CAPITAL LEASE FUNDING INC, S-1/A, 1998-06-29

CAPITAL LEASE FUNDING INC
S-1/A, 1998-06-29
REAL ESTATE INVESTMENT TRUSTS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 1998

REGISTRATION NO. 333-48745
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 2
on
FORM S-1
to
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

CAPITAL LEASE FUNDING, INC.
(Exact Name of Registrant as Specified in its Charter)

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<S> <C> <C>
MARYLAND 6162 13-3995833
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>

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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 LLP
NEW YORK, NEW YORK 10038 919 THIRD AVENUE
TELEPHONE: (212) 504-6000 NEW YORK, NEW YORK 10022
FACSIMILE: (212) 504-6666 TELEPHONE: (212) 735-3000
FACSIMILE: (212) 735-2000
</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 any of the securities being registered on this form are to be offered on
a delayed or continuous basis pusuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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. / /
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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 8,441,000 $16.00 $135,056,000 $39,842
</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 1-12

<TABLE>
<CAPTION>
FORM S-1 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. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds

5. Determination of Offering Price...................... Underwriting

6. Dilution............................................. Dilution

7. Selling Security Holders............................. *

8. Plan of Distribution................................. Underwriting

9. Description of Securities to be Registered........... Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of Common Stock; Federal
Income Tax Consequences

10. Interests of Named Experts and Counsel............... Experts

11. Information With Respect to Registrant............... Prospectus Summary; Risk Factors; Dividend and
Distribution Policy; Selected Historical and Pro
Forma Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; The Company; Yield
Considerations Related to the Company's
Investments; Description of Existing Real Estate
Interests; Targeted Investments; Directors and
Executive Officers; Certain Relationships and
Related Transactions; Financial Statements and
Information

12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
</TABLE>

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* Not Applicable
<PAGE>

SUBJECT TO COMPLETION--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
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
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7,340,000 Shares

CAPITAL LEASE FUNDING, INC.

Common Stock
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Capital Lease Funding, Inc. (the "Company") is a Maryland corporation created to
continue and expand the specialty finance business of Capital Lease Funding,
L.P. ("CLF") 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 continue and expand such activities, and to extend
them to related lines of business which the Company's management believes will
generate attractive risk-adjusted returns on invested capital.

All of the 7,340,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company offered hereby are being sold by the Company in
an initial public offering (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. The Common Stock has been
approved for inclusion in The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "CLFI" subject to official notice of
issuance.

SEE "RISK FACTORS" ON PAGES 16 TO 31 FOR A DISCUSSION OF MATERIAL RISKS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.

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

<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 $1,300,000.

(3) The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to 1,101,000 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."
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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

NATIONSBANC MONTGOMERY SECURITIES LLC

STIFEL, NICOLAUS &
COMPANY

INCORPORATED

, 1998
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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............................................................................ 3
Related Businesses..................................................................................... 5
Business Strategy...................................................................................... 6
Existing Loans and Pipeline for Future Originations.................................................... 8
Loan Origination Capability and Correspondent Network.................................................. 10
Credit Facilities...................................................................................... 11
Formation Transactions................................................................................... 11
Investment Company Act Compliance........................................................................ 12
Summary Selected Historical and Pro Forma Financial Information.......................................... 12
The Offering............................................................................................. 15
RISK FACTORS............................................................................................... 16
Risks Related to Operations............................................................................ 16
Risks Related to Credit Tenant Loans................................................................... 17
A Lack of Availability of Financing Could Adversely Affect the Company's Results....................... 19
Risks Related to Borrowings............................................................................ 19
Risks Related to Mortgage Assets....................................................................... 20
Risks Related to Investments in Real Estate............................................................ 23
Risks Related to Lease Enhancement..................................................................... 25
Risks Related to Business Strategy and Policies........................................................ 26
Competition May Adversely Affect the Ability of the Company to Conduct its Business.................... 28
Dependence on Limited Number of Key Personnel Could Adversely Affect the Company's Operations if Such
Personnel are No Longer Available..................................................................... 28
Concentration of Ownership May Adversely Affect the Ability of New Investors to Influence the
Company............................................................................................... 29
Year 2000 Software Deficiences Could Adversely Affect the Company...................................... 29
Dilution, Legal and Other Risks........................................................................ 29
USE OF PROCEEDS............................................................................................ 32
DIVIDEND AND DISTRIBUTION POLICY........................................................................... 32
CAPITALIZATION............................................................................................. 33
DILUTION................................................................................................... 34
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION.................................................... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 37
Overview............................................................................................... 37
Historical Results--January 1997 Securitization........................................................ 37
Current Loans.......................................................................................... 38
Certain Accounting Policies............................................................................ 38
Historical Results of Operations--Three Months Ended March 31, 1998 and 1997........................... 39
Historical Results of Operations--1997 to 1996......................................................... 39
Pro Forma Results of Operations--Three Months Ended March 31, 1998..................................... 40
Pro Forma Results of Operations--1997.................................................................. 41
Liquidity and Capital Resources........................................................................ 41
Leverage............................................................................................... 42
Hedging................................................................................................ 42
Interest Rates and Inflation........................................................................... 42
Year 2000 Issues....................................................................................... 42
THE COMPANY................................................................................................ 43
General................................................................................................ 43
Credit Tenant Loan Business............................................................................ 44
Related Businesses..................................................................................... 47
Competitive Position................................................................................... 48
</TABLE>

i
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<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Business Strategy...................................................................................... 49
Existing Loans and Pipeline for Future Originations.................................................... 51
Management............................................................................................. 52
Loan Origination Capability and Correspondent Network.................................................. 53
Credit Facilities...................................................................................... 54
Loan Process........................................................................................... 55
Hedging Strategy....................................................................................... 55
Securitization......................................................................................... 55
Company Policies....................................................................................... 58
Industry Overview...................................................................................... 61
Employees.............................................................................................. 61
Competition............................................................................................ 61
Certain Key Relationships.............................................................................. 62
Facilities............................................................................................. 62
Legal Proceedings...................................................................................... 62
FORMATION TRANSACTIONS..................................................................................... 63
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS.................................................. 66
Credit Tenant Loans Held in Inventory.................................................................. 66
Other Mortgage Loans................................................................................... 67
Commercial Mortgage-Backed Securities.................................................................. 68
DESCRIPTION OF EXISTING REAL ESTATE INTERESTS.............................................................. 69
Credit Tenant and Other Mortgage Loans................................................................. 69
Initial Investments; Existing Loans, Commitments and Properties........................................ 70
TARGETED INVESTMENTS....................................................................................... 74
Net Leased Real Estate................................................................................. 74
Commercial Mortgage-Backed Securities.................................................................. 75
Other Investments...................................................................................... 75
Investment in Other Entities........................................................................... 76
Foreign Investments.................................................................................... 76
DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 77
Indemnification of Officers and Directors.............................................................. 80
Committees of the Board................................................................................ 80
Compensation of Directors.............................................................................. 80
Employment Agreements.................................................................................. 80
Executive Compensation................................................................................. 81
Stock Options.......................................................................................... 81
Management Shareholders' Agreement..................................................................... 81
Expenses............................................................................................... 82
Limitation of Liability and Indemnification............................................................ 82
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 84
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 85
FEDERAL INCOME TAX CONSEQUENCES............................................................................ 86
Distributions.......................................................................................... 86
Dividends to Corporate Shareholders.................................................................... 86
Taxation of Stockholders on the Disposition or Redemption of the Common Stock.......................... 87
Capital Gains and Losses............................................................................... 87
Information Reporting Requirements and Backup Withholding.............................................. 87
Taxation of Non-U.S. Stockholders...................................................................... 88
Taxation of the Company................................................................................ 89
State and Local Taxes.................................................................................. 90
ERISA CONSIDERATIONS....................................................................................... 91
DESCRIPTION OF CAPITAL STOCK............................................................................... 91
General................................................................................................ 91
Registration Rights Agreement.......................................................................... 92
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS................................. 92
Number of Directors; Classification of the Board of Directors.......................................... 93
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Removal; Filling Vacancies............................................................................. 93
Business Combinations.................................................................................. 93
Control Share Acquisition Statute...................................................................... 94
Shareholder Rights Plan................................................................................ 95
Amendment to the Charter............................................................................... 95
Dissolution of the Company............................................................................. 95
Advance Notice of Director Nominations and New Business................................................ 95
Meetings of Shareholders............................................................................... 95
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Charter
and Bylaws........................................................................................... 95
Transfer Agent and Registrar........................................................................... 95
Reports to Shareholders................................................................................ 96
Amendment to the Bylaws................................................................................ 96
SHARES ELIGIBLE FOR FUTURE SALE............................................................................ 97
UNDERWRITING............................................................................................... 98
LEGAL MATTERS.............................................................................................. 99
EXPERTS.................................................................................................... 100
ADDITIONAL INFORMATION..................................................................................... 100
GLOSSARY................................................................................................... 101
FINANCIAL STATEMENTS AND INFORMATION....................................................................... F-1
</TABLE>

iii
<PAGE>
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"
BEGINNING ON PAGE 101 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, CLF has been primarily engaged in the business of
originating, underwriting, pooling and financing mortgage loans secured by first
liens on commercial properties which are long-term net leased to tenants
("Credit Tenants") whose unsecured credit rating is equal to or greater than BB-
or its equivalent (such leases, "Credit Tenant Leases," 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 to pool and finance them with the intention of matching the
duration of its assets with the duration of its long-term liabilities. Based
upon management's knowledge and experience, the Company believes that its
national network of loan origination correspondent brokers (see "--Loan
Origination Capability and Correspondent Network"), underwriting and loan
processing systems, securitization experience and loan product innovations have
established the Company's name in the Credit Tenant Loan market place and that
continued innovation will permit the Company to expand into other related
investment activities.

Since 1995, the Company has closed over 120 Credit Tenant Loans with an
aggregate original principal amount exceeding $480 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, the Company expects will aggregate
approximately $930 million (subject to reduction to $730 million at September 1,
1998), and will be provided by NationsBank, N.A. ("NationsBank"), and Prudential
Securities Credit Corporation ("Prudential Credit"). In 1997, CLF completed the
first ever CTL Pool Financing involving a variety of Credit Tenants and multiple
enhanced net leased properties. This transaction was accomplished through 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.

The Company's revenues are principally derived from the spread between
interest revenues from its loans and the cost it incurs on its borrowings. The
Company's business strategy is to grow its revenues both through increasing loan
origination volumes and increasing the net interest spread on its loans and
other investments. This increased spread may occur from the origination of
higher margin products and/or from decreasing the Company's cost of funding. The
Company's strategy is to pool and finance its Credit Tenant Loans in order to
lower its costs of funds, which it expects to accomplish primarily through
issuing collateralized obligations backed by pools of Credit Tenants Loans. The
Company, however, from time to time on an opportunistic basis, may sell equity
interests in such pools or sell whole loans.

1
<PAGE>

lack of historic loan origination volume, and the completion of only a single
CTL Pool Financing which was of limited size and diversity, during the past
three years. The Company's negative net income for the period from September 29,
1995 through December 31, 1995, and for the years ended December 31, 1996 and
1997 was approximately ($1.7 million), ($3.7 million) and ($3.4 million),
respectively. On a pro forma basis (after giving effect to the adjustments
referred to below under "--Summary Selected Historical and Pro Forma Financial
Information"), the Company's net income for the year ended December 31, 1997
would have been approximately $1.0 million. The Company's Net Cash Used in
Operating Activities for the period from September 29, 1995 through December 31,
1995, and for the years ended December 31, 1996 and 1997 was approximately ($4.4
million), ($13.6 million) and ($2.7 million), respectively. There is no
assurance that the Company will be profitable in the future, and it should be
noted that the Company's experience in CTL Pool Financing transactions is
limited to the one CTL Pool Financing accomplished in January 1997, and the
Company's future business plans call for it to expand into related lines of
business in which it has no or limited experience. For certain of these new
businesses, the Company will require financing, the availability of which will
be dependent upon numerous factors, including, possibly, the Company's ability
to attain positive cash flow or net income and certain minimum net worth
requirements.

CTL Pool Financings involve the formation and utilization of a special
single-purpose entity into which is placed a pool of multiple borrower Credit
Tenant Loans involving multiple Credit Tenants. The Credit Tenant Loans in CTL
financing pools are either "bond" leases or enhanced to "bond" lease status so
that these loans are rated on the quality of the Credit Tenant rather than on
the value of the underlying real property. The ratings received for any pool
will be dependent, in part, on the size of the pool and the diversity of the
Credit Tenant Loans. A CTL Pool Financing as structured in the past by CLF,
differs from other mortgage pool financings because of the reliance of a Credit
Tenant Loan on the credit rating of the underlying Credit Tenant and the
expected cash flow therefrom. This reliance upon the expected cash flow from the
applicable Credit Tenant, rather than the underlying value of the real property,
allows the Company to underwrite higher loan to value loans with prepayment
protection provisions that increase the proceeds available to the borrower.

As of May 15, 1998, CLF held 93 Credit Tenant Loans with an aggregate
original principal balance exceeding $350 million (the "Existing Loans"). In
addition, as of May 15, 1998, CLF has issued 88 commitments to fund further
Credit Tenant Loans with an aggregate committed principal balance of
approximately $402 million (the "Committed Loans"). Furthermore, as of May 15,
1998, the Company has purchased or committed to purchase real property net
leased to tenants with an aggregate purchase price of approximately $12 million
(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 May 15, 1998,
totaled approximately $623 million), and the business which may be generated
therefrom. See "--Existing Loans and Pipeline for Future Originations." The
Company intends to engage in a transaction to pool and finance all or a portion
of the Existing Loans and certain of the Committed Loans following completion of
the Offering and expects to pool and finance the remaining Committed Loans in
future transactions.

The Company's objective is to maximize stockholder value by creating an
on-going and increasing cash flow stream through originating, pooling and
financing Credit Tenant Loans and by investing in related 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 lines of 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 expects to begin offering
Mezzanine Construction Loans and retaining or purchasing Subordinate Interests
following the Offering, but has not originated, retained or purchased any of
such

2
<PAGE>

assets to date. As of June 25, 1998, the Company has acquired three parcels of
real property net leased to Credit Tenants for an aggregate purchase price of
approximately $10.1 million.

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

The financing of 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. As more fully described below, under a Credit Tenant Loan, the
principal credit underlying the transaction is not that of the borrower nor is
it the liquidation value of the applicable real estate, rather the principal
credit is the credit of the applicable tenant.

The Company primarily focuses on making loans on properties net leased to
Credit Tenants. This focus differentiates the Company from conventional real
estate lenders. The typical Credit Tenant Loan made by the Company (other than
the Company's Extended-Term Loans) 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 or a suitable
defeasance mechanism. 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 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 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. Consequently, loans secured by a "bond"
lease are analyzed as if they were a direct obligation of the applicable tenant
and, in a pool financing, can be expected to receive credit ratings equivalent
to the unsecured debt rating of the applicable Credit Tenants.

3
<PAGE>
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. Under many net leases, in contrast to a "bond" lease, a tenant has the
right to terminate the applicable lease or abate rent in certain circumstances,
such as the occurrence of significant casualty loss or condemnation, or failure
by the landlord 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 do not qualify as "bond" leases have
been traditionally 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
expected to be available to the Company in the pooling and financing of Credit
Tenant Loans.

The Company's Lease Enhancement mechanisms consist primarily of an
integrated set of specialized insurance policies, servicer advancing mechanisms,
loan documents, and various borrower and expense reserve accounts. The
specialized insurance policies are non-cancellable during the term of the Credit
Tenant Loan and have been designed to protect the holder of the mortgage from
(i) under all of the Company's Credit Tenant Loans, rent abatement or lease
termination under the associated Credit Tenant Lease as a result of a casualty
or condemnation event, (ii) under the Company's Extended-Term Loans, failure of
the borrower to pay the balance of the mortgage outstanding, if any, at the
expiration of the initial term of the Credit Tenant Lease, or (iii) under the
Company's CPI Loans, increases in rent. The servicer advancing mechanisms and
reserve funds (combined with specialized borrower recourse provisions where
appropriate) have been established to support the landlord's maintenance and
other obligations under a Credit Lease in order to mitigate the risk of rent
abatement or lease termination by the Credit Tenant due to the failure of a
landlord to perform his obligations.

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. Based upon management's
knowledge and experience in the industry, 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 to promote these programs.

4
<PAGE>

permanent financing earlier in the borrowing cycle. As of May 15, 1998, the
Company had committed to fund approximately $168 million in the aggregate of
Construction/Permanent Loans, including approximately $64 million for which
NationsBank has commenced advances under the construction loan portion under the
1TC 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 KeyBank, N.A. and other selected banks that
make construction loans on net leased properties.

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
periodic 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 May 15, 1998, the Company had funded approximately $54 million
in additional aggregate principal amount of Extended-Term Loans and has
committed to fund approximately $98 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 (loans made thereunder, "CPI Loans") (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. As of May 15, 1998, the
Company has committed to fund one CPI Loan with an estimated principal balance
of approximately $22 million.

RELATED BUSINESSES

As part of the Company's growth plans, the Company intends to expand into
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 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). Such loan will be 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, consequently reducing the risk
that the developer will default on the Construction Loan. The Company expects
these transactions to generate yields superior to conventional bank construction
loan yields. 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.

5
<PAGE>

EQUITY INVESTMENTS IN NET LEASED PROPERTIES. In connection with its Credit
Tenant Loan business, the Company frequently is presented with opportunities to
purchase net leased properties from developers, and other owners or tenants of
net leased properties. From time to time, the Company intends to purchase net
leased properties, make its usual Credit Tenant Loan upon such properties (to be
pooled and financed later) and retain ownership of the properties. 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.

COMMERCIAL MORTGAGE-BACKED SECURITIES. In its Credit Tenant Loan business,
the Company will issue collateralized obligations backed by pools of Credit
Tenant Loans. The Company anticipates that it will retain the Subordinate
Interests of such pools depending upon the then current market condition and its
business needs. Based upon management's knowledge and experience in the
industry, the Company believes that it is in a unique position to analyze
whether the Subordinate Interests of its CTL pools 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 specialized skills to analyze the risks
associated with investing in the Subordinate Interests in its own CTL pools,
management believes, based upon its knowledge and experience in the industry,
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 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 REITs, registered investment companies, partnerships and other
investment funds and real estate operating companies involved in the ownership
of real estate interests or the rendering of real estate-related services.

BUSINESS STRATEGY

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

The Company has a specialized and experienced staff (a number of whom have
been previously employed by the real estate departments of 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 Company has continuously engineered its loan
underwriting and closing process with the intention of eliminating redundant
procedures and speedily approving loans to prospective borrowers. The Company
believes, based upon management's knowledge and experience in the industry, that
its current process is one of the most streamlined and comprehensive in the
Credit Tenant Loan industry.

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) and the
increasing importance of capital markets in real estate financing. 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

6
<PAGE>
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, CPI 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.
Based upon management's experience in the industry, the Company believes
that it can utilize its existing credit tenant financing programs to make,
pool and finance Credit Tenant Loans on favorable terms on properties net
leased to BB Grade tenants. Management believes that the market for
financing properties net leased to tenants with BB 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 pool and finance the
Credit Tenant Loans, while retaining the ownership of the properties.

Although the Company presently outsources servicing, the Company may explore
acting as a primary servicer, subservicer or special servicer.

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). Based upon its
knowledge and experience in the industry, 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.

Based upon management's knowledge and experience in the industry, 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.

7
<PAGE>

As its loan volume grows, the Company expects to continue to improve cost
efficiency by modestly 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 backed by
enhanced leases with the sale of approximately $130 million of mortgage-backed
pass-through certificates. This securitization was rated by Duff & Phelps Credit
Rating Co. ("DCR") and Fitch IBCA, Inc. ("Fitch"). 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 May 15, 1998, of the 93 outstanding loans owned by the Company, none were
delinquent more than 30 days or are otherwise nonperforming.

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
pooling and financing. 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 pooling and financing. See "The Company--Hedging
Strategy."

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 May 15,
1998, of approximately $342 million. In addition, the Company will assume
commitments made by CLF to fund approximately $402 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. Based
on management's review of the publicly available ratings for its Credit Tenants
and Internal Classifications of the limited number of tenants which do not have
publicly available credit ratings, management believes that the Credit Tenants
underlying approximately 92% in aggregate principal amount of the Existing Loans
are rated Investment Grade (with the remaining 8% being rated BB Grade) and the
Credit Tenants underlying approximately 98% of the expected aggregate principal
amount of the Committed Loans are rated Investment Grade. The Company expects to
pool and finance 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 CTL Pool Financing (based upon a
preliminary review by the Rating Agencies of a large portion of this loan pool)
is expected by management to result in a significantly higher percentage of the
loan pool being rated AAA than were obtained in the first CTL Pool Financing. In
each case, the amount of the loans and commitments listed above are as of May
15, 1998, and are expected to increase between such date and the closing of the
Offering. In addition, as of June 25, 1998, the Company will assume from CLF
three parcels of real property net leased to Credit Tenants for an aggregate
purchase price of approximately $10.1 million.

8
<PAGE>

"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 the substantial majority of
these Committed 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 ("Rate-Locked Loans"). Management
believes, based on the Company's operating experience, that a significant
portion of loans in the Application Stage and a lesser percentage 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 generated
closed and Rate-Locked Loans totaling approximately $115 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 May 15, 1998, the Company's total pipeline of 265 loans either under
various stages of negotiation or under due diligence totaled approximately
$1.3 billion, the largest such loan having a principal amount of $36
million. Of this pipeline, the Company had 88 Committed Loans (potential
loans as to which the Company had accepted signed loan applications and
commenced due diligence) with respect to approximately $402 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 $239
million, and $383 million, respectively.

- Based upon its experience and responses from customers, the Company
believes that its Extended-Term Loans 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. As of May 15, 1998, the
Company had funded approximately $54 million in Extended-Term Loans and
had committed to make an additional $98 million of Extended-Term Loans.
Furthermore, as of May 15, 1998, the Company had committed to fund
approximately $168 million in aggregate principal amount of
Construction/Permanent Loans.

- 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 BB
Grade tenants (which management believes, based upon its industry
experience, is a large potential market for its programs), Mezzanine
Construction Loans and Consumer Price Index financing. In addition, the
Company anticipates acquiring properties net leased to Credit Tenants on
which it expects to place its Credit Tenant Loans.

9
<PAGE>
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, the Company's loan originations
will continue to grow during calendar year 1998. There can be no assurance,
however, that the Company's growth will continue.

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 60
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. The Company has entered
into a written or oral arrangement with each of its correspondent brokers, who
are generally compensated by the applicable borrower. In general, pursuant to
the Company's arrangements with its correspondents, the Company has agreed to
originate loans primarily through those brokers which have entered into a
correspondent relationship with the Company. The Company agrees to provide these
correspondent brokers with training and information regarding the Company's
products. These correspondent brokers are not required to originate loans
exclusively through the Company, although the Company closely tracks the volume
of loans generated by each of its correspondents and does replace correspondent
brokers with whom it is not satisfied.

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.

A comprehensive marketing, advertising and public relations program supports
correspondent loan origination efforts. The objective of the program has been to
establish and 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, based upon its experience and
responses from customers, that 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.

Based upon responses from correspondent brokers as well as the Company's
experience, 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
borrowers for Credit Tenant Loans and facilitating the loan closing process,
rather than focusing solely on underwriting each loan.

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

10
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CREDIT FACILITIES

The Company entered into the Prudential Warehouse in the initial amount of
$250 million on July , 1998 which amount is expected to increase to $350
million upon closing of the Offering, based upon the application of the net
proceeds of the Offering and the consequent achievement of certain minimum net
worth requirements. The Prudential Warehouse will expire one year from the date
of closing of the Offering. As with the NationsBank Warehouse, the Company
intends to utilize the Prudential Warehouse for purposes of funding and holding
the Company's Credit Tenant Loans prior to pooling and financing. In addition,
on July , 1998 the Company entered into a Mezzanine Construction Loan
financing facility (the "Mezzanine Construction Facility") with Prudential
Credit which the Company expects to be in the amount of $30 million at the
closing of the Offering and the application of the net proceeds thereof. The
Mezzanine Construction Facility will be used by the Company to fund its
Mezzanine Construction Loans.

The availability of financing to the Company under the Warehouse Credit
Facilities will be subject to compliance by the Company with the terms and
conditions established for each such facility.

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 May 15, 1998,
were in the aggregate amount of approximately $342 million and $402 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 $21.4 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 $500,000.

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.

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<PAGE>
The number of shares of the Company and the cash that each equity ownership
class of CLF will receive in conjunction with this transaction, in accordance
with the Partnership agreement, is as follows:

<TABLE>
<CAPTION>
NUMBER
OF SHARES CASH
---------- -------------
<S> <C> <C>
General partners:
CLF Holdings, Inc. ............................................. 275,308 --
CLFC HP II, Inc. ............................................... 39,225 $ 215,862
Limited partners:
Preferred....................................................... -- 21,370,295
Class A......................................................... 1,922,007 290,000
Class B......................................................... 1,250,094 --
Class C......................................................... 1,053,366 --
---------- -------------
4,540,000 $ 21,876,157
---------- -------------
---------- -------------
</TABLE>

The Company will record the recapitalization of the predecessor historical
balance sheet as of March 31, 1998, including the assets, assumption of
liabilities and deficits at their historical amounts.

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."

The Company expects that it will originate all of its future loans through a
newly-formed subsidiary limited partnership (a Delaware limited partnership
which, upon conclusion of the Formation Transactions will be renamed "Capital
Lease Funding, L.P.") of which the Company directly owns 100% of the limited
partnership interests and, indirectly through a wholly owned subsidiary, 100% of
the general partnership interests. In addition, the Company expects that it will
purchase real estate through individual Delaware business trusts of which it
will be the sole beneficiary.

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 38%
and 62%, respectively, of the then outstanding Common Stock of CLF, Inc.

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
exclusion from regulation under the Investment Company Act.

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 consolidated 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 consolidated
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, based upon its
knowledge and experience in the industry, that its staff is largely sufficient
in terms of size, expertise and

12
<PAGE>
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 $0.7 million, resulted in an economically inefficient transaction.
However, this initial securitization resulted in a number of benefits for the
Company. The Company has received preliminary subordination levels from the
Rating Agencies in connection with a proposed second CTL Pool Financing during
the fourth quarter of 1997 and again in June 1998. 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. Based upon preliminary subordination levels received verbally
from one or more of the Rating Agencies for pools presented for review in
October of 1997 and June of 1998, management believes that pools of Credit
Tenant Loans greater than $200 million and involving more than 10 Credit Tenants
can be efficiently and profitably securitized. Management estimates, after
consulting with its bankers and investment advisors, that the value of the
Company's loans exceeded their carrying value by $10 million at December 31,
1997, and by $13 million at May 15, 1998, after giving effect to the value of
associated hedge positions.

The summary selected unaudited pro forma balance sheet as of March 31, 1998
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 March 31, 1998. The summary selected unaudited pro
forma statements of operations data for the three months ended March 31, 1998
and 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."

13
<PAGE>

<TABLE>
<CAPTION>
SEPTEMBER 29
(COMMENCEMENT
OF OPERATIONS)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, TO
--------------------------------------- --------------------------------------- DECEMBER 31,
HISTORICAL HISTORICAL CLF, L.P. --------------
PRO FORMA ------------------------- PRO FORMA -------------------------
----------- 1998 1997 COMPANY 1997 1996 HISTORICAL
1998 ----------- ----------- ----------- ----------- ----------- CLF, L.P.
----------- 1997 --------------
(UNAUDITED) (UNAUDITED) ----------- 1995
(UNAUDITED) (UNAUDITED) --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:

REVENUE:
Interest income from
mortgage loans....... $5,279,888 $5,279,888 $ 1,498,770 $9,859,768 $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of
mortgage loans....... -- -- (160,782) (160,782) (160,782) (923,611) --
Other revenue from
mortgage loans....... 20,787 20,787 8,081 43,326 43,326 16,520 --
----------- ----------- ----------- ----------- ----------- ----------- --------------
Total Revenues......... 5,300,675 5,300,675 1,346,069 9,742,312 9,742,312 4,153,585 224,313
----------- ----------- ----------- ----------- ----------- ----------- --------------

LOAN EXPENSES:
Interest on repurchase
agreements........... 3,288,281 4,899,369 1,146,617 3,662,631 8,829,548 4,048,601 221,400
Loss on loan in
default.............. -- -- -- -- -- -- 717,359
Servicer fees.......... 40,721 40,721 13,341 76,328 76,328 50,320 --
----------- ----------- ----------- ----------- ----------- ----------- --------------
Total Loan Expenses.... 3,329,002 4,940,090 1,159,958 3,738,959 8,905,876 4,098,921 938,759
----------- ----------- ----------- ----------- ----------- ----------- --------------

OPERATING EXPENSES....... 1,192,907 1,105,407 752,811 4,459,040 4,109,040 3,805,230 1,087,320
----------- ----------- ----------- ----------- ----------- ----------- --------------

OPERATING INCOME (LOSS).. 778,766 (744,822) (566,700) 1,544,313 (3,272,604) (3,750,566) (1,801,766)

OTHER INCOME (EXPENSE)... 38,956 (885,359) 61,581 169,889 (122,938) 86,900 136,789
----------- ----------- ----------- ----------- ----------- ----------- --------------
INCOME (LOSS) BEFORE
PROVISION FOR FEDERAL AND
STATE INCOME TAX......... 817,722 (1,630,181) (505,119) 1,714,202 (3,395,542) (3,663,666) (1,664,977)
PROVISION FOR FEDERAL AND
STATE INCOME TAX....... (327,100) -- -- (685,700) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- --------------
NET INCOME (LOSS)........ $ 490,622 $(1,630,181) $ (505,119) $1,028,502 $(3,395,542) $(3,663,666) $ (1,664,977)
----------- ----------- ----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- ----------- ----------- --------------
PRO FORMA NET INCOME PER
SHARE.................... $ 0.04 $ -- $ -- $ 0.09 $ -- $ -- $ --
----------- ----------- ----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- ----------- ----------- --------------

OTHER DATA:
Cash flows from
operating
activities........... $ -- $(4,060,275) $ 4,684,622 $ -- $(2,704,304) $(13,630,639) $ (4,411,903)
Cash flows from
investing
activities........... $ -- $ (1,198) $ (12,968) $ -- $ (60,612) $ (77,581) $ --
Cash flows from
financing
activities........... $ -- $6,232,704 $ (487,559) $ -- $ 5,032,880 $ 7,546,214 $ 12,714,139
Number of loans
funded............... -- 23 12 -- 60 26 6
Original principal
amount of loans
funded............... $ -- $62,475,112 $50,963,285 $ -- $224,866,628 $137,940,791 $ 22,735,140
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1998 AS OF DECEMBER 31,
-------------------------- ---------------------------------
PRO FORMA HISTORICAL HISTORICAL CLF, L.P.
------------ ------------ ---------------------------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) 1997 1996
------------ -------------------
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 11,964,425 $ 6,579,425 $ 4,408,194 $ 2,140,230
Mortgage loans held for sale..................................... 323,509,279 323,509,279 263,473,373 157,719,912
Total assets..................................................... 342,423,635 337,423,635 274,378,058 168,349,353
Notes payable.................................................... -- 18,507,023 12,274,318 487,559
Total liabilities................................................ 263,274,799 337,491,642 272,815,884 154,671,846
Total partners' capital (deficit)/ stockholders' equity.......... 79,148,836 (68,007) 1,562,174 13,677,507
</TABLE>

14
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered Hereby................................. 7,340,000 shares (1)

Common Stock to be Outstanding After the Offering........... 11,880,000 shares (1)(2)

Use of Proceeds............................................. To repay 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 Nasdaq National Market Symbol...................... CLFI
</TABLE>

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

(1) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 1,101,000 shares will not be exercised. See "Underwriting."

(2) Includes 4,540,000 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 1,425,600 shares of
Common Stock reserved for issuance under the Company's 1998 Stock Option
Plans. As of the closing of the Offering, the Company expects to grant
options to acquire 712,800 shares of Common Stock pursuant to such plan on
terms to be determined. See "Directors and Executive Officers--Stock
Options."

15
<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.

RISKS RELATED TO OPERATIONS

THE LACK OF OPERATING HISTORY DOES NOT PROVIDE A LONG-TERM BASIS ON WHICH TO
PROJECT FUTURE RESULTS. 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 positive earnings from
operations. The Company also will be subject to the risks generally associated
with the formation of any new business.

HISTORICALLY, THE COMPANY HAS EXPERIENCED SIGNIFICANT LOSSES AND MAY NOT
ACHIEVE PROFITABLE RESULTS. As a start-up company, the Company has incurred
significant losses and has had substantial negative cash flow since its
inception. The Company's negative net income for the period from September 29,
1995 through December 31, 1995, and for the years ended December 31, 1996 and
1997 was approximately ($1.7 million), ($3.7 million) and ($3.4 million),
respectively. The Company's Net Cash Used in Operating Activities for the period
from September 29, 1995 through December 31, 1995, and for the years ended
December 31, 1996 and 1997 was approximately ($4.4 million), ($13.6 million) and
($2.7 million), respectively. 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, pooling and financing
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 expects to
continue to have operating losses through the closing of this Offering and the
application of the net proceeds therefrom as provided under "Use of Proceeds"
and may continue to have operating losses at least through the first pooling and
financing of loans following the Offering.

THE COMPANY'S OPERATIONS ARE DEPENDENT UPON THE CREDIT TENANT LOAN AND
SECURITIZATION BUSINESS. The Company is highly dependent for its revenues and
profitability on its ability to continue to originate, pool and finance its
Credit Tenant Loans. There can be no assurance that the Company will be able to
continue to originate, pool and finance 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 lines of business. The
Company's failure to continue originating, pooling and financing such loans
would likely have a material adverse effect on the Company's business, financial
condition and results of

16
<PAGE>

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 CTL Pool Financing, which are subject to risk of loss of principal and
credit downgrades that could hinder the ability of the Company to pool and
finance 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 CTL Pool
Financing, is dependent upon various market factors including changes in CMBS
yields and interest rates.

RISKS RELATED TO CREDIT TENANT LOANS

THE LIMITED HISTORY OF SECURITIZATION OF CREDIT TENANT LOANS PROVIDES
UNCERTAINTY AS TO WHETHER THE COMPANY WILL BE ABLE TO EXECUTE ITS BUSINESS
PLAN. The Company is aware of only four public securitizations of pools
containing a significant number of Credit Tenant Loans with a variety of Credit
Tenants and multiple properties. There can be no assurance that securitizations
of this type of assets will achieve broad market acceptance. The inability of
the Company to securitize its Credit Tenant Loans on acceptable terms would
adversely effect the Company's business, financial condition, results of
operations and prospects. The securitization of Credit Tenant Loans is a fairly
new component of the overall securitization market. The Rating Agencies have
only recently developed the models and other ratings methodologies that permit
them to analyze and rate pools of Credit Tenant Loans. A material change in the
modeling techniques or ratings methodologies by the Rating Agencies, a failure
of the portion of the market that is made up of pools of Credit Tenant Loans to
further develop, or a downturn in the securitization market for corporate
credits generally could have a material adverse impact on the Company's ability
to securitize its Credit Tenant Loans.

A DOWNTURN IN INDUSTRIES IN WHICH THE COMPANY HAS A HIGH LOAN CONCENTRATION
COULD ADVERSELY AFFECT THE COMPANY'S RESULTS AND INVESTMENTS. Of the Company's
93 Credit Tenant Loans with an aggregate balance of approximately $342 million
on May 15, 1998, 55 loans, with an aggregate balance of approximately $120
million, or 35% of the aggregate balance of Credit Tenant Loans are secured by
leases with tenants in the Retail Drug industry, 3 loans, with an aggregate
balance of approximately $38 million, or 11.1% of the aggregate balance of
Credit Tenant Loans are secured by leases with tenants in the Healthcare
Services industry, and 5 loans, with an aggregate balance of approximately $37
million, or 11.0% of the aggregate balance of Credit Tenant Loans are secured by
leases with tenants in the Grocery industry. In addition, the Company holds
Credit Tenant Loans secured by leases with Credit Tenants in each of the
following industries which each exceed 5% (but are less than 10%) of the
aggregate balance of the Company's Existing Loans: Retail Electronics;
Insurance; Retail Building Materials; Retail Discount and General Merchandise;
and Banking. A downturn in any of these industries, particularly the industries
in which the Company has its highest number and amount of loans, could have a
material adverse effect on the Company's ability profitably to sell or
securitize loans it holds in portfolio or to orginate loans in the future and
consequently on the Company's results. In addition, such an event could have a
material adverse effect on the value of the Company's investments.

TENANT CONCENTRATION COULD SUBJECT THE COMPANY TO RISKS ASSOCIATED WITH
CERTAIN TENANTS. Of the Company's total of 93 Credit Tenant Loans with an
aggregate balance of approximately $342 million as of May 15, 1998, 22 Credit
Tenant Loans, with an aggregate balance of approximately $51 million or 14.9% of
the aggregate balance of Credit Tenant Loans are upon properties leased to, or
which leases are guaranteed by, CVS Corporation or a subsidiary thereof, and 20
Credit Tenant Loans, with an aggregate balance of approximately $38 million, or
11.2% of the aggregate balance of Credit Tenant Loans are upon properties leased
to, or which leases are guaranteed by, Rite Aid Corporation. In addition,
approximately six other corporations each lease or guarantee properties which
represent over 5% (but are less than 10%) of the aggregate outstanding balance
of the Company's Credit Tenant Loans as of May 15, 1998. A change in the credit
rating of the Credit Tenants and/or the Guarantors may have a related positive
or adverse effect on the rating of the related Credit Tenant Loans. In addition,
any financial difficulty or bankruptcy

17
<PAGE>
of one or more of such Tenants or Guarantors resulting in nonpayment or delay in
payment of rental payments and other amounts due under such Credit Tenant Leases
could, as a result of this concentration, have a greater adverse effect on the
Company than a similar problem at a less significant tenant. Such events could
also have a material adverse effect on the Company's ability profitably to sell
or securitize loans it holds in portfolio or to originate loans in the future
and consequently on the Company's results. In addition, such an event could have
a material adverse effect on the value of the Company's investments.

GEOGRAPHIC CONCENTRATION COULD SUBJECT THE COMPANY TO RISKS ASSOCIATED WITH
CERTAIN GEOGRAPHIC AREAS. Of the Company's 93 Credit Tenant Loans with an
aggregate balance of approximately $342 million on May 15, 1998, 22 loans with
an aggregate balance of approximately $65 million or 19% of the aggregate
balance are located in New York, 10 loans with an aggregate balance of
approximately $54 million, or 15.7% of the aggregate balance of the Existing
Loans are located in Massachusetts, and 5 loans with an aggregate balance of
approximately $45 million, or 13.3% of the aggregate balance are located in
Texas. In the event of a tenant default, the ability of the Company to recover
upon its loans will be dependent upon the value of the underlying real estate.
The economy of the relevant state may be adversely affected by certain
developments to a greater degree than that of other areas of the country.
Moreover, in recent periods, several regions of the United States have
experienced significant downturns in the market value of real estate. Regional
economic downturns, particularly in areas where a number of Credit Tenant Loans
have been made, may result in elevated levels of Credit Tenant Lease defaults
and subsequent foreclosures. In addition, such an event would have a material
adverse effect on the value of the Company's investments.

LIMITED ASSETS AND OBLIGATIONS OF THE BORROWERS COULD SUBJECT THE COMPANY TO
INCREASED RISK THAT LOANS WILL NOT BE REPAID. 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 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.

A DECREASE IN THE CREDIT QUALITY OF TENANTS COULD ADVERSELY AFFECT THE VALUE
OF THE COMPANY'S INVESTMENTS AND ITS EARNINGS. The credit of each tenant or, if
applicable, the related guarantor, will generally be rated Investment Grade or
BB Grade. A decline in the credit rating of the tenants or, the assignment by
the Company in its underwriting process of too high of a 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.

IF THE COMPANY WERE TO INACCURATELY CLASSIFY THE CREDIT RATINGS OF
APPLICABLE CREDIT TENANTS, IT COULD ADVERSELY AFFECT THE VALUE OF THE COMPANY'S
INVESTMENTS AND ITS EARNINGS. A significant portion (22%) of the Company's
existing portfolio of Credit Tenant Loans consists of loans backed by leases
with Credit Tenants the ratings for which are Internal Classifications. These
Credit Tenants do not have publicly available credit ratings although the vast
majority of such Credit Tenants are public companies. In such cases, the Company
prepares an internally generated (generally after consultation with one or more
Rating Agencies) credit rating of each such Credit Tenant. In each case, the
Company has determined that, upon formal review of a Rating Agency, such Credit
Tenant would receive a credit rating of at least BB Grade. If, upon a formal
review by one or more Rating Agencies of any Credit Tenant Loan with an Internal
Classification credit rating, the Company were to be found to have erroneously
assigned too high of a
credit rating to such a Credit Tenant, the rating of the applicable Credit
Tenant Loan and its value to the Company could be adversely affected.

18
<PAGE>

A LACK OF AVAILABILITY OF FINANCING COULD ADVERSELY AFFECT THE COMPANY'S
RESULTS.

The Company expects to rely upon its ability to borrow money to fund its
origination of loans and investments. 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.

RISKS RELATED TO BORROWINGS

THE COMPANY EXPECTS TO BE HIGHLY LEVERAGED WHICH MAY SUBJECT THE COMPANY TO
INCREASED RISK OF LOSS. 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).

Required debt service will reduce cash and net income available for
operations. 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 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.

To create yields commensurate with its investment objectives and to reduce
the risks set forth above, the Company may leverage its assets through various
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 pool financing 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.

The Charter and Bylaws of the Company do not limit the level of debt the
Company may incur. However, the Board of Directors has adopted certain policies
to which the Company must adhere before increasing its level of indebtedness
above those available under the Warehouse Credit Facilities, although such
policies may be altered by the Board of Directors in its sole discretion. The
Company could become highly leveraged, which could 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 $259.6
million under its Warehouse Credit Facilities (calculated based upon the
outstanding balance under such facilities as of March 31, 1998). 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 and its
Warehouse Credit Facility with Prudential Securities Credit Corp. to provide the
majority of its cash for loan fundings. If the Company could not enter into
alternative funding arrangements, a deterioration in the financial condition of
NationsBank or Prudential Securities Credit Corp. could have a negative impact
on the Company's ability to fund its loans.

19
<PAGE>
RISKS RELATED TO MORTGAGE ASSETS

CREDIT AND MARKET EVENTS COULD ADVERSELY AFFECT THE VALUE OF THE COMPANY'S
INVESTMENTS AND EARNINGS. As of May 15, 1998 the Company had significant amounts
of Mortgage Loans pending securitization ($342 million), the market value of
which could be adversely affected by adverse CMBS market or tenant credit
events. 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, pooling and financing Credit
Tenant Loans is principally dependent on its ability to generate loans and to
finance such loans during the holding period pending pooling and financing, 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 pooling and financing, the percentage of
the principal balance of securities in any CTL Pool Financing 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 a CTL Pool Financing. 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 incurred to finance 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 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.
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.

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

20
<PAGE>
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.

LOSSES ON MORTGAGE LOANS AND SUBORDINATE INTERESTS MAY ADVERSELY AFFECT THE
COMPANY'S RESULTS. 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 and credit 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 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 MAY SUBJECT THE COMPANY TO INCREASED
RISK OF LOSS. 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). The Company has established no limits on its
ability to acquire or retain subordinate interests. 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

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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.

THE COMPANY'S NONRECOURSE COMMERCIAL MORTGAGE LENDING MAY SUBJECT THE
COMPANY TO THE RISK OF LOSS OF RENT. 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.

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.

CHANGES IN INTEREST RATES COULD ADVERSELY AFFECT THE COMPANY'S RESULTS. 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 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.

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PREPAYMENTS OF CERTAIN MORTGAGE LOANS COULD ADVERSELY AFFECT THE VALUE OF
THE COMPANY'S INVESTMENTS. 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,
the Company 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.

RISKS RELATED TO INVESTMENTS IN REAL ESTATE

INVESTMENTS IN REAL PROPERTY NET LEASED TO TENANTS BEAR CERTAIN RISKS
DIFFERENT THAN THOSE ASSOCIATED WITH CREDIT TENANT LOANS. 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 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, which may result in a loss by the Company of its
capital invested in, and anticipated profits from, such property.

INVESTMENTS IN REAL PROPERTY WHERE A NET LEASE HAS CEASED BEAR ALL RISKS
ASSOCIATED WITH DIRECT INVESTMENTS IN REAL ESTATE PROPERTIES. 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.

All real property owned by the Company will be subject to real property
taxes and, in some instances, personal property taxes. Such real and personal
property taxes may increase or decrease as property tax rates change and as the
properties are assessed or reassessed by taxing authorities. An increase in
property taxes on the Company's real property could affect adversely the
Company's income and 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 and income could be affected adversely by the existence of an
environmental liability with respect to its properties.

THE ABILITY OF TENANTS TO REJECT LEASES IN A BANKRUPTCY COULD ADVERSELY
AFFECT THE VALUE OF THE COMPANY'S INVESTMENTS. 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. Lease Enhancements do
not cover risks attendant to tenant bankruptcies. 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.

THE COSTS OF ANY APPLICABLE ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT THE
COMPANY'S RESULTS. 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.

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INVESTMENTS IN FOREIGN REAL ESTATE ASSETS COULD SUBJECT THE COMPANY TO
DIFFERENT RISKS. Any Credit Tenant Loans which the Company may make outside of
the United States or any direct investment in real estate properties outside of
the United States, will be subject to certain risks associated with such loans
or investments. Investments by the Company in Credit Tenant Loans or direct
investments in properties located outside of the United States create risks
associated with exposure to local political and economic conditions, the
uncertainty of foreign laws (including tax laws) and markets, fluctuations of
currency exchange rates, the enforceability of loan documentation and the
provisions of local foreclosure laws. In addition, income from activities
conducted in foreign jurisdictions may be subject to tax by those jurisdictions,
which would reduce the economic benefit of such investments. Neither the Company
nor its management has experience in conducting lending activities or in
investing in real property located in foreign countries. The Company currently,
intends to limit its initial foreign activities to Canada, Australia, the United
Kingdom and Mexico. The Company has not entered into any agreements to make
loans on or to acquire real estate in any foreign jurisdiction.

RISKS RELATED TO LEASE ENHANCEMENT

FAILURE OF THE COMPANY TO ADEQUATELY ANALYZE LEASES AND APPLY LEASE
ENHANCEMENT MECHANISMS. If in the Company's underwriting process, the Company
fails to adequately analyze a lease and to apply all appropriate Lease
Enhancement mechanisms, such a loan supported by such lease may be rejected
during the securitization process, which in turn could adversely affect the
value of the Company's investments and its results.

FAILURE OF LEASE ENHANCEMENT MECHANISMS WOULD ADVERSELY AFFECT THE VALUE OF
THE COMPANY'S INVESTMENTS AND ITS EARNINGS. 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. Furthermore, such event could adversely
effect the value of the loans held for securitization and the ability of the
Company to securitize such loans.

The Company has obtained non-cancellable casualty and condemnation insurance
policies from a third party insurance provider with respect to each Existing
Loan secured by a triple net lease or double net lease. Each such lease
enhancement policy provides generally that in the event of the exercise by a
Credit Tenant of its right to terminate the lease or abate rent as a result of a
casualty or condemnation, the enhancement insurer will on demand by the holder
of the mortgage have the option either to (i) pay to the insured a lump sum
payment equal to the outstanding principal balance of the Credit Tenant Loan,
plus accrued and unpaid interest thereon through the date of payment, and take
an assignment of the Credit Tenant Loan and all related rights (including any
rights under any related hazard or other insurance policies and rights to any
condemnation proceeds) or (ii) pay, for the remaining term of the Credit Tenant
Loan or the period of any rent abatement period, whichever is shorter, the
difference between the monthly rental payment and the amount actually received
from the Credit Tenant. Protection against casualty or condemnation termination
or abatement rights is provided first by the enhancement insurer through the
lease enhancement insurance policies and second, by the application of any
condemnation award or casualty insurance coverage. There are certain exclusions
under the lease enhancement insurance policies relating to war, insurrection,
rebellion, revolution or civil riot and radioactive matter, earthquakes (in
earthquake zones) and takings (other than by condemnation) by reason of danger
to public health, public safety or the environment. At May 15, 1998, less than
5% of the mortgage loans were with respect to properties in earthquake zones.

The Company obtains extended amortization insurance from a third party
insurance provider with respect to each Existing Loan that has an amortization
period that extends beyond the initial term of the associated Credit Tenant
Lease. Under each extended amortization policy, in the event that a borrower

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defaults in its obligations to pay under the terms of the Loan after the
expiration of the initial term of the Credit Tenant Lease, the Extended
Amortization insurer will protect the holder of the mortgage by (i) paying
monthly debt service or (ii) paying to the insured a lump sum payment equal to
the outstanding principal balance of the Credit Tenant Loan, plus accrued and
unpaid interest thereon through the date of payment, and take an assignment of
the Credit Tenant Loan.

The failure by a Lease Enhancement insurer to pay under the terms of the
Lease Enhancement Policies (provided such failure occurred prior to the
securitization of the associated Credit Tenant Loan) could result in the loss by
the Company of its capital invested in, and anticipated profits from, such loan.

Double net leases contain termination or abatement rights on the part of the
Credit Tenant in the event of the failure of the lessor to fulfill its
obligations under the Credit Tenant Lease. In particular, such Credit Tenant
Leases may include rights to terminate the Credit Tenant Lease or abate rent in
the event of a failure by the borrower, as and if required by the Credit Tenant
Lease, to maintain and repair the related commercial property or the related
common areas, if any as well as a variety of other non-recurring, non-expected
and non-quantifiable obligations such as environmental remediation. In each such
case, as applicable, the Credit Tenant Loan is additionally secured by a pledge
of a borrower reserve fund, funded over time from a portion of the Credit
Tenant's monthly rent payment on the Credit Tenant Lease not required for debt
service, in an amount which is generally at least 125% of the amount determined
by an engineering firm approved by the Company to be sufficient to cover the
costs of any such expected maintenance and repair during the term of the Credit
Tenant Loan. In the event (i) maintenance or repair is required which costs more
than amounts which are available in the borrower reserve fund, (ii) the borrower
fails to perform such maintenance or repairs at its own expense, and (iii)
either (x) the servicer is not required to or fails to make required advances
and/or perform appropriate protective actions, or (y) the Company declines to
make advances and perform appropriate protective actions, then the Credit Tenant
may be entitled to exercise a maintenance termination or abatement right under
the Credit Tenant Lease, which may result in a loss by the Company of its
capital invested in, and anticipated profits from, such loan.

THE LIMITED NUMBER OF INSURANCE CARRIERS AVAILABLE TO PROVIDE LEASE
ENHANCEMENTS RESTRICTS THE ABILITY OF THE COMPANY TO REPLACE SUCH INSURERS. The
Company presently obtains specialized Lease Enhancement insurance policies from
two carriers, as part of its Lease Enhancements. A deterioration in the
relationship of the Company with one or all of its current 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.

RISKS RELATED TO BUSINESS STRATEGY AND POLICIES

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.
Failure of the Company to accomplish its business strategy could adversely
affect the value of an investment therein.

FAILURE TO MANAGE GROWTH MAY ADVERSELY AFFECT THE COMPANY. As of May 15,
1998, the Company had 21 employees. If the Company grows rapidly, it may
experience a significant strain on its management, operational, financial and
other 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

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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, results of operations and prospects.

THE COMPANY'S BROAD DISCRETION WITH REGARD TO POLICIES AND STRATEGIES
CREATES UNCERTAINTY. 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.

HEDGING TRANSACTIONS MAY NOT EFFECTIVELY PROTECT THE COMPANY AGAINST
ANTICIPATED RISKS AND MAY SUBJECT THE COMPANY TO CERTAIN OTHER RISKS AND
COSTS. 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 which the Company commits a rate to a
borrower and the date such Mortgage Loan is included in a securitization or is
otherwise sold. The Company's current policy is to attempt to hedge
substantially all of its interest rate risk during this period. 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. The Company's hedging strategy may serve to
reduce the returns which the Company could possibly achieve if it did not hedge
certain risks.

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.

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. Furthermore, the enforceability of agreements underlying derivative
transactions may depend on compliance with applicable statutory and commodity
and other regulatory requirements and, depending on the identity of the
counterparty, applicable international requirements. 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.

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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 MAY ADVERSELY AFFECT THE
COMPANY'S RESULTS. 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.

FUTURE OFFERINGS OF DEBT AND EQUITY MAY ADVERSELY AFFECT THE 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 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.

IF THE COMPANY ELECTS GAIN ON SALE ACCOUNTING TREATMENT, IRREGULAR
SECURITIZATIONS MAY AFFECT THE MARKET PRICE OF THE COMMON STOCK. To the extent
the Company elects to securitize its loans in a transaction which would result
in gain on sale accounting, the Company will receive a significant portion of
its revenues from such securitizations. To the extent it cannot generate a
sufficient volume of Credit Tenant Loans to securitize in each fiscal quarter,
the Company may experience fluctuations in its quarterly financial results.
Uneven financial results from quarter to quarter may adversely affect the market
price of the Common Stock.

COMPETITION MAY ADVERSELY AFFECT THE ABILITY OF THE COMPANY TO CONDUCT ITS
BUSINESS.

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 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.

DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL COULD ADVERSELY AFFECT THE
COMPANY'S OPERATIONS IF SUCH PERSONNEL ARE NO LONGER AVAILABLE.

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. 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 or that services rendered thereunder will be
sufficient for the Company's purposes. 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.

28
<PAGE>

CONCENTRATION OF OWNERSHIP MAY ADVERSELY AFFECT THE ABILITY OF NEW INVESTORS
TO INFLUENCE THE COMPANY.

Upon completion of this Offering, the current owners of CLF will own
approximately 38% in the aggregate of the outstanding shares of Common Stock.
Accordingly, such current owners will collectively have significant influence
over the Company and may determine to vote their shares together. The Company's
management group has agreed to vote its shares together pursuant to the
Management Shareholders' Agreement. Such influence may result in Company
decisions which may not fully serve the best interests of all stockholders. The
Charter 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.

YEAR 2000 SOFTWARE DEFICIENCIES COULD ADVERSELY AFFECT THE COMPANY.

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 any material adverse
impact on the Company's business, financial condition or operations, although
this cannot be assured. In addition, there can be no assurance that "Year 2000"
problems will not adversely affect financial markets or the Company's lenders,
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, LEGAL AND OTHER RISKS

THE OFFERING RESULTS IN A DILUTION TO NEW INVESTORS. Purchasers of shares
of Common Stock in the Offering will experience an immediate and substantial
dilution of $8.34 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."

CHARTER PROVISIONS MAY RESTRICT A CHANGE OF CONTROL. 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 Charter 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.

Certain provisions of the Maryland General Corporation Law, as amended
("MGCL") relating to "business combinations" and a "Control Share Acquisition"
and of the Charter 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.

Furthermore, prior to the completion of the Offering, the Company expects
that it will adopt a shareholder rights plan. While the terms of such plan have
yet to be determined, the Company expects that

29
<PAGE>

this plan 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.

STAGGERED BOARD COULD DISCOURAGE A CHANGE OF CONTROL. 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.

ISSUANCE OF ADDITIONAL SHARES AND PREFERRED SHARES COULD DISCOURAGE A CHANGE
OF CONTROL. 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.

ACCOUNTING RULE CHANGES COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS. 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.

FAILURE TO DEVELOP A STABLE MARKET MAY RESULT IN A DEPRESSED MARKET
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."

FAILURE TO MAINTAIN EXCLUSION FROM THE INVESTMENT COMPANY ACT WOULD RESTRICT
THE COMPANY'S OPERATING FLEXIBILITY. The Company at all times intends to
conduct its business so as to be excluded from regulation 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.

SALES BY SHAREHOLDERS COULD ADVERSELY AFFECT THE MARKET PRICE OF THE COMMON
SHARES. Upon completion of the Offering, the Company will have a total of
11,880,000 shares of Common Stock outstanding. Of these shares, all 7,340,000
shares of Common Stock offered hereby (8,441,000 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. The remaining
shares of Common Stock outstanding (4,540,000 shares) will be "restricted
securities"

30
<PAGE>

as defined by Rule 144 promulgated under the Securities Act. Pursuant to the
Registration Rights Agreement, it is expected that the holders of an aggregate
of 4,540,000 shares of Common Stock or their transferees will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. See "Description of Capital Stock--Registration Rights
Agreement."

All investors holding equity interests in the Company on the date hereof
(including Hyperion Partners II L.P., South Ferry #2, 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). Furthermore, such securities would
be available for private resale. 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."

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 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 and may result in the
reduction of the price of shares of the Common Stock. The Company is unable to
estimate the amount, timing or nature of additional offerings as they will
depend upon market conditions and other factors.

31
<PAGE>
USE OF PROCEEDS

The net proceeds from the Offering are estimated to be approximately
$101,478,000 ($116,836,950 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 $21.6 million to retire the preferred
interest issued by CLF, approximately $18.5 million to repay notes payable to
one of CLF's limited partners, approximately $0.3 million to a general partner
of CLF with the remainder (approximately $5.3 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 0.85% to LIBOR plus 6% (in each case per annum) and
matures on April 1, 2000. The notes payable to CLF's limited partner 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

CLF, Inc. has never declared or paid any cash dividends. CLF, Inc. intends
to retain future earnings for use in the development of its business and does
not anticipate declaring or paying any cash dividends on the Common Stock in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other factors, CLF, Inc.'s
earnings, financial condition, capital requirements, levels of indebtedness, and
other considerations which the Board of Directors deems relevant. The
distribution policy of CLF, Inc. is subject to revision at the discretion of the
Board of Directors. All distributions will be made by CLF, Inc. at the
discretion of the Board of Directors and will depend on the earnings and
financial condition of CLF, Inc., and such other factors as the Board of
Directors deems relevant.

32
<PAGE>
CAPITALIZATION

The capitalization of the Company, as of March 31, 1998, and as adjusted to
reflect the sale of the shares of the Common Stock offered hereby at an assumed
initial public offering price per share and the application of the estimated net
proceeds therefrom is as follows:

<TABLE>
<CAPTION>
ADJUSTMENTS FOR
CONTRIBUTIONS
AND THE PRO FORMA
OFFERING COMPANY
HISTORICAL --------------- --------------
CLF AS OF
MARCH 31, 1998
-----------------
(UNAUDITED)
<S> <C> <C> <C>
DEBT:
Repurchase agreement obligations(1)........................ $ 315,266,832 $ (55,709,820) $ 259,557,012
Notes payable to partner(2)................................ 18,507,023 (18,507,023) --
----------------- --------------- --------------
333,773,855 (74,216,843) 259,557,012
PARTNERS' CAPITAL (DEFICIT)/ STOCKHOLDERS' EQUITY:
Partners' Capital (Deficit)................................ (68,007) 68,007 --
Common Stock, $.01 par value;
50,000,000 shares authorized;
11,880,000 issued and outstanding
on a pro forma basis(3)(4)............................... -- 118,800 118,800
Additional paid-in capital................................. -- 79,030,036 79,030,036
----------------- --------------- --------------
Total Partners' Capital (Deficit)/Stockholders' Equity..... (68,007) 79,216,843 79,148,836
----------------- --------------- --------------
Total Capitalization................................... $ 333,705,848 $ 5,000,000 $ 338,705,848
----------------- --------------- --------------
----------------- --------------- --------------
</TABLE>

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

(1) Upon completion of the Offering and the application of the net proceeds to
the repayment of a portion of the principal and accrued interest outstanding
under the repurchase obligations, the Company will have approximately $260
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 $9.0 million, and assuming no
exercise of the Underwriters' over-allotment option to purchase up to an
additional 1,101,000 shares of Common Stock.

(4) Does not include 1,425,600 shares of Common Stock reserved for issuance upon
exercise of options granted under the Company's 1998 Stock Option Plans. See
"Directors and Executive Officers--Stock Options."

33
<PAGE>
DILUTION

Purchasers of shares of Common Stock sold in the Offering will experience an
immediate and substantial dilution in the net tangible book value of their
shares from the initial public offering price. 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. After giving effect to
the sale of the 7,340,000 Shares offered hereby at an assumed initial public
Offering price of $15.00 per Share and after deducting the Underwriting
discounts and commissions and estimated Offering expenses, the net tangible book
value would be $79,148,836 or $6.66 per share. This represents an immediate
increase in the net tangible book value of $6.68 per share to existing
stockholders and an immediate and substantial dilution in the net tangible book
value of $8.34 per share to purchasers of Common Stock in the Offering. The
following table illustrates this per share dilution.

<TABLE>
<S> <C> <C>
Assumed initial public offering price(1).................... $ 15.00
Pro forma net tangible book value before the Offering..... $ (0.02)
Increase attributable to new investors.................. 6.68
---------
Pro forma net tangible book value after the Offering(2)..... 6.66
---------
Dilution of net tangible book value of Common Stock to new
investors(3).............................................. $ 8.34
---------
---------
</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 $79.1 million at March 31, 1998 by
11,880,000 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, based on an assumed initial public offering price of $15
per share and assuming no exercise of the Underwriters' over allotment option.

<TABLE>
<CAPTION>
SHARES ISSUED
-------------------- TOTAL AVERAGE CONSIDERATION
SHARES PERCENT CONSIDERATION PER SHARE
---------- -------- --------------- ---------------------
<S> <C> <C> <C> <C>
Existing Stockholders....... 4,540,000 38.22% $ 8,000,000(1) $ 1.76
New Investors............... 7,340,000 61.78% 110,100,000 $15.00
---------- -------- ---------------
Total................. 11,880,000 100.00% $ 118,100,000
---------- -------- ---------------
---------- -------- ---------------
</TABLE>

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

(1) 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.

34
<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, based upon its
knowledge and experience in the industry, 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 $0.7 million, resulted in an economically inefficient transaction.
However, this initial securitization resulted in a number of benefits for the
Company. The Company has received preliminary subordination levels from the
Rating Agencies in connection with a proposed second CTL Pool Financing during
the fourth quarter of 1997 and again in June 1998. 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. Based upon preliminary subordination levels received verbally
from one or more of the Rating Agencies for pools presented for review in
October of 1997 and June of 1998, management believes that pools of Credit
Tenant Loans greater than $200 million and involving more than 10 Credit Tenants
can be efficiently and profitably securitized. Management estimates, after
consulting with its bankers and investment advisors, that the value of the
Company's loans exceeded their carrying value by $10 million at December 31,
1997, and by $13.0 million at May 15, 1998, after giving effect to the value of
associated hedge positions.

The selected unaudited pro forma balance sheet as of March 31, 1998 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 March 31, 1998. The selected unaudited pro forma statements of
operations data for the three months ended March 31, 1998 and 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 does it 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 "Prospectus Summary--Summary Selected
Historical and Pro Forma Financial Information" and "Financial Statements and
Information."

