AMERICA FIRST REAL ESTATE INVESTMENT CO INC, S-4, 1998-05-07

AMERICA FIRST REAL ESTATE INVESTMENT CO INC
S-4, 1998-05-07

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 6513 (APPLIED FOR)
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of organization) Classification Number) Identification
No.)
</TABLE>

SUITE 400, 1004 FARNAM STREET
OMAHA, NEBRASKA 68102
(402) 444-1130
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

PAUL L. ABBOTT
SUITE 400, 1004 FARNAM STREET
OMAHA, NEBRASKA 68102
(402) 444-1130
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------

WITH COPIES TO:
PAUL E. BELITZ, ESQ.
BRIAN V. CAID, ESQ.
Kutak Rock
717 17th Street, Suite 2900
Denver, Colorado 80202
(303) 292-7797
--------------------------

APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND
AFTER
CONDITIONS IN THE MERGER AGREEMENT HAVE BEEN SATISFIED.
--------------------------

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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 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. / /
--------------------------

CALCULATION OF REGISTRATION FEE

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<CAPTION>
PROPOSED PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED TO BE REGISTERED PRICE PER UNIT(1) OFFERING PRICE(1) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $.001 par value per share..... 3,354,887(2) $25 $83,872,175 $24,742.29
Variable Rate Senior Notes and Promissory
Notes...................................... N/A(3) N/A(3) $40,000,000 $0
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f), promulgated under the Securities Act of 1933, as
amended.

(2) Represents the maximum number of shares of Common Stock (the "Shares")
issuable upon consummation of the transactions described herein.

(3) The maximum principal amount of the Variable Rate Senior Notes and any
Promissory Notes that may be issued in lieu of fractional Notes (the
"Notes") that will be issued is $40 million. Investors whose securities are
exchanged or cancelled will receive Shares or Notes. To the extent Notes are
issued in lieu of Shares, the proposed maximum aggregate offering price of
the Shares will be proportionately reduced. Accordingly, no further fee is
due for the registration of the Notes.
--------------------------

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>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
CROSS REFERENCE SHEET
FURNISHED PURSUANT TO ITEM 1 OF FORM S-4 AND ITEM 501(b) OF REGULATION S-K

<TABLE>
<CAPTION>
CAPTION IN OR PART OF
ITEM OF S-4 PROSPECTUS/CONSENT SOLICITATION STATEMENT
- -------------------------------------------------------------------- ---------------------------------------------------------
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A. Information about the Transaction

1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.............. Front Cover Page of the Registration Statement; Outside
Front Cover Page of the Prospectus/ Consent
Solicitation Statement

2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Inside Front Cover Page of the Prospectus/Consent
Solicitation Statement; Available Information; Outside
Back Cover Page of the Prospectus/ Consent Solicitation
Statement

3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............... Summary; Risk Factors; Selected Financial Data of the
Partnership; Voting

4. Terms of the Transaction...................... Summary; Risk Factors; The Transaction; The Company;
Description of Capital Stock; Certain Federal Income
Tax Considerations

5. Pro Forma Financial Information............... Pro Forma Financial Information

6. Material Contacts of the Partnerships Being
Acquired.................................... The Transaction; The Partnerships

7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters................................ *

8. Interest of Named Experts and Counsel......... *

9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. *

B. Information about the Registrant

10. Information with Respect to S-3 Registrants... *

11. Incorporation of Certain Information by
Reference................................... *

12. Information with Respect to S-2 or S-3
Registrants................................. *

13. Incorporation of Certain Information by
Reference................................... *

14. Information with Respect to Registrants Other
than S-3 or S-2 Registrants................. Available Information; Summary; Risk Factors; The
Transaction; The Company; Certain Federal Income Tax
Considerations
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAPTION IN OR PART OF
ITEM OF S-4 PROSPECTUS/CONSENT SOLICITATION STATEMENT
- -------------------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C>
C. Information about the Partnerships Being Merged

15. Information with Respect to S-3
Partnerships................................ *

16. Information with Respect to S-2 or S-3
Partnerships................................ *

17. Information with Respect to Partnerships other
than S-3 or S-2 Partnerships................ Available Information; Summary; Benefits of, and
Background and Reasons for, the Transaction; The
Transaction; The Partnerships; Selected Financial Data
of the Partnerships; see Index to Financial Statements

D. Voting and Management Information

18. Information if Proxies, Consents or
Authorizations are to be Solicited.......... Available Information; Summary; The Transaction; The
Company; Voting

19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in
an Exchange Offer........................... *
</TABLE>
<PAGE>
SUBJECT TO COMPLETION

DATED MAY 7, 1998
THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE 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>
PRELIMINARY CONSENT SOLICITATION STATEMENT OF
CAPITAL SOURCE L.P. AND CAPITAL SOURCE II L.P.--A

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

THIS CONSENT SOLICITATION STATEMENT ALSO SERVES AS
THE PROSPECTUS OF AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

3,354,887 SHARES OF COMMON STOCK AND
VARIABLE RATE SENIOR NOTES DUE , 2006

This Prospectus/Consent Solicitation Statement relates to the proposed
merger (the "Transaction") of Capital Source L.P., a Delaware limited
partnership ("Cap Source I"), and Capital Source II L.P.--A, a Delaware limited
partnership ("Cap Source II", and together with Cap Source I, the
"Partnerships") with and into America First Real Estate Investment Company,
Inc., a newly organized Delaware corporation (the "Company"). As a result of the
Transaction, the Company will issue securities to the Partnerships in exchange
for the assets of the Partnerships and the separate existence of the
Partnerships will cease. After the Transaction, the Company's primary business
objective will be to make growth-oriented real estate investments through the
direct acquisition, rehabilitation, development, financing and management of
real property, including the acquisition of equity securities of entities
engaged in similar real estate businesses.

The holders (the "Investors") of beneficial assignment certificates
representing assigned limited partnership interests in the Partnerships (the
"Units") are being asked to approve the Transaction as described in this
Prospectus/Consent Solicitation Statement. Upon completion of the Transaction,
Investors will receive, at their election and subject to certain limitations,
either shares of the Company's $.001 par value common stock (the "Shares") or
the Company's Variable Rate Senior Notes due , 2006 (the "Notes").
See "THE NOTES--Notes--INTEREST" for the interest rate calculation for the
Notes. The common stock of the Company (the "Common Stock") will be listed on
the New York Stock Exchange ("NYSE"), subject to official notice of issuance.

Consummation of the Transaction is subject to certain conditions and will
not occur unless, among other things: (i) both Partnerships participate in the
Transaction, and (ii) Investors who vote against the Transaction ("Dissenting
Investors") do not elect to receive more than the maximum amount of Notes
issuable in connection with the Transaction. Participation in the Transaction
requires the approval of a majority in interest of Investors in each
Partnership. The maximum amount of Notes that may be issued in the Transaction
(the "Maximum Note Limitation") is $40.0 million. The Company may, at its
option, pay cash in lieu of issuing Notes.

THIS TRANSACTION INVOLVES CERTAIN RISKS THAT SHOULD BE CONSIDERED BY THE
INVESTORS. SEE "RISK FACTORS" BEGINNING ON PAGE 19. IN PARTICULAR, INVESTORS
SHOULD CONSIDER THE FOLLOWING:

- The Common Stock may trade at prices substantially below the estimated
liquidation value of the Company's assets and the value assigned to the
Shares for purposes of the Transaction.

- A public market for the Notes is not expected to develop. If the Notes are
sold, they may sell at prices substantially below their issuance price.

- The Company is newly formed and has no operating history.

- The investment strategy of the Company will be materially different from
that of the Partnerships, which increases the risk to Investors.

(CONTINUED ON FOLLOWING PAGE)

THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., CENTRAL TIME
ON , 1998, UNLESS EXTENDED.

------------------------
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE 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 FAIRNESS OR MERITS OF THIS TRANSACTION OR
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/ CONSENT SOLICITATION
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
------------------------

THE DATE OF THE PROSPECTUS/CONSENT SOLICITATION STATEMENT IS , 1998.
<PAGE>
(COVER PAGE CONTINUED)

- The general partners of the Partnerships (the "General Partners") initiated
and participated in the structuring of the Transaction and have certain
potential conflicts of interest with respect to its completion.

- There can be no guarantee with respect to the level of the Company's future
cash dividends, and regardless of the initial level of such dividends, they
could decline so that some Investors who receive Shares ("Shareholders")
would receive lower distributions than they received from the Partnership
prior to the Transaction.

- The Transaction involves a fundamental change in the nature of the
Investors' investment. If the Transaction is completed, Investors will not
receive a return on their investment in the form of liquidation proceeds
through sales of Partnership assets. Instead, Shareholders will recover
their investment by selling their Shares on the NYSE or in private
transactions. An Investor's share of liquidation proceeds could be higher
than the amount realized from the sale of the Company's Shares or payments
on the Notes.

- Dissenting Investors are not entitled to any appraisal or other dissenters'
rights under Delaware law and none will be offered in the Transaction.

- There are alternatives to the Transaction. By approving the Transaction,
Investors will effectively preclude the pursuit of certain alternatives.

- To the extent Notes are issued, the Partnerships will be required to
recognize taxable gain which would be allocated to all Investors in
proportion to their ownership of Units.

- The Company's use of increased borrowing to increase its real estate asset
portfolio may subject the Company to risks associated with substantial
borrowing.

- Approval of a majority in interest of the Investors in a Partnership with
respect to the Transaction will bind all Investors in that Partnership,
including Dissenting Investors and Investors who abstained from voting with
respect to the Transaction.

- The Company may be liable for unknown, undisclosed or contingent liabilities
of the Partnerships, which could adversely affect the Company's ability to
pay expected dividends to Shareholders.

- The Company's ability to acquire real estate and generate income relating
thereto will be affected by factors beyond the Company's control.

- Investors who receive Notes ("Noteholders") will not hold an equity interest
in the Company and therefore will not be able to participate in the
Company's growth or benefit from any increases in the value of the Shares.
The Notes will be unsecured obligations of the Company and may be redeemed
prior to maturity at the Company's option.

- The rights of Shareholders or Noteholders will differ from their rights as
Investors in the Partnerships.

See "GLOSSARY" for definitions of certain key terms used in this
Prospectus/Consent Solicitation Statement.

This Prospectus/Consent Solicitation Statement is being furnished to
Investors in connection with the solicitation of consents by the General
Partners. Approval by a majority in interest of the Investors of each
Partnership is required for the Partnership to approve the Transaction. The
established record date for voting the Units is , 1998 (the "Record
Date"). In order to be valid, the enclosed form of consent (the "Consent Card")
must be received by Service Data Corporation by 5:00 p.m. Central Time on
, 1998. INVESTORS ARE URGED TO COMPLETE, DATE AND SIGN THE CONSENT
CARD AND RETURN IT IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. This
Prospectus/Consent Solicitation Statement and the accompanying Consent Card are
first being mailed to Investors on or about , 1998.

THE GENERAL PARTNERS RECOMMEND THAT ALL INVESTORS VOTE "YES" IN FAVOR OF THE
TRANSACTION.

ALL QUESTIONS AND INQUIRIES SHOULD BE DIRECTED TO ,
INFORMATION AGENT, , OR BY TELEPHONE AT (800) .
<PAGE>
AVAILABLE INFORMATION

The Partnerships are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "SEC" or
"Commission"). In addition, the Company has filed with the Commission a
Registration Statement on Form S-4 of which this Prospectus/Consent Solicitation
Statement forms a part (including all amendments, exhibits, annexes and
schedules thereto, the "Registration Statement") pursuant to the Securities Act
of 1933, as amended (the "Securities Act") and the rules and regulations
promulgated thereunder, with respect to the Shares and Notes offered pursuant to
this Prospectus/Consent Solicitation Statement. This Prospectus/ Consent
Solicitation Statement, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and financial schedules thereto. For further information with respect
to the Partnerships and the Company, reference is made to the reports of the
Partnerships filed under the Exchange Act and the Company's Registration
Statement and such exhibits and schedules, copies of which may be examined
without charge or obtained upon payment of prescribed fees at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission at 7 World Trade Center, New York, New York 10048 and Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a site in the World Wide Web at http:www.sec.gov that
contains reports, proxy and other information statements and other information
regarding registrants that file electronically with the Commission, including
the electronic filings of the Partnerships and the Company.

Statements contained in this Prospectus/Consent Solicitation Statement as to
the contents of any contract, agreement or other document are not necessarily
complete, and in each instance, reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
information in this Prospectus/Consent Solicitation Statement concerning the
Company, Cap Source I and Cap Source II has been furnished by the Company, Cap
Source I and Cap Source II, respectively. For further information with respect
to the Company, the Partnerships and the Shares and Notes offered hereby,
reference is made to the Registration Statement.

A separate supplement to this Prospectus/Consent Solicitation Statement has
been prepared for each Partnership and will be delivered to each Investor of the
Partnership covered thereby. Upon receipt of a written request by an Investor or
representative so designated in writing, the General Partners of the Investor's
Partnership will send a copy of any supplement without charge. All requests
should be directed to Service Data Corporation, 2424 South 130th Circle, Omaha,
Nebraska 68144.

Upon consummation of the Transaction, the Company will be required to file
reports and other information with the Commission pursuant to the Exchange Act.
Shareholders and Noteholders will receive annual reports containing audited
financial statements with a report thereon by the Company's independent public
accountants, and quarterly reports containing unaudited financial information
for each of the first three quarters of each fiscal year. If the Transaction is
not consummated, the Partnerships will continue to file reports and other
information with the Commission as required by law.

i
<PAGE>
TABLE OF CONTENTS

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PAGE
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SUMMARY.................................................................................................... 3
The Transaction.......................................................................................... 3
Risk Factors............................................................................................. 4
Benefits................................................................................................. 5
Fairness................................................................................................. 6
Fairness Opinion......................................................................................... 7
Recommendation of the General Partners and the Independent Committee; Fairness Determination............. 7
Appraisals............................................................................................... 7
Contacts Regarding Fairness Opinions, Valuations and Other Reports....................................... 8
The Shares............................................................................................... 8
The Notes................................................................................................ 8
Voting Procedures........................................................................................ 8
Communicating With Other Investors....................................................................... 9
No Dissenters' Rights.................................................................................... 9
The Company.............................................................................................. 10
The Advisor.............................................................................................. 11
Background and Reasons for the Transaction............................................................... 11
Exchange Value........................................................................................... 11
Consideration of Alternatives............................................................................ 12
Conflicts of Interest.................................................................................... 14
Compensation, Reimbursements and Distributions to the General Partners................................... 14
Dividend Policy.......................................................................................... 15
Federal Income Tax Considerations........................................................................ 15
Accounting Treatment..................................................................................... 16
Relationships to the Company............................................................................. 17
Comparison of Partnership Units and Company Shares....................................................... 18
RISK FACTORS............................................................................................... 19
Risks Associated with the Transaction.................................................................... 19
No Prior Market for the Shares; Market Price May Decrease After the Transaction........................ 19
No Prior Market for the Notes; Market Price May Decrease After the Transaction......................... 19
Lack of Operating History.............................................................................. 19
Risk Relating to a Significant Change in Business Operations........................................... 19
Potential Conflicts of Interest of General Partners.................................................... 20
Possible Alternatives to the Transaction Will Not Be Pursued........................................... 20
A Majority in Interest Will Bind All Investors in Each Partnership..................................... 20
Contingent or Undisclosed Liabilities.................................................................. 20
No Dissenters' Rights.................................................................................. 20
Risk of Lower Distributions............................................................................ 20
Certain Federal Income Tax Risks....................................................................... 20
Risks Associated with the Company's Business............................................................. 21
No Assurance of Successful Implementation of New Business Plan......................................... 21
General Risks of Investing in Real Estate.............................................................. 21
Investments in Assets Located Outside the United States................................................ 21
Leveraging Strategy.................................................................................... 21
Dependence on Available Investments.................................................................... 22
Competition............................................................................................ 22
</TABLE>

ii
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<TABLE>
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PAGE
---------
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Illiquidity of Real Estate............................................................................. 22
Risks Associated with Unspecified Acquisitions......................................................... 22
Title Defects.......................................................................................... 22
Environmental Laws May Impose Additional Liability..................................................... 22
Ability to Change Policies Without Shareholder Approval................................................ 23
Registration Under the Investment Company Act.......................................................... 23
Potential Liability Under the Americans With Disabilities Act.......................................... 23
Regulatory and Legislative Risks......................................................................... 23
BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION............................................... 24
History of the Partnerships.............................................................................. 24
The Decision to Pursue the Transaction................................................................... 26
Preparation for and Chronology of Events Leading to the Transaction...................................... 27
Alternatives Considered.................................................................................. 29
Continuation of Partnerships............................................................................. 29
Listing Partnership Units................................................................................ 30
Merger Resulting in a Single Publicly Traded Limited Partnership......................................... 30
Single REIT.............................................................................................. 30
Individual REITs......................................................................................... 30
Liquidation.............................................................................................. 31
Reasons for, and Benefits of, the Transaction............................................................ 31
Consequences if Transaction Not Completed................................................................ 32
THE TRANSACTION............................................................................................ 32
General.................................................................................................. 32
Terms of the Merger Agreement............................................................................ 33
Issuance of Shares and Notes of the Company.............................................................. 33
No Fractional Shares..................................................................................... 34
Fractional Notes......................................................................................... 34
Transaction Expenses..................................................................................... 34
Accounting Treatment..................................................................................... 35
Regulatory Matters....................................................................................... 35
The Independent Committee................................................................................ 36
Recommendation of the General Partners and the Independent Committee..................................... 36
Effect of the Transaction on Dissenting Investors........................................................ 37
Effective Time........................................................................................... 37
Conflicts of Interest.................................................................................... 37
FAIRNESS................................................................................................... 38
Belief as to Fairness.................................................................................... 38
Material Factors Underlying Belief as to Fairness........................................................ 38
Certain Alternatives to the Transaction.................................................................. 40
Comparison of Certain Alternatives to the Transaction.................................................... 42
FAIRNESS OPINION AND APPRAISALS............................................................................ 45
Fairness Opinion......................................................................................... 45
Appraisals............................................................................................... 48
Compensation and Material Relationships.................................................................. 52
EXCHANGE VALUES............................................................................................ 53
COMPARISON OF LIMITED PARTNERSHIP AND CORPORATE STRUCTURE.................................................. 55
Form of Organization..................................................................................... 55
Business................................................................................................. 55
Duration of Existence.................................................................................... 56
Investment Objectives and Policies....................................................................... 56
</TABLE>

iii
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<TABLE>
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PAGE
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Borrowing Policies....................................................................................... 57
Management............................................................................................... 57
Fees and Expenses........................................................................................ 58
Voting Rights............................................................................................ 59
Anti-Takeover Provisions................................................................................. 60
Review of Investor Lists................................................................................. 60
Nature of Investment..................................................................................... 61
Potential Dilution of Payments Rights.................................................................... 62
Expected Distributions and Payments...................................................................... 62
Liquidity and Transferability............................................................................ 63
Taxation of Taxable Investors............................................................................ 63
THE COMPANY................................................................................................ 64
Overview................................................................................................. 64
The Advisor.............................................................................................. 65
Investment Strategy...................................................................................... 65
Underperforming Commercial Properties.................................................................... 65
Real Estate Operating Companies.......................................................................... 65
Foreign or Foreign-Controlled Real Estate................................................................ 66
Existing Properties...................................................................................... 66
Financing Strategies..................................................................................... 66
Risk Control............................................................................................. 66
Affiliated REIT.......................................................................................... 66
Operating Restrictions................................................................................... 67
Dividend Policy.......................................................................................... 67
MANAGEMENT OF THE COMPANY.................................................................................. 68
Directors and Executive Officers of the Company.......................................................... 68
Board of Directors Compensation.......................................................................... 71
Committees of the Directors.............................................................................. 71
Compensation of Executive Officers....................................................................... 72
Stock Option Plan........................................................................................ 72
Limitation of Directors' Liability....................................................................... 72
Indemnification.......................................................................................... 73
The Advisor.............................................................................................. 73
VOTING..................................................................................................... 77
Solicitation by the General Partners..................................................................... 77
Voting Procedures........................................................................................ 77
Record Date and Outstanding Units........................................................................ 78
Solicitation of Votes; Solicitation Expenses............................................................. 78
Revocability of Consent.................................................................................. 78
Communicating With Other Investors....................................................................... 79
No Right of Appraisal.................................................................................... 79
FIDUCIARY RESPONSIBILITIES................................................................................. 79
PRO FORMA FINANCIAL INFORMATION............................................................................ 80
THE PARTNERSHIPS........................................................................................... 93
Cap Source I............................................................................................. 93
Cap Source II............................................................................................ 95
SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP UNITS........................................................ 97
Sale Prices of Units..................................................................................... 97
Unitholders.............................................................................................. 100
Partnership Distributions................................................................................ 100
</TABLE>

iv
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<TABLE>
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PAGE
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SELECTED FINANCIAL DATA OF THE PARTNERSHIPS................................................................ 102
DESCRIPTION OF CAPITAL STOCK............................................................................... 104
General.................................................................................................. 104
Common Stock............................................................................................. 104
Preferred Stock.......................................................................................... 105
Shares Eligible for Future Sale.......................................................................... 106
THE NOTES.................................................................................................. 106
General.................................................................................................. 106
Allocation of Notes...................................................................................... 106
Notes.................................................................................................... 107
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS................................ 111
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................................................. 113
General.................................................................................................. 113
Opinions of Counsel...................................................................................... 113
Certain Tax Differences Between the Ownership of Units and the Shares.................................... 114
Tax Treatment of the Transaction......................................................................... 114
Taxation of the Company.................................................................................. 116
Taxation of Shareholders................................................................................. 116
Taxation of Non-U.S. Shareholders........................................................................ 117
Tax Issues Associated with Notes......................................................................... 119
Considerations for Tax-Exempt Shareholders............................................................... 121
General Partner Liabilities.............................................................................. 122
Termination of Trade Processing.......................................................................... 122
EMPLOYEE RETIREMENT INCOME SECURITY ACT.................................................................... 122
INDEPENDENT PUBLIC ACCOUNTANTS............................................................................. 123
LEGAL MATTERS.............................................................................................. 123
GLOSSARY................................................................................................... 124
INDEX TO FINANCIAL STATEMENTS.............................................................................. FS-1

LIST OF APPENDICES

APPENDIX A--Form of Agreement and Plan of Merger........................................................... A-1
APPENDIX B--Fairness Opinion of Sutro & Co., Inc........................................................... B-1
</TABLE>

FINANCIAL STATEMENTS--The Financial Statements of the Partnerships are included
in a separate volume to this Prospectus/Consent Solicitation Statement. Such
Financial Statements constitute an integral part of this Prospectus/Consent
Solicitation Statement and should be reviewed in conjunction with this material
and the accompanying Prospectus Supplement.

v
<PAGE>
SUMMARY

THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT AND THE APPENDICES AND
SUPPLEMENTS HERETO. SEE "GLOSSARY" FOR CERTAIN CAPITALIZED TERMS USED IN THIS
PROSPECTUS/ CONSENT SOLICITATION STATEMENT.

THE TRANSACTION

This Prospectus/Consent Solicitation Statement relates to the proposed
merger (the "Transaction") of Capital Source L.P., a Delaware limited
partnership ("Cap Source I"), and Capital Source II L.P.-A, a Delaware limited
partnership ("Cap Source II," and together with Cap Source I, the
"Partnerships"), with and into America First Real Estate Investment Company,
Inc., a newly organized Delaware corporation (the "Company"). The Company was
organized to implement a new growth-oriented business strategy for the
Partnerships upon completion of the Transaction. The Transaction is being
proposed in accordance with an Agreement and Plan of Merger among the
Partnerships and the Company (the "Merger Agreement"). The form of the Merger
Agreement is attached to this Prospectus/Consent Solicitation Statement as
Appendix A. In connection with the Transaction, the Company will issue
securities to the Partnerships in exchange for the assets of the Partnerships,
and the separate existence of the Partnerships will cease.

The holders (the "Investors") of beneficial assignment certificates
representing assigned limited partner interests in the Partnerships (the
"Units") are being asked to approve the Transaction as described in this
Prospectus/Consent Solicitation Statement. Upon completion of the Transaction,
Investors will receive, at their election and subject to certain limitations,
shares of the Company's $.001 par value common stock (the "Shares") or Variable
Rate Senior Notes due , 2006 (the "Notes") of the Company. The Company
may, at its option, pay cash in lieu of issuing Notes. See "THE NOTES." The
common stock of the Company (the "Common Stock") will be listed on the New York
Stock Exchange ("NYSE"), subject to official notice of issuance.

The Transaction is being proposed by Insured Mortgage Equities, Inc. and
America First Capital Source I, L.L.C. (together, the "Cap Source I General
Partners"), and Insured Mortgage Equities II L.P. and America First Capital
Source II, L.L.C. (together, the "Cap Source II General Partners," and together
with the Cap Source I General Partners, the "General Partners"), in an effort to
increase the value of the investments held by the Investors while offering
substantially enhanced liquidity. To achieve these objectives, the General
Partners are proposing to restructure the business of the Partnerships by
merging the Partnerships with and into the Company in accordance with the Merger
Agreement. After the Transaction, the Company's primary business objective will
be to provide Shareholders with long term after-tax returns that are greater
than those available from real estate investment trusts ("REITs") and other
similar publicly traded real estate companies. The Company expects to achieve
this objective by investing in assets and using investment and management
strategies not generally permitted to or used by REITs. Such strategies may
include investing in real estate operating companies, in underperforming real
estate assets such as office buildings and apartment complexes with the
objective of renovating and repositioning them to increase values, and in
underperforming markets and foreign markets that the Company expects will show
significant improvement. See "THE COMPANY."

The Transaction is subject to certain conditions and will not occur unless,
among other things: (i) both Partnerships participate in the Transaction, and
(ii) Investors who vote against the Transaction ("Dissenting Investors") do not
elect to receive more than the maximum amount of Notes issuable in connection
with the Transaction. Participation in the Transaction requires approval of a
majority in interest of Investors in each Partnership. The maximum amount of
Notes that may be issued in the Transaction (the "Maximum Note Limitation") is
$40.0 million. If the Transaction is not consummated, the Partnerships will

3
<PAGE>
continue to operate as separate legal entities with their own assets and
liabilities, and their respective investment objectives, policies and
restrictions will not change.

RISK FACTORS

The following is a summary of the potential disadvantages, adverse
consequences and risks of the Transaction. This summary is qualified in its
entirety by the more detailed discussion in the section entitled "RISK FACTORS"
contained in this Prospectus/Consent Solicitation Statement.

- There is substantial uncertainty as to the prices at which the Common
Stock will trade after the Transaction. The price of the Shares may
decrease after the Transaction due to the potentially large number of
Shares that may be sold immediately by Shareholders. Thus, the Common
Stock may trade at prices substantially below the estimated liquidation
value of the Company's assets and the value assigned to the Shares for
purposes of the Transaction.

- A public market for the Notes is not expected to develop. If the Notes are
sold, they may sell at prices substantially below their issuance price.
Noteholders are likely to receive the full face amount of the Notes only
if they hold the Notes to maturity, which is approximately eight years
after the Transaction, or if the Company repays or refinances the Notes at
or prior to maturity.

- The Company has only recently been organized and has no operating history.
As a result, there can be no assurance that any of the Company's planned
future activities will be successful.

- There is a material difference between the investment objectives of the
Partnerships and the Company. The Company's investment objective will be
to identify and pursue growth-oriented real estate investments, which will
create a greater degree of risk for Investors than the investments of the
Partnerships.

- The General Partners initiated and participated in the structuring of the
Transaction and have certain conflicts of interests with respect to its
completion. See "THE TRANSACTION--Conflicts of Interest."

- There can be no guarantee with respect to the level of the Company's
future dividends, and regardless of the initial level of such dividends,
they could decline in the future so that some Shareholders would receive
dividends that are lower than the distributions they received as Investors
prior to the Transaction. The Company may also reinvest cash generated by
the sale of existing assets or from operations to acquire additional
assets, potentially causing cash dividends to be lower than the
distributions made by the Partnerships in certain cases.

- The Transaction involves a fundamental change in the nature of the
Investors' investment from an investment in a finite-life entity, which
has a legal life of 40 to 49 years from the date of formation and in which
Investors will receive a distribution upon liquidation based on the net
proceeds from the sale of the entity's assets, to an investment in an
infinite-life entity in which Shareholders will recover their investment
from the sale of their Shares and not from liquidation proceeds. Retaining
the finite life feature of the Partnerships would allow Investors
eventually to receive liquidation proceeds from the disposition of the
Partnership assets, and an Investor's share of these proceeds could be
higher than the amount realized from the sale of the Company's Shares or
payments on the Notes received in the Transaction.

- Dissenting Investors are not entitled to receive cash based on an
appraisal of their Units or other dissenters' rights under Delaware law,
and no such rights will be afforded by the Partnerships. Dissenting
Investors will only have the right to exchange their Units for Notes if
they so elect, subject to certain limitations. See "THE NOTES."

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<PAGE>
- There are alternatives to the Transaction. By approving the Transaction,
Investors will effectively preclude the pursuit of certain alternatives.
See "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered."

- In the event the Company issues Notes, the Partnerships will be required
to recognize gain and include such gain in income. Each Investor,
regardless of whether such Investor chooses Shares or Notes, would be
allocated a portion of such gain based on his ownership of Units. The
amount of such gain could be material if the maximum amount of Notes is
chosen.

- Although the Notes will be issued under an indenture (the "Indenture")
which creates certain debt limitations, the Company's organizational
documents do not limit the amount of debt the Company may incur. The
Company may therefore be more leveraged than either of the Partnerships.
The Company's use of increased borrowing may subject the Company to risks
associated with substantial borrowing, including an increased risk of
default on the Company's obligations.

- Approval of the Transaction by Investors holding a majority of outstanding
Units of a Partnership may cause the Partnership to be merged with and
into the Company, and such approval will bind all Investors in such
Partnership, including Dissenting Investors and Investors who abstained
from voting with respect to the Transaction.

- The Company may be liable for unknown, undisclosed or contingent
liabilities of the Partnerships, which could adversely affect the
liquidity of the Company and its ability to pay expected distributions to
Shareholders.

- The Company's ability to acquire real estate and generate income relating
thereto will be affected by factors beyond the Company's control.

- Noteholders will not hold an equity interest in the Company and therefore
will not be able to participate in the Company's growth or benefit from
any increases in the value of the Shares. The Notes, which will be
prepayable at any time, are unsecured obligations of the Company and, as a
practical matter, will be junior to all other debt of the Company. The
Notes will bear interest at a variable rate that may be lower than rates
on other variable rate debt instruments that may be perceived as having
comparable or lower risks than the Notes.

- Upon completion of the Transaction, Investors will become either
Shareholders or Noteholders of the Company, and their rights will differ
from their rights as Investors in the Partnerships. See "COMPARISON OF
LIMITED PARTNERSHIP AND CORPORATE STRUCTURE."

- If Dissenting Investors elect to receive Notes in excess of the Maximum
Note Limitation, the Transaction will not be consummated. If this does not
occur, but the total amount of Notes allocable to all Investors who elect
to receive Notes exceeds the Maximum Note Limitation, Notes will be
allocated first to Dissenting Investors who elected to receive Notes and
then, on a pro rata basis, to Investors who abstained from voting or who
voted "YES" in favor of the Transaction ("Consenting Investors"). Thus, an
Investor could choose Notes but receive Shares instead. To be assured of
receiving Notes, an Investor must vote "NO" with respect to the
Transaction.

BENEFITS

The following is a summary of the principal benefits of the Transaction.
This summary is qualified in its entirety by the more detailed discussion in the
section titled "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION"
contained in this Prospectus/Consent Solicitation Statement:

- The Transaction creates the potential for substantially enhanced liquidity
of investment due to conversion of limited partnership interests into
publicly traded Shares of the Company. There is no established public
trading market for the Units, and secondary sales activity for the Units
has been

5
<PAGE>
limited and sporadic at prices which the General Partners believe are
generally below fair value. The Transaction offers Shareholders liquidity
through the public trading expected to result from the listing of the
Common Stock on the NYSE.

- The Company will be afforded significant growth and profit opportunities
due to new real estate investments. The Company will expand the investment
objectives and policies of the Partnerships and will have the potential
for enhanced access to and flexibility in obtaining additional equity and
debt financing. In particular, the Company will have the ability to fund
future portfolio growth through the issuance of additional publicly traded
securities and the raising of funds from borrowing under secured and
unsecured debt obligations.

- If the Transaction is completed, affiliates of the Cap Source I General
Partners have agreed to permanently waive amounts which may be payable to
such affiliates by certain Operating Partnerships (as defined herein)
pursuant to the terms of the respective partnership agreements of such
Operating Partnerships. Such amounts aggregate, as of December 31, 1997,
$3,416,295, as reflected in the financial statements of Cap Source I.

- By combining the Partnerships into a single ownership entity, the
Transaction will create an investment portfolio larger and more
diversified than the portfolio of a Partnership. The diversification of
assets to be held by the Company is anticipated to limit the effect of
adverse developments and reduce Shareholder risks associated with
investments concentrated in any particular asset type. The increased size
and the resulting combination of operations spreads the risk of the
investment over a broader group of assets and reduces the dependence of
Investors' investment upon the performance of any particular asset or
group of assets.

- The Transaction will provide a capital and operating structure that will
allow the Company to respond more efficiently to, and to anticipate the
occurrence of, changing conditions in the U.S. equity markets, thereby
potentially reducing the adverse effects of such changes.

- The Transaction will result in simplified federal and state tax reporting
for Investors. Shareholders and Noteholders will receive Form 1099 rather
than the more complicated Schedule K-1 and will no longer be subject to
state tax withholding or be required to file individual state tax returns
(other than in their state of residence) solely as a result of an
investment in the Company.

For a discussion of the potential benefits of the alternatives to the
Transaction and the reasons such alternatives were rejected by the General
Partners, see "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered," below, and "FAIRNESS--Comparison of
Alternatives to the Transaction." The Transaction will require Investors to
forego certain alternatives to the Transaction.

FAIRNESS

The General Partners reasonably believe the terms of the Transaction are
fair as a whole, to each of the Partnerships and to the Investors in each of the
Partnerships. The General Partners have based their determination as to the
fairness of the Transaction on a variety of factors, including, but not limited
to: (i) the process of arm's-length negotiation of the terms and conditions of
the Transaction, with an independent committee (the "Independent Committee")
acting on behalf of the Partnerships and Investors; (ii) the opportunity for
each Investor to object to the Transaction and the requirement that the
Transaction be approved by Investors holding a majority in interest in each of
the Partnerships' outstanding Units; (iii) the form and amount of consideration
offered to the Investors; (iv) the method of allocating the Shares and Notes
between the Partnerships in the Transaction and the Exchange Values used in
connection with this allocation (the "Exchange Values"); (v) the fairness
opinion dated May 7, 1998 (the "Fairness Opinion"), rendered by Sutro & Co.,
Inc. ("Sutro & Co."); (vi) the independent appraisals (the "Appraisals")
prepared by Valuation Research Corporation ("Valuation Research"), which were
used in part in the

6
<PAGE>
determination of the Exchange Values; (vii) the lack of material differences
with respect to the assets of the Partnerships and the consistent valuation
methodology applied to the assets; and (viii) the fact that all Investors,
including Dissenting Investors, will be given the opportunity to elect to
receive Notes, subject to certain limitations. For a more detailed discussion of
the General Partners' belief as to the fairness of the Transaction, see
"FAIRNESS."

The General Partners arranged for the organization of the Independent
Committee to represent the interests of the Partnerships and Investors in
negotiating the structure, terms and conditions of the Transaction. The
Independent Committee negotiated the Exchange Values attributable to each of the
Partnerships and the fees to be paid to America First Real Estate Advisors LLC,
a Delaware limited liability company (the "Advisor"), following the Transaction.
The Independent Committee also concluded that the terms of the Transaction are
fair as a whole, to the Partnerships and to the Investors in each of the
Partnerships. The Independent Committee was retained without conditions or
restrictions.

The members of the Independent Committee are Messrs. Martin A. Massengale
and George Kubat. Since the organization of the Independent Committee, it has
met in person on four occasions and has had six additional telephonic meetings,
and numerous telephone conferences for the purpose of considering the proposed
Transaction. As part of its analysis of the Transaction, the Independent
Committee engaged its own counsel and also engaged Sutro & Co. to render the
Fairness Opinion with regard to the Transaction. See "FAIRNESS OPINION AND
APPRAISALS" below.

FAIRNESS OPINION

The Independent Committee retained Sutro & Co. to render the Fairness
Opinion as to the fairness, from a financial point of view, of the Transaction.
Based on the analysis described under "FAIRNESS OPINION AND APPRAISALS--Fairness
Opinion," and subject to the assumptions, limitations and qualifications noted
in the Fairness Opinion, Sutro & Co. concluded that the aggregate consideration
to be received by the Investors and General Partners, collectively, the
allocation of such consideration to be received by the Investors and General
Partners and the principal allocation of the Notes in the Transaction, including
the allocation of Shares and Notes between the Partnerships, is fair to the
Investors and each Partnership from a financial point of view.

The full text of the Fairness Opinion and the assumptions and qualifications
made, matters considered and limitations imposed on the review and analysis, is
set forth at Appendix B attached hereto and should be read in its entirety.

RECOMMENDATION OF THE GENERAL PARTNERS AND THE INDEPENDENT COMMITTEE; FAIRNESS
DETERMINATION

The General Partners, together with the Independent Committee, have
determined that the Transaction is fair to, and in the best interests of, the
Investors. Accordingly, the General Partners have approved the Transaction and
the Merger Agreement, and the General Partners and the Independent Committee
recommend that Investors vote in favor of the Transaction and the adoption of
the Merger Agreement. The General Partners believe the Transaction is fair as to
each Partnership and as a whole, and that it is the most attractive alternative
for providing Investors with the possibility of increasing the value of their
investments while offering substantially enhanced liquidity. See "THE
TRANSACTION--Recommendation of the General Partners and the Independent
Committee" and "FAIRNESS." The General Partners and the Independent Committee
therefore strongly recommend that Investors vote "YES" in favor of the
Transaction.

APPRAISALS

In connection with the Transaction, Valuation Research, an independent full
service appraisal firm, rendered its opinion as to the fair market value of the
real estate held by the Operating Partnerships (the "Properties"). In its
appraisal of the Properties, Valuation Research considered the cost approach,
the

7
<PAGE>
direct sales comparison approach and the income approach to market value, and
relied upon the income approach as its primary appraisal technique, using the
direct sales comparison approach as a basis for checking the reasonableness of
the results obtained using the income approach. See "FAIRNESS OPINION AND
APPRAISALS--Appraisals."

CONTACTS REGARDING FAIRNESS OPINIONS, VALUATIONS AND OTHER REPORTS

In addition to Sutro & Co., the Independent Committee conducted interviews
with three other firms regarding the possibility of advising the Independent
Committee with respect to the Transaction and issuing a fairness opinion for the
Transaction. The three other firms were Valuation Research, J.C. Bradford & Co.
and Schroders. The Independent Committee selected Sutro & Co. over these firms
based on Sutro & Co.'s experience in similar transactions, its research
capabilities, reputation, resources and more competitive fee structure. Other
than Valuation Research, the General Partners did not make any other contacts
with outside parties regarding the valuation of the Properties or other
Partnership assets or commission any other report with respect to the
Transaction. See "FAIRNESS OPINION AND APPRAISALS."

THE SHARES

In connection with the Transaction, the Company will issue to the
Partnerships up to an aggregate of 3,354,887 Shares. The total number of Shares
allocated to the Partnerships was based upon the Exchange Value for each
Partnership and was derived by dividing such Exchange Value by $25, an arbitrary
price per Share chosen for the sole purpose of allocating the Shares.

THE NOTES

All Investors, including Dissenting Investors, will be given the opportunity
to elect to receive Notes instead of Shares, subject to the limitations
discussed below. The Notes will be Variable Rate Senior Notes due ,
2006 and will be unsecured obligations of the Company. The Company, however, may
issue additional senior debt, which may be secured, in compliance with the
covenants of the Notes for the issuance of senior debt.

The Notes will bear interest at a floating rate equal to 120% of the annual
applicable federal rate for debt instruments with a term of not over three years
as determined under the Internal Revenue Code of 1986, as amended (the "Code")
and applicable regulations thereunder. The interest rate on the Notes will be
adjusted and paid annually. The Notes will mature on , 2006 and are
subject to optional redemption by the Company at any time. This optional
redemption may prevent the sale of the Notes at a premium and limit the term the
Notes will be outstanding. See "THE NOTES."

The Company may, at its option, pay cash in lieu of issuing the Notes. If
the Company elects to pay cash to Investors otherwise entitled to receive Notes,
it will pay such Investors an amount equal to the principal amount of Notes such
Investors would have received plus interest accrued to the date of payment at a
rate determined as set forth above.

The total amount of Notes to be issued is subject to the Maximum Note
Limitation, which is equal to $40.0 million. See "THE NOTES."

VOTING PROCEDURES

Each Investor is being asked to consider the following elections with
respect to the Transaction:

"YES," I approve of the merger of the Partnerships and the Company.

"NO," I do not approve of the merger of the Partnerships and the Company.

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<PAGE>
Investors may also abstain from voting.

An Investor will receive Shares unless the Investor elects to receive Notes.
An Investor may elect to receive Notes regardless of whether he votes "YES" or
"NO" with respect to the Transaction. An otherwise valid consent card will be
deemed to grant consent to the Transaction if it is not marked "NO" or to
abstain. See "VOTING."

The General Partners will not hold a meeting of the Investors to consider
the Transaction, but instead are seeking the written consent of the Investors as
provided in Article X of the respective limited partnership agreements of the
Partnerships (the "Partnership Agreements"). Investors holding Units as of
, 1998 (the "Record Date") will be entitled to vote with respect to the
Transaction. A consent card (the "Consent Card") is included with this
Prospectus/Consent Solicitation Statement and Investors are asked to complete,
date and sign the Consent Card and return it to Service Data Corporation in the
enclosed envelope as soon as possible. In order to be valid, consents must be
received by Service Data Corporation by 5:00 p.m. Central Time on ,
1998, unless such date is extended by the General Partners in their sole
discretion (the "Approval Date"). See "VOTING."

An Investor who does not wish to approve his Partnership's participation in
the Transaction may either (i) vote "NO" or (ii) abstain from voting. An
Investor who votes "NO" will receive Shares if the Transaction is completed,
unless such Investor elects to receive Notes as indicated on the Consent Card.
An Investor who abstains from voting with respect to the Transaction by
indicating his abstention on the Consent Card will also receive Shares if the
Transaction is completed, unless such Investor elects to receive Notes as
indicated on the Consent Card. An Investor who does not return the Consent Card
will receive Shares if the Transaction is completed. Investors may withdraw or
revoke their consent at any time prior to the Approval Date. See
"VOTING--Revocability of Consent."

THE GENERAL PARTNERS BELIEVE THAT THE TERMS OF THE TRANSACTION ARE FAIR AND
IN THE BEST INTERESTS OF THE PARTNERSHIPS AND THE INVESTORS AND RECOMMEND THAT
INVESTORS VOTE "YES" IN FAVOR OF THE TRANSACTION.

COMMUNICATING WITH OTHER INVESTORS

Under Rule 14a-7 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), each Partnership, upon written request from an Investor, will
deliver to such Investor (i) a statement of the approximate number of Investors
of the Partnership and (ii) the estimated cost of mailing proxy materials or
similar communications to the Investors of such Partnership. In addition, under
such rule, an Investor has the right, at his or her option, to have his or her
Partnership (i) mail (at the Investor's expense) any such materials which the
Investor desires to deliver to the other Investors of the Partnership in
connection with the Transaction or (ii) to have the Partnership deliver, within
five business days of the receipt of the request, a reasonably current list of
the names and addresses of the Investors of the Partnership as of the Record
Date. The Partnerships may require a requesting Investor to pay the reasonable
cost of duplicating and mailing such Investor list. Any such requests should be
sent to Maurice Cox, Suite 400, 1004 Farnam Street, Omaha, Nebraska, 68102.

NO DISSENTERS' RIGHTS

Dissenting Investors are not entitled to receive cash based on an appraisal
of their Units or other dissenters' or appraisal rights under the Partnership
Agreements or Delaware law, nor will such rights be provided by the Partnerships
or the Company. Dissenting Investors do, however, have the right to exchange
their Units for Notes rather than Shares. If a Dissenting Investor votes against
the Transaction but does not elect to receive Notes, the Dissenting Investor
will receive Shares. See "VOTING--No Right of Appraisal."

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<PAGE>
THE COMPANY

The Company was organized under the laws of the State of Delaware on
February 5, 1998, to facilitate the Transaction. As a result of the Transaction,
the Company will acquire the assets and liabilities of the Partnerships.

In furtherance of its business objectives, the Company intends to focus
initially on investments in four distinct aspects of the real estate business.
The Company will seek to acquire underperforming office, residential and other
commercial properties and attempt to improve their value by renovation,
redevelopment, and/or releasing and by acquiring over time groups of similar
assets that have a value as a portfolio greater than their individual values.
The Company will also seek investments in real estate operating companies. Such
operating companies include brokers, developers, partnerships and general
partners thereof which own real estate, and other similar companies. In
addition, the Company plans to consider investments in foreign or
foreign-controlled real estate. The Company will also maintain ownership in the
Operating Partnerships and plans to conduct a detailed evaluation of each of the
properties in order to determine the best strategy to maximize their value to
the Company.

The Company's investment strategy will be funded initially from available
cash and short-term investments and from borrowing against the mortgage-backed
securities (the "GNMA Certificates") guaranteed as to principal and interest by
the United States Government National Mortgage Association ("GNMA") and first
mortgage loans on multifamily housing properties (the "FHA Loans") insured as to
principal and interest by the United States Federal Housing Authority (the
"FHA"), which the Company will acquire from the Partnerships in connection with
the Transaction. The Company also plans to seek additional sources of financing,
both debt and equity, to further its growth-oriented business strategy.

The Company currently does not intend to qualify as a REIT under the Code.
Consequently, the Company will have the flexibility to respond quickly to
opportunities without the structural limitations imposed by the Code for REITs
and to operate, when deemed advantageous by management, on a more highly
leveraged basis than most REITs. By not qualifying as a REIT under the Code
(which would require the Company to distribute each year at least 95% of its net
taxable income, excluding capital gains), the Company will have the ability to
retain cash flow generated from operations and to retain proceeds from sales of
properties for reinvestment and to sell properties without the substantial
income tax penalties which may be imposed on REITs from certain prohibited
transactions.

In addition, the Company differs from real estate opportunity funds that are
typically structured as private partnerships. Such private partnerships
typically have a finite life which limits their ability to grow and may limit
their ability to maximize value. Furthermore, investment in such private
partnerships are generally limited to large, institutional investors. In
addition, unlike investors in such private partnerships, the Company's
Shareholders are expected to have enhanced liquidity through their ability to
sell or margin their Shares. However, unlike private partnerships and in most
cases REITs, the Company will be subject to corporate level taxation.

The Company will enter into an advisory agreement (the "Advisory Agreement")
with the Advisor to manage the assets held by the Company and to provide other
services to the Company. See "--The Advisor" below. The principal executive
offices of the Company are located at 399 Park Avenue, New York, New York 10022,
and its telephone number is (212) 935-8760.

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<PAGE>
THE ADVISOR

Under the terms of the Advisory Agreement, the Advisor will manage the
investments of the Company, formulate investment criteria, represent the Company
in connection with the acquisition and disposition of real estate assets,
recommend strategies to improve the performance of the Company's investments,
administer the day-to-day operation of the Company, communicate with and
maintain relations with the investors of the Company, and perform such other
services as set forth in the Advisory Agreement and as directed from
time-to-time by the Board of Directors. The Advisory Agreement will have an
initial term of three years (subject to earlier termination as provided
therein), and will automatically renew for one year terms unless written notice
of termination is delivered 180 days prior to the expiration of any term. The
Advisor will bear all costs of providing services to the Company, except for the
costs of services provided by third parties, certain limited office expenses and
travel expenses on behalf of the Company. Pursuant to the terms of the Advisory
Agreement, the Advisor will receive compensation (the "Advisor Fees") in the
form of an Acquisition Fee, an Asset Management Fee and an Incentive Fee on New
Assets, as more particularly described under "MANAGEMENT OF THE COMPANY--The
Advisor--THE ADVISORY AGREEMENT." The Advisor Fees were negotiated with the
Advisor by the Independent Committee. The Company may engage affiliates of the
Advisor to provide other services if approved by, and upon the terms approved
by, the Independent Directors (as defined herein) of the Company. See
"MANAGEMENT OF THE COMPANY."

BACKGROUND AND REASONS FOR THE TRANSACTION

Cap Source I was formed in 1985 and Cap Source II was formed in 1986. Both
Partnerships were formed to make debt and equity investments in multifamily
rental complexes (the "Complexes"). The Partnerships were organized and
sponsored by persons not affiliated with the Company, the Advisor or their
affiliates. The current General Partners acquired ownership of the General
Partner entities in 1991 and 1997.

The General Partners have proposed the Transaction in an effort to, among
other things, increase the value of the investments held by the Investors while
offering substantially enhanced liquidity, provide a capital and operating
structure that will be able to respond more efficiently to changing conditions
in the U.S. equity markets, and simplify federal and state tax reporting for
Investors. To achieve these objectives, the General Partners are proposing to
restructure the business of the Partnerships by merging them with and into
Company, which will pursue new business objectives and will list its Common
Stock on the NYSE. See "THE COMPANY" and "BENEFITS OF, AND BACKGROUND AND
REASONS FOR, THE TRANSACTION."

EXCHANGE VALUE

Investors will receive Shares or Notes based upon the exchange values (the
"Exchange Values") set forth in the table below. For their respective 1% general
partner interests in the Partnerships, the General Partners will receive Shares
in an amount based upon the Exchange Values in accordance with the distribution
provisions of the Partnership Agreements. Approximately 89% of the Partnerships'
combined assets are in the form of (i) cash, (ii) the GNMA Certificates, which
are collateralized by first mortgage loans on multifamily housing properties,
and (iii) the FHA Loans. The Exchange Values, which were reviewed and approved
by the Independent Committee, are based on (i) the principal amount of GNMA
Certificates and the FHA Loans as set forth in the Partnerships' audited
financial statements for the period ended December 31, 1997, (ii) the value of
the Partnerships' limited partnership interests in the Operating Partnerships
based on the Appraisals, and (iii) the market value of the Partnerships'
remaining net assets as set forth in the Partnerships' audited financial
statements for the period ended December 31, 1997.

The following table sets forth the Exchange Values attributable to the
Partnerships for purposes of the Transaction.

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EXCHANGE VALUE

<TABLE>
<CAPTION>
EXCHANGE VALUE PER $1,000
TOTAL EXCHANGE ORIGINAL INVESTMENT
PARTNERSHIP VALUE BY INVESTORS(1)
- ---------------------------------------------- ------------------- ---------------------------
<S> <C> <C>
Cap Source I.................................. $ 50,991,970 $ 748
Cap Source II................................. 32,880,190 406
-------------------
Total....................................... $ 83,872,160
-------------------
-------------------
</TABLE>

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

(1) Since the initial investment by Investors, per $1,000 original investment,
the Cap Source I Investors have received a return of capital of $83 and the
Cap Source II Investors have received a return of capital of $381.

CONSIDERATION OF ALTERNATIVES

In addition to the proposed Transaction, the General Partners considered the
following options: (i) continued management of the Partnerships as currently
structured, (ii) listing the Units of each Partnership on a national securities
exchange or automated quotation system; (iii) merging the Partnerships into a
single publicly traded partnership and listing the resulting partnership
interests on a national securities exchange or automated quotation system; (iv)
merging the Partnerships together to form a single REIT; (v) qualifying each
Partnership as an individual REIT; and (vi) liquidating the Partnerships through
entire portfolio sales or sales of individual properties. For the reasons set
forth under "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered," the General Partners rejected each of the
alternatives in favor of the Transaction.

CONTINUATION OF THE PARTNERSHIPS. An alternative to the Transaction would
be to continue each of the Partnerships in accordance with its respective
existing business plan and the Partnership Agreements. Continuing the
Partnerships without change would have the following benefits: (i) each
Partnership would remain a separate entity, with its own assets and liabilities,
and would remain under an obligation to pursue its original investment
objectives, consistent with the Partnership Agreement; (ii) the Partnership's
performance would not be affected by the performance of the other Partnership,
including the investment objectives, interests and intentions of the Investors
in the other Partnership; (iii) the Partnerships would not incur any expenses in
connection with the Transaction; (iv) the Partnerships would avoid the risks
inherent in the Transaction and (v) the Partnerships would continue their tax
advantaged status and not be subject to federal income tax. See "RISK FACTORS."

However, maintaining the Partnerships as separate entities would have the
following disadvantages, among others: (i) illiquidity of investment on a
current basis due to the lack of a large and established secondary market; (ii)
inability to raise new capital or make new investments, thus limiting growth of
the Partnerships' capital to that inherent in the existing Partnership
investments; (iii) less flexibility and control in actively managing the
portfolio; (iv) duplication among the Partnerships in reporting, filing and
other costly administrative services; (v) continued complicated tax filings for
Investors; and (vi) the declining value of the mortgage investments due to
amortization and subsequent distribution of such amounts.

LISTING THE PARTNERSHIP UNITS. Another alternative to the Transaction would
be to list the Units of each Partnership on a national securities exchange or an
automated quotation system in an attempt to increase the liquidity of the Units.
However, the General Partners believe that limited partnership units generally
do not trade well on such exchanges or automated quotation systems and that
meaningful liquidity would not be achieved. Furthermore, the General Partners
believe that the market tends to view common stock more favorably than limited
partnership units and that pursuing this alternative would substantially
diminish the Partnerships' ability to grow compared to the Transaction. As a
publicly traded company with a base of assets greater than a single Partnership,
the Company expects to be able to issue additional debt

12
<PAGE>
and equity securities with greater ease and on more attractive terms than would
be available to a Partnership individually. The General Partners therefore
concluded that the potential negatives of this alternative outweigh any
advantages it may have over the Transaction.

MERGER RESULTING IN A SINGLE PUBLICLY TRADED LIMITED PARTNERSHIP. In lieu
of participating in the Transaction, the Partnerships could be merged together
to form a single publicly traded limited partnership with the partnership units
of the new partnership listed on a national securities exchange or quoted on an
automated quotation system. For the reasons discussed above with respect to
listing the Units of each individual Partnership, the General Partners
determined that this alternative is less advantageous to the Investors than the
Transaction.

SINGLE REIT. The General Partners considered merging the two Partnerships
into a single entity which would elect REIT status but determined that it was a
less attractive alternative to the Transaction. The General Partners concluded
that the resulting REIT would be too small in terms of total capitalization to
compete with existing REITs having similar investment objectives. Specifically,
the initial capitalization of the new company would be less than $85 million, in
contrast to over 85 publicly traded REITS with total current capitalization in
excess of $500 million each, placing the new company at a significant
disadvantage. For example, many investment opportunities available to the
competition would be foreclosed to the new company because of its small size and
resulting difficulty in attracting capital at competitive pricing. As such,
growth prospects would be constrained by the new company's unfavorable
competitive position. Furthermore, due to restrictions in the Code relating to
distributions of net taxable income and limitations on sales of assets, as a
REIT, the new company would not be able to pursue the business plan described
herein which involves the ability to retain cash flow for investment purposes
and to sell assets regularly after the achievement of goals set for those
assets.

INDIVIDUAL REIT. The General Partners considered converting each
Partnership into an individual REIT, but determined that it was a less
attractive alternative than the Transaction for the same reasons discussed above
for the single REIT alternative. The issues cited above as reasons for the lack
of attractiveness of a new company as a single REIT would be magnified when
applied to each Partnership as an individual REIT due to the significantly
smaller size of each Partnership as a stand alone entity.

LIQUIDATION. Although the investment objectives and policies of the
Partnerships do not contemplate the commencement of the liquidation of the
Partnerships at any specific time, the General Partners assessed the possibility
of commencing the orderly liquidation of the Partnerships and distributing the
net proceeds from such liquidation to the Investors and General Partners. The
General Partners concluded that liquidation would be costly and time-consuming
and would not be as beneficial to Investors as the Transaction.

The General Partners determined that an attempt to liquidate the
Partnerships' investments at the current time would likely result in the
Investors not achieving the full potential benefits from an investment in the
Partnerships. They concluded that liquidation would not be the best option to
realize the optimum return on an investment in the Partnerships because although
the Partnerships' investments in mortgage loans could likely be sold at or
slightly above their face value, most of the Partnerships equity positions in
the Operating Partnerships are not attractive to buyers due to restrictions in
the various partnership documents. Liquidation of most of the equity positions
would require either (i) a protracted period of negotiations with the various
general partners of the Operating Partnerships which could potentially create
both substantial transaction costs and additional costs to the Partnerships of
continuing operations during the negotiation period, and/or (ii) the
Partnerships' accepting substantial discounts in value. In addition, there may
be additional costs associated with representations, warranties, and
indemnifications that purchasers generally require and which may result in
additional escrow costs and a delay in final distributions to Investors.
Furthermore, the liquidation of the Partnerships would involve certain
transaction costs, such as legal fees and various other closing costs, which
would further reduce the amount of net proceeds available for distribution.

13
<PAGE>
On the other hand, in a liquidation of the Partnerships, Investors would
benefit by avoiding the risks of continuing their ownership of the Partnerships
and those associated with the Transaction. Liquidation would provide for the
final liquidation of the Investors' investments and a likely substantial
distribution of cash equal to net liquidation proceeds, though not in an amount
that would allow Investors to realize their original investment. In addition,
the Investors would have the potential to reinvest the net proceeds received in
the liquidation in similar or different investments.

CONFLICTS OF INTEREST

The General Partners have participated in the initiation and structuring of
the Transaction and have certain conflicts of interest with respect to its
completion. The conflicts of interest of the General Partners include: (i) the
management of the Company by the Advisor, an affiliate of the General Partners;
and (ii) the retention by the General Partners of 1% of the shares of Common
Stock outstanding immediately after the Transaction, pursuant to the terms of
the Partnership Agreements. See "THE TRANSACTION--Conflicts of Interest."

COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS

The following table sets forth the cash distributions, fees and
reimbursements the General Partners currently receive from the Partnerships and
the fees that the Advisor, an Affiliate of the General Partners, would have
received from the Company had the Transaction occurred prior to the periods
indicated.

COMPARISON OF COMPENSATION,
REIMBURSEMENTS AND DISTRIBUTIONS TO
GENERAL PARTNERS

<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
ACTUAL AMOUNTS PAID TO GENERAL PARTNERS

Capital Source I
- -----------------------------------------------------------------------------
1% Share of Cash Distributions(1)........................................ $ 34,424 $ 34,424 $ 34,424
Asset Management and Partnership Administrative Fee(2)................... 0 0 0
Reimbursements(3)........................................................ 138,857 193,822 240,759
---------- ---------- ----------
Subtotal............................................................... $ 173,281 $ 228,246 $ 275,183
---------- ---------- ----------

Capital Source II
- -----------------------------------------------------------------------------
1% Share of Cash Distributions(1)........................................ $ 32,818 $ 32,818 $ 32,818
Asset Management and Partnership Administrative Fee(4)................... 166,000 166,000 166,000
Reimbursements(3)........................................................ 128,754 165,424 211,845
---------- ---------- ----------
Subtotal............................................................... $ 327,572 $ 364,242 $ 410,663
---------- ---------- ----------
Total.................................................................... $ 500,853 $ 592,488 $ 685,846
---------- ---------- ----------
---------- ---------- ----------

COMPANY--FEES PAYABLE TO THE ADVISOR
Acquisition Fee(5)......................................................... $ 0 $ 0 $ 0
Asset Management Fee(6).................................................... 431,790 429,968 433,014
Incentive Fee(7)........................................................... 0 0 0
---------- ---------- ----------
Total.................................................................... $ 431,790 $ 429,968 $ 433,014
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

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

(1) The respective Partnership Agreements provide that 1% of cash available for
distribution will be allocated to the General Partners.

14
<PAGE>
(2) The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum,
payable only during such years that an 8% return has been paid to investors
on a noncumulative basis. Any unpaid amounts will accrue and be payable only
after a 13% annual return to investors has been paid on a cumulative basis
and the investors have received the return of their capital contributions.

(3) The General Partners are paid or reimbursed for certain costs and expenses
incurred in connection with the operation of the Partnership.

(4) The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum,
the first $50,000 of which shall be paid each year with the balance payable
only during such years that a 6.5% annual return has been paid to investors
on a noncumulative basis. An additional fee of 0.5% of invested assets will
be paid in those years that an 11.5% annual return has been paid to
investors on a cumulative basis. Any unpaid amounts will accrue and be
payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions.

(5) No acquisition fees would have been paid because no new assets were
purchased or permitted to be purchased in the years 1995 to 1997.

(6) Calculated based on the Advisor fees described in more detail under "THE
COMPANY--The Advisor".

(7) No incentive fee would have been paid because no new assets were owned which
would have qualified for such a fee if sold.

DIVIDEND POLICY

The Company intends to pay regular quarterly dividends to its Shareholders,
beginning with the first full fiscal quarter following the completion of the
Transaction, subject to the discretion of, and in amounts determined by, the
Board of Directors. The Company intends to distribute substantially all of its
net cash flow from operations, after giving effect to any reasonable reserves,
as dividends with respect to the Company's first four complete quarters of
operations. In addition, the Company intends to distribute with respect to the
first two complete quarters of operations an amount which is the greater of (i)
substantially all of its net cash flow from operations as described above or
(ii) the cash distributions which would have been distributed to Cap Source I
investors if the Transaction had not occurred and distributions were made at the
same quarterly rates as were made in 1997 for the Cap Source I Partnership or
(iii) cash distributions which would have been distributed to Cap Source II
investors if the Transaction had not occurred and distributions were made on the
basis of actual net cash from operations of Cap Source II. The Company
anticipates that the amount resulting from the application of (ii) and (iii)
above will be $.42 per share per quarter.

FEDERAL INCOME TAX CONSIDERATIONS

The Company will not recognize any gain or loss as a result of the
Transaction. In addition, the Partnerships will not recognize gain as a result
of the Transaction except to the extent of the fair market value of any Notes
received in the Transaction subject to the assumptions and other matters
discussed in this Prospectus/Consent Solicitation Statement under "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS--Tax Treatment of the Transaction." The
Company will be characterized as a corporation for federal income tax purposes.
Therefore, the Company's income and gains are subject to federal corporate
income taxation and do not pass through to the Shareholders. In addition, all
items of losses, deductions and credits must be used to offset the Company's
income and thus are not passed through to the Shareholders. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS--Taxation of the Company." Distributions by the
Company to Shareholders will generally be characterized as dividends and

15
<PAGE>
taken into account by Shareholders as ordinary income. Dividends by the Company
will be treated as portfolio income to the Shareholders and, thus, will not be
available to offset passive losses from any other source. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS--Taxation of Shareholders."

Dividends by the Company will not constitute unrelated business taxable
income to tax-exempt Shareholders unless Shares are "debt-financed property."
Shares will generally be deemed "debt-financed property" in the hands of a
tax-exempt Shareholder if such Shares are subject to debt. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS--Considerations for Tax-Exempt Shareholders."

ACCOUNTING TREATMENT

The Transaction will be accounted for using the purchase method of
accounting in accordance with generally accepted accounting principles ("GAAP").
Cap Source I will be deemed to be the acquirer of Cap Source II under the
purchase method because it is the larger of the two Partnerships. Accordingly,
the Transaction will result, for financial accounting purposes, in the effective
purchase by Cap Source I of all of the Units of Cap Source II. As the surviving
entity for financial accounting purposes, the assets and liabilities of Cap
Source I will be recorded by the Company at their historical cost and the assets
and liabilities of Cap Source II will be recorded at their estimated fair
values.

16
<PAGE>
RELATIONSHIPS TO THE COMPANY

The following diagram sets forth the organizational structure of the Company
after the Transaction.

[LOGO]

*Affiliates of America First Companies L.L.C. own a 1% General Partner interest
in these Operating Partnerships.

17
<PAGE>
COMPARISON OF PARTNERSHIP UNITS AND COMPANY SHARES

The following is a summary of certain attributes of the ownership of
Partnership Units and the ownership of Shares. The following descriptions are
qualified in their entirety by reference to the Company's Second Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") and
Bylaws (the "Bylaws," and together with the Certificate of Incorporation, the
"Organizational Documents") and to each Partnership's Partnership Agreement. The
descriptions are summaries and do not purport to be complete discussions of
these matters. Investors are encouraged to review carefully the more detailed
comparison regarding the Units, the Shares and the Notes discussed in
"COMPARISON OF LIMITED PARTNERSHIP AND CORPORATE STRUCTURE" and this
Prospectus/Consent Solicitation Statement for additional comparisons.

<TABLE>
<CAPTION>
CHARACTERISTICS INVESTORS SHAREHOLDERS
- ---------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Business -Equity and debt investments in -Equity and debt investments in
multifamily rental complexes real estate and real estate
related activities

Liquidity -Illiquid - no established market -Traded on NYSE
-Transfers are subject to -Freely transferable
limitations

Property Portfolio -Static portfolio -Investment flexibility
-More diversification and ability
to grow
-Larger portfolio

Duration -40 to 49 years from formation -Perpetual

Federal Taxation -The Partnerships are not subject -The Company is subject to federal
to federal tax tax as a C corporation

State Tax Withholding -Some states require withholding on -Generally, no withholding
partnership distributions

Tax Characterization of Income -Passive income -Portfolio income

Tax Reporting -Schedule K-1, generally mailed by -Form 1099-DIV must be mailed by
March 15 of each year January 31 of each year

Borrowing -New borrowing generally not -Generally permitted
permitted

Management -Vested in two General Partners -Vested in Board of Directors
elected by Shareholders

Voting -Voting is based on Investor's -One vote per Share.
ownership interest in a
Partnership; voting is generally
permitted only for significant
actions
</TABLE>

18
<PAGE>
RISK FACTORS

In addition to the other information contained in this Prospectus/Consent
Solicitation Statement, the following risk factors should be carefully
considered in evaluating the Company and its business before voting with respect
to the Transaction.

RISKS ASSOCIATED WITH THE TRANSACTION

NO PRIOR MARKET FOR THE SHARES; MARKET PRICE MAY DECREASE AFTER THE
TRANSACTION. Prior to the Transaction, there has been no public market for the
Shares, and there can be no assurance that an active trading market will develop
or be sustained. There is substantial uncertainty as to the prices at which the
Shares will trade, and the possibility exists that the trading price of the
Shares may be lower than the proportionate Exchange Value estimated for each
Share. The price of the Shares may decrease after the Transaction due to the
potentially large number of Shares that may be sold immediately by Investors who
elect to receive Shares. The market value of the Shares could also be
substantially affected by numerous factors such as: governmental regulatory
action; changes in tax laws; the market's perception of the Company and its
ability to maintain or increase dividend levels; the size of the Company in
terms of assets and market capitalization; the degree to which the management's
interests are perceived to be aligned with the interests of Shareholders; the
degree to which leverage is used in the Company's capital structure; the
historical performance of the Partnerships; external factors such as market
interest rates and conditions of the mortgage investment and stock markets; and
technical factors relating to the supply and demand for Shares.

NO PRIOR MARKET FOR THE NOTES; MARKET PRICE MAY DECREASE AFTER THE
TRANSACTION. The Notes will not be listed on a national securities exchange or
quoted on an automated quotation system. Therefore, the Company does not expect
that an orderly and active trading market for the Notes will develop, and there
is substantial uncertainty as to the prices at which the Notes will trade
following the Transaction. Since the Notes may be redeemed at any time by the
Company without premium for an amount equal to the outstanding principal balance
thereon plus accrued interest, the Notes may never trade at a premium.
Noteholders are likely to receive the full face amount of the Notes only if they
hold the Note to their maturity, which is eight years after the Transaction,
unless the Notes are redeemed earlier by the Company. See "THE NOTES--Notes."

LACK OF OPERATING HISTORY. The Company is newly organized and has no
operating history. The Company's results of operations, financial condition and
liquidity depend, to a material extent, on the ability of the Company to obtain
long term after-tax returns that are greater than those available from REITs and
other similar publicly traded real estate companies. Therefore, the failure to
invest in real estate investments generating such returns will have a material
adverse effect upon the Company's results of operations and financial condition.

RISK RELATING TO A SIGNIFICANT CHANGE IN BUSINESS OPERATIONS. The
investment strategy of the Partnerships was to originate, acquire, hold, sell,
dispose of and otherwise deal with insured mortgages on multifamily rental
housing complexes and to acquire, hold, sell, dispose of and otherwise deal with
limited partnership interests in the Operating Partnerships which construct and
operate multifamily rental housing complexes. The investment strategy of the
Company will be materially different from that of the Partnerships. The
Company's investment strategy is to maximize total returns by making
growth-oriented real estate investments. The Company expects to make both equity
and debt investments, both directly and by the purchase of partnership interests
and other securities of issuers owning such assets. There can be no assurance
that the Company will be able to achieve its investment strategy as a result of
the change in business. These investments will have substantially higher risk
and the potential for higher returns than the current assets of the Partnership.

19
<PAGE>
POTENTIAL CONFLICTS OF INTEREST OF GENERAL PARTNERS. The General Partners
initiated and participated in the structuring of the Transaction and have
certain conflicts of interest with respect to its completion. These conflicts
include: (i) the management of the Company by the Advisor, an affiliate of the
General Partners; and (ii) the retention by the General Partners of 1% of the
shares of Common Stock outstanding immediately after the Transaction, pursuant
to the terms of the Partnership Agreements. However, the General Partners have a
fiduciary duty to the Partnerships and Investors and have determined that the
Transaction is fair to and in the best interest of the Investors. See
"FAIRNESS--Belief as to Fairness."

POSSIBLE ALTERNATIVES TO THE TRANSACTION WILL NOT BE PURSUED. Alternatives
to the Transaction include (i) continued management of the Partnerships as
currently structured, (ii) listing the Units of each Partnership on a national
securities exchange or automated quotation system; (iii) merging the
Partnerships into a single publicly traded partnership and listing the
partnership units on a national securities exchange or automated quotation
system; (iv) merging the Partnerships together to form a single REIT; (v)
qualifying each Partnership as an individual REIT; and (vi) liquidating the
Partnerships through entire portfolio sales or sales of individual properties.
By approving the Transaction, the Investors will effectively preclude the
pursuit of certain alternatives.

A MAJORITY IN INTEREST WILL BIND ALL INVESTORS IN EACH PARTNERSHIP. Under
the Merger Agreement and the requirements of the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Partnership Law"), a Partnership will
participate in the Transaction if a majority in interest of its Investors
consent to the Transaction. If the Transaction is approved by such majority, all
Investors in each Partnership will be bound by the decision of the majority.

CONTINGENT OR UNDISCLOSED LIABILITIES. Under the Merger Agreement, the
Company will, as of the effective date of the Transaction (the "Effective
Date"), acquire all assets and liabilities of the Partnerships. Each of the
Partnerships will deliver to the Company financial statements for such entity
disclosing all known material liabilities and reserves, if any, set aside for
contingent liabilities as of the Closing Date. The General Partners will
represent and warrant that, to the best of their knowledge, the financial
statements fairly present the financial position of each Partnership, as if
there is no liability or obligation to be set forth or reserved against in the
financial statements based upon generally accepted accounting principles. The
accuracy and completeness of these representations are conditions to the closing
of the Transaction and if, on or prior to the Closing Date, these
representations and warranties are shown to be inaccurate, there may be
adjustments to the consideration paid by the Company or the Company may elect
not to proceed to close the Transaction.

NO DISSENTERS' RIGHTS. Under the Delaware Partnership Law, Investors will
have no appraisal, dissenters' or similar rights in connection with the
Transaction. Therefore, Investors will not be entitled to receive cash payment
for the fair value of their partnership interest if they do not vote in favor of
the Transaction and the Transaction is approved and consummated.

RISK OF LOWER DISTRIBUTIONS. There is no guarantee with respect to the
level of the Company's future cash dividends. Regardless of the initial level of
such dividends, they could decline in the future to a level at which some
Investors would receive dividends lower than the distributions they received
prior to the Transaction. See "THE COMPANY--Dividend Policy."

CERTAIN FEDERAL INCOME TAX RISKS. In the event the Company issues Notes in
connection with the Transaction, the Partnerships will be required to recognize
gain. In the event the maximum amount of Notes are chosen, the resulting gain
could be a material amount. In general, such gain will be determined by
allocating the value of the Notes among the assets of each Partnership on the
basis of their relative fair market values. The amount of gain recognized will
not exceed the amount of value of the Notes allocable to each asset. The
character of any recognized gain would be the same as would be the case if each
Partnership had sold its assets. Each Investor would be required to include in
income a share of such gain even if such Investor did not vote in favor of the
Transaction and/or did not choose Notes. The Company

20
<PAGE>
does not expect to distribute cash to Investors which would correspond to the
income recognized as a result of the issuance of the Notes.

RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS

NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF NEW BUSINESS PLAN. The Company
is subject to the risks generally associated with the development and
implementation of its new business plan and will need to develop effective
investment and operating policies and strategies in connection therewith. There
can be no assurance that the Company will be successful in developing the
necessary investment and operating policies or that it will be able to
effectively implement its business plan.

GENERAL RISKS OF INVESTING IN REAL ESTATE. The ultimate performance of the
Company's proposed investments under its new business plan will be subject to
the varying degrees of risk generally incident to the ownership and operation of
the underlying real property. The ultimate value of the Company's security in
the underlying real property depends upon the owners' ability to operate the
real property in a manner sufficient to maintain or increase revenues in excess
of operating expenses and debt service or, in the case of real property leased
to a single lessee, the ability of the lessee to make rental payments. Revenues
may be adversely affected by adverse changes in national economic conditions,
adverse changes in local market conditions due to changes in general or local
economic conditions and neighborhood characteristics, competition from other
properties offering the same or similar services, changes in interest rates and
in the availability, cost and terms of mortgage funds, the impact of present or
future environmental legislation and compliance with environmental laws, the
ongoing need for capital improvements (particularly in older structures),
changes in real estate tax rates and other operating expenses, adverse changes
in governmental rules and fiscal policies, civil unrest, acts of God, including
earthquakes, hurricanes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors which are beyond the control of the real property owners and the
Company. In the event that any of the properties underlying the Company's
investments experience any of the foregoing events or occurrences, the value of
and return on such investments would be negatively impacted.

INVESTMENTS IN ASSETS LOCATED OUTSIDE THE UNITED STATES. The Company may
make investments outside the United States. These investments may have
substantially greater risks than investments in the United States. These risks
include uncertain or unknown local and regional market conditions, differences
in governmental regulation, differences in laws relating to the ownership and
operation of real estate and changes in the value of the local currency in
relationship to the value of the United States dollar. Other risks include
application of local tax laws relating to investment by foreign investors.

LEVERAGING STRATEGY. The Company will employ a strategy to increase the
size of its real estate asset portfolio by bank borrowing or other credit
arrangements used to finance the acquisition of growth-oriented real estate
investments. Therefore, such assets may not be available to the Shareholders in
the event of the liquidation of the Company except to the extent that the market
value thereof exceeds the amounts due to creditors.

Substantial leverage incurred by the Company will be subject to the
following risks: (a) the Company could lose its interests in assets given as
collateral for secured borrowing if the required principal and interest payments
are not made when due; (b) the Company's cash flow from operations may not be
sufficient to retire these obligations as they mature, making it necessary for
the Company to either refinance these obligations prior to maturity or to raise
additional debt and/or equity for the Company or dispose of some of the
Company's assets to retire the obligations, which could have an adverse effect
on the amount of funds available for distribution to Shareholders; (c) no
assurance can be given as to the availability, or the terms and conditions, of
any financing needed by the Company to refinance borrowing; and (d) debt
incurred by the Company may be at interest rates that adjust based on prevailing
market interest rates, and an increase in the prevailing market interest rates
would adversely affect the Company's earnings and could reduce the amount of
funds available for distribution to Shareholders.

21
<PAGE>
DEPENDENCE ON AVAILABLE INVESTMENTS. The results of the Company's future
operations under the new business plan will be dependent upon the availability
of, as well as management's ability to identify, complete and realize, real
estate investment opportunities. It may take considerable time for the Company
to find and consummate appropriate investments. In general, the availability of
desirable investment opportunities and the results of the Company's operations
will be affected by the level and volatility of interest rates, by conditions in
the financial markets, and general economic conditions. No assurances can be
given that the Company will be successful in finding and then acquiring
economically desirable assets or that the assets, once acquired, will maintain
their economic desirability.

COMPETITION. The Company is engaged in a highly competitive business. The
Company will be competing for investments with many recent entrants into the
business, including numerous public and private real estate investment vehicles,
including financial institutions (such as mortgage banks, pension funds and real
estate investment trusts) and other institutional investors, as well as
individuals. In addition, the Company's competitors may seek to establish
relationships with the financial institutions and other firms from whom the
Company intends to purchase such assets. Many of the Company's anticipated
competitors are significantly larger than the Company, have established
operating histories and procedures, may have access to greater capital and other
resources, may have management personnel with more experience than the officers
of the Company, and may have other advantages over the Company in conducting
certain businesses and providing certain services.

ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively
illiquid. Such illiquidity limits the ability of the Company to vary its
portfolio of proposed and current investments in response to changes in economic
and other conditions. Illiquidity may result from the absence of an established
market for investments as well as the legal or contractual restrictions on their
resale by the Company. In addition, illiquidity may result from the decline in
value of a property securing an investment by the Company. No assurances can be
given that the fair market value of any of the real property serving as security
will not decrease in the future leaving the Company's investment
under-collateralized or not collateralized at all. It would be difficult to sell
an under-collateralized investment, and if the Company needed to do so, assuming
it were even able to do so given its typically subordinated lien position, it is
likely that such investment would be sold at a loss.

RISKS ASSOCIATED WITH UNSPECIFIED ACQUISITIONS. The Company expects to
pursue discussions with respect to possible real estate acquisitions. Any
decision to pursue acquisition opportunities will be in the discretion of the
Company's management and may be consummated without prior notice or shareholder
approval. In such instances, shareholders will be relying on the Company's
management to assess the relative benefits and risks associated with any such
acquisition.

TITLE DEFECTS. At the time the Properties were developed or acquired by the
Partnerships, each of the Partnerships obtained title insurance policies under
which a successor in interest by operation of law to the Partnerships will
become the insured under such policies. The General Partners are generally not
aware of any exceptions to title that may have been created by third parties
during the Partnerships' ownership of the Properties. Management of the Company
has no actual knowledge of any actions or liens of third parties which would
have a material adverse effect upon the merger or the financial condition of the
Company.

ENVIRONMENTAL LAWS MAY IMPOSE ADDITIONAL LIABILITY. Under various federal,
state, and local environmental laws, ordinances, and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under, or in such
property. Such laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances. In addition, the presence of hazardous or toxic substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to borrow using such real property as collateral. Certain environmental
laws impose liability for release of asbestos-containing materials ("ACMs") into
the air, and third parties may seek recovery from

22
<PAGE>
owners or operators of real properties for personal injury associated with ACMs.
In connection with the ownership (direct or indirect), operation, management,
and development of real properties, the Company may be liable for removal or
remediation costs, as well as certain other potential costs which could relate
to such hazardous or toxic substances or ACMs (including governmental fines and
injuries to persons and property).

ABILITY TO CHANGE POLICIES WITHOUT SHAREHOLDER APPROVAL. The Company's
operating and financial policies, including its policies with respect to
acquisitions, growth, operations, indebtedness, capitalization and dividends,
will be determined by the Board of Directors. Although it has no present
intention to amend or revise these or other policies as described herein, the
Board of Directors generally may do so, from time to time, without Shareholder
approval. Accordingly, Shareholders will have little direct control over changes
in the Company's policies. Changes in the Company's policies could adversely
affect the Company's financial condition and results of operations.

REGISTRATION UNDER THE INVESTMENT COMPANY ACT. The Company at all times
intends to conduct its business so as not to become regulated as an investment
company under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). The Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" ("Qualifying Interests"). Under current
interpretation of the staff of the Securities and Exchange Commission (the "SEC"
or "Commission"), in order to quality for this exemption, the Company must
maintain at least 55% of its assets directly in Qualifying Interests. If the
Company fails to qualify for exemption from registration as an investment
company, its use of leverage would be substantially reduced, and it would be
unable to conduct its business as described herein. Such a failure to qualify
could have a material adverse effect on the Company.

POTENTIAL LIABILITY UNDER THE AMERICANS WITH DISABILITIES ACT. All of the
properties of the Partnerships were required to be in compliance with the
Americans With Disabilities Act (the "ADA"). The ADA generally requires that
places of public accommodation be made accessible to people with disabilities to
the extent readily achievable. Compliance with the ADA requirements could
require removal of access barriers, and non-compliance could result in
imposition of fines by the federal government, an award of damages to private
litigants and/or a court order to remove access barriers. Because of the limited
history of the ADA, the impact of its application to the Company's properties,
including the extent and timing of required renovations, is uncertain.
Consequently, the Company will be required to cover the costs associated with
such compliance, if any, with funds from operations, established reserves or
bank borrowings.

REGULATORY AND LEGISLATIVE RISKS

The Company's business is subject to numerous federal, state and consumer
laws and regulations, which among other things: (a) require the Company to
obtain and maintain certain licenses, certifications, registrations and
qualifications; (b) require the Company to post a bond in certain states; (c)
limit the interest rates, fees and other charges the Company is allowed to
charge; (d) limit or prescribe certain other terms and conditions of the
Company's contracts; and (e) require the Company to provide specified
disclosures.

The Company's business is subject to regulation, supervision and licensing
by the federal, state and local government authorities and is subject to various
laws and judicial administrative decisions imposing requirements and
restrictions on a substantial portion of its operations. Failure to comply with
these requirements can cause the termination or suspension of certain rights of
recision for mortgage loans, class action law suits and administrative
enforcement actions. Although the Company believes that it has systems and
procedures to facilitate compliance with these requirements and believes that it
is in compliance with all material aspects with applicable local, state and
federal laws, rules and regulations,

23
<PAGE>
there can be no assurance that more restrictive laws, regulations or rules will
not be adopted in the future that could make compliance more difficult or
expensive.

BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION

HISTORY OF THE PARTNERSHIPS

FORMATION. Cap Source I was formed in 1985, and Cap Source II was formed
1986. Both Partnerships were formed to make debt and equity investments in
multifamily rental complexes (the "Complexes"). The Partnerships' combined debt
and equity investments are intended to provide Investors with regular
distribution of cash derived from principal and interest payments on Insured
Mortgages, as well as the benefits of ownership of the Complexes, including any
tax losses and income from operations.

CAP SOURCE I GENERAL PARTNERS' MANAGEMENT OF CAP SOURCE I. Cap Source I's
original general partners were TIG Insured Mortgage Equities Inc. (the "TIG
General Partner") and Hutton Insured Mortgage Equities Inc. (the "Hutton General
Partner"). All of the issued and outstanding stock of the TIG General Partner
was purchased by TIG I Holdings, Inc. ("TIG Holdings") pursuant to a stock
purchase agreement dated June 10, 1991. Thereafter, TIG Holdings merged into the
TIG General Partner with the TIG General Partner being the surviving
corporation. The TIG General Partner subsequently changed its name to America
First Capital Source I, Inc. All of the issued and outstanding capital stock of
America First Capital Source I, Inc. was transferred to America First Companies
L.L.C. as of March 1, 1994. America First Capital Source I, Inc. was
subsequently converted from a Delaware corporation to a Delaware limited
liability company and changed its name to America First Capital Source I, L.L.C.

Lehman Brothers, Inc. ("Lehman"), the successor to E.F. Hutton & Co.,
acquired all of the interests in the Hutton General Partner. The Hutton General
Partner changed its name to Insured Mortgage Equities Inc. Subsequently, on May
16, 1997, Lehman sold all of the shares of Insured Mortgage Equities Inc. to
America First Companies L.L.C.

Thus, Insured Mortgage Equities Inc. and America First Capital Source I,
L.L.C. are the current Cap Source I General Partners. The Cap Source I General
Partners are both wholly owned by America First Companies L.L.C.

Pursuant to the Cap Source I Partnership Agreement, the Cap Source I General
Partners manage Cap Source I and are entitled to receive management fees and
certain reimbursements from Cap Source I and 1% of distributions from Cap Source
I.

CAP SOURCE II'S MANAGEMENT OF CAP SOURCE II. Cap Source II's original
general partners were TIG Insured Mortgage Equities II Inc. (the "TIG II General
Partner") and Hutton Insured Mortgage Equities II L.P. (the "Hutton II General
Partner"). All of the issued and outstanding stock of the TIG II General Partner
was purchased by TIG II Holdings, Inc. ("TIG II Holdings") pursuant to a stock
purchase agreement dated June 10, 1991. Thereafter, TIG II Holdings merged into
the TIG II General Partner with the TIG II General Partner being the surviving
corporation. The TIG II General Partner subsequently changed its name to America
First Capital Source II, Inc. All of the issued and outstanding capital stock of
America First Capital Source II, Inc. was transferred to America First Companies
L.L.C. as of March 1, 1994. America First Capital Source II, Inc. was
subsequently converted from a Delaware corporation to a Delaware limited
liability company and changed its name to America First Capital Source II,
L.L.C.

