Share" means a share of Common Stock of the Company offered pursuant to the
Offering.

"Stockholder of Record" shall have the meaning given under "Dividend
Reinvestment and Direct Purchase Plan."

"Stock Option Plan" means the stock option plan adopted by the Company in
1998.

"Subordinate Interest" means a class of CMBS that is junior to one or more
other classes of CMBS in the right to receive payments from the underlying
Mortgage Loans and the retained interests in Mortgage Loans securitized by the
Company.

"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plans, Keogh plans, bank commingled trust funds for
such plans, and IRAs, and other similar entities intended to be exempt from
federal income taxation.

"Transfer" means any issuance, sale, transfer, gift, assignment, devise,
bequest or other disposition, as well as any other event that causes any person
to acquire direct, indirect, beneficial or constructive ownership, or any
agreement to take any such actions or cause any such events, of Common Stock or
the right to vote or receive dividends on Common Stock, including (a) the
granting or exercise of any option (or any disposition of any option), (b) any
disposition of any securities or rights convertible into or exchangeable for
Common Stock or any interest in Common Stock or any exercise of any such
conversion or exchange right, and (c) Transfers of interests in other entities
that result in changes in the direct, indirect, beneficial or constructive
ownership of Common Stock; in each case, whether voluntary or involuntary,
whether owned of record, indirectly owned, constructively owned, or beneficially
owned, and whether by operation of law or otherwise.

"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code, including proposed regulations to the extent that by reason of
their effective dates they are proposed to apply to the Company or a transaction
entered into by the Company.

"Trust" means a trust that is the transferee of that number of shares of
Common Stock the beneficial or constructive ownership of which otherwise would
cause a person to acquire or hold, directly or indirectly, shares of Common
Stock in an amount that violates the Articles of Incorporation, which trust
shall be for the exclusive benefit of one or more Charitable Beneficiaries.

"Trustee" means the trustee of a Trust for the exclusive benefit of one or
more charitable beneficiaries.

109
<PAGE>
"Unaffiliated Directors" shall mean a director who (a) does not own greater
than a DE MINIMIS interest in the Company or any of its Affiliates, and (b)
within the last two years, has not (i) directly or indirectly been employed by
the Company or any of its Affiliates, (ii) been an officer or director of the
Company or any of its Affiliates, (iii) performed services for the Company or
any of its Affiliates, or (iv) had any material business or professional
relationship with the Company or any of its Affiliates.

"UBTI" means unrelated trade or business income as defined in Section 512 of
the Code.

"UBTI Percentage" shall have the meaning given under "Federal Income Tax
Considerations."

"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.

"Underwriters" shall mean Prudential Securities Incorporated as well the
other underwriters of the Offering and each of the underwriters for whom they
are acting as Representative.

"Warehouse Credit Facilities" means the credit facilities entered into by
the Company that are used for the purposes of funding and holding up to 100% of
the loan proceeds to a borrower under the Company's credit tenant lease program
prior to securitization, to support major requirements related to the Company's
hedging positions, and for mezzanine financing to minimize the equity required
to support the loans financed through the warehouse credit facilities. The
Warehouse Credit Facilities consist of the NationsBank Warehouse, the Prudential
Warehouse and the Mezzanine Construction Loan Facility (each as defined under
"The Company--Credit Facilities").

"Yield" or "yield to maturity" is the discount rate that will cause the net
present value of the future cash flow from an investment equal to its price.

110
<PAGE>
FINANCIAL STATEMENTS AND INFORMATION

<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1

PRO FORMA COMPANY:
Capital Lease Funding, Inc. (a Maryland corporation) Unaudited Pro Forma Financial Statements.............. F-2
Pro Forma Statement of Financial Condition as of December 31, 1997....................................... F-3
Pro Forma Statement of Operations for the Year Ended December 31, 1997................................... F-4
Notes to Pro Forma Financial Statements.................................................................. F-5
HISTORICAL COMPANY:
Capital Lease Funding, Inc. (a Maryland corporation) Historical Financial Statements
Report of Independent Auditors........................................................................... F-6
Statement of Financial Condition as of March 15, 1998.................................................... F-7
Notes to Financial Statements............................................................................ F-8
HISTORICAL CAPITAL LEASE FUNDING, L.P.:
Capital Lease Funding, L.P. (a Delaware partnership) Historical Financial Statements
Report of Independent Auditors........................................................................... F-10
Consolidated Statements of Financial Condition as of December 31, 1997 and 1996.......................... F-11
Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996 and for the period
from September 29, 1995 (commencement of operations)
to December 31, 1995................................................................................... F-12
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 and for the period
from September 29, 1995 (commencement of operations)
to December 31, 1995................................................................................... F-13
Consolidated Statement of Partners' Capital for the Years Ended December 31, 1997 and 1996 and for the
period from September 29, 1995 (commencement of operations) to December 31, 1995....................... F-14
Notes to Consolidated Financial Statements............................................................... F-15
Schedule of Mortgage Loans on Real Estate as of December 31, 1997........................................ F-19
</TABLE>

F-1
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

PRO FORMA FINANCIAL STATEMENTS

(UNAUDITED)

The pro forma statement of financial condition of the Company as of December
31, 1997 has been prepared as if the Offering and Formation Transactions had
been consummated on December 31, 1997. The pro forma statement of income for the
year ended December 31, 1997 is presented as if the completion of the Offering
and Formation Transactions occurred at January 1, 1997 and the effect thereof
was carried forward through the twelve months ended December 31, 1997.

The pro forma financial statements do not purport to represent what the
Company's financial position or results of operations would have been assuming
the completion of the Formation Transactions and the Offering on such date or at
the beginning of the period indicated, nor do they purport to project the
Company's financial position or results of operations at any future date or for
any future period. The pro forma financial statements should be read in
conjunction with the financial statements of CLF, L.P. included elsewhere
herein.

F-2
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

UNAUDITED PRO FORMA STATEMENT OF FINANCIAL CONDITION

AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
CONTRIBUTION
PREDECESSOR OF FINANCING PRO FORMA
HISTORICAL THE OFFERING PARTNERSHIP ADJUSTMENTS COMPANY
CLF, LP (A) INTERESTS (B) (C)(D) AS ADJUSTED
-------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS

Cash and cash equivalents............. $ 4,408,194 $ 93,050,000 $ (225,000) $ (88,050,000) $ 9,183,194
Mortgages held for sale............... 263,473,373 -- -- -- 263,473,373
Deferred securitization costs......... 1,647,515 -- -- -- 1,647,515
Hedge account margin deposit.......... 3,755,926 -- -- -- 3,755,926
Accrued interest income............... 797,483 -- -- -- 797,483
Prepaid expenses...................... 192,250 -- -- -- 192,250
Furniture, fixtures and equipment (net
of accumulated depreciation of
$66,521 and $25,691,
respectively)....................... 103,317 -- -- -- 103,317
-------------- --------------- -------------- -------------- --------------
Total Assets.......................... $ 274,378,058 $ 93,050,000 $ (225,000) $ (88,050,000) $ 279,153,058
-------------- --------------- -------------- -------------- --------------
-------------- --------------- -------------- -------------- --------------

LIABILITIES

Accounts payable and accrued
expenses............................ $ 4,770,873 $ -- $ -- $ -- $ 4,770,873
Repurchase agreement obligations...... 255,770,693 -- -- (54,670,154) 201,100,539
Notes payable to partner.............. 12,274,318 -- -- (12,274,318) --
-------------- --------------- -------------- -------------- --------------
Total Liabilities..................... 272,815,884 -- -- (66,944,472) 205,871,412