35
<PAGE>

<TABLE>
<CAPTION>
SEPTEMBER 29
(COMMENCEMENT OF
THREE MONTHS ENDED OPERATIONS) TO
MARCH 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------------- ---------------------------------------------- --------------------
PRO FORMA HISTORICAL PRO FORMA COMPANY HISTORICAL CLF, L.P. HISTORICAL CLF, L.P.
----------- ------------------------ ----------------- -------------------------- --------------------
1998 1998 1997 1997 1997 1996 1995
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
REVENUE:
Interest income
from mortgage
loans........... $5,279,888 $5,279,888 $1,498,770 $9,859,768 $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of
mortgage
loans........... -- -- (160,782 ) (160,782) (160,782) (923,611) --
Other revenue from
mortgage
loans........... 20,787 20,787 8,081 43,326 43,326 16,520 --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Total Revenues.... 5,300,675 5,300,675 1,346,069 9,742,312 9,742,312 4,153,585 224,313
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
LOAN EXPENSES:
Interest on
repurchase
agreements...... 3,288,281 4,899,369 1,146,617 3,662,631 8,829,548 4,048,601 221,400
Loss on loan in
default......... -- -- -- -- -- -- 717,359
Servicer fees..... 40,721 40,721 13,341 76,328 76,328 50,320 --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Total Loan
Expenses........ 3,329,002 4,940,090 1,159,958 3,738,959 8,905,876 4,098,921 938,759
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Operating Expenses:
Personnel
expense......... 761,176 736,176 466,949 2,980,307 2,880,307 2,100,932 313,916
General and
administrative
expense......... 265,887 203,387 200,096 977,642 727,642 1,298,368 736,461
Marketing and
advertising
expense......... 165,844 165,844 85,766 501,091 501,091 405,930 36,943
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Total Operating
Expenses........ 1,192,907 1,105,407 752,811 4,459,040 4,109,040 3,805,230 1,087,320
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Operating Income
(Loss)............ 778,766 (744,822 ) (566,700 ) 1,544,313 (3,272,604) (3,750,566) (1,801,766)
OTHER INCOME
(EXPENSE):
Other interest
income.......... 38,956 38,956 66,756 169,889 169,889 155,781 136,789
Interest expense
on notes
payable......... -- (924,315 ) (5,175 ) -- (292,827) (68,881) --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Net other income
(expense)....... 38,956 (885,359 ) 61,581 169,889 (122,938) 86,900 136,789
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
INCOME (LOSS) BEFORE
PROVISION FOR
FEDERAL AND STATE
INCOME TAX........ 817,722 (1,630,181 ) (505,119 ) 1,714,202 (3,395,542) (3,663,666) (1,664,977)
Provision for
Federal and State
Income Tax........ (327,100 ) -- -- (685,700) -- -- --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Net Income (Loss)... $ 490,622 $(1,630,181) $ (505,119 ) $1,028,502 $ (3,395,542) $ (3,663,666) $(1,664,977)
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
PRO FORMA NET INCOME
PER SHARE......... $ 0.04 $ -- $ -- $ 0.09 $ -- $ -- $ --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
OTHER DATA:
Cash flows from
operating
activities...... $ -- $(4,060,275) $4,684,622 $ -- $ (2,704,304) $(13,630,639) $(4,411,903)
Cash flows from
investing
activities...... $ -- $ (1,198 ) $ (12,968 ) $ -- $ (60,612) $ (77,581) $ --
Cash flows from
financing
activities...... $ -- $6,232,704 $ (487,559 ) $ -- $ 5,032,880 $ 7,546,214 $12,714,139
Number of loans
funded.......... -- 23 12 -- 60 26 6
Original principal
amount of loans
funded.......... $ -- $62,475,112 $50,963,285 $ -- $224,866,628 $137,940,791 $22,735,140
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998 AS OF DECEMBER 31,
------------------------------ --------------------------
<S> <C> <C> <C> <C>
PRO FORMA HISTORICAL HISTORICAL CLF, L.P.
------------- --------------- --------------------------

<CAPTION>
(UNAUDITED) (UNAUDITED) 1997 1996
------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 11,964,425 $ 6,579,425 $ 4,408,194 $ 2,140,230
Mortgage loans held for sale........................................ 323,509,279 323,509,279 263,473,373 157,719,912
Total assets........................................................ 342,423,635 337,423,635 274,378,058 168,349,353
Notes payable....................................................... -- 18,507,023 12,274,318 487,559
Total liabilities................................................... 263,274,799 337,491,642 272,815,884 154,671,846
Total partners' capital (deficit)/shareholders' equity.............. 79,148,836 (68,007) 1,562,174 13,677,507
</TABLE>

36
<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 currently operates principally as a specialty lender originating
Credit Tenant Loans. The Company's revenues and cash flows will be derived from
interest or distributions paid on Mortgage Assets, fee interest from the
origination of Mortgage Loans, rents received from Real Estate Assets, the
proceeds from any sales or pool financings 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 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 Credit Facilities, rating agency
negotiation, and various other organizational matters; establishing and training
the Company's national correspondent broker 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 21 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, execution, subordination levels,
geographic and tenant diversity, and efficiencies realized by securitizing a
larger pool of assets. Management believes that pools of Credit Tenant Loans
greater than $200 million and involving more than 10 Credit Tenants 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
was for legal expenses related to drafting various disclosure and other

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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 net 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 May 15, 1998, the Company held 93 Credit Tenant Loans with an
aggregate principal balance of $342 million, backed by 32 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 $13 million, after giving effect to
the value of the associated hedge position. At year end, management estimates
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, the Company's
developmental CTL Pool Financing 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 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.

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HISTORICAL RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 AND 1997

REVENUES. Total revenue consists predominantly of interest income from
Mortgage Loans. With the exception of interest income and other income which are
treated as period income, revenues collected by the Company related to
origination of Mortgage Loans are recorded as deferred items and recognized upon
the sale or securitization of the related loans. Total revenue increased to $5.3
million for the quarter ended March 31, 1998 from $1.3 million for the quarter
ended March 31, 1997, primarily due to an increase in interest income as a
result of the increased volume of Mortgage Loans originated and held by the
Company compared to the same period in the preceding year.

MORTGAGE LOAN EXPENSES. Mortgage 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 Mortgage Loans. Mortgage Loan expenses increased to $4.9 million for the
quarter ended March 31, 1998 from $1.2 million for the quarter ended March 31,
1997.

Interest on repurchase agreement obligations increased to $4.9 million for
the quarter ended March 31, 1998 from $1.1 million for the quarter ended March
31, 1997, primarily due to the increased volume of Mortgage Loans originated and
held by the Company compared to the same period in the preceding year.

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 $1.1 million
for the quarter ended March 31, 1998 from $0.8 million for the quarter ended
March 31, 1997.

Personnel expense increased to $0.7 million for the quarter ended March 31,
1998 from $0.5 million for the Quarter ended March 31, 1997. The Company added
several additional personnel during 1997 in support of loan origination and
processing activities.

General and administrative expense was unchanged for the quarter ended March
31, 1998 compared with the quarter ended March 31, 1997.

Marketing and advertising increased to $0.2 million for the quarter ended
March 31, 1998 from $0.1 million for the quarter ended March 31, 1997, 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 was
approximately unchanged for the quarter ended March 31, 1998 compared with the
quarter ended March 31, 1997. Interest expense on notes payable increased $0.9
million for the quarter ended March 31, 1998 from the quarter ended March 31,
1997, due to increased notes payable issued in support of hedging and operating
capital requirements.

CASH FLOW DATA. Cash flows from operating activities decreased to ($4.1
million) for the quarter ended March 31, 1998 from $4.7 million for the quarter
ended March 31, 1997, primarily due to the effects of interest rates and the
corresponding margin requirements under the Company's hedging programs. Cash
flows from investing activities was approximately unchanged for the quarter
ended March 31, 1998 compared to the quarter ended March 31, 1997.

Cash flows from financing activities increased to $6.2 million for the
quarter ended March 31, 1998 from $(0.5) million for the quarter ended March 31,
1997 due to increased notes payable issued in support of hedging and operating
capital requirements.

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.

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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 $1.3 million 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 $(2.7)
million for the year ended December 31, 1997 from $(13.6) million for the year
ended December 31, 1996, primarily due to increased levels of borrowings under
the Company's repurchase agreements versus mortgage assets originated. Cash
flows from investing 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 $5.0 million for the year ended December 31, 1997 from
$7.5 million for the year ended December 31, 1996, due to lower net levels of
capital additions to the Company.

PRO FORMA RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998

Pro forma net income was $0.5 million for the quarter ended March 31, 1998,
compared to a historical net loss of $1.6 million for the same period. Pro forma
interest expense on repurchase agreements declined by $1.6 million as as result
of the reduction 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 personnel expense increased
by $25,000 to reflect additional personnel hired related to operating as a
public company. Pro forma general and administrative expense increased by
$62,500 to reflect increased

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general and administrative expenses associated with operating as a public
company. Pro forma income decreased by $327,100 to reflect a provision for
federal and state income taxes. The pro forma adjustments were assumed to have
occurred on January 1, 1997.

PRO FORMA RESULTS OF OPERATIONS--1997

Pro forma net income was $1.0 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 $5.2 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 personnel expense increased
by $100,000 to reflect additional personnel hired related to operating as a
public company. Pro forma general and administrative expense increased by
$250,000 to reflect increased general and administrative expenses associated
with operating as a public company. Pro forma income decreased by $685,700 to
reflect a provision for federal and state income taxes. The pro forma
adjustments were assumed to have occurred on January 1, 1997.

LIQUIDITY AND CAPITAL RESOURCES

At May 15, 1998, CLF had $4.6 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 $260 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. In April 1998, the
facility was increased to $550 million for a limited period ending on September
1, 1998, and the Company may not choose to seek a continuation of this increase.
The NationsBank Warehouse is scheduled to expire on April 1, 2000. The Company
entered into the Prudential Warehouse in the initial amount of $250 million on
July , 1998 which amount is expected to increase to $350 million upon closing
of the Offering and the application of the net proceeds thereof. Prudential
Credit will advance up to 98% of the funded balance on a Credit Tenant Loan.

The Company entered into a separate additional Warehouse Credit Facility
from Prudential Credit which the Company expects to be in the amount of $30
million at the closing of the Offering and the application of the net proceeds
thereof. The purpose of this facility will be for warehousing loans financed
under its Mezzanine Construction Loan program.

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."

The Company intends to pool and finance a portion of its Existing Loans, as
soon as reasonably practical following the Offering, taking into account market
conditions and other factors which may affect the Company's decision when to
finance such a pool of loans. If the Company is unable to complete this pooling
and financing transaction, its ability to continue to fund and accumulate Credit
Tenant Loans will be limited unless additional warehouse financing can be
obtained.

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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, CTL Pool Financings, 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 Loans that it
originates or acquires. It may do so by selling such Mortgage Loans, or may
retain such Mortgage Loans and pledge them to secure structured debt. Because
any such debt would be nonrecourse debt (recourse being limited to the pledged
Mortgage Loans) and such debt would be structured to have, in the aggregate,
fixed interest rates corresponding to the interest rates on the Mortgage Loans,
and would pay down principal as principal on the underlying Mortgage Loans is
paid, the economic impact to the Company will be substantially equivalent to a
sale in which a Subordinate Interest is retained.

HEDGING

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. 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. 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 March 31, 1998, the
Company had short positions in futures on U.S. Treasuries of approximately $390
million related to its loan portfolio hedging.

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 determine that its critical
software applications are Year 2000 compliant. The Company is also identifying
and prioritizing critical lenders, suppliers and borrowers 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, CLF has been primarily engaged in the business of
originating, underwriting, pooling and financing mortgage loans secured by first
liens on commercial properties which are long-term net leased to tenants
("Credit Tenants") whose unsecured credit rating is equal to or greater than BB-
(or its equivalent such leases "Credit Tenant Leases," 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 to pool and finance them with the intention of matching the
duration of its assets with the duration of its long-term liabilities. Based
upon management's knowledge and experience, the Company believes that its
national network of loan origination correspondent brokers (see "--Loan
Origination Capability and Correspondent Network"), underwriting and loan
processing systems, securitization experience and loan product innovations have
established the Company's name in the Credit Tenant Loan marketplace and that
continued innovation will permit the Company to expand into other related
investment activities.

Since 1995, the Company has closed over 120 Credit Tenant Loans with an
aggregate original principal amount exceeding $480 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, the Company expects will aggregate
approximately $930 million (subject to reduction to $730 million at September 1,
1998,) and will be provided by NationsBank, N.A. ("NationsBank"), and Prudential
Securities Credit Corporation ("Prudential Credit"). In 1997, CLF completed the
first ever CTL Pool Financing involving a variety of Credit Tenants and multiple
enhanced net leased properties. This transaction was accomplished through 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.

The Company's revenues are principally derived from the spread between
interest revenues from its loans and the cost it incurs on its borrowings. The
Company's business strategy is to grow its revenues both through increasing loan
origination volumes and increasing the net interest spread on its loans and
other investments. This increased spread may occur from the origination of
higher margin products and/or decreasing the Company's cost of funding. The
Company's strategy is to pool and finance its Credit Tenant Loans in order to
lower its costs of funds, which it expects to accomplish primarily through
issuing collateralized obligations backed by pools of Credit Tenants Loans. The
Company, however, from time to time on an opportunistic basis, may sell equity
interests in such pools or sell whole loans.

The Company has sustained negative net income from operating and investing
activities in each year since its inception in 1995. The negative net income was
principally the result of factors such as the Company's historic cost of
borrowing and degree of leverage, expenses incurred by establishing a national
origination network, and investments in product development, marketing and loan
processing systems, a lack of historic loan origination volume, and the
completion of only a single CTL Pool Financing which was of limited size and
diversity, during the past three years. The Company's negative net income for
the period from September 29, 1995 through December 31, 1995, and for the years
ended December 31, 1996 and 1997 was approximately ($1.7 million), ($3.7
million) and ($3.4 million), respectively. On a pro forma basis (after giving
effect to the adjustments referred to below under "--Summary Selected Historical
and Pro Forma Financial Information"), the Company's net income for the year
ended December 31, 1997 would have been approximately $1.0 million. The
Company's Net Cash Used in Operating Activities for the period from September
29, 1995 through December 31, 1995, and for the years ended December 31, 1996
and 1997 was approximately ($4.4 million), ($13.6 million) and ($2.7 million),
respectively. There is no assurance that the Company will be profitable in the
future, and it should be noted that the Company's experience in CTL Pool
Financing transactions is limited to the one CTL Pool Financing accomplished in
January 1997, and the Company's future business plans call for it to expand into
related lines of business in

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which it has no or limited experience. For certain of these new businesses, the
Company will require financing, the availability of which will be dependent upon
numerous factors, including, possibly the Company's ability to attain positive
cash flow or net income and certain minimum net worth requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Overview."

CTL Pool Financings involve the formation and utilization of a special
single-purpose entity into which is placed a pool of multiple borrower Credit
Tenant Loans involving multiple Credit Tenants. The Credit Tenant Loans in CTL
financing pools are either "bond" leases or enhanced to "bond" status so that
these loans are rated on the quality of the Credit Tenant rather than on the
value of the underlying real estate. The ratings received for any pool will be
dependent, in part, on the size of the pool and the diversity of the Credit
Tenant Loans. A CTL Pool Financing, as structured in the past by CLF, differs
from other mortgage pool financings because of the reliance of a Credit Tenant
Loan on the credit rating of the underlying Credit Tenant. This reliance upon
the expected cash flow from the applicable Credit Tenant, rather than the
underlying value of the real property, allows the Company to underwrite higher
loan to value loans with prepayment protection provisions that increase the
proceeds available to the borrower.

As of May 15, 1998, CLF held 93 Credit Tenant Loans with an aggregate
original principal balance exceeding $350 million (the "Existing Loans"). In
addition, as of May 15, 1998 CLF has issued 68 commitments to fund further
Credit Tenant Loans with an aggregate committed principal balance of
approximately $402 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 approximately $12 million (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 May 15, 1998,
totaled approximately $623 million), and the business which may be generated
therefrom. See "--Existing Loans and Pipeline for Future Originations." The
Company intends to engage in a transaction to pool and finance all or a portion
of the Existing Loans and certain of the Committed Loans following completion of
the Offering and expects to pool and finance the remaining Committed Loans in
future transactions.

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

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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. As more fully described below, under a Credit Tenant Loan, the principal
credit underlying the transaction is not that of the borrower nor is it the
liquidation value of the applicable real estate, rather the principal credit is
the credit of the applicable tenant.

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. Consequently, loans secured by a "bond"
lease are analyzed as if they were a direct obligation of the applicable tenant
and, in a pool financing, can be expected to receive credit ratings equivalent
to the unsecured debt rating of the applicable Credit Tenant.

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. Under many net leases in contrast to a "bond" lease, a tenant has the
right to terminate the applicable lease or abate rent in certain circumstances,
such as the occurance of significant casualty loss or condemnation, or failure
by 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.

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Properties subject to net leases do not qualify as "bond" leases have been
traditionally 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
expected to be available to the Company in the pooling and financing of Credit
Tenant Loans.

The Company's Lease Enhancement mechanisms consist primarily of an
integrated set of specialized insurance policies, servicer advancing mechanisms,
loan documents, and various borrower and expense reserve accounts. The
specialized insurance policies are non-cancellable during the term of the Credit
Tenant Loan and have been designed to protect the holder of the mortgage from
(i) under all of the Company's Credit Tenant Loans, rent abatement or lease
termination under the associated Credit Tenant Lease as a result of a casualty
or condemnation event, (ii) under the Company's Extended-Term Loans, failure of
the borrower to pay the balance of the mortgage outstanding, if any, at the
expiration of the initial term of the Credit Tenant Lease, or (iii) under the
Company's CPI Loans, increases in rent. The servicer advancing mechanisms and
reserve funds (combined with specialized borrower recourse provisions where
appropriate) have been established to support the landlord's maintenance and
other obligations under the Credit Tenant Lease so as to mitigate the risk of
rent abatement or lease termination by the Credit Tenant due to landlord
performance problems.

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. Based upon management's
knowledge and experience in the industry, 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 to promote these programs.

CONSTRUCTION/PERMANENT LOANS. The Company has developed a
"Construction/Permanent" program under which a developer/borrower may obtain
both a construction loan from a commercial bank and a permanent loan from the
Company with one set of documents in one integrated closing process. The loans
made by the Company under the "Construction/Permanent" program are referred to
as "Construction/ Permanent Loans." The Construction/Permanent program has been
marketed with NationsBank 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 May 15, 1998, the
Company had committed to fund approximately $168 million in the aggregate of
Construction/Permanent Loans, including approximately $64 million for which
NationsBank has commenced advances under the construction loan portion under the
1TC 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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<PAGE>

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 periodic debt service can be reduced (making more cash flow
available to the borrower), enhancing certain tax benefits that may be available
to borrowers. As of May 15, 1998, the Company had funded approximately $54
million in additional aggregate principal amount of Extended-Term Loans and has
committed to fund approximately $98 million in aggregate principal of
Extended-Term Loans. This program has been marketed under the name the "Extended
Amortization Program."

RELATED BUSINESSES

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.

47
<PAGE>

business needs. Based upon management's knowledge and experience in the
industry, the Company believes that it is in a unique position to analyze
whether the Subordinate Interests of its CTL pools 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 specialized skills to analyze the risks
associated with investing in the Subordinate Interests in its own CTL pools,
management believes, based upon its knowledge and experience in the industry,
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 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 REITs, registered investment companies, partnerships and other
investment funds and operating companies involved in the ownership of real
estate interests or the rendering of real estate-related services.

COMPETITIVE POSITION

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 due to the factors listed below, it enjoys a strong
competitive position.

FOCUS AND EXPERIENCE. The Company believes that it has the largest
organization in the U.S. dedicated to originating, underwriting, pooling and
financing 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.

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RELATIONSHIPS WITH CREDIT TENANTS. As of May 15, 1998, the Company had
closed over 120 Credit Tenant Loans backed by leases with 35 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.

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.

COMPETITIVE CONCERNS. Despite the competitive position of the Company and
its products, many of the Company's competitors for loan origination (including
other specialty finance companies, REITs, savings and loan associations, banks,
mortgage bankers, insurance companies, mutual funds, institutional investors,
investment banking firms, other lenders and other entities) 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. In addition, because the Company focuses
on Credit Tenant funding, many of its competitors offer Credit Tenant and other
types of real estate financing and consequently offer a broader range of
financing products.

BUSINESS STRATEGY

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 and its increased credit facilities 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.

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<PAGE>
in the construction and borrowing cycle as a means of expanding and better
controlling loan origination.

Although the Company presently outsources servicing, the Company may explore
acting as a primary servicer, subservicer or special servicer.

Based upon its knowledge and experience in the industry, 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.

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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 May 15,
1998, of approximately $342 million. In addition, the Company will assume
commitments made by CLF to fund approximately $402 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. Based
on management's review of the publicly available ratings for its Credit Tenants
and Internal Classifications of the limited number of tenants which do not have
publicly available credit ratings, management believes that the Credit Tenants
underlying approximately 92% in aggregate principal amount of the Existing Loans
are rated Investment Grade (with the remaining 8% being rated BB Grade) and the
Credit Tenants underlying approximately 98% of the expected aggregate principal
amount of the Committed Loans are rated Investment Grade. The Company expects to
pool and finance 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 CTL Pool Financing (based upon a
preliminary review by the Rating Agencies of a large portion of this loan pool)
is expected by management to result in a significantly higher percentage of the
loan pool being rated AAA than were obtained in the first CTL Pool Financing. In
addition, the Company will assume commitments by CLF to purchase Net Leased Real
Estate in the amount of approximately $12 million . In each case, the amount of
the loans and commitments listed above are as of May 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 the substantial majority of
these Committed 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 ("Rate-Locked Loans"). Management
believes, based on the Company's operating experience, that a significant
portion of loans in the Application Stage and a lesser percentage 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.

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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 generated
closed and Rate-Locked Loans totaling approximately $115 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:

Management believes, based on the foregoing factors, the volume of Credit
Tenant Loans closed since January 1, 1998 and management's current expectation
of 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, the
Company's loan originations will continue to grow during calendar year 1998.
There can be no assurance, however, that the Company's growth will continue.

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 five persons. Mr. William R. Pollert, President and
Chief Executive Officer, who will serve as Chairman of the Board of Directors,
is the only member of the Company's management to serve on the initial 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

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Credit Tenant Loans. The principal executive officers of the Company will
consist of: Mr. William R. Pollert, President, Chief Executive Officer and
Director; 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 60
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. The Company has entered
into a written or oral arrangement with each of its correspondent brokers who
are generally compensated by the applicable borrower. In general, pursuant to
the Company's arrangements with its correspondents, the Company has agreed to
originate loans primarily through those brokers which have entered into a
correspondent relationship with the Company. The Company agrees to provide these
correspondent brokers with training and information regarding the Company's
products. These correspondent brokers are not required to originate loans
exclusively through the Company, although the Company closely tracks the volume
of loans generated by each of its correspondents and does replace correspondent
brokers with whom it is not satisfied.

In addition to the Company's training and marketing support of
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.

Based upon responses from corespondent brokers as well as the Company's
experience, 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
borrowers for Credit Tenant Loans and facilitating the loan closing process,
rather than focusing solely on underwriting each loan.

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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 million in
July, 1996. In April 1998, the facility was temporarily increased to $550
million for a limited period ending on September 1, 1998, and the Company may
not choose to seek a continuation of this increase. The NationsBank Warehouse's
scheduled expiration is on April 1, 2000, although such facility can be
terminated prior to expiration by either party upon 120 days notice. The
NationsBank Warehouse is used primarily to fund and hold the Company's Credit
Tenant Loans prior to securitization as well as certain other financing
functions directly related thereto. These other financing 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 NationsBank Warehouse is a
repurchase agreement pursuant to which the Company's Credit Tenants Loans are
purchased by NationsBank upon funding and repurchased by the Company upon
repayment of the applicable portion of the NationsBank Warehouse. NationsBank is
one of the Company's correspondents and an affiliate of NationsBank was the lead
placement agent with respect to the Company's January 1997 securitization of
Credit Tenant Loans.

The Company entered into the Prudential Warehouse in the initial amount of
$250 million on July 1998, which amount is expected to increase to $350
million upon closing of the Offering, based upon the application of the net
proceeds of the Offering and the consequent achievement of certain minimum net
worth requirements. The Prudential Warehouse will expire one year from the date
of closing of the Offering. As with the NationsBank Warehouse, the Company
intends to utilize the Prudential Warehouse for purposes of funding and holding
the Company's Credit Tenant Loans prior to securitization. In addition, on July
, 1998 the Company entered into a Mezzanine Construction Loan financing
facility (the "Mezzanine Construction Facility") with Prudential Credit which
the Company expects to be in the amount of $30 million, at the close of the
Offering and the application of the net proceeds thereof. The Mezzanine
Construction Facility will be used by the Company to fund its Mezzanine
Construction Loans.

The availability of financing to the Company under the Warehouse Credit
Facilities will be subject to compliance by the Company with the terms and
conditions established for each such facility. In addition, the Prudential
Warehouse and the Mezzanine Construction Facility will require the Company to
maintain a certain minimum net worth and to comply with certain other financial
covenants. Furthermore, under the Prudential Warehouse and the Mezzanine
Construction Facility, Prudential Credit will be under no obligation to make
advances under these facilities if, among other things, there has been a
material adverse change in the financial condition of the Company, the financial
markets in general or the secondary market for Mortgage Loans.

The Warehouse Credit Facilities are secured facilities and are evidenced by
warehouse agreements pursuant to which the Company may obtain financing for the
origination of Mortgage Loans. 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 subject to the obligation of the Company to apply such
principal and a portion of such interest to its obligations under the applicable
Warehouse Credit Facility.

Additionally, the Warehouse Credit Facilities require the Company to deposit
additional collateral or reduce its borrowings thereunder, if the market value
of the pledged collateral declines. This may require

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the Company to sell a portion of its Invested Portfolio to provide such
additional collateral or to reduce its borrowings.

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.

SECURITIZATION

The Company completed the first CTL Pool Financing in January 1997 with the
sale of approximately $130 million of mortgage pass-through certificates. The
transaction was rated by DCR and Fitch and was placed by NationsBanc Capital
Markets, Inc. (the predecessor to NationsBanc Montgomery Securities LLC) and
Goldman, Sachs & Co. In connection with this securitization, the Company caused
the following classes of securities with the following characteristics to be
issued:

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JANUARY 1997 SECURITIZATION

<TABLE>
<CAPTION>
INITIAL
CERTIFICATE
PRINCIPAL FIXED
BALANCE/ CERTIFICATE SCHEDULED FINAL RATING
NOTIONAL AMOUNT RATE DISTRIBUTION DATE (DUFF/FITCH)
----------------- -------------- ---------------------- --------------
<S> <C> <C> <C> <C>
Class A-1............................ $ 23,939,902 7.421% April 22, 2003 AAA/AAA
Class A-2............................ $ 40,439,024 7.349% February 22, 2010 AAA/AAA
Class A-3............................ $ 17,793,170 6.640% July 22, 2012 AAA/AAA
Class IO............................. $ 129,391,938(1) (2) June 22, 2022 AAA/AAA
Class B.............................. $ 15,528,585 6.900% July 22, 2014 AA/AA
Class C.............................. $ 15,528,585 7.400% March 22, 2017 A/A
Class D.............................. $ 6,146,731 6.162% November 22, 2018 BBB+/BBB
Class E.............................. $ 6,793,756 6.162% January 22, 2021 BBB/BBB-
Class F.............................. $ 1,941,073 6.000% August 22, 2021 BB/BB
Class G.............................. $ 1,294,052 6.000% June 22, 2022 B/B
</TABLE>

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

(1) The amount shown for the Class IO Certificates is its original notional
principal amount and does not represent principal that is payable.

(2) The "Certificate Rate" for the Class IO Certificates for any distribution
date is equal to the excess of (a) the weighted average loan rate net of
servicing fees over (b) the weighted average "Certificate Rate" of all of
the other Classes of other certificates offered in such private placement,
described herein.

In connection with the first CTL Pool Financing, the Company successfully
utilized Lease Enhancement mechanisms to 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.

The Company (which includes for the purpose of this paragraph, Capital Lease
Funding Securitization L.P., a Delaware limited partnership organized for the
purposes of the Company's January 1997 CTL Pool Financing) has entered into a
Pooling and Servicing Agreement with respect to such CTL Pool Financing. The
Company's principal continuing obligations thereunder relate to representations
and warranties with respect to the Company, the Credit Tenant Loans included in
such CTL Pool Financing and delivery of complete loan documentation. The sole
remedy available to the trustee or any certificateholder for a material breach
of a loan-related representation or warranty or defect in a constituent
document, to the extent the Company is unable to cure such breach or defect in
specified time periods, is to substitute a new Credit Tenant Loan for or to
repurchase the affected Credit Tenant Loan. All such representations and
warranties relate to facts at or prior to the time such representations and
warranties were made. Further, the Company itself originated all Credit Tenant
Loans in such CTL Pool Financing, and performed extensive due diligence to
assure itself of the accuracy of such representations and warranties and the
completeness and correctness of such documentation. There can be no assurances,
however, that the Company will not incur obligations to cure material breaches
of such representations and warranties or defects in documentation, to
repurchase Credit Tenant Loans for which cures cannot be achieved or to
substitute new Credit Tenant Loans therefor, or that the Company will have the
funds required to effect any such cure, repurchase or substitution.

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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. The Company chose
to delay securitizing this pool until the completion of the Offering. In June of
1998, as an initial stage of preparation for a pool financing of some or all of
the Company's existing portfolio of Credit Tenant Loans, the Company submitted
an aggregate principal amount of approximately $400 million of loans to S&P,
Moody's Investors Service, Fitch and DCR for review (including the $215 million
of loans reviewed in late 1997). The Company believes, based upon preliminary
verbal indications from the Rating Agencies (primarily S&P and DCR), that, upon
completion of their review of such loans, the review will result in a
significantly higher percentage of the loan pool being rated AAA than in its
first securitization. The higher percentage of the pool being rated AAA should
result in the Company receiving more proceeds from a future CTL Pool Financing
of such loans, consequently lowering the Company's overall cost of funds. The
Company intends to securitize a pool of Existing Loans as soon as reasonably
practicable following the Offering, taking into account market conditions and
other factors which may affect the Company's decision when to finance such a
pool of loans. No definitive actions have yet been taken to pursue this planned
CTL Pool Financing. The Company believes that the improved percentages of the
pool being rated AAA are a result of both an increased familiarity by the Rating
Agencies with the Company's Lease Enhancement mechanisms and the greater credit
diversity in the pool.

In the future, the Company intends to securitize its loans, either directly
or through one or more wholly owned subsidiaries, in the form of real estate
mortgage conduits ("REMICS") and other borrowings. In a REMIC securitization,
the Company would securitize its Credit Tenant Loans by transferring them to a
special purpose trust or other entity that elects to be treated as a 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. It is
probable that the Company would retain certain classes of the REMIC
certificates. 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 intends to use the proceeds from such REMIC securitizations 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.

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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 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 is excluded
from regulation as an investment company. 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 exclusion from regulation under the Investment
Company Act.

CAPITAL, LEVERAGE AND FINANCING POLICIES. There is no limit on the maximum
indebtedness which the Company may incur and the Company's organizational
documents do not limit the amount of indebtedness that the Company may incur.
The Company has adopted certain policies which the Company must adhere to before
increasing its level of indebtedness, although such policies may be altered by
the Company 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--A Lack of Availability of Financing Could Adversely Affect the
Company's Results; --Risks Related to Borrowings-- The Company Expects to be
Highly Leveraged Which May Subject the Company to Increased Risk of Loss."

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--A Lack of Availability of Financing Could Adversely Affect the
Company's Results." However, neither the Charter 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--Risks Related to Mortgage Assets--Changes in
Interest Rates Could Adversely Affect the Company's Results." The Company may
enter into hedging transactions in an effort to protect its Invested Portfolio
and related debt from interest rate fluctuations.

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See "Risk Factors--Risks Related to Business Strategy and Policies--Hedging
Transactions May Not Effectively Protect the Company Against Anticipated Risks
and May Subject the Company to Certain Other Risks and Costs."

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 the guidelines 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. 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
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. 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

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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 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 Company 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 described 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.

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 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
subsidiary 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. 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."

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."

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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.

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. Based upon
its experience in the industry, the Company believes it has been 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 is unaware of
any published data estimating the overall 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.

EMPLOYEES

At the closing of the Offering, the Company initially expects to have 21
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. Based upon its knowledge and experience in the industry, 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 for loan origination (including other specialty finance
companies, REITs, savings and loan associations, banks, mortgage bankers,
insurance companies, mutual funds, institutional investors, investment banking
firms, other lenders and other

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entities) 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 presently subleases office space at 85 John Street, 12th Floor,
New York, New York 10038. In May of 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 in August 1998.

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

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 May 15, 1998,
were in the aggregate amount of approximately $342 million and $402 million,
respectively), subject to the existing indebtedness, as well as all of the
operating assets of CLF.

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.

The number of shares of the Company and the cash that each equity ownership
class of CLF will receive in conjunction with this transaction, in accordance
with the Partnership agreement, is as follows:

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.

The Company will record the recapitalization of the predecessor historical
balance sheet as of March 31, 1998, including the assets, assumption of
liabilities and deficits, at their historical amounts.

The Company expects that it will originate all of its future loans through a
newly-formed subsidiary limited partnership (a Delaware limited partnership
which, upon conclusion of the Formation Transactions, will be renamed "Capital
Lease Funding, L.P.") of which the Company directly owns 100% of the limited
partnership interests and, indirectly through a wholly-owned subsidiary, 100% of
the general partnership interests. In addition, the Company expects that it will
purchase real estate through individual Delaware business trusts of which it
will be the sole beneficiary.

The following diagrams illustrate the Formation Transactions, by showing (i)
the ownership of CLF prior to the Formation Transactions, (ii) the ownership of
CLF, Inc. after the contribution of the CLF partnership interests discussed in
A. and B., above, (iii) the liquidation of CLF in accordance with applicable law
discussed in C. above, and (iv) the anticipated ownership of CLF, Inc. following
the Offering.

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STRUCTURE PRIOR TO FORMATION TRANSACTIONS (1)

[CHART]

STRUCTURE AFTER TRANSFER OF PARTNERSHIP INTERESTS

[CHART]

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

(1) Pursuant to the terms of the Limited Partnership Agreement of CLF, the
actual percentage ownership interests in CLF are only determinable upon a
distribution to the partners and are dependent upon the amount of such
distribution.

(2) CLF Holdings, Inc. is 60% owned by William R. Pollert, the Company's
Chairman of the Board, Chief Executive Officer, and President.

(3) CLF Investors LLC is 46.88% owned by William R. Pollert, the Company's
Chairman of the Board, Chief Executive Officer, and President.

(4) South Ferry #2, L.P. is a 2.8% limited partner in Hyperion Partners II L.P.

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STRUCTURE FOLLOWING THE OFFERING

[CHART]

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

(1) CLF Holdings, Inc. is 60% owned by William R. Pollert, the Company's
Chairman of the Board, Chief Executive Officer, and President.

(2) CLF Investors LLC is 46.88% owned by William R. Pollert, the Company's
Chairman of the Board, Chief Executive Officer, and President.

(3) South Ferry #2, L.P. is a 2.8% limited partner in Hyperion Partners II L.P.

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YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS

Before acquiring an asset for inventory or portfolio investment, the Company
will consider the expected yield of the investment. In the case of assets
acquired for inventory, the yield is calculated based on the cost of originating
or acquiring a particular asset as compared with expected proceeds of
disposition of the asset, factoring in interest rate, credit and other risks, as
well as the cost of carrying the asset, including, principally, financing costs.
In the case of assets acquired for portfolio investment, the Company will
consider the expected yield to maturity of the investment, taking into account
the price of the asset and the anticipated cash flows of asset after adjusting
for anticipated credit losses, likelihood of prepayment and other factors.
"Yield to maturity" is the discount rate that will make the present value of the
anticipated 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.

CREDIT TENANT LOANS HELD IN INVENTORY

The Company's principal line of business is the origination or acquisition
of Credit Tenant Loans with a view to disposition of such Credit Tenant Loans
through a pool financing or otherwise. Accordingly, such loans are generally
held in inventory for a relatively short period of time. The yield of such
investments is dependent principally on (i) the cost of origination or purchase,
(ii) the cost or profit of carrying the asset (generally being the difference
between interest earned on the Credit Tenant Loan and interest paid on any
warehouse facility or other financing used to carry the Credit Tenant Loan) and
(iii) the net proceeds of disposition of the Credit Tenant Loan.

The net proceeds of disposition of Credit Tenant Loans held for inventory
are affected by many factors. Net disposition proceeds are principally affected
by (i) the interest rate, term, prepayment restrictions and other payment terms
of the Credit Tenant Loan and the related impact on the payment terms of
securities issued in the resulting securitization, (ii) the costs of preparing
the Credit Tenant Loan for securitization (including, principally, the cost of
Lease Enhancements or other mechanisms designed to convert any Credit Tenant
Lease which is not a "bond" lease into the approximate equivalent of a "bond"
lease), and (iii) the impact of such Credit Tenant Loan on credit enhancement
levels in a CTL Pool Financing. To the extent required credit enhancement levels
are low, the Company is able to issue a greater percentage of its securities in
higher rating categories, thereby generating expected higher sale proceeds.
Credit enhancement levels are principally affected by the credit quality of such
Credit Tenant Loans, including in particular the credit ratings of the Credit
Tenants. Any default on such Credit Tenant Loans or credit downgrades of the
related Credit Tenants while such Credit Tenant Loans are held by the Company
will tend adversely to affect net disposition proceeds, while improvements in
credit ratings of the Credit Tenants may improve such proceeds. In addition,
credit enhancement levels will be affected by the terms of the underlying Credit
Tenant Leases (including, in particular, any adverse affect to the extent the
related Lease is not a "bond" lease and such Credit Tenant Lease, as enhanced,
is considered not to be fully the equivalent of a "bond" lease), and the impact
of such Credit Tenant Loan on the diversity of the securitization pool. Credit
enhancement levels tend to be favorably affected by greater diversity within the
pool of Credit Tenant Loans in terms of geographic location of the properties,
identity of Credit Tenants, business lines for such Credit Tenants and other
factors, and tend to be adversely affected by a concentration of any such
characteristics. Further, net disposition proceeds are affected by the costs
directly related to such disposition, including, among other things: rating
agency, printing, servicing, trustee and legal fees and expenses and any
underwriting discounts or placement fees.

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Net proceeds of disposition are also significantly affected by levels of
interest rates for commercial mortgage-backed securities, which in turn are
affected by yields on comparable-maturity United States Treasury securities and
the "spreads", or differences in yields, of commercial mortgage-backed
securities of different rating levels over comparable-maturity United States
Treasury securities. The Company intends to engage in hedging strategies as
described in "The Company--Hedging Strategies". The Company anticipates that it
will be able to hedge effectively against changes in interest rates of United
States Treasury securities (generating hedging profits to substantially offset
any drop in net disposition proceeds as a result of rising interest rates, but
with the consequence of generating losses on such hedges which will offset any
increase in net disposition proceeds as a result of falling interest rates, but
any such hedging strategies do not perfectly match the risks being hedged, and
are subject to their own credit and other risks, and accordingly there can be no
assurance that such hedging strategies will fully protect the Company from
changes in yields of United States Treasury securities. Furthermore, the Company
does not anticipate that it will effectively be able to hedge against changes in
spreads in yields of commercial mortgage-backed securities over yields of
comparable-duration United States Treasury securities. Accordingly, the
Company's yield on its investment in Credit Tenant Loans held for inventory will
be adversely affected by increases in such spreads, and will be favorably
affected by decreases in such spreads.

Because the credit on Credit Tenant Loans is based on the credit of rated
Credit Tenants, and because Credit Tenant Loans held in inventory are expected
to be held for a relatively short term, the Company believes that the risk of
default during such term is small. However, any defaults that do occur will
generally prevent such Credit Tenant Loans from being included in the Company's
CTL Pool Financings, will generally have an adverse affect the net disposition
proceeds of any such Credit Tenant Loan sold on an individual or "whole loan"
basis, and may make it impossible to dispose of such Credit Tenant Loans. To the
extent the Company continues to hold defaulted Credit Tenant Loans through
liquidation, the Company's yield will be affected by the severity of any loss,
determined largely by the market value of the underlying property. Because the
Company originates its Credit Tenant Loans at higher loan-to-value ratios than
typically apply for commercial mortgage loans not involving Credit Tenants, the
severity of losses on default may be greater than for such other types of
commercial mortgage loans. Further, defaults, if any, on Credit Tenant Loans are
expected to arise generally only as a result of defaults by the related Credit
Tenants, who may therefore no longer be in occupancy. In such event, loss
severity may increase because the appraised value of vacant, or "dark,"
properties will generally be lower than the appraised value assuming Credit
Tenant occupancy which is used in connection with origination or acquisition of
the Credit Tenant Loan.

OTHER MORTGAGE LOANS

The Company anticipates that it will invest in certain other Mortgage Loans
without a view to disposition thereof, including, in particular, Mezzanine
Construction Loans. Mezzanine Construction Loans are short-term loans expected
to be paid in full from proceeds of a permanent Credit Tenant Loan. Yields on
Mortgage Loans held in portfolio for investment will be affected by their
interest rates, prepayment restrictions and other payment terms. The
profitability of such Mortgage Loans for the Company will also be affected by
the cost of any financing used to carry such Mortgage Loans.

In addition, the yield to maturity on Mortgage 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.
Mezzanine Construction Loans are made only in cases where a Credit Tenant Lease
is in place and the Company has issued a commitment to make a Credit Tenant Loan
upon completion of construction in an amount sufficient to pay the full
principal balance of the Mezzanine Construction Loan and the senior construction
loan, to pay all costs of construction under the terms of applicable
construction contracts, all of which provide for a fixed or capped cost of
construction, and to pay a certain level of unanticipated additional expenses.
In the event, however, that construction costs exceed costs provided in the
contract, or

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construction takes significantly longer than provided in the contract, and the
contractor or any bonding company defaults in its obligation to complete
construction or to cover any additional costs, or the ultimate Credit Tenant
Loan is not made due to failure to satisfy conditions to such loan, such as a
default by the Credit Tenant under its Credit Lease, there may be insufficient
funds to repay the Mezzanine Construction Loan. 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.

The yield to maturity of the Mortgage Loans held for investment and, in
particular, longer-term Mortgage Loans, will be affected by the rate of
prepayments on such Mortgage Loans and any yield maintenance or other prepayment
premiums payable upon any such prepayment. Whether and when there are any
principal prepayments on such Mortgage Loans will be affected by a variety of
factors, including, without limitation, the credit liquidity and other
attributes of the borrower, the terms of such Mortgage Loans, the level of
prevailing interest rates, the availability of mortgage credit and economic,
tax, legal and other factors. Principal prepayments on such Mortgage Loans
secured by commercial properties are likely to be affected by lock-out periods
and prepayment premium provisions applicable to each of such Mortgage Loans, and
by the extent to which the Company, or a servicer acting on its behalf, is able
to enforce such prepayment premium provisions. It is anticipated that any such
Mortgage Loans will generally be 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 pool financings or other
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 included in 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 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

68
<PAGE>
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.

DESCRIPTION OF EXISTING REAL ESTATE INTERESTS

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--Loan Underwriting Guidelines."

69
<PAGE>
In addition, the Company may purchase, from time to time, BB Grade Credit
Tenant Loans which the Company will hold in its portfolio. The Company may or
may not securitize such purchased loans.

INITIAL INVESTMENTS; EXISTING LOANS, COMMITMENTS AND PROPERTIES

The Existing Loans consist of 93 fixed-rate mortgage loans. 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 32 different Credit Tenants (and in the case of one loan, two Credit
Tenants), (ii) first mortgages on fee or leasehold interests, 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, 86 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, seven 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
seven loans by an insurer with a claims paying rating of "AAA" by S&P (the
"Extension Amortization Insurer") 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. All of the Existing loans are current and
have experienced no default. There is no assurance that these results will be
representative of results which the Company may experience on the loans
underlying the CMBS which the Company may purchase or loans the Company will
make in the future or on future results of the Existing Loan.

As of May 15, 1998, the aggregate outstanding principal balance of the
Existing Loans was $342.7 million with an average loan size of approximately
$3.7 million (maximum: $20.5 million, minimum: $0.9 million). The weighted
average gross coupon was 7.57% (maximum: 8.20% and minimum: 6.92%) with a
weighted average original term to maturity of 243.6 months (maximum: 308 months,
minimum 133 months) and a remaining weighted average term to maturity of 235.8
months (maximum 301 months, minimum: 118 months). The weighted average original
debt service coverage was 1.05x (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: 98.8%, minimum: 70.5%)
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 127.2%
(maximum: 231.3%, minimum 36.9%). 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 88 months
(maximum: 96 months, minimum 77.5 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 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 May 15, 1998.

70
<PAGE>
EXISTING LOANS--TENANT CONCENTRATION

<TABLE>
<CAPTION>
NUMBER OF CURRENT % OF
MORTGAGE AGGREGATE AGGREGATE
TENANT/GUARANTOR(1) LOANS BALANCE BALANCE
- -------------------------------------------------------------------------- --------------- -------------- -----------
<S> <C> <C> <C>
CVS Corporation or a subsidiary thereof................................... 22 $ 51,050,808 14.9%
Rite Aid Corporation...................................................... 20 38,480,581 11.2
Koninklijke Ahold, N.V.................................................... 3 27,568,836 8.0
Circuit City Stores, Inc.................................................. 3 20,735,066 6.1
The Home Depot, Inc. or a subsidiary thereof.............................. 2 20,553,503 6.0
BlueCross and Blue Shield of Texas, Inc................................... 1 20,514,134 6.0
CareGroup, Inc............................................................ 1 20,249,768 5.9
Wal-Mart Stores, Inc...................................................... 2 19,010,446 5.5
Walgreen Co............................................................... 6 15,188,568 4.4
Eckerd Corporation........................................................ 6 12,176,165 3.6
Georgia Baptist Health Care System, Inc................................... 1 12,130,649 3.5
KeyBank National Association.............................................. 1 11,172,055 3.3
John H. Harland Company................................................... 1 9,534,875 2.8
Wegmans Food Markets, Inc................................................. 1 8,412,266 2.5
The Pep Boys--Manny, Moe & Jack........................................... 3 5,869,283 1.7
MedPartners, Inc.......................................................... 1 5,636,627 1.6
The TJX Companies, Inc.................................................... 1 5,633,817 1.6
Riggs Bank N.A............................................................ 1 5,484,602 1.6
Hanson North America, Inc................................................. 1 5,328,070 1.6
State of New Jersey....................................................... 1 3,981,124 1.2
Tandy Corporation......................................................... 1 3,879,159 1.1
McDonald's Corporation.................................................... 3 3,463,482 1.0
American Drug Stores, Inc................................................. 1 3,105,236 0.9
Bridgestone/Firestone, Inc................................................ 2 2,236,087 0.7
The Chase Manhattan Bank.................................................. 1 2,027,033 0.6
Hannaford Bros. Co........................................................ 1 1,758,382 0.5
Exxon Corporation......................................................... 1 1,480,897 0.4
Boston Gas Company........................................................ 1 1,452,449 0.4
Mobil Oil Corporation..................................................... 1 1,365,427 0.4
Sears, Roebuck & Co....................................................... 1 1,347,796 0.4
Amoco Oil Company......................................................... 1 950,773 0.3
United States Postal Service.............................................. 1 925,132 0.3
--
-------------- -----
Total............................................................. 93 $ 342,703,096 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>

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

(1) Meaning either, in the case of the tenant, the primary obligor under the
lease and, in the case of the Guarantor, the entity which guarantees the
obligations under the associated Credit Tenant Lease. In either case, the
principal credit upon which the Company is relying is listed.

CREDIT RATING CONCENTRATION

The following table sets forth the long-term credit ratings of the tenants
or guarantors under the Credit Tenant Leases underlying the Existing Loans as of
May 15, 1998. Such ratings of the tenants or guarantors (other than those
internally classified ("IC")) are published by S&P and are publicly available.
The long-term credit rating is an opinion of the applicable Rating Agency of an
obligor's overall credit worthiness and its ability to pay its financial
obligations as they come due. Such ratings should not be

71
<PAGE>
deemed a recommendation to purchase the securities offered hereby or any
securities which may be offered in any future securitization of the Existing
Loans.

<TABLE>
<CAPTION>
CUMULATIVE
NUMBER OF % OF % OF
TENANT/GUARANTOR MORTGAGE AGGREGATE AGGREGATE AGGREGATE
CREDIT RATING LOANS BALANCE BALANCE BALANCE
- ------------------------------------------------------- --------------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
AAA.................................................... 3 $ 3,356,802 1.0% 1.0%
AA+.................................................... 1 3,981,124 1.2 2.1
AA..................................................... 6 23,839,355 7.0 9.1
AA-.................................................... 2 20,553,503 6.0 15.1
A+..................................................... 7 17,215,601 5.0 20.1
A...................................................... 12 72,619,273 21.2 41.3
A-..................................................... 25 64,690,029 18.9 60.2
BBB+................................................... 24 49,983,681 14.6 74.8
BBB-................................................... 1 5,636,627 1.6 76.4
BB+.................................................... 1 5,484,602 1.6 78.0
IC(1).................................................. 11 75,342,499 22.0 100.0
--
-------------- ----- -----
Total.............................................. 93 $ 342,703,096 100.0% 100.0%
--
--
-------------- ----- -----
-------------- ----- -----
</TABLE>

INDUSTRY CONCENTRATION

<TABLE>
<CAPTION>
NUMBER OF % OF
MORTGAGE AGGREGATE AGGREGATE
TENANT/GUARANTOR INDUSTRY LOANS BALANCE BALANCE
- ------------------------------------------------------------------------- ----------------- -------------- -----------
<S> <C> <C> <C>
Retail Drug.............................................................. 55 $ 120,001,358 35.0%
Healthcare Services...................................................... 3 38,017,044 11.1
Grocery.................................................................. 5 37,739,484 11.0
Retail Electronics....................................................... 4 24,614,225 7.2
Insurance................................................................ 1 20,514,134 6.0
Retail Building Materials................................................ 2 20,553,503 6.0
Retail Discount & General Merchandise.................................... 2 19,010,446 5.5
Banking.................................................................. 3 18,683,690 5.5
Printing................................................................. 1 9,534,875 2.8
Automotive............................................................... 5 8,105,370 2.4
Retail Apparel........................................................... 1 5,633,817 1.6
Manufacturing............................................................ 1 5,328,070 1.6
Energy................................................................... 4 5,249,546 1.5
Government............................................................... 2 4,906,256 1.4
Food Service............................................................. 3 3,463,482 1.0
Department Stores........................................................ 1 1,347,796 .4
--
-------------- -----
Total................................................................ 93 $ 342,703,096 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>

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

(1) IC represents Internal Classifications. An internal classification is
internally generated by the Company (generally after consultation with one
or more Rating Agencies) with regard to an applicable Credit Tenant. Such
Credit Tenants do not have publicly available credit ratings although the
vast majority of such Credit Tenants are public companies. In each case, the
Company has determined that, upon formal review of a Rating Agency, such
Credit Tenant would receive a Credit Rating of at least BB Grade.

72
<PAGE>
GEOGRAPHIC CONCENTRATION

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
MORTGAGE AGGREGATE AGGREGATE
PROPERTY LOCATION LOANS BALANCE BALANCE
- ----------------------------------------------------------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
NY..................................................................... 22 $ 65,114,439 19.0%
MA..................................................................... 10 53,922,284 15.7
TX..................................................................... 5 45,717,945 13.3
GA..................................................................... 2 22,718,208 6.6
MI..................................................................... 10 21,159,763 6.2
PA..................................................................... 7 20,437,636 6.0
VA..................................................................... 9 17,837,459 5.2
FL..................................................................... 3 17,393,681 5.1
MD..................................................................... 2 14,333,176 4.2
CA..................................................................... 3 14,067,123 4.1
NJ..................................................................... 5 13,625,197 4.0
OH..................................................................... 1 5,914,373 1.7
NE..................................................................... 1 5,570,223 1.6
TN..................................................................... 3 5,408,624 1.6
AR..................................................................... 1 3,993,004 1.2
NC..................................................................... 2 3,079,537 0.9
NV..................................................................... 1 2,926,136 0.8
CT..................................................................... 2 2,589,128 0.8
ME..................................................................... 1 2,521,593 0.7
SC..................................................................... 1 2,100,639 0.6
IL..................................................................... 1 1,347,796 0.4
WA..................................................................... 1 925,132 0.3
--
-------------- -----
93 $ 342,703,096 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>

Total Number of States Represented 22

OUTSTANDING COMMITMENTS CONCENTRATION

<TABLE>
<CAPTION>
APPROXIMATE
AGGREGATE
EXPECTED NUMBER OF MORTGAGE PRINCIPAL % OF AGGREGATE
PRINCIPAL AMOUNT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------------- ------------- --------------
<S> <C> <C> <C>
$0-999,999........................................................ 1 928,000 0.2%
$1,000,000-$2,499,999............................................. 44 77,177,000 19.3
$2,500,000- 4,999,999............................................. 33 94,115,000 23.5
$5,000,000- 7,499,999............................................. 4 22,405,000 5.6
$7,500,000- 9,999,999............................................. 3 24,275,000 6.1
$10,000,000 & greater............................................. 9 181,767,000 45.3
--
------------- -------
Total........................................................... 94 400,667,000 100.0%
--
--
------------- -------
------------- -------
</TABLE>

(1) Includes $64 million of the construction/permanent loans for which
NationsBank has commenced advances under the construction loan portion.

CVS CORPORATION

Loans, constituting 14.9% of the Existing Loans are secured by
properties leased to CVS Corporation ("CVS") or a subsidiary (or former
subsidiary thereof). The obligations of each tenant (other than CVS itself)
under these leases are guaranteed by CVS. CVS, formerly Melville Corporation, is
a

73
<PAGE>
Delaware corporation, and is a leader in the chain drug industry. The long-term
senior credit rating of CVS by S&P is A-.

CVS's stock trades on the New York Stock Exchange (the "NYSE") under the
symbol "CVS," and its World Wide Web site is located at http://www.cvs.com. CVS
currently is subject to the public reporting requirements of the Exchange Act.

RITE AID CORPORATION

Loans, constituting 11.2% of the Existing Loans, are secured by
properties leased to Rite Aid Corporation ("Rite Aid") or for which leases Rite
Aid is the guarantor. Rite Aid is a Delaware corporation operaing a chain of
retail drugstores in the United States. The long-term senior credit rating of
Rite Aid by S&P is BBB+.

Rite Aid's common stock trades on the NYSE under the symbol "RAD," and its
World Wide Web site is located at http://www.riteaid.com. Rite Aid currently is
subject to the public reporting requirements of the Exchange Act.

TARGETED INVESTMENTS

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--Risks Related to Operations--The Company's Operations are Dependent
Upon the Credit Tenant Loan and Securitization Business."

The Company expects periodically to sell or dispose of a significant
component of its Net Leased Real Estate as circumstances warrant. The Company
believes that a significant number of the Net Leased Real Estate it sells or
disposes of will be acquired by buyers motivated by the "like kind exchange
rules" of Section 1031 of the Code. Generally under the like kind exchange
rules, buyers may defer capital gains taxes on a transfer of real estate
investments provided that they identify a "like kind" property within 45 days of
transferring the previous property. Net Leased Real Estate is a desirable
exchange medium for buyers interested in deferring capital gains due to the high
credit quality of real estate backed by a Credit Tenant Lease, the relatively
straightforward due diligence necessary for such acquisitions and the limited
nature of the owner's on-going responsibilities during the life of the Credit
Tenant Lease.

74
<PAGE>
COMMERCIAL MORTGAGE-BACKED SECURITIES

The Company intends to retain certain subordinated classes of CMBS in
connection with pool financings or other 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).

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.

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) 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.

75
<PAGE>
INVESTMENT IN OTHER ENTITIES

The Company may acquire equity interests or make other investments in REITs,
registered investment companies, partnerships and other investment funds and
real estate operating companies 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
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.

76
<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, Chairman of the Board
of Directors

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

DIRECTORS TO BE APPOINTED UPON COMPLETION OF THE OFFERING

Richard J. Campo............................... 43

Lawrence Chimerine............................. 57

Dan Kearney.................................... 59
</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

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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
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., Inc. since its
formation in 1988. Mr. Shay is a founder of Hyperion Partners and Hyperion
Partners II L.P. 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 one of the general partners 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
L.P. Mr. Shay is one of the control persons of the general partners of Hyperion
Partners and Hyperion Partners II L.P. Prior to joining Ranieri & Co., Inc., 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 Messrs. Richard V. Campo, Lawrence Chimerine and
Dan Kearney, which directors will be Unaffiliated Directors.

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<PAGE>
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 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. He is currently a member of the board of directors of Bank
United Corp. and Bank United. 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.

DAN KEARNEY

Dan Kearney, age 59, retired as Executive Vice President of Investments and
Financial Services of Aetna Inc. on February 28, 1998. Since December 1994, Mr.
Kearney was the President of Aetna Life and Annuity Co. (the predecessor to
Aetna Retirement Services, Inc.) in Hartford, Connecticut and since 1991 he was
the Chief Investment Officer of Aetna Inc. overseeing a $72 billion portfolio of
stock equities, bonds and real estate investments.

Prior to joining Aetna in 1991, Mr. Kearney was President and Chief
Executive Officer of the Resolution Trust Corporation Oversight Board. Before
joining the RTC Oversight Board, he was a principal at Aldrich, Eastman and
Waltch, Inc., a Boston-based pension fund advisor. From 1977 to 1988, Mr.
Kearney was an executive of Salomon Brothers Inc., where he was Managing
Director of its Real Estate Financing Department and one of the founders of its
Mortgage Securities Department.

From 1976 to 1977, Mr. Kearney was Associate Director of the Office of
Management and Budget (OMB) for the U.S. Federal Government. He served as
President of the Government National Mortgage Association (Ginnie Mae) from 1974
to 1976, Deputy Assistant Secretary of the Department of Housing and Urban
Development (HUD) from 1973 to 1974, and as Executive Director of the Illinois
Housing Development Authority from 1969 to 1973. He was in private law practice
in Chicago from 1965 to 1968.

Mr. Kearney is a director of MBIA, Inc., the country's largest provider of
municipal bond insurance. He is also a Director of BioTransplant, a leading
developer of organ transplant technology. Mr. Kearney received a Bachelor of
Business Administration degree in 1961 and his Master of Economics degree in
1963. He received a J.D. from the University of Chicago Law School in 1965.

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

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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.

INDEMNIFICATION OF OFFICERS AND 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. In
addition, the Company has entered into indemnification agreements with each of
its directors and senior officers to the fullest extent permitted by applicable
law and which otherwise reflect the indemnification provisions set forth in the
Company's Charter. 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 independent 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.

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 Non-Qualified Stock Option Plan.
Directors who are employed by the Company will not be separately compensated by
the Company.

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.

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

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

<S> <C> <C> <C> <C> <C>
RESTRICTED SECURITIES
SHARE AWARDS UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS/SARS (#)
- ----------------------------------------------- --------- ---------- ---------- --------------- -------------------
William R. Pollert, 1997 $ 275,000 $ -0- $ (1) (1)
Chief Executive Officer and President

Edwin J. Glickman, 1997 $ 260,000 $ 75,000 (1) (1)
Executive Vice President, Product Development

Steven L. Maloy, 1997 $ 170,000 $ 130,000 (1) (1)
Senior Vice President, Marketing and Sales

Paul H. McDowell, 1997 $ 185,000 $ 145,000 (1) (1)
Senior Vice President, General Counsel and
Secretary

Shawn P. Seale, 1997 $ 175,000 $ 135,000 (1) (1)
Senior Vice President, Chief Financial Officer
and Assistant Secretary
</TABLE>

(1) Pursuant to the terms of the limited partnership agreement of CLF the actual
percentage ownership interests in CLF are only determinable upon a
distribution to the partners and are dependent upon the amount of such
distribution. Based upon the anticipated distributions in connection with
the Formation Transaction, Messrs. Pollert, Glickman, Maloy, McDowell and
Seale would have received Class C limited partnership interests representing
1.42%, 1.40%, 1.00%, 1.16%, and 1.14% of the equity interests in CLF,
respectively, assuming closing of the Offering.

STOCK OPTIONS

On , 1998, the Company adopted the 1998 Employee Stock Option
Plan and 1998 Stock Option Plan for Non-Employee Directors. The Company has
authorized that 11% of the Common Stock outstanding following the Offering be
reserved for issuance pursuant to its 1998 Employee Stock Option Plan and that
1% of the Common Stock outstanding following the Offering be reserved for
issuance pursuant to its 1998 Stock Option Plan for Non-Employee Directors. 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 its Stock
Option Plans.

MANAGEMENT SHAREHOLDERS' AGREEMENT

The Company and certain management shareholders have entered into a
shareholders' agreement which provides, among other things, for certain
restrictions on transfer and the grant of a proxy to William R. Pollert by other
members of management which proxy entitles Mr. Pollert to vote the shares of
Common Stock of such other members of management. Pursuant to the Management
Shareholders' Agreement, Mr. Pollert will have the right to vote 2,136,402 or
18.0% of the Common Stock outstanding following the Offering (inclusive of the
883,648 shares of Common Stock held by Mr. Pollert directly or indirectly
without regard to the effect of the proxy contained in the Management
Shareholders' Agreement). In addition, the Management Shareholders' Agreement
provides that the participating members of management (which consists of all
current members of management) will be granted certain registration

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<PAGE>

rights pursuant to the Registration Rights Agreement. See "Description of
Capital Stock--Registration Rights Agreement."

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 $1.3 million. 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 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

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<PAGE>
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.

The Company has entered into indemnification agreements with each of its
directors and senior officers to the fullest extent permitted by applicable law
and which otherwise reflect the indemnification provisions set forth in the
Company's Charter.

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<PAGE>
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. Mr. Scott
A. Shay, a director of the Company, is a principal of Hyperion Partners II L.P.
At December 31, 1996, the Company had issued $15,345,000 in the aggregate of
preferred capital to Hyperion Partners II L.P. and South Ferry 2, L.P. Such
preferred capital accrued at a rate of 30% per annum. In addition, the Company
had issued notes to Hyperion Partners II L.P. during 1997 that were payable on
demand and bore interest at 20%. Since January 1, 1997, CLF has issued unsecured
notes payable and made repayments of notes payable to Hyperion Partners II 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 (including interest) (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 (including interest) (4,145,000)
2/18/98......................... Issue notes payable 3,000,000
3/5/98.......................... Retire notes payable (including interest) (5,146,610)
3/13/98......................... Issue notes payable 2,500,000
4/6/98.......................... Issue notes payable 4,000,000
4/15/98......................... Retire notes payable (including interest) (2,803,761)
4/30/98......................... Retire notes payable (including interest) (4,053,333)
5/7/98.......................... Issue notes payable 3,000,000
5/27/98......................... Issue notes payable 2,000,000
6/11/98......................... Issue notes payable 3,000,000
</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, Chief Executive Officer 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 May 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 executive officer and director
of the Company, and (iii) all executive officers and directors of the Company as
a group. The beneficial ownership data set forth below is determined in
accordance with a formula set forth in the partnership agreement of CLF and
assumes an initial public offering price of $15 per share and the sale of
7,340,000 shares in the Offering.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR BENEFICIAL OWNERSHIP
TO THE OFFERING(12) 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)...................................... 2,578,768 (11) 56.8% 2,246,525 18.9%
Edwin J. Glickman (4)........................................... 303,586 6.7% 303,586 2.6%
Paul H. McDowell (4)............................................ 213,866 4.7% 213,866 1.8%
Steven L. Maloy (4)............................................. 194,510 4.3% 194,510 1.6%
Shawn P. Seale (4).............................................. 211,233 4.7% 211,233 1.8%

Scott A. Shay (5)............................................... 1,609,216 35.4% 1,609,216 13.5%
50 Charles Lindbergh Boulevard
Uniondale, New York 11553

Hyperion Partners II L.P. (5)................................... 1,609,216 35.4% 1,609,216 13.5%
50 Charles Lindbergh Boulevard
Uniondale, New York 11553

South Ferry #2, L.P. (6)........................................ 352,016 7.8% 352,016 3.0%
1 State Street Plaza
New York, New York 10004

Alexander E. Fisher (4) (7)..................................... 289,826 6.4% 289,826 2.4%
A. Fisher Co. Inc.
101 East 52nd Street
New York, New York 10022

CLF Holdings, Inc. (8).......................................... 275,308 6.1% 275,308 2.3%

CLF Investors, LLC (9).......................................... 1,250,094 27.5% -0- 0.00%

All executive officers and directors as a group (9 persons)
(10).......................................................... 2,120,491 46.7% 4,097,633 34.5%
</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 883,648 shares held by Mr. Pollert directly and 275,308 shares
owned by CLF Holdings, Inc. of which Mr. Pollert owns 60% of the Common
Stock. Includes 1,252,754 shares deemed beneficially owned pursuant to the
Management Shareholders' Agreement.

(4) Includes 715,109, 137,286, 76,270, 76,270, 76,270, and 289,826, shares,
respectively, held beneficially by Messrs. Pollert, Glickman, McDowell,
Maloy, Seale and Fisher as members of CLF Investors, LLC.

(5) Includes 1,569,991 shares of Common Stock owned by Hyperion Partners II L.P.
and 39,225 shares of Common Stock owned by CLFC HP II, Inc. Mr. Shay
disclaims beneficial ownership of all 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 275,308 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 to which beneficial ownership is attributed to held by
Messrs. Pollert, Glickman, McDowell, Maloy, Seale and Shay.

(11) Includes 332,243 shares owned by non-management shareholders of CLF
Investors, LLC.

(12) Prior to the Offering, the beneficial owners held only partnership
interests in CLF, and thus this table reflects the number of shares of
Common Stock such partnerhip interests will receive upon consummation of the
Formation Transactions and the Offering, and the percentage such shares
bears to a total of 4,540,000 shares of Common Stock to be issued to such
partners upon consummation of the Formation Transactions and the Offering.

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<PAGE>
FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of material federal income tax consequences 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
consequences 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. In addition, this discussion is limited to persons who hold the
Common Stock as a "capital asset" (generally, property held for investment)
within the meaning of Section 1221 of the Code.

The statements in this discussion and the opinion of Counsel 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, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP AND SALE, AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.