The sole general partner of the Hutton II General Partner was CS Housing II
Inc. Lehman, the successor to E.F. Hutton & Co., acquired all of the interests
in CS Housing II Inc. The Hutton II General Partner changed its name to Insured
Mortgage Equities II L.P. Subsequently, on May 16, 1997, Lehman sold all of the
shares of CS Housing II Inc. to America First Companies L.L.C.

Thus, Insured Mortgage Equities II L.P. and America First Capital Source II,
L.L.C. are the current Cap Source II General Partners. The Cap Source II General
Partners are both controlled by America First

24
<PAGE>
Companies L.L.C. America First Companies L.L.C. owns 100% of America First
Capital Source II L.L.C. and owns 100% of CS Housing II Inc., the sole general
partner of Insured Mortgage Equities II L.P.

Pursuant to the Cap Source II Partnership Agreement, the Cap Source II
General Partners manage Cap Source II and are entitled to receive management
fees from Cap Source II and 1% of distributions from Cap Source II.

HISTORICAL INFORMATION AND ACHIEVEMENT OF OBJECTIVES. Cap Source I and Cap
Source II have paid quarterly distributions at the same level since March 31,
1993, and June 30, 1993, respectively. As of December 31, 1997, Cap Source I has
distributed to its Investors an aggregate of approximately $53,646,991, and Cap
Source II has distributed to its Investors an aggregate of approximately
$55,167,935.

The table set forth below provides a comparison of the capital raised and
distributions made by the Partnerships as of December 31, 1997:

HISTORICAL INFORMATION CONCERNING THE PARTNERSHIPS

<TABLE>
<CAPTION>
DATE OF
DISTRIBUTIONS DISTRIBUTIONS TO LAST
TO INVESTORS INVESTORS IN ADMISSION
TOTAL INVESTOR THROUGH MOST OF ORIGINAL
PARTNERSHIP CAPITAL RAISED 12/31/97 RECENT QUARTER INVESTORS
- ----------------------------- -------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C>
Cap Source I................. $ 67,484,440 $ 53,646,991 $ 851,991 5/13/86
Cap Source II................ 62,372,621(1) 55,167,935 812,247 1/04/88
-------------- -------------- ----------------
Total...................... $ 129,857,061 $ 108,814,926 $ 1,664,238
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>

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

(1) Total capital contributions for Cap Source II were $80,222,020, of which
$62,372,621 was invested in accordance with the Partnership's original
investment objectives, and the remaining $17,849,399 was returned to
Investors as a return of capital.

To the best knowledge of the General Partners, 100% of the net proceeds of
the original offerings of Cap Source I was invested in accordance with the
Partnership's original investment objectives. To the best knowledge of the
General Partners, 77.75% of the net proceeds of the original offerings of Cap
Source II was invested in accordance with the Partnership's original investment
objectives.

The following information sets forth the original objectives of Cap Source I
and Cap Source II and the extent to which the General Partners believes such
objectives have been met.

CAP SOURCE I. The original investment objectives of Cap Source I are to:
(a) achieve long-term capital appreciation through increases in the value of Cap
Source I's equity investments in the Cap Source I Operating Partnerships (as
defined below); (b) provide quarterly cash distributions to Cap Source I
Investors; (c) provide Cap Source I Investors with federal income tax deductions
that may offset, in part, taxable cash distributions subsequent to two years
after the initial closing on Cap Source I Units purchased by Cap Source I
Investors; (d) provide the potential for increases in cash distributions from
income from the Cap Source I Operating Partnerships and sale of the Complexes;
and (e) preserve and protect Cap Source I's capital. Cap Source I originally
intended to qualify its Units for quotation on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") within 24 to 36 months
after it commenced operations in order to make the Units freely transferable.
However, at a Special Meeting of Investors on May 17, 1990, an amendment to the
Cap Source I Partnership Agreement was approved to only allow limited
transferability of Units to preserve the tax status of the Partnership as a
partnership under the Code and avoid being designated as a "publicly traded
partnership." Based upon the original capital raised from the Cap Source I
Investors of $67,484,440, distributions of $53,646,991 as of December 31, 1997,
and a net asset value of $50,991,970, the Cap Source I General Partners believe
that objectives (b), (c) and (e) above were substantially met and objectives (a)
and (d) were not met.

25
<PAGE>
The Cap Source I Operating Partnerships are Bluff Ridge Associates Limited
Partnership, Waters Edge Limited Partnership, Interstate Limited Partnership
(a/k/a Highland Park), Cypress Landings II, Ltd. (a/k/a Misty Springs), Oyster
Cove Limited Partnership (a/k/a Waterman's Crossing), Fox Hollow, Ltd. and Ponds
at Georgetown Limited Partnership (the "Cap Source I Operating Partnerships").

CAP SOURCE II. The original investment objectives of Cap Source II are to:
(a) preserve and protect Cap Source II's capital by investing in Federally
Insured Mortgages and Cap Source II Operating Partnership Interests; (b) provide
quarterly cash distributions to Cap Source II Investors from income from
Federally Insured Mortgages; and (c) achieve increasing current income and
long-term capital appreciation through increases in the income from Cap Source
II's equity investments in the Cap Source II Operating Partnerships (as defined
below). Originally, there was a fourth investment objective which was to make
the Cap Source II Units freely transferable 24 to 36 months after the
Partnership commenced operations by qualifying the Units for quotation on
NASDAQ. However, at a Special Meeting of Cap Source II Investors on December 17,
1990, amendments to the Cap Source II Partnership Agreement were approved to
allow limited transferability of Units to preserve the tax status of the
Partnership as a partnership under the Code and avoid being designated as a
"publicly traded partnership." Based upon the original capital raised from the
Cap Source II Investors of $62,372,621 (net of capital returned), distributions
of $55,167,935 as of December 31, 1997, and a net asset value of $32,880,190,
the Cap Source II General Partners believe that objective (a) and (b) above were
substantially met and that objective (c) above was not met.

The Cap Source II Operating Partnerships are Crane's Landing Partners, Ltd.,
Delta Crossing Limited Partnership, Centrum Monticello Limited Partnership and
Ponds at Georgetown Limited Partnership (the "Cap Source II Operating
Partnerships," and together with the Cap Source I Operating Partnerships, the
"Operating Partnerships").

The following table sets forth, with respect to each Partnership, the age of
the Partnership relative to (a) the original term of the Partnership as set
forth in the applicable Partnership Agreement, and (b) the anticipated holding
period of the Partnership's investments as set forth in the applicable offering
materials:

LEGAL LIFE OF THE PARTNERSHIPS

<TABLE>
<CAPTION>
COMMENCED LEGAL ORIGINAL REMAINING
OPERATIONS TERMINATION DURATION LIFE
PARTNERSHIP (MO./YR.) (MO./YR.) (YEARS) (YEARS)
- -------------------------------------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Cap Source I................................ 8/85 12/30 45 32
Cap Source II............................... 8/86 12/35 49 37
</TABLE>

THE DECISION TO PURSUE THE TRANSACTION

As the General Partners reviewed the original investment objectives of the
Partnerships and began to explore options to increase the value of the
investments made by Investors in the Partnerships, the General Partners
concluded that the Partnerships had failed to achieve two of their original
investment objectives, which were liquidity and growth.

The General Partners have been concerned about the lack of meaningful
liquidity available for Investors in the Partnerships. The lack of a formal
market limits the ability of Investors to increase or decrease their investment
in the Partnerships in response to changing personal circumstances or the
performance of the Partnerships. This concern has recently increased as
unrelated third parties have made tender offers and other offers to purchase the
Units at prices which the General Partners believe do not fairly represent the
underlying value of the Units. Liquidity was further decreased by the suspension
of trading of partnership interests on the Chicago Partnership Board by action
of the SEC. The General Partners concluded that it was in the best interest of
Investors to develop a transaction which would provide substantially better
liquidity and will permit Investors the opportunity to increase or decrease
their individual investment at prices more directly related to their underlying
value.

26
<PAGE>
The operations of the Partnerships were adversely affected in their early
years by weakness in the real estate markets throughout the United States. This
adversely impacted the operating results of the Partnerships' real estate
investments and led to decreases in distributions to Investors. However, in
recent years, the real estate markets nationwide have generally improved, in
some cases significantly, and the General Partners have been concerned with the
failure of those national trends to translate into improved operating results
for the Partnerships, and hence increased distributions to their Investors. In
analyzing this situation, the General Partners decided that there were two
primary reasons for the lack of improvement in the operations of the
Partnerships. First, the Partnerships' portfolios have been fixed since original
acquisition. Therefore, the Partnerships have been unable to acquire new
investments irrespective of potential investment return, have been unable to
trade poorly performing assets for assets with better profit potential, and have
been unable to increase the overall size of their portfolios to take advantage
of improving markets. Second, the majority of the Partnerships' assets are fixed
income GNMA securities or FHA insured loans, which by their nature do not
participate in improvements in the real estate markets. Consequently, the
General Partners decided that the best way to improve total returns to the
Investors was to develop a transaction that would broaden the investment
limitations of the current Partnerships so as to allow more flexibility in the
type of assets acquired and their investment management and to allow overall
portfolio growth as market conditions warrant.

The General Partners evaluated a number of alternative transactions to
achieve these objectives. Each of these alternatives appeared to have some
advantages and disadvantages, and might be in the best interest of some
Investors but not others. The General Partners consequently concluded that on
balance the proposed transaction was the best of the alternatives for the
Investors of each Partnership as a whole.

PREPARATION FOR AND CHRONOLOGY OF EVENTS LEADING TO THE TRANSACTION

The events leading to the Transaction may be divided into two general
phases, which overlapped somewhat: (a) general investigation and consideration
of alternate transactions; and (b) events directly leading to the structuring
and implementation of the Transaction.

GENERAL INVESTIGATION AND CONSIDERATION OF ALTERNATE TRANSACTIONS. Since
assuming management of each of the Partnerships, the General Partners have been
evaluating each Partnership's business prospects, especially with respect to the
feasibility of providing liquidity to the Investors and increasing distributions
to Investors. As the General Partners reviewed the original investment
objectives of the Partnerships and began to explore options, the General
Partners concluded that the Partnerships had failed to achieve two of their
original investment objectives, which were liquidity and growth. The General
Partners thus began to explore options such as the Transaction and certain
alternatives to the Transaction. See "--The Decision to Pursue the Transaction"
above.

STRUCTURING AND IMPLEMENTATION OF THE TRANSACTION. In September 1997,
representatives of the General Partners contacted the law firm of Kutak Rock in
Omaha, Nebraska and Denver, Colorado to discuss legal issues relating to the
Transaction. On September 12, 1997, representatives of the General Partner
initiated a conference call with representatives of Kutak Rock in Denver, and
representatives of the law firm of Skadden, Arps, Slate, Meagher & Flom
("Skadden Arps") in New York, New York to discuss preliminary issues relating to
the Transaction and the preparation of a preliminary discussion draft of the
prospectus/ consent solicitation statement and a registration statement on Form
S-4 (the "Registration Statement"). During the conference call representatives
of the General Partners authorized Kutak Rock to begin preparing the preliminary
discussion draft of the Registration Statement and related documents describing
the Transaction as a merger of the Partnerships into a publicly traded limited
partnership. In September, 1997, representatives of the General Partners signed
a formal engagement letter retaining Kutak Rock to perform the legal services in
connection with the Transaction. Another conference call with the same parties
was held on September 29, 1997, to discuss tax issues and other matters
potentially relating to the Transaction.

27
<PAGE>
In September, 1997, representatives of the General Partners contacted
representatives of Sutro & Co. in Los Angeles regarding the possibility of Sutro
& Co. rendering a fairness opinion in connection with the Transaction.
Representatives of the General Partner also contacted representatives of Robert
A. Stanger & Co., Inc. in New Jersey regarding valuations and fairness opinions
for the Transaction.

On October 4, 1997, Kutak Rock circulated a preliminary discussion draft of
the Registration Statement to representatives of the General Partners. On
October 8 and 9, 1997, a meeting was held in the offices of Skadden Arps in New
York to discuss the draft and other preliminary issues relating to the
Transaction. In attendance were representatives of the General Partners, Kutak
Rock, Skadden Arps, E&Y Kenneth Leventhal Real Estate Group and a representative
of a national investment banking firm. At the time, the possibility of forming
the Company as various different types of entities was discussed.

In October, 1997, representatives of the General Partners contacted
Valuation Research regarding the possibility of Valuation Research rendering
valuations and fairness opinions in connection with the Transaction. In
November, 1997 Valuation Research was retained to provide the Appraisals of the
real estate of the Operating Partnerships in which the Partnerships have limited
partner interests.

At various times during the month of October, representatives of the General
Partners contacted representatives of Kutak Rock by telephone to discuss legal
issues relating to the Transaction and the disclosure in the Registration
Statement.

In November, 1997, representatives of America First Companies LLC contacted
George J. Kubat, Mariann Byerwalter and Martin A. Massengale to see if they
would be willing to serve on the Independent Committee. All three agreed to
serve on the Independent Committee. Ms. Byerwalter subsequently resigned from
the independent committee because of a potential conflict of interest. See "THE
TRANSACTION--The Independent Committee"

On December 15, 1997, the Independent Committee met in Denver, Colorado for
an organizational meeting to review the outline of the proposed transaction and
to interview law firms to represent the Independent Committee. At the meeting
the Independent Committee selected Holland & Hart LLP to serve as counsel to the
Independent Committee. At this meeting, the Independent Committee also
interviewed Valuation Research as a potential advisor to the Independent
Committee and as a potential fairness opinion provider with respect to the
Transaction. Valuation Research was also interviewed with respect to the
Appraisals it had already been retained to conduct.

At a meeting of the Independent Committee held in Denver, Colorado on
January 19, 1998, Sutro & Co., J.C. Bradford & Co. and Schroders were each
interviewed as potential advisors to the Independent Committee, and as potential
providers of the Fairness Opinion with respect to the Transaction. At the
meeting, Sutro & Co. was selected by the Independent Committee to serve these
roles. See "FAIRNESS."

At a meeting of the Independent Committee held February 6, 1998 in San
Francisco, Sutro & Co. was formally retained to act as an advisor to the
Independent Committee and to render the Fairness Opinion in connection with the
Transaction. Sutro & Co. then made a presentation discussing the current status,
business strategy and future business plan and goals of the Partnerships,
alternatives to the Transaction, an analysis of a pro forma trading range of the
Common Stock of the Company, an analysis of proposed management contracts and an
analysis of the Fairness Opinion to be issued by Sutro & Co.

At a meeting of the Independent Committee held March 5, 1998 in Denver,
Sutro & Co. made a presentation discussing an analysis of Exchange Values and
exchange value percentage allocation of Shares to the Partnerships, pro forma
estimated trading valuation of the Partnerships, peer groups of the Partnerships
and an analysis of proposed management contracts.

At a telephonic meeting of the Independent Committee held on May 4, 1998 the
Independent Committee concluded that the Transaction was fair as a whole to, and
in the best interests of, the Investors, and recommended that the General
Partners and the Investors approve the Transaction.

28
<PAGE>
Between December 15, 1997 and May 4, 1998, the Independent Committee
participated in numerous telephone conversations, many of which included
representatives from Holland & Hart LLP and/or Sutro & Co., in which various
issues raised during meetings of the Independent Committee were discussed
further.

The Board of Managers of America First Companies L.L.C. met on May 5, 1998
to consider and approve the Transaction.

ALTERNATIVES CONSIDERED

Before deciding to recommend the Transaction, the General Partners and the
Independent Committee considered alternatives to the proposed Transaction in an
effort to achieve maximum Investor return and substantially enhanced liquidity.
In addition to the proposed Transaction, the General Partners and the
Independent Committee considered the following options: (i) continued management
of the Partnerships as currently structured, (ii) listing the Units of each
Partnership on a national securities exchange or automated quotation system;
(iii) merging the Partnerships into a single publicly traded partnership and
listing the resulting partnership interests on a national securities exchange or
automated quotation system; (iv) merging the Partnerships together to form a
single REIT; (v) qualifying each Partnership as an individual REIT; and (vi)
liquidating the Partnerships through entire portfolio sales or sales of
individual properties. For a quantitative comparison of the alternatives to the
Transaction, see "FAIRNESS."

CONTINUATION OF PARTNERSHIPS

BENEFITS OF CONTINUATION. An alternative to the Transaction would be to
continue each of the Partnerships in accordance with its existing business plan.
If the Partnerships were to continue in their current form, they would remain
separate legal entities governed by their respective Partnership Agreements,
with their own assets and liabilities. Investors in favor of this option should
consider voting against the Transaction. Continuing the Partnerships without
change has a number of benefits, including the following:

- each Partnership would remain a separate entity, with its own assets,
liabilities and original investment objectives, consistent with the
guidelines, restrictions and safeguards in its Partnership Agreement;

- there would be no change in the nature of the Investors' investments or
relative voting rights, and the Partnership's performance would not be
affected by the performance of the other Partnership, including the
investment objectives, interests and intentions of the Investors in the
other Partnership;

- the Partnerships would not incur any expenses in connection with the
Transaction;

- the Partnerships would avoid the risks inherent in the Transaction; and

- the Partnerships would continue their tax advantaged status and not be
subject to federal income tax.

DETRIMENTS OF CONTINUATION. Maintaining the Partnerships as separate
entities may have the following potentially negative results when compared with
the benefits the General Partners believe may be derived from the Transaction:

- illiquidity of investment on a current basis due to the lack of a large
and established secondary market;

- inability to raise new capital or make new investments, thus limiting
growth of the Partnerships' capital to that inherent in the existing
Partnership investments;

- no flexibility or control in actively managing the portfolio in response
to changing conditions in national and international real estate markets;

29
<PAGE>
- the declining value of the mortgage investments due to amortization of
principal and subsequent distributions of such amounts;

- duplication among the Partnerships in reporting, filing and other costly
administrative services; and

- continued complicated tax filings for Investors.

LISTING PARTNERSHIP UNITS

Another alternative to the Transaction would be to list the Units of each
Partnership on a national securities exchange or on an automated quotation
system in an attempt to increase the liquidity of the Units. However, the
General Partners believe that limited partnership units generally do not trade
well on such exchanges or automated quotation systems and that consequently
meaningful liquidity would not be achieved. Furthermore, the General Partners
believe that the market tends to view common stock more favorably than limited
partnership units and that pursuing this alternative would substantially
diminish the Partnerships' ability to grow compared to the Transaction. As a
publicly traded company with a base of assets greater than a single Partnership,
the Company expects to be able to issue additional debt and equity securities
with greater ease and on more attractive terms than would be available to a
Partnership individually. For the reasons described above, as well as for some
of the reasons set forth above with respect to continuation of the Partnerships,
the General Partners concluded that the potential negatives of this alternative
outweigh any advantages it may have over the Transaction.

MERGER RESULTING IN A SINGLE PUBLICLY TRADED LIMITED PARTNERSHIP

In lieu of participating in the Transaction, the Partnerships could be
merged together to form a single publicly traded limited partnership with the
units of the new limited partnership listed on a national securities exchange or
automated quotation system. For the reasons discussed above with respect to
listing the Units of each individual Partnership, the General Partners
determined that this alternative is less advantageous to the Investors than the
Transaction.

SINGLE REIT

The General Partners considered merging the two Partnerships into a single
entity which would elect REIT status but determined that it was a less
attractive alternative to the Transaction. The General Partners concluded that
the resulting REIT would be too small in terms of total capitalization to
compete with existing REITs having similar investment objectives. Specifically,
the initial capitalization of the new company would be less than $85 million, in
contrast to the more than 85 REITS with total current capitalization in excess
of $500 million each, placing the new company at a significant disadvantage. For
example, many investment opportunities available to the competition would be
foreclosed to the new company because of its small size and resulting difficulty
in attracting capital at competitive pricing. As such, growth prospects would be
constrained by the company's unfavorable competitive position. Furthermore, due
to restrictions in the Code relating to distributions of net taxable income and
limitations on sales of assets, as a REIT, the Company would not be able to
pursue the business plan described herein which involves the ability to retain
cash flow for investment purposes and to sell assets regularly after the
achievement of goals set for those assets.

INDIVIDUAL REITS

The General Partners considered converting each Partnership into an
individual REIT, but determined that it was a less attractive alternative than
the Transaction for the same reasons discussed above for the single REIT
alternative. The issues cited above as reasons for the lack of attractiveness of
a new company as a single REIT would be magnified when applied to each
Partnership as an individual REIT due to the significantly smaller size of each
Partnership as a stand alone entity.

30
<PAGE>
LIQUIDATION

Although the investment objectives and policies of the Partnerships do not
contemplate the commencement of the liquidation of the Partnerships at any
specific time, the General Partners assessed the possibility of commencing the
orderly liquidation of the Partnerships and distributing the net proceeds from
such liquidation to the Investors and General Partners. The General Partners
concluded that liquidation would be costly and time consuming and would not be
as beneficial to Investors as the Transaction.

The General Partners determined that an attempt to liquidate the
Partnerships' investments at the current time would likely result in the
Investors not achieving the full potential benefits from an investment in the
Partnerships. They concluded that liquidation would not be the best option to
realize the optimum return on an investment in the Partnerships because although
the Partnerships' investments in mortgage loans could likely be sold at or
slightly above their face value, most of the Partnerships equity positions in
the Operating Partnerships are not attractive to buyers due to restrictions in
the various partnership documents. Liquidation of most of the equity positions
would require either (i) a protracted period of negotiations with the various
general partners of the Operating Partnerships which could potentially create
both substantial transaction costs and additional costs to the Partnerships of
continuing operations during the negotiation period, and/or (ii) the
Partnerships' accepting substantial discounts in value. In addition, there may
be additional costs associated with representations, warranties, and
indemnifications that purchasers generally require and which may result in
additional escrow costs. In addition to reviewing the liquidation of the
Partnerships' assets through methods outlined by the General Partners, the
Independent Committee separately considered the viability of liquidating the
Partnerships through a potential sale of the Partnerships' assets to a REIT. The
Independent Committee concluded that this was not a viable option due to various
restrictions in the Operating Partnership partnership agreements. Furthermore,
the liquidation of the Partnerships would involve certain transaction costs,
such as legal fees and various other closing costs, which would further reduce
the amount of net proceeds available for distribution.

On the other hand, in a liquidation of the Partnerships, Investors would
benefit by avoiding the risks of continuing their ownership of the Partnerships
and those associated with the Transaction. Liquidation would provide for the
final liquidation of the Investors' investments and a likely substantial
distribution of cash equal to net liquidation proceeds, though not at a level
that would allow Investors to realize their original investment. In addition,
the Investors would have the potential to reinvest the net proceeds received in
the liquidation in similar or different investments.

REASONS FOR, AND BENEFITS OF, THE TRANSACTION

In deciding whether to recommend the Transaction to the Investors, and in
structuring its terms, the General Partners considered the benefits to be
derived as a result of the Transaction. The following is a brief discussion of
the primary benefits the Transaction is expected to generate for the Investors.

SUBSTANTIALLY ENHANCED LIQUIDITY POTENTIAL. The Units are not currently
listed or regularly traded on a national securities exchange or quoted in the
automated quotation system of any registered securities association or other
over-the-counter market. Following the Transaction, the anticipated listing of
the Common Stock on the NYSE and the Company's larger equity market
capitalization and growth strategy should enhance the liquidity of investments
held by Investors. The General Partners therefore believe the Transaction offers
Investors a faster and more efficient means of liquidating their investment than
if the Partnership were to attempt to liquidate their portfolios through
conventional property sales.

POTENTIAL FOR COMPANY GROWTH; ENHANCED ACCESS TO CAPITAL. The Company will
expand the investment objectives and policies of the Partnerships. Following the
Transaction, the Company will have the potential for enhanced access to and
flexibility in obtaining additional equity and debt financing. In particular,
the Company will have the ability to fund future portfolio growth through the
issuance of additional publicly traded securities and the raising of funds from
borrowing under secured and unsecured debt obligations.

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<PAGE>
The Partnerships are currently limited under their respective Partnership
Agreements in their ability to raise additional capital. Following the
Transaction, the Company will not be subject to the same capital-raising
limitations. In addition, the size and structure of the Company should provide
financing alternatives presently not available to the Partnerships. The General
Partners believe that the larger total market capitalization of the Company, as
compared to those of the individual Partnerships, will encourage additional and
continuing investment, in many cases by institutional investors (which tend to
favor companies with large market capitalizations), which may over time lead to
an increase in the trading multiple and share price of the Company.

WAIVER BY AFFILIATES OF THE CAP SOURCE I GENERAL PARTNERS OF AMOUNTS PAYABLE
BY CERTAIN CAP SOURCE I OPERATING PARTNERSHIPS. If the Transaction is
completed, affiliates of the Cap Source I General Partners have agreed to
permanently waive amounts which may be payable by certain Cap Source I Operating
Partnerships to such affiliates which aggregate as of December 31, 1997
$3,416,295, as reflected in the financial statements of Cap Source I. These
amounts are payable pursuant to the terms of the partnership agreements for the
Cap Source I Operating Partnerships.

DIVERSIFICATION OF ASSETS. By combining the Partnerships into a single
ownership entity, the Transaction will create an investment portfolio
substantially larger and more diversified than the portfolio of an individual
Partnership. This increased size and the resulting combination of operations
spreads the risk of the investment over a broader group of assets and reduces
the dependence of Investors' investment upon the performance of any particular
asset or group of assets, any specific geographic area or industry, or any
particular large tenant or tenants.

SIMPLIFIED REPORTING REQUIREMENTS. The Transaction will result in
simplified federal and state tax reporting for Investors. Shareholders and
Noteholders will receive Form 1099 rather than the more complicated Schedule K-1
and will no longer be subject to state tax withholding or be required to file
individual state tax returns (other than in their state of residence) solely as
a result of an investment in the Company.

For a discussion of the potential benefits of the alternatives to the
Transaction and the reasons such alternatives were rejected by the General
Partners, see "--Alternatives Considered," above, and "FAIRNESS--Comparison of
Certain Alternative to the Transaction." The Transaction will require Investors
to forego certain alternatives to the Transaction.

CONSEQUENCES IF TRANSACTION NOT COMPLETED

If the Transaction is not completed the Partnerships will continue to
operate as separate legal entities with their own assets and liabilities. There
will be no change in their investment objectives, policies and restrictions.

THE TRANSACTION

GENERAL

The General Partners have proposed the Transaction in which (i) the
Partnerships and the Company will be merged, (ii) the separate existence of the
Partnerships will cease and the Company will be the surviving entity and will
succeed to all of the assets and liabilities of the Partnerships, and (iii)
Investors will receive, at their election and subject to certain limitations,
either Shares or Notes of the Company based upon the Exchange Value assigned to
their respective partnerships for purposes of the Transaction. The Transaction
has been proposed by the General Partners in an effort to increase the value of
investments held by Investors while offering substantially enhanced liquidity.

The Company and the Partnerships have entered into the Merger Agreement and
will consummate the Transaction pursuant to the terms thereof promptly after the
receipt of consents from Investors holding

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<PAGE>
a majority of the outstanding Units of each of the Partnerships. If the consent
of a majority in interest of the Investors of each of the Partnerships is not
received, or all other conditions to the Transaction are not satisfied, by
, 1998, the Merger Agreement will terminate. In addition, the Merger
Agree-
ment may be terminated by a majority of the Board of Directors of the Company
before or after the receipt of consents from Investors at any time prior to the
Effective Date.

TERMS OF THE MERGER AGREEMENT

The following is a summary of the material terms of the Merger Agreement.
This summary does not purport to be complete and is subject to, and qualified in
its entirety by, the terms of the Merger Agreement, a copy of which is attached
as Appendix A of this Prospectus/Consent Solicitation Statement and is
incorporated by reference herein.

EFFECT OF THE MERGER. Under the terms of the Merger Agreement (i) the
separate existence of the Partnerships will cease and the Company will be the
surviving entity and will succeed to all of the assets and liabilities of the
Partnerships, and (ii) Investors will become Shareholders or Noteholders of the
Company.

CONDITIONS TO CONSUMMATION OF THE TRANSACTION. The closing for the
Transaction will take place promptly after the General Partners have received
the consent to the Transaction from the holders of a majority of the outstanding
Units of each of the Partnerships. The receipt of such consent by no later than
, 1998 (unless such date is extended by the General Partners in their
sole discretion) is a condition to closing the Transaction and if it is not
obtained, or all other conditions to closing are not satisfied or waived, the
Merger Agreement will terminate. Other conditions to closing include (i) the
declaration of effectiveness of the registration statement for the Shares of the
Company under the Securities Act of 1933, as amended (the "Securities Act");
(ii) the delivery of a tax opinion acceptable to the General Partners to the
effect that for federal income tax purposes the Transaction will be an exchange
subject to the nonrecognition provisions of Section 351 of the Code; (iii) the
absence of any material adverse change in the overall business of the
Partnerships from the date of this Prospectus/Consent Solicitation Statement to
the Effective Date; and (iv) the approval of the Shares of the Company for
listing on NYSE, subject to official notice of issuance.

TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated
by a majority of the Board of Directors of the Company before or after the
receipt of consents from Investors at any time prior to the effective time of
the Certificate of Merger filed with the Secretary of State of the State of
Delaware relating to the Transaction.

ISSUANCE OF SHARES AND NOTES OF THE COMPANY

As promptly as practical after the closing of the Transaction, Service Data
Corporation will mail to each Investor of record on the Record Date a letter of
transmittal along with instructions for the exchange of Units for Shares or
Notes of the Company.

INVESTORS SHOULD NOT SEND IN THEIR UNITS WITH THE CONSENT CARD. CERTIFICATES
REPRESENTING UNITS SHOULD ONLY BE RETURNED ALONG WITH THE LETTER OF TRANSMITTAL
FORM FROM SERVICE DATA CORPORATION.

Upon surrender by an Investor to Service Data Corporation of the certificate
for his or her Units in the Partnerships together with a properly executed
letter of transmittal and any other required documents, Shares or Notes of the
Company will be issued and mailed to the Investor.

Notwithstanding the failure of an Investor to surrender the certificate for
his or her Units for Shares or Notes of the Company, such Investor will be
recognized as a Shareholder or Noteholder, as the case may be, in the Company
for all purposes and will be entitled to all rights thereof, including the right
to

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<PAGE>
receive dividends. However, there will be no transfers of Units in the
Partnerships recognized after the Effective Date. If certificates for Units are
presented for transfer after the Effective Date of the Transaction, they will be
returned to the presenter together with a form of letter of transmittal and
exchange instructions.

If a certificate for Units has been lost, stolen or destroyed, Shares or
Notes in the Company will be issued only upon receipt of appropriate evidence as
to such loss, theft or destruction, appropriate evidence as to the ownership of
such Units by the claimant and appropriate and customary indemnification
including, when appropriate, the posting of a bond. Neither the Company, the
Partnerships nor Service Data Corporation will be liable to any holder of Units
in the Partnerships for any amount properly delivered to any public official
pursuant to applicable abandoned property, escheat or similar laws.

NO FRACTIONAL SHARES

No fractional Shares will be issued by the Company in the Transaction. Each
Investor who would otherwise be entitled to a fractional Share (which
entitlement will be determined by combining such Investor's allocation of Shares
from each Partnership as to which such Investor is receiving Shares) will
instead receive a cash payment equal to $25 multiplied by the fraction.

FRACTIONAL NOTES

The principal balance of the Notes to which an Investor is entitled is
determined by multiplying the number of the Investor's Units by the Exchange
Value, per $1,000 original investment, assigned to such Investor's Partnerships.
The application of this formula may result in the Investor's being entitled to a
fractional interest in a Note (determined after combining such Investor's
allocation of Notes from each Partnership as to which such Investor is receiving
Notes). The Company will issue to each Investor entitled to such a fractional
interest a promissory note ("Promissory Note") with an original principal
balance equal to that fraction times $1,000, subject to the Company's right, at
its option, to pay cash in lieu of any portion of a Promissory Note. Apart from
its principal balance, this Promissory Note will be identical to the Notes and
will be issued by the Company pursuant to the Indenture. No market is expected
to develop for these Promissory Notes and they will not be listed on any
securities exchange.

TRANSACTION EXPENSES

GENERAL. The term "Transaction Costs" means all costs associated with the
Transaction. Assuming the Transaction is approved, the Transaction Costs are
estimated to be as follows:

SOLICITATION/COMMUNICATION COSTS

<TABLE>
<S> <C>
Information Agent................................................. $ 35,000
Printing, postage and brochure.................................... 225,000
Marketing expenses................................................ 20,000
---------
Subtotal........................................................ $ 280,000
---------
</TABLE>

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<PAGE>
PRECLOSING TRANSACTION COSTS

<TABLE>
<S> <C>
Legal Fees........................................................ $ 390,000
Independent Committee............................................. 40,000
Appraisals (including fee and expenses)........................... 90,000
Fairness Opinion (including fees and expenses).................... 225,000
Registration, Listing and Filing Fees............................. 110,000
Accounting........................................................ 65,000
Contingency....................................................... 35,000
---------
Subtotal........................................................ $ 955,000
---------
</TABLE>

CLOSING TRANSACTION COSTS

<TABLE>
<S> <C>
Transfer Fees, Taxes and Title..................................... $ 50,000
---------
</TABLE>

COSTS TO WIND UP AND DISSOLVE PARTNERSHIPS

<TABLE>
<S> <C>
Accounting...................................................... $ 20,000
---------
Total Transaction Costs......................................... $1,305,000
---------
---------
</TABLE>

ALLOCATION OF COSTS. If the Transaction is approved, all Transaction Costs
will be paid by the Partnerships and the Company. If the Transaction is
rejected, the General Partners of each Partnership will bear a percentage of all
Transaction Costs, excluding solicitation/communication costs, equal to the
total number of abstentions and "NO" votes cast by Investors in that Partnership
with respect to the Transaction, divided by the total number of abstentions and
votes cast by Investors in that Partnership. In such event, the Partnerships
will bear the remaining Transaction Costs. The solicitation/communication costs
listed above will be paid by the Partnerships.

ACCOUNTING TREATMENT

The Transaction will be accounted for using the purchase method of
accounting in accordance with GAAP. Cap Source I will be deemed to be the
acquirer of Cap Source II under the purchase method because it is the larger of
the two Partnerships. Accordingly, the Transaction will result, for financial
accounting purposes, in the effective purchase by Cap Source I of all of the
Units of Cap Source II. As the surviving entity for financial accounting
purposes, the assets and liabilities of Cap Source I will be recorded by the
Company at their historical cost and the assets and liabilities of Cap Source II
will be recorded at their estimated fair values.

REGULATORY MATTERS

The Transaction will not be subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. However, the Transaction
is subject to the completion of receipt by the General Partners of all necessary
requirements and approvals by the United States Department of Housing and Urban
Development ("HUD"). These requirements include the filing by principals and
affiliates of a certificate regarding their previous participation in HUD
projects and clearance of such certificate by HUD. HUD may also require the
submission of information for a modified review of the Transaction. The General
Partners are not aware of any facts which would cause HUD not to take the
required action or approvals. Other than federal proxy solicitation rules
relating to the solicitation of Investor consents and state and federal
regulations relating to the offering of the Company's Shares, no other federal
or state

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<PAGE>
regulatory requirements must be complied with and no approval thereunder must be
obtained in connection with the Transaction.

THE INDEPENDENT COMMITTEE

The General Partners arranged for the organization of the Independent
Committee to represent the interests of the Partnerships and Investors in
negotiating the terms and conditions of the Transaction. The Independent
Committee negotiated the Exchange Values attributable to the Partnerships and
the General Partners and negotiated the Advisory Agreement, including the fees
to be paid to the Advisor following the Transaction. The Independent Committee
also concluded that the terms of the Transaction are fair as a whole, to the
Partnerships and to the Investors in each of the Partnerships. The Independent
Committee was retained without conditions or restrictions.

The members of the Independent Committee are Messrs. Martin A. Massengale
and George J. Kubat. Since the organization of the Independent Committee, it has
met in person on four occasions and has had six additional telephonic meetings
and numerous other telephone conferences for the purpose of considering the
proposed Transaction. As part of its analysis of the Transaction, the
Independent Committee engaged its own counsel and also engaged Sutro & Co. to
render the Fairness Opinion with regard to the Transaction. See "FAIRNESS
OPINION AND APPRAISALS--Fairness Opinion." The Independent Committee originally
consisted of three members, including the two current members and Ms. Mariann
Byerwalter. Ms. Byerwalter resigned from the Independent Committee as a result
of a potential conflict of interest relating to her prior relationship with an
entity that could have been considered an affiliate of America First Companies
L.L.C., which entity was sold in January 1998, and is no longer an affiliate of
America First Companies L.L.C.

The business experience of the members of the Independent Committee is as
follows:

George J. Kubat is president and chief executive officer of Phillips
Manufacturing, Inc. of Omaha, Nebraska. From 1969 to 1992, Mr. Kubat was
employed by Coopers & Lybrand, most recently as Tax Partner-in-Charge of the
Omaha office. Mr. Kubat is a director and chairman of the Audit Committee of
American Business Information, Inc.; member of the board of managers and
chairman of the Audit Committee of America First Companies, L.L.C.; and a
director and chairman of the Audit Committee of Sitel Corp. He is active in
numerous civic and charitable organizations including being a director and
treasurer of the Nebraska Game and Parks Foundation and a director of All Our
Kids, Inc. Mr. Kubat holds a degree of Juris Doctorate from Creighton University
and is a Certified Public Accountant.

Martin A. Massengale is a member of the board of managers of America First
Companies, L.L.C. Since 1976 Dr. Massengale has been associated with the
University of Nebraska as vice chancellor, chancellor, interim president,
president and currently as president emeritus. Prior to joining the University
of Nebraska, he was a professor and associate dean with the University of
Arizona. He serves on the Board of Directors of IBP, Inc., a meat packing
company, on the Board of Trustees of Great Plains Funds, a mutual fund, has
served on a number of professional boards and has received more than 30 awards
recognizing his contributions to agriculture and education and has published
more than 70 articles pertaining to agriculture. At the invitation of the
Minister of Education, Dr. Massengale traveled to the People's Republic of China
to review educational programs with the State Commission of Education in Beijing
and for the Shaanxi Providence in Xi'an. He has also provided his expertise to
Australia and New Zealand, Morocco, Indonesia, the Soviet Union, Saudi Arabia,
Mexico and Brazil. He has been recognized by more than 20 publications, both
national and international, for his achievements and leadership in both
education and agriculture.

RECOMMENDATION OF THE GENERAL PARTNERS AND THE INDEPENDENT COMMITTEE

The General Partners, together with the Independent Committee, have
determined that the Transaction is fair to, and in the best interest of, the
Investors. Accordingly, the General Partners have approved

36
<PAGE>
the Transaction and the Merger Agreement, and the General Partners and the
Independent Committee recommend that the Investors vote in favor of the
Transaction and the adoption of the Merger Agreement. The General Partners
believe the Transaction is fair as to each Partnership and as a whole, and that
it is the most attractive alternative for providing Investors with the
possibility of increasing the value of their investments while offering
substantially enhanced liquidity. See "FAIRNESS." The General Partners and the
Independent Committee therefore strongly recommend that Investors vote "YES" in
favor of the Transaction.

EFFECT OF THE TRANSACTION ON DISSENTING INVESTORS

Dissenting Investors and Investors who abstain from voting with respect to
the Transaction do not have a statutory right to elect to be paid the appraised
value of their interests in the Partnership. However, all Investors, including
Dissenting Investors, will be given the opportunity to elect to receive Notes
instead of Shares for their Units as described under "THE NOTES." Noteholders
are entitled to receive only the principal and interest payments required under
the Notes. Unlike Shareholders, Noteholders will have no right to participate in
the Company's earnings in excess of operating expenses, debt service and other
obligations, and will not benefit from growth in Shareholders' equity that might
result from future financial performance of the Company.

EFFECTIVE TIME

The Effective Time of the Transaction will be at the time the Certificates
of Merger with respect to the merger of the Partnerships with and into the
Company are filed with the Secretary of State of Delaware, or at such later time
as may be specified in the Certificates of Merger. It is anticipated that such
filings will be made as promptly as practicable after the requisite approval of
the Investors has been obtained and the other conditions to the Transaction have
been satisfied or waived, if permitted under the Merger Agreement.

CONFLICTS OF INTEREST

The General Partners participated in the structuring of the Transaction and
recommend that Investors approve it. Because the General Partners will realize
certain economic benefits in connection with the Transaction, they have certain
inherent conflicts of interest with respect to its completion. These conflicts
include: (i) the management of the Company by the Advisor, an affiliate of the
General Partners; (ii) the retention by the General Partners, pursuant to the
terms of the Partnership Agreements, of 1% of the shares of Common Stock
outstanding immediately after the Transaction, and (iii) the fact that the
General Partners will not have personal liability for the debts and obligations
of the Partnerships after the Transaction. However, the General Partners have a
fiduciary duty to the Investors and have determined that the Transaction is fair
to and in the best interest of the Partnerships and the Investors. To avoid
potential conflicts of interest, the Partnerships have been represented by the
Independent Committee in the negotiation of the structure, terms and conditions
of the Transaction and Advisory Agreement.

37
<PAGE>
FAIRNESS

BELIEF AS TO FAIRNESS

The General Partners, together with the Independent Committee, reasonably
believe that the terms of the Transaction are fair when considered as a whole,
and to the Investors in each of the Partnerships, regardless of whether an
Investor receives Shares or Notes. The material factors underlying the beliefs
of the General Partners and the Independent Committee relating to the fairness
of the Transaction are discussed below under "--Material Factors Underlying
Belief as to Fairness."

The General Partners and the Independent Committee based their
determinations as to the fairness of the Transaction on a variety of factors,
including, but not limited to: (i) the process of arm's-length negotiation of
the structure, terms and conditions of the Transaction and Advisory Agreement,
with the Independent Committee acting on behalf of the Partnerships and
Investors; (ii) the opportunity for each Investor to object to the Transaction
and the requirement that the Transaction be approved by Investors holding a
majority in interest of each of the Partnerships' outstanding Units; (iii) the
form and amount of consideration offered to the Investors; (iv) the method of
allocating the Shares and Notes between the Partnerships in the Transaction; (v)
the Fairness Opinion rendered by Sutro & Co.; (vi) the independent Appraisals
prepared by Valuation Research, which were used in part in the determination of
the Exchange Values; (vii) the lack of material differences with respect to the
assets of the Partnerships and the consistent valuation methodology applied to
the assets; and (viii) the fact that all Investors, including Dissenting
Investors, will be given the opportunity to elect to receive Notes, subject to
certain limitations.

The General Partners and the Independent Committee also considered the
potential benefits of the Transaction compared to the alternatives in reaching
their conclusion as to the fairness of the Transaction. Such potential benefits
include, but are not limited to: (i) enhanced liquidity resulting from the
anticipated listing of the Shares on the NYSE and the Company's larger equity
market capitalization and growth strategy; (ii) the Company's potential for
growth and enhanced access to capital; (iii) a capital and operating structure
that will allow the Company to respond more efficiently to changing conditions
in the U.S. equity markets, thereby potentially reducing the adverse effects of
such changes; and (iv) simplified tax reporting requirements for Investors. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION."

MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS

The following is a discussion of the material factors underlying the belief
of the General Partners and the Independent Committee that the Transaction is
fair as a whole, and to the Investors in each of the Partnerships.

(a) INDEPENDENT REPRESENTATIVES. The Partnerships and Investors have
been represented by the Independent Committee, which participated in
arm's-length negotiations on behalf of the Partnerships with respect to the
terms and conditions of the Transaction and Advisory Agreement. The
Independent Committee reviewed and approved the Exchange Values attributable
to the Partnerships and the General Partners and negotiated the fees to be
paid to the Advisor under the Advisory Agreement. In addition, the
Independent Committee retained Sutro & Co. to render the Fairness Opinion.

(b) VOTING PROCEDURES AND OPPORTUNITY TO ELECT TO RECEIVE NOTES. The
General Partners and the Independent Committee believe that the voting
process and alternatives presented to Investors, including Dissenting
Investors, are fair. Each Investor has the opportunity to make an investment
decision by voting "YES," "NO" or "ABSTAIN" with respect to the Transaction,
and the Transaction must be approved by Investors holding a majority in
interest of each Partnership's outstanding Units. See "VOTING." All
Investors, including Dissenting Investors, are also being given the
opportunity to elect to receive Notes instead of Shares in exchange for
their Units. See "THE NOTES."

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<PAGE>
(c) CONSIDERATION OFFERED. The General Partners and the Independent
Committee believe that the Shares and Notes offered to the Investors
constitute fair value. In reaching this conclusion, the General Partners and
the Independent Committee considered the fact that Investors will surrender
their right to receive cash proceeds from the liquidation of the
Partnerships at some time in the future. In this regard, the General
Partners and the Independent Committee compared the amount of consideration
to be received in alternative transactions, including liquidation, to the
anticipated market value of the Company's Shares. The General Partners and
the Independent Committee believe the Exchange Value, which was negotiated
in arm's-length negotiations by the Independent Committee and is based in
part on the Appraisals, adequately takes into account the relative values of
each of the Partnerships.

(d) METHOD OF ALLOCATION. The General Partners and the Independent
Committee believe that it is fair to allocate the Shares and Notes between
the Partnerships in accordance with their respective Exchange Values. The
Shares and Notes will be allocated between the General Partners and the
Investors in accordance with the terms of the Partnership Agreements. The
provisions of the Partnership Agreements generally allocate to the General
Partners the right to receive 1% of distributions made by the Partnerships
out of operating cash flow and 1% of the sale proceeds from the disposition
of Partnership assets or in liquidation. In view of the similarities between
the Partnerships in terms of their investment objectives and policies as
well as in their assets, the General Partners and the Independent Committee
believe there is no material difference between the Partnerships with
respect to determinations related to the allocation of Shares and Notes
between the Partnerships. The General Partners and the Independent Committee
therefore believe the allocation of the Shares and principal allocation of
Notes to be received by the Investors and the General Partners is fair.

(e) FAIRNESS OPINION. The General Partners and the Independent
Committee have relied, in part, upon the Fairness Opinion rendered by Sutro
& Co. to support their conclusion that the Transaction is fair. The
preparation and delivery of the Fairness Opinion was requested by the
Independent Committee. Sutro & Co. was retained to render the Fairness
Opinion without any conditions or restrictions. See "FAIRNESS."

(f) INDEPENDENT APPRAISALS. The General Partners and the Independent
Committee have relied upon the Appraisals prepared by Valuation Research, an
independent appraiser, to establish the fair market value (the "Appraised
Value") of the Properties. Such Appraised Values were utilized, in part, in
determining the Exchange Values of the Partnerships. In preparing the
Appraisals, Valuation Research was not engaged to represent the interests of
the General Partners or any specific group of Investors, but was engaged to
determine the fair market value of the Properties in which the Partnerships
hold an interest without taking into account the specific financial interest
of any person or group. The General Partners and the Independent Committee
believe that the use of a single independent appraiser, applying consistent
methodology and criteria in assessing the value of each of the Properties,
increased the likelihood that the value of each such real property would be
determined on a fair, consistent and unbiased basis. Sutro & Co. also
reviewed the Appraisals in connection with its issuance of the Fairness
Opinion, and found the Appraisals to be acceptable. The General Partners and
the Independent Committee therefore believe the Appraisals support their
conclusion as to the fairness of the Transaction.

(g) NOTES. The Indenture for the Notes contains specific covenants for
the benefit of Noteholders. These covenants include (i) a limitation on
Company indebtedness, (ii) certain restrictions on the sale or transfer of
Company assets and (iii) certain prohibitions against mergers or
transactions involving the Company. See "THE NOTES." In addition, the Notes
are variable rate obligations. The General Partners believe the use of a
variable rate note, combined with these restrictive covenants, may improve
the likelihood that after the Transaction the price of the Notes will not
fall below their face value upon issuance. Although the aggregate principal
amount of Notes to be issued may not

39
<PAGE>
exceed $40 million, the General Partners and the Independent Committee
believe this limitation is procedurally fair because the Notes will be
allocated first to Dissenting Investors, who will be able to receive Notes
under any circumstances, whereas an abstaining or Consenting Investor who
wishes to receive Notes will receive Shares if the issuance of Notes has
reached $40 million. See "THE NOTES--Allocation of Notes."

The General Partners and the Independent Committee did not give any specific
weight to any one of the foregoing factors but viewed them in the aggregate in
supporting its fairness determination.

CERTAIN ALTERNATIVES TO THE TRANSACTION

Prior to concluding that the Transaction should be proposed to Investors and
to evaluate the fairness of the transaction, the General Partners examined the
estimated values which could be derived from alternatives to the Transaction.
The alternatives examined by the General Partners were: (i) continuation of the
Partnerships, and (ii) liquidation of the Partnerships. To determine whether the
Transaction or one of these alternatives would be more beneficial to Investors,
the General Partners compared the potential benefits and detriments of the
Transaction with the potential benefits and detriments of each of the
alternatives. Each of the Transaction and its alternatives have potential
benefits and detriments not present in the other alternatives. For the reasons
set forth below, the General Partners determined that the Transaction is more
beneficial to Investors than either of the alternatives to the Transaction.

CONTINUATION OF THE PARTNERSHIPS. In assessing the Transaction, the General
Partners and the Independent Committee considered the advantages and
disadvantages of keeping the Partnerships intact and continuing to operate them
in accordance with their respective Partnership Agreements and existing business
plans. If the Partnerships were to continue in their current form, they would
remain separate legal entities governed by their respective Partnership
Agreements. In managing the businesses of the Partnerships, the General Partners
would continue to take whatever actions they deemed were appropriate in
satisfying their fiduciary obligations to the Investors and the Partnerships.
Under this alternative, Investors would have continued to receive cash
distributions in the future and, ultimately, a liquidation distribution.

Continuing the Partnerships without change has a number of benefits,
including (i) the Partnerships would remain separate entities, with their own
assets and liabilities, and their original investment objectives, consistent
with the guidelines, restrictions and safeguards in their Partnership
Agreements; (ii) the Partnership's performance would not be affected by the
performance of the other Partnership, including the investment objectives,
interests and intentions of the Investors in the other Partnership; (iii) there
would be no change in the nature of the Investors' investments; (iv) the
Partnerships would not incur any expenses in connection with the Transaction;
and (v) the Partnerships would avoid the risks inherent in the Transaction. See
"RISK FACTORS."

The General Partners and the Independent Committee concluded that
maintaining the Partnerships as separate entities may have the following
potentially negative results when compared with the benefits that the General
Partners and Independent Committee perceive may be derived from the Transaction:
(i) lower liquidity of investment due to the illiquid nature of the market for
Units; (ii) inability to raise new capital or make new investments, thus
limiting growth of the Partnerships' capital to that inherent in the existing
Partnership investments; (iii) less flexibility and control in actively managing
the portfolio; (iv) duplicative general and administrative expenses; and (v)
continued complicated tax filings.

LIQUIDATION. Although the investment objectives and policies of the
Partnerships do not contemplate the commencement of the liquidation of the
Partnerships at any specific time, the General Partners and the Independent
Committee assessed the possibility of commencing the orderly liquidation of the
Partnerships and distributing the net proceeds from such liquidation to the
Investors and General Partners. The General Partners and Independent Committee
concluded that liquidation would be costly and time consuming and would not be
as beneficial to Investors as the Transaction.

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<PAGE>
The General Partners and the Independent Committee determined that an
attempt to liquidate the Partnerships' investments at the current time would
likely result in the Investors not achieving the full potential benefits from an
investment in the Partnerships. They concluded that liquidation would not be the
best option to realize the optimum return on an investment in the Partnerships
because although the Partnerships' investments in mortgage loans could likely be
sold at or slightly above their face value, most of the Partnerships equity
positions in the operating partnerships are not attractive to buyers due to
restrictions in the various partnership documents. Liquidation of most of the
equity positions would require either (i) a protracted period of negotiations
with the various general partners of the operating partnerships which could
potentially create both substantial transaction costs and additional costs to
the Partnerships of continuing operations during the negotiation period, and/or
(ii) the Partnerships' accepting substantial discounts in value. In addition,
there may be additional costs associated with representations, warranties, and
indemnifications that purchasers generally require and which may result in
additional escrow costs. Furthermore, the liquidation of the Partnerships would
involve certain transaction costs, such as legal fees and various other closing
costs, which would further reduce the amount of net proceeds available for
distribution.

Based upon this comparison of the potential benefits and detriments of the
Transaction to the potential benefits and detriments of certain possible
alternatives to the Transaction, the General Partners have concluded that the
Transaction is the more attractive alternative for Investors.

Notwithstanding the belief of the General Partners and the Independent
Committee that the assets of the Partnerships cannot be liquidated on favorable
terms and conditions, the following table describes the estimated liquidation
values of the Partnerships.

ESTIMATED LIQUIDATION VALUES
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP PARTNERSHIP NET OTHER
AND MORTGAGE EQUITY TERMINATION ASSETS AND LIQUIDATION
LOANS(1) INTERESTS(2) COSTS(3) LIABILITIES(4) VALUES
------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cap Source I............................ $ 35,502,310 $ 2,644,095 $(500,000) $ 10,755,845 $ 48,402,250
Cap Source II........................... $ 27,494,089 $ 1,917,753 $(500,000) $ 1,630,253 $ 30,542,095
</TABLE>

ESTIMATED LIQUIDATION VALUES
AS OF DECEMBER 31, 1997
PER $1000 INVESTMENT*

<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP PARTNERSHIP NET OTHER
AND MORTGAGE EQUITY TERMINATION ASSETS AND LIQUIDATION
LOANS(1) INTERESTS(2) COSTS(3) LIABILITIES(4) VALUES
--------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Cap Source I................................. $ 521 $ 39 $ (7) $ 157 $ 710
Cap Source II................................ $ 339 $ 24 $ (6) $ 20 $ 377
</TABLE>

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

* Totals are adjusted for General Partners' 1% share.

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<PAGE>
(1) GNMA Certificates and FHA Loans are reflected at an average premium over
their current principal balances equivalent to 1.5%, with the exception of
The Ponds at Georgetown ("The Ponds") which is reflected at par due to the
failure of The Ponds to pay principal, interest and property taxes when due.

(2) Derived by using the arithmetic average of the value of the properties as
determined by the Appraisals and subtracting repayment of the current
principal balances of the mortgages then allocating the remaining proceeds,
if any, according to the limited partnership agreements. These resulting
equity values were then discounted to reflect, in the cases where the
Operating Partnership remains in the control of a non-affiliated General
Partner, an amount that might be sufficient to acquire that General
Partner's interest plus, for all partnership interests, an additional
amount, 37.5% on average, to reflect the leveraged nature of the limited
partnership interest being sold.

(3) An estimate of costs to terminate the Partnership's business.

(4) Includes cash, cash equivalents, miscellaneous GNMA certificates, interest
receivables and accounts payable.

COMPARISON OF CERTAIN ALTERNATIVES TO THE TRANSACTION

To assist Investors in evaluating the fairness of the consideration offered
by the Company in the Transaction, the General Partners have compared the
estimated market value of the Shares with: (i) estimates of the value of the
Units on a "going concern" basis, assuming that the Operating Partnerships would
be in existence until December 31, 2002, followed by the immediate liquidation
of all the Operating Partnerships for cash and the immediate distribution of the
available proceeds to the Partnerships for further distribution to the Investors
and General Partners in accordance with the respective Partnership Agreements;
(ii) estimates of the value of the Units under a liquidation scenario, assuming
that the Partnerships' mortgages were sold at their current market value, the
limited partnership interests in the Operating Partnerships were sold at prices
reflecting discounts for the highly leveraged nature of the interests plus
estimated amounts, if any, to gain operating control of the Operating
Partnerships, and that these amounts together with cash, cash equivalents and
other net assets of the Partnership are distributed to Investors and General
Partners in accordance with their respective Partnership Agreements; and (iii)
prices at which the Units have been trading on the illiquid secondary market
over the recent 12-month period ended December 31, 1997 as compiled and reported
to the General Partners by Service Data Corporation. These valuation estimates
are subject to significant uncertainties, since the value of the Shares, as well
as the comparative estimated values are based upon numerous estimates,
variables, assumptions and market conditions. Therefore, no assurance can be
given that the estimated values indicated could be realized, and actual realized
values may be higher or lower than the estimates of such values.

The results of this comparative analysis are summarized in the table
entitled "Summary of Comparative Valuation Alternatives" set forth below.
Investors should consider that the estimated values assigned to the Shares and
alternative forms of consideration are based on a variety of assumptions that
have been made by the General Partners, using information and analysis from
Sutro & Co. as to the estimated market value of the Shares. These assumptions
relate, among other things, to: (i) projections as to the Partnerships' future
income, expenses, cash flow and other significant financial matters; (ii) the
capitalization rates that would likely be used by prospective buyers if the
Partnerships' assets were liquidated; (iii) appropriate discount rates applied
to expected cash flows in computing the present value of the cash flows that may
be received with respect to the Units; and (iv) selling costs and other
expenses, discounts and contingencies attributable to the sales of assets and
liquidation of the Partnerships. In addition, these estimates are based upon
certain information available to the General Partners at the time the estimates
were prepared, and no assurance can be given that the same conditions will exist
at the time of closing of the Transaction. The assumptions have been determined
by the General Partners, using information and analysis from Sutro & Co. as to
the estimated values of the Shares, and where appropriate, are based upon
current historical

42
<PAGE>
information regarding the Partnerships and current real estate markets, and have
been highlighted below to the extent material to the General Partners'
conclusions. While the General Partners believe they have a reasonable basis for
the assumptions made, it is unlikely that all of the assumptions used by the
General Partners will prove to be accurate in all material respects, and some
assumptions used by the General Partners as to future events have been deleted
to simplify the analysis and may not approximate the actual experience of the
Partnerships. The estimated values of the Shares and alternative forms of
consideration would have been different had the General Partners made different
assumptions. No assurance can be given that such consideration would have been
realized through any of the alternatives described.

SUMMARY OF COMPARATIVE VALUATION ALTERNATIVES
PER $1,000 OF ORIGINAL INVESTMENT*

<TABLE>
<CAPTION>
ESTIMATED LIQUIDATION ESTIMATED MARKET
ESTIMATED MARKET VALUE OF UNITS IF ASSETS VALUE OF UNITS
VALUE OF SHARES(1) SOLD AT ADJUSTED NET ASSET BASED ON WEIGHTED
-------------------- ESTIMATED GOING VALUE(3) AVERAGE OF
HIGH CONCERN VALUE OF -------------------------- SECONDARY MARKET
PARTNERSHIP VALUE LOW VALUE UNITS(2) RANGE MIDPOINT TRADES(4)
- ------------------------------------- --------- --------- ----------------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Cap Source I......................... $ 754 $ 653 $ 747 $700-720 710 $ 510
Cap Source II........................ $ 409 $ 354 $ 373 $371-383 377 $ 354
</TABLE>

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

* An Original Investment of $1,000 consists of 50 Units in each of Cap Source
I and Cap Source II.

(1) The General Partners were unable to identify publicly traded companies
directly comparable to the Company. As such, the General Partners were
unable to estimate the market value at which the Shares may initially trade
based upon the trading history of similar companies. However, based upon
methodology used by Sutro & Co. in preparing its Fairness Opinion, the
General Partners have determined the range of estimated market values of the
Company based upon a division of the assets in each Partnership into three
asset types. Asset Type A is the limited partnership interests in the
Operating Partnerships; Asset Type B is the mortgages and Asset Type C is
cash, cash equivalents and other net assets. On the low end of estimated
value, no value was assigned to Asset Type A. On the high end, Funds from
Operations ("FFO") attributable to the limited partnership interests were
valued using an FFO multiple of 10. The FFO multiple of 10 was derived by
taking the average and median 1998 estimated FFO multiple from a peer group
of equity REITs, as identified by Sutro & Co. For both the high and low
estimates, Asset Types B and C were valued at their face values as of
December 31, 1997. Values assigned to Asset Types A, B and C were added
together and divided by the number of shares outstanding after consummation
of the Transaction to determine a per Share value. The Value per original
$1,000 Investment was determined by multiplying the resulting per Share
value by the number of shares allocated per original $1,000 Investment using
the Exchange Value methodology. The General Partners and the Independent
Committee recognized that there is substantial uncertainty as to the prices
at which the Shares will trade following the Transaction, and it is possible
that the Shares will trade below the values reflected in this analysis.

(2) These values were derived from a discounted cash flow analysis at the
Partnership level for the period from January 1, 1998 through December 31,
2002. The five-year period was used because it was a time period reasonably
determined by the General Partners to obtain control of the Operating
Partnerships from non-affiliates of the General Partners, thus allowing the
liquidation of the Partnerships' assets on an equivalent fee-simple basis.
Cash flows from mortgages owned by the Partnerships were included at the
fixed monthly amounts described in the respective mortgage documents. To
determine any cash flow to the Partnerships from the limited partnership
interests in the Operating Partnerships, estimated cash flows for 1998 were
taken from the Appraisals prepared by Valuation Research, and revenue and
expenses in subsequent years were increased at the rates set forth in the
Appraisals. From net income in each year, debt service payments and
applicable fees were deducted to arrive at

43
<PAGE>
net cash flow available for distribution by the Operating Partnerships. Such
cash is then assumed to be distributed to the Partners in the Operating
Partnerships as prescribed in the limited partnership agreements for each
Operating Partnership; any shortfalls are assumed to be funded by the
Partnerships. Interest income and cash from principal repayments on
miscellaneous GNMA certificates are estimated based on a model of
Partnership level cash flow; that model includes an estimate of annual
administrative and operating expenses which were increased annually by 4%.
At the end of the final year of analysis, the properties were assumed to be
sold at prices derived by capitalizing the following year's net income at a
rate 25 basis points higher than the current year capitalization rate
applied to each property in the Appraisals. Selling costs are assumed to be
3% of proceeds. Net proceeds are first used to repay the then outstanding
principal balance of any mortgage loan, and remaining cash is distributed in
accordance with the respective partnership agreements. At the Partnership
level at the end of the final year of analysis, proceeds from repayment of
the mortgage loans, cash received in respect of limited partnership
interests in the operating partnerships, and any other net assets, including
cash and cash equivalents, are then distributed to the Limited Partners and
General Partners in accordance with the Partnership Agreement. Annual
distributed cash flows, inclusive of liquidating proceeds from the assets
sales at the end of the period, are discounted at a rate of 11% to arrive at
an estimate of the present value of each Partnership on a "going concern"
basis.

(3) The figures in this column represent the amount that would be available for
distribution to Investors if the Partnerships sold their assets as of
December 31, 1997 based on the following assumptions. Mortgages were sold at
their current market values which on the noted date would have been at
slight premiums to their current principal values. With the exception of the
mortgage on The Ponds which is included at its current principal value due
to the failure of The Ponds to pay principal, interest and property taxes
when due, premiums for the high value are 2% and for the low value are 1%.
These estimated premiums reflect, to the best knowledge of the General
Partner, current pricing on similar mortgage instruments which are generally
prepayable with minimal or no penalties. Limited partner interests in the
operating partnerships were sold at discounts to the values derived by using
the arithmetic average of the value of the properties as determined by the
Appraisals and subtracting repayment of the current principal balance of the
mortgages then allocating the remaining proceeds, if any, according to the
limited partnership agreements. Discounts were determined by the General
Partner by taking into account two factors. First, if the Operating
Partnership remains in the control of a non-affiliated General Partner, an
amount was estimated that might be sufficient to acquire that General
Partner's interest and was deducted from the derived value of the limited
partnership interest. Second, discounts ranging from 25% for the high value
and 50% for the low value were taken to reflect the leveraged nature of the
ownership interest being sold, and thus the higher return requirement of a
buyer. Cash and cash equivalents were included at their current market
values, along with any other net assets. A deduction was made for estimated
costs of winding up the Partnerships. The resulting amount was deemed to be
distributed to the Investors and General Partners in accordance with the
Partnership Agreements.

(4) Based on the high and low value of secondary market trades during 1997,
provided to the General Partners by Service Data Corporation. Service Data
Corporation's records may not reflect all trading activity for the Units.

44
<PAGE>
FAIRNESS OPINION AND APPRAISALS

Sutro & Co. has rendered its opinion that the Consideration (as defined in
the Fairness Opinion) to be received by Investors and the General Partners
collectively, the allocation of such Consideration among the Investors and the
General Partners, and the principal allocation of the Notes (as defined in the
Fairness Opinion) in the Transaction, is fair to the Investors and the General
Partners from a financial point of view.

FAIRNESS OPINION

GENERAL. Sutro & Co. was engaged by the Independent Committee to conduct an
analysis of the Transaction and has delivered a written summary of its
determination, based on the review, analysis, scope and limitations described
therein, as to the fairness of the allocation of interests in the Company, from
a financial point of view, pursuant to the Transaction (the "Fairness Opinion").
The full text of the Fairness Opinion, which contains a description of the
assumptions and qualifications made, matters considered and limitations imposed
on the review and analysis, is set forth in Appendix B and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations to
the Fairness Opinion are described below. The summary set forth below does not
purport to be a complete description of the analyses used by Sutro & Co. in
rendering the Fairness Opinion.

Except for certain assumptions described more fully below, which the
Partnerships advised Sutro & Co. that it would be reasonable to make, the
Partnerships imposed no conditions or limitations on the scope of Sutro & Co.'s
investigation or the methods and procedures to be followed in rendering the
Fairness Opinion. The Partnerships have agreed to indemnify Sutro & Co. against
certain liabilities arising out of its engagement to prepare and deliver the
Fairness Opinion. Upon consummation of the Transaction such indemnity
obligations will be obligations of the Company.

EXPERIENCE OF SUTRO & CO. Sutro & Co., as part of its investment banking
business, is regularly engaged in the evaluation of capital structures, the
valuation of businesses and their securities in connection with mergers and
acquisitions, firm commitment underwriting, secondary distributions of listed
and unlisted securities, private placements, financial restructurings and other
financial services.

SUMMARY OF MATERIALS CONSIDERED. Sutro & Co.'s analysis of the Transaction
involved a review of the following: (i) the Registration Statement on Form S-4
of the Company as filed on May 7, 1998, including the Preliminary
Prospectus/Consent Solicitation Statement included therein, (ii) the Appraisals,
(iii) individual Partnership Annual Reports and Form 10-Ks for the years ended
December 31, 1996 and December 31, 1997, (iv) the Prospectus for Cap Source I
dated January 10, 1986, (v) the Prospectus for Cap Source II dated February 6,
1987, (vi) the Agreement and Plan of Merger among the Partnerships and the
Company, (vii) certain other publicly available business, financial and other
information concerning the Partnerships, (viii) certain internal information,
primarily financial in nature (including analytical models, projections,
forecasts, estimates and analyses) prepared by or on behalf of the management of
the Partnerships, (ix) certain information provided to Sutro & Co. by the
General Partners concerning the distributions on, the trading of, and the
trading market for, the equity securities of the Partnerships, and (x) such
other information which Sutro & Co. deemed to be relevant to providing the
Fairness Opinion.

ANALYSIS AND CONCLUSIONS. Sutro & Co., in conducting its review and
arriving at its opinion, noted that the exchange ratios (the "Exchange Ratios")
for Cap Source I and Cap Source II in the Transaction are based on the
Appraisals and the market values of the Partnerships' remaining assets and
liabilities at December 31, 1997 and before transaction costs or other costs
associated with the Transaction (individually or collectively the "Exchange
Values"). The Exchange Ratios relating to the Exchange Values for Cap Source I
and Cap Source II are used to determine the allocation of Shares to be received
by the investors in Cap Source I and Cap Source II in the Transaction and the
principal allocation of the Notes to be

45
<PAGE>
received by Investors in Cap Source I and Cap Source II in the Transaction. The
Exchange Values are used to determine the amount of the Consideration to be
received.

Sutro & Co.'s evaluation of the fairness of the Consideration among the
Partnerships is based, in part, on an analysis of the net book values of the
assets and liabilities of each of the Partnerships. Cash and temporary cash
investments, investments in FHA Loans and GNMA Certificates, interest
receivable, accounts payable and distributions payable were valued at the stated
values shown at December 31, 1997 in the audited Parent Company Only Condensed
Balance Sheets in the Annual Reports on Form 10-Ks for 1997 of each of the
Partnerships. Other assets at December 31, 1997 in the audited Parent Company
Only Condensed Balance Sheets in the Annual Reports on Form 10-K for each of the
Partnerships were deemed to have no value. Values for the investments in the
Operating Partnerships were based on the low and high of the range of appraised
values for the fee simple ownership of the individual real estate properties net
of the outstanding mortgage indebtedness of the real estate properties and other
related property level liabilities at December 31, 1997. Such net book value
evaluations indicated a range of net book values for Cap Source I of $49.4
million to $52.8 million or for Cap Source I Investors a net book value of $725
to $775 per $1,000 of original investment and a range of net book values for Cap
Source II of $31.9 million to $33.3 million or for Cap Source II Investors a net
book value of $394 to $411 per $1,000 of original investment.

In addition, Sutro & Co. based its analysis, in part, on an analysis of the
liquidation values of the assets and liabilities of each of the Partnerships.
Liquidation values were calculated as net book values plus a range of a 1% to 2%
premium on the FHA Loans and GNMA Certificates to reflect pro forma market sale
values for such securities less costs associated with disposing of the
investments in the Operating Partnerships and winding down costs for the
Partnerships. Such liquidation value evaluations indicated a range of
liquidation values for Cap Source I of $46.9 million to $50.5 million or for Cap
Source I Investors a liquidation value of $688 to $740 per $1,000 of original
investment and a range of liquidation values for Cap Source II of $29.7 million
to $31.3 million or for Cap Source II Investors a liquidation value of $367 to
$387 per $1,000 of original investment.

Sutro & Co. also analyzed the going concern values for the Partnerships to
approximate the pro forma values of the Partnerships "as is." A five-year
discounted cash flow analysis was calculated based upon pro forma dividends
projected to be received by the Investors plus a pro forma projected liquidation
of the Partnerships at the end of year five. Such cash flows were discounted at
a range of 11% to 13%. Such pro forma "as is" value evaluations indicated a
range of "as is" values for Cap Source I of $47.0 million to $50.9 million or
for Cap Source I Investors an "as is" value of $690 to $747 per $1,000 of
original investment and a range of "as is" values for Cap Source II of $28.0
million to $30.2 million or for Cap Source II Investors an "as is" value of $346
to $373 per $1,000 of original investment. Pro forma projected dividends were
provided by the General Partners and were based, in part, on five-year pro forma
projected income statements and balance sheets derived from property level
projections by Valuation Research and Partnership level projections by the
General Partners.

As part of its analysis, Sutro & Co. reviewed a peer group of publicly
traded multifamily REITs with market capitalizations of less than $500 million.
The low, high, median and average stock price to estimated 1998 FFO for this
peer group were 8.5x, 11.3x, 9.9x and 9.9x, respectively. Sutro & Co. also
reviewed a peer group of publicly traded C corporations or real estate limited
partnerships engaged in, among other things, ownership of residential properties
and development activities with market capitalizations of less than $200
million. The low, high, median and average stock price to latest twelve months'
per share earnings before interest, taxes, depreciation and amortization
("EBITDA") multiples were 3.3x, 13.2x, 9.8x and 9.1x.

Sutro & Co. also considered such financial and other factors it deemed
important under the circumstances, including, among other things, the following:
(a) the historical and current operating results of the Partnerships including,
among other things, the cash flow from the investments in FHA Loans and

46
<PAGE>
GNMA Certificates and the cash flow from the investments in the Operating
Partnerships, (b) distributions over the life of each of the Partnerships
including distributions and return of capital to the Investors, and (c) certain
balance sheet items of the Partnerships. Sutro & Co. also took into account its
assessment of general economic, market and financial conditions and its
experience in other transactions, as well as its experience in the securities
industry and knowledge of real estate generally.

Additionally, Sutro & Co. was requested to provide an opinion as to the
fairness, from a financial point of view, of the principal allocation of the
Notes that may be elected by the Investors. As used herein, principal allocation
refers solely to the method of allocation, as determined by Exchange Values, of
the Notes among the investors in the Partnerships. Sutro & Co. in arriving at
its opinion as to the fairness, from a financial point of view, of the
allocation of the consideration to be received by the Investors, and with
respect to each Partnership individually, assumed that the maximum amount of
Notes that may be issued in the Transaction is $40.0 million.

In the course of Sutro & Co.'s engagement, Sutro & Co. held discussions with
the senior management of the Partnerships concerning the historical, current and
projected future operations, business plans, financial conditions and results,
and prospects of the Partnerships. Additionally, Sutro & Co. discussed with
representatives of Valuation Research the results, methodology, and limitations
of the Appraisals. Sutro & Co. did not, however, independently verify the
accuracy or completeness of the Appraisals.

Based on the foregoing, Sutro & Co. concluded that, based upon its analysis
and assumptions, and as of the date of the information considered in the
Fairness Opinion, that the allocation of the Consideration to be received by
Investors and the General Partners collectively, the allocation of such
Consideration among the Investors and the General Partners, and the principal
allocation of the Notes, in the Transaction, is fair to the Investors and the
General Partners from a financial point of view.

ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF FAIRNESS OPINIONS. In
conducting its review, Sutro & Co. relied upon and assumed the accuracy and
completeness of the financial and other information, including the Appraisals,
provided to Sutro & Co. or which were publicly available, without independent
verification. Sutro & Co. relied upon the statements and information provided by
the management of the Partnerships as to the reasonableness and achievability of
the financial and operating forecasts and projections (and the assumptions and
bases therefor) provided to Sutro & Co. Sutro & Co. assumed that the financial
models and the financial projections provided by the General Partners that
project future results of the Partnerships are the best currently available
estimates and good faith judgements of the General Partners as to the future
performance of the Partnerships.

Sutro & Co.'s Fairness Opinion is based upon conditions as of the date of
the Fairness Opinion and the information made available to Sutro & Co. as of the
date of the Fairness Opinion and the information made available to Sutro & Co.
as of the date such information was prepared.

The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Sutro &
Co. has advised the Partnerships that its entire analysis must be considered as
a whole and that selecting portions of its analyses and the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion.

The Fairness Opinion does not constitute a recommendation of the Transaction
over any alternative transactions which may be possible for the Partnerships and
does not address the Partnerships' underlying business decision to effect the
proposed Transaction. Furthermore, the Fairness Opinion did not consider any
other aspect of the proposed Transaction or any agreements or other matters,
which include, but are not limited to, the terms or fairness of the Advisory
Agreement that may be deemed part of the Transaction. Sutro & Co. was not asked
to opine on and did not express an opinion as to: (a) the terms of the
Transaction, (b) the tax consequences of the Transaction to the Investors, and
(c) the prices at which the Company's securities may trade at in the future.

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<PAGE>
Sutro & Co. will receive the following fees for delivering the Fairness
Opinion: (i) a non-refundable retainer of $50,000 paid upon the Partnerships'
execution of the engagement letter, plus (ii) a fee of $50,000 paid upon the
mailing of this Prospectus/Consent Solicitation Statement to the Investors
concerning the Transaction, plus (iii) a fee of $50,000 paid upon the delivery
and presentation of Sutro & Co.'s first analysis to the Independent Committee,
plus (iv) a fee of $50,000 payable on the final closing of the Transaction, plus
(v) reimbursement for reasonable fees and disbursements of Sutro & Co.'s counsel
and Sutro & Co.'s reasonable travel and other incidental expenses.

APPRAISALS

GENERAL. Valuation Research was engaged by the Partnerships to appraise the
multi-family apartment complexes owned by the Partnerships through their
interest in the Operating Partnerships (the "Properties") and has delivered a
written summary of its analysis, based upon the review, analysis, scope and
limitations described therein, as to the fair market value of the Properties as
of December 31, 1997 (the "Appraisals"). The Independent Committee has relied,
in part, upon these Appraisals to determine the ratios for allocating the Shares
and Notes in the Transaction. Certain of the material assumptions,
qualifications, limitations and methods used in the Appraisals are described
below.

SUMMARY OF METHODOLOGY. Valuation Research evaluated each Property based
primarily upon the income approach to valuation. Appraisers typically use up to
three approaches in valuing real property: the cost approach, the direct sales
comparison approach and the income approach. These approaches are based on the
cost to replace assets, market exchanges for comparable properties and the
capitalization of income.

The Appraisals take into account all three methods of valuation. However,
due to the income-producing nature of the properties and current market
conditions, the Appraisals place more emphasis on the income approach and use
the direct sales comparison approach as a check on the reasonableness of the
results obtained using the income approach.

The scope of the Appraisals included an inspection of each Property in
December 1997, and an analysis of recent comparable sales and rental rates of
similar property in each of the subject's specific area.

The highest and best use of each property was also considered. Valuation of
a property is based on its most profitable likely use. The highest and best use
is arrived at by testing potential uses of the property, both as improved and as
though vacant, to find the use which meets the following criteria: physically
possible--the uses of vacant land which are possible after considering physical
characteristics of the land; legally permitted--uses that are permissible after
considering local, state and federal regulations and private restrictions;
financially feasible--those uses which are physically possible and legally
permitted which produce a positive return beyond operating expenses, financial
obligations, and capital amortization; and maximum productive use--the use that
is physically possible, legally permitted and financially feasible which
produces the highest price or value, which is the highest and best use.
Valuation Research concluded that the highest and best use of the Properties is
for multi-family residential development, which is also the current use of the
Properties.

THE COST APPROACH. The cost approach is a valuation technique that uses the
concept of replacement as a value indicator. Reproduction or replacement cost is
estimated for the property being appraised and is then adjusted for losses in
value (appraised depreciation) due to a variety of factors. This process
requires valuing the site as if vacant, then adding the replacement cost new of
improvements based upon market derived costs for similarly constructed
properties. Then, accrued depreciation from physical deterioration and
obsolescence of all causes is estimated and subtracted from the replacement cost
new to arrive at the present value.

48
<PAGE>
THE SALES COMPARISON APPROACH. The sales comparison approach is a valuation
technique in which value is estimated on the basis of market prices in actual
transactions. The technique consists of studying available market comparable
information and adjusting for differences. This process is essentially that of
comparison and correlation. Differences always exist between properties even
though they may be almost identical, and therefore adjustments for these
differences must be made. Some adjustments that may prove important are: (i)
conditions of sale, (ii) financing terms, (iii) market conditions (time), (iv)
location, (v) physical characteristics, and (vi) income characteristics. A
minimum of three comparable sales were used to form the basis for estimating the
market value of the subject Properties.

THE INCOME APPROACH. The income approach is a valuation technique that
capitalizes the anticipated income stream from the appraised assets. This
approach is predicated on developing either cash flow or income projections,
which are then discounted for risk and time value. Additionally, the present
value of a projected residual value is estimated and added to the present value
of the income stream to derive a total present value.

The income approach attempts to quantify expected, yet uncertain future
benefits. There are two accepted methods of applying the income approach: direct
capitalization and discounted cash flow analysis.

DIRECT CAPITALIZATION APPROACH

The direct capitalization approach is the determination of a proper rental
or revenue value that one would expect to be able to obtain for the subject
property based on actual historical operations and a study of comparable leased
properties with respect to rent levels, location, and amenities offered.
Adjustments are made for differences between the subject and comparable
properties to derive an estimated current economic rent. A similar analysis of
operating expenses aids in constructing an operating statement. The end result
is a net operating income ("NOI") for the first year income that can be
converted into an indicated property value through the overall capitalization
process.

The direct capitalization approach begins with an estimate of the subject's
market rent potential based on an analysis of comparable properties and their
current rental rates and an analysis of the actual rentals in place on the
subject property. The unit of comparison is typically the rent per unit. From
this is deducted an amount estimated to reflect the operating expenses
attributable to the subject property. This operating expense deduction is based
on published market surveys and actual historical data.

To arrive at an appropriate market rent, Valuation Research analyzed several
similar apartments in the immediate area of each subject. Gross potential rent
was derived from the historical revenue trends of the subject property, as well
as from the market surveys mentioned above. The market area for each subject was
also analyzed with respect to current and future apartment rental trends. This
information, taken together with the historical vacancy and collection loss
experience of the subject property based on discussions with the operating
manager and published data, was used to estimate the appropriate vacancy and
collection loss over the projection period.

Effective gross income for each property was estimated based on the
historical income information provided and the market rental information.
Operating expenses were estimated based upon information published by the
Institute of Real Estate Management ("IREM") along with the actual historical
experience of the subject property. A management fee of 5% of effective gross
income, including miscellaneous income, is generally charged for properties such
as the subject properties, and was used most often in Valuation Research's
analysis. A reserve for replacement was also included in the analysis.

Net operating income was calculated by taking potential gross rental income,
less vacancy and collection loss, less operating expenses, less a management fee
and less reserves for replacement. The relationship between NOI and value can be
expressed in its overall rate of return, or capitalization rate. Capitalization
rates were abstracted from market surveys conducted by reputable national firms
for each of

49
<PAGE>
the major metropolitan areas in which the subject properties are located, as
well as reports by The National Real Estate Index for the Third Quarter, 1997,
KORPACZ REAL ESTATE INVESTOR SURVEY and the American Council of Life Insurance
reports. The indicated value for each property was derived from the NOI for each
property divided by the Capitalization Rate.

DISCOUNTED CASH FLOW METHOD

The discounted cash flow method has two components. The first component
equals the sum of the present value of cash flows over a selected holding
period. Valuation Research used a ten year holding period in its analysis. The
second component, a residual, equals the present value of a perpetuity paying
income equal to net income in year eleven and capitalized with the appropriate
capitalization rate. The residual reflects the property's ongoing potential
after the tenth year.

The income and expense projections for each property were based on
historical operating data, information provided by local lessors, and published
data sources. Income and expense statements, furnished by the building
management, were reviewed and adjusted, where necessary, to reflect more typical
market expenses as reported by IREM. These operating results were cross-checked
for reasonableness with market information obtained from area lessors, leasing
agents and brokers who also provided data relating to current rental rates,
vacancy levels, and typical lease terms.

The anticipated earnings received in the future must be discounted to a
present value using a discount rate derived from current market rates for
alternative investments. To determine the current discount rate applicable for
real estate investment, Valuation Research reviewed market surveys of large
institutional real estate investors. Using this market derived data, and
adjusting it based on the specific risks involved with investing in each of the
subject properties, a unique discount rate was estimated and used to discount
the projected cash flows to determine an estimated present value for each
property.

50
<PAGE>
CONCLUSIONS AS TO VALUE. Based on the valuation methodology described
above, Valuation Research assigned a value to each individual Property as set
forth in the following table:

PROPERTY/VALUE RANGE SCHEDULE
<TABLE>
<CAPTION>
CAPITAL SOURCE I VALUE RANGE
- ------------------------------------------ ----------------------------
<S> <C>
Bluff Ridge (108 Units) $3,250,000 - $3,700,000
Jacksonville, North Carolina

Waterman's Crossing (260 Units) $11,700,000 - $12,500,000
Newport News, Virginia

Water's Edge (108 Units) $5,700,000 - $6,500,000
Lake Villa, Illinois

Highland Park (252 Units) $11,000,000 - $11,350,000
Reynoldsburg, Ohio

Fox Hollow (184 Units) $6,770,000 - $7,550,000
High Point, North Carolina

Misty Springs (128 Units) $4,500,000 - $5,000,000
Daytona Beach, Florida

CAPITAL SOURCE II VALUE RANGE
- ------------------------------------------ ----------------------------
<S> <C>

Crane's Landing (252 Units) $12,500,000 - $13,000,000
Winter Park, Florida

Delta Crossing (178 Units) $7,500,000 - $8,300,000
Charlotte, North Carolina

Monticello (106 Units) $5,500,000 - $6,000,000
Southfield, Michigan
<CAPTION>

CAPITAL SOURCE I AND II VALUE RANGE
- ------------------------------------------ ----------------------------
<S> <C>

The Ponds at Georgetown (134 Units) $7,250,000 - $7,375,000
Ann Arbor, Michigan
</TABLE>

ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF APPRAISALS. Valuation
Research utilized certain assumptions to determine the appraised value of the
Properties under the income approach. The Appraisals reflect Valuation
Research's valuation of the Properties as of December 31, 1997 in the context of
information available on such date. Events occurring after December 31, 1997 and
before the Effective Date could affect the properties or assumptions used in
preparing the Appraisals. Valuation Research will not deliver any additional
written summary of the analysis.

Financial statements and other related information provided by the General
Partners in the course of the investigation was accepted, without further
verification, as fully and correctly reflecting the Partnership's business
conditions and operating results for the respective periods, except as
specifically noted in the report. Public information and industry and
statistical information was obtained from sources Valuation Research deemed to
be reliable; however, Valuation Research made no representation as to the
accuracy or completeness of such information, and accepted the information
without further verification.

The conclusions of value are based upon the assumption that the current
level of management expertise and effectiveness would continue to be maintained
and that the character and integrity of the enterprise through any sale,
reorganization, exchange, or diminution of the owners' participation would

51
<PAGE>
not be materially or significantly changed. Valuation Research also assumed that
the Properties will be responsibly owned and properly maintained.

Valuation Research did not make a land survey of the Properties. The
boundaries used in the report were taken from records believed to be accurate.
Valuation Research assumed that there were no hidden or unapparent conditions of
the Properties, subsoil, or structures which would render the properties more or
less valuable. Any information furnished by others and included in the Appraisal
report is from sources deemed by Valuation Research to be reliable and believed
to be true and accurate; however, no responsibility was assumed for its
accuracy.