Commitments and contingencies

PARTNERS'/STOCKHOLDERS' EQUITY

Partners' capital..................... 1,562,174 -- (1,562,174) -- --
Common stock.......................... -- 67,500 33,333 -- 100,833
Paid-in capital....................... -- 92,982,500 1,303,841 (21,105,528) 73,180,813
Retained earnings..................... -- -- -- -- --
-------------- --------------- -------------- -------------- --------------
Total Partners'/Stockholders'
Equity.............................. 1,562,174 93,050,000 (225,000) (21,105,528) 73,281,646
Total Liabilities and Equity.......... $ 274,378,058 $ 93,050,000 $ (225,000) $ (88,050,000) $ 279,153,058
-------------- --------------- -------------- -------------- --------------
-------------- --------------- -------------- -------------- --------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-3
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS ADJUSTED
CLF, LP FOR OFFERING FOR OFFERING
------------- -------------- ------------
<S> <C> <C> <C>
REVENUES:
Interest income from mortgages.................................... $ 9,859,768 $ -- $ 9,859,768
Loss on sales of mortgages........................................ (160,782) -- (160,782)
Other revenue from mortgages...................................... 43,326 -- 43,326
------------- -------------- ------------
Total Revenues.................................................... 9,742,312 -- 9,742,312
------------- -------------- ------------
LOAN EXPENSES:
Interest on repurchase agreements................................. 8,829,548 (4,802,444 (a) 4,027,104
Servicer fees..................................................... 76,328 -- 76,328
------------- -------------- ------------
Total Loan Expenses............................................... 8,905,876 (4,802,444) 4,103,432
------------- -------------- ------------
Gross Profit...................................................... 836,436 4,802,444 5,638,880
------------- -------------- ------------
OPERATING EXPENSES:
Personnel......................................................... 2,880,307 -- 2,880,307
General and administrative........................................ 727,642 250,000(b) 977,642
Marketing and advertising......................................... 501,091 -- 501,091
------------- -------------- ------------
Total Operating Expenses.......................................... 4,109,040 250,000 4,359,040
------------- -------------- ------------
Operating Income.................................................. (3,272,604) 4,552,444 1,279,840
OTHER INCOME (EXPENSE):
Other interest income............................................. 169,889 -- 169,889
Interest expense on notes payable................................. (292,827) 292,827(c) --
------------- -------------- ------------
Total Other Income (Expense)...................................... (122,938) 292,827 169,889
------------- -------------- ------------
PRO FORMA NET INCOME.............................................. $ (3,395,542) $ 4,845,271 $ 1,449,729
------------- -------------- ------------
------------- -------------- ------------
PRO FORMA NET INCOME PER SHARE.................................... -- --(d) $ 0.14
------------- -------------- ------------
------------- -------------- ------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

1. ADJUSTMENTS TO THE PRO FORMA STATEMENT OF FINANCIAL CONDITION:

The accompanying unaudited statement of financial condition as of December
31, 1997 has been prepared as if the following transactions had been consummated
as of December 31, 1997:

<TABLE>
<S> <C> <C>
(a) Sale of 6,750,000 shares of Common Stock in the Offering at $15 per
share:
Proceeds from the Offering........................................... $101,250,000
Less, costs associated with the Offering............................. (8,200,000)
-----------
Net proceeds......................................................... $93,050,000
-----------
-----------
Par value of Common Stock to be issued in the Offering............... $ 67,500
Additional paid-in capital from the net proceeds of the Offering..... 92,982,500
-----------
$93,050,000
-----------
-----------

(b) Issuance of 3,333,333 shares of Common Stock and cash of $225,000 in
exchange for various partnership interests of the Predecessor:
Partners' capital $(1,562,174)
Par value of Common Stock............................................ 33,333
Additional paid-in capital from issuance of Common Stock............. 1,281,906
Cash................................................................. 225,000

(c) Use of a portion of net proceeds of the Offering to redeem Notes
Payable and Preferred Capital for cash as follows:
Notes payable........................................................ $12,274,318
Cash redemption amount of Preferred Capital.......................... 21,105,528
-----------
$33,379,846
-----------
-----------

(d) Use of a portion of net proceeds of the Offering to retire debt related
to
Credit facility...................................................... $54,670,154
-----------
-----------
</TABLE>

2. ADJUSTMENTS TO THE PRO FORMA STATEMENT OF OPERATIONS:

The accompanying unaudited statement of operations for the year ended
December 31, 1997 presents results as if the transactions described in Note 1
(above) had been consummated on January 1, 1997:

<TABLE>
<S> <C> <C>
(a) Reduce interest expense to reflect debt retired by the Company.......... $(4,802,444)
----------
----------

(b) Increase general and administrative expenses to reflect additional
salaries, benefits and other incremental costs related to operating as a
public REIT............................................................. $ 250,000
----------
----------

(d) Weighted average outstanding Common Stock is as follows:
Shares issued in exchange for partnership interests in Capital Lease
Funding, L.P............................................................ 3,333,333
Shares issued in the Offering........................................... 6,750,000
----------
10,083,333
----------
----------
</TABLE>

F-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Capital Lease Funding, Inc.

We have audited the accompanying statement of financial condition of Capital
Lease Funding, Inc. as of March 15, 1998. This statement of financial condition
is the responsibility of Capital Lease Funding, Inc. Our responsibility is to
express an opinion on the statement of financial condition based on our audit.

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

In our opinion, the statement of financial condition presents fairly, in all
material respects, the financial position of Capital Lease Funding, Inc. at
March 15, 1998 in conformity with generally accepted accounting principles.

/s/Ernst & Young LLP

New York, New York

March 17, 1998

F-6
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

STATEMENT OF FINANCIAL CONDITION

AS OF MARCH 15, 1998

<TABLE>
<S> <C>
ASSETS
Cash (Note 1)....................................................................... $ 1,000
---------
Total Assets........................................................................ $ 1,000
---------
---------

LIABILITIES AND STOCKHOLDER'S EQUITY

Commitments and Contingencies (Note 4)
Common Stock, $.01 par value, 1,000 shares authorized, 100 shares issued and
outstanding (Notes 1, 2 and 4).................................................... $ 1
Additional paid-in capital.......................................................... 999
Retained earnings (Note 2) --
---------
Total Liabilities and Stockholder's Equity.......................................... $ 1,000
---------
---------
</TABLE>

SEE ACCOMPANYING NOTES.

F-7
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

NOTES TO STATEMENT OF FINANCIAL CONDITION

AS OF MARCH 15, 1998

1. ORGANIZATION AND FORMATION TRANSACTIONS

FORMATION AND INITIAL PUBLIC OFFERING

Capital Lease Funding, Inc. (a Maryland corporation) (the "Company") was
formed in March 1998, for the purpose of continuing and expanding the existing
business of Capital Lease Funding, L.P. (the "Predecessor"). The Company intends
to pursue an initial public offering (the "Offering") to expand the capital base
of the Predecessor, and to retire certain debt obligations. The Company will
receive a contribution of the partnership interests in the Predecessor as part
of the formation transactions. The Company intends to elect to be taxed as a
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended; and will operate as a self-administered, self-managed REIT. A REIT
is a legal entity that holds real estate or real estate related assets and,
through payments of dividends to stockholders, is permitted to reduce or avoid
the payment of federal income taxes at the corporate level.

The Company's principal activity is the origination and securitization of
commercial mortgage loans. The Company also intends to purchase properties which
are net leased to credit tenants.

The Company has authorized the issuance of up to 1,000 shares of Common
Stock, $.01 par value per share. In connection with the formation of the
Company, the Company issued 100 shares of Common Stock to William R. Pollert,
the Company's President, for $1,000. At the conclusion of the Offering, such
shares of stock will be repurchased by the Company at cost. The Company expects
to issue 6,750,000 shares of its Common Stock to the public through the
Offering. In addition, the Company expects to issue 3,333,333 to the existing
partners of the Predecessor in exchange for their respective partnership
interests. Note 2.

INITIAL PUBLIC OFFERING AND USE OF PROCEEDS

The net cash proceeds to be received by the Company from the Offering (after
deducting underwriting discounts) are expected to be approximately $93.1
million. Of this amount, the Company expects to use approximately $54 million to
reduce outstanding repurchase agreement obligations related to the underlying
mortgage assets, $21 million to redeem the preferred partnership interests of
the Predecessor, $12 million to pay off notes payable outstanding of the
Predecessor, $1.1 million to pay expenses incurred in the Offering, and $5
million to fund general working capital needs.

If the underwriters' over-allotment option to purchase 1,012,500 shares of
Common Stock is exercised, the Company will use the additional net proceeds
(estimated to be approximately $14.1 million if the option is exercised in full)
to reduce outstanding repurchase agreement obligations and/or for working
capital.