DISTRIBUTIONS

Distributions with respect to the Common Stock will be treated as a
dividend, taxable as ordinary income to the recipient thereof, to the extent of
the Company's current or accumulated earnings and profits ("earnings and
profits") as determined under Federal income tax principles. To the extent that
the amount of such distribution exceeds the current and accumulated earnings and
profits of the Company, the excess will be applied against and will reduce the
holder's tax basis in the Common Stock. Any amount by which such distribution
exceeds the amount treated as a dividend and the amount applied against basis
will be treated as short-term or long-term capital gain, as the case may be,
depending upon the holder's holding period for the Common Stock.

DIVIDENDS TO CORPORATE SHAREHOLDERS

In general, a distribution that is treated as a dividend for federal income
tax purposes and that is made to a corporate shareholder with respect to the
Common Stock will qualify for the 70% dividends-received deduction under Section
243 of the Code. Holders should note, however, that there can be no assurance
that distributions with respect to the Common Stock will not exceed the amount
of current or accumulated earnings and profits of the Company in the future.
Accordingly, there can be no assurance that the dividends-received deduction
will apply to distributions on the Common Stock.

In addition, there are many exceptions and restrictions relating to the
availability of such dividends-received deduction such as restrictions relating
to (i) the holding period of stock the dividends on which are sought to be
deducted, (ii) debt-financed portfolio stock, (iii) dividends treated as
"extraordinary dividends" for purposes of Section 1059 of the Code, and (iv)
taxpayers that pay alternative minimum tax. Corporate shareholders should
consult their own tax advisors regarding the extent, if any, to which such

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exceptions and restrictions (as amended by the Taxpayer Relief Act of 1997) may
apply to their particular factual situation.

TAXATION OF STOCKHOLDERS ON THE DISPOSITION OR REDEMPTION OF THE COMMON STOCK

Upon a sale or other disposition of Common Stock, a holder will generally
recognize gain or loss equal to the difference between the amount of cash and
the fair market value of property received by the holder in such sale or other
disposition and such holder's adjusted tax basis in such shares. 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. All or a 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.

Any gain or loss recognized by a holder upon redemption of the Common Stock
will be treated as gain or loss from the sale or exchange of Common Stock, if,
taking into account stock that is actually or constructively owned as determined
under Section 318 of the Code, (i) such holder's interest in the Company's
Common Stock is completely terminated as a result of the redemption, (ii) such
holder's percentage ownership in the Company's voting stock immediately after
the redemption is less than 80% of such percentage ownership immediately before
such redemption, or (iii) the redemption is "not essentially equivalent to a
dividend" (within the meaning of Section 302 of the Code).

If a redemption of the Common Stock is treated as a distribution that is
taxable as a dividend, the holder will be taxed on the payment received in the
same manner as described above under "Distributions," and the holder's adjusted
tax basis in the redeemed Common Stock will be transferred to any remaining
shares held by such holder in the Company. If the holder does not retain any
stock ownership in the Company following the redemption, then such holder may
lose such basis completely.

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. 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 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

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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.

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 are 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.

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. 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%.

Under FIRPTA, gain from sales of U.S. real property interests ("USRP
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 gains 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. Gains subject to FIRPTA also may be
subject to the 30 percent branch profits tax in the hands of a Non-U.S.
corporate stockholder not entitled to treaty relief or exemption.

An interest in a domestic corporation is itself a USRP interest subject to
U.S. taxation under FIRPTA if the corporation was a U.S. real property holding
corporation ("USRPHC") at any time during the five years preceding the
taxpayer's disposition of his interest in the corporation. A domestic
corporation is a USRPHC if it holds USRP interests having an aggregate fair
market value that equals or exceeds 50

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percent of the fair market value of the corporation's real property and business
assets wherever located. While an interest in real property solely as a creditor
is generally not considered a USRP interest, a creditor relationship that
involves any direct or indirect right to share in the appreciation in the value
of, or in the gross or net proceeds or profits generated by the real property is
such a USRP interest. Whether the Company will be a USRPHC is currently unknown
and will depend on the future operations and activities of the Company. Non-U.S.
Stockholders are strongly urged to consult their own tax advisors with regard to
the potential impact of FIRPTA on an investment in the Common Stock.

Any gain on the disposition of Common Stock which is 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 the 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 percent tax on the
individual's capital gains.

TAXATION OF THE COMPANY

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 Taxable Income. For example, the Company will
recognize 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 will have resulting disposable cash
because such income 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. The Company also may recognize Excess Inclusion
or other 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.

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 recognize income but receive no cash ("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.

If the Company owns REMIC Residual Interests, it is possible that the
Company would not be permitted to offset certain portions of the income it
derives from such interests with its current deductions or net operating loss
carryovers or carrybacks. The portion of the income that would be subject to
this limitation would equal the amount of any Excess Inclusion income derived by
the Company with respect to the REMIC Residual Interests. The Company's Excess
Inclusion income for any calendar quarter will

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equal the excess of its income from each REMIC Residual Interest over its "daily
accruals" with respect to such REMIC Residual Interest 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.

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 Nasdaq, 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, 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 authorized and 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, sinking fund, redemption,
appraisal preemptive or cumulative voting rights. The Charter authorizes the
Board of Directors to reclassify any unissued shares of Common Stock into other
classes or series of classes of stock and to establish the number of shares in
each class or series and to set the preferences, conversion and other rates,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption for each such class or
series. The authorized capital stock of the Company may be increased and altered
from time to time as permitted by Maryland law.

The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Shares and to reclassify any previously classified but
unissued shares of any series, as authorized by the Board of Directors. Prior to
the issuance of shares of each series, the Board is required by the MGCL and the
charter of the Company to set, subject to the provisions of the charter
regarding the restrictions on transfer of stock, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such series. Preferred stock would be available for possible
future financings of, or acquisitions by, the Company and for general corporate
purposes without any legal or regulatory requirement that stockholder
authorization for issuance be obtained, unless such approval is required by
applicable law or the rules of any stock exchange or automated quotation system
or which the Company's securities may be listed or traded. The

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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 Charter reserves 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. The
Common Stock has been approved for trading on the Nasdaq under the symbol
"CLFI," subject to compliance with certain final conditions.

REGISTRATION RIGHTS AGREEMENT

Pursuant to a Registration Rights Agreement, dated , 1998 (the
"Registration Rights Agreement"), the Company has granted demand and piggyback
registration rights to holders of equity interests in the Company prior to the
Offering, including members of management (the "Registration Rights Holders")
holding an aggregate of 4,540,000 shares of Common Stock. See "Formation
Transactions" and "Security Ownership of Certain Beneficial Owners and
Management." At any time following the consummation of the Offering,
Registration Rights Holders then owning in the aggregate in excess of 25% of the
Common Stock then outstanding may make a written request for registration under
the Securities Act of their shares of Common Stock; provided that the expected
price to the public of such registered shares would be at least $10,000,000 in
the aggregate. Subject to certain conditions, upon receipt of such request, the
Company shall cause a registration statement to be filed with the Commission
pertaining to the public sale of such shares of Common Stock and, subject to
certain exceptions, use its commercially reasonable efforts to cause such
registration statement to become effective under the Securities Act within 100
days of its receipt of such request for registration, provided such effective
date will be no earlier than the expiration of the Lock-Up Period (as defined
below). In addition, the Company has agreed to file on the first anniversary of
the effective date of the registration statement of which this Prospectus is a
part a shelf registration statement with regard to the shares of Common Stock
then held by the Registration Rights Holders. Furthermore, the Company has
granted the Registration Rights Holders certain rights to include their shares
of Common Stock in any registration statement filed by the Company with the
Commission pertaining to the public sale of Common Stock.

Notwithstanding the foregoing, each of the Registration Rights Holders has
executed a lock-up agreement pursuant to which each Registration Rights Holder
has 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 securities convertible into or exerciseable for shares of Common Stock
directly or indirectly, for a period of one year after the date of this
Prospectus (the "Lock-Up Period") without the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters, except
pursuant to the Company's 1998 Stock Option Plans.

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

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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 fewer than two or more than nine persons. The Bylaws require 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 two-thirds 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 terms of directors 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 two-thirds of the remaining
directors, even if such two-thirds vote 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, only for cause, 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 two-thirds of 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

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five years after the most recent date on which the Interested Stockholder became
an Interested Stockholder. An "Interested Stockholder" is any person who
beneficially owns 10% or more of the voting power of the corporation's shares or
an affiliate of the corporation who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the then-outstanding voting stock of the corporation.
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 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 shareholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any shareholders 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 shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
shareholders 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 and adopted at any time before the acquisition of the
Control Shares.

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

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can be amended or eliminated by the Board of Directors without consent of the
shareholders of the Company.

SHAREHOLDER RIGHTS PLAN

Prior to the completion of the Offering, the Company expects that it will
adopt a shareholder rights plan. While the terms of such plan have yet to be
determined, the Company expects that this plan 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.

AMENDMENT TO THE CHARTER
The Company reserves the right from time to time to make any amendment to
its Charter, now or hereafter authorized by law, including any amendment which
alters the contract rights, as expressly set forth in the Charter, of any shares
of outstanding stock. The Charter of the Company may be amended upon the
recommendation of the Board of Directors in accordance with Section 2-604 of the
MGCL and the Charter and the approval of the amendment by a majority of all
votes entitled to be cast on the matter by the shareholders.

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 a majority 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 shareholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by shareholders 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 shareholder 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 shareholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting of shareholders 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 shareholder who is entitled to vote at the meeting and who
has complied with the advance notice provisions set forth in the Bylaws.

MEETINGS OF SHAREHOLDERS

The Company's Bylaws provide that annual meetings of shareholders shall be
held on a date and at the time set by the Board of Directors during the month of
May of each year, or at such other date and time as shall, from time to time, be
designated by the Board of Directors (commencing in May 1999). Special meetings
of the shareholders may be called by (i) the Chief Executive Officer of the
Company, (ii) the President, or (iii) the Board of 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.

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

The Business Combination provisions, and, if the applicable provision in the
Bylaws is rescinded, the Control Share Acquisition provisions of the MGCL, the
provisions of the charter on classification of the Board of Directors and
removal of directors and the advance notice provisions of the Bylaws could
delay,

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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 The Bank of New York as its transfer agent
and registrar for the Common Stock.

REPORTS TO SHAREHOLDERS

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.

AMENDMENT TO THE BYLAWS

The Bylaws may be amended 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 or by the affirmative vote of no less than two-thirds of all
directors at the time; 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.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 11,880,000 shares of
Common Stock outstanding. Of these shares, the 7,340,000 shares offered hereby
(8,441,000 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 4,540,000 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 4,540,000 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 118,800 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 #2, L.P., all of the Company's officers and directors 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 the Registration Rights Agreement, it is expected that the
holders of an aggregate of 4,540,000 shares of Common Stock or their transferees
will be entitled to certain rights with respect to the registration of such
shares under the Securities Act. See "Description of Capital Stock--Registration
Rights Agreement."

The Company currently intends to file one or more registration statements on
Form S-8 with the Commission in order to register the 1,425,600 shares of Common
Stock subject to the 1998 Stock Option Plans.

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.

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UNDERWRITING

The underwriters named below (the "Underwriters") for whom Prudential
Securities Incorporated, NationsBanc Montgomery Securities LLC, Stifel, Nicolaus
& Company, Incorporated are acting as representatives (the "Representatives"),
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>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated...............................................
NationsBanc Montgomery Securities LLC............................................
Stifel, Nicolaus & Company, Incorporated.........................................
----------

Total:........................................................................... 7,340,000
----------
----------
</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 Representatives, 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 granted the Underwriters an over-allotment option exercisable
for 30 days from the date of this Prospectus to purchase up to 1,101,000
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 7,340,000.

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

The Representatives 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.

The officers and directors of CLF, Inc. and all investors holding equity
interests in the Company on the date hereof (including Hyperion Partners II
L.P., South Ferry #2, 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 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, except pursuant to the Company's
1998 Stock Option Plans. 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 agreements.

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

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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.

The Common Stock has applied for inclusion in the Nasdaq National Market
under the symbol "CLFI," subject to official notice of issuance.

In connection with the Offering, certain Underwriters (and selling group
members, if any) 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 1,101,000 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 Representatives 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 both the Prudential Warehouse and the Mezzanine
Construction Loan 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, 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 on an ongoing basis, will beneficially own, at the

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consummation of the Offering, less than 0.15%, in the aggregate, of the then
outstanding shares of Common Stock.

EXPERTS

The statement of financial condition of Capital Lease Funding, Inc., at
April 30, 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.

"Affiliate" or "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.

"Application Stage" is as defined under "Prospectus Summary--The
Company--Existing Loans and Pipeline for Future Originations" and "The
Company--Existing Loans and Pipeline for Future Originations."

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

"Audit Committee" means the committee of the Board of Directors, comprised
entirely of independent directors, that will perform specified duties related to
accounting and audit issues of the Company.

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

"BB 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-.

"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.

"Charter" shall mean the Articles of Incorporation of the Company, as
amended.

"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 Nasdaq or, if such shares are not listed or admitted to trading
on the Nasdaq, 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.

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"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.

"Construction/Permanent Loans" are as defined under "Prospectus Summary--The
Company-- Credit Tenant Loan Business" and "The Company--Credit Tenant Loan
Business."

"CPI Loans" or "Consumer Price Index Financing" are as defined under
"Prospectus Summary--The Company--Credit Tenant Loan Business" and "The
Company--Credit Tenant Loan Business."

"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 BB Grade rating from any Rating Agency (and
which has not received a Non-Investment Grade rating less than BB 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.

"CTL Market" is as defined under "The Company--Industry Overview."

"CTL Pool Financing" involve the formation and utilization of a special
single-purpose entity into which is placed a pool of multiple borrower Credit
Tenant Loans involving multiple Credit Tenants and the issuance of debt or
equity securities by such single-purpose entity. The Credit Tenant Loans in CTL
Securitization pools are either "bond" leases or enhanced to "bond" status so
that these loans are rated on the quality of the Credit Tenant rather than on
the value of the underlying real estate. The ratings received for any pool will
be dependent in part, on the size of the pool and the diversity of the
underlying credits.

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

"DCR" means Duff & Phelps Credit Rating Company.

"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.

"earnings and profits" means the Company's current or accumulated earnings
and profits as determined under Federal income tax principles.

"Enhancement Insurer" or "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.

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

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

"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.

"Extended Amortization Program" is as defined under "Prospectus Summary--The
Company-- Credit Tenant Loan Business" and "The Company--Credit Tenant Loan
Business."

"Extended-Term Loans" are as defined under "Prospectus Summary--The
Company--Credit Tenant Loan Business" and "The Company--Credit Tenant Loan
Business."

"Extension Amortization Insurer" means an insurer with a claims paying
rating of "AAA" by S&P.

"extraordinary dividends" means dividends treated as extraordinary dividends
for purposes of Section 1059 of the Code.

"FASIT" means financial asset securitization investment trust.

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

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

"Fitch" means Fitch IBCA.

"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.

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"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.

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

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

"Investment Grade" means: (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-.

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

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

"IRS" means the Internal Revenue Service.

"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.

"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" or "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 Facility" is as defined under "Prospectus
Summary--The Company--Credit Facilities" and "The Company--Credit Facilities."

104
<PAGE>

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

"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-Backed Securities and (ii) Mortgage
Loans.

"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.

"Mortgage-Backed Securities" means (i) Pass-Through Certificates, and (ii)
other securities representing interests in, or obligations backed by pools of
Mortgage Loans.

"Nasdaq" means the Nasdaq Stock Market's National Market.

"NationsBank" means NationsBank, N.A.

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

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

"Net Leased Real Estate" or "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.

"1998 Incentive Stock Option Plan" is the Incentive Stock Option Plan
adopted by the Company in 1998.

"1998 Non-Qualified Stock Option Plan" is the Non-Qualified Stock Option
Plan adopted by the Company in 1998.

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

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

"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.

"One Time Close" or "1TC" is as defined under "Prospectus Summary--The
Company--Credit Tenant Loan Business" and "The Company--Credit Tenant Loan
Business."

"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,

105
<PAGE>
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.

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

"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.

"Purchase Commitment" is as defined under "Prospectus Summary--The
Company--General" and "The Company--General."

"Rate-Locked Loans" is as defined under "Prospectus Summary--The
Company--Existing Loans and Pipeline for Future Originations" and "The
Company--Existing Loans and Pipeline for Future Originations."

"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" or "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 REITs.

"Registration Rights Agreement" means the Registration Rights Agreement,
dated , 1998 among the Company and holders of equity interests in the
Company prior to the Offering, including members of management.

"Registration Rights Holders" means holders of equity interests in the
Company prior to the Offering, including members of management, holding an
aggregate of 4,540,000 shares of Common Stock, which have been granted certain
registration rights pursuant to the Registration Rights Agreement.

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

"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 as
to which REMIC status is elected.

"Rent" or "rent" shall have the meaning given under "Federal Income Tax
Consequences."

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

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

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

106
<PAGE>

"securitization" means the process of pooling mortgage loans and other fixed
income assets usually 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.

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

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

"Stock Option Plans" means the Company's 1998 Employee Stock Option Plan and
1998 Stock Option Plan For Non-Employee Directors.

"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.

"Taxable Income" means the taxable income of the Company as determined under
the Code.

"Term Sheet" is as defined under "Prospectus Summary--The Company--Existing
Loans and Pipeline for Future Originations" and "The Company--Existing Loans and
Pipeline for Future Originations."

"Term Sheet Stage" is as defined under "Prospectus Summary--The
Company--Existing Loans and Pipeline for Future Originations" and "The
Company--Existing Loans and Pipeline for Future Originations."

"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" or "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 Charter, which trust shall
be for the exclusive benefit of one or more Charitable Beneficiaries.

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

"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.

107
<PAGE>

"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.

"USRPHC" is as defined under "Federal Income Tax Consequences--Taxation of
Non-U.S. Stockholders."

"USRP Interests" or "USRP interests" is as defined under "Federal Income Tax
Consequences-- Taxation of Non-U.S. Stockholders."

"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.

108
<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 March 31, 1998.......................................... F-3
Pro Forma Statement of Operations for the Three Months Ended March 31, 1998.............................. F-4
Pro Forma Statement of Operations for the Year Ended December 31, 1997................................... F-5
Notes to Pro Forma Financial Statements.................................................................. F-6
HISTORICAL COMPANY:
Capital Lease Funding, Inc. (a Maryland corporation) Historical Financial Statements
Report of Independent Auditors........................................................................... F-8
Statement of Financial Condition as of April 30, 1998.................................................... F-9
Notes to Financial Statements............................................................................ F-10
HISTORICAL CAPITAL LEASE FUNDING, L.P.:
Capital Lease Funding, L.P. (a Delaware partnership) Historical Financial Statements
Report of Independent Auditors........................................................................... F-12
Consolidated Statements of Financial Condition as of March 31, 1998 (unaudited) and December 31, 1997 and
1996................................................................................................... F-13
Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997 (unaudited) and
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
Consolidated Statement of Partners' Capital (Deficit) for the Three Months Ended March 31, 1998
(unaudited) and the Years Ended December 31, 1997 and 1996 and for the period from September 29, 1995
(commencement of operations) to December 31, 1995...................................................... F-15
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) and
the Years Ended December 31, 1997 and 1996 and for the period from September 29, 1995 (commencement of
operations) to December 31, 1995....................................................................... F-16
Notes to Consolidated Financial Statements............................................................... F-17
Schedule of Mortgage Loans on Real Estate as of December 31, 1997........................................ F-23
</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 March
31, 1998 has been prepared as if the Offering and Formation Transactions had
been consummated on March 31, 1998. The pro forma statements of operations for
the three months ended March 31, 1998 and the year ended December 31, 1997 are
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 three months ended March 31, 1998.

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 consolidated 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 MARCH 31, 1998
(UNAUDITED)

<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................. $ 6,579,425 $ 101,478,000 $ (290,000) $ (95,803,000) $ 11,964,425
Mortgages held for sale................... 323,509,279 -- -- -- 323,509,279
Deferred securitization costs............. 1,840,943 -- -- -- 1,840,943
Deferred registration costs............... 385,000 (385,000) -- -- --
Hedge account margin deposit.............. 3,727,876 -- -- -- 3,727,876
Accrued interest income................... 1,094,000 -- -- -- 1,094,000
Prepaid expenses.......................... 192,596 -- -- -- 192,596
Furniture, fixtures and equipment (net of
accumulated depreciation of $76,521).... 94,516 -- -- -- 94,516
------------- --------------- -------------- ------------- -------------
Total Assets.............................. $ 337,423,635 $ 101,093,000 $ (290,000) $ (95,803,000) $ 342,423,635
------------- --------------- -------------- ------------- -------------
------------- --------------- -------------- ------------- -------------

LIABILITIES

Accounts payable and accrued expenses..... $ 3,717,787 $ -- $ -- $ -- $ 3,717,787
Repurchase agreement obligations.......... 315,266,832 -- -- (55,709,820) 259,557,012
Notes payable to partner.................. 18,507,023 -- -- (18,507,023) --
------------- --------------- -------------- ------------- -------------
Total Liabilities......................... 337,491,642 -- -- (74,216,843) 263,274,799

Commitments and contingencies

PARTNERS' CAPITAL (DEFICIT)/STOCKHOLDERS' EQUITY

Partners' capital (deficit)............... (68,007) -- 68,007 -- --
Common stock.............................. -- 73,400 45,400 -- 118,800
Paid-in capital........................... -- 101,019,600 (403,407) (21,586,157) 79,030,036
Retained earnings......................... -- -- -- -- --
------------- --------------- -------------- ------------- -------------
Total Partners' Capital (Deficit)/
Stockholders' Equity.................... (68,007) 101,093,000 (290,000) (21,586,157) 79,148,836
------------- --------------- -------------- ------------- -------------
Total Liabilities and Equity.............. $ 337,423,635 $ 101,093,000 $ (290,000) $ (95,803,000) $ 342,423,635
------------- --------------- -------------- ------------- -------------
------------- --------------- -------------- ------------- -------------
</TABLE>

SEE ACCOMPANYING NOTES.

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

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998

<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS ADJUSTED
CLF, LP FOR OFFERING FOR OFFERING
----------- ------------ ------------
(UNAUDITED)

<S> <C> <C> <C>
REVENUES:
Interest income from mortgages.................................................. $ 5,279,888 $ -- $ 5,279,888
Loss on sales of mortgages...................................................... -- -- --
Other revenue from mortgages.................................................... 20,787 -- 20,787
----------- ------------ ------------
Total Revenues.................................................................. 5,300,675 -- 5,300,675
----------- ------------ ------------
LOAN EXPENSES:
Interest on repurchase agreements............................................... 4,899,369 (1,611,088 (a) 3,288,281
Servicer fees................................................................... 40,721 -- 40,721
----------- ------------ ------------
Total Loan Expenses............................................................. 4,940,090 (1,611,088) 3,329,002
----------- ------------ ------------
Gross Profit.................................................................... 360,585 1,611,088 1,971,673
----------- ------------ ------------
OPERATING EXPENSES:
Personnel....................................................................... 736,176 25,000(b) 761,176
General and administrative...................................................... 203,387 62,500(c) 265,887
Marketing and advertising....................................................... 165,844 -- 165,844
----------- ------------ ------------
Total Operating Expenses........................................................ 1,105,407 87,500 1,192,907
----------- ------------ ------------
Operating Income................................................................ (744,822) 1,523,588 778,766
OTHER INCOME (EXPENSE):
Other interest income........................................................... 38,956 -- 38,956
Interest expense on notes payable............................................... (924,315) 924,315(d) --
----------- ------------ ------------
Total Other Income (Expense).................................................... (885,359) 924,315 38,956
----------- ------------ ------------
PRO FORMA INCOME (LOSS) BEFORE PROVISION FOR FEDERAL AND STATE INCOME TAX....... (1,630,181) 2,447,903 817,722
PROVISION FOR FEDERAL AND STATE INCOME TAX...................................... -- (327,100 (e) (327,100)
----------- ------------ ------------
PRO FORMA NET INCOME (LOSS)..................................................... $(1,630,181) $ 2,120,803 $ 490,622
----------- ------------ ------------
----------- ------------ ------------
PRO FORMA NET INCOME PER SHARE.................................................. $ -- $ --(f) $ 0.04
----------- ------------ ------------
----------- ------------ ------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<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 (5,166,917 (a) 3,662,631
Servicer fees................................................................... 76,328 -- 76,328
----------- ------------- ------------
Total Loan Expenses............................................................. 8,905,876 (5,166,917) 3,738,959
----------- ------------- ------------
Gross Profit.................................................................... 836,436 5,166,917 6,003,353
----------- ------------- ------------
OPERATING EXPENSES:
Personnel....................................................................... 2,880,307 100,000(b) 2,980,307
General and administrative...................................................... 727,642 250,000(c) 977,642
Marketing and advertising....................................................... 501,091 -- 501,091
----------- ------------- ------------
Total Operating Expenses........................................................ 4,109,040 350,000 4,459,040
----------- ------------- ------------
Operating Income................................................................ (3,272,604) 4,816,917 1,544,313
OTHER INCOME (EXPENSE):
Other interest income........................................................... 169,889 -- 169,889
Interest expense on notes payable............................................... (292,827) 292,827(d) --
----------- ------------- ------------
Total Other Income (Expense).................................................... (122,938) 292,827 169,889
----------- ------------- ------------
PRO FORMA INCOME (LOSS) BEFORE PROVISION FOR FEDERAL AND STATE INCOME TAX....... (3,395,542) 5,109,744 1,714,202
PROVISION FOR FEDERAL AND STATE INCOME TAX...................................... -- (685,700 (e) (685,700)
----------- ------------- ------------
PRO FORMA NET INCOME (LOSS)..................................................... $(3,395,542) $ 4,424,044 $ 1,028,502
----------- ------------- ------------
----------- ------------- ------------
PRO FORMA NET INCOME PER SHARE.................................................. $ -- $ --(f) $ 0.09
----------- ------------- ------------
----------- ------------- ------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-5
<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:

To record the recapitalization of the Predecessor historical balance sheet
as of March 31, 1998, including the assets, assumption of liabilities and
deficits, of the Predecessor at their historical amounts. The accompanying
unaudited statement of financial condition as of March 31, 1998 has been
prepared as if the following transactions had been consummated as of March 31,
1998:

<TABLE>
<S> <C> <C> <C>
(a) Sale of 7,340,000 shares of Common Stock in the Offering
at $15 per share:
Proceeds from the Offering.............................. $110,100,000
Less, costs associated with the Offering................
Underwriting fees..................................... $(7,707,000)
Legal and professional fees, net of
$385,000 deferred registration costs................ (815,000)
Other miscellaneous costs............................. (100,000) (8,622,000)
---------- -----------
Net proceeds............................................ $101,478,000
-----------
-----------
Par value of Common Stock to be issued in the
Offering.............................................. $ 73,400
Additional paid-in capital from the net proceeds of the
Offering.............................................. 101,019,600
-----------
$101,093,000
-----------
-----------
</TABLE>

<TABLE>
<S> <C> <C>
(b) Issuance of 4,540,000 shares of Common Stock and cash of $290,000 in
exchange for various partnership interests of the Predecessor:
Partners' deficit................................................... $ (68,007)
Par value of Common Stock........................................... (45,400)
Additional paid-in capital from issuance of Common Stock............ 403,407
Cash................................................................ (290,000)

(c) Use of a portion of net proceeds of the Offering to redeem Notes
Payable and Preferred Capital for cash as follows:
Notes payable....................................................... $18,507,023
Cash redemption amount of Preferred Capital......................... 21,586,157
-----------
$40,093,180
-----------
-----------
(d) Use of a portion of net proceeds of the Offering to retire debt
related to
Credit facility..................................................... $55,709,820
-----------
-----------
</TABLE>

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

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)

1. ADJUSTMENTS TO THE PRO FORMA STATEMENT OF FINANCIAL CONDITION: (CONTINUED)
The number of shares of the Company and the cash that each equity ownership
class of the Partnership will receive in conjunction with this transaction, in
accordance with the Partnership agreement, is as follows:

<TABLE>
<CAPTION>
NUMBER
OF SHARES CASH
---------- -------------
<S> <C> <C>
General partners:
CLF Holdings, Inc................................................................... 275,308 --
CLFC HP II, Inc..................................................................... 39,225 $ 215,862
Limited partners:
Preferred........................................................................... -- 21,370,295
Class A............................................................................. 1,922,007 290,000
Class B............................................................................. 1,250,094 --
Class C............................................................................. 1,053,366 --
---------- -------------
4,540,000 $ 21,876,157
---------- -------------
---------- -------------
</TABLE>

2. ADJUSTMENTS TO THE PRO FORMA STATEMENT OF OPERATIONS:

The accompanying unaudited statement of operations for the three months
ended March 31, 1998 and 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>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER
1998 31, 1997
---------- ----------
<S> <C> <C> <C>
(a) Reduce interest expense to reflect debt retired by the
Company..................................................... $(1,611,088) $(5,166,917)
---------- ----------
---------- ----------
(b) Increase personnel expense to reflect additional costs
related to operating as a public company.................... $ 25,000 $ 100,000
---------- ----------
---------- ----------
(c) Increase general and administrative expenses to reflect
additional costs related to operating as a public Company... $ 62,500 $ 250,000
---------- ----------
---------- ----------
(d) Eliminate interest expense to reflect debt retired by the
Company..................................................... $ (924,315) $ (292,827)
---------- ----------
---------- ----------
(e) To provide for federal and state income taxes (40% effective
rate)....................................................... $ (327,100) $ (685,700)
---------- ----------
---------- ----------
(f) Weighted average outstanding Common Stock is as follows:
Shares issued in exchange for partnership interests in
Capital Lease Funding, L.P.................................. 4,540,000 4,540,000
Shares issued in the Offering............................... 7,340,000 7,340,000
---------- ----------
----------
11,880,000 11,880,000
---------- ----------
---------- ----------
</TABLE>

F-7
<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 April 30, 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
April 30, 1998 in conformity with generally accepted accounting principles.

/s/Ernst & Young LLP

New York, New York

May 20, 1998

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

STATEMENT OF FINANCIAL CONDITION

AS OF APRIL 30, 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-9
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

NOTES TO STATEMENT OF FINANCIAL CONDITION

AS OF APRIL 30, 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'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 expects that it will originate all of its future loans through a
newly-formed subsidiary limited partnership (a Delaware limited partnership
which, upon conclusion of the Formation Transactions will be renamed "Capital
Lease Funding, L.P.") of which the Company will directly own 100% of the general
partnership interests. In addition, the Company expects that it will purchase
real estate though individual Delaware business trusts of which it will be the
sole beneficiary.

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 7,340,000 shares of its Common Stock to the public through the
Offering. In addition, the Company expects to issue 4,540,000 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 $102.4
million. Of this amount, the Company expects to use approximately $55.7 million
to reduce outstanding repurchase agreement obligations related to the underlying
mortgage assets, $21.6 million to redeem the preferred partnership interests of
the Predecessor, $18.5 million to pay off notes payable outstanding of the
Predecessor, $1.3 million to pay expenses incurred in the Offering, $.3 million
to a general partner of the Predecessor and $5.3 million to fund general working
capital needs.

If the underwriters' over-allotment option to purchase 1,101,000 shares of
Common Stock is exercised, the Company will use the additional net proceeds
(estimated to be approximately $15.4 million if the option is exercised in full)
to reduce outstanding repurchase agreement obligations and/or for working
capital.

F-10
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)

NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)

AS OF APRIL 30, 1998

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 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. The NationsBank facility will decrease by $200 million on
September 1, 1998. The Company expects to enter into the Prudential Warehouse in
the amount of $250 million in July 1998, which will increase to $350 million
upon closing of the Offering. 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 and incentive 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 these plans.

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-11
<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 subsidiary (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 subsidiary as of December 31, 1997 and 1996, and
the consolidated results of their operations and their 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-12
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
------------- ------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... 6,579,425 $ 4,408,194 $ 2,140,230
Mortgage loans held for sale (Notes 4 and 5)...... 323,509,279 263,473,373 157,719,912
Deferred securitization costs..................... 1,840,943 1,647,515 2,566,019
Deferred registration costs....................... 385,000 -- --
Hedge account margin deposit...................... 3,727,876 3,755,926 3,271,005
Accrued interest income........................... 1,094,000 797,483 513,013
Prepaid expenses.................................. 192,596 192,250 86,956
Property held for sale (Note 7)................... -- -- 1,968,682
Furniture, fixtures and equipment (net of
accumulated depreciation of $76,521 (unaudited),
$66,521 and $25,691, respectively).............. 94,516 103,317 83,536
------------- ----------- -----------
Total Assets...................................... $ 337,423,635 $274,378,058 $168,349,353
------------- ----------- -----------
------------- ----------- -----------

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and accrued expenses............. $ 3,717,787 $ 4,770,873 $ 3,279,379
Repurchase agreement obligations (Note 5)......... 315,266,832 255,770,693 150,904,908
Notes payable..................................... -- -- 358,461
Notes payable to partner and officer (Note 6)..... 18,507,023 12,274,318 129,098
------------- ----------- -----------
Total Liabilities................................. 337,491,642 272,815,884 154,671,846
Commitments and contingencies (Notes 4 and 5)
Partners' Capital (Deficit)....................... (68,007) 1,562,174 13,677,507
------------- ----------- -----------
Total Liabilities and Partners' Capital
(Deficit)....................................... $ 337,423,635 $274,378,058 $168,349,353
------------- ----------- -----------
------------- ----------- -----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-13
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SEPTEMBER 29
(COMMENCEMENT
OF
THREE MONTHS ENDED MARCH YEAR ENDED OPERATIONS)--
31, DECEMBER 31 DECEMBER 31
--------------------------- ---------------------------- ---------------
1998 1997 1997 1996 1995
------------- ------------ ------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:

Interest income from mortgages............ $ 5,279,888 $ 1,498,770 $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of mortgages................ -- (160,782) (160,782) (923,611) --
Other revenue from mortgages.............. 20,787 8,081 43,326 16,520 --
------------- ------------ ------------- ------------- ---------------
Total Revenues............................ 5,300,675 1,346,069 9,742,312 4,153,585 224,313
------------- ------------ ------------- ------------- ---------------

LOAN EXPENSES:

Interest on repurchase agreements......... 4,899,369 1,146,617 8,829,548 4,048,601 221,400
Loss on loan in foreclosure
(Note 7) -- -- -- -- 717,359
Servicer fees............................. 40,721 13,341 76,328 50,320 --
------------- ------------ ------------- ------------- ---------------
Total Loan Expenses....................... 4,940,090 1,159,958 8,905,876 4,098,921 938,759
------------- ------------ ------------- ------------- ---------------

GROSS PROFIT (LOSS)....................... 360,585 186,111 836,436 54,664 (714,446)
------------- ------------ ------------- ------------- ---------------

Operating Expenses:
Personnel................................. 736,176 466,949 2,880,307 2,100,932 313,916
General and administrative................ 203,387 200,096 727,642 1,298,368 736,461
Marketing and advertising................. 165,844 85,766 501,091 405,930 36,943
------------- ------------ ------------- ------------- ---------------
Total Operating Expenses.................. 1,105,407 752,811 4,109,040 3,805,230 1,087,320
------------- ------------ ------------- ------------- ---------------

OPERATING LOSS............................ (744,822) (566,700) (3,272,604) (3,750,566) (1,801,766)

OTHER INCOME (EXPENSE):
Other interest income..................... 38,956 66,756 169,889 155,781 136,789
Interest expense on notes payable......... (924,315) (5,175) (292,827) (68,881) --
------------- ------------ ------------- ------------- ---------------
Total Other Income (Expense).............. (885,359) 61,581 (122,938) 86,900 136,789
------------- ------------ ------------- ------------- ---------------
NET LOSS $ (1,630,181) $ (505,119) $ (3,395,542) $ (3,663,666) $ (1,664,977)
------------- ------------ ------------- ------------- ---------------
------------- ------------ ------------- ------------- ---------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-14
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

<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 for the period from
September 29, 1995 (commencement
of operations) to December 31,
1995.............................. (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 for the year ended December
31, 1996.......................... (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 for the year ended December
31, 1997.......................... (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
Net loss for the three months ended
March 31, 1998 (unaudited)........ -- (16,302) -- -- (1,613,879) (1,630,181)
------------- ---------- ------------- ----------- ------------- -------------
Partners' Capital (Deficit) at March
31, 1998 (unaudited).............. $ (4,493,950) $ 51,740 $ -- $ (738,205) $ 5,112,408 $ (68,007)
------------- ---------- ------------- ----------- ------------- -------------
------------- ---------- ------------- ----------- ------------- -------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-15
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SEPTEMBER 29
(COMMENCEMENT
THREE MONTHS ENDED YEAR ENDED OF OPERATIONS)-
MARCH 31, DECEMBER 31 DECEMBER 31
---------------------------- ------------------------------ ---------------
1998 1997 1997 1996 1995
------------- ------------- -------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,630,181) $ (505,119) $ (3,395,542) $ (3,663,666) $ (1,664,977)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization........... 10,000 10,208 40,830 23,737 1,954
Loss on sale of mortgages............... -- 160,782 160,782 -- --
Reduction in provision for loss on sale
of mortgage loans..................... -- (923,611) (923,611) -- --
Provision for loss on sale of mortgage
loans................................. -- -- -- 923,611 --
Loss on loan in foreclosure............. -- -- -- -- 717,359
Changes in operating assets and
liabilities:
Proceeds from sale of mortgages....... -- 128,061,471 128,061,471 -- --
Net principal advanced to borrowers... (59,784,648) (50,354,913) (216,887,135) (132,578,616) (34,754,952)
Borrowing under repurchase
agreements.......................... 59,496,139 (78,043,982) 104,865,785 119,559,139 31,124,371
Funds used in portfolio hedging
activities.......................... (262,942) 5,986,427 (14,767,460) (4,699,791) (837,714)
Loan origination costs and deferred
securitization expenses............. (539,044) 1,261,362 (963,925) (3,883,577) --
Recoveries against property held for
sale/troubled loans................. -- 53,402 2,771 9,763,780 --
Increase in other assets.............. (296,863) 242,982 (389,764) (496,250) (34,380)
Increase in accounts payable and
accrued expenses.................... (1,052,736) (1,264,387) 1,491,494 1,420,994 1,036,436
------------- ------------- -------------- -------------- ---------------
Net Cash (Used in) Provided by
Operating Activities.............. (4,060,275) 4,684,622 (2,704,304) (13,630,639) (4,411,903)
------------- ------------- -------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets................. (1,198) (12,968) (60,612) (77,581) --
------------- ------------- -------------- -------------- ---------------
Net Cash Used in Investing
Activities........................ (1,198) (12,968) (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............ 6,232,704 (487,559) 11,786,760 46,214 (670,961)
------------- ------------- -------------- -------------- ---------------
Net Cash Provided by (Used in)
Financing Activities.............. 6,232,704 (487,559) 5,032,880 7,546,214 12,714,139
------------- ------------- -------------- -------------- ---------------
Net increase (decrease) in cash......... 2,171,231 4,184,095 2,267,964 (6,162,006) 8,302,236
Cash and cash equivalents at beginning
of period............................. 4,408,194 2,140,230 2,140,230 8,302,236 --
------------- ------------- -------------- -------------- ---------------
Cash and Cash Equivalents at End of
period................................ $ 6,579,425 $ 6,324,325 $ 4,408,194 $ 2,140,230 $ 8,302,236
------------- ------------- -------------- -------------- ---------------
------------- ------------- -------------- -------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest.................... $ 5,448,073 $ 1,245,113 $ 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-16
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1998 (UNAUDITED) AND 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 consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.

HEDGING ACTIVITIES

The Partnership enters into hedging transactions in order to reduce exposure
that a change in interest rates will result in a decrease in the value of the
Partnership's current mortgage loan portfolio which it has originated or loans
it has committed to originate. Specifically, the Partnership enters into short
sales of U.S. Treasury futures contracts, which typically require initial margin
deposits and margin calls depending on changes in interest rates. These forward
sale agreements generally have terms of not more than 90 days. Such hedging
transactions are entered into for purposes other than trading.

The Partnership accounts for its hedging transactions in accordance with
Statement of Financial Accounting Standards No. 80, ACCOUNTING FOR FUTURES
CONTRACTS ("SFAS 80"). SFAS 80 requires that changes in the market value of a
futures contract be recognized as a gain or loss in the period of the change
unless the contract meets certain criteria in order to qualify as a hedge. The
Partnership has determined that such transactions qualify as hedges since i) the
mortgage loan portfolio exposes the Partnership to interest rate risk until the
loans are securitized and ii) the futures contracts entered into reduce the
Partnership's exposure to such interest rate risk and are designated as a hedge.
In addition, the correlation between the price performance of the mortgage loan
portfolio being hedged and the hedge instruments is very high due to the
similarity of the assets and liabilities being hedged and the related hedge
instruments. Accordingly, gains and losses on these hedging transactions are
deferred as an adjustment to the carrying value of the related mortgage loans
and are recognized upon the securitization or sale of the mortgage loans.
Further, gains and losses on hedging transactions related to anticipated
transactions that are no longer likely to occur are recognized currently in the
statement of operations. Note 4.

ALLOCATION OF INCOME AND DISTRIBUTIONS

Partnership income, losses and distributions are allocated in accordance
with the provisions of the Partnership agreement.

F-17
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 AND INVESTMENT IN LIMITED PARTNERSHIP

The Partnership has a 99% limited partnership interest in Capital Lease
Funding Securitization, L.P. ("Securitization L.P.") which it accounts for using
the equity method. Securitization L.P. holds no assets or liabilities at
December 31, 1997. In addition, there were no operations of Securitization L.P.
during 1997. 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"). As
of December 31, 1997, the stock of Branson was distributed to certain of the
limited partners of the Partnership. See Note 7. All significant intercompany
transactions, balances and accounts have been eliminated.

INCOME TAXES

No provision for federal or state income taxes is included in the
accompanying consolidated financial statements as partners are individually
responsible for including their share of the Partnership's income or loss on
their respective income tax returns.

INTERIM UNAUDITED FINANCIAL INFORMATION

The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
may have been condensed or omitted pursuant to such rules and regulations,
although management believes that the disclosures are adequate to make the
information presented not misleading. The unaudited financial statements as of
March 31, 1998 and for the three month periods ended March 31, 1998 and 1997
include, in the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial information set
forth herein.

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.

F-18
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. MORTGAGES HELD FOR SALE

Mortgage loans held for sale consists of (in thousands):

<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
(UNAUDITED)
Principal.................................................. $ 310,695 $ 249,983 $ 159,204
Unearned discount.......................................... (6,847) (5,919) (4,729)
-------------- -------- --------
Carrying amount of mortgages............................... 303,849 244,064 154,475
Deferred loan costs (net).................................. 2,971 3,011 2,052
Provision for loss on securitization transaction........... -- -- (924)
Deferred hedging losses.................................... 16,690 16,398 2,117
-------------- -------- --------
Total mortgage loans held for sale....................... $ 323,509 $ 263,473 $ 157,720
-------------- -------- --------
-------------- -------- --------
</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 approximately $129.4 million 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 received approximately
$128.1 million in gross proceeds and realized a loss of approximately $1.2
million, 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 Partnership's
repurchase agreement obligations were reduced by approximately $118 million
after completion of the sale.

At March 31, 1998, the Partnership had entered into short sales under which
it sold short approximately $390 million (unaudited) of futures contracts on
U.S. Treasury obligations. The unrealized (losses) on the short sales of U.S.
Treasury futures contracts at March 31, 1998 was approximately ($1.3 million)
(unaudited). At December 31, 1997, the Partnership had entered into short sales
under which it sold short approximately $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 approximately ($4.4
million). At December 31, 1996, the Partnership had entered into short sales
under which it sold short approximately $59.0 million of U.S. Treasury
obligations and approximately $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
approximately ($1.5 million) and $1.3 million, 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

F-19
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. MORTGAGES HELD FOR SALE (CONTINUED)
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.

The Partnership had hedged the following assets, liabilities and firm
commitments under rate lock agreements (in thousands):

<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
(UNAUDITED)
Mortgage loans held for sale (principal amount)............ $ 310,695 $ 249,982 $ 159,204
Firm commitments under rate lock agreements................ 126,394 143,154 7,800
-------------- -------- --------
Total assets and liabilities hedged...................... $ 437,089 $ 393,136 $ 167,004
-------------- -------- --------
-------------- -------- --------
</TABLE>

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 March
31, 1998 (unaudited) and 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 March 31, 1998, and December 31, 1997 and 1996, approximately $3.8 million
(unaudited), $3.5 million and $1.6 million 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 and March 31, 1998, the Partnership had issued
outstanding commitments to fund approximately $169 million and $224 million
(unaudited) of loans, respectively.

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-20
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. REPURCHASE AGREEMENTS (CONTINUED)
fluctuations in interest rates. Management believes that the carrying amounts of
the repurchase agreements approximate fair market value.

The Partnership had entered into repurchase agreements maturing on demand
with NationsBank for mortgages held for sale and associated repurchase
liabilities as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
(UNAUDITED)
Carrying amount of mortgages held for sale................. $ 303,849 $ 244,064 $ 154,475
Approximate market value of mortgages held for sale........ 329,000 264,000 160,000
Repurchase liability--LIBOR + 1%........................... 290,278 233,486 146,883
Repurchase liability--LIBOR + 3%........................... 9,974 9,972 4,022
Repurchase liability--LIBOR + 6%........................... 15,015 12,313 --
</TABLE>

Interest expense incurred with respect to the repurchase agreements for the
years ended December 31, 1997 and 1996 was approximately $8.9 million and $4.0
million, respectively. For the three months ended March 31, 1998, interest
expense incurred with respect to the repurchase agreements was approximately
$4.9 million (unaudited). As of March 31, 1998, (unaudited) and December 31,
1997 the Partnership was in compliance with the terms of the repurchase
agreements.

6. RELATED PARTY TRANSACTIONS

During 1998 and 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 approximately $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 March 31, 1998, (unaudited) and December 31, 1997
NationsBank carried an A+ rating from Standard & Poor's.

F-21
<PAGE>

CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. SUBSEQUENT EVENT

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.

10. SUBSEQUENT EVENTS - SUBSEQUENT TO AUDITOR'S REPORT DATE (UNAUDITED)

In April 1998, the NationsBank facility was increased to $550 million. The
facility will decrease to $350 million on September 1, 1998.

As of May 15, 1998, the Partnership has issued commitments to fund
additional Credit Tenant Loans with an aggregate committed principal balance of
approximately $402 million. In addition, as of May 15, 1998, the Partnership has
purchased or committed to purchase real property net leased to tenants with an
aggregate purchase price of approximately $12 million.

In May 1998, the Company executed a sublease for 12,000 square feet of
office space in New York, New York at an estimated annual lease payment of
approximately $300,000.

As of June 25, 1998, the Company has acquired three parcels of real property
net leased to Credit Tenants for an aggregate purchase price of approximately
$10.1 million.

F-22
<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-23
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)

SCHEDULE OF MORTGAGE LOANS ON REAL ESTATE (CONTINUED)

DECEMBER 31, 1997

Total $-- $244,063,759 $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-24
<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.......................................... 16
Use of Proceeds....................................... 32
Dividend and Distribution Policy...................... 32
Capitalization........................................ 33
Dilution.............................................. 34
Selected Historical and Proforma Financial
Information......................................... 35
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 37
The Company........................................... 43
Formation Transactions................................ 63
Yield Considerations Related to the Company's
Investments......................................... 66
Description of Existing Real Estate Interests......... 69
Targeted Investments.................................. 74
Directors and Executive Officers...................... 77
Certain Relationships and Related Transactions........ 84
Security Ownership of Certain Beneficial Owners and
Management.......................................... 85
Federal Income Tax Consequences....................... 86
ERISA Considerations.................................. 91
Description of Capital Stock.......................... 91
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws........................ 92
Shares Eligible for Future Sale....................... 97
Underwriting.......................................... 98
Legal Matters......................................... 99
Experts............................................... 100
Additional Information................................ 100
Glossary.............................................. 101
Financial Statements and Information.................. F-1
</TABLE>

7,340,000 Shares
CAPITAL LEASE FUNDING, INC.
Common Stock

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

PROSPECTUS

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

PRUDENTIAL SECURITIES INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
STIFEL, NICOLAUS & COMPANY
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
Nasdaq listing fee.............................................................. 79,875
NASD filing fee................................................................. 12,790
Printing and engraving expenses.................................................
Legal fees and expenses.........................................................
Accounting fees and expenses....................................................
Transfer agent and custodian fees...............................................
Miscellaneous...................................................................
------------
Total..................................................................... $ 1,300,000
------------
------------
</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 has entered
into indemnification agreements with each of its directors and senior officers
to the fullest extent permitted by applicable law and which otherwise reflect
the indemnification provisions set forth in the Company's Charter. 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 March 31, 1998

Pro Forma Statement of Operations for the Three Months Ended March
31, 1998

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 April 30, 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 March 31, 1998
(unaudited) and December 31, 1997 and 1996

Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and 1997 (unaudited) and 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 (Deficit) for the Three
Months Ended March 31, 1998 (unaudited) and 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 Three Months Ended
March 31, 1998 (unaudited) and 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 Articles of Amendment and Restatement
*3.3 Bylaws
*3.4 Amended and Restated Bylaws
***5.1 Opinion of Cadwalader, Wickersham & Taft
***8.1 Opinion of Cadwalader, Wickersham & Taft Regarding Tax Matters
*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 Amended and Restated Repurchase Agreement Governing Purchases and
Sales of Mortgage Loans between NationsBank, N.A. and Capital
Lease Funding, L.P., dated April 1, 1998
***10.3 Registration Rights Agreement
*10.4 Form of Indemnification Agreement
*10.5 1998 Employee Stock Option Plan
*10.6 1998 Stock Option Plan for Non-Employee Directors
*10.7 Form of Employment Agreement, dated , 1998 between
William R. Pollert and the Company
*10.8 Form of Employment Agreement, dated , 1998 between the
Company and each of Edward J. Glickman, Steven J. Maloy, Paul H.
McDowell and Shawn P. Seale
*10.9 Amended and Restated Interim Servicing Agreement between Capital
Lease Funding, L.P., Owner and Midland Loan Services, L.P.,
Servicer, LaSalle National Bank, Custodian and ABN Amro Bank N.V.,
Fiscal Agent, dated July 19, 1996
*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 Consent of Richard J. Campo pursuant to Rule 438
*99.2 Consent of Lawrence A. Chimerine pursuant to Rule 438
*99.3 Consent of Dan Kearney pursuant to Rule 438
</TABLE>

- ------------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.

II-3
<PAGE>
ITEM 37. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issues.

The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting 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-1 and has duly caused this Amendment No. 2 to
the 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 June
29, 1998.

CAPITAL LEASE FUNDING, INC.

By: /S/ WILLIAM R. POLLERT
-----------------------------------------
Name: William R. Pollert
Title: President

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board,
/s/ WILLIAM R. POLLERT Chief Executive Officer,
- ------------------------------ President and Director June 29, 1998
William R. Pollert (principal executive
officer)

* Senior Vice President and
- ------------------------------ Chief Financial Officer June 29, 1998
Shawn P. Seale

* Director
- ------------------------------ June 29, 1998
Scott A. Shay

/S/ WILLIAM R. POLLERT
----------------------------------------
William R. Pollert
*By: Attorney-in-fact

II-5
<PAGE>
EXHIBIT INDEX

<TABLE>
<C> <S>
***1.1 Form of Underwriting Agreement

*3.1 Articles of Incorporation

*3.2 Articles of Amendment and Restatement

*3.3 Bylaws

*3.4 Amended and Restated Bylaws

***5.1 Opinion of Cadwalader, Wickersham & Taft

***8.1 Opinion of Cadwalader, Wickersham & Taft Regarding Tax Matters

*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 Amended and Restated Repurchase Agreement Governing Purchases and Sales of
Mortgage Loans between NationsBank, N.A. and Capital Lease Funding, L.P., dated
April 1, 1998

***10.3 Registration Rights Agreement

*10.4 Form of Indemnification Agreement

*10.5 1998 Employee Stock Option Plan

*10.6 1998 Stock Option Plan for Non-Employee Directors

*10.7 Form of Employment Agreement, dated , 1998 between William R. Pollert and
the Company

*10.8 Form of Employment Agreement, dated , 1998 between the Company and each
of Edward J. Glickman, Steven J. Maloy, Paul H. McDowell and Shawn P. Seale

*10.9 Amended and Restated Interim Servicing Agreement between Capital Lease Funding,
L.P., Owner and Midland Loan Services, L.P., Servicer, LaSalle National Bank,
Custodian and ABN Amro Bank N.V., Fiscal Agent, dated July 19, 1996

*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 Consent of Richard J. Campo pursuant to Rule 438

*99.2 Consent of Lawrence A. Chimerine pursuant to Rule 438

*99.3 Consent of Dan Kearney pursuant to Rule 438
</TABLE>

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

* Filed herewith.

** Previously filed.

*** To be filed by amendment.

II-6

<PAGE>

CAPITAL LEASE FUNDING, INC.
---------------------------

ARTICLES OF INCORPORATION

THIS IS TO CERTIFY THAT:

FIRST: The undersigned, Sharon A. Kroupa, whose address is c/o Ballard
Spahr Andrews & Ingersoll, LLP, 300 East Lombard Street, Baltimore, Maryland
21202, being at least 18 years of age, does hereby form a corporation under the
general laws of the State of Maryland.

SECOND: The name of the corporation (which is hereinafter called the
"Corporation") is:

Capital Lease Funding, Inc.

THIRD: The Corporation is formed for the purpose of carrying on any
lawful business.

FOURTH: The address of the principal office of the Corporation in this
State is c/o Ballard Spahr Andrews & Ingersoll, LLP, 300 East Lombard Street,
Baltimore, Maryland 21202, Attention: James J. Hanks, Jr.

FIFTH: The name and address of the resident agent of the Corporation are
James J. Hanks, Jr., c/o Ballard Spahr Andrews & Ingersoll, LLP, 300 East
Lombard Street, Baltimore, Maryland 21202. The resident agent is a citizen of
and resides in the State of Maryland.

SIXTH: The total number of shares of stock which the Corporation has
authority to issue is 1,000 shares, $.01 par value per share, all of one class.
The aggregate par value of all authorized shares having a par value is $10.00.

SEVENTH: The Corporation shall have a board of one director unless the
number is increased or decreased in accordance with the Bylaws of the
Corporation. However, the number of directors shall never be less than the
minimum number required by the Maryland General Corporation Law. The initial
director is:

William R. Pollert

<PAGE>

EIGHTH: (a) The Corporation reserves the right to make any amendment of
the charter, now or hereafter authorized by law, including any amendment which
alters the contract rights, as expressly set forth in the charter, of any shares
of outstanding stock.

(b) The Board of Directors of the Corporation may authorize the
issuance from time to time of shares of its stock of any class, whether now or
hereafter authorized, or securities convertible into shares of its stock of any
class, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable, subject to such restrictions or limitations, if
any, as may be set forth in the Bylaws of the Corporation.

(c) The Board of Directors of the Corporation may, by articles
supplementary, classify or reclassify any unissued stock from time to time by
setting or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of the stock.

NINTH: No holder of shares of stock of any class shall have any
preemptive right to subscribe to or purchase any additional shares of any class,
or any bonds or convertible securities of any nature; provided, however, that
the Board of Directors may, in authorizing the issuance of shares of stock of
any class, confer any preemptive right that the Board of Directors may deem
advisable in connection with such issuance.

TENTH: To the maximum extent that Maryland law in effect from time to
time permits limitation of the liability of directors and officers, no director
or officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither the amendment nor repeal of this
Article, nor the adoption or amendment of any other provision of the charter or
Bylaws inconsistent with this Article, shall apply to or
affect in any respect the applicability of the preceding sentence with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption.

IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 6th day of March, 1998.

---------------------------
Sharon A. Kroupa

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<PAGE>
Exhibit 3.2

CAPITAL LEASE FUNDING, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT

FIRST: Capital Lease Funding, a Maryland corporation (the "Corporation"),
desires to amend and restate its charter as currently in effect and as
hereinafter amended.

SECOND: The following provisions are all the provision of the charter
currently in effect and as hereinafter amended:

ARTICLE I
INCORPORATOR

The undersigned, Sharon A. Kroupa, whose address is c/o Ballard Spahr
Andrews and Ingersoll, LLP, 300 East Lombard Street, Baltimore, Maryland 21202,
being at least 18 years of age, on March 6, 1998 formed a corporation under the
general laws of the State of Maryland.

ARTICLE II
NAME

The name of the corporation (the "Corporation") is:

Capital Lease Funding, Inc.

ARTICLE III
PURPOSE

The purposes for which the Corporation is formed are to engage in any
lawful act or activity including, without limitation or obligation, the
continuation of business heretofore conducted by Capital Lease Funding, L.P., a
Delaware limited partnership being or to be merged with or contributed to this
Corporation (the "Predecessor Partnership").

<PAGE>

ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT

The address of the principal office of the Corporation in the State of
Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202. The name of the resident agent of the Corporation in the State
of Maryland is The Corporation Trust Incorporated, the post address of which is
32 South Street, Baltimore, Maryland 21202. The resident agent is a Maryland
corporation.

ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS

Section 5.1 NUMBER AND CLASSIFICATION OF DIRECTORS. The business and
affairs of the Corporation shall be managed under the direction of the Board of
Directors. The number of directors of the Corporation initially shall be two,
which number may be increased or decreased pursuant to the Bylaws, but shall
never be less than the minimum number required by the Maryland General
Corporation Law. The names of the directors who shall serve until their
successors are duty elected and qualify are:

William R. Pollert
Scott A. Shay

The directors may increase the number of directors and may fill any
vacancy, whether resulting from an increase in the number of directors or
otherwise, on the Board of Directors in the manner provided in the Bylaws.

At any meeting of stockholders, the directors (other than any director
elected solely by holders of one or more classes or series of Preferred Stock)
may be classified, with respect to the terms for which they severally hold
office, into three classes, as nearly equal in number as possible, one class to
hold office initially for a term expiring at the next succeeding annual meeting
of stockholders, another class to hold office initially for a term expiring at
the second succeeding annual meeting of stockholders, and another class to hold
office initially for a term expiring at the third succeeding annual meeting of
stockholders, with the members of each class to hold office until their
successors are duly elected and qualified. At each annual meeting of the
stockholders, the successors to the class of directors whose term expires at
such meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election and until their successors are duly elected and qualified.

Section 5.2 EXTRAORDINARY ACTIONS. Except as specifically provided in
Section 5.7 (relating to removal of directors) and Section 7.1, notwithstanding
any provision of law permitting or requiring any action to be taken or approved
by the affirmative vote of

-2-
<PAGE>

the holders of shares entitled to cast a greater number of votes, any such
action, including without limitation, any merger, consolidation, share exchange,
transfer of assets, or dissolution of the Corporation, shall be effective and
valid if such action has been approved or recommended by the Board of Directors
and is taken or approved by the affirmative vote of holders of shares entitled
to cast a majority of all of the votes entitled to be cast on the matter.

Section 5.3 AUTHORIZATION BY BOARD OF STOCK ISSUANCE. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in the Charter or the Bylaws.

Section 5.4 PREEMPTIVE RIGHTS. Except as may be provided by the Board
of Directors in setting the terms of classified or reclassified shares of stock
pursuant to Section 6.4, or as may otherwise be provided by contract, no holder
of shares of stock of the Corporation shall, as such holder, have any preemptive
right to purchase or subscribe for any additional shares of stock of the
Corporation or any other security of the Corporation which it may issue or sell.

Section 5.5 INDEMNIFICATION. The Corporation shall have the power, to
the maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former director, officer or general partner of the Corporation or the
Predecessor Partnership or (b) any individual who, while a director or general
partner of the Corporation or the Predecessor Partnership and at the request of
the Corporation or the Predecessor Partnership, serves or has served as a
director, officer, partner or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or any 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,
officer or general partner of the Corporation or the Predecessor Partnership.
The Corporation shall have the power, with the approval of the Board of
Directors, to provide such indemnification and advancement of expenses to a
person who served any other predecessor of the Corporation in any of the
capacities described in (a) or (b) above and to any employee or agent of the
Corporation or any other predecessor of the Corporation.

Section 5.6 DETERMINATIONS BY BOARD. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the Charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; the amount of
paid-

-3-
<PAGE>

in surplus, net assets, other surplus, annual or other net profit, net assets in
excess of capital, undivided profits or excess of profits over losses on sales
of assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any reserves or charges and the propriety thereof
(whether or not any obligation or liability for which such reserves or charges
shall have been created shall have been paid or discharged); the fair value, or
any sale, bid or asked price to be applied in determining the fair value, of any
asset owned or held by the Corporation; any matter relating to the acquisition,
holding and disposition of any assets by the Corporation; or any other matter
relating to the business and affairs of the Corporation.

Section 5.7 REMOVAL OF DIRECTORS. Subject to the rights of holders of
one or more classes or series of Preferred Stock to elect or remove one or more
directors, any director, or the entire Board of Directors, may be removed from
office at any time, but only for cause and then only by the affirmative vote of
at least two thirds of the votes entitled to be cast generally in the election
of directors. If the stockholders of any class or series are entitled
separately to elect one or more directors, a director elected by such class or
series may not be removed without cause except by the affirmative vote of
two-thirds of all of the votes of that class or series. For the purpose of this
paragraph, "cause" shall mean with respect to any particular director,
conviction of a felony or a final judgment of a court of competent jurisdiction
holding that such director caused demonstrable, material harm to the Corporation
through bad faith or active and deliberate dishonesty.

ARTICLE VI
STOCK

Section 6.1 AUTHORIZED SHARES. The Corporation has authority to issue
55,000,000 shares of stock, consisting of 50,000,000 shares of Common Stock,
$.01 par value per share ("Common Stock"), and 5,000,000 shares of Preferred
Stock, $.01 par value per share ("Preferred Stock"). The authorized but
unissued shares of the Common Stock and Preferred Stock of the Corporation will
be available for issue from time to time without further action or authorization
by the stockholders (except as required by law or by the rules of any stock
exchange on which the Corporation's securities may be listed) for such corporate
purposes as may be determined by the Board of Directors. The aggregate par
value of all authorized shares of stock having par value is $550,000. If shares
of one class of stock are classified or reclassified into shares of another
class of stock pursuant to Sections 6.2, 6.3 or 6.4 of this Article VI, the
number of authorized shares of the former class shall be automatically decreased
and the number of shares of the latter class shall be automatically increased,
in each case by the number of shares so classified or reclassified, so that the
aggregate number of shares of stock of all classes that the Corporation has
authority to issue shall not be more than the total number of shares of stock
set forth in the first sentence of this paragraph.

Section 6.2 COMMON STOCK. Subject to the provisions of Article VII,
each share of Common Stock shall entitle the holder thereof to one vote. The
Board of Directors may reclassify any unissued shares of Common Stock from time
to time in one or more classes or series of stock.

-4-
<PAGE>

Section 6.3 PREFERRED STOCK. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time in one or
more classes or series of stock.

Section 6.4 CLASSIFIED OR RECLASSIFIED SHARES. Prior to issuance of
classified or reclassified shares of any class or series, the Board of Directors
by resolution shall: (a) designate that class or series to distinguish it from
all other classes and series of stock of the Corporation; (b) specify the number
of shares to be included in the class or series; (c) set or change, subject to
the provisions of Article VII and subject to the express terms of any class or
series of stock of the Corporation outstanding at the time, the preferences,
conversion or other rights, voting powers, restrictions, dividend rights,
limitations as to dividends or other distributions, qualifications, terms and
conditions of redemption for each class or series, and similar matters; and (d)
cause the Corporation to file articles supplementary with the State Department
of Assessments and Taxation of Maryland ("SDAT"). Any of the terms of any class
or series of stock set or changed pursuant to clause (c) of this Section 6.4 may
be made dependent upon facts or events ascertainable outside the Charter
(including determinations by the Board of Directors or other facts or events
within the control of the Corporation) and may vary among holders thereof,
provided that the manner in which such facts, events or variations shall operate
upon the terms of such class or series of stock is clearly and expressly set
forth in the articles supplementary filed with the SDAT.

Section 6.5 CHARTER AND BYLAWS. All persons who shall acquire stock in
the Corporation shall acquire the same subject to the provisions of the Charter
and the Bylaws.

ARTICLE VII
AMENDMENTS

Section 7.1 CHARTER. The Corporation reserves the right from time to
time to make any amendment to its Charter, now or hereafter authorized by law,
including any amendment altering the terms or contract rights, as expressly set
forth in the Charter, of any shares of outstanding stock. All rights and powers
conferred by the Charter on stockholders, directors and officers are granted
subject to this reservation. An amendment to the Charter must be approved by
the board of directors and the affirmative vote of a majority of all the votes
entitled to be cast on the matter. However, any amendment to section 5.7 or to
this section of the Charter shall be valid only if approved by the affirmative
vote of two-thirds of all of the votes entitled to be cast on the matter.