It was assumed that there was full compliance with all applicable federal,
state, and local environmental regulations and laws unless noncompliance was
stated, defined and considered in the Appraisal report. Valuation Research is
not an environmental consultant or auditor, and it did not take responsibility
for any actual or potential environmental liabilities. Valuation Research did
not conduct or provide environmental assessments. Valuation Research asked the
managers of the apartment complexes whether they were subject to any present or
future liability relating to environmental matters (including but not limited to
CERCLA/Superfund liability). Valuation Research did not determine independently
whether any of the apartment complexes or their owners were subject to any such
liabilities, nor the scope of any such liabilities. The Appraisal did not take
such liabilities into account except as they were reported expressly to
Valuation Research by the managers of the apartment complexes, and then only to
the extent that the liability was reported to Valuation Research in an actual or
estimated dollar amount. Such matters are noted in the report. To the extent
such information was reported, Valuation Research relied on it without
verification and offered no warranty or representation as to its accuracy or
completeness.

It was assumed that all applicable zoning and use regulations and
restrictions were complied with, unless a nonconformity was stated, defined, and
considered in the appraisal report. It was also assumed that all required
licenses, certificates of occupancy, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity or organization was or could be obtained or renewed for any use
on which the value estimate contained in the Appraisal report is based.

Valuation Research did not make a specific compliance survey or analysis of
the subject properties to determine whether they were subject to or in
compliance with the ADA and the opinion did not consider the impact, if any, of
noncompliance in estimating the value of the Property.

SUMMARY OF VALUATION RESEARCH ASSUMPTIONS

<TABLE>
<CAPTION>
REVENUE GROWTH EXPENSE GROWTH CURRENT YEAR
PROPERTY RATE RATE CAPITALIZATION RATE
- ---------------------------------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
Bluff Ridge................................... 3.0% 3.0% 9.50%
Waterman's Crossing........................... 2.5 2.0 9.25
Misty Springs................................. 3.0 2.0 9.00
Waters Edge................................... 2.0 3.0 9.25
Highland Park................................. 3.0 2.0 9.00
Ponds at Georgetown........................... 2.5 2.0 9.50
Crane's Landing............................... 3.0 3.0 9.00
Delta Crossing................................ 2.5 3.0 9.75
Monticello.................................... 2.5 3.0 9.75
Fox Hollow.................................... 2.5 3.0 9.50
</TABLE>

COMPENSATION AND MATERIAL RELATIONSHIPS

Neither Valuation Research, Sutro & Co., nor any of their employees have a
present or intended material financial interest in the Company, the Partnerships
or the Properties.

52
<PAGE>
The Partnerships paid Valuation Research aggregate fees of $80,000.00 plus
expenses to prepare the Appraisals. Sutro & Co. will receive the following fees
for delivering the Fairness Opinion: (i) a non-refundable retainer of $50,000
paid upon the Partnerships' execution of the engagement letter, plus (ii) a fee
of $50,000 paid upon the mailing of this Prospectus/Consent Solicitation
Statement to the Investors concerning the Transaction, plus (iii) a fee of
$50,000 paid upon the delivery and presentation of Sutro & Co.'s first analysis
to the Independent Committee, plus (iv) a fee of $50,000 payable on the final
closing of the Transaction, plus (v) reimbursement for reasonable fees and
disbursements of Sutro & Co.'s counsel and Sutro & Co.'s reasonable travel and
other incidental expenses.

EXCHANGE VALUES

Investors in the Partnerships will receive Shares or Notes based upon an
exchange value (the "Exchange Value") described below. The General Partners will
also receive Shares based upon the Exchange Value. The Exchange Values were
reviewed and approved by the Independent Committee, which was retained without
any conditions or restrictions.

The Exchange Values were determined as of December 31, 1997. As of the date
of this Prospectus/ Consent Solicitation Statement, the General Partners and
management of the Company do not know of any material change in the Partnerships
which would affect the Exchange Value.

The following tables set forth the Exchange Value attributable to the
Partnerships for purposes of the Transaction, as well as the allocation of
Shares based on the Exchange Values. The tables assume that no Notes are issued
in connection with the Transaction.

EXCHANGE VALUES
FOR ALLOCATION OF SHARES

<TABLE>
<CAPTION>
TOTAL TOTAL NUMBER PERCENT OF
EXCHANGE VALUE OF SHARES TOTAL SHARES
-------------- ------------- -------------
<S> <C> <C> <C>
PARTNERSHIPS
Cap Source I................................... $ 50,991,970 2,039,679 60.8%
Cap Source II.................................. 32,880,190 1,315,208 39.2
-------------- ------------- -----
Total........................................ $ 83,872,160 3,354,887 100.0%
-------------- ------------- -----
-------------- ------------- -----
INVESTORS
Cap Source I Investors......................... $ 50,482,050 2,019,282 60.2%
Cap Source II Investors........................ 32,551,388 1,302,056 38.8
-------------- ------------- -----
Total........................................ $ 83,033,438 3,321,338 99.0%
-------------- ------------- -----
-------------- ------------- -----
GENERAL PARTNERS
Cap Source I General Partners.................. $ 509,920 20,397 .6%
Cap Source II General Partners................. 328,802 13,152 .4
-------------- ------------- -----
Total........................................ $ 838,722 33,549 1.0%
-------------- ------------- -----
-------------- ------------- -----
</TABLE>

<TABLE>
<CAPTION>
PER $1,000
ORIGINAL INVESTMENT BY INVESTORS
--------------------------------------
EXCHANGE VALUE NUMBER OF SHARES
----------------- -------------------
<S> <C> <C>
PARTNERSHIPS
Cap Source I.................................. $ 748 29.92
Cap Source II................................. $ 406 16.23
</TABLE>

53
<PAGE>
CALCULATION OF EXCHANGE VALUES. The following table sets forth the
components of the Exchange Value for the Partnerships.

CALCULATION OF EXCHANGE VALUES

<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP NET OTHER
AND MORTGAGE EQUITY ASSETS AND EXCHANGE
LOANS(1) INTERESTS(2) LIABILITIES VALUE
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Cap Source I.......................................... $ 35,010,658 $ 5,225,467 $ 10,755,845 $ 50,991,970
Cap Source II......................................... 27,162,646 4,087,291 1,630,253 32,880,190
</TABLE>

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

(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balances as of December 31, 1997.

(2) Partnership Equity Interests are derived by using the arithmetic average of
the value of the properties as determined by the Appraisals, subtracting the
current principal balances of the mortgages then allocating the remaining
proceeds, if any, according to the limited partnership agreements.

NET OTHER ASSETS AND LIABILITIES TABLE. The following table sets forth the
components of net other assets and liabilities.

NET OTHER ASSETS AND LIABILITIES TABLE
FOR PARTNERSHIPS

<TABLE>
<CAPTION>
NET OTHER
CASH & CASH MISC. GNMA ASSETS & DISTRIBUTIONS
EQUIVALENTS CERTIFICATES(1) LIABILITIES(2) PAYABLE TOTAL
------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Cap Source I........................... $ 10,410,564 $ 1,088,526 $ 117,342 $ (860,587) $ 10,755,845
Cap Source II.......................... 1,240,992 1,050,718 (114,489) (546,968) 1,630,253
</TABLE>

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

(1) These assets are classified for reporting purposes as "available for sale"
and, as such, are reported at fair value.

(2) Generally, interest receivable less accounts payable.

54
<PAGE>
COMPARISON OF LIMITED PARTNERSHIP AND CORPORATE STRUCTURE

In the Transaction, each Partnership will be deemed to have received Shares
and Notes and to have distributed such property to its Investors. The effect of
the Transaction, therefore, is to convert the Units into Shares and Notes. Due
to the inherent differences in form, the change in structure from a partnership
to a corporation will result in certain differences in the scope and operation
of the Partnerships' current businesses and in the interests of the Investors.
In addition, the Partnerships have certain features and characteristics which
are different from those which will exist in the Company.

The rights of Investors are governed by the Delaware Partnership Law and by
the respective Partnership Agreements of the Partnerships. The rights of the
Company's Shareholders will be governed by the Delaware General Corporation Law
(the "Delaware GCL") and the Organizational Documents of the Company.

A summary of this comparison is set forth under "SUMMARY."

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
UNITS SHARES
- ------------------------------------------------------------------------------------------
<S> <C>
FORM OF ORGANIZATION

Each Partnership is a limited partnership The Company was organized as a corporation
formed under the Delaware Partnership Law. under the Delaware GCL.
Each Partnership has been treated as a
partnership for federal income tax purposes.

EACH PARTNERSHIP WAS FORMED AS A LIMITED PARTNERSHIP UNDER THE DELAWARE PARTNERSHIP
LAW WHILE THE COMPANY WAS ORGANIZED AS A CORPORATION UNDER THE DELAWARE GCL.

BUSINESS

The Partnership Agreements limit the The Company will invest in real estate and
business of the Partnerships to originating, real estate-related activities, and may
acquiring, holding, selling, disposing of engage in any other business activities
and otherwise dealing with insured mortgages permitted a corporation organized under the
on multi-family rental housing complexes and laws of the State of Delaware. The powers,
to acquiring, holding, selling, disposing of limitations and rights with respect to the
and otherwise dealing with limited part- real estate operations conferred in the
nership interests in operating partnerships Partnership Agreements will not be
which construct and operate multi-family applicable to the business activities of the
rental housing complexes. The Partnership Company. The Company will be able to take
Agreements do not permit the Partnerships to advantage of financing opportunities and may
raise new capital. use forms of financing which the
Partnerships did not use. Additional capital
may be raised through all available sources,
including additional equity financing,
borrowings from banks, institutional
investors, public and private debt markets
or other financing vehicles which will be
dependent upon the equity and debt market
conditions, interest rates and other
factors. Many of these additional forms of
financing also expose the Company to
additional risks which do not exist with
respect to the Partnerships, including the
risk of default and foreclosure on any
security securing debt.

THE COMPANY WILL HAVE BROADER BUSINESS OPPORTUNITIES THAN THE PARTNERSHIPS. IN
ADDITION, THE COMPANY WILL HAVE ACCESS TO ADDITIONAL FINANCING OPPORTUNITIES WHICH ARE
CURRENTLY NOT ACCESSIBLE TO THE PARTNERSHIPS. INHERENT IN SEVERAL OF THE ADDITIONAL
FINANCING OPPORTUNITIES ARE CERTAIN RISKS WHICH DO NOT EXIST IN THE CASE OF THE
PARTNERSHIPS.
</TABLE>

55
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
UNITS SHARES
- ------------------------------------------------------------------------------------------
<S> <C>
DURATION OF EXISTENCE

The Partnership Agreements provide that the In accordance with the Delaware GCL and the
Partnerships may exist for terms ranging Company's Certificate of Incorporation, the
from 40 to 49 years and that the Company will continue in perpetual
Partnerships have a limited existence. In existence. The Company has no present
furtherance of this objective, the Part- intention to sell a substantial number of
nership Agreements generally provide that properties. The Company will have no
the proceeds from the sale, financing, restrictions in reinvesting funds after the
refinancing or other disposition of any sale of an original investment. Therefore,
property owned by the Partnerships will not the Company believes that it will be in a
be reinvested but will be distributed to the position to take advantage of economic
Investors to the extent such proceeds exceed opportunities as they are presented. Because
the Partnerships' other cash requirements. the Company will have no restrictions on the
reinvestment of funds, Shareholders will
assume the risk of such reinvestment and
will not be entitled to an immediate
distribution from sale, financing,
refinancing or disposition proceeds.

THE PARTNERSHIP AGREEMENTS PROVIDE FOR THE DISSOLUTION OF THE PARTNERSHIPS AFTER A
SPECIFIED NUMBER OF YEARS, WHEREAS THE COMPANY'S CERTIFICATE OF INCORPORATION PROVIDES FOR
PERPETUAL EXISTENCE. UPON COMPLETION OF THE TRANSACTION, SHAREHOLDERS WILL NOT BE ENTITLED
TO AN IMMEDIATE DISTRIBUTION OF LIQUIDATION OR DISPOSITION PROCEEDS.

INVESTMENT OBJECTIVES AND POLICIES

The principal investment objectives of the The investment objectives of the Company are
Partnerships are substantially the same: to to provide dividends and the potential for
preserve invested capital, to maximize the capital appreciation as reflected in the
potential for appreciation in property market price of the Common Stock, and to
values and to provide for partially tax expand the capital and asset base of the
deferred cash distributions throughout a Company. The Company's Board of Directors
finite life. may change the investment policies of the
Under the Partnership Agreements, the Company without a vote of the Shareholders.
Partnerships are not permitted to reinvest The Company intends to continue its
cash from sales in new properties, except in operations for an indefinite period of time
limited circumstances. The Partnerships will and is not precluded from raising new
automatically dissolve at varying times capital, including senior securities that
between 2030 and 2035, unless dissolved will have priority over the Common Stock as
earlier. The Partnerships have no present to cash flow, distributions and liquidation
intention to liquidate or to sell or finance proceeds, or from reinvesting cash flow or
their properties. sale or financing proceeds in new
properties. Therefore, Shareholders have the
ability to liquidate their investment only
by selling their Shares in the market, and
the market value of the Shares may never
equal or exceed the market value of the Com-
pany's assets or the net proceeds which may
be available for distribution upon
liquidation if the Company were to
liquidate. The Company has the potential for
increasing assets and stockholder value as
new investments are made.

INVESTORS WHO BECOME SHAREHOLDERS WILL BE ABLE TO LIQUIDATE THEIR INVESTMENT BY
SELLING THEIR SHARES IN THE MARKET. THE INTEREST OF SHAREHOLDERS IN THE COMPANY CAN BE
DILUTED THROUGH THE ISSUANCE OF ADDITIONAL SECURITIES, INCLUDING SECURITIES THAT HAVE
PRIORITY OVER THE COMMON STOCK AS TO CASH FLOW, DISTRIBUTIONS AND
</TABLE>

56
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
UNITS SHARES
- ------------------------------------------------------------------------------------------
<S> <C>
LIQUIDATION PROCEEDS. THE COMPANY'S BOARD OF DIRECTORS MAY CHANGE THE INVESTMENT POLICIES
OF THE COMPANY WITHOUT A VOTE OF THE SHAREHOLDERS.

BORROWING POLICIES

The Partnerships are not authorized to incur The Company has broad powers to borrow in
borrowings or are restricted in the amount furtherance of its investment objectives.
and nature of borrowings. The Partnerships The Company intends to incur both short-term
do not incur borrowings in the ordinary and long- term debt in the future to
course of business. increase its funds available for investment
in real estate. While the ability of the
Company to incur indebtedness provides
additional sources of funds and additional
financing opportunities, there are also
certain risks inherent in incurring
indebtedness, including the risk of default
and foreclosure on any security securing
such debt.

INVESTORS WHO BECOME SHAREHOLDERS WILL HAVE INVESTED IN AN ENTITY THAT INCURS DEBT IN
THE ORDINARY COURSE OF BUSINESS AND THAT REINVESTS PROCEEDS FROM BORROWINGS. THE
INCURRENCE OF DEBT INCREASES THE RISK OF INVESTMENT.

MANAGEMENT

The Partnerships are managed by the General The Company will be managed by a Board of
Partners, which have exclusive authority Directors elected by the Shareholders. Under
over the Partnerships' operations, subject Delaware law, the directors are accountable
to certain limitations provided in the to the Company and its Shareholders as
Partnership Agreements. Under Delaware law, fiduciaries and are required to perform
the General Partners are accountable to the their duties in good faith, in a manner
Partnerships and the limited partners as believed to be in the best interests of the
fiduciaries. The limited partners may not Company and its Shareholders and with such
participate in management of the care, including reasonable inquiry, as an
Partnerships. The General Partners have ordinarily prudent person in a like position
general liability for all partnership would use under similar circumstances. The
obligations. The Partnership Agreements liability of the directors is limited
provide generally that the General Partners pursuant to the provisions of Delaware law
are indemnified from losses relating to acts and the Company's Organizational Documents,
performed or omitted to be performed in good which limit a director's liability for mone-
faith and in the best interests of the tary damages to the Company or its
Partnerships, provided the conduct did not Shareholders for breach of the director's
constitute negligence, misconduct, breach of duty of care, where a director fails to
a fiduciary duty or a breach of obligations exercise sufficient care in carrying out the
under the Partnership Agreements. The responsibilities of his office. Those provi-
General Partners may be removed by a vote of sions would not protect a director from
a majority of partnership interests in the liability for a breach of duty of loyalty,
respective Partnerships. intentional misconduct or knowing violations
of law, unlawful dividend payments or
redemption of stock, or any transaction in
which the director derived an improper
personal benefit, nor would they foreclose
any other remedy which might be available to
the Company or the Shareholders. The Bylaws
require the Company to indemnify its
officers and directors under certain
circumstances for expenses or liability
incurred as a result of litigation. The Com-
pany intends to take full advantage of those
provisions and enter into agreements with
the Company's directors and officers,
indemnifying them to the fullest extent
permitted by Delaware law.
</TABLE>

57
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
UNITS SHARES
- ------------------------------------------------------------------------------------------
<S> <C>
THE RIGHTS OF SHAREHOLDERS AGAINST MANAGEMENT OF THE COMPANY IN CERTAIN CIRCUMSTANCES
ARE MORE LIMITED THAN THE RIGHTS OF INVESTORS AGAINST THE GENERAL PARTNERS.

FEES AND EXPENSES

DISBURSABLE CASH FEE

The Partnership Agreements generally provide
that the General Partners are entitled to an
amount not to exceed 1% of cash
distributions in each year.

ASSET MANAGEMENT COMPENSATION

The Cap Source I General Partners are The Advisor will be paid an Acquisition Fee
entitled to receive an asset management and in an amount equal to 1% of the increase in
partnership administrative fee equal to 0.5% the Company's actual investment in New
of invested assets per annum, payable only Assets, including any costs related to the
during such years that an 8% return has been acquisition or financing of New Assets but
paid to Investors on a noncumulative basis. excluding debt which is incurred or assumed
Any unpaid amounts will accrue and be in connection therewith, payable monthly in
payable only after a 13% annual return to arrears. The Advisor will be paid an Asset
Cap Source I Investors has been paid on a Management Fee each month in an amount equal
cumulative basis and such Investors have to .475%, on an annual basis, of the
received the return of their capital Company's Total Assets. The Advisor will
contributions. The Cap Source II General also receive an Incentive Fee on New Assets,
Partners are entitled to receive an asset equal to 10% of any Capital Gain on New
management and partnership administrative Assets (offset by Capital Losses), payable
fee equal to 0.5% of invested assets per by the Company to the Advisor on an annual
annum, the first $50,000 of which is paid basis in the form of Restricted Stock.
each year with the balance payable only
during such years that a 6.5% annual return
has been paid to Cap Source II Investors on
a noncumulative basis. An additional fee of
0.5% of invested assets will be paid in
years that an 11.5% annual return has been
paid to Cap Source II Investors on a
cumulative basis. Any unpaid amounts will
accrue and be payable only after an 11.5%
annual return to Investors has been paid on
a cumulative basis and the Investors have
received the return of their capital
contributions. The General Partners also
receive 1% of the net proceeds from any sale
of Partnership assets. The General Partners
will receive a termination fee equal to 3%
of all sales proceeds less actual costs
incurred in connection with all sales
transactions, payable only after the
Investors have received a return of their
capital contributions and a 13% annual
return on a cumulative basis with respect to
Cap Source I or an 11.5% annual return on a
cumulative basis with respect to Cap Source
II. The General Partners will also receive a
fee equal to 9.1% of all cash available for
distribution and sales proceeds (after
deducting from cash available or sales
proceeds
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any termination fee paid therefrom) after
Investors have received a return of their
capital contributions and a 13% annual
return on a cumulative basis with respect to
Cap Source I or an 11.5% annual return on a
cumulative basis with respect to Cap Source
II.

REIMBURSEMENT OF EXPENSES

The Partnership Agreements provide that all In connection with providing services to the
of the Partnerships' expenses, including Company, the Advisor shall be reimbursed by
legal, auditing and accounting expenses, the Company only for (i) rent, utilities,
will be billed directly to and paid by the capital equipment and related expenses
Partnerships. Under the Partnership associated with any office which is
Agreements, the General Partners are established and maintained by the Advisor
reimbursed for their expenses for services exclusively to provide services to the
performed for the Partnerships, such as Company, (ii) expenses of third parties
legal, accounting, transfer agent, data which derive 25% or less of their gross
processing and duplicating services. revenues from providing services to the
Company, and (iii) travel expenses incurred
by employees of the Advisor in connection
with travel at the request or on behalf of
the Company; provided that the Company's
reimbursement of these expenses shall be
limited to amounts for them in the annual
budget as approved by the Board of
Directors, with any subsequent changes
approved by the Board of Directors.

ONE OF THE BENEFITS OF THE TRANSACTION IS TO ALIGN THE INTERESTS OF THE SHAREHOLDERS
AND MANAGEMENT OF THE COMPANY SO AS TO MINIMIZE THE INHERENT CONFLICTS OF INTEREST
CURRENTLY EXISTING AMONG THE PARTNERSHIPS, THE GENERAL PARTNERS AND THEIR AFFILIATES. THE
TRANSACTION WILL RESULT IN THE PERSONS WHO MANAGE THE COMPANY HAVING A SUBSTANTIAL
FINANCIAL INTEREST IN ITS SUCCESS.

VOTING RIGHTS

The Investors are entitled to vote only as With respect to the rights of the
provided under the Delaware Partnership Law stockholders of a Delaware corporation, in
and the respective Partnership Agreements. general stockholders are entitled to vote on
Generally, an Investor may vote on: (i) any material transactions or actions
material amendments to the Partnership relating to such corporation, and such
Agreement; (ii) the approval of the transactions or actions may not be
disposition of substantially all of the consummated without the approval of the
Partnership's assets; (iii) an election to requisite number of stockholders. These
dissolve the Partnership; (iv) the instances include: (i) the right to elect
determination to remove the General Partner; the board of directors and thus participate
(v) the approval of the Partnership in the management of the corporation; (ii)
incurring material additional amounts of the right to amend the corporation's
indebtedness; (vi) the determination to articles of incorporation and bylaws; (iii)
terminate a contract between the Partnership the determination to dissolve the
and the General Partner or an affiliate corporation; (iv) the determination to merge
thereof; and (vii) the approval of a the corporation with or into another entity;
successor General Partner. Under the (v) the determination to approve or
Delaware Partnership Law and the Partnership disapprove the sale of substantially all of
Agreements, decisions relating to the the corporation's assets; and (vi) any other
operation and management of the Partnerships matters which are properly brought before
are made by the General Partners of each the stockholders. Corporations are also
Partnership. There are no provi- required to hold annual meetings which allow
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sions for annual meetings of Investors in stockholders to vote for the directors of
the Partnership Agreements. If a limited the corporation and to participate in the
partner were granted additional voting corporation's decision-making process.
rights, the possibility exists under the Therefore, stockholders have enhanced voting
Code that the partnership structure and the rights as to both determinations of the
terms of the applicable Partnership parties who will be effectuating policy on
Agreement would be disregarded. In such behalf of the corporation, as well as with
event, the Partnership may be taxed as an respect to all material matters affecting
association for tax purposes and thus would the corporation.
be subject to double taxation similar to a
corporation.
INVESTORS WILL BE ENTITLED TO VOTE ON MORE MATTERS AS SHAREHOLDERS OF THE COMPANY THAN
AS UNITHOLDERS OF A PARTNERSHIP. IN ADDITION, AFFILIATES OF THE COMPANY MAY HAVE VOTING
RIGHTS. ON SUBSTANTIALLY ALL MATTERS ON WHICH INVESTORS CAN VOTE, THE GENERAL PARTNERS
HAVE NO VOTE.
ANTI-TAKEOVER PROVISIONS
While the Units are transferable, subject to The Company has a staggered Board, whereby
certain restrictions, the General Partners the Board is divided into three separate
under the Partnership Agreements may under classes, with the term of each class
certain circumstances refuse to permit expiring in a different year than the other
assignees (who are not permitted to vote on two classes. A vacancy on the Board may only
any partnership matters) to become be filled by a majority of the Board of
substituted Investors. Directors. Shareholder action may only be
taken at an annual or special meeting of
Shareholders, and Shareholders do not have
the power to call a special meeting. The
Organizational Documents contain a
supermajority provision, whereby certain
provisions of such documents may not be
amended without the vote of at least 75% of
the Shareholders entitled to vote. The
Certificate of Incorporation limits the
voting power of certain persons who own a
certain percentage of the voting stock of
the Company. The Certificate of
Incorporation authorizes the Company to
issue preferred stock with disproportionate
voting power. In addition, under Section 203
of the Delaware GCL, certain business
combinations with stockholders owning 15% or
more of the Company's outstanding stock (an
"interested stockholder") are prohibited for
three years after such interested
stockholder becomes an interested
stockholder. This may have the effect of
discouraging attempts to take control of the
Company.
CERTAIN PROVISIONS OF THE ORGANIZATIONAL DOCUMENTS OF THE PARTNERSHIPS AND THE COMPANY
COULD BE USED TO DETER ATTEMPTS TO OBTAIN CONTROL OF THE PARTNERSHIPS AND THE COMPANY IN
TRANSACTIONS NOT APPROVED BY THE GENERAL PARTNERS AND THE BOARD OF DIRECTORS,
RESPECTIVELY. HOWEVER, THERE ARE MORE OPPORTUNITIES FOR SUCH ANTI-TAKEOVER PROVISIONS
AVAILABLE TO THE COMPANY THAN TO THE PARTNERSHIPS.
REVIEW OF INVESTOR LISTS
Under the Partnership Agreements and Under Delaware law, a Shareholder is
applicable law, any Investor is entitled to entitled, upon written demand, to inspect
obtain a list of the Investors in his or her and copy the record of stockholders, at any
Partnership upon reasonable demand for any time during usual business hours, for a
purpose reasonably related to the Investor's purpose reasonably related to his or her
interest as an Investor. interest as a Shareholder.
THE RIGHT OF SHAREHOLDERS TO OBTAIN A STOCKHOLDER LIST IS SIMILAR TO THE CORRESPONDING
RIGHT OF INVESTORS IN THE PARTNERSHIPS.
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The following compares certain of the investment attributes and legal rights
associated with the ownership of Units, Shares and Notes.

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NATURE OF INVESTMENT

The Units of each Partnership The Shares constitute equity The Notes will be senior,
constitute equity interests interests in the Company. unsecured obligations of the
entitling each Investor to Each Shareholder will be Company and will be issued
his pro rata share of cash entitled to his pro rata pursuant to an Indenture
distributions made to the share of the dividends made qualified under the Trust
Investors of the Partner- with respect to the Common Indenture Act of 1939, as
ship. Each Partnership Agree- Stock. The dividends payable amended. The Company may
ment specifies how the cash to the Shareholders are not issue additional senior debt,
available for distribution is fixed in amount and are only which may be secured, only in
to be shared among the paid when declared by the compliance with the covenants
General Partners and Company's Board of Directors. of the Notes for the issuance
Investors. The distributions of senior debt. The Notes
payable to the Investors are will bear interest at a
not fixed in amount and variable rate and will mature
depend upon the operating as of , 2006.
results and net sale or Prior to maturity, interest
refinancing proceeds only payments will be made to
available from the the Noteholders, on an annual
disposition of the basis, and on ,
Partnerships' assets. 2006, the outstanding
principal balance, plus
interest accruing since the
last payment, will be payable
in full. If the Company sells
or refinances any of the
Designated Assets of the
Partnership, 80% of the net
proceeds must be applied
toward the prepayment of the
Notes.
The Company reserves the
right to redeem the Notes at
any time, in whole or in
part, at par. Failure to make
principal and interest
payments when due constitutes
an event of default under the
Notes, allowing the Trustee
to declare the outstanding
principal, plus accrued but
unpaid interest, to be
immediately due and payable.

BOTH THE UNITS AND SHARES REPRESENT EQUITY INTERESTS ENTITLING THE HOLDERS THEREOF TO
PARTICIPATE IN THE GROWTH OF THE PARTNERSHIPS AND THE COMPANY, RESPECTIVELY. DISTRIBUTIONS
AND DIVIDENDS PAYABLE WITH RESPECT TO THE UNITS AND SHARES DEPEND UPON THE PERFORMANCE OF
THE PARTNERSHIPS AND THE COMPANY, RESPECTIVELY. IN CONTRAST, THE NOTES CONSTITUTE DEBT
OBLIGATIONS OF THE COMPANY PROVIDING FOR ANNUAL PAYMENTS OF PRINCIPAL AND INTEREST.
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POTENTIAL DILUTION OF PAYMENTS RIGHTS

Since the Partnerships are The Board of Directors may, Since the Notes are debt
not authorized to issue in its discretion, issue obligations of the Company,
additional equity securities, additional Shares of Common their payment is not
there can be no dilution of Stock or issue Preferred subordinate to dividends or
distributions to Investors. Stock, with such powers, distributions payable to the
preferences and rights as the Shareholders of the Company.
Board of Directors may at the The Company is obligated to
time designate. The issuance apply 80% of the Net Proceeds
of additional Shares of from Sales or Refinancings of
either Common Stock or Designated Assets of the
Preferred Stock, beyond the Partnerships to prepay the
Shares to be issued in the Notes. Except for the
Transaction, may result in restriction in the preceding
the dilution of the interests sentence, there are no
of the Shareholders. restrictions upon the
Company's authority to grant
mortgages, liens or other
security interests in the
Company's real and personal
property, and such security
interests, if granted, would
permit the holders thereof to
have a priority claim against
such collateral in the event
the secured obligations were
in default.

THE SHAREHOLDERS WILL BE SUBJECT TO POTENTIAL DILUTION IF THE COMPANY ISSUES ADDITIONAL
EQUITY SECURITIES. FURTHERMORE, THE COMPANY MAY ISSUE PREFERRED STOCK WITH PRIORITIES OR
PREFERENCES WITH RESPECT TO DIVIDENDS AND LIQUIDATION PROCEEDS. PAYMENT OF THE NOTES WILL
HAVE PRIORITY OVER DISTRIBUTIONS TO THE SHARES OR ANY CLASS OF EQUITY SECURITIES THAT MIGHT
BE ISSUED BY THE COMPANY; HOWEVER, ANY SENIOR SECURED OBLIGATIONS ISSUED BY THE COMPANY
WOULD HAVE PRIOR CLAIMS AGAINST THE COLLATERAL GIVEN FOR SECURITY IN THE EVENT THE COMPANY
DEFAULTS IN THE PAYMENTS OF THOSE SECURED OBLIGATIONS.
EXPECTED DISTRIBUTIONS AND PAYMENTS

Cap Source I makes quarterly The Company intends to make Noteholders are generally
distributions and Cap Source quarterly dividend payments entitled to receive only the
II makes monthly to its Shareholders, subject principal and interest
distributions. Amounts to the discretion of the payments required under the
distributed to the Investors Board of Directors. The Notes. The Company must apply
are derived from their share amount of such dividends will 80% of Net Proceeds from
of cash flow from operations be established by the Board Sales or Refinancings of
or cash flow from sales or of Directors, taking into Designated Assets of the
financings. The General account the amount of funds Participating Partnerships to
Partners may, under the lawfully available therefor prepay the Notes. Noteholders
Partnership Agreements, and the cash needs of the will have no right to
create reserves which may Company. Unlike the participate in any (a)
decrease cash distributions. Partnerships, the Company is profits derived from opera-
See "SELECTED FINANCIAL DATA not required to distribute tions of any of the Company's
OF THE PARTNERSHIPS" for a net proceeds from the sale or assets, including properties
presentation of the cash refinancing of properties, acquired as part of the
distributions to the except as may be required Transaction from the
Investors of the Partnerships under the terms of the Notes. Partnerships, or (b) profits
over the five most recent derived from the sale or
calendar years. refinancing of properties
other than those acquired as
part of the Transaction.
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INVESTORS WHO BECOME SHAREHOLDERS WILL RECEIVE THEIR PRO RATA SHARE OF THE DIVIDENDS
MADE WITH RESPECT TO THE COMPANY'S COMMON STOCK. THE AMOUNT OF SUCH DIVIDENDS WILL DEPEND
UPON THE COMPANY'S OPERATING EXPENSES, DEBT SERVICE PAYMENTS, CAPITAL EXPENDITURES,
RESERVES AND FUNDS SET ASIDE FOR EXPANSION. INTEREST PAYMENTS MADE ON THE NOTES WILL BE
PRIOR TO ANY DISTRIBUTIONS WITH RESPECT TO THE SHARES AND WILL REDUCE THE AMOUNT OTHERWISE
DISTRIBUTABLE TO THE SHAREHOLDERS.

INVESTORS WHO RECEIVE NOTES CONVERT THEIR EQUITY INVESTMENT IN THE PARTNERSHIP INTO A
SENIOR DEBT OBLIGATION OF THE COMPANY AND ARE ENTITLED TO RECEIVE ONLY PRINCIPAL AND
INTEREST PAYMENTS ONLY UNTIL MATURITY UNDER THE NOTES. IF THE COMPANY SELLS OR REFINANCES
THE PROPERTIES OWNED BY THE OPERATING PARTNERSHIPS, 80% OF THE NET PROCEEDS FROM SALES OR
REFINANCINGS OF DESIGNATED ASSETS MUST BE APPLIED TOWARD PREPAYMENT OF THE NOTES. THE NOTES
MAY BE REDEEMED BY THE COMPANY AT ANY TIME WITHOUT PREMIUM.
LIQUIDITY AND TRANSFERABILITY

While the Units are The market for the Common The Notes will be freely
transferable, the General Stock, which will be traded transferable but will not be
Partners have discretion on the NYSE, should be more listed on a national
under the Partnership active and broader based than securities exchange or quoted
Agreements to refuse to the market for the Units. The on an automated quotation
permit assignees to become Common Stock may trade at a system. The Company does not
substituted Investors and the discount to its book value, expect that an active trading
Partnership Agreements and the market value of the market for the Notes will
contain various other Shares may never equal or develop. The Promissory Notes
restrictions on the transfer- exceed the net proceeds that will not be listed on a
ability of Units. Although might be available if the national securities exchange
limited secondary sales of Company's assets, including and no active trading market
Units have occurred, there is the investments in the for the Promissory Notes is
essentially no established Partnerships, were expected to develop.
public trading market for the liquidated.
Units and none is expected to
develop. The Units are not
marginable. Potential adverse
tax consequences would arise
if a Partnership were to be
considered a publicly traded
partnership.

ONE OF THE PRIMARY OBJECTIVES OF THE TRANSACTION IS TO PROVIDE INCREASED LIQUIDITY TO
THE INVESTORS. THE SHARES WILL BE LISTED ON THE NYSE, SUBJECT TO OFFICIAL NOTICE OF
ISSUANCE, AND THERE IS EXPECTED TO BE A PUBLIC MARKET FOR THE SHARES FOLLOWING THE
TRANSACTION. NEITHER THE NOTES NOR THE PROMISSORY NOTES WILL BE LISTED ON A NATIONAL
SECURITIES EXCHANGE OR QUOTED ON AN AUTOMATED QUOTATION SYSTEM. THE BREADTH OF THE MARKETS
FOR THE SHARES AND NOTES CANNOT YET BE DETERMINED, BUT IT IS EXPECTED THAT THE MARKET FOR
THE NOTES WILL BE LESS ACTIVE THAN THAT FOR THE SHARES. WHILE THERE HAS BEEN A LIMITED
SECONDARY MARKET FOR THE UNITS, TRADING ON THAT MARKET HAS BEEN SPORADIC AND LIMITED.

TAXATION OF TAXABLE INVESTORS

The Partnerships, as Dividends received by Interest payments made on the
partnerships for federal Shareholders from the Company Notes will constitute
income tax purposes, are not generally will constitute portfolio income which cannot
subject to tax, but the portfolio income, which offset passive losses from
Investors report their cannot offset passive losses other investments. During
allocable share of from other investments. January of each year,
partnership income and loss During January of each year, Noteholders will receive from
on their respective tax Shareholders will be mailed the Company Form 1099-INT to
returns. Income from the the less complex Form show the investors'
Partnerships generally 1099-DIV used by cor-
constitutes
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passive income to the porations that pay dividends interest payments during the
Investors, which can to their stockholders. prior calendar year.
generally offset passive Shareholders are not required
losses from their other to file state income tax
investments. Generally, by returns and/or pay state
March 15 of each year, income taxes outside of their
Investors receive annual state of residence with
Schedule K-1 forms with respect to the Company's
respect to information for operations. The Company will
inclusion on their federal be required to pay federal
income tax returns. Investors income taxes and state income
must file state income tax taxes in certain states where
returns and incur state it is qualified to do
income tax in most states in business.
which the Partnerships have
property.

EACH PARTNERSHIP IS A PASS-THROUGH ENTITY WHOSE INCOME AND LOSS IS NOT TAXED AT THE
ENTITY LEVEL BUT INSTEAD ALLOCATED DIRECTLY TO THE GENERAL PARTNERS AND INVESTORS.
INVESTORS ARE TAXED ON INCOME OR LOSS ALLOCATED TO THEM WHETHER OR NOT CASH DISTRIBUTIONS
ARE MADE TO THE INVESTORS. THE COMPANY'S NET INCOME WILL BE TAXED AT THE COMPANY'S LEVEL AT
THE STANDARD CORPORATE TAX RATES. DIVIDENDS PAID TO SHAREHOLDERS WILL CONSTITUTE PORTFOLIO
INCOME AND NOT PASSIVE INCOME. NOTEHOLDERS WILL RECOGNIZE PORTFOLIO INCOME ON THE INTEREST
PAYMENTS RECEIVED ON THE NOTES.
</TABLE>

THE COMPANY

OVERVIEW

Following the Transaction, the Company's primary business objective will be
to provide Shareholders with long term after-tax returns that are greater than
those available from REITs and other similar publicly traded real estate
companies. The Company expects to achieve this objective by investing in assets
and using investment and management strategies not generally permitted under the
Code or used by REITs. Such strategies may include investing in real estate
operating companies, underperforming real estate assets such as office buildings
and apartment complexes with the objective of renovating and repositioning them
to increase values, and underperforming markets and foreign markets that the
Company expects will show significant improvement.

The Company currently does not intend to qualify as a REIT under the Code.
Consequently, the Company will have the flexibility to respond quickly to
opportunities without the structural limitations imposed by the Code for REITs
and to operate, when deemed advantageous by management, on a more highly
leveraged basis than most REITs. By not qualifying as a REIT under the Code
(which would require the Company to distribute each year at least 95% of its net
taxable income, excluding capital gains), the Company will have the ability to
retain cash flow generated from operations, to retain proceeds from sales of
properties for reinvestment, to sell properties without the substantial income
tax penalties which may be imposed on REITs from certain prohibited
transactions, and to invest in the securities of real estate operating
companies.

In addition, the Company differs from real estate opportunity funds that are
typically structured as private partnerships. Such private partnerships
typically have a finite life which limits their ability to grow and may limit
their ability to maximize value. Furthermore, investment in such private
partnerships is generally limited to large, institutional investors. In
addition, unlike investors in such private partnerships, the Company's
Shareholders are expected to have enhanced liquidity through their ability to
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their Shares. However, unlike REITs and private partnerships, the Company will
be subject to corporate level taxation.

The Company will enter into the Advisory Agreement with the Advisor to
manage the assets held by the Company and to provide other services to the
Company. See "--The Advisor" below. The principal executive offices of the
Company are located at 399 Park Avenue, New York, New York 10022, and its
telephone number is (212) 935-8760.

THE ADVISOR

Under the terms of the Advisory Agreement, the Advisor will manage the
investments of the Company, formulate investment criteria, represent the Company
in connection with the acquisition and disposition of real estate assets,
recommend strategies to improve the performance of the Company's investments,
administer the day-to-day operation of the Company, communicate with and
maintain relations with the investors of the Company, and perform such other
services as set forth in the Advisory Agreement and as directed from
time-to-time by the Board of Directors. The Advisory Agreement will have an
initial term of three years (subject to earlier termination as provided
therein), and will automatically renew for one year terms unless written notice
of termination is delivered 180 days prior to the expiration of any term. The
Advisor will bear all costs of providing services to the Company, except for the
costs of services provided by third parties, and certain limited office expenses
and travel expenses on behalf of the Company. Pursuant to the terms of the
Advisory Agreement, the Advisor will receive compensation (the "Advisor Fees")
in the form of an Acquisition Fee, an Asset Management Fee and an Incentive Fee
on New Assets, as more particularly described under "MANAGEMENT OF THE
COMPANY--The Advisor--THE ADVISORY AGREEMENT." The Company may engage affiliates
of the Advisor to provide other services if approved by, and upon the terms
approved by, the Independent Directors of the Company.

INVESTMENT STRATEGY

In furtherance of its business objectives, the Company intends to focus
initially on investments in four distinct aspects of the real estate business.

UNDERPERFORMING COMMERCIAL PROPERTIES. The Company will seek to acquire
underperforming office, residential and other commercial properties; to improve
their value by renovation, redevelopment, and/or releasing and by acquiring over
time groups of similar assets that have a value as a portfolio greater than
their individual values; and to dispose of them at such time as the Company
believes the value to its shareholders is maximized without the need to comply
with limitations on such activities that apply to REITs.

The Company believes that the prices for most Class A, well leased, large
commercial properties in the largest metropolitan areas have increased
drtamatically in the last several years due to aggressive competition among the
REITs and other similar investors. However, the Company believes there are
substantial opportunities available to acquire properties at attractive prices
that are not currently sought by REITs and other similar investors because of
little or no short term cash flow due to the need for substantial investment in
rehabilitation and/or releasing; because the properties are individually too
small or the markets in which they are located are too small to attract the
interest of REITs and other similar investors; and/or because the seller wishes
to sell a portfolio of assets that is not attractive to any single REIT or
similar buyer because of varying asset classes, locations, or quality. The
Company believes that by acquiring properties on this basis and renovating them
and/or repackaging them, it can increase asset value and produce substantial
returns to the Company.

REAL ESTATE OPERATING COMPANIES. The ability of REITs to invest in
operating companies not directly related to the management of the properties
they own is limited by the Code and other factors.

Such operating companies include brokers, developers, partnerships and
general partners thereof which own real estate, and other similar companies.
Many of these companies have significant expertise

65
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and good reputations, but have been unable to grow and increase their
profitability due to lack of capital, fragmented control, and so forth. The
Company believes that there are significant opportunities to make investments in
real estate operating companies at attractive prices. The Company believes that
its financial position and managerial expertise can allow such companies to
grow. It also believes that some real estate companies may well provide
synergistic value to the Company's other businesses.

FOREIGN OR FOREIGN-CONTROLLED REAL ESTATE. The Company believes that the
liquidity that has returned to the United States real estate markets remains
limited in many foreign markets. Some of the causes of this illiquidity are the
lack of capital; pricing disparities due to poor information flow; and
regulatory or policy constraints on foreign real estate lenders and owners such
as banks and finance companies.

In addition, the Company believes that foreign financial institutions and
other foreign non-real estate corporations will increasingly seek to liquidate
non-strategic businesses and assets such as U.S. and foreign real estate. The
Company believes that the recent turmoil in several Asian economies will
exacerbate this trend as companies in these countries seek to divest themselves
of non-core assets.

EXISTING PROPERTIES. The Company will own limited partnership Interests in
ten partnerships owning multifamily properties. The Company will conduct a
detailed evaluation of each of the properties to determine the best strategy to
maximize their value to the Company. Such strategies could include
rehabilitation, refinancing and disposition. Those efforts may be adversely
impacted by the fact that the Company has limited control over most of the
partnerships. Consequently, the Company will evaluate purchasing the interest of
the existing general partner interests to permit it to control the properties
and maximize their value to the Company.

While the Company has targeted these four areas upon which to focus
initially, the Company intends to pursue other investment opportunities that may
arise that meet the Company's business objective.

FINANCING STRATEGIES

The Company intends to fund its new investments first by using its initial
cash and short-term investments, which are expected to approximate $12.2 million
at the completion of the Transaction. Thereafter the Company intends to borrow
against its GNMA Certificates and FHA Loans by entering into "reverse repo
agreements." The Company anticipates it can borrow up to 90% of the principal
balance of the loans. Since the loans carry interest rates significantly above
the rates the Company will pay on its borrowings, the Company expects to make a
significant positive spread which will contribute to cash flow and earnings.

The Company will also consider selling one or more of its loans or
partnership interests, entering into a line-of-credit or similar corporate
financing agreement, the issuance of additional stock either directly in the
market or to sellers of assets, or other ways to meet its investment objectives.

RISK CONTROL

The Company will endeavor to control risks by a variety of strategies. The
company will use experienced third-parties for construction, redevelopment,
property management and other similar services. The Company also expects to rely
on the expertise of its Advisor and its Advisor's affiliates in foreign
investing, property management and other areas. The Company will also endeavor
to use non-recourse or limited recourse debt when it believes the relationship
between cost and risk is favorable. The Company will also consider controlling
its risk on floating rate debt and any transactions in foreign currencies by
employing swaps, hedges, and other methods of controlling risk. The Company will
not invest in or engage in any such derivative transactions except to control
risks that are attendant to its business objectives.

AFFILIATED REIT

The Company intends to achieve its business objectives by investing in
assets and using investment and management strategies not generally permitted to
or employed by REITs. Occasionally, the Company may

66
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acquire as part of a diversified portfolio or otherwise assets which may be more
appropriately owned by a REIT. Furthermore, the Company expects that its
investments in the renovation of underperforming real estate assets will result
in assets that are attractive candidates for acquisition by REITs.

Should the Company acquire a critical mass of such assets, the Company
intends to consider the formation or acquisition of a subsidiary company which
would qualify as a REIT. In such event, the Company would consider spinning off
the REIT to its shareholders. If the subsidiary is formed and spun off, the
Company and the new REIT would initially share management and would be able to
take advantage of cost and tax synergies. The Company believes that such
synergies would provide the Company and the new REIT with substantial
competitive advantages in making investments in, managing, and disposing of
assets.

OPERATING RESTRICTIONS

The Board of Directors of the Company has established the Company's
investment and financing strategies and, except as otherwise restricted, the
Board of Directors of the Company has the power to modify or alter the Company's
policies and strategies without the consent of the Shareholders. Developments in
the market which affect the Company's policies and strategies or which change
the Company's assessment of the market may cause the Board of Directors to
revise such policies and strategies.

The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interest in real estate" (such mortgages and liens being referred to herein as
"Qualifying Interests"). Under current interpretation of the staff of the SEC,
in order to qualify for this exemption, the Company must maintain at least 55%
of its assets directly in Qualifying Interests. In addition, unless certain
securities relating to federally insured mortgages ("Mortgage Securities")
represent all the certificates issued with respect to an underlying pool of
mortgages, such Mortgage Securities may be treated as securities separate from
the underlying mortgage loans and, thus, may not be considered Qualifying
Interests for purposes of the 55% requirement. The Company will closely monitor
its compliance with this requirement and intends to maintain its exempt status.

Except as provided under "THE NOTES," the Company will have no restriction
on the ratio of debt to equity investments it holds and expects to use
significant levels of leverage to achieve its objective. Such leverage can be
achieved by a combination of direct borrowings by the Company, borrowings
secured by real estate, and through investing in securities of issuers who
themselves employ leverage.

DIVIDEND POLICY

The Company intends to pay regular quarterly dividends to its Shareholders,
beginning with the first full fiscal quarter of operations following the
completion of the Transaction, subject to the discretion of, and in amounts
determined by, the Board of Directors. The Company intends to distribute
substantially all of its net cash flow from operations, after giving effect to
any reasonable reserves, as dividends with respect to the Company's first four
complete quarters of operations. In addition, the Company intends to distribute
with respect to the first two complete quarters of operations an amount which is
the greater of (i) substantially all of its net cash flow from operations as
described above or (ii) the cash distributions which would have been distributed
to Cap Source I investors if the Transaction had not occurred and distributions
were made at the same quarterly rates as were made in 1997 for the Cap Source I
Partnership or (iii) cash distributions which would have been distributed to Cap
Source II investors if the Transaction had not occurred and distributions were
made on the basis of actual net cash from operations of Cap Source II. The
Company anticipates that the amount resulting from the application of (ii) and
(iii) above will be $.42 per share per quarter.

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<PAGE>
MANAGEMENT OF THE COMPANY

The Board of Directors of the Company is responsible for the management of
the Company, its property and the disposition thereof, and is responsible for
the general policies of the Company and the general supervision of the Company's
activities conducted by its officers, agents, employees, advisors, managers or
independent contractors as may be necessary in the course of the Company's
business. At all meetings of the Board of Directors, a majority of the directors
shall constitute a quorum for the transaction of business, which majority shall
include at least two Independent Directors. The term "Independent Directors"
refers to directors of the Company who are not affiliated with the Company or
the Advisor and do not perform any services for the Company or the Advisor,
other than as directors, and are not officers or employees of the Company, the
Advisor or any of their respective affiliates. Actions to be taken by the Board
of Directors will require approval of a majority of the directors present at any
meeting in which there is a quorum, unless otherwise specified by the Company's
Bylaws or by law.

The Board of Directors is divided into three classes and currently consists
of three members. Following the Transaction, the Board of Directors will be
increased to seven, with three directors in Class A, two directors in Class B
and two directors in Class C. The resulting vacancies will be filled by a vote
of the existing directors. Thereafter, the Board of Directors will consist of
not less than five nor more than eleven directors. At least one director in each
class will be an Independent Director. In the election of directors, each holder
of Common Stock has one vote for each Share held.

The term of the initial Class A directors will terminate on the date of the
1999 annual meeting of shareholders; the term of the initial Class B directors
will terminate on the date of the 2000 annual meeting of shareholders; and the
term of the initial Class C directors will terminate on the date of the 2001
annual meeting. At each annual meeting of shareholders, directors of the class
to be elected shall be elected for a three-year term. Directors will hold office
until the annual meeting for the year in which their terms expire and until
their successors shall be elected and qualify.

The Board of Directors expects to hold meetings at least quarterly, and may
take action on behalf of the Company by unanimous written consent without a
meeting. Directors may participate in meetings by conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The Company's Board of Directors currently consists of the following
persons:

<TABLE>
<CAPTION>
NAME CLASS AGE POSITION WITH THE COMPANY
- --------------------------------------------- ----- --- ---------------------------------
<S> <C> <C> <C>
Michael B. Yanney............................ B 63 Chairman of the Board

Paul L. Abbott............................... C 52 Director, President and Chief
Executive Officer

George H. Krauss............................. A 56 Director
</TABLE>

The business experience during the past five (5) years of each of the
current directors is as follows:

Michael B. Yanney, Chairman of the Board of Directors of the Company, has
served, since 1984, as the Chairman and Chief Executive Officer of America First
and its predecessors, a financial services firm located in Omaha, Nebraska, that
manages public investment funds which have raised over $1.5 billion. From 1977
until the organization of America First, Mr. Yanney was principally engaged in
the ownership and management of commercial banks. From 1961 to 1977, Mr. Yanney
was employed by Omaha National Bank and Omaha National Corporation (subsequently
merged into FirsTier Financial which has merged into First Bank), where he held
various positions, including the position of Executive Vice President and
Treasurer of the holding company. Mr. Yanney also serves as a member of the
boards of directors of

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Burlington Northern Santa Fe Corporation, Forest Oil Corporation, Lozier
Corporation, Freedom Communications, Inc., PKS Information Services, Inc.,
Magnum Resources, Inc., Rio Grande Medical Technologies, Inc., Level 3
Communications, Inc. and RCN Corporation.

Paul L. Abbott serves as Director, President and Chief Executive Officer of
the Company. Mr. Abbott joined America First in 1997. From 1988 until 1997, Mr.
Abbott was a Managing Director of Lehman Brothers, Inc. ("Lehman Brothers"). At
Lehman Brothers, Mr. Abbott served as chairman and chief executive of over 50
real estate investment funds controlled by Lehman Brothers representing gross
client investments exceeding $2.5 billion. The assets owned by those funds
included 50,000 multifamily units; 5,000 manufactured housing sites; 5 million
square feet of retail; 900,000 feet of self-service storage; and a variety of
other debt and equity real estate investments. His responsibilities included
executive responsibility for acquisitions, financings, planning, investment
management, investor relations and regulatory reporting. In serving as chief
executive of these funds, Mr. Abbott was also responsible for developing and
managing relationships throughout the real estate industry, including regional
and national developers, property managers, brokers, owners and lenders. Mr.
Abbott served on various Lehman Brothers committees responsible for approving a
variety of real estate transactions and was involved in a number of real estate
advisory assignments for Lehman Brothers.

Prior to joining Lehman Brothers, from 1983 until 1988, Mr. Abbott was a
Senior Vice President of Daseke & Co., Inc., a predecessor to Walden
Residential, a NYSE-traded real estate investment trust. At Daseke, Mr. Abbott
was responsible for asset management of 20,000 multifamily units and arranging
over $500 million of financings. From 1979 until 1983, Mr. Abbott was a vice
president of various insurance subsidiaries of Household International.

George H. Krauss serves as a Director of the Company and is a consultant to
America First Companies. From 1972 until the time he became a consultant to
America First Companies, Mr. Krauss was a member of Kutak Rock, a national law
firm with over 200 lawyers in eight states and the District of Columbia. As a
member of Kutak Rock, Mr. Krauss gained extensive experience in the corporate,
merger and acquisition, and regulatory areas of the firm's practice. In addition
to his legal education, Mr. Krauss has a Masters of Business Administration and
is a registered Professional Engineer. Mr. Krauss has served on the board of
directors of numerous companies including Gateway 2000, Inc., a computer
manufacturing and distribution company with over $6 billion in sales in 1997,
which is listed on the NYSE, America First Mortgage Investments, Inc., also a
NYSE member, and Bayview Capital Corporation, which is listed on the NASDAQ.

No later than thirty (30) days after the Transaction, the following persons
will be considered for election to the Board of Directors by the current members
of the Board to serve as Independent Directors:

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

--
- -------------------------------------------
</TABLE>

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The business experience during the past five (5) years of each of the
foregoing individuals is as follows:

Officers of the Company will be elected by and serve at the discretion of
the Board of Directors. The current officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Michael B. Yanney.......................... 63 Chairman of the Board

Paul L. Abbott............................. 52 President and Chief Executive Officer

Gary Thompson.............................. 55 Chief Financial Officer and Treasurer

Helen L. Poorman........................... 37 Executive Vice President-- Acquisitions

Jack Cassidy............................... 46 Executive Vice President--Asset Management

George H. Krauss........................... 56 Secretary
</TABLE>

Subject to the approval of the Board of Directors, it is anticipated that
the foregoing persons will function as executive officers of the Company after
the Transaction, serving a one-year term and until their successors are elected
and qualified or until their earlier resignation or removal. There are no
arrangements or understandings between or among any of the officers or directors
and any other person pursuant to which any officer or director of the Company
was selected as such. There are no family relationships among any directors and
officers of the Company.

The business experience of Messrs. Yanney, Abbott and Krauss is set forth
above. The business experience for the past five (5) years of each of the other
officers of the Company is as follows:

Gary Thompson serves as Chief Financial Officer of the Company. He currently
serves as financial vice president of America First and is responsible for
financial accounting and tax reporting for all America First Funds. Prior to
1989, Mr. Thompson was an audit partner at KPMG Peat Marwick. He is a certified
public accountant.

Helen L. Poorman serves as Executive Vice President--Acquisitions of the
Company. Ms. Poorman joined America First in 1998 after having completed a
consulting assignment for the Company in 1997. From 1987 through 1996, Ms.
Poorman was with Copley Real Estate Advisors ("Copley") in various Portfolio and
Asset Management positions, most recently as Managing Director. Ms. Poorman was
responsible for the overall management of the account of Copley's largest
client, the real estate equity portfolio of New England Mutual Life Insurance
Company. Her responsibilities included strategic planning, asset management,
financings, workouts, and dispositions, among others. The portfolio included
approximately 200 assets comprising 32 million square feet of office and
industrial property, 2,500 apartment units, 4 hotels and nearly 5,000 acres of
land for development or sale. Her Copley background also includes portfolio
management of other multi-billion dollar portfolios, extensive workout
experience, and management of all commercial property types in various ownership
structures. Prior to joining Copley, Ms. Poorman was a Senior Asset Manager with
Daseke & Co., Inc., overseeing the management of numerous limited partnerships
which owned multi-family and office properties. Ms. Poorman holds an M.B.A. in
Finance from the University of Chicago and a B.A. SUMMA CUM LAUDE, in Economics
and Management from DePauw University.

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Jack Cassidy serves as Executive Vice President--Asset Management of the
Company. Mr. Cassidy co-founded and currently serves as President of America
First Properties Management L.L.C., an affiliate of the Advisor. As President of
America First Properties Management L.L.C., Mr. Cassidy has been responsible for
the management of over 8,000 apartments located in 18 states since the Company's
inception in 1992. Prior to his position with the property management of the
Company, Mr. Cassidy supervised the America First Companies' real estate asset
management team overseeing a portfolio of 45 apartment communities. Before
joining America First, Mr. Cassidy was a Vice President of E.F. Hutton & Co.
involved in the analysis, acquisition and asset management of real estate
investments. Mr. Cassidy holds an M.B.A. in finance from the Columbia University
School of Business and an undergraduate degree from Georgetown University.

BOARD OF DIRECTORS COMPENSATION

The Company intends to pay an annual fee of $20,000 to each Independent
Director of the Company, $10,000 of which will be paid in the form of Common
Stock of the Company and $10,000 will be paid in cash. The Company will
reimburse all directors for travel expenses and other out-of-pocket expenses
incurred in connection with their activities on behalf of the Company.

COMMITTEES OF THE DIRECTORS

Promptly following the consummation of the Transaction, the Board of
Directors will establish the following committees:

AUDIT COMMITTEE. The Audit Committee will consist of three directors, at
least two of which will be Independent Directors. The Audit Committee will be
established to make recommendations concerning the engagement of independent
public accountants, review with the independent public accountants the plans and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range of audit and nonaudit fees and review the
adequacy of the Company's internal accounting controls.

EXECUTIVE COMMITTEE. The Executive Committee will consist of three
directors. The Executive Committee will have the authority to acquire, dispose
of and finance investments for the Company and execute contracts and agreements,
including those related to the borrowing of money by the Company, and generally
exercise all other powers of the Board of Directors except for those which
require action by all the directors or the Independent Directors under the
Certificate of Incorporation or the Bylaws of the Company, or under applicable
law.

COMPENSATION COMMITTEE. The Compensation Committee will consist of three
directors, which will advise the Board of Directors on all matters pertaining to
compensation programs and policies and will establish guidelines for employee
incentive and benefits programs which it will review on a continuous basis. All
members of the Compensation Committee will be Independent Directors.

The Board of Directors may from time to time establish other committees to
facilitate the management of the Company. The Board of Directors initially will
not have a nominating committee and the entire Board of Directors will perform
the function of such a committee.

COMPENSATION OF EXECUTIVE OFFICERS

The Company was formed on February 5, 1998. Accordingly, the Company has not
paid any cash compensation to its executive officers for prior years, and no
compensation will be paid until after the Transaction; however, pursuant to the
terms of the Company's 1998 Stock Option Plan (the "Plan"), the Compensation
Committee of the Board of Directors may, subject to certain restrictions, grant
options to the executive officers to purchase Common Stock of the Company. See
"--Stock Option Plan." There are

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<PAGE>
no employment agreements between the Company and any of its officers, and the
Company does not expect to enter into any such agreements in the future.

STOCK OPTION PLAN

GENERALLY. The Plan is intended to provide incentive to key employees,
officers and directors of the Company and any subsidiary of the Company, to
encourage proprietary interest in the Company, to encourage such key employees
to remain in the employ of the Company, attract new employees with outstanding
qualifications and to afford additional incentive to others to increase their
efforts in providing significant services to the Company. The term of the Plan
is ten years. No grants will be made under the Plan with an exercise price of
less than $25 per share for six months following the Effective Date.

ADMINISTRATION. The Plan will be administered by the compensation committee
appointed by the Board (the "Committee"). No member of the Committee may act as
to matters under the Plan specifically relating to such member.

Any director of the Company who is also appointed to serve on the Committee
and who at the time of his appointment qualifies as a "Non-Employee Director"
under Rule 16b-3(b)(3)(i) promulgated under the Exchange Act and, to the extent
that relief from the limitation of Section 162(m) of the Code is sought, as an
"Outside Director" under Section 1.162-27(e)(3)(i) of the Treasury Regulations
will be granted initial and periodic awards pursuant to the formula set forth in
Section 7(a) of the Plan.

The Plan vests authority in the Board to amend the Plan. However, the Board
may not make any amendment in the Plan that would, if such amendment were not
approved by the holders of the Common Stock, cause the Plan to fail to comply
with any requirement or applicable law or regulation, unless and until the
approval of the holders of such Common Stock is obtained.

ELIGIBILITY. Officers, directors and employees of the Company are eligible
to be granted awards under the Plan.

LIMITATION OF DIRECTORS' LIABILITY

Delaware law authorizes Delaware corporations to limit or eliminate the
personal liability of a director to the corporation and its stockholders for
monetary damages for certain breaches of the director's fiduciary duties as a
director, other than for breach of his duty of loyalty to the corporation and
its stockholders, or for acts or omissions not in good faith or involving
intentional misconduct or knowing violation of the law, or for the unlawful
purchase or redemption of stock or payment of unlawful dividends or the receipt
of improper personal benefits. The Board of Directors believes that such
provisions have become commonplace among major corporations and are beneficial
in attracting and retaining qualified directors, and the Company's Certificate
of Incorporation includes such provisions.

The director's duty of care requires that, when acting on behalf of the
corporation, directors must exercise an informed business judgment based on all
material information reasonably available to them. Absent these limitations,
directors are accountable to corporations and/or their shareholders for monetary
damages for conduct constituting gross negligence in the exercise of their duty
of care. Although this provision of Delaware law does not change directors' duty
of care, it enables corporations to limit available relief to equitable remedies
such as injunction or rescission.

The Company's Certificate of Incorporation limits the liability of directors
of the Company to its shareholders (in their capacity as directors but not in
their capacity as officers) to the fullest extent permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability (a) for any breach of the directors' duty of loyalty to the
Company or its shareholders, (b) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (c) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware

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<PAGE>
GCL or (d) for any transaction from which the director derived an improper
personal benefit. The inclusion of this provision in the Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter shareholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though the action, if successful, might otherwise benefit the Company
and its shareholders.

INDEMNIFICATION

Subject to applicable law, the Company's Bylaws require the Company to
indemnify its officers and directors against expenses, judgments, settlements
and fines incurred in the defense of any claim, including any claim brought by
or in the right of the Company, to which they were made party by reason of being
or having been officers or directors.

It is anticipated that each of the Company's directors and executive
officers will enter into an indemnity agreement with the Company following the
completion of the Transaction. Pursuant to such agreements, the Company will
agree to indemnify the directors and executive officers against any costs and
expenses, judgments, settlements and fines incurred in connection with any claim
involving a director or executive officer by reason of his position as director
or executive officer that are in excess of the coverage provided by any
insurance if the indemnitee meets certain standards of conduct.

THE ADVISOR

DIRECTORS AND OFFICERS OF THE ADVISOR. The directors and officers of the
Advisor are set forth below. These officers of the Advisor may also provide
services to the Company on behalf of the Advisor.

<TABLE>
<CAPTION>
NAME AGE OFFICES HELD
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Michael B. Yanney.......................... 63 Director

Paul L. Abbott............................. 52 Director, President and Chief Executive
Officer

George H. Krauss........................... 56 Director

Helen L. Poorman........................... 37 Director and Executive Vice President
</TABLE>

Biographical information with respect to the directors and officers of the
Advisor is set forth above under "--Directors and Executive Officers of the
Company."

THE ADVISORY AGREEMENT. The Company will enter into an Advisory Agreement
with the Advisor for an initial term of three years, beginning on the Effective
Date, subject to earlier termination for cause as provided therein. After the
initial term, the Advisory Agreement automatically renews for additional one-
year periods unless written notice is delivered 180 days prior to the expiration
of any term.

The Advisor is entitled to receive compensation in the form of an
Acquisition Fee, an Asset Management Fee and an Incentive Fee on New Assets for
services rendered under the Advisory Agreement. The Acquisition Fee will be
payable each month in arrears and will be an amount equal to 1% of the increase
in the Company's actual investment in all New Assets, including any costs
related to the acquisition or financing of New Assets but excluding debt which
is incurred or assumed in connection therewith. The Asset Management Fee will be
equal to .475%, on an annual basis, of the Company's Total Assets, calculated as
of the last day of each month, payable by the Company to the Advisor on a
monthly basis in arrears. The Incentive Fee on New Assets will be equal to 10%
of any Capital Gain offset by any Capital Loss on New Assets, payable by the
Company to the Advisor on an annual basis in the form of Restricted Stock. The
Advisor Fees were negotiated by the Independent Committee.

The Advisor may not sell, transfer or otherwise dispose of the Restricted
Stock until the earlier of: (i) the termination of the Advisory Agreement as
provided therein; and (ii) five years following the

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<PAGE>
issuance of the Restricted Stock. Upon the termination of the Advisory Agreement
by the Company without cause, or by the Advisor for cause, the Advisor is
entitled to certain registration rights with respect to the Restricted Stock as
set forth in the Advisory Agreement.

The Company will pay all of its expenses, including all costs associated
with third party services provided to it, and will reimburse the Advisor for
documented expenses of the Advisor incurred on its behalf. The Advisor will pay
all of the costs of providing services to the Company, including personnel
costs. In connection with providing services to the Company, the Advisor will be
reimbursed by the Company only for (i) rent, utilities, capital equipment and
related expenses associated with any office which is established and maintained
by the Advisor exclusively to provide services to the Company, (ii) expenses of
third parties which derive 25% or less of their gross revenues from providing
services to the Company, and (iii) travel expenses incurred by employees of the
Advisor in connection with travel at the request or on behalf of the Company;
provided that the Company's reimbursement of these expenses will be limited to
amounts for them in the annual budget as approved by the Board of Directors,
with any subsequent changes approved by the Board of Directors. In addition, no
reimbursement will be permitted for services for which the Advisor is entitled
to compensation by way of a separate fee.

The Advisor at all times will be subject to the supervision of the Board of
Directors and will only have such functions and authority as the Company may
delegate to it. The Advisor will be responsible for the day-to-day operations of
the Company and will perform such services and activities relating to the assets
and operations of the Company as may be appropriate, including:

(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy guidelines by the Board of
Directors;

(ii) representing the Company in connection with the acquisition and
disposition of real estate assets;

(iii) representing the Company in monitoring the performance of its
assets and recommending strategies to improve such performance;

(iv) furnishing reports and statistical and economic research to the
Company regarding the investment activities and results of operations of the
Company and the services performed by the Advisor for the Company;

(v) providing the executive and administrative personnel, office space
and services required in rendering services to the Company;

(vi) administering the day-to-day operations of the Company and
performing and supervising the performance of such administrative functions
necessary in the management of the Company as may be agreed upon by the
Advisor and the Board of Directors, including collection of revenues and
payment of the expenses, debts and obligations and maintenance of
appropriate computer services to perform such administrative functions;

(vii) communicating on behalf of the Company with the holders of equity
and debt securities of the Company as required to satisfy the reporting and
other requirements of any governmental or regulatory bodies or agencies and
maintaining effective relations with such holders;

(viii) counseling the Company in connection with policy decisions to be
made by the Board of Directors;

(ix) upon request by, and in accordance with the directions of, the
Board of Directors, investing or reinvesting any money of the Company;

(x) qualifying and causing the Company to qualify to do business in all
applicable jurisdictions;

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<PAGE>
(xi) causing the Company to retain qualified accountants and tax experts
to assist in developing appropriate accounting procedures and testing
systems and conducting quarterly compliance reviews;

(xii) maintaining exemption from the Investment Company Act;

(xiii) arranging for the preparation and timely filing of all reports
required to be filed by the Company under the Exchange Act, and under any
other applicable securities laws or regulations;

(xiv) complying with and using its best efforts to cause the Company to
comply with all applicable laws; and

(xv) as approved and directed by the Board of Directors, performing such
other services as may be required from time to time for management and other
activities relating to the assets of the Company and its Subsidiaries as the
Advisor shall deem appropriate under the circumstances.

The Company may enter into separate agreements with the Advisor or
affiliates for additional services to be provided to the Company on terms and
conditions to be negotiated by the parties to such agreements. The fees to be
paid by the Company for such additional services will be negotiated and approved
by the Independent Directors on behalf of the Company. Neither the Company nor
the Advisor may assign the Advisory Agreement without the written consent of the
other party.

The Company may terminate the Advisory Agreement upon 60 days' written
notice of termination from the Board of Directors to the Advisor if the Advisor
(i) materially breaches any provision of the Advisory Agreement and fails to
cure the breach as provided therein; or (ii) engages in fraud or willful
misconduct in connection with the business of the Company. If the Advisory
Agreement is terminated by the Company for cause, the Advisor is not entitled to
receive any additional amounts from the Company.

The Company may terminate the Advisory Agreement without cause at any time
after the third annual anniversary of the Effective Date by delivering 180 days
prior written notice of termination. Any termination without cause or
non-renewal of the Advisory Agreement by the Company must be approved by a
majority vote of the Independent Directors or by a vote of the holders of a
majority of the outstanding shares of the Company's Common Stock. In such event,
the Company shall pay the Advisor a termination fee equal to the sum of: (i) the
amount of the Acquisition Fee and the Asset Management Fee for the previous
twelve-month period, and (ii) the fair value of any Incentive Fee on New Assets
that would be earned on any New Assets owned by the Company on the date of the
termination. Under the terms of the Advisory Agreement, the Company and Advisor
are required to use their best efforts to reach a mutual agreement with respect
to the amount of the Incentive Fee on New Assets under such circumstances. If
the parties are unable to agree upon such amount within 30 days following the
notice of termination, the amount shall be determined by an independent
valuation as provided in the Advisory Agreement.

The Advisor may terminate the Advisory Agreement upon 60 days' written
notice of termination to the Company if the Company (i) materially breaches any
provision of the Advisory Agreement and fails to cure the breach as provided
therein; or (ii) engages in fraud, willful misconduct or gross negligence, other
than as a result of acts or omissions caused by employees of the Advisor. In the
case of termination of the Advisory Agreement by the Advisor with cause, the
Company is required to pay the Advisor a fee equal to the sum of: (i) the amount
of the Acquisition Fee and the Asset Management Fee for the previous twelve-
month period, and (ii) the fair value of any Incentive Fee on New Assets that
would be earned on any New Assets owned by the Company on the date of the
termination. Under the terms of the Advisory Agreement, the Company and Advisor
are required to use their best efforts to reach a mutual agreement with respect
to the amount of the Incentive Fee on New Assets under such circumstances. If
the parties are unable to agree upon such amount within 30 days following the
notice of termination, the amount shall be determined by an independent
valuation as provided in the Advisory Agreement.

The Advisor may terminate the Advisory Agreement without cause at any time
after the third annual anniversary of the Effective Date by delivering 180 days
prior written notice of termination. In such event,

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<PAGE>
the Advisor is entitled to receive twenty-five percent of the fair value of any
Incentive Fee on New Assets that would be earned on any New Asset owned by the
Company on the date of termination. All such amounts payable to the Advisor
shall be paid on the third anniversary of the date of termination, provided,
however, that if any new Asset is sold during such three-year period, the
Advisor shall be paid, at the time of sale, twenty-five percent of the Incentive
Fee on New Assets which would have been payable to the Advisor, pursuant to the
terms of the Advisory Agreement, until the Advisor receives the total amount
payable as provided therein. The parties are required to use their best efforts
to reach a mutual agreement with respect to such fee. If the parties are unable
to agree upon such amount within 30 days following the notice of termination,
the amount shall be determined by an independent valuation as provided in the
Advisory Agreement.

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<PAGE>
VOTING

THE MATTER TO WHICH THE INVESTORS ARE REQUESTED TO CONSENT IS OF GREAT
IMPORTANCE TO THE PARTNERSHIPS AND THE INVESTORS. ACCORDINGLY, INVESTORS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT AND TO COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ENCLOSED CONSENT CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

SOLICITATION BY THE GENERAL PARTNERS

The General Partners are seeking the consent of the Investors of the
Partnerships to the Transaction. The General Partners will not hold a meeting of
the Investors to consider the Transaction, but instead are seeking the written
consent of Investors as provided in Article X of the Partnership Agreements.
Under the terms of the Partnership Agreements, the transfer of all the assets of
the Partnerships in a single transaction and the dissolution of the Partnerships
requires the consent of the holders of a majority of the outstanding Units.
Accordingly, the Transaction may not be consummated without the consent of the
holders of a majority of the outstanding Units of each of the Partnerships. This
Prospectus/Consent Solicitation Statement constitutes the solicitation of the
approval of the Investors to the Transaction.

VOTING PROCEDURES

Each Investor is being asked to consider the following elections with
respect to the Transaction:

YES, I approve of the merger of the Partnerships and the Company.

NO, I do not approve of the merger of the Partnerships and the Company.

Investors may also abstain from voting.

Investors, including Dissenting Investors and Investors who abstain from
voting with respect to the Transaction by indicating their abstention on the
Consent Card, will receive Shares if the Transaction is completed unless such
Investors elect to receive Notes as indicated on the Consent Card. An Investor
may elect to receive Notes regardless of whether he votes "YES" or "NO" with
respect to the Transaction. An Investor who does not return the Consent Card
will receive Shares if the Transaction is completed. If Dissenting Investors
elect to receive Notes in excess of the Maximum Note Limitation, the Transaction
will not be consummated. If this does not occur, but the total amount of Notes
allocable to all Investors who elect to receive Notes exceeds the Maximum Note
Limitation, Notes will be allocated first to Dissenting Investors who elected to
receive Notes and then, on a pro rata basis (in denominations of $1,000), to
Investors who elected to receive Notes and either abstained from voting or voted
"YES" in favor of the Investors. Thus, an Investor could choose Notes but
receive Shares instead. To be assured of receiving Notes, an Investor must vote
"NO" with respect to the Transaction. See "NOTES--Allocation of Notes." An
otherwise valid Consent Card will be deemed to grant consent to the Transaction
if it is not marked "NO" or to abstain.

A Consent Card is included with this Prospectus/Consent Solicitation
Statement and Investors are asked to complete, date and sign the Consent Card
and return it to Service Data Corporation in the enclosed envelope as soon as
possible. INVESTORS SHOULD NOT SEND THE CERTIFICATES FOR THEIR UNITS WITH THE
CONSENT CARD.

In order to be valid, consents must be received by Service Data Corporation
by 5:00 p.m. Central Time on , 1998, which date may be extended by
the General Partners in their sole discretion.

77
<PAGE>
Consent Cards should be returned in the enclosed envelope to Service Data
Corporation at the following address:

Service Data Corporation
2424 South 130th Circle
Omaha, Nebraska 68144

Abstentions and broker nonvotes will have the same effect as a vote against
the Transaction. Investors who vote against the Transaction or abstain from
voting will have no right to require the Partnerships to purchase their Units or
any other rights similar to those available to dissenting shareholders of
corporations under Delaware law. See "--No Right of Appraisal" below.

The vote of the Investors with respect to the Transaction will be tabulated
by Service Data Corporation of Omaha, Nebraska on , 1998, unless such
date is extended by the General Partners in their sole discretion. Service Data
Corporation currently serves as the transfer agent and registrar for the
Partnerships and for other public limited partnerships sponsored by America
First Companies L.L.C., but is not otherwise affiliated with the Company or the
General Partners.

THE GENERAL PARTNERS BELIEVE THAT THE TERMS OF THE TRANSACTION ARE FAIR AND
IN THE BEST INTERESTS OF THE PARTNERSHIPS AND ALL OF THE INVESTORS AND
RECOMMENDS THE APPROVAL THEREOF BY THE INVESTORS.

RECORD DATE AND OUTSTANDING UNITS

Only Investors holding Units of record at the close of business on the
Record Date will be entitled to receive this notice and to vote with respect to
the Transaction. Under the terms of the Partnership Agreement, Investors are
entitled to one vote for each Unit they hold as of the Record Date. As of the
Record Date, there was a total of 3,374,222 Cap Source I Units and 4,011,101 Cap
Source II Units outstanding. Therefore, the affirmative vote of the holders of
1,687,112 Cap Source I Units is required to approve the Transaction, and the
affirmative vote of the holders of 2,005,551 Cap Source II Units is required to
approve the Transaction. As of the Record Date, no Units were beneficially owned
by the General Partners, America First Companies L.L.C. or any of the officers
or managers of America First Companies L.L.C.

SOLICITATION OF VOTES; SOLICITATION EXPENSES

Votes of Investors may be solicited by the management of the General
Partners. Costs of solicitation will be allocated as set forth under "THE
TRANSACTION--Transaction Expenses." Certain officers and employees of the
General Partners and affiliates may solicit consents without additional
compensation therefor other than reimbursement for actual and reasonable
out-of-pocket expenses incurred by such persons in connection with such
solicitation. Brokerage firms, fiduciaries, nominees and others will be
reimbursed for out-of-pocket expenses incurred by them in connection with
forwarding consent materials to beneficial holders of Units held in their names.
In addition to the use of the mails, consents may be solicited by officers and
regular employees of the General Partners and affiliates, who will not be
specifically compensated for such services, by means of personal calls upon or
telephonic communications with Investors or their representatives. Moreover, the
General Partners may engage the services of a professional proxy solicitation
firm in connection with the solicitation of consents. No party will receive any
compensation contingent upon solicitation of a favorable vote.

REVOCABILITY OF CONSENT

Investors may withdraw or revoke their consent at any time prior to the
Approval Date. To be effective, a written, telegraphic or telex notice of
revocation or withdrawal of the Consent Card must be received by Service Data
Corporation no later than the Approval Date, addressed as follows: Service Data

78
<PAGE>
Corporation, 2424 South 130th Circle, Omaha, Nebraska 68114. A notice of
revocation or withdrawal must specify the Investor's name and the name of the
Partnership to which such revocation or withdrawal relates.

COMMUNICATING WITH OTHER INVESTORS

Under Rule 14a-7 of the Exchange Act, each Partnership, upon written request
from an Investor, will deliver to such Investor (i) a statement of the
approximate number of Investors of the Partnership and (ii) the estimated cost
of mailing proxy materials or similar communications to the Investors of such
Partnership. In addition, under such rule, an Investor has the right, at his or
her option, to have his or her Partnership (i) mail (at the Investor's expense)
any such materials which the Investor desires to deliver to the other Investors
of the Partnership in connection with the Transaction or (ii) to have the
Partnership deliver, within five business days of the receipt of the request, a
reasonably current list of the names and addresses of the Investors of the
Partnership as of the Record Date. The Partnerships may require a requesting
Investor to pay the reasonable cost of duplicating and mailing such Investor
list. Any such requests should be sent to Maurice Cox, Suite 400, 1004 Farnam
Street, Omaha, Nebraska, 68102.

NO RIGHT OF APPRAISAL

Neither Dissenting Investors nor Investors who abstain from voting with
respect to the Transaction will be entitled to dissenters' or appraisal rights
under the Partnership Agreements, the Delaware Partnership Law or the Delaware
GCL. Such rights, when they exist, give the holders of securities the right to
surrender such securities for an appraised value in cash if the securityholder
opposes a merger or similar reorganization. No such rights will be provided by
the Partnerships or the Company. Dissenting Investors do, however, have the
right to exchange their Units for Notes rather than Shares. If a Dissenting
Investor votes against the Transaction but does not elect to receive Notes, the
Dissenting Investor will receive Shares.

FIDUCIARY RESPONSIBILITIES

Under the Delaware GCL, the directors and officers of the Company, in
exercising the powers and responsibilities of managing the Company, owe the
Company and its Shareholders a duty of care and a duty of loyalty. However, the
directors and officers of the Company are not liable for errors in judgment or
other acts or omissions made in good faith unless their actions are found to be
grossly negligent. Under Delaware law, the General Partners are accountable to
the Partnership and the Investors as fiduciaries and consequently must exercise
good faith and integrity in handling Partnership affairs. Investors who have
questions concerning the duties of the directors and officers with respect to
the Company or the duties of the General Partners with respect to any of the
Partnerships should consult their counsel.

The liability of the directors is limited pursuant to the provisions of the
Delaware GCL and the Company's Organizational Documents, which limit the
personal liability of a director to the Company or its Shareholders for monetary
damages for breach of fiduciary duty as a director. Those provisions would not
protect a director (i) for any breach of the director's duty of loyalty to the
Company or its Shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
any unlawful payment of dividends or unlawful purchase or redemption of the
Company's stock, or (iv) for any transaction from which the director derived an
improper personal benefit. In addition, the Company's Organizational Documents
provide for mandatory indemnification of the directors and officers by the
Company to the full extent permitted under Delaware law. Delaware law generally
authorizes Delaware corporations to indemnify their directors, officers,
employees or agents against liabilities (including litigation costs) incurred as
the result of their service to the corporation if such persons acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In
accordance with these provisions, the Company has entered into

79
<PAGE>
agreements with the Company's directors and executive officers indemnifying them
to the fullest extent permitted by Delaware law. To the extent that the
foregoing provisions concerning indemnification apply to actions arising under
the Securities Act, the Company has been advised that, in the opinion of the
Securities and Exchange Commission, such provisions are contrary to public
policy and therefore are not enforceable.

The Partnership Agreements provide for indemnification of the General
Partners for losses arising out of any act or omission, provided that it was
determined in good faith that such conduct was in the best interest of the
Partnership and that such conduct did not constitute negligence, misconduct or a
breach of fiduciary obligations to the Investors.

The rights of Shareholders against management of the Company in certain
circumstances are more limited than the rights of Investors against the General
Partners.

Notwithstanding the indemnification conferred, no director or executive
officer of the Company shall be indemnified with regard to any liability, loss
or damage incurred by them in connection with any claim or settlement involving
allegations that the Securities Act, as amended, or any state securities laws
were violated by the director or executive officer unless: (a) (i) the director
or executive officer seeking indemnification is successful in defending such
action on the merits of each count involving such violation, (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction or (iii) a court of competent jurisdiction approves a settlement of
such claims; and (b) such indemnification is specifically approved by a court of
law which shall have been advised as to the then current position of the SEC
regarding indemnification for violations of securities laws.

PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma consolidated statements of operations and
cash flows for the year ended December 31, 1997, have been prepared to reflect
the transactions and related adjustments and assumptions described in the
accompanying notes as if the transactions occurred on January 1, 1997. The pro
forma consolidated balance sheet has been prepared assuming the transaction
occurred on December 31, 1997. Such pro forma financial information is based on
the historical financial statements of each of the Partnerships and should be
read in conjunction with the financial statements and notes included in the
separately bound supplement delivered with this Prospectus/Consent Solicitation
Statement. In the opinion of management, all adjustments necessary to reflect
the effects of the transaction have been made.

To assist Unitholders in analyzing the Transaction, two presentations of pro
forma financial statements have been prepared. The first presentation of pro
forma financial statements assumes the Company will not issue any Notes. The
second presentation of pro forma financial statements assumes the Company will
issue the maximum amount of Notes. Unitholders should bear in mind that the
assumptions regarding the issuance of Notes to Investors in connection with the
Transaction are not necessarily the Company's or the General Partners'
expectations regarding the outcome of the Transaction.

Since the Transaction will be accounted for using the purchase method of
accounting, the pro forma financial statements have been prepared using this
method. Under the purchase method, Cap Source I will be deemed to be the
acquirer of Cap Source II because it is the larger of the two partnerships. As
the surviving entity, Cap Source I's assets and liabilities will be recorded by
the Company at their historical cost, and the assets and liabilities of Cap
Source II will be recorded at their estimated fair market values.

The pro forma financial statements are based upon available information and
upon certain assumptions, as set forth in the notes to the pro forma
consolidated financial statements, that the General Partners believe are
reasonable in the circumstances. The pro forma information is unaudited and is
not necessarily indicative of the results which actually would have occurred if
the transaction had been consummated on such dates or at the beginning of such
periods, nor does it purport to represent the financial position or results of
operations for future periods.