2. STOCKHOLDER'S EQUITY

COMMON STOCK

The authorized capital stock of the Company will consist of 55,000,000
shares of capital stock, $0.01 par value, of which 50,000,000 shares will be
designated as shares of Common Stock. Each share of Common Stock is entitled to
participate equally in dividends when and as declared by the Board of

F-8
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)

AS OF MARCH 15, 1998

2. STOCKHOLDER'S EQUITY (CONTINUED)
Directors and in the distribution of assets of the Company upon liquidation.
Each share of Common Stock is entitled to one vote and will be fully paid and
nonassessable by the Company upon issuance. Shares of the Common Stock of the
Company have no preference, conversion, exchange, preemptive or cumulative
voting rights. The authorized capital stock of the Company may be increased and
altered from time to time as permitted by Maryland law.

RETAINED EARNINGS

The Company has not engaged in any operations from inception in 1998.

3. CREDIT FACILITIES/REPURCHASE AGREEMENTS

The Company expects to have, as of the closing of its initial public
offering, warehouse credit facilities provided by NationsBank ("NationsBank
Warehouse") and Prudential Credit ("Prudential Warehouse"). The facilities are
expected to total $930 million, and will be used primarily to fund the Company's
mortgage loans. These facilities are more fully described under the caption "The
Company--Credit Facilities".

4. COMMITMENTS AND CONTINGENCIES

STOCK OPTION AND INCENTIVE PLAN

The Company intends to adopt a stock option plan designed to attract, retain
and motivate executive officers of the Company and other key employees and the
plan will authorize the issuance of shares of Common Stock pursuant to options
granted under the plan.

INCENTIVE COMPENSATION PLAN

The Company intends to establish an incentive compensation plan for key
employees of the Company. This plan will provide for payment of cash bonuses to
participating employees after an evaluation of the employee's performance and
the overall performance of the Company. The Compensation Committee of the Board
of Directors will make the determination for the award of the bonuses.

EMPLOYMENT AGREEMENTS

The Company expects to enter into employment agreements with certain of its
officers, as described further under the caption "Directors And Executive
Officers--Employment Agreements".

F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS

To the Partners of
Capital Lease Funding L.P.

We have audited the accompanying consolidated statements of financial
condition of Capital Lease Funding L.P. and subsidiaries (the "Partnership") as
of December 31, 1997 and 1996, and the related consolidated statements of
operations and partners' capital and cash flows for each of the two years in the
period ended December 31, 1997 and for the period September 29, 1995
(commencement of operations) to December 31, 1995. We have also audited the
financial statement schedule listed in the Index to financial statements
included in the Prospectus. These financial statements and financial statement
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Capital Lease Funding L.P. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and cash flows for each of the
two years in the period ended December 31, 1997 and for the period September 29,
1995 (commencement of operations) to December 31, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

/s/ Ernst & Young LLP

New York, New York
January 23, 1998 except for Note 9,
as to which the date is March 17, 1998

F-10
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF DECEMBER 31

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................ $ 4,408,194 $ 2,140,230
Mortgage loans held for sale (Notes 4 and 5)..................................... 263,473,373 157,719,912
Deferred securitization costs.................................................... 1,647,515 2,566,019
Hedge account margin deposit..................................................... 3,755,926 3,271,005
Accrued interest income.......................................................... 797,483 513,013
Prepaid expenses................................................................. 192,250 86,956
Property held for sale (Note 7).................................................. -- 1,968,682
Furniture, fixtures and equipment (net of accumulated depreciation of $66,521 and
$25,691, respectively)......................................................... 103,317 83,536
-------------- --------------
Total Assets..................................................................... $ 274,378,058 $ 168,349,353
-------------- --------------
-------------- --------------

LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses............................................ $ 4,770,873 $ 3,279,379
Repurchase agreement obligations (Note 5)........................................ 255,770,693 150,904,908
Notes payable.................................................................... -- 358,461
Notes payable to partner and officer (Note 6).................................... 12,274,318 129,098
-------------- --------------
Total Liabilities................................................................ 272,815,884 154,671,846
Commitments and contingencies (Notes 4 and 5)
Partners' Capital................................................................ 1,562,174 13,677,507
-------------- --------------
Total Liabilities and Partners' Capital.......................................... $ 274,378,058 $ 168,349,353
-------------- --------------
-------------- --------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-11
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, AND THE PERIOD FROM
SEPTEMBER 29, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:

Interest income from mortgages....................................... $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of mortgages........................................... (160,782) (923,611) --
Other revenue from mortgages......................................... 43,326 16,520 --
------------- ------------- -------------
Total Revenues....................................................... 9,742,312 4,153,585 224,313
------------- ------------- -------------

LOAN EXPENSES:

Interest on repurchase agreements.................................... 8,829,548 4,048,601 221,400
Loss on loan in foreclosure (Note 7) -- -- 717,359
Servicer fees........................................................ 76,328 50,320 --
------------- ------------- -------------
Total Loan Expenses.................................................. 8,905,876 4,098,921 938,759
------------- ------------- -------------

GROSS PROFIT (LOSS).................................................. 836,436 54,664 (714,446)
------------- ------------- -------------

Operating Expenses:
Personnel............................................................ 2,880,307 2,100,932 313,916
General and administrative........................................... 727,642 1,298,368 736,461
Marketing and advertising............................................ 501,091 405,930 36,943
------------- ------------- -------------
Total Operating Expenses............................................. 4,109,040 3,805,230 1,087,320
------------- ------------- -------------

OPERATING LOSS....................................................... (3,272,604) (3,750,566) (1,801,766)

OTHER INCOME (EXPENSE):
Other interest income................................................ 169,889 155,781 136,789
Interest expense on notes payable.................................... (292,827) (68,881) --
------------- ------------- -------------
Total Other Income (Expense)......................................... (122,938) 86,900 136,789
------------- ------------- -------------
NET LOSS $ (3,395,542) $ (3,663,666) $ (1,664,977)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-12
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, AND THE PERIOD FROM
SEPTEMBER 29, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,395,542) $ (3,663,666) $ (1,664,977)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 40,830 23,737 1,954
Provision for loss on sale of mortgage loans...................... -- 923,611 --
Loss on loan in foreclosure....................................... -- -- 717,359
Changes in operating assets and liabilities:
Net principal advanced to borrowers............................. (89,588,493) (132,578,616) (34,754,952)
Borrowing under repurchase agreements........................... 104,865,785 119,559,139 31,124,371
Funds used in portfolio hedging activities...................... (14,767,460) (4,699,791) (837,714)
Loan origination costs and deferred securitization expenses..... (963,925) (3,883,577) --
Recoveries against property held for sale/troubled loans........ 2,771 9,763,780 --
Increase in other assets (389,764) (496,250) (34,380)
Increase in accounts payable and accrued expenses............... 1,491,494 1,420,994 1,036,436
-------------- --------------- --------------
Net Cash Used in Operating Activities......................... (2,704,304) (13,630,639) (4,411,903)
-------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets........................................... (60,612) (77,581) --
-------------- --------------- --------------
Net Cash Used in Investing Activities......................... (60,612) (77,581) --
-------------- --------------- --------------
Cash Flows from Financing Activities
Partner contributions (distributions)............................... (6,753,880) 7,500,000 13,385,100
Borrowings under notes payable...................................... 11,786,760 46,214 (670,961)
-------------- --------------- --------------
Net Cash Provided by Financing Activities..................... 5,032,880 7,546,214 12,714,139
-------------- --------------- --------------
Net increase (decrease) in cash................................... 2,267,964 (6,162,006) 8,302,236
Cash and cash equivalents at beginning of period.................. 2,140,230 8,302,236 --
-------------- --------------- --------------
Cash and Cash Equivalents at End of Period........................ $ 4,408,194 $ 2,140,230 $ 8,302,236
-------------- --------------- --------------
-------------- --------------- --------------
Supplemental Disclosure of Cash Flow Information
Cash paid for interest.............................................. $ 7,517,304 $ 3,251,437 $ --
-------------- --------------- --------------
-------------- --------------- --------------
Supplemental Disclosure of Non-Cash Flow Information
Book value of stock distribution to partners (Note 7)............... $ 1,965,911 $ -- $ --
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-13
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, AND THE PERIOD FROM
SEPTEMBER 29, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
GENERAL PARTNERS LIMITED PARTNERS
--------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
CLF CLF PREFERRED
HOLDINGS, HPII, LIMITED
INC. INC. CLASS A CLASS B PARTNERS TOTAL
------------- ------------ ----------- ------------ ------------- -------------
Capital Contribution............... $ (1,723,950) $ 160,100 $ 2,940,000 $ 230,000 $ 9,900,000 $ 11,506,150
Net loss........................... (1,537,273) -- -- (127,704) -- (1,664,977)
------------- ------------ ----------- ------------ ------------- -------------
Partners' Capital at December 31,
1995............................. (3,261,223) 160,100 2,940,000 102,296 9,900,000 9,841,173
------------- ------------ ----------- ------------ ------------- -------------
Capital contribution............... -- 85,000 1,470,000 500,000 5,445,000 7,500,000
Net loss........................... (770,248) (48,260) (2,364,743) (480,415) -- (3,663,666)
Partners' Capital at December 31,
1996............................. (4,031,471) 196,840 2,045,257 121,881 15,345,000 13,677,507
------------- ------------ ----------- ------------ ------------- -------------
Distributions (Note 7)............. -- (67,539) (1,105,825) (860,086) (6,686,341) (8,719,791)
Net loss........................... (462,479) (61,259) (939,432) -- (1,932,372) (3,395,542)
------------- ------------ ----------- ------------ ------------- -------------
Partners' Capital at December 31,
1997............................. $ (4,493,950) $ 68,042 $ -- $ (738,205) $ 6,726,287 $ 1,562,174
------------- ------------ ----------- ------------ ------------- -------------
------------- ------------ ----------- ------------ ------------- -------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-14
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