Section 7.2 BYLAWS. The Board of Directors shall have the power to
adopt, amend or repeal the Bylaws, provided that any such action may only be
taken by the affirmative vote of no less than two-thirds of all directors at the
time. Alternatively, the Bylaws may be adopted, amended or repealed by the
affirmative vote of a majority of all the votes cast by holders of shares of
stock entitled to vote generally in the election of directors.

-5-
<PAGE>

ARTICLE VIII
LIMITATION OF LIABILITY

To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers of a corporation, no
director or officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither the amendment nor repeal of this
Article VIII, nor the adoption or amendment of any other provision of the
Charter or Bylaws inconsistent with this Article VIII, shall apply to or affect
in any respect the applicability of the preceding sentence with respect to any
act or failure to act which occurred prior to such amendment, repeal or
adoption.

THIRD: The amendment to and restatement of the charter as hereinabove
set forth has been duly advised by the Board of Directors and approved by the
stockholders of the Corporation as required by law.

FOURTH: The current address of the principal office of the Corporation is
as set forth in Article IV of the foregoing amendment and restatement of the
Charter.

FIFTH: The name and address of the Corporation's current resident agent
is as set forth in Article IV of the foregoing amendment and restatement of the
Charter.

SIXTH: The number of directors of the Corporation and the names of those
currently in office are as set forth in Article V of the foregoing amendment and
restatement of the Charter.

SEVENTH: The total number of shares which the Corporation had authority to
issue immediately prior to this amendment and restatement was 1,000 shares, $.01
par value per share, all of one class. The aggregate par value of all shares of
stock having par value was $10.00.

EIGHTH: The total number of shares of stock which the Corporation has
authority to issue pursuant to the foregoing amendment and restatement of the
Charter is 55,000,000, consisting of 50,000,000 shares of Common Stock, $.01 par
value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per
share. The aggregate par value of all authorized shares of stock having par
value is $550,000.00.

NINTH: The undersigned President acknowledges these Articles of
Amendment and Restatement to be the corporate act of the Corporation and as to
all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.

-6-
<PAGE>

IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
and Restatement to be signed in its name and on its behalf by its President and
attested to by its Secretary on this _______ day of ___________ 1998.

ATTEST: CAPITAL LEASE FUNDING, INC.

By: By:
----------------------------- ----------------------------- (SEAL)
Paul H. McDowell William R. Pollert
CORPORATE SECRETARY PRESIDENT

-7-

<PAGE>
Exhibit 3.3

CAPITAL LEASE FUNDING, INC.

BYLAWS

ARTICLE I

OFFICES

Section 1. PRINCIPAL OFFICE. The principal office of the Corporation
shall be located at such place or places as the Board of Directors may
designate.

Section 2. ADDITIONAL OFFICES. The Corporation may have additional
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. PLACE. All meetings of stockholders shall be held at the
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.

Section 3. SPECIAL MEETINGS. The president, chief executive officer or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than 25% of all the votes entitled to be cast at such meeting. Such
request shall state the purpose of such meeting and the matters proposed to be
acted on at such meeting. The secretary shall inform such stockholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment to the Corporation by such stockholders of such costs, the
secretary shall give notice to each stockholder entitled to notice of the
meeting. Unless requested by the stockholders entitled to cast a majority of all
the votes entitled to be cast at such meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding twelve
months.

Section 4. NOTICE. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such

<PAGE>

meeting and to each stockholder not entitled to vote who is entitled to notice
of the meeting written or printed notice stating the time and place of the
meeting and, in the case of a special meeting or as otherwise may be required by
any statute, the purpose for which the meeting is called, either by mail or by
presenting it to such stockholder personally or by leaving it at his residence
or usual place of business. If mailed, such notice shall be deemed to be given
when deposited in the United States mail addressed to the stockholder at his
post office address as it appears on the records of the Corporation, with
postage thereon prepaid.

Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.

Section 6. ORGANIZATION. At every meeting of stockholders, the
chairman of the board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the chairman of the board, one of the
following officers present shall conduct the meeting in the order stated: the
vice chairman of the board, if there be one, the president, the vice presidents
in their order of rank and seniority, or a chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, and the secretary, or, in his absence,
an assistant secretary, or in the absence of both the secretary and assistant
secretaries, a person appointed by the chairman shall act as secretary.

Section 7. QUORUM. At any meeting of stockholders, the presence in
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If,
however, such quorum shall not be present at any meeting of the stockholders,
the stockholders entitled to vote at such meeting, present in person or by
proxy, shall have the power to adjourn the meeting from time to time to a date
not more than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.

Section 8. VOTING. A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of stockholders duly called
and at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the charter of the Corporation. Unless
otherwise provided in the charter, each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.

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<PAGE>

Section 9. PROXIES. A stockholder may cast the votes entitled to be
cast by the shares of the stock owned of record by him either in person or by
proxy executed in writing by the stockholder or by his duly authorized agent.
Such proxy shall be filed with the secretary of the Corporation before or at the
time of the meeting. No proxy shall be valid after eleven months from the date
of its execution, unless otherwise provided in the proxy.

Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the
Corporation registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by the president or a vice
president, a general partner or trustee thereof, as the case may be, or a proxy
appointed by any of the foregoing individuals, unless some other person who has
been appointed to vote such stock pursuant to a bylaw or a resolution of the
governing body of such corporation or other entity or agreement of the partners
of a partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such stock. Any director or other
fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.

Shares of stock of the Corporation directly or indirectly owned by it shall
not be voted at any meeting and shall not be counted in determining the total
number of outstanding shares entitled to be voted at any given time, unless they
are held by it in a fiduciary capacity, in which case they may be voted and
shall be counted in determining the total number of outstanding shares at any
given time.

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

Notwithstanding any other provision of the charter of the Corporation or
these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article
of the Annotated Code of Maryland (or any successor statute) shall not apply to
any acquisition by any person of shares of stock of the Corporation. This
section may be repealed, in whole or in part, at any time, whether before or
after an acquisition of control shares and, upon such repeal, may, to the extent
provided by any successor bylaw, apply to any prior or subsequent control share
acquisition.

Section 11. INSPECTORS. At any meeting of stockholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors

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<PAGE>

shall ascertain and report the number of shares represented at the meeting based
upon their determination of the validity and effect of proxies, count all votes,
report the results and perform such other acts as are proper to conduct the
election and voting with impartiality and fairness to all the stockholders.

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

Section 12. VOTING BY BALLOT. Voting on any question or in any election
may be VIVA VOCE unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.

ARTICLE III

DIRECTORS

Section 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors.

Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting
or at any special meeting called for that purpose, a majority of the entire
Board of Directors may establish, increase or decrease the number of directors,
provided that the number thereof shall never be less than the minimum number
required by the Maryland General Corporation Law, nor more than 15, and further
provided that the tenure of office of a director shall not be affected by any
decrease in the number of directors.

Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board
of Directors shall be held immediately after and at the same place as the annual
meeting of stockholders, no notice other than this Bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.

Section 4. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the chairman of the board,
president or by a majority of the directors then in office. The person or
persons authorized to call special meetings of the Board of Directors may fix
any place, either within or without the State of Maryland, as the place for
holding any special meeting of the Board of Directors called by them.

-4-
<PAGE>

delivery, by telephone or a facsimile transmission shall be given at least two
days prior to the meeting. Notice by mail shall be given at least five days
prior to the meeting and shall be deemed to be given when deposited in the
United States mail properly addressed, with postage thereon prepaid. Telephone
notice shall be deemed to be given when the director is personally given such
notice in a telephone call to which he is a party. Facsimile transmission
notice shall be deemed to be given upon completion of the transmission of the
message to the number given to the Corporation by the director and receipt of a
completed answer-back indicating receipt. Neither the business to be transacted
at, nor the purpose of, any annual, regular or special meeting of the Board of
Directors need be stated in the notice, unless specifically required by statute
or these Bylaws.

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

Section 7. VOTING. The action of the majority of the directors present
at a meeting at which a quorum is present shall be the action of the Board of
Directors, unless the concurrence of a greater proportion is required for such
action by applicable statute.

Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.

Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
director and such written consent is filed with the minutes of proceedings of
the Board of Directors.

Section 10. VACANCIES. If for any reason any or all the directors cease
to be directors, such event shall not terminate the Corporation or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain). Any vacancy on the Board of Directors for any cause
shall be filled by a majority of the remaining directors, even if such majority
is less than a quorum. Any vacancy in the number of directors created by an
increase in the number of directors may be filled by a majority vote of the
remaining Board of Directors. Any individual so elected as director shall hold
office until the next annual meeting of stockholders and until his successor is
elected and qualifies.

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Section 11. COMPENSATION. Directors shall not receive any stated salary
for their services as directors but, by resolution of the Board of Directors,
may receive compensation per year and/or per meeting and/or per visit to real
property or other facilities owned or leased by the Corporation and for any
service or activity they performed or engaged in as directors. Directors may be
reimbursed for expenses of attendance, if any, at each annual, regular or
special meeting of the Board of Directors or of any committee thereof and for
their expenses, if any, in connection with each property visit and any other
service or activity they performed or engaged in as directors; but nothing
herein contained shall be construed to preclude any directors from serving the
Corporation in any other capacity and receiving compensation therefor.

Section 12. LOSS OF DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock have been
deposited.

Section 13. SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.

Section 14. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.

Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
The directors shall have no responsibility to devote their full time to the
affairs of the Corporation. Any director or officer, employee or agent of the
Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.

ARTICLE IV

COMMITTEES

Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors
may appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee and other committees, composed of one or more directors,
to serve at the pleasure of the Board of Directors.

Section 2. POWERS. The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.

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Section 3. MEETINGS. Notice of committee meetings shall be given in
the same manner as notice for special meetings of the Board of Directors. A
majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee. The act of a majority
of the committee members present at a meeting shall be the act of such
committee. The Board of Directors may designate a chairman of any committee,
and such chairman or any two members of any committee (if there are at least two
members of the Committee) may fix the time and place of its meeting unless the
Board shall otherwise provide. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another director to act in the place of such
absent member. Each committee shall keep minutes of its proceedings.

Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.

Section 6. VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.

ARTICLE V

OFFICERS

Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
include a chief executive officer, a president, a secretary and a treasurer and
may include a chairman of the board, a vice chairman of the board, one or more
vice presidents, a chief operating officer, a chief financial officer, one or
more assistant secretaries and one or more assistant treasurers. In addition,
the Board of Directors may from time to time appoint such other officers with
such powers and duties as they shall deem necessary or desirable. The officers
of the Corporation shall be elected annually by the Board of Directors at the
first meeting of the Board of Directors held after each annual meeting of
stockholders, except that the chief executive officer may appoint one or more
vice presidents, assistant secretaries and assistant treasurers. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as may be convenient. Each officer shall hold office
until his successor is elected and qualifies or until his death, resignation or
removal in the manner

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hereinafter provided. Any two or more offices except president and vice
president may be held by the same person. In its discretion, the Board of
Directors may leave unfilled any office except that of president, treasurer and
secretary. Election of an officer or agent shall not of itself create contract
rights between the Corporation and such officer or agent.

Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the chairman of the board, the
president or the secretary. Any resignation shall take effect at any time
subsequent to the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The
acceptance of a resignation shall not be necessary to make it effective unless
otherwise stated in the resignation. Such resignation shall be without
prejudice to the contract rights, if any, of the Corporation.

Section 3. VACANCIES. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.

Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may
designate a chief executive officer. In the absence of such designation, the
chairman of the board shall be the chief executive officer of the Corporation.
The chief executive officer shall have general responsibility for implementation
of the policies of the Corporation, as determined by the Board of Directors, and
for the management of the business and affairs of the Corporation.

Section 5. CHIEF OPERATING OFFICER. The Board of Directors may
designate a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.

Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may
designate a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.

Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall
designate a chairman of the board. The chairman of the board shall preside over
the meetings of the Board of Directors and of the stockholders at which he shall
be present. The chairman of the board shall perform such other duties as may be
assigned to him or them by the Board of Directors.

Section 8. PRESIDENT. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. In the absence of a designation of a chief
operating officer by the Board of Directors, the president shall be the chief
operating officer. He may execute any deed, mortgage, bond, contract or other
instrument, except in cases where the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other

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officer or agent of the Corporation or shall be required by law to be otherwise
executed; and in general shall perform all duties incident to the office of
president and such other duties as may be prescribed by the Board of Directors
from time to time.

Section 9. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there be
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Board of Directors. The Board of
Directors may designate one or more vice presidents as executive vice president
or as vice president for particular areas of responsibility.

Section 10. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation; (d) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder;
(e) have general charge of the share transfer books of the Corporation; and
(f) in general perform such other duties as from time to time may be assigned to
him by the chief executive officer, the president or by the Board of Directors.

Section 11. TREASURER. The treasurer shall have the custody of the
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. In the absence of a designation of a chief financial officer by
the Board of Directors, the treasurer shall be the chief financial officer of
the Corporation.

The treasurer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the president and Board of Directors, at the regular meetings of
the Board of Directors or whenever it may so require, an account of all his
transactions as treasurer and of the financial condition of the Corporation.

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

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Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or treasurer, respectively,
or by the president or the Board of Directors. The assistant treasurers shall,
if required by the Board of Directors, give bonds for the faithful performance
of their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors.

Section 13. SALARIES. The salaries and other compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he is also a director.

ARTICLE VI

CONTRACTS, LOANS, CHECKS AND DEPOSITS

Section 1. CONTRACTS. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Corporation and such authority may be general
or confined to specific instances. Any agreement, deed, mortgage, lease or
other document executed by one or more of the directors or by an authorized
person shall be valid and binding upon the Board of Directors and upon the
Corporation when authorized or ratified by action of the Board of Directors.

Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or agent of the
Corporation in such manner as shall from time to time be determined by the Board
of Directors.

Section 3. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.

ARTICLE VII

STOCK

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issued whether or not an officer who signed it is still an officer when it is
issued. Each certificate representing shares which are restricted as to their
transferability or voting powers, which are preferred or limited as to their
dividends or as to their allocable portion of the assets upon liquidation or
which are redeemable at the option of the Corporation, shall have a statement of
such restriction, limitation, preference or redemption provision, or a summary
thereof, plainly stated on the certificate. If the Corporation has authority to
issue stock of more than one class, the certificate shall contain on the face or
back a full statement or summary of the designations and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends and other distributions, qualifications and terms and conditions of
redemption of each class of stock and, if the Corporation is authorized to issue
any preferred or special class in series, the differences in the relative rights
and preferences between the shares of each series to the extent they have been
set and the authority of the Board of Directors to set the relative rights and
preferences of subsequent series. In lieu of such statement or summary, the
certificate may state that the Corporation will furnish a full statement of such
information to any stockholder upon request and without charge. If any class of
stock is restricted by the Corporation as to transferability, the certificate
shall contain a full statement of the restriction or state that the Corporation
will furnish information about the restrictions to the stockholder on request
and without charge.

Section 2. TRANSFERS. Upon surrender to the Corporation or the
transfer agent of the Corporation of a stock certificate duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, the Corporation shall issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.

The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.

Notwithstanding the foregoing, transfers of shares of any class of stock
will be subject in all respects to the charter of the Corporation and all of the
terms and conditions contained therein.

Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the
Board of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.

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Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
Board of Directors may set, in advance, a record date for the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or determining stockholders entitled to receive payment of any
dividend or the allotment of any other rights, or in order to make a
determination of stockholders for any other proper purpose. Such date, in any
case, shall not be prior to the close of business on the day the record date is
fixed and shall be not more than 90 days and, in the case of a meeting of
stockholders, not less than ten days before the date on which the meeting or
particular action requiring such determination of stockholders of record is to
be held or taken.

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

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

When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.

Section 5. STOCK LEDGER. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.

Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any
other provision of the charter or these Bylaws, the Board of Directors may issue
units consisting of different securities of the Corporation. Any security
issued in a unit shall have the same characteristics as any identical securities
issued by the Corporation, except that the Board of Directors may provide that
for a specified period, securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.

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ARTICLE VIII

ACCOUNTING YEAR

The Board of Directors shall have the power, from time to time, to fix the
fiscal year of the Corporation by a duly adopted resolution.

ARTICLE IX

DISTRIBUTIONS

Section 1. AUTHORIZATION. Dividends and other distributions upon the
stock of the Corporation may be authorized and declared by the Board of
Directors, subject to the provisions of law and the charter of the Corporation.
Dividends and other distributions may be paid in cash, property or stock of the
Corporation, subject to the provisions of law and the charter.

Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.

ARTICLE X

INVESTMENT POLICY

Subject to the provisions of the charter of the Corporation, the Board of
Directors may from time to time adopt, amend, revise or terminate any policy or
policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.

ARTICLE XI

SEAL

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Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.

ARTICLE XII

INDEMNIFICATION AND ADVANCE OF EXPENSES

To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation shall indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, shall pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any individual who is a present or former director or officer of the
Corporation and 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 Corporation
and at the request of the Corporation, 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 Corporation may, with
the approval of its Board of Directors, provide such indemnification and advance
for expenses to a person who served a predecessor of the Corporation in any of
the capacities described in (a) or (b) above and to any employee or agent of the
Corporation or a predecessor of the Corporation.

Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.

ARTICLE XIII

WAIVER OF NOTICE

Whenever any notice is required to be given pursuant to the charter of the
Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.

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ARTICLE XIV

AMENDMENT OF BYLAWS

The Board of Directors shall have the exclusive power to adopt, alter or
repeal any provision of these Bylaws and to make new Bylaws.

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<PAGE>
Exhibit 3.4

CAPITAL LEASE FUNDING, INC.
----------------------------

AMENDED AND RESTATED BYLAWS

ARTICLE I
OFFICES

Section 1. PRINCIPAL OFFICE. The principal office of Capital Lease
Funding, Inc., a Maryland corporation (the "Corporation"), shall be located at
such place or places as the Board of Directors may designate.

Section 2. ADDITIONAL OFFICES. The Corporation may have additional
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.

ARTICLE II
MEETINGS OF STOCKHOLDERS

Section 1. PLACE. Except as may be provided by the Board of Directors in
setting the terms of classified shares pursuant to the Corporation's Charter,
all meetings of stockholders shall be held at the principal office of the
Corporation or at such other place within the United States as shall be stated
in the notice of the meeting.

Section 2. ANNUAL MEETING. An annual meeting of the stockholders for the
election of directors and the transaction of any business within the powers of
the Corporation shall be held on a date and at the time set by the Board of
Directors during the month of May in each year, or at such other date and time
as shall, from time to time, be designated by the Board of Directors and stated
in the notice of the meeting.

Section 3. SPECIAL MEETINGS. The chief executive officer, president or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the Secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than a majority of all the votes entitled to be cast at such meeting,
except as may otherwise be provided by the Board of Directors in setting the
terms of classified shares as aforesaid. Such request shall state the purpose
of such meeting and the matters proposed to be acted on at such meeting. The
secretary shall inform such stockholders of the reasonably estimated cost of
preparing and mailing notice of the meeting. Upon payment to the Corporation by
such stockholders of such costs, except as may otherwise be provided by the
Board of Directors in setting the terms of classified shares as aforesaid, the
secretary shall give notice to each stockholder entitled to notice of the
meeting.

Section 4. NOTICE. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting

<PAGE>

written or printed notice stating the time and place of the meeting and, in the
case of a special meeting or as otherwise may be required by any statute, the
purpose for which the meeting is called, either by mail or by presenting it to
such stockholder personally or by leaving it at his residence or usual place of
business. If mailed, such notice shall be deemed to be given when deposited in
the United States mail addressed to the stockholder at his post office address
as it appears on the records of the Corporation, with postage thereon prepaid.
The notice to be provided to the holders of classified shares in the event of a
special meeting of such holders shall be as provided to the secretary by the
holders of such classified shares acting to call such a special meeting.

Section 6. ORGANIZATION. Except as may otherwise be provided by the Board
of Directors in setting the terms of classified shares as aforesaid, at every
meeting of stockholders, the chairman of the board, if there shall be one, shall
conduct the meeting or, in the case of vacancy in office or absence of the
chairman of the board, one of the following officers present shall conduct the
meeting in the order stated: the vice chairman of the board, if there be one,
the president, the vice presidents in their order of rank and seniority, or a
chairman chosen by the stockholders entitled to cast a majority of the votes
which all stockholders present in person or by proxy arc entitled to cast, shall
act as chairman, and the secretary, or, in his absence, an assistant secretary,
or in the absence of both the secretary and assistant secretaries, a person
appointed by the chairman shall act as secretary.

Section 7. QUORUM. At any meeting of stockholders, the presence in person
or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If,
however, such quorum shall not be present at any meeting of the stockholders,
the stockholders entitled to vote at such meeting, present in person or by
proxy, shall have the power to adjourn the meeting from time to time to a date
not more than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.

Section 8. VOTING. A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted; however, there shall be no cumulative voting and no share may cast for
more than one vote for any one individual. A majority of the votes cast at a
meeting of stockholders duly called and at which a quorum is present shall be
sufficient to approve any other matter which may properly come before the
meeting, unless

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more than a majority of the votes cast is required by statute or by the charter
of the Corporation. Unless otherwise provided in the charter, each outstanding
share, regardless of class, shall be entitled to one vote on each matter
submitted to a vote at a meeting of stockholders.

Section 9. PROXIES. A stockholder may cast the votes entitled to be cast
by the shares of the stock owned of record by him either in person or by proxy
executed in writing by the stockholder or by his duly authorized agent. Such
proxy shall be filed with the secretary of the Corporation before or at the time
of the meeting. No proxy shall be valid after eleven months from the date of
its execution, unless otherwise provided in the proxy.

Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the Corporation
registered in the name of a corporation, partnership, trust, limited liability
company, or other entity, if entitled to be voted, may be voted by the president
or a vice president, a general partner or, trustee or member thereof, as the
case may be, or a proxy appointed by any of the foregoing individuals, unless
some other person who has been appointed to vote such stock pursuant to a bylaw
or a resolution of the governing body of such corporation or other entity or
agreement of the partners of a partnership presents a certified copy of such
bylaw, resolution or agreement, in which case such person may vote such stock.
Any director or other fiduciary may vote stock registered in his name as such
fiduciary, either in person or by proxy.

Section 11. CONTROL SHARE ACQUISITIONS. Notwithstanding any other
provision of the charter of the Corporation or these Bylaws, Title 3, Subtitle 7
of the Corporations and Associations Article of the Annotated Code of Maryland
(or any successor statute) shall not apply to any acquisition by any person of
shares of stock of the Corporation.

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Except as may otherwise be provided by the Board of Directors in setting the
terms of classified shares as aforesaid, this section may be repealed, in whole
or in part, at any time, whether before or after an acquisition of control
shares and, upon such repeal, may, to the extent provided by any successor
bylaw, apply to any prior or subsequent control share acquisition.

Section 12. INSPECTORS. At any meeting of stockholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares represented at
the meeting based upon their determination of the validity and effect of
proxies, count all votes, report the results and perform such other acts as are
proper to conduct the election and voting with impartiality and fairness to all
the stockholders.

Section 13. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS.

(a) ANNUAL MEETING OF STOCKHOLDERS. (1) Except as may otherwise be
provided by the Board of Directors in setting the terms of classified shares as
aforesaid, nominations of persons for election to the Board of Directors and the
proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (i) pursuant to the Corporation's notice of
meeting, (ii) by or at the direction of the Board of Directors or (iii) by any
stockholder of the Corporation who was a stockholder of record both at the time
of giving of notice provided for in this Section 13(a) and at the time of the
annual meeting, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 13(a).

(2) Except as may otherwise be provided by the Board of Directors in
setting the terms of classified shares as aforesaid, nominations or other
business to be properly brought before an annual meeting by a stockholder
pursuant to clause (iii) of paragraph (a)(1) of this Section 13, the stockholder
must have given timely notice thereof in writing to the secretary of the
Corporation and such other business must otherwise be a proper matter for action
by stockholders,. To be timely, a stockholder's notice shall be delivered to the
secretary at the principal executive offices of the Corporation not later than
the close of business on the 60th day nor earlier than the close of business on
the 90th day prior to the first anniversary of the preceding year's annual
meeting; provided however, that in the event that the date of the annual meeting
is advanced by more than 30 days or delayed by more than 60 days from such
anniversary date or if the Corporation has not previously held an annual
meeting, notice by the stockholder to be timely must be so delivered not earlier
than the close of business on the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following

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the day on which public announcement of the date of such meeting is first made
by the Corporation. In no event shall the public announcement of a postponement
or adjournment of an annual meeting to a later date or time commence a new time
period for the giving of a stockholders notice as described above. Except as
may otherwise be provided by the Board of Directors in setting the terms of
classified shares as aforesaid, such stockholder's notice shall set forth (i) as
to each person whom the stockholder proposes to nominate for election or
reelection as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors
in an election contest, or is otherwise required, in which case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (ii) as
to any other business that the stockholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and of the beneficial owner, if
any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, (x) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (y) the
number of shares of each class of stock of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.

(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 13 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement by the Corporation naming all of the nominees for director
or specifying the size of the increased Board of Directors at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 13(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth day
following the day on which such public announcement is first made by the
Corporation.

(b) SPECIAL MEETINGS OF STOCKHOLDERS. Except as may be provided by the
Board of Directors in setting the terms of classified shares as aforesaid, and
subject to the last sentence of Article II, Section 4 of these Bylaws, only such
business shall be conducted at a special meeting of stockholders as shall have
been brought before the meeting pursuant to the Corporation's notice of meeting.
Except as may otherwise be provided by the Board of Directors in setting the
terms of classified shares as aforesaid, nominations of persons for election to
the Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected (i) pursuant to the Corporation's notice of 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 any stockholder of the Corporation which is a stockholder of
record both at the time of giving of notice provided for in this Section 13(b)
and at the time of the special meeting, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in this Section 13(b).
Except as may

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otherwise be provided by the Board of Directors in setting the terms of
classified shares as aforesaid, in the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate a person or persons (as
the case may be) for election to such position as specified in the Corporation's
notice of meeting, if the stockholder's notice containing the information
required by paragraph (a)(2) of this Section 13 shall be delivered to the
secretary at the principal executive offices of the Corporation not earlier than
the close of business on the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting. In no event shall the
public announcement of the postponement or adjournment of a special meeting to a
later date or time commence a new time period for the giving of a stockholder's
notice as described above.

(c) GENERAL. (1) Except as may otherwise be provided by the Board of
Directors in setting the terms of classified shares as aforesaid, such persons
who are nominated in accordance with the procedures set forth in this Section 13
shall be eligible to serve as directors and only such business shall be
conducted at a meeting of stockholders as shall have been brought before the
meeting in accordance with the procedures set forth in this Section 13. The
chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this Section 13 and, if any proposed nomination or business is not in compliance
with this Section 13, to declare that such nomination or proposal shall be
disregarded.

(2) For purposes of this Section 13, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press, Business Wire or comparable business news service or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.

(3) Notwithstanding the foregoing provisions of this Section 13, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 13. Nothing in this Section 13 shall be
deemed to affect any rights of stockholders to request inclusion of proposals
in, nor the rights of the Corporation to omit a proposal from the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.

Section 14. VOTING BY BALLOT. Voting on any question or in any election
may be VIVA VOCE unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.

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ARTICLE III
DIRECTORS

Section 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors.

Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or
at any special meeting called for that purpose, two-thirds of the entire Board
of Directors may establish, increase or decrease, respectively, the number of
directors: provided that the number thereof shall never be less than the minimum
number required by the Maryland General Corporation Law, nor more than nine;
further provided that the tenure of office of a director shall not be affected
by any decrease in the number of directors. The term of office of each director
shall be for three years, and the initial term of office for the seat held or to
be held by William R. Pollert shall expire in the year 2001 and for Scott A.
Shay in the year 2000. 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. "Unaffiliated Director" 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.
"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. "Person" means any individual, partnership,
trust, corporation, limited liability corporation, limited liability
partnership, business trust, estate, unincorporated association, government or
any agency or political subdivision thereof.

Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of
Directors shall be held immediately after and at the same place as the annual
meeting of stockholders, no notice other than this Bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.

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Board of Directors may fix any place, either within or without the State of
Maryland, as the place for holding any special meeting of the Board of Directors
called by them.

Section 5. NOTICE. Notice of any special meeting of the Board of
Directors shall be delivered personally or by telephone, facsimile transmission,
United States mail or courier to each director at his business or residence
address or, if such director has authorized the Corporation to notify him by
electronic mail, by electronic mail at the address provided by the director to
the Corporation. Notice by personal delivery, telephone, facsimile or
electronic transmission shall be given at least two days prior to the meeting.
Notice by mail shall be given at least five days prior to the meeting and shall
be deemed to be given when deposited in the United States mail properly
addressed, with postage thereon prepaid. Telephone notice shall be deemed to be
given when the director is personally given such notice in a telephone call to
which he is a party. Facsimile transmission notice shall be deemed to be given
upon completion of the transmission of the message to the number given to the
Corporation by the director with receipt of a completed answer-back indicating
receipt. Neither the business to be transacted at, nor the purpose of, any
annual, regular or special meeting of the Board of Directors need be stated in
the notice, unless specifically required by statute or these Bylaws. Notice
shall also be timely provided to persons with rights to attend meetings of the
Board of Directors in setting the terms of classified shares, as aforesaid.

Section 6. QUORUM. A majority of the directors shall constitute a quorum
for transaction of business at any meeting of the Board of Directors, provided
that, if less than a majority of such directors are present at said meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice, and provided further that if, pursuant to the charter of
the Corporation or these Bylaws, the vote of a majority of a particular group of
directors is required for action, a quorum must also include a majority of such
group. Notwithstanding the foregoing, approval by the Board of Directors of an
"interested director transaction," as set forth in Section 2-419 of the Maryland
General Corporation Law, or any successor provision thereof, may be obtained by
a majority vote of the disinterested directors, even if such majority is less
than a majority of a quorum.

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

Section 7. VOTING. The action of the majority of the directors present at
a meeting at which a quorum is present shall be the action of the Board of
Directors, unless the concurrence of a greater proportion is required for such
action by applicable statute.

Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting by
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.

Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a

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meeting, if a consent in writing to such action is signed by each director and
such written consent or a facsimile transmission thereof received by the
Corporation is filed with the minutes of proceedings of the Board of Directors.
Copies of materials relating to any such consent to its solicitation shall, at
the time provided to members of the Board of Directors, be provided to persons
with rights to attend meetings of the Board of Directors as provided by the
Board of Directors in setting the terms of classified shares as aforesaid.

Section 10. VACANCIES. If for any reason any or all of the directors
cease to be directors, such event shall not terminate the Corporation or affect
these Bylaws or (subject to existing law) the powers of the remaining directors
hereunder (even if fewer than three directors remain). Stockholders of the
Corporation may elect a successor to fill a vacancy on the Board of Directors
which results from the removal of any director, subject to any nomination,
suggestion or voting provisions that may exist from time to time regarding
directors elected by one class of stock. Any vacancy on the Board of Directors
for any cause, including an increase in the number of directors, shall be filled
by a two-thirds vote of the remaining directors, whether or not sufficient to
constitute a quorum, except as may otherwise be established by the Board of
Directors in setting the terms of classified shares, as aforesaid. Any
individual so elected as director shall hold office until his term expires and
until his successor is elected and qualifies.

Section 11. COMPENSATION. Directors shall not receive any stated salary
for their services as directors but, by resolution of the Board of Directors,
may receive compensation, in the form of money, securities or other
consideration, per year and/or per meeting and/or per visit to real property or
other facilities owned or leased by the Corporation and for any service or
activity they performed or engaged in as directors. Directors may be reimbursed
for expenses of attendance, if any, at each annual, regular or special meeting
of the Board of Directors or of any committee thereof and for their expenses, if
any, in connection with each property visit and any other service or activity
they performed or engaged in as directors; but nothing herein contained shall be
construed to preclude any directors from serving the Corporation in any other
capacity and receiving compensation therefor.

Section 12. LOSS OR DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock have been
deposited.

Section 13. SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.

Section 14. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by any financial or other
advisers, accountants, appraisers or other experts or consultants selected by
the Board of

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Directors or officers of the Corporation, regardless of whether such counsel or
expert may also be a director.

Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
The directors shall have no responsibility to devote their full time to the
affairs of the Corporation. Any director or officer, employee or agent of the
Corporation, in his personal capacity or in a capacity as an Affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.

ARTICLE IV
COMMITTEES

Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors will
appoint an Audit Committee, consisting of at least two independent directors.
The Board of Directors may appoint from among its members an Executive
Committee, a Compensation Committee and other committees, composed of one or
more directors, to serve at the pleasure of the Board of Directors.

Section 2. POWERS. The Board of Directors may delegate to committees
appointed under Section I of this Article any of the powers of the Board of
Directors, except as prohibited by law. Persons with rights to attend meetings
of the Board of Directors as provided by the Board of Directors in setting the
terms of classified shares, as aforesaid, may attend meetings of any committee
to which the Board of Directors has delegated powers of the Board of Directors
which relate to material transactions, or proposals thereto, or are otherwise
powers which other corporations' boards do not customarily so delegate.

Section 3. MEETINGS. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. Notice
shall also be timely provided to persons with rights to attend meetings of such
committee as established in the last sentence of Section 2 of this Article IV.
A majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee. The act of a majority
of the committee members present at a meeting shall be the act of such
committee. The Board of Directors may designate a chairman of any committee,
and such chairman or any two members of any committee which consists of two or
more members may fix the time and place of its meeting unless the Board shall
otherwise provide. In the absence of any member of any such committee, the
members thereof present at any meeting, whether or not they constitute a quorum,
may appoint another director to act in the place of such absent member. Each
committee shall keep minutes of its proceedings.

Section 4. TELEPHONE MEETINGS. Members (and other permitted attendees) of
the Board of Directors may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Participation in a meeting by
these means shall constitute presence in person at the meeting.

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Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent or a facsimile
transmission thereof received by the Corporation is filed with the minutes of
proceedings of such committee. Copies of materials relating to any such consent
and to this solicitation shall, at the time provided to members of the
committee, be provided to persons with rights to attend meetings of such
committee, as provided in the last sentence of Section 2 of this Article IV.

ARTICLE V
OFFICERS

Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
include a chief executive officer, a president, a secretary and a treasurer and
may include a chairman of the board, one or more vice presidents, a chief
operating officer, a chief administrative officer, a chief financial officer,
one or more assistant secretaries and one or more assistant treasurers. In
addition, the Board of Directors may from time to time appoint such other
officers with such titles, powers and duties as they shall deem necessary or
desirable. The officers of the Corporation shall be elected annually by the
Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of stockholders and thereafter as the Board of Directors may
determine, except that the chief executive officer may appoint one or more vice
presidents, assistant secretaries, assistant treasurers or officers having other
titles descriptive of the functions to be performed by such officers. Each
officer shall hold office until his successor is elected and qualifies or until
his death, resignation or removal in the manner hereinafter provided. Any two
or more offices, except president and vice president, may be held by the same
person. In its discretion, the Board of Directors may leave unfilled any office
except that of any of president, treasurer or secretary. Election of an officer
or agent shall not of itself create contract rights between the Corporation and
such officer or agent.

Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors, if in its judgment the
best interests of the Corporation would be served thereby. However, removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Any officer of the Corporation may resign at any time by giving
written notice of his resignation to the Board of Directors, the chairman of the
board, the president or the secretary. Any resignation shall take effect at any
time subsequent to the time specified therein or, if the time when it shall
become effective is not specified therein, immediately upon its receipt. The
acceptance of a resignation shall not be necessary to make it effective unless
otherwise stated in the resignation. Such resignation shall be without
prejudice to the contract rights if any, of the Corporation.

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Section 3. VACANCIES. A vacancy in any office may be filled by the Board
of Directors for the balance of the term.

Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate
a chief executive officer. In the absence of such designation, the president
shall be the chief executive officer of the Corporation. The chief executive
officer shall have general responsibility for implementation of the policies of
the Corporation, as determined by the Board of Directors, and for the management
of the business and affairs of the Corporation.

Section 5. CHIEF OPERATING OFFICER. The Board of Directors may designate
a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.

Section 6. CHIEF ADMINISTRATIVE OFFICER. The Board of Directors may
designate a chief administrative officer. The chief administrative officer
shall have the responsibilities and duties as set forth by the Board of
Directors or the chief executive officer.

Section 7. CHIEF FINANCIAL OFFICER. The Board of Directors may designate
a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.

Section 8. CHAIRMAN OF THE. BOARD. The Board of Directors shall designate
a chairman of the board, and if none is so designated, the president shall serve
as the chairman of the board. The chairman of the board shall preside over the
meetings of the Board of Directors and of the stockholders at which he shall be
present. The chairman of the board shall perform such other duties as may be
assigned to him by the Board of Directors.

Section 9. PRESIDENT. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. He may execute any deed, mortgage, bond, contract
or other instrument, except in cases where the execution thereof shall be
expressly delegated by the Board of Directors or by these Bylaws to some other
officer or agent of the Corporation or shall be required by law to be otherwise
executed and, in general, shall perform all duties incident to the office of
president and such other duties as may be prescribed by the Board of Directors
from time to time.

Section 10. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there is
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all of the powers of, and be subject to, all the restrictions upon
the president, and shall perform such other duties as from time to time may be
assigned to him by, the president or by the Board of Directors. The Board of
Directors may designate one or more vice presidents as executive vice president
or as vice president for particular areas of responsibility.

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Section 11. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation; (d) unless a transfer agent has been appointed with
responsibility therefor, keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder and
have general charge of the share transfer books of the Corporation; and (e) in
general perform such other duties as from time to time may be assigned to him by
the chief executive officer, the president or by the Board of Directors.

Section 12. TREASURER. The treasurer shall have the custody of the funds
and securities of the Corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. In the absence of a designation of a chief financial officer by the
Board of Directors, the treasurer shall be the chief financial officer of the
Corporation.

The treasurer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the president and Board of Directors, at the regular meetings of
the Board of Directors or whenever it may so require, an account of all of his
transactions as treasurer and of the financial condition of the Corporation.

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

Section 13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or treasurer, respectively, or by the
president or the Board of Directors. The assistant treasurers shall, if
required by the Board of Directors, give bonds for the faithful performance of
their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors.

Section 14. OTHER OFFICERS. Officers having titles other than set forth
above shall perform such duties as shall be assigned to them by the Board of
Directors or the officer who appointed them or the officer to whom they report
as established in an organization chart approved by the Board of Directors or
the chief executive officer.

Section 15. SALARIES. The salaries and other compensation of the officers
shall be fixed from time to time by the Board of Directors and no officer shall
be prevented

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from receiving such salary or other compensation by reason of the fact that he
is also a director.

ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS

Section 1. CONTRACTS. The Board of Directors may authorize any officer or
agent to enter into any contract or to execute and deliver any instrument in the
name of and on behalf of the Corporation and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the directors or by an authorized person
shall be valid and binding upon the Board of Directors and upon the Corporation
when authorized or ratified by action of the Board of Directors.

Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or agent of the Corporation in
such manner as shall from time to time be determined by the Board of Directors.

Section 3. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors or one or
more officers authorized by the Board of Directors may designate.

ARTICLE VII
STOCK

Section 1. CERTIFICATES. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the chief executive officer, the president or a vice
president and countersigned by the secretary or an assistant secretary or the
treasurer or an assistant treasurer and may be sealed with the seal, if any, of
the Corporation. The signatures may be either manual or facsimile.
Certificates shall be consecutively numbered; and if the Corporation shall, from
time to time, issue several classes of stock, each class may have its own number
series. A certificate is valid and may be issued whether or not an officer who
signed it is still an officer when it is issued. Each certificate representing
shares which are restricted as to their transferability or voting powers, which
are preferred or limited as to their dividends or as to their allocable portion
of the assets upon liquidation or which are redeemable at the option of the
Corporation, shall have a statement of such restriction, limitation, preference
or redemption provision, or a summary thereof, plainly stated on the
certificate. If the Corporation has authority to issue stock of more than one
class, the certificate shall contain on the face or back a full statement or
summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption of each
class of stock and, if the Corporation is authorized to issue any preferred

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<PAGE>

or special class in series, the differences in the relative rights and
preferences between the shares of each series to the extent they have been set
and the authority of the Board of Directors to set the relative rights and
preferences of subsequent series. In lieu of any such statement or summary, the
certificate may state that the Corporation will furnish a full statement of such
information to any stockholder upon request and without charge. If any class of
stock is restricted by the Corporation as to transferability, the certificate
shall contain a full statement of the restriction or state that the Corporation
will furnish information about the restrictions to the stockholder on request
and without charge.

Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.

Notwithstanding the foregoing, transfers of shares of any class of stock
will be subject in all respects to the charter of the Corporation and all of the
terms and conditions contained therein.

Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board
of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.

Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board
of Directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
determining stockholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of stockholders, not less
than ten days before the date on which the meeting or particular action
requiring such determination of stockholders of record is to be held or taken.

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<PAGE>

Section 5. STOCK LEDGER. The Corporation shall maintain at its principal
office or cause to be maintained at the office of its transfer agent, an
original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.

Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any
other provision of the charter or these Bylaws, the Board of Directors may issue
units consisting of different securities of the Corporation. Any security
issued in a unit shall have the same characteristics as any identical securities
issued by the Corporation, except that the Board of Directors may provide that
for a specified period securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.

ARTICLE VIII
ACCOUNTING YEAR

The Board of Directors shall have the power, from time to time, to fix the
fiscal year of the Corporation by a duly adopted resolution. In the absence of
a resolution to the contrary, the fiscal year shall be the calendar year.

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<PAGE>

ARTICLE IX
DISTRIBUTIONS

ARTICLE X
INVESTMENT POLICY

Subject to the provisions of the charter of the Corporation and as
otherwise provided by the Board of Directors in setting the terms of classified
shares as aforesaid, the Board of Directors may from time to time adopt, amend,
revise or terminate any policy or policies with respect to investments by the
Corporation as it shall deem appropriate in its sole discretion.

ARTICLE XI
SEAL

Section 1. SEAL. The Board of Directors may authorize the adoption of a
seal by the Corporation. The seal shall contain the name of the Corporation and
the year of its incorporation and the words "Incorporated in Maryland." The
Board of Directors may authorize one or more duplicate seals and provide for the
custody thereof. Any document requiring a seal or on which a seal appears shall
be deemed to be duly sealed by or on behalf of the Corporation notwithstanding
that the seal may be the seal of the Predecessor Partnership (as defined in
Article XII).

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<PAGE>

ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES

To the maximum extent permitted by Maryland law in effort from time to
time, the Corporation shall indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, shall pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any individual who is a present or former director or officer of the
Corporation or Capital Lease Funding, L.P., a Delaware limited partnership being
or to be merged into or contributed to this Corporation (the "Predecessor
Partnership"), and 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
Corporation or the Predecessor Partnership and at the request of the Corporation
or the Predecessor Partnership, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, 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
Corporation may, with the approval of its Board of Directors, provide such
indemnification and advance for expenses to a person who served any other
predecessor of the Corporation in any of the capacities, described in (a) or (b)
above and to any employee or agent of the Corporation or any other predecessor
of the Corporation.

ARTICLE XIII
WAIVER OF NOTICE

Whenever any notice is required to be given pursuant to the charter of the
Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.

ARTICLE XIV
AMENDMENT OF BYLAWS

Except as otherwise provided in this Article XIV, the Board of Directors
shall have the power to adopt, amend or repeal the Bylaws and to make new
Bylaws, provided that any such action may only be taken by the affirmative vote
of a majority of all directors at the

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<PAGE>

time. Notwithstanding the foregoing, these Bylaws may not be amended except in
conformity with the provisions established by the Board of Directors in setting
the terms of classified shares, as aforesaid.

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<PAGE>
Exhibit 9.1

MANAGEMENT SHAREHOLDERS' AGREEMENT

THIS MANAGEMENT SHAREHOLDERS' AGREEMENT dated as of _______ __, 1998
(together with all schedules hereto, and as each may be amended, supplemented or
otherwise modified from time to time, the "AGREEMENT") is by and among Capital
Lease Funding, Inc., a Maryland corporation (the "COMPANY") and each of the
shareholders listed on the signature pages hereto.

WHEREAS, the Company was recently organized in order to facilitate the
continuation and expansion of the business of Capital Lease Funding, L.P., a
Delaware limited partnership (the "PARTNERSHIP");

WHEREAS, on the date hereof each Management Shareholder (as hereinafter
defined) has become the owner of the number of shares of the Company's common
stock, par value $.01 per share (the "COMMON STOCK"), set forth on Schedule A
attached hereto opposite such Management Shareholder's name (the "ORIGINAL ISSUE
COMMON STOCK"), in connection with the contribution of such Management
Shareholder's limited partnership interests in the Partnership to the Company
pursuant to the Contribution Agreement dated as of March 12, 1998 by and among
the Company and the equity investors therein (as the same may be amended,
supplemented or otherwise modified from time to time, the "CONTRIBUTION
AGREEMENT");

WHEREAS, the Company has granted or may grant, from time to time, to one or
more Management Shareholders an option or options (the "OPTIONS") to purchase
shares of the Common Stock, pursuant to the terms of the Company's 1998 Stock
Option Plan, the 1998 Non-Qualified Stock Option Plan or any successor plan or
agreement;

WHEREAS, on the date hereof, the Company has registered an aggregate of
[6,750,000] shares of the Common Stock (for issuance to persons other than the
Management Shareholders) in an initial public offering (the "INITIAL PUBLIC
OFFERING") pursuant to the Securities Act (as hereinafter defined);

WHEREAS, the issuance of the Shares (as hereinafter defined) issued or to
be issued to the Management Shareholders have not been (or will not be)
registered under the Securities Act or any state securities laws and the
certificates representing such Shares bear (or will bear) a legend restricting
their transfer;

WHEREAS, the Company has agreed to provide the Management Shareholders with
certain registration rights in respect of that portion of such Shares
constituting Original Issue Common Stock pursuant to the Registration Rights
Agreement, dated as of ________, 1998, among the Company and the shareholders
party thereto (as the same may be amended, supplemented or otherwise modified
from time to time, the "REGISTRATION RIGHTS AGREEMENT");

WHEREAS, the Company and the Management Shareholders desire to promote the
interests of the Company and the mutual interests of the Management Shareholders
by

<PAGE>

establishing certain terms and conditions upon which the Shares will be held by
the Management Shareholders.

NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:

ARTICLE I
DEFINITIONS

1.1. DEFINITIONS. Capitalized words and phrases used and not otherwise
defined in this Agreement shall have the following meanings:

"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.

"COMPANY" includes, in addition to the Company, any successor or assignee
corporation or corporations into which or with which the Company may be merged
or consolidated; any corporation for whose shares the Shares of the Company may
be exchanged; and any assignee of or successor to all or substantially all of
the assets of the Company.

"DISABILITY" means the inability, as determined by the Board of Directors
of the Company in its sole and absolute discretion, of a Management Shareholder,
by reason of physical, mental, or emotional infirmity resulting from injury,
sickness, disease, or otherwise, to perform on a full-time basis, for any period
of indefinite duration or for any significant period relative to the function
performed by such Management Shareholder as an employee of the Company, the
duties and obligations then assigned and delegated to such Management
Shareholder by the Company.

"FAMILY MEMBER" means any spouse (including a former spouse under a legally
terminated marriage), or descendant (whether natural, step or adopted) of a
Management Shareholder or any trust formed exclusively for the benefit of the
Management Shareholder or of any such Family Member.

"MANAGEMENT SHAREHOLDER" means each of the persons identified in Schedule A
attached hereto (including Persons acquiring Shares after the date hereof and
becoming parties to this Agreement) and the respective successors, assigns and
transferees of each Management Shareholder as permitted pursuant to this
Agreement.

"PERSON" means any individual, corporation, partnership, trust or other
entity of any nature whatsoever.

"PROPORTIONATE INTEREST" means the proportion of the Offered Shares which
the Shares of each Offeree Shareholder bears to the total Shares owned by all
Offeree Shareholders, in each case at any particular time. The terms "OFFERED
SHARES" and "OFFEREE SHAREHOLDER" are defined in Section 4.1(a).

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<PAGE>

"REGISTRABLE SECURITIES" means any shares of Original Issue Common Stock
subject to the Registration Rights Agreement. Any of such shares of Original
Issue Common Stock shall cease to be Registrable Securities when (i) a
registration statement shall have become effective under the Securities Act
pursuant to the provisions of the Registration Rights Agreement and such shares
shall have been disposed of pursuant to such registration statement; (ii) such
shares have been sold or otherwise distributed pursuant to Rule 144 (or any
successor provision) under the Securities Act, (iii) with respect to shares of
Original Issue Common Stock held by any Management Shareholder, registration
under the Securities Act or any applicable state law is not required to permit
the distribution of such securities to the public or an exemption from
registration is available therefor, including, without limitation, at such time
as such securities are eligible for sale or other distribution under Rule 144
(or any successor provision) in accordance with the volume and other limitations
thereof, and (iv) such shares have ceased to be outstanding.

"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.

"SHARES" means the Common Stock, including, without limitation, the shares
of Common Stock issued upon exercise of the Options, and any shares of any other
class of stock which the Company may hereafter authorize and issue, including
subscription and other purchase rights relative to any such Shares and all
securities and obligations convertible into or exercisable or exchangeable for
such Shares, in each case whether now or hereafter issued.

"THIRD PARTY" means any Person other than any of the Management
Shareholders and each of their respective Family Members.

"TRANSFER" means any transfer, sale, gift, assignment, distribution,
conveyance, pledge, hypothecation, encumbrance or other voluntary or involuntary
transfer of title or beneficial interest, whether or not for value, including,
without limitation, any disposition by operation of law or any grant of a
derivative or economic interest therein.

ARTICLE II
AGREEMENT TO VOTE SHARES

2.1. AGREEMENT TO VOTE SHARES.

(a) During the term of this Agreement, at every meeting of the
shareholders of the Company and every adjournment thereof, and to the extent
that such action or approval is permitted by the Company's articles of
incorporation or bylaws, on every action or approval by written consent of the
shareholders of the Company, each Management Shareholder shall vote his Shares
in the same manner as the individuals designated as the management designee
pursuant to Section 2.1(b) (the "MANAGEMENT DESIGNEE") shall vote the Shares
owned by such Management Designee.

(b) William R. Pollert is initially designated as the Management Designee.
In the event that Mr. Pollert (or any successor Management Designee) shall no
longer be

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<PAGE>

employed as the President and Chief Executive Officer of the Company, including,
without limitation, as a result of Disability, such individual shall cease to
serve as a Management Designee as of the date of such termination of his
employment, and Paul H. McDowell, Senior Vice President and General Counsel of
the Company, shall serve as the Management Designee. In the event that Mr.
McDowell shall no longer be employed by the Company, including, without
limitation, as a result of Disability, such individual shall cease to serve as a
Management Designee as of the date of such termination of his employment. The
Board of Directors of the Company shall then designate the individual succeeding
to the office of President and Chief Executive Officer, or other office, of the
Company as a successor Management Designee.

2.2. APPOINTMENT OF PROXIES. Each Management Shareholder hereby
constitutes and appoints the Management Designees, and each of them, with full
power of substitution, the Management Shareholder's true and lawful proxies and
attorneys-in-fact, to vote the Shares as indicated in Section 2.1 at any meeting
or, to the extent permitted by the Company's articles of incorporation or
bylaws, in any written consent of the shareholders of the Company. Each
Management Shareholder intends the proxy granted hereby to be irrevocable and
coupled with an interest and will take such further action and execute such
other instruments as may be necessary to effectuate the intent of this proxy.
Each Management Shareholder hereby revokes any proxy previously granted by the
Management Shareholder with respect to the Shares. During the term of this
Agreement, no Management Shareholder shall grant any proxy to any Person which
conflicts with the proxy granted herein and any attempt to do so shall be void.

2.3. VOTING. Each Management Shareholder shall have the right in the first
instance to vote the Shares at any meeting or in any written consent in
accordance with the provisions of Section 2.1. In the event that the Management
Shareholder fails for any reason to vote the Shares in accordance with Section
2.1, then the Management Designee shall have the right to vote the Shares in
accordance with the provisions of Section 2.1 pursuant to the provisions of
Section 2.2. The vote of the Management Designee shall control in any conflict
between the Management Designee's vote of the Shares and the vote by any
Management Shareholder of the Shares.

ARTICLE III
RESTRICTIONS ON TRANSFER

3.1. RESTRICTIONS ON TRANSFER.

(a) No Management Shareholder shall Transfer any Shares which he may now
or hereafter own outright or beneficially, except in accordance with and as
expressly permitted in this Agreement. The Company shall not reflect on its
books any attempted Transfer of Shares, or issue any new Shares, except in
compliance with all of the applicable conditions of this Agreement.

(b) During all periods for which the Shares held by any Management
Shareholder bear a legend restricting their Transfer, no Management Shareholder
shall make

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<PAGE>

any Transfer of such Shares unless (i) such Transfer is pursuant to an effective
registration statement under the Securities Act, and in compliance with
applicable provisions of state securities laws or (ii) the transferor has first
obtained an opinion of the Company's counsel, or of other counsel reasonably
acceptable to the Company, which opinion shall be reasonably satisfactory in
form and substance to the Company, that no such registration is required because
of the availability of an exemption from registration under the Act and
applicable provisions of state securities laws. Notwithstanding the foregoing,
the Company acknowledges and agrees that Transfers made in compliance with the
federal securities laws to Family Members pursuant to Section 3.2, and Transfers
to the Company made pursuant to Section 4.1 are deemed to be in compliance with
the Act and this Agreement and no opinion of counsel is required in connection
therewith.

(c) Each Management Shareholder acknowledges the reasonableness of the
Transfer restrictions contained in this Agreement in view of the purposes of the
Company and the relationship of the Management Shareholders. Any Transfer of
any Shares made in conflict with or in derogation of any of the terms,
provisions or conditions of this Agreement or which is not expressly permitted
in this Agreement, shall be null, void and of no effect whatsoever. Any Person
to whom Shares are attempted to be Transferred in violation of the provisions of
this Agreement shall not be entitled to any of the rights of a shareholder of
the Company.

3.2. TRANSFER TO FAMILY MEMBERS. Notwithstanding anything to the contrary
contained in this Agreement, subject to any then-existing agreement with one or
more underwriters not to Transfer Shares, each Management Shareholder shall be
entitled to Transfer any or all of his Shares to any Family Member, without any
requirement to comply with the provisions of Section 4.1.

3.3. CONDITION TO TRANSFER. Notwithstanding anything herein to the
contrary, but subject to the immediately following sentence, it shall be a
condition to any Transfer of Shares that, prior to such Transfer, each Family
Member acquiring such Shares shall become a party to this Agreement (as from
time to time in effect) by executing a counterpart hereof and shall thereby
succeed to all of the rights and obligations of the transferring Management
Shareholder as a shareholder of the Company. Any such Family Member or Third
Party, by the acceptance of Shares, shall be bound by all of the terms and
provisions of this Agreement whether or not such entity executes a counterpart
hereof.

3.4. COMPANY ELECTION TO WAIVE CERTAIN RESTRICTIONS UPON DEATH OR
DISABILITY. In the event of termination of a Management Shareholder's
employment as a result of death or Disability, the Company, in its sole and
absolute discretion, may elect to waive applicability of the provisions of
Section 4.1.

3.5. AUTHORITY OF MANAGEMENT DESIGNEES TO WAIVE RESTRICTIONS.
Notwithstanding the provisions of Section 3.4, the Management Designee shall
have the authority, exercisable in the sole and absolute discretion of the
Management Designee, to elect

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<PAGE>

to waive the applicability of the provisions of Article II and Section 4.1 with
respect to any Management Shareholder.

ARTICLE IV
RIGHT OF FIRST REFUSAL

4.1. RIGHT OF FIRST REFUSAL.

(a) TRANSFER NOTICE. If at any time, a Management Shareholder (the
"SELLING SHAREHOLDER") receives a bona fide offer (the "OFFER") to purchase all
or any part of his Shares from a Third Party (the "THIRD-PARTY OFFEROR") which
the Selling Shareholder wishes to accept, the Selling Shareholder shall cause
the Offer to be reduced to writing and shall give written notice (a "TRANSFER
NOTICE") to the Company and each other Management Shareholder (such other
Management Shareholders collectively referred to as the "OFFEREE SHAREHOLDERS")
of his desire to accept the Offer. The Transfer Notice shall set forth the
number of Shares which the Selling Shareholder desires to Transfer (the "OFFERED
SHARES") and contain an irrevocable offer to sell the Offered Shares to the
Company and the Offeree Shareholders (in the manner set forth below) at a
purchase price equal to the price contained in, and on the same terms and
conditions of, the Offer. The Transfer Notice shall be accompanied by a true
copy of the Offer (which shall identify the Third-Party Offeror) and all
correspondence and other documents relating thereto.

(b) COMPANY RIGHT OF FIRST REFUSAL. At any time within 15 days after the
date of issuance of the Transfer Notice, the Company shall have the right, but
not the obligation, to purchase, or to arrange for a Third Party selected by the
Company (the "COMPANY DESIGNEE") to purchase, the Offered Shares either (i) at
the same price and on the same terms and conditions as set forth in the Offer or
(ii) if the Offer includes any consideration other than cash, then at the
Company's sole option, at the equivalent all cash price, determined in good
faith by the Board of Directors of the Company. The Company shall exercise its
right to purchase (or to have the Company Designee purchase) Offered Shares by
delivering irrevocable notice (an "EXERCISE NOTICE") to the Selling Shareholder
(with a copy to the Offeree Shareholders) of its or such Company Designee's
commitment to purchase such number of Offered Shares as shall be set forth in
the Exercise Notice. The right of first refusal referred to in this Section
4.1(b) shall only apply to a transfer of the Offered Shares in a private sale,
and will not apply to any transfer of the Offered Shares through an offering
registered with the Commission or through a transfer exempt from registration
under Rule 144 of the Securities Act.

(c) OFFER TO OFFEREE SHAREHOLDERS. If the Company or the Company Designee
shall not have exercised their respective rights to purchase all of the Offered
Shares within such 15-day period, each of the Offeree Shareholders shall then
have the right, but not the obligation, to purchase all or any amount of his
Proportionate Interest in the Offered Shares remaining to be purchased, at the
same price and upon the same terms and conditions as set forth in the Offer.
Each Offeree Shareholder shall exercise such right to purchase Offered Shares by
delivery of an Exercise Notice to the Selling Shareholder (with copies to the

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<PAGE>

Company and the other Offeree Shareholders) within 30 days after the date of
issuance of the Transfer Notice.

(d) PURCHASE OF REMAINING SHARES. In the event that the Company, any
Company Designee and any Offeree Shareholders shall have exercised their
respective rights to purchase some, but not all, of the Offered Shares within
the time periods provided pursuant to Section 4.1(b) and Section 4.1(c), each of
the Offeree Shareholders who exercised a right to purchase Offered Shares shall
then have the further right, but not the obligation, to purchase his
Proportionate Interest in the balance of the Offered Shares. Such right shall
be exercised by each such Offeree Shareholder's delivery to the Selling
Shareholder (with copies to the Company and the other Offeree Shareholders) of
an Exercise Notice within 45 days after the date of issuance of the Transfer
Notice. To the extent that any Offeree Shareholder does not elect to purchase
his full Proportionate Interest in Offered Shares, the Proportionate Interest of
each other Offeree Shareholder shall be increased accordingly.

(e) PURCHASE PRICE. Except as provided in Section 4.1(b)(ii), the
purchase price (the "PURCHASE PRICE") for the Offered Shares to be purchased by
any of the Company, the Company Designee or the Offeree Shareholders shall be
identical to the price set forth in the Offer. Payment by cashier's check,
certified check or wire transfer of immediately available funds shall be deemed
payment of cash. Any transfer and other taxes payable in connection with the
Transfer of Shares shall be paid by the Selling Shareholder.

(f) The closing (the "CLOSING") of the purchase of the Offered Shares with
respect to which any of the Company, the Company Designee or the Offeree
Shareholders has exercised its rights to purchase shall take place at the
principal office of the Company not later than 60 days following the date of
issuance of the Transfer Notice, or on such other date as the Selling
Shareholder and such of the Company, the Company Designee and the Offeree
Shareholders who are purchasing Offered Shares shall mutually agree, subject to
the receipt of any required Third-Party or governmental approvals, compliance
with applicable laws and the absence of any injunction or similar legal order
preventing the Transfer of Offered Shares. In the event that such date is not a
business day, the Closing shall occur on the next business day thereafter. At
the Closing, the Selling Shareholder shall deliver:

(i) certificates for the Offered Shares being purchased, duly
endorsed in blank for transfer or accompanied by stock powers
duly executed in blank; and

(ii) if applicable, the opinion provided for pursuant to Section
3.1(b).

The Offered Shares shall be conveyed free and clear of all claims, liens,
encumbrances and rights of Third Parties whatsoever.

(g) Certificates representing Offered Shares being purchased shall be
deemed canceled on the stock transfer records of the Company, as of the date of
payment or tender of the Purchase Price therefor, whether or not such
certificates have been delivered at the Closing. Each Management Shareholder
agrees that such deemed cancellation shall be

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<PAGE>

binding upon the Company and the Selling Shareholder. Upon cancellation of such
certificates, the Selling Shareholder shall have no further voting, dividend or
distribution rights. New certificates representing such Offered Shares shall be
issued to each Person (other than the Company) purchasing Offered Shares, and
upon such issuance, the original certificates representing Offered Shares shall
be canceled. All dividends or distributions that may be payable to shareholders
of record on a date on or after the date of cancellation of the Selling
Shareholder's certificates shall be paid by the Company to each such Person
(other than the Company) purchasing Offered Shares. Upon delivery of the
Purchase Price, such purchasers shall succeed to record and beneficial ownership
of the Offered Shares sold by the Selling Shareholder.

(h) In the event that no Offered Shares, or less than all of the Offered
Shares, are purchased by the Offeree Shareholders, subject to Section 3.1(b) and
Section 3.3, for a period of 90 days from the last to expire of any applicable
period during which the Company, the Company Designee or any Offeree Shareholder
may exercise a right to purchase Offered Shares, the Selling Shareholder shall
have the right to Transfer any remaining portion of the Offered Shares to a
Third Party. In the event that the Selling Shareholder shall not have sold any
remaining Offered Shares to a Third Party transferee for any reason before the
expiration of the 90-day period provided for in the immediately preceding
sentence, then all of the provisions of this Section 4.1 shall again become
applicable to any Transfers of Shares by the Selling Shareholder.

(i) Nothing in this Agreement shall be deemed to restrict or prohibit the
Company from purchasing Shares from a Management Shareholder, at any time, upon
such terms and conditions, and for such price, as may be mutually agreed upon
between the parties, whether or not at the time of such purchase circumstances
exist which specifically grant the Company the right to purchase Shares under
the terms of this Agreement, and all such purchases shall be deemed to be in
accordance with the terms of this Agreement.

ARTICLE V
REGISTRATION RIGHTS

5.1. REGISTRATION RIGHTS. All Shares held by any Management Shareholder
which are Registrable Securities shall be subject to the provisions of the
Registration Rights Agreement.

ARTICLE VI
LEGEND

6.1. LEGEND ON CERTIFICATES. The stock records of the Company and all
certificates representing Shares now or hereafter outstanding, shall bear a
legend which shall read substantially as follows:

"The issuance of the Shares evidenced by this certificate has not been
registered under the Securities Act of 1933, as amended, or the laws of any
state, and such Shares may not be sold,

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<PAGE>

transferred or otherwise disposed of unless registered in accordance with
said Act, any applicable state law or pursuant to an exemption from
registration thereunder. In addition, the voting, sale, transfer, pledge
or other disposition of the Shares represented by this certificate is
restricted by the provisions contained in a certain Management
Shareholders' Agreement dated as of _____ __, 1998, among Capital Lease
Funding, Inc., a Maryland corporation (the "Company") and certain
management shareholders (the "Management Shareholders' Agreement"). The
holder of this certificate takes the same and holds it subject to the terms
and conditions of the Management Shareholders' Agreement and any transfer
in conflict therewith or in derogation thereof shall be null, void and of
no effect whatsoever. A copy of the Management Shareholders' Agreement is
on file and may be inspected at the offices of the Company.

Each Management Shareholder shall deliver to the Company certificates
representing his Shares to permit the Company to affix such legend.
Certificates representing any new Shares issued by the Company to the Management
Shareholders during the term of this Agreement shall bear a legend as provided
in this Section 6.1.

ARTICLE VII
MISCELLANEOUS

7.1. REMEDIES FOR BREACH. It is expressly understood that the equitable
remedies of specific performance and injunction shall be available for the
enforcement of the covenants and agreements herein, and that the availability of
these equitable remedies shall not be deemed to limit any other right or remedy
to which any party to this Agreement would otherwise be entitled.

7.2. SUCCESSORS, ASSIGNS AND TRANSFEREES. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED that no Management Shareholder may assign or
otherwise Transfer to any transferee any of his rights hereunder other than in
connection with a Transfer of Shares in accordance with all of the provisions of
this Agreement.