80
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

PRO FORMA CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1997

(UNAUDITED)

WITHOUT NOTES ISSUED

<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in real estate
Land...................................... $ 3,093,671 $ 2,800,750 $ 1,493,518 (A) $ 7,387,939
Buildings................................. 35,536,966 23,055,361 4,148,263 (A) 62,740,590
Personal property......................... 2,001,950 1,666,485 (1,471,300) (A) 2,197,135
------------- ------------- ------------- -------------
40,632,587 27,522,596 4,170,481 72,325,664
Less accumulated depreciation............. (10,831,199) (6,330,294) 6,330,294 (A) (10,831,199)
------------- ------------- ------------- -------------
Net investment in real estate............. 29,801,388 21,192,302 10,500,775 61,494,465
------------- ------------- ------------- -------------
Cash and temporary cash investments, at cost
which approximates market value........... 10,410,564 1,240,992 (1,194,820) (B) 10,456,736
Escrow deposits and property reserves....... 894,986 1,104,823 -- 1,999,809
Investment in mortgage-backed securities.... 1,088,526 1,050,718 -- 2,139,244
Interest and other receivables.............. 70,542 19,443 -- 89,985
Deferred mortgage issuance costs, net of
accumulated amortization.................. 2,099,768 1,589,510 3,689,278
Other assets................................ 767,156 241,498 597,410 (B) 1,445,238
(160,826) (A)
------------- ------------- ------------- -------------
$ 45,132,930 $26,439,286 $ 9,742,539 $ 81,314,755
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses..... $ 1,532,202 $ 1,118,970 $ -- $ 2,651,172
Distributions payable..................... 860,587 546,968 -- 1,407,555
Mortgage loan payable..................... 6,320,076 -- -- 6,320,076
Due to general partners and their
affiliates.............................. 4,013,626 1,067,313 (3,416,295) (M) 1,664,644
------------- ------------- ------------- -------------
12,726,491 2,733,251 (3,416,295) 12,043,447
------------- ------------- ------------- -------------
Minority interest........................... 192,296 205,603 -- 397,899
Stockholders' Equity (Deficit)
General Partners.......................... (293,517) (331,453) 624,970 (C) --
Limited Partners.......................... 32,507,660 23,831,885 10,339,949 (A) --
(66,679,494) (C)
Stockholders' Equity...................... -- -- 66,054,524 (C) 68,873,409
(597,410) (B)
3,416,295 (M)
------------- ------------- ------------- -------------
32,214,143 23,500,432 13,158,834 68,873,409
------------- ------------- ------------- -------------
$ 45,132,930 $26,439,286 $ 9,742,539 $ 81,314,755
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

See accompanying Notes to Consolidated Pro Forma Financial Statements

81
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 1997

(UNAUDITED)

WITHOUT NOTES ISSUED

<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Income
Rental income................................ $7,555,700 $ 5,105,108 $ -- $ 12,660,808
Mortgage-backed securities income............ 90,320 104,411 -- 194,731
Interest on temporary cash investments and
U.S. government securities................. 583,881 82,182 -- 666,063
Other income................................. 252,057 202,670 -- 454,727
------------ ------------- ------------- -------------
Total Income............................... 8,481,958 5,494,371 -- 13,976,329
------------ ------------- ------------- -------------
Expenses
Real estate operating expenses............... 3,903,102 2,562,636 -- 6,465,738
Depreciation................................. 905,563 666,758 475,455 (D) 2,047,776
Interest expense............................. 558,789 -- -- 558,789
General and administrative expenses
Investor servicing......................... 455,322 411,005 87,000 (E) 350,989
(602,338) (F)
Professional fees.......................... 93,950 156,809 12,300 (G) 263,059
--
Other expenses............................. 16,135 23,326 58,900 (H) 98,361
--
Amortization................................. 141,467 111,144 (62,376) (I) 206,606
16,371 (J)
Asset management and partnership
administration fees........................ -- 166,000 (166,000) (F) 433,014
433,014 (K)
------------ ------------- ------------- -------------
6,074,328 4,097,678 252,326 10,424,332
Minority interest in (income) losses of
Operating Partnerships..................... (5,090) 857 -- (4,233)
------------ ------------- ------------- -------------
Income before income taxes................... 2,402,540 1,397,550 (252,326) 3,547,764
Provision for income taxes................... -- -- 1,369,437 (L) 1,369,437
------------ ------------- ------------- -------------
Net income..................................... $2,402,540 $ 1,397,550 $ (1,621,763) $ 2,178,327
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net income per share........................... $ 0.70 $ 0.34 $ 0.65
------------ ------------- -------------
------------ ------------- -------------
Weighted average number of shares outstanding
during the period............................ 3,374,222 4,011,101 3,354,887
------------ ------------- -------------
------------ ------------- -------------
Ratio of earnings to fixed charges............. 7.35
-------------
-------------
</TABLE>

See accompanying Notes to Consolidated Pro Forma Financial Statements

82
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1997

(UNAUDITED)
WITHOUT NOTES ISSUED

<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 2,402,540 $ 1,397,550 $ (1,621,763) $ 2,178,327
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 1,047,030 777,902 429,450 2,254,382
Amortization of discount on securities............. (2,665) (1,397) (4,062)
Minority interests in operating partnerships....... 5,090 (857) 4,233
Decrease (increase) in interest and other
receivables...................................... (8,428) 3,682 (4,746)
Decrease (increase) in escrow deposits and working
capital reserves................................. 22,810 (333,762) (310,952)
Decrease (increase) in other assets................ (156,964) (21,269) (178,233)
Increase (decrease) in accounts payable and accrued
liabilities...................................... 115,472 244,408 1,192,313 1,552,193
Increase (decrease) due to operating partnerships'
general partners and their affiliates............ (103,479) (32,396) (135,875)
Increase (decrease) in interest payable
------------- ------------- ------------- -------------
Net cash provided by operating activities........ 3,321,406 2,033,861 -- 5,355,267
------------- ------------- ------------- -------------
Cash flows from investing activities
Principal payments received on mortgage backed
securities....................................... 243,649 127,727 371,376
Acquisition of real estate......................... (19,652) (19,652)
Acquisition of personal property................... (8,971) (69,723) (78,694)
Increase in other assets........................... 78,605 78,605
------------- ------------- ------------- -------------
Net cash provided by investing activities........ 293,631 58,004 -- 351,635
------------- ------------- ------------- -------------
Cash flow used in financing activities............... --
Principal payments on mortgage loan payable........ (34,581) (34,581)
Distributions...................................... (3,442,389) (3,281,810) (6,724,199)
------------- ------------- ------------- -------------
Net cash used in financing activities............ (3,476,970) (3,281,810) -- (6,758,780)
------------- ------------- ------------- -------------
Net increase in cash and temporary cash
investments.................................... 138,067 (1,189,945) -- (1,051,878)
Cash and temporary cash investments at beginning of
year............................................... 10,272,497 2,430,937 (1,194,820) 11,508,614
------------- ------------- ------------- -------------
Cash and temporary cash investments at end of year... $ 10,410,564 $ 1,240,992 $ (1,194,820) $ 10,456,736
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Distributions--income................................ $ 2,178,327
Distributions--return of capital..................... 4,545,872
-------------
$ 6,724,199
-------------
-------------
</TABLE>

See accompanying Notes to Consolidated Pro Forma Financial Statements

83
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

WITHOUT NOTES ISSUED

A The historical balance sheet of Cap Source II has been adjusted to reflect
the impact of applying the purchase method of accounting to this
transaction. The net assets of Cap Source II are being adjusted to their
estimated fair value. The fair value is based on: (i) the Appraised value of
the properties; (ii) the market value of the mortgage-backed securities
based on market prices; (iii) any undistributed cash and other assets; less
(iv) any outstanding liabilities owed by the partnership.

The effect of all this on the balance sheet results in the following
adjustments: (i) land and buildings have been adjusted to their estimated
fair value based on their appraised value; (ii) intangible items included in
other assets have been eliminated as these items were assigned no value; and
(iii) the net effect of those changes to the assets and liabilities has been
applied to the partners' capital account.

B Represents the following adjustments to record remaining transaction costs
expected to be incurred: (i) a decrease in cash for anticipated transaction
costs remaining to be incurred of $1,194,820; (ii) goodwill of $597,410
resulting from Cap Source 1's share of the remaining transaction costs; and
(iii) a reduction to stockholders' equity for Cap Source II's share of the
remaining transaction costs. Cap Source II's share of the remaining
transaction costs have been excluded from the pro forma statement of
operations.

C Represents reclassification of the existing general partners' and unit
holders' capital to stockholders' equity.

D Represents additional depreciation that will be incurred as a result of
adjusting Cap Source II's assets to fair value.

E Represents additional incremental costs expected to be incurred in
conjunction with operating the Company. These incremental costs consist of:
(i) liability insurance of $73,000 for the Company's directors and officers
and (ii) an increase of $14,000 in mailing, printing and other miscellaneous
costs associated with operating the new Company.

F Under the terms of the Advisory Agreement, the Advisor is responsible for
certain types of general and administrative expenses, namely compensation of
the Company's officers and other personnel whereas, pursuant to the terms of
each Partnership's partnership agreement, compensation costs and
administrative fees were allocated to the respective Partnership. As such,
general and administrative expenses have been adjusted to reflect the
elimination of these expenses. The Advisor will receive a management fee as
described in footnote K.

G Represents additional incremental legal costs expected to be incurred in
conjunction with operating the Company.

H Represents additional incremental costs expected to be incurred in
conjunction with operating the Company. These incremental costs consist of:
(i) board of directors fees and expenses of $29,200 as the Company will have
its own board of directors and (ii) travel costs of $29,700 relating to
expanding the Company's real estate portfolio.

I Represents the elimination of historical amortization of the initial
advisory fee for Cap Source II as these items were assigned no value in
adjusting to fair value in applying the purchase method of accounting.

J Represents the amortization of goodwill using the straight line method over
a period of 40 years.

K Represents the Asset Management Fee payable to the Advisor pursuant to the
terms of the Advisory Agreement. The Asset Management Fee is .475% per annum
of the Company's Total Assets. The

84
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

WITHOUT NOTES ISSUED

Asset Management Fee will be calculated and payable monthly. For purposes of
the pro forma financial statements, the Asset Management Fee is based on the
pro forma Total Assets as of December 31, 1997 for all periods presented.
Expenses incurred by the Advisor and reimbursed by the Company are included
in pro forma general and administrative expenses.

L Represents estimated income tax expense at a rate of 38.6% resulting from
electing to be taxed as a corporation rather than a partnership.

M Represents the amount that is recorded as payable to affiliates of General
Partners of Capital Source I which will be waived by such affiliates if the
transaction is completed. The gain on forgiveness of the payable has been
excluded from the pro forma statements of operations.

85
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

SUPPLEMENTAL PRO FORMA PER SHARE/UNIT DATA (A)

WITHOUT NOTES ISSUED

<TABLE>
<CAPTION>
EXCHANGE DISTRIBUTIONS
VALUE BOOK VALUE YEAR ENDED NET INCOME
AS OF AS OF DEC. 31, YEAR ENDED
DEC. 31, 1997 DEC. 31, 1997 1997 DEC. 31, 1997
------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Pro forma--the Company (Per Share)...................... $ 25.00 $ 20.53 $ 2.0043 $ 0.65

Historical--Cap Source I (Per Unit)..................... $ 9.63 $ 1.0100 $ 0.70
Equivalent pro forma--Cap Source I (Per Unit)........... $ 14.96 $ 12.29 $ 1.1995 $ 0.39

Historical--Cap Source II (Per Unit).................... $ 5.94 $ 0.8100 $ 0.34
Equivalent pro forma--Cap Source II (Per Unit).......... $ 8.12 $ 6.66 $ 0.6506 $ 0.21
</TABLE>

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

(A) Equivalent pro forma data has been calculated by multiplying the Company pro
forma amounts by the exchange ratio (below) for each participating
partnership, so that the Company per share pro forma amounts are equated to
the respective values for one unit of the respective partnership.

<TABLE>
<S> <C>
Exchange Values
(1 unit = x shares)

Cap Source I...................................................... 0.598444
Cap Source II..................................................... 0.324613
</TABLE>

86
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
WITH NOTES ISSUED

<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in real estate
Land......................................... $3,093,671 $ 2,800,750 $ 1,493,518 (A) $ 7,387,939
Buildings.................................... 35,536,966 23,055,361 4,148,263 (A) 62,740,590
Personal property............................ 2,001,950 1,666,485 (1,471,300) (A) 2,197,135
------------ ------------- ------------ ------------
40,632,587 27,522,596 4,170,481 72,325,664
Less accumulated depreciation................ (10,831,199) (6,330,294) 6,330,294 (A) (10,831,199)
------------ ------------- ------------ ------------
Net investment in real estate................ 29,801,388 21,192,302 10,500,775 61,494,465
------------ ------------- ------------ ------------
Cash and temporary cash investments, at cost
which approximates market value.............. 10,410,564 1,240,992 (1,194,820) (B) 10,456,736
Escrow deposits and property reserves.......... 894,986 1,104,823 -- 1,999,809
Investment in mortgage-backed securities....... 1,088,526 1,050,718 -- 2,139,244
Interest and other receivables................. 70,542 19,443 -- 89,985
Deferred mortgage issuance costs, net of
accumulated amortization..................... 2,099,768 1,589,510 3,689,278
Other assets................................... 767,156 241,498 597,410 (B) 1,445,238
(160,826) (A)
------------ ------------- ------------ ------------
$45,132,930 $26,439,286 $ 9,742,539 $ 81,314,755
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses........ $1,532,202 $ 1,118,970 $ -- $ 2,651,172
Distributions payable........................ 860,587 546,968 -- 1,407,555
Mortgage loan payable........................ 6,320,076 -- -- 6,320,076
Due to general partners and their
affiliates................................. 4,013,626 1,067,313 (3,416,295) (O) 1,664,644
Notes payable................................ -- -- 40,000,000 (C) 40,000,000
------------ ------------- ------------ ------------
12,726,491 2,733,251 36,583,705 52,043,447
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Minority interest.............................. 192,296 205,603 -- 397,899
Stockholders' Equity (Deficit)
General Partners............................. (293,517) (331,453) 624,970 (D) --
Limited Partners............................. 32,507,660 23,831,885 10,339,949 (A) --
(66,679,494) (D)
Stockholders' Equity......................... -- -- 66,054,524 (D) 28,873,409
(597,410) (B)
3,416,295 (O)
(40,000,000) (C)
------------ ------------- ------------ ------------
32,214,143 23,500,432 (26,841,166) 28,873,409
------------ ------------- ------------ ------------
$45,132,930 $26,439,286 $ 9,742,539 $ 81,314,755
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>

See accompanying Notes to Consolidated Pro Forma Financial Statements

87
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
WITH NOTES ISSUED

<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income
Rental income................................. $7,555,700 $ 5,105,108 $ -- $ 12,660,808
Mortgage-backed securities income............. 90,320 104,411 -- 194,731
Interest on temporary cash investments and
U.S. government securities.................. 583,881 82,182 -- 666,063
Other income.................................. 252,057 202,670 -- 454,727
------------ ------------- ------------ ------------
Total Income................................ 8,481,958 5,494,371 -- 13,976,329
------------ ------------- ------------ ------------
Expenses
Real estate operating expenses................ 3,903,102 2,562,636 -- 6,465,738
Depreciation.................................. 905,563 666,758 475,455 (E) 2,047,776
Interest expense.............................. 558,789 -- 2,732,000 (F) 3,290,789
General and administrative expenses
Investor servicing.......................... 455,322 411,005 87,000 (G) 350,989
(602,338) (H)
Professional fees........................... 93,950 156,809 12,300 (I) 263,059
--
Other expenses.............................. 16,135 23,326 58,900 (J) 98,361
--
Amortization.................................. 141,467 111,144 (62,376) (K) 206,606
16,371 (L)
Asset management and partnership
administration fees......................... -- 166,000 (166,000) (H) 433,014
433,014 (M)
------------ ------------- ------------ ------------
6,074,328 4,097,678 2,984,326 13,156,332
------------ ------------- ------------ ------------
Minority interest in (income) losses of
Operating Partnerships...................... (5,090) 857 -- (4,233)
------------ ------------- ------------ ------------
Income before income taxes.................... 2,402,540 1,397,550 (2,984,326) 815,764
Provision for income taxes.................... -- -- 314,885 (N) 314,885
------------ ------------- ------------ ------------
Net income...................................... $2,402,540 $ 1,397,550 $ (3,299,211) $ 500,879
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Net income per share............................ $ 0.70 $ 0.34 $ 0.29
------------ ------------- ------------
------------ ------------- ------------
Weighted average number of shares outstanding
during the period............................. 3,374,222 4,011,101 1,754,887
------------ ------------- ------------
------------ ------------- ------------
Ratio of earnings to fixed charges.............. 1.25
------------
------------
</TABLE>

See accompanying Notes to Consolidated Pro Forma Financial Statements

88
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1997

(UNAUDITED)
WITH NOTES ISSUED

<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $2,402,540 $ 1,397,550 $(3,299,211) $ 500,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 1,047,030 777,902 429,450 2,254,382
Amortization of discount on securities......... (2,665) (1,397) (4,062)
Minority interests in operating partnerships... 5,090 (857) 4,233
Decrease (increase) in interest and other
receivables.................................. (8,428) 3,682 (4,746)
Decrease (increase) in escrow deposits and
working capital reserves..................... 22,810 (333,762) (310,952)
Decrease (increase) in other assets............ (156,964) (21,269) (178,233)
Increase (decrease) in accounts payable and
accrued liabilities.......................... 115,472 244,408 2,869,761 3,229,641
Increase (decrease) due to operating
partnerships' general partners and their
affiliates................................... (103,479) (32,396) (135,875)
Increase (decrease) in interest payable
------------ ------------- ----------- ------------
Net cash provided by operating activities.... 3,321,406 2,033,861 -- 5,355,267
------------ ------------- ----------- ------------
Cash flows from investing activities
Principal payments received on mortgage backed
securities................................... 243,649 127,727 371,376
Acquisition of real estate..................... (19,652) (19,652)
Acquisition of personal property............... (8,971) (69,723) (78,694)
Increase in other assets....................... 78,605 78,605
------------ ------------- ----------- ------------
Net cash provided by investing activities...... 293,631 58,004 -- 351,635
------------ ------------- ----------- ------------
Cash flow used in financing activities........... --
Principal payments on mortgage loan payable.... (34,581) (34,581)
Distributions.................................. (3,442,389) (3,281,810) (6,724,199)
------------ ------------- ----------- ------------
Net cash used in financing activities........ (3,476,970) (3,281,810) -- (6,758,780)
------------ ------------- ----------- ------------
Net increase in cash and temporary cash
investments................................ 138,067 (1,189,945) -- (1,051,878)
Cash and temporary cash investments at beginning
of year........................................ 10,272,497 2,430,937 (1,194,820) 11,508,614
------------ ------------- ----------- ------------
Cash and temporary cash investments at end of
year........................................... $10,410,564 $ 1,240,992 $(1,194,820) $ 10,456,736
------------ ------------- ----------- ------------
------------ ------------- ----------- ------------
Distributions--income............................ $ 500,879
Distributions--return of capital................. 6,223,320
------------
$ 6,724,199
------------
------------
</TABLE>

See accompanying Notes to Consolidated Pro Forma Financial Statements

89
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

C Represents the issuance of Notes by the Company to Participating Investors
electing to receive Notes. The issuance of the Notes results in an increase
in notes payable and a reduction of stockholders' equity. The Notes mature
on 2006 and bear interest at 120% of the quarterly applicable federal
rate for debt instruments with a term of not over three years (assumed to be
6.83%).

D Represents reclassification of the existing general partners' and unit
holders' capital to stockholders' equity.

E Represents additional depreciation that will be incurred as a result of
adjusting Cap Source II's assets to fair value.

F Represents interest on the Notes at an assumed rate of 6.83%.

G Represents additional incremental costs expected to be incurred in
conjunction with operating the Company. These incremental costs consist of:
(i) liability insurance of $73,000 for the Company's directors and officers
and (ii) an increase of $14,000 in mailing, printing and other miscellaneous
costs associated with operating the new Company.

H Under the terms of the Advisory Agreement, the Advisor is responsible for
certain types of general and administrative expenses, namely compensation of
the Company's officers and other personnel whereas, pursuant to the terms of
each Partnership's partnership agreement, compensation costs and
administrative fees were allocated to the respective Partnership. As such,
general and administrative expenses have been adjusted to reflect the
elimination of these expenses. The Advisor will receive a management fee as
described in footnote M.

I Represents additional incremental legal costs expected to be incurred in
conjunction with operating the Company.

J Represents additional incremental costs expected to be incurred in
conjunction with operating the Company. These incremental costs consist of:
(i) board of directors fees and expenses of $29,200 as the Company will have
its own board of directors and (ii) travel costs of $29,700 relating to
expanding the Company's real estate portfolio.

90
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K Represents the elimination of historical amortization of the initial advisory
fee for Cap Source II as these items were assigned no value in adjusting to
fair value in applying the purchase method of accounting.

L Represents the amortization of goodwill using the straight line method over a
period of 40 years.

M Represents the Asset Management Fee payable to the Advisor pursuant to the
terms of the Advisory Agreement. The Asset Management Fee is .475% per annum
of the Company's Total Assets. The Asset Management Fee will be calculated
and payable monthly. For purposes of the pro forma financial statements, the
Asset Management Fee is based on the pro forma Total Assets as of December
31,1997 for all periods presented. Expenses incurred by the Advisor and
reimbursed by the Company are included in pro forma general and
administrative expenses.

N Represents estimated income tax expense at a rate of 38.6% resulting from
electing to be taxed as a corporation rather than a partnership.

O Represents the amount that is recorded as payable to affiliates of General
Partners of Capital Source I which will be waived by such affiliates if the
transaction is completed. The gain on forgiveness of the payable has been
excluded from the pro forma statements of operations.

91
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
SUPPLEMENTAL PRO FORMA PER SHARE/UNIT DATA (A)

WITH NOTES ISSUED

<TABLE>
<CAPTION>
EXCHANGE DISTRIBUTIONS
VALUE BOOK VALUE AS YEAR ENDED NET INCOME YEAR
AS OF DEC. OF DEC. 31, DEC. 31, ENDED DEC. 31,
31, 1997 1997 1997 1997
------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Pro forma--the Company (Per Share)...................... $ 25.00 $ 16.45 $ 2.2749 $ 0.29

Historical--Cap Source I (Per Unit)..................... $ 9.63 $ 1.0100 $ 0.70
Equivalent pro forma--Cap Source I (Per Unit)........... $ 14.96 $ 9.84 $ 1.3614 $ 0.17

Historical--Cap Source II (Per Unit).................... $ 5.94 $ 0.8100 $ 0.34
Equivalent pro forma--Cap Source II (Per Unit).......... $ 8.12 $ 5.34 $ 0.7385 $ 0.09
</TABLE>

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

<TABLE>
<S> <C>
Exchange Values
(1 unit = x shares)

Cap Source I...................................................... 0.598444
Cap Source II..................................................... 0.324613
</TABLE>

92
<PAGE>
THE PARTNERSHIPS

CAP SOURCE I

HISTORY. Cap Source I, a Delaware limited partnership, was formed August
22, 1985. The general partners of Cap Source I are Insured Mortgage Equities,
Inc. and America First Capital Source I, L.L.C. The initial limited partner, H/T
Corp., a Delaware corporation wholly owned by the Cap Source I General Partners,
assigned certain of the ownership attributes of the limited partner interest to
the Cap Source I Investors, including rights to a percentage of Cap Source I's
income, gain, losses, deductions, credits and distributions. H/T Corp. has
agreed to vote the limited partner interests as directed by the Cap Source I
Investors. The Cap Source I Investors hold beneficial assignment certificates,
which represent beneficial assignments of the limited partner interest in Cap
Source I.

Cap Source I was formed to invest principally in federally insured mortgages
on multifamily housing property (the "Cap Source I Mortgage Securities") and to
acquire, hold, sell and otherwise deal with limited partnership interests (the
"Cap Source I Partnership Equity Interests") in the Cap Source I Operating
Partnerships. The Cap Source I Partnership Agreement originally provided that
the Units would be listed on NASDAQ for trading. The Investors voted by proxy
not to list the Units on NASDAQ.

Cap Source I's assets originally consisted of debt and equity financing for
eight multifamily rental housing properties. Cap Source I's investments in these
properties consisted of: (a) approximately 85% in the form of permanent
mortgages and/or construction loans, each of which was insured or guaranteed, in
an amount substantially equal to the face amount of the mortgage, by the FHA or
GNMA; and (b) the balance to purchase up to a 99% limited partnership interest
in limited partnerships which developed, constructed, own and operate these
properties.

The original Cap Source I Operating Partnerships were structured with the
developer of the respective property serving as the general partner (the "Cap
Source I Operating General Partner") with a 1% interest, Cap Source I as the
limited partner with a 98.99% interest and CS Properties I, Inc., a corporation
wholly owned by affiliates of the Cap Source I General Partners, as the special
limited partner (the "Cap Source I Special Limited Partner") with a .01%
interest. The Cap Source I Special Limited Partner has the power, among other
things, to remove the Cap Source I Operating General Partners under certain
circumstances and to consent to the sale of the Cap Source I Operating
Partnerships' Assets. In the only exception to the above-described original
structuring, in one of the Cap Source I Operating Partnerships, the Ponds at
Georgetown L.P., Cap Source I is a limited partner with a 30.29% interest and
Capital Source II L.P., an affiliate of the Cap Source I General Partners, is a
limited partner with a 68.7% interest.

Since inception, Cap Source has been repaid by GNMA on one of its Cap Source
I Mortgage Securities, and, as a result, it no longer holds a Cap Source I
Partnership Equity Interest in the Cap Source I Operating Partnership which
owned the property collateralizing the repaid mortgage (Falcon Point). It has
also been repaid by FHA on another of its Cap Source I Mortgage Securities but
continues to own its Cap Source I Partnership Equity Interest in the Cap Source
I Operating Partnership (Fox Hollow). Three of the Cap Source I Operating
Partnerships (Fox Hollow, Misty Springs and Waterman's Crossing) have been
restructured with CS Properties I, Inc. succeeding to the general partner 1%
interest.

As a result of the foregoing, at December 31, 1997, Cap Source I held debt
and/or equity investments in seven properties. These investments consist of (a)
four mortgage-backed securities guaranteed as to principal and interest by GNMA,
collateralized by first mortgage loans insured as to principal and interest by
FHA on multifamily housing properties located in Virginia, Florida, Illinois and
Michigan; (b) two first mortgage loans insured as to principal and interest by
FHA on multifamily housing properties located in North Carolina and Ohio; (c)
Cap Source I Partnership Equity Interests in seven limited partnerships. Cap
Source I also holds reserve investments in the form of cash and cash equivalents
and investments in certain GNMA securities backed by pools of single family
mortgages (the "Cap Source I Reserve Investments").

93
<PAGE>
The Cap Source I Mortgage Securities provide Cap Source I with monthly
payments of principal and interest which are guaranteed either by GNMA or FHA.
The Cap Source I Partnership Equity Interests were intended to be sufficient to
cover all costs not covered by the Cap Source I Mortgage Securities until the
Cap Source I Operating Partnerships' income was sufficient to cover their
expenses, including debt service on the Cap Source I Mortgage Securities, as
well as a return to Cap Source I on its investment during the period. The
current return to Cap Source I on its Cap Source I Partnership Equity Interests
is a function of the net cash flow generated by the properties and is dependent
on the rental and occupancy rates and on the level of expenses at the
properties.

The FHA Loans and GNMA Certificates owned by Cap Source I are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of FHA
and GNMA are backed by the full faith and credit of the United States
government. The Cap Source I Partnership Equity Interests, however, are not
insured or guaranteed. The value of these investments is a function of the value
of the real estate owned by the Cap Source I Operating Partnerships.

The following FHA Loans and GNMA Certificates associated with the Operating
Partnerships were owned by Cap Source I at December 31, 1997.

<TABLE>
<CAPTION>
GUARANTEED AGGREGATE
OR INTEREST MATURITY PRINCIPAL AMOUNT
PROPERTY NAME INSURED BY RATE DATE OUTSTANDING
- ---------------------------------------------------------- ----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments.................................... FHA 8.72% 11/15/2028 $ 3,510,035
Highland Park Apartments.................................. FHA 8.75 11/01/2028 9,001,010
Misty Springs Apartments.................................. GNMA 8.75 6/15/2029 4,271,964
The Ponds at Georgetown................................... GNMA 9.00 12/15/2029 2,233,927
Waterman's Crossing....................................... GNMA 10.00 9/15/2028 10,927,185
Water's Edge Apartments................................... GNMA 8.75 12/15/2028 5,066,537
----------------
$ 35,010,658
----------------
----------------
</TABLE>

The following table shows the occupancy levels and effective rental rates of
the properties financed by Cap Source I in 1997:

<TABLE>
<CAPTION>
AVERAGE EFFECTIVE
NUMBER OF PERCENTAGE OF ANNUAL RENTAL
PROPERTY NAME LOCATION UNITS UNITS OCCUPIED RATE PER UNIT
- ---------------------------------------------- ---------------------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments........................ Jacksonville, NC 108 96% $ 6,258
Fox Hollow Apartments......................... High Point, NC 184 96 6,482
Highland Park Apartments...................... Columbus, OH 252 93 6,333
Misty Springs Apartments...................... Daytona Beach, FL 128 98 6,101
The Ponds at Georgetown....................... Ann Arbor, MI 134 97 9,883
Waterman's Crossing........................... Newport News, VA 260 98 7,207
Water's Edge Apartments....................... Lake Villa, IL 108 96 8,723
-----
1,174
-----
-----
</TABLE>

In the opinion of Cap Source I's management, each of the properties is
adequately covered by insurance.

RECENT DEVELOPMENTS. The mortgage on The Ponds has been in default for
several years because cash flow from the property has been insufficient to fully
fund the property's mortgage obligations. In addition, the property is
approximately $584,000 delinquent on its property taxes as of December 31, 1997.
Despite the default, Cap Source I has continued to receive full payment with
respect to the GNMA Certificate due to the co-insurer's (private mortgage
lender) funding of the deficits. The co-insurer has the option to

94
<PAGE>
suspend its funding of the property's deficits and assign its mortgage to GNMA,
which would result in a return to Cap Source I of the outstanding principal
balance of its GNMA Certificate and the possible loss of the Partnership Equity
Interest in the property. There can be no assurance that the co-insurer will not
make an election in the future to suspend funding of the property's deficits. In
April 1997, Cap Source I funded $53,550 from its reserves to assist the property
in paying a portion of its property takes in order to avoid a tax sale of the
property. Discussions are under way with the involved parties as to the best
method to resolve the mortgage and tax delinquencies with full resolution
expected in 1998.

CAP SOURCE II

HISTORY. Cap Source II, a Delaware limited partnership, was formed August
22, 1986. The general partners of Cap Source II are Insured Mortgage Equities,
II L.P. and America First Capital Source II, L.L.C. The initial limited partner,
H/T Corp. II, a Delaware corporation wholly owned by the Cap Source II General
Partners assigned certain of the ownership attributes of the limited partner
interest to the Cap Source II Investors, including rights to a percentage of Cap
Source II's income, gain, losses, deductions, credits and distributions. H/T
Corp. II has agreed to vote the limited partner interests as directed by the Cap
Source II Investors. The Cap Source II Investors hold beneficial assignment
certificates, which represent beneficial assignments of the limited partner
interest in Cap Source II.

Cap Source II was formed to invest principally in federally insured
mortgages on multifamily housing property (the "Cap Source II Mortgage
Securities") and to acquire, hold, sell and otherwise deal with limited
partnership interests (the "Cap Source II Partnership Equity Interests") in the
Cap Source II Operating Partnerships. The Cap Source II Partnership Agreement
originally provided that the Units would be listed on NASDAQ for trading. The
Investors voted by proxy not to list the Units on NASDAQ.

Cap Source II's assets originally consisted of debt and equity financing for
five multifamily rental housing properties. Cap Source II's investments in these
properties consisted of: (a) approximately 85% in the form of permanent
mortgages and/or construction loans, each of which was insured or guaranteed, in
an amount substantially equal to the face amount of the mortgage, by the FHA or
GNMA; and (b) the balance to purchase up to a 99% limited partnership interest
in limited partnerships which developed, constructed, own and operate these
properties.

The Cap Source II Operating Partnerships were structured with the developer
of the respective property serving as the general partner (the "Cap Source II
Operating General Partner") with a 1% interest, Cap Source II as the limited
partner with a 98.99% interest and CS Properties II, Inc., a corporation wholly
owned by affiliates of the Cap Source II General Partners, as the special
limited partner (the "Cap Source II Special Limited Partner") with a .01%
interest. The Cap Source II Special Limited Partner has the power, among other
things, to remove the Cap Source II Operating General Partners under certain
circumstances and to consent to the sale of the Cap Source II Operating
Partnerships' Assets. In the only exception to the above-described original
structuring, in one of the Cap Source II Operating Partnerships, the Ponds at
Georgetown L.P., Cap Source II is a limited partner with a 68.7% interest and
Capital Source I L.P., an affiliate of the Cap Source I General Partners, is a
limited partner with a 30.29% interest.

Since inception, Cap Source II has been repaid by GNMA on one of its Cap
Source II Mortgage Securities, and, as a result, it no longer holds a Cap Source
II Partnership Equity Interest in the Cap Source II Operating Partnership which
owned the property collateralizing the repaid mortgage.

As a result of the foregoing, at December 31, 1997, Cap Source II held debt
and/or equity investments in four properties. These investments consist of (a)
three mortgage-backed securities guaranteed as to principal and interest by
GNMA, collateralized by first mortgage loans insured as to principal and
interest by FHA on multifamily housing properties located in Michigan and
Florida; (b) one first mortgage loan insured as to principal and interest by FHA
on a multifamily housing property located in North Carolina; (c) Cap Source II
Partnership Equity Interests in four limited partnerships. Cap Source II also
holds

95
<PAGE>
reserve investments in the form of cash and cash equivalents and investments in
certain GNMA securities backed by pools of single family mortgages (the "Cap
Source II Reserve Investments").

The Cap Source II Mortgage Securities provide Cap Source II with monthly
payments of principal and interest which are guaranteed either by GNMA or FHA.
The Cap Source II Partnership Equity Interests were intended to be sufficient to
cover all costs not covered by the Cap Source II Mortgage Securities until the
Cap Source II Operating Partnerships' income was sufficient to cover their
expenses, including debt service on the Cap Source II Mortgage Securities, as
well as a return to Cap Source II on its investment during the period. The
current return to Cap Source II on its Cap Source II Partnership Equity
Interests is a function of the net cash flow generated by the properties and is
dependent on the rental and occupancy rates and on the level of expenses at the
properties.

The FHA Loan and GNMA Certificates owned by Cap Source II are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of FHA
and GNMA are backed by the full faith and credit of the United States
government. The Cap Source II Partnership Equity Interests, however, are not
insured or guaranteed. The value of these investments is a function of the value
of the real estate owned by the Cap Source II Operating Partnerships.

The following FHA Loan and GNMA Certificates were owned by Cap Source II at
December 31, 1997. Interest income from the FHA Loan and GNMA Certificates is
the primary source of cash available for distribution to Investors.

<TABLE>
<CAPTION>
GUARANTEED AGGREGATE
OR INTEREST MATURITY PRINCIPAL AMOUNT
PROPERTY NAME INSURED BY RATE DATE OUTSTANDING
- ---------------------------------------------------------- ----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Crane's Landing........................................... GNMA 8.75% 12/15/2030 $ 10,229,304
Delta Crossing............................................ FHA 9.10 10/01/2030 6,538,424
Monticello Apartments..................................... GNMA 8.75 11/15/2029 5,328,430
The Ponds at Georgetown................................... GNMA 9.00 12/15/2029 5,066,488
----------------
$ 27,162,646
----------------
----------------
</TABLE>

The following table shows the occupancy levels and effective rental rates of
the properties financed by Cap Source II in 1997:

<TABLE>
<CAPTION>
AVERAGE EFFECTIVE
NUMBER OF PERCENTAGE OF ANNUAL RENTAL
PROPERTY NAME LOCATION UNITS UNITS OCCUPIED RATE PER UNIT
- ------------------------------------------------- ------------------ ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Crane's Landing.................................. Winter Park, FL 252 96% $ 7,366
Delta Crossing................................... Charlotte, NC 178 93 7,260
Monticello Apartments............................ Southfield, MI 106 97 8,873
The Ponds at Georgetown.......................... Ann Arbor, MI 134 97 9,883
---
670
---
---
</TABLE>

In the opinion of Cap Source II's management, each of the properties is
adequately covered by insurance.

RECENT DEVELOPMENTS. The mortgage on the Ponds at Georgetown has been in
default for several years because cash flow from the property has been
insufficient to fully fund the property's mortgage obligations. In addition, the
property is approximately $584,000 delinquent on its property taxes as of
December 31, 1997. Despite the default, Cap Source II has continued to receive
full payment with respect to the GNMA Note due to the co-insurer's (private
mortgage lender) funding of the deficits. The co-insurer has the option to
suspend its funding of the property's deficits and assign its mortgage to GNMA,
which would

96
<PAGE>
result in a return to Cap Source II of the outstanding principal balance of its
GNMA Note and the possible loss of the Partnership Equity Interest in the
property. There can be no assurance that the co-insurer will not make an
election in the future to suspend funding of the property's deficits. In April
1997, Cap Source II funded $124,450 from its reserves to assist the property in
paying a portion of its property taxes in order to avoid a tax sale of the
property. Discussions are under way with the involved parties as to the best
method to resolve the mortgage and tax delinquencies with full resolution
expected in 1998.

SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP UNITS

SALE PRICES OF UNITS

The Units are not listed on any national or regional securities exchange or
quoted on any automated quotation system, and there is no established public
trading market for the Units. Secondary sales activity for the Units has been
limited and sporadic. The General Partners monitor transfers of the Units (a)
because the admission of the transferee as a substitute investor requires the
consent of the General Partners under each of the Partnership Agreements, and
(b) in order to track compliance with safe harbor provisions to avoid treatment
of the Partnerships as "publicly traded partnerships" for federal income tax
purposes.

Set forth in the tables that follow is certain information regarding sale
transactions in the Units. Such information was obtained from the sources
indicated. The transactions reflected in the tables below represent only some of
the sale transactions in the Units. There may have been other secondary sale
transactions in the Units, although specific information regarding such
transactions is not readily available to the General Partners. Because the
information regarding sale transactions in the Units included in the tables
below is provided without verification by the General Partners and because the
information provided does not reflect sufficient activity to cause the prices
shown to be representative of the values of the Units, such information should
not be relied upon as indicative of the ability of Investors to sell their Units
in secondary sale transactions or as to the prices at which such Units may be
sold. Therefore, the information presented should not necessarily be relied upon
by Investors in determining whether or not to tender their Units in the
Transaction.

The General Partners do not believe that the secondary sale prices of the
Units accurately reflect the value of the assets of the Partnerships because
secondary sale prices are adversely affected by a variety of factors unrelated
to the value of the assets of a limited partnership. Limited partner interests
are generally traded on a sporadic basis. Sale prices can vary dramatically
based on the number of interests sold at once or over time. Additionally, the
Tax Reform Act of 1986 contained provisions which eliminated certain federal
income tax advantages associated with investments in limited partnerships and
which caused limited partnerships to place restrictions on transfers of
interests in order to avoid taxation of income at the partnership and partner
levels. Accordingly, limited partnerships have not been well received by
investors and secondary sale prices have been adversely affected.

While the General Partners receive some information regarding the prices of
secondary sales transactions of the Units, the General Partners do not receive
or maintain comprehensive information regarding all activities of all
broker/dealers and others known to facilitate secondary sales of the Units. The
General Partners estimate, based solely on the transfer records of the
Partnerships, that the number of Units transferred in sale transactions (i.e.,
excluding transactions believed to be between related parties, family members or
the same beneficial owner) was as follows:

97
<PAGE>
SECONDARY MARKET PARTNERSHIP NET UNIT PRICES
FROM JANUARY 1, 1996 THROUGH DECEMBER 31, 1996
CAPITAL SOURCE L.P.

<TABLE>
<CAPTION>
ADJUSTED CAPITAL
UNIT SALES PRICE PER ORIGINAL PRICE VERSUS ADJUSTED CAPITAL
PER $1,000 ORIGINAL INVESTMENT $1,000 NUMBER
------------------------------- INVESTMENT --------------------------------- OF
MONTH WEIGHTED HIGH LOW AS OF 12/31/95 WEIGHTED HIGH LOW UNITS
- --------------------------- --------- --------- --------- ---------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January.................... $ 575.00 $ 575.00 $ 575.00 $ 917.50 (37.3)% (37.3)% (37.3)% 434
February................... 529.00 540.00 450.00 917.50 (42.3) (41.1) (51.0) 10,980
March...................... N/A N/A N/A 917.50 N/A N/A N/A N/A
April...................... N/A N/A N/A 917.50 N/A N/A N/A N/A
May........................ 522.50 550.50 501.50 917.50 (43.1) (40.0) (45.3) 2,400
June....................... N/A N/A N/A 917.50 N/A N/A N/A N/A
July....................... 523.00 569.50 401.50 917.50 (43.0) (37.9) (56.2) 1,700
August..................... 549.00 587.50 300.00 917.50 (40.2) (36.0) (67.3) 10,820
September.................. 300.50 502.50 300.00 917.50 (67.2) (45.2) (67.3) 101,524
October.................... 494.50 576.00 300.00 917.50 (46.1) (37.2) (67.3) 29,936
November................... 492.50 550.00 300.00 917.50 (46.3) (40.1) (67.3) 2,229
December................... 558.00 562.50 545.00 917.50 (39.2) (38.7) (40.1) 1,188
</TABLE>

SECONDARY MARKET PARTNERSHIP NET UNIT PRICES
FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
CAPITAL SOURCE L.P.

<TABLE>
<CAPTION>
ADJUSTED CAPITAL
UNIT SALES PRICE PER ORIGINAL PRICE VERSUS ADJUSTED CAPITAL
PER $1,000 ORIGINAL INVESTMENT $1,000 NUMBER
------------------------------- INVESTMENT --------------------------------- OF
MONTH WEIGHTED HIGH LOW AS OF 12/31/96 WEIGHTED HIGH LOW UNITS
- --------------------------- --------- --------- --------- ---------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January.................... $ 565.00 $ 568.00 $ 563.50 $ 917.50 (38.4)% (38.1)% (38.6)% 1,183
February................... 568.50 583.00 463.00 917.50 (38.0) (36.5) (49.5) 1,602
March...................... 542.00 545.00 529.50 917.50 (40.9) (40.6) (42.3) 2,130
April...................... 541.50 550.00 537.50 917.50 (41.0) (40.1) (41.4) 300
May........................ 476.50 537.50 450.00 917.50 (48.1) (41.4) (51.0) 1,860
June....................... N/A N/A N/A 917.50 N/A N/A N/A N/A
July....................... 410.00 537.50 387.50 917.50 (55.3) (41.4) (57.8) 5,865
August..................... 454.00 537.50 374.50 917.50 (50.5) (41.4) (59.2) 914
September.................. 568.50 606.00 482.50 917.50 (38.0) (34.0) (47.4) 2,740
October.................... 588.50 625.00 512.50 917.50 (35.9) (31.9) (44.1) 6,355
November................... 405.00 405.00 405.00 917.50 (55.9) (55.9) (55.9) 1,875
December................... N/A N/A N/A 917.50 N/A N/A N/A N/A
</TABLE>

98
<PAGE>
SECONDARY MARKET PARTNERSHIP NET UNIT PRICES
FROM JANUARY 1, 1996 THROUGH DECEMBER 31, 1996
CAPITAL SOURCE II L.P.-A

<TABLE>
<CAPTION>
ADJUSTED CAPITAL
UNIT SALES PRICE PER ORIGINAL PRICE VERSUS ADJUSTED CAPITAL
PER $1,000 ORIGINAL INVESTMENT $1,000 NUMBER
------------------------------- INVESTMENT --------------------------------- OF
MONTH WEIGHTED HIGH LOW AS OF 12/31/95 WEIGHTED HIGH LOW UNITS
- -------------------------- --------- --------- --------- ---------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January................... $ 350.00 $ 350.00 $ 350.00 $ 619.50 (43.5)% (43.5)% (43.5)% 2,406
February.................. 303.50 315.00 225.50 619.50 (51.0) (49.2) (63.6) 763
March..................... 327.00 350.00 323.00 619.50 (47.2) (43.5) (47.9) 4,250
April..................... 323.00 342.50 275.00 619.50 (47.9) (44.7) (55.6) 7,805
May....................... N/A N/A N/A 619.50 N/A N/A N/A N/A
June...................... 317.50 319.50 310.00 619.50 (48.7) (48.4) (50.0) 2,605
July...................... N/A N/A N/A 619.50 N/A N/A N/A N/A
August.................... 338.50 362.50 200.00 619.50 (45.4) (41.4) (67.7) 2,350
September................. 204.50 348.00 200.00 619.50 (67.0) (43.8) (67.7) 145,086
October................... 252.50 340.00 200.00 619.50 (59.2) (45.1) (67.7) 5,513
November.................. 207.50 361.00 200.00 619.50 (66.5) (41.7) (67.7) 115,275
December.................. 330.00 330.00 330.00 619.50 (46.7) (46.7) (46.7) 2,983
</TABLE>

SECONDARY MARKET PARTNERSHIP NET UNIT PRICES
FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
CAPITAL SOURCE II L.P.-A

<TABLE>
<CAPTION>
ADJUSTED CAPITAL
UNIT SALES PRICE PER ORIGINAL PRICE VERSUS ADJUSTED CAPITAL
PER $1,000 ORIGINAL INVESTMENT $1,000 NUMBER
------------------------------- INVESTMENT --------------------------------- OF
MONTH WEIGHTED HIGH LOW AS OF 12/31/96 WEIGHTED HIGH LOW UNITS
- --------------------------- --------- --------- --------- ---------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January.................... $ 333.50 $ 342.50 $ 300.00 $ 619.50 (46.2)% (44.7)% (51.6)% 3,250
February................... 343.00 349.50 337.50 619.50 (44.6) (43.6) (45.5) 3,589
March...................... 329.50 345.00 200.00 619.50 (46.8) (44.3) (67.7) 1,254
April...................... 378.50 387.50 355.00 619.50 (38.9) (37.4) (42.7) 9,160
May........................ 383.50 387.50 307.50 619.50 (38.1) (37.4) (50.4) 16,613
June....................... 359.00 370.00 314.00 619.50 (42.1) (40.3) (49.3) 2,375
July....................... 285.00 364.00 275.00 619.50 (54.0) (41.2) (55.6) 10,339
August..................... 338.50 350.00 334.00 619.50 (45.4) (43.5) (46.1) 850
September.................. 372.00 407.00 362.50 619.50 (40.0) (34.3) (41.5) 4,636
October.................... 363.50 368.00 225.50 619.50 (41.3) (40.6) (63.6) 3,350
November................... 387.50 387.50 387.50 619.50 (37.4) (37.4) (37.4) 1,000
December................... 305.00 305.00 305.00 619.50 (50.8) (50.8) (50.8) 250
</TABLE>

99
<PAGE>
UNITHOLDERS

NUMBER OF UNITHOLDERS. As of the Record Date, Cap Source I had outstanding
3,374,222 Units which were held of record by approximately Investors.
Cap Source II had outstanding 4,011,101 Units which were held of record by
approximately Investors.

BENEFICIAL OWNERS OF MORE THAN 5% OF THE UNITS. There are no Persons known
by the General Partners to be the beneficial owners of more than 5% of the
outstanding Units in either of the Partnerships.

PARTNERSHIP DISTRIBUTIONS

Cap Source I paid quarterly distributions totaling $1.01 per Unit for the
year ended December 31, 1997, including a fourth quarter distribution in the
amount of $.2525 per Unit paid to limited partners on February 17, 1998. Cash
distributions for 1997 were funded solely from cash flow generated by Cap Source
I's investment in insured or guaranteed mortgages on six remaining multifamily
apartment complexes. Cumulative cash distributions as of February 17, 1998
totaled $16.02 or $15.81 per original $20.00 Unit, depending on the initial
closing date of the Investor's investment. These amounts include a $1.65 per
Unit special return of capital distribution paid to Investors in 1993.
Accordingly, current cash distributions are based on an adjusted Unit of $18.35.

Cash distributions paid or accrued per Cap Source I Unit for 1996 and 1997
were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Regular monthly distributions
Income.............................................. $ .7049 .7767
Return of capital................................... .3051 .2333
------- -------
$ 1.0100 $ 1.0100
------- -------
------- -------
Distributions
Paid out of cash flow............................... $ 1.0100 $ 1.0100
------- -------
------- -------
</TABLE>

Regular quarterly distributions to Investors consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for distributions
is received from other temporary investments. Cap Source I may draw on reserves
to pay operating expenses or to supplement cash distributions to Investors. Cap
Source I is permitted to replenish reserves with cash flows in excess of
distributions paid. For the year ended December 31, 1997, a net amount of
$189,014 of undistributed cash flow was added to reserves. The total amount held
in reserves at December 31, 1997, was $10,787,058 of which $1,088,526 was
invested in GNMA Certificates.

Cap Source II paid monthly distributions totaling $.81 per Unit for the year
ended December 31, 1997, including the distribution for the month of December in
the amount of $.0675 per Unit paid to Limited Partners on February 17, 1998.
Cash distributions for 1997 were funded primarily from cash flow generated by
Cap Source II's investment in insured or guaranteed mortgages on four
multifamily apartment complexes. As in prior years, a portion of these
distributions, approximately $.29 per Unit, was funded from Cap Source II's
reserves. Cumulative cash distributions through February 17, 1998 totaled $18.51
to $17.54 per original $20.00 Unit, depending on the initial closing date of the
Investor's investment. These amounts include a total of $7.61 per Unit in
special return of capital distributions. Accordingly, current cash distributions
are based on an adjusted Unit of $12.39.

100
<PAGE>
Cash distributions paid or accrued per Cap Source II Unit for 1995, 1996 and
1997 were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
<S> <C> <C>
Regular monthly distributions
Income.............................................. $ .3449 $ .2947
Return of capital................................... .4651 .4153
------ ------
.8100 .8100
------ ------
------ ------
Distributions
Paid out of cash flow............................... .5172 .6019
Paid out of reserves................................ .2928 .2081
------ ------
$ .8100 $ .8100
------ ------
------ ------
</TABLE>

Regular monthly distributions to Investors consist primarily of interest
received on the FHA Loan, GNMA Certificates and the Cap Source II Reserve
Investments. Additional cash for distributions is received from other temporary
investments. Cap Source II may draw on reserves to pay operating expenses or to
supplement cash distributions to Investors. Cap Source II is permitted to
replenish reserves with cash flows in excess of distributions paid. During 1997,
$1,186,163 was withdrawn from reserves to supplement regular monthly cash
distributions. The total amount held in reserves at December 31, 1997, was
$1,550,084 of which $1,050,718 was invested in mortgaged-backed securities.

Cap Source II has been supplementing cash flow from operations with
withdrawals from reserves in order to maintain distributions at the current
levels. Consequently, it is likely that the level of distributions will be
reduced in the future.

Following consummation of the Transaction, Investors may receive a final
distribution from their Partnership for the period commencing on the first day
following the end of the last fiscal quarter for which distributions are made
and ending on the Effective Date.

101
<PAGE>
SELECTED FINANCIAL DATA OF THE PARTNERSHIPS

The following selected financial data of the Partnerships has been derived
from, and should be read in conjunction with, the financial statements and
related notes for, and as of, the end of the period indicated, which are
contained in the separately bound supplement delivered with this
Prospectus/Consent Solicitation Statement. The financial statements as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 have been audited by Coopers & Lybrand L.L.P., independent
public accountants, whose reports thereon are included in the separately bound
supplement.

Reference is made to the Pro Forma Financial Information which reflects the
historical financial statements of the Company and the Partnerships after giving
effect to the Transaction under the assumptions and adjustments set forth in the
accompanying notes to the pro forma financial statements.

SELECTED FINANCIAL DATA
CAPITAL SOURCE L.P.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income................................. $ 7,530,940 $ 7,748,867 $ 7,210,114 $ 7,203,323 $ 7,555,700
Interest on temporary cash investments and
U.S. government securities.................. 184,042 159,005 225,135 550,599 583,881
Mortgage-backed securities income............. -- 77,012 132,211 112,182 90,320
Interest on FHA Debentures.................... -- -- -- -- --
Interest on GNMA securities................... -- 446,103 519,970 -- --
Other income.................................. 202,831 306,903 219,376 270,132 252,057
Unusual item--gain on disposition of Falcon
Point assets and related liabilities........ -- 2,746,326 -- -- --
Expenses (including depreciation)............. (5,437,478) (6,167,516) (5,477,264) (5,573,880) (6,074,328)
Minority interest in (income) losses of
operating partnerships...................... 6,889 (19,772) 2,571 2,746 (5,090)
------------- ------------- ------------- ------------- -------------
Income before extraordinary item.......... 2,487,224 5,296,928 2,832,113 2,565,102 2,402,540
Extraordinary item--gain from forgiveness of
accrued interest............................ -- -- -- 82,216 --
------------- ------------- ------------- ------------- -------------
Net income.................................... 2,487,224 5,296,928 2,832,113 2,647,318 2,402,540
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per Unit
Income before extraordinary item............ .73 1.55 .83 .76 .70
Extraordinary item.......................... -- -- -- .02 --
------------- ------------- ------------- ------------- -------------
Net income per Unit........................... .73 1.55 .83 .78 .70
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Cash distributions per Unit................... 2.6825 1.0100 1.0100 1.0100 1.0100
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Total assets.................................. 48,098,722 48,103,699 47,193,984 46,223,005 $ 45,132,930
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Mortgage loan payable......................... $ 6,395,004 $ 6,395,004 $ 6,392,007 $ 6,354,657 $ 6,320,076
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>

102
<PAGE>
SELECTED FINANCIAL DATA
CAPITAL SOURCE II L.P.-A

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income................................. $ 4,442,657 $ 4,529,975 $ 4,656,371 $ 4,854,898 $ 5,105,108
Mortgage-backed securities income............. 259,294 78,153 123,033 91,982 82,182
Interest on FHA Debentures.................... -- -- -- -- --
Interest on GNMA securities................... -- -- -- -- --
Interest on temporary cash investments and
U.S. government securities.................. 372,655 195,309 218,077 168,311 104,411
Other income.................................. 254,238 161,039 144,967 161,805 202,670
Gain on sale of mortgage-backed securities.... -- -- 15,670 -- --
Unusual item--gain on disposition of
Brookridge assets and related liabilities... -- -- -- -- --
Expenses (including depreciation)............. (3,674,507) (3,526,029) (3,432,024) (3,678,376) (4,097,678)
Minority interest in losses of operating
partnerships................................ 6,243 3,582 2,220 608 857
------------- ------------- ------------- ------------- -------------
Net income.................................... 1,660,580 1,442,029 1,728,314 1,599,228 1,397,550
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per Unit........................... .41 .36 .43 .39 .34
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Cash distributions per Unit................... 4.0702 .8100 .8100 .8100 0.8100
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Total assets.................................. $ 33,356,335 $ 31,262,819 $ 29,795,170 $ 28,106,422 26,439,286
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Mortgage loan payable......................... $ -- $ -- $ -- $ -- $ --
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>

103
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

Pursuant to the Second Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") of the Company, the total number of shares
of capital stock that the Company has authority to issue is 100,000,000,
consisting of 50,000,000 shares of common stock, par value $.001 per share and
50,000,000 shares of preferred stock, par value $.001 per share. There are
presently 1,000 shares of Common Stock issued and outstanding, all of which are
held by America First Companies L.L.C., who purchased the shares at a price of
$1.00 per share when the Company was organized. Upon consummation of the
Transaction, all such outstanding shares held by America First Companies L.L.C.
will be repurchased by the Company at a price of $1.00 per share. The number of
shares of Common Stock to be issued in connection with the Transaction depends
on the number of Notes issued. Assuming all Investors receive Shares in
connection with the Transaction, 3,354,887 shares of Common Stock will be issued
and outstanding after the Transaction. Under Delaware law, shareholders
generally are not liable for the Company's debts or obligations.

COMMON STOCK

The holders of shares of Common Stock are entitled to one vote per share on
all matters voted on by Shareholders, including election of directors, and,
except as provided in the Certificate of Incorporation in respect of any other
class or series of stock, the holders of such shares exclusively possess all
voting power. The Certificate of Incorporation does not provide for cumulative
voting in the election of directors. Subject to any preferential rights of any
outstanding shares or series of stock, holders of shares of Common Stock are
entitled to receive dividends when and as declared by the Board of Directors,
out of funds legally available therefor. Upon any liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
pro rata all assets of the Company available for distribution to its
Shareholders after payment of, or adequate provisions for, all known debts and
liabilities of the Company. All shares of Common Stock now outstanding are, and
the Shares of Common Stock offered hereby will be when issued, fully paid and
nonassessable. The holders thereof will not have preemptive rights to subscribe
to additional stock or securities issued by the Company at a subsequent date.
The Company may issue additional shares of common stock without further
stockholder approval, up to the maximum authorized number of shares, except as
may be otherwise required by applicable law or stock exchange regulations.

As further described in the Certificate of Incorporation, persons who
acquire beneficial ownership of shares of the Company's Common Stock entitling
such person, in the aggregate, to 15% or more of all voting power of the
Company, will not be able to exercise more than 15% of the Company's total
voting power until such time as such exercise is approved by a vote of at least
75% of the remaining shares of the Company entitled to vote on such matter.

The Certificate of Incorporation authorizes the Board of Directors to
classify or reclassify any unissued shares of stock, to provide for the issuance
of shares in other classes or series, including preferred stock in one or more
series, to establish the number of shares in each class or series and to fix the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications or terms or conditions of
redemption of such class or series. The Company has no present intention to
issue shares of any class or series other than Common Stock.

There is currently no established trading market for the Common Stock, and
prior to the Transaction, the Common Stock will not be listed on any national
securities exchange or quoted on an automated quotation system. Therefore, no
sale or bid price information is available with respect to the Common Stock. The
Common Stock has been approved for listing on the NYSE under the symbol
" ," subject to official notice of issuance. The Company will meet the
round lot distribution and market value standards established by the NYSE.
will act as transfer agent and registrar of the Common
Stock.

104
<PAGE>
PREFERRED STOCK

Pursuant to the Certificate of Incorporation, the Board of Directors may
from time to time issue in one or more series up to 50,000,000 shares of
preferred stock in one or more series (the "Preferred Stock"). The Board of
Directors is authorized, by filing a certificate pursuant to the Delaware GCL
(hereinafter, the "Preferred Stock Designation"), to establish from time to time
the number of shares to be included in each series, and to fix the designations,
voting powers, privileges, preferences, terms and rights, and the limitations,
restrictions and qualifications of the shares of each series. The authority of
the Board of Directors with respect to each series shall include, but not be
limited to, determination of the following:

(a) the designation of the series, which may be by distinguishing
number, letter or title;

(b) the number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the preferred
stock designation) increase or decrease (but not below the number of shares
thereof then outstanding);

(c) whether dividends, if any, shall be cumulative or noncumulative,
and, in the case of shares of any series having cumulative dividend rights,
the date or dates or method of determining the date or dates from which
dividends on the shares of such series shall be cumulative;

(d) the rate of any dividends (or method of determining such dividends)
payable to the holders of the shares of such series, any conditions upon
which such dividends shall be paid and the date or dates or the method for
determining the date or dates upon which such dividends shall be payable;

(e) the price or prices (or method of determining such price or prices)
at which, the form of payment of such price or prices (which may be cash,
property or rights, including securities of the same or another corporation
or other entity) for which, the period or periods within which and the terms
and conditions upon which the shares of such series may be redeemed or
exchanged, in whole or in part, at the option of the Company or at the
option of the holder or holders thereof or upon the happening of a specified
event or events, if any;

(f) the obligation, if any, of the Company to purchase, exchange or
redeem shares of such series pursuant to a sinking fund or otherwise and the
price or prices at which, the form of payment of such price or prices (which
may be cash, property or rights, including securities of the same or another
corporation or other entity) for which, the period or periods within which
and the terms and conditions upon which the shares of such series shall be
redeemed, exchanged or purchased, in whole or in part, pursuant to such
obligation;

(g) the amount payable out of the assets of the Company to the holders
of shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company;

(h) provisions, if any, for the conversion or exchange of the shares of
such series, at any time or times at the option of the holder or holders
thereof or at the option of the Company or upon the happening of a specified
event or events, into shares of any other class or classes or any other
series of the same or any other class or classes of stock or any other
security, of the Company, or any other corporation or other entity, and the
price or prices or rate or rates of conversion or exchange and any
adjustments applicable thereto, and all other terms and conditions upon
which such conversion or exchange may be made;

(i) restrictions on the issuance of shares of the same series or
restrictions on the issuance of shares of the same series or of any other
class or series, if any;

(j) the voting powers, if any, of the holders of shares of the series,
which may provide more than one vote per share; and

(k) any other relative rights, preferences and limitations on that
series allowed by Delaware law.

105
<PAGE>
Subject to the express provisions of any other series of Preferred Stock
then outstanding, the Board of Directors may increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares, or
amend the voting powers, designations, preferences and relative, participating,
optional or other rights, if any, or the qualifications, limitations or
restrictions thereof of the shares of any such series of Preferred Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Shares received by Investors in the Transaction will be freely transferable
without restriction or further registration under the Securities, except for
Shares acquired by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act, which sales would be subject to certain volume
limitations and other restrictions described below.

In general, under Rule 144 as currently in effect, a person, including a
person who may be deemed an "affiliate" of the Company, who has held restricted
shares for at least one year may sell such shares, subject to certain volume
limitations and other restrictions, without registering them under the
Securities Act. Rule 144 generally also permits sales of restricted shares,
without any volume limitations, by a person who has not been an "affiliate" of
the Company for at least three months preceding the sale of such shares and who
has held those restricted shares for at least two years.

THE NOTES

GENERAL

If the Investors holding a majority of outstanding Units of a Partnership
approve the Transaction and the other conditions to the Transaction are met, the
Transaction will be consummated and such action will bind all Investors in that
Partnership, including those who abstain from voting, fail to return a completed
Consent Card or vote "NO" against the Transaction. All Investors will be given
the opportunity to elect to receive either Shares or Notes. An Investor who
failed to return a completed Consent Card will receive Shares of the Company for
his Units. Each Investor will receive written instructions on the proper
procedures for completing and submitting the Consent Card. See "VOTING." Certain
provisions of the Notes and the Indenture under which they will be issued are
summarized under "--Notes."

Neither the Partnership Agreements nor the Delaware Partnership Law give an
Investor the right to demand any type of dissenter's rights or to elect to
receive the appraised value of his Units in connection with the Transaction. No
such rights will be given to Dissenting Investors by the Partnerships or the
Company in connection with the Transaction. See "VOTING--No Right of Appraisal."

ALLOCATION OF NOTES

The aggregate principal amount of Notes to be issued by the Company may not
exceed the Maximum Note Limitation, which is $40.0 million. If Dissenting
Investors elect to receive Notes in excess of the Maximum Note Limitation, the
Transaction will not be consummated. In the event Dissenting Investors do not
elect to receive Notes in excess of the Maximum Note Limitation, but the total
amount of Notes allocable to all Investors who elect to receive Notes exceeds
such limit, Notes will be allocated first to Dissenting Investors who elected to
receive Notes and any remaining Notes will be allocated on a pro rata basis (in
denominations of $1,000) to those Investors who elected to receive Notes and
either abstained from voting by indicating their abstention on the Consent Card
or voted "YES" in favor of the Transaction. In such event, the abstaining
Investors and Consenting Investors who elected to receive Notes will receive
Shares in an amount equal to the difference between the Exchange Value allocable
to such Investors and the amount of Notes distributed to such Investors.

106
<PAGE>
NOTES

The following summaries describing certain provisions of the Notes do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Indenture, which is included as an
exhibit to the Registration Statement.

GENERAL. The Notes, if any, will be senior, unsecured obligations of the
Company issued under the Indenture, to be dated as of the first day of the month
in which the Notes are issued, by and between the Company and
, as Trustee. The Notes will be limited to $40.0 million aggregate
principal amount and will be designated as Variable Rate Senior Notes due
, 2006.

The Company may issue additional senior indebtedness, which may be secured,
only in compliance with the covenants of the Notes for the issuance of senior
debt.

On , 2006 (the "Maturity Date") the outstanding principal balance
of the Notes, plus accrued but unpaid interest, will be payable in full. The
Notes will be payable as follows:

(a) annual installments of accrued interest, payable on the fifteenth
day of each January (an "Interest Payment Date"), commencing on the first
Interest Payment Date following the issuance of the Notes and continuing
until the entire interest on and principal of each Note is paid in full; and

(b) the unpaid principal balance and accrued but unpaid interest on the
Maturity Date.

Payments under the Notes will be paid to the persons in whose names such Notes
are registered, subject to certain exceptions, at the close of business on the
last day of the month preceding the applicable Interest Payment Date. The Notes
will be issued in registered form without coupons in denominations of $1,000.

FRACTIONAL NOTES. Since the aggregate principal balance of the Notes to
which an Investor is entitled is determined by multiplying the Investor's Units
by the Exchange Value, per $1,000 original investment, assigned to such
Investor's Partnerships, the Investor may be entitled to a fractional interest
in a Note. Rather than issue a fractional interest in a Note, the Company will
issue to each such Investor a promissory note ("Promissory Note") with an
original principal balance equal to the fraction times $1,000, subject to the
Company's right, at its option, to pay cash in lieu of any portion of a
Promissory Note. The Promissory Notes will be issued pursuant to the terms of
the Indenture, but will not be listed on a national securities exchange.

INTEREST. For each period from and including an Interest Payment Date to
and including the day immediately preceding the next Interest Payment Date, the
Notes will bear interest at a rate equal to 120% of the annual applicable
federal rate for debt instruments with a term of not over three years as
determined under the Code and applicable regulations thereunder. As of the date
of this Prospectus/ Consent Solicitation Statement, 120% of the annual
applicable federal rate for debt instruments with a term of not over three years
was %. Therefore, the interest rate on the Notes as of the date of this
Prospectus/Consent Solicitation Statement is %. The interest rate will
remain in effect until the first day of the calendar year following completion
of the Transaction. Interest on the Notes will be adjusted annually and computed
on the basis of a 360-day year for the actual number of days elapsed.

OPTIONAL REDEMPTION. The Company may, at its option, redeem all or any
portion of the Notes or Promissory Notes from time to time by giving written
notice of the proposed redemption to the holders of the Notes or the Promissory
Notes, as the case may be. In the event less than all of the Notes and
Promissory Notes are to be redeemed, the Trustee will select first the
Promissory Notes to be redeemed and then the Notes to be redeemed by lot until
all Notes and Promissory Notes are paid in full and redeemed. The redemption
price will be 100% of the outstanding principal balance of such Notes or the
Promissory Notes, as the case may be, together with accrued interest to the date
fixed for redemption. There will be no sinking fund established to retire the
Notes or the Promissory Notes.

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MANDATORY REDEMPTION. The Indenture requires that the Company use 80% of
the Net Proceeds from Sales or Refinancings of Designated Assets (as defined
herein) to prepay the Notes. Net Proceeds from Sales or Refinancings of
Designated Assets generally means the gross proceeds of all sales, exchanges or
refinancings received with respect to assets acquired by the Company from the
Partnerships in the Transaction, less all costs and expenses incurred by the
Company in connection with such sales, exchanges or refinancings. Upon receipt
by the Company, at least 80% of the Net Proceeds from Sales or Refinancings of
Designated Assets will be deposited into a segregated trust account established
under the Indenture, and when the funds in such account equal or exceed $5
million, the proceeds will be used to redeem the Notes as provided in the
Indenture. In the event less than all of the Notes are to be redeemed pursuant
to this provision, the Trustee will select the Promissory Notes and the Notes to
be redeemed in the same manner as for an optional redemption until all Notes and
Promissory Notes are paid in full and redeemed.

LIMITATION ON INDEBTEDNESS. The Indenture prohibits the Company from
incurring any indebtedness if the new indebtedness would cause the Company's
aggregate principal amount of indebtedness then outstanding to exceed 70% of the
greater of (a) the value which is placed by an independent appraiser on all the
assets of the Company as of the date of the Transaction, and (b) the value
placed by an independent appraiser on all assets of the Company as of the date
of determination.

TRANSACTION, CONVEYANCE OR TRANSFER. The Company will not merge or
consolidate with or into, or sell, assign, transfer, lease or otherwise dispose
of all or substantially all of its properties and assets as an entirety to, any
other entity or entities, and the Company will not permit any of its wholly
owned subsidiaries to enter into any such transaction if, in the aggregate, such
transaction would result in a sale, assignment, transfer, lease or other
disposition of all or substantially all of the properties and assets of the
Company and its subsidiaries on a consolidated basis to any other entity or
entities, unless at the time and after giving effect thereto (a) either (i) if
the transaction is a merger or transaction, the Company shall be the surviving
entity, or (ii) the entity formed by such transaction or into which the Company
or such subsidiary is merged or to which the properties and assets of the
Company or such subsidiary, as the case may be, substantially as an entirety,
are transferred shall be a corporation organized and existing under the laws of
the United States of America, any state thereof or the District of Columbia and
shall expressly assume by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the Company
under the Notes and the Indenture, and in each case, the Indenture shall remain
in full force and effect; (b) immediately before and immediately after giving
effect to such transaction on a pro forma basis (including, without limitation,
any indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), no event of default shall have occurred and be
continuing and the Company, or the surviving entity, as the case may be, after
giving effect to such transaction on a pro forma basis, could incur $1.00 of
additional indebtedness under "--LIMITATION ON INDEBTEDNESS" above; and (iii)
immediately after giving effect to such transaction on a pro forma basis, the
consolidated net worth of the Company, or the surviving entity, as the case may
be, is at least equal to the consolidated net worth of the Company immediately
before such transaction.

EVENTS OF DEFAULT. A default will occur under the Indenture with respect to
the Notes if (a) the Company defaults in the payment of the principal of any
Note when the same becomes due and payable at maturity, upon redemption or
otherwise, (b) the Company defaults in the payment of interest on any Note when
the same becomes due and payable and such default continues for a period of 30
days, (c) the Company fails to comply with any of its other agreements contained
in the Indenture or the Notes for a period of 30 days after written notice
thereof, as provided in the Indenture, (d) the Company shall default under any
agreement relating to any other indebtedness of the Company where the
indebtedness exceeds $5 million, or (e) certain events of bankruptcy, insolvency
or reorganization shall have occurred.

If an event of default specified in (a) through (d) above occurs and is
continuing, either the Trustee or the holders of not less than 25% in principal
amount of the Notes then outstanding may declare all unpaid

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principal of and interest accrued on the Notes to be immediately due and
payable. In the event of a default specified in (e) above, all unpaid principal
and accrued interest on the Notes shall be immediately due and payable without
any declaration or other act on the part of the Trustee or any Noteholders. Upon
certain conditions such declarations may be annulled by the holders of a
majority in principal amount of the Notes and past defaults may be waived
(except a continuing default in payment of principal of or interest on the
Notes) by the holders of a majority in principal amount of the Notes.

The holders of a majority in principal amount of the outstanding Notes may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee, provided that such direction shall not be in conflict with any rule of
law or the Indenture. Before proceeding to exercise any right or power under the
Indenture at the direction of such holders, the Trustee shall be entitled to
receive from such holders reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with any
such direction.

The Company will be required to furnish to the Trustee annually a statement
of certain officers of the Company as to their knowledge of the Company's
compliance with all conditions and covenants under the Indenture. The Indenture
requires the Trustee to give to all Noteholders notice of any default by the
Company, unless such default shall have been cured or waived; however, except in
the case of a default in the payment of principal of or interest on any
outstanding Notes, the Trustee is entitled to withhold such notice in the event
that a trust committee of directors or certain officers of the Trustee in good
faith determine that withholding such notice is in the interest of the holders
of the outstanding Notes.

DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
discharged from obligations in respect of the Notes under the Indenture
(excluding certain obligations, such as the obligation to pay principal of and
interest on the Notes then outstanding, obligations of the Company in the event
of acceleration following default in the payment of any installment of interest
on and, if applicable, principal of the Notes and obligations to register the
transfer or exchange of the outstanding Notes and to replace stolen, lost or
mutilated certificates), upon the irrevocable deposit, in trust, of cash or
certain U.S. government obligations which through the payment of interest and
principal thereof in accordance with their terms will provide cash in an amount
sufficient to pay any installment of principal of and interest on the
outstanding Notes on the stated maturity of such installments in accordance with
the terms of the Indenture and the outstanding Notes, provided that the Company
has received an opinion of counsel or a favorable ruling of the IRS to the
effect that such a discharge will not be deemed, or result in, a taxable event
with respect to holders of the outstanding Notes and that certain other
conditions are met.

CHANGE IN CONTROL. The Indenture does not contain provisions requiring
redemption of the Notes or Promissory Notes by the Company, or adjustment to any
terms of the Notes or Promissory Notes, upon any change in control of the
Company.

LIMITED PROTECTION AGAINST DECLINE IN CREDIT QUALITY. The Indenture does
not contain any provisions protecting Noteholders against a sudden and dramatic
decline in credit quality of the Notes or Promissory Notes resulting from
takeovers, restructuring, reorganizations or similar transactions involving the
Company.

MODIFICATION OF THE INDENTURE. The Company and the Trustee may amend or
supplement the Indenture or the Notes without the consent of the Noteholders to:
(a) provide for uncertificated Notes in addition to or in place of certificated
Notes, (b) add covenants and events of default for the protection of the
Noteholders, (c) cure any ambiguity, defect or inconsistency in the Indenture or
to make any other change that does not adversely affect the rights of any
Noteholder, and (d) evidence the acceptance of appointment by a successor
trustee.

The Indenture also contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Notes then outstanding, to add any

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provisions to, or change in any manner or eliminate any of the provisions of,
the Indenture, or modify in any manner the rights of the holders of the Notes,
provided that the Company and the Trustee may not, without the consent of the
holder of each outstanding Note affected thereby, (a) reduce the amount of Notes
whose holders must consent to an amendment, supplement or waiver; (b) reduce the
rate of or change the time for payment of interest on any Note; (c) reduce the
principal of or change the fixed maturity of any Note or alter the redemption
provisions with respect thereto; (d) waive a default in the payment of the
principal of or interest on any Note; or (e) make any Note payable in money
other than that stated in the Note.

GOVERNING LAW. The Notes, the Promissory Notes and the Indenture will be
governed by and construed in accordance with the laws of the State of Delaware.

THE TRUSTEE. , (the "Trustee") will be the Trustee
under the Indenture. The Trustee does not serve as a trustee under any other
indenture relating to obligations of the Company and has no prior business
relationship with the Company, the General Partners or any of their Affiliates.

PURCHASE OF NOTES IN SECONDARY MARKET. In addition to making partial
redemption of the Notes, the Company may purchase Notes in the secondary market,
and such purchases may be at discounts from the outstanding principal balance of
the Notes. Such purchases have the effect of retiring the obligations, but do
not obligate the Company to follow the procedures for partial redemption of the
Notes described in the Indenture.

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CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS

Certain provisions of the Company's Organizational Documents generally have
an anti-takeover effect with respect to the Company, and may deter an offer with
a substantial premium to the then-current trading price of the Company's Common
Stock or hinder a potential transaction that may be attractive to Shareholders.

PURPOSES AND ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS. The Certificate
of Incorporation contains several provisions that will make difficult an
acquisition of control of the Company, by means of a tender offer, open market
purchase, a proxy fight or otherwise, that is not approved by the Company's
Board of Directors. The Bylaws also contain provisions that could have an
anti-takeover effect.

The purposes of the relevant provisions of the Certificate of Incorporation
and Bylaws are to discourage certain types of transactions, described below,
which may involve an actual or threatened change of control of the Company and
to encourage persons seeking to acquire control of the Company to consult first
with the Board of Directors to negotiate the terms of any proposed business
combination or offer. The provisions are designed to reduce the vulnerability of
the Company to an unsolicited proposal for a takeover that does not contemplate
the acquisition of all outstanding shares or is otherwise unfair to stockholders
of the Company or an unsolicited proposal for the restructuring or sale of all
or part of the Company. The Company believes that, as a general rule, such
proposals would not be in the best interests of the Company and its
stockholders.

The Company believes that the imminent threat of removal of the Company's
management or Board of Directors in such situations would severely curtail the
ability of management or the Board of Directors to negotiate effectively with
such purchasers. The management or the Company's Board of Directors would be
deprived of the time and information necessary to evaluate the takeover
proposal, to study alternative proposals and to help ensure that the best price
is obtained in any transaction involving the Company which may ultimately be
undertaken. If the real purpose of a takeover bid were to force the Company to
repurchase an accumulated stock interest at a premium price, management or the
Board of Directors would face the risk that, if it did not repurchase the
purchaser's stock interest, The Company's business and the Company's management
would be disrupted, perhaps irreparably.

Certain provisions of the Certificate of Incorporation and Bylaws, in the
view of the Company, will help ensure that the Company's Board of Directors, if
confronted by a surprise proposal from a third-party which has acquired a block
of stock, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to be the best
interests of the stockholders. In addition, certain other provisions of the
Certificate of Incorporation are designed to prevent a purchaser from utilizing
two-tier pricing and similar inequitable tactics in the event of an attempt to
take over the Company.

These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interests of the stockholders, and may delay
or frustrate the assumption of control by a holder of a large block of the
Company's Common Stock and the removal of incumbent management, even if such
removal might be beneficial to the stockholders. Furthermore, these provisions
may deter or could be utilized to frustrate a future takeover attempt which is
not approved by the incumbent Board of Directors, but which the holders of a
majority of the Company's Common Stock may deem to be in their best interests or
through which stockholders may receive a substantial premium for their stock
over prevailing market prices of such stock. By discouraging takeover attempts,
these provisions may have the incidental effect of inhibiting certain changes in
management (some or all of the members of which might be replaced in the course
of a change of control) and also the temporary fluctuations in the market price
of the stock, should a market develop, which often result from actual or rumored
takeover attempts.

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Set forth below is a description of all such material provisions in the
Certificate of Incorporation and the Bylaws. Such description is intended as a
summary only and is qualified in its entirety by reference to the Certificate of
Incorporation and the Bylaws.

REMOVAL; FILLING VACANCIES. The Certificate of Incorporation generally
provides that only a majority of the Board of Directors then in office shall
have the authority to fill any vacancies on the Board of Directors, including
vacancies created by an increase in the number of directors. Further, a director
may be removed only for cause and then only pursuant to the affirmative vote of
75% of the outstanding shares of stock entitled to vote in the election of
directors. In addition, the Bylaws provide that a new director elected to fill a
vacancy on the Board of Directors will serve for the remainder of the full term
of his or her predecessor and that no decrease in the number of directors shall
shorten the term of an incumbent. These provisions relating to removal and
filling of vacancies on the Board of Directors will preclude stockholders from
enlarging the Board of Directors or removing incumbent directors and filling the
vacancies with their own nominees.

TERMS OF DIRECTORS. Generally, the Certificate of Incorporation provides
that directors shall be classified, with respect to the time for which they hold
office, into three classes as nearly equal in number as possible. One class will
be originally elected for a term expiring at the annual meeting of stockholders
to be held in 1999, another class will be originally elected for a term expiring
at the annual meeting of stockholders to be held in 2000 and the third class
will be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2001. Directors in all classes will hold office until
such person's successor is duly elected and qualified.

LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The
Certificate of Incorporation and Bylaws provide that stockholder action can be
taken at an annual or special meeting of stockholders. No action of stockholders
may be taken by any consent in writing by the stockholders in lieu of such
meeting. The Certificate of Incorporation and Bylaws also provide that special
meetings of stockholders can be called only by the Chairman of the Board, the
President or the Board of Directors. Any power of stockholders to call a special
meeting is specifically denied by the Certificate of Incorporation.

INTERESTED STOCKHOLDER TRANSACTIONS. The Certificate of Incorporation
specifically provides that the Company will be governed by Section 203 of the
Delaware GCL ("Section 203"). Section 203 generally provides that the Company
may not engage in any business combination with any interested stockholder for a
period of three years following the date such stockholder became an interested
stockholder, unless (i) prior to such date the Board of Directors of the Company
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
for determining the number of shares outstanding (a) shares owned by persons who
are directors and officers and (b) employee stock plans, in certain instances),
or (iii) on or subsequent to such date the business combination is approved by
the Board of Directors and authorized at an annual or special meeting of the
stockholders by at least 66 2/3% of the affirmative voting stock that is not
owned by the interested stockholder. An interested stockholder is defined in
Section 203 as any person who (i) owns, directly or indirectly, 15% or more of
the outstanding voting stock of the Company or (ii) is an affiliate or associate
of the Company and was the owner of 15% or more of the outstanding voting stock
at any time within the three-year period immediately prior to the date on which
it is sought to be determined whether such person is an interested stockholder;
and the affiliates and the associates of such person.

SUPERMAJORITY VOTES. Certain provisions of the Certificate of Incorporation
and the Bylaws may not be amended, or repealed, nor may inconsistent provisions
be adopted, without the affirmative vote of stockholders holding at least 75% of
the stock of the Company entitled to vote.

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CONTROL SHARES. Pursuant to the Certificate of Incorporation, a person
acquiring beneficial ownership of more than 15% of the Company's Common Stock
will not be able to vote more than 15% of the total voting power of the Company
unless approved by the stockholders of the Company. See "DESCRIPTION OF CAPITAL
STOCK."

PREFERRED STOCK. Pursuant to the Certificate of Incorporation, the Board of
Directors is authorized to issue up to 50,000,000 shares of preferred stock in
one or more series. The Board of Directors is also authorized to determine (i)
the number of shares, (ii) the voting power, (iii) the privileges and
preferences, (iv) the terms and rights and (v) the limitations, restrictions and
qualifications with respect to any such series. The preferred stock may be
issued with disproportionate voting power in the discretion of the Board of
Directors. See "DESCRIPTION OF CAPITAL STOCK--Preferred Stock."

ADDITIONAL ANTI-TAKEOVER PROVISIONS. The Board of Directors may, in the
future, consider and adopt future anti-takeover provisions for the Company.
These provisions may include, but are not limited to, rights agreements for
stockholders of the Company which provide for the issuance of securities to
stockholders upon the occurrence of certain events, commonly known as "poison
pills." The purpose of these provisions would be to protect, for the benefit of
the stockholders, unrecognized or unrealized value in investments of the
Company.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The following discussion describes the material federal income tax
considerations to the Partnerships, the Investors, the Shareholders and the
Company that may result from the Transaction. This discussion is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury Department regulations promulgated thereunder (the
"Regulations"), rulings of the Internal Revenue Service (the "Service") and
applicable court decisions.

There is no assurance that provisions of the Code, Regulations or rulings
will not be changed by new legislation, Regulations or rulings, which may or may
not apply retroactively to transactions entered into or completed prior to the
date of the change, or that there will not be differences of opinion as to the
interpretation of provisions of the Code and Regulations and their application
to the Partnerships, the Investors, the Shareholders, the Company and the
holders of the Notes.

This summary is directed primarily to Investors who are individual residents
or citizens of the United States. This summary does not discuss federal income
tax consequences peculiar to nonresident alien individuals and foreign entities,
insurance companies, banking institutions, regulated investment companies, real
estate investment trusts, or other persons or entities to which special rules
apply by virtue of the nature of their specific activities. Specific
consideration is given, however, to entities that are exempt from federal income
taxation in "--Considerations for Tax-Exempt Shareholders" below. In addition,
no representations are made as to state or local tax consequences resulting from
the Transaction or an investment in the Company. In particular, Investors who
are nonresident aliens are urged to contact their tax advisors concerning the
potential effects of the relevant provisions of the Foreign Investment in Real
Property Tax Act of 1980 to the Transaction. ACCORDINGLY, THIS SUMMARY IS NOT
INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND INVESTORS AND IN
PARTICULAR TAX-EXEMPT INVESTORS, SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS
TO THEIR PARTICULAR CIRCUMSTANCES IN RELATION TO THE TAX CONSIDERATIONS
DESCRIBED HEREIN.

OPINIONS OF COUNSEL

Kutak Rock, counsel to the Company ("Counsel"), will render its opinion (the
"Opinion"), subject to various assumptions and conditioned upon certain
representations as to factual matters, that: (a) subject to

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the limitations described herein, the Transaction will be an exchange subject to
the nonrecognition provisions of Section 351 of the Code; and (b) the discussion
that follows fairly summarizes the material federal income tax considerations
associated with the Transaction. It should be noted that a ruling from the
Service will not be requested and that the Opinion, unlike a ruling by the
Service, is not binding on the Service or any court. Therefore, no assurance can
be given that the Service will not challenge any views expressed in this
discussion.

CERTAIN TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND THE SHARES

Investors are treated as limited partners of the Partnerships for federal
income tax purposes. The Partnerships are not subject to federal income taxation
and, instead, each Investor is required to take into account his or her share of
income, deductions or loss of the Partnership in which he or she invested,
regardless of whether any cash is distributed. The character of income to each
Investor is dependent upon its character to the Partnership. Upon consummation
of the Transaction, the Investors will, in essence, receive Shares in exchange
for their Units and thereby become shareholders of the Company which is
characterized as a corporation for federal income tax purposes. See "--Tax
Treatment of the Transaction" and "--Taxation of the Company" below.

In contrast to the tax treatment of the Partnerships, the Company is subject
to corporate income taxation. In addition, Shareholders will be taxed based on
the amount of distributions received from the Company. Each Shareholder will
receive a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to him or her during the preceding year. The extent to which
such distributions are taxable depends upon the amount of the Company's earnings
and profits. The character of distributions to the Shareholders is also not
dependant on its character to the Company and is generally characterized as
ordinary dividend income to the Shareholders. In addition, such income is
classified as portfolio income under the passive loss rules. Furthermore,
deductions and losses are not passed through to the Shareholders. See
"--Taxation of the Company" and "--Taxation of Shareholders" below.

TAX TREATMENT OF THE TRANSACTION

OVERVIEW. The Transaction will be consummated as described herein under the
laws of the State of Delaware. The Transaction shall be treated, for federal
income tax purposes, as (a) a contribution by both Cap Source I and Cap Source
II of their respective assets to the Company in exchange for Shares, Notes and
the assumption of any liabilities by the Company; and (b) the liquidation of the
Partnerships and the distribution of the Shares and Notes received in the
Transaction to the Investors.