1. ORGANIZATION

Capital Lease Funding L.P. (a Delaware limited partnership) (the
"Partnership"), was formed in September 1995, with CLFC HPII Inc. and CLF
Holdings, Inc. as general partners and other investors as limited partners.

The Partnership's principal activity is the origination and securitization
of commercial mortgage loans. Since 1995, the Partnership has been primarily
engaged in the business of originating, underwriting and securitizing mortgage
loans secured by first liens on commercial properties which are long-term net
leased to investment grade and near investment grade credit tenants ("Credit
Tenants," and loans to owners of real property subject to Credit Tenant Leases,
"Credit Tenant Leases").

2. SIGNIFICANT ACCOUNTING POLICIES

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

HEDGING ACTIVITIES

The Partnership enters into short sales of U.S. Treasury futures contracts
to reduce exposure to interest rate risk on the mortgage loans which it has
originated or committed to originate. These forward sale agreements generally
have terms of not more than 90 days. Gains and losses on these hedging
transactions are deferred as an adjustment to the carrying value of the related
mortgage loans, and will be recognized as part of the gain or loss upon on the
securitization or sale of the mortgage loans. Note 4.

ALLOCATION OF INCOME AND DISTRIBUTIONS

Partnership income, losses and distributions are allocated in accordance
with the provisions of the Partnership agreement.

DEFERRED ORIGINATION AND SECURITIZATION COSTS

The Partnership defers the recognition of expenses associated with the
origination and securitization of its commercial loans. These costs include
certain legal fees, insurance costs, rating agency fees and certain other
expenses. Deferred costs will be recognized upon the sale of the mortgages.

PRINCIPLES OF CONSOLIDATION

For the years ended December 31, 1997 and 1996 and as of December 31, 1996,
the accompanying consolidated financial statements include the assets,
liabilities, revenues and expenses of CLF Branson Holdings, Inc. ("Branson") and
Capital Lease Funding Securitization, L.P. (a 99% owned limited partnership). As
of December 31, 1997, the stock of Branson was distributed to certain of the
limited partners of the Partnership. Note 7. All significant intercompany
transactions, balances and accounts have been eliminated.

F-15
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES

No provision for federal or state income taxes is included in the
accompanying financial statements as partners are individually responsible for
including their share of the Partnership's income or loss on their respective
income tax returns.

3. CASH AND CASH EQUIVALENTS

The Partnership defines cash equivalents as highly liquid investments
purchased with original maturities of three months or less. The account balance
at the financial institution exceeds Federal Depository Insurance Corporation
("FDIC") insurance coverage and as a result, there is a concentration of credit
risk related to the balance on deposit in excess of FDIC insurance coverage. The
Partnership believes that the risk is not significant as the Partnership does
not anticipate non-performance.

4. MORTGAGES HELD FOR SALE

Mortgage loans held for sale at December 31 consists of:

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Principal.................................................... $ 249,982,406 $ 159,204,268
Unearned discount............................................ (5,918,647) (4,729,002)
-------------- --------------
Carrying amount of mortgages................................. 244,063,759 154,475,266
Deferred loan costs (net).................................... 3,010,575 2,051,758
Provision for loss on securitization transaction............. -- (923,611)
Deferred hedging losses...................................... 16,399,039 2,116,499
-------------- --------------
Total mortgage loans held for sale..................... $ 263,473,373 $ 157,719,912
-------------- --------------
-------------- --------------
</TABLE>

Mortgage loans held for sale are secured by corporate leases (the majority
of which are investment grade) and mortgages on the underlying real estate and
are reported at the lower of cost (unpaid principal balance adjusted for
unearned discount and deferred expenses) or market, on an aggregate basis.
Mortgage origination fees, net of direct costs in connection with closing a
loan, are deferred and are reported as part of the cost of the loan balance to
which they relate. The aggregate cost is adjusted for deferred hedging gains or
losses prior to the lower of cost or market valuation.

During January 1997, the Partnership transferred a pool of mortgage loans
with an aggregate face amount of $129,404,878 to a 99% owned limited partnership
(the "Depositor") in connection with a securitization of the mortgage loans by
the Depositor. The securitization was accounted for as a sale in accordance with
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" which is
effective for transactions occurring subsequent to December 31, 1996. In
connection with the sale, the Partnership realized a loss of approximately
$1,196,000, of which approximately $924,000 was accrued as of and for the year
ended December 31, 1996 and included in the accompanying consolidated statement
of operations and partners' capital. Borrowings under the Partner's repurchase
agreement obligations were reduced by approximately $118,000,000 after
completion of the sale.

F-16
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

4. MORTGAGES HELD FOR SALE (CONTINUED)
At December 31, 1997, the Partnership had entered into short sales under
which it sold short $361.8 million of futures contracts on U.S. Treasury
obligations. The unrealized (losses) on the short sales of U.S. Treasury futures
contracts at December 31, 1997 was ($4,391,874). At December 31, 1996, the
Partnership had entered into short sales under which it sold short $59.0 million
of U.S. Treasury obligations and $102.4 million of futures contracts on U.S.
Treasury obligations. The unrealized gains (losses) on the short sales of U.S.
Treasury obligations and futures contracts at December 31, 1996 was ($1,483,906)
and $1,276,875, respectively. As of December 31, 1996, the Partnership has
accounted for the securitization which occurred in January 1997. Accordingly,
the unrealized gains and losses on the short sales of U.S. Treasury obligations
has been charged to expense as part of the provision for loss on securitization.
Unrealized gains and losses of short sales of U.S. Treasury obligations and U.S.
Treasury futures contracts are computed as the difference between the contract
value of the short sales and the current prevailing market value of U.S.
Treasury obligations or futures contracts with similar terms or remaining
maturities.

Mortgages held for sale are subject to changes in value because of changes
in interest rates. Management believes that the fair value of the loans at
December 31, 1997 exceeds their carrying value.

For certain of its loans, the Partnership obtains non-cancelable lease
enhancement insurance policies as additional security for its mortgage loans.
Certain of these policies protect the mortgage holder against losses due to
termination of or abatement of rent from the underlying leases as the result of
a casualty or condemnation event at the mortgaged property. Certain other of
these policies protect the mortgage holder against losses due to the failure of
the underlying tenant to renew its lease followed by a subsequent default by the
borrower of its obligations under the associated mortgage loan, or the failure
of the borrower to pay a balloon balance at the maturity of the mortgage loan.
At December 31, 1997 and 1996, $3,463,495 and $1,558,980 of such lease
enhancement insurance costs, respectively, are included in deferred loan costs
as part of the carrying value of mortgage loans held for sale. The Partnership
believes that these types of policies will continue to be available in the
future. The Partnership is unaware of any limitations by the insurance providers
at the present time.