7.3. NOTICES. All notices and other communications provided for hereunder
shall be in writing and sent by registered or certified mail, return receipt
requested, postage prepaid or delivered in person or by courier, telecopier or
electronic mail, and shall be deemed to have been duly given when received, by
the party to whom such notice is to be given at its address set forth below, or
at such other address for the party as shall be specified by notice given
pursuant hereto:

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<PAGE>

(a) if to the Company, to:

Capital Lease Funding, Inc.
85 John Street, 12th Floor
New York, NY 10038

Attention: William R. Pollert
President

with a copy to:

Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038

Attention: Allen Curtis Greer, II, Esq.

(b) If to a Management Shareholder, to such Management Shareholder at
the address set forth for such Management Shareholder in the
stock records of the Company.

7.4. GOVERNING LAW. This Agreement and any controversy or claim arising
out of or relating to this Agreement shall be governed by the laws of the State
of Maryland, without giving effect to the principles of conflicts of laws.

7.5 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. Each of the Company
and each Management Shareholder hereby irrevocably appoint The Corporation Trust
Incorporated, at its office at 32 South Street, Baltimore, MD 21202, its lawful
agent and attorney to accept and acknowledge service of any and all process
against it in any action, suit or proceeding arising in connection with this
Agreement and upon whom such process may be served, with the same effect as if
such party were a resident of the State of Maryland and had been lawfully served
with such process in such jurisdiction, and waives all claims of error by reason
of such service, PROVIDED that in the case of any service upon such agent and
attorney, the party effecting such service shall also deliver a copy thereof to
each other party at the address and in the manner specified in Section 7.3.
Each of the Company and each Management Shareholder will enter into such
agreements with such agent as may be necessary to constitute and continue the
appointment of such agent hereunder. In the event that such agent and attorney
resigns or otherwise becomes incapable of acting as such, each party will
appoint a successor agent and attorney in Baltimore, Maryland, reasonably
satisfactory to the Company, with like powers. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the United States District Court
for the District of Maryland or any court of the State of Maryland located in
the City of Baltimore in any such action, suit or proceeding, and agrees that
any such action, suit or proceeding shall be brought only in such court (and
waives any objection based on FORUM NON CONVENIENS or any other objection to
venue therein), PROVIDED, HOWEVER, that such consent to jurisdiction is solely
for the purpose referred to in this

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<PAGE>

Section 7.5 and shall not be deemed to be a general submission to the
jurisdiction of said courts or in the State of Maryland other than for such
purpose. Nothing herein shall affect the right of any party to serve process in
any other manner permitted by law or to commence legal proceedings or otherwise
proceed against any other party in any other jurisdiction.

7.6. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement constitutes
the entire agreement among the parties pertaining to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
discussions whether oral or written, of the parties. No supplement,
modification or waiver of this Agreement shall be binding unless executed in
writing by all parties; PROVIDED that the provisions of this Agreement
applicable to a particular Management Shareholder may be supplemented, modified
or waived pursuant to written agreement between the Company and such Management
Shareholder. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.

7.7. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Copies of executed
counterparts transmitted by telecopy or other electronic transmission service
shall be considered original executed counterparts for purposes of this Section
7.7.

7.8. SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement.

7.9. HEADINGS. The headings of the Articles and Sections herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.

7.10. GENDER AND OTHER REFERENCES. Unless the context clearly
indicates otherwise, the use of any gender pronoun in this Agreement shall be
deemed to include all other genders, and singular references shall include the
plural and vice versa.

[SIGNATURE PAGE FOLLOWS]

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.

CAPITAL LEASE FUNDING, INC.

By:
------------------------------
William R. Pollert
President

MANAGEMENT SHAREHOLDERS:

---------------------------------
[Name:]
[Address]

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<PAGE>

SCHEDULE A

NAME OF MANAGEMENT SHAREHOLDER NUMBER OF SHARES OF
ORIGINAL ISSUE COMMON
STOCK

<PAGE>
Exhibit 10.4

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made as of _____ ___,
1998 between Capital Lease Funding, Inc., a Maryland corporation (the
"Corporation") and _____________ (the "Indemnified Party").

W I T N E S S E T H:

WHEREAS, the Indemnified Party is an officer or director of the
Corporation, and in such capacity is performing valuable services for the
Corporation;

WHEREAS, the Articles of Amendment and Restatement of the Corporation (the
"Articles") provide for the indemnification, to the extent authorized therein,
of present or former directors, officers, employees and agents of the
Corporation or its Predecessor Partnership (as defined in the Articles) and any
individual who, while a director of the Corporation or the Predecessor
Partnership and at the request of the Corporation or the Predecessor
Partnership, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise;

WHEREAS, the General Corporation Law of the State of Maryland (the "MGCL")
authorizes the Corporation to indemnify any person who is or was a director,
officer, employee or agent of the Corporation as described therein; and

WHEREAS, in recognition of the Indemnified Party's need for protection
against personal liability in order to provide services to the Corporation in an
effective manner and in order to induce the Indemnified Party to continue to
provide services to the Corporation, the Corporation desires to provide in this
Agreement for the indemnification of, and the advancing of expenses to, the
Indemnified Party as set forth in this Agreement and to the fullest extent
permitted by law;

NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

1. DEFINITIONS.

"Litigation Costs" means costs, charges, fees and expenses (including,
without limitation, bonds, expenses of investigation, fees of experts, travel,
lodging and attorneys' fees and expenses) reasonably incurred or contracted for
the investigation, defense or prosecution of, or other involvement with or in,
any Proceeding and any appeal therefrom.

<PAGE>

"Losses" means the total amount which the Indemnified Party becomes legally
obligated to pay in connection with any Proceeding or settlement of a Proceeding
(including, without limitation, judgments, penalties, fines, interest, court or
investigative costs, amounts paid in settlement, amounts lost or ordered
forfeited pursuant to injunctive sanctions and Litigation Costs).

"Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative.

2. INDEMNITY OF INDEMNIFIED PARTY.

(a) The Corporation shall indemnify, defend and hold harmless the
Indemnified Party pursuant to the terms and provisions of this Agreement.

(b) The Corporation shall indemnify, defend and hold harmless the
Indemnified Party to the fullest extent permitted by applicable law against any
and all Litigation Costs and Losses incurred by the Indemnified Party, except as
otherwise provided in this Agreement, in connection with any Proceeding to which
the Indemnified Party is, was or at any time becomes a party, by reason of the
Indemnified Party's service to the Corporation.

3. LIMITATIONS ON INDEMNITY. No amounts of indemnity pursuant to Section
2 hereof shall be paid by the Corporation:

(a) except to the extent that the aggregate of Litigation Costs and Losses
in any Proceeding or group of related Proceedings to be indemnified hereunder
shall exceed the sum of (i) the amount of Litigation Costs and Losses for which
the Indemnified Party is indemnified pursuant to either Section 2 hereof or
pursuant to any insurance purchased and maintained by the Corporation, plus (ii)
the amount of Litigation Costs and Losses for which the Indemnified Party is
indemnified from or by any other source (provided, in the case of (i) and (ii),
that the Indemnified Party actually receives such amounts);

(b) if it is established by a final order or judgment in any judicial
proceeding, administrative proceeding or arbitration that (i) the act or
omission on the part of the Indemnified Party was material to the matter giving
rise to the Proceeding and to have been committed in bad faith, or the result of
active and deliberate dishonesty; (ii) the Indemnified Party actually received
an improper personal benefit in money, property or services; or (iii) in the
case of any criminal Proceeding, the Indemnified Party had reasonable cause to
believe that the act or omission was unlawful;

(c) if the Proceeding was one by or in the right of the Corporation, and
the Indemnified Party was adjudged in such Proceeding to have been liable to the
Corporation; or

(d) in respect of any Proceeding charging improper personal benefit to the
Indemnified Party, whether or not involving action in the Indemnified Party's
Official Capacity (as defined in Section 2-418 of the MGCL), in which the
Indemnified Party was adjudged

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<PAGE>

to be liable in a court of competent jurisdiction on the basis that personal
benefit was improperly received.

4. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period the Indemnified
Party is providing services to the Corporation, and shall continue thereafter so
long as the Indemnified Party is subject to any possible Litigation Costs or
Losses in any Proceeding by reason of the Indemnified Party's services to the
Corporation.

5. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the
Indemnified Party of notice of the commencement of any Proceeding, the
Indemnified Party shall, if a claim in respect thereof is to be made against the
Corporation under this Agreement, give detailed written notice to the
Corporation of the commencement thereof, but the failure to so notify the
Corporation shall not relieve the Corporation from any liability which it may
have to the Indemnified Party hereunder. With respect to any such Proceeding as
to which the Indemnified Party becomes involved:

(a) The Corporation shall be entitled to participate therein at its own
expense.

(b) Except as otherwise provided below, to the extent that it may desire,
the Corporation may, jointly with any other indemnifying party, assume the
defense thereof, with counsel reasonably satisfactory to the Indemnified Party.
Subject to clauses (i), (ii) and (iii) below, after notice from the Corporation
to the Indemnified Party of its election to so assume the defense of any
Proceeding, the Corporation shall not be liable to the Indemnified Party under
this Agreement for any Litigation Costs (other than attorneys' fees and
expenses, as provided below) subsequently incurred by the Indemnified Party in
connection with the defense thereof. The Indemnified Party shall have the right
to employ his own counsel in any Proceeding, but the fees and expenses of such
counsel incurred after notice from the Corporation of its assumption of the
defense thereof shall be at the expense of the Indemnified Party unless (i) the
employment of such counsel by the Indemnified Party shall have been authorized
by the Corporation, (ii) the Indemnified Party shall have reasonably concluded
that there may be a conflict of interest between the Corporation and the
Indemnified Party in the conduct of the defense of such Proceeding or (iii) the
Corporation shall not in fact have employed counsel to assume the defense of
such Proceeding, in each of which cases the fees and expenses of such counsel
shall be at the expense of the Corporation. The Corporation shall not be
entitled to assume the defense of any Proceeding brought by or on behalf of the
Corporation or as to which the Indemnified Party shall have made the conclusion
provided for in (ii) above.

(c) The Corporation shall not be liable to indemnify the Indemnified Party
under this Agreement for any Losses paid in settlement of any Proceeding or
claim effected without the Corporation's prior written consent. The Corporation
shall not settle any Proceeding or claim in any manner which would impose any
liability, penalty or limitation on the Indemnified Party without the
Indemnified Party's prior written consent. Neither the

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<PAGE>

Corporation nor the Indemnified Party shall unreasonably withhold or delay its
consent to any proposed settlement. Without intending to limit the
circumstances in which it would be unreasonable for the Corporation to withhold
its consent to a settlement, the parties hereto agree that it would be
unreasonable for the Corporation to withhold its consent: (i) to a settlement in
an amount that did not exceed, in the business judgment of the Board of
Directors of the Corporation, the estimated amount of Litigation Costs of the
Indemnified Party to litigate the Proceeding to conclusion; or (ii) with respect
to any Proceeding other than a Proceeding brought by or in the name of the
Corporation, to any settlement proposed by the Indemnified Party unless a
determination is reasonably made within 90 days of being proposed in writing by
the Indemnified Party that the Indemnified Party acted in bad faith and in a
manner that the Indemnified Party did not believe to be in, or not opposed to,
the best interests of the Corporation, or with respect to any criminal
Proceeding that the Indemnified Party believed, or had reasonable cause to
believe, that his conduct was unlawful.

(d) In determining whether the Indemnified Party is entitled to
indemnification under this Agreement, such determination shall be made (i) by
the Board of Directors by a majority vote of a quorum consisting of directors
not, at the time, parties to the Proceeding, or, if such a quorum cannot be
obtained, then by a majority vote of a committee of the Board consisting solely
of two or more directors not, at the time, parties to such Proceeding and who
were duly designated to act in the matter by a majority vote of the full Board
in which the designated directors who are parties may participate; (ii) by
special legal counsel selected by the Board of Directors or a committee of the
Board by vote set forth in subparagraph (i) of this paragraph, or, if the
requisite quorum of the full Board cannot be obtained therefor and the committee
cannot be established, by a majority vote of the full Board in which directors
who are parties may participate; or (iii) by the stockholders.

(e) Nothing in this Section is intended to eliminate the requirement that
the Indemnified Party satisfy the applicable standards of conduct for
indemnification required by the MGCL or the Articles.

6. NO PRESUMPTIONS. The termination of any Proceeding by judgment,
order, or settlement does not create a presumption that the Indemnified Party
(i) did not act in bad faith or was not actively and deliberately dishonest,
(ii) did not actually receive an improper personal benefit or (iii) in the case
of any criminal Proceeding, did not believe or had no reasonable cause to
believe that the act or omission was unlawful; PROVIDED, HOWEVER, that the
termination of any Proceeding by conviction, a plea of NOLO CONTENDERE or its
equivalent, or an entry of an order of probation prior to judgment, creates a
rebuttable presumption that the director did not meet the standard of conduct
listed in (i) through (iii).

7. ADVANCEMENT OF EXPENSES. Upon the written affirmation by the
Indemnified Party of the Indemnified Party's good faith belief that the standard
of conduct necessary for indemnification by the Corporation has been met, and
pursuant to the terms and provisions of this Agreement, Litigation Costs
incurred or contracted by the Indemnified Party in any Proceeding shall be paid
by the Corporation on a continuing and current basis in

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<PAGE>

advance of the final disposition thereof, with the undertaking which the
Indemnified Party makes hereby that if it shall be ultimately determined that
the Indemnified Party was not entitled to be indemnified or was not entitled to
be fully indemnified, the Indemnified Party shall repay to the Corporation the
amount, or appropriate portion thereof, so advanced. Such advancement and
current payment of Litigation Costs by the Corporation shall be made promptly
(but in any event within 30 days) after receipt by the Corporation of the
Indemnified Party's written request therefor.

8. REPAYMENT. The Indemnified Party agrees that the Indemnified Party
shall reimburse the Corporation for all amounts paid by the Corporation to the
Indemnified Party under this Agreement in the event and only to the extent that
it shall be ultimately determined that the Indemnified Party is not entitled to
be indemnified by the Corporation for such Litigation Costs or Losses under the
provisions of the MGCL or the Articles, this Agreement, or otherwise.

9. PROCEDURE. Indemnification under this Agreement shall be made
promptly, and in any event paid within 30 days following the Indemnified Party's
written request therefor.

10. ENFORCEMENT.

(a) The Corporation confirms and agrees that it has entered into this
Agreement and assumed the obligations imposed on the Corporation hereunder in
order to induce the Indemnified Party to continue to serve the Corporation and
acknowledges that the Indemnified Party is relying upon this Agreement in
agreeing to serve in such capacity.

(b) Any controversy or claim arising out of or relating to the Indemnified
Party's entitlement to indemnification under this Agreement shall be settled by
arbitration in the City of New York by three arbitrators, one of whom shall be
appointed by the Corporation, one by the Indemnified Party and the third of whom
shall be appointed by the two so appointed. The arbitration shall be conducted
in accordance with the rules of the American Arbitration Association. Judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. Interest on any judgment shall be assessed at a rate the
arbitrators consider just under the circumstances. If it is necessary or
desirable for the Indemnified Party to retain legal counsel or incur other costs
and expenses in connection with enforcement of his rights under this Agreement,
the Corporation shall pay his reasonable attorneys' fees and costs and expenses
in connection with enforcement of his rights (including the enforcement of any
arbitration award in court), regardless of the final outcome, unless the
arbitrators determine that under the circumstances recovery by the Indemnified
Party of all or a part of any such fees and costs and expenses would be unjust.

(c) The right to indemnification under this Agreement shall be enforceable
by the Indemnified Party as provided above if the Indemnified Party's claim
therefore shall be denied, in whole or in part, in the manner provided herein,
or if no disposition of such claim

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<PAGE>

shall be made within 30 days from the receipt by the Corporation of the
Indemnified Party's written request for indemnification hereunder.

11. SUBROGATION. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnified Party, who shall execute all documents and
take all actions requested by the Corporation to implement such right of
subrogation.

12. MISCELLANEOUS.

(a) SEVERABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the other provisions hereof. If any
provision of this Agreement, or the application of any such provision to any
person or circumstance, shall be held to be invalid, unenforceable, or
inconsistent with any present or future law, ruling, rule, or regulation of any
court or governmental or regulatory authority having jurisdiction over the
subject matter of this Agreement, such provision shall be deemed to be rescinded
or modified in accordance with such holding, law, ruling, rule, or regulation,
and the remainder of this Agreement, or the application of such provision to
persons or circumstances other than those as to which it is held invalid,
unenforceable, or inconsistent, shall not be affected thereby.

(b) OTHER INDEMNIFICATION. The Company acknowledges that an Indemnified
Party will be entitled to indemnification, pursuant to this Agreement, whether
or not such Indemnified Party is entitled to indemnification as a result of
their role as an officer, director, partner, principal, employee or agent of any
other entity.

(c) NOTICES. Any notice, request, proposal, or other communication under
or pursuant to this Agreement to the Corporation or the Indemnified Party shall
be in writing and shall be deemed given when actually received by the intended
recipient party via either courier, registered or certified mail (return receipt
requested), or telex, facsimile, telegram, cable, or other similar means,
addressed to the intended recipient party at the respective addresses set forth
below (or such other address as either party hereto may designate to the other
from time to time).

If to the Corporation to:

Capital Lease Funding, Inc.
85 John Street
12th Floor
New York, NY 10038
Attention: Paul H. McDowell
General Counsel
Telephone: (212) 587-7676
Facsimile: (212) 267-4976

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<PAGE>

If to the Indemnified Party to:

______________________
______________________
______________________
______________________
Telephone: ______________
Facsimile: _______________

(c) Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the law of the State of Maryland without reference
to its choice of law doctrine.

(d) BINDING EFFECT; TRANSFER. This Agreement shall be binding upon the
Indemnified Party and upon the Corporation and its successors and assigns, and
shall inure to the benefit of the Indemnified Party and his heirs and personal
representatives and to the benefit of the Corporation and its successors and
assigns.

(e) MERGERS, CONSOLIDATION AND SALE OF ASSETS. The Corporation shall not
merge or consolidate into, or transfer all or substantially all its assets to,
any other entity unless the surviving entity in such transaction specifically
agrees in writing to assume the obligations of the Corporation hereunder.

(f) WAIVERS. No waiver of any provision of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver.

(g) AMENDMENTS. No amendment, modification, termination, cancellation, or
waiver of any provision of this Agreement shall be effective or valid unless it
is set forth in a written instrument and signed by both parties hereto.

(h) COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but both of which taken together shall
constitute one and the same instrument.

(i) CAPTIONS. The captions in this Agreement are inserted for convenience
of reference only and shall not affect the interpretation or construction of any
of the terms hereof.

[SIGNATURE PAGE FOLLOWS]

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.

CAPITAL LEASE FUNDING, INC.

By:________________________________
Name:
Title:

___________________________________
[INDEMNIFIED PARTY]

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<PAGE>
Exhibit 10.5

CAPITAL LEASE FUNDING, INC.
1998 EMPLOYEE STOCK OPTION PLAN

1. PURPOSE. The purpose of the Capital Lease Funding, Inc. 1998 Employee
Stock Option Plan (the "Plan") is to maintain the ability of Capital Lease
Funding, Inc. (the "Company") and its subsidiaries to attract and retain highly
qualified and experienced employees and to give such employees a continued
proprietary interest in the success of the Company and its subsidiaries.

As used herein, the term "subsidiary" shall mean any present or future
corporation which is or would be a "subsidiary corporation" of the Company as
the term is defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended from time to time (the "Code"). References to the "Exchange Act" are to
the Securities Exchange Act of 1934, as it may be amended from time to time.
Unless indicated otherwise, the term "employee" shall include a non-employee who
performs services for the Company as an independent contractor.

2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a
compensation committee (the "Committee") as appointed from time to time by the
Board of Directors of the Company (the "Board"), which Committee shall consist
of not less than three (3) members of the Board. No member of the Committee
shall be eligible to be granted options under the Plan. No member of the Board
shall be appointed to the Committee who has been granted an option under the
Plan within one year prior to appointment. A majority of the members of the
Committee shall constitute a quorum. The vote of a majority of a quorum shall
constitute action by the Committee.

In administering the Plan, the Committee may adopt rules and regulations
for carrying out the Plan. The interpretation and decision with regard to any
question arising under the Plan made by the Committee shall be final and
conclusive on all employees of the Company and its subsidiaries participating or
eligible to participate in the Plan. The Committee may consult with counsel,
who may be counsel to the Company, and shall not incur any liability for any
action taken in good faith in reliance upon the advice of counsel. The
Committee shall determine the employees to whom, and the time or times at which,
grants shall be made and the number of shares to be included in the grants.
Within the limitations of the Plan, the number of shares for which options will
be granted from time to time and the periods for which the options will be
outstanding will be determined by the Committee.

Each option granted pursuant to the Plan shall be evidenced by an Option
Agreement (the "Agreement"). The Agreement shall not be a precondition to the
granting of options; however, no person shall have any rights under any option
granted under the Plan unless and until the person to whom such option shall
have been granted shall have executed and delivered to the Company an Agreement.
The Committee shall prescribe the form of all Agreements. A fully executed
original of the Agreement shall be provided to both the Company and the
recipient of the grant.

<PAGE>

3. SHARES OF STOCK SUBJECT TO THE PLAN. The total number of shares that
may be optioned or awarded under the Plan is [________________](1) shares of the
$.01 par value common stock of the Company (the "Common Stock") except that said
number of shares shall be adjusted as provided in Paragraph 11. Any shares
subject to an option which for any reason expires or is terminated unexercised
may again be optioned under the Plan. Shares subject to the Plan may be either
authorized and unissued shares or issued shares acquired by the Company or its
subsidiaries.

4. ELIGIBILITY. Key salaried employees, including officers, of the
Company and its subsidiaries (but excluding non-employee directors), as well as
non-employee independent contractors, are eligible to be granted options under
the Plan. The employees who shall receive options under the Plan shall be
selected from time to time by the Committee, in its sole discretion, from among
those eligible, which may be based upon information furnished to the Committee
by the Company's management, and the Committee shall determine, in its sole
discretion, the number of shares to be covered by the option or options granted
to each such employee selected. Such employees who are selected to participate
in the Plan shall be referred to collectively herein as "Participants."

5. DURATION OF THE PLAN. No option may be granted under the Plan more
than ten (10) years from the date the Plan is adopted by the Board or the date
the Plan receives shareholder approval, whichever is earlier, but options
theretofore granted may extend beyond that date.

6. TERMS AND CONDITIONS OF STOCK OPTIONS. All options granted under this
Plan shall be either incentive stock options, as defined in Section 422 of the
Code, or options other than incentive stock options. Each such option shall be
subject to all the applicable provisions of the Plan, including the following
terms and conditions, and to such other terms and conditions not inconsistent
therewith as the Committee shall determine:

(a) The option price per share shall be determined by the Committee.
However, subject to Paragraph 6(j), the option price of incentive stock
options shall not be less than 100% of the fair market value of a share of
Common Stock at the time the option is granted. For purposes of the Plan,
the fair market value on any date, means (i) if the Common Stock is listed
on a securities exchange or is traded over the Nasdaq National Market
System, the closing sales price on such exchange or over such system on
such date or, in the absence of reported sales on such date, the closing
sales price on the immediately preceding date on which sales were reported,
or (ii) if the Common Stock is not listed on a securities exchange or
traded over the Nasdaq National Market System, the mean between the bid and
offered prices as quoted by the National Association of Securities Dealers
through Nasdaq for such date, provided that if it is determined that the
fair market value is not properly

- ----------------------
(1) Insert such number of shares of Common Stock as represents 11% of the
outstanding Common Stock, on a fully-diluted basis, immediately following the
consummation of the Company's initial public offering of Common Stock.

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<PAGE>

reflected by such Nasdaq quotations, fair market value will be determined
by such other method as the Committee determines in good faith to be
reasonable.

(b) Each option shall be exercisable during and over such period
ending not later than ten (10) years from the date it was granted, as may
be determined by the Committee and stated in the Agreement. In no event
may an option be exercised more than ten (10) years from the date the
option was granted.

(c) Unless otherwise provided in the Agreement, no option shall be
exercisable within six months from the date of the granting of the option.
An option shall not be exercisable with respect to a fractional share of
Common Stock or with respect to less than the lesser of fifty (50) shares
or the full number of shares then subject to the option. No fractional
shares of Common Stock shall be issued upon the exercise of an option. If
a fractional share of Common Stock shall become subject to an option by
reason of a stock dividend or otherwise, the optionee shall not be entitled
to exercise the option with respect to such fractional share.

(d) Each Option Agreement shall state whether the option(s) evidenced
thereby will or will not be treated as incentive stock option(s).

(e) Each option may be exercised by delivery of written notice of
exercise to the Company specifying the number of shares to be purchased,
which shall be accompanied by payment in full (including an amount, as
specified by the Company, to permit the Company to comply with applicable
withholding tax requirements). Payment, except as provided in the
Agreement, shall be

(A) in United States dollars by check or bank draft, or

(B) by tendering to the Company Common Stock shares already
owned for at least six (6) months by the person exercising the option,
which may include shares received as the result of a prior exercise of
an option, and having a fair market value, as determined in accordance
with Paragraph 6(a), on the date on which the option is exercised
equal to the cash exercise price applicable to such option, or

(D) in accordance with a cashless exercise program established
by the Committee in its sole discretion under which either (A) if so
instructed by the optionee, shares may be issued directly to the

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<PAGE>

optionee's broker or dealer upon receipt of the purchase price in cash
from the broker or dealer, or (B) shares may be issued by the Company
to an optionee's broker or dealer in consideration of such broker's or
dealer's irrevocable commitment to pay to the Company that portion of
the proceeds from the sale of such shares that is equal to the
exercise price of the option(s) relating to such shares, or

(E) in such other manner as permitted by the Committee at the
time of grant or thereafter.

No optionee shall have any rights to dividends or other rights of a
shareholder with respect to shares of Common Stock subject to his or her
option until he or she has given written notice of exercise of his or her
option and paid in full for such shares.

(f) An option which is intended to be an incentive stock option may
be exercised only if at all times during the period beginning with the date
of the granting of the option and ending three months before the date of
such exercise, the grantee was an employee of either the Company or of a
subsidiary of the Company or of another corporation referred to in Section
421(a)(2) of the Code. Except as otherwise provided in the Agreement an
option which is not intended to be an incentive stock option may be
exercised after termination of continuous employment, but any such exercise
shall in no event be later than the termination date of the option. If the
grantee should die, or become permanently disabled as determined by the
Committee in accordance with the Agreement, at any time when the option, or
any portion thereof, shall be exercisable by him or her, the option will be
exercisable within a period provided for in the Agreement, by the optionee
or person or persons to whom his or her rights under the option shall have
passed by will or by the laws of descent and distribution, but in no event
at a date later than the termination of the option. Notwithstanding the
preceding sentence, an option which is intended to be an incentive stock
option may not be exercised more than twelve months following the
termination of the grantee's employment by reason of disability. The
Committee may require medical evidence of permanent disability, including
medical examinations by physicians selected by it.

(g) The option by its terms shall be personal and shall not be
transferable by the optionee otherwise than by will or by the laws of
descent and distribution as provided in Paragraph 6(f) above. During the
lifetime of an optionee, the option shall be exercisable only by the
optionee. In the event any option is exercised by the executors,
administrators, heirs or distributees of the estate of a deceased optionee
as provided in Paragraph 6(f) above, the Company shall be under no
obligation to issue Common Stock thereunder unless and until the Company is
satisfied that the person or persons exercising the option are the

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<PAGE>

duly appointed legal representative of the deceased optionee's estate or
the proper legatees or distributees thereof.

(h) Notwithstanding any intent to grant incentive stock options, an
option granted will not be considered an incentive stock option to the
extent that it, together with any other incentive stock options already
granted to the employee, permits the exercise for the first time in any
calendar year with respect to more than $100,000 in fair market value of
Common Stock (determined in accordance with Paragraph 6(a) at the time of
grant). In applying the preceding sentence, options shall be taken into
account in the order in which they were granted.

(i) The Committee may, but need not, require such consideration from
an optionee at the time of granting an option as it shall determine, either
in lieu of, or in addition to, the limitations on exercisability provided
herein.

(j) No incentive stock option shall be granted to an employee who
immediately before the grant of such option, directly or indirectly owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company. This restriction does not apply if, at
the time such incentive stock option is granted, the option price is at
least 110% of the fair market value of the Common Stock, as determined in
accordance with Paragraph 6(a), on the date of grant and the incentive
stock option by its terms is not exercisable after the expiration of five
(5) years from the date of grant.

(k) No incentive stock option shall be granted to any employee who
qualifies as such solely by reason of performing services for the Company
as an independent contractor.

(l) An option and any Common Stock received upon the exercise of an
option shall be subject to such other transfer restrictions and/or
legending requirements that are specified in the Agreement.

7. CHANGE IN CONTROL.

(a) In the event of a change in control of the Company, as defined by
the Committee in the Agreement, the Committee may, in its sole discretion,
provide that any of the following applicable actions be taken as a result,
or in anticipation, of any such event to assure fair and equitable
treatment of Participants:

(i) accelerate the exercise date of any outstanding option
granted pursuant to this Plan;

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<PAGE>

(ii) offer to purchase any outstanding option from the holder
for its equivalent cash value, as determined by the Committee, as of
the date of the change in control; or

(iii) make adjustments or modifications to outstanding options
as the Committee deems appropriate to maintain and protect the rights
and interests of the Participants following such change in control.

Any such action approved by the Committee shall be conclusive and binding
on the Company, its subsidiaries and all Participants.

(b) In no event, however, may (i) any option be exercised prior to
the expiration of six (6) months from the date of grant (unless otherwise
provided for in the Agreement), or (ii) any option be exercised after ten
(10) years from the date it was granted.

8. TRANSFER, LEAVE OF ABSENCE. For the purpose of the Plan: (a) a
transfer of an employee from the Company to a subsidiary or affiliate of the
Company, whether or not incorporated, or vice versa, or from one subsidiary or
affiliate of the Company to another, and (b) a leave of absence, duly authorized
in writing by the Company or a subsidiary or affiliate of the Company, shall not
be deemed a termination of employment.

9. RIGHTS OF EMPLOYEES.

(a) No person shall have any rights or claims under the Plan except
in accordance with the provisions of the Plan and the Agreement.

(b) Nothing contained in the Plan or Agreement shall be deemed to
give any employee the right to be retained in the service of the Company or
its subsidiaries.

10. TAX WITHHOLDING OBLIGATIONS.

If required by applicable law, upon the exercise of an option pursuant to
Paragraph 6(e) tax withholding obligations may be met (a) by withholding cash
paid by the employee in addition to the exercise price, pursuant to Paragraph
6(a) or (b) by the withholding of Common Stock otherwise deliverable to the
optionee pursuant to procedures approved by the Committee; PROVIDED, FURTHER,
HOWEVER, the amount of Common Stock so withheld shall not exceed the required
withholding obligation.

11. CHANGES IN CAPITAL; REORGANIZATION.

(a) Upon changes in the outstanding Common Stock by reason of a stock
dividend, stock split, reverse split, subdivision, recapitalization, an
extraordinary dividend payable in cash or property, combination or exchange
of

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<PAGE>

shares, separation, reorganization or liquidation, and the like, the
aggregate number and class of shares available under the Plan as to which
stock options may be granted, the number and class of shares under each
option and the option price per share shall be correspondingly adjusted by
the Committee, such adjustments to be made in the case of outstanding
options without change in the total price applicable to such options.

(b) In the event (i) the Company is merged or consolidated with
another corporation and the company is not the surviving corporation, or
the Company shall be the surviving corporation and there shall be any
change in the Common Stock of the Company by reason of such merger or
consolidation, or (ii) all or substantially all of the assets of the
Company are acquired by another corporation, or (iii) there is a
reorganization or liquidation of the Company (each such event being
hereinafter referred to as a "Reorganization Event"), or (iv) the Board of
Directors of the Company shall propose that the Company enter into a
Reorganization Event, then the Board (acting solely through members of the
Board who were members of the Board prior to the occurrence of the
Reorganization Event) may in its discretion take any or all of the
following actions:

(A) by written notice to the holders of stock options provide
that the stock options shall be terminated unless exercised within
thirty days (or such longer period as the Board shall determine in its
discretion) after the date of such notice; and

(B) advance the dates upon which any or all outstanding stock
options granted shall be exercisable.

Whenever deemed appropriate by the Board, any action referred to in this
Section 11(b) may be made conditional upon the consummation of the applicable
Reorganization Event.

(c) Any adjustments or other action pursuant to this Section 11 shall
be made by the Board and the Board's determination as to what adjustments
shall be made or actions taken, and the extent thereof, shall be final and
binding.

12. MISCELLANEOUS PROVISIONS.

(a) The Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the issuance of shares or the payment of cash upon
exercise of any option under the Plan. Proceeds from the sale of shares of
Common Stock

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<PAGE>

pursuant to options granted under this Plan shall constitute general funds
of the Company. The expenses of the Plan shall be borne by the Company.

(b) It is understood that the Committee may, at any time and from
time to time after the granting of an option hereunder, specify such
additional terms, conditions and restrictions with respect to such option
as may be deemed necessary or appropriate to ensure compliance with any and
all applicable laws, including, but not limited to, terms, restrictions and
conditions for compliance with federal and state securities laws and
methods of withholding or providing for the payment of required taxes.

(c) If at any time the Committee shall determine, in its discretion,
that the listing, registration or qualification of shares of Common Stock
upon any national securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body, is necessary
or desirable as a condition of, or in connection with, the sale or purchase
of shares of Common Stock hereunder, no option may be exercised in whole or
in part until such listing, registration, qualification, consent or
approval shall have been effected or obtained, or otherwise provided for,
free of any conditions not acceptable to the Committee.

(d) By accepting any benefit under the Plan, each Participant and
each person claiming under or through such Participant shall be
conclusively deemed to have indicated his acceptance and ratification, and
consent to, any action taken under the Plan by the Committee, the Company
or the Board.

(e) The Plan shall be governed by and construed in accordance with
the laws of the State of New York.

13. LIMITS OF LIABILITY.

(a) Any liability of the Company or a subsidiary of the Company to
any Participant with respect to any option shall be based solely upon
contractual obligations created by the Plan and the Agreement.

(b) Neither the Company nor a subsidiary of the Company, nor any
member of the Committee or the Board, nor any other person participating in
any determination of any question under the Plan, or in the interpretation,
administration or application of the Plan, shall have any liability to any
party for any action taken or not taken in connection with the Plan, except
as may expressly be provided by statute.

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<PAGE>

14. AMENDMENTS AND TERMINATION. The Board may, at any time, amend, alter
or discontinue the Plan; provided, however, no amendment, alteration or
discontinuation shall be made which, without the approval of the shareholders,
would:

(a) except as is provided in Paragraph 11, increase the maximum
number of shares of Common Stock reserved for the purpose of the Plan;

(b) except as is provided in Paragraph 11, decrease the option price
of an option to less than 100% of the fair market value, as determined in
accordance with Paragraph 6(a), of a share of Common Stock on the date of
the granting of the option;

(d) extend the duration of the Plan.

The Committee may amend the terms of any option theretofore granted,
retroactively or prospectively, but no such amendment shall impair the rights of
any holder without his or her written consent.

15. DURATION. The Plan shall be adopted by the Board as of the date on
which it is approved by the Company's stockholders, which approval must occur
within the period ending twelve months after the date the Plan is adopted. The
Plan shall terminate upon the earliest of the following dates or events to
occur:

(a) the adoption of a resolution of the Board, terminating the Plan;
or

(b) the date all shares of Common Stock subject to the Plan are
purchased according to the Plan's provisions; or

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(2) Insert date which is the 10th anniversary of the date of adoption.

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<PAGE>
Exhibit 10.6

CAPITAL LEASE FUNDING, INC.
1998 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS

1. PURPOSE OF THE PLAN. The purpose of the Capital Lease Funding, Inc.
1998 Stock Option Plan for Non-Employee Directors (the "Plan") is to aid Capital
Lease Funding, Inc. (the "Company") in securing for the Company and its
stockholders the benefits of having experienced and highly qualified persons who
are not and have never been employees of the Company or any of its Subsidiaries
or affiliates become and remain members of the Board of Directors (the "Board")
of the Company and to provide to such persons the benefits of the incentive
inherent in common stock ownership.

2. STOCK SUBJECT TO PLAN. The stock which may be issued and sold under
the Plan shall be the Common Stock (par value $.01 per share) of the Company, of
a total number not exceeding [___________](1) shares, subject to adjustment as
provided in Section 9. The stock to be issued may be either authorized and
unissued shares or issued shares acquired by the Company. Each stock option
granted pursuant to the Plan is referred to herein as an "Option." In the event
that Options granted under the Plan shall terminate or expire without being
exercised in whole or in part, new Options may be granted covering the shares
not purchased under such lapsed Options.

3. ELIGIBILITY. Each member of the Board shall be eligible to receive
Options in accordance with the terms of the Plan, provided he or she, as of the
date of a granting of an Option, (i) is not an employee of the Company or any of
its Subsidiaries or affiliates and (ii) is otherwise not eligible for selection
to participate in any plan of the Company or any of its Subsidiaries or
affiliates that entitles the participant therein to acquire securities or
derivative securities of the Company. Each member of the Board who receives an
option hereunder is referred to herein as an "Optionee." As used in the Plan,
"Subsidiary" means any corporation in which the Company, directly or indirectly,
controls 50% or more of the total combined voting power of all classes of such
corporation's stock.

4. OPTION GRANTS. (a) Subject to the maximum number of shares which may
be purchased pursuant to the exercise of Options, as set forth in Section 2 (as
such number may be adjusted pursuant to the provisions of Section 9), and to the
approval of the Plan by the stockholders of the Company, an Option to purchase,
in the manner and subject to the terms and conditions hereinafter provided,
[ ] shares of the Common Stock of the Company shall be and hereby is
granted, without further action by the Board, as of the close of business on the
[ ](2), to each person who is serving as an eligible director
of the Company on such date.

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(1) Insert such number of shares of Common Stock as represents 1% of the
outstanding Common Stock, on a full-diluted basis, immediately following the
consummation of the Company's initial public offering of Common Stock (the
"IPO").

(2) Insert date of the consummation of the IPO.

<PAGE>

(b) Each person who becomes an eligible director of the Company shall (i)
on the date of the Annual or Special Meeting of Stockholders of the Company at
which he or she is first elected to the Board by vote of the stockholders, or
(ii) on the date of appointment to the Board with respect to a director
appointed to the Board by the Board to fill a vacancy on the Board, however
occurring, whether by the death, resignation or removal of any director, any
increase in the number of directors comprising the Board, or otherwise, shall,
by reason of such election or appointment and without further action by the
Board, be granted as of the close of business on said date an Option to
purchase, in the manner and subject to the terms and conditions herein provided
and to the extent such number of shares remain available for such purpose
hereunder, [ ] shares of the Common Stock of the Company. In the event
that the number of shares available for grants under the Plan is insufficient to
make all grants hereby specified on the applicable date, then all those who
become entitled to a grant on such date shall share ratably in the number of
shares then available for grant under the Plan.

(c) It is understood that the Board may, at any time and from time to time
after the granting of an Option hereunder, specify such additional terms,
conditions and restrictions with respect to such Option as may be deemed
necessary or appropriate to ensure compliance with any and all applicable laws,
including, but not limited to, terms, restrictions and conditions for compliance
with federal and state securities laws and methods of withholding or providing
for the payment of required taxes.

5. GENERAL TERMS AND CONDITIONS OF OPTIONS. Each Option granted under
the Plan shall be evidenced by an agreement in such form as the Board shall
prescribe from time to time in accordance with the Plan and shall comply with
the following terms and conditions:

(a) The Option exercise price with respect to each Option shall be the
higher of: (i) the Fair Market Value (as defined below) of the Common Stock on
the date the Option is granted or (ii) the average of the Fair Market Values of
the Common Stock for each of the 10 days ending on the date the Option is
granted.

Fair Market Value on any date, means (i) if the Common Stock is listed on a
securities exchange or is traded over the Nasdaq National Market System, the
closing sales price on such exchange or over such system on such date or, in the
absence of reported sales on such date, the closing sales price on the
immediately preceding date on which sales were reported, or (ii) if the Common
Stock is not listed on a securities exchange or traded over the Nasdaq National
Market System, the mean between the bid and offered prices as quoted by the
National Association of Securities Dealers through Nasdaq for such date,
provided that if it is determined that the fair market value is not properly
reflected by such Nasdaq quotations, fair market value will be determined by
such other method as the Board determines in good faith to be reasonable.

(b) Each Option granted pursuant to the Plan shall be evidenced by an
Option Agreement. The Option Agreement shall not be a precondition to the
granting of Options; however, no person shall have any rights under any Option
granted under the Plan

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<PAGE>

unless and until the Optionee to whom such Option shall have been granted shall
have executed and delivered to the Company an Option Agreement. A fully
executed original of the Option Agreement shall be provided to both the Company
and the Optionee.

(c) All Options shall be nonstatutory stock options not intended to
qualify as stock options entitled to special tax treatment under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").

(d) Options shall not be transferable by the Optionee otherwise than by
will or the laws of descent and distribution, and shall be exercisable during
the Optionee's lifetime only by the Optionee.

(e) Each Option shall become exercisable immediately upon the date of
grant, but shall be subject to the following restrictions on exercise:

(i) The Option shall not be exercisable, in whole or in part, after
the expiration of ten years from the date the Option was granted. To the
extent that an Option is not exercised within the ten-year period of
exercisability, it shall expire as to the then unexercised part.

(ii) An Option shall not be exercisable with respect to a fractional
share or with respect to the lesser of fifty (50) shares or the full number
of shares then subject to the Option.

(iii) An Option may only be exercised by delivery of written notice of
the exercise to the Company specifying the number of shares to be purchased
and by making payment in full for the shares of Common Stock being acquired
thereunder at the time of exercise; unless the Option Agreement shall
otherwise provide, such payment shall be made

(A) in United States dollars by check or bank draft, or

(B) by tendering to the Company Common Stock shares already
owned for at least six (6) months by the person exercising the Option,
which may include shares received as the result of a prior exercise of
an Option, and having a Fair Market Value equal to the cash exercise
price applicable to such Option, or

(D) in accordance with a cashless exercise program under which,
if so instructed by the Optionee, shares of Common Stock may be issued
directly to the Optionee's broker or dealer upon receipt of the
purchase price for such shares in cash from the broker or dealer.

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<PAGE>

(iv) If at any time the Board shall determine, in its discretion, that
the listing, registration or qualification of shares upon any national
securities exchange or the Nasdaq National Market or under any state or
federal law, or the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with,
the sale or purchase of shares hereunder, such Option may not be exercised
in whole or in part unless and until such listing, registration,
qualification, consent or approval shall have been effected or obtained, or
otherwise provided for, free of any conditions not acceptable to the Board
in the exercise of its reasonable judgment.

6. TERMINATION OF SERVICE. Upon termination of service as a director of
the Company by reason of death or disability each unexpired Option shall remain
exercisable by the Optionee, or in the case of death, the Optionee's executors,
administrators, heirs or distributees, as the case may be, in whole or in part,
for a period of one (1) year after such termination. Disability shall mean an
inability as determined by the Board to perform duties and services as a
director of the Company by reason of a medically determinable physical or mental
impairment, supported by medical evidence, which can be expected to last for a
continuous period of not less than six (6) months.

In the event any Option is exercised by the executors, administrators,
heirs or distributees of the estate of a deceased Optionee, the Company shall be
under no obligation to issue Common Stock thereunder unless and until the
Company is satisfied that the person or persons exercising the Option are the
duly appointed legal representative of the deceased Optionee's estate or the
proper legatees or distributees thereof.

In no event, however, may an Option be exercised after ten (10) years from
the date it was granted.

7. CHANGE IN CONTROL. (a) Notwithstanding other provisions of the Plan,
but subject to Sections 6 and 7(c), in the event of a change in control of the
Company, (i) all of the Optionee's then outstanding Options shall remain
exercisable, unless directed otherwise by a resolution adopted by the Board
prior to and specifically relating to the occurrence of such change in control,
and (ii) each Optionee shall have the right within one (1) year after such event
to exercise the Option in full notwithstanding any limitation or restriction in
any Option Agreement or in the Plan.

(b) For purposes of this Section 7, a "change in control" shall mean a
change in control with respect to the Company, that would be required to be
reported in response to Item 1 (a) of the Current Report on Form 8-K, pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided that, without limitation, such a change in control
shall be deemed to have occurred at such time as any "person" (as defined in
Section 3(9) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly of 20% or
more of the securities of the Company which are entitled to vote.
Notwithstanding anything aforesaid to the contrary, a change in control with
respect to the Company shall be deemed to

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<PAGE>

have occurred if individuals who constitute the Board, cease for any reason to
constitute at least a majority of the Board.

8. PURCHASE FOR INVESTMENT. (a) Except as hereafter provided, the holder
of an Option shall, upon any exercise thereof, execute and deliver to the
Company a written statement, in form satisfactory to the Company, in which such
holder represents and warrants that such holder is purchasing or acquiring the
shares acquired thereunder for such holder's own account, for investment only
and not with a view to the resale or distribution thereof, and represents and
agrees that any subsequent offer for sale or distribution of any of such shares
shall be made only pursuant to either (i) a registration statement on an
appropriate form under the Securities Act of 1933, as amended (the "Securities
Act"), which registration statement has become effective and is current with
regard to the shares being offered or sold, or (ii) a specific exemption from
the registration requirements of the Securities Act, but in claiming such
exemption the holder shall, prior to any offer for sale or sale of such shares,
obtain a prior favorable written opinion, in form and substance satisfactory to
the Company, from counsel for or approved by the Company, as to the
applicability of such exemption thereto. The foregoing restriction shall not
apply to (a) issuances by the Company so long as the shares being issued are
registered under the Securities Act and a prospectus in respect thereof is
current or (b) reofferings of shares by affiliates of the Company (as defined in
Rule 405 or any successor rule or regulation promulgated under the Securities
Act) if the shares being reoffered are registered under the Securities Act and a
prospectus in respect thereof is current.

(b) The Company may endorse such legend or legends upon the certificates
for shares issued upon exercise of an Option granted hereunder and may issue
such "stop transfer" instructions to its transfer agent in respect of such
shares as, in its discretion, it determines to be necessary or appropriate to
prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act.

9. ADJUSTMENT IN THE EVENT OF CHANGE IN STOCK; REORGANIZATION. (a) In
the event of changes in the outstanding Common Stock of the Company by reason of
stock dividend, reverse split, subdivision, recapitalization, split-up,
combination or exchange of shares, reorganization or liquidation, extraordinary
dividend payable in cash or property, and the like, the aggregate number and
class of shares available under the Plan, and the number, class and the price of
shares of Common Stock subject to outstanding Options shall be appropriately
adjusted by the Board, whose determination shall be conclusive.

(b) In the event (i) the Company is merged or consolidated with another
corporation and the Company is not the surviving corporation, or the Company
shall be the surviving corporation and there shall be any change in the Common
Stock of the Company by reason of such merger or consolidation, or (ii) all or
substantially all of the assets of the Company are acquired by another
corporation, or (iii) there is a reorganization or liquidation of the Company
(each such event being hereinafter referred to as a "Reorganization Event"),

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<PAGE>

or (iv) the Board shall propose that the Company enter into a Reorganization
Event, then the Board (acting solely through members of the Board who were
members of the Board prior to the occurrence of the Reorganization Event) may in
its discretion take any or all of the following actions:

(A) by written notice to Optionee, provide that the Option shall
be terminated unless exercised within thirty days (or such longer
period as the Board shall determine in its discretion) after the date
of such notice; and

(B) advance the dates upon which any or all outstanding Options
granted to Optionee shall be exercisable.

Whenever deemed appropriate by the Board, any action referred to
in this Section 9(b) may be made conditional upon the consummation of
the applicable Reorganization Event.

(c) Any adjustments or other action pursuant to this Section 9 shall be
made by the Board and the Board's determination as to what adjustments shall be
made or actions taken, and the extent thereof, shall be final and binding.

10. ADMINISTRATION. The Plan shall be administered by the Board. The
Board shall have all the powers vested in it by the terms of the Plan, such
powers to include authority (within the limitations described herein) to
prescribe the form of all Option Agreements. The Board shall, subject to the
provisions of the Plan, have the power to construe the Plan, to determine all
questions arising thereunder and to adopt and amend such rules and regulations
for the administration of the Plan as it may deem desirable. Any decision of
the Board in the administration of the Plan, as described herein, shall be final
and conclusive. The Board may act only by a majority of its members in office,
except that the members thereof may authorize any one or more of their number or
the secretary or any other officer of the Company to execute and deliver
documents on behalf of the Board. No member of the Board shall be liable for
anything done or omitted to be done by such member or by any other member of the
Board in connection with the Plan, except as may expressly be provided by
statute.

11. MISCELLANEOUS PROVISIONS. (a) Except as expressly provided for in the
Plan, no director or other person shall have any claim or right to be granted an
Option under the Plan. Neither the Plan nor any action taken hereunder shall be
construed as giving any eligible director any right to be retained in the
service of the Company as a director or otherwise.

(b) An Optionee's rights and interest under the Plan may not be assigned
or transferred in whole or in part either directly or by operation of law or
otherwise (except in the event of an Optionee's death, by will or the laws of
descent and distribution), including, but not by way of limitation, execution,
levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no
such right or interest of any participant in the Plan shall be subject to any
obligation or liability of such participant.

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<PAGE>

(c) It shall be a condition to the obligation of the Company to issue
shares of Common Stock upon exercise of an Option that the Optionee (or any
beneficiary or person entitled to act) pay to the Company, upon its demand, such
amount, in cash and/or Common Stock, as may be requested by the Company for the
purpose of satisfying its liability, if any, to withhold federal, state, local
or foreign income or other taxes; PROVIDED, HOWEVER, that such withholding
obligation may be met by the withholding of Common Stock otherwise deliverable
to the Optionee in accordance with such procedures as may be adopted by the
Board; PROVIDED, FURTHER, HOWEVER, the amount of Common Stock so withheld shall
not exceed the minimum required withholding obligation. If the amount requested
is not paid, the Company may refuse to issue the shares of Common Stock.

(d) The expenses of the Plan shall be borne by the Company.

(e) The Plan shall be unfunded. Neither the Company nor the Board shall
be required to establish any special or separate fund or to make any other
segregation of assets to assure the issuance of shares upon exercise of any
Option under the Plan and issuance of shares upon exercise of Options shall be
subordinate to the claims of the Company's general creditors. Proceeds from the
sale of shares pursuant to Options however shall constitute general funds of the
Company. Neither the Company, a Subsidiary or the Board shall be deemed to be a
trustee of any amounts to be paid under the Plan.

(f) By accepting any Option or other benefit under the Plan, each Optionee
and each person claiming under or through such person shall be conclusively
deemed to have indicated his acceptance and ratification, and consent to, any
action taken under the Plan by the Company or the Board.

(g) An Optionee shall have no voting rights or other rights of
stockholders with respect to shares which are subject to an Option, nor shall
cash dividends accrue or be payable with respect to any such shares.

(h) The Plan shall be governed by and construed in accordance with the
laws of the State of New York.

(i) No fractional shares shall be issued upon the exercise of an Option.
If a fractional share shall become subject to an Option by reason of a stock
dividend or otherwise, the Optionee shall not be entitled to exercise the Option
with respect to such fractional share.

12. AMENDMENT OR DISCONTINUANCE. Except as provided in this Section 12,
the Plan may be amended at any time and from time to time by the Board as the
Board shall deem advisable including, but not limited to amendments necessary to
qualify for any exemption or to comply with applicable law or regulations.
Except as provided in Section 9 above, the Board may not, without further
approval by the stockholders of the Company, increase the maximum number of
shares of Common Stock as to which Options may be granted under the Plan,
increase the number of shares subject to an Option, reduce the Option exercise
price described in Section 5(a), extend the period during which Options may be
granted or exercised under the Plan or change the class of persons eligible to
receive Options

-7-
<PAGE>

under the Plan, it being the intent to include in this sentence any amendment
that would have the effect of materially increasing the benefits accruing to
Optionees under the Plan. The Plan provisions affecting the amount of Common
Stock to be awarded eligible directors, the timing of those awards or the
determination of those eligible to receive such awards may not be amended more
than once every six months, other than as may be required in order to comply
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder; provided however, to the extent that, in
the opinion of counsel to the Company, stockholder approval of an amendment to
the Plan is not required under the Exchange Act (including the rules and
regulations promulgated thereunder), in order for the Options under the Plan to
continue to be exempt from the operation of Section 16(b) of the Exchange Act,
such amendment may be made by the Board acting alone. No amendment of the Plan
shall materially and adversely affect any right of any Optionee with respect to
any Option theretofore granted without such Optionee's written consent.

13. LIMITS OF LIABILITY. (a) Any liability of the Company to any
participant with respect to an Option award shall be based solely upon
contractual obligations, if any, created by the Plan and the Option Agreement.

(b) Neither the Company nor or any member of the Board, nor any other
person participating in any determination of any question under the Plan, or in
the interpretation, administration or application of the Plan, shall have any
liability to any party for any action taken or not taken in connection with the
Plan, except as may expressly be provided by statute.

14. TERMINATION. This Plan shall terminate upon the earlier of the
following dates or events to occur:

(a) upon the adoption of a resolution of the Board terminating the Plan;

(b) the date all shares of Common Stock subject to the Plan are purchased
according to the Plan's provisions; or

No such termination of this Plan shall affect the rights of any Optionee
hereunder and all Options previously granted hereunder shall continue in force
and in operation after termination of the Plan, except as they may be otherwise
terminated in accordance with the terms of the Plan.

- ------------------------
(3) Insert date which is the 10th anniversary of the date of adoption.

-8-

<PAGE>
Exhibit 10.7

EMPLOYMENT AGREEMENT

THIS AGREEMENT ("Agreement"), dated as of ________, 1998, is by and between
CAPITAL LEASE FUNDING, INC., a Maryland corporation (the "Company"), and WILLIAM
R. POLLERT ("Executive").
RECITALS

The Board of Directors of the Company (the "Board") desires to employ
Executive in an executive capacity and to provide Executive with compensation
and other benefits on the terms and conditions set forth in this Agreement.

Executive desires to accept such employment and perform services for the
Company on the terms and conditions set forth in this Agreement.

It is therefore hereby agreed by and between the parties as follows:
AGREEMENT

1. EMPLOYMENT.

1.1 Subject to the terms and conditions of this Agreement, the Company
agrees to employ Executive during the term hereof as Chairman, President and
Chief Executive Officer of the Company, and Executive hereby agrees to serve as
President and Chief Executive Officer of the Company. In his capacity as a
senior executive officer of the Company, Executive shall have the customary
powers, responsibilities and authorities of a senior executive officer of the
Company, as they exist from time to time.

1.2 The Company shall, during the term of this Agreement, use its best
efforts to insure the election and retention of Executive as a member of the
Board.

1.3 During the term of this Agreement, Executive agrees to devote
substantially his full working time and efforts, to the best of his ability,
experience and talent, to the performance of services, duties and
responsibilities in connection therewith. Executive shall perform such duties
and exercise such powers as a senior executive officer of the

<PAGE>

Company as the Board shall from time to time delegate to him on such terms and
conditions and subject to such restrictions as the Board may from time to time
impose. Nothing in this Agreement shall preclude Executive from engaging, so
long as, in the reasonable determination of the Board, such activities do not
interfere with his duties and responsibilities hereunder, in charitable and
community affairs, or from serving, subject to the prior approval of the Board,
as an officer or member of boards of directors or as a trustee of any other
company, association or entity.

2. TERM OF EMPLOYMENT. Executive's term of employment under this
Agreement shall commence on the date of an initial public offering and sale of
the common stock, par value $.01 per share, of the Company and, subject to the
terms hereof, shall terminate on the earlier of (i) two years from the date
hereof (the "Termination Date") or (ii) termination of Executive's employment
pursuant to this Agreement; PROVIDED, HOWEVER, that on the Termination Date and
on each subsequent anniversary of such Termination Date, the Termination Date
shall be automatically extended for a period of two years, unless either party
shall have given written notice to the other party not less than 90 days prior
to any such date that the Termination Date shall not be so extended.

3. COMPENSATION.

3.1 SALARY. In consideration of the services to be furnished by Executive
to the Company and its subsidiaries pursuant to the provisions of this
Agreement, the Company shall pay Executive a base salary ("Base Salary") at the
rate of [$ ____] per annum, payable in accordance with the ordinary payroll
practices of the Company. Executive's rate of Base Salary shall be reviewed
periodically by the Board (at intervals of not longer than [12] months) for the
purposes of considering increases thereof, but the decision of whether to award
such an increase shall be made in the sole discretion of the Board. Executive's
Base Salary for any partial year shall be prorated based upon the number of days
elapsed in such year.

3.2 BONUSES. In addition to his Base Salary, the Company may, in its sole
discretion, grant bonuses to Executive in such amounts and at such times as the
Compensation Committee of the Board shall determine.

-2-
<PAGE>

3.3 OPTIONS. Upon consummation of an initial public offering (the "IPO")
of the common stock, par value $.01 per share, of the Company (the "Common
Stock"), the Company shall grant to Executive pursuant to the [Capital Lease
Funding 1998 Employee Stock Option Plan (the "Option Plan")] such number of
incentive stock options as would give Executive the right to acquire _____
shares of Common Stock at an exercise price equal to the price to the public of
the Common Stock in the IPO. Thereafter, the Compensation Committee of the
Board may, from time to time and in its discretion, grant additional options to
Executive pursuant to the Option Plan or other option plans or compensation
arrangements of the Company.

4. EMPLOYEE BENEFITS.

4.1 EMPLOYEE BENEFIT PROGRAMS, PLANS AND PRACTICES.

During the term of his employment hereunder, Executive shall be included,
to the extent eligible, in all employee benefit programs as are or may be made
available from time to time to executives and other salaried employees of the
Company. In addition to the foregoing, Executive shall be provided, at the
expense of the Company, a level of disability and life insurance, the terms,
conditions and amounts of which are no less favorable to Executive than those in
effect on the date hereof; PROVIDED, HOWEVER, that Executive shall have
submitted to a physical examination and met other criteria established by the
Company in its sole discretion.

4.2 VACATION AND FRINGE BENEFITS. Executive shall be entitled to no less
than 25 business days paid vacation in each year. In addition, Executive shall
be entitled to the perquisites and other fringe benefits made available to other
comparable senior executives of the Company, commensurate with his position with
the Company.

5. EXPENSES. Executive is authorized to incur reasonable expenses
necessary in carrying out his duties and responsibilities under this Agreement.
The Company will reimburse Executive for all such expenses upon presentation by
Executive from time to time of appropriately itemized and approved (consistent
with the Company's policy) accounts of such expenditures.

-3-
<PAGE>

6. TERMINATION OF EMPLOYMENT.

6.1 TERMINATION NOT FOR CAUSE OR FOR GOOD REASON. (a) The Company may
terminate Executive's employment at any time for any reason, and Executive may
terminate his employment at any time in accordance with the terms of this
Agreement. If Executive's employment is terminated by the Company other than
for Cause (as defined in Section 6.3 hereof) or if Executive terminates his
employment for Good Reason (as defined in Section 6.1 (c) hereof) prior to the
Termination Date, as then in effect, Executive shall be entitled to continue to
receive the benefits provided for in Section 4 of this Agreement for the greater
of one year or until the Termination Date, as then in effect, and shall further
be entitled to receive, in lieu of any other future compensation, an amount
(calculated as set forth below, the "Termination Amount") which shall be payable
in equal monthly installments commencing on the first day of the month following
such termination until the Termination Date. The Termination Amount shall
consist of (i) Executive's Base Salary at its then current annual rate,
multiplied by the number of full years and partial years (measured in whole
months) occurring between the date Executive's employment with the Company is
terminated and the Termination Date; PROVIDED, HOWEVER, that such amount shall
be no less than 100% of Executive's Base Salary at its then current annual rate,
PLUS (ii) the average of the bonuses paid to Executive for the three preceding
years under Section 3.2 or, if no bonus was paid during such preceding years, an
amount equal to 50% of Executive's Base Salary at its then current annual rate.

(b) Notwithstanding anything to the contrary, if Executive terminates his
employment following a Change of Control (as defined in Section 6.1 (c) hereof)
prior to the Termination Date, as then in effect, Executive shall only be
entitled hereunder, in lieu of any other future compensation, to receive an
amount equal to (i) 200% of Executive's Base Salary at its then current annual
rate, PLUS (ii) the bonus paid to Executive during the prior year under Section
3.2 or, if no bonus was paid during the prior year, an amount equal to 50% of
Executive's Base Salary at its then current annual rate, which amount shall be
payable in equal monthly installments commencing on the first day of the month
following such termination until the Termination Date.

-4-
<PAGE>

(c) For purposes of this Agreement, "Good Reason" shall mean any of the
following (without Executive's express prior written consent):

(i) Any material breach by the Company of any provision of this
Agreement, including any material reduction by the Company of Executive's
duties or responsibilities, or any removal of the Executive or any failure
to re-elect Executive as President and Chief Executive Officer of the
Company (except in connection with the promotion of Executive, termination
of Executive's employment for Cause, as a result of Permanent Disability,
as a result of Executive's death or by Executive other than for Good
Reason) or a reduction by the Company in Executive's Base Salary;

(ii) A relocation of Executive's place of employment to a location
outside of the New York City metropolitan area;

(iii) A "Change of Control", which shall be deemed to have occurred
(A) upon the sale by the Company of all or substantially all of its assets
or (B) if any person (as such term is used in Section 13(d) and Section
14(d)(2) of the Securities Exchange Act as in effect on the date hereof
(the "ACT")), other than Executive, or related persons constituting a group
(as such term is used in Rule 13d-5 under the Act), other than a group with
which Executive is affiliated, become the "beneficial owners" (as such term
is used in Rule 13d-3 under the Act), directly or indirectly, of more than
51% of the total voting power of all classes then outstanding of the voting
stock of the Company; or

(iv) Any removal of Executive from or any failure to elect or re-elect
Executive to the Board; PROVIDED, HOWEVER, that any failure to elect or
re-elect Executive in connection with a termination of Executive's
employment hereunder (other than for Good Reason) shall not constitute Good
Reason.

6.2 PERMANENT DISABILITY OR DEATH. If Executive shall fail during the
term of his employment hereunder, because of illness, physical or mental
disability or other incapacity, for a period of 180 days in any 365 consecutive
days, to render the services provided for by this Agreement ("Permanent
Disability"), the Company or Executive may terminate Executive's employment on
written notice thereof, setting forth the facts and

-5-
<PAGE>

circumstances claimed to provide a basis for termination of Executive's
employment under this Section 6.2. If Executive should die during the term of
this Agreement, the Agreement shall terminate on the date of Executive's death.
In the event of termination under this Section 6.2 by reason of Permanent
Disability or death, the Company shall pay to Executive or Executive's estate,
Executive's Base Salary at its then current annual rate, prorated for the period
remaining until the Termination Date, in equal monthly installments commencing
on the first day of the month following such termination until the Termination
Date.

6.3 VOLUNTARY TERMINATION BY EXECUTIVE; DISCHARGE FOR CAUSE. The Company
shall have the right to terminate the employment of Executive for Cause, as
hereinafter defined. In the event that Executive's employment is terminated by
the Company for Cause, or by Executive (other than for Good Reason), prior to
the Termination Date, the Company shall only be obligated to pay Executive such
portion of his Base Salary payable to him up to the date of termination, and all
other obligations of the Company under this Agreement to make any further
payments, or provide any benefits specified herein, to Executive shall thereupon
cease and terminate. As used herein, the term "Cause" shall be limited to (i)
willful action by Executive involving malfeasance or misconduct in connection
with his employment, (ii) continuing refusal by Executive to perform his duties
hereunder or any lawful direction of the Board, (iii) any breach of the
provisions of Section 12 of this Agreement by Executive or any other material
breach of this Agreement by Executive, (iv) excessive abuse of alcohol or of any
controlled substance by Executive, (v) excessive absenteeism not relating to
illness or (vi) Executive being convicted of (a) any felony or (b) a misdemeanor
involving moral turpitude. Termination of Executive pursuant to this Section
6.3 shall be made by delivery to Executive of a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the directors (in
which vote Executive will not participate) at a meeting of the Board called and
held for the purpose (after reasonable notice and opportunity for Executive to
be heard before the Board prior to such vote), finding that in the judgment of
such Board, Executive was guilty of conduct set forth in any of clauses (i)
through (iv) above and specifying the particulars thereof.

-6-
<PAGE>

7. RIGHT OF OFFSET. The Company may offset the amounts of any
outstanding loans, advances or other disbursements made to or on behalf of the
Executive by the Company against any amounts the Company owes Executive
hereunder for severance pay, Base Salary, bonuses, benefits or other items of
compensation hereunder.