RECOGNITION OF GAIN OR LOSS AS A RESULT OF THE TRANSACTION. In general,
under Section 351 of the Code, no gain or loss is recognized as a result of a
contribution of property to a corporation, provided that immediately after the
exchange, the contributor is part of a group of contributors who own 80% or more
of each class of voting stock of the corporation and 80% of each other class of
stock. However, gain will be recognized by a contributor to the extent
liabilities on the contributed assets exceed the contributor's aggregate basis
in such assets. Similarly, if a contributor receives property other than stock,
such as the Notes, then gain but not loss on the transfer will be recognized to
the extent of the fair market value of such property.

In addition, Section 351 of the Code will not apply and gain or loss will be
recognized if property is transferred to an investment company. A transfer of
property will be considered to be a transfer to an investment company if the
transfer results directly or indirectly in the diversification of the
transferors' interests and the transferee is a regulated investment company, a
real estate investment trust or a corporation more than 80% of the value of the
assets of which are held for investment and are readily marketable stock or
securities. The Taxpayer Relief Act of 1997 (the "Tax Act") has changed the
definition of an investment company so that it includes certain corporations if
more than 80% of the value of their assets (the "80% Test") consists of, among
other things, readily marketable stock or securities, money,

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stocks and other equity interests in corporations, evidences of indebtedness,
publicly traded partnership interests and interests in an entity if
substantially all of the assets of such entity are assets listed in this
sentence (the "Listed Assets"). The legislative history of the Tax Act indicates
that even though money is treated as a Listed Asset, if pursuant to a plan,
money contributed to a corporation is used to acquire assets, other than Listed
Assets, the 80% Test will be applied immediately after such acquisition. In this
regard, the General Partners have represented that the cash to be contributed to
Company will be used to acquire assets, other than Listed Assets.

Regulations promulgated under Section 351 of the Code provide that where
there are two or more transferors in a Section 351 transaction, a transferor may
have taxable income in the event it receives stock with a value in excess of the
property contributed by it. Thus, a Partnership which receives Shares with a
fair market value in excess of the fair market value of the assets it
contributes to the Company, may recognize income in amounts equal to such
excess. Similarly, in the event the fair market values of the Notes and the
Shares are different from those anticipated by the Company, Investors of each
Partnership could recognize gain as a result of the Transaction.

The Company (a) does not expect that the liabilities of the Partnerships
will exceed their bases in their contributed assets; (b) expects that, in
addition to Shares, the Partnerships will receive, as a result of the
Transaction, Notes, Promissory Notes or cash which will be distributed to
Dissenting Investors or in certain circumstances Investors (see "THE NOTES");
(c) expects that more than 20% of the value of the assets of the Company,
(including for this purpose cash which pursuant to a plan will be invested as
described above) will be attributable to assets, other than Listed Assets; and
(d) expects that the value of the Shares each Partnership receives will not
exceed the value of its assets contributed to the Company. Based on the
foregoing, the Company expects that the Transaction will be treated as an
exchange subject to the nonrecognition provisions of Section 351 of the Code and
that gain will not be recognized except to the extent of the fair market value
of any Notes, Promissory Notes or cash received by the Partnerships.

It should be noted that the Company will not request a ruling from the
Service that the Transaction will be subject to Section 351 of the Code and that
the Opinion is based in part on factual representations of the Company. In
addition, there is little guidance regarding the interpretation of the foregoing
provisions of the Tax Act. Further, the valuation of the assets of the
Partnerships is subject to uncertainty. As a result, there can be no assurance
that the Service will concur with the conclusions set forth herein.

FORMATION OF THE COMPANY. As discussed above, pursuant to the provisions of
Section 351 of the Code, the Company expects that the Partnerships will not
recognize gain or loss as a result of the contribution of assets in exchange for
Shares, except to the extent of the fair market value of any Notes, Promissory
Notes or Cash received. Each Investor would be required to include in income a
share of such gain even if such Investor did not vote in favor of the
Transaction. The Company does not expect to distribute cash to Investors which
would correspond to the income recognized as a result of the issuance of the
Notes. See "RISK FACTORS--Risks Associated with the Transaction--CERTAIN FEDERAL
INCOME TAX RISKS."

Any gain or loss recognized as a result of the Transaction would pass
through the Partnerships and be recognized by the Investors as capital gain or
losses, except for any portion of gain attributable to the Partnerships'
recapture amounts. In general, an individual may only use up to $3,000 of
capital loss in excess of capital gains to offset ordinary income in any taxable
year. The amount of any such gain recognized by an Investor would result in an
increase in his adjusted basis in his Units and a corresponding increase in the
adjusted basis of his Shares.

The basis of the Company in assets acquired from the Partnerships will equal
the Partnerships' bases in such assets immediately prior to the Transaction plus
any gain recognized as a result of the Transaction. The Company's holding period
for assets contributed by the Partnership will include the period during which
such assets were held by the Partnerships.

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LIQUIDATION AND TERMINATION OF THE PARTNERSHIPS. Upon receipt of the Shares
pursuant to the Transaction, the Partnerships will liquidate and distribute to
the Investors the Shares. The taxable year for the Partnerships will end at such
time and the Investors must report, in the taxable year of the Transaction,
their respective share of all income, gain, loss, deduction and credit from the
Partnerships including, if any, their allocable share of gain or loss resulting
from the Transaction. An Investor whose taxable year differs from that of the
Partnership in which he holds Units may have bunching of income from such
Partnership because of the foregoing short taxable year.

As a general matter, a partner will recognize gain as a result of the
liquidation of a partnership only to the extent the amount of distributed cash
exceeds the basis of his or her partnership interest. However, for this purpose,
certain marketable securities are treated as if they were cash. This provision
will not apply to marketable securities received in a nonrecognition transaction
if: (i) the value of the marketable securities and cash exchanged by the
partnership in the nonrecognition transaction is less than 20% of all its assets
transferred in such exchange; and (ii) the partnership distributes the
marketable securities acquired in the nonrecognition transaction within five
years of their acquisition. Consequently, the General Partners do not expect
that the Investors will recognize gain or loss as a result of this provision.

Pursuant to the terms of their respective Partnership Agreements, upon
liquidation of the Partnerships, the General Partners are obligated to restore
any remaining deficient balances in their Capital Account. In addition, each
General Partner will receive 1% of the total number of Shares to be issued in
the Transaction. The remaining deficit balances of the General Partners' Capital
Accounts, are not expected to be material and in that event will be disregarded
in distributing Shares in liquidation of the Partnerships.

TAXATION OF THE COMPANY

The Company will be characterized as a corporation for federal income tax
purposes. The Company's income and gains are subject to federal corporate income
taxation and do not pass through to the Shareholders. In addition, all items of
losses, deductions and credits resulting from a Company's operations must be
used to offset its income and, thus, are not passed through to the Shareholders.
There is no deduction for dividends paid by the Company. See "--Certain Tax
Differences Between the Ownership of Units and the Shares".

The Company's income will be subject to two levels of taxation because a
corporate level tax is imposed on the Company's taxable income and the
Shareholders are taxed on dividends from the Company. See "--Taxation of
Shareholders--DISTRIBUTIONS."

TAXATION OF SHAREHOLDERS

DISTRIBUTIONS. Distributions by the Company to Shareholders will be
characterized as dividends and taken into account by Shareholders as ordinary
income to the extent distributions are paid from the Company's current and
accumulated earnings and profits. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a Shareholder to the
extent that the distributions do not exceed the recipient Shareholder's adjusted
basis in his or her Shares, but rather will reduce their adjusted basis therein.
To the extent such distributions exceed the adjusted basis of a Shareholder's
Shares, the distribution will be included in income as long-term capital gain
assuming the Shares are a capital asset in the hands of the Shareholder and have
been held for more than eighteen months. The Company expects that all
distributions will be made from current or accumulated earnings and profits.
Therefore, the Company's distributions should be characterized as dividends and
be taken into account by Shareholders as ordinary income. Shareholders which are
corporations may be entitled to exclude from gross income a portion of any
dividends received with respect to the Shares.

BACKUP WITHHOLDING FOR SHAREHOLDERS. The Company will report to its
Shareholders and the Service the amount of dividends paid during each calendar
year and the amount of tax withheld, if any, with respect

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thereto. Under the backup withholding rules, a Shareholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless such
Shareholder (a) is a corporation or comes within certain exempt categories and,
when required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A Shareholder who does not provide the Company with its correct taxpayer
identification number may also be subject to penalties imposed by the Service.
Any amount paid as backup withholding will be creditable against the
Shareholder's income tax liability.

PASSIVE INCOME AND LOSSES. Section 469 of the Code provides that losses or
deductions from passive trade or business activities in excess of income from
all such passive activities may not be deducted against wages, salaries or
portfolio income. Similarly, credits from passive activities are limited to the
tax allocable to such passive activities. Suspended losses and credits may be
carried forward and treated as deductions and credits from passive trade or
business activities in succeeding taxable years. Suspended losses are allowed in
full when the taxpayer disposes of his entire interest in the passive activity
in a taxable transaction to an unrelated party.

Portfolio income, in general, includes interest, dividends, annuities and
royalties. Generally, portfolio income and the expenses which are clearly,
directly and properly allocable to such portfolio income are not treated as
income or expense from passive activity. Therefore, the passive losses or
deductions may not be applied to offset portfolio income.

Dividends of a corporation will be treated as portfolio income and will not
be available to offset passive losses from any other source. The Company will be
characterized as a corporation for federal income tax purposes. Consequently,
dividends received by Shareholders will be characterized as portfolio income and
will not be available to offset passive losses from other sources.

GAIN OR LOSS ON THE SALE OF SHARES. The Tax Act increased the holding
period required to receive long term capital gains treatment on the sale or
exchange of capital assets. In order to receive long term capital gains rates an
individual must now hold capital assets for 18 months. In addition, the Tax Act
reduced the maximum long-term capital gains rate from 28% to 20%. However, an
18% maximum long-term capital gains rate will apply to capital assets held for
more than five years beginning after December 31, 2000. Gain on assets held more
than 12 but less than 18 months will be subject to tax at a rate of 28%. In
general, an individual may only use up to $3,000 of capital loss in excess of
capital gains to offset ordinary income, such as wages and interest income, in
any taxable year. Assuming that a Shareholder holds Shares as a capital asset,
the sale of Shares will result in either capital gain or loss and be subject to
the foregoing rules.

INVESTMENT INTEREST. Investment interest (i.e., interest paid or accrued on
indebtedness incurred or continued to purchase or carry property held for
investment) is deductible by non-corporate taxpayers only to the extent it does
not exceed "net investment income" (i.e., investment income less investment
expenses). Investment interest which is not allowable as a deduction in one year
pursuant to this limitation may be carried over to subsequent years within
certain limits. Investors who borrowed to finance the purchase of their Units
should be aware that interest on such borrowing may constitute investment
interest and would therefore be subject to the above-described limitations
before and after the Transaction.

TAXATION OF NON-U.S. SHAREHOLDERS

GENERAL. The following is a general discussion of certain federal income
tax consequences of the ownership and disposition of Shares by a Shareholder who
is not a United States person (a "Non-U.S. Shareholder"). For this purpose, the
term "United States person" is defined as any person who is a citizen or
resident of the United States, a corporation or a partnership or other entity
created or organized in the United States or under the laws of the United States
or of any state, or an estate or trust whose income is includible in gross
income for federal income tax purposes regardless of source. The rules governing
the

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federal income taxation of Non-U.S. Shareholders are complex, and no attempt
will be made herein to provide more than a limited summary of such rules. Each
Investor that may be characterized as a Non-U.S. Shareholder is advised to
consult a tax advisor with respect to current and possible future federal income
and federal estate tax consequences of acquiring, holding and disposing of
Shares as well as any other tax consequences that may arise under the laws of
any U.S. state, municipality or other taxing jurisdiction including any
information reporting and withholding requirements associated with the
foregoing.

An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate of
at least 183 days during the three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year) (a "Resident Alien"). Resident
Aliens are subject to federal income tax as if they were U.S. citizens.

In general, Non-U.S. Shareholders will be subject to regular federal income
taxation with respect to holding their Shares in the same manner as a U.S.
Shareholder (i.e., at graduated rates on a net basis after deductions) if the
holding of such Shares is "effectively connected" with the conduct of a trade or
business in the United States by such Non-U.S. Shareholder. A Non-U.S.
Shareholder that is a corporation and that receives income with respect to its
investment in Shares that is "effectively connected" with the conduct of a trade
or business in the United States may also be subject to the 30% branch profits
tax imposed under Section 884 of the Code, which is payable in addition to the
regular federal corporate income tax. The following discussion addresses only
the federal income taxation of Non-U.S. Shareholders whose holding of Shares is
not "effectively connected" with the conduct of a trade or business in the
United States. Investors who may be characterized as Non-U.S. Shareholders and
whose holding of Shares may be "effectively connected" with the conduct of a
United States trade or business should consult their own tax advisors as to the
federal income and other tax consequences associated therewith.

DISTRIBUTIONS. The Company expects to make quarterly dividend
distributions. See "THE COMPANY--Dividend Policy." To the extent distributions
of the Company are deemed to be dividends, such dividends paid to Non-U.S.
Shareholders will be subject to withholding of federal income tax on a gross
basis at a 30% rate or such lower rate as may be specified by an applicable
income tax treaty.

Under current Regulations, dividends paid to an address outside the United
States are presumed to be paid to a resident of such country for purposes of the
withholding discussed above (unless the payor has knowledge to the contrary).
Under proposed Regulations not currently in effect, however, a Non-U.S.
Shareholder who wishes to claim the benefit of an applicable treaty rate would
be required to satisfy applicable certification and other requirements. A
Non-U.S. Shareholder eligible for a reduced rate of withholding tax pursuant to
an income tax treaty may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the Service.

GAIN OR LOSS ON SALE OF SHARES. A Non-U.S. Shareholder generally will not
be subject to federal income tax with respect to gain recognized on a sale or
other disposition of Shares unless: (a)(i) the gain is effectively connected
with the conduct of a trade or business in the United States by the Non-U.S.
Shareholder or (ii) if a treaty applies, the gain is attributable to a United
States permanent establishment of the Non-U.S. Shareholder; (b) in the case of a
Non-U.S. Shareholder who is an individual and holds the Shares as a capital
asset, such Shareholder is present in the United States for 183 or more days in
the taxable year of the sale or other disposition and certain other conditions
are met; (c) the Shares are characterized as United States real property
interests ("USRPIs") for federal income tax purposes; or (d) the Non-U.S.
Shareholder is subject to tax pursuant to certain provisions of the Code
applicable to expatriates.

If any class of stock of a corporation is regularly traded on an established
securities market, stock of such class shall be treated as a USRPI only in the
case of a person or entity who, at some time during the shorter of five years or
the period such person or entity held such stock, held more than 5% of such
stock.

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The Company believes that the Shares likely will qualify as being regularly
traded on an established securities market. Therefore, the Company expects that
the Shares will not be characterized as USRPIs except with respect to any
Non-U.S. Shareholder who acquires more than 5% of the Shares.

If an individual Non-U.S. Shareholder falls under clause (b) above, such
individual generally will be subject to a flat 30% tax on the gain derived from
a sale, which may be offset by certain United States capital losses
(notwithstanding the fact that such individual is not considered a Resident
Alien). Thus, Non-U.S. Shareholders who fall or expect to fall in clause (b)
above in the taxable year in which they contemplate a sale of Shares are urged
to consult their tax advisors as to the tax consequences of such sale.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX. The Company must report
annually to the Service and to each Non-U.S. Shareholder the amount of dividends
paid to such Shareholder and the tax withheld with respect to such dividends.
These information reporting requirements apply even if withholding was not
required because the dividends were effectively connected with the conduct of a
trade or business in the United States by the Non-U.S. Shareholder or
withholding was reduced by an applicable income tax treaty. Copies of the
information returns reporting such dividends and withholding may be made
available to the tax authorities in the country in which the Non-U.S.
Shareholder resides or is established under the provisions of an applicable
income tax treaty or agreement.

United States backup withholding (see "--Taxation of Shareholders--BACKUP
WITHHOLDING FOR SHAREHOLDERS") generally will not apply to dividends paid to
Non-U.S. Shareholders that are either subject to the 30% withholding discussed
above or subject to withholding at a reduced treaty rate.

TAX ISSUES ASSOCIATED WITH NOTES

STATED INTEREST. Under general federal income tax principles, holders of
Notes must include stated interest in income in accordance with their method of
tax accounting. Accordingly, holders of Notes using the accrual method of tax
accounting must include stated interest in income as it accrues and holders of
Notes using the cash method of tax accounting must include stated interest in
income as it is actually or constructively received.

Payments of interest to taxable holders of Notes will constitute portfolio
income for purposes of Section 469 of the Code and not passive activity income.
Accordingly, such income will not be subject to reduction by losses from passive
activities (e.g., any interest in a trade or business held as a limited partner
in which the holders of Notes do not materially participate) of holders of Notes
who are subject to the passive activity loss rules. However, income attributable
to interest payments may be offset by investment expense deductions, subject to
the limitation that individual investors may only deduct miscellaneous itemized
deductions (including investment expenses) to the extent such deductions exceed
two percent of the investor's adjusted gross income.

ORIGINAL ISSUE DISCOUNT. Original issue discount is generally defined as
the excess of a debt instrument's stated redemption price at maturity over its
issue price, subject to a statutorily-defined DE MINIMIS exception (generally,
one-quarter of 1% of the debt instrument's stated redemption price at maturity
multiplied by the number of complete years to maturity from its issue date). The
"stated redemption price at maturity" of a debt instrument is generally the sum
of the debt instrument's stated principal amount plus all other payments
required thereunder, other than payments of "qualified stated interest"
(generally, stated interest that is unconditionally payable in cash or in
property at least annually at a single fixed rate). The "issue price" of a debt
instrument, that is not part of an issue of which a substantial part is sold for
money and is traded on an established securities market, is its fair market
value when issued, or in the case of such a debt instrument that is not so
traded, either (a) its stated principal amount, if the debt instrument provides
for "adequate stated interest" (generally, interest at the applicable federal
rate for the month of issuance) or (b) its "imputed principal amount"
(generally, the sum of the present value of all payments due under the debt
instrument, discounted at the applicable federal rate), if the debt instrument
does not provide for "adequate stated interest."

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The Regulations set forth special rules applicable to debt instruments
providing for variable rates of interest. In general, if a debt instrument
providing for variable rates of interest qualifies as a variable rate debt
instrument, then the debt instrument would generally not be treated as issued
with original issue discount unless the debt instrument is issued at a price
below the debt instrument's stated principal amount, subject to the statutorily
defined DE MINIMIS amount. A debt instrument will qualify as a variable rate
debt instrument under the Regulations if (a) the issue price of the debt
instrument does not exceed the total noncontingent principal payments by more
than a specified amount, (b) the debt instrument provides for stated interest,
paid or compounded at least annually, at current values of (i) one or more
qualified floating rates, (ii) a single fixed rate and one or more qualified
floating rates, (iii) a single objective rate, or (iv) a single fixed rate and a
single objective rate that is a qualified inverse floating rate. A qualified
floating rate is any floating rate where variations in such rate can reasonably
be expected to measure contemporaneous variations in the cost of newly borrowed
funds, including certain rates based on a qualified floating rate. An objective
rate is a rate that is not itself a qualified floating rate but which is
determined using a single formula that is fixed throughout the term of the debt
instrument and which is (A) based upon one or more qualified floating rates, (B)
based upon one or more rates where each rate would be a qualified floating rate
for a debt instrument denominated in a currency other than the currency in which
the debt instrument is denominated, (C) based upon the price of certain types of
actively traded personal property, or (D) a combination of (A), (B) or (C).

The Company believes that the variable rates of interest on the Notes will
be treated as providing for stated interest, paid at least annually, at one or
more qualified floating rates and that, as a result, the Notes should qualify as
variable rate debt instruments under the Regulations. Accordingly, the Notes are
not expected to be issued with original issue discount.

Alternatively, if the Notes qualify as variable rate debt instruments under
the Regulations but the fair market value of the Notes is less than their stated
principal amount by more than the statutorily-defined DE MINIMIS amount, then
the Notes would be issued with original issue discount. In such case, the
holders of Notes would be required to include in gross income on a constant
yield to maturity basis the sum of the daily portions of original issue discount
for the period during the taxable year the holders of Notes held the Notes even
through the holders of Notes may not receive a payment representing the original
issue discount in such year. Any amount or original issue discount included in
income would increase a holders of Notes' tax basis in the Notes.

In addition, if, contrary to the Company's expectations, the Notes do not
qualify as variable rate debt instruments under the Regulations, then the Notes
may be subject to certain contingent payment provisions of the Regulations. In
this event, Noteholders would generally be required to include stated interest
on the Notes in income in the taxable year in which the amount of the interest
payments become fixed, regardless of their method of tax accounting.

BOND PREMIUM AND MARKET DISCOUNT. Holders of Notes should have a basis in
the Notes received in liquidation of their interests in a Partnership equal to
the adjusted basis in their Units, which may be more or less than the face
amount of Notes received. As a result, holders of Notes may have bond premium or
market discount with respect to the Notes.

If the Noteholders' initial adjusted basis in the Notes or their fair market
value immediately after the Transaction, whichever is lower, exceeds the amount
payable at maturity of such Notes (or in certain cases, on an earlier call
date), the Noteholders may be able to elect to deduct such excess using a
constant yield method over the remaining term of the Notes as amortizable bond
premium under Section 171 of the Code provided the Notes are held as a capital
asset. Except as provided in the Regulations, the amortizable bond premium will
be treated as an offset to interest income on the Notes rather than as a
separate deduction item. An election under Code Section 171 generally is binding
once made and applies to all obligations owned or subsequently acquired by the
taxpayer.

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The market discount provisions of the Code generally provide that, subject
to a statutorily-defined DE MINIMIS exception, if a holder of a debt instrument
acquires it at a market discount and thereafter recognizes gain on a disposition
of the debt instrument (including a gift), the lesser of such gain or the
portion of the market discount that accrued while the debt instrument was held
by such holder will be treated as ordinary interest income at the time of the
disposition. For this purpose, in the case of a debt instrument not issued with
original issue discount, an acquisition at a market discount includes an
acquisition, other than an acquisition at original issuance, resulting in a
basis in the debt instrument below the debt instrument's stated redemption price
at maturity. The market discount rules also provide that a holder who acquires a
debt instrument at a market discount (and who does not elect to include such
market discount in income on a current basis) may be required to defer a portion
of any interest incurred or maintained to purchase or carry such debt instrument
until the holder disposes of the debt instrument in a taxable transaction.

The Notes provide that they may be redeemed, in whole or in part, before
maturity. If some or all of the Note are redeemed, each holder of a Note
acquired at a market discount would be required to treat the principal payment
as ordinary interest income to the extent of any accrued market discount on such
Notes.

A holder of a debt instrument may elect to have market discount accrue on a
constant interest rate basis (as opposed to a straight line basis). The current
inclusion election, once made, applies to all market discount obligations
acquired by such holder on or after the first day of the first taxable year to
which the election applies and may not be revoked without the consent of the
Service. If a Noteholder elects to include market discount in income in
accordance with the preceding sentence, the foregoing rules with respect to the
recognition of ordinary income on a sale or certain other dispositions of a Note
and the deferral of interest deduction on indebtedness related to such Note will
not apply.

DISPOSITION OF NOTES. In general, a holder of Notes will recognize gain or
loss upon the sale, exchange, redemption or other taxable disposition of a Note
measured by the difference between (a) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (b) such holder's adjusted
basis in the Note (as increased by any original issue discount or market
discount previously included in income by such holder and decreased by any cash
payments received, other than payments constituting qualified stated interest,
and any amortizable bond premium deducted over the term of the Note). Subject to
the market discount and bond premium rules discussed above, any such gain or
loss will generally be long-term capital gain or loss, provided the Note was a
capital asset in the hands of the holder and was held for more than one year.

CONSIDERATIONS FOR TAX-EXEMPT SHAREHOLDERS

Shareholders that are tax-exempt entities, including charitable
corporations, pension, profit sharing or stock bonus plans, Keogh Plans,
Individual Retirement Accounts and certain other employee benefit plans are
subject to federal income tax on unrelated business taxable income (i.e., net
income derived from the conduct of a trade or business regularly carried on by a
tax-exempt entity or by a partnership in which it is a partner). A $1,000
special deduction is allowed in determining the amount of unrelated business
taxable income subject to tax. Tax-exempt entities taxed on their unrelated
business taxable income are also subject to the alternative minimum tax for
items of tax preference which enter into the computation of unrelated business
taxable income. Dividends are generally deemed not to constitute unrelated
business taxable income. Therefore, dividends received by tax-exempt
Shareholders should not constitute unrelated business taxable income. However,
unrelated business taxable income may arise from dividends from "debt-financed
property," which may result when a tax-exempt Shareholder incurs debt in
connection with the acquisition of Shares or its Shares are subject to debt
previously incurred in connection with the acquisition of Units.

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GENERAL PARTNER LIABILITIES

Three Cap Source I Operating Partnerships currently have certain contingent
liabilities which might in the future become payable to their respective General
Partners which are affiliates of America First Companies L.L.C. The contingent
liabilities consist of:

(a) property development and management fees;

(b) asset management and partnership administration fees; and

The affiliates of America First Companies L.L.C. have agreed that the noted
liabilities should be waived if the Transaction is completed. The General
Partners believe that the forgiveness of these liabilities should not give rise
to any material amount of discharge of indebtedness income for federal income
tax purposes because of certain conditions precedent to their payment. If the
forgiveness of these liabilities were characterized as discharge of indebtedness
income, however, the Partnerships and the Operating Partnerships would be
required to recognize corresponding amounts of income. If such income were
recognized, no additional funds would be received by the Partnerships and
distributed to the Unitholders.

TERMINATION OF TRADE PROCESSING

In the event the General Partners have reason to believe that a requested
sale, transfer or assignment of Units would cause Cap Source I or Cap Source II
to be characterized as a publicly traded partnership for federal income tax
purposes, the General Partners will, pursuant to their powers under Section 5.09
of the Partnership Agreement, refuse to process such requested sale, transfer or
assignment unless the General Partners receive an unqualified opinion of Counsel
to the effect that such sale, transfer or assignment of Units, in conjunction
with all other reasonably expected sales, transfers or assignments of Units,
would not cause the Partnership to be characterized as a publicly traded
partnership for federal income tax purposes. Neither the General Partner nor the
Partnership may be held liable for any losses resulting to a holder of Units or
a purchaser of Units as a result of a requested sale, transfer or assignment of
Units not being processed due to these limitations.

The foregoing restrictions are intended to prevent the trading volume of
Units from reaching a level that would cause the Partnership to be characterized
as a publicly traded partnership under Section 7704 of the Code. In the event
the Partnership were characterized as a publicly traded partnership, the
Partnership could be subject to entity level taxation. In such event, amounts
otherwise distributable to holders of Units would be used to satisfy federal
income tax liabilities of the Partnership and, thus, amounts received by holders
of Units would be less than anticipated.

EMPLOYEE RETIREMENT INCOME SECURITY ACT

The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
applies to investments by pension, profit sharing, stock bonus, Keogh and other
employee benefit plans, and by IRAs (collectively referred to as "Benefit
Plans"). ERISA does not prohibit Benefit Plans from investing in any specific
type of investment but does require that plan fiduciaries give appropriate
consideration to the facts and circumstances relevant to a particular
investment, including whether the investment is reasonably designed, as part of
the investment portfolio, to further the purposes of the Benefit Plan, taking
into consideration risk of loss and opportunity for gain. ERISA also requires
fiduciaries to take into account factors such as composition of the portfolio
with regard to diversification, liquidity, current return relative to
anticipated cash flow requirements and projected return relative to funding
objectives, and the need to value plan assets annually. ERISA prohibits certain
transactions between a Benefit Plan and a "party in interest" as defined by
ERISA. Section 4975 of the Code imposes a 5% excise tax on any fiduciary or
"disqualified person" (as defined therein) who engages in certain transactions
similar to those transactions prohibited under ERISA. The excise tax may
increase to 100% if violations are not timely corrected after

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notice. A corporation, such as the Company, will be subject to the foregoing
rules restrictions and penalties if its assets are deemed to be the assets of a
Benefit Plan under ERISA. Whether or not assets of the Company will be deemed to
be assets of a Benefit Plan for purposes of ERISA or Section 4975 of the Code
will be determined in accordance with the "plan asset" regulations discussed
below. It should be noted that Benefit Plan fiduciaries should carefully
consider whether an investment in the Company is consistent with their
responsibilities under ERISA.

Under the Department of Labor plan assets regulations, the assets of a
pooled investment vehicle, the definition of which may include the Company, will
not be plan assets of a Benefit Plan for ERISA purposes (and will not be subject
to requirements regarding fiduciary responsibility and the holding of plan
assets in trust) if the issuer is an "operating company" (i.e., "an entity that
is primarily engaged in the production or sale of a product or service other
than the investment of capital") or if equity participation in the entity by
Benefit Plans is not significant (i.e., less than 25% of the value of any class
of equity interests in an entity is held by Benefit Plan investors). The Company
believes that it may be an operating company and anticipates that ownership of
Shares by Benefit Plans will be less than 25%. There can be no absolute
assurance, however, that the Company will meet the operating company exception
or 25% test.

Alternatively, the plan assets regulations further provide that assets of a
corporation will not be treated as plan assets if equity interests in such
corporation are "publicly offered securities" (i.e., a security that is widely
held, freely transferable, not offered primarily to tax-exempt limited partners,
either registered under the Exchange Act or sold pursuant to a registration
statement under the Securities Act and the class of securities is registered
under the Exchange Act within 120 days after the end of the issuer's fiscal year
during which the public offering occurred). In general, the regulations provide
that securities are "widely held" only if they are part of a class of securities
purchased and held by 100 or more persons who are independent of the issuer and
of one another. The Company expects that (a) it will have significantly more
than 100 Shareholders independent from it and one another; (b) the Shares will
not be offered primarily to tax-exempt investors; (c) the Shares will be freely
transferrable; (d) the Shares are being offered pursuant to a registration
statement under the Securities Act; and (e) the Company will be registered under
Section 12(g) of the Exchange Act within the applicable period because it will
have more than 500 Shareholders and total assets exceeding $5,000,000. Based on
these facts, the Company believes that the Shares satisfy all criteria for the
"publicly offered securities exception." Accordingly, based on all the facts and
circumstances described above, the Shares will be characterized as "publicly
offered securities" and the assets of the Company will not be plan assets for
ERISA purposes.

INDEPENDENT PUBLIC ACCOUNTANTS

The audited financial statements of the Company and the Partnerships
included in the Prospectus/ Consent Solicitation Statement have been audited by
Coopers & Lybrand L.L.P., independent public accountants, as indicated in their
respective reports thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

LEGAL MATTERS

Kutak Rock, a national law firm, will deliver an opinion to the effect that
the Shares offered by this Prospectus/Consent Solicitation Statement will be
validly issued, and that the Notes offered by this Prospectus/Consent
Solicitation Statement will be binding obligations of the Company. Kutak Rock
has relied on Richards, Layton & Finger as to certain matters of Delaware law.
Kutak Rock has previously performed certain legal services on behalf of the
Partnerships, the General Partners, the Company and their Affiliates.

The opinion of Kutak Rock is not attached as an Appendix to this
Prospectus/Consent Solicitation Statement; however, upon receipt of a written
request by an Investor or representative so designated in writing, a copy of
such opinion will be sent by the General Partners. All requests should be
directed to Maurice Cox, Suite 400, 1004 Farnam Street, Omaha, Nebraska, 68102.

123
<PAGE>
GLOSSARY

Certain capitalized terms used in this Prospectus/Consent Solicitation
Statement shall have the following meanings unless the context otherwise
requires.

"ACMS" means asbestos-containing materials.

"ACQUISITION FEE" means an amount equal to 1% of the increase in the
Company's actual investment in all New Assets including any costs related to the
acquisition or financing of New Assets but excluding debt which is incurred or
assumed in connection therewith, payable by the Company to the Advisor on a
monthly basis as provided in the Advisory Agreement.

"ADA" means the Americans with Disabilities Act, as amended.

"ADJUSTED NEW ASSET VALUE" means, with respect to each individual New Asset
owned by the Company, the Beginning New Asset Value increased by additional
investments in such New Asset (which investments may be made from any
borrowings, additional equity or any other source available to the Company) and
decreased by Returns of Capital; provided, however, this Value shall not be
decreased below zero by Returns of Capital; provided, further, if, after the
final sale of a New Asset, the Adjusted New Asset Value is greater than zero,
such value shall be zero.

"ADJUSTED ORIGINAL ASSET VALUE" means, with respect to each individual
Original Asset owned by the Company, (i) for each Equity Interest in an
Operating Partnership, the amount set forth in Exhibit A to the Advisory
Agreement which represents an equity interest in an Operating Partnership
reduced to zero upon the sale or redesignation as a New Asset of such asset or
(ii) for each GNMA as set forth in Exhibit A to the Advisory Agreement, the
aggregate outstanding principal amount of such GNMA decreased by (A) borrowings
which are directly or indirectly secured by such GNMA and (B) principal
repayments with respect to such GNMA.

"ADVISOR" means America First Real Estate Advisors LLC, a Delaware limited
liability company.

"ADVISORY AGREEMENT" means the agreement between the Company and the Advisor
whereby the Advisor is to manage the assets of the Company as directed by the
Board of Directors of the Company.

"ADVISOR FEES" means the Acquisition Fee, Asset Management Fee and Incentive
Fee on New Assets as set forth in the Advisory Agreement.

"AFFILIATE" means, with respect to a Person, or any other Person directly or
indirectly controlling, controlled by or under common control with such Person,
or any other Person owning or controlling 10% or more of the outstanding voting
securities of such Person.

"APPRAISALS" means the independent appraisals of the real estate assets of
each of the Operating Partnerships prepared by Valuation Research to show the
fair market value of such assets as of December 31, 1997.

"APPROVAL DATE" means , 1998, which is the date by which each
Investor must inform the General Partners as to whether the Investor wishes to
vote in favor of or against the Transaction, and the date on which the vote of
the Investors will be tabulated, unless extended.

"ASSET MANAGEMENT FEE" means an amount equal to .475% on an annual basis, of
the Company's Total Assets, calculated as of the last day of each month, payable
by the Company to the Advisor each month in arrears.

124
<PAGE>
entity, the total consideration paid by the Company for such interest, including
all payments in respect of such interest and all debt incurred, assumed or
allocated with respect to such interest, plus any costs related to the
acquisition or financing of such interest.

"BYLAWS" means the Bylaws of the Company, as in effect from time to time.

"CAPITAL GAIN" means with respect to each individual New Asset owned by the
Company, the excess, if any, of (i) the net proceeds, net of all closing costs
(including without limitation any real estate or selling commissions), but
without deduction for any applicable mortgage indebtedness, from any partial
sale or a whole sale received by the Company upon the sale of a New Asset over
(ii) the Adjusted New Asset Value of such New Asset prior to such sale.

"CAPITAL LOSS" means with respect to each individual New Asset owned by the
Company, the deficit, if any, upon the occurrence of final sale of such Asset of
(i) the net proceeds, net of all closing costs (including without limitation any
real estate or selling commissions), but without deduction for any applicable
mortgage indebtedness, from any partial sale or a whole sale received by the
Company upon the sale of a New Asset over (ii) the Adjusted New Asset Value of
such New Asset prior to such sale.

"CAP SOURCE I" means Capital Source L.P., a Delaware limited partnership.

"CAP SOURCE I GENERAL PARTNERS" means Insured Mortgage Equities Inc. and
America First Capital Source I, L.L.C.

"CAP SOURCE I MORTGAGE SECURITIES" means securities relating to federally
insured mortgages on multifamily housing properties owned by Cap Source I.

"CAP SOURCE I OPERATING PARTNERSHIPS" means Bluff Ridge Associates Limited
Partnership, Waters Edge Limited Partnership, Interstate Limited Partnership
(a/k/a Highland Park), Cypress Landings II, Ltd. (a/k/a Misty Springs), Oyster
Cove Limited Partnership (a/k/a Waterman's Crossing), Fox Hollow, Ltd. and Ponds
at Georgetown Limited Partnership.

"CAP SOURCE I PARTNERSHIP EQUITY INTERESTS" means the limited partnership
interests in the Cap Source I Operating Partnerships.

"CAP SOURCE I SPECIAL LIMITED PARTNER" means CS Properties I, Inc.

"CAP SOURCE II" means Capital Source II L.P.-A, a Delaware limited
partnership.

"CAP SOURCE II GENERAL PARTNERS" means Insured Mortgage Equities II L.P. and
America First Capital Source II, L.L.C.

"CAP SOURCE II MORTGAGE SECURITIES" means the federally insured mortgages on
multifamily housing properties owned by Cap Source II.

"CAP SOURCE II OPERATING PARTNERSHIPS" means Crane's Landing Partners, Ltd.,
Delta Crossing Limited Partnership, Centrum Monticello Limited Partnership and
Ponds at Georgetown Limited Partnership.

"CAP SOURCE II PARTNERSHIP EQUITY INTERESTS" means the limited partnership
interests in the Cap Source II Operating Partnerships.

"CAP SOURCE II SPECIAL LIMITED PARTNER" means CS Properties II, Inc.

"CASH" means cash and cash equivalents and amounts invested on a short-term
basis by the Company.

"CERTIFICATE OF INCORPORATION" means the Second Amended and Restated
Certificate of Incorporation of the Company, as amended from time to time.

"CERTIFICATE OF MERGER" means the Certificate of Merger to be filed with the
Delaware Secretary of State with respect to the merger of the Partnerships and
the Company under the terms and conditions set forth in the Merger Agreement.

125
<PAGE>
"CODE" means the Internal Revenue Code of 1986, as amended, including
successor statutes thereto.

"COMMISSION" means the United States Securities and Exchange Commission,
also sometimes referred to as the "SEC."

"COMMON STOCK" means the $.001 par value common stock of the Company.

"COMPANY" means America First Real Estate Investment Company, Inc., a newly
organized Delaware corporation.

"CONSENT CARD" means the consent card accompanying the Prospectus/Consent
Solicitation Statement which includes a ballot on which the Investor may vote in
favor of or against his Partnerships's participation in the Transaction or
abstain from voting with respect thereto.

"CONSENTING INVESTORS" means Investors who vote "YES" in favor of the
Transaction.

"COUNSEL" means Kutak Rock, a partnership including professional
corporations, which has served as counsel to the Company in the preparation of
the Transaction.

"DELAWARE GCL" means the Delaware General Corporation Law, as may be amended
from time to time.

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

"DESIGNATED ASSETS" means assets of the Company which were owned by a
Partnership prior to the Transaction.

"DISSENTING INVESTOR" means an Investor who votes "NO" against the
Transaction.

"EFFECTIVE DATE" means the time at which the Partnerships will be merged
with and into the Company in accordance with the Merger Agreement and the
Transaction will be consummated.

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

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
all rules and regulations promulgated thereunder.

"EXCHANGE VALUE" means the value attributable to the Partnerships for
purposes of the Transaction.

"FAIRNESS OPINION" means the opinion rendered by Sutro & Co., Inc. that the
consideration (as defined therein) to be received by Investors and the General
Partners collectively, and with respect to each Partnership individually, the
allocation of such consideration among the Investors and the General Partners,
and the principal allocation of the Notes in the Transaction, is fair from a
financial point of view.

"FFO" or "FUNDS FROM OPERATIONS" means net income determined in accordance
with GAAP, excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation.

"FHA" means the United States Federal Housing Administration.

"FHA LOANS" means the first mortgage loans insured as to principal and
interest by the FHA on certain multifamily housing properties owned by the
Operating Partnerships.

"GAAP" means generally accepted accounting principles.

"GENERAL PARTNERS" means the Cap Source I General Partners and the Cap
Source II General Partners.

"GNMA" means the United States Government National Mortgage Association.

"GNMA CERTIFICATES" means the mortgage-backed securities guaranteed as to
principal and interest by GNMA and collateralized by first mortgage loans on
multifamily housing properties owned by the Operating Partnerships.

126
<PAGE>
"INCENTIVE FEE" means an annual amount equal to 10% of any Capital Gain on
New Assets, offset by any Capital Loss, payable by the Company to the Advisor on
an annual basis in the form of Restricted Stock as provided in the Advisory
Agreement.

"INDENTURE" means the indenture dated as of the first day of the month in
which the Notes are issued, between the Company and the Trustee, pursuant to
which the Notes and the Promissory Notes are to be issued.

"INDEPENDENT COMMITTEE" means the independent committee established to
determine the fairness of the Transaction and the Exchange Value for the
Partnerships.

"INDEPENDENT DIRECTORS" means the directors of the Company who are not
affiliated with the Company or the Advisor and do not perform any services for
the Company or the Advisor, other than as directors, and who are not officers or
employees of the Company, the Advisor or any of their respective affiliates.

"INTEREST PAYMENT DATE" means the fifteenth day of each January, commencing
on the first Interest Payment Date following the issuance of the Notes, until
the principal and interest on all Notes and Promissory Notes have been paid in
full.

"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder.

"INVESTOR" means the holder of one or more beneficial assignment certificate
representing limited partner interests in a Partnership as of the Record Date.

"IRS" means the United States Internal Revenue Service, also referred to
sometimes as the "SERVICE."

"MATURITY DATE" means the date on which the outstanding principal balance of
the Notes, plus accrued but unpaid interest thereon, will be payable in full,
which date shall be , 2006.

"MAXIMUM NOTE LIMITATION" means $40 million, the maximum aggregate dollar
amount of Notes that the Company may issue in connection with the Transaction.

"MERGER AGREEMENT" means the Agreement and Plan of Merger among the
Partnerships and the Company pursuant to which the Transaction is to be
consummated.

"MORTGAGE SECURITIES" means securities relating to federally insured
mortgages on multifamily housing property.

"NASDAQ" means the National Association of Securities Dealers Automated
Quotations System.

"NET PROCEEDS FROM SALES OR REFINANCINGS OF DESIGNATED ASSETS" means the
gross proceeds of all sales, exchanges or refinancings received in connection
with Designated Assets, less any and all costs and expenses incurred by the
Company in connection with such sales, exchanges or refinancings.

"NEW ASSETS" means any and all assets acquired by the Company after the
Effective Date and prior to the termination of the Advisory Agreement, and any
Original Asset designated by the Board of Directors as a redevelopment project.

"NOTEHOLDERS" means Investors who receive Notes in connection with the
Transaction.

"NOTES" means the Variable Rate Senior Notes due , 2006 of the
Company issued pursuant to the Indenture.

"NYSE" means the New York Stock Exchange.

"OPERATING PARTNERSHIPS" means the Cap Source I Operating Partnerships and
the Cap Source II Operating Partnerships, collectively.

127
<PAGE>
"ORGANIZATIONAL DOCUMENTS" means the Second Amended and Restated Certificate
of Incorporation and Bylaws of the Company.

"ORIGINAL ASSET" means the assets contributed to the Company on the
Effective Date as set forth in Exhibit A to the Advisory Agreement, excluding
any Original Asset that is subsequently classified as a New Asset because of its
classification as a redevelopment project.

"PARTNERSHIP AGREEMENTS" means the limited partnership agreements of the
Partnerships, as amended.

"PARTNERSHIP EQUITY INTERESTS" means the Cap Source I Partnership Equity
Interests together with the Cap Source II Partnership Equity Interests.

"PARTNERSHIPS" means Cap Source I and Cap Source II, together.

"PERSON" means an individual, partnership, corporation, trust or other
entity.

"PROMISSORY NOTE" means a promissory note issued by the Company in
connection with the Transaction to Investors entitled to a fractional interest
in a Note.

"PROPERTIES" means the real estate held by the Operating Partnerships.

"PROSPECTUS/CONSENT SOLICITATION STATEMENT" means this Prospectus/Consent
Solicitation Statement, together with the supplements and appendices thereto,
filed with the SEC as it may be further supplemented or amended from time to
time.

"PROSPECTUS SUPPLEMENT" means, with respect to each Partnership, the
Supplement to this Prospectus/ Consent Solicitation Statement prepared
specifically for the Investors of that Partnership.

"REAL ESTATE ASSETS" means the real estate and real estate related
investments of the Company, including New Assets.

"RECORD DATE" means , 1998.

"REGISTRATION STATEMENT" means the Registration Statement on Form S-4,
Registration No. 333- , as filed with the SEC by the Company under the
Securities Act to register the offering and sale of Shares and Notes pursuant to
the Transaction, as the same may be amended or supplemented from time to time.

"REGULATIONS" means the Treasury Department regulations promulgated under
the Code.

"REIT" means the classification for federal tax purposes as a real estate
investment trust pursuant to Part II, Subchapter M of Chapter 1 of Subtitle A of
the Code, as now enacted or hereafter amended, including successor statutes and
regulations promulgated thereunder.

"RESERVE INVESTMENTS" means amounts held in each Partnership's reserve
account invested in certain GNMA securities backed by pools of single-family
mortgages.

"RESTRICTED STOCK" means Common Stock issued to the Advisor for the
Incentive Fee on New Assets, which contains the restrictions described in the
Advisory Agreement.

"RETURNS OF CAPITAL" means net proceeds, net of all closing costs (including
without limitation any real estate or selling commissions) but without deduction
for any applicable mortgage indebtedness, from any partial sale or a whole sale
of any asset, and principal repayments on debt obligations; provided, however,
this amount shall not be greater than the Adjusted New Asset Value with respect
to such assets.

"SEC" means the United States Securities and Exchange Commission, also
sometimes referred to as the "Commission."

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

"SERVICE" means the United States Internal Revenue Service, also referred to
sometimes as the "IRS."

128
<PAGE>
"SHAREHOLDER" means a holder of Shares.

"SHARES" means shares of the Company's $.001 par value Common Stock proposed
to be issued in connection with the Transaction.

"STATE" means any state of the United States of America, and the District of
Columbia.

"SUTRO & CO." means Sutro & Co., Inc.

"TAX ACT" means the Taxpayer Relief Act of 1997, as may be amended from time
to time.

"THE PONDS" means Ponds at Georgetown Limited Partnership.

"TOTAL ASSETS" means the sum of (a) Adjusted Original Asset Value, (b)
Adjusted New Asset Value, and (c) Cash, less any allowance or adjustment for the
permanent impairment of assets as reflected on the financial statements of the
Company.

"TRANSACTION" means the merger of Cap Source I and Cap Source II with and
into the Company pursuant to the terms and conditions set forth in the Merger
Agreement, as more fully described in the Prospectus/Consent Solicitation
Statement.

"TRANSACTION COSTS" means, with respect to the Transaction, the cost of
mailing and printing the Prospectus/Consent Solicitation Statement, any
supplement thereto or other documents related to the Transaction, legal fees not
related to the solicitation of consents, financial advisory fees, investment
fees, appraisal fees, accounting fees, Independent Committee expenses, travel
expenses and all other fees related to the preparatory work of the Transaction,
but not including costs that would have otherwise been incurred by the
Partnerships in the ordinary course of business.

"TRUSTEE" means , as trustee under the Indenture.

"UNIT" means the ownership interest of an Investor in a Partnership
representing an assigned limited partner interest in a Partnership.

"VALUATION RESEARCH" means Valuation Research Corporation.

129
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEX TO FINANCIAL STATEMENTS OF
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
Report of Independent Public Accountants................................................................... FS-2

Balance Sheet at April 16, 1998............................................................................ FS-3

Notes to Balance Sheet..................................................................................... FS-4
</TABLE>

INDEX TO FINANCIAL STATEMENTS OF THE PARTNERSHIPS

Financial statements and related notes for each of the Partnerships are
included in a separately bound volume provided with this Prospectus/Consent
Solicitation Statement. The index to such financial statements is set forth in
the separately bound volume.

FS-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders
America First Real Estate Investment Company, Inc.

We have audited the accompanying balance sheet of America First Real Estate
Investment Company, Inc. as of April 16, 1998. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.

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

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of America First Real Estate
Investment Company, Inc. as of April 16, 1998 in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Omaha, Nebraska
April 22, 1998

FS-2
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

BALANCE SHEET

APRIL 16, 1998

<TABLE>
<S> <C>
Asset
Cash.............................................................................. $ 1,000
---------
---------
Stockholders' Equity
Common stock, $.001 par value;
50,000,000 shares authorized
1,000 shares issued and outstanding............................................. $ 1
Preferred stock $.001 par value;
50,000,000 shares authorized
No shares issued or outstanding................................................. --
Additional Paid-In Capital.......................................................... 999
---------
Total Stockholders' Equity...................................................... $ 1,000
---------
---------
</TABLE>

The accompanying notes are an integral part of the balance sheet.

FS-3
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

NOTES TO BALANCE SHEET

APRIL 16, 1998

1. ORGANIZATION

America First Real Estate Investment Company, Inc. (the "Company") was
incorporated in Delaware on February 5, 1998. The Company has not yet commenced
operations.

The Company has issued 1,000 shares of common stock for consideration of
$1,000 to America First Companies L.L.C., an affiliate of the general partners
of Capital Source L.P. and Capital Source II L.P.-A (collectively referred to as
the "Capital Source Funds"). The Company intends to issue up to 3,354,387 shares
of common stock in the ratio of 1% to America First Companies L.L.C. and 99% to
holders of Beneficial Assignment Certificates (BACs) of the Capital Source
Funds.

2. RELATED PARTY TRANSACTIONS

America First Real Estate Advisors L.L.C. (the "Advisor") will manage the
operations and investments of the Company and perform administrative services
for the Company. The Advisor is entitled to receive compensation in the form of
an Acquisition Fee, an Asset Management Fee and an Incentive Fee on New assets
for services rendered under the Advisory Agreement. The Acquisition Fee will be
payable each month in arrears and will be an amount equal to 1% of the increase
in the Company's actual investment in all New Assets, including any costs
related to the acquisition or financing of New Assets but excluding debt which
is incurred or assumed in connection therewith. The Asset Management Fee will be
equal to .475%, on an annual basis, of the Company's Total Assets, calculated as
of the last day of each month, payable by the Company to the Advisor on a
monthly basis. The Incentive Fee on New Assets will be equal to 10% of any
Capital Gain offset by any Capital Loss on New Assets, payable by the Company to
the Advisor on an annual basis in the form of Restricted Stock.

America First Properties Management Company L.L.C. (the "Manager"), will
provide property management services for certain of the multifamily properties
to be obtained by the Company. The Manager will receive a management fee equal
to a stated percentage of the gross revenues generated by the property under
management.

FS-4
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF MERGER
AMONG THE COMPANY AND
THE PARTNERSHIPS

This Agreement and Plan of Merger (this "Agreement") dated as of
, 1998, is by and among America First Real Estate Investment Company,
Inc., a Delaware corporation (the "Company"); Capital Source I L.P., a Delaware
limited partnership ("Cap Source I") organized on August 22, 1985; and Capital
Source II L.P.-A, a Delaware limited partnership ("Cap Source II") organized on
August 22, 1986 (collectively, the "Partnerships" and individually, a
"Partnership").

W I T N E S S E T H:

WHEREAS, the Company and the Partnerships desire to merge the Partnerships
with and into the Company, pursuant to Delaware law, with the Company being the
surviving entity (the "Merger"), as part of the merger by consolidation of the
Partnerships and the Company. The Company has filed a registration statement on
Form S-4, No. 333- , including all amendments thereto (the "Registration
Statement"), with the Securities and Exchange Commission (the "SEC") pursuant to
the Securities Act of 1933, as amended (the "Act") relating to the Transaction,
of which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and

WHEREAS, Section 263 of the General Corporation Law of the State of
Delaware, 8 DEL.C. Section 101 ET SEQ. (the "DGCL") and Section 17-211 of the
Delaware Revised Uniform Limited Partnership Act (the "Partnership Act")
authorize the merger of a Delaware corporation and Delaware limited
partnerships; and

WHEREAS, the Company's Certificate of Incorporation and Bylaws permit, and
resolutions adopted by the Company's Board of Directors authorize, this
Agreement and the consummation of the Merger.

NOW, THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties to this Agreement covenant and agree as
follows:

ARTICLE I
THE MERGER

Section 1.01. THE MERGER; SURVIVING CORPORATION. Subject to the terms and
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.02 below), the Partnerships shall each be merged with and into the
Company, pursuant to Section 17-211(e) of the Partnership Act and Sections 263,
251 and 103 of the DGCL, and the separate existence of each of the Partnerships
shall cease. The Company shall be the surviving entity (the "Surviving
Corporation") and shall continue to be governed by the DGCL.

Section 1.02. EFFECTIVE TIME. In accordance with Section 17-211(e) of the
Partnership Act and Sections 263, 251 and 103 of the DGCL, the Merger shall
become effective (the "Effective Time") upon the filing of the certificate of
merger (the "Certificate of Merger") with the Secretary of State of the State of
Delaware, or at such later time, not later than five business days thereafter,
as may be specified in the Certificate of Merger. All other filings or
recordings required by Delaware law in connection with the Merger shall also be
made.

Section 1.03. EFFECT OF THE MERGER. The Merger shall have the effects set
forth in Section 17-211 of the Partnership Act and Section 263 of the DGCL.

A-1
<PAGE>
ARTICLE II
THE SURVIVING CORPORATION

Section 2.01. NAME. The name of the Surviving Corporation shall be America
First Real Estate Investment Company, Inc.

Section 2.02. CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation and Bylaws of the Company as in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation and Bylaws of the
Surviving Corporation unless and until amended in accordance with their terms
and applicable law.

Section 2.03. OFFICERS AND DIRECTORS. The officers of the Company
immediately prior to the Effective Time shall continue as officers of the
Surviving Corporation and remain officers until their successors are duly
appointed or their prior resignation, removal or death. The directors of the
Company immediately prior to the Effective Time shall continue as directors of
the Surviving Corporation and shall remain directors until their successors are
duly elected and qualified or their prior resignation, removal or death.

ARTICLE III
CONVERSION OF PARTNERSHIP INTERESTS

Section 3.01. CONVERSION OF LIMITED PARTNER INTERESTS.

(a) At the Effective Time, each limited partner interest ("Unit") in
each of the Partnerships shall be converted, in accordance with the capital
accounts of each limited partner of the Partnerships (the "Investor") and
pursuant to the terms of each respective Partnership's Partnership Agreement
(individually, a "Partnership Agreement" and collectively, the "Partnership
Agreements"), into the number of shares of the Company's Common Stock, $.001
par value per share (the "Common Stock"), as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PARTNERSHIP COMMON STOCK PER UNIT
- ---------------------------------------------------------------------- -----------------------
<S> <C>
Cap Source I.......................................................... .5984
Cap Source II......................................................... .3246
</TABLE>

Each of the Partnerships has one class of Units and all such Units are
held by the Investors.

The number of shares of Common Stock to be issued as a result of the
conversion of Units shall first be multiplied by the number of Units held by
an Investor on the Record Date, as defined in the Prospectus/Consent
Solicitation Statement. No fractional shares of Common Stock will be issued.
Each Investor who would otherwise be entitled to a fractional share (which
entitlement will be determined by combining such Investor's allocation of
shares of Common Stock from each Partnership as to which such Investor is
receiving shares) of Common Stock will instead receive cash equal to $25
multiplied by the fraction.

(b) Notwithstanding subparagraph (a) above and subject to the
limitations described herein, Investors who, in connection with the
Transaction, elected to receive the Company's Variable Rate Senior Notes Due
, 2006 ("Notes"), will, except as hereinafter provided, receive
Notes. In the event Investors elect to receive Notes in the aggregate
principal amount which exceeds $40 million, the Notes will be allocated
first to such Investors who voted against the Transaction, and any remaining
Notes will be allocated on a pro rata basis (in denominations of $1,000) to
those Investors who elected to receive Notes and either abstained from
voting by indicating their abstention on the Consent Card or voted "YES" in
favor of the Transaction. In such event, the Investors who voted for the
Transaction or abstained from voting and who elected to receive Notes will
receive

A-2
<PAGE>
shares of Common Stock in an amount equal to the difference between the
Exchange Value allocable to such an Investor and the amount of Notes
distributed to such an Investor. Subject to the foregoing limitations, each
Unit held by an Investor who elected to receive Notes shall be converted
into the Notes.

Section 3.02. CONVERSION OF GENERAL PARTNER INTERESTS. At the Effective
Time, the General Partners' interests in each of the Partnerships shall be
converted into the aggregate number of shares of the Company's Common Stock, as
follows:

<TABLE>
<CAPTION>
AGGREGATE NUMBER OF SHARES OF
COMMON STOCK IN EXCHANGE FOR
PARTNERSHIP GENERAL PARTNERS' INTERESTS
- --------------------------------------------------------------- -----------------------------
<S> <C>
Cap Source I................................................... 20,397
Cap Source II.................................................. 13,152
</TABLE>

Section 3.03. TAX ASPECTS. For federal income tax purposes, the conversion
of the Units and General Partners' interests in the Partnerships pursuant to
Section 3.01(a) and Section 3.02 of this Agreement shall be deemed a transfer of
the assets of each Partnership to the Company in exchange for the Common Stock
and Notes and a distribution of such Common Stock and Notes in liquidation of
each of the Partnerships pursuant to the terms of each respective Partnership
Agreement in accordance with the provisions of the Partnership Agreements.

Section 3.04. ISSUANCE OF SHARES.

(a) The Company shall designate an exchange agent (the "Exchange Agent")
to act as such in connection with the issuance of certificates representing
Common Stock and Notes pursuant to this Agreement.

(b) As soon as practicable after the Effective Time, the Company shall
cause the Exchange Agent to distribute to each Investor who, in connection
with the Transaction, elected to receive shares of Common Stock, or who made
no election with respect to Common Stock or Notes, and to the General
Partners, certificates representing the number of shares of Common Stock to
which such Investor and the General Partners are entitled pursuant to
Section 3.01(a) and Section 3.02 of this Agreement.

Section 3.05. ISSUANCE OF NOTES. As soon as practicable after the
Effective Time, the Company shall cause the Exchange Agent to distribute to each
Investor who elected to receive Notes in connection with the Transaction, Notes
to which such Investor is entitled pursuant to, and subject to the limitations
set forth in, Section 3.01(b) of this Agreement.

ARTICLE IV
TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES

Section 4.01. TRANSFER, CONVEYANCE AND ASSUMPTION. At the Effective Time,
the Company shall continue in existence as the Surviving Corporation and without
further transfer, succeed to and possess all the rights, privileges and powers
of the Partnerships, and all the assets and property of whatever kind and
character of the Partnerships shall vest in the Company without further act or
deed. Thereafter, the Company, as the Surviving Corporation, shall be liable for
all of the liabilities and obligations of the Partnerships, and any claim or
judgement against the Partnerships may be enforced against the Company, as the
Surviving Corporation, in accordance with Section 17-211 of the Partnership Act
and Section 263, 259 and 103 of the DGCL.

Section 4.02. FURTHER ASSURANCES. If at any time the Company shall
consider or be advised that any further assignment, conveyance or assurance is
necessary or advisable to vest, perfect or confirm of record

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in the Surviving Corporation the title to any property or right of the
Partnerships, or otherwise, to carry out the provisions hereof, the proper
representatives of the Partnerships as of the Effective Time shall execute and
deliver any and all proper deeds, assignments and assurances, and do all things
necessary and proper to vest, perfect or convey title to such property or right
in the Surviving Corporation and otherwise to carry out the provisions hereof.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS

The Partnerships each severally represent and warrant to the Company and to
each other (with respect only to the Partnership making the representation and
warranty) as follows:

Section 5.01. VALIDITY OF ACTIONS. Each Partnership (a) is a limited
partnership duly formed, validly existing and in good standing under the laws of
the State of Delaware, (b) has the authority to conduct its business as
currently conducted and to own and operate the properties which it now owns and
operates, (c) is qualified to do business in all jurisdictions in which such
qualification is necessary, and (d) has full power and authority to enter into
this Agreement and to carry out all acts contemplated by it. This Agreement has
been duly executed and delivered on behalf of the Partnerships, and has received
all necessary authorization and is a legal, valid and binding obligation of the
Partnerships, enforceable against the Partnerships in accordance with its terms.
The execution and delivery of this Agreement and consummation of the
transactions contemplated by it will not violate any provision of the
Partnership Agreements nor violate, conflict with or result in any breach of any
of the terms, provisions or conditions of, or constitute a default or cause
acceleration of, any indebtedness under any agreement or instrument to which any
of the Partnerships are a party or by which they or their assets may be bound,
or cause a breach of any applicable federal or state law or governmental
regulation, or any applicable order, judgment, writ, award, injunction or decree
of any court or governmental instrumentality.

Section 5.02. PARTNERSHIPS' FINANCIAL STATEMENTS. The financial statements
and schedules of the Partnerships, together with related notes (the "Financial
Statements"), set forth in the Registration Statement of the Company, fairly
present, on the basis stated in the Registration Statement, the financial
position of the Partnerships at the date or for the periods specified in the
Registration Statement. The Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis ("GAAP"), except to the extent stated therein.

Section 5.03. NO MISSTATEMENTS. The representations of the Partnerships
contained in this Agreement and the information supplied by the Partnerships for
inclusion in the Registration Statement and the Prospectus/Consent Solicitation
Statement do not contain any untrue statement of a material fact or omit to
state any fact necessary to make such representations or information not
materially misleading.

Section 5.04. NO MATERIAL ADVERSE CHANGE. Since the respective dates as to
which information is given in the Registration Statement and the
Prospectus/Consent Solicitation Statement with respect to the Partnerships, and
except as described in the Registration Statement or the Prospectus/Consent
Solicitation Statement, there have been no changes in the business, operations,
properties, assets or the prospects or condition, financial or otherwise, of the
Partnerships which would, in the aggregate, have a material adverse effect on
the business, properties, prospects, profitability, assets or financial
condition of the Partnerships.

Section 5.05. TITLE TO ASSETS. Each Partnership has good and marketable
title to the assets reflected in the most recent balance sheet (the "Balance
Sheet") included in the Financial Statements with respect to such Partnership,
and will hold good and marketable title to such assets, and any assets acquired
by the Partnership prior to the Effective Time, as of the Effective Time, except
for assets disposed of in the ordinary course of business. Such assets, together
with the related goodwill and rights of each Partnership as a going concern,
tangible and intangible, are collectively referred to as the "Assets." Except as
otherwise

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disclosed in the Balance Sheet or related notes accompanying it, all of the
Assets are owned free and clear of any and all adverse claims, security
interests, charges or other encumbrances or restrictions of every nature, except
liens for current taxes not yet due and payable or landlords' liens as provided
for in the relevant leases or by applicable law.

Section 5.06. LIABILITIES OF THE PARTNERSHIPS. The Partnerships have no
material liabilities, contingent or otherwise, including, without limitation,
liabilities for state or federal income, withholding or other taxes, except to
the extent reflected, reserved against, or provided for in the Balance Sheet,
and except for any material liabilities disclosed in the Prospectus/Consent
Solicitation Statement or any other obligations incurred after , 1998
in the ordinary course of business which subsequently incurred obligations are
of an amount and nature as to be capable of being discharged from the operations
of the Partnerships without requiring additional equity or borrowing.

Section 5.07. REPRESENTATIONS AND WARRANTIES PERTAINING TO REAL
PROPERTY. For purposes of the following representations and warranties, "Real
Property" shall mean those parcels of real property of a Partnership as listed
in the Prospectus/Consent Solicitation Statement and "Improvements" shall mean
any building, structure or other improvements situated on the Real Property.
Each Partnership makes the following representations and warranties only with
respect to the Real Property owned by it as specified in the Prospectus/Consent
Solicitation Statement.

(a) To the best knowledge of each Partnership, all assumptions of the
appraisers of the Real Property (the "Appraisers") used by the Appraisers in
preparing the appraisals of the Real Property, as the same may have been
revised (the "Appraisals"), are reasonable assumptions. All information
provided by each Partnership to the Appraisers with respect to the Real
Property was true and correct as of the date given.

(b) To the best knowledge of each Partnership, there is at present no
material violation of any law, ordinance, rule, requirement, resolution,
policy statement or regulation (including, without limitation, those
relating to land use, subdivision, zoning, environmental, occupational
health and safety, water, and building and fire codes) of any governmental
authority (collectively, "Governmental Regulations") applicable to the
construction, alteration, rehabilitation, maintenance, use, operation or
sale of any of the Real Property, which violation would have a material
adverse impact on the use of the Real Property or the Improvements. None of
the Partnerships have received notice or have knowledge that any
governmental authority, or any employee or agent thereof, considers the
operations, use or ownership of any of the Improvements to violate or have
violated in a material manner any Governmental Regulation, or that any
investigation has been commenced or is contemplated regarding such possible
violation.

(c) To the best knowledge of each Partnership, such Partnership has
neither received notice nor has knowledge of any plan or study of any
governmental authority which would materially adversely affect the use of
the Real Property or the Improvements for their intended uses, or result in
any public improvements which will result in any material charge being
levied against, or any material lien assessed upon, all or any portion of
such Real Property or Improvements.

(d) To the best knowledge of each Partnership, such Partnership has good
and marketable title to the Real Property and Improvements owned by it, free
and clear of all liens, encumbrances, claims, covenants, conditions and
restrictions, easements, rights of way, charges and any other exceptions to
or defects of title ("Encumbrances"), except for (i) those matters disclosed
in the Prospectus/Consent Solicitation Statement or the Title Insurance
Policy issued to each Partnership with respect to each Real Property
(collectively, the "Title Policies"), and (ii) those matters created by
third parties which are the liability of the lessee of such Real Property
and Improvements, or, in the absence of acceptance of responsibility by such
lessee, have been or will be resolved by the Partnership.

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(e) Except as disclosed in the Prospectus/Consent Solicitation Statement
or the Title Policies, to the best knowledge of each Partnership, there are
no delinquent taxes, assessments, charges, debts, liabilities, claims or
obligations arising from the construction, design, development, ownership,
maintenance or operation of, or otherwise relating to, the Real Property or
the Improvements, which matters could give rise to any mechanic's or
materialmen's or other statutory or common law lien against such Real
Property or Improvements or any part thereof which, individually or in the
aggregate, would have a material adverse impact on the value of such Real
Property and Improvements.

(f) Except as disclosed in the Prospectus/Consent Solicitation
Statement, to the best knowledge of each Partnership, none of the Real
Property, which for purposes of this paragraph shall include, without
limitation, subsurface soil and ground water, contains any substance,
including, without limitation, any asbestos, formaldehyde, radioactive
substance, hydrocarbons, industrial solvents, flammables, explosives, and
any hazardous substance or toxic material, which could presently or at any
time in the future cause a material detriment to or materially impair the
value or beneficial use of the Real Property, or constitute or cause a
health, safety or environmental hazard on or relating to the Real Property
or to any person who may enter on the Real Property or require remediation
at the behest of any governmental agency (collectively, "Hazardous
Materials"). Except as disclosed in the Prospectus/Consent Solicitation
Statement, none of the Partnerships have received notice that the ownership,
operation, use and condition of any of the Real Property is in violation of
any federal, state or local law, ordinance or regulation pertaining to
industrial hygiene, Hazardous Materials or environmental protection. Except
as disclosed in the Prospectus/Consent Solicitation Statement, to the best
knowledge of each Partnership, there is no proceeding or action pending or,
to its actual knowledge, threatened by any person or governmental agency
regarding the environmental condition of any of the Real Property.

Section 5.08. INSURANCE. Either each Partnership, or, in the absence of
each Partnership so doing, the respective tenants of the Real Property and
Improvements owned by each Partnership, or, where applicable, each borrower from
each Partnership which holds a loan secured by real property owned by such
borrower, carries, to the extent deemed reasonable by the General Partners under
the circumstances, comprehensive liability, fire, extended coverage and rental
loss insurance with respect to the Partnerships' properties with policy
specifications and insured limits customarily carried for similar properties.
All such policies are currently in effect and will remain in effect after the
Merger.

Section 5.09. TAXES. Each Partnership has filed timely all federal, state
and local tax returns which it is required to file, has provided to its
Investors all required Form K-1's and such other tax forms as may be required by
federal, state or local authorities, and has no outstanding liability for any
federal, state or local taxes or interest or penalties thereon, whether disputed
or not, except taxes not yet payable which have been provided for in accordance
with GAAP and are disclosed in the Financial Statements.

Section 5.10. ACTIONS PENDING. Except as disclosed in the
Prospectus/Consent Solicitation Statement: (a) there are no actions, suits,
proceedings or claims pending or threatened against the Partnerships or the
general partner of the Partnerships which, if determined adversely to such
Partnerships, could (i) have a material adverse effect on the Partnerships, the
Assets or the business of the Partnerships when taken as a whole, or (ii)
prevent or delay the consummation of any of the transactions contemplated by
this Agreement; (b) no Partnership, to the best of its knowledge, is the subject
of any pending or threatened investigation relating to any aspect of such
Partnership's operations by any federal, state or local governmental agency or
authority; and (c) each Partnership, to the best of its knowledge, is not and
has not been the subject of any formal or informal complaint, investigation or
inspection under the Equal Employment Opportunity Act or the Occupational Safety
and Health Act (or their state or local counterparts) or by any other federal,
state or local authority.

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Section 5.11. APPRAISAL OF PARTNERSHIPS. To the best knowledge of each
Partnership, the information furnished by such Partnership to the appraisers
named in the Prospectus/Consent Solicitation Statement for the purposes of
determining the appraised value of the Partnerships is accurate and complete in
all material respects.

ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Partnerships as follows:

Section 6.01. VALIDITY OF ACTIONS. The Company (a) is duly organized,
validly existing and in good standing under the laws of the State of Delaware,
(b) has the authority to conduct its business as currently conducted, (c) is
qualified to do business in all jurisdictions in which such qualification is
necessary, and (d) has full power and authority to enter into this Agreement and
to carry out all acts contemplated by it. This Agreement has been duly executed
and delivered on behalf of the Company, has received all necessary authorization
and is a legal, valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms. The execution and delivery of this
Agreement and consummation of the transactions contemplated by it will not
violate any provision of the Certificate of Incorporation or Bylaws of the
Company nor violate, conflict with or result in any breach of any of the terms,
provisions or conditions of, or constitute a default or cause acceleration of,
any indebtedness under any agreement or instrument to which the Company is a
party or by which it or its assets may be bound, or cause a breach of any
applicable federal or state law or regulation, or any applicable order,
judgment, writ, award, injunction or decree of any court or governmental
instrumentality.

Section 6.02. CAPITAL STOCK OF THE COMPANY. The authorized capital stock
of the Company consists of 100,000,000 shares of capital stock, of which there
are 50,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock
authorized. One thousand shares of Common Stock, having an aggregate par value
of $1.00, are issued and outstanding as of the date of this Agreement, and such
shares of Common Stock constitute all of the issued and outstanding capital
stock of the Company outstanding as of the date hereof. The shares of Common
Stock of the Company to be delivered to the Investors pursuant to this Agreement
have been duly and validly authorized, and when issued and delivered, will be
fully paid and nonassessable. As of the date hereof, the Company has no binding
commitment to issue any capital stock, except as described herein.

Section 6.03. MISSTATEMENTS. The representations of the Company contained
in this Agreement and the information regarding the Company contained in the
Registration Statement and the Prospectus/ Consent Solicitation Statement do not
contain any untrue statement of a material fact or omit to state any fact
necessary to make such representations or information not materially misleading.

Section 6.04. INVESTMENT OF CASH. Upon consummation of the Merger, the
Company will invest the cash it receives from the Partnerships so that not more
than 80% of the Company's assets will consist of assets listed under Section
351(e) of the Code.

ARTICLE VII
COVENANTS OF THE PARTIES

Section 7.01. PROHIBITED ACTS. Pending consummation of the Merger or prior
to termination of this Agreement, the Partnerships agree that, without prior
written consent of the Company, given in a letter which specifically refers to
this Section of the Agreement, the Partnerships shall:

(a) use their reasonable efforts so as not to perform any act, or omit
to take any action that would make any of their representations made above
or any information pertaining to them in the

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Registration Statement or the Prospectus/Consent Solicitation Statement
inaccurate or materially misleading as of the Effective Time;

(b) not enter into any commitment, contract or other transaction in any
way affecting any of the Partnerships' business, except to carry out its
business in the ordinary course, and as contemplated by this Agreement or in
the Prospectus/Consent Solicitation Statement;

(c) not make any loans or advances to, or investments in, any other
corporation, partnership or other legal entity or to any other persons
except in the ordinary course of business;

(d) not borrow money for any purpose or agree to become contingently
liable, by guaranty or otherwise, for the obligations or indebtedness of any
other person other than in the ordinary course of business; and

(e) not mortgage, pledge, encumber, sell, lease or transfer any of the
Assets other than in the ordinary course of business.

Section 7.02. NOTICE. Pending the consummation of the Merger or prior to
termination of this Agreement, each party agrees that it will promptly advise
the other of the occurrence of any condition or event which would make any of
its representations contained in this Agreement or the Prospectus/Consent
Solicitation Statement inaccurate, incorrect, or materially misleading.

Section 7.03. ADDITIONAL DOCUMENTS. At the request of any party, each
party will execute and deliver any additional documents and perform in good
faith such acts as reasonably may be required in order to consummate the
transactions contemplated by this Agreement.

ARTICLE VIII
CONDITIONS TO THE MERGER

The obligation of the Company, on the one hand, and each Partnership on the
other hand, to consummate the Merger shall be subject to compliance with or
satisfaction of the following conditions:

Section 8.01. BRING DOWN. The representations and warranties set forth in
this Agreement shall be true and correct in all material respects at and as of
the Effective Time as if then made (except for those representations and
warranties made as of a given date, which shall continue to be true and correct
as of such given date), as evidenced by a certificate made by the General
Partners of each Partnership and the President, Chief Executive Officer or Chief
Operating Officer of the Company, as of the Effective Time.

Section 8.02. COMPLIANCE. The Company and each Partnership shall have
complied with all of the covenants and agreements in this Agreement on its part
to be complied with as of or prior to the Effective Time.

Section 8.03. PARTNERSHIP APPROVALS. The Investors holding a majority of
outstanding Units of Cap Source I and Cap Source II shall have approved the
Transaction and the Dissenting Investors of the Partnerships have not elected to
receive Notes exceeding $40,000,000 in principal amount.

Section 8.04. STOCK EXCHANGE LISTING. At or before the Effective Time, the
Common Stock to be issued in the Merger shall be approved for listing on the New
York Stock Exchange, subject to official notice of issuance.

Section 8.05. CONSENTS OBTAINED. All necessary consents, waivers,
approvals, authorizations or orders required to be obtained, and the making of
all filings required to be made by any party to the Merger for the
authorization, execution and delivery of this Agreement and the Certificate and
Plan of Merger between the Company and the Partnerships, and the consummation of
the transactions contemplated thereby on or before (and remain in effect at) the
Effective Time shall have been obtained or made.

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Section 8.06. NO MATERIAL ADVERSE CHANGE. Since the respective dates as to
which information is given in the Registration Statement and the
Prospectus/Consent Solicitation Statement, there shall not have occurred or been
threatened any material adverse changes in the overall business or prospects of
the Partnerships or in the tax or other regulatory provisions applicable to the
Partnerships or the Company, and the Company shall not have become aware of any
facts that, in the sole judgment of the Company and the General Partners, have
or may have a material effect, whether adverse or otherwise, on the
Partnerships, taken as a whole, the Transaction, or the value to the Company of
the properties of the Partnerships, taken as a whole.

Section 8.07. OPINIONS AND LETTERS. The Company shall have received, on or
prior to the Effective Time, an opinion of counsel, which shall not have been
withdrawn as of the Effective Time, to the effect that for federal income tax
purposes the Merger will be an exchange subject to the nonrecognition provisions
of Section 351 of the Internal Revenue Code of 1986, as amended.

Section 8.08. NO STATUTE, RULE OR REGULATION AFFECTING CONSUMMATION. At
the Effective Time, there shall be no statute, rule, regulation, injunction or
court order enacted or issued by the United States or any State, or by a court,
which prohibits or challenges the consummation of the Transaction.

Section 8.09. NO DECLARATIONS. At the Effective Time, there shall be no
declaration of suspension of trading in, or limitation on prices for, securities
generally on the New York Stock Exchange, declaration of a banking moratorium by
federal or state authorities or any suspension of payments by banks in the
United States (whether mandatory or not) or of the extension of credit by
lending institutions in the United States, or commencement of war, armed
hostility, or other international or national calamity directly or indirectly
involving the United States, which war, hostility or calamity, in the sole
judgment of the Company, would have a material adverse effect on the business
objectives of the Company, or, in the case of any of the foregoing existing on
the date of the Prospectus/Consent Solicitation Statement, any material
acceleration or worsening thereof.

Section 8.10. EFFECTIVENESS OF REGISTRATION STATEMENT. At or prior to the
Effective Time, the Registration Statement shall have been declared effective,
no stop order suspending the effectiveness of the Registration Statement shall
have been issued, no proceedings for such purpose shall have been initiated, and
all necessary approvals under state securities or blue sky laws shall have been
received.

ARTICLE IX
OTHER AGREEMENTS

Section 9.01. WAIVER BY GENERAL PARTNERS. Immediately prior to the
Effective Time, the General Partners of the Partnerships shall waive all rights
to (a) any fees not accrued to the Effective Time, and (b) any proceeds from the
sale or liquidation of any property of a Partnership to which the General
Partners would have been entitled pursuant to the Partnership Agreement of such
Partnership.

Section 9.02. INDEMNIFICATION.

(a) To the fullest extent permitted by law, the Partnerships (the
"Indemnifying Parties"), jointly and severally, agree to defend, indemnify
and hold harmless the Company and its directors, officers, employees and
agents (the "Indemnified Parties") from and against any losses, claims,
damages or liabilities (including, without limitation, attorneys' fees and
disbursements) to which such Indemnified Party may become subject under the
Act, the Securities Exchange Act of 1934, as amended, or otherwise, insofar
as such losses, claims, damages or liabilities (or actions with respect
thereof arise out of or are based upon an untrue statement or an alleged
untrue statement of a material fact contained in the Registration Statement,
the Prospectus/Consent Solicitation Statement, or any amendment or
supplement to such documents, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or to
the extent that such losses, claims, damages or liabilities

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(including, without limitation, attorneys' fees and disbursements) result
from a breach by an Indemnifying Party of the representations and warranties
of the Partnerships contained in Article V of this Agreement.

(b) The Indemnified Parties shall give (or cause to be given) to the
Indemnifying Parties notice of claim or matter for which indemnity is (or
will be) sought under this Section 9.02; such notice shall be given promptly
after the Indemnified Parties receive actual notice or knowledge of the
claim or matter that is subject to indemnification. With respect to any
claim asserted by a third party against any Indemnified Parties for which
indemnity is sought, the relevant Indemnifying Party shall have the right to
employ counsel reasonably acceptable to the relevant Indemnified Parties to
defend against such assertion, and such Indemnifying Parties shall have the
right to compromise or otherwise settle any such action or claim only with
the prior written consent of the relevant Indemnified Party, which shall not
be unreasonably withheld.

ARTICLE X
TERMINATION; AMENDMENT; WAIVER

Section 10.01. TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, (a)
by mutual consent of the Board of Directors of the Company and the General
Partners of the Partnerships, (b) by action of the Board of Directors of the
Company in the event of a failure of a condition to the obligations of the
Company set forth in Article VIII of this Agreement, (c) by action of the
General Partners of the Partnerships in the event of a failure of a condition to
the obligations of the Partnerships set forth in Article VIII of this Agreement,
or (d) by action of the Board of Directors of the Company or of the General
Partners of the Partnerships in the event that the Merger is not consummated
prior to , 1998 or such later date as the parties shall mutually
agree in writing.

Section 10.02. EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 10.01, this Agreement shall become void and of no effect
with no liability on the part of any party hereto.

Section 10.03. AMENDMENT. The parties hereto may, by written agreement,
amend this Agreement at any time prior to the filing of the Certificate of
Merger with the Delaware Secretary of State, such amendment to be approved by
the parties hereto; provided that, after the approval of the Merger by the
Investors holding a majority of the Units of each Partnership no amendment shall
be made which alters or changes (a) the amount or kind of consideration which
the Investors of each Partnership are entitled to receive upon conversion of the
Units of each Partnership, (b) the Certificate of Incorporation of the Company,
or (c) the terms and conditions of this Agreement if such alteration or change
would have an adverse effect on the Investors of each Partnership or the
shareholders of the Company.

Section 10.04. WAIVER. At any time prior to the Effective Time, any party
to this Agreement may extend the time for the performance of any of the
obligations or other acts of any other party hereto, or waive compliance with
any of the agreements of any other party or with any condition to the
obligations hereunder, in each case only to the extent that such obligations,
agreements and conditions are intended for its benefit.

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ARTICLE XI
MISCELLANEOUS

Section 11.01. EXPENSES. If the Merger becomes effective, and all of the
Partnerships participate, all of the expenses incurred in connection with the
Merger shall be paid as specified in the Prospectus/ Consent Solicitation
Statement.

Section 11.02. NOTICES. All notices or other communications required or
permitted under the terms of this Agreement by any party shall be made in
writing and shall be delivered by first class mail or by personal delivery,
postage or fees prepaid, to the other parties at America First Companies L.L.C.,
Attn: Paul L. Abbott, 399 Park Avenue, Floor 36, New York, New York 10022, with
a copy to Kutak Rock, 717 17th Street, Suite 2900, Denver, Colorado 80202,
Attention: Paul E. Belitz, or to such other address as any of the parties hereto
may designate by notice to the others.

Section 11.03. NON-ASSIGNABILITY. This Agreement shall not be assignable
by any of the parties to this Agreement.

Section 11.04. ENTIRE AGREEMENT. This Agreement contains the parties'
entire understanding and agreement with respect to its subject matter, and any
and all conflicting or inconsistent discussions, agreements, promises,
representations and statements, if any, between the parties or their
representatives that are not incorporated in this Agreement shall be null and
void and are merged into this Agreement.

Section 11.05. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original, but all of which
together shall constitute a single agreement.

Section 11.06. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without giving
effect to conflicts of law principles.

Section 11.07. HEADINGS. The various section headings are inserted for
purposes of reference only and shall not affect the meaning or interpretation of
this Agreement or any provision hereof.

Section 11.08. GENDER; NUMBER. All references to gender or number in this
Agreement shall be deemed interchangeably to have a masculine, feminine, neuter,
singular or plural meaning, as the sense of the context requires.

Section 11.09. SEVERABILITY. The provisions of this Agreement shall be
severable, and any invalidity, unenforceability or illegality of any provision
or provisions of this Agreement shall not affect any other provision or
provisions of this Agreement, and each term and provision of this Agreement
shall be construed to be valid and enforceable to the full extent permitted by
law.

Section 11.10. AUTHORIZATION. The General Partners (a) shall be
authorized, at such time in their full discretion as they deem appropriate, to
execute, acknowledge, verify, deliver, file and record, for and in the name of
the Partnerships and, to the extent necessary, the General Partners and the
Investors, any and all documents and instruments, and (b) shall do and perform
any and all acts required by applicable law or which the General Partners deem
necessary or advisable to effectuate the Merger.

Section 11.11. LIMITATIONS OF REMEDIES. If any party hereto becomes aware,
prior to the closing, of a breach of any representation, warranty or covenant
contained in this Agreement, the sole remedy of the nonbreaching party for such
breach shall be limited to termination of this Agreement.

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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by an officer duly authorized to do so, all as of the day and year
first above written.

AMERICA FIRST REAL ESTATE
INVESTMENT COMPANY, INC.,
a Delaware corporation

By
--------------------------------------

-----------------------------------------------------------------------------,
President

CAPITAL SOURCE I L.P., a Delaware
limited
partnership

By:
--------------------------------------

General Partner

By
-----------------------------------

----------------------------------------------------------------------------,
President

By:
--------------------------------------

General Partner

By
-----------------------------------

----------------------------------------------------------------------------,
President

CAPITAL SOURCE II L.P.-A, a Delaware
limited
partnership

By:
--------------------------------------

General Partner

By
-----------------------------------

----------------------------------------------------------------------------,
President

By:
--------------------------------------

General Partner

By
-----------------------------------

----------------------------------------------------------------------------,
President

A-12
<PAGE>
APPENDIX B
FAIRNESS OPINION

May 7, 1998

The Independent Committee of
the Board of Managers of America First Companies L.L.C.

Mr. George J. Kubat
4601 South 76th Street
Omaha, NE 68132

Dr. Martin A. Massengale
University of Nebraska
Lincoln, NE 68583

America First Real Estate
Investment Company, Inc.
Suite 400
1004 Farnam Street
Omaha, NE 68102

Capital Source L.P. and
Capital Source II L.P.-A
Suite 400
1004 Farnam Street
Omaha, NE 68102

Ladies and Gentlemen:

You have requested Sutro & Co., Inc.'s ("Sutro & Co.") opinion as investment
bankers as to the fairness, from a financial point of view, of the consideration
to be received by the holders (the "Investors") of beneficial assignment
certificates representing assigned limited partnership interests (the "Units")
in Capital Source L.P. ("Cap Source I") and Capital Source II L.P.-A ("Cap
Source II") (collectively, the "Partnerships"), in connection with the proposed
merger (the "Transaction") of Cap Source I and Cap Source II with and into
America First Real Estate Investment Company, Inc. (the "Company"), a newly
formed Delaware corporation that intends to qualify as a "C" Corporation for
federal income tax purposes.