At December 31, 1997, the Partnership had issued outstanding commitments to
fund $169 million of loans.

5. REPURCHASE AGREEMENTS

The Partnership has entered into repurchase agreements with NationsBank,
N.A. ("NationsBank"), to finance the mortgage loans originated by the
Partnership. The repurchase agreements have a maturity date of July 19, 1998,
and are secured by the mortgage loans. The repurchase agreements are to be
repaid upon sale or securitization of the mortgage loans. At maturity of the
repurchase agreement the Partnership may enter into new agreements. The
outstanding repurchase agreement balances accrue interest at variable rates,
ranging from LIBOR + 1% to LIBOR + 6%, and are paid on a monthly basis. The
aggregate outstanding repurchase agreements may not exceed $350 million. If the
borrowings under the repurchase agreements exceed the market value of the
mortgage loans, determined based on such factors as the debt rating of the
underlying credit tenants, mortgage defaults, or other factors determined by
NationsBank, NationsBank may require either the repayment of a portion of the
borrowings prior to maturity, or the delivery of additional collateral.
NationsBank may not, however, require additional collateral due to

F-17
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

5. REPURCHASE AGREEMENTS (CONTINUED)
fluctuations in interest rates. Management believes that the carrying amounts of
the repurchase agreements approximate fair market value.

Interest expense incurred with respect to the repurchase agreements for the
years ended December 31, 1997 and 1996 was $8,829,548 and $4,048,601,
respectively. As of December 31, 1997, the Partnership was in compliance with
the terms of the repurchase agreements.

6. RELATED PARTY TRANSACTIONS

During 1997, the Partnership issued unsecured notes payable to a limited
partner of the Partnership. The notes carry an interest rate of 20%, and are
payable on demand. As of December 31, 1996, the Partnership owed $129,098 for a
note payable issued to an officer of the Partnership. The note payable to
officer was repaid during January 1997.

7. PROPERTY HELD FOR SALE AND LOSS ON LOAN IN FORECLOSURE

Property held for sale as of December 31, 1996 consisted of land held from
the receipt of a deed in lieu of foreclosure. In February 1996, the Partnership
became aware that a loan with an outstanding balance of $12.9 million was in
default. On February 26, 1996 the Partnership received a deed in lieu of
foreclosure on the property and subsequently recovered approximately $10.2
million in cash. The recovered property had an appraised value of approximately
$2.0 million, and the Partnership recognized a loss during 1995 of approximately
$717,000 from the defaulted loan. The property was held in a wholly-owned
subsidiary of the Partnership until December 31, 1997. On December 31, 1997, the
Partnership distributed the stock of the subsidiary corporation to certain of
the limited partners of the Partnership. Note 2.

8. CONCENTRATION RISKS

The Partnership relies on its repurchase agreement with NationsBank to
provide the majority of its cash for loan fundings. A deterioration in the
financial condition of NationsBank could have a negative impact on the
Partnership's ability to continue funding loans. However, management is
confident that alternative funding sources could be obtained with substantially
similar terms. As of December 31, 1997, NationsBank carried an A+ rating from
Standard & Poor's.

9. SUBSEQUENT EVENTS

Through March 17, 1998, the Partnership had issued net additional notes
payable of $5.5 million for cash advances from a limited partner of the
Partnership.

F-18
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

SCHEDULE OF MORTGAGE LOANS ON REAL ESTATE

DECEMBER 31, 1997

<TABLE>
<CAPTION>
COL D
------------------------
AMOUNT OF PRINCIPAL
COL A UNPAID AT CLOSE OF COL E
- -------------------------------------------------------- COL C PERIOD -----------
COL B ------------ ------------------------ AMOUNT OF
LIST BY CLASSIFICATION ------------- CARRYING SUBJECT TO MORTGAGE
- -- COMMERCIAL PRIOR AMOUNT OF DELINQUENT BEING
LOAN # GUARANTOR LOCATION LIENS MORTGAGES(1) TOTAL INTERESTS FORECLOSED
- --------- ----------------- -------------------------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1059 Ahold Howland, OH $ -- $5,976,175 $ 5,976,175 $ -- $ --
1652 Ahold White Plains, NY -- 10,260,267 10,260,267 -- --
1017 Amoco Bronx, NY -- 952,737 952,737 -- --
865NB Blue Cross/Shield Richardson, TX -- 21,703,961 21,703,961 -- --
838 Boston Gas Waltham, MA -- 1,420,125 1,478,188 -- --
1386 Bridgestone Branford, CT -- 930,087 967,741 -- --
727 Bridgestone Richmond, VA -- 1,252,355 1,276,925 -- --
1501 Chase Westfield, NJ -- 2,019,197 2,033,432 -- --
1012 Circuit City Omaha, NE -- 5,411,410 5,612,030 -- --
854 Circuit City South Portland, ME -- 2,456,391 2,557,357 -- --
1076 Circuit City Tampa, FL -- 12,235,577 12,734,477 -- --
1699 CVS Braintree, MA -- 8,078,836 8,280,291 -- --
870 CVS Dedham, MA -- 2,544,059 2,648,005 -- --
1212 CVS East Rockaway, NY -- 1,555,708 1,619,439 -- --
1322 CVS Easthampton, MA -- 1,391,941 1,448,544 -- --
554 CVS Little Rock, AR -- 3,885,080 4,026,425 -- --
842 CVS Medford, MA -- 1,990,944 2,079,758 -- --
1240 CVS New Bedford, MA -- 2,464,692 2,563,156 -- --
1930 CVS Philadelphia, PA -- 2,065,000 2,065,000 -- --
1323 CVS Queensbury, NY -- 1,348,047 1,402,330 -- --
1889 CVS Randolph, MA -- 2,118,225 2,118,225 -- --
841 CVS Rochester, NY -- 1,605,985 1,678,547 -- --
1324 CVS Rochester, NY -- 1,278,228 1,329,977 -- --
1071 CVS West Babylon, NY -- 1,217,636 1,270,782 -- --
1887 Eckerd Vero Beach, FL -- 2,654,481 2,654,481 -- --
1805 Exxon Hauppauge, NY -- 1,500,774 1,500,774 -- --
1213NB Georgia Baptist Atlanta, GA -- 11,962,509 12,166,133 -- --
742NB Home Depot Bel Air, MD -- 4,620,419 4,802,216 -- --
1945 Home Depot Dallas, TX -- 15,229,529 15,767,896 -- --
1877 John Harland Glen Burnie, MD -- 9,213,872 9,586,176 -- --
467 Key Bank Newburgh, NY -- 11,031,084 11,415,382 -- --
356 McDonald's Fair Lakes, VA -- 869,557 904,567 -- --
1965 McDonald's Mineola, NY -- 1,463,976 1,463,976 -- --
543 McDonald's Philadelphia, PA -- 1,068,091 1,111,346 -- --
1133 MedPartners Amarillo, TX -- 5,642,691 5,725,970 -- --
610 Pep Boys Ridgewood, NY -- 2,519,511 2,650,858 -- --
1533 Pep Boys Springfield Gardens, NY -- 1,732,742 1,732,743 -- --
1734 Revco Clarksville, TN -- 945,907 977,093 -- --
1736 Revco Richmond, VA -- 1,226,260 1,274,904 -- --
1577 Revco Richmond, VA -- 1,796,686 1,868,004 -- --
1037 Rite Aid Buffalo, NY -- 1,425,037 1,460,764 -- --
1320 Rite Aid Castle Shannon, PA -- 1,687,274 1,755,716 -- --
412 Rite Aid Flint, MI -- 2,042,823 2,125,328 -- --
859 Rite Aid Kalkaska, MI -- 1,753,376 1,823,661 -- --
1585 Rite Aid Pearisburg, VA -- 1,767,953 1,808,045 -- --
1014 Rite Aid Pittston, PA -- 2,066,918 2,108,806 -- --
961 Rite Aid Portland, MI -- 1,570,987 1,616,583 -- --
943 Rite Aid Pulaski, VA -- 1,530,342 1,591,203 -- --
784 Rite Aid Ridgewood, NY -- 2,666,568 2,777,912 -- --
1525 Rite Aid Saginaw, MI -- 2,638,085 2,693,227 -- --
1036 Rite Aid Tonawanda, NY -- 1,246,915 1,277,941 -- --
1556 Rite Aid Wytheville, VA -- 2,100,447 2,184,139 -- --
1365 State of NJ Jersey City, NJ -- 3,938,326 4,045,846 -- --
</TABLE>