8. NOTICES. All notices or communications hereunder shall be in writing,
addressed as follows:

IF TO THE COMPANY:

Capital Lease Funding, Inc.
85 John Street, 12th Floor
New York, New York 10038
Attention: Paul H. McDowell, Esq.

WITH A COPY TO:

Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: W. Christopher White, Esq.

IF TO EXECUTIVE:

[Address]

or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
such notice or communication shall be sent certified or registered mail, return
receipt requested, postage prepaid, addressed as above (or to such other address
as such party may designate in a notice duly delivered as described above), and
the actual date of receipt, as shown by the receipt therefor, shall constitute
the time at which notice was given.

9. SEPARABILITY. If any provision of this Agreement shall be declared to
be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.

10. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the estate and representatives of Executive and the assigns and
successors of the

-7-
<PAGE>

Company, but neither this Agreement nor any rights hereunder shall be assignable
or otherwise subject to hypothecation by Executive.

11. AMENDMENT. This Agreement may only be amended by written agreement of
the parties hereto.

12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION; NON-COMPETITION.

(a) Executive acknowledges that, as a consequence of his employment and
position with the Company, Executive will have access to and become acquainted
with confidential information of the Company, its affiliates and customers.
During the term of this Agreement and at all times thereafter, Executive shall
not, without the prior written consent of the Company, use, divulge, disclose or
make accessible to any other person, firm, partnership, corporation or other
entity any Confidential Information pertaining to the business of the Company or
any of its affiliates, except while employed by the Company, in the business of
and solely for the benefit of the Company. For purposes of this Section 12(a),
"Confidential Information" shall mean non-public information including, but not
limited to, trade secrets, designs, financial structures, financial data,
strategic business plans, product development (or other proprietary product
data), customer lists, information relating to suppliers and methods of
production, sales and marketing information and plans, and other technical,
creative and proprietary and confidential information of the Company, its
affiliates or its customers.

(b) Executive agrees that, without the prior written consent of the
Company, (A) during the period of his employment hereunder and for one year
thereafter, he shall not, directly or indirectly, either as principal, manager,
agent, consultant, officer, stockholder, partner, investor, lender or employee
or in any other capacity, carry on, be engaged in or have any financial interest
in, any business which is now or during his employment in competition with the
business of the Company and/or its affiliates, or any business which the Company
and/or its affiliates has taken substantial steps to commence, (B) during the
period of his employment hereunder and for six months thereafter, he shall not,
on his own behalf or on behalf of any person, firm or company, directly or
indirectly, have any dealings or contact with any correspondents, borrowers or
suppliers of the Company or (C) during the period of his employment hereunder
and for two years thereafter, he shall not, on his own behalf or on

-8-
<PAGE>

behalf of any person, firm or company, directly or indirectly, solicit or offer
employment to any person who has been employed by the Company or any of its
affiliates at any time during the six months immediately preceding such
solicitation.

(c) Executive and the Company agree that this covenant not to compete is a
reasonable covenant under the circumstances, and further agree that if in the
opinion of any court of competent jurisdiction such restraint is not reasonable
in any respect, such court shall have the right, power and authority to excise
or modify such provision or provisions of this covenant as to the court shall
appear not reasonable and to enforce the remainder of the covenant as so
amended. Executive agrees that any breach of the covenants contained in this
Section 12 would irreparably injure the Company. Accordingly, Executive agrees
that the Company may, in addition to pursuing any other remedies it may have in
law or in equity, obtain an injunction against Executive from any court having
jurisdiction over the matter, restraining any further violation of this
Agreement by Executive.

13. BENEFICIARIES; REFERENCES. Executive shall be entitled to select (and
change, to the extent permitted under any applicable law) a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Executive's death, and may change such election, in either case by giving the
Company written notice thereof. In the event of Executive's death or a judicial
determination of his incompetence, reference in this Agreement to Executive
shall be deemed, where appropriate, to refer to his beneficiary, estate or other
legal representative. Any reference to the masculine gender in this Agreement
shall include, where appropriate, the feminine.

14. SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations. The
provisions of this Section 14 are in addition to the survivorship provisions of
any other section of this Agreement.

15. GOVERNING LAW. This Agreement shall be construed, interpreted and
governed in accordance with the laws of the State of New York, without reference
to rules relating to conflicts of law.

-9-
<PAGE>

16. EFFECT ON PRIOR AGREEMENTS. This Agreement contains the entire
understanding between the parties hereto and supersedes in all respects any
prior or other agreement or understanding between the Company or any affiliate
of the Company and Executive.

17. WITHHOLDING. The Company shall be entitled to withhold from payment
any amount of withholding required by law.

18. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original.

[SIGNATURE PAGE FOLLOWS]

-10-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.

CAPITAL LEASE FUNDING, INC.

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

-------------------------------
William R. Pollert

-11-

<PAGE>
Exhibit 10.8

EMPLOYMENT AGREEMENT

THIS AGREEMENT ("Agreement"), dated as of ________, 1998, is by and between
CAPITAL LEASE FUNDING, INC., a Maryland corporation (the "Company"), and [Name
of Executive] ("Executive").

RECITALS

Executive desires to accept such employment and perform services for the
Company on the terms and conditions set forth in this Agreement.

It is therefore hereby agreed by and between the parties as follows:

AGREEMENT
1. EMPLOYMENT.

1.1 Subject to the terms and conditions of this Agreement, the Company
agrees to employ Executive during the term hereof as [Title] of the Company, and
Executive hereby agrees to serve as [Title] of the Company. In his capacity as
a senior executive officer of the Company, Executive shall have the customary
powers, responsibilities and authorities of a senior executive officer of the
Company, as they exist from time to time.

1.2 During the term of this Agreement, Executive agrees to devote
substantially his full working time and efforts, to the best of his ability,
experience and talent, to the performance of services, duties and
responsibilities in connection therewith. Executive shall perform such duties
and exercise such powers as a senior executive officer of the Company as the
Board shall from time to time delegate to him on such terms and conditions and
subject to such restrictions as the Board may from time to time impose. Nothing
in this Agreement shall preclude Executive from engaging, so long as, in the
reasonable

<PAGE>

determination of the Board, such activities do not interfere with his duties and
responsibilities hereunder, in charitable and community affairs, or from
serving, subject to the prior approval of the Board, as an employee, officer or
member of boards of directors or as a trustee of any other company, association
or entity.

3. COMPENSATION.

-2-
<PAGE>

4. EMPLOYEE BENEFITS.

4.1 EMPLOYEE BENEFIT PROGRAMS, PLANS AND PRACTICES.

4.2 VACATION AND FRINGE BENEFITS. Executive shall be entitled to no less
than 20 business days paid vacation in each year. In addition, Executive shall
be entitled to the perquisites and other fringe benefits made available to other
comparable senior executives of the Company, commensurate with his position with
the Company.

-3-
<PAGE>

time of appropriately itemized and approved (consistent with the Company's
policy) accounts of such expenditures.

6. TERMINATION OF EMPLOYMENT.

-4-
<PAGE>

Section 3.2, which amount shall be payable in equal monthly installments
commencing on the first day of the month following such termination until the
Termination Date.

(c) For purposes of this Agreement, "Good Reason" shall mean any of the
following (without Executive's express prior written consent):

(ii) A relocation of Executive's place of employment to a location
outside of the New York City metropolitan area; or

-5-
<PAGE>

6.3 VOLUNTARY TERMINATION BY EXECUTIVE; DISCHARGE FOR CAUSE. The Company
shall have the right to terminate the employment of Executive for Cause, as
hereinafter defined. In the event that Executive's employment is terminated by
the Company for Cause, or by Executive (other than for Good Reason), prior to
the Termination Date, the Company shall only be obligated to pay Executive such
portion of his Base Salary payable to him up to the date of termination and such
portion of any bonus compensation accrued by Executive pursuant to Section 3.2
prior to the time of termination, and all other obligations of the Company under
this Agreement to make any further payments, or provide any benefits specified
herein, to Executive shall thereupon cease and terminate. As used herein, the
term "Cause" shall be limited to (i) willful action by Executive involving
malfeasance or misconduct in connection with his employment, (ii) continuing
refusal by Executive to perform his duties hereunder or any lawful direction of
the Board, (iii) any breach of the provisions of Section 12 of this Agreement by
Executive or any other material breach of this Agreement by Executive, (iv)
excessive abuse of alcohol or of any controlled substance by Executive, (v)
excessive absenteeism not relating to illness or (vi) Executive being convicted
of (a) any felony or (b) a misdemeanor involving moral turpitude. Termination
of Executive pursuant to this Section 6.3 shall be made by delivery to Executive
of a copy of a resolution duly adopted by the affirmative vote of not less than
a majority of the directors at a meeting of the Board called and held for the
purpose (after reasonable notice and opportunity for Executive to be heard

-6-
<PAGE>

before the Board prior to such vote), finding that in the judgment of such
Board, Executive was guilty of conduct set forth in any of clauses (i) through
(iv) above and specifying the particulars thereof.

8. NOTICES. All notices or communications hereunder shall be in writing,
addressed as follows:

IF TO THE COMPANY:

Capital Lease Funding, Inc.
85 John Street, 12th Floor
New York, New York 10038
Attention: Paul H. McDowell, Esq.

WITH A COPY TO:

Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: W. Christopher White, Esq.

IF TO EXECUTIVE:

[Address]

-7-
<PAGE>

10. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the estate and representatives of Executive and the assigns and
successors of the Company, but neither this Agreement nor any rights hereunder
shall be assignable or otherwise subject to hypothecation by Executive.

11. AMENDMENT. This Agreement may only be amended by written agreement of
the parties hereto.

12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION; NON-COMPETITION.

-8-
<PAGE>

any financial interest in, any business which is now or during his employment in
competition with the business of the Company and/or its affiliates, or any
business which the Company and/or its affiliates has taken substantial steps to
commence, (B) during the period of his employment hereunder and for six months
thereafter, he shall not, on his own behalf or on behalf of any person, firm or
company, directly or indirectly, have any dealings or contact with any
correspondents, borrowers or suppliers of the Company or (C) during the period
of his employment hereunder and for two years thereafter, he shall not, on his
own behalf or on behalf of any person, firm or company, directly or indirectly,
solicit or offer employment to any person who has been employed by the Company
or any of its affiliates at any time during the six months immediately preceding
such solicitation.

-9-
<PAGE>

or other legal representative. Any reference to the masculine gender in this
Agreement shall include, where appropriate, the feminine.

15. GOVERNING LAW. This Agreement shall be construed, interpreted and
governed in accordance with the laws of the State of New York, without reference
to rules relating to conflicts of law.

17. WITHHOLDING. The Company shall be entitled to withhold from payment
any amount of withholding required by law.

18. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original.

[SIGNATURE PAGE FOLLOWS]

-10-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.

CAPITAL LEASE FUNDING, INC.

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

---------------------------------
[Executive]

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<PAGE>

Exhibit 10.9

================================================================================

CAPITAL LEASE FUNDING, L.P.,
OWNER
MIDLAND LOAN SERVICES, L.P.,
SERVICER

LASALLE NATIONAL BANK,
CUSTODIAN

and

ABN AMRO BANK N.V.,
FISCAL AGENT

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

AMENDED AND RESTATED
INTERIM SERVICING AGREEMENT

Dated as of July 19, 1996

================================================================================

<PAGE>

TABLE OF CONTENTS
PAGE

ARTICLE I DEFINITIONS
SECTION 1.01. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 1.02. Certain Calculations. . . . . . . . . . . . . . . . . . . . .18

ARTICLE II OWNER'S ENGAGEMENT OF SERVICER TO PERFORM
SERVICING RESPONSIBILITIES

SECTION 2.01. Possession of Servicer Mortgage Files . . . . . . . . . . . .19
SECTION 2.02. Books and Records . . . . . . . . . . . . . . . . . . . . . .19
SECTION 2.03. Commencement of Servicing Responsibilities. . . . . . . . . .20
SECTION 2.04. Custody Agreement . . . . . . . . . . . . . . . . . . . . . .20
SECTION 2.05. Representations, Warranties and Covenants of the Servicer . .20

ARTICLE III ADMINISTRATION AND SERVICING OF THE MORTGAGE LOANS

SECTION 3.01. Servicer to Act as Servicer; Administration of the
Mortgage Loans. . . . . . . . . . . . . . . . . . . . . . . .23
SECTION 3.02. Liability of the Servicer . . . . . . . . . . . . . . . . . .25
SECTION 3.03. Collection of Certain Mortgage Loan Payments. . . . . . . . .26
SECTION 3.04. Collection of Taxes, Assessments, Insurance Payments
and Similar Items . . . . . . . . . . . . . . . . . . . . . .26
SECTION 3.05. Rent Escrow Account; Collection Account . . . . . . . . . . .28
SECTION 3.06. Permitted Withdrawals from the Collection Account . . . . . .30
SECTION 3.07. Investment of Funds in the Collection Account and the
Reserve Accounts. . . . . . . . . . . . . . . . . . . . . . .32
SECTION 3.08. Maintenance of Insurance Policies and Errors and
Omissions and Fidelity Coverage . . . . . . . . . . . . . . .34
SECTION 3.09. Enforcement of Due-On-Sale Clauses; Assumption Agreements . .37
SECTION 3.10. Realization Upon Mortgage Loans . . . . . . . . . . . . . . .38
SECTION 3.11. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . .41
SECTION 3.12. Servicing Compensation. . . . . . . . . . . . . . . . . . . .41
SECTION 3.13. Reports to the Owner; Collection Account Statements . . . . .43
SECTION 3.14. Annual Statement as to Compliance . . . . . . . . . . . . . .43
SECTION 3.15. Annual Independent Public Accountants' Servicing Report . . .44
SECTION 3.16. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . .44
SECTION 3.17. Title and Management of REO Properties. . . . . . . . . . . .44
SECTION 3.18. Sale of Specially Serviced Mortgage Loans
and REO Properties. . . . . . . . . . . . . . . . . . . . . .46

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SECTION 3.19. Additional Obligations of the Servicer; Inspections . . . . .46
SECTION 3.20. Available Information and Notices . . . . . . . . . . . . . .46
SECTION 3.21. Reserve Accounts; Maintenance Reserve Account;
Performance of Borrower's Lease Obligations . . . . . . . . .48
SECTION 3.22. Property Advances . . . . . . . . . . . . . . . . . . . . . .49
SECTION 3.23. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . .50
SECTION 3.24. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . .50
SECTION 3.25. Maintenance of Lease Enhancement Insurance Policies . . . . .50
SECTION 3.26. Confidentiality . . . . . . . . . . . . . . . . . . . . . . .51

ARTICLE IV REMITTANCE TO THE OWNER

SECTION 4.01. Remittances . . . . . . . . . . . . . . . . . . . . . . . . .53
SECTION 4.02. Nonrecoverable Advances . . . . . . . . . . . . . . . . . . .53

ARTICLE V THE OWNER AND THE SERVICER

SECTION 5.01. Liability of the Owner and the Servicer . . . . . . . . . . .55
SECTION 5.02. Merger or Consolidation of the Servicer . . . . . . . . . . .55
SECTION 5.03. Limitation on Liability of the Servicer and Others. . . . . .55
SECTION 5.04. Limitation on Resignation of the Servicer . . . . . . . . . .56
SECTION 5.05. Rights of the Owner in Respect of the Servicer. . . . . . . .57

ARTICLE VI DEFAULT AND SERVICING TRANSFER

SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . .58
SECTION 6.02. Custodian to Act; Appointment of Successor. . . . . . . . . .60
SECTION 6.03. Other Remedies of Owner . . . . . . . . . . . . . . . . . . .61
SECTION 6.04. Waiver of Past Events of Default; Termination . . . . . . . .61

ARTICLE VII CONCERNING THE CUSTODIAN

SECTION 7.01. Possession of Custodian Mortgage File; Duties of Custodian. .63
SECTION 7.02. Certain Matters Affecting the Custodian . . . . . . . . . . .64
SECTION 7.03. Custodian and Fiscal Agent Not Liable for Mortgage Loans. . .65
SECTION 7.04. Payment of Custodian's Fees and Expenses; Indemnification . .66
SECTION 7.05. Eligibility Requirements for Custodian. . . . . . . . . . . .68
SECTION 7.06. Resignation and Removal of the Custodian; Removal
of the Fiscal Agent . . . . . . . . . . . . . . . . . . . . .68
SECTION 7.07. Successor Custodian and Fiscal Agent. . . . . . . . . . . . .69
SECTION 7.08. Merger or Consolidation of Custodian and of the
Fiscal Agent. . . . . . . . . . . . . . . . . . . . . . . . .70
SECTION 7.09. Fiscal Agent Appointed; Concerning the Fiscal Agent . . . . .70

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ARTICLE VIII WHOLE LOAN TRANSFER; PASS-THROUGH TRANSFER;
RIGHTS OF NATIONSBANK

SECTION 8.01. Removal of Mortgage Loans from Inclusion Under
this Agreement Upon a Pass-Through Transfer or a
Whole Loan Transfer on One or More Reconstitution
Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
SECTION 8.02. Rights of NationsBank . . . . . . . . . . . . . . . . . . . .74
SECTION 8.03. Further Assurances. . . . . . . . . . . . . . . . . . . . . .75

ARTICLE IX MISCELLANEOUS PROVISIONS

SECTION 9.01. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . .76
SECTION 9.02. Governing Law . . . . . . . . . . . . . . . . . . . . . . . .76
SECTION 9.03. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . .76
SECTION 9.04. Severability of Provisions. . . . . . . . . . . . . . . . . .77
SECTION 9.05. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . .77

EXHIBITS

Exhibit A Mortgage Loan Schedule
Exhibit B Form of Acknowledgment Agreement
Exhibit C Form of Lease Enhancement Insurance Policy

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Amended and Restated Interim Servicing Agreement, dated as of July 19,
1996, among Capital Lease Funding, L.P., as Owner, Midland Loan Services, L.P.,
as Servicer, LaSalle National Bank, as Custodian and ABN AMRO Bank N.V., as
Fiscal Agent.

PRELIMINARY STATEMENT

WHEREAS, the parties hereto intend to amend and restate in its entirety the
Interim Servicing Agreement, dated as of November 1, 1995, among Capital Lease
Funding, L.P., as Owner, Midland Loan Services, L.P., as Servicer, LaSalle
National Bank, as Custodian, and ABN AMRO Bank N.V., as Fiscal Agent; and

WHEREAS, the Owner desires to engage the Servicer, and the Servicer desires
to accept the Owner's engagement, to service certain of the Mortgage Loans that
the Owner originates or acquires from time to time in accordance with the
provisions of this Agreement; and

WHEREAS, the Owner desires to engage the Custodian and the Fiscal Agent,
and the Custodian and Fiscal Agent desire to accept the Owner's engagement, to
act as custodian pursuant to the Custody Agreement as backup servicer and backup
advancing party hereunder to the Servicer (in the case of the Custodian) and
backup advancing party to the Custodian (in the case of the Fiscal Agent) with
respect to certain Mortgage Loans which the Owner originates or acquires from
time to time in accordance with the provisions of this Agreement; and

WHEREAS, the Owner intends upon origination, or other acquisition of any
Mortgage Loan to transfer ownership of such Mortgage Loan to NationsBank, N.A.
("NationsBank") subject to repurchase by the Owner pursuant to the terms of that
certain Repurchase Agreement Governing Purchases and Sales of Mortgage Loans
(the "Master Repurchase Agreement") dated July 19, 1996 between the Owner and
NationsBank; and

WHEREAS, the Servicer is an independent contractor in the business of
servicing mortgage loans, and is not an Affiliate of the Owner; and

WHEREAS, the Owner, the Custodian and the Servicer shall execute an
Acknowledgment Agreement, a form of which is attached hereto as Exhibit B, with
respect to each Mortgage Loan, or group or portfolio of Mortgage Loans, to be
serviced hereunder which shall describe such Mortgage Loan or Mortgage Loans and
shall set forth additional rights and obligations, if any, of the Servicer or
Custodian with respect to the Mortgage Loan or Mortgage Loans described therein;
and

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WHEREAS, this Agreement shall become effective with respect to each
Mortgage Loan, or group or portfolio of Mortgage Loans, upon the execution of an
Acknowledgment Agreement relating thereto by the Owner, the Custodian and the
Servicer and the delivery by the Owner to the Servicer of the Servicer Mortgage
File and the delivery by the Owner to the Custodian of the Custodian Mortgage
File with respect to the Mortgage Loans described in each such Acknowledgment
Agreement;

NOW THEREFORE, in consideration of the recitals in this Preliminary
Statement which are made a contractual part hereof, and of the mutual promises
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

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ARTICLE I

DEFINITIONS

SECTION 1.01. DEFINED TERMS

Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the meanings specified in this
Article.

"ACKNOWLEDGMENT AGREEMENT": The document to be executed by the Owner,
Custodian and the Servicer as of each Transfer Date, substantially in the form
of EXHIBIT B to this Agreement, which document shall amend the Mortgage Loan
Schedule to reflect the addition of a Mortgage Loan, or group or portfolio of
Mortgage Loans (as described in such document), to such schedule and which sets
forth such other relevant terms and conditions with respect to such Mortgage
Loans. To the extent that there is any inconsistency between the provisions of
this Agreement and any Acknowledgment Agreement, the provisions of such
Acknowledgment Agreement shall govern and control with respect to the Mortgage
Loans described therein.

"AFFILIATE": With respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.

"AGREEMENT": This Amended and Restated Interim Servicing Agreement and all
amendments hereof and supplements hereto.

"APPLICABLE RATING AGENCY": With respect to a particular Mortgage Loan,
any Rating Agency which is issuing a rating at origination of the Mortgage Loan
with respect to the status of the Lease underlying such Mortgage Loan as a
"bond" quality lease.

"ASSIGNMENT OF MORTGAGE": An assignment of mortgage without recourse,
notice of transfer or equivalent instrument, in recordable form, which is
sufficient under the laws of the jurisdiction in which the related Mortgaged
Property is located to reflect of record the sale of the Mortgage, which
assignment, notice of transfer or equivalent instrument may be in the form of
one or more blanket assignments covering Mortgages encumbering Mortgaged
Properties located in the same jurisdiction, if permitted by law and acceptable
for recording; PROVIDED, HOWEVER, that none of the Custodian, the Fiscal Agent
and the Servicer shall be responsible for determining whether any such
assignment is legally sufficient or in recordable form.

"BASIC RENT": With respect to any Lease, the amount paid by the Lessee
equal to net rentals in monthly installments in an amount at least equal to the
Monthly Payment then

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due on the related Mortgage Loan and as otherwise provided under the terms of
the related Lease.

"BORROWER": With respect to each Mortgage Loan, any obligor on any related
Note.

"BORROWER LEASE OBLIGATION": All covenants, conditions and agreements in a
Lease required to be paid, performed or observed by the related Borrower, as
landlord under such Lease, including, without limitation, (i) maintenance,
repair and restoration obligations with respect to the Mortgaged Property, (ii)
obligations to maintain insurance, (iii) payments and/or contributions required
to be made by landlord with respect to the Mortgaged Property or pursuant to any
reciprocal easement, operating or similar agreement, (iv) the enforcement of
restrictions with respect to the use of any property adjacent to or within a
specified area of the Mortgaged Property, and (v) the enforcement of the
provisions of any reciprocal easement, operating or similar agreement.

"BUSINESS DAY": Any day other than a Saturday, a Sunday or a day on which
banking institutions in the States of Illinois, Missouri or New York are
authorized or obligated by law, executive order or governmental decree to be
closed.

"CLF": As defined in Section 8.02.

"CLOSING DATE": July 19, 1996.

"CODE": The Internal Revenue Code of 1986, as amended from time to time,
any successor statute thereto, and any temporary or final regulations of the
United States Department of the Treasury promulgated pursuant thereto.

"COLLECTION ACCOUNT": The segregated account or accounts created and
maintained by the Servicer pursuant to Section 3.05(b).

"COLLECTION PERIOD": With respect to any Remittance Date, the period
beginning on the day immediately succeeding the Determination Date in the month
preceding the month in which such Remittance Date occurs and ending on the
Determination Date in the month in which such Remittance Date occurs.

"CONDEMNATION PROCEEDS": Any amount (other than Insurance Proceeds)
received by the Servicer in connection with the taking of any Mortgaged Property
by exercise of the power of eminent domain or condemnation.

"CORPORATE TRUST OFFICE": The principal office of the Custodian located at
135 South LaSalle Street, Suite 1740, Chicago, Illinois 60674-4107, Attention:
Asset Backed Securities Trust Services Group, or the principal trust office of
any successor custodian qualified and appointed pursuant to Section 7.07.

"CUSTODIAN": LaSalle National Bank, its permitted successors and assigns.

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"CUSTODIAN FEE": With respect to each Mortgage Loan and for any Remittance
Date, an amount per calendar month equal to the product of (i) one-twelfth of
the Custodian Fee Rate multiplied by (ii) the Scheduled Principal Balance of
such Mortgage Loan as of the Due Date in the month preceding the month in which
such Remittance Date occurs; PROVIDED, HOWEVER, that with respect to any
Mortgage Loan the Custodian shall only be entitled to a pro rata portion based
on the number of days of the Custodian Fee for any month in which custody of
such Mortgage Loan Documents commences or terminates pursuant to the Custody
Agreement, as applicable.

"CUSTODIAN FEE RATE": A rate equal to .015% per annum.

"CUSTODIAN MORTGAGE FILE": With respect to any Mortgage Loan, the
documents included in the Mortgage File (as defined in the Custody Agreement).

"CUSTODY AGREEMENT": With respect to any Mortgage Loan, the Custody
Agreement, if any, in effect from time to time between the Custodian, the Owner
(as seller or borrower), and NationsBank (as buyer or lender) relating to all or
any of the Mortgage Loans.

"DEFAULT INTEREST": With respect to any Mortgage Loan, interest accrued on
such Mortgage Loan in excess of interest at the Mortgage Rate on the outstanding
principal balance of the Mortgage Loan.

"DETERMINATION DATE": With respect to each Remittance Date, the 15th day
of the month in which such Remittance Date occurs, or if such 15th day is not a
Business Day, the Business Day immediately following such 15th day.

"DEFAULT NOTICE": As defined in Section 8.02.

"DISPOSITION FEE": With respect to any Specially Serviced Mortgage Loan or
REO Property which is sold or transferred or otherwise liquidated by the
Servicer at the request of the Owner pursuant to Section 3.18, an amount equal
to the product of (I) the excess, if any, of (a) the Liquidation Proceeds of
such Specially Serviced Mortgage Loan or REO Property, over (b) any broker's
commission and related brokerage referral fees, times (II) 1.0%.

"DUE DATE": With respect to any Collection Period and any Mortgage Loan,
the date during such Collection Period on which scheduled payments are due on
the related Note, being in each case (except as otherwise specified in the
Acknowledgment Agreement) the 15th day of the month.

"ELIGIBLE ACCOUNT": With respect to funds related to any Mortgage Loan,
either (i) an account or accounts maintained with a depository institution or
trust company, the long term unsecured debt obligations of which are assigned a
rating of "AA" (or its equivalent) or higher by each Applicable Rating Agency
(or if not so rated by any such Applicable Rating Agency such account to be
approved, in writing, by any such Applicable

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Rating Agency) or (ii) a segregated trust account or accounts maintained with a
federally or state-chartered depository institution or trust company acting in
its fiduciary capacity, having, in either case, a combined capital and surplus
of at least $50,000,000 and subject to supervision or examination by federal or
state authority, or otherwise confirmed in writing by each Applicable Rating
Agency. Eligible Accounts may bear interest.

"ENVIRONMENTAL CONSULTANT": As defined in Section 3.10(f).

"ESCROW ACCOUNT": As defined in Section 3.04(b).

"ESCROW PAYMENT": Any payment made by or on behalf of any Borrower to the
Servicer for the account of such Borrower for application toward the payment of
taxes, insurance premiums, assessments, ground rents, and similar items in
respect of the related Mortgaged Property.

"EVENT OF DEFAULT": As defined in Section 6.01.

"EXCESS BALANCE": The excess of funds held in the Rent Escrow Account
(following any required transfers therefrom on a Rent Escrow Transfer Date as
provided in Section 3.05(a)), excluding any amounts representing payments due on
a future date.

"FDIC": The Federal Deposit Insurance Corporation, or any successor
thereto.

"FHLMC": The Federal Home Loan Mortgage Corporation, or any successor
thereto.

"FISCAL AGENT": ABN AMRO Bank N.V., in its capacity as fiscal agent of the
Custodian, or its successors in interest, or any successor fiscal agent
appointed as herein provided.

"FNMA": The Federal National Mortgage Association, or any successor
thereto.

"HAZARDOUS MATERIALS": Any dangerous, toxic or hazardous pollutants,
chemicals, wastes, or substances, including, without limitation, those so
identified pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act, 42 U.S.C. Section 9601 et seq., or any other environmental
laws now existing, and specifically including, without limitation, asbestos and
asbestos-containing materials, polychlorinated biphenyls, radon gas, petroleum
and petroleum products, urea formaldehyde and any substances classified as being
"in inventory", "usable work in process" or similar classification which would,
if classified as unusable, be included in the foregoing definition.

"INDEMNIFIED PARTY": As defined in Section 7.04(c).

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"INDEPENDENT": When used with respect to any specified Person, any other
Person who (i) does not have any direct financial interest, or any material
indirect financial interest, in any of the Manager, the Servicer, the Owner, any
Borrower, any Lessee or any Affiliate thereof, and (ii) is not connected with
any such specified Person as an officer, employee, promoter, underwriter,
trustee, partner, director or Person performing similar functions.

"INSURANCE PROCEEDS": Proceeds of any Lease Enhancement Insurance Policies
or of any fire and hazard insurance policy, title policy or other insurance
policy relating to a Mortgage Loan and/or the Mortgaged Property securing any
Mortgage Loan (including any amounts paid by the Servicer pursuant to Section
3.08), to the extent such proceeds are not to be applied to the restoration of
the related Mortgaged Property or released to the Borrower in accordance with
the express requirements of the related Mortgage or other documents included in
the related Custodian Mortgage File or in accordance with the Servicing
Standard.

"INVESTMENT ACCOUNT": As defined in Section 3.07(a).

"IRS": The Internal Revenue Service or any successor agency.

"LEASE": With respect to each Mortgaged Property, the lease between the
Borrower and the lessee thereunder with respect to such Mortgaged Property.

"LEASE DEFAULT": A default or breach of an obligation by the Lessee under
a Lease, after the expiration of any applicable grace period set forth in the
Lease.

"LEASE ENHANCEMENT INSURANCE POLICIES": The Lease Enhancement Insurance
Policies issued with respect to certain of the Mortgaged Properties by American
International Group, Inc., or an Affiliate thereof rated "AAA" (or its
equivalent rating) by a Rating Agency, naming the Borrower and the Owner as loss
payee and providing, with respect to such Mortgaged Property and in the event of
certain casualty or condemnation events, for payment in respect of such Mortgage
Loan. A form of a Lease Enhancement Insurance Policy is attached hereto as
Exhibit C.

"LEASE TERMINATION CONDITION": As defined in Section 3.21(c).

"LESSEE": The lessee with respect to any Lease.

"LESSEE RENTAL PAYMENT" Any payment of rent under the related Lease by or
on behalf of the Lessee with respect to any Mortgaged Property made to the
Servicer for the account of the related Borrower or required under the Mortgage
Loan Documents.

"LIQUIDATION EXPENSES": Expenses incurred by the Servicer in connection
with the liquidation of any Specially Serviced Mortgage Loan or any REO Property
(including, without limitation, legal fees and expenses, committee or referee
fees and, if applicable, brokerage commissions and conveyance taxes) and any
Property Protection Expenses incurred

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by the Servicer with respect to such Specially Serviced Mortgage Loan or such
property not previously reimbursed from collections or other proceeds therefrom.

"LIQUIDATION PROCEEDS": The amount received in connection with (i) the
liquidation of a Specially Serviced Mortgage Loan through a trustee's sale,
foreclosure sale or otherwise (but not including Insurance Proceeds or
Condemnation Proceeds) or (ii) a sale of a Specially Serviced Mortgage Loan or
an REO Property by or on behalf of the Owner, including without limitation by
the Servicer, in accordance with Section 3.18.

"MAI": Member of the Appraisal Institute.

"MAINTENANCE DEPOSIT AMOUNT": With respect to each Mortgage Loan, the
amount required to be reserved on a monthly basis (except for any initial
deposits made at the closing of such Mortgage Loan) for certain Borrower Lease
Obligations with respect to the related Mortgaged Property which amount will be
indicated on the Acknowledgment Agreement relating to such Mortgage Loan.

"MAINTENANCE RESERVE ACCOUNT": As defined in Section 3.21(b).

"MAINTENANCE RESERVE AGREEMENT": The Maintenance Reserve Agreement
executed by the Borrower and setting forth the terms and amounts required to be
reserved for maintenance of the Mortgaged Property with respect to a particular
Mortgage Loan.

"MANAGER": Any property manager or Person fulfilling a similar function
with respect to any of the Mortgaged Properties.

"MATURITY DATE": With respect to each Mortgage Loan, the maturity date as
set forth in the related Mortgage Loan Documents.

"MONTHLY PAYMENT": With respect to any Mortgage Loan (other than any REO
Mortgage Loan) and any Due Date, the scheduled monthly payment of principal and
interest on such Mortgage Loan which is payable by the related Borrower on such
Due Date under the related Note (after giving effect to any extension or
modification permitted thereunder). With respect to any REO Mortgage Loan, the
monthly payment which would otherwise have been payable on such Due Date had the
related Note not been discharged (after giving effect to any extension or other
modification), determined as set forth in the preceding sentence and on the
assumption that all other amounts, if any, due thereunder are paid when due.

"MORTGAGE": The mortgage, deed of trust, deed to secure debt, security
agreement or other instrument securing a Note, as the same may have been
modified, assigned or consolidated.

"MORTGAGE LOAN": Each of the mortgage loans from time to time subject to
this Agreement and which are described in an Acknowledgment Agreement. Such
term shall include any REO Mortgage Loan.

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"MORTGAGE LOAN DOCUMENTS": Any and all documents relating to a Mortgage
Loan which are required to be maintained by either the Custodian or the Servicer
pursuant to this Agreement.

"MORTGAGE LOAN SCHEDULE": The list of Mortgage Loans to be serviced
pursuant to this Agreement as of the Closing Date and which list shall be
updated with respect to the related Mortgage Loans upon the execution and
delivery of any Acknowledgment Agreements or upon the termination of the
Servicer's servicing obligations upon a Pass-Through Transfer, a Whole Loan
Transfer or upon any other such termination.

"MORTGAGE RATE": With respect to each Mortgage Loan, the per annum rate at
which interest accrues on such Mortgage Loan (in the absence of a default), as
set forth in the related Mortgage Loan Documents.

"MORTGAGED PROPERTY": The underlying property securing a Mortgage Loan,
including any REO Property, consisting of a fee simple or leasehold estate in a
parcel of land improved by a commercial property, together with any personal
property, fixtures, leases and other property or rights pertaining thereto.

"NET LIQUIDATION PROCEEDS": The excess of Liquidation Proceeds received
with respect to any Mortgage Loan over the amount of Liquidation Expenses
incurred with respect thereto.

"NET MORTGAGE RATE": With respect to any Mortgage Loan, the Mortgage Rate
for such Mortgage Loan minus the Servicing Fee Rate and the Custodian Fee Rate.

"NET REO PROCEEDS": With respect to each REO Property, REO Proceeds with
respect to such REO Property net of any insurance premiums, taxes, assessments
and other costs and expenses permitted to be paid therefrom pursuant to Section
3.17(b).

"NONRECOVERABLE ADVANCE": Any portion of a Property Advance proposed to be
made or previously made (including accrued and unpaid interest at the Property
Advance Rate compounded monthly in the event of a Property Advance previously
made) which has not been previously reimbursed to the Servicer, the Custodian or
the Fiscal Agent, as applicable, and which the Servicer (or, if applicable, the
Custodian or the Fiscal Agent) has determined to be nonrecoverable in accordance
with Section 4.02.

"NOTE": With respect to any Mortgage Loan as of any date of determination,
the note or other evidence of indebtedness and/or agreement evidencing the
indebtedness of the related Borrower under such Mortgage Loan, including any
amendments or modifications, or any renewal or substitution notes, as of such
date.

"OFFICERS' CERTIFICATE": A certificate signed by the Chairman of the
Board, the Vice Chairman of the Board, the President or a Vice President
(however denominated) and by the Treasurer, the Secretary, one of the Assistant
Treasurers or Assistant Secretaries, any

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Trust Officer or any other officer of the general partner of the Servicer
customarily performing functions similar to those performed by any of the above
designated officers, or with respect to a particular matter, any other officer
to whom such matter is referred because of such officer's knowledge of and
familiarity with the particular subject.

"OPINION OF COUNSEL": A written opinion of counsel reasonably acceptable
to the Owner.

"OWNER": Capital Lease Funding, L.P., a Delaware limited partnership, and
its permitted successors and assigns.

"PASS-THROUGH TRANSFER": The sale or transfer of some or all of the
Mortgage Loans to a trust to be formed as part of a publicly or privately
traded, rated or unrated mortgage pass-through transaction.

"PERMITTED INVESTMENTS": With respect to funds relating to any Mortgage
Loan, any one or more of the following obligations or securities payable on
demand or having a scheduled maturity on or before the Business Day preceding
the date on which such funds are required to be drawn, regardless of whether
issued by the Owner, the Servicer, the Custodian or any of their respective
Affiliates, and having at all times the required ratings, if any, provided for
in this definition (provided that no Permitted Investment, if downgraded, shall
be required to be sold at a loss):

(i) direct obligations of, or guaranteed as to full and timely payment of
principal and interest by, the United States or any agency or
instrumentality thereof, provided that such obligations are backed by
the full faith and credit of the United States of America;

(ii) direct obligations of, or guaranteed as to timely payment of principal
and interest by, FHLMC, FNMA or the Federal Farm Credit System,
provided that any such obligation is qualified by each Applicable
Rating Agency as an investment of funds backing securities having a
long-term debt rating that is not lower than "AA" (or the equivalent
rating);

(iii) demand and time deposits in, or demand notes of, or certificates of
deposit of, or bankers' acceptances issued by, any bank or trust
company, savings and loan association or savings bank, provided that,
in the case of obligations that are not fully FDIC-insured deposits,
the commercial paper and/or long-term unsecured debt obligations of
such depository institution or trust company (or in the case of the
principal depository institution in a holding company system, the
commercial paper or long-term unsecured debt obligations of such
holding company) have, in the case of commercial paper, a rating that
is in the highest short-term rating category of each Applicable Rating
Agency, or, in the

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case of long-term unsecured debt obligations, a rating of each
Applicable Rating Agency that is not lower than "AA" (or its
equivalent rating);

(iv) general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the highest
long-term unsecured debt ratings available for such securities by
each Applicable Rating Agency;

(v) commercial or finance company paper (including (A) both
non-interest-bearing discount obligations and interest-bearing
obligations payable on demand or on a specified date not more than
one year after the date of issuance thereof and (B) demand notes
that constitute vehicles for investment in commercial paper) that
is rated by each Applicable Rating Agency in its highest short-term
unsecured rating category, and is issued by a corporation the
outstanding senior long-term debt obligations of which are then
rated by each Applicable Rating Agency in its highest long-term
unsecured rating category;

(vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation rated in the highest long-term
unsecured rating category by each Applicable Rating Agency,
provided that any such agreement must by its terms provide that it
is terminable by the purchaser without penalty in the event any
such rating is at any time lower than such level;

(vii) repurchase obligations with respect to any security described in
clause (i) or (ii) above entered into with a depository institution
or trust company (acting as principal) meeting the rating standards
described in (iii) above;

(viii) securities (other than stripped bonds or stripped coupons) bearing
interest or sold at a discount that are issued by any corporation
incorporated under the laws of the United States of America or any
State thereof and rated by each Applicable Rating Agency in its
highest long-term unsecured rating category; PROVIDED, HOWEVER,
that securities issued by any such corporation will not be
Permitted Investments to the extent that investment therein would
cause the outstanding principal amount of securities issued by such
corporation that are then held as part of the Collection Account to
exceed 20% of the aggregate principal amount of all Permitted
Investments then held in the Collection Account;

(ix) units of taxable money market funds or mutual funds, which funds
seek to maintain a constant asset value and have been rated by each
Applicable Rating Agency, in its highest rating category or, if not
so rated by any such Applicable Rating Agency, which have been

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designated in writing by such Applicable Rating Agency as Permitted
Investments with respect to this definition;

(x) any other demand, money market or time deposit, demand obligation
or any other obligation, security or investment which is rated at
least "AA" (or its equivalent rating) by each Applicable Rating
Agency; and

(xi) any other obligation or security which has been approved in writing
by the Owner.

"PERSON": Any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, estate,
unincorporated organization or government or any agency or political subdivision
thereof.

"PREPAYMENT PREMIUM": With respect to each Mortgage Loan, the Prepayment
Consideration (as defined in the Note).

"PRIME RATE": The "Prime Rate" as published, from time to time, in the
WALL STREET JOURNAL or, if not so published, in THE NEW YORK TIMES.

"PRINCIPAL PREPAYMENT": With respect to any Mortgage Loan, any payment of
principal made by the related Borrower which is received in advance of its
scheduled Due Date and which is not accompanied by an amount of interest
representing the full amount of scheduled interest due on any date or dates in
any month or months subsequent to the month of prepayment.

"PROPERTY ADVANCE": As to any Mortgage Loan, any advance made by the
Servicer (or, if applicable, the Custodian or the Fiscal Agent) in respect of
Property Protection Expenses or any expenses incurred to protect and preserve
the security for such Mortgage Loan or taxes and assessments, insurance
premiums, or Borrower Lease Obligations pursuant to Section 3.04(a), 3.08,
3.10(c), 3.21 or Section 3.22, as applicable.

"PROPERTY ADVANCE INTEREST AMOUNT": The sum for all Mortgage Loans as to
which any Property Advance remains unreimbursed of interest compounded monthly
at the related Property Advance Rate on the amount of any Property Advances for
which the Servicer (or, if applicable, the Custodian or the Fiscal Agent), as
applicable, has not been paid or reimbursed for the number of days from the date
on which such Property Advance was made or, if interest has been previously paid
on such Property Advance, from the date through which interest was last paid,
through the date of payment or reimbursement of the related Property Advance
(which in no event shall be later than the Remittance Date following the date on
which funds are available to reimburse such Property Advance with interest
thereon at the Property Advance Rate).

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<PAGE>

"PROPERTY ADVANCE RATE": With respect to any Property Advances made by the
Servicer, the Custodian or the Fiscal Agent hereunder, an amount equal to the
Prime Rate plus 1%.

"PROPERTY PROTECTION EXPENSES": Any costs and expenses incurred pursuant
to Sections 3.10(c), 3.17(b), 3.18 and 3.21.

"QUALIFIED INSURER": An insurance company or security or bonding company
qualified to write the related insurance policy in the relevant jurisdiction,
which (i) shall have a claims paying ability of "AA" (or its equivalent rating)
or better by any Applicable Rating Agency (or if such company is not rated by
any Applicable Rating Agency, A-VIII by A.M. Best's Key Rating Guide), (ii) in
the case of public liability insurance policies required to be maintained with
respect to REO Properties in accordance with Section 3.08(a), shall have a
claims paying ability of "A" (or its equivalent rating) or better by any
Applicable Rating Agency (or if such company is not rated by any Applicable
Rating Agency, A-VIII by A.M. Best's Key Rating Guide), or (iii) in the case of
errors and omissions insurance required to be maintained pursuant to Section
3.08(c), shall have a claims paying ability rated by any Applicable Rating
Agency (or if such company is not rated by any Applicable Rating Agency, A-VIII
by A.M. Best's Key Rating Guide) no lower than "A" (or its equivalent rating),
unless in any such case, any such company has been consented to by the Owner
(which consent shall not be unreasonably withheld) or any Applicable Rating
Agency has confirmed in writing to the Servicer that such company shall not
result, in and of itself, in a downgrading, withdrawal or qualification of the
then-current rating assigned by any such Rating Agency to any of the
mortgaged-backed securities which evidence interests in any pool of mortgage
loans which is being serviced by the Servicer under a separate servicing
agreement.

"RATING AGENCY": Any one of the four major statistical rating
organizations. References herein to the highest long-term unsecured debt rating
category of each Rating Agency shall mean "AAA".

"RECONSTITUTION AGREEMENTS": The agreement or agreements entered into by
the Owner and/or certain third parties on the Reconstitution Date or
Reconstitution Dates with respect to any or all of the Mortgage Loans serviced
hereunder, in connection with a Whole Loan Transfer or a Pass-Through Transfer
as set forth in Section 8.01, including, but not limited to, a seller's
warranties and servicing agreement or a participation and servicing agreement in
the event of a Whole Loan Transfer, and in the event of a Pass-Through Transfer,
a pooling and servicing agreement.

"RECONSTITUTION DATE": The date or dates on which any or all of the
Mortgage Loans serviced under this Agreement shall be removed from this
Agreement and reconstituted as part of a Whole Loan Transfer or a Pass-Through
Transfer pursuant to Section 8.01 hereof. On such date, the Mortgage Loans
transferred shall cease to be covered by this Agreement and the Servicer shall
cease to service those Mortgage Loans under this Agreement in accordance with
the termination provisions set forth in this Agreement.

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"REMITTANCE DATE": With respect to each Determination Date, the second
Business Day following such Determination Date.

"RENT ESCROW ACCOUNT": The segregated escrow account or accounts
established and maintained by the Servicer pursuant to Section 3.05(a), which
shall be entitled "Capital Lease Funding, L.P. and NationsBank, N.A. and Various
Borrowers, Rent Escrow Account" and which shall be an Eligible Account (to the
extent consistent with the related Mortgage Loan Documents).

"RENT ESCROW TRANSFER DATE": The first Business Day immediately succeeding
the Determination Date.

"REO ACCOUNT": As defined in Section 3.17(b).

"REO MORTGAGE LOAN": Any Mortgage Loan as to which the related Mortgaged
Property has become an REO Property.

"REO PROCEEDS": With respect to any REO Property and the related REO
Mortgage Loan, all revenues received by the Servicer with respect to such REO
Property or REO Mortgage Loan that do not constitute Liquidation Proceeds.

"REO PROPERTY": A Mortgaged Property title to which has been acquired by
the Servicer on behalf of the Owner through foreclosure, deed in lieu of
foreclosure or other comparable conversion of ownership.

"RESERVE ACCOUNTS": With respect to any Mortgage Loan, reserve accounts,
if any (including, without limitation, the Maintenance Reserve Account and any
Escrow Account), established by the Servicer pursuant to the related Mortgage
Loan Documents. Each Reserve Account shall be an Eligible Account to the extent
consistent with the related Mortgage Loan Documents.

"RESPONSIBLE OFFICER": Any officer or any employee with responsibilities
similar to those of an officer of the corporate trust department of the
Custodian assigned to the Corporate Trust Office with direct responsibility for
the administration of this Agreement and also, with respect to a particular
matter, any other officer or any employee with responsibilities similar to those
of an officer of the corporate trust department of the Custodian to whom such
matter is referred because of such officer's or employee's knowledge of and
familiarity with the particular subject, and, in the case of any certification
required to be signed by a Responsible Officer, such an officer or employee
whose name and specimen signature appears on a list of corporate trust officers
and employees furnished to the Servicer by the Custodian, as such list may from
time to time be amended.

"SCHEDULED PRINCIPAL BALANCE": With respect to any Mortgage Loan, as of
any Due Date, the principal balance of such Mortgage Loan as of such Due Date,
after giving effect to (a) any Principal Prepayments or other unscheduled
recoveries of principal received

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on or prior to such Due Date, and (b) any payment in respect of principal due on
or before such Due Date, irrespective of any delinquency in payment by the
Borrower.

"SERVICER": Midland Loan Services, L.P., a Missouri limited partnership,
or its successor in interest, or any successor Servicer appointed as herein
provided.

"SERVICER MORTGAGE FILE": With respect to any Mortgage Loan, the documents
comprising the Servicing File (as defined in the Custody Agreement).

"SERVICER REMITTANCE REPORT": A report prepared by the Servicer in such
media as may be agreed upon by the Servicer and the Owner containing such
information regarding the Mortgage Loans as is agreed to by such parties.

"SERVICING COMPENSATION": With respect to each Mortgage Loan, the
Servicing Fee which shall be due to the Servicer, and such other compensation of
the Servicer specified in Section 3.12.

"SERVICING FEE": With respect to each Mortgage Loan and for any Remittance
Date, an amount per calendar month equal to the product of (i) one-twelfth of
the related Servicing Fee Rate and (ii) the Scheduled Principal Balance of such
Mortgage Loan as of the Due Date in the month preceding the month in which such
Remittance Date occurs; PROVIDED, HOWEVER, that with respect to any Mortgage
Loan the Servicer shall only be entitled to a pro rata portion of the Servicing
Fee for any month in which servicing or special servicing for such Mortgage Loan
commences or terminates, as applicable.

"SERVICING FEE RATE": With respect to each Mortgage Loan, the per annum
rate set forth in the related Acknowledgment Agreement, which rate shall be
calculated in accordance with the following schedule:

(i) for double net types of Leases:

(x) 0.10% for any Mortgage Loan with an initial principal balance
less than or equal to $4,000,000;

(y) 0.05% for any Mortgage Loan with an initial principal balance
of greater than $4,000,000 and less than or equal to
$7,500,000; or

(z) 0.035% for any Mortgage Loan with an initial principal balance
of greater than $7,500,000; or

(ii) for triple net and bond net types of Leases:

(x) 0.08% for any Mortgage Loan with an initial principal balance
less than or equal to $4,000,000;

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(y) 0.04% for any Mortgage Loan with an initial principal balance
of greater than $4,000,000 and less than or equal to
$7,500,000; or

(z) 0.02% for any Mortgage Loan with an initial principal balance
of greater than $7,500,000.

Notwithstanding the foregoing, such rate shall be equal to .35% with respect to
any Specially Serviced Mortgage Loans or REO Mortgage Loans.

"SERVICING OFFICER": Any officer or employee of the Servicer involved in,
or responsible for, the administration and servicing of the Mortgage Loans or
this Agreement and also, with respect to a particular matter, any other officer
or employee to whom such matter is referred because of such officer's or
employee's knowledge of and familiarity with the particular subject, and, in the
case of any certification required to be signed by a Servicing Officer, such an
officer or employee whose name and specimen signature appears on a list of
servicing officers furnished to the Custodian by the Servicer, as such list may
from time to time be amended, together with, in the case of a certificate or
other writing executed by an employee who constitutes a Servicing Officer
because of such employee's knowledge and familiarity with a particular subject,
a countersignature of an officer of the general partner of the Servicer.

"SERVICING STANDARD": The standards for the conduct of the Servicer in the
performance of its obligations under this Agreement set forth in Section
3.01(a).

"SPECIALLY SERVICED MORTGAGE LOAN": Any Mortgage Loan with respect to
which:

(i) the related Borrower is delinquent in the payment of a Balloon
Payment or 60 or more days delinquent in the payment of a Monthly
Payment;

(ii) the Servicer has received notice that such Borrower has become the
subject of any bankruptcy, insolvency or similar proceeding,
admitted in writing the inability to pay its debts as they come due
or made an assignment for the benefit of creditors;

(iii) the Servicer has received notice of a foreclosure or threatened
foreclosure of any lien on the related Mortgaged Property;

(iv) the Servicer proposes to commence foreclosure or other workout
arrangements;

(v) a default of which the Servicer has notice (other than a failure by
the Borrower to pay principal or interest) and which materially and
adversely affects the interest of the Owner has occurred and
remained unremedied for the applicable grace period specified in
the Mortgage

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<PAGE>

Loan (or, if no grace period is specified, 60 days); PROVIDED that
a default requiring a Property Advance shall be deemed to
materially and adversely affect the interests of the Owner; or

(vi) the Servicer has received notice that the related Borrower has
failed to correct a Lease Termination Condition in a timely manner
(as determined by the Servicer in accordance with the Servicing
Standard);

PROVIDED, HOWEVER, that with respect to the circumstances described in clauses
(iii), (iv) and (v) above, the Servicer has received written confirmation from
the Owner that such Mortgage Loan shall be a Specially Serviced Mortgage Loan;
and PROVIDED FURTHER that a Mortgage Loan will cease to be a Specially Serviced
Mortgage Loan:

(a) with respect to the circumstances described in clause (i) above,
when the related Borrower has brought such Mortgage Loan current
and thereafter made three consecutive full and timely Monthly
Payments (with respect to any delinquencies in the payment of a
Balloon Payment, pursuant to any workout of the Mortgage Loan and
the Lessee has made three consecutive full and timely payments of
Basic Rent);

(b) with respect to the circumstances described in clauses (ii), (iii),
(iv) and (v) above, when (x) such circumstances cease to exist or
such default is cured, as the case may be, in the good faith
judgment of the Servicer (as confirmed in writing by the Owner) or
(y) when the Owner determines (and notifies the Servicer in
writing) that the Mortgage Loan shall no longer be a Specially
Serviced Mortgage Loan; or

(c) with respect to the circumstances described in clause (vi), when
the correction of such Lease Termination Condition has been
substantially completed notwithstanding the fact that Property
Advances relating thereto may still be outstanding.

PROVIDED, HOWEVER, that at that time no circumstance identified in clauses (i)
through (vi) above exists that would cause the Mortgage Loan to continue to be
characterized as a Specially Serviced Mortgage Loan.

"TRANSFER DATE": With respect to each Mortgage Loan, and subject to
Section 2.03 the date on which servicing responsibilities for such Mortgage Loan
are assigned by the Owner and assumed by the Servicer pursuant to the related
Acknowledgment Agreement.

"UNSCHEDULED PAYMENTS": With respect to a Mortgage Loan and a Collection
Period, all Net Liquidation Proceeds, Condemnation Proceeds and Insurance
Proceeds payable under such Mortgage Loan and any other payments under or with
respect to such Mortgage Loan not scheduled to be made, including Principal
Prepayments (but excluding Prepayment Premiums) received during such Collection
Period.

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<PAGE>

"WHOLE LOAN TRANSFER": The sale or transfer by the Owner of some or all of
the Mortgage Loans in a whole loan format pursuant to Section 8.01, which sale
or transfer does not constitute a Pass-Through Transfer.

SECTION 1.02. CERTAIN CALCULATIONS

UNLESS OTHERWISE SPECIFIED HEREIN, THE FOLLOWING PROVISIONS SHALL APPLY:

(a) All calculations of interest (including interest on the Mortgage
Loans), except as otherwise provided in the Mortgage Loan Documents) provided
for herein shall be made on the basis of a 360-day year consisting of twelve
30-day months.

(b) The portion of any Insurance Proceeds, Condemnation Proceeds,
Liquidation Proceeds or Net REO Proceeds in respect of a Mortgage Loan allocable
to principal and Prepayment Premiums shall equal the total amount of such
proceeds minus (a) first any portion thereof payable to the Custodian, the
Fiscal Agent or the Servicer pursuant to the provisions of this Agreement and
(b) second any portion thereof equal to interest on the unpaid principal balance
of such Mortgage Loan at the related Net Mortgage Rate from the Due Date as to
which interest was last paid by the related Borrower up to but not including the
Due Date in the Collection Period in which such proceeds are received.
Allocation of such amount between principal and any Prepayment Premium shall be
made first to principal and second to Prepayment Premium.

(c) Any Mortgage Loan payment is deemed to be received on the date such
payment is actually received by the Servicer and applied to payment of the
related Mortgage Loan pursuant to the terms of the related Note; PROVIDED,
HOWEVER, that for purposes of calculating remittances to the Owner, Principal
Prepayments with respect to any Mortgage Loan are deemed to be received on the
date they are applied in accordance with Section 3.01(b) to reduce the
outstanding principal balance of such Mortgage Loan on which interest accrues.

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ARTICLE II

OWNER'S ENGAGEMENT OF SERVICER
TO PERFORM SERVICING RESPONSIBILITIES

SECTION 2.01. POSSESSION OF SERVICER MORTGAGE FILES

With respect to each Mortgage Loan, pursuant to this Agreement, on or
before each Transfer Date, the Owner shall transfer or cause to be transferred
the related Servicer Mortgage Files to the Servicer to be held in trust for the
Owner pursuant to this Agreement. Each Servicer Mortgage File, or relevant
portion thereof, delivered to the Servicer shall be held by the Servicer in
order to service the Mortgage Loans pursuant to this Agreement and shall be held
in trust by the Servicer for the benefit of the Owner. The Servicer's
possession of any portion of the Mortgage Loan Documents shall be for the sole
purpose of facilitating servicing of the related Mortgage Loan pursuant to this
Agreement, and such retention and possession by the Servicer shall be in a
custodial capacity only. The ownership of each Note, Mortgage and other
documents in the Custodian Mortgage File and the contents of the Servicer
Mortgage File shall be vested in the Owner and the ownership of all records and
documents with respect to the related Mortgage Loan prepared by or which come
into the possession of the Servicer shall immediately vest in the Owner and
shall be retained and maintained, in trust, by the Servicer in such custodial
capacity only. The portion of each Servicer Mortgage File retained by the
Servicer pursuant to this Agreement shall be identified to clearly reflect the
ownership of the related Mortgage Loan by the Owner. The Servicer shall release
from its custody the contents of any Servicer Mortgage File retained by it only
in accordance with this Agreement.

SECTION 2.02. BOOKS AND RECORDS

Record title to each Mortgage and the related Note and other recorded
Mortgage Loan Documents shall at the direction of the Owner be in the name of
(i) the Owner or (ii) in such name as the Owner shall designate (which shall not
include the Servicer's or the Custodian's name). The Owner shall prepare and
record any Assignments of Mortgage required pursuant to this Section 2.02. The
Owner shall pay all necessary recording fees associated with recording the
Assignments of Mortgage. Notwithstanding the foregoing, the Servicer shall
cooperate with the Owner in the Owner's preparation and recording of any and all
Assignments of Mortgage. Additionally, the Servicer shall cooperate with the
Owner in the Owner's preparation and arranging the execution of any Note
endorsements in connection with any and all Reconstitution Agreements. All
rights arising out of the Mortgage Loans including, but not limited to, all
funds received by the Servicer on or in connection with a Mortgage Loan after
the related Transfer Date shall be vested in the Owner, except for any rights of
the Servicer to payments or reimbursements from such funds pursuant to this
Agreement. All funds received on or in connection with a Mortgage Loan shall be
received and held by the Servicer in trust for the benefit of the Owner as the
owner of the Mortgage

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Loans and the Mortgagors as their respective interests may appear pursuant to
the terms of this Agreement.

SECTION 2.03. COMMENCEMENT OF SERVICING RESPONSIBILITIES

With respect to each Mortgage Loan, prior to each Transfer Date, the Owner
shall notify the Servicer and the Custodian of the related Transfer Date by
delivering an Acknowledgment Agreement to the Servicer and the Custodian for
execution. Subject to the Servicer's and the Custodian's execution of the
Acknowledgment Agreement and the receipt of the related Servicer Mortgage File
by the Servicer, the Servicer shall perform the servicing responsibilities as
provided herein and as set forth in the related Acknowledgment Agreement
relating to such Mortgage Loan. The Servicer shall have no obligation to accept
a prospective mortgage loan for servicing hereunder in the event that in its
reasonable discretion it determines that the terms upon which it would be
required to service such mortgage loan are unacceptable. The Servicer shall
promptly communicate any determination that it will not accept a mortgage loan
for servicing to the Owner and NationsBank.

SECTION 2.04. CUSTODY AGREEMENT.

On or prior to each Transfer Date, the Owner or the Owner's designee, as
applicable, shall deliver to the Custodian those Mortgage Loan Documents that
will constitute for each Mortgage Loan the Custodian Mortgage File pursuant to
the Custody Agreement. In the event of any conflict, inconsistency or
discrepancy between any of the provisions of this Agreement and any of the
provisions of the Custody Agreement, the provisions of the Custody Agreement
shall control and be binding upon the Owner and the Servicer. Contemporaneously
with the remittance by the Custodian of any Trust Receipt (as defined in the
Custody Agreement) to NationsBank, the Custodian shall forward a copy of such
Trust Receipt to the Servicer.

The Servicer shall forward to the Custodian original documents evidencing
an assumption, modification, consolidation or extension of any Mortgage Loan
entered into in accordance with this Agreement within one week of execution
thereof, PROVIDED, HOWEVER, that the Servicer shall provide the Custodian with a
true copy of any such document certified by the Servicer as having been
submitted for recordation within one week of execution thereof, and shall use
its best efforts to provide the original of any document submitted for
recordation or a copy of such document certified by the appropriate public
recording office to be a true and complete copy of the original within ninety
(90) days of submission thereof for recordation.

SECTION 2.05. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SERVICER

(a) The Servicer hereby represents, warrants and covenants that as of
the closing date, or as of such date specifically provided herein:

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(i) ORGANIZATION; GOOD STANDING. The Servicer is a limited
partnership, duly organized, validly existing and in good standing
under the laws of the State of Missouri and has all licenses
necessary to carry on its business as now being conducted or is in
compliance with the laws of each state in which any Mortgaged
Property is located to the extent necessary to ensure the
enforceability of each Mortgage Loan in accordance with the terms
of this Agreement;

(ii) AUTHORIZATION. The Servicer has the full partnership power,
authority and legal right to execute and deliver this Agreement and
to perform in accordance herewith; the execution and delivery of
this Agreement by the Servicer and its performance and compliance
with the terms of this Agreement do not violate the Servicer's
certificate of limited partnership or constitute a default (or an
event which, with notice or lapse of time, or both, would
constitute a default) under, or result in the breach of, any
material contract, agreement or other instrument to which the
Servicer is a party or which may be applicable to the Servicer or
any of its assets;

(iii) EXECUTION; DELIVERY; ENFORCEABILITY. This Agreement has been duly
and validly authorized, executed and delivered by the Servicer and,
assuming due authorization, execution and delivery by the other
parties hereto, constitutes a legal, valid and binding obligation
of the Servicer, enforceable against it in accordance with the
terms of this Agreement, except as such enforcement may be limited
by bankruptcy, insolvency, reorganization, liquidation,
receivership, moratorium or other laws relating to or affecting
creditors' rights generally, or by general principles of equity
(regardless of whether such enforceability is considered in a
proceeding in equity or at law);

(iv) NO CONFLICT. The Servicer is not in violation of, and the
execution and delivery of this Agreement by the Servicer and its
performance and compliance with the terms of this Agreement will
not constitute a violation with respect to, any order or decree of
any court or any order or regulation of any federal, state,
municipal or governmental agency having jurisdiction, or result in
the creation or imposition of any lien, charge or encumbrance
which, in any such event, would have consequences that would
materially and adversely affect the condition (financial or
otherwise) or operation of the Servicer or its properties or impair
the ability of the Owner to realize on the Mortgage Loans;

(v) NO LEGAL IMPEDIMENT. There is no action, suit or proceeding
pending or, to the knowledge of the Servicer, threatened, against
the Servicer which, either in any one instance or in the aggregate,
would result in any material adverse change in the business,
operations or financial condition

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<PAGE>

of the Servicer or would, if adversely determined, materially
impair the ability of the Servicer to perform under the terms of
this Agreement or which would draw into question the validity of
this Agreement or the Mortgage Loans or of any action taken or to
be taken in connection with the obligations of the Servicer
contemplated herein; and

(vi) NO CONSENTS REQUIRED. No consent, approval, authorization or order
of, or registration or filing with, or notice to any court or
governmental agency or body is required for the execution, delivery
and performance by the Servicer of, or compliance by the Servicer
with, this Agreement or, if required, such approval has been
obtained prior to the date hereof, except to the extent that the
failure of the Servicer to be qualified as a foreign limited
partnership or licensed in one or more states is not necessary for
the enforcement of the Mortgage Loans.

(b) It is understood and agreed that the representations and warranties
set forth in this Section shall survive until the termination of this Agreement,
and shall inure to the benefit of the Owner. Upon discovery by the Owner, the
Servicer or a Responsible Officer of the Custodian of a breach of any of the
representations and warranties set forth in this Section which materially and
adversely affects the interests herein of the Owner, the Servicer or the
Custodian, the party discovering such breach shall give prompt written notice to
the other parties hereto. Within 90 days of the earlier of discovery by the
Servicer or receipt of notice by the Servicer of the breach of any
representation, warranty or covenant of the Servicer set forth in this Section
2.05 which materially and adversely affects the interests of the Owner in any
Mortgage Loan, the Servicer shall cure such breach in all material respects.