Sutro & Co. has been advised by the Partnerships and the Company that in
connection with the proposed Transaction, (a) Investors will receive, at their
election and subject to certain limitations, either shares of the Company's
$0.001 par value common stock (the "Shares" or "Consideration") or Variable Rate
Senior Notes due , 2006 (the "Notes"), (b) up to 2,019,282 Shares have
been allocated to Investors in Cap Source I in exchange for the Investors' Units
and up to 1,302,056 Shares have been allocated to Investors in Cap Source II in
exchange for the Investors' Units, (c) up to 33,549 Shares or 1.00% of the pro
forma outstanding Shares immediately following the consummation of the
Transaction have been collectively allocated to Insured Mortgage Equities, Inc.
and America First Capital Source I, LLC (together, the "Cap Source I General
Partners") and Insured Mortgage Equities, Inc. and America First Capital Source
II, LLC (together, the "Cap Source II General Partners" and collectively with
the Cap Source I General Partners, the "General Partners") and (d) the Company
will enter into an advisory agreement (the "Advisory Agreement") with America
First Real Estate Advisors LLC (the "Advisor") to manage the Company.

B-1
<PAGE>
Sutro & Co., in conducting its review and arriving at its opinion, noted
that the exchange ratios (the "Exchange Ratios") for Cap Source I and Cap Source
II in the Transaction are based on (i) the principal amount of the investments
in FHA loans and GNMA certificates at December 31, 1997 in the audited Parent
Company Only Condensed Balance Sheets contained in the Annual Reports on Form
10-K for 1997 for each of the Partnerships, (ii) the value of the Partnerships'
investments in the operating partnerships (that owned the underlying real estate
properties of each of the Partnerships) based on certain appraisals prepared by
Valuation Research dated December 31, 1997 (the "Appraisals"), and (iii) the
market values of the Partnerships' remaining assets and liabilities at December
31, 1997 and before transaction costs or other costs associated with the
Transaction (individually or collectively the "Exchange Values"). The Exchange
Ratios relating to the Exchange Values for Cap Source I and Cap Source II are
used to determine the allocation of Shares to be received by the Investors in
Cap Source I and Cap Source II in the Transaction and the principal allocation
of the Notes to be received by Investors in Cap Source I and Cap Source II in
the Transaction.

Additionally, Sutro & Co. was requested to provide an opinion as to the
fairness, from a financial point of view, of the principal allocation of the
Notes that may be elected by the Investors. As used herein, principal allocation
refers solely to the method of allocation, as determined by the Exchange Values,
of the Notes among the investors in the Partnerships. Sutro & Co. in arriving at
its opinion as to the fairness, from a financial point of view, of the
Consideration to be received by the Investors, assumes that the maximum amount
of Notes that may be issued in the Transaction is $40.0 million.

Based upon and subject to the foregoing and following, Sutro & Co. is of the
opinion, as investment bankers, that, as of the date hereof, the Consideration
to be received by the Investors and the General Partners collectively, the
allocation of such Consideration among the Investors and the General Partners,
and the principal allocation of the Notes, in the Transaction, is fair to the
Investors and the General Partners from a financial point of view.

Sutro & Co., as part of its investment banking business, is regularly
engaged in the evaluation of capital structures, the valuation of businesses and
their securities in connection with mergers and acquisitions, firm commitment
underwritings, secondary distributions of listed and unlisted securities,
private placements, financial restructurings and other financial services. Sutro
& Co. is currently acting as a financial advisor to the Independent Committee of
the Board of Managers of America First Companies L.L.C. (the "Independent
Committee") in connection with the proposed Transaction and will receive a fee
for delivering this opinion and for performing those advisory services. The
Partnerships have agreed to indemnify Sutro & Co. against certain liabilities
arising out of or in connection with the services rendered by Sutro & Co. under
such engagement. Sutro & Co., in the ordinary course of business, may in the
future trade securities of the Company for its own account or for the accounts
of its customers, and accordingly, may at any time hold a long or short position
in those securities.

Sutro & Co., in arriving at its opinion, reviewed and analyzed, among other
things, the following: (a) the Registration Statement on Form S-4 of the Company
as filed on May 7, 1998, including the Preliminary Prospectus/Consent
Solicitation Statement included therein, (b) the Appraisals, (c) individual
Partnership Annual Reports and Reports on Form 10-K for the years ended December
31, 1996 and December 31, 1997, (d) the Prospectus of Capital Source I dated
January 10, 1986, (e) the Prospectus of Capital Source II dated February 6,
1987, (f) the Agreement and Plan of Merger among the Partnerships and the
Company, (g) certain other publicly available business, financial and other
information concerning the Partnerships, (h) certain internal information,
primarily financial in nature (including analytical models, projections,
forecasts, estimates and analyses) prepared by or on behalf of the management of
the Partnerships, (i) certain information provided to us by the management of
the Partnerships concerning the distributions on, the trading of and the trading
market for, the equity securities of the Partnerships, and (j) such other
information which Sutro & Co. deemed to be relevant to provide the fairness
opinion.

B-2
<PAGE>
In the course of Sutro & Co.'s engagement, Sutro & Co. held discussions with
the senior management of the Partnerships concerning the historical, current and
projected future operations, business plans, financial conditions and results,
and prospects of the Partnerships. Additionally, Sutro & Co. has discussed with
representatives of Valuation Research, the results, methodology and limitations
of the Appraisals. Sutro & Co. has not, however, independently verified the
accuracy or completeness of the Appraisals.

In conducting its review, Sutro & Co. has relied upon and assumed the
accuracy and completeness of the financial and other information, including the
Appraisals, provided to Sutro & Co. or which were publicly available and have
not attempted to verify the same. Sutro & Co. has relied upon the statements and
information provided by the management of the Partnerships as to the
reasonableness and achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to Sutro & Co.
While the financial models and the financial projections, that were provided by
the management of the Partnerships, that project future results of the
Partnerships are inherently subject to uncertainty, we have assumed that such
forecasts and projections are the best currently available estimates and good
faith judgments of the management of the Partnerships as to the future
performance of the Partnerships.

In rendering its opinion, Sutro & Co. notes that the consummation of the
proposed Transaction is conditioned upon, among other things, the approval of
the majority of both Partnerships. Sutro & Co. is not recommending or
disapproving of any action that may be taken by the Investors, the Partnerships,
the Company, the Advisor or any other person in regard to the Transaction. This
opinion does not constitute a recommendation of the proposed Transaction over
any alternative Transactions which may be possible for the Partnerships and does
not address the Partnerships' underlying business decision to effect the
proposed Transaction. Furthermore, our analysis in this matter has not
considered any other aspect of the proposed Transaction or any agreement or
other matters, which include, but are not limited to, the terms or fairness of
the Advisory Agreement. Sutro & Co. was not asked to opine on and is not
expressing an opinion as to: (a) the terms of the Transaction, (b) the tax
consequences of the Transaction to the Investors, and (c) the prices at which
the Company's securities may trade at in the future.

In connection with this opinion, we have assumed that the documents to be
prepared and used to effect the Transaction will do substantially on the terms
set forth in the Agreement and Plan of Merger among the Partnerships and the
Company. Sutro has not participated in the negotiation of the Transaction or
provided any legal or other advice with respect to the Transaction except as
otherwise described herein or to providing advice regarding the Advisory
Agreement between the Company and the Advisor.

Sutro & Co.'s opinion is necessarily based upon conditions as they exist and
can be evaluated as of the date hereof and the information made available to
Sutro & Co. as of the dates that such information was prepared and based upon.

The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Sutro has
advised the Partnerships that its entire analysis must be considered as a whole
and that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying its opinion.

It is understood and agreed that this opinion is provided solely for the use
of the Committee and the Partnerships as one element of their consideration of
the Transaction, and may not be used for any other purpose or any other party,
or otherwise referred to, relied upon, quoted, summarized or circulated, except
with Sutro & Co.'s written consent. This opinion may be reproduced in full in
the Company's Prospectus/ Consent Solicitation Statement pertaining to the
Transaction.

/s/ Sutro & Co., Inc.
Sutro & Co., Inc.

B-3
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE EXCHANGE NOTES TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. 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 DATE SUBSEQUENT TO THE
DATE HEREOF.

UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
<PAGE>
------------------------

FINANCIAL STATEMENT SUPPLEMENT

PROSPECTUS/CONSENT SOLICITATION STATEMENT
---------------

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CAPITAL SOURCE L.P.

Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31,
1997..................................................................................................... 1

Report of Independent Public Accountants................................................................... 7

Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... 9

Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, 1995........................ 10

Consolidated Statements of Partners' Capital from December 31, 1994 to December 31, 1997................... 11

Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995................ 12

Notes to Financial Statements.............................................................................. 13

Schedule III Real Estate and Accumulated Depreciation for the Years Ended December 31, 1997 and 1996....... 22

CAPITAL SOURCE II L.P.-A

Report of Independent Public Accountants................................................................... 30

Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... 32

Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, 1995........................ 33

Consolidated Statements of Partners' Capital from December 31, 1994 to December 31, 1997................... 34

Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995................ 35

Notes to Financial Statements.............................................................................. 36

Schedule III Real Estate and Accumulated Depreciation for the Years Ended December 31, 1997 and 1996....... 44
</TABLE>

i
<PAGE>
CAPITAL SOURCE L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.

LIQUIDITY AND CAPITAL RESOURCES

Capital Source L.P. (the "Partnership") originally acquired: (i) five
mortgage-backed securities guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in five states; (ii)
three first mortgage loans insured as to principal and interest by the Federal
Housing Administration ("FHA") on multifamily housing properties located in two
states; and (iii) Partnership Equity Investments in eight limited partnerships
which own the multifamily properties financed by the GNMA Certificates and FHA
Loans. The Partnership subsequently received FHA Debentures in payment of the
FHA Loan on Fox Hollow Apartments which were paid in full in 1993. In 1994,
foreclosure proceedings were initiated on Falcon Point Apartments and,
accordingly, the Partnership no longer holds a Partnership Equity Investment in
this property.

In addition, during 1995, the GNMA Certificate related to Falcon Point
Apartments was paid-in-full to the Partnership. Collectively, the remaining GNMA
Certificates, FHA Loans and Partnership Equity Investments are referred to as
the "Permanent Investments." The Partnership has also invested amounts held in
its reserve account in certain GNMA securities backed by pools of single-family
mortgages ("Reserve Investments"). The obligations of GNMA and FHA are backed by
the full faith and credit of the United States government.

The FHA Loans, GNMA Certificates and Partnership Equity Investments in
Operating Partnerships represent the Partnership's principal assets as shown in
the Parent Company Only Financial Information in Note 6 to the financial
statements. The parent company information is presented using the equity method
of accounting for the investment in Operating Partnerships. Generally accepted
accounting principles, however, require that the Partnership's financial
statements consolidate the Operating Partnerships, since the Partnership holds a
majority ownership in each Operating Partnership and can influence decisions of
the general partners in certain circumstances.

The following FHA Loans and GNMA Certificates were owned by the Partnership
at December 31, 1997.

<TABLE>
<CAPTION>
GUARANTEED
OR INTEREST MATURITY CARRYING
PROPERTY NAME INSURED BY RATE DATE VALUE
- ------------------------------------------------------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments................................. FHA 8.72% 11/15/2028 $ 3,510,035
Highland Park Apartments............................... FHA 8.75 11/01/2028 9,001,010
Misty Springs Apartments............................... GNMA 8.75 06/15/2029 4,271,964
The Ponds at Georgetown................................ GNMA 9.00 12/15/2029 2,233,928
Waterman's Crossing.................................... GNMA 10.00 09/15/2028 10,927,185
Water's Edge Apartments................................ GNMA 8.75 12/15/2028 5,066,537
Pools of Single-Family Mortgages....................... GNMA 7.58(1) 2008 to 2009 539,913
Pools of Single-Family Mortgages....................... GNMA 7.58(1) 2007 to 2008 548,613
-------------
$ 36,099,185
-------------
-------------
</TABLE>

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

(1) Represents yield to the Partnership.

1
<PAGE>
DISTRIBUTIONS

Cash distributions paid or accrued per Beneficial Assignment Certificate of
the Partnership (a "BAC") were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Regular monthly distributions
Income.......................... $ .7049 $ .7767 $ .8309
Return of capital............... .3051 .2333 .1791
------- ------- -------
$ 1.0100 $ 1.0100 $ 1.0100
------- ------- -------
------- ------- -------
Distributions
Paid out of cash flow........... $ 1.0100 $ 1.0100 $ 1.0100
------- ------- -------
------- ------- -------
</TABLE>

Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for distributions
is received from other temporary investments. The Partnership may draw on
reserves to pay operating expenses or to supplement cash distributions to BAC
Holders. The Partnership is permitted to replenish reserves with cash flows in
excess of distributions paid. For the year ended December 31, 1997, a net amount
of $189,014 of undistributed cash flow was added to reserves. The total amount
held in reserves at December 31, 1997, was $10,787,058 of which $1,088,526 was
invested in GNMA Certificates.

The Partnership believes that cash provided by operating activities and, if
necessary, withdrawals from the Partnership's reserves will be adequate to meet
its short-term and long-term liquidity requirements, including the payments of
distributions to BAC Holders. Under the terms of its Partnership Agreement, the
Partnership has the authority to enter into short-term and long-term debt
financing arrangements; however, the Partnership currently does not anticipate
entering into such arrangements. The Partnership is not authorized to issue
additional BACs to meet short-term and long-term liquidity requirements.

America First Capital Source I, L.L.C., and Insured Mortgage Equities, Inc.
(referred to as the "General Partners") have conducted a review of their
computer systems to identify those areas that could be affected by the "Year
2000" issue and have developed a plan to resolve the issue. The General Partners
believe the "Year 2000" problem can be resolved without significant operational
difficulties. The Partnership does not maintain its own computer systems and
does not reimburse the General Partners for any capital expenses associated with
computer systems. Therefore, no material effect to the Partnership's results of
operations, financial position or cash flows is anticipated from the "Year 2000"
issue or its resolution.

ASSET QUALITY

The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships.

2
<PAGE>
The following table shows the occupancy levels of the properties financed by
the Partnership at December 31, 1997:

<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NUMBER OF UNITS OF UNITS
PROPERTY NAME LOCATION OF UNITS OCCUPIED OCCUPIED
- ------------------------------------- ---------------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments............... Jacksonville, NC 108 106 98%
Fox Hollow Apartments................ High Point, NC 184 170 92
Highland Park Apartments............. Columbus, OH 252 225 89
Misty Springs Apartments............. Daytona Beach, FL 128 127 99
The Ponds at Georgetown.............. Ann Arbor, MI 134 128 96
Waterman's Crossing.................. Newport News, VA 260 249 96
Water's Edge Apartments.............. Lake Villa, IL 108 104 96
----- ----- --
1,174 1,109 94%
----- ----- --
----- ----- --
</TABLE>

BLUFF RIDGE APARTMENTS. Bluff Ridge Apartments is a 108-unit complex
located in Jacksonville, North Carolina. Average occupancy was 96% in 1997,
compared to 94% in 1996. Operations at Bluff Ridge are heavily dependent on
demand from the local military personnel. The Jacksonville rental market has
remained relatively stable throughout 1997. An increase in operating revenue
resulting from rental rate increases and an increase in average occupancy was
virtually offset by an increase in property operating costs. The increase in
operating costs was largely due to property improvements made during the year.
As a result net cash generated by the property in 1997, excluding interest,
approximated that of 1996. The property was current on its debt service payments
during 1997 and generated cash flow in excess of debt service.

FOX HOLLOW APARTMENTS. Fox Hollow Apartments is a 184-unit apartment
community located in High Point, North Carolina. Average occupancy was 96% in
1997, compared to 95% in 1996. Excluding interest, net cash flow generated by
Fox Hollow Apartments decreased approximately 12% from 1996 to 1997. This
decrease is primarily due to increases of approximately 27% in repairs and
maintenance expenses and property improvements and 18% in property taxes which
were partially offset by a slight increase in operating revenue. Notwithstanding
the decrease in net cash flow, the property remained in compliance with the
terms of the Loan Modification Agreement ("LMA") entered into with a mortgage
holder in 1996. While there can be no assurance that the modified terms of the
Fox Hollow mortgage will enable the property to remain current on its mortgage
obligations, the restructuring allows the Partnership to retain its Partnership
Equity Investment in the Fox Hollow Apartments and improves the property's
ability to make its required mortgage payments from operating cash flow.

HIGHLAND PARK APARTMENTS. Highland Park Apartments contains 252 luxury
garden apartments and is located in Columbus, Ohio. Average occupancy was 93% in
1997, compared to 95% in 1996. Excluding interest, net cash flow generated by
Highland Park Apartments increased approximately 7% from 1996 to 1997. This
increase is due to a 3% increase in operating revenue resulting from rental rate
increases and a 4% decrease in real estate operating expenses, primarily
property improvements. The property remained current on its mortgage obligations
throughout 1997 and generated cash flow in excess of debt service.

MISTY SPRINGS APARTMENTS. Misty Springs Apartments is a 128-unit apartment
community located in Daytona Beach, Florida. Average occupancy was 98% in 1997,
compared to 94% in 1996. The net cash flow generated by the property, excluding
interest, was approximately 22% higher in 1997, compared to 1996, due to an
increase of approximately 9% in operating revenue accompanied by a decrease of
approximately 2% in real estate operating expenses. The increase in operating
revenue was due to the increase in average occupancy and rental rate increases.
Real estate operating expenses were lower primarily due to a decrease in
property taxes.

3
<PAGE>
At December 31, 1997, the Operating Partnership was in compliance with the
terms of a Reinstatement Agreement entered into in 1993. The Operating
Partnership was current on its debt service payments on its mortgage loan during
1997, with a shortfall of $30,000 being funded by Partnership reserves.

THE PONDS AT GEORGETOWN. The Ponds at Georgetown consists of 134 apartments
located in Ann Arbor, Michigan. Average occupancy was 97% in 1997 compared to
95% in 1996. Operating revenue increased approximately 8% in 1997, compared to
1996, primarily due to the increase in average occupancy, rental rate increases
and an increase in corporate unit rentals. Despite the increase in operating
revenue the Operating Partnership remains in default on its mortgage loan and is
delinquent in paying property taxes and insurance. The Partnership continues to
explore a number of alternatives with the mortgage holder to determine the best
course of action to pursue, including a possible restructuring of the mortgage
loan.

WATERMAN'S CROSSING. Waterman's Crossing is a 260-unit apartment community
located in Newport News, Virginia. Average occupancy was 98% in 1997, compared
to 96% in 1996. The Operating Partnership remains current on its mortgage
obligations; however shortfalls of $95,000 were funded by Partnership reserves
in 1997. An increase in operating revenue resulting from an increase in average
occupancy and rental rate increases was virtually offset by an increase in
repairs and maintenance expenses and property improvements. As a result, net
cash flow generated by the property in 1997, excluding interest, approximated
that of 1996.

WATER'S EDGE APARTMENTS. Water's Edge Apartments is a 108-unit apartment
complex located in Lake Villa, Illinois. Average occupancy was 96% in 1997,
compared to 91% in 1996. The property's net cash flow, excluding interest,
increased approximately 5% in 1997 compared to 1996. This increase resulted from
a 7% increase in operating revenue due to the increase in average occupancy and
rental rate increases which was partially offset by a 10% increase in real
estate operating expenses, primarily real estate taxes. The Operating
Partnership remained current on its mortgage obligations in 1997.

4
<PAGE>
RESULTS OF OPERATIONS

The tables below compare the results of operations for each year shown.

Real estate operating expenses......................................... 3,903,102 3,615,907 3,569,892
Depreciation........................................................... 905,563 897,337 896,420
Interest expense....................................................... 558,789 562,015 571,801
Investor Servicing..................................................... 455,322 301,694 238,667
Professional fees...................................................... 93,950 50,164 53,121
Other expenses......................................................... 16,135 9,966 5,849
Amortization........................................................... 141,467 136,797 141,514
------------ ------------ ------------
6,074,328 5,573,880 5,477,264
------------ ------------ ------------
Minority interest in (income) losses of Operating Partnerships......... (5,090) 2,746 2,571
------------ ------------ ------------
Income before extraordinary item....................................... 2,402,540 2,565,102 2,832,113
Extraordinary item--gain from forgiveness of accrued interest.......... -- 82,216 --
------------ ------------ ------------
Net income............................................................. $2,204,540 $2,647,318 $2,832,113
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM 1996 FROM 1995
----------- -----------
<S> <C> <C>
Rental income........................................................................... $ 352,377 $ (6,791)
Mortgage-backed securities income....................................................... (21,862) (20,029)
Interest on GNMA securities............................................................. -- (519,970)
Interest on temporary cash investments and U.S. government securities................... 33,282 325,464
Other income............................................................................ (18,075) 50,756
----------- -----------
345,722 (170,570)
----------- -----------

Real estate operating expenses.......................................................... 287,195 46,015
Depreciation............................................................................ 8,226 917
Interest expense........................................................................ (3,226) (9,786)
Investor servicing...................................................................... 153,628 63,027
Professional fees....................................................................... 43,786 (2,957)
Other expenses.......................................................................... 6,169 4,117
Amortization............................................................................ 4,670 (4,717)
----------- -----------
500,448 96,616
----------- -----------
Minority interest in (income) losses of Operating Partnerships.......................... (7,836) 175
----------- -----------
Income before extraordinary item........................................................ (162,562) (267,011)
Extraordinary item--gain from forgiveness of accrued interest........................... (82,216) 82,216
----------- -----------
Net income.............................................................................. $ (244,778) $ (184,795)
----------- -----------
----------- -----------
</TABLE>

5
<PAGE>
Rental income is recognized net of any vacancy losses and rental concessions
offered. Rental income, net of real estate operating expenses, depreciation and
amortization, increased $52,286 from 1996 to 1997. This increase is due to an
increase in rental income which was partially offset by increases in real estate
operating expenses, primarily repairs and maintenance expenses and property
improvements. The increase in rental income consisted of an increase of
approximately $223,000 due to rental rate increases and approximately $129,000
due to increases in average occupancy at six of the properties.

Rental income, net of real estate operating expenses, depreciation and
amortization decreased $49,006 from 1995 to 1996. The decrease is due to a
slight decrease in rental income accompanied by increases in real estate
operating expenses, primarily repairs and maintenance expenses and property
improvements. The decrease in rental income consisted of a decrease of
approximately $115,000 due to decreases in average occupancy at four of the
properties which was partially offset by an increase in revenue of approximately
$108,000 resulting from rental rate increases.

Mortgage-backed securities income decreased $21,862 from 1997 to 1996 and
$20,029 from 1995 to 1996 due to the continued amortization of the principal
balance of the mortgage-backed securities.

Interest on temporary cash investments and U.S. government securities
increased $33,282 from 1996 to 1997 due to an increase in the Partnership's cash
reserve as additional cash was placed in reserves during 1996 and 1997. Interest
on temporary cash investments and U.S. government securities increased $325,464
from 1995 to 1996. This increase is the result of investing proceeds received
from the payoff of the GNMA Certificate related to Falcon Point Apartments in
November 1995 and to additions made to the Partnership's reserves during 1996.

Other income consists primarily of corporate unit rentals, garage rentals,
washer/dryer and vending income generated by the Partnership's properties.
Income from such sources decreased $18,075 from 1996 to 1997, due primarily to
decreases in corporate unit rentals at Fox Hollow Apartments and Waterman's
Crossing Apartments, partially offset by increases in corporate unit rentals at
Water's Edge Apartments and The Ponds at Georgetown Apartments. Income from such
sources increased $50,756 from 1995 to 1996, due primarily to an increase in
corporate unit rentals at Fox Hollow Apartments.

Investor servicing costs increased $153,628 from 1996 to 1997 and $63,027
from 1995 to 1996. The increase from 1996 to 1997 was due to: (i) an increase of
approximately $137,000 in salaries and related expenses, (ii) an increase of
approximately $6,000 in printing and servicing expenses and (iii) an increase of
approximately $11,000 in other investor servicing expenses. The increase from
1995 to 1996 was due to: (i) an increase of approximately $49,000 in salaries
and related expenses, (ii) an increase of approximately $5,000 in printing and
servicing expenses, (iii) an increase of approximately $3,000 in insurance
expenses and (iv) an increase of approximately $6,000 in other investor
servicing expenses.

Professional fees increased $43,786 from 1996 to 1997, primarily due to
costs incurred in connection with a review of various options available to the
Partnership to improve total investment returns and provide liquidity to the
Partnership's investors. Professional fees decreased $2,957 from 1995 to 1996,
primarily due to a decrease in legal fees.

The Partnership recorded an extraordinary gain of $82,216 in 1996 due to the
forgiveness of accrued interest on the Fox Hollow Apartments mortgage. The
interest was forgiven in conjunction with a Loan Modification Agreement entered
into in January 1996.

This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made constitute forward-looking statements. BAC Holders and others should
understand that these forward looking statements are subject to numerous risks
and uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward-looking statements contained herein.

6
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT

To the Partners
Capital Source L.P.:

We have audited the accompanying consolidated balance sheets of Capital
Source L.P. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, partners' capital, and cash flows for each of
the three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Capital Source L.P. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

/s/ Coopers & Lybrand L.L.P.

Omaha, Nebraska
March 26, 1998

7
<PAGE>
To the Partners
Capital Source L.P.

Our report on the financial statements of Capital Source L.P. and
subsidiaries is included herein. In connection with our audit of such
consolidated financial statements, we have also audited the related consolidated
financial statement schedule of Real Estate and Accumulated Depreciation.

In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material aspects, the information required to be
included therein.

/s/ Coopers & Lybrand L.L.P

Omaha, Nebraska
March 26, 1998

8
<PAGE>
CAPITAL SOURCE L.P.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
ASSETS

Investment in Real Estate:
Land..................................................................... $ 3,093,671 $ 3,093,671
Buildings................................................................ 35,536,966 35,517,314
Personal Property........................................................ 2,001,950 1,992,979
----------------- -----------------
40,632,587 40,603,964
Less Accumulated Depreciation.............................................. (10,831,199) (9,925,636)
----------------- -----------------
Net Investment in Real Estate.............................................. 29,801,388 30,678,328
----------------- -----------------
Cash and Temporary Cash Investments, at cost which approximates market
value (Note 5)........................................................... 10,410,564 10,272,497
Escrow Deposits and Property Reserves...................................... 894,986 917,796
Investment in Mortgage-Backed Securities (Note 5).......................... 1,088,526 1,327,396
Interest and Other Receivables............................................. 70,542 62,114
Deferred Mortgage Issuance Costs, net of accumulated amortization of
$1,503,039 in 1997 and $1,361,572 in 1996................................ 2,099,768 2,241,235
Other Assets............................................................... 767,156 723,639
----------------- -----------------
$ 45,132,930 $ 46,223,005
----------------- -----------------
----------------- -----------------

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

Liabilities
Accounts Payable and Accrued Expenses.................................... $ 1,532,202 $ 1,416,730
Distribution Payable (Note 3)............................................ 860,587 860,587
Mortgage Loan Payable (Note 7)........................................... 6,320,076 6,354,657
Due to General Partners and Their Affiliates (Note 4).................... 4,013,626 4,117,105
----------------- -----------------
12,726,491 12,749,079
----------------- -----------------
Minority Interest.......................................................... 192,296 222,048
----------------- -----------------
Partners' Capital (Deficit)
General Partners......................................................... (293,517) (283,139)
Limited Partners ($9.63 per BAC in 1997 and $9.94 in 1996)............... 32,507,660 33,535,017
----------------- -----------------
32,214,143 33,251,878
----------------- -----------------
$ 45,132,930 $ 46,223,005
----------------- -----------------
----------------- -----------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

9
<PAGE>
CAPITAL SOURCE L.P.

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Income
Rental Income......................................... $ 7,555,700 $ 7,203,323 $ 7,210,114
Mortgage-Backed Securities Income..................... 90,320 112,182 132,211
Interest on GNMA Securities........................... -- -- 519,970
Interest on Temporary Cash Investments and U.S.
Government Securities............................... 583,881 550,599 225,135
Other Income.......................................... 252,057 270,132 219,376
----------------- ----------------- -----------------
8,481,958 8,136,236 8,306,806
----------------- ----------------- -----------------
Expenses
Real Estate Operating Expenses........................ 3,903,102 3,615,907 3,569,892
Depreciation.......................................... 905,563 897,337 896,420
Interest Expense...................................... 558,789 562,015 571,801
General and Administrative Expenses (Note 4)
Investor Servicing.................................. 455,322 301,694 238,667
Professional Fees................................... 93,950 50,164 53,121
Other Expenses...................................... 16,135 9,966 5,849
Amortization........................................ 141,467 136,797 141,514
----------------- ----------------- -----------------
6,074,328 5,573,880 5,477,264
----------------- ----------------- -----------------
Minority Interest in (Income) Losses of Operating
Partnerships.......................................... (5,090) 2,746 2,571
----------------- ----------------- -----------------
2,402,540 2,565,102 2,832,113
Income Before Extraordinary Item
Extraordinary Item--Gain from Forgiveness of Accrued
Interest (Note 7)..................................... -- 82,216 --
----------------- ----------------- -----------------
Net Income.............................................. $ 2,402,540 $ 2,647,318 $ 2,832,113
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net Income Allocated to:
General Partners...................................... $ 24,025 $ 26,473 $ 28,321
Limited Partners...................................... 2,378,515 2,620,845 2,803,792
----------------- ----------------- -----------------
$ 2,402,540 $ 2,647,318 $ 2,832,113
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net Income per BAC
Income Before Extraordinary Item...................... $ .70 $ .76 $ .83
Extraordinary Item.................................... -- .02 --
----------------- ----------------- -----------------
Net Income, Basic and Diluted, per BAC.................. $ .70 $ .78 $ .83
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

10
<PAGE>
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1994 TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Partners' Capital (Deficit)
(excluding net unrealized holding gain)
Balance at December 31, 1994........................................ $ (269,500) $ 34,885,222 $ 34,615,722
Net Income.......................................................... 28,321 2,803,792 2,832,113
Cash Distributions Paid or Accrued (Note 3)......................... (34,424) (3,407,964) (3,442,388)
----------- ------------- -------------
Balance at December 31, 1995........................................ (275,603) 34,281,050 34,005,447
Net Income.......................................................... 26,473 2,620,845 2,647,318
Cash Distributions Paid or Accrued (Note 3)......................... (34,424) (3,407,965) (3,442,389)
----------- ------------- -------------
Balance at December 31, 1996........................................ (283,554) 33,493,930 33,210,376
Net Income.......................................................... 24,025 2,378,515 2,402,540
Cash Distributions Paid or Accrued (Note 3)......................... (34,424) (3,407,965) (3,442,389)
----------- ------------- -------------
(293,953) 32,464,480 32,170,527
----------- ------------- -------------
Net Unrealized Holding Gain
Balance at December 31, 1994........................................ -- -- --
Net Change.......................................................... 810 80,196 81,006
----------- ------------- -------------
Balance at December 31, 1995........................................ 810 80,196 81,006
Net Change.......................................................... (395) (39,109) (39,504)
----------- ------------- -------------
Balance at December 31, 1996........................................ 415 41,087 41,502
Net Change.......................................................... 21 2,093 2,114
----------- ------------- -------------
436 43,180 43,616
----------- ------------- -------------
Balance at December 31, 1997.......................................... $ (293,517) $ 32,507,660 $ 32,214,143
----------- ------------- -------------
----------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

11
<PAGE>
CAPITAL SOURCE L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income.............................................. $ 2,402,540 $ 2,647,318 $ 2,832,113
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Extraordinary Item--Gain from Forgiveness of Accrued
Interest............................................ -- (82,216) --
Depreciation and Amortization......................... 1,047,030 1,034,134 1,037,934
Amortization of Discount on Mortgage-Backed and U.S.
Government Securities............................... (2,665) (6,700) (11,656)
Minority Interest in (Income) Losses of Operating
Partnerships........................................ 5,090 (2,746) (2,571)
Decrease (Increase) in Interest and Other
Receivables......................................... (8,428) 10,879 (44,538)
Decrease in Escrow Deposits and Property Reserves..... 22,810 101,533 352,231
Increase in Other Assets.............................. (156,964) (203,990) (105,999)
Increase in Accounts Payable and Accrued Expenses..... 115,472 211,132 61,848
Increase (Decrease) in Due to General Partners and
Their Affiliates.................................... (103,479) 4,522 (399,530)
Decrease in Interest Payable.......................... -- (229,746) (37,196)
----------------- ----------------- -----------------
Net Cash Provided by Operating Activities............... 3,321,406 3,484,120 3,682,636
----------------- ----------------- -----------------
Cash Flows from Investing Activities
Principal Payments Received on Mortgage-Backed and
U.S. Government Securities.......................... 243,649 322,603 219,865
Acquisition of Real Estate............................ (19,652) (12,000) --
Acquisition of Personal Property...................... (8,971) (5,222) (7,211)
Increase in Other Assets.............................. 78,605 -- --
Maturity of U.S. Government Securities................ -- 1,000,000 --
Principal Payments Received on GNMA Securities........ -- -- 7,145,554
Acquisition of U.S. Government Securities............. -- -- (987,578)
----------------- ----------------- -----------------
Net Cash Provided by Investing Activities........... 293,631 1,305,381 6,370,630
----------------- ----------------- -----------------
Cash Flow Used in Financing Activities
Principal Payments on Mortgage Loan Payable........... (34,581) (37,350) --
Distributions......................................... (3,442,389) (3,442,389) (3,442,388)
----------------- ----------------- -----------------
Net Cash Used in Financing Activities............... (3,476,970) (3,479,739) (3,442,388)
----------------- ----------------- -----------------
Net Increase in Cash and Temporary Cash Investments..... 138,067 1,309,762 6,610,878
Cash and Temporary Cash Investments at Beginning of
Year.................................................. 10,272,497 8,962,735 2,351,857
----------------- ----------------- -----------------
Cash and Temporary Cash Investments at End of Year...... $ 10,410,564 $ 10,272,497 $ 8,962,735
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest.............. $ 558,789 $ 791,761 $ 608,997
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Supplemental Disclosure of Non-Cash Investing
Activities:
Abandonment of Fully Depreciated Property............. $ -- $ 11,008 $ --
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

12
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

1. ORGANIZATION.

Capital Source L.P. (the "Partnership") was formed on August 22, 1985, under
the Delaware Revised Uniform Limited Partnership Act. The General Partners of
the Partnership are insured Mortgage Equities Inc. and America First Capital
Source I, L.L.C. (the "General Partners").

The Partnership provided virtually 100% of the debt and equity financing for
eight multifamily rental housing properties. The Partnership's investment in the
properties consisted of (a) approximately 85% in the form of permanent mortgages
and/or loans to fund construction; and (b) the balance to purchase up to a 99%
limited partnership interest in the Operating Partnerships which developed, own
and operate the properties. Each loan is insured or guaranteed, in an amount
substantially equal to the face amount of the mortgage, by the Federal Housing
Administration ("FHA") or the Government National Mortgage Association ("GNMA").
The Partnership has been repaid by FHA on one of its first mortgage loans. The
Partnership has also been repaid by GNMA on one of its GNMA Certificates. The
Partnership no longer holds a Partnership Equity Investment in the Operating
Partnership which owned the property collateralizing the repaid GNMA
Certificate. The seven remaining Operating Partnerships are geographically
located as follows: (i) two in North Carolina and (ii) one each in Ohio,
Florida, Michigan, Virginia and Illinois.

CS Properties I, Inc., which is owned by affiliates of the General Partners,
serves as the Special Limited Partner for the Operating Partnerships. The
Special Limited Partner has the power, among other things, to remove the general
partners of the Operating Partnerships under certain circumstances and to
consent to the sale of the Operating Partnerships' assets. CS Properties I, Inc.
also serves as the general partner of Misty Springs Apartments, Waterman's
Crossing and Fox Hollow Apartments.

The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2030.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

(a) FINANCIAL STATEMENT PRESENTATION. The consolidated financial
statements include the accounts of the Partnership and seven subsidiary
Operating Partnerships. The Partnership is a limited partner with an
ownership interest of up to 99% in six of the subsidiary Operating
Partnerships. The Partnership's ownership interest in The Ponds at
Georgetown L.P. is 30.29%. The remaining limited partner interest of 68.70%
is owned by Capital Source II L.P.--A, an affiliate of the General Partners.
All significant intercompany accounts and transactions have been eliminated
in consolidation.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(b) INVESTMENT IN REAL ESTATE. The Partnership's investment in real
estate is carried at cost less accumulated depreciation. The carrying value
of each property is reviewed for impairment whenever events or circumstances
indicate that the carrying value may not be recoverable. If the sum of the
expected undiscounted future cash flows is less than the carrying amount, an
impairment is recorded based on fair value.

13
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED)
(c) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities
are classified as held-to-maturity, available-for-sale or trading.
Investments classified as held-to-maturity are carried at amortized cost.
Investments classified as available-for-sale are reported at fair value with
any unrealized gains or losses excluded from earnings and reflected as a
separate component of partners' capital. Subsequent increases and decreases
in the net unrealized gain/loss on the available-for-sale securities are
reflected as adjustments to the carrying value of the portfolio and
adjustments to the component of partners' capital. The Partnership does not
have investment securities classified as trading.

(d) DEPRECIATION AND AMORTIZATION. Depreciation of real estate is
based on the estimated useful life of the properties using the straight-line
method. Deferred mortgage issuance costs are being amortized using the
effective yield method over the 40-year term of the respective loan.

(e) REVENUE RECOGNITION. The Operating Partnerships lease multifamily
rental units under operating leases with terms of one year or less. Rental
revenue is recognized as earned net of any vacancy losses and rental
concessions offered.

(f) INCOME TAXES. No provision has been made for income taxes since
BAC Holders are required to report their share of the Partnership's income
for federal and state income tax purposes. The tax basis of the
Partnerships' assets and liabilities exceeded the reported amounts by
$4,169,385 and $4,701,874 at December 31, 1997 and December 31, 1996,
respectively.

(g) TEMPORARY CASH INVESTMENTS. Temporary cash investments are
invested in short-term debt securities purchased with original maturities of
three months or less.

(h) NET INCOME PER BENEFICIAL ASSIGNMENT CERTIFICATE ("BAC"). Net
income per BAC is based on the number of BACs outstanding (3,374,222) during
each year presented.

(i) NEW ACCOUNTING PRONOUNCEMENT. The Financial Accounting Standards
Board has issued Financial Accounting Standards No. 128 "Earnings Per Share"
("FAS 128"). FAS 128, which is effective for periods ending after December
15, 1997, did not have an impact on the Partnership's computation,
presentation or disclosure of earnings per BAC as no dilutive common share
equivalents existed at December 31, 1997.

3. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.

Profits and losses from normal operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the consolidated financial statements represent the actual cash distributions
made during each year and the cash distributions accrued at the end of each
year.

The General Partners will also receive 1% of the net proceeds from any sale
of Partnership assets. The General Partners will receive a termination fee equal
to 3% of all sales proceeds less actual costs incurred in connection with all
sales transactions, payable only after the investors have received a return of
their capital contributions and a 13% annual return on a cumulative basis. The
General Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis.

14
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

4. TRANSACTIONS WITH RELATED PARTIES.

The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows.

The Operating Partnerships' general partners provide various on-site
property development and management services. There were no property development
and management fees incurred for the years ended December 31, 1997, 1996 and
1995. Unpaid fees, which are non-interest bearing, are included in amounts due
to general partners and their affiliates on the accompanying consolidated
balance sheets and will be paid in accordance with the terms of the respective
Operating Partnership's limited partnership agreement.

The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum,
payable only during such years than an 8% return has been paid to investors on a
noncumulative basis. Any unpaid amounts will accrue and be payable only after a
13% annual return to investors has been paid on a cumulative basis and the
investors have received the return of their capital contributions. For the years
ended December 31, 1997, 1996 and 1995, distributions to investors represented
less than an 8% return; accordingly, no fees were paid or accrued during these
years.

Amounts due to general partners and their affiliates on December 31, 1997
and 1996 are comprised of the following:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Unpaid Property Development and Management Fees................... $ 450,073 $ 445,652
Operating Deficit Loans........................................... 3,563,553 3,671,453
------------ ------------
$ 4,013,626 $ 4,117,105
------------ ------------
------------ ------------
</TABLE>

Substantially all of the Partnership's general and administrative expenses
and certain costs capitalized by the Partnership are paid by a General Partner
or an affiliate and reimbursed by the Partnership. The amount of such expenses
reimbursed to the General Partner was $533,419, $347,522 and $309,826 for the
years ended December 31, 1997, 1996 and 1995, respectively. Reimbursed expenses
are presented on a cash basis and do not reflect accruals made at each year end.

An affiliate of America First Capital Source I, L.L.C. has been retained to
provide property management services for Waterman's Crossing, Misty Springs
Apartments, Fox Hollow Apartments (beginning in June 1995) and The Ponds at
Georgetown (beginning in November 1996). The fees for services provided were
$183,069, $165,721 and $136,529 for 1997, 1996 and 1995, respectively, and
represented the lower of costs incurred in providing management of the property
or customary fees for such services determined on a competitive basis.

15
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

5. PARTNERSHIP RESERVE ACCOUNT.

The Partnership maintains a reserve account which consisted of the following
at December 31, 1997:

<TABLE>
<S> <C>
Cash and Temporary Cash Investments............................ $9,698,532
GNMA Certificates.............................................. 1,088,526
----------
$10,787,058
----------
----------
</TABLE>

The reserve account was established to maintain working capital for the
Partnership and is available for distribution to BAC Holders and for any
contingencies related to Permanent Investments and the operation of the
Partnership. The GNMA Certificates mature between 2007 and 2009.

At December 31, 1997, the total amortized cost, gross unrealized holding
gains and aggregate fair value of available-for-sale securities were $1,044,910,
$43,616 and $1,088,526, respectively. At December 31, 1996, the total amortized
cost, gross unrealized holding gains and aggregate fair value of available-
for-sale securities were $1,285,894, $41,502 and $1,327,396, respectively.

Prior to June 30, 1995, the Partnership classified all investment securities
as held-to-maturity. However, during the quarter ending June 30, 1995, the
Partnership reassessed the appropriateness of the classification of securities
held in the reserve account. The Partnership concluded, given the nature of the
reserve account, it would be more appropriate to classify securities held in the
reserve account as available-for-sale rather than as held-to-maturity.
Accordingly, on June 30, 1995, the Partnership transferred all securities held
in the reserve account from the held-to-maturity classification to the
available-for-sale classification. The total amortized cost, gross unrealized
holding gains and aggregate fair value of the securities transferred were
$2,740,792, $57,052 and $2,797,844, respectively.

6. PARENT COMPANY ONLY FINANCIAL INFORMATION.

Generally accepted accounting principles require that the Partnership's
financial statements consolidate the Operating Partnerships since the
Partnership holds a majority ownership interest and, through CS Properties I,
Inc., can influence the decisions of the general partners in certain
circumstances. In the consolidated financial statements, the Partnership's
investment in FHA Loans and GNMA Certificates is eliminated against the related
mortgage payable recorded by the Operating Partnership. If a mortgage loan goes
into default and is foreclosed upon by FHA or GNMA, the respective agency may,
at their discretion, repay the FHA Loan or the GNMA Certificate. If this occurs,
the Partnership's investment in the Operating Partnership would be eliminated,
resulting in the recognition of a gain on the Partnership's financial
statements. This arises because consolidation accounting does not allow the
Partnership to stop recording losses from the Operating Partnerships when the
net investment is reduced to zero.

The parent company only financial information below represents the condensed
financial information of the Partnership using the equity method of accounting
for the investment in Operating Partnerships, rather than the consolidation of
those partnerships. Under the equity method of accounting, the Partnership's
capital contributions are adjusted to reflect its share of operating partnership
profits or losses and distributions. The investment in Operating Partnerships
represents the Partnership's limited partnership interest in the accumulated
deficits of those Operating Partnerships. The parent company only information is
provided to more clearly present the Partnership's investment in the Operating
Partnerships. Since the Partnership is not a general partner, it is not
obligated to fund the negative balances. If the investments in

16
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

6. PARENT COMPANY ONLY FINANCIAL INFORMATION. (CONTINUED)
all Operating Partnerships were eliminated at December 31, 1997, Partnership
capital would increase by $13,686,936 ($4.02 per BAC).

The FHA Loans and the GNMA Certificates are collateralized by first mortgage
loans on the properties owned by the Operating Partnerships and are guaranteed
or insured as to principal and interest by FHA or GNMA. The FHA insured mortgage
loans are subject to a 1% assignment fee. The obligations of FHA and GNMA are
backed by the full faith and credit of the United States government.

PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS

Cash and temporary cash investments........................... $ 10,410,564 $ 10,272,497
Investment in FHA Loans....................................... 12,511,046 12,585,755
Investment in GNMA Certificates............................... 23,588,139 23,937,795
Investment in Operating Partnerships.......................... (13,686,936) (13,038,255)
Interest receivable........................................... 321,485 321,760
Other assets.................................................. 134,574 130,969
-------------- --------------
$ 33,278,872 $ 34,210,521
-------------- --------------
-------------- --------------

LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
Accounts payable............................................ $ 204,142 $ 98,056
Distributions payable....................................... 860,587 860,587
-------------- --------------
1,064,729 958,643
Partners' Capital............................................. 32,214,143 33,251,878
-------------- --------------
$ 33,278,872 $ 34,210,521
-------------- --------------
-------------- --------------
</TABLE>

17
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

6. PARENT COMPANY ONLY FINANCIAL INFORMATION. (CONTINUED)
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income....... $ 3,117,407 $ 3,148,565
Interest on temporary cash investments and U.S.
government securities.............................. 554,604 523,636
Interest on mortgage-backed securities............... 90,320 112,182
Equity in losses of Operating Partnerships........... (732,231) (717,501)
Other income......................................... 5,334 9,749
----------------- -----------------
3,035,434 3,076,631
Expenses
Operating and administrative......................... 632,894 429,313
----------------- -----------------
Net income......................................... $ 2,402,540 $ 2,647,318
----------------- -----------------
----------------- -----------------
</TABLE>

18
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

6. PARENT COMPANY ONLY FINANCIAL INFORMATION. (CONTINUED)
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 2,402,540 $ 2,647,318
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in losses of Operating Partnerships................. 732,231 717,501
Amortization............................................... 67,488 67,488
Amortization of discount on mortgage-backed and U.S.
government securities.................................... (2,665) (6,700)
Other non-cash adjustments................................. 35,268 12,302
------------- -------------
Net cash provided by operating activities...................... 3,234,862 3,437,909
------------- -------------
Cash flows from investing activities:
FHA Loan and GNMA Certificate principal payments............... 429,144 491,754
Investment in Operating Partnerships........................... (83,550) (254,745)
Maturity of U.S. government securities......................... -- 1,000,000
Distributions received from Operating Partnerships............. -- 77,233
------------- -------------
Net cash provided by investing activities...................... 345,594 1,314,242
------------- -------------
Cash flow used in financing activity
Distributions................................................ (3,442,389) (3,442,389)
------------- -------------
Net increase in cash and temporary cash investments............ 138,067 1,309,762
Cash and temporary cash investments at beginning of year....... 10,272,497 8,962,735
------------- -------------
Cash and temporary cash investments at end of year............. $ 10,410,564 $ 10,272,497
------------- -------------
------------- -------------
</TABLE>

7. MORTGAGE LOAN PAYABLE AND EXTRAORDINARY ITEM.

The mortgage is an 8.86% loan collateralized by Fox Hollow Apartments. Prior
to May 12, 1995 HUD was the mortgage holder, and the Operating Partnership
operated under a Provisional Workout Agreement ("PWA"). A Loan Modification
Agreement ("LMA") dated January 8, 1996, was signed between the Operating
Partnership and the new mortgage holder, dissolving the PWA and modifying
certain terms and conditions of the mortgage payable. The new mortgage holder
agreed to accept $229,745 (of which $161,745 was paid by the Partnership and
$68,000 was paid by the property) as payment of accrued unpaid interest, thereby
forgiving $82,216 of accrued interest. Further, commencing on January 1, 1996,
installments of interest and principal in the amount of $49,947 are due on the
first day of each month, with the balance of principal and accrued interest due
and payable no later than October 1, 2028. The mortgage

19
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

7. MORTGAGE LOAN PAYABLE AND EXTRAORDINARY ITEM. (CONTINUED)
loan payable is recorded on the consolidated balance sheet, since it is no
longer eliminated in consolidation. The mortgage is an obligation of the
Operating Partnership which owns the property. Principal maturities on the
mortgage loan are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------- ------------
<S> <C>
1998....................... $ 41,053
1999....................... 44,841
2000....................... 48,980
2001....................... 53,500
2002....................... 58,437
Thereafter................. 6,073,265
------------
$ 6,320,076
------------
------------
</TABLE>

8. FAIR VALUE OF FINANCIAL INSTRUMENTS.

The following methods and assumptions were used by the Partnership in
estimating the fair value of its financial instruments:

(a) CASH AND TEMPORARY CASH INVESTMENTS. Fair value approximates the
carrying value of such assets.

(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Fair values are amounts
obtained from an independent pricing source.

(c) MORTGAGE LOAN PAYABLE. Fair value is not readily determinable as
certain terms of the mortgage loan have recently been revised under a loan
modification agreement.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments................. $ 10,410,564 $ 10,410,564 $ 10,272,497 $ 10,272,497
Investment in mortgage-backed securities............ 1,088,526 1,088,526 1,327,396 1,327,396
</TABLE>

9. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS.

<TABLE>
<CAPTION>
FIRST SECOND FOURTH
FROM JANUARY 1, 1997 TO DECEMBER 31, 1997 QUARTER QUARTER THIRD QUARTER QUARTER
- ------------------------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total income.......................................... $ 2,084,816 $ 2,101,877 $ 2,183,595 $ 2,111,670
Total expenses........................................ (1,331,384) (1,576,853) (1,550,863) (1,615,228)
Minority interest in (income) losses of operating
partnerships........................................ 4,849 4,653 4,796 (19,388)
------------- ------------- ------------- -------------
Net income............................................ $ 758,281 $ 529,677 $ 637,528 $ 477,054
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income, basic and diluted, per BAC................ $ .22 $ .16 $ .18 $ .14
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

20
<PAGE>
CAPITAL SOURCE L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

9. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS. (CONTINUED)

<TABLE>
<CAPTION>
FIRST SECOND FOURTH
FROM JANUARY 1, 1996 TO DECEMBER 31, 1996 QUARTER QUARTER THIRD QUARTER QUARTER
- ------------------------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total income.......................................... $ 1,990,066 $ 2,010,934 $ 2,069,863 $ 2,065,373
Total expenses........................................ (1,204,651) (1,486,392) (1,416,101) (1,466,736)
Minority interest in (income) losses of operating
partnerships........................................ 32 668 806 1,240
------------- ------------- ------------- -------------
Income before extraordinary item...................... 785,447 525,210 654,568 599,877
Extraordinary item--gain from forgiveness of accrued
interest.......................................... -- -- -- 82,216
------------- ------------- ------------- -------------
Net income............................................ $ 785,447 $ 525,210 $ 637,568 $ 682,093
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income per BAC
Income before extraordinary item.................... $ .23 $ .15 $ .20 $ .18
Extraordinary item.................................. -- -- -- .02
------------- ------------- ------------- -------------
Net income per BAC.................................... $ .23 $ .15 $ .20 $ .20
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

21
<PAGE>
SCHEDULE III

CAPITAL SOURCE L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996

<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
ACQUISITION
INITIAL COST TO ------------------------
DESCRIPTION PARTNERSHIP CARRYING
- ----------------------------------------------------------------------------- ------------------------ COSTS
PROPERTY LOCATION # OF UNITS ENCUMBRANCES LAND PROPERTY IMPROVEMENTS (C)
- --------------------------- -------------------- ----- ------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Waterman's Crossing........ Newport News, VA 260 (a) $ 700,000 $ 893,682 $ 8,894,510 $ 65,190
Fox Hollow................. High Point, NC 184 (b) 272,215 499,365 5,518,162 98,580
Highland Park.............. Columbus, OH 252 (a) 65,799 37,792 8,591,903 69,176
Bluff Ridge................ Jacksonville, NC 108 (a) 196,050 33,281 3,272,492 77,738
Misty Springs.............. Daytona Beach, FL 128 (a) 710,400 351,972 2,840,884 68,679
Water's Edge............... Lake Villa, IL 108 (a) 246,160 24,550 4,805,273 139,440
Ponds at Georgetown........ Ann Arbor, MI 134 (a) 174,879 118,649 1,812,662 24,481
----------- ----------- ------------- ---------
$ 2,365,503 $ 1,959,291 $35,735,886 $ 543,284
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
</TABLE>

<TABLE>
<CAPTION>
GROSS AMOUNT AT DECEMBER 31, 1996
----------------------------------------
BUILDINGS,
IMPROVEMENTS LIFE ON
AND PERSONAL ACCUMULATED WHICH
LAND PROPERTY TOTAL DEPRECIATION DATE OF DATE DEPRECIATION
PROPERTY (D) (E) (D) AND (E) (F) CONSTRUCTION ACQUIRED IS COMPUTED
- ----------------------------- ----------- ------------- ------------ ------------ --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Waterman's Crossing.......... $ 1,122,322 $ 9,431,060 $ 10,553,382 $2,972,902 1987 N/A 5-40 years
Fox Hollow................... 272,215 6,116,107 6,388,322 1,768,704 1988 N/A 5-40 years
Highland Park................ 208,403 8,556,267 8,764,670 1,930,147 1988 N/A 5-40 years
Bluff Ridge.................. 203,050 3,376,511 3,579,561 745,618 1988 N/A 5-40 years
Misty Springs................ 741,587 3,230,348 3,971,935 989,619 1988 N/A 5-40 years
Water's Edge................. 371,215 4,844,208 5,215,423 1,045,121 1988 N/A 5-40 years
Ponds at Georgetown.......... 174,879 1,955,792 2,130,671 473,525 1989 N/A 5-40 years
----------- ------------- ------------ ------------
$ 3,093,671 $37,510,293 $ 40,603,946 $9,925,636
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
</TABLE>

22
<PAGE>
SCHEDULE III

CAPITAL SOURCE L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997

<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
ACQUISITION
INITIAL COST TO ------------------------
DESCRIPTION PARTNERSHIP CARRYING
- ----------------------------------------------------------------------------- ------------------------ COSTS
PROPERTY LOCATION # OF UNITS ENCUMBRANCES LAND PROPERTY IMPROVEMENTS (C)
- --------------------------- -------------------- ----- ------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Waterman's Crossing........ Newport News, VA 260 (a) $ 700,000 $ 893,682 $ 8,894,510 $ 65,190
Fox Hollow................. High Point, NC 184 (b) 272,215 499,365 5,518,162 98,580
Highland Park.............. Columbus, OH 252 (a) 65,799 37,792 8,591,903 69,176
Bluff Ridge................ Jacksonville, NC 108 (a) 196,050 33,281 3,272,492 77,738
Misty Springs.............. Daytona Beach, FL 128 (a) 710,400 351,972 2,840,884 68,679
Water's Edge............... Lake Villa, IL 108 (a) 246,160 24,550 4,833,896 139,440
Ponds at Georgetown........ Ann Arbor, MI 134 (a) 174,879 118,649 1,812,662 24,481
----------- ----------- ------------- ---------
$ 2,365,503 $ 1,959,291 $35,764,509 $ 543,284
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
</TABLE>

<TABLE>
<CAPTION>
GROSS AMOUNT AT DECEMBER 31, 1997
----------------------------------------
BUILDINGS,
IMPROVEMENTS LIFE ON
AND PERSONAL ACCUMULATED WHICH
LAND PROPERTY TOTAL DEPRECIATION DATE OF DATE DEPRECIATION
PROPERTY (D) (E) (D) AND (E) (F) CONSTRUCTION ACQUIRED IS COMPUTED
- ----------------------------- ----------- ------------- ------------ ------------ --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Waterman's Crossing.......... $ 1,122,322 $ 9,431,060 $ 10,553,382 $ 3,186,337 1987 N/A 5-40 years
Fox Hollow................... 272,215 6,116,107 6,388,322 1,910,707 1988 N/A 5-40 years
Highland Park................ 208,403 8,556,267 8,764,670 2,150,076 1988 N/A 5-40 years
Bluff Ridge.................. 203,050 3,376,511 3,579,561 829,474 1988 N/A 5-40 years
Misty Springs................ 741,587 3,230,348 3,971,935 1,061,578 1988 N/A 5-40 years
Water's Edge................. 371,215 4,872,831 5,244,046 1,173,572 1988 N/A 5-40 years
Ponds at Georgetown.......... 174,879 1,955,792 2,130,671 519,455 1989 N/A 5-40 years
----------- ------------- ------------ ------------
$ 3,093,671 $37,538,916 $ 40,632,587 $ 10,831,199
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
</TABLE>

23
<PAGE>
SCHEDULE III

CAPITAL SOURCE L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 AND 1996

(a) The Partnership has no encumbrances against this property. Encumbrances
recorded by the operating partnerships are eliminated in the consolidated
financial statements of the Partnership.

(b) The Partnership has a mortgage obligation which totalled $6,320,076 at
December 31, 1997, and $6,354,657 at December 31, 1996. The mortgage
obligation is collateralized solely by this property. Pursuant to the terms
of a Loan Modification Agreement ("LMA") entered into on January 8, 1996,
installments of principal and interest of $49,947 are due monthly with the
balance due and payable no later than October 1, 2028. The mortgage loan
bears interest at 8.86%. The mortgage loan was in compliance with the terms
of the LMA as of December 31, 1997.

(d) The aggregate cost for federal income tax purposes is the same as for
financial reporting purposes.

(e) Reconciliation of Real Estate:

<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Balance--beginning of year..................................... $ 40,603,964 $ 40,597,750
Acquisitions................................................... 19,652 12,000
Improvements................................................... 8,971 5,222
Disposition of personal property............................... -- (11,008)
------------- -------------
Balance--end of year........................................... $ 40,632,587 $ 40,603,964
------------- -------------
------------- -------------
</TABLE>

(f) Reconciliation of Accumulated Depreciation:

<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Balance--beginning of year..................................... $ 9,925,636 $ 9,039,307
Depreciation expense........................................... 905,563 897,337
Disposition of personal property............................... -- (11,008)
------------- ------------
Balance--end of year........................................... $ 10,831,199 $ 9,925,636
------------- ------------
------------- ------------
</TABLE>

24
<PAGE>
CAPITAL SOURCE II L.P.-A

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

Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.

LIQUIDITY AND CAPITAL RESOURCES

Capital Source II L.P.-A (the "Partnership") originally acquired: (i) four
GNMA Certificates which are guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in three states; (ii)
an FHA Loan which is insured as to principal and interest by the Federal Housing
Administration ("FHA") on a multifamily housing property; and (iii) Partnership
Equity Investments in five Operating Partnerships which own the multifamily
properties financed by the GNMA Certificates and the FHA Loan. The Partnership
has been repaid by GNMA on one of the GNMA Certificates and the related property
has been deeded to GNMA in lieu of foreclosure, thus eliminating the Partnership
Equity Investment in this property. Collectively, the remaining GNMA
Certificates, the FHA Loan, and the Partnership Equity Investments are referred
to as the "Permanent Investments." The Partnership has also invested amounts
held in its reserve account in certain GNMA securities backed by pools of
single-family mortgages ("Reserve Investments"). The obligations of GNMA and FHA
are backed by the full faith and credit of the United States government.

The FHA Loan, GNMA Certificates and Partnership Equity Investments in
Operating Partnerships represent the Partnership's principal assets as shown in
the Parent Company Only Financial Information in Note 6 to the financial
statements. The parent company information is presented using the equity method
of accounting for the investment in Operating Partnerships. Generally accepted
accounting principles, however, require that the Partnership's financial
statements consolidate the Operating Partnerships, since the Partnership holds a
majority ownership interest in each Operating Partnership, and can influence
decisions of the general partners in certain circumstances.

The following FHA Loan and GNMA Certificates were owned by the Partnership
at December 31, 1997. Interest income from the FHA Loan and GNMA Certificates is
the primary source of cash available for distribution to investors.

<TABLE>
<CAPTION>
GUARANTEED
OR INTEREST MATURITY CARRYING
PROPERTY NAME INSURED BY RATE DATE VALUE
- ------------------------------------------------------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Crane's Landing........................................ GNMA 8.75% 12/15/2030 $ 10,229,304
Delta Crossing......................................... FHA 9.10 10/01/2030 6,538,424
Monticello Apartments.................................. GNMA 8.75 11/15/2029 5,328,430
The Ponds at Georgetown................................ GNMA 9.00 12/15/2029 5,066,488
Pools of Single-Family Properties...................... GNMA 7.58(1) 2008 to 2009 1,050,718
-------------
$ 28,213,364
-------------
-------------
</TABLE>

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

(1) Represents yield to the Partnership.

25
<PAGE>
DISTRIBUTIONS

Cash distributions paid or accrued per Beneficial Assignment Certificate of
the Partnership (a "BAC") were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Regular monthly distributions
Income.......................... $ .3449 $ .3947 $ .4266
Return of capital............... .4651 .4153 .3834
------ ------ ------
$ .8100 $ .8100 $ .8100
------ ------ ------
------ ------ ------

Distributions..................... $ .5172 $ .6019 $ .6497
Paid out of cash flow........... .2928 .2081 .1603
------ ------ ------
Paid out of reserves............ $ .8100 $ .8100 $ .8100
------ ------ ------
------ ------ ------
</TABLE>

Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan, GNMA Certificates and the Reserve Investments.
Additional cash for distributions is received from other temporary investments.
The Partnership may draw on reserves to pay operating expenses or to supplement
cash distributions to BAC Holders. The Partnership is permitted to replenish
reserves with cash flows in excess of distributions paid. During 1997,
$1,186,163 was withdrawn from reserves to supplement regular monthly cash
distributions. The total amount held in reserves at December 31, 1997, was
$1,550,084 of which $1,050,718 was invested in mortgaged-backed securities.

The Partnership has been supplementing cash flow from operations with
withdrawals from reserves in order to maintain distributions at the current
levels. Consequently, it is likely that the level of distributions will be
reduced in the future. The General Partners will continue to review the level of
distributions each quarter in light of the Partnership's operating results and
financial position.

The Partnership believes that cash provided by operating activities and, if
necessary, withdrawals from the Partnership's reserves will be adequate to meet
its short-term liquidity requirements, including the payments of distributions
to BAC Holders. The Partnership has no other internal or external sources of
liquidity. Under the terms of its Partnership Agreement, the Partnership has the
authority to enter into short-and long-term debt financing arrangements;
however, the Partnership currently does not anticipate entering into such
arrangements. The Partnership is not authorized to issue additional BACs to meet
short-term and long-term liquidity requirements.

ASSET QUALITY

The FHA Loan and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships.

26
<PAGE>
The following table shows the occupancy levels of the properties financed by
the Partnership as of December 31, 1997:

<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NUMBER OF UNITS OF UNITS
PROPERTY NAME LOCATION OF UNITS OCCUPIED OCCUPIED
- ---------------------------------------- ------------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Crane's Landing......................... Winter Park, FL 252 237 94%
Delta Crossing.......................... Charlotte, NC 178 168 94
Monticello Apartments................... Southfield, MI 106 104 98
The Ponds at Georgetown................. Ann Arbor, MI 134 128 96
--
--- ---
670 637 95%
--
--
--- ---
--- ---
</TABLE>

CRANE'S LANDING. Crane's Landing, located in Winter Park, Florida, is a
252-unit complex with one-, two- and three-bedroom apartments on 14 acres of
land. Average occupancy was 96% during 1997, compared to 94% during 1996. As a
result of the increase in average occupancy and rental rate increases, rental
income increased approximately 9% in 1997, compared to 1996. The increase in
rental income was partially offset by an increase in real estate operating
expenses, primarily an increase of approximately 23% in repairs and maintenance
expenses and 15% in labor expenses. This resulted in an increase of
approximately 4.4% in net cash flow generated by this property, before debt
service, in 1997, compared to 1996. The property generated cash flow in excess
of debt service and was current on its mortgage obligations during 1997.

DELTA CROSSING. Delta Crossing is a 178-unit apartment complex located in
Charlotte, North Carolina. Average occupancy was 93% in 1997, compared to 92% in
1996. As a result of the increase in occupancy and rental rate increases, rental
income increased approximately 2% in 1997, compared to 1996. The increase in
rental income was offset by increases of approximately 11% in repairs and
maintenance expenses and property improvements, 9% in labor expenses and slight
increases in other expenses. Thus, net cash flow generated by this property in
1997 was comparable to 1996. The property generated cash flow in excess of debt
service and was current on its mortgage obligations during 1997.

MONTICELLO APARTMENTS. Monticello Apartments, located in Southfield,
Michigan, contains 106 rental units. Average occupancy was 97% in 1997, compared
to 96% in 1996. As a result, rental income increased slightly in 1997, compared
to 1996. The increase in rental income was more than offset by increases in real
estate operating expenses, primarily an increase of approximately 42% in repairs
and maintenance expenses and property improvements and 13% in labor expenses.
Thus, net cash flow generated by this property, before debt service, decreased
approximately 2.3% in 1997, compared to 1996. Despite the decrease in net cash
flow, the property generated cash flow in excess of debt service and was current
on its mortgage obligations during 1997.

THE PONDS AT GEORGETOWN. The Ponds at Georgetown consists of 134 apartments
located in Ann Arbor, Michigan. Average occupancy was 97% in 1997 compared to
95% in 1996. Operating revenue increased approximately 8% in 1997 compared to
1996, primarily due to the increase in average occupancy, rental rate increases
and an increase in corporate unit rentals. Despite the increase in operating
revenue, the Operating Partnership remains in default on its mortgage loan and
is delinquent in paying property taxes and insurance. The Partnership continues
to explore a number of alternatives with the mortgage holder to determine the
best course of action to pursue, including a possible restructuring of the
mortgage loan.

America First Capital Source II, L.L.C., and Insured Mortgage Equities II
L.P., (referred to as the "General Partners") have conducted a review of their
computer systems to identify those areas that could be affected by the "Year
2000" issue and have developed a plan to resolve the issue. The General Partners
believe the "Year 2000" problem can be resolved without significant operational
difficulties. The Partnership does not maintain its own computer systems and
does not reimburse the General Partners for any capital expenses associated with
computer systems. Therefore, no material effect to the Partnership's results of
operations, financial position or cash flows is anticipated from the "Year 2000"
issue or its resolution.

27
<PAGE>
RESULTS OF OPERATIONS

The tables below compare the results of operations for each year shown.

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Rental income.......................................................... $5,105,108 $4,854,898 $4,656,371
Interest on temporary cash investments and U.S. government
securities........................................................... 104,411 168,311 218,077
Mortgage-backed securities income...................................... 82,182 91,982 123,033
Other income........................................................... 202,670 161,805 144,967
Gain on sale of mortgage-backed securities............................. -- -- 15,670
------------ ------------ ------------
5,494,371 5,276,996 5,158,118
------------ ------------ ------------
Real estate operating expenses......................................... 2,562,636 2,384,690 2,134,277
Depreciation........................................................... 666,758 692,383 704,155
Property development and management fees............................... -- 314 28,769
General and administrative expenses
Investor servicing................................................... 411,005 265,836 221,174
Professional fees.................................................... 156,809 38,224 40,234
Other expenses....................................................... 23,326 19,734 10,119
Asset management and partnership administration fees................... 166,000 166,000 166,000
Amortization........................................................... 111,144 111,195 127,296
------------ ------------ ------------
4,097,678 3,678,376 3,432,024
------------ ------------ ------------
Minority interest in losses of Operating Partnerships.................. 857 608 2,220
------------ ------------ ------------
Net income............................................................. $1,397,550 $1,599,228 $1,728,314
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM 1996 FROM 1995
----------- -----------
<S> <C> <C>
Rental income........................................................................... $ 250,210 $ 198,527
Interest on temporary cash investments and U.S. government securities................... (63,900) (49,766)
Mortgage-backed securities income....................................................... (9,800) (31,051)
Other income............................................................................ 40,865 16,838
Gain on sale of mortgage-backed securities.............................................. -- (15,670)
----------- -----------
217,375 118,878
----------- -----------
Real estate operating expenses.......................................................... 177,946 250,413
Depreciation............................................................................ (25,625) (11,772)
Property development and management fees................................................ (314) (28,455)
General and administrative expenses
Investor servicing.................................................................... 145,169 44,662
Professional fees..................................................................... 118,585 (2,010)
Other expenses........................................................................ 3,592 9,615
Asset management and partnership administration fees.................................... -- --
Amortization............................................................................ (51) (16,101)
----------- -----------
419,302 246,352
----------- -----------
Minority interest in losses of Operating Partnerships................................... 249 (1,612)
----------- -----------
Net income.............................................................................. $ (201,678) $ (129,086)
----------- -----------
----------- -----------
</TABLE>

28
<PAGE>
Rental income is recognized net of any vacancy losses and rental concessions
offered. Rental income, net of real estate operating expenses, depreciation and
amortization increased $97,940 from 1996 to 1997. The increase was primarily due
to an increase in rental income due to an increase in average occupancy
partially offset by higher repairs and maintenance expenses and labor expenses.
See the discussion of each property in the Asset Quality section for additional
information.

Rental income, net of real estate operating expenses, depreciation, and
amortization, decreased $24,013 from 1995 to 1996. The decrease was due to an
increase in real estate operating expenses resulting from higher repairs and
maintenance expenses, property improvements and administrative expenses. The
increase in real estate operating expenses was partially offset by an increase
in rental income due primarily to an increase in the average occupancy of
Crane's Landing and rental rate increases in certain markets. Also contributing
to the partial offsetting of the increase in real estate operating expenses was
a decrease in depreciation due to certain personal property becoming fully
depreciated and a decrease in amortization due to certain costs becoming fully
amortized.

Interest on temporary cash investments and U.S. government securities
decreased $63,900 from 1996 to 1997 and $49,766 from 1995 to 1996 due to
withdrawals made from the partnership's reserves to supplement distributions to
BAC Holders.

Mortgage-backed securities income decreased $9,800 from 1996 to 1997 and
$31,051 from 1995 to 1996 due to the continued amortization of the principal
balances of the partnership's mortgage-backed securities.

Other income consists of income such as corporate unit rentals, garage
rentals, washer/dryer and vending income earned by the properties. Other income
increased $40,865 from 1996 to 1997 and $16,838 from 1995 to 1996 primarily due
to an increase in corporate unit rentals at The Ponds at Georgetown.

During 1995, the Partnership sold a portion of its mortgage-backed
securities and realized a gain of $15,670 on the sale. There were no such sales
during either 1996 or 1997.

Property development and management fees decreased $314 from 1996 to 1997
and $28,455 from 1995 to 1996 due to a decrease in the amount of such income
earned by the general partners of the Operating Partnerships in accordance with
their respective partnership agreement.

Investor servicing expenses increased $145,169 from 1996 to 1997 and $44,662
from 1995 to 1996 due primarily to an increase in salaries and related expenses.
The Partnership incurred costs of approximately $126,000 during 1997 in
connection with a review of various options available to the Partnership to
improve total investment returns and provide liquidity to the Partnership's
investors. Excluding such costs, professional fees decreased from 1996 to 1997
and 1995 to 1996 due primarily to a decrease in legal fees. Other expenses
increased $3,592 from 1996 to 1997 due to increases in miscellaneous expenses.
Other income increased $9,615 from 1995 to 1996 due to increases in travel and
other miscellaneous expenses.

This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made constitute forward-looking statements. BAC Holders and others should
understand that these forward-looking statements are subject to numerous risks
and uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward-looking statements contained herein.

29
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT

To the Partners
Capital Source II L.P.-A:

We have audited the accompanying consolidated balance sheets of Capital
Source II L.P.-A and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, partners' capital and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Capital
Source II L.P.-A and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

/s/ Coopers & Lybrand L.L.P.

Omaha, Nebraska
March 26, 1998

30
<PAGE>
To the Partners
Capital Source II L.P.-A:

Our report on the consolidated financial statements of Capital Source II
L.P.-A and subsidiaries is included herein. In connection with our audit of such
consolidated financial statements, we have also audited the related consolidated
financial statement schedule of Real Estate and Accumulated Depreciation.

/s/ Coopers & Lybrand L.L.P.

Omaha, Nebraska
March 26, 1998

31
<PAGE>
CAPITAL SOURCE II L.P.-A

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
ASSETS

Investments in real estate
Land..................................................................... $ 2,800,750 $ 2,800,750
Buildings................................................................ 23,055,361 23,055,361
Personal property........................................................ 1,666,485 1,597,666
----------------- -----------------
27,522,596 27,453,777
Less accumulated depreciation............................................ (6,330,294) (5,664,440)
----------------- -----------------
Net investment in real estate............................................ 21,192,302 21,789,337
----------------- -----------------

Cash and temporary cash investments, at cost which approximates market
value (Note 5)........................................................... 1,240,992 2,430,937
Escrow deposits and property reserves...................................... 1,104,823 771,061
Investment in mortgage-backed securities (Note 5).......................... 1,050,718 1,171,079
Interest and other receivables............................................. 19,443 23,125
Deferred mortgage issuance costs net of accumulated amortization of
$792,341 in 1997 and $681,197 in 1996.................................... 1,589,510 1,700,654
Other assets............................................................... 241,498 220,229
----------------- -----------------
$ 26,439,286 $ 28,106,422
----------------- -----------------
----------------- -----------------

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

Liabilities
Accounts payable and accrued expenses.................................... $ 1,118,970 $ 874,562
Distribution payable (Note 3)............................................ 546,968 546,968
Due to general partners and their affiliates (Note 4).................... 1,067,313 1,099,709
----------------- -----------------
2,733,251 2,521,239
----------------- -----------------
Minority interest.......................................................... 205,603 206,460
----------------- -----------------
Partners' Capital (Deficit)
General Partners......................................................... (331,453) (312,671)
Limited Partners ($5.94 per BAC in 1997 and $6.41 in 1996)............... 23,831,885 25,691,394
----------------- -----------------
23,500,432 25,378,723
----------------- -----------------
$ 26,439,286 $ 28,106,422
----------------- -----------------
----------------- -----------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

32
<PAGE>
CAPITAL SOURCE II L.P.-A

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Rental income......................................................... $ 5,105,108 $ 4,854,898 $ 4,656,371
Interest on temporary cash investments and U.S. government
securities.......................................................... 104,411 168,311 218,077
Mortgage-backed securities income..................................... 82,182 91,982 123,033
Other income.......................................................... 202,670 161,805 144,967
Gain on sale of mortgage-backed securities............................ -- -- 15,670
------------ ------------ ------------
5,494,371 5,276,996 5,158,118
------------ ------------ ------------
Expenses:
Real estate operating expenses........................................ 2,562,636 2,384,690 2,134,277
Depreciation.......................................................... 666,758 692,383 704,155
Property development and management fees (Note 4)..................... -- 314 28,769
General and administrative expenses (Note 4)
Investor servicing.................................................. 411,005 265,836 221,174
Professional fees................................................... 156,809 38,224 40,234
Other expenses...................................................... 23,326 19,734 10,119
Asset management and partnership fees (Note 4)........................ 166,000 166,000 166,000
Amortization.......................................................... 111,144 111,195 127,296
------------ ------------ ------------
4,097,678 3,678,376 3,432,024
------------ ------------ ------------
Minority interest in losses of Operating Partnerships................... 857 608 2,220
------------ ------------ ------------
Net Income........................................................ $ 1,397,550 $ 1,599,228 $ 1,728,314
------------ ------------ ------------
------------ ------------ ------------
Net Income Allocated to:
General Partners...................................................... $ 13,976 $ 15,992 $ 17,283
Limited Partners...................................................... 1,383,574 1,583,236 1,711,031
------------ ------------ ------------
$ 1,397,550 $ 1,599,228 $ 1,728,314
------------ ------------ ------------
------------ ------------ ------------
Net income, basic and diluted, per BAC.................................. $ .34 $ .39 $ .43
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

33
<PAGE>
CAPITAL SOURCE II L.P.-A

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

FROM DECEMBER 31, 1994 TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Partners' Capital (Deficit)
(excluding net unrealized
holding gains)
Balance at December 31, 1994........................................ $ (280,672) $ 28,859,231 $ 28,578,559
Net income.......................................................... 17,283 1,711,031 1,728,314
Cash distributions paid or accrued (Note 3)......................... (32,818) (3,248,992) (3,281,810)
----------- ------------- -------------
Balance at December 31, 1995........................................ (296,207) 27,321,270 27,025,063
Net income.......................................................... 15,992 1,583,236 1,599,228
Cash distributions paid or accrued (Note 3)......................... (32,818) (3,248,992) 3,281,810
----------- ------------- -------------
Balance at December 31, 1996........................................ (313,033) 25,655,514 25,342,481
Net income.......................................................... 13,976 1,383,574 1,397,550
Cash distributions paid or accrued (Note 3)......................... (32,818) (3,248,992) (3,281,810)
----------- ------------- -------------
(331,875) 23,790,096 23,458,221
----------- ------------- -------------
Net unrealized holding gains
Balance at December 31, 1994........................................ -- -- --
Net change.......................................................... 787 77,955 78,742
----------- ------------- -------------
Balance at December 31, 1995........................................ 787 77,955 78,742
Net change.......................................................... (425) (42,075) (42,500)
----------- ------------- -------------
Balance at December 31, 1996........................................ 362 35,880 36,242
Net change.......................................................... 60 5,909 5,969
----------- ------------- -------------
422 41,789 42,211
----------- ------------- -------------

Balance at December 31, 1997.......................................... $ (331,453) $ 23,831,885 $ 23,500,432
----------- ------------- -------------
----------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

34
<PAGE>
CAPITAL SOURCE II L.P.-A

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................ $ 1,397,550 $ 1,599,228 $ 1,728,314
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization....................... 777,902 803,578 831,451
Amortization of discount on government securities... (1,397) (9,400) (25,076)
Loss on disposition of assets....................... -- 282 --
Property development and management fees............ -- 314 28,769
Minority interest in losses of Operating
Partnerships...................................... (857) (608) (2,220)
Gain on sale of mortgage-backed securities.......... -- -- (15,670)
Decrease (increase) in interest and other
receivables....................................... 3,682 36,242 (27,405)
Decrease (increase) in escrow deposits and property
reserves.......................................... (333,762) 57,409 (12,887)
Increase in other assets............................ (21,269) (21,863) (79,536)
Increase in accounts payable and accrued expenses... 244,408 21,852 119,621
Increase (decrease) in due general partners and
their affiliates.................................. (32,396) 14,776 (139,065)
----------------- ----------------- -----------------
Net cash provided by operating activities............. 2,033,861 2,501,810 2,406,296
----------------- ----------------- -----------------
Cash flows from investing activities
Principal payments received on mortgage-backed
securities.......................................... 127,727 134,435 178,420
Acquisition of buildings and construction in
progress............................................ -- (78,587) (34,527)
Acquisition of personal property...................... (69,723) (102,292) (100,757)
Maturity (acquisition) of U.S. government
securities.......................................... -- 2,500,000 (2,468,945)
Disposition of mortgage-backed securities............. -- -- 470,667
----------------- ----------------- -----------------
Net cash provided by (used in) investing
activities...................................... 58,004 2,453,556 (1,955,142)
----------------- ----------------- -----------------
Cash flow used in financing activity
Distributions......................................... (3,281,810) (3,281,810) (3,281,810)
----------------- ----------------- -----------------
Net increase (decrease) in cash and temporary cash
investments........................................... (1,189,945) 1,673,556 (2,830,656)
Cash and temporary cash investments at beginning of
year.................................................. 2,430,937 757,381 3,588,037
----------------- ----------------- -----------------
Cash and temporary cash investments at end of year...... $ 1,240,992 $ 2,430,937 $ 757,381
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Supplemental disclosure of noncash investing activities
Write-off of fully depreciated assets................. $ 904 $ -- $ --
Disposition of buildings.............................. $ -- $ 17,924 $ --
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

35
<PAGE>
CAPITAL SOURCE II L.P.-A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

1. ORGANIZATION.

Capital Source II L.P.-A (the "Partnership") was formed on August 22, 1986,
under the Delaware Revised Uniform Limited Partnership Act. The General Partners
of the Partnership are insured Mortgage Equities Inc. II L.P. and America First
Capital Source I, L.L.C. (the "General Partners").

The Partnership provided virtually 100% of the debt and equity financing for
five multifamily rental housing properties. The Partnership's investment in the
properties consisted of (a) approximately 85% in the form of permanent mortgages
and/or loans to fund construction; and (b) the balance to purchase up to a 99%
limited partnership interest in the Operating Partnerships which developed, own
and operate the properties. Each loan is insured or guaranteed, in an amount
substantially equal to the face amount of the mortgage, by the Federal Housing
Administration ("FHA") or the Government National Mortgage Association ("GNMA").
The Partnership has been repaid by GNMA on one of its GNMA Certificates and the
related property has been deeded to GNMA in lieu of foreclosure thus eliminating
the Partnership's Equity Investment. The four remaining Operating Partnerships
are geographically located as follows: (i) two in Michigan and (ii) one each in
Florida and North Carolina.

CS Properties II, Inc., which is owned by affiliates of the General
Partners, serves as the Special Limited Partner for the Operating Partnerships.
The Special Limited Partner has the power, among other things, to remove the
general partners of the Operating Partnerships under certain circumstances and
to consent to the sale of the Operating Partnerships' assets.

The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2035.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

(a) METHOD OF ACCOUNTING. The consolidated financial statements
include the accounts of the Partnership and four subsidiary Operating
Partnerships. The Partnership is a limited partner with an ownership
interest in three of the subsidiary Operating Partnerships of up to 99%. The
Partnership's ownership interest in The Ponds at Georgetown L.P. is 68.70%.
The remaining limited partner interest of 30.29% is owned by Capital Source
L.P., an affiliate of the General Partners. All significant intercompany
accounts and transactions have been eliminated in consolidation.

(c) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities
are classified as held-to-maturity, available-for-sale or trading.
Investments classified as held-to-maturity are carried at amortized cost.
Investments classified as available-for-sale are reported at fair value with
any unrealized

36
<PAGE>
CAPITAL SOURCE II L.P.-A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED)
gains or losses excluded from earnings and reflected as a separate component
of partners' capital. Subsequent increases and decreases in the net
unrealized gain/loss on the available-for-sale securities are reflected as
adjustments to the carrying value of the portfolio and adjustments to the
component of partners' capital. The Partnership does not have investment
securities classified as trading.

(e) REVENUE RECOGNITION. The Operating Partnerships lease multifamily
rental units under operating leases with terms of one year or less. Rental
revenue is recognized net of any vacancy losses and rental concessions
offered.

(f) INCOME TAXES. No provision has been made for income taxes since
BAC Holders are required to report their share of the Partnership's income
for federal and state income tax purposes. The tax basis of the
Partnerships' assets and liabilities exceeded the reported amounts by
$7,271,784 and $7,345,644 at December 31, 1997, and December 31, 1996,
respectively.

(g) TEMPORARY CASH INVESTMENTS. Temporary cash investments are
invested in short-term debt securities purchased with original maturities of
three months or less.

(h) NET INCOME PER BENEFICIAL ASSIGNMENT CERTIFICATE ("BAC"). Net
income per BAC is based on the number of BACs outstanding (4,011,101) during
each year presented.

3. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.

The General Partners will also receive 1% of the net proceeds from any sale
of Partnership assets. The General Partners will receive a termination fee equal
to 3% of all sales proceeds less actual costs incurred in connection with all
sales transactions, payable only after the investors have received a return of
their capital contributions and an 11.5% annual return on a cumulative basis.
The General Partners will also receive a fee equal to 9.1% of all cash available
for distribution and sales proceeds (after deducting from cash available or
sales proceeds any termination fee paid therefrom) after investors have received
a return of their capital contributions and a 11.5% annual return on a
cumulative basis.

37
<PAGE>
CAPITAL SOURCE II L.P.-A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

4. TRANSACTIONS WITH RELATED PARTIES.

The Operating Partnerships' general partners provide various on-site
property development and management services. Property development and
management fees for the years ended December 31, 1996 and 1995 amounted to $314
and $28,769, respectively. No such fees were incurred for the year ended
December 31, 1997. Unpaid fees, which are non-interest bearing, are included in
amounts due to general partners and their affiliates on the accompanying
consolidated balance sheets and will be paid in accordance with the terms of the
respective Operating Partnership's limited partnership agreement.

The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum, the
first $50,000 of which will be paid each year with the balance payable only
during such years that a 6.5% annual return has been paid to investors on a
noncumulative basis. An additional fee equal to 0.5% of invested assets per
annum will be payable only during those years that an 11.5% annual return has
been paid to investors on a noncumulative basis. Any unpaid amounts will accrue
and be payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions. Asset management and partnership administration fees for the
years ended December 31, 1997, 1996 and 1995 amounted to $166,000 for each year.

Amounts due to general partners and their affiliates on December 31, 1997
and 1996 are comprised of the following:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Unpaid Property Development and Management Fees................... $ 111,791 $ 97,015
Operating Deficit and Construction Loans.......................... 849,772 874,194
Unpaid Asset Management and Partnership Administrative Fees....... 105,750 128,500
------------ ------------
$ 1,067,313 $ 1,099,709
------------ ------------
------------ ------------
</TABLE>

Substantially all of the Partnership's general and administrative expenses
are paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to the General Partner for the years
ended December 31, 1997, 1996 and 1995 amounted to $494,165, $313,049 and
$281,606, respectively. These amounts are presented on a cash basis and do not
reflect accruals made at each year end.