F-19
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

SCHEDULE OF MORTGAGE LOANS ON REAL ESTATE (CONTINUED)

DECEMBER 31, 1997

Total $ -- 2$44,063,759 $249,982,406 $ -- $ --
------ ------------ ----------- ----------- -----------
------ ------------ ----------- ----------- -----------
</TABLE>

<TABLE>
<S> <C>
(1) Balance at beginning of period:........................................... $154,475,266
Additions during period:
New mortgage loans...................................................... 219,141,829
Other (describe)........................................................ --
-----------
219,141,829
Deductions during period:
Collections of principal................................................ 4,683,610
Foreclosures............................................................ --
Cost of mortgages sold.................................................. 124,869,726
Amortization of premium................................................. --
Other (describe)........................................................ --
-----------
129,553,336
Balance at close of period.................................................... $244,063,759
-----------
-----------
</TABLE>

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

Footnotes:

(1) A reconciliation of the carrying amount of the mortgages is as follows: Face
amount ($249,982,406) less unearned discount ($5,918,647) equals carrying
amount ($244,063,759).

(2) The aggregate cost of the carrying amount of the mortgages for federal
income tax purposes is $244,063,759.

(3) See the footnotes to the consolidated financial statements (Note 5) for
discussion of the repurchase agreement which are secured by the mortgage
loans.

F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY THE SHARES
OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS 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 THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

UNTIL , 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING 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.
--------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 17
Use of Proceeds................................. 31
Dividend and Distribution Policy................ 31
Capitalization.................................. 32
Dilution........................................ 33
Selected Historical and Proforma Financial
Information................................... 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 36
The Company..................................... 42
Formation Transactions.......................... 59
Yield Considerations Related to the Company's
Investments................................... 60
Description of Real Estate/Targeted
Investments................................... 62
Directors and Executive Officers................ 68
Certain Relationships and Related
Transactions.................................. 74
Security Ownership of Certain Beneficial Owners
and Management................................ 74
Dividend Reinvestment and Direct Purchase
Plan.......................................... 76
Federal Income Tax Considerations............... 78
ERISA Considerations............................ 92
Description of Capital Stock.................... 92
Repurchase of Shares and Restrictions on
Transfer...................................... 93
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws.................. 94
Shares Eligible for Future Sale................. 98
Underwriting.................................... 99
Legal Matters................................... 100
Experts......................................... 101
Additional Information.......................... 101
Glossary........................................ 102
Financial Statements and Information............ F-1
</TABLE>

SHARES
CAPITAL LEASE FUNDING, INC.
COMMON STOCK

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

PROSPECTUS

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

PRUDENTIAL SECURITIES INCORPORATED
, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II

ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
for the SEC registration fee and the NASD filing fee.

<TABLE>
<CAPTION>
TO BE PAID
- --------------------------------------------------------------------------------
<S> <C>
SEC Registration fee............................................................ $ 36,369
NYSE listing fee................................................................
NASD filing fee................................................................. 12,790
Printing and engraving expenses.................................................
Legal fees and expenses.........................................................
Accounting fees and expenses....................................................
Transfer agent and custodian fees...............................................
Miscellaneous...................................................................
------------
Total..................................................................... $ 1,112,500
------------
------------
</TABLE>

ITEM 32. SALES TO SPECIAL PARTIES.

Not Applicable.

ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.

In connection with the Formation Transactions and pursuant to a Contribution
Agreement, dated as of March 12, 1998, among CLF, Inc. and holders of direct or
indirect partnership interests in CLF (the "Partners"), the Partners agreed to
transfer their interests in CLF to CLF, Inc. in return for such number of shares
of Common Stock of CLF, Inc. and/or cash as will be determined pursuant to a
stated formula which transactions will close simultaneously with the Offering.

ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

As permitted by the MGCL, the Articles of Incorporation obligate the Company
to indemnify its present and former directors and officers and its employees and
controlling persons and to pay or reimburse reasonable expenses for such persons
in advance of the final disposition of a proceeding, to the maximum extent
permitted from time to time by Maryland law. The MGCL permits a corporation to
indemnify its present and former directors 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 director or officer was material
to the matter giving rise to such proceeding and (i) was committed in bad faith,
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services, or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. The
Bylaws implement the provisions relating to indemnification contained in the
Articles of Incorporation. The MGCL permits the charter of a Maryland
corporation to include a provision limiting the ability of its directors and
officers to the corporation and its stockholders for money damages, except to
the extent that (i) the person actually received an improper benefit or profit
in money, property or services, or (ii) a judgment or other final adjudication
is entered in a proceeding based on a finding that

II-1
<PAGE>
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. The Articles of Incorporation contain a provision providing for
elimination of the liability of its directors or officers to the Company or its
stockholders for money damages to the maximum extent permitted by Maryland law
from time to time. In addition, the officers, directors, and controlling persons
of the Company are indemnified against certain liabilities by the Company under
the Underwriting Agreement relating to this Offering. The Company will maintain
for the benefit of its officers and directors, officers' and directors'
insurance.

The Underwriting Agreement (Exhibit 1.1) also provides for the
indemnification by the Underwriters of the Company, its directors and officers
and persons who control the Company within the meaning of Section 15 of the
Securities Act with respect to certain liabilities, including liabilities
arising under the Securities Act.

ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.

Not applicable.

ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements included in the Prospectus are:

PRO FORMA COMPANY:

Capital Lease Funding, Inc. (a Maryland corporation) Unaudited Pro
Forma Financial Statements

Pro Forma Statement of Financial Condition as of December 31, 1997

Pro Forma Statement of Operations for the Year Ended December 31,
1997

Notes to Pro Forma Financial Statements

HISTORICAL COMPANY:

Capital Lease Funding, Inc. (a Maryland corporation) Historical
Financial Statements

Report of Independent Auditors

Statement of Financial Condition as of March 15, 1998

Notes to Financial Statements

HISTORICAL CAPITAL LEASE FUNDING, L.P.:

Capital Lease Funding, L.P. (a Delaware partnership) Historical
Financial Statements

Report of Independent Auditors

Consolidated Statements of Financial Condition as of December 31,
1997 and 1996

Consolidated Statements of Operations for the Years Ended December
31, 1997 and 1996 and for the period from September 29, 1995
(commencement of operations) to December 31, 1995

Consolidated Statements of Cash Flows for the Years Ended December
31, 1997 and 1996 and for the period from September 29, 1995
(commencement of operations) to December 31, 1995

II-2
<PAGE>
Consolidated Statement of Partners' Capital for the Years Ended
December 31, 1997 and 1996 and for the period from September 29, 1995
(commencement of operations) to December 31, 1995

Notes to Consolidated Financial Statements

Schedule of Mortgage Loans on Real Estate as of December 31, 1997

(b) Exhibits

<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement

*3.1 Articles of Incorporation

*3.2 Amended and Restated Articles of Incorporation

*3.3 Bylaws

*3.4 Amended and Restated Bylaws

*5.1 Opinion of Cadwalader, Wickersham & Taft

*8.1 Opinion of Cadwalader, Wickersham & Taft

*9.1 Management Shareholder Agreement

10.1 Contribution Agreement, dated as of March 12, 1998, among the Company
and the other signatories thereto.

*10.2 Registration Rights Agreement

*10.3 Indemnity Agreement

*10.4 1998 Stock Option Plan

*10.5 Dividend Reinvestment and Direct Purchase Plan

23.1 Consent of Ernst & Young LLP

*23.2 Consent of Cadwalader, Wickersham & Taft (included in Exhibits 5.1
and 8.1)

*24.1 Power of Attorney (included on page II-5)

*27.1 Financial Data Schedule

*99.1 Consents to be named as a director pursuant to Rule 438
</TABLE>

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

* To be filed by amendment.

ITEM 37. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the securities being

II-3
<PAGE>
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issues.

The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
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-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on March 27, 1998.

CAPITAL LEASE FUNDING, INC.