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ARTICLE III

ADMINISTRATION AND SERVICING
OF THE MORTGAGE LOANS

SECTION 3.01. SERVICER TO ACT AS SERVICER; ADMINISTRATION OF THE
MORTGAGE LOANS

(a) The Servicer, as an independent contractor, shall service and
administer the Mortgage Loans on behalf of the Owner solely in the best
interests of, and for the benefit of, the Owner in accordance with the terms of
this Agreement and the respective Mortgage Loans. In furtherance of, and to the
extent consistent with, the foregoing, and except to the extent that this
Agreement provides for a contrary specific course of action, the Servicer shall
service and administer each Mortgage Loan in the same manner in which, and with
the same care, skill, prudence and diligence with which, it services and
administers similar mortgage loans for other third-party portfolios, giving due
consideration to customary and usual standards of practice of prudent
institutional commercial mortgage loan servicers, and taking into account its
other obligations hereunder, but without regard to:

(i) any other relationship that the Servicer, any subservicer or any
Affiliate of the Servicer or any subservicer may have with the
related Borrower or any Affiliate of such Borrower;

(ii) the Servicer's, Custodian's or Fiscal Agent's obligation to make
Property Advances or to incur servicing expenses with respect to
such Mortgage Loan;

(iii) the Servicer's or any sub-servicer's right to receive compensation
for its services hereunder or with respect to any particular
transaction; or

(iv) the ownership or servicing or management for others by the Servicer
or any sub-servicer, of any other mortgage loans or property.

The standards set forth in the first paragraph of this Section 3.01 above
with respect to the conduct of the Servicer in the performance of its
obligations under this Agreement is herein referred to as the "Servicing
Standard."

The Servicer's liability for actions and omissions in its capacity as
Servicer hereunder is limited as provided herein (including, without limitation,
pursuant to Section 6.03 hereof). To the extent consistent with the foregoing
and subject to any express limitations set forth in this Agreement, the Servicer
shall seek to maximize the timely and complete recovery of principal and
interest on the Notes; PROVIDED, HOWEVER, that nothing herein contained shall be
construed as an express or implied guarantee by the Servicer of the
collectability of the

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Mortgage Loans. Subject only to the above-described Servicing Standard and the
terms of this Agreement and of the respective Mortgage Loans, the Servicer shall
have full power and authority, acting alone or through sub-servicers (subject to
paragraph (c) of this Section 3.01 and to Section 3.02), to do or cause to be
done any and all things in connection with such servicing and administration
which it may deem necessary or desirable. Without limiting the generality of
the foregoing, the Servicer shall, and is hereby authorized and empowered by the
Owner to, with respect to each Mortgage Loan and the related Mortgaged Property,
prepare, execute and deliver, on behalf of the Owner, any and all financing
statements, continuation statements and other documents or instruments necessary
to maintain the lien on the related Mortgaged Property and related collateral;
any modifications, waivers, consents or amendments to or with respect to any
Mortgage Loan or any documents contained in the related Custodian Mortgage File
the preparation, execution and delivery of which have been consented to by the
Owner in writing; and any and all instruments of satisfaction or cancellation,
or of partial or full release or discharge, and all other comparable
instruments, if, in its reasonable judgment, such action is in the best
interests of the Owner and is in accordance with, or is required by, this
Agreement. The Servicer shall service and administer the Mortgage Loans in
accordance with applicable state and federal law and shall provide to the
Borrowers any reports required to be provided to them thereby. The Owner shall,
upon the receipt of a written request of a Servicing Officer, execute and
deliver to the Servicer any powers of attorney and other documents prepared by
the Servicer and necessary or appropriate (as certified in such written request)
to enable the Servicer to carry out their servicing and administrative duties
hereunder.

(b) Unless otherwise provided in the related Note, the Servicer shall
apply any partial Principal Prepayment received on a Mortgage Loan on a date
other than a Due Date to the principal balance of such Mortgage Loan as of the
Due Date immediately following the date of receipt of such partial Principal
Prepayment.

(c) The Servicer may enter into sub-servicing agreements with third
parties with respect to any of its respective obligations hereunder, provided
that (1) any such agreement shall be consistent with the provisions of this
Agreement and (2) no sub-servicer retained by the Servicer shall grant any
modification, waiver or amendment to any Mortgage Loan without the approval of
the Servicer and (3) such agreement shall be consistent with the Servicing
Standard. Any such sub-servicing agreement may permit the sub-servicer to
delegate its duties to agents or subcontractors so long as the related
agreements or arrangements with such agents or subcontractors are consistent
with the provisions of this Section 3.01(c).

Any sub-servicing agreement entered into by the Servicer shall provide that
it may be assumed or terminated by the Owner if the Custodian or a successor
Servicer has assumed the duties of the Servicer, without cost or obligation to
the assuming or terminating party or the Owner, upon the assumption by the
Custodian or a successor servicer of the obligations of the Servicer pursuant to
Section 6.02.

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Any sub-servicing agreement, and any other transactions or services
relating to the Mortgage Loans involving a sub-servicer, shall be deemed to be
between the Servicer and such sub-servicer alone, and the Custodian and the
Owner shall not be deemed parties thereto and shall have no claims, rights,
obligations, duties or liabilities with respect to the sub-servicer, including
the Owner acting in such capacity, except as set forth in Section 3.01(d).

(d) If the Custodian or any successor Servicer assumes the obligations
of the Servicer in accordance with Section 6.02, the Custodian or such successor
Servicer, to the extent necessary to permit the Custodian or such successor
Servicer to carry out the provisions of Section 6.02, shall, without act or deed
on the part of the Custodian or such successor Servicer, succeed to all of the
rights and obligations of the Servicer under any sub-servicing agreement entered
into by the Servicer pursuant to Section 3.01(c), subject to the right of
termination by the Owner set forth in Section 3.01(c). In such event, the
Custodian or such successor Servicer shall be deemed to have assumed all of the
Servicer's interest therein (but not any liabilities or obligations in respect
of acts or omissions of the Servicer prior to such deemed assumption) and to
have replaced the Servicer as a party to such sub-servicing agreement to the
same extent as if such sub-servicing agreement had been assigned to the
Custodian or such successor Servicer, except that the Servicer shall not thereby
be relieved of any liability or obligations under such sub-servicing agreement
that accrued prior to the assumption of duties hereunder by the Custodian or
such successor Servicer.

In the event that the Custodian or any successor Servicer assumes the
servicing obligations of the Servicer, upon request of the Custodian or such
successor Servicer, the Servicer shall, at its own expense, deliver to the
Custodian or such successor Servicer (as the case may be) all documents and
records relating to any sub-servicing agreement and the Mortgage Loans then
being serviced thereunder and an accounting of amounts collected and held by it,
if any, and will otherwise use its best efforts to effect the orderly and
efficient transfer of any sub-servicing agreement to the Custodian or such
successor Servicer.

(e) The Servicer shall, promptly upon the failure of any Borrower to
make its Monthly Payment on the related Due Date, deliver any notice to such
Borrower that is required pursuant to the terms of the related Note or other
Mortgage Loan Documents to commence the accrual of Default Interest on the
related Mortgage Loan.

SECTION 3.02. LIABILITY OF THE SERVICER

Notwithstanding any sub-servicing agreement, any of the provisions of this
Agreement relating to agreements or arrangements between the Servicer and any
Person acting as sub-servicer (or its agents or subcontractors) or any reference
to actions taken through any Person acting as sub-servicer or otherwise, the
Servicer shall remain obligated and primarily liable to the Owner for the
servicing and administering of the Mortgage Loans in accordance with the
provisions of this Agreement without diminution of such obligation or liability
by virtue of such sub-servicing agreements or arrangements or by virtue of
indemnification from any Person acting as sub-servicer (or its agents or
subcontractors) to the same extent and under the same terms and conditions as if
the Servicer alone were servicing and administering the

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Mortgage Loans. The Servicer shall be entitled to enter into an agreement with
any sub-servicer providing for indemnification of the Servicer by such
sub-servicer, and nothing contained in this Agreement shall be deemed to limit
or modify such indemnification, but no such agreement for indemnification shall
be deemed to limit or modify this Agreement.

SECTION 3.03. COLLECTION OF CERTAIN MORTGAGE LOAN PAYMENTS

The Servicer shall make reasonable efforts to collect all payments called
for under the terms and provisions of the Mortgage Loans when the same shall be
due and payable, and shall follow such collection procedures as it would follow
with respect to mortgage loans comparable to the Mortgage Loans and held for
other third-party portfolios, including using its best efforts in accordance
with the Servicing Standard to collect income statements and rent rolls from the
related Borrowers as required by the related Mortgage Loan Documents.
Consistent with the foregoing, the Servicer may in its discretion waive any late
payment charge or penalty fees in connection with any delinquent Monthly Payment
with respect to any Mortgage Loan.

In connection with its servicing activities hereunder relating to each
Mortgage Loan and to the extent consistent with the related Mortgage Loan
Documents, applicable law and the related Lease, the Servicer shall use
reasonable efforts consistent with the Servicing Standard to (i) collect
payments of rent (including Basic Rent) and all other amounts due and owing
under the related Lease, (ii) collect income statements and other reports from
the related Lessee as required by the related Lease, and (iii) enforce all other
duties, obligations and covenants of the related Lessee under the related Lease.

SECTION 3.04. COLLECTION OF TAXES, ASSESSMENTS, INSURANCE PAYMENTS AND
SIMILAR ITEMS

(a) With respect to each Mortgage Loan (other than REO Mortgage Loans),
the Servicer shall maintain accurate records with respect to each related
Mortgaged Property reflecting the status of taxes, assessments and other similar
items that are or may become a lien on such related Mortgaged Property, the
status of insurance premiums payable with respect thereto and the amounts of
Escrow Payments, if any, required in respect thereof. From time to time, the
Servicer shall (i) obtain all bills for the payment of such items (including
renewal premiums), and (ii) effect payment of all such bills with respect to
each such Mortgaged Property prior to the applicable penalty or termination
date, in each case employing for such purpose Escrow Payments as allowed under
the terms of such Mortgage Loan. If a Borrower fails to make any such payment
on a timely basis or collections from such Borrower are insufficient to pay any
such item before the applicable penalty or termination date, the Servicer shall
(in accordance with Section 3.08 with respect to the payment of insurance
premiums) make a Property Advance in an amount necessary to effect payment of
any such item, unless the Servicer determines that such Property Advance would
be a Nonrecoverable Advance in accordance with Section 4.02. With respect to
any Mortgage Loan as to which the related Borrower is not required to make
Escrow Payments, if such Borrower fails to effect payment of any such bill, then
the Servicer shall (in accordance with

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Section 3.08 with respect to the payment of insurance premiums) make a Property
Advance in an amount necessary to effect payment of any such bill on or before
the applicable penalty or termination date unless (x) the Servicer reasonably
anticipates that such bill will be paid by the Borrower by the close of business
on or before the applicable penalty or termination date, but in any event the
Servicer shall make such Property Advance (subject to clause (y) below) within
90 days after such date, or (y) the Servicer determines that such Property
Advance would be a Nonrecoverable Advance in accordance with Section 4.02. The
Servicer shall be entitled to reimbursement of Property Advances that it makes
pursuant to the two preceding sentences, with interest thereon at the Property
Advance Rate, from amounts received on or in respect of the Mortgage Loan
respecting which such Property Advance was made or if such Property Advance has
become a Nonrecoverable Advance, to the extent permitted by Section 3.06 of this
Agreement.

(b) The Servicer shall segregate and hold all funds collected and
received pursuant to any Mortgage Loan constituting Escrow Payments under the
related Mortgage Loan separate and apart from any of its own funds and general
assets and shall establish and maintain one or more segregated custodial
accounts (each, an "Escrow Account") into which all Escrow Payments shall be
deposited within one (1) Business Day after receipt (except with respect to any
Escrow Payments which have been deposited in the Rent Escrow Account, in which
case the deposit shall be made on the Rent Escrow Transfer Date pursuant to
Section 3.05(a)). The Servicer shall also deposit into each Escrow Account any
amounts representing losses on Permitted Investments in which amounts on deposit
in such Escrow Account have been invested pursuant to Section 3.07(b) and any
Insurance Proceeds, Condemnation Proceeds or Liquidation Proceeds which are
required to be applied to the restoration or repair of the related Mortgaged
Property pursuant to the related Mortgage Loan. Escrow Accounts, to the extent
required to be established, shall be Eligible Accounts (to the extent consistent
with the related Mortgage Loan Documents) and shall be entitled, "Midland Loan
Services, L.P., as Servicer, in trust for Capital Lease Funding, L.P. and
NationsBank, N.A. and Various Borrowers". Withdrawals from an Escrow Account
may be made by the Servicer only:

(i) to effect timely payments of items with respect to which Escrow
Payments are required pursuant to the related Mortgage;

(ii) to transfer funds to the Collection Account to reimburse the
Servicer, the Custodian or the Fiscal Agent, as applicable, for any
Property Advance relating to Escrow Payments, but only from amounts
received with respect to the related Mortgage Loan which represent
late collections of Escrow Payments thereunder;

(iii) for application to the restoration or repair of the related
Mortgaged Property in accordance with the related Mortgage Loan and
the Servicing Standard;

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<PAGE>

(iv) to clear and terminate such Escrow Account upon the termination of
this Agreement;

(v) to pay from time to time to the Servicer any interest or investment
income earned on funds deposited in such Escrow Account pursuant to
Section 3.07(b) to the extent (a) permitted by law and (b) not
required to be paid to the related Borrower under the terms of the
related Mortgage Loan or by law, or to pay such interest or income
to the related Borrower if such income is required to paid to the
related Borrower under law or by the terms of the related Mortgage
Loan; and

(vi) to remove any funds deposited in such Escrow Account that were not
required to be deposited therein or that are required under the
terms of the applicable Mortgage Loan Documents or applicable law
to be returned to the Borrower.

SECTION 3.05. RENT ESCROW ACCOUNT; COLLECTION ACCOUNT

(a) The Servicer shall establish and maintain the Rent Escrow Account,
which account shall be used for collection of the Lessee Rental Payments. The
Rent Escrow Account shall be an Eligible Account (to the extent consistent with
the related Mortgage Loan Documents). The Servicer shall deposit or cause to be
deposited in the Rent Escrow Account within one Business Day following receipt
all Lessee Rental Payments. The Servicer shall keep and maintain separate
accounting, on a Mortgage Loan-by-Mortgage Loan basis, for the purpose of
tracking each deposit in and withdrawal from the Rent Escrow Account.

Any funds on deposit in the Rent Escrow Account shall be transferred to the
Collection Account (with respect to Monthly Payments due on the Mortgage Loan),
any Escrow Account (with respect to Escrow Payments) or any Reserve Account
(with respect to any other payments that are required to be deposited therein
under the Mortgage Loan), as applicable, on the Rent Escrow Transfer Date. To
the extent that funds on deposit in the Rent Escrow Account for any Mortgage
Loan are available pursuant to the terms of the related Mortgage Loan Document
to fund deficiencies or delinquencies with respect to such Mortgage Loan, the
Servicer shall, to the extent of funds available therefor, fund such
deficiencies or delinquencies from amounts on deposit in the Rent Escrow
Account. On each Rent Escrow Transfer Date, the Servicer shall remit the Excess
Balance (except for any income or gain realized from the investment of funds
therein for the benefit of the Servicer pursuant to Section 3.07, which may be
withdrawn by the Servicer from time to time from the Rent Escrow Account) to the
related Mortgagor by wire transfer or by check mailed not later than three
Business Days following the related Rent Escrow Transfer Date.

Notwithstanding anything herein to the contrary, in no event shall the
Servicer pay any portion of the Excess Balance held on account of a specific
Mortgage Loan to the related Borrower unless all accounts required to be
maintained with respect to such Mortgage

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<PAGE>

Loan have been funded to their required levels, except as otherwise required
under the related Mortgage Loan Documents.

The foregoing requirements for deposits in the Rent Escrow Account shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, payments in the nature of late fees or late payment charges,
assumption fees, loan modification expenses, loan service transaction fees,
extension fees, demand fees, beneficiary statement charges and similar fees need
not be deposited in the Rent Escrow Account by the Servicer and, to the extent
permitted by applicable law, the Servicer shall be entitled to retain any such
charges and fees received with respect to the Mortgage Loans as additional
Servicing Compensation. In the event that the Servicer deposits in the Rent
Escrow Account any amount not required to be deposited therein, the Servicer may
at any time withdraw such amount from the Rent Escrow Account, any provision
herein to the contrary notwithstanding.

(b) The Servicer shall establish and maintain the Collection Account in
the Owner's and NationsBank's name which account shall be used for collection of
the amounts specified below. The Collection Account shall be an Eligible
Account. The Servicer shall deposit or cause to be deposited in the Collection
Account within one Business Day following receipt (except with respect to item
(i) below, in which case the deposit shall be made on the Rent Escrow Transfer
Date pursuant to Section 3.05(a)) the following payments and collections
received or made by it on or with respect to the Mortgage Loans:

(i) all funds on deposit in the Rent Escrow Account required to be paid
on account of principal or interest which is due and owing under
any Mortgage Loan on the related Due Date;

(ii) all other payments on account of principal on the Mortgage Loans,
including the principal component of Unscheduled Payments on the
Mortgage Loans, which were received by the Servicer but not
transferred to the Collection Account pursuant to (i) above;

(iii) all other payments on account of interest (excluding any portion of
such payment allocable to the period before the related Transfer
Date), including, without limitation, Default Interest and the
interest portion of all Unscheduled Payments and all Prepayment
Premiums, which were received by the Servicer but not transferred
to the Collection Account pursuant to (i) above;

(iv) any amounts required to be deposited pursuant to Section 3.07(b) in
connection with losses realized on Permitted Investments with
respect to funds held in the Collection Account;

(v) all Net REO Proceeds transferred from an REO Account pursuant to
Section 3.17(b);

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<PAGE>

(vi) any amounts received from Borrowers which represent recoveries of
Property Advances made pursuant to this Agreement; and

(vii) any other amounts required by the provisions of this Agreement to
be deposited into the Collection Account by the Servicer,
including, without limitation, proceeds of any purchase of a
Mortgage Loan pursuant to Section 3.18 hereof and any loan
modification fees payable under the Mortgage Loan Documents to
which the Servicer is not entitled.

The foregoing requirements for deposits in the Collection Account shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, payments in the nature of late fees or late payment charges,
assumption fees, loan modification expenses, loan service transaction fees,
extension fees, demand fees, beneficiary statement charges and similar fees need
not be deposited in the Collection Account by the Servicer and, to the extent
permitted by applicable law, the Servicer shall be entitled to retain any such
charges and fees received with respect to the Mortgage Loans as additional
Servicing Compensation. In the event that the Servicer deposits in the
Collection Account any amount not required to be deposited therein, the Servicer
may at any time withdraw such amount from the Collection Account, any provision
herein to the contrary notwithstanding.

(c) Funds in the Collection Account and the Rent Escrow Accounts may be
invested in Permitted Investments in accordance with the provisions of Section
3.07. The Servicer shall give written notice to the Owner of the location and
account number of the Collection Account and the Rent Escrow Accounts and shall
notify the Owner in writing prior to any subsequent change thereof.

SECTION 3.06. PERMITTED WITHDRAWALS FROM THE COLLECTION ACCOUNT

The Servicer may make withdrawals from the Collection Account only as
described below (the order set forth below not constituting an order of priority
for such withdrawals):

(i) to remit to the Owner the amounts required to be remitted pursuant
to Section 4.01;

(ii) to pay or reimburse the Fiscal Agent, the Custodian or the Servicer
(in the order provided in Section 6.02) for Property Advances, the
right of the Servicer, the Custodian or the Fiscal Agent to
reimburse itself pursuant to this clause (ii) being limited to
either (x) any collections in excess of amounts necessary to make
the Monthly Payment on or in respect of the particular Mortgage
Loan or REO Property respecting which each such Property Advance
was made, or (y) any other amounts in the Collection Account in the
event that such Property Advances have

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<PAGE>

been deemed to be Nonrecoverable Advances in accordance with
Section 4.02 hereof;

(iii) to pay to the Fiscal Agent, the Custodian or the Servicer (in the
order provided in Section 6.02) the Property Advance Interest
Amount (subject to the reimbursement limitations set forth in (ii)
above);

(iv) to pay on or before each Remittance Date to the Servicer and the
Custodian, as applicable, as compensation, the unpaid Servicing Fee
and Custodian Fee in respect of such Remittance Date, to be paid
from interest received on the related Mortgage Loans (except with
respect to the Servicing Fee for any Specially Serviced Mortgage
Loan, which shall be paid to the Servicer as a Property Advance
(and reimbursable with interest thereon at the Property Advance
Rate) to the extent interest on the related Mortgage Loan has not
been received in order to pay such fee), and to pay from time to
time, to the Servicer any interest or investment income earned on
funds deposited in the Collection Account, and to pay to the
Servicer as additional Servicing Compensation any other amounts
constituting Servicing Compensation (including any investment
income earned on funds on deposit in the Rent Escrow Account which
were transferred to the Collection Account and not paid to the
Servicer);

(v) to pay on or before each Remittance Date to the purchaser of any
Specially Serviced Mortgage Loan or REO Property, as the case may
be, with respect to each Mortgage Loan or REO Property that has
previously been purchased or repurchased by such purchaser, all
amounts received thereon during the related Collection Period and
subsequent to the date as of which the amount required to effect
such purchase or repurchase was determined;

(vi) to the extent not reimbursed or paid pursuant to any other clause
of this Section 3.06, to reimburse or pay the Servicer, the
Custodian or the Fiscal Agent, as applicable, for unpaid items
incurred by such Person pursuant to the last sentence of Section
3.10(b), Section 3.12(d), Section 3.17 (b) and (c), Section
3.18(a), Section 3.25, Section 5.03, Section 6.02 or Section
7.04(b) and (d), or any other provision of this Agreement pursuant
to which such Person is entitled to reimbursement or payment from
the Owner, in each case only to the extent reimbursable under such
Section, it being acknowledged that (x) this clause (vi) shall not
be deemed to modify the substance of any such Section, including
the provisions of such Section that set forth the extent to which
one of the foregoing Persons is or is not entitled to payment or
reimbursement and (y) in the event that there are insufficient
funds in the Collection

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<PAGE>

Account to permit such reimbursement or payment, the Owner shall
remit the necessary funds to Servicer for deposit in the Collection
Account within ten (10) Business Days after the Owner's receipt of
an itemized invoice therefor;

(vii) on or before each Remittance Date, to deposit into each Maintenance
Reserve Account the related Maintenance Deposit Amounts for each
Mortgage Loan to the extent of funds available therefor;

(viii) to withdraw any amount deposited into the Collection Account that
was not required to be deposited therein; and

(ix) to clear and terminate the Collection Account upon the termination
of this Agreement.

The Servicer shall keep and maintain separate accounting, on a Mortgage
Loan-by-Mortgage Loan basis, for the purpose of justifying any withdrawal from
the Collection Account pursuant to subclauses (ii) - (vii) above.

The Servicer shall pay to the Custodian and the Fiscal Agent from the
Collection Account (to the extent permitted by clauses (i)-(viii) above) amounts
permitted to be paid to the Custodian or the Fiscal Agent therefrom, promptly
upon receipt of a certificate of a Responsible Officer of the Custodian
describing the item and amount to which the Custodian or the Fiscal Agent is
entitled. The Servicer may rely conclusively on any such certificate and shall
have no duty to recalculate the amounts stated therein.

The Custodian, the Fiscal Agent and the Servicer shall in all cases have a
right prior to the Owner and NationsBank to any funds on deposit in the
Collection Account from time to time for the reimbursement or payment of
Servicing Fees, Custodian Fees and Property Advances (subject to the limitation
set forth in Section 3.06(ii) above) and any expenses (including Property
Advance Interest Amounts subject to the limitations set forth in Section
3.06(ii) above)) hereunder to the extent such expenses are to be reimbursed or
paid from amounts on deposit in the Collection Account pursuant to this
Agreement (and to have such amounts paid directly to third party contractors for
any invoices approved by the Custodian or the Servicer, as applicable).

SECTION 3.07. INVESTMENT OF FUNDS IN THE COLLECTION ACCOUNT AND THE
RESERVE ACCOUNTS

(a) The Servicer may direct any depository institution maintaining the
Collection Account, the Rent Escrow Account, any REO Account or (subject to
applicable laws and the related Mortgage Loan Documents) any Reserve Accounts
(each, for purposes of this Section 3.07, an "Investment Account") to invest the
funds in such Investment Account in one or more Permitted Investments that bear
interest or are sold at a discount, and that mature, unless payable on demand,
no later than the Business Day preceding the date on which such

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funds are required to be withdrawn from such Investment Account pursuant to this
Agreement. Any direction by the Servicer to invest funds on deposit in an
Investment Account shall be in writing and shall certify that the requested
investment is a Permitted Investment which matures at or prior to the time
required hereby or is payable on demand. In the case of any Reserve Account,
the Servicer shall act upon the written request of the related Borrower, to the
extent the Servicer is required to do so under the terms of the related Mortgage
Loan, provided that in the absence of appropriate written instructions from such
Borrower meeting the requirements of this Section 3.07, the Servicer shall have
no obligation to, but will be entitled to, direct the investment of funds in
such Reserve Accounts. All such Permitted Investments shall be held to maturity,
unless payable on demand. Any investment of funds in an Investment Account
shall be made in the name of the Owner and NationsBank or in the name of a
nominee of the Owner or NationsBank. The Owner shall have sole control (except
with respect to investment direction which shall be in the sole control of the
Servicer as an independent contractor to the Owner) over each such investment
and any certificate or other instrument evidencing any such investment shall be
delivered directly to the Owner or its agent (which shall initially be the
Servicer), together with any document of transfer, if any, necessary to transfer
title to such investment to the Owner or its nominee. The Owner shall have no
responsibility or liability with respect to the investment directions of the
Servicer or any losses resulting therefrom, whether from Permitted Investments
or otherwise. In the event amounts on deposit in an Investment Account are at
any time invested in a Permitted Investment payable on demand, the Servicer
shall:

(x) consistent with any notice required to be given thereunder,
demand that payment thereon be made on the last day such
Permitted Investment may otherwise mature hereunder in an
amount equal to the lesser of (1) all amounts then payable
thereunder and (2) the amount required to be withdrawn on such
date; and

(y) demand payment of all amounts due thereunder promptly upon
determination by the Servicer that such Permitted Investment
would not constitute a Permitted Investment in respect of
funds thereafter on deposit in the related Investment Account.

(b) All income and gain realized from investment of funds deposited in
the Collection Account, Rent Escrow Account, any REO Account and any Reserve
Account as to which the related Borrower is not entitled to interest thereon
shall be for the benefit of the Servicer and may be withdrawn by the Servicer
from time to time in accordance with Sections 3.05(a) and 3.17(b), as
applicable. The Servicer shall deposit from its own funds in the Collection
Account, the Rent Escrow Account, any REO Account, as applicable, the amount of
any loss incurred in respect of any such Permitted Investment immediately upon
realization of such loss. The Servicer shall also deposit into each Reserve
Account any amounts representing losses on Permitted Investments in which such
Reserve Accounts have been invested, except to the extent that amounts are
invested for the benefit of the Borrower under

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applicable law or the terms of the related Mortgage Loan. The income and gain
realized from investment of funds deposited in any Reserve Account shall be paid
from time to time to the related Borrower to the extent required under the
Mortgage Loan or applicable law.

(c) Except as otherwise expressly provided in this Agreement, if any
default occurs in the making of a payment due under any Permitted Investment, or
if a default occurs in any other performance required under any Permitted
Investment, the Owner may take such action as may be appropriate to enforce such
payment or performance, including the institution and prosecution of appropriate
proceedings.

SECTION 3.08. MAINTENANCE OF INSURANCE POLICIES AND ERRORS AND
OMISSIONS AND FIDELITY COVERAGE

(a) The Servicer on behalf of the Owner, as mortgagee, shall use its
best efforts in accordance with the Servicing Standard to cause the related
Borrower to maintain with respect to each Mortgaged Property (other than REO
Property), and if the related Borrower does not so maintain, the Servicer shall
cause to be maintained, to the extent the Owner has an insurable interest, such
insurance as is required under the related Mortgage Loan and which is available
at commercially reasonable rates, providing coverage against (i) "all risks" of
physical loss or damage, including fire and extended coverage, on the related
Mortgaged Property in an amount which is at least equal to the lesser of (x) one
hundred percent (100%) of the then "full replacement cost" of the improvements
and equipment, (excluding foundations, footings and excavation costs), without
deduction for physical depreciation, and (y) the outstanding principal balance
of the related Mortgage Loan or such other amount as is necessary to prevent any
reduction in such policy by reason of the application of co-insurance and to
prevent the Owner thereunder from being deemed to be a co-insurer, (ii) rental
loss insurance equal to the aggregate amount of the Basic Rent payable under the
related Lease for a period of one year after the date of the fire or casualty in
question, irrespective of whether the Lease on the Mortgaged Property has been
terminated during such one year period, and (iii) "forced place" coverage (in an
amount which satisfies the requirements set forth in item (i) above). The
Servicer shall also maintain, to the extent not inconsistent with the
immediately preceding sentence and to the extent available at commercially
reasonable rates, with respect to each REO Property (A) public liability
insurance providing such coverage against such risks as the Servicer determines,
consistent with the related Mortgage and the Servicing Standard, to be in the
best interests of the Owner and (B) such other insurance as was provided in the
related Mortgage Loan immediately prior to foreclosure in the case of each of
(A) and (B) from a Qualified Insurer. In the case of any insurance otherwise
required to be maintained pursuant to this section that is not being so
maintained because the Servicer has determined that it is not available at
commercially reasonable rates, the Servicer shall deliver an Officer's
Certificate to the Owner detailing the steps that the Servicer took in seeking
such insurance and the factors which lead to its determination that such
insurance is not so available. Any amounts collected by the Servicer under any
such policies (other than amounts to be applied to the restoration or repair of
the related Mortgaged Property or amounts to be released to the Borrower in
accordance with the

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terms of the related Mortgage) shall be deposited into the Collection Account
pursuant to Section 3.05, subject to withdrawal pursuant to Section 3.06. It is
understood and agreed that no earthquake or other additional insurance other
than flood insurance is to be required of any Borrower or to be maintained by
the Servicer other than pursuant to the terms of the related Mortgage Loan and
pursuant to such applicable laws and regulations as shall at any time be in
force and as shall require such additional insurance. If the Mortgaged Property
is located in a federally designated special flood hazard area, the Servicer
will use its best efforts in accordance with the Servicing Standard to cause the
related Borrower to maintain or will itself obtain flood insurance in respect
thereof to the extent available at commercially reasonable rates. Such flood
insurance shall be in an amount equal to the lesser of (i) the unpaid principal
balance of the related Mortgage Loan and (ii) the maximum amount of such
insurance required by the terms of the related Mortgage and as is available for
the related property under the national flood insurance program (assuming that
the area in which such property is located is participating in such program).
If an REO Property is located in a federally designated special flood hazard
area, the Servicer will obtain flood insurance in respect thereof providing
substantially the same coverage as described in the preceding sentences. If at
any time during the term of this Agreement a recovery under a flood or fire and
hazard insurance policy in respect of an REO Property is not available but would
have been available if such insurance were maintained thereon in accordance with
this Section 3.08 the standards applied to Mortgaged Properties described
herein, the Servicer shall either (i) immediately deposit into the Collection
Account from its own funds the amount that would have been recovered or (ii)
apply to the restoration and repair of the property from its own funds the
amount that would have been recovered, if such application would be consistent
with the Servicing Standard; PROVIDED, HOWEVER, that the Servicer shall not be
responsible for any shortfall in insurance proceeds resulting from an insurer's
refusal or inability to pay a claim unless such refusal or inability results
from the Servicer's negligence or willful misconduct. Costs to the Servicer of
maintaining insurance policies pursuant to this Section 3.08 shall be paid by
the Servicer as a Property Advance and shall be reimbursable to the Servicer
with interest at the Property Advance Rate, which reimbursement may be effected
under Section 3.06.

The Servicer agrees to prepare and present, on behalf of itself and the
Owner, claims under each related insurance policy maintained pursuant to this
Section 3.08(a) in a timely fashion in accordance with the terms of such policy
and to take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder.

The Servicer shall require that all insurance policies required hereunder
shall name the Owner or the Servicer, on behalf of the Owner as the mortgagee,
as loss payee.

(b) (I) If the Servicer obtains and maintains a blanket insurance
policy with a Qualified Insurer at its own expense insuring against fire and
hazard losses, 12-month rent interruptions or other required insurance on all of
the Mortgage Loans as to which the Borrower has not maintained insurance, it
shall conclusively be deemed to have satisfied its obligations concerning the
maintenance of such insurance coverage set forth in Section 3.08(a), it being
understood and agreed that such policy may contain a deductible clause, in

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which case the Servicer shall, in the event that (i) there shall not have been
maintained on one or more of the related Mortgaged Properties a policy otherwise
complying with the provisions of Section 3.08(a), and (ii) there shall have been
one or more losses which would have been covered by such a policy had it been
maintained, immediately deposit into the Collection Account from its own funds
the amount not otherwise payable under the blanket policy because of such
deductible clause to the extent that any such deductible exceeds the deductible
limitation that pertained to the related Mortgage Loan, or, in the absence of
such deductible limitation, the deductible limitation which is consistent with
the Servicing Standard. In connection with its activities as Servicer hereunder
the Servicer agrees to prepare and present, on behalf of itself and the Owner,
claims under any such blanket policy which it maintains in a timely fashion in
accordance with the terms of such policy and to take such reasonable steps as
are necessary to receive payment or permit recovery thereunder.

(II) If the Servicer causes any Mortgaged Property or REO Property
to be covered by a master force placed insurance policy, which policy is issued
by a Qualified Insurer and provides no less coverage in scope and amount for
such Mortgaged Property or REO Property than the insurance required to be
maintained pursuant to Section 3.08(a), the Servicer shall conclusively be
deemed to have satisfied its obligations to maintain insurance pursuant to
Section 3.08(a). In the event that the Servicer shall cause any Mortgaged
Property or REO Property to be covered by such a master force placed insurance
policy, the incremental costs of such insurance applicable to such Mortgaged
Property or REO Property (i.e., other than any minimum or standby premium
payable for such policy whether or not any Mortgage Property or REO Property is
covered thereby) shall be paid by the Servicer as a Property Advance. Such
policy may contain a deductible clause, in which case the Servicer shall, in the
event that (i) there shall not have been maintained on the related Mortgaged
Property or REO Property a policy otherwise complying with the provisions of
Section 3.08(a), and (ii) there shall have been one or more losses which would
have been covered by such a policy had it been maintained, immediately deposit
into the Collection Account from its own funds the amount not otherwise payable
under such policy because of such deductible to the extent that any such
deductible exceeds the deductible limitation that pertained to the related
Mortgage Loan, or, in the absence of any such deductible limitation, the
deductible limitation which is consistent with the Servicing Standard.

(c) The Servicer shall maintain a fidelity bond in the form and amount
that would meet the servicing requirements of prudent institutional commercial
mortgage loan servicers. The Servicer shall be deemed to have complied with
this provision if one of its respective Affiliates has such fidelity bond
coverage and, by the terms of such fidelity bond, the coverage afforded
thereunder extends to the Servicer. In addition, the Servicer shall keep in
force during the term of this Agreement a policy or policies of insurance
covering loss occasioned by the errors and omissions of its officers and
employees in connection with its obligations to service the Mortgage Loans
hereunder in the form and amount that would meet the servicing requirements of
prudent institutional commercial mortgage loan servicers. The Servicer shall
cause each and every sub-servicer for it to maintain, or cause to be maintained
by any agent or contractor servicing any Mortgage Loan on behalf of such
sub-servicer, a

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fidelity bond and an errors and omissions insurance policy which satisfy the
requirements for the fidelity bond and the errors and omissions policy to be
maintained by the Servicer pursuant to this Section 3.08(c). All fidelity bonds
and policies of errors and omissions insurance obtained under this Section
3.08(c) shall be issued by a Qualified Insurer.

SECTION 3.09. ENFORCEMENT OF DUE-ON-SALE CLAUSES; ASSUMPTION
AGREEMENTS

(a) If any Mortgage Loan contains a provision in the nature of a
"due-on-sale" clause, which, by its terms:

(i) provides that such Mortgage Loan shall (or may at the related
mortgagee's option) become due and payable upon the sale or other
transfer of an interest in the related Mortgaged Property, or

(ii) provides that such Mortgage Loan may not be assumed without the
consent of the related mortgagee in connection with any such sale
or other transfer,

then the Servicer shall notify the Owner in the event the Servicer has actual
notice of a proposed sale or transfer or the Mortgaged Property and shall, for
so long as such Mortgage Loan is owned by the Owner and on behalf of the Owner,
enforce such provision to the extent permitted under the terms of such Mortgage
Loan, applicable law and governmental regulations, unless the Owner has notified
the Servicer in writing that it is not to enforce such "due-on-sale" provision.
Subject to the foregoing, the Servicer is authorized to take or enter into an
assumption agreement from or with the Person to whom such Mortgaged Property has
been or is about to be conveyed, or to release the original related Borrower
from liability upon such Mortgage Loan and substitute the new Borrower as
obligor thereon. To the extent permitted by law, the Servicer shall enter into
an assumption or substitution agreement only if the Owner, upon prior written
notice, consents to such assumption or substitution. The Servicer shall notify
the Owner and the Custodian that any such assumption or substitution agreement
has been completed by forwarding to the Custodian (with a copy to the Owner) the
original of such agreement (except to the extent such original has been
submitted to the applicable recording office, in which event the Servicer shall
provide the Custodian with a copy of such agreement), which document shall be
added to the related Custodian Mortgage File and shall, for all purposes, be
considered a part of such Custodian Mortgage File to the same extent as all
other documents and instruments constituting a part thereof. In connection with
any such assumption or substitution agreement, the Mortgage Rate, principal
amount and other material payment terms (including any cross-collateralization
and cross-default provisions) of such Mortgage Loan pursuant to the related Note
and Mortgage, shall not be changed, other than as directed by the Owner in
writing. Assumption fees collected by the Servicer for entering into an
assumption or substitution agreement will be retained by the Servicer as
additional Servicing Compensation.

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(b) If any Mortgage Loan contains a provision in the nature of a
"due-on-encumbrance" clause, which, by its terms:

(i) provides that such Mortgage Loan shall (or may at the related
mortgagee's option) become due and payable upon the creation of any
lien or other encumbrance on such Mortgaged Property, or

(ii) requires the consent of the related mortgagee to the creation of
any such lien or other encumbrance on such Mortgaged Property,

then, for so long as such Mortgage Loan is owned by the Owner, to the extent
that the Servicer has actual notice of any proposed or actual additional
encumbrance, the Servicer, on behalf of the Owner, shall give written notice to
the Owner of such additional encumbrance and shall follow such written
instructions as are provided by the Owner.

(c) Nothing in this Section 3.09 shall constitute a waiver of the Owner's
right, as the mortgagee of record, to receive notice of any assumption of a
Mortgage Loan, any sale or other transfer of the related Mortgaged Property or
the creation of any lien or other encumbrance with respect to such Mortgaged
Property.

SECTION 3.10. REALIZATION UPON MORTGAGE LOANS

(a) With respect to any Specially Serviced Mortgage Loan, the Servicer
shall follow the written instructions of the Owner in determining whether to
grant a modification, waiver or amendment of the terms of such Specially
Serviced Mortgage Loan, commence foreclosure proceedings or attempt to sell such
Specially Serviced Mortgage Loan.

(b) The Servicer shall consult with, and follow the written
instructions of, the Owner prior to taking any of the following actions:

(i) granting or agreeing to any proposed modification of, or waiver
with respect to, a Specially Serviced Mortgage Loan that would
result in the extension of the stated maturity of such loan, a
reduction in the Mortgage Rate, any Monthly Payment or any
Prepayment Premium with respect to such Specially Serviced Mortgage
Loan or a forgiveness of interest on or principal of such Specially
Serviced Mortgage Loan;

(ii) proceeding with any proposed foreclosure of a Specially Serviced
Mortgage Loan or any acquisition of a Mortgaged Property by deed in
lieu of foreclosure;

(iii) proceeding with any proposed sale of a Specially Serviced Mortgage
Loan or REO Property (other than upon the Reconstitution Date); or

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(iv) taking any action pursuant to Section 3.10(g) to bring a Mortgaged
Property relating to a Specially Serviced Mortgage Loan or an REO
Property into compliance with applicable Environmental Laws.

Notwithstanding anything herein to the contrary, the Servicer shall not be
obligated to take, or to refrain from taking, any actions which the Owner
requests that the Servicer take or refrain from taking to the extent that the
Servicer determines in its reasonable discretion that such actions shall cause
(i) a violation of applicable laws, regulations, codes, ordinances or
restrictive covenants with respect to any Mortgage Loan, Mortgaged Property, or
REO Property, or (ii) a violation of any provision of a Mortgage Loan Document.
In addition, in the event that (1) the Owner does not instruct or authorize the
Servicer to foreclose or otherwise realize or liquidate any Mortgaged Property
for which an event of default under the related Mortgage Loan has occurred and
is continuing or (2) the Owner does not instruct or authorize the Servicer, or
the Servicer is otherwise not permitted under the terms of the related Mortgage
Loan Documents or this Agreement, to foreclose or otherwise realize or liquidate
the related Mortgaged Property notwithstanding the related Borrower's continuing
failure to pay, perform or observe a Borrower Lease Obligation, then, in the
case of either (1) or (2) above, the Owner shall promptly reimburse the Servicer
for any unreimbursed Property Advances with respect to the related Mortgage Loan
(including interest thereon at the Property Advance Rate).

(c) In connection with any foreclosure or other acquisition, the
Servicer shall pay the costs and expenses in any such proceedings as a Property
Advance unless the Servicer determines, in its good faith judgment, that such
Property Advance would constitute a Nonrecoverable Advance in accordance with
Section 4.02. The Servicer shall be entitled to reimbursement of Property
Advances (with interest at the Property Advance Rate) made pursuant to the
preceding sentence to the extent permitted by Section 3.06(ii) (or Section
3.06(iii), in the case of interest at the Property Advance Rate).

If the Servicer is instructed, in writing, by the Owner to proceed with a
non-judicial foreclosure in accordance with the laws of the state where the
related Mortgaged Property is located, the Servicer shall not be required to
pursue a deficiency judgment against the related Borrower or any other liable
party if the laws of such state do not permit such a deficiency judgment after a
non-judicial foreclosure or if the Servicer determines, in its best judgment,
that the likely recovery if a deficiency judgment is obtained will not be
sufficient to warrant the cost, time, expense and/or exposure of pursuing such a
deficiency judgment and such determination is evidenced by an Officers'
Certificate delivered to the Owner.

In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
shall be issued to the Owner, or to its nominee (which shall not be the
Servicer). Notwithstanding any such acquisition of title and cancellation of
the related Mortgage Loan, such Mortgage Loan shall be considered to be a
Mortgage Loan held by the Owner until such time as the related REO Property
shall be sold by the Owner and the Scheduled Principal Balance of each REO
Mortgage Loan shall be

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reduced by any Net REO Proceeds allocated to principal. Consistent with the
foregoing, for purposes of all calculations hereunder, so long as such Mortgage
Loan shall be considered to be an outstanding Mortgage Loan:

(i) it shall be assumed that, notwithstanding that the indebtedness
evidenced by the related Note shall have been discharged, such Note
and, for purposes of determining the Scheduled Principal Balance
thereof, the related amortization schedule in effect at the time of
any such acquisition of title, remain in effect; and

(ii) Net REO Proceeds received in any month shall be applied to amounts
that would have been payable under the related Note in accordance
with the terms of such Note. In the absence of such terms, Net REO
Proceeds shall be deemed to have been received FIRST in payment of
the accrued interest that remained unpaid on the date that the
related REO Property was acquired by the Owner; SECOND in respect
of the delinquent principal installments that remained unpaid on
such date; and THEREAFTER, Net REO Proceeds received in any month
shall be applied to the payment of installments of principal and
accrued interest on such Mortgage Loan deemed to be due and payable
in accordance with the terms of such Note and such amortization
schedule. If such Net REO Proceeds exceed the Monthly Payment then
payable, the excess shall be treated as a Principal Prepayment
received in respect of such Mortgage Loan.

(d) [Reserved]

(e) Notwithstanding any provision to the contrary contained in this
Agreement, the Servicer shall not, unless otherwise instructed to do so by the
Owner in writing, on behalf of the Owner, obtain title to a Mortgaged Property
as a result of or in lieu of foreclosure or otherwise obtain title to any direct
or indirect partnership interest or other equity interest in any Borrower
pledged pursuant to a pledge agreement and thereby be the beneficial owner of a
Mortgaged Property, and shall not otherwise acquire possession of, or take any
other action with respect to, any Mortgaged Property if, as a result of any such
action, the Owner would be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or "operator" of such
Mortgaged Property within the meaning of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended from time to time,
or any comparable law, unless in addition to the other requirements specified in
this Section 3.10, the Servicer has previously determined in accordance with the
Servicing Standard, based on an updated environmental assessment report prepared
by an Independent Person who regularly conducts environmental audits, that:

(A) such Mortgaged Property is in compliance with applicable
environmental laws, and

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(B) there are no circumstances present at such Mortgaged Property
relating to the use, management or disposal of any Hazardous Materials for
which investigation, testing, monitoring, containment, clean-up or
remediation could be required under any currently effective federal, state
or local law or regulation.

In the event that the environmental assessment first obtained by the
Servicer with respect to a Mortgaged Property indicates that such Mortgaged
Property may not be in compliance with applicable environmental laws or that
Hazardous Materials may be present but does not definitively establish such
fact, the Servicer shall cause such further environmental tests as the Owner, in
writing, shall deem prudent to protect the interests of the Owner to be
conducted by an Independent Person who regularly conducts such tests. Any such
tests shall be deemed part of the environmental assessment obtained by the
Servicer for purposes of this Section 3.10.

(f) The environmental assessment contemplated by Section 3.10(e) shall
be prepared by any Independent Person (the "Environmental Consultant") who
regularly conducts environmental audits for purchasers of commercial properties
located in the same general area as the Mortgaged Property with respect to which
the Servicer is ordering such environmental assessment, as determined by the
Servicer in a manner consistent with the Servicing Standard. The Servicer shall
pay as a Property Advance the cost of preparation of such environmental
assessments. The Servicer shall be entitled to reimbursement of such Property
Advances (with interest at the Property Advance Rate) made pursuant to the
preceding sentence to the extent permitted pursuant to Section 3.06(ii) (or
Section 3.06(iii) in the case of interest at the Property Advance Rate).

(g) The Servicer shall follow the written instructions of the Owner
with regard to any clean up of the Mortgaged Property or the taking of any
action to bring any Mortgaged Property into compliance with applicable
environmental laws. Neither the Servicer nor the Custodian shall be required to
make a Property Advance for the cost of any such compliance, containment,
clean-up or remediations and such expense shall be an expense of the Owner.

(h) The Servicer shall report to the IRS and to the related Borrower,
in the manner required by Section 6050J of the Code, the information required to
be reported regarding any Mortgaged Property which is abandoned or foreclosed.
The Servicer shall also file with the IRS and provide to the related Borrower
reports under Section 6050H and 6050P of the Code. The Servicer shall deliver a
copy of any such report to the Owner.

SECTION 3.11. [RESERVED].

SECTION 3.12. SERVICING COMPENSATION

(a) As compensation for its activities hereunder, the Servicer shall be
entitled to the Servicing Fee, which shall be payable solely from receipts on
the related Mortgage Loans, and may be withheld from payments on account of
interest prior to deposit in the Collection Account, or may be withdrawn from
amounts on deposit in

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the Collection Account as set forth in Section 3.06(iv). The Servicer's rights
to the Servicing Fee may not be transferred in whole or in part except in
connection with the transfer of all of the Servicer's responsibilities and
obligations under this Agreement. In addition, the Servicer shall be entitled
to receive, as additional Servicing Compensation, any late fees, late payment
charges, assumption fees, loan modification expenses, extension fees, loan
service transaction fees, Reserve Account administration fees, beneficiary
statement charges, or similar items (but not including any Prepayment Premiums),
in each case to the extent received and not required to be deposited or retained
in the Collection Account pursuant to Section 3.05 or to the extent permitted to
be withdrawn from the Collection Account pursuant to Section 3.06. The Servicer
shall also be entitled pursuant to, and to the extent provided in, Section
3.07(b) to withdraw from the Collection Account, the Rent Escrow Account and the
REO Accounts and to receive from the Reserve Accounts (to the extent not
required to be paid to the related Borrower pursuant to the related Mortgage
Loan Documents or applicable law) any interest or other income earned on
deposits therein.

Except as otherwise provided herein, the Servicer shall pay all expenses
incurred by it in connection with its servicing activities hereunder and the
Custodian shall pay all expenses incurred by it in connection with its
activities hereunder. In the event the Servicer is required to provide services
relating to modifications with respect to any Mortgage Loan, the Servicer shall
be entitled to charge the Borrower for any expenses relating to such work.
Except as so specifically agreed to by the Owner, the Servicer shall not be
entitled to any loan modification fees, and any such loan modification fees
payable by the Borrower and received by the Servicer shall be promptly deposited
into the Collection Account in accordance with Section 3.05(b)(vii).

(b) In addition to other Servicer compensation provided for in this
Agreement, and not in lieu thereof, the Servicer shall be entitled to the
Disposition Fee payable out of the Liquidation Proceeds prior to the deposit of
the related Net Liquidation Proceeds in the Collection Account.

(d) The Servicer and the Custodian shall be entitled to reimbursement
from the Owner for the unusual or unanticipated costs and expenses incurred by
them in the performance of their duties under this Agreement which are
non-routine or extraordinary expenses. Such expenses shall include, by way of
example and not by way of limitation, environmental assessments, appraisals in
connection with foreclosure, the fees and expenses of any administrative or
judicial proceeding and expenses expressly identified as reimbursable in Section
3.06(vi).

(e) Consistent with Section 4.02 relating to Property Advances, no
provision of this Agreement shall require the Servicer, the Custodian or the
Fiscal Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or thereunder, or in
the exercise of any of their rights or powers, if, in the

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good faith business judgment of the Servicer, the Custodian or the Fiscal Agent
repayment of such funds would not be ultimately recoverable from late payments,
Insurance Proceeds, Condemnation Proceeds, Net Liquidation Proceeds and other
collections on or in respect of the Mortgage Loans, or from adequate indemnity
against such risk or liability.

If the Servicer receives a request or inquiry from a Borrower or any other
Person the response to which would, in the Servicer's good faith business
judgment, require the assistance of Independent legal counsel or other
consultant to the Servicer, the cost of which would not be an expense of the
Owner hereunder, then the Servicer, as the case may be, shall not be required to
take any action in response to such request or inquiry unless such Borrower or
such other Person, as applicable, makes arrangements for the payment of the
Servicer's expenses associated with such counsel or other consultant (including,
without limitation, posting an advance payment for such expenses) satisfactory
to the Servicer in its sole discretion. Unless such arrangements have been
made, the Servicer shall have no liability to any Person for the failure to
respond to such request or inquiry except if otherwise required to act
hereunder.

SECTION 3.13. REPORTS TO THE OWNER; COLLECTION ACCOUNT STATEMENTS.

(a) The Servicer shall deliver to the Owner, with a copy to the
Custodian and Fiscal Agent, on or before each Remittance Date, (i) the Servicer
Remittance Report with respect to the related Determination Date and (ii) a
written statement of required Property Advances for the related Determination
Date together with the certificate and documentation required by Section 4.02
relating to any Nonrecoverable Advance determination made as of such
Determination Date.

(b) For so long as the Servicer makes deposits into and withdrawals
from the Rent Escrow Account and the Collection Account, not later than fifteen
days after each Remittance Date, the Servicer shall forward to the Owner a
statement prepared by the Servicer setting forth the status of the Rent Escrow
Account and the Collection Account as of the close of business on the last
Business Day of the related Collection Period showing the aggregate amount of
deposits into and withdrawals from the Rent Escrow Account and the Collection
Account for each category of deposit specified in Section 3.05 and each category
of withdrawal specified in Section 3.06 (or Section 3.05 in the case of the Rent
Escrow Account) for such Collection Period.

SECTION 3.14. ANNUAL STATEMENT AS TO COMPLIANCE

The Servicer shall deliver to the Owner on or before March 31 of each year,
beginning with March 31, 1997, an Officers' Certificate stating, as to each
signatory thereof, (i) that a review of the activities of the Servicer during
the preceding calendar year (or such shorter period from the Closing Date to the
end of the related calendar year) and of its performance under this Agreement
has been made under such officer's supervision, (ii) that, to the best of such
officer's knowledge, based on such review, it has fulfilled all of its
obligations under this Agreement throughout such year (or such shorter period),
or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officer, the nature and status
thereof and what action it proposes to take with respect thereto and (iii) that,
to the best of such officer's knowledge, each sub-servicer has fulfilled its
obligations

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under its sub-servicing agreement in all material respects, or, if there has
been a material default in the fulfillment of such obligations, specifying each
such default known to such officer and the nature and status thereof.

SECTION 3.15. ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT

On or before March 31 of each year, beginning with March 31, 1997, the
Servicer at its expense shall cause a firm of nationally recognized Independent
public accountants (who may also render other services to the Servicer) which is
a member of the American Institute of Certified Public Accountants to furnish a
statement to the Owner, to the effect that such firm has examined certain
documents and records relating to the servicing of the similar mortgage loans
under similar agreements (which may or may not include this Agreement) and that,
on the basis of such examination conducted substantially in compliance with
generally accepted auditing standards and the Uniform Single Attestation Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, such
servicing has been conducted in compliance with similar agreements except for
such significant exceptions or errors in records that, in the opinion of such
firm, generally accepted auditing standards and the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC require it to report, in which case such exceptions and errors shall be so
reported.

SECTION 3.16. [RESERVED].

SECTION 3.17. TITLE AND MANAGEMENT OF REO PROPERTIES

(a) The Servicer shall maintain accurate records with respect to each
related REO Property reflecting the status of taxes, assessments and other
similar items that are or may become a lien on such REO Property and the status
of insurance premiums payable with respect thereto.

(b) The Servicer shall have full power and authority, subject only to
the specific requirements and prohibitions of this Agreement, to do any and all
things in connection with any REO Property as are consistent with the manner in
which the Servicer manages and operates similar property owned or managed by the
Servicer or any of its Affiliates, all on such terms and for such period as the
Servicer deems to be in the best interests of the Owner (unless otherwise
instructed, in writing, by the Owner), and, in connection therewith, the
Servicer shall only agree to the payment of management fees that are consistent
with general market standards. The Servicer shall segregate and hold all
revenues received by it with respect to any REO Property separate and apart from
its own funds and general assets and shall establish and maintain with respect
to any REO Property a segregated

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custodial account (each, an "REO Account"), each of which shall be an Eligible
Account and shall be entitled "Capital Lease Funding, L.P. and NationsBank,
N.A., REO Account". The Servicer shall be entitled to any interest or
investment income earned on funds deposited in an REO Account to the extent
provided in Section 3.07(b). The Servicer shall deposit or cause to be
deposited in the related REO Account within one Business Day after receipt all
REO Proceeds received by it with respect to any REO Property, and shall withdraw
therefrom funds necessary for the proper operation, management and maintenance
of such REO Property and for other Property Protection Expenses with respect to
such REO Property, including:

(i) all insurance premiums due and payable in respect of such REO
Property;

(ii) all real estate taxes and assessments in respect of such REO
Property that may result in the imposition of a lien thereon; and

(iii) all costs and expenses reasonable and necessary to protect,
maintain, manage, operate, repair and restore such REO Property,
including any property management fees.

To the extent that such REO Proceeds are insufficient for the purposes set
forth in clauses (i) through (iii) above, the Servicer shall make a Property
Advance equal to the amount of such shortfall. The Servicer shall be entitled
to reimbursement of such Property Advances (with interest at the Property
Advance Rate) made pursuant to the preceding sentence, to the extent permitted
pursuant to Section 3.06. The Servicer shall transfer from each REO Account to
the Collection Account on a monthly basis prior to the related Remittance Date
the Net REO Proceeds received or collected from the related REO Property, except
that in determining the amount of such Net REO Proceeds, the Servicer may retain
in such REO Account reasonable reserves for repairs, replacements and necessary
capital improvements and other related expenses (provided that such reserves
shall not cover a period longer than six months).

(c) Promptly following any acquisition by the Owner of an REO Property,
the Servicer shall obtain (i) an update of any appraisal, if any, performed in
connection with the realization or work-out with respect to Specially Serviced
Mortgage Loans pursuant to Section 3.10 which is more than 12 months old, or
(ii) to the extent that an appraisal has not been obtained pursuant to such
Section, an appraisal of such REO Property by an Independent appraiser familiar
with the area in which such REO Property is located in order to determine the
fair market value of such REO Property and shall notify the Owner of the results
of such appraisal. Any such appraisal shall be conducted in accordance with MAI
standards and the cost thereof shall be an expense of the Owner.

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SECTION 3.18. SALE OF SPECIALLY SERVICED MORTGAGE LOANS AND REO
PROPERTIES

(a) With respect to any Specially Serviced Mortgage Loan or REO
Property which the Servicer has been instructed, in writing, to sell on behalf
of the Owner in accordance with Section 3.10 or otherwise, the Servicer shall
use its best efforts to sell to any Person (other than an Affiliate of the
Servicer) such Specially Serviced Mortgage Loan or REO Property on commercially
reasonable terms that are consistent with the Servicing Standard; PROVIDED,
HOWEVER, that any such sale must be approved in writing by the Owner.

(b) If instructed by the Owner in writing, the Servicer shall act on
behalf of the Owner in negotiating and taking any other action necessary or
appropriate in connection with the sale of any Specially Serviced Mortgage Loan
or REO Property, including the collection of all amounts payable in connection
therewith. Any sale of a Specially Serviced Mortgage Loan or any REO Property
shall be without recourse to, or representation or warranty by, the Owner, the
Servicer or the Custodian (except that any contract of sale and assignment and
conveyance documents may contain customary warranties of title), and, if such
sale is consummated in accordance with the duties of the Servicer pursuant to
the terms of this Agreement, no such Person who so performed shall have any
liability to the Owner with respect to the purchase price therefor accepted by
the Servicer.

(c) Net Liquidation Proceeds related to any such sale shall be
promptly, and in any event within one Business Day following receipt thereof,
deposited in the Collection Account in accordance with Section 3.05(b)(v).

SECTION 3.19. ADDITIONAL OBLIGATIONS OF THE SERVICER; INSPECTIONS

The Servicer shall inspect or cause to be inspected (at its own expense)
each Mortgaged Property at such times and in such manner as are consistent with
the Servicing Standard, but in any event (i) the Servicer shall inspect each
Mortgaged Property (at its own expense) at least once every 12 months commencing
in January 1997; and (ii) if instructed to do so by the Owner and in the event
any Monthly Payment becomes more than 60 days delinquent (without giving effect
to any grace period permitted under the related Note or Mortgage), each related
Mortgaged Property shall be inspected by the Servicer (at the Owner's expense,
unless the Mortgage Loan is a Specially Serviced Mortgage Loan, in which case,
such inspection shall be at the expense of the Servicer) as soon as practicable
thereafter.

SECTION 3.20. AVAILABLE INFORMATION AND NOTICES

The Servicer shall promptly give written notice, specifying this Section
3.20 and including copies of any related notice or other documentation, to the
Owner of (a) any notice from a Borrower or insurance company (including the
insurer under any Lease Enhancement Insurance Policies) regarding an upcoming
voluntary or involuntary prepayment (including that resulting from a casualty or
condemnation) of all or part of the related

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Mortgage Loan (provided that a request by a Borrower or other party for a
quotation of the amount necessary to satisfy all obligations with respect to a
Mortgage Loan shall not, in and of itself, be deemed to be such notice); and (b)
of any other occurrence known to it with respect to a Mortgage Loan or REO
Property that the Servicer determines, in accordance with the Servicing
Standard, would have a material effect on such Mortgage Loan or REO Property,
which notice shall include an explanation as to the reason for such material
effect (provided that any extension of the term of any Mortgage Loan shall be
deemed to have a material effect).

The Servicer shall not be responsible for the accuracy or completeness of
any information supplied to it by a Borrower or otherwise for inclusion in any
such notice, and the Servicer and the Custodian shall be indemnified and held
harmless by the Owner against any loss, liability or expense incurred in
connection with any legal action relating to any statement or omission or
alleged statement or omission therein.

In addition to the other reports and information made available and
distributed to the Owner pursuant to other provisions of this Agreement, the
Servicer shall, in accordance with such reasonable rules and procedures as it
may adopt (which may include the requirement that an agreement governing the
availability, use and disclosure of such information, and which provides
adequate indemnity to the Servicer, be executed to the extent the Servicer deems
such action to be necessary or appropriate), also make available any information
relating to the Mortgage Loans, the Mortgaged Properties or the Borrowers, for
review by the Owner and any other Persons to whom the Servicer believes such
disclosure is appropriate, in each case except to the extent doing so is
prohibited by applicable law or by any documents related to a Mortgage Loan.

The Servicer shall make available at its offices during normal business
hours, for review by the Owner, any Person identified to the Servicer by the
Owner as a prospective transferee of a Mortgage Loan and any other Persons to
whom the Servicer believes such disclosure is appropriate, the following items:
(i) the inspection reports prepared by or on behalf of the Servicer in
connection with the property inspections conducted by the Servicer pursuant to
Section 3.19, (ii) any and all modifications, waivers and amendments of the
terms of a Mortgage Loan entered into by the Servicer and (iii) any and all
Officer's Certificates and other evidence delivered to the Owner to support the
Servicer's determination that any Property Advance was, or if made would be, a
Nonrecoverable Advance in accordance with Section 4.02 hereof. Copies of any
and all of the foregoing items shall be available from the Servicer upon
request. The Servicer shall be permitted to require payment (other than from
any Rating Agency) of a sum sufficient to cover the reasonable costs and
expenses incurred by it in providing copies of or access to any information
requested in accordance with this paragraph.

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SECTION 3.21. RESERVE ACCOUNTS; MAINTENANCE RESERVE ACCOUNT;
PERFORMANCE OF BORROWER'S LEASE OBLIGATIONS

(a) The Servicer shall administer each Reserve Account in accordance
with the related Mortgage Loan Documents and applicable law.

(b) With respect to each Mortgage Loan and to the extent required
thereby, the Servicer shall establish and maintain, in the name of the Owner,
NationsBank and the Borrower, a special reserve account (each, a "Maintenance
Reserve Account") to be held in trust for the benefit of the Owner, NationsBank
and the Borrower, which account shall serve as additional collateral securing
the obligations of the Borrower thereunder and which shall be available to
satisfy the Borrower Lease Obligations of the related Borrower (to the extent
that other Reserve Accounts have not been established pursuant to the Mortgage
Loan Documents for such obligations). The Servicer shall make monthly deposits
into the Maintenance Reserve Account from collections on the related Mortgage
Loans as provided in Section 3.06(vii) and shall apply the funds in such account
in accordance with Section 3.21(c). The deposit and expenditure of funds in the
Maintenance Reserve Account shall be made on a Mortgage Loan-by-Mortgage Loan
basis.

(c) In the event the Servicer has received actual notice of a condition
(a "Lease Termination Condition") with respect to any Mortgaged Property which
would permit the related Lessee to either (i) offset against or abate payments
of rent (including Basic Rent) or (ii) terminate such Lease, the Servicer in
connection with its respective servicing activities hereunder, and to the extent
consistent with the related Mortgage Loan Documents, applicable law and the
related Lease, shall use reasonable efforts consistent with the Servicing
Standard to cause the related Borrower to perform the Borrower Lease Obligations
in a manner which would correct the Lease Termination Condition. In the event
the related Borrower is required to expend funds in order to correct a Lease
Termination Condition, the Servicer shall make withdrawals from the related
Maintenance Reserve Account, to the extent of available funds therein and to the
extent consistent with the related Mortgage Loan Documents, for reimbursement to
the related Borrower of such expenses, upon its receipt of a written
disbursement request therefor from the related Borrower; PROVIDED, HOWEVER,
that, to the extent consistent with the related Mortgage Loan Documents, the
Servicer may, as a condition to the disbursement of such funds to the Borrower,
(x) require that the Borrower provide the Servicer with (1) evidence reasonably
satisfactory to the Servicer that such expenses were actually incurred and paid
by the Borrower (including, without limitation, the presentation by the Borrower
to the Servicer of lien waivers, invoices, bills and the like) and (2)
confirmation of compliance with the Borrower Lease Obligations from the Lessee
in form satisfactory to the Servicer and (y) require an inspection by the
Servicer of the related Mortgaged Property at the expense of the related
Borrower (to be paid from amounts on deposit in the related Maintenance Reserve
Account) in order to verify the Borrower's compliance with the Borrower Lease
Obligations for which such disbursement is sought.

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In the event the related Borrower fails to correct a Lease Termination
Condition in a timely manner (as determined by the Servicer in accordance with
the Servicing Standard), and to the extent consistent with the Mortgage Loan
Documents, applicable law and the related Lease, the Servicer shall use
reasonable efforts consistent with the Servicing Standard to maintain the
related Mortgaged Property or take such other actions in a manner which would
correct the Lease Termination Condition. The Servicer shall make withdrawals
from the related Maintenance Reserve Account, to the extent of available funds
therein and to the extent consistent with the related Mortgage Loan Documents,
for payment of the expenses required to correct the Lease Termination Condition.