An affiliate of America First Capital Source II, L.L.C. has been retained to
provide property management services for The Ponds at Georgetown beginning in
November 1996. The fees for services provided were $31,924 for 1997 and $4,933
for 1996, respectively, and represented the lower of costs incurred in providing
management of the property or customary fees for such services determined on a
competitive basis.

38
<PAGE>
CAPITAL SOURCE II L.P.-A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

5. PARTNERSHIP RESERVE ACCOUNT.

The Partnership maintains a reserve account which consisted of the following
at December 31, 1997:

<TABLE>
<S> <C>
Cash and Temporary Cash Investments............................. $ 499,366
GNMA Certificates............................................... 1,050,718
---------
Balance at End of Year.......................................... $1,550,084
---------
---------
</TABLE>

The reserve account was established to maintain working capital for the
Partnership and is available to supplement distributions to investors or for
other contingencies related to the ownership of investments and the operation of
the Partnership. The GNMA Certificates mature between 2008 and 2009.

At December 31, 1997, the total amortized cost, gross unrealized holding
gains and aggregate fair value of available-for-sale securities were $1,008,507,
$42,211 and $1,050,718, respectively. At December 31, 1996, the total amortized
cost, gross unrealized holding gains and aggregate fair value of available-
for-sale securities were $1,134,837, $36,242 and $1,171,079, respectively.

During 1995, the Partnership sold a portion of the securities in the
available-for-sale portfolio. The total amortized cost and realized gain for
sales of securities classified as available-for-sale were $454,997 and $15,670,
respectively.

6. PARENT COMPANY ONLY FINANCIAL INFORMATION.

Generally accepted accounting principles require that the Partnership's
financial statements consolidate the Operating Partnerships since the
Partnership holds a majority ownership interest and, through CS Properties II,
Inc., it can influence the decisions of the general partners in certain
circumstances. In the consolidated financial statements, the Partnership's
investment in FHA Loans and GNMA Certificates is eliminated against the related
mortgage payable recorded by the Operating Partnership. If a mortgage loan goes
into default and is foreclosed upon by FHA or GNMA, the respective agency may,
at their discretion, repay the FHA Loan or the GNMA Certificate. If this occurs,
the Partnership's investment in the Operating Partnership would be eliminated,
resulting in the recognition of a gain on the Partnership's financial
statements. This arises because consolidation accounting does not allow the
Partnership to stop recording losses from the Operating Partnerships when the
net investment is reduced to zero.

39
<PAGE>
CAPITAL SOURCE II L.P.-A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

6. PARENT COMPANY ONLY FINANCIAL INFORMATION. (CONTINUED)
distributions. The investment in Operating Partnerships represents the
Partnership's limited partnership interest in the accumulated deficits of those
Operating Partnerships. The parent company only information is provided to more
clearly present the Partnership's investment in the Operating Partnerships.
Since the Partnership is not a general partner, it is not obligated to fund the
negative balances. If the investments in all Operating Partnerships were
eliminated at December 31, 1997, Partnership capital would increase by
$5,454,621 ($1.35 per BAC).

The FHA Loan and the GNMA Certificates are collateralized by first mortgage
loans on the properties owned by the Operating Partnerships and are guaranteed
or insured as to principal and interest by FHA or GNMA. The FHA insured mortgage
loan is subject to a 1% assignment fee. The obligations of FHA and GNMA are
backed by the full faith and credit of the United States government.

PARENT COMPANY ONLY

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS

Cash and temporary cash investments............................ $ 1,240,992 $ 2,430,937
Investment in FHA Loan......................................... 6,538,424 6,568,139
Investment in GNMA Certificates................................ 21,674,940 21,895,675
Investment in Operating Partnerships........................... (5,454,621) (5,198,166)
Interest receivable............................................ 213,024 219,661
Other assets................................................... 162,154 225,743
------------- -------------
$ 24,374,913 $ 26,141,989
------------- -------------
------------- -------------

LIABILITIES AND PARTNERS' CAPITAL

Liabilities
Accounts payable............................................. $ 327,513 $ 216,298
Distribution payable......................................... 546,968 546,968
------------- -------------
874,481 763,266
------------- -------------
Partners' Capital.............................................. 23,500,432 25,378,723
------------- -------------
$ 24,374,913 $ 26,141,989
------------- -------------
------------- -------------
</TABLE>

40
<PAGE>
CAPITAL SOURCE II L.P.-A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

6. PARENT COMPANY ONLY FINANCIAL INFORMATION. (CONTINUED)
PARENT COMPANY ONLY

CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income.................. $ 2,499,844 $ 2,520,727
Interest on temporary cash investments and U.S. government
securities.................................................... 91,327 147,530
Equity in losses of Operating Partnerships...................... (377,905) (523,809)
Other income.................................................... 3,800 6,950
------------ ------------
2,217,066 2,151,398

Expenses
Operating and administrative.................................... 819,516 552,170
------------ ------------
Net income.................................................... $ 1,397,550 $ 1,599,228
------------ ------------
------------ ------------
</TABLE>

41
<PAGE>
CAPITAL SOURCE II L.P.-A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

6. PARENT COMPANY ONLY FINANCIAL INFORMATION. (CONTINUED)
PARENT COMPANY ONLY

CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income.................................................... $ 1,397,550 $ 1,599,228
Adjustments to reconcile net income to net cash from
operating activities:
Equity in losses of Operating Partnerships.................. 377,905 523,809
Amortization................................................ 62,376 62,376
Other non-cash adjustments.................................... 117,668 16,695
------------- -------------
Net cash provided by operating activities....................... 1,955,499 2,202,108
------------- -------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments.............. 257,816 253,258
Investment in Operating Partnerships.......................... (121,450) --
Maturity of U.S. government securities........................ -- 2,500,000
------------- -------------
Net cash provided by investing activities..................... 136,366 2,753,258
------------- -------------
Cash flow used in financing activity
Distributions................................................. (3,281,810) (3,281,810)
------------- -------------
Net increase (decrease) in cash and temporary cash
investments................................................... (1,189,945) 1,673,556
Cash and temporary cash investments at beginning of year........ 2,430,937 757,381
------------- -------------
Cash and temporary cash investments at end of year.............. $ 1,240,992 $ 2,430,937
------------- -------------
------------- -------------
</TABLE>

7. FAIR VALUE OF FINANCIAL INSTRUMENTS.

The following methods and assumptions were used by the Partnership in
estimating the fair value of its financial instruments:

(a) CASH AND TEMPORARY CASH INVESTMENTS. Fair value approximates the
carrying value of such assets.

(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Fair values are based on
amounts obtained from an independent pricing source.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments...................... $ 1,240,992 $ 1,240,992 $ 2,430,937 $ 2,430,937
Investment in mortgage-backed securities................. 1,050,718 1,050,718 1,171,079 1,171,079
</TABLE>

42
<PAGE>
CAPITAL SOURCE II L.P.-A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

8. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FROM JANUARY 1, 1997 TO DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Total income............................................ $ 1,353,416 $ 1,348,345 $ 1,351,644 $ 1,440,966
Total expenses.......................................... (858,776) (954,972) (1,005,215) (1,278,715)
Minority interest in losses of Operating Partnerships... 147 181 369 160
------------ ------------ ------------- -------------
Net income.............................................. $ 494,787 $ 393,554 $ 346,798 $ 162,411
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net income, basic and diluted, per BAC.................. $ .12 $ .10 $ .08 $ .04
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FROM JANUARY 1, 1996 TO DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total income............................................. $ 1,314,149 $ 1,302,210 $ 1,306,100 $ 1,354,537
Total expenses........................................... (794,837) (798,182) (903,409) (1,181,948)*
Minority interest in losses of Operating Partnerships.... 353 144 228 (117)
------------ ------------ ------------ ------------
Net income............................................... $ 519,665 $ 504,172 $ 402,919 $ 172,472
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per BAC....................................... $ .13 $ .12 $ .10 $ .04
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

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

* Real estate operating expenses were higher during the fourth quarter due to
adjustments made to certain real estate operating expenses.

43
<PAGE>
SCHEDULE III

CAPITAL SOURCE II L.P.-A

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 1997
<TABLE>
<CAPTION>
DATE OF DATE
PROPERTY LOCATION # OF UNITS ENCUMBRANCES CONSTRUCTION ACQUIRED
- -------------------------------------------- ----------------- ----- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Ponds at Georgetown......................... Ann Arbor, MI 134 (a) 1989 N/A
Monticello.................................. Southfield, MI 106 (a) 1989 N/A
Delta Crossing.............................. Charlotte, NC 178 (a) 1989 N/A
Crane's Landing............................. Winter Park, FL 252 (a) 1990 N/A

<CAPTION>
LIFE ON
WHICH
DEPRECIATION
PROPERTY IS COMPUTED
- -------------------------------------------- ------------
<S> <C>
Ponds at Georgetown......................... 5 - 40 years
Monticello.................................. 5 - 40 years
Delta Crossing.............................. 5 - 40 years
Crane's Landing............................. 5 - 40 years
</TABLE>

<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT DECEMBER 31, 1997
----------------------------------------
ACQUISITION BUILDINGS,
INITIAL COST TO ------------------------ IMPROVEMENTS
PARTNERSHIP CARRYING AND PERSONAL ACCUMULATED
------------------------ COSTS LAND PROPERTY TOTAL DEPRECIATION
PROPERTY LAND PROPERTY IMPROVEMENTS (B) (C) (D) (C) AND (D) (E)
- ------------------- ----------- ----------- ------------- --------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ponds at
Georgetown....... $ 261,440 $ 269,094 $ 4,246,230 $ 55,523 $ 396,621 $ 4,435,666 $ 4,832,287 $(1,173,647)
Monticello......... 402,933 363,117 4,683,322 88,306 411,566 5,126,112 5,537,678 (1,595,196)
Delta Crossing..... 700,000 461,011 5,730,514 69,565 960,861 6,000,229 6,961,090 (1,588,441)
Crane's Landing.... 978,902 206,060 8,933,639 72,940 1,031,702 9,159,839 10,191,541 (1,973,010)
----------- ----------- ------------- --------- ----------- ------------- ------------ ------------
$ 2,343,275 $ 1,299,282 $23,593,705 $ 286,334 $ 2,800,750 $24,721,846 $ 27,522,596 $(6,330,294)
----------- ----------- ------------- --------- ----------- ------------- ------------ ------------
----------- ----------- ------------- --------- ----------- ------------- ------------ ------------
</TABLE>

44
<PAGE>
SCHEDULE III

CAPITAL SOURCE II L.P.-A

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 1996
<TABLE>
<CAPTION>
DATE OF DATE
PROPERTY LOCATION # OF UNITS ENCUMBRANCES CONSTRUCTION ACQUIRED
- -------------------------------------------- ----------------- ----- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Ponds at Georgetown......................... Ann Arbor, MI 134 (a) 1989 N/A
Monticello.................................. Southfield, MI 106 (a) 1989 N/A
Delta Crossing.............................. Charlotte, NC 178 (a) 1989 N/A
Crane's Landing............................. Winter Park, FL 252 (a) 1990 N/A

<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT DECEMBER 31, 1996
----------------------------------------
ACQUISITION BUILDINGS,
INITIAL COST TO ------------------------ IMPROVEMENTS
PARTNERSHIP CARRYING AND PERSONAL ACCUMULATED
------------------------ COSTS LAND PROPERTY TOTAL DEPRECIATION
PROPERTY LAND PROPERTY IMPROVEMENTS (B) (C) (D) (C) AND (D) (E)
- ------------------- ----------- ----------- ------------- --------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ponds at
Georgetown....... $ 261,440 $ 269,094 $ 4,246,230 $ 55,523 $ 396,621 $ 4,435,666 $ 4,832,287 $(1,069,482)
Monticello......... 402,933 363,117 4,683,322 88,306 411,566 5,126,112 5,537,678 (1,451,691)
Delta Crossing..... 700,000 461,011 5,687,375 69,565 960,861 5,957,090 6,917,951 (1,418,851)
Crane's Landing.... 978,902 206,060 8,907,959 72,940 1,031,702 9,134,159 10,165,861 (1,724,416)
----------- ----------- ------------- --------- ----------- ------------- ------------ ------------
$ 2,343,275 $ 1,299,282 $23,524,886 $ 286,334 $ 2,800,750 $24,653,027 $ 27,453,777 $(5,664,440)
----------- ----------- ------------- --------- ----------- ------------- ------------ ------------
----------- ----------- ------------- --------- ----------- ------------- ------------ ------------
</TABLE>

45
<PAGE>
SCHEDULE III

CAPITAL SOURCE II L.P.-A

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 1997 AND 1996

(a) The Partnership has no encumbrances against this property. Encumbrances
recorded by the Operating Partnerships are eliminated in the consolidated
financial statements of the Partnership.

(b) Carrying costs include legal fees, appraisal fees, title costs and other
related professional fees.

(d) Reconciliation of Real Estate:

<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Balance--beginning of year..................................... $ 27,453,777 $ 27,290,822
Acquisitions................................................... 69,723 180,879
Disposition of personal property............................... (904) (17,924)
------------- -------------
Balance--end of year........................................... $ 27,522,596 $ 27,453,777
------------- -------------
------------- -------------
</TABLE>

(e) Reconciliation of Accumulated Depreciation:

<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Balance--beginning of year..................................... $ 5,664,440 $ 4,989,699
Depreciation expense........................................... 666,758 692,383
Disposition of personal property............................... (904) (17,642)
------------- ------------
Balance--end of year........................................... $ 6,330,294 $ 5,664,440
------------- ------------
------------- ------------
</TABLE>

46
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
SUPPLEMENT DATED , 1998
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1998
FOR
CAPITAL SOURCE II L.P.-A

On the terms described in the Prospectus/Consent Solicitation Statement
dated , 1998, of which this Supplement (the "Supplement") is a part,
Insured Mortgage Equities, Inc. and America First Capital Source I, L.L.C.
(together, the "Cap Source I General Partners") and Insured Mortgage Equities II
L.P. and America First Capital Source II, L.L.C. (together, the "Cap Source II
General Partners, " and together with the Cap Source I General Partners, the
"General Partners") are proposing the consolidation by merger (the
"Transaction") of Capital Source L.P., a Delaware limited partnership ("Cap
Source I") and Capital Source II L.P.-A, a Delaware limited partnership ("Cap
Source II," or the "Partnership" and together with Cap Source I, the
"Partnerships"), with and into America First Real Estate Investment Company,
Inc., a newly organized Delaware corporation (the "Company"). The Partnerships
are Delaware limited partnerships formed from 1985 through 1986 to invest
principally in federally-insured mortgages on multifamily housing properties and
to acquire, hold, sell, dispose of and otherwise deal with limited partnership
interests ("Partnership Equity Interests") in the limited partnerships (the
"Operating Partnerships") which construct, own and operate these properties.
Upon completion of the Transaction, the Company's primary business objective
will be to make growth-oriented real estate investments through the direct
acquisition, rehabilitation, development, financing and management of real
property, including the acquisition of securities of entities engaged in similar
real estate businesses.

Upon completion of the Transaction, the Partnerships will be merged with and
into the Company. Cap Source I Investors, together with Cap Source II Investors
(collectively, the "Investors"), will receive, at their election, either shares
of the Common Stock of the Company (the "Common Stock" or the "Shares") or
Variable Rate Senior Notes due , 2006 (the "Notes") of the Company,
together with promissory notes (the "Promissory Notes") to each Investor
entitled to a fractional interest in the Notes. See "DESCRIPTION OF CAPITAL
STOCK" and "THE NOTES" in the Prospectus/Consent Solicitation Statement. The
Common Stock will be listed on the New York Stock Exchange under the symbol
" ," subject to official notice of issuance. The Transaction will not occur
unless it is approved by both Partnerships and Investors who vote against the
Transaction ("Dissenting Investors") do not elect to receive more than the
maximum amount of Notes issuable in connection with the Transaction. The maximum
amount of Notes that may be issued in the Transaction is $40.0 million.

This Supplement has been prepared for the Cap Source II Investors to discuss
the effects and fairness of the Transaction with respect to their beneficial
assignment certificates of the Partnership (the "Units"), and to provide
information on the Partnership. The effects of the Transaction may be different
for Cap Source II Investors than for Cap Source I Investors. A supplement has
also been prepared for Cap Source I Investors. The Supplements are a part of the
Prospectus/Consent Solicitation Statement. Capitalized terms not defined herein
shall have the meaning set forth in the accompanying Prospectus/ Consent
Solicitation Statement.

Copies of any Supplement may be obtained without charge by an Investor or
representative so designated in writing, by giving written notice to the General
Partners of the Investor's respective Partnership. All requests should be
directed to America First Companies L.L.C., Attn: Maurice Cox, 1004 Farnam
Street, Suite 400, Omaha, Nebraska 68102.

SIMILARITIES BETWEEN CAP SOURCE I AND CAP SOURCE II

The investment objectives and the assets held by the Partnerships are
substantially similar in nature and character. Based on the Exchange Values
determined as of December 31, 1997, Cap Source I's assets consisted of 70.8% in
GNMA Certificates and FHA Loans, 19.0% in cash, cash equivalents and net other
<PAGE>
assets and liabilities, and the remaining 10.2% in the Partnership Equity
Interests in the Cap Source I Operating Partnerships. As of December 31, 1997,
Cap Source II's assets consisted of 85.8% in GNMA Certificates and FHA Loans,
1.8% in cash, cash equivalents and net other assets and liabilities, and the
remaining 12.4% in the Partnership Equity Interests in the Cap Source II
Operating Partnerships.

Although there are differences in the geographic area, style of construction
and specific locations for each property owned by the Operating Partnerships,
there are no significant differences in occupancy rates or property types. All
of the properties owned by the Operating Partnerships are multifamily apartment
complexes. In addition, the Operating Partnership interests in the Ponds at
Georgetown Limited Partnership ("The Ponds") are owned by Cap Source I and Cap
Source II.

DIFFERENCES BETWEEN CAP SOURCE I AND CAP SOURCE II

Except for The Ponds, each Partnership Equity Interest is unique to the
Partnership that holds the interest. The style of construction, specific
location and geographic areas for each property owned by the Operating
Partnerships are different. Cap Source I has Partnership Equity Interests in
three Operating Partnerships that have a general partner that is an affiliate of
Cap Source I, which include Waterman's Crossing, Fox Hollow and Misty Springs.
The remaining Cap Source I Operating Partnerships have general partners that are
not affiliated with Cap Source I. All of the Cap Source II Operating
Partnerships have general partners that are not affiliated with Cap Source II.
See "THE PARTNERSHIPS" in the Prospectus/Consent Solicitation Statement.

Although both Partnerships hold a majority of their assets in liquid
investments, the amount of cash and cash equivalents held by each Partnership is
different. Cash, cash equivalents and net other assets and liabilities make up
19% of Cap Source I's assets, whereas only 1.8% of Cap Source II's assets are in
cash, cash equivalents and net other assets and liabilities.

Distributions for both Partnerships are based upon the adjusted Unit value,
which is $20.00 per Unit of original investment, adjusted for returns of capital
to Investors. The adjusted Unit value for Cap Source I is $18.35. The adjusted
Unit value for Cap Source II is $12.39.

In 1997, Cap Source I made distributions at the rate of 5.5% of its adjusted
Unit value, which equaled $1.01 per Unit for the year. Cap Source II made
distributions at the rate of 6.5% of its adjusted Unit value, which equaled $.81
per Unit for 1997, $.279 of which was made from reserves. Since Cap Source II
has been making part of its distributions from reserves, distributions for Cap
Source II are likely to decrease in future years as reserves are depleted. See
"SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP UNITS--Partnership Distributions"
in the Prospectus/Consent Solicitation Statement.

The Partnerships have different fee structures for compensating the General
Partners. The Cap Source I General Partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested assets
per annum, payable only during such years that an 8% return has been paid to
Investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to Cap Source I Investors has been paid
on a cumulative basis and such Investors have received the return of their
capital contributions.

The Cap Source II General Partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested assets
per annum, the first $50,000 of which is paid each year with the balance payable
only during such years that a 6.5% annual return has been paid to Cap Source II
Investors on a noncumulative basis. An additional fee of 0.5% of invested assets
will be paid in years that an 11.5% annual return has been paid to Cap Source II
Investors on a cumulative basis. Any unpaid amounts will accrue and be payable
only after an 11.5% annual return to investors has been paid on a cumulative
basis and the investors have received the return of their capital contributions.

The General Partners of both Partnerships also receive 1% of the net
proceeds from any sale of Partnership assets. The General Partners of both
Partnerships will receive a termination fee equal to 3% of

Cap Source II Supp-2
<PAGE>
all sales proceeds less actual costs incurred in connection with all sales
transactions, payable only after the Investors have received a return of their
capital contributions and a 13% annual return on a cumulative basis with respect
to Cap Source I or an 11.5% annual return on a cumulative basis with respect to
Cap Source II. The General Partners of both Partnerships will also receive a fee
equal to 9.1% of all cash available for distribution and sales proceeds (after
deducting from cash available or sales proceeds any termination fee paid
therefrom) after Investors have received a return of their capital contributions
and a 13% annual return on a cumulative basis with respect to Cap Source I or an
11.5% annual return on a cumulative basis with respect to Cap Source II.
However, the difference in this latter fee is not a material difference since
neither Partnership has achieved such a target level since their inception, and
the General Partners do not anticipate that such a level will be reached in the
foreseeable future.

RISK FACTORS

The Transaction does not involve risks which are more significant to Cap
Source II Investors than to Cap Source I Investors. However, the Transaction
involves certain risks and other adverse factors which are applicable to both
Partnerships, as discussed in detail in the accompanying Prospectus/Consent
Solicitation Statement, of which this Supplement is a part. See "RISK FACTORS"
in the Prospectus/ Consent Solicitation Statement. Because all of the risks and
adverse factors described in the Prospectus/ Consent Solicitation Statement
apply to the effect of the Transaction on both Partnerships, Cap Source II
Investors should carefully review the section entitled "RISK FACTORS" therein.
Except as otherwise stated herein, there are no material differences in the
manner in which Cap Source I or Cap Source II will be affected by any of the
risks or adverse factors discussed in such "RISK FACTORS" section.

For most Investors, the Transaction will not result in a taxable transaction
except to the extent Notes are received in the Transaction. For a more detailed
discussion of the tax consequences of the transaction see "Certain Tax
Differences Between the Ownership of Units and Shares" herein and "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus/Consent Solicitation
Statement.

By participating in the Transaction, Investors in Cap Source II will assume
risks associated with the assets of Cap Source I. Although the majority of the
assets in Cap Source I are substantially similar to those of Cap Source II, the
multifamily apartment complexes in which Cap Source I owns limited partnership
interests are of different construction, geographic area and specific location
than the complexes in which Cap Source II owns interests. Because the market for
real estate may vary from one region of the country to another, the change in
geographic diversity may expose Cap Source II Investors to different and greater
risks than those to which they are presently exposed. For geographic information
regarding the Partnerships' properties, see "THE PARTNERSHIPS" in the
Prospectus/Consent Solicitation Statement. Moreover, because the properties
owned by the Partnerships are not of uniform quality, combining assets and
liabilities of the Partnerships in the Transaction may diminish the overall
asset quality underlying the investments of certain of the Investors by
comparison with their existing Partnership investment.

For a more detailed discussion of the risks associated with the Transaction,
see "RISK FACTORS" in the Prospectus/Consent Solicitation Statement.

EXCHANGE VALUE TABLES

The first table set forth below indicates the Exchange Value as it relates
to the allocation of Shares to Cap Source II in connection with the Transaction.
The second indicates the Exchange Value as it relates to the allocation of
Shares to the Cap Source II General Partners in connection with the Transaction.
The third table sets forth the Exchange Value assigned to Cap Source II, which
is composed of (a) the principal amount of GNMA Certificates and the FHA Loans
as set forth in the Partnership's audited financial statements for the period
ended December 31, 1997, (b) the value of the Partnership's limited partnership
interests in the Cap Source II Operating Partnerships based in part on the
Appraisals, and (c) the market value of the Partnership's remaining net assets
as set forth in the Partnership's audited financial statements

Cap Source II Supp-3
<PAGE>
for the period ended December 31, 1997. The Cap Source II General Partners will
receive Shares in an amount equal to 1% of the Exchange Value assigned to Cap
Source II upon consummation of the Transaction. See "--Determination of Exchange
Values" herein, and the tables entitled "Calculation Of Exchange Values" and
"Net Other Assets and Liabilities Table for Partnerships" in the
Prospectus/Consent Solicitation Statement. The fourth table sets forth the
specific components of net other assets and liabilities of Cap Source II.

EXCHANGE VALUE(1)
FOR ALLOCATION OF SHARES TO CAP SOURCE II
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
PER $1,000 ORIGINAL
INVESTMENT
PERCENT OF TOTAL ------------------------
TOTAL EXCHANGE TOTAL NUMBER SHARES EXCHANGE NUMBER OF
VALUE(2) OF SHARES(3) (EXCHANGE RATIO) VALUE SHARES(4)
- ---------------------- ------------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
$32,880,190 1,315,208 39.2% $ 406 16.23
</TABLE>

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

(1) This Exchange Value Table assumes that no Notes will be issued.

(2) See the table entitled "Calculation Of Exchange Values" in the
Prospectus/Consent Solicitation Statement for a determination of the
Exchange Values for each of the Partnerships.

(3) The total number of Shares to be allocated to Cap Source II was calculated
by dividing the Total Exchange Value assigned to the Partnership by $25.

(4) The number of Shares to be issued per $1,000 original investment was
calculated by dividing the Exchange Value per $1,000 original investment by
$25. No fractional Shares will be issued. Each Investor who would otherwise
be entitled to a fractional Share will instead receive a cash payment equal
to $25 multiplied by the fraction. See "THE TRANSACTION--No Fractional
Shares" in the Prospectus/Consent Solicitation Statement.

EXCHANGE VALUE(1)
FOR ALLOCATION OF SHARES TO CAP SOURCE II GENERAL PARTNERS
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
TOTAL EXCHANGE TOTAL NUMBER PERCENT OF TOTAL SHARES
VALUE(2) OF SHARES(3) (EXCHANGE RATIO)
- ---------------------- ------------- -------------------------
<S> <C> <C>
$328,802 13,152 .4%
</TABLE>

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

(1) This Exchange Value Table assumes that no Notes will be issued.

(2) See the table entitled "Calculation Of Exchange Values" in the
Prospectus/Consent Solicitation Statement for a determination of the
Exchange Values for each of the Partnerships.

(3) The total number of Shares to be allocated to the Cap Source II General
Partners was calculated by dividing the Total Exchange Value assigned to the
General Partners by $25.

Cap Source II Supp-4
<PAGE>
CALCULATION OF EXCHANGE VALUE
OF CAP SOURCE II
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
LIMITED
GNMA CERTIFICATES AND PARTNERSHIP NET OTHER ASSETS EXCHANGE
MORTGAGE LOANS(1) INTERESTS(2) AND LIABILITIES VALUE
- --------------------- ------------------ ---------------- -------------
<S> <C> <C> <C>
$27,162,646 $ 4,087,291 $ 1,630,253 $ 32,880,190
</TABLE>

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

(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balance as of December 31, 1997.

NET OTHER ASSETS AND LIABILITIES TABLE
FOR CAP SOURCE II
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
MISCELLANEOUS NET OTHER ASSETS
GNMA AND DISTRIBUTIONS
CASH(1) CERTIFICATES(2) LIABILITIES(3) PAYABLE TOTAL
- ------------ ------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
$1,240,992 $ 1,050,718 $ (114,489) $ (546,968) $ 1,630,253
</TABLE>

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

(1) Cash and cash equivalents.

(2) These assets are classified for reporting purposes as "available for sale"
and, as such, are reported at fair value.

(3) Generally, interest receivable less accounts payable.

DETERMINATION OF EXCHANGE VALUES

GENERAL. Exchange Values, which were determined as of December 31, 1997,
have been assigned to each of the Partnerships solely to establish a consistent
method for allocating Shares and Notes to Investors. The Exchange Values are
based on (i) the principal amount of GNMA Certificates and the FHA Loans as set
forth in the Partnerships' audited financial statements for the period ended
December 31, 1997, (ii) the value of the Partnerships' limited partnership
interests in the Operating Partnerships based in part upon the Appraisals, and
(iii) the market value of the Partnerships' remaining net assets as set forth in
the Partnerships' audited financial statements for the period ended December 31,
1997.

The Exchange Value assigned to Cap Source II for purposes of the Transaction
is $32,880,190. The aggregate Exchange Value assigned to both Partnerships is
$83,872,160. Based on the assigned Exchange Values, Cap Source II will receive
1,315,208 Shares of Common Stock, or approximately 39.2% of the total 3,354,887
Shares of Common Stock issued in the Transaction, assuming that no Notes are
issued. See "EXCHANGE VALUES" in the Prospectus/Consent Solicitation Statement.
The Exchange Value of Cap Source II does not necessarily reflect the price at
which the assets of the Partnership may be sold, or the price at which Shares or
Notes may be sold after the Transaction.

VALUATION. The value of the Partnership Equity Interests is based in part
upon the Appraisals by Valuation Research. In its appraisal of the Partnership
Properties, Valuation Research considered the cost approach, the direct sales
comparison approach and the income approach to market value, and relied upon the
income approach as its primary appraisal technique, using the direct sales
comparison approach as a basis for checking the reasonableness of the results
obtained using the income approach. See "FAIRNESS OPINION AND
APPRAISALS--Appraisals" in the Prospectus/Consent Solicitation Statement.

Cap Source II Supp-5
<PAGE>
CERTAIN TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND SHARES

Investors are treated as limited partners of the Partnerships for federal
income tax purposes. The Partnerships are not subject to federal income taxation
and, instead, each Investor is required to take into account his or her share of
income, deductions or loss of the Partnership in which he or she invested,
regardless of whether any cash is distributed. The character of income to each
Investor is dependent upon its character to the Partnership. Upon consummation
of the Transaction, the Investors will, in essence, receive Shares in exchange
for their Units and thereby become shareholders of the Company which is
characterized as a corporation for federal income tax purposes. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus/Consent Solicitation
Statement.

In contrast to the tax treatment of the Partnerships, the Company is subject
to corporate income taxation. In addition, Shareholders will be taxed based on
the amount of distributions received from the Company. Each Shareholder will
receive a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to him or her during the preceding year. The extent to which
such distributions are taxable depends upon the amount of the Company's earnings
and profits. The character of distributions to the Shareholders is also not
dependant on its character to the Company and is generally characterized as
ordinary dividend income to the Shareholders. In addition, such income is
classified as portfolio income under the passive loss rules. Furthermore,
deductions and losses are not passed through to the Shareholders. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus/Consent Solicitation
Statement.

FAIRNESS

There are no material differences with respect to the fairness of the
Transaction to the Partnerships, individually, or in the aggregate. Therefore,
the discussion of the fairness of the Transaction in incorporated by reference
from the sections entitled "FAIRNESS" and "FAIRNESS OPINION AND
APPRAISALS--Fairness Opinion" in the Prospectus/Consent Solicitation Statement.
For a more detailed discussion of the fairness of the Transaction, see the
sections entitled "FAIRNESS" and "FAIRNESS OPINION AND APPRAISALS--Fairness
Opinion" in the Prospectus/Consent Solicitation Statement.

COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS

The following information has been prepared to compare the amounts of
compensation paid, and cash distributions made, by Cap Source II to its General
Partners and their affiliates to the amounts that would have been paid if the
compensation and distribution structure, which will be in effect after the
Transaction, had been in effect during the years presented.

Under Cap Source II's Partnership Agreement, the General Partners are
entitled to receive fees in connection with managing the affairs of the
Partnership. The Partnership Agreement also provides that the General Partners
are to be reimbursed for expenses for services performed for the Partnership,
such as legal, accounting, transfer agent, data processing and duplicating
services. In addition, the General Partners of Cap Source II have a 1% interest
in the Partnership.

During the years ended December 31, 1995, 1996 and 1997, amounts actually
paid by Cap Source II to its General Partners are shown below under "Historical"
and Cap Source II's share of the estimated

Cap Source II Supp-6
<PAGE>
amounts of compensation that would have been paid to the Advisor had the
Transaction been in effect for the years presented are shown under "Pro Forma":

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
HISTORICAL:
1% share of Cash Distributions(1)............................................ $ 32,818 $ 32,818 $ 32,818
Asset Management and Partnership Administrative Fee(2)....................... 166,000 166,000 166,000
Reimbursements(3)............................................................ 128,754 165,424 211,845
---------- ---------- ----------
Total historical......................................................... $ 327,572 $ 364,242 $ 410,663
---------- ---------- ----------
---------- ---------- ----------

PRO FORMA:
Acquisition Fee(4)........................................................... $ 0 $ 0 $ 0
Asset Management Fee(5)...................................................... 169,262 168,547 169,741
Incentive Fee(6)............................................................. 0 0 0
---------- ---------- ----------
Total Pro Forma.......................................................... $ 169,262 $ 168,547 $ 169,741
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

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

(1) The Partnership Agreement provides that 1% of cash available for
distribution will be allocated to the General Partners.

(2) The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum,
the first $50,000 of which shall be paid each year with the balance payable
only during such years that a 6.5% annual return has been paid to investors
on a noncumulative basis. An additional fee of 0.5% of invested assets will
be paid in those years that an 11.5% annual return has been paid to
investors on a cumulative basis. Any unpaid amounts will accrue and be
payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions.

(3) The General Partners are paid or reimbursed for certain costs and expenses
incurred in connection with the operation of the Partnership.

(4) No acquisition fees would have been paid because no new assets were
purchased or permitted to be purchased in the years 1995 to 1997.

(5) Calculated based on the Advisor fees described in more detail under "THE
COMPANY--The Advisor" in the Prospectus/Consent Solicitation Statement.

(6) No incentive fee would have been paid because no new assets were owned which
would have qualified for such a fee if sold.

For purposes of comparing pro forma compensation levels to historical
compensation levels of the General Partners, a pro forma model was developed of
the compensation and distribution structure that the General Partners expect
would have been in place had the Transaction been consummated.

The pro forma model was applied to the years ended December 31, 1995, 1996
and 1997 as shown in the "Pro Forma" table above. Cap Source II's allocation of
the total pro forma cash compensation to the General Partners is set forth
below, using December 31, 1997 amounts for illustrative purposes. The

Cap Source II Supp-7
<PAGE>
allocation is based on the ratio that Cap Source II's assigned Exchange Value
bears to the aggregate Exchange Value for both Partnerships:

<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Cap Source II's assigned Exchange Value........................................ $ 32,880,190
Aggregate Exchange Value of both Partnerships.................................. $ 83,872,160
Allocation Ratio............................................................... 39.2%
Aggregate pro forma compensation............................................... $ 433,014
Cap Source II's allocation of pro forma compensation........................... $ 169,741
</TABLE>

CASH DISTRIBUTIONS TO INVESTORS

The information below should be read in conjunction with the information in
the Prospectus/Consent Solicitation Statement under the captions "SECONDARY
MARKET AND OWNERSHIP OF PARTNERSHIP UNITS" and "SELECTED FINANCIAL DATA OF THE
PARTNERSHIPS."

The following table sets forth the distributions paid to Investors in Cap
Source II (per $1,000 original investment) for the periods indicated below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Distributions from Income................................. $ 20.495 $ 17.795 $ 21.330 $ 19.735 $ 17.245
Distributions from Return of Capital...................... 183.015 22.705 19.170 20.765 23.255
---------- --------- --------- --------- ---------
Total................................................. $ 203.510 $ 40.500 $ 40.500 $ 40.500 $ 40.500
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>

Cash from operations, defined in the Partnership Agreement as disbursable
cash, is distributed to the Investors. Any variation in the amount of
distributions from operations is due to fluctuations in net cash from operating
activities. Reference is made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Financial Statement
Supplement to the Prospectus/Consent Solicitation Statement for a discussion and
analysis of such fluctuations. Cash proceeds from the sale of property may be
distributed separately to the Investors as a return of capital. The Adjusted
Capital Contribution of an Investor is generally the Investor's initial capital
contribution reduced by the cash distributions to the Investor of proceeds from
the sale of Partnership properties. The Adjusted Capital Contribution per Unit
for Investors in Cap Source II, as defined in its Partnership Agreement, was
$12.39 as of December 31, 1997, based on an initial capital contribution of $20
per unit.

See the information in the Prospectus/Consent Solicitation Statement under
"SELECTED FINANCIAL DATA OF THE PARTNERSHIPS" for more detailed financial
information with respect to the Partnerships and the effects of the Transaction.

Cap Source II Supp-8
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
SUPPLEMENT DATED , 1998
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1998
FOR
CAPITAL SOURCE L.P.

On the terms described in the Prospectus/Consent Solicitation Statement
dated , 1998, of which this Supplement (the "Supplement") is a part,
Insured Mortgage Equities, Inc. and America First Capital Source I, L.L.C.
(together, the "Cap Source I General Partners") and Insured Mortgage Equities II
L.P. and America First Capital Source II, L.L.C. (together, the "Cap Source II
General Partners," and together with the Cap Source I General Partners, the
"General Partners") are proposing the consolidation by merger (the
"Transaction") of Capital Source L.P., a Delaware limited partnership ("Cap
Source I" or the "Partnership") and Capital Source II L.P.-A, a Delaware limited
partnership ("Cap Source II," and together with Cap Source I, the
"Partnerships"), with and into America First Real Estate Investment Company,
Inc., a newly organized Delaware corporation (the "Company"). The Partnerships
are Delaware limited partnerships formed from 1985 through 1986 to invest
principally in federally-insured mortgages on multifamily housing properties and
to acquire, hold, sell, dispose of and otherwise deal with limited partnership
interests ("Partnership Equity Interests") in the limited partnerships (the
"Operating Partnerships") which construct, own and operate these properties.
Upon completion of the Transaction, the Company's primary business objective
will be to make growth-oriented real estate investments through the direct
acquisition, rehabilitation, development, financing and management of real
property, including the acquisition of securities of entities engaged in similar
real estate businesses.

This Supplement has been prepared for the Cap Source I Investors to discuss
the effects and fairness of the Transaction with respect to their beneficial
assignment certificates of the Partnership (the "Units"), and to provide
information on the Partnership. The effects of the Transaction may be different
for Cap Source I Investors than for Cap Source II Investors. A supplement has
also been prepared for Cap Source II Investors. The Supplements are a part of
the Prospectus/Consent Solicitation Statement. Capitalized terms not defined
herein shall have the meaning set forth in the accompanying Prospectus/Consent
Solicitation Statement.

SIMILARITIES BETWEEN CAP SOURCE I AND CAP SOURCE II

The investment objectives and the assets held by the Partnerships are
substantially similar in nature and character. Based on the Exchange Values
determined as of December 31, 1997, Cap Source I's assets
<PAGE>
consisted of 70.8% in GNMA Certificates and FHA Loans, 19.0% in cash, cash
equivalents and net other assets and liabilities, and the remaining 10.2% in the
Partnership Equity Interests in the Cap Source I Operating Partnerships. As of
December 31, 1997, Cap Source II's assets consisted of 85.8% in GNMA
Certificates and FHA Loans, 1.8% in cash, cash equivalents and net other assets
and liabilities, and the remaining 12.4% in the Partnership Equity Interests in
the Cap Source II Operating Partnerships.

DIFFERENCES BETWEEN CAP SOURCE I AND CAP SOURCE II

Cap Source I Supp-2
<PAGE>
The General Partners of both Partnerships also receive 1% of the net
proceeds from any sale of Partnership assets. The General Partners of both
Partnerships will receive a termination fee equal to 3% of all sales proceeds
less actual costs incurred in connection with all sales transactions, payable
only after the Investors have received a return of their capital contributions
and a 13% annual return on a cumulative basis with respect to Cap Source I or an
11.5% annual return on a cumulative basis with respect to Cap Source II. The
General Partners of both Partnerships will also receive a fee equal to 9.1% of
all cash available for distribution and sales proceeds (after deducting from
cash available or sales proceeds any termination fee paid therefrom) after
Investors have received a return of their capital contributions and a 13% annual
return on a cumulative basis with respect to Cap Source I or an 11.5% annual
return on a cumulative basis with respect to Cap Source II. However, the
difference in this latter fee is not a material difference since neither
Partnership has achieved such a target level since their inception, and the
General Partners do not anticipate that such a level will be reached in the
foreseeable future.

RISK FACTORS

The Transaction does not involve risks which are more significant to Cap
Source I Investors than to Cap Source II Investors. However, the Transaction
involves certain risks and other adverse factors which are applicable to both
Partnerships, as discussed in detail in the accompanying Prospectus/Consent
Solicitation Statement, of which this Supplement is a part. See "RISK FACTORS"
in the Prospectus/ Consent Solicitation Statement. Because all of the risks and
adverse factors described in the Prospectus/ Consent Solicitation Statement
apply to the effect of the Transaction on both Partnerships, Cap Source I
Investors should carefully review the section entitled "RISK FACTORS" therein.
Except as otherwise stated herein, there are no material differences in the
manner in which Cap Source I or Cap Source II will be effected by any of the
risks or adverse factors discussed in such "RISK FACTORS" section.

By participating in the Transaction, Investors in Cap Source I will assume
risks associated with the assets of Cap Source II. Although the majority of the
assets in Cap Source II are substantially similar to those of Cap Source I, the
multifamily apartment complexes in which Cap Source II owns limited partnership
interests are of different construction, geographic area and specific location
than the complexes in which Cap Source I owns interests. Because the market for
real estate may vary from one region of the country to another, the change in
geographic diversity may expose Cap Source I Investors to different and greater
risks than those to which they are presently exposed. For geographic information
regarding the Partnerships' properties, see "THE PARTNERSHIPS" in the
Prospectus/Consent Solicitation Statement. Moreover, because the properties
owned by the Partnerships are not of uniform quality, combining assets and
liabilities of the Partnerships in the Transaction may diminish the overall
asset quality underlying the investments of certain of the Investors by
comparison with their existing Partnership investment.

For a more detailed discussion of the risks associated with the Transaction,
see "RISK FACTORS" in the Prospectus/Consent Solicitation Statement.

EXCHANGE VALUE TABLES

The first table set forth below indicates the Exchange Value as it relates
to the allocation of Shares to Cap Source I in connection with the Transaction.
The second indicates the Exchange Value as it relates to the allocation of
Shares to the Cap Source I General Partners in connection with the Transaction.
The third table sets forth the Exchange Value assigned to Cap Source I, which is
composed of (a) the principal amount of GNMA Certificates and the FHA Loans as
set forth in the Partnership's audited financial statements for the period ended
December 31, 1997, (b) the value of the Partnership's limited partnership

Cap Source I Supp-3
<PAGE>
interests in the Cap Source I Operating Partnerships based in part on the
Appraisals, and (c) the market value of the Partnership's remaining net assets
as set forth in the Partnership's audited financial statements for the period
ended December 31, 1997. The Cap Source I General Partners will receive Shares
in an amount equal to 1% of the Exchange Value assigned to Cap Source I upon
consummation of the Transaction. See "--Determination of Exchange Values"
herein, and the tables entitled "Calculation Of Exchange Values" and "Net Other
Assets and Liabilities Table for Partnerships" in the Prospectus/Consent
Solicitation Statement. The fourth table sets forth the specific components of
net other assets and liabilities of Cap Source I.

EXCHANGE VALUE(1)
FOR ALLOCATION OF SHARES TO CAP SOURCE I
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
PER $1,000 ORIGINAL
INVESTMENT
------------------------
TOTAL EXCHANGE TOTAL NUMBER PERCENT OF TOTAL SHARES EXCHANGE NUMBER OF
VALUE(2) OF SHARES(3) (EXCHANGE RATIO) VALUE SHARES(4)
- -------------- ------------- ------------------------- ----------- -----------
<S> <C> <C> <C> <C>
$ 50,991,970 2,039,679 60.8% $ 748 29.92
</TABLE>

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

(1) This Exchange Value Table assumes that no Notes will be issued.

(2) See the table entitled "Calculation Of Exchange Values" in the
Prospectus/Consent Solicitation Statement for a determination of the
Exchange Values for each of the Partnerships.

(3) The total number of Shares to be allocated to Cap Source I was calculated by
dividing the Total Exchange Value assigned to the Partnership by $25.

EXCHANGE VALUE(1)
FOR ALLOCATION OF SHARES TO CAP SOURCE I GENERAL PARTNERS
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
TOTAL EXCHANGE TOTAL NUMBER PERCENT OF TOTAL SHARES
VALUE(2) OF SHARES(3) (EXCHANGE RATIO)
- -------------- ------------- ---------------------------
<S> <C> <C>
$ 509,920 20,397 .6%
</TABLE>

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

(1) This Exchange Value Table assumes that no Notes will be issued.

(2) See the table entitled "Calculation Of Exchange Values" in the
Prospectus/Consent Solicitation Statement for a determination of the
Exchange Values for each of the Partnerships.

(3) The total number of Shares to be allocated to the Cap Source I General
Partners was calculated by dividing the Total Exchange Value assigned to the
General Partners by $25.

Cap Source I Supp-4
<PAGE>
CALCULATION OF EXCHANGE VALUE
OF CAP SOURCE I
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
LIMITED
GNMA CERTIFICATES AND PARTNERSHIP NET OTHER ASSETS EXCHANGE
MORTGAGE LOANS(1) INTERESTS(2) AND LIABILITIES VALUE
- --------------------- ------------------ ---------------- -------------
<S> <C> <C> <C>
$ 35,010,658 $ 5,225,467 $ 10,755,845 $ 50,991,970
</TABLE>

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

(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balance as of December 31, 1997.

NET OTHER ASSETS AND LIABILITIES TABLE
FOR CAP SOURCE I
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
MISCELLANEOUS NET OTHER ASSETS
GNMA AND DISTRIBUTIONS
CASH(1) CERTIFICATES(2) LIABILITIES(3) PAYABLE TOTAL
- ------------- ------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C>
$ 10,410,564 $ 1,088,526 $ 117,342 $ (860,587) $ 10,755,845
</TABLE>

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

(1) Cash and cash equivalents.

(2) These assets are classified for reporting purposes as "available for sale"
and, as such, are reported at fair value.

(3) Generally, interest receivable less accounts payable.

DETERMINATION OF EXCHANGE VALUES

The Exchange Value assigned to Cap Source I for purposes of the Transaction
is $50,991,970. The aggregate Exchange Value assigned to both Partnerships is
$83,872,160. Based on the assigned Exchange Values, Cap Source I will receive
2,039,679 Shares of Common Stock, or approximately 60.8% of the total 3,354,887
Shares of Common Stock issued in the Transaction, assuming that no Notes are
issued. See "EXCHANGE VALUES" in the Prospectus/Consent Solicitation Statement.
The Exchange Value of Cap Source I does not necessarily reflect the price at
which the assets of the Partnership may be sold, or the price at which Shares or
Notes may be sold after the Transaction.

Cap Source I Supp-5
<PAGE>
CERTAIN TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND SHARES

Investors are treated as limited partners of the Partnerships for federal
income tax purposes. The Partnerships are not subject to federal income taxation
and, instead, each Investor is required to take into account his or her share of
income, deductions or loss of the Partnership in which he or she invested,
regardless of whether any cash is distributed. The character of income to each
Investor is dependent upon its character to the Partnership. Upon consummation
of the Transaction, the Investors will, in essence, receive Shares in exchange
for their Units and thereby become shareholders of the Company which is
characterized as a corporation for federal income tax purposes. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus/Consent Solicitation
Statement.

In contrast to the tax treatment of the Partnerships, the Company is subject
to corporate income taxation. In addition, Shareholders will be taxed based on
the amount of distributions received from the Company. Each Shareholder will
receive a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to him or her during the preceding year. The extent to which
such distributions are taxable depends upon the amount of the Company's earnings
and profits. The character of distributions to the Shareholders is also not
dependant on its character to the Company and is generally characterized as
ordinary dividend income to the Shareholders. In addition, such income is
classified as portfolio income under the passive loss rules. Furthermore,
deductions and losses are not passed through to the Shareholders. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus/Consent Solicitation
Statement.

FAIRNESS

There are no material differences with respect to the fairness of the
Transaction to the Partnerships, individually, or in the aggregate. Therefore,
the discussion of the fairness of the Transaction is incorporated by reference
from the sections entitled "FAIRNESS" and "FAIRNESS OPINION AND
APPRAISALS--Fairness Opinion" in the Prospectus/Consent Solicitation Statement.
For a more detailed discussion of the fairness of the Transaction, see the
sections entitled "FAIRNESS" and "FAIRNESS OPINION AND APPRAISALS--Fairness
Opinion" in the Prospectus/Consent Solicitation Statement.

COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS

The following information has been prepared to compare the amounts of
compensation paid, and cash distributions made, by Cap Source I to its General
Partners and their affiliates to the amounts that would have been paid if the
compensation and distribution structure, which will be in effect after the
Transaction, had been in effect during the years presented.

Under Cap Source I's Partnership Agreement, the General Partners are
entitled to receive fees in connection with managing the affairs of the
Partnership. The Partnership Agreement also provides that the General Partners
are to be reimbursed for expenses for services performed for the Partnership,
such as legal, accounting, transfer agent, data processing and duplicating
services. In addition, the General Partners of Cap Source I have a 1% interest
in the Partnership.

During the years ended December 31, 1995, 1996 and 1997, amounts actually
paid by Cap Source I to its General Partners are shown below under "Historical"
and Cap Source I's share of the estimated

Cap Source I Supp-6
<PAGE>
amounts of compensation that would have been paid to the Advisor had the
Transaction been in effect for the years presented are shown under "Pro Forma":

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
HISTORICAL:
1% share of Cash Distributions(1)............................................ $ 34,424 $ 34,424 $ 34,424
Asset Management and Partnership............................................. 0 0 0
Administrative Fee(2)........................................................
Reimbursements(3)............................................................ 138,857 193,822 240,759
---------- ---------- ----------
Total historical......................................................... $ 173,281 $ 228,246 $ 275,183
---------- ---------- ----------
---------- ---------- ----------

PRO FORMA:
Acquisition Fee(4)........................................................... $ 0 $ 0 $ 0
Asset Management Fee(5)...................................................... 262,528 261,421 263,273
Incentive Fee(6)............................................................. 0 0 0
---------- ---------- ----------
Total Pro Forma.......................................................... $ 262,528 $ 261,421 $ 263,273
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

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

(1) The Partnership Agreement provides that 1% of cash available for
distribution will be allocated to the General Partners.

(2) The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum,
payable only during such years that an 8% return has been paid to investors
on a noncumulative basis. Any unpaid amounts will accrue and be payable only
after a 13% annual return to investors has been paid on a cumulative basis
and the investors have received the return of their capital contributions.

(3) The General Partners are paid or reimbursed for certain costs and expenses
incurred in connection with the operation of the Partnership.

(4) No acquisition fees would have been paid because no new assets were
purchased or permitted to be purchased in the years 1995 to 1997.

(5) Calculated based on the Advisor fees described in more detail under "THE
COMPANY--The Advisor" in the Prospectus/Consent Solicitation Statement.

(6) No incentive fee would have been paid because no new assets were owned which
would have qualified for such a fee if sold.

The pro forma model was applied to the years ended December 31, 1995, 1996
and 1997 as shown in the "Pro Forma" table above. Cap Source I's allocation of
the total pro forma cash compensation to the General Partners is set forth
below, using December 31, 1997 amounts for illustrative purposes. The

Cap Source I Supp-7
<PAGE>
allocation is based on the ratio that Cap Source I's assigned Exchange Value
bears to the aggregate Exchange Value for both Partnerships:

<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Cap Source I's assigned Exchange Value............................... $ 50,991,970
Aggregate Exchange Value of both Partnerships........................ $ 83,872,160
Allocation Ratio..................................................... 60.8%
Aggregate pro forma compensation..................................... $ 433,014
Cap Source I's allocation of pro forma compensation.................. $ 263,273
</TABLE>

CASH DISTRIBUTIONS TO INVESTORS

The following table sets forth the distributions paid to Investors in Cap
Source I (per $1,000 original investment) for the periods indicated below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Distributions from Income................................. $ 36.490 $ 50.50 $ 41.545 $ 38.835 $ 35.245
Distributions from Return of Capital...................... 97.635 -- 8.955 11.665 15.255
---------- --------- --------- --------- ---------
Total................................................. $ 134.125 $ 50.500 $ 50.500 $ 50.500 $ 50.500
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>

Cash from operations, defined in the Partnership Agreement as disbursable
cash, is distributed to the Investors. Any variation in the amount of
distributions from operations is due to fluctuations in net cash from operating
activities. Reference is made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Financial Statement
Supplement to the Prospectus/Consent Solicitation Statement for a discussion and
analysis of such fluctuations. Cash proceeds from the sale of property may be
distributed separately to the Investors as a return of capital. The Adjusted
Capital Contribution of an Investor is generally the Investor's initial capital
contribution reduced by the cash distributions to the Investor of proceeds from
the sale of Partnership properties. The Adjusted Capital Contribution per Unit
for Investors in Cap Source I, as defined in its Partnership Agreement, was
$18.35 as of December 31, 1997, based on an initial capital contribution of $20
per unit.

Cap Source I Supp-8
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS/CONSENT
SOLICITATION STATEMENT

ITEM 20. INDEMNIFICATION

The General Corporation Law of the State of Delaware permits a Delaware
corporation to indemnify its officers or directors under certain circumstances.
Such statute provides that, in actions in which the corporation is not a party,
a corporation may indemnify its officers or directors for losses incurred by
them if the officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. In actions in which the corporation is a party, the statute
provides the same standard but prohibits indemnification if the director or
officer is adjudged liable to the corporation.

The Company has implemented such indemnification provisions in its
Certificate of Incorporation which provides that officers and directors shall be
entitled to be indemnified by the corporation to the fullest extent permitted by
law against expenses (including attorney's fees), judgments, fines and amounts
paid in settlement incurred in connection with any action, suit or proceeding by
reason of the fact that he is or was an officer or director of the Company.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following is a complete list of exhibits filed as part of the
Registration Statement. For electronic filing purposes only, this registration
statement contains Exhibit 27.1, the Financial Data Schedule. Exhibit numbers
correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
2.01 Form of Agreement and Plan of Merger to be entered into by and among
Capital Source L.P. Capital Source II L.P.-A and America First Real
Estate Investment Company, Inc. (the "Company"), is incorporated herein
by reference from Appendix A to the Prospectus/Consent Solicitation
Statement.

3.01 Amended and Restated Certificate of Incorporation of the Company.(1)

3.02 Bylaws of the Company.(2)

3.03 Form of Second Amended and Restated Certificate of Incorporation of the
Company.(1)

3.04 Limited Partnership Agreement and Amended Certificate of Limited
Partnership of Capital Source L.P.(1)

3.05 Limited Partnership Agreement and Amended Certificate of Limited
Partnership of Capital Source II L.P.-A.(1)

4.01 The Amended and Restated Certificate of Incorporation and Bylaws of the
Company included as Exhibits 3.01 and 3.02 are incorporated herein by
reference.

4.02 Form of Indenture between the Company and the trustee relating to the
Notes being registered pursuant to this Registration Statement,
including the form of Variable Rate Senior Notes due , 2006 and
the form of Promissory Notes.(1)

4.03 Form of Common Stock Certificate of the Company.(1)

4.04 Form of Variable Rate Senior Notes due , 2006 and Promissory
Notes of the Company are included in Exhibit 4.02.

5.01 Opinion of Kutak Rock as to the legality of the Shares and the validity of
the Notes.(2)
</TABLE>

II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
8.01 Opinion of Kutak Rock as to certain tax matters.(2)

10.01 Advisory Agreement between the Company and America First Real Estate
Advisors LLC.(1)

23.01 Consent of Independent Accountants.(1)

23.02 Consent of Kutak Rock (included in Exhibits 5.01 and 8.01).

23.03 Consent of Sutro & Co., Inc., to being named in the Registration Statement
and to the inclusion in the Prospectus/Consent Solicitation Statement of
its Fairness Opinion.(1)

23.04 Consent of Valuation Research Corporation to being named in the
Registration Statement.(1)

24.01 Power of Attorney (included on Page II-5 of the Registration Statement).

25.01 Statement of Eligibility of Trustee.(2)

27.01 Financial Data Schedule of the Company.(1)

99.01 The Fairness Opinion of Sutro & Co., Inc., is incorporated herein by
reference from Appendix B to the Prospectus/Consent Solicitation
Statement.

99.02 Market Value Report of Valuation Research Corporation.(1)

99.03 Form of Consent Card for Capital Source I and Capital Source II.(1)
</TABLE>

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

(1) Filed herewith.

(2) To be filed by amendment.

(b) The following financial statement schedule information is furnished as
part of this Registration Statement in a separately bound volume:

<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
----------------- --------------------------------------------
<S> <C> <C>
Capital Source L.P............... III Real Estate and Accumulated Depreciation for
the Years Ended December 31, 1997 and 1996
</TABLE>

<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
----------------- --------------------------------------------
<S> <C> <C>
Capital Source II L.P.-A......... III Real Estate and Accumulated Depreciation for
the Years Ended December 31, 1997 and 1996
</TABLE>

(c) The Fairness Opinion of Sutro & Co., Incorporated is included as
Appendix B to the Prospectus/ Consent Solicitation Statement. The Market Value
Report of Valuation Research Corporation is included as Exhibit 99.02 to this
Registration Statement.

ITEM 22. UNDERTAKINGS

A. The Company hereby undertakes the following:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:

(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

II-2
<PAGE>
(b) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and

(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

B. (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.

(2) The undersigned Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is
used in connection with an offering of securities subject to Rule 415, will be
filed as part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
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.

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

D. The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Consent
Solicitation Statement pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.

E. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.

II-3
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Omaha,
State of Nebraska, on May 6, 1998.

<TABLE>
<S> <C> <C>
AMERICA FIRST REAL ESTATE INVESTMENT
COMPANY, INC.

By: /s/ PAUL L. ABBOTT
-----------------------------------------
Paul L. Abbott,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

II-4
<PAGE>
POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned, whose signatures
appear below, hereby constitute and appoint Paul L. Abbott their true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for them and in their name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as full
and to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

/s/ PAUL L. ABBOTT
- ------------------------------ Director, President and May 6, 1998
Paul L. Abbott Chief Executive Officer

/s/ MICHAEL B. YANNEY
- ------------------------------ Director and Chairman of May 6, 1998
Michael B. Yanney the Board

/s/ GEORGE H. KRAUSS
- ------------------------------ Director and Secretary May 6, 1998
George H. Krauss

/s/ GARY THOMPSON Chief Financial Officer,
- ------------------------------ Treasurer and Principal May 6, 1998
Gary Thompson Accounting Officer

II-5

<PAGE>

EXHIBIT 2.01

Form of Agreement and Plan of Merger to be entered into by and among Capital
Source L.P., Capital Source II L.P.-A and America First Real Estate
Investment Company, Inc. (the "Company"), incorporated herein by reference
from Appendix A to the Prospectus/Consent Solicitation Statement.

<PAGE>

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AMERICA FIRST REAL ESTATE OPPORTUNITIES COMPANY, INC.

America First Real Estate Opportunities Company, Inc., a Delaware
corporation (the "Corporation"), does hereby certify that (i) the name of the
corporation is America First Real Estate Opportunities Company, Inc., (ii) the
Certificate of Incorporation of the Corporation was originally filed with the
Secretary of State of the State of Delaware on February 5, 1998, (iii) the
original name of the Corporation was America First Real Estate Opportunities
Company, Inc.; (iv) the Corporation has not received any payment for any of its
common stock; (v) the corporation has not appointed any officers; and (vi)
pursuant to and in accordance with the provisions of Sections 241 and 245 of the
General Corporation Law of the State of Delaware, the text of the Certificate of
Incorporation is hereby restated, integrated and further amended to read in its
entirety as follows:

ARTICLE I

The name of the Corporation is America First Real Estate Investment
Company, Inc.

ARTICLE II

The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the County of New Castle,
City of Wilmington, Delaware 19801. The name of the Corporation's registered
agent at such address is The Corporation Trust Company.

ARTICLE III

The nature of the business of the Corporation and the purposes for which it
is organized are to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.

ARTICLE IV

The total number of shares of all classes of capital stock that the
Corporation shall have authority to issue is 100,000,000 shares, consisting of
50,000,000 shares of Common Stock, having a par value of $.001 per share (the
"Common Stock") and 50,000,000 shares of preferred stock having a par value of
$.001 per share (the "Preferred Stock"). Authority is hereby expressly granted
to the Board of Directors of the Corporation to authorize the issuance of one or
more series of Preferred Stock, and with respect to each such series to fix by
resolution or resolutions providing for the issuance of such series the number
of shares of such series, the voting powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, including without
limitation the

<PAGE>

dividend rights, dividend rates, terms of redemption (including sinking fund
provisions), redemption price or prices, conversion rights, transfer and
ownership restrictions and liquidation preferences, that are permitted by the
General Corporation Law of the State of Delaware in respect of any class or
classes of stock or any series of any class of stock of the Corporation, without
further action or vote by the Corporation's stockholders.

ARTICLE V

The business and affairs of the Corporation shall be managed by or under
the direction of a Board of Directors. The number of directors of the
Corporation shall be fixed from time to time in the manner provided in the
bylaws of the Corporation and may be increased or decreased from time to time in
the manner provided in the bylaws of the Corporation. Election of directors
need not be by written ballot except and to the extent provided in the bylaws of
the Corporation.

ARTICLE VI

In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, alter, amend
or repeal the bylaws of the Corporation, but such authorization shall not divest
the stockholders of the power, nor limit their power, to adopt, amend or repeal
bylaws.

ARTICLE VII

No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption or limitation thereof is
not permitted under the General Corporation Law of the State of Delaware as the
same exists or may hereafter be amended. Any repeal or modification of this
Article VII shall not adversely affect any right or protection of a director of
the Corporation under this Article VII, as in effect immediately prior to such
repeal or modification, with respect to any liability that would have accrued,
but for this Article VII, prior to such repeal or modification.

ARTICLE VIII

2
<PAGE>

liability asserted against and incurred by such person in any such capacity or
arising out of such person's position, whether or not the Corporation would have
the power to indemnify against such liability under the provisions of this
Article VIII. The indemnification provided by this Article VIII shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under this certificate of incorporation, any bylaw, agreement, vote of
stockholders or disinterested directors, statute, or otherwise, and shall inure
to the benefit of their heirs, executors, and administrators. The provisions of
this Article VIII shall not be deemed to preclude the Corporation from
indemnifying other persons from similar or other expenses and liabilities as the
Board of Directors or the stockholders may determine in a specific instance or
by resolution of general application.

ARTICLE IX

The Corporation shall have authority, to the fullest extent now or
hereafter permitted by the General Corporation Law of the State of Delaware, or
by any other applicable law, to enter into any contract or transaction with one
or more of its directors or officers, or with any corporation, partnership,
joint venture, trust, association, or other entity in which one or more of its
directors or officers are directors or officers, or have a financial interest,
notwithstanding such relationships and notwithstanding the fact that the
director or officer is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes the contract or transaction.

Executed this 21st day of April, 1998.

/s/ Paul L. Abbott
Paul L. Abbott, Sole Director

<PAGE>

FORM OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

America First Real Estate Investment Company, Inc., a Delaware corporation
(the "Corporation"), does hereby certify that (i) the name of the corporation is
America First Real Estate Investment Company, Inc., (ii) the Certificate of
Incorporation of the Corporation was originally filed with the Secretary of
State of the State of Delaware on February 5, 1998, (iii) the original name of
the Corporation was America First Real Estate Opportunities Company, Inc.; (iv)
the Certificate of Incorporation was first amended and restated on April 22,
1998; and (v) pursuant to and in accordance with the provisions of Sections 242
and 245 of the General Corporation Law of the State of Delaware, the text of the
Certificate of Incorporation is hereby restated, integrated and further amended
to read in its entirety as follows:

ARTICLE I

The name of the Corporation is America First Real Estate Investment
Company, Inc.

ARTICLE II

ARTICLE III

ARTICLE IV

<PAGE>

redemption price or prices, conversion rights, transfer and ownership
restrictions and liquidation preferences, that are permitted by the General
Corporation Law of the State of Delaware in respect of any class or classes of
stock or any series of any class of stock of the Corporation, without further
action or vote by the Corporation's stockholders.

ARTICLE V

Section 5.01. GENERAL. The business and affairs of the Corporation shall
be managed by or under the direction of a Board of Directors. The number of
directors of the Corporation shall be fixed from time to time in the manner
provided in the bylaws of the Corporation and may be increased or decreased from
time to time in the manner provided in the bylaws of the Corporation.

Section 5.02. ELECTION AND TERMS OF DIRECTORS. The directors, other than
any directors elected by the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, shall be
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible. One class will be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998, another class will be originally elected for a term expiring at
the annual meeting of stockholders to be held in 1999, and another class will be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 2000, with directors in each class to hold office until a successor
is duly elected and qualified. At each succeeding annual meeting of
stockholders, directors elected to succeed those directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director to hold
office until such person's successor shall have been duly elected and qualified.

Section 5.03. VACANCIES. Except as otherwise provided for or fixed
pursuant to the provisions of Article IV hereof relating to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect additional directors under
specified circumstances, newly created directorships resulting from any increase
in the authorized number of directors and any vacancies on the board of
directors resulting from death, resignation, disqualification, removal or other
cause shall only be filled by a majority of the board of directors then in
office.

Section 5.04. ELECTION OF DIRECTORS. The directors of the Corporation
shall not be required to be elected by written ballots except and to the extent
the Bylaws of the Corporation so provide.

Section 5.05. REMOVAL OF DIRECTORS. Subject to any Preferred Holders'
Rights, directors may be removed only for cause upon the affirmative vote of
holders of at least 75% of the entire voting power of all the then-outstanding
shares of stock entitled to vote generally in the election of directors (the
"Voting Stock"), voting together as a single class.

Section 5.06. AMENDMENT OF CERTAIN PROVISIONS OF ARTICLE VIII.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of the

2
<PAGE>

holders of at least 75% of the Voting Stock then outstanding, voting together as
a single class, shall be required to alter, amend or adopt any provision
inconsistent with or repeal this Article V.

ARTICLE VI

STOCKHOLDER ACTION

Any action required or permitted to be taken by the stockholders of the
Corporation must be affected at a duly called annual or special meeting of such
holders and may not be affected by any consent in writing by such holders.
Except as otherwise provided for herein or required by law and subject to the
rights of any class or series of stock having a preference over the Common Stock
as to dividends or upon liquidation, special meetings of stockholders of the
Corporation for any purpose or purposes may be called only by the Chairman of
the Board, the President or the Board of Directors pursuant to a resolution
stating the purpose or purposes thereof approved by a majority of the total
number of directors which the Corporation would have if there were no vacancies
(the "Whole Board"). Any power of stockholders to call a special meeting is
specifically denied. No business other than that stated in the notice shall be
transacted at any special meeting. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 75% of the Voting Stock, voting together as a single class,
shall be required to alter, amend or adopt any provision inconsistent with or
repeal this Article VI.

ARTICLE VII

ARTICLE VIII

No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption or limitation thereof is
not permitted under the General Corporation Law of the State of Delaware as the
same exists or may hereafter be amended. Any repeal or modification of this
Article VIII shall not adversely affect any right or protection of a director of
the Corporation under this Article VIII, as in effect immediately prior to such
repeal or modification, with respect to any liability that would have accrued,
but for this Article VIII, prior to such repeal or modification.

3
<PAGE>

ARTICLE IX

The Corporation shall, to the fullest extent permitted by Delaware law as
in effect from time to time, indemnify any person against all liability and
expense (including attorneys' fees) incurred by reason of the fact that he is or
was a director or officer of the Corporation or, while serving as a director or
officer of the Corporation, he is or was serving at the request of the
Corporation as a director, officer, partner or trustee of, or in any similar
managerial or fiduciary position of, or as an employee or agent of, another
corporation, partnership, joint venture, trust, association, or other entity.
Expenses (including attorneys' fees) incurred in defending an action, suit, or
proceeding may be paid by the Corporation in advance of the final disposition of
such action, suit, or proceeding to the full extent and under the circumstances
permitted by Delaware law. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee, fiduciary,
or agent of the Corporation against any liability asserted against and incurred
by such person in any such capacity or arising out of such person's position,
whether or not the Corporation would have the power to indemnify against such
liability under the provisions of this Article IX. The indemnification provided
by this Article IX shall not be deemed exclusive of any other rights to which
those indemnified may be entitled under this certificate of incorporation, any
bylaw, agreement, vote of stockholders or disinterested directors, statute, or
otherwise, and shall inure to the benefit of their heirs, executors, and
administrators. The provisions of this Article IX shall not be deemed to
preclude the Corporation from indemnifying other persons from similar or other
expenses and liabilities as the Board of Directors or the stockholders may
determine in a specific instance or by resolution of general application.

ARTICLE X

RESTRICTION ON BUSINESS COMBINATIONS

The Corporation will be governed by Del. Code Ann. Tit. 8, Section 203
(1991).

ARTICLE XI

BYLAWS

The Bylaws may be altered or repealed and new Bylaws may be adopted (a) at
any annual or special meeting of stockholders, by the affirmative vote of the
holders of a majority of the Voting Stock, provided, however, that any proposed
alteration or repeal of, or the adoption of any Bylaw inconsistent with,
Sections __________________ of the Bylaws by the stockholders shall require the
affirmative vote of the holders of at least 75% of the Voting Stock, voting
together as a single class; and provided, further, however, that in the case of
any such stockholder action at a special meeting of stockholders, notice of the
proposed alteration, repeal or adoption of the new Bylaw or Bylaws must be
contained in the notice of such special meeting, or (b) by the affirmative vote
of a majority of the board of directors.

Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of at least 75% of the Voting
Stock, voting together as a

4
<PAGE>

single class, shall be required to alter, amend, adopt any provision
inconsistent with or repeal this Article XI.

ARTICLE XII

VOTING RIGHTS OF CERTAIN CONTROL SHARES

Section 12.01. DEFINITIONS. In this Article XIV, the following words have
the meanings indicated:

"ACQUIRING PERSON" means a person who makes or proposes to make a Control
Share Acquisition.

"ASSOCIATE," when used to indicate a relationship with any Person, means:

(a) any corporation, entity or organization (other than the
Corporation or a subsidiary (other than the Corporation or a subsidiary of
the Corporation) of which such person is an officer, director or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities;

(b) any trust or other estate in which such Person has a beneficial
interest of 10% or more or as to which such Person serves as trustee or in
a similar fiduciary capacity;

(c) any relative or spouse of such Person, or any relative of such
spouse, who has the same home as such Person or who is a director, trustee
or officer of any corporation listed in Section 12.01(a) above or any of
its affiliates; or

(d) a Person that:

(i) directly or indirectly controls, or is controlled by, or is
under common control with, the Person specified; or

(ii) is acting or intends to act jointly or in concert with the
Person specified.

"CONTROL SHARES"

(a) means shares of stock of the Corporation that, except for this
Article, would, if aggregated with all other shares of stock of the
Corporation (including shares of stock the acquisition of which is excluded
from the definition of "Control Share Acquisition" in Section 12.01) owned
by a Person or in respect of which that Person is entitled to exercise or
direct the exercise of voting power, except solely by virtue of a revocable
proxy, entitle that person, directly or indirectly, to exercise or direct
the exercise of the voting power of shares of stock of the Corporation in
the election of directors of [15%] or more of all voting power;

5
<PAGE>

(b) includes shares of stock of the Corporation only to the extent
that the Acquiring Person, following the acquisition of the shares, is
entitled, directly or indirectly, to exercise or direct the exercise of
voting power within any level of voting power set forth in this section for
which approval has not been obtained previously under Section 12.02; and

"CONTROL SHARE ACQUISITION"

(a) means the acquisition, directly or indirectly, by any Person, of
ownership of, or the power to direct the exercise of voting power with
respect to, issued and outstanding Control Shares; but

(b) does not include the acquisition of shares of stock:

(i) under the satisfaction of a pledge or other security
interest charged in good faith and not for the purpose of
circumventing this Article; or

(ii) under a merger, consolidation or share exchange if the
Corporation is a party to the merger, consolidation or share exchange.

(c) Unless the acquisition entitles any Person, directly or
indirectly, to exercise or direct the exercise of voting power in the
election of directors in excess of the range of voting power previously
authorized or attained under an acquisition that is exempt under paragraph
(b) of this definition, "Control Share Acquisition" does not include the
acquisition of shares of the Corporation in good faith and not for the
purpose of circumventing this Article by or from:

(i) any person whose Voting Rights have previously been
authorized by stockholders in compliance with this Article; or

(ii) any person whose previous acquisition of shares of
beneficial interest of the Corporation would have constituted a
Control Share Acquisition but for paragraph (b) of this definition.

"INTERESTED SHARES" means shares of voting stock of the Corporation in
respect of which any of the following persons is entitled to exercise or direct
the exercise of the voting power of shares of voting stock of the Corporation in
the election of directors:

(a) an Acquiring Person;

(b) an officer of the Corporation; or

6
<PAGE>

"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, joint stock company, trust, unincorporated
organization, government agency, political subdivision or an Associate of any
such Person.

Section 12.02. VOTING RIGHTS.

(a) APPROVAL BY STOCKHOLDERS. Holders of Control Shares
acquired in a Control Share Acquisition have no voting rights or powers
(collectively, "Voting Rights") in respect of such Control Shares except
to the extent approved by the stockholders at a meeting held under
Section 12.04 by the affirmative vote of at least 75% of all the votes
entitled to be cast on the matter, excluding all Interested Shares.

(b) ACQUISITION OF SHARES; VOTING POWER. For the purposes of
Section 12.01(c) of this Article:

(i) Shares of stock acquired within 90 days of shares
acquired under a plan to make a Control Share Acquisition are
considered to have been acquired in the same acquisition; and

(ii) a Person may not be deemed to be entitled to
exercise or direct the exercise of voting power with respect to
shares of stock held for the benefit of others if the Person:

(A) is acting in the ordinary course of business,
in good faith and not for the purpose of circumventing the
provisions of this section; and

(B) is not entitled to exercise or to direct the
exercise of the voting power of the shares unless the
Person first seeks to obtain the instruction of another
Person.

Section 12.03. ACQUIRING PERSON STATEMENT. Any Person who proposes to
make or who has made a Control Share Acquisition may deliver an Acquiring Person
Statement (the "Acquiring Person Statement") to the Corporation at the
Corporation's principal office. The Acquiring Person Statement shall set forth
all of the following:

(a) the identity of the Acquiring Person and each other member
of any group of which the Person is a part for purposes of determining
Control Shares;

(b) a statement that the Acquiring Person Statement is given
under this Article;

(c) the number of shares of the Corporation owned and the
number of shares proposed to be owned (directly or indirectly) by the
Acquiring Person and each other member of any group;

7
<PAGE>

(d) the applicable range of voting power as set forth in
Section 12.01(c) of this Article; and

(e) if the Control Share Acquisition has not occurred:

(i) a description in reasonable detail of the terms of
the proposed Control Share Acquisition; and

(ii) representations of the Acquiring Person, together
with a statement in reasonable detail of the facts on which they
are based, that:

(A) the proposed Control Share Acquisition, if
consummated, will not be contrary to law; and

(B) the Acquiring Person has the financial
capacity, through financing to be provided by the Acquiring
Person and any additional specified sources of financing
required under Section 12.05, to make the proposed Control
Share Acquisition.

Section 12.04. SPECIAL MEETING.

(a) REQUEST BY ACQUIRING PERSON. Except as provided in Section
12.05, if the Acquiring Person requests, at the time of delivery of an
Acquiring Person Statement, and gives a written undertaking (the
"Undertaking") to pay the Corporation's expenses of a special meeting,
except the expenses of opposing approval of the Voting Rights of the
holder in respect of such Control Shares, of the Control Shares of the
holder or holders thereof within 10 days after the day on which the
Corporation receives both the request and the Undertaking, the directors
of the Corporation shall call a special meeting of stockholders of the
Corporation for the purpose of considering the Voting Rights to be
accorded with respect to the shares acquired or to be acquired in the
Control Share Acquisition.

(b) BOND. The Corporation may require the Acquiring Person to
give bond, with sufficient surety, to reasonably assure the Corporation
that the Undertaking will be satisfied.

(c) TIME FOR MEETING. Unless the Acquiring Person agrees in
writing to another date, the special meeting of stockholders shall be
held within 50 days after the day on which the Corporation has received
both the request and the Undertaking.

(d) DELAY AT REQUEST OF ACQUIRING PERSON. If the Acquiring
Person makes a request in writing at the time of delivery of the
Acquiring Person Statement, the special meeting may not be held sooner
than 30 days after the day on which the Corporation receives the
Acquiring Person Statement.

8
<PAGE>

(e) IN ABSENCE OF REQUEST.

(i) If no request is made under Section 12.01, the issue
of the Voting Rights to be accorded to the holder in respect of
such Control Shares acquired in the Control Share Acquisition may,
at the option of the Corporation, be presented for consideration
at any meeting of stockholders.

(ii) If no request is made under Section 12.01 and the
Corporation proposes to present the issue of the Voting Rights to
be accorded to the holder in respect of such Control Shares
acquired in a Control Share Acquisition for consideration at any
meeting of stockholders, the Corporation shall provide the
Acquiring Person with written notice of the proposal not less than
20 days before the date on which notice of the before the date on
which notice of the meeting is given.

Section 12.05. CALLS. A call of a special meeting of stockholders of
the Corporation is not required to be made under Section 12.04(a) unless, at the
time of delivery of an Acquiring Person Statement under Section 12.03, the
Acquiring Person has:

(a) entered into a definitive financing agreement or agreements
with one or more responsible financial institutions or other entities
that have the necessary financial capacity, providing for any amount of
financing of the Control Share Acquisition not to be provided by the
Acquiring Person; and

(b) delivered a copy of such agreements to the Corporation.

Section 12.06. NOTICE OF MEETING.

(a) IN GENERAL. If a special meeting of stockholders is
requested, notice of the special meeting shall be given as promptly as
reasonably practicable by the Corporation to all stockholders of record
as of the record date set for the meeting, whether or not the stockholder
is entitled to vote at the meeting.

(b) CONTENTS. Notice of the special or annual meeting of
stockholders at which the Voting Rights of the holder in respect of such
Control Shares are to be considered shall include or be accompanied by
the following:

(i) a copy of the Acquiring Person Statement delivered
to the Corporation under Section 12.03; and

(ii) a statement by the board of directors of the
Corporation setting forth the position or recommendation of the
board, or stating that the board is taking no position or making
no recommendation, with respect to the issue of voting rights to
be accorded the control shares.

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<PAGE>

Section 12.07. REDEMPTION RIGHTS.

(a) UPON DELIVERY OF ACQUIRING PERSON STATEMENT. If an
Acquiring Person Statement has been delivered on or before the 10th day
after the Control Share Acquisition, the Corporation at its option, shall
have the right, but not the obligation, to redeem for "fair value" (as
defined herein) any or all Control Shares, except Control Shares for
which Voting Rights in respect of the holder thereof have been previously
approved under Section 12.02, at any time during a 60-day period
commencing on the day of a meeting at which Voting Rights are considered
under Section 12.04 and are not approved.

(b) IN ABSENCE OF DELIVERY OF ACQUIRING PERSON STATEMENT. In
addition to the redemption rights authorized under Section 12.01, if an
Acquiring Person Statement has not been delivered on or before the tenth
day after the Control Share Acquisition, the Corporation, at its option,
shall have the right to redeem any or all Control Shares, except Control
Shares for which Voting Rights have been previously approved under
Section 12.02, at any time during a period commencing on the eleventh day
after the Control Share Acquisition and ending 60 days after a statement
has been delivered.

(c) FAIR VALUE. Any redemption of Control Shares under this
section shall be at the fair value of the Control Shares, is determined
by the board of directors in its discretion. For purposes of this
section, "fair value" shall be determined:

(i) as of the date of the last acquisition of Control
Shares by the Acquiring Person in a Control Share Acquisition or,
if a meeting is held under Section 12.04, as of the date of the
meeting;

(ii) without regard to the absence of Voting Rights of
the holders of such Control Shares; and

(iii) "Fair Value" means, in the case of the stock, the
average of the highest and lowest closing sale price during the
30-day period immediately prior to and including the date in
question of a share of stock on the principal United States
securities exchange registered under the Exchange Act (or any
subsequent provisions replacing such Act or the rules and
regulations promulgated thereunder) on which such stock is listed,
or, if such stock is not listed on any such exchange, the average
of the highest and lowest closing bid quotation with respect to a
share of such stock during the 30-day period immediately prior to
and including the date in question on the National Association of
Securities Dealers Automated Quotation System or any comparable
system then in use, or if no such quotations are available, the
fair market value on the date in question of a share of such stock
as determined by the affirmative vote of a majority of the board
of directors in good faith.

10
<PAGE>

Section 12.08. STATUS AS DISSENTING STOCKHOLDERS.

(a) IN GENERAL. Before a Control Share Acquisition has
occurred, if Voting Rights for an Acquiring Person's Control Shares are
approved at a meeting held under Section 12.04 and the Acquiring Person
is entitled to exercise or direct the exercise of a majority or more of
all voting power in respect of such Control Shares, then the Certificate
of Incorporation of the Corporation shall be amended to so state and all
stockholders of the Corporation (other than the acquiring person) have
the rights of dissenting stockholders under the DGCL.

(b) CORPORATION DEEMED SUCCESSOR. For purposes of applying the
provisions of the DGCL to stockholders under this Section 12.08, the
Corporation shall be deemed to be a successor in a merger and the date of
the most recent approval of Voting Rights referred to in Section 12.01
shall be deemed to be the date of filing of a certificate of merger or
corresponding document for record as therein provided.

(c) STATUS TO BE CONTAINED IN NOTICE. The notice required by
Section 12.06 shall also state that stockholders (other than the
Acquiring Person) are entitled to the rights of dissenting shareholders
under the DGCL and shall include a copy of the applicable provisions
thereof.

(d) APPLICATION OF DGCL. For purposes of applying the
provisions of Section 262 of the DGCL to this Section:

(i) "Fair value" may not be less than the highest price
per share paid by the Acquiring Person in the Control Share
Acquisition;

(ii) Section 262(b)(1) and the second, third, fourth and
fifth sentences of Section 262 (d)(1) of the DGCL do not apply;
and

(iii) There shall be no requirement that the dissenting
stockholder shall not have voted in favor of the action.

ARTICLE XIII

AMENDMENT OF CERTIFICATE OF INCORPORATION

The Corporation reserves the right at any time from time to time to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, and any other provisions authorized by the law of the State of
Delaware at the time in force may be added or inserted, in the manner now or
hereafter prescribed by law; and, except as set forth in this Article XIII, all
rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the rights reserved in this Article. Notwithstanding
anything contained in this Certificate of Incorporation to the contrary, the
affirmative vote of the holders of at least 75% of the Voting Stock, voting
together as a single

11
<PAGE>

class, shall be required to alter, amend or adopt any provision inconsistent
with or repeal Article V, VI, XI, XII or this sentence.

ARTICLE XIV

The Corporation shall have authority, to the fullest extent now or
hereafter permitted by the Delaware General Corporation Law of the State of
Delaware, or by any other applicable law, to enter into any contract or
transaction with one or more of its directors or officers, or with any
corporation, partnership, joint venture, trust, association, or other entity in
which one or more of its directors or officers are directors or officers, or
have a financial interest, notwithstanding such relationships and
notwithstanding the fact that the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction.

12
<PAGE>

IN WITNESS WHEREOF, the undersigned has executed and acknowledged this
Second Amended and Restated Certificate of Incorporation as of this ____ day of
_____, 1998.

AMERICA FIRST REAL ESTATE INVESTMENT
COMPANY, INC.

By:
----------------------------------
Paul L. Abbott, President

ATTEST:

- ----------------------------------------
_____________________________, Secretary

<PAGE>

CAPITAL SOURCE L.P., A LIMITED PARTNERSHIP

LIMITED PARTNERSHIP AGREEMENT
AND AMENDED CERTIFICATE OF LIMITED PARTNERSHIP

THIS AGREEMENT is made as of March 24, 1986 by and among the undersigned
parties.

RECITALS

WHEREAS, as of August 21, 1985, Hutton Insured Mortgage Equities, Inc., a
Delaware corporation (the "Hutton General Partner"), a wholly owned subsidiary
of The E.F. Hutton Group, Inc., a Delaware corporation, and TIG Insured Mortgage
Equities Inc. (the "TIG General Partner"), a wholly owned subsidiary of
The Investment Group Capital Corp., a Delaware corporation, as General Partners,
and H/T Corp., a Delaware corporation, as Initial Limited Partner, executed a
Certificate of Limited Partnership, as amended as of October 31, 1985 (the
"Certificate") forming a limited partnership under the Delaware Revised Uniform
Limited Partnership Act known as Capital Source L.P., which Certificate was
filed in the office of the Secretary of State of the State of Delaware on
August 22, 1985 and amended on November 1, 1985; and

WHEREAS, the parties hereto desire to amend the Certificate to set forth in
full terms and conditions of their agreements and understandings in this Limited
Partnership Agreement and Amended Certificate of Limited Partnership.