By: /S/ WILLIAM R. POLLERT
-----------------------------------------
Name: William R. Pollert
Title: President

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
William R. Pollert his or her true and lawful attorney-in-fact and agent, with
full powers of substitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign and to file any and all amendments,
including post-effective amendments and any registration statements filed
pursuant to Rule 462(B), to this Registration Statement with the Securities and
Exchange Commission, granting to said attorney-in-fact power and authority to
perform any other act on behalf of the undersigned required to be done in
connection therewith.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board,
/s/ WILLIAM R. POLLERT Chief Executive Officer,
- ------------------------------ President and Director March 27, 1998
William R. Pollert (principal executive
officer)

/s/ SHAWN P. SEALE Senior Vice President and
- ------------------------------ Chief Financial Officer March 27, 1998
Shawn P. Seale

/s/ SCOTT A. SHAY Director
- ------------------------------ March 27, 1998
Scott A. Shay

II-5
<PAGE>
EXHIBIT INDEX

<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement

*3.1 Articles of Incorporation

*3.2 Amended and Restated Articles of Incorporation

*3.3 Bylaws

*3.4 Amended and Restated Bylaws

*5.1 Opinion of Cadwalader, Wickersham & Taft

*8.1 Opinion of Cadwalader, Wickersham & Taft

*9.1 Management Shareholder Agreement

10.1 Contribution Agreement, dated as of March 12, 1998, among the Company and the other
signatories thereto.

*10.2 Registration Rights Agreement

*10.3 Indemnity Agreement

*10.4 1998 Stock Option Plan

*10.5 Dividend Reinvestment and Direct Purchase Plan

23.1 Consent of Ernst & Young LLP

*23.2 Consent of Cadwalader, Wickersham & Taft (included in Exhibits 5.1 and 8.1)

*24.1 Power of Attorney (included on page II-5)

*27.1 Financial Data Schedule

*99.1 Consents to be named as a director pursuant to Rule 438
</TABLE>

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

* To be filed by amendment.

II-6

<PAGE>

EXHIBIT 10.1

CONTRIBUTION AGREEMENT

CONTRIBUTION AGREEMENT (this "Agreement") made as of March 12, 1998
(the "Agreement Date"), by and among CLFC HPII, INC. ("HPII GP"), CLF HOLDINGS,
INC. ("CLFC GP"), and the Preferred Limited Partners (the "Preferred Limited
Partners"), Class A Limited Partners (the "Class A Limited Partners"), Class B
Limited Partner (the "Class B Limited Partner") and Class C Limited Partners
(the "Class C Limited Partners"), in each case listed on the signature pages
hereto (HPII GP, CLFC GP, the Preferred Limited Partners, the Class A Limited
Partners, the Class B Limited Partner, and the Class C Limited Partners,
collectively, the "Contributors") and CAPITAL LEASE FUNDING, INC., a Maryland
corporation (the "Company").

RECITALS

A. The Contributors own 100% of the partnership and other equity
interests (such interests, together with all related rights and obligations in
connection with the Partnership (as defined herein) are referred to as the
"Partnership Interests") in Capital Lease Funding, L.P., a Delaware limited
partnership (the "Partnership") governed pursuant to the Third Amended and
Restated Agreement of Limited Partnership, dated as of December 31, 1997 (as the
same may be further amended, restated, supplemented or otherwise modified from
time to time, the "Partnership Agreement").

B. In connection with the initial public offering (the "IPO") of
the common stock, par value $.01 per share (the "Common Stock"), of the Company
pursuant to a registration statement to be filed on Form S-11 with the
Securities and Exchange Commission, the Contributors desire to contribute their
respective Partnership Interests to the Company in return for shares of Common
Stock and/or cash as further set forth herein (the "Contributions").

C. The Contributions will be consummated simultaneously with the
closing of the IPO.

D. Capitalized terms used herein and not otherwise defined have
the meanings ascribed thereto in the Partnership Agreement.

AGREEMENT

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

I. Determination of Fair Market Value and Related Matters. For
the purposes hereof and the Partnership Agreement, the term "Fair Market Value"
means: the product of (a) the price to the public per share at which the Common
Stock is sold in the IPO, and (b) the number of shares of Common Stock which,
upon consummation of the IPO and the transactions contemplated hereby will be
held by the Contributors, collectively as a group (not inclusive of the 100
shares of Common Stock issued to William R. Pollert upon formation of the
Company). Furthermore, for the purposes of determining distributions in
accordance with Section 4.2 of the Partnership Agreement, Common Stock issued to
a Contributor pursuant hereto shall be deemed to be the equivalent of a cash
distribution in an amount equal to the product of (y) the price to the public
per share at which the Common Stock is sold in the IPO, and (z) the number of
shares of Common Stock so distributed.

II. Contribution of Preferred Limited Partnership Interests by the
Preferred Limited Partners. Each Preferred Limited Partner shall contribute or
cause to be contributed to the Company its respective Preferred Limited
Partnership Interest, in accordance with the terms hereof, free and clear of all
liens, in return for the receipt of such amount of cash as would be
distributable pursuant to Sections 4.2.1(a) and 4.2.1(b) of the Partnership
Agreement.

III. Contribution of Partnership Interests of HPII GP. HPII GP
shall contribute or cause to be contributed to the Company its Partnership
Interest, in accordance with the terms hereof, free and clear of all liens, in
return for the receipt of:

A. $225,000 and such additional amount of cash as would
distributable to HPII GP pursuant to Sections 4.2.1(a) and 4.2.1(b) of
the Partnership Agreement; and

B. such number of shares of Common Stock as would be
distributable to HPII GP pursuant to the remainder of Section 4.2.1 of
the Partnership Agreement taking into account the distributions to the
Preferred Limited Partners pursuant to Section 2 hereof.

IV. Contribution of Partnership Interests by CLFC GP, the Class A
Limited Partners, the Class B Limited Partner and the Class C Limited Partners.
Each of CLFC GP and each Class A Limited Partner, Class B

Exhibit 10.1-1
<PAGE>

Limited Partner and Class C Limited Partner shall contribute or cause to be
contributed to the Company its respective general Partnership Interest, Class A
Limited Partnership Interest, Class B Limited Partnership Interest or Class C
Limited Partnership Interest, as the case may be, in accordance with the terms
hereof, free and clear of all liens, in return for the receipt of such number of
shares of Common Stock as would distributable to such Contributor pursuant to
Section 4.2.1 of the Partnership Agreement taking into account the distributions
to the Preferred Limited Partners pursuant to Section 2 hereof and the
distribution to HPII GP pursuant in Section 3 hereof.

V. Conditions to Closing. The obligations of each Contributor
and the Company hereunder are subject to the satisfaction of the conditions set
forth below on or before the closing of the Contributions (the "Closing"). If
for any reason any of the conditions set forth in this Section 5 are not
satisfied or waived by the each party entitled to the benefit of such conditions
at or prior to the Closing or if the Closing shall not have occurred by
December 31, 1998, then each party hereto by written notice given to the other
parties hereto shall have the right to elect to terminate this Agreement and
each party shall be released from their obligations hereunder shall have no
further liability hereunder.

A. Representations and Warranties True and Correct. The
representations and warranties of each other party hereto shall be true
and correct in all material respects as of the date of the Closing.

B. Closing of Contributions. The closing of each
Contribution applicable to each other party hereto shall occur
simultaneously therewith and all obligations of each other party hereto
pursuant hereto shall have been performed or complied with in all
material respects.

C. Closing of IPO. The IPO shall have been consummated
simultaneously therewith.

D. Partnership Agreement. The Partnership Agreement shall
be in full force and effect and no party thereto shall be in material
default thereunder.

E. No Pending Litigation. There shall be no pending
litigation or like proceeding with respect to the Partnership, the
Partnership Interests or the Company which, if successfully pursued,
would prevent the consummation of the transactions contemplated hereby.

VI. Transaction Costs. All costs and expenses with respect to the
transactions contemplated hereby shall be borne by the Company, unless such
transaction is not consummated, in which case such costs and expense shall be
borne by the Partnership.

VII. Representations, Warranties and Covenants. Each Contributor
and the Company make the following representations and warranties (with respect
to itself, himself or herself only and not with respect to any other party
hereto) to each other party hereto, all of which are true and correct in all
material respects as of the date hereof and as of the Closing:

A. Each Contributor which is not a natural person and the
Company is duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization and has been duly
authorized by all necessary and appropriate action to enter into this
Agreement and to consummate the transactions contemplated hereby.