In the event funds in the related Maintenance Reserve Account are
insufficient to pay the expenses required to correct a Lease Termination
Condition, the Servicer shall be required to pay such shortfall as a Property
Advance; PROVIDED, HOWEVER, that the Servicer shall not be required to advance
such funds to the extent that (i) such advance is determined to be a
Nonrecoverable Advance in accordance with Section 4.02 herein or (ii) such
advance relates to a Borrower Lease Obligation for which reserves have been
established by or on behalf of the related Borrower with the Servicer in one or
more Reserve Accounts, as set forth in the related Acknowledgment Agreement, if
and to the extent any funds so reserved remain available. The Servicer shall be
entitled to withdraw any funds subsequently deposited and held in the
Maintenance Reserve Account or any other Reserve Accounts established for the
purposes related to such advance in order to pay itself for any unreimbursed
Property Advances (including interest thereon at the Property Advance Rate)
relating to the correction of any Lease Termination Condition with respect to
any related Mortgaged Property; and PROVIDED, FURTHER, that the Servicer shall
in no event be required to make a Property Advance for any Borrower Lease
Obligation which is not of the type of obligation for which reserves are, but
need not be, customarily taken from the related Borrower.

SECTION 3.22. PROPERTY ADVANCES

(a) The Servicer (or, to the extent provided in Section 3.22(b), the
Custodian or Fiscal Agent) shall make any Property Advances as and to the extent
otherwise required pursuant to the terms hereof.

(b) The Servicer shall notify the Custodian and the Fiscal Agent in
writing promptly upon, and in any event within one Business Day after, becoming
aware that it will be financially unable to make any Property Advance required
to be made pursuant to the terms hereof, and in connection therewith, shall set
forth in such notice the amount of such Property Advance, the Person to whom it
should be paid, and the circumstances and purpose of such Property Advance, and
shall set forth therein information and instructions for the payment of such
Property Advance, and, on the date specified in such notice for the payment of
such Property Advance, or, if no such date is specified, then within one
Business Day following such notice, the Custodian or Fiscal Agent shall, subject
to the other provisions of this Section 3.22, pay the amount of such Property
Advance in accordance with such information and instructions.

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(c) Notwithstanding anything herein to the contrary, none of the
Servicer, the Custodian nor the Fiscal Agent shall be obligated to make a
Property Advance as to any Mortgage Loan or REO Property if the Servicer, the
Custodian or the Fiscal Agent, as applicable, determines, in accordance with
Section 4.02 hereof, that such Property Advance, if made, would be a
Nonrecoverable Advance. The Custodian and the Fiscal Agent shall be entitled to
rely, conclusively, on any determination by the Servicer that a Property
Advance, if made, would be a Nonrecoverable Advance. The Custodian and the
Fiscal Agent, in determining whether or not a Property Advance previously made
is, or a proposed Property Advance, if made, would be, a Nonrecoverable Advance
shall be subject to the Servicing Standard.

(d) The Servicer, the Custodian or the Fiscal Agent, as applicable,
shall be entitled to, and the Servicer hereby covenants and agrees to promptly
seek and effect, the reimbursement of Property Advances to the extent permitted
pursuant to Section 3.06(ii) of this Agreement, together with any related
Property Advance Interest Amount in respect of such Property Advances pursuant
to Section 3.06(iii) of this Agreement.

(e) The Servicer, the Custodian or the Fiscal Agent shall not be
required to make Property Advances aggregating in excess of $10,000 for each
Mortgaged Property for any amounts required to cure any failure of any Mortgaged
Property to comply with the Americans with Disability Act of 1990, and all rules
and regulations promulgated pursuant thereto, and, in the case of an REO
Property, such excess amounts shall be an expense of the Owner.

SECTION 3.23. [RESERVED]

SECTION 3.24. [RESERVED]

SECTION 3.25. MAINTENANCE OF LEASE ENHANCEMENT INSURANCE POLICIES

The Servicer hereby agrees to use reasonable best efforts to abide by the
terms and conditions precedent to payment of claims under any Lease Enhancement
Insurance Policies and to use reasonable best efforts to take all such action as
may be required to comply with the terms and provisions of such policies in
order to maintain, in full force and effect, such Lease Enhancement Insurance
Policies, including, but not limited to, (i) notifying the insurer in writing as
soon as reasonably practicable after the Servicer first receives written
notification of the commencement of a Condemnation (as defined in the Lease
Enhancement Insurance Policy) proceeding with respect to any Mortgaged Property
covered by a Lease Enhancement Insurance Policy, (ii) notifying the insurer in
writing as soon as reasonably practicable after the Servicer first receives
written notification of the occurrence of Substantial Physical Damage (as
defined in the Lease Enhancement Insurance Policy) with respect to any such
Mortgaged Property that may be covered by such policy and (iii) notifying the
insured as soon as reasonably practicable after the Servicer first receives
written notification of termination or rent abatement with respect to any
Lease underlying a Mortgaged Property

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covered by a Lease Enhancement Insurance Policy. In addition to the above
conditions to coverage, the Servicer hereby agree that it will use reasonable
best efforts to take any and all actions required under the Lease Enhancement
Insurance Policy in connection with any claim, including the timely presentation
of a proof of loss containing all required information, the prosecution of all
claims relating to a casualty or condemnation, consistent with the Servicing
Standard, which will maximize any recoveries or awards from sources other than
the insurer under the Lease Enhancement Insurance Policy, providing reasonable
access to any Mortgaged Property (but only to the extent such access is
available pursuant to the related Mortgage Loan Documents, applicable law and
the related Lease), the providing of any other notices required under the Lease
Enhancement Insurance Policies in a timely fashion and any other actions which
will maximize any recoveries under the Lease Enhancement Insurance Policies.
Notwithstanding anything provided in the two preceding sentences, the Servicer
shall only be obligated to maintain or cause to be maintained with respect to
each Mortgaged Property the types and amounts of insurance required pursuant to
Section 3.08. and any actions taken by the Servicer with respect to the Lease
Enhancement Insurance Policy shall be consistent with the related Mortgage Loan
Documents.

In addition to the foregoing, the Servicer hereby acknowledges that the
Lease Enhancement Insurance Policies contain provisions which result in
automatic termination as to any Mortgaged Property in the event that such
Mortgaged Property is conveyed (either by a transfer of fee simple title or a
transfer of a direct beneficial or equitable ownership interest of greater than
50% of the related Borrower) unless (i) the insurer is notified in writing of
such proposed transfer at least 30 days prior thereto and (ii) the agreement
governing the transfer contains a clause requiring the transferee to assume the
transferor's obligations under the Lease Enhancement Insurance Policy, and (iii)
the insurer has approved such assumption provision prior to the effective date
of the transfer. The Servicer agrees that, unless otherwise instructed by the
Owner in writing, it will not consent to the transfer of fee simple title to any
Mortgaged Property covered by a Lease Enhancement Insurance Policy, or
beneficial ownership thereof, in a transaction which fails to comply with items
(i)-(iii) above.

Any and all amounts collected under a Lease Enhancement Insurance Policy
shall be immediately deposited in the Collection Account, subject to withdrawal
as provided herein.

SECTION 3.26 CONFIDENTIALITY.

Except as otherwise consented to by the Owner in writing, all
information acquired by the Servicer, the Custodian or the Fiscal Agent
hereunder that is not publicly available, including but not limited to any
Lease Enhancement Insurance Policies or any information relating thereto,
shall be kept confidential by the Servicer, the Custodian or the Fiscal
Agent, as applicable, and such party shall not use any such non-public
information for any purpose other than in connection with this Agreement,
except to the extent that (a) it is appropriate for the Servicer, Custodian
or Fiscal Agent to do so (i) in working with legal counsel, auditors, other
advisors, taxing authorities or other governmental agencies, (ii) in

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accordance with the Servicing Standard in connection with the servicing and
administration of the Mortgage Loans or (iii) when required by any law,
regulation, ordinance, court order or subpoena or (b) the Servicer is
disseminating general statistical information relating to the mortgage loans
being serviced by the Servicer (including the Mortgage Loans) so long as the
Servicer does not identify the Owner or the Borrowers.

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ARTICLE IV

REMITTANCE TO THE OWNER

SECTION 4.01. REMITTANCES.

On each Remittance Date, the Servicer shall remit by wire transfer of
immediately available funds to the Owner (x) all amounts deposited in the
Collection Account as of the close of business on the Rent Escrow Transfer Date
(net of charges against or withdrawals from the Collection Account permitted
under this Agreement), minus (y) any amounts attributable to Monthly Payments
collected but due on a Due Date or Dates subsequent to the Remittance Date,
which amounts shall be remitted on the Remittance Date next succeeding the Due
Date for which such amounts relate.

With respect to any remittance received by the Owner after the second
Business Day following the Business Day on which such payment was due from the
Collection Account, the Servicer shall pay to the Owner interest on such amount
until paid, at a per annum rate equal to the Prime Rate plus 5%. Such interest
shall be deposited in the Collection Account by the Servicer on the date such
late payment is made and shall cover the period commencing with the day
following such second Business Day and ending with the Business Day on which
such payment is made, both inclusive. Such interest shall be remitted along
with the distribution payable on the next succeeding Remittance Date. The
payment by the Servicer of any such interest shall not be deemed an extension of
time for payment or a waiver of any Event of Default by the Servicer.

SECTION 4.02. NONRECOVERABLE ADVANCES

Any conclusion that a Property Advance is (or, if made, would be) a
Nonrecoverable Advance must be (i) documented by, in addition to the Officer's
Certificate required by this Section 4.02, an appraisal conducted within the 12
months preceding any such determination by an independent appraiser, at the
expense of the Owner, in accordance with MAI standards and methodologies and
(ii) based upon the good faith business judgment of the Servicer, the Custodian
or the Fiscal Agent, as applicable, that such Property Advance will not or, in
the case of a proposed Property Advance, would not, be ultimately recoverable by
the Servicer, the Custodian or the Fiscal Agent, as applicable, from the sum of
late payments, reserve deposits, Insurance Proceeds, Condemnation Proceeds, Net
Liquidation Proceeds and other collections on or in respect of the related
Mortgage Loan (including without limitation all rent payments due under the
related Lease (including, but not limited to, Basic Rent, excess rent and any
additional rent) which exceed the Monthly Payment due on the Mortgage Loan,
whether due to the existence of such differences at origination, increases in
such rents or otherwise). To the extent that any Borrower is not obligated
under the related Mortgage Loan Documents to pay or reimburse any portion of any
Property Advances and/or interest thereon that are outstanding with respect to
the related Mortgage Loan as a result of (1) a modification or work-out of such
Mortgage Loan which forgives unreimbursed amounts for which the Servicer had
previously advanced, or (2) the Property Advance Rate exceeding the sum of the

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related Mortgage Rate and Default Interest, and the Servicer determines that no
other source of payment or reimbursement for such advances and/or interest is
available to it, such Property Advances and/or interest thereon shall be deemed
to be nonrecoverable; PROVIDED, HOWEVER, that in connection with the foregoing
the Servicer shall provide an Officer's Certificate as described in the
succeeding paragraph.

The determination by the Servicer, the Custodian or the Fiscal Agent, as
applicable, that it has made a Nonrecoverable Advance or that any proposed
Property Advance, if made, would constitute a Nonrecoverable Advance shall be
evidenced by an Officer's Certificate or a certificate of a Responsible Officer,
as applicable, of the party making such determination delivered to the Owner
setting forth such determination and the procedures and considerations of the
Servicer, the Custodian or the Fiscal Agent, as applicable, forming the basis of
such determination (including a copy of the appraisal which was considered in
making such determination).

Notwithstanding the above, the Custodian and the Fiscal Agent shall be
entitled to rely upon any certificate conforming to the requirements of this
Section 4.02 delivered by the Servicer to the effect that any Property Advance
previously made is a Nonrecoverable Advance or that any proposed Property
Advance, if made, would constitute a Nonrecoverable Advance.

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ARTICLE V

THE OWNER AND THE SERVICER

SECTION 5.01. LIABILITY OF THE OWNER AND THE SERVICER

The Owner and the Servicer each shall be liable in accordance herewith only
to the extent of the obligations specifically imposed by this Agreement.

SECTION 5.02. MERGER OR CONSOLIDATION OF THE SERVICER

Subject to the following paragraph, the Servicer will keep in full effect
its existence, rights and good standing as a limited partnership under the laws
of the State of Missouri and will not jeopardize its ability to do business in
each jurisdiction in which one or more of the Mortgaged Properties are located
in order to protect the validity and enforceability of this Agreement or any of
the Mortgage Loans and to perform its respective duties under this Agreement.

The Servicer may be merged or consolidated with or into any Person, or
transfer all or substantially all of its assets to any Person, in which case any
Person resulting from any merger or consolidation to which it shall be a party,
or any Person succeeding to its business, shall be the successor of the Servicer
hereunder, and shall be deemed to have assumed all of the liabilities of the
Servicer hereunder, if either (i) the Owner consents to such merger,
consolidation or succession, which consent shall not be unreasonably withheld,
or (ii) at the time of such merger, consolidation or succession, such merger,
consolidation or succession does not result in a downgrading, withdrawal or
qualification of the then-current rating assigned by any of the Rating Agencies
to any of the mortgage-backed securities which evidence interests in any pool of
one or more mortgage loans which was previously serviced by the Servicer under a
separate servicing agreement.

SECTION 5.03. LIMITATION ON LIABILITY OF THE SERVICER AND OTHERS

Neither the Servicer nor any of the directors, officers, employees or
agents of the Servicer (or the general partner of the Servicer) shall be under
any liability to the Owner for any action taken, or for refraining from the
taking of any action, in good faith pursuant to this Agreement, or for errors in
judgment; PROVIDED, HOWEVER, that this provision shall not protect the Servicer
or any such Person against any breach of warranties or representations made
herein, or against any specific liability imposed on the Servicer pursuant to
Section 3.01 for a breach of the Servicing Standard therein or any other Section
hereof, or against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith, fraud or negligence in the performance of duties
or by reason of reckless disregard of obligations or duties hereunder. The
Servicer and any director, officer, employee or agent of the Servicer (or the
general partner of the Servicer) may rely in good faith on any document of any
kind

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which, PRIMA FACIE, is properly executed and submitted by any appropriate Person
respecting any matters arising hereunder. The Servicer and any director,
officer, employee or agent of the Servicer (or the general partner of the
Servicer) shall be indemnified and held harmless by the Owner against any loss,
liability or expense incurred in connection with any legal action relating to
this Agreement, other than any loss, liability or expense incurred by reason of
the Servicer's willful misfeasance, bad faith, fraud or negligence or a breach
of the Servicing Standard in the performance of duties or by reason of reckless
disregard of the Servicer's obligations or duties hereunder. The Servicer shall
not be under any obligation to appear in, prosecute or defend any legal action
unless such action is related to its respective duties under this Agreement and
in its opinion does not expose it to any expense or liability; PROVIDED,
HOWEVER, that the Servicer may in its discretion and upon its receipt of written
consent from the Owner undertake any action related to its obligations hereunder
which it may deem necessary or desirable with respect to this Agreement and the
rights and duties of the parties hereto and the interests of the Owner
hereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom (except any liability related to the Servicer's
obligations under Section 3.01(a)) shall be expenses, costs and liabilities of
the Owner, and the Servicer shall be entitled to be reimbursed therefor from the
Collection Account as provided in Section 3.06(vi) of this Agreement.

SECTION 5.04. LIMITATION ON RESIGNATION OF THE SERVICER.

(a) The Servicer may assign its rights and delegate its duties and
obligations under this Agreement in connection with the sale or transfer of a
substantial portion of its mortgage servicing or asset management portfolio,
provided that: (i) the purchaser or transferee accepting such assignment and
delegation shall execute and deliver to the Owner an agreement, in form and
substance reasonably satisfactory to the Owner, which contains an assumption by
such Person of the due and punctual performance and observance of each covenant
and condition to be performed or observed by the Servicer under this Agreement
from and after the date of such agreement; (ii) such sale or transfer to the
purchaser or transferee is (A) consented to by the Owner, which consent shall
not be unreasonably withheld, or (B) does not, at the time of such assignment or
delegation, result in a downgrading, withdrawal or qualification of the
then-current rating assigned by any of the nationally recognized statistical
rating agencies to any of the mortgage-backed securities which evidence
interests in any pool of mortgage loans being serviced by the Servicer under a
separate servicing agreement; (iii) the Servicer shall not be released from its
obligations under this Agreement that arose prior to the effective date of such
assignment and delegation under this Section 5.04; and (iv) the rate at which
the Servicing Fee (or any component thereof) is calculated shall not exceed the
rate in effect prior to such assignment and delegation. Upon acceptance of such
assignment and delegation, the purchaser or transferee shall be the successor
Servicer hereunder.

(b) Except as provided in this Sections 5.02, 5.04 and 8.01, the
Servicer shall not resign from the obligations and duties hereby imposed on it
except upon determination that its duties hereunder are no longer permissible
under applicable law. Any

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such determination permitting the resignation of the Servicer shall be evidenced
by an Opinion of Counsel (obtained at the resigning Servicer's expense) to such
effect delivered to the Owner.

(c) No resignation or removal of the Servicer as provided in this
Section 5.04 shall become effective until the Custodian or a successor servicer
shall have assumed the Servicer's responsibilities, duties, liabilities and
obligations hereunder pursuant to Section 6.02.

SECTION 5.05. RIGHTS OF THE OWNER IN RESPECT OF THE SERVICER.

The Servicer shall afford the Owner, upon reasonable notice, during normal
business hours access to all records maintained by it in respect of its rights
and obligations hereunder and access to its officers responsible for such
obligations. Upon request, the Servicer shall furnish to the Owner its most
recent financial statements and such other information in its possession
regarding its business, affairs, property and condition, financial or otherwise,
as the party requesting such information, in its reasonable judgment, determines
to be relevant to the performance of the obligations hereunder of the Servicer.

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ARTICLE VI

DEFAULT AND SERVICING TRANSFER

SECTION 6.01. EVENTS OF DEFAULT.

"EVENT OF DEFAULT", wherever used herein, means any one of the following
events:

(i) any failure by the Servicer to remit to the Collection Account or
any failure by the Servicer to remit to the Owner any amount
required to be so remitted by the Servicer pursuant to and in
accordance with the terms of this Agreement; or

(ii) any failure on the part of the Servicer duly to observe or perform
in any material respect any other of the covenants or agreements,
contained in this Agreement which continues unremedied for a period
of 30 days (except in the case of a breach of the Servicer's
representations and warranties under Section 2.05(a), which shall
be cured in the time period and in the manner prescribed in Section
2.05(b)) after the date on which written notice of such failure or
breach, requiring the same to be remedied, shall have been given to
the Servicer by the Owner; or

(iii) [reserved]

(iv) a decree or order of a court or agency or supervisory authority
having jurisdiction in the premises in an involuntary case under
any present or future federal or state bankruptcy, insolvency or
similar law for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings, or for the
winding-up or liquidation of its affairs, shall have been entered
against the Servicer and such decree or order shall have remained
in force, undischarged or unstayed, for a period of 60 days; or

(v) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or
relating to the Servicer, or of or relating to all or substantially
all of the property of either the Servicer; or

(vi) the Servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily suspend
payment of its obligations; or

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(vii) the Servicer shall fail to make any Property Advance required to be
made by the Servicer hereunder (whether or not the Custodian or the
Fiscal Agent makes such Property Advance);

then, and in each and every such case, so long as an Event of Default shall not
have been remedied, the Owner may, by notice in writing to the Servicer (with a
copy thereof to the Custodian) terminate all of its rights and obligations under
this Agreement and in and to the Mortgage Loans and the proceeds thereof, other
than any rights or obligations that accrued prior to the date of such
termination (including the right to receive all amounts accrued or owing to it
under this Agreement, plus interest at the Property Advance Rate on such amounts
until received to the extent such amounts bear interest as provided in this
Agreement, with respect to periods prior to the date of such termination, and
the right to the benefits of Section 5.03 notwithstanding any such termination).
On or after the receipt by the Servicer of such written notice, all of its
authority and power under this Agreement, whether with respect to the Mortgage
Loans or otherwise, shall pass to and be vested in the Custodian pursuant to and
under this Section (notwithstanding any failure of the Custodian to satisfy the
criterion set forth in Section 5.04) and, without limitation, the Custodian is
hereby authorized and empowered to execute and deliver, on behalf of and at the
expense of the defaulting Servicer as attorney-in-fact or otherwise, any and all
documents and other instruments, and to do or accomplish all other acts or
things necessary or appropriate to effect the purposes of such notice of
termination. The Servicer on behalf of itself, agrees in the event it is
terminated pursuant to this Section 6.01 to cooperate with the Custodian and the
successor to its responsibilities hereunder in effecting the termination of its
responsibilities and rights hereunder, including, without limitation, the
transfer to the successor Servicer or the Custodian, as applicable, for
administration by it of all amounts on deposit in the Rent Escrow Account, the
Collection Account and any REO Account, Escrow Account or Reserve Account or
thereafter received with respect to the Mortgage Loans, and shall promptly
provide the Custodian or such successor Servicer (which may include the
Custodian), as applicable, all documents and records reasonably requested by it,
such documents and records to be provided in such form as the Custodian or such
successor Servicer shall reasonably request (including electromagnetic form), to
enable it to assume the Servicer's function hereunder. All reasonable costs and
expenses of the successor Servicer incurred in connection with transferring the
Servicing Mortgage Files to the successor Servicer and amending this Agreement
to reflect such succession as Servicer pursuant to this Section 6.01 shall be
paid by the predecessor Servicer upon presentation of reasonable documentation
of such costs and expenses. Furthermore, in the event that the Servicer is
required but fails to make a Property Advance hereunder, and for so long as such
Event of Default shall not have been remedied, the Custodian shall have the same
right to terminate the Servicer hereunder as would the Owner for an Event of
Default provided that the Custodian shall deliver notice in writing to the Owner
of its intent to terminate the Servicer and upon termination the Custodian shall
assume the servicing functions of the Servicer hereunder until such time as a
successor Servicer is appointed pursuant to Section 6.02.

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SECTION 6.02. CUSTODIAN TO ACT; APPOINTMENT OF SUCCESSOR

On and after the time the Servicer receives a notice of termination
pursuant to Section 6.01, or upon the termination of the Servicer pursuant to
Section 5.04(b), and unless otherwise directed in writing by the Owner, the
Custodian shall be its successor in all respects in its capacity as Servicer
under this Agreement and the transactions set forth or provided for herein and,
except as provided herein, shall be subject to all the responsibilities, duties,
limitations on liability and liabilities relating thereto and arising thereafter
placed on the Servicer by the terms and provisions hereof; PROVIDED, HOWEVER,
that (i) the Custodian shall have no responsibilities, duties, liabilities or
obligations with respect to any act or omission of the terminating or resigning
Servicer and (ii) any failure to perform, or delay in performing, such duties or
responsibilities caused by the terminated party's failure to provide, or delay
in providing, records, tapes, disks, information or monies shall not be
considered a default by any successor hereunder. The appointment of a successor
Servicer shall not affect any liability of the predecessor Servicer which may
have arisen prior to its termination as Servicer. The Custodian shall not be
liable for any of the representations and warranties of the Servicer herein or
in any related document or agreement, for any acts or omissions of the
predecessor Servicer or for any losses incurred in respect of any Permitted
Investment by the Servicer pursuant to Section 3.07 hereunder nor shall the
Custodian be required to purchase any Mortgage Loan hereunder. As compensation
therefor, the Custodian as successor Servicer shall be entitled to the Servicing
Fees and all Servicing Compensation relating to the Mortgage Loans that accrue
after the date of the Custodian's succession to which the Servicer would have
been entitled if the Servicer had continued to act hereunder. Except as
otherwise agreed to in writing by the Servicer, the Custodian and the Fiscal
Agent, in the event any Property Advances made by the Servicer and the Custodian
or the Fiscal Agent, as applicable, shall at any time be outstanding, or any
amounts of interest thereon shall be accrued and unpaid, all amounts available
to repay Property Advances and interest hereunder shall be applied entirely to
the Property Advances made by the Fiscal Agent or Custodian, in that order (and
the accrued and unpaid interest thereon), until such Property Advances made by
the the Fiscal Agent or the Custodian, as applicable (and accrued and unpaid
interest thereon) shall have been repaid in full. Notwithstanding the above,
the Custodian may, if it shall be unwilling to so act, or shall, if it is unable
to so act, or if the Owner so requests in writing to the Custodian, or if (x)
either the Custodian or the Fiscal Agent is not rated by each Applicable Rating
Agency as "AA" (or its equivalent rating) or higher or (y) the Custodian is not
listed on the list of approved servicers of each Applicable Rating Agency,
promptly appoint, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution which is ranked as a master
servicer and special servicer by any of the Applicable Rating Agencies, at the
time of such appointment, at least as high as Midland Loan Services, L.P. at the
time such appointment is made, as the successor to the Servicer hereunder in
the assumption of all or any part of the responsibilities, duties or liabilities
of the Servicer hereunder. No appointment of a successor to the Servicer
hereunder shall be effective until the assumption by such successor of all the
Servicer's responsibilities, duties and liabilities hereunder. Pending
appointment of a successor to the Servicer hereunder, unless the Custodian shall
be prohibited by law from so acting, the Custodian shall act in such capacity

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as herein above provided. In connection with such appointment and assumption
described herein, the Custodian may make such arrangements for the compensation
of such successor out of payments on Mortgage Loans as it and such successor
shall agree; PROVIDED, HOWEVER, that no such compensation shall be in excess of
that permitted the terminated party hereunder. The Owner, the Custodian or
Servicer and such successor shall take such action, consistent with this
Agreement, as shall be necessary to effectuate any such succession. Upon the
termination of the Servicer pursuant to Sections 5.04(b), 6.01, 8.01 or as
otherwise provided for herein, the Owner shall within thirty (30) days following
the date of such termination remit to the Servicer any unpaid Servicing Fees and
other Servicing Compensation, any unreimbursed Property Advances (with interest
thereon at the Property Advance Rate), and any other outstanding amounts due to
the Servicer hereunder; PROVIDED, HOWEVER, that in the event the Servicer is
terminated pursuant to Section 6.01, and except as set forth in the sixth
preceding sentence, such unreimbursed Property Advances shall be reimbursed to
the Servicer (including any interest thereon at the Property Advance Rate) from
future amounts received with respect to such Mortgage Loan which are allocable
to the reimbursement of Property Advances or as otherwise permitted pursuant to
Sections 3.06(ii) and 3.06(iii). In addition to the foregoing, and except as
otherwise agreed in writing by the Servicer, the Custodian and the Fiscal Agent
prior to such termination, it is expressly agreed that any successor Servicer
(which, for purposes of this sentence, shall not include the Custodian or the
Fiscal Agent) shall be required to allocate funds available with respect to a
Mortgage Loan for the payment of unreimbursed Property Advances on a first in,
first out basis resulting in the payment of unreimbursed Property Advances
(including any interest thereon at the Property Advance Rate) first to the
predecessor Servicer, unless during the first six months since the appointment
of the successor Servicer the successor Servicer shall have been required to
make any Property Advances, in which case any unreimbursed Property Advances
made by the successor Servicer during such six month period shall be
reimbursable first to the successor Servicer.

SECTION 6.03. OTHER REMEDIES OF OWNER

During the continuance of any Event of Default, so long as such Event of
Default shall not have been remedied, the Owner, in addition to the rights
specified in Section 6.01, shall have the right to take all actions now or
hereafter existing at law, in equity or by statute to enforce its rights and
remedies and to protect its interests (including the institution and prosecution
of all judicial, administrative and other proceedings and the filing of proofs
of claim and debt in connection therewith). Except as otherwise expressly
provided in this Agreement, no remedy provided for by this Agreement shall be
exclusive of any other remedy, and each and every remedy shall be cumulative and
in addition to any other remedy and no delay or omission to exercise any right
or remedy shall impair any such right or remedy or shall be deemed to be a
waiver of any Event of Default.

SECTION 6.04. WAIVER OF PAST EVENTS OF DEFAULT; TERMINATION

The Owner may waive any default by the Servicer in the performance of its
obligations hereunder and its consequences. Upon any such waiver of a past
default, such

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default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been remedied for every purpose of this Agreement. No such
waiver shall extend to any subsequent or other default or impair any right
consequent thereon.

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ARTICLE VII

CONCERNING THE CUSTODIAN

SECTION 7.01. POSSESSION OF CUSTODIAN MORTGAGE FILE; DUTIES OF
CUSTODIAN

(a) With respect to each Mortgage Loan, pursuant to the Custody
Agreement, with respect to each Transfer Date, the Owner shall transfer or cause
to be transferred the related Custodian Mortgage Files to the Custodian.

(b) The Custodian, prior to the occurrence of an Event of Default of
which a Responsible Officer of the Custodian has actual knowledge and after the
curing or waiver of all Events of Default which may have occurred, undertakes to
perform such duties and only such duties as are specifically set forth in this
Agreement and no permissive right of the Custodian shall be construed as a duty.
During the continuance of an Event of Default of which a Responsible Officer of
the Custodian has actual knowledge, the Custodian shall exercise such of the
rights and powers vested in it by this Agreement, and use the same degree of
care and skill in their exercise, as a prudent person would exercise or use
under the circumstances in the conduct of such person's own affairs.

(c) The Custodian, upon receipt of any resolutions, certificates,
statements, opinions, reports, documents, orders or other instruments furnished
to the Custodian which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they
conform on their face to the requirements of this Agreement; PROVIDED, HOWEVER,
that, the Custodian shall not be responsible for the accuracy or content of any
such resolution, certificate, statement, opinion, report, document, order or
other instrument provided to it hereunder by the Servicer.

(d) No provision of this Agreement shall be construed to relieve the
Custodian from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct; PROVIDED, HOWEVER, that the foregoing
shall be subject to Section 7.02; and PROVIDED, FURTHER, that:

(i) Prior to the occurrence of an Event of Default of which a
Responsible Officer of the Custodian has actual knowledge, and
after the curing or waiver of all such Events of Default which may
have occurred, the duties and obligations of the Custodian shall be
determined solely by the express provisions of this Agreement, the
Custodian shall not be liable except for the performance of such
duties and obligations as are specifically set forth in this
Agreement, no implied covenants or obligations shall be read into
this Agreement against the Custodian and, in the absence of bad
faith on the part of the Custodian, the Custodian may conclusively
rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon any resolutions,

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certificates, statements, reports, opinions, documents, orders or
other instruments furnished to the Custodian that conform on their
face to the requirements of this Agreement without responsibility
for investigating the contents thereof;

(ii) The Custodian shall not be personally liable for an error of
judgment made in good faith by a Responsible Officer or Responsible
Officers, unless it shall be proved that the Custodian was
negligent in ascertaining the pertinent facts; and

(iii) The Custodian shall not be charged with knowledge of any failure by
the Servicer to comply with the obligations of the Servicer
referred to in clause (i) or (vii) of Section 6.01, or of any
breach or occurrence referred to in clause (ii) through (vi) of
Section 6.01, unless a Responsible Officer of the Custodian obtains
actual knowledge of such failure, breach or occurrence.

The Custodian, in its capacity as Custodian, shall not be required to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if in the Custodian's opinion the repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it, and none of the provisions contained in this Agreement shall in any event
require the Custodian to perform, or be responsible for the manner of
performance of, any of the obligations of the Servicer under this Agreement,
except during such time, if any, as the Custodian shall be the successor to, and
be vested with the rights, duties, powers and privileges of, the Servicer in
accordance with the terms of this Agreement. The Custodian shall not be
required to post any surety or bond of any kind in connection with its
performance of its obligations under this Agreement.

SECTION 7.02. CERTAIN MATTERS AFFECTING THE CUSTODIAN

(a) Except as otherwise provided in Section 7.01:

(i) The Custodian may request and/or rely upon and shall be protected
in acting or refraining from acting upon any resolution, Officers'
Certificate, certificate of auditors or any other certificate,
statement, instrument, opinion, report, notice, request, consent,
order, appraisal, bond or other paper or document reasonably
believed by it to be genuine and to have been signed or presented
by the proper party or parties and the Custodian shall have no
responsibility to ascertain or confirm the genuineness of any such
party or parties;

(ii) The Custodian may consult with counsel and any Opinion of Counsel
shall be full and complete authorization and protection in

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respect of any action taken or suffered or omitted by it hereunder
in good faith and in accordance with such Opinion of Counsel;

(iii) (A) The Custodian shall be under no obligation to institute,
conduct or defend any litigation hereunder or in relation hereto at
the request, order or direction of the Owner, pursuant to the
provisions of this Agreement, unless the Owner shall have offered
to the Custodian reasonable security or indemnity against the
costs, expenses and liabilities which may be incurred therein or
thereby; and (B) the right of the Custodian to perform any
discretionary act enumerated in this Agreement shall not be
construed as a duty, and the Custodian shall not be answerable for
other than its negligence or willful misconduct in the performance
of any such act;

(iv) The Custodian shall not be personally liable for any action taken,
suffered or omitted by it in good faith and reasonably believed by
it to be authorized or within the discretion or rights or powers
conferred upon it by this Agreement;

(v) The Custodian shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order,
approval, bond or other paper or document; and

(vi) The Custodian may execute any of the powers hereunder or perform
any duties hereunder either directly or by or through agents or
attorneys. The Custodian shall not be liable or responsible for
the misconduct or negligence of any of the Custodian's agents or
attorneys appointed with due care by the Custodian hereunder.

SECTION 7.03. CUSTODIAN AND FISCAL AGENT NOT LIABLE FOR MORTGAGE LOANS

The recitals contained herein shall not be taken as the statements of the
Custodian, the Fiscal Agent or the Servicer, and the Custodian, the Fiscal Agent
and the Servicer assume no responsibility for their correctness. The Custodian,
the Fiscal Agent and the Servicer make no representations or warranties as to
the validity or sufficiency of this Agreement or the validity, enforceability or
sufficiency of any Mortgage Loan or related document. The Custodian and the
Fiscal Agent shall at no time have any responsibility or liability for or with
respect to the legality, validity and enforceability of any Mortgage or any
Mortgage Loan, or the perfection and priority of any Mortgage or the maintenance
of any such perfection and priority. Without limiting the foregoing, neither
the Custodian nor the Fiscal Agent shall not be liable or responsible for: the
existence, condition and ownership of any

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Mortgaged Property; the existence of any hazard or other insurance thereon
(other than, with respect to the Custodian only, if the Custodian shall assume
the duties of the Servicer pursuant to Section 6.02) or the enforceability
thereof; the existence of any Mortgage Loan or the contents of the related
Custodian Mortgage File on any computer or other record thereof (other than,
with respect to the Custodian only, if the Custodian shall assume the duties of
the Servicer pursuant to Section 6.02); the validity of the assignment of any
Mortgage Loan or of any intervening assignment; the completeness of any
Custodian Mortgage File; the performance or enforcement of any Mortgage Loan
(other than, with respect to the Custodian only, if the Custodian shall assume
the duties of the Servicer pursuant to Section 6.02); the compliance by the
Servicer with any warranty or representation made under this Agreement or in any
related document; the acts or omissions of any of the Servicer (other than, with
respect to the Custodian only, if the Custodian shall assume the duties of the
Servicer pursuant to Section 6.02) or any subservicer or any Borrower; the
failure of the Servicer or any subservicer to act or perform any duties required
of it on behalf of the Owner hereunder; or any action by or omission of the
Custodian taken at the instruction of the Servicer (other than in each case,
with respect to the Custodian only, if the Custodian shall assume the duties of
the Servicer pursuant to Section 6.02) unless the taking of such action is not
permitted by the express terms of this Agreement; PROVIDED, HOWEVER, that the
foregoing shall not relieve the Custodian or the Fiscal Agent of its obligation
to perform its duties as specifically set forth in this Agreement. The
Custodian and the Fiscal Agent shall not be accountable for the use or
application by the Servicer of any funds paid to the Servicer in respect of the
Mortgage Loans or deposited in or withdrawn from the Collection Account, the
Rent Escrow Account, any Escrow Account, any Reserve Account and any REO Account
by the Servicer. The Custodian (unless the Custodian shall have become the
successor Servicer) and the Fiscal Agent shall have no responsibility for
(A) filing any financing or continuation statement in any public office at any
time or to otherwise perfect or maintain the perfection of any security interest
or lien granted to it hereunder or to record this Agreement, or (B) seeing to
any insurance or (C) confirming or verifying the contents of any reports or
certificates of the Servicer delivered to the Custodian pursuant to this
Agreement believed by the Custodian to be genuine and to have been signed or
presented by the proper party or parties. In making any calculation hereunder
which includes as a component thereof the payment or distribution of interest
for a stated period at a stated rate "to the extent permitted by applicable
law," the Custodian shall assume that such payment is so permitted unless a
Responsible Officer of the Custodian has actual knowledge, or receives an
Opinion of Counsel (at the expense of the Person asserting the impermissibility)
to the effect, that such payment is not permitted by applicable law.

SECTION 7.04. PAYMENT OF CUSTODIAN'S FEES AND EXPENSES;
INDEMNIFICATION

(a) As compensation for its activities hereunder, the Custodian shall
be entitled to the Custodian Fee, which shall be payable solely from receipts on
the related Mortgage Loans, and may be withheld from payments on account of
interest prior to deposit in the Collection Account, or may be withdrawn from
amounts on deposits in the Collection Account as set forth in Section 3.06(iv).
The Custodian's rights to the Custodian Fee may not

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be transferred in whole or in part except in connection with the transfer of all
of the Custodian's responsibilities and obligations under this Agreement.

(b) To the extent specifically permitted by Section 3.06(ii), (iii) and
(vi), the Custodian shall be paid or reimbursed by the Owner from the Collection
Account upon its request for expenses, disbursements and advances incurred or
made by the Custodian pursuant to and in accordance with any of the provisions
of this Agreement except any such expense, disbursement or advance as may arise
from its negligence or bad faith; PROVIDED, HOWEVER, that the Custodian shall
not refuse to perform any of its duties hereunder solely as a result of the
failure to be paid the Custodian Fee and the Custodian's expenses.

The Servicer covenants and agrees to pay or reimburse the Custodian for the
reasonable expenses, disbursements and advances incurred or made by the
Custodian in connection with any transfer of the servicing responsibilities of
the Servicer hereunder, pursuant to or otherwise arising from the resignation or
removal of the Servicer, in accordance with any of the provisions of this
Agreement (and including the reasonable fees and expenses and disbursements of
its counsel and all other persons not regularly in its employ), except any such
expense, disbursement or advance as may arise from the negligence or bad faith
of the Custodian.

(c) The Servicer shall indemnify the Owner, NationsBank, the Custodian
and the Fiscal Agent, and their respective Affiliates and each of the directors,
officers, employees and agents of the Custodian and the Fiscal Agent and their
respective Affiliates (each, an "Indemnified Party"), and hold each of them
harmless against any and all claims, losses, damages, penalties, fines,
forfeitures, reasonable and necessary legal fees and related costs, judgments,
and any other costs, fees and expenses that the Indemnified Party may sustain in
connection with this Agreement related to the Servicer's willful misconduct, bad
faith, fraud and/or negligence in the performance of its duties hereunder or by
reason of reckless disregard of its obligations and duties hereunder (including
in the case of the Servicer, any agent of the Servicer or subservicer).

(d) The Owner shall indemnify each Indemnified Party from, and hold it
harmless against, any and all losses, liabilities, damages, claims or expenses
(including reasonable attorneys' fees) arising in respect of this Agreement
incurred in connection with any legal action relating to this Agreement other
than (i) those resulting from the negligence, fraud, bad faith or willful
misconduct of the Indemnified Party and (ii) those as to which such Indemnified
Party is entitled to indemnification pursuant to Section 7.04(c). The right of
reimbursement of the Indemnified Parties under this Section 7.04(d) shall be
senior to the rights of the Owner.

(e) Notwithstanding anything herein to the contrary, this Section 7.04
shall survive the termination or maturity of this Agreement or the resignation
or removal of the Custodian or the Fiscal Agent as regards rights accrued prior
to such resignation or removal and (with respect to any acts or omissions during
their respective tenures) the resignation, removal or termination of the
Servicer.

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(f) This Section 7.04 shall be expressly construed to include, but not
be limited to, such indemnities, compensation, expenses, disbursements,
advances, losses, liabilities, damages and the like, as may pertain or relate to
any environmental law or environmental matter.

SECTION 7.05. ELIGIBILITY REQUIREMENTS FOR CUSTODIAN

The Custodian hereunder shall at all times be a corporation or association
organized and doing business under the laws of any state of the United States of
America, authorized under such laws to exercise and to accept the powers
conferred under this Agreement, having a combined capital and surplus of at
least $50,000,000 and a rating on its unsecured long-term debt of at least "BBB"
(or its equivalent rating) by each Applicable Rating Agency (or "AA" (or its
equivalent rating) at any time when there is no Fiscal Agent appointed and
acting hereunder or any such Fiscal Agent so appointed has a rating on its
long-term unsecured debt that is lower than "AA" (without regard to any plus or
minus) by each Applicable Rating Agency). If a corporation or association
publishes reports of condition at least annually, pursuant to law or to the
requirements of the aforesaid supervising or examining authority, then for
purposes of this Section the combined capital and surplus of such corporation
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published.

SECTION 7.06. RESIGNATION AND REMOVAL OF THE CUSTODIAN; REMOVAL OF THE
FISCAL AGENT

The Custodian may not resign and be discharged from its rights and
responsibilities herein set forth without the prior written consent of the Owner
and NationsBank. Upon any such resignation, the Fiscal Agent shall also be
deemed to have been removed and, accordingly, the Servicer shall, at the
direction of NationsBank, use reasonable efforts to promptly appoint a successor
Custodian meeting the eligibility requirements set forth in Section 7.05, by
written instrument, in triplicate, which instrument shall be delivered to the
resigning Custodian, with a copy to the Fiscal Agent deemed removed, and the
successor Custodian and successor Fiscal Agent. Notwithstanding the foregoing,
if no successor Custodian and Fiscal Agent shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Custodian and departing Fiscal Agent may petition any
court of competent jurisdiction for the appointment of a successor Custodian and
successor Fiscal Agent.

If at any time the Custodian shall cease to be eligible in accordance with
the provisions of Section 7.05 and shall fail to resign after written request
therefor by the Owner or Servicer, or if at any time the Custodian or the Fiscal
Agent shall become incapable of acting, or shall be adjudged bankrupt or
insolvent, or a receiver of the Custodian or the Fiscal Agent or of its property
shall be appointed, or any public officer shall take charge or control of the
Custodian or the Fiscal Agent or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then the Owner or the Servicer may
remove the Custodian and the Fiscal Agent and shall promptly appoint a successor
Custodian and

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successor Fiscal Agent by written instrument, which shall be delivered to the
Custodian and the Fiscal Agent so removed and to the successor Custodian and
successor Fiscal Agent.

Notwithstanding the foregoing, if the Custodian is removed or resigns as
Custodian under the Custody Agreement, the Custodian shall be permitted to
resign from its rights and responsibilities herein set forth.

The Owner may at any time remove the Custodian and the Fiscal Agent (and
any removal of the Custodian shall be deemed to be a removal also of the Fiscal
Agent) and appoint a successor Custodian and successor Fiscal Agent (each
meeting the requirements of Section 7.07) by written instrument or instruments,
in seven originals, signed by the Owner or its attorneys-in-fact duly
authorized, one complete set of which instruments shall be delivered to the
successor Custodian so appointed and one complete set to the successor Fiscal
Agent so appointed.

In the event of the resignation or removal of the Custodian, the Fiscal
Agent shall be entitled to resign, it being understood that the initial Fiscal
Agent shall not be obligated to act in such capacity hereunder at any time that
LaSalle National Bank is not the Custodian.

Any resignation or removal of the Custodian and Fiscal Agent and
appointment of a successor Custodian and, if such successor Custodian is not
rated "AA" (or its equivalent) each Applicable Rating Agency, a successor Fiscal
Agent pursuant to any of the provisions of this Section 7.06 shall not become
effective until acceptance of appointment by the successor Custodian and, if
necessary, Fiscal Agent as provided in Section 7.07.

SECTION 7.07. SUCCESSOR CUSTODIAN AND FISCAL AGENT

Any successor Custodian and any successor Fiscal Agent appointed as
provided in Section 7.06 shall execute, acknowledge and deliver to the
predecessor Custodian and predecessor Fiscal Agent, as the case may be,
instruments accepting their appointment hereunder, and thereupon the resignation
or removal of the predecessor Custodian and predecessor Fiscal Agent shall
become effective and such successor Custodian and successor Fiscal Agent,
without any further act, deed or conveyance, shall become fully vested with all
the rights, powers, duties and obligations of its predecessor hereunder, with
the like effect as if originally named as Custodian herein. The predecessor
Custodian shall deliver to the successor Custodian and successor Fiscal Agent
all Custodial Mortgage Files and related documents and statements held by it
hereunder, and the predecessor Custodian and successor Fiscal Agent shall
execute and deliver such instruments and do such other things as may reasonably
be required for more fully and certainly vesting and confirming in the successor
Custodian and successor Fiscal Agent all such rights, powers, duties and
obligations. No successor Custodian or successor Fiscal Agent shall accept
appointment as provided in this Section 7.07 unless at the time of such
acceptance such successor Custodian or successor Fiscal Agent shall be eligible
under the provisions of Section 7.05.

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SECTION 7.08. MERGER OR CONSOLIDATION OF CUSTODIAN AND OF THE FISCAL
AGENT

Any corporation into which the Custodian may be merged or converted or with
which it may be consolidated or any corporation resulting from any merger,
conversion or consolidation to which the Custodian shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Custodian, shall be the successor of the Custodian hereunder,
provided that such corporation shall be eligible under the provisions of Section
7.05, without the execution or filing of any paper or any further act on the
part of any of the parties hereto, anything herein to the contrary
notwithstanding. Any Person into which the Fiscal Agent may be merged or
converted or with which it may be consolidated or any corporation or bank
resulting from any merger, conversion or consolidation to which the Fiscal Agent
shall be a party, or any corporation or banking association succeeding to all or
substantially all of the corporate trust business of the Fiscal Agent shall be
the successor of the Fiscal Agent hereunder, provided that such corporation or
bank shall be eligible under the provisions of Section 7.05 without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything to the contrary notwithstanding.

SECTION 7.09. FISCAL AGENT APPOINTED; CONCERNING THE FISCAL AGENT.

(a) The Custodian hereby appoints ABN AMRO Bank N.V. as the initial
Fiscal Agent hereunder for the purposes of exercising and performing the
obligations and duties imposed upon the Fiscal Agent by Sections 3.22.

(b) The Fiscal Agent undertakes to perform such duties and only such
duties as are specifically set forth in Sections 3.22.

(c) No provision of this Agreement shall be construed to relieve the
Fiscal Agent from liability for its own negligent failure to act, bad faith or
its own willful misfeasance; PROVIDED, HOWEVER, that (i) the duties and
obligations of the Fiscal Agent shall be determined solely by the express
provisions of Sections 3.22, the Fiscal Agent shall not be liable except for the
performance of such duties and obligations, no implied covenants or obligations
shall be read into this Agreement against the Fiscal Agent and, in the absence
of bad faith on the part of the Fiscal Agent, the Fiscal Agent may conclusively
rely, as to the truth and correctness of the statements or conclusions expressed
therein, upon any resolutions, certificates, statements, opinions, reports,
documents, orders or other instruments furnished to the Fiscal Agent by the
Owner, the Servicer or the Custodian and which on their face do not contradict
the requirements of this Agreement, and (ii) the provisions of clause (ii) of
Section 7.01(d) shall apply to the Fiscal Agent.

(d) The Fiscal Agent also shall have the benefit of provisions of
clauses (i), (ii), (iii), (iv), (v), and (vi) of Section 7.02(a).

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ARTICLE VIII

WHOLE LOAN TRANSFER; PASS THROUGH
TRANSFER; RIGHTS OF NATIONSBANK

SECTION 8.01. REMOVAL OF MORTGAGE LOANS FROM INCLUSION UNDER THIS
AGREEMENT UPON A PASS-THROUGH TRANSFER OR A WHOLE LOAN
TRANSFER ON ONE OR MORE RECONSTITUTION DATES

The Servicer, the Custodian and the Owner agree that with respect to some
or all of the Mortgage Loans, the Owner may, upon the written consent of
NationsBank (such consent required only in the event of a payment default by the
Owner under the Master Repurchase Agreement), effect either one or more Whole
Loan Transfers and/or one or more Pass-Through Transfers.

With respect to each Whole Loan Transfer entered into by the Owner, the
Servicer agrees:

(1) to cooperate fully with the Owner and any prospective purchaser
with respect to all reasonable requests and due diligence procedures; and

(2) to execute or acknowledge, at the Owner's discretion, either (a) an
assignment by the Owner to a purchaser of some or all of the Mortgage Loans,
which Mortgage Loans may, at the option of the Owner, be assigned subject to the
servicing and custodial provisions, representations and warranties and covenants
set forth in this Agreement, provided that following such assignment, such
purchaser shall not be entitled to have any additional mortgage loans become
subject to this Agreement without the Servicer's written consent, and/or (b) a
Reconstitution Agreement under which, at the option of the Owner, the Servicer
would continue to service, and the Custodian would continue to provide custodial
services with respect to, some or all of the Mortgage Loans, provided that in
the case of (a) or (b) (i) each of the Servicer, the Custodian (in the case of
an assignment or a Reconstitution Agreement subject to the servicing or
custodial provisions, respectively) and the Owner is given an opportunity to
review and reasonably negotiate in good faith the content of any of such
documents, (ii) the Owner shall on or before the transfer of such Mortgage Loans
remit to the Servicer any unpaid Servicing Fees and other Servicing
Compensation, to the Custodian any unpaid Custodian Fees and to the Servicer,
the Custodian and the Fiscal Agent any unreimbursed Property Advances (with
interest thereon at the Property Advance Rate) and any other outstanding amounts
due to the Servicer, the Custodian and the Fiscal Agent hereunder related to
such Mortgage Loans and (iii) the Servicer, the Custodian and the Fiscal Agent
have been provided with adequate assurances that the prospective purchaser shall
be capable of reimbursing any Property Advances made by the Servicer, the
Custodian and the Fiscal Agent, as applicable, after such Whole Loan Transfer to
the extent the Owner is required to make such reimbursement pursuant to the
terms of this Agreement.

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The Owner intends that, with respect to a Pass-Through Transfer, the Owner
shall engage Midland Loan Services, L.P. as servicer under any pooling and
servicing agreement or other similar document, and the Owner shall engage
LaSalle National Bank as trustee under any such pooling and servicing agreement
or other similar document to the extent that each such party (i) is not in
default hereunder, (ii) consents to perform such services at the fee levels
charged hereunder (assuming that the trustee's fees under such agreement are not
greater than the Custodian Fee), (iii) is still performing its duties under this
Agreement immediately prior to such Pass-Through Transfer, and (iv) would not,
by its engagement and in the good faith determination of the Owner, jeopardize
the rating of any securities offered in connection with such Pass-Through
Transfer; PROVIDED, HOWEVER, that if the Owner in its good faith judgment
determines that it is in its best interest to use any other Person as such
servicer or trustee, the Owner may do so without any liability on the part of
the Owner with respect to the Servicer or the Custodian (including but not
limited to the payment of any termination fee). In the event that Midland Loan
Services, L.P. is not retained as the servicer under any such pooling and
servicing agreement or other similar agreement, Midland Loan Services, L.P. or
the Owner shall each have the right upon written notice to terminate all of its
rights and obligations under this Agreement; PROVIDED, HOWEVER, that the
Servicer shall continue to service any Mortgage Loans then subject to this
Agreement until the sooner to occur of (i) the appointment of a successor
servicer or (ii) the passage of four months from the time notice of such
termination is given. In the event that LaSalle National Bank is not retained
as trustee under any such pooling and servicing agreement or other similar
agreement, LaSalle National Bank shall have the right, upon written notice, to
terminate all of its rights and obligations under this Agreement; PROVIDED,
HOWEVER, that in any such event, LaSalle National Bank shall continue to serve
as Custodian hereunder until the sooner to occur of (i) the appointment of a
successor to the Custodian hereunder, or (ii) the passage of four months from
the time notice of such termination is given. The Servicer shall cooperate with
the Owner in connection with a Pass-Through Transfer in accordance with this
Section 8.01. In that connection, the Servicer shall (a) service the Mortgage
Loans in accordance with the applicable pooling and servicing agreement or other
similar agreement, (b) negotiate in good faith and execute any Reconstitution
Agreements required to effectuate the foregoing, and (c) provide to the trustee
and/or the Owner: (i) any and all information and appropriate verification of
information which may be reasonably available to the Servicer, whether through
letters of its auditors and counsel or otherwise, as the Owner or any trustee
shall reasonably request; and (ii) such additional representations, warranties,
covenants, indemnities, opinions of counsel, letters from auditors, and
certificates of public officials or officers of the Servicer as are reasonably
believed necessary by the trustee, any Rating Agency or the Owner, as the case
may be, in connection with such Pass-Through Transfer. The Servicer shall
execute any Reconstitution Agreements required within a reasonable period of
time after receipt of such Reconstitution Agreements, provided that such time
shall have been sufficient for the Servicer and the Servicer's counsel to review
and negotiate in good faith such Reconstitution Agreements. Under the
applicable Reconstitution Agreement, the Servicer shall retain a servicing fee
at a rate per annum not less than the Servicing Fee Rate (assuming that the
trustee's fees under such Reconstitution Agreement are not greater than the
Custodian Fee). The Servicer shall be required to pay all expenses incurred by
it in connection with its servicing activities under the

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Reconstitution Agreement (including, without limitation, the fees of any
subservicer, and the trustee) out of the servicing fee thereunder and shall not
be entitled to reimbursement therefor, except as specifically provided for
herein. Under the Reconstitution Agreement, the Servicer may also be required
to undertake responsibility for advancing the amount of any delinquent Monthly
Payments or other Mortgagor defaults, subject to limitations relating to the
Servicer's determination that such advances are not reasonably recoverable from
the related Mortgage Loan or REO Property in accordance with customary servicing
practices. The servicing terms, provisions, obligations and benefits in any
Reconstitution Agreement shall be otherwise similar in all material respects to
the terms, provisions, obligations and benefits set forth herein, except (i)
additional terms may be discussed and negotiated in good faith, (ii) the timing
relating to the remittance of funds and reports to the trustee thereunder may be
changed in order to provide additional time necessary to perform the servicing
and reporting activities which may be required under such agreement and (iii)
such other provisions as the parties shall agree to change which may be
necessary or appropriate in connection with a securitization transaction.

Prior to a Reconstitution Date the Owner or its designee shall prepare an
Assignment of Mortgage acceptable to the trustee or such third party, as the
case may be, for each Mortgage Loan that is part of a Pass-Through Transfer or a
Whole Loan Transfer and shall pay all recording costs associated therewith. The
Servicer shall cooperate with the Owner, at the direction of the Owner, in the
preparation and arranging the execution of any Note endorsements in connection
with any and all Reconstitution Agreements.

With respect to all Mortgage Loans that are sold or transferred pursuant to
(i) a Whole Loan Transfer on a servicing released basis or (ii) a Pass-Through
Transfer, this Agreement and the Servicer's and the Custodian's duties and
obligations hereunder shall be terminated; PROVIDED, HOWEVER, that such
termination shall not affect any rights of the Servicer or the Custodian for
payment or reimbursement that have arisen with respect to any Mortgage Loan
prior to such termination. All Mortgage Loans not sold or transferred pursuant
to a Whole Loan Transfer on a servicing released basis or a Pass-Through
Transfer and any and all Mortgage Loans repurchased by the Owner with respect to
a Pass-Through Transfer shall be subject to this Agreement and shall continue to
be serviced in accordance with the terms of this Agreement and with respect
thereto this Agreement shall remain in full force and effect.

It is understood that after the delivery of a Default Notice, NationsBank
may, pursuant the exercise of its rights and remedies under Section 13 of the
Master Repurchase Agreement, elect to sell any or all of the Mortgage Loans to a
third party. Any such sale may be effected in the same manner as a Whole Loan
Transfer on a servicing released basis pursuant to this Section 8.01. With
respect to all such Mortgage Loans that are so sold to a third party, this
Agreement and the Servicer's and the Custodian's duties and obligations
hereunder shall be terminated; PROVIDED, HOWEVER, that such termination shall
not affect any rights of the Servicer or the Custodian for payment or
reimbursement that have arisen with respect to any Mortgage Loan prior to such
termination.

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SECTION 8.02. RIGHTS OF NATIONSBANK

The parties hereto acknowledge that the Mortgage Loans will be originated
or acquired by the Owner, or an Affiliate thereof, and simultaneously sold to
NationsBank subject to the obligation of the Owner under the Master Repurchase
Agreement, to repurchase the Mortgage Loans on a Repurchase Date (as defined in
the Master Repurchase Agreement). In connection therewith and notwithstanding
any provision to the contrary contained herein, the parties hereto agree that
under the terms of the Master Repurchase Agreement, Capital Lease Funding, L.P.
("CLF") has irrevocably agreed that NationsBank shall have the exclusive right
to exercise all rights and powers of the Owner hereunder. Until such time as
NationsBank notifies the Servicer in writing that its right to exercise the
rights and powers of the Owner hereunder has terminated or expired under the
terms of the Master Repurchase Agreement, (1) the Servicer will only look to
NationsBank to provide all directions, consents, powers of attorney and any
other executed documents which the Owner is authorized or required to provide to
the Servicer hereunder, and the Servicer may rely upon all such directions,
consents and documents provided by NationsBank and shall have no obligation to
follow or rely upon any directions of CLF or any other Person; (2) except as
provided in this Section 8.02, CLF shall perform the obligations of the Owner
hereunder, and the Servicer, the Custodian and the Fiscal Agent shall look only
to CLF for the payment of any amounts due from the Owner hereunder (including,
without limitation, amounts due under any indemnification granted by the Owner
hereunder) with respect to actions arising on or before a Default Notice
(defined below) shall have been delivered to the Servicer by NationsBank;
PROVIDED, HOWEVER, that in the event (i) CLF as Owner is required under the
terms of this Agreement to reimburse the Servicer, the Custodian or the Fiscal
Agent for any unreimbursed Property Advances (with interest thereon at the
Property Advance Rate), (ii) CLF fails to so reimburse the Servicer, the
Custodian or the Fiscal Agent in a timely manner, and (iii) the Servicer uses
its best efforts to enforce such requirement and CLF does not comply with such
requirement within thirty days after receiving written notice from the Servicer
of such noncompliance, NationsBank shall assume such requirement and reimburse
the Servicer, the Custodian or the Fiscal Agent for such unreimbursed Property
Advances (with interest thereon at the Property Advance Rate); (3) all
remittances of funds with respect to the Mortgage Loans which are required to be
remitted by the Servicer to the Owner hereunder shall be remitted to NationsBank
or its Affiliate pursuant to wiring instructions designated by NationsBank, and
(4) a copy of each notice or communication sent to NationsBank as Owner in
connection with this Agreement shall be simultaneously sent to CLF at the
address indicated in Section 9.03 hereof in the same manner as that used to send
such notice or communication to NationsBank. NationsBank shall promptly advise
the Servicer in writing if the right, title and interest of CLF in the Mortgage
Loans has been terminated under the terms of the Master Repurchase Agreement due
to the default of CLF thereunder (such written advice being referred to as the
"Default Notice"), whereupon NationsBank shall succeed to CLF as the Owner
hereunder and shall assume all of the rights and obligations of the Owner
hereunder. NationsBank hereby agrees, prior to a Default Notice, to act
reasonably in giving instructions to the Servicer so as to protect the
interests, if any, of CLF in the Mortgage Loans; PROVIDED, HOWEVER, that the
Servicer shall not have any obligation to determine whether the instructions or
directions of

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NationsBank are reasonable as such instructions or directions relate to the
interests of CLF, if any, in and to the Mortgage Loans.

SECTION 8.03. FURTHER ASSURANCES.

The parties hereto agree to take any such action as is reasonably necessary
to conform the provisions of this Agreement to future requirements of any Rating
Agency rating (or issuing letters with respect to) the Mortgage Loans, and to
the requirements of future Mortgage Loans originated in connection with the
transaction herein contemplated including, if necessary and reasonably
acceptable to the parties hereto, amending and/or restating this Agreement at a
future date.

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ARTICLE IX

MISCELLANEOUS PROVISIONS

SECTION 9.01. COUNTERPARTS

This Agreement may be executed simultaneously in any number of
counterparts, each of which counterparts shall be deemed to be an original, and
such counterparts shall constitute but one and the same instrument.

SECTION 9.02. GOVERNING LAW

THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.

SECTION 9.03. NOTICES

All demands, notices and communications hereunder shall be in writing,
shall be deemed to have been given upon receipt as follows:

If to the Custodian or Fiscal Agent, to:

LaSalle National Bank
135 LaSalle Street, Suite 1740
Chicago, Illinois 60674-4107
Attention: Asset Backed Securities Trust Services Group-CLF

With copies to:

Latham & Watkins
885 Third Avenue
New York, New York 10022
Attention: Mark I. Michigan, Esq.

If to the Owner, to:

Capital Lease Funding, L.P.
85 John Street
New York, New York 10038
Attention: Paul H. McDowell, Esq.

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With copies to:

Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: Karsten P. Giesecke, Esq.

If to the Servicer, to:

Midland Loan Services, L.P.
210 West 10th Street, Sixth Floor
Kansas City, Missouri 64105
Attention: Alan L. Atterbury

With copies to:

Morrison & Hecker
2600 Grand Avenue
Kansas City, Missouri 64108-4606
Attention: William A. Hirsch, Esq.

If to NationsBank, to:

NationsBank, N.A.
100 North Tryon Street, 11th Floor
NC-007-11-07
Charlotte, North Carolina 28255
Attention: William Green

or, in the case of the parties to this Agreement, to such other address as such
party shall specify by written notice to the other parties hereto.

SECTION 9.04. SEVERABILITY OF PROVISIONS

If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever held invalid, then, to the
extent permitted by applicable law, such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.

SECTION 9.05. AMENDMENT

This Agreement may be amended in writing from time to time by the Owner,
the Servicer, the Custodian, the Fiscal Agent and NationsBank.

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IN WITNESS WHEREOF, the Owner, the Servicer, NationsBank (whose duties
hereunder arise solely in connection with Article VIII hereof), and the
Custodian and the Fiscal Agent have caused their names to be signed hereto by
their respective officers thereunto duly authorized all as of the day and year
first above written.

CAPITAL LEASE FUNDING, L.P.
as Owner

By: CLF HOLDINGS, INC.
its General Partner

By: _____________________________
Name:
Title:

MIDLAND LOAN SERVICES, L.P.
as Servicer

By: MIDLAND DATA SYSTEMS, INC.
its General Partner

By: __________________________
Name:
Title:

LASALLE NATIONAL BANK
as Custodian

By: _____________________________
Name:
Title:

ABN AMRO BANK N.V.
as Fiscal Agent

By: _____________________________
Name:
Title:

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NATIONSBANK, N.A.
(solely with respect to Article VIII hereof)

By: _____________________________
Name:
Title:

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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 May
20, 1998 with respect to the statement of financial condition of Capital Lease
Funding, Inc. at April 30, 1998 and January 23, 1998 except Note 9, as to which
the date is March 17, 1998, with respect to the consolidated financial
statements of Capital Lease Funding, L.P. and Subsidiary (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 Amendment #2 to the Registration Statement (on Form S-1 to Form S-11) and
the related Prospectus of Capital Lease Funding, Inc. for the registration of
8,441,000 shares of its common stock.

/s/ ERNST & YOUNG LLP

New York, NY
June 26, 1998

<PAGE>
EXHIBIT 99.2

CONSENT OF PROPOSED DIRECTOR

I, Lawrence A. Chimerine hereby consent to having my name listed as a
proposed director under the caption "Directors and Executive Officers" in the
Registration Statement on Form S-1 (No. 33-48745) and related Prospectus of
Capital Lease Funding, Inc.

Executed this 15th day of June, 1998

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<S> <C> <C>
By: /s/ LAWRENCE A. CHIMERINE
-----------------------------------------
</TABLE>

<PAGE>
EXHIBIT 99.3

CONSENT OF PROPOSED DIRECTOR

I, Dan Kearney hereby consent to having my name listed as a proposed
director under the caption "Directors and Executive Officers" in the
Registration Statement on Form S-1 (No. 33-48745) and related Prospectus of
Capital Lease Funding, Inc.

Executed this 15th day of June, 1998

<TABLE>
<S> <C> <C>
By: /s/ DAN KEARNEY
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</TABLE>