B. Each Contributor and the Company has duly executed and
delivered this Agreement and this Agreement is valid, binding and
enforceable against such party in accordance with its terms.

C. Each Contributor is the sole record owner of its
respective Partnership Interest, free and clear of all liens.

D. The shares of Common Stock to be issued upon consummation
of the Contributions will be validly issued, fully paid and
nonassessable.

E. Each Contributor has been advised and acknowledges that:
the Common Stock to be issued upon consummation of the Contributions
will not be registered under the Securities Act of 1933, as amended (the
"Act"), pursuant to an exemption therefrom; each Contributor which is
not a natural person is an accredited investor (as defined in Rule 501
promulgated under the Act) or is owned entirely by persons which are
accredited investors; such party is able to and understands that it, he
or she must bear the economic risk of the shares of Common Stock
received by it, he or she for an indefinite period of time; such shares
of Common Stock may not be sold unless they are subsequently registered
under the Act or an exemption therefrom is available; such shares are
being held by such party solely for such party's own account or for the
account of an

Exhibit 10.1-2
<PAGE>

accredited investor and such party has no present intention of selling,
granting a participation in, or otherwise distributing the same except
to beneficial owners thereof which are accredited investors.

F. Each Contributor acknowledges and agrees that it will not
offer, sell or assign the shares of Common Stock it, he or she receives
pursuant to the Contributions in contravention of the Act or any state
securities law. Furthermore, no such party has any contract,
understanding, agreement or arrangement with any person or entity to
sell, transfer or grant a participation to such person or entity or any
other person or entity, with respect to any or all of the shares of
Common Stock such party may so receive.

G. Each Contributor is a partner in the Partnership and has
a preexisting personal or business relationship with the Company of a
nature and duration such as has enabled such party to be aware of the
character, business acumen and general business and financial
circumstances of the Company and its officers and directors.

VIII. Survival and Indemnity. The representations, warranties and
covenants contained herein shall survive the Closing. Each Contributor,
severally and not jointly, agrees to indemnify, defend and hold harmless the
Company and each other party hereto from and against all costs, expenses, losses
and damages (including, without limitation, reasonable attorney's fees and
expenses, but excluding consequential damages) incurred by the Company or such
other party resulting from any misrepresentation or breach of warranty made by
such Contributor.

IX. Consents. Each party hereto consents to each of the
transactions contemplated hereby on the terms and conditions set forth herein.

X. Notices. All notices and other communications required to be
given hereunder shall be in writing and shall be given in accordance with the
provisions of Section 12.1 of the Partnership Agreement with the Company being
deemed to have the same address as the Partnership.

XI. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed wholly within that State.

XII. Invalid Provisions. This Agreement contains the entire
agreement between the parties relating to the subject matter hereof and all
prior agreements relative hereto which are not contained herein are terminated.
Amendments, variations, modifications or changes herein may be made effective
and binding upon the parties hereto by, and only by, the setting forth of same
in a document duly executed by each party hereto, and any alleged amendment,
variation, modification or change herein which is not so documented shall not be
effective as to any party hereto.

XIII. Amendments. This Agreement may be amended only by an
instrument in writing executed by the party or an authorized representative of
the party against whom such amendment is sought to be enforced.

XIV. Parties Bound; Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, assigns and legal representatives; provided, however, that no party
hereto may, without the prior written consent of each other party hereto, assign
any of its rights, powers, duties or obligations hereunder.

XV. Headings. Section headings are for convenience of reference
only and shall in no way affect the interpretation of this Agreement.

XVI. Recitals. The recital and introductory paragraphs hereof are
a part hereof, form a basis for this Agreement and shall be considered prima
facie evidence of the facts and documents referred to therein.

XVII. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
Copies of executed counterparts transmitted by telecopy, telefax or other
electronic transmission service shall be considered original executed
counterparts for purposes of this Section.

XVIII. No Third Party Beneficiaries. The provisions of this
Agreement are intended to be for the sole benefit of the parties hereto and
their respective permitted successors and assigns, and none of the provisions of
this Agreement are intended to be, nor shall they be construed to be, for the
benefit of any third party.

[SIGNATURE PAGES FOLLOW]

Exhibit 10.1-3

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

CAPITAL LEASE FUNDING, INC.

By: /s/ William R. Pollert
--------------------------
Name: William R. Pollert
Title: President

GENERAL PARTNERS:

CLFC HPII INC.

By: /s/ Robert A. Perro
--------------------------
Name: Robert A. Perro
Title: Vice President & Secretary

CLF HOLDINGS, INC.

By: /s/ William R. Pollert
--------------------------
Name: William R. Pollert
Title:

PREFERRED LIMITED PARTNERS:

HYPERION PARTNERS II L.P.

By: Hyperion Ventures II L.P.,
its general partner

By: Hyperion Funding II Corp.,
its general partner

By: /s/ Robert A. Perro
--------------------------
Name: Robert A. Perro
Title: Vice President & Secretary

Exhibit 10.1-4

<PAGE>

SOUTH FERRY #2, L.P.

By: /s/ Abraham Wolfson
--------------------------
Name: Abraham Wolfson
Title: General Partner

CLASS A LIMITED PARTNERS:

HYPERION PARTNERS II L.P.

By: Hyperion Ventures II L.P.,
its general partner

By: Hyperion Funding II Corp.,
its general partner

By: /s/ Robert A. Perro
--------------------------
Name: Robert A. Perro
Vice President & Secretary

SOUTH FERRY #2, L.P.

By: /s/ Abraham Wolfson
--------------------------
Name: Abraham Wolfson
Title: General Partner

CLASS B LIMITED PARTNER:

CLF INVESTORS LLC

By: /s/ William R. Pollert
--------------------------
Name: William R. Pollert
Title: Managing Member

CLASS C LIMITED PARTNERS:

/s/ William R. Pollert
--------------------------
WILLIAM R. POLLERT

Exhibit 10.1-5
<PAGE>

/s/ Edwin J. Glickman
--------------------------
EDWIN J. GLICKMAN

/s/ Paul H. McDowell
--------------------------
PAUL H. MCDOWELL

/s/ Shawn P. Seale
--------------------------
SHAWN P. SEALE

/s/ Steven L. Maloy
--------------------------
STEVEN L. MALOY

/s/ William F. Paylor
--------------------------
WILLIAM F. PAYLOR

/s/ Elizabeth A. Yang
--------------------------
ELIZABETH A. YANG

/s/ Mary Kay Downey
--------------------------
MARY KAY DOWNEY

/s/ Carol Burns
--------------------------
CAROL BURNS

/s/ Don Bindler
--------------------------
DON BINDLER

/s/ Gary Landriau
--------------------------
GARY LANDRIAU

/s/ James Vlahos
--------------------------
JAMES VLAHOS

/s/ Julianne Gaiser
--------------------------
JULIANNE GAISER

Exhibit 10.1-6
<PAGE>

/s/ Kathleen Doody Redmond
--------------------------
KATHLEEN DOODY REDMOND

/s/ Maureen Fitzgerald
--------------------------
MAUREEN FITZGERALD

/s/ Michael Heneghan
--------------------------
MICHAEL HENEGHAN

/s/ Peter Amari
--------------------------
PETER AMARI

/s/ Peter McGill
--------------------------
PETER MCGILL

Exhibit 10.1-7

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Summary Selected
Historical and Pro Forma Financial Information," "Selected Historical and Pro
Forma Financial Information," "Experts" and to the use of our reports dated
March 17, 1998 with respect to the statement of financial condition of Capital
Lease Funding, Inc. at March 15, 1998, and January 23, 1998 except for Note 9 as
to which date is March 17, 1998, with respect to the consolidated financial
statements of Capital Lease Funding L.P. and Subsidiaries (a Limited
Partnership) for each of the two years in the period ended December 31, 1997 and
for the period September 25, 1995 (commencement of operations) to December 31,
1995, in the Registration Statement (Form S-11) and related Prospectus of
Capital Lease Funding, Inc. for the registration of 7,762,500 shares of its
common stock.

/s/ ERNST & YOUNG LLP

New York, New York
March 23, 1998