NOW, THEREFORE, in consideration of the mutual promises made herein, the
parties, intending to be legally bound, agree to continue Capital Source L.P. as
follows:

ARTICLE I

CONTINUATION, NAME, PLACE OF BUSINESS, PURPOSE AND TERM

Section 1.01. CONTINUATION OF PARTNERSHIP. The undersigned hereby
continue the Partnership under the Delaware Revised Uniform Limited Partnership
Act on the terms and conditions set forth in this Agreement.

Section 1.02. NAME, PRINCIPAL OFFICE AND NAME AND ADDRESS OF REGISTERED
AGENT. The name of the Partnership is Capital Source L.P. The address of the
registered office of the Partnership in the State of Delaware shall be
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The
name of the Partnership's registered agent for service of process at that
address is The Corporation Trust Company. The address of the principal place of
business of the Partnership, unless hereafter changed by the General Partners,
shall be 1150 Seventeenth Street, N.W., Suite 500, Washington, D.C. 20036.
Notification of any

<PAGE>

change in the Partnership's principal office and place of business shall be
given to the Limited Partners and Unitholders.

Section 1.03. PURPOSE. The purpose and character of the business of the
Partnership is to originate, acquire, hold, sell, dispose of and otherwise deal
with Insured Mortgages on multifamily rental housing complexes and to acquire,
hold, sell, dispose of and otherwise deal with limited partnership interests in
Operating Partnerships which construct and operate multifamily rental housing
complexes in order to (a) achieve long-term capital appreciation through
increases in the value of the Partnership's equity investments in the Operating
Partnerships; (b) provide quarterly cash distributions to Investors; (c) provide
Investors with federal income tax deductions that may offset, in part, taxable
cash distributions subsequent to two years after the Initial Closing;
(d) provide the potential for increases in cash distributions from income from
Operating Partnerships and sale of the Complexes; and (e) preserve and protect
the Partnership's capital.

Section 1.04. TERM. The Partnership began on August 22, 1985 and shall
continue in full force and effect until December 31, 2030 or until sooner
dissolved pursuant to the provisions of this Agreement, and upon the filing of a
Certificate of Cancellation with the Secretary of State of the State of Delaware
in accordance with Article VIII.

ARTICLE II

DEFINED TERMS

The defined terms used in this Agreement shall, unless the context
otherwise requires, have the meanings specified in this Article II. The
singular shall include the plural and the masculine gender shall include the
feminine and neuter, and vice versa, as the context requires.

"ACCOUNTANTS" means Arthur Andersen & Co. or such other nationally
recognized firm of independent public accountants as shall be engaged from time
to time by the General Partners on behalf of the Partnership.

"ADJUSTED CAPITAL CONTRIBUTION" means, at any time, the Limited Partners'
Capital Contribution (but not including the Initial Limited Partner's Capital
Contribution attributable to Assigned Limited Partnership Interests which are
held by the Initial Limited Partner on behalf of Unitholders) reduced by all
distributions to Limited Partners of Sale Proceeds. Reductions of the Adjusted
Capital Contributions in accordance with the foregoing shall be determined
subsequent to calculation of any distributions to be made to Limited Partners,
but shall be effective as of the date of receipt by the Partnership of the Sale
Proceeds giving rise to such distributions.

"ADJUSTED CONTRIBUTION" means, with respect to Limited Partners, the
"Adjusted Capital Contribution" and, with respect to Unitholders, the "Adjusted
Contribution of Unitholders."

<PAGE>

"ADJUSTED CONTRIBUTION OF UNITHOLDERS" means, at any time, the Contribution
of Unitholders reduced by all amounts distributed to Unitholders of Sale
Proceeds. Reduction of the Adjusted Contributions of Unitholders in accordance
with the foregoing will be determined subsequent to calculation of any
distributions to be made to Unitholders, but shall be effective as of the date
of receipt by the Partnership of the Sale Proceeds giving rise to such
distributions.

"AFFILIATE" means, when used with reference to a specified Person, (a) any
Person who directly or indirectly controls or is controlled by or is under
common control with the specified Person, (b) any Person who 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, (c) any Person who, directly or indirectly, is the beneficial owner of
or controls 10% 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
or controls 10% or more of any class of equity securities, and (d) any Person
who is an officer, director, general partner, trustee or holder of 10% or more
of the voting securities or beneficial interests of any of the foregoing. An
Affiliate of the Partnership or either of the General Partners does not include
a Person who is a partner in a partnership or joint venture with the Partnership
or any other Affiliate of the Partnership if such Person is not otherwise an
Affiliate of the Partnership or either of the General Partners.

"AGREEMENT" means this Limited Partnership Agreement and Amended
Certificate of Limited Partnership, as originally executed and as amended from
time to time.

"ANNUAL ASSET MANAGEMENT AND PARTNERSHIP ADMINISTRATION FEE" means the
annual fee payable to the General Partners in accordance with
Section 5.30(b)(iii) for services rendered by the General Partners to the
Partnership in managing the Partnership's portfolio of Insured Mortgages and
Operating Partnership Interests.

"ASSIGNED LIMITED PARTNERSHIP INTEREST" means a Limited Partnership
Interest which is held of record by the Initial Limited Partner as a nominee on
behalf of a Unitholder.

"BANKRUPTCY" or "BANKRUPT" as to any Person means the filing of a
petition for relief as to any such Person as debtor or bankrupt under the
Bankruptcy Code of 1978 or like provision of law (except if such petitions is
contested by such Person and has been dismissed within 120 days); insolvency
of such Person as finally determined by a court preceeding; filing by such
Person of a petition or application to accomplish the same or for the
appointment of a receiver or a trustee for such Person or a substantial part
of his assets; or commencement of any proceedings relating to such Person
under any other reorganization, arrangement, insolvency, adjustment or debt
or liquidation law of any jurisdiction, whether now in existence or
hereinafter in effect, either by such Person or by another, provided that if
such proceeding is commenced by another, such Person indicates his approval
of such proceeding, consents thereby or acquiesces therein, or such
proceeding is contested by such Person and has not been finally dismissed
within 120 days.

<PAGE>

"BENEFICIAL OWNERSHIP CERTIFICATE" means a certificate evidencing the
ownership of Units.

"BENEFICIAL OWNERSHIP INTEREST" means the entire ownership interest of a
Unitholder in the Partnership at any particular time, including the right of
such Unitholder to any and all benefits to which a Unitholder may be entitled as
provided in this Agreement. Reference to a majority or specified percentage in
the interest of the Unitholders means Unitholders whose combined holdings of
Units represent more than 50%, or such specified percentage, respectively, of
all of the outstanding Units of the Partnership. The ownership interests of the
Unitholders in the Partnership are sometimes referred to herein as "Units."

"CAPITAL ACCOUNT" means the capital account of a Partner or Unitholder as
described in Section 4.05.

"CAPITAL CONTRIBUTION" means, with respect to Partners, "Capital
Contribution of Partners" and with respect to Unitholders, "Capital Contribution
of Unitholders."

"CAPITAL CONTRIBUTION OF PARTNERS" means the total amount of money
contributed to the Partnership (prior to the deduction of any Selling
Commissions or expenses) by all the Partners or any class of Partners, or by any
one Partner, as the context may require (or the predecessor holders of the
interests of such Partners or Partner), reduced, in the case of the Limited
Partners, by the amount of any funds returned to them pursuant to
Section 3.03(d).

"CAPITAL CONTRIBUTION OF UNITHOLDERS" means the total amount of money paid
to the Partnership (prior to the deduction of any Selling Commissions or
expenses) by all Persons who purchase Units (pursuant to the Partnership's
public offering of up to 5,000,000 Units effected pursuant to the Partnership's
Registration Statement filed with the Securities and Exchange Commission) and
which shall be deemed to be contributed to the Partnership by the Initial
Limited Partner on behalf of the Unitholders, reduced by the amount of any funds
returned to the Unitholders pursuant to Section 3.03(d).

"CASH AVAILABLE FOR DISTRIBUTION" means, with respect to any period, Cash
Flow less any amount set aside from Cash Flow for the creation or restoration of
Reserves.

"CASH FLOW" means, with respect to any period, (a) all cash receipts of the
Partnership from payments of principal and interest on its Insured Mortgages
(exclusive of any Sale Proceeds attributable to such Insured Mortgages), plus
(b) any cash distributions from Operating Partnerships (exclusive of any Sale
Proceeds attributable to the sale or exchange by the Partnership of its interest
in such Operating Partnerships and exclusive of any Sale Proceeds attributable
to the assets of the Operating Partnerships) plus (c) cash receipts from
Partnership operations (including any interest or other income from temporary
investments of the Partnership pursuant to Section 5.02(a)(xiv) and any amounts
withdrawn from Reserves deemed no longer necessary for Partnership operations by
the General Partners), but after deducting from any such receipts amounts used
to pay Operating Expenses and debt service.

<PAGE>

"CODE" means the Internal Revenue Code of 1954, as amended, or any
corresponding provision or provisions of succeeding law.

"COINSURED MORTGAGE" means a first mortgage loan on a Complex insured by
the FHA and a coinsured lender utilizing the GNMA Mortgage-Backed Securities
Program pursuant to the coinsurance program under the Section 221(d)(4) of the
National Housing Act.

"COMMITMENT FEE" means fees paid by an Operating Partnership to the General
Partners in an amount up to 3.97% of each Insured Mortgage.

"COMPLEX" means a multifamily, rental housing complex in a suburban or
metropolitan area which is owned or is to be constructed by an Operating
Partnership.

"CONSENT" means either the consent given by a vote at a meeting called and
held in accordance with the provisions of Section 10.01 or the prior written
consent, as the case may be, of a Person to do the act or thing for which the
consent is solicited, or the act of granting such consent, as the context may
require.

"DEALER MANAGER" means E.F. Hutton & Company Inc., a Delaware corporation
which is an Affiliate of the Hutton General Partner.

"EQUITY CONTRIBUTION" means the Partnership's contribution to an Operating
Partnership in exchange for an Operating Partnership Interest.

"ESCROW AGENT" means Omaha National Bank or any successor thereto.

"FHA" means the Federal Housing Administration of HUD.

"FHA INSURED MORTGAGE" means a first mortgage loan on a Complex, insured
pursuant to Section 221(d)(4) or similar section of the National Housing Act.

"FOREIGN PERSON" means a nonresident alien, foreign corporation trust,
foreign trust or foreign estate, within the meaning of Sections 897 and 1445 of
the Code.

"FRONT END FEES" means all acquisition fees, selling commissions,
organizational, offering and selling expenses and any other fees or expenses
paid by any party for any services rendered during the Partnership's
organizational and acquisition phases. Such expenses include but are not
limited to legal fees and expenses, travel and communication expenses, costs of
appraisals, nonrefundable option payments on property not acquired, accounting
fees and expenses, title insurance and miscellaneous expenses related to
selection and acquisition of property, whether or not acquired, including
similar fees paid by the Operating Partnerships during their acquisition or
operational phases if paid directly or indirectly by the Partnership. Front End
Fees (a) shall include the Initial Advisory Fee and the Commitment Fee and
(b) shall not exceed in the aggregate the lesser of such compensation
customarily charged by others rendering similar

<PAGE>

services as an ongoing public activity in the same geographic location and
for comparable property or an amount equal to 18% of the Gross Proceeds.

"GENERAL PARTNERS" means the Hutton General Partner, the TIG General
Partner and any Person or Persons who, at the time of reference thereto, has
been admitted as a successor General Partner or as an additional General Partner
and, in the case of any of the foregoing, has not withdrawn from the
Partnership, in each such Person's capacity as a General Partner.

"GENERAL PARTNER REIMBURSABLE EXPENSES" means expenses incurred by the
General Partner(s) in connection with the promotion, management and/or operation
of the Partnership.

"GNMA" means the Government National Mortgage Association.

"GNMA MORTGAGE-BACKED SECURITIES PROGRAM" means a program pursuant to which
GNMA guarantees the monthly principal and interest payments of the mortgages
underlying mortgage-backed securities issued by private entities.

"GROSS PROCEEDS" means the total proceeds from the sale of Units before
deduction for expenses incurred in organizing the Partnership and offering the
Units for sale.

"HUD" means the United States Department of Housing and Urban Development
acting through any authorized representative.

"HUTTON GENERAL PARTNER" means Hutton Insured Mortgage Equities, Inc., a
Delaware corporation.

"INCENTIVE FEE" means the fee payable to the General Partners in accordance
with Section 5.03(b)(v).

"INITIAL ADVISORY FEE" means the nonrecurring fee paid to the General
Partners in accordance with Section 5.03(b)(i) for organizing the Partnership,
analyzing and evaluating potential investments in Insured Mortgages and
Operating Partnership Interests, negotiating the terms of the Partnership's
investments in Insured Mortgages and Operating Partnership Interests and related
matters.

"INITIAL CLOSING" means the initial closing on the sale of at least 500,000
Units to Investors.

"INITIAL LIMITED PARTNER" means H/T Corp., a Delaware corporation, which
(a) owns 100 Limited Partnership Interests, (b) will own a maximum of 5,000,100
Limited Partnership Interests, including 5,000,000 Assigned Limited Partnership
Interests, in the Partnership, and (c) will transfer and assign to those Persons
who purchase Units certain of its rights and interest in Assigned Limited
Partnership Interests in accordance with Section 11.01(a).

<PAGE>

"INITIAL PROSPECTUS" means the prospectus contained in the Registration
Statement (File No. 2-99909) filed pursuant to Rule 424(b) in its final form
with the Securities and Exchange Commission for the registration of the Units
under the Securities Act of 1933.

"INSURED MORTGAGE" means an FHA Insured Mortgage or a Coinsured Mortgage.

"INTEREST" means the entire ownership interest of a Partner or a Unitholder
in the Partnership at any particular time, including the right of such Partner
or Unitholder to any and all benefits to which a Partner or Unitholder may be
entitled under this Agreement, together with the obligations of such Partner or
Unitholder to comply with all the terms and provisions of this Agreement.

"INVESTED ASSETS" means that portion of the Net Proceeds invested from time
to time in Insured Mortgages, Operating Partnership Interests and other
investments in Operating Partnerships owned by the Partnership.

"INVESTMENT DATE" means the date or dates, from time to time, of the final
closing of the sale of Units pursuant to Section 11.04.

"INVESTMENT IN PROPERTIES" means the amount of Capital Contributions used
to make or invest in mortgage loans or the amount actually paid or allocated to
the purchase, development, construction or improvement of properties acquired by
the Partnership (including the purchase of properties, working capital reserves
allocable thereto (except that working capital reserves in excess of 5% shall
not be included)), and other cash payments such as interest and taxes but
excluding Front End Fees.

"INVESTOR SERVICES REIMBURSEMENT" means the amount to be reimbursed to the
TIG General Partner and its Affiliates for performance of investor services, not
to exceed, together with all other reimbursements to the General Partners and
Affiliates of expenses incurred in the Partnership's operations, 0.5% of
Invested Assets per annum.

"IRAS AND KEOGH PLANS" means Individual Retirement Accounts formed pursuant
to Section 408 of the Code, Retirement (Keogh) plans for self-employed
individuals as described in Section 404(a)(8) of the Code and other tax-deferred
pension and profit-sharing plans.

"LIMITED PARTNER" means any Person who is a Limited Partner, including the
Initial Limited Partner, at the time reference thereto, in such Person's
capacity as a Limited Partner of the Partnership.

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

<PAGE>

"NASDAQ" means the National Association of Securities Dealers Automated
Quotations, an electronic automated quotation system for a selected number of
over-the-counter securities.

"NET PROCEEDS" means the Gross Proceeds reduced by the expenses, including
Selling Commissions, incurred by the Partnership in connection with its
organization and the offering and sale of the Units.

"NOTICE" means a writing, containing the information required by this
Agreement to be communicated to any Person, personally delivered to such
Person or sent by registered, certified or regular mail, postage prepaid, to
such Person at the last known address of such Person. The date of personal
delivery or the date of mailing thereof, as the case may be, shall be deemed
the date of receipt of Notice.

"OFFERING" means the offering of Units by the Partnership pursuant to the
terms and conditions described in the Prospectus.

"OPERATING EXPENSES" means, with respect to any fiscal period, except to
the extent paid with cash withdrawn from Reserves therefore, the amount of
expenses which were incurred by the Partnership in such period in the ordinary
course of the Partnership's business, including but not limited to the Annual
Asset Management and Partnership Administration Fee, which is subordinated to
payment of the Priority Return on Adjusted Contribution Account on a
noncumulative basis, the Investor Services Reimbursement and all other fees and
expense reimbursements to the General Partners (except for the Incentive Fee and
the Termination Fee), fees paid for placing, servicing and disposition of
Insured Mortgages and Operating Partnership Interests, computer costs,
insurance, brokerage fees, taxes, accounting, bookkeeping, legal, travel and
telephone expenses.

"OPERATING PARTNERSHIP" or "OPERATING PARTNERSHIPS" means any or all of the
limited partnerships which own or lease Complexes and in which the Partnership
acquires an Operating Partnership Interest.

"OPERATING PARTNERSHIP INTEREST" means the limited partnership interest of
the Partnership in an Operating Partnership.

<PAGE>

State of Delaware or for the formation of a limited partnership and
thereafter for the continued good standing of a limited partnership, (c) the
cost of any escrow arrangements, including any compensation to the Escrow
Agent, (d) filing fees payable to the Securities and Exchange Commission, to
state securities commissions and to the National Association of Securities
Dealers, Inc., and (e) fees of the Partnership's counsel and accountants.

"ORGANIZATIONAL, OFFERING AND SELLING EXPENSE REIMBURSEMENT ALLOWANCE"
means the nonaccountable allowance in an amount of 2% of Gross Proceeds payable
to the General Partners in accordance with Section 5.03(b)(ii).

"PARTNER" means any General Partner or any Limited Partner.

"PARTNERSHIP" means the limited partnership formed as of August 22, 1985,
under the Delaware Revised Uniform Limited Partnership Act and known as Capital
Source L.P., as said limited partnership may from time to time be constituted.

"PERMITTED INTERIM INVESTMENTS" means securities issued or fully
guaranteed by the United States Government or its agencies, Certificates of
Deposit and Time or Demand Deposits fully insured by an agency of the United
States Government or in commercial banks or savings and loan associations
having a net worth of at least $100,000,000, or commercial paper rated "P-1"
(the highest possible rating) by Moody's Investors Service, Inc.

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

"PRIORITY RETURN ON ADJUSTED CONTRIBUTION ACCOUNT" means a ledger account
maintained on behalf of each Limited Partner or Unitholder which shall be
credited each quarter with 2% of the Adjusted Contribution attributable to such
Limited Partner or Unitholder, as adjusted through the last day of such quarter,
and shall be charged each quarter with all Cash Available for Distribution which
is distributed to such Limited Partner or Unitholder, in respect of such
quarter.

"PROFITS FOR TAX PURPOSES" and "LOSSES FOR TAX PURPOSES" means the income
or loss of the Partnership for federal income tax purposes determined as of the
close of each calendar quarter. For these purposes, Profits for Tax Purposes
will include income and gain exempt from tax and Losses for Tax Purposes shall
include expenditures which constitute, or are deemed under Treasury Regulations
to constitute, expenditures described in Section 705(a)(2)(B) of the Code.

"PROSPECTUS" means the prospectus contained in the Registration Statement
(File No. 2-99909) filed pursuant to Rule 424(b) with the Securities and
Exchange Commission for the registration of Units under the Securities Act of
1933, in the final form in which such prospectus is filed pursuant to
Rule 424(b) with such Commission and as thereafter supplemented pursuant to
Rule 424(c) under such Act.

<PAGE>

"RESERVES" means amounts allocated to reserves maintained for working
capital of the Partnership and contingencies, which initially will not be less
than 1% of Gross Proceeds.

"SALE PROCEEDS" means receipts of the Partnership attributable to a Sale
Transaction exclusive of all expenses attributable to the event generating such
receipts and exclusive of any amount of such receipts used to pay Operating
Expenses or set aside by the General Partners for Reserves.

"SALE TRANSACTION" means a transaction involving (a) the prepayment, sale,
exchange, foreclosure or other disposition of an Insured Mortgage held by the
Partnership, (b) the sale, exchange or other disposition of an Operating
Partnership Interest held by the Partnership, (c) the sale, exchange or other
disposition by an Operating Partnership of any of its assets, or (d) the sale,
exchange or other disposition by the Partnership of any of its assets.

"SCHEDULE A" means the schedule, as amended from time to time, of Partners'
names, addresses, Capital Contributions and Interest, which schedule, in its
initial form, is attached to, and made a part of this Agreement.

"SELLING COMMISSIONS" means the commissions up to a maximum of 7% per Unit,
payable by the Partnership to the Dealer Manager.

"SPECIFIED INVESTMENT" means an Operating Partnership in which the
Partnership has determined to invest and which is identified and described in
the Prospectus.

"TARGET RETURN ON ADJUSTED CONTRIBUTION ACCOUNT" means a ledger account on
behalf of each Limited Partner or Unitholder which shall be credited each day
with an amount equal to 13% per annum, as calculated on daily basis, of the
Adjusted Contributions attributable to such Limited Partner or Unitholder as
adjusted through the preceding day, and shall be charged each quarter with all
Cash Available for Distribution which is distributed to such Limited Partner in
respect of such quarter and shall be further charged, as of the day of receipt
by the Partnership of Sale Proceeds, with all such Sale Proceeds distributed to
such Limited Partner or Unitholder in excess of the amount of such Limited
Partner's and Unitholder's Adjusted Contribution, determined as of the day
preceding such receipt by the Partnership of Sale Proceeds.

"TAX MATTERS PARTNER" means the Partner designated as the Tax Matters
Partner of the Partnership by the General Partners pursuant to Section 9.06.

"TERMINATION FEE" means the fee payable to the General Partners in
accordance with Section 5.03(b)(vi).

"TIG GENERAL PARTNER" means TIG Insured Mortgage Equities Inc., a Delaware
corporation.

<PAGE>

"UNIT" means a Beneficial Ownership Interest representing the assignment
by the Initial Limited Partner of one Assigned Limited Partnership Interest.

"UNITHOLDER" means any Person who holds a Beneficial Ownership Interest
represented by a Unit and who is reflected as a Unitholder on the books and
records of the Partnership.

"VOLUNTARY LOAN" means a loan to the Partnership by a General Partner or
its Affiliate in accordance with Section 5.03(b)(ix).

ARTICLE III

PARTNERS AND CAPITAL

Section 3.01. GENERAL PARTNERS. The names, addresses, Capital
Contributions and Interests of the General Partners are as set forth in
Schedule A. The General Partners, as such, shall not be required to make any
additional Capital Contribution to the Partnership, except as provided in
Section 4.05(b).

Section 3.02. INITIAL LIMITED PARTNER. The name, address, Capital
Contribution and Interest of the Initial Limited Partner are as set forth in
Schedule A. All proceeds which the Partnership receives from persons who
purchase Units pursuant to the Partnership's Registration Statement filed
with the Securities and Exchange Commission shall be treated as contributions
to the Partnership made by the Initial Limited Partner on behalf of, and as
nominee for, the Unitholders. Except as set forth above and with respect to
its own Capital Contributions, the Initial Limited Partner shall not be
required to make any additional Capital Contribution to the Partnership.
Other than to serve as Initial Limited Partner, the Initial Limited Partner
has no other business purpose and will engage in any other activity or incur
any debts.

Section 3.03. PARTNERSHIP CAPITAL.

(a) No Partner or Unitholder shall be paid interest on any Capital
Contribution.

(b) The Partnership shall not redeem or repurchase any Unit and no
Partner or Unitholder shall have the right to withdraw, or receive any
return of, his Capital Contribution, except as specifically provided in
this Agreement, and no Capital Contribution may be returned in the form of
property other than cash.

(c) No Limited Partner or Unitholder shall have priority over any
other Limited Partner or Unitholder as to the return of his Capital
Contribution as or to profits, losses or distributions.

(d) Any portion of the Limited Partners' or Unitholders' Capital
Contributions (except for any amounts utilized to pay the Partnership's
Operating Expenses or any

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amounts set aside for Reserves) which is not invested or committed for
investment within 24 months from the date of the Prospectus, including the
amount of the Initial Advisory Fee paid to the General Partners with
respect to such portion of the Limited Partner's and Unitholder's Capital
Contributions, shall be distributed, without interest, by the Partnership
to the Limited Partners and Unitholders, as a return of capital. Any
funds with respect to the investment of which the Partnership has executed
a written agreement in principle, commitment letter, letter of intent or
understanding, option agreement or other similar understanding or
contract, within 24 months after the date of the Prospectus shall be deemed
committed to investment on that date and shall not subsequently be returned
to the Limited Partners and Unitholders even if the investment of such
funds is not consummated or the contingent payments are not made.

(e) The General Partners shall have no personal liability for the
repayment of the Capital Contribution of any Limited Partner or Unitholder.

(f) A creditor who makes a nonrecourse loan to the Partnership shall
not have or acquire at any time, solely as a result of making the loan, any
direct or indirect interest in the profits, capital or property of the
Partnership, other than as a creditor or secured creditor, as the case may
be.

Section 3.04. LIABILITY OF LIMITED PARTNERS.

(a) The liability of each Limited Partner for the losses, debts,
liabilities and obligations of the Partnership shall, so long as the
Limited Partner complies with Section 5.01(c), be limited to his Capital
Contribution and his share of any undistributed profits of the Partnership.
Similarly, no Unitholder shall have any liability for the losses, debts,
liabilities or obligations of the Partnership so long as the Unitholder
complies with the provisions of Section 5.01(c). No Limited Partner or
Unitholder shall be required to lend any funds to the Partnership or, after
his Capital Contribution has been paid, to make any further capital or
other contribution to the Partnership. It is the intent of the Partners
that no distribution (or any part of any distribution) made to any Limited
Partner pursuant to Section 4.01 shall be deemed a return or withdrawal of
capital even if such distribution represents, in full or in part, an
allocation of depreciation or any other noncash item accounted for as a
loss or deduction from or offset to the Partnership's income, and that no
Limited Partner shall be obligated to pay any such amount to or for the
account of the Partnership or any creditor of the Partnership. If any
court of competent jurisdiction holds, however, that notwithstanding the
provisions of this Agreement, any Limited Partner is obligated to make any
such payment, such obligation shall be the obligation of such Limited
Partner and not of the General Partners.

(b) Notwithstanding the provisions of Section 3.04(a) in the event
the Partnership is required, pursuant to applicable provisions of any
Operating Partnership Agreement or of the limited partnership act of the
jurisdiction of organization of an Operating Partnership to return to any
Operating Partnership any funds previously

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distributed by such Operating Partnership to the Partnership, which funds
have been distributed by the Partnership, in turn, to the Limited Partners
and Unitholders hereunder, the Limited Partners and Unitholders shall be
required to return promptly to the Partnership that portion of such
Partnership distribution (on a pro rata basis) as shall be required by the
Partnership to meet its obligation to return funds to such Operating
Partnership.

ARTICLE IV

DISTRIBUTIONS OF CASH; ALLOCATIONS OF PROFITS AND LOSSES

Section 4.01. DISTRIBUTIONS OF CASH AVAILABLE FOR DISTRIBUTION. All
Cash Available for Distribution at the end of each quarter of each calendar
year shall be distributed, within 45 days after the end of such quarter, 99%
to the Limited Partners and Unitholders considered as a class and 1% to the
General Partners; provided, however, that after the Adjusted Contributions
have been reduced to zero and the Target Return on Adjusted Contribution
Accounts has been paid on a cumulative basis, such distributions shall be
subordinated to the payment of any accrued but unpaid Incentive Fee or
Termination Fee then owed to the General Partners in accordance with Sections
5.03(b)(v) and 5.03(b)(vi).

Section 4.02. DISTRIBUTIONS OF SALE PROCEEDS.

(a) Except as otherwise provided in Section 8.02 in connection with
the liquidation of the Partnership, Sale Proceeds will be distributed, as
soon as practicable after the Partnership receives such proceeds, 99% to
the Limited Partners and Unitholders considered as a class and 1% to the
General Partners; provided, however, that after the Adjusted Contributions
have been reduced to zero and the Target Return on Adjusted Contribution
Accounts has been paid on a cumulative basis, such distribution shall be
subordinated to the payment of any accrued but unpaid Incentive Fee or
Termination Fee then owed to the General Partners in accordance with
Sections 5.03(b)(v) and 5.03(b)(vi).

(b) Noncash Sale Proceeds shall not be distributed until converted
into cash by the Partnership.

Section 4.03. PROFITS AND LOSSES FOR TAX PURPOSES.

(a) Profits and Losses for Tax Purposes shall be determined in
accordance with the accounting method followed by the Partnership for
federal income tax purposes.

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Purposes shall be determined on the basis of an interim closing of the
Partnership's books as of the first date on which Units are purchased.

(c) Except as set forth in Section 4.03(b), all Profits and Losses
for Tax Purposes not arising from Sale Transactions, and every item of
income, gain, loss, deduction, credit or allowance entering into the
computation thereof, shall be allocated 99% to the Limited Partners and
Unitholders considered as a class and 1% to the General Partners.

(d) Profits and Losses for Tax Purposes arising from Sale
Transactions in respect of a calendar quarter shall be allocated 99% to the
Limited Partners and Unitholders considered as a class and 1% to the
General Partners.

(e) Notwithstanding anything to the contrary that may be expressed or
implied in this Agreement, the aggregate interest of the General Partners
in each item of Partnership income, gain, loss, deduction or credit will be
equal to at least 1% of each of those items at all times during the
existence of the Partnership. In determining the interests of the General
Partners in these items, any Limited Partnership Interest owned by the
General Partners shall not be taken into account.

(f) Subject to the provisions of Section 4.03(e), in the event that
the Capital Account of a Partner or the separate subsidiary capital account
of a Unitholder is reduced below zero (or, in the case of a General
Partner, reduced below the deficit balance which such General Partner will
be obligated to restore under Section 4.05(b)), (i) due to an unexpected
allocation of loss or deduction made pursuant to Section 704(e)(2) of the
Code, Section 706(d) of the Code or Paragraph (b)(2)(ii) of Treasury
Regulation Section 1.751-1 or (ii) due to an unexpected distribution to
such Partner or Unitholder which is not offset by a corresponding increase
to such Partner's Capital Account or to such Unitholder's separate
subsidiary capital account, then such Partner or such Unitholder, as the
case may be, will be allocated items of income and gain in an amount and
manner sufficient to eliminate the deficit balance in such Partner's
Capital Account or such Unitholder's separate subsidiary capital account as
quickly as possible.

Section 4.04. DETERMINATION OF ALLOCATIONS AND DISTRIBUTIONS AMONG
LIMITED PARTNERS AND UNITHOLDERS. Within 45 days after the end of each
calendar quarter during the term of the Partnership, a determination shall be
made of (a) the amounts of the Profits and Losses for Tax Purposes (including
every item of income, gain, loss, deduction, credit or allowance entering
into the computation of such Profits and Losses for Tax Purposes) which arose
during such calendar quarter and which was allocable to the Limited Partners
and Unitholders in accordance with the provisions of Section 4.03) and (b)
the amount of the Cash Available for Distribution and the Sale Proceeds which
were actually received by the Partnership during such calendar quarter and
which were allocable to the Limited Partners and Unitholders in accordance
with the provisions of Section 4.03. The above-referenced amounts of tax
items which were attributable to a particular month in a calendar quarter and
which were not attributable to Sale Transactions

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shall be allocated among each Limited Partner and Unitholder who held an
Interest on the last day of any month (the "Monthly Record Date") during such
calendar quarter and the above-referenced amounts of Cash Available for
Distribution shall be distributed among each Limited Partner and Unitholder
who held an Interest on any Monthly Record Date during such calendar quarter,
both in the ratio which (i) the number of Limited Partnership Interests or
Units held by such Limited Partner or Unitholder on such Monthly Record Date
bears to (ii) the aggregate number of Limited Partnership Interests and Units
outstanding on such Monthly Record Date; provided, however, that such
allocations and distributions with respect to any month during which
subscriptions for Units are released by the Escrow Agent to the Partnership
in accordance with Section 11.04 shall be made pro rata to such Limited
Partners and Unitholders on the basis of the number of days of such month
that they were Limited Partners or Unitholders of record.

The above-referenced amounts of tax items attributable to Sale
Transactions and the above-referenced amounts of Sale Proceeds shall be
allocated or distributed, as the case may be, to each Limited Partner and
Unitholder of record on the date of receipt as determined by the General
Partner if, due to the circumstances of such receipt, advance notice of the
particular date of receipt by the Partnership of such Sale Proceeds (or such
other date within 10 days of such receipt cannot be provided as required by
the federal securities laws or the regulations of any exchange on which the
Units are traded) in the ratio which the number of Limited Partnership
Interests or Units held by such Limited Partner or Unitholder bears to the
aggregate number of Limited Partnership Interests or Units outstanding on
such date.

Section 4.05. CAPITAL ACCOUNTS.

(a) A separate Capital Account shall be maintained and adjusted for
each Partner in accordance with the Code and the Treasury Regulations
thereunder. There shall be credited to each Partner's Capital Account the
amount of his Capital Contribution and such Partner's distributive share of
the Profits for Tax Purposes of the Partnership; and there shall be charged
against each Partner's Capital Account the amount of all Cash Available for
Distribution and Sale Proceeds distributed to such Partner and such
Partner's distributive share of all the Losses for Tax Purposes of the
Partnership. A separate subsidiary capital account with respect to the
Initial Limited Partner's Capital Account shall be maintained and adjusted
for each Unitholder in accordance with the principles contained in this
Section.

(b) Upon the dissolution and termination of the Partnership, the
General Partners will contribute to the Partnership an amount equal to the
lesser of (i) any deficit balance in their Capital Accounts or (ii) the
excess of 1.01% of the total capital contributions attributable to the
Limited Partners and Unitholders over the amount of capital previously
contributed by the General Partners.

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ARTICLE V

RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNERS

Section 5.01. MANAGEMENT OF THE PARTNERSHIP.

(a) The General Partners, within the authority granted to them under
this Agreement, shall have full, complete and exclusive discretion to
manage and control the business of the Partnership to the best of their
ability to use their best efforts to carry out the purposes of the
Partnership. In so doing, the General Partners shall take all actions
necessary or appropriate to protect the interests of the Limited Partners
and the Unitholders. The General Partners shall devote such time as is
necessary to the affairs of the Partnership and shall receive no
compensation from the Partnership other than as expressly provided in this
Agreement. The General Partners shall, except as otherwise provided in
this Agreement, have all the rights and powers and shall be subject to all
the restrictions and liabilities of a partner in a partnership without
limited partners or Unitholders. All decisions of the General Partners
shall be made pursuant to the unanimous approval of the General Partners
except in respect to decisions involving areas where unilateral authority
has been delegated by the General Partners to one of the General Partners.

(b) All decisions made for and on behalf of the Partnership by the
General Partners shall be binding upon the Partnership. Except as
expressly set forth elsewhere in this Agreement, the General Partners
(acting for and on behalf of the Partnership), in extension and not in
limitation of the rights and powers given by this Section or by the
provisions of this Agreement shall, in their sole discretion, have the full
and entire right, power and authority in the management of the Partnership
business to do any and all things necessary to effectuate the purposes of
the Partnership. Without limiting the foregoing grant of authority, but
subject to the other provisions of this Agreement, the General Partners, in
their capacity as General Partners, shall have the right, power and
authority, acting for and on behalf of the Partnership, to do all acts and
things set forth in Section 5.02. No Person dealing with the General
Partners shall be required to determine their authority to make any
undertaking on behalf of the Partnership or to determine any facts bearing
upon the existence of such authority.

(c) No Limited Partner or Unitholder (except one who may also be a
General Partner, and then only in his capacity as General Partner within
the scope of his authority hereunder) shall participate in or have any
control over the Partnership business or shall have any authority or right
to act or bind the Partnership.

(d) The General Partners shall, after the release from escrow of
subscriptions for Units pursuant to Section 11.04, establish initial
Reserves out of Capital Contributions in an amount not less than 1% of the
Gross Proceeds.

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(e) All of the Partnership's expenses shall be billed to and paid by
the Partnership; provided, however, that all Organizational, Offering and
Selling Expenses shall be paid by the General Partners. The expenses to be
paid by the Partnership in connection with the Partnership's business shall
include: (i) all costs of personnel employed by the Partnership and
involved in the business of the Partnership, other than individuals who are
employees of the General Partners, (ii) all costs of borrowed money, taxes
and assessments applicable to the Partnership (including interest and other
charges on loans or letters of credit by, or obtained by, the General
Partners or their Affiliates, as permitted hereby), (iii) legal, audit,
accounting, appraisal and engineering fees, (iv) printing, engraving and
other expenses and taxes incurred in connection with the issuance,
distribution, transfer, registration and recording of documents evidencing
ownership of Interests in the Partnership or in connection with the
business of the Partnership, (v) fees paid to the Escrow Agent for services
provided in connection with the sale of Units, (vi) fees and expenses paid
to independent contractors, mortgage bankers, finders, brokers and
servicers, consultants, real estate brokers, insurance brokers and other
agents, (vii) expenses in connection with the origination, acquisition,
sale, exchange, foreclosure, prepayment or other disposition of Insured
Mortgages, (viii) expenses of organizing, revising, amending, converting,
modifying or terminating the Partnership, (ix) the cost of insurance in
connection with the business of the Partnership, (x) the costs and expenses
incurred in qualifying the Partnership to do business in any jurisdiction,
including fees and expenses of any resident agent appointed by the
Partnership, (xi) the cost of preparing and disseminating to Limited
Partners and Unitholders the reports described in Section 9.04 and the cost
of preparing and filing reports and tax returns with governmental agencies,
(xii) the costs incurred in connection with any litigation or regulatory
proceedings in which the Partnership is involved unless the General
Partners are adjudged guilty of fraud, bad faith, negligence or misconduct,
(xiii) the cost of any computer services used by the Partnership, and
(xiv) amounts paid to the General Partners as reimbursements in accordance
with Section 5.01(f).

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the administration of the Partnership shall not be charged to the
Partnership. General overhead expenses include, but are not limited to,
salaries of employees not specifically performing the services described
in this Section, rent, capital equipment and such other items generally
constituting overhead, salaries, fringe benefits, travel and utilities
expenses of the General Partners, Affiliates of the General Partners or
any individual general partner or managing officers, directors and
controlling persons of the General Partners. For purposes of this Section
5.01(f), "controlling persons" shall include any person who performs
functions for the General Partners or their Affiliates similar to those
performed by the Chairman or members of the Board of Directors, executive
management, senior management or any person who holds a 5% or more equity
interest in a General Partner or who has the power to direct or cause the
direction of the General Partners.

(g) In no event shall the total of all Front End Fees result in the
commitment of less than eighty-two percent (82%) of all Capital
Contributions of Unitholders to Investment in Properties.

Section 5.02. AUTHORITY OF THE GENERAL PARTNERS.

(a) Subject to Sections 5.02(c), 5.03 and 5.04, the General Partners
for, and in the name and on behalf of, the Partnership, are hereby
authorized, without limitation:

(i) to enter into the Operating Partnership Agreements and all
other agreements, instruments and documents as may be necessary or
appropriate in connection with the acquisition of Operating
Partnership Interests and the admission of the Partnership as a
limited partner of the Operating Partnership;

(ii) to give the consent of the Partnership in its capacity
as a limited partner of each Operating Partnership to any action
proposed to be taken by such Operating Partnership or any of the
Operating General Partners which, under the provisions of its
Operating Partnership Agreement, requires the consent of the
Partnership as the limited partner;

(iii) to invest in, acquire, hold, foreclose, redeem, sell,
dispose of and otherwise deal with Insured Mortgages, at such prices
and upon such terms as they deem to be in the best interests of the
Partnership; provided, however, that notwithstanding any other
provision of this Agreement, the General Partners shall not sell,
dispose of or otherwise transfer (including upon liquidation or
reorganization of the Partnership) any FHA Insured Mortgage other than
to an FHA-approved mortgagee;

(iv) to acquire, hold, sell, dispose of and otherwise deal with
Operating Partnership Interests at such prices and upon such terms as
they deem to be in the best interests of the Partnership;

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(v) to acquire by purchase, lease, exchange or otherwise, any
real or personal property to be used in connection with the business
of the Partnership;

(vi) to borrow money and issue evidences of indebtedness, and
to secure the same by mortgage, deed of trust, pledge or other lien on
any assets of the Partnership;

(vii) to employ agents, employees, managers, accountants,
attorneys, consultants and other Persons necessary or appropriate to
carry out the business and operations of the Partnership, and to pay
fees, expenses, salaries, wages and other compensation to such
persons; provided, however, that no compensation or fees shall be paid
to a General Partner or its Affiliates except as specifically
permitted by this Agreement;

(viii) to pay, extend, renew, modify, adjust, submit to
arbitration, prosecute, defend or compromise, upon such terms as it
may determine and upon such evidence as they may deem sufficient, any
obligation, suit, liability, cause of action or claim, including
taxes, either in favor of or against the Partnership;

(ix) to determine the appropriate accounting method or methods
to be used by the Partnership (the Partnership intends initially to
utilize the accrual method of accounting in maintaining its books and
records);

(x) to cause the Partnership to make or revoke any of the
elections referred to in Sections 108, 709, 732, 754 or 1017 of the
Code or any similar provisions enacted in lieu thereof;

(xi) to offer and sell Interests in the Partnership to the
public directly or through any licensed Person, including without
limitation the Dealer Manager, and to employ personnel, agents and
dealers for such purposes;

(xii) to establish and maintain Reserves in an initial amount
not less than 1% of Gross Proceeds, for such purposes and in such
amounts as they deem appropriate from time to time;

(xiii) to amend this Agreement to reflect the addition or
substitution of Limited Partners or the reduction of Capital Accounts
upon the return of capital to Partners;

(xiv) to invest all funds not immediately needed in the
operation of the business, including but not limited to (A) the Net
Proceeds prior to investment in Insured Mortgages and Operating
Partnership Interests and (B) Reserves, in Permitted Interim
Investments;

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(xv) to deal with, or otherwise engage in business with, or
provide services to and receive compensation therefor from any Person
who has provided or may in the future provide any services to, lend
money to, sell property to or purchase property from the General
Partners or any of their Affiliates;

(xvi) to form an Investment Committee to be composed of two
persons selected by the Hutton General Partner and two persons
selected by the TIG General Partner to make all decisions pertaining
to the Partnership's investment in Operating Partnership Interests and
Insured Mortgages;

(xvii) to engage in any kind of activity and to perform and
carry out contracts of any kind necessary or incidental to, or in
connection with, the accomplishment of the purposes of the
Partnership;

(xviii) to transfer any or all Insured Mortgages and Operating
Partnership Interests held by the Partnership at its termination date
to a liquidation trust (but only if at that time the General Partners
determine such transfer to be in the best interest of the Partners and
Unitholders) and to receive fees for serving as trustee of such trust
which are reasonable and consistent with their fiduciary obligations
under the circumstances, and which would not exceed the fees which the
General Partners are otherwise entitled to receive hereunder.

(b) With respect to all of their obligations, powers and
responsibilities under this Agreement, the General Partners are authorized
to execute and deliver, for and on behalf of the Partnership, such notes
and other evidences of indebtedness, contracts, agreements, assignments,
deeds, leases, loan agreements, mortgages and other security instruments
and agreements as they deem proper, all on such terms and conditions as
they deem proper.

(c) Notwithstanding any provision in this Agreement to the contrary,
it is understood and agreed that in making the selection and determination
of the Complexes in respect of which they will invest in Insured Mortgages
and obtain Operating Partnership Interests, the General Partners shall be
bound by the following investment policies which may not be changed,
altered or amended, except as provided in Section 10.02(a):

(i) except for temporary investments as described in
Section 5.02(a)(xiv), investments shall be limited to Insured
Mortgages and Operating Partnership Interests; and

(ii) in selecting Complexes in respect of which they will
originate an Insured Mortgage, the General Partners shall evaluate,
among other factors: (A) the data supplied by the owner to HUD and
(B) the general rental market conditions in the area of the Complexes
(including vacancy rates).

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(d) Any Person dealing with the Partnership or a General Partner may
rely upon a certificate signed by a General Partner as to:

(i) the identity of the General Partners or Limited Partners or
Unitholders;

(ii) the existence or nonexistence of any fact or facts which
constitute a condition precedent to acts by the General Partners or
are in any other manner germane to the affairs of the Partnership;

(iii) the Persons who are authorized to execute and deliver
any instrument or document by or on behalf of the Partnership; or

(iv) any act or failure to act by the Partnership or as to any
other matter whatsoever involving the Partnership or any Partner.

(e) Notwithstanding any other provision of this Agreement, if, as a
result of the enactment of new federal tax legislation, the Partnership is
or would become or is or would be held to be taxable as a corporation, the
General Partners, with the Consent of a majority in interest of the Limited
Partners and Unitholders, may take any and all such actions they may deem
necessary or appropriate to qualify the Partnership (or a successor entity)
for taxation as a real estate investment trust under Section 856 to 860 of
the Code (or similar provisions). Such actions may include, but shall not
be limited to, amending this Agreement or reorganizing the Partnership into
some other form of association such as a corporation or a business trust.
The General Partners shall effectuate any such qualification, amendment or
reorganization so that, to the extent possible and legally permissible
under the circumstances, the respective interests of the Limited Partners,
Unitholders and the General Partners in the assets and income of the
Partnership (or successor entity) immediately following such qualification,
amendment or reorganization are substantially equivalent to such interests
immediately prior thereto, and the governing documents of the real estate
investment trust comply with the requirements of the applicable guidelines
of the North American Securities Administrators Association, Inc.

(f) Notwithstanding any other provisions of this Agreement, at all
times the General Partners shall have designated one and only one General
Partner to represent the Partnership on an exclusive basis in all dealings
with the FHA (the "Designated FHA Partner"). The Designated FHA Partner's
concurrence shall be required in all Partnership matters involving the FHA,
including, without limitation, any sale of FHA Insured Mortgages or
dissolution of the Partnership (it being understood that the Designated FHA
Partner shall concur in any decision on such matters by vote of the
Unitholders pursuant to Article X). With respect to all such dealings with
the FHA (and only in such respect), the Designated FHA Partner shall be
deemed to be the managing partner of the Partnership and, for purposes of
this provision only, any employee of the

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Partnership who represents the Partnership in dealing with the FHA will
be deemed an employee of and under the control of the Designated FHA
Partner. The Designated FHA Partner shall be the TIG General Partner.
If the TIG General Partner shall cease to be a General Partner, then,
notwithstanding any other provision of this Agreement, the remaining
General Partners or the Partnership shall designate another Designated
FHA Partner which shall be a "chartered institution" as required by the
regulations of the FHA, and the FHA shall be informed immediately of the
new Designated FHA Partner. Further, if the Partnership shall be in any
way reorganized as or into another entity, the FHA shall be informed
immediately, and, if required, an application for approval of such
entity as an FHA-approved investing mortgagee shall be submitted.

Section 5.03. AUTHORITY OF GENERAL PARTNERS AND THEIR AFFILIATES TO DEAL
WITH THE PARTNERSHIP AND OPERATING PARTNERSHIPS.

(a) Affiliates of the General Partners may, and shall have the right
to, become Operating General Partners, including the sole Operating General
Partner, of any Operating Partnership. Affiliates of the General Partners
may, and shall have the right to deal with Operating Partnerships on an
administrative level including establishing the books of the Operating
Partnership and providing other administrative services, act as management
agent of any Complex on the terms and conditions permitted by applicable
governmental regulations, and shall be compensated for such services in an
amount not to exceed the lesser of cost of such services to the General
Partner or its respective Affiliate or 90% of the competitive price which
would be charged in an arm's-length transaction by others rendering
comparable services in the locality where the Complex is located.

(b) Without limitation upon the other powers set forth herein, the
General Partners are expressly authorized to, in the name of, and on behalf
of, the Partnership:

(ii) pay to the General Partners a nonaccountable Organizational,
Offering and Selling Expense Reimbursement Allowance for those
expenses incurred and payable by the General Partners in connection
with or related to the formation and qualification of the Partnership,
the registration and qualification of the Units under applicable
federal and state laws and the marketing, distribution, sale and
processing of the Units, in an amount equal to 2% of Gross Proceeds
and, except for such amount, the General Partners shall not have
recourse to the Partnership for any further reimbursement for
Organizational, Offering and Selling Expenses;

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(iv) agree to the payment to the General Partners by each
Operating Partnership of a Commitment Fee in an amount up to 3.97% of
the amount of each Insured Mortgage, out of which the General Partners
will pay all expenses incurred in connection with the Partnership's
investments in Operating Partnerships;

(v) pay to the General Partners an Incentive Fee equal to 9.1%
of all Cash Available for Distribution and Sale Proceeds attributable
to receipts of Cash Flow and Sale Transactions subsequent to such time
as the Adjusted Contributions have been reduced to zero and the Target
Return on Adjusted Contribution Accounts has been paid on a cumulative
basis (after deduction from such Cash Available for Distribution
and/or Sale Proceeds of any Termination Fee paid therefrom);

(vi) pay to the General Partners a Termination Fee equal to 3%
of all Sale Proceeds reduced by the amount of actual costs incurred in
connection with all Sales Transactions including closing costs,
brokerage and legal fees; provided, however, that such fees be paid
only after the Adjusted Contributions have been reduced to zero and
the Target Return on Adjusted Contributions has been paid on a
cumulative basis;

(vii) pay to the Dealer Manager a Selling Commission for each
Unit sold in a per Unit amount which will vary depending on the number
of Units purchased by each Investor, but not to exceed 7% of the
purchase price of the Unit;

(viii) utilize Reserves, borrowed funds or loan guarantees to
make additional investments in Operating Partnerships in which the
Partnership owns an interest in an amount not to exceed 15% of the
Partnership's original

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investment (Insured Mortgage and Equity Contribution) in an Operating
Partnership;

(ix) borrow funds from a General Partner or any of its
Affiliates (a "Voluntary Loan"); provided, however, that such
borrowings may only be on a short-term basis (not to exceed 24
months) and the Partnership may not pay in connection therewith (A)
interest or other financing charges or fees in excess of the
amounts which would be charged by unrelated lending institutions on
comparable loans for the same locality; or (B) any prepayment
charge or penalty;

(x) reimburse the General Partners as provided in
Section 5.01(f); and

(xi) in their sole discretion, defer any amount of the Annual
Asset Management and Partnership Administration Fee otherwise payable
in accordance with Section 5.03(b)(iii) until the Adjusted
Contributions have been reduced to zero and the Target Return on
Adjusted Contribution Accounts has been paid on a cumulative basis,
and/or defer any amount otherwise reimbursable to the General Partners
in accordance with Section 5.01(f) until such time or times that the
Priority Return on Adjusted Contribution Accounts has been paid on a
noncumulative basis with respect to a calendar year.

(c) Any agreements, contracts and arrangements with any General
Partner or Affiliate of any General Partner permitted by this Agreement
shall be subject to the following conditions (except that subsections
(iii), (iv) and (v) shall not apply to the fees and reimbursements set
forth in Section 5.03(b) herein):

(i) any such agreements, contracts or arrangements shall be
embodied in a written contract which describes the services to be
rendered and all compensation to be paid or the goods or materials to
be provided and the price to be paid therefor or the method of
determining such price;

(ii) any such agreements, contracts or arrangements shall be
fully and promptly disclosed to all Partners in the reports provided
for in Section 9.04(c);

(iii) any such agreements, contracts or arrangements shall be
terminable by either party, without penalty, upon 60 days' prior
written notice, and shall not be amended without the Consent of a
majority in interest of the Limited Partners and Unitholders as a
class;

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(v) the person providing such services or goods must be
previously engaged in the business of rendering such services or
selling or leasing such goods, independently of the Partnership as an
ordinary and ongoing business, and shall represent that it has
adequate staff which it utilizes in the conduct of the business and is
able to render such services or provide such goods or materials to the
Partnership in accordance with its needs therefor.

Section 5.04. GENERAL RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNERS.
Subject to the provisions of Subsection 5.01(b), in exercising management and
control of the Partnership, the General Partners, on behalf of the Partnership
and in furtherance of the business of the Partnership, shall have the authority
to perform all acts which the Partnership is authorized to perform. However,
the General Partners shall not have any authority to:

(a) perform any act in violation of this Agreement or any applicable
law or regulation thereunder;

(b) do any act required to be approved or ratified in writing by all
or part of the Limited Partners under the Delaware Revised Uniform Limited
Partnership Act, unless the right to do so is expressly granted in this
Agreement;

(c) without the consent of a majority in interest of the Limited
Partners (it being understood that the Initial Limited Partner is voting at
the direction of the Unitholders) sell, pursuant to a single transaction or
a series of related transactions, 75% or more of the book value of the
assets of the Partnership, except for (i) a liquidating sale of a final
Insured Mortgage and corresponding Operating Partnership Interest remaining
after the sale of all other Insured Mortgages and Operating Partnership
Interests, or (ii) sales in connection with the liquidation and winding up
of Partnership's business upon its dissolution;

(d) borrow from the Partnership;

(e) without the Consent of a majority in Interest of the Limited
Partners (it being understood that the Initial Limited Partner is voting at
the direction of the Unitholders) (or such greater number of Limited
Partners as may then be required under the Delaware Revised Uniform Limited
Partnership Act) elect to dissolve the Partnership;

(f) do any act which would make it impossible to carry on the
ordinary course of business of the Partnership;

(g) confess a judgment against the Partnership;

(h) possess Partnership property, or assign the Partnership's rights
in specific Partnership property, for other than a Partnership purpose;

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(i) admit a Person as a General Partner, except as provided in this
Agreement;

(j) admit a Person as a Limited Partner, except as provided in this
Agreement;

(k) knowingly perform any act that would subject any Limited Partner
or Unitholder to liability as a general partner in any jurisdiction;

(l) allocate any income, gain, loss, deduction or credit (or any item
thereof) to any Partner if, and only to the extent that, such allocation
will cause the determinations and allocations of income, gain, loss,
deduction or credit (or any item thereof) provided for in Article IV hereof
not to be permitted by Code Section 704(b) and the Treasury Regulations
promulgated thereunder;

(m) lend any funds to any Person other than in connection with the
extension of funds to the Operating Partnerships or in connection with
temporary investments as described in Section 5.02(a)(xiv);

(n) cause the Partnership to acquire interests in an Operating
Partnership owning unimproved or nonincome-producing property unless it is
anticipated that such property will be developed into a Complex as
evidenced by a construction loan;

(o) invest in the securities of other issuers, except as provided in
Sections 5.02(a) or 9.03;

(p) underwrite the securities of other issuers;

(q) reinvest Sale Proceeds, other than in Permitted Interim
Investments pending distribution of such proceeds;

(r) directly or indirectly pay or award any finder's fees,
commissions or other compensation to any Person engaged by a potential
investor for investment advice as an inducement to such advisor to advise
the purchaser regarding the purchase of Units; provided, however, that the
General Partners shall not be prohibited from paying the normal sales
commissions payable to a registered broker-dealer or other properly
licensed Person for selling Units;

(s) acquire any Insured Mortgage or Operating Partnership Interests
in exchange for Units;

(t) except for the investments specified in the Initial Prospectus,
purchase any Insured Mortgage or Operating Partnership Interest on behalf
of the Partnership from the General Partners or any of their Affiliates
unless one of such Persons purchased the

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Insured Mortgage or Operating Partnership Interest in his or its name
and temporarily hold title thereto in order to facilitate the
acquisition of such Insured Mortgage or Operating Partnership Interest
by the Partnership; provided, however, that in the event of such an
acquisition from a General Partner or one of its Affiliates, (i) the
purchase price paid by the Partnership shall not exceed the cost of such
Insured Mortgage or Operating Partnership Interest to the seller, and
(ii) no compensation or other benefit from the transaction may accrue to
such General Partner or any of its Affiliates except (A) the General
Partner or any of its Affiliates may be reimbursed for the costs
incurred to carry an Insured Mortgage or Operating Partnership Interest
acquired for the Partnership; and (B) as otherwise permitted by this
Agreement.

(u) change the Partnership's purposes from those set forth in
Section 1.03;

(v) engage in any transaction which results in the receipt by a
General Partner or any of its Affiliates of any undisclosed "rebate" or
"give-up" or in any reciprocal business arrangement which results in the
circumvention of the restrictions contained in this Agreement or in
applicable state securities laws and regulations upon transactions between
the Partnership, a General Partner and its Affiliates;

(w) without the consent of a majority in interest of the Limited
Partners (it being understood that the Initial Limited Partner is voting at
the direction of the Unitholders) amend this Agreement except as provided
in Sections 12.02(b) or (e) hereof;

(x) cause the Partnership to invest in joint venture arrangements
with another program formed by the General Partners or their Affiliates
unless (i) such other program has investment objectives substantially
identical to the Partnership's, (ii) there are no duplicate property
management or other fees, (iii) the sponsor compensation arrangements of
such other program are substantially identical to the Partnership's,
(iv) the Partnership has a right of first refusal to buy if the other
program wishes to sell property held in the joint venture, (v) the
investment of each program is on substantially the same terms and
conditions, and (vi) the Partnership is in control of the joint venture;

(y) pay any person a real estate brokerage commission for the sale of
Partnership property unless such commission is reasonable, customary and
competitive in light of the size, type and location of the property, and
does not exceed 6% of the contract price for the sale of the property, up
to one-half of which (not to exceed 3% of the contract price) may be paid
to a General Partner or an Affiliate only if such person provided
substantial services in the sales effort and payment of such amount is
subordinated to the Investors having received a return of their Adjusted
Contributions and payment of the Target Return on Adjusted Contribution
Accounts on a cumulative basis; provided, however, that no General Partner
or Affiliate shall be granted an exclusive right to act as real estate
agent of the Partnership;

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(z) pay any fees to a General Partner or Affiliate for property
management services unless such fees are for residential property
management and do not exceed the lesser of (i) 5% of gross revenues from
the property or (ii) fees which are competitive for similar services in the
same geographic area; and

(aa) pay any fees to a General Partner or Affiliate for insurance
brokerage services in connection with obtaining insurance on the
Partnership's property unless (i) such person is independently engaged in
the business of providing such services and 75% or more of such person's
gross revenue is derived from services to non-Affiliates and (ii) the cost
of providing such services is not greater than the lowest quote obtained
from two unaffiliated insurance agencies for comparable coverage and terms.

Section 5.05. DUTIES AND OBLIGATIONS OF THE GENERAL PARTNERS.

(a) The General Partners shall devote to the affairs of the
Partnership such time as may be necessary for the proper performance of
their duties under this Agreement, but neither the General Partners nor the
officers, directors or shareholders of the General Partners shall be
expected to devote his full time to the performance of such duties.

(b) The General Partners shall take such action as may be necessary
or appropriate for the continuation of the Partnership's valid existence
under the laws of the State of Delaware and in order to qualify the
Partnership under the laws of any jurisdiction in which the Partnership is
doing business or in which such qualification is necessary or appropriate
to protect the limited liability of the Limited Partners and Unitholders or
in order to continue in effect such qualification. The General Partners
shall file or cause to be filed for recordation in the office of the
appropriate authorities of the State of Delaware, and in the proper office
or offices in each other jurisdiction in which the Partnership is
qualified, such certificates, including limited partnership and fictitious
name certificates, and other documents as are required by the applicable
statutes, rules or regulations of any such jurisdiction.

(c) The General Partners shall prepare or cause to be prepared and
shall file on or before the due date (or any extension thereof) any
federal, state or local tax returns required to be filed by the
Partnership. The General Partners shall cause the Partnership to pay any
taxes payable by the Partnership.

(d) The General Partners shall use their best efforts to assure that
the Partnership shall not be deemed an "investment company" as such term is
defined in the Investment Company Act of 1940.

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employ such funds or assets in any manner except for the exclusive
benefit of the Partnership; provided, however, that by the execution of
this Agreement, each Partner and Unitholder hereby consents to the
placing by the General Partners of Partnership funds in a bank account
or accounts at banks with which the General Partners or their Affiliates
have informal banking arrangements (which may include compensating
balance requirements), and to the inclusion by such banks of such
Partnership funds in calculating compliance by the General Partners or
their Affiliates with such banking arrangements; however, Partnership
funds may not be used to meet any formal compensating balance
requirements.

(f) The General Partners are authorized, in their sole discretion, to
cause the Partnership to acquire policies of limited partnership liability
insurance, insuring the General Partners, their officers, directors,
employees, shareholders and certain of their Affiliates against certain
liabilities in connection with the business of the Partnership and insuring
the Partnership against certain liabilities with respect to any
indemnification it is legally required or permitted to provide pursuant to
this Agreement to such General Partners, their officers, directors,
employees, shareholders and such Affiliates.

(g) The General Partners will use their best efforts to observe the
standards described under the caption "Investment Objectives and Policies"
in the Prospectus. The Hutton General Partner and the TIG General Partner
shall each designate two representatives to serve on the Investment
Committee and any investment in any Operating Partnership Interest or the
sale of any Operating Partnership Interest shall be subject to the
unanimous approval of the members of the Investment Committee.

Section 5.06. DELEGATIONS OF AUTHORITY. Subject to the provisions of this
Article V, the General Partners may delegate all or any of their powers, rights
and obligations under this Agreement, and may appoint, employ, contract or
otherwise deal with any Person for the transaction of the business of the
Partnership, which Person may, under supervision of the General Partners,
perform any acts or services for the Partnership as the General Partners may
approve.

Section 5.07. OTHER ACTIVITIES. The General Partners and any Affiliate
may engage independently or with others in other business ventures of every
nature and description, including the rendering of advice or services of any
kind to other investors and the making or management of other investments,
including investments in Insured Mortgages or Operating Partnership Interests.
Neither the Partnership nor any Partner or Unitholder shall have any right by
virtue of this Agreement or the partnership relationship created by this
Agreement in or to such other ventures or activities or to the income or
proceeds derived therefrom, and the pursuit of such ventures, even if
competitive with the business of the Partnership, shall not be deemed wrongful
or improper.

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Section 5.08. LIMITATION ON LIABILITY OF THE GENERAL PARTNERS;
INDEMNIFICATION.

(a) The General Partners shall not be liable, responsible or
accountable in damages or otherwise to the Partnership or any of the
Limited Partners and Unitholders for any act or omission performed or
omitted by such General Partner in good faith and in a manner reasonably
believed by it to be within the scope of the authority granted to it by
this Agreement and in the best interests of the Partnership; provided that
such General Partner's conduct did not constitute fraud, bad faith,
negligence or misconduct. The Partnership shall indemnify and hold
harmless the General Partners and their respective officers, directors,
partners, employees, agents, Affiliates, subsidiaries and assigns from and
against any loss, liability or damage incurred by any of them or the
Partnership by reason of any act performed or omitted to be performed by
them in connection with the business of the Partnership, including all
judgments, costs and reasonable attorneys' fees (which attorneys' fees may
be paid as incurred) and any reasonable amounts expended in settlement of
any claims of liability, loss or damage; provided that such General
Partner's conduct did not constitute fraud, bad faith, negligence or
misconduct. The satisfaction of any indemnification obligation shall be
from and limited to Partnership assets, and no Limited Partner or
Unitholder shall have any personal liability on account thereof. The
termination of any action, suit or proceeding shall not, of itself, create
a presumption that the General Partner did not act in good faith and in a
manner which is reasonably believed to be in or not opposed to the best
interest of the Partnership. Any indemnification under this subsection,
unless ordered by a court, shall be made by the Partnership only as
authorized in the specific case and only upon a determination by
independent legal counsel in a written opinion that indemnification of the
General Partner is proper in the circumstances because he has met the
applicable standard of conduct set forth in this subsection.
Notwithstanding any provision of this subsection to the contrary, the
General Partners shall be presumed to be personally liable to creditors for
the debts of the Partnership.

(b) Notwithstanding the provisions of Section 5.08(a), neither the
General Partners, nor any officer, director, partner, employee, agent,
Affiliate, subsidiary or assign of the General Partners, or the Partnership
shall be indemnified from any liability, loss or damage incurred by them in
connection with any claim or settlement involving allegations that the
Securities Act of 1933 or any state securities law was violated by the
General Partners or by any such other Person or entity unless: (i) the
General Partners or other Persons or entities seeking indemnification are
successful in defending such claim; and (ii) such indemnification is
specifically approved by a court of law which shall have been advised as to
the current position of the Securities and Exchange Commission regarding
indemnification for violations of securities law.

(c) The Partnership shall not incur the cost of that portion of any
liability insurance which insures the General Partners for any liability as
to which the General Partners are prohibited from being indemnified under
this Section.

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(d) In the event that Section 5.08(a) or any portion thereof or the
application thereof to any Person or circumstances shall to any extent be
invalid or unenforceable, a right of contribution shall exist on the part
of the party or parties who otherwise would have been an indemnified party
or parties under Section 5.08(a) (hereinafter collectively referred to as
"contribution recipient") to the extent of 90% of any losses, claims,
damages, expenses or liabilities to which a contribution recipient may
become liable. In such event, and upon the incurring by a contribution
recipient of any such loss, claim, damage, expense or liability and the
giving by such contribution recipient of written notice thereof to the
party or parties who otherwise would have been an indemnifying party under
the aforesaid provisions (hereinafter collectively referred to as
"contributor"), the contributor shall promptly pay to such contribution
recipient an amount equal to 90% of any such loss, claim, damage, expense
or liability incurred by such contribution recipient as aforesaid. The
Partnership shall satisfy any obligation under this Section 5.08(d) out of,
and only to the extent of, its assets.

Section 5.09. TAX STATUS OF PARTNERSHIP. The General Partners shall use
their best efforts to meet such requirements of the Code, as interpreted from
time to time by the Internal Revenue Service, any other agency of the federal
government, or the courts, necessary to assure that the Partnership will be
classified as a partnership for federal income tax purposes.

Section 5.10. SALES AGENCY AGREEMENT. The Partnership has entered into a
sales agency agreement with E.F. Hutton & Company Inc., as Dealer Manager,
pursuant to which said firm will assist the Partnership in the sale of Units and
be paid Selling Commissions therefor and be indemnified against certain
liabilities as set forth in Section 8 of such agreement. The Unitholders accept
the terms of such agreement by their adherence to this Agreement and acceptance
of their Units.

Section 5.11. RESTRICTIONS ON AUTHORITY TO DEAL WITH THE GENERAL PARTNERS
AND AFFILIATES. Except as specifically authorized in this Article V, the
General Partners are prohibited from entering into any agreements, contracts or
arrangements on behalf of the Partnership with the General Partners or any
Affiliate of the General Partners. Such prohibition shall include, without
limitation, the following: (a) the Partnership shall not loan money to a General
Partner or any Affiliate of a General Partner except in connection with
investments described in the Initial Prospectus; (b) neither a General Partner
nor any such Affiliate shall loan money to the Partnership if interest rates and
other finance charges and fees in connection with such loan are in excess of the
amounts charged by unrelated banks on comparable loans, or make loans with a
prepayment charge or penalty; (c) no compensation or fees shall be paid a
General Partner or its Affiliates except as described in this Agreement or in
the Prospectus, and (d) the Partnership shall not sell or lease property to a
General Partner or Affiliate of a General Partner.

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ARTICLE VI

CHANGES IN GENERAL PARTNERS

Section 6.01. WITHDRAWAL OF GENERAL PARTNERS.

(a) A General Partner shall not be entitled to withdraw from the
Partnership, or to sell, transfer or assign its Interest as General
Partner, unless a substitute General Partner has been admitted in
accordance with the conditions of Section 6.02.

(b) In the event that a General Partner withdraws from the
Partnership or sells, transfers or assigns its entire Interest, such
General Partner shall be and shall remain liable for all obligations and
liabilities incurred by the Partnership before such withdrawal, sale,
transfer or assignment becomes effective, but shall be free of any
obligation or liability incurred on account of the activities of the
Partnership from and after such withdrawal, sale, transfer or assignment
becomes effective.

(c) The General Partners (with the consent of all General Partners)
may at any time designate additional Persons to be General Partners, whose
Interest in the Partnership shall be such as agreed upon by the General
Partners and such additional General Partners, provided that the Interests
of the Limited Partners and Unitholders shall not be affected thereby.
Such additional Persons shall become additional General Partners only upon
meeting the conditions contained in Section 6.02.

Section 6.02. ADMISSION OF A SUCCESSOR OR ADDITIONAL GENERAL PARTNER. A
Person shall be admitted as a General Partner of the Partnership only if each of
the following conditions is satisfied:

(a) the admission of such Person shall have been Consented to, or
ratified, subject to Section 10.02, by such number of Limited Partners as
are then required under the Delaware Revised Uniform Limited Partnership
Act to Consent to, or ratify, the admission of a general partner, but in
any event, subject to Section 10.02, such admission shall have been
Consented to by not less than a majority in Interest of the Limited
Partners (it being understood that the Initial Limited Partner is voting at
the direction of the Unitholders);

(b) such Person shall have accepted and agreed to be bound by the
terms and provisions of this Agreement, by executing a counterpart hereof,
and such other documents or instruments as may be required or appropriate
in order to effect the admission of such Person as a General Partner shall
have been filed for recording, and all other actions required by law in
connection with such admission shall have been performed;

<PAGE>

(c) if such Person is a corporation, it shall have provided the
Partnership with evidence satisfactory to counsel for the Partnership of
its authority to become a General Partner and to be bound by the terms and
provisions of this Agreement;

(d) counsel for the Partnership or the Limited Partners and
Unitholders, as the case may be, shall have rendered an opinion to the
Partnership that the admission of such Person is in conformity with the
Delaware Revised Uniform Limited Partnership Act and that none of the
actions taken in connection with the admission of such Person is in
violation of the Delaware Revised Uniform Limited Partnership Act, will
impair the limited liability of the Limited Partners and Unitholders, will
cause the termination or dissolution of the Partnership, will cause the
Partnership to be classified other than as a partnership for federal income
tax purposes or will violate federal or state securities laws; and

(e) such Person is not an individual.

Section 6.03. CONSENT OF LIMITED PARTNERS AND UNITHOLDERS TO ADMISSION OF
SUCCESSOR OR ADDITIONAL GENERAL PARTNER. Unless otherwise prohibited by the
Delaware Revised Uniform Limited Partnership Act at the time that such Consent
is necessary, each of the Limited Partners and Unitholders, by the execution of
this Agreement by the Initial Limited Partner, Consents to the admission of any
Person as a successor additional General Partner to which at the time there has
been given the express Consent of a majority in Interest of the Limited Partners
(including the Initial Limited Partner). Upon receipt of such Consent of a
majority in Interest of the Limited Partners (including the Initial Limited
Partner), such admission shall, without any further Consent or approval of the
Limited Partners or Unitholders, be the act of all the Limited Partners and
Unitholders.

Section 6.04. REMOVAL OF A GENERAL PARTNER. Subject to Section 10.02, a
majority in Interest of the Limited Partners (including the Initial Limited
Partner) voting together as a class, without the Consent or other action by the
General Partner to be removed, may remove any General Partner and may elect a
replacement therefor, such replacement shall become a General Partner only upon
meeting the conditions contained in Section 6.02.

Section 6.05. EFFECT OF REMOVAL, BANKRUPTCY, DEATH, WITHDRAWAL,
DISSOLUTION OR INCOMPETENCY OF A GENERAL PARTNER.

(a) In the event of the removal, Bankruptcy, death, dissolution or
adjudication of incompetence of a General Partner or any other event of
withdrawal of a General Partner, the business of the Partnership may be
continued with Partnership property by any other General Partners with the
unanimous Consent of such other General Partners; provided, however, that
if the removed, Bankrupt, deceased, dissolved, incompetent or withdrawn
General Partner is then the sole General Partner, the provisions of
Section 8.01 shall be applicable.

<PAGE>

(b) Upon the removal, Bankruptcy, death, dissolution, adjudication of
incompetence or any other event of withdrawal of a General Partner who is
not then the sole General Partner, the removed, Bankrupt, deceased,
dissolved, incompetent or withdrawn General Partner shall immediately cease
to be a General Partner, and there shall first be assigned and transferred
to each remaining or substitute General Partner such percentage as they
shall mutually determine of the General Partner's Interest of the removed,
Bankrupt, deceased, dissolved, incompetent or withdrawn General Partner as
shall be required to increase the aggregate of all remaining General
Partners' Interests to at least one percent (1%), in consideration for
which, except in the case of a General Partner removed for cause, the
removed, Bankrupt, deceased, dissolved, incompetent or withdrawn General
Partner shall be paid the fair market value thereof. Any dispute as to the
fair market value shall be ascertained by averaging appraisals of the fair
market value of such Interest submitted by three appraisers, one chosen by
the removed General Partner, one chosen by the successor General Partner or
the Limited Partners as a class (it being understood that the Initial
Limited Partner is voting at the direction of the Unitholders), as the case
may be, and the third chosen by the two so chosen. To the extent that the
Interest of the removed, Bankrupt, deceased, dissolved, incompetent or
withdrawn General Partner is not so assigned, his Interest shall be
converted to that of a Limited Partner, but with the same rights under
Article IV (except as reduced by assignment and transfer pursuant to the
first sentence of this paragraph) to share in the Profits and Losses for
Tax Purposes, and Cash Available for Distribution of the Partnership and
the same rights under Article IV (which shall not be reduced by reason of
any assignment and transfer pursuant to the first sentence of this
paragraph) to receive Sale Proceeds or proceeds from liquidation of the
Partnership that he would have had if he had remained as a General Partner;
provided, however, that in the case of a General Partner removed for cause,
any such nonassigned Interest shall be forfeited. Nothing in this
Section 6.05(b) shall affect any rights or liabilities of the removed,
Bankrupt, deceased, dissolved, incompetent or withdrawn General Partner
which matured prior to the removal, Bankruptcy, death, dissolution,
incompetence or withdrawal of such General Partner.

(c) If, at the time of removal, Bankruptcy, death, dissolution,
adjudication of incompetence or withdrawal of a General Partner, the
removed, Bankrupt, deceased, dissolved, incompetent or withdrawn General
Partner was not the sole General Partner of the Partnership, the remaining
General Partner or Partners shall immediately (i) give Notice to the
Limited Partners and Unitholders of such removal, Bankruptcy, death,
dissolution, adjudication of incompetence or withdrawal, and (ii) prepare
such amendments to this Agreement and execute and file for recording such
amendments or documents or other instruments necessary to reflect the
assignment, transfer, termination or conversion (as the case may be) of the
Interest of the removed, Bankrupt, deceased, dissolved, incompetent or
withdrawn General Partner.

<PAGE>

(d) All parties hereto hereby agree to take all actions and to
execute all documents necessary or appropriate to effect the foregoing
provisions of this Section 6.05.

ARTICLE VII

TRANSFERABILITY OF LIMITED PARTNERS' INTERESTS

Section 7.01. ASSIGNABILITY OF UNITS. The Units shall be evidenced by
Beneficial Ownership Certificates which shall be issued in registered form only.
Until such time as the Partnership qualifies the Units for quotation by NASDAQ
or a national or regional securities exchange, the transferability of Units
shall be subject to the restrictions imposed in Section 7.02 below. Upon
qualification of the Units for quotation by NASDAQ or a national or regional
securities exchange, such Units shall be freely transferable (except when
transfer is restricted under federal or state securities laws). Notwithstanding
the foregoing, the General Partners may cause the delisting of the Units and the
reimposition of the restriction of Section 7.02 if (a) in their opinion, a
termination pursuant to Code Section 708 is likely to occur as a result of 50%
or more of the Units being sold or exchanged, exclusive of successive sales or
exchanges within a 12-month period or (b) if, as a result of federal income tax
legislation, partnerships with publicly traded partnership interests would be
taxable as corporations.

Section 7.02. RESTRICTIONS ON TRANSFERS OF INTERESTS OF LIMITED PARTNERS
OR UNITHOLDERS. Except as provided in Section 7.01, a Limited Partner or (until
such time as the Partnership qualifies the Units for quotation by NASDAQ or a
national or regional securities exchange) a Unitholder may assign his Limited
Partnership Interests or Units by a duly executed written instrument of
assignment, the terms of which are not in contravention of any of the provisions
of this Agreement. Within 30 days after an assignment of a beneficial interest
in Limited Partnership Interests or Units which occurs without a transfer of
record ownership of such Limited Partnership Interests or Units, the assignor
shall give notice of such assignment to the General Partners. Notwithstanding
the foregoing, a Limited Partner or Unitholder may not sell, assign, pledge,
transfer or exchange any of his Limited Partnership Interests or Units:

(a) until said Limited Partnership or Unitholder obtains an opinion
of counsel for the Partnership stating:

(i) that such sale, assignment, pledge, transfer or exchange
would not result, when considered with all other sales, assignments,
transfers and exchanges of Interests in the Partnership within the
previous 12 months, in the Partnership being considered to have been
terminated within the meaning of Section 708 of the Code; and

(ii) that such sale, assignment, pledge, transfer or exchange
would not be in violation of any applicable federal or state
securities laws (including any investor suitability standards);

<PAGE>

(b) except for transfers by gift or inheritance, intrafamily
transfers, transfers resulting from family dissolutions and transfers to
Affiliates, if the transferor or the transferee would hold less than 250
(100 in the case of IRAs and Keogh Plans) Limited Partnership Interests or
Units; or

Any attempted sale, assignment, pledge, transfer or exchange in contravention of
the provisions of this Article VII shall be void and ineffectual and shall not
be recognized by the Partnership.

Section 7.03. ASSIGNEES OF LIMITED PARTNERS.

(a) If a Limited Partner or Unitholder dies, his executor,
administrator or trustee, or, if he is adjudicated incompetent, his
committee, guardian or conservator, or, if he becomes Bankrupt, the trustee
or receiver of his estate, shall have all the rights of a Limited Partner
or Unitholder for the purpose of settling or managing his estate and such
power as the deceased or incompetent Limited Partner or Unitholder
possessed to assign all or any part of his Limited Partnership Interest or
Units and to join with the assignee thereof in satisfying any conditions
precedent to such assignee becoming a Limited Partner or Unitholder. The
death, dissolution, adjudication of incompetence or Bankruptcy of a Limited
Partner or Unitholder shall not dissolve the Partnership.

(b) The Partnership need not recognize for any purpose any assignment
of all or any fraction of the Limited Partnership Interests or (so long as
the transfer restrictions of Section 7.02 are applicable to Units) Units of
a Limited Partner or Unitholder unless there shall have been filed with the
Partnership and recorded on the Partnership's books a duly executed and
acknowledged counterpart of the instrument effecting such assignment and
unless such instrument evidences the written acceptance by the assignee of
all of the terms and provisions of this Agreement, contains a
representation that such assignment was made in accordance with all
applicable laws and regulations (including any investor suitability
requirements) and in all other respects is satisfactory in form and
substance to the General Partners.

(c) Any Limited Partner or (so long as the transfer restrictions of
Section 7.02 are applicable to Units) Unitholder who shall assign all of
his Limited Partnership Interests or Units shall cease to be a Limited
Partner or Unitholder of the Partnership, except that unless and until a
Limited Partner is admitted, or a Unitholder is recognized, in his stead,
such assigning Limited Partner or Unitholder shall retain the statutory
rights of an assignor of a limited partnership interest or Unit under the
Delaware Revised Uniform Limited Partnership Act.

(d) An assignee of Limited Partnership Interests or (so long as the
transfer restrictions of Section 7.02 are applicable to Units) Units may
become a Limited Partner or Unitholder only if each of the following
conditions is satisfied:

<PAGE>

(i) the instrument of assignment sets forth the intentions of
the assignor that the assignee succeed to the assignor's interest as a
Limited Partner or Unitholder in his place;

(ii) the assignee shall have fulfilled the requirements of
Sections 7.03(b) and 12.02;

(iii) the assignee shall have paid all reasonable legal fees
and filing costs incurred by the Partnership in connection with his
substitution as a Limited Partner or Unitholder; and

(iv) the General Partners shall have consented to such
substitution, which consent may be granted or withheld by the General
Partners in their sole discretion.

(e) This Agreement shall be amended at least once each calendar
quarter if necessary to recognize the admission of any Limited Partners and
shall be submitted in a timely manner for filing with the office of the
Secretary of State of the State of Delaware. Assignees of Limited
Partnership Interests shall be recognized as such, to the extent set forth
in Sections 7.03(b) or 7.03(d), as of the day which the Partnership has
received the instrument of assignment and all of the other conditions to
the assignment are satisfied.

(f) An assignee of Limited Partnership Interests or Units who does
not become a Limited Partner or Unitholder and who desires to make a
further assignment of his Limited Partnership Interests or Units shall be
subject to all of the provisions of this Article VII to the same extent and
in the same manner as a Limited Partner or Unitholder desiring to make an
assignment of Limited Partnership Interests or Units.

Section 7.04. JOINT OWNERSHIP OF INTERESTS. Subject to the other
provisions of this Agreement, a Limited Partnership Interest or Unit may be
acquired by two or more individuals, who shall, at the time they acquire such
Limited Partnership Interest or Unit, indicate to the Partnership whether the
Limited Partnership Interest or Unit is being held by them as joint tenants with
the right of survivorship, as tenants-in-common or as community property. In
the absence of any such designation, they shall be presumed to hold such Limited
partnership Interest or Unit as tenants-in-common. Any Consent of the Limited
Partners or Units shall require the action or vote of all owners of any such
jointly held Limited Partnership Interest or Unit.

Section 7.05. RESTRICTIONS ON TRANSFERS OF INTERESTS OF THE INITIAL
LIMITED PARTNER. Other than pursuant to Section 11.01(a), the Initial Limited
Partner may not transfer or assign a Limited Partnership Interest without the
prior written consent of the General Partners.

<PAGE>

ARTICLE VIII

DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP

Section 8.01. EVENTS CAUSING DISSOLUTION.

(a) The Partnership shall dissolve upon the happening of any of the
following events:

(i) the bankruptcy, death, dissolution, withdrawal, removal or
adjudication of incompetence of a General Partner, unless the
remaining General Partners (or in the case of a General Partner who is
at that time the sole General Partner, all of the remaining Partners)
agree in writing to continue the business of the Partnership within 90
days of the occurrence of such an event;

(ii) the sale, repayment or other disposition of all Insured
Mortgages and Operating Partnership Interests held by, and
substantially all other assets, if any, held by the Partnership;

(iii) the election by the General Partners pursuant to
Section 5.04(e);

(iv) the expiration of the term of the Partnership specified in
Section 1.04; or

(v) any other event causing the dissolution of the Partnership
under the laws of the State of Delaware.

(b) Dissolution of the Partnership shall be effective on the day on
which the event occurs giving rise to the dissolution, but the Partnership
shall not terminate until a Certificate of Cancellation is filed with the
office of the Secretary of State of the State of Delaware and the assets of
the Partnership are distributed as provided in Section 8.02.
Notwithstanding the dissolution of the Partnership, prior to the
termination of the Partnership, the business of the Partnership and the
affairs of the Partners shall continue to be governed by this Agreement.

Section 8.02. LIQUIDATION.

(a) Upon dissolution of the Partnership, unless all of the Partners
and Unitholders elect to reform the Partnership, the General Partners shall
liquidate the assets of the Partnership, apply and distribute the proceeds
thereof as contemplated by this Section 8.02 and cause this Agreement to be
cancelled. If there is no General Partner, the Limited Partners, acting
together as a class, may elect a liquidator to liquidate the assets of the
Partnership and perform the functions of the General Partners set forth in
this Section 8.02.

<PAGE>

(b) After payment of liabilities owing to creditors of the
Partnership, the General Partners shall set aside as a Reserve such amount
as they deem reasonably necessary for any contingent or unforeseen
liabilities or obligations of the Partnership. Said reserve may be paid
over by the General Partners to a bank, to be held in escrow for the
purpose of paying any such contingent or unforeseen liabilities or
obligations and, at the expiration of such period as the General Partners
may deem advisable, the amount in such reserve shall be distributed among
the Partners in the manner set forth in Section 8.02(c).

(c) After paying such liabilities and providing for such reserve, the
General Partners shall cause the remaining net assets of the Partnership to
be distributed among the Partners. The Profits or Losses for Tax Purposes
resulting from the liquidation of the assets of the Partnership (determined
prior to any deduction attributable to the payment to the General Partners
of any Incentive Fee or Termination Fee from the proceeds resulting from
such liquidation of the assets of the Partnership) shall be allocated among
the Partners in accordance with the applicable provisions of Section
4.03(d). All remaining net assets shall then be distributed among the
Partners and Unitholders in proportion to their respective Capital
Accounts, including, in the case of Unitholders, the special subaccounts
established through the Initial Limited Partner's Capital Account on behalf
of such Unitholders, until the Adjusted Contributions and the Target Return
on Adjusted Contribution Accounts have been reduced to zero. After the
Adjusted Contributions and the Target Return on Adjusted Contribution
Accounts have been reduced to zero, remaining net assets shall be applied
to the payment of any accrued but unpaid Incentive Fee or Termination Fee
then owed to the General Partners in accordance with Section 5.03(b)(v) and
(b)(vi). Any Partnership net assets remaining after the payment of such
fees shall be distributed among the Partners and Unitholders in proportion
to their respective adjusted Capital Accounts, including, in the case of
Unitholders, the special subaccounts established through the Initial
Limited Partner's Capital Account on behalf of such Unitholders.

(d) Notwithstanding the foregoing, if the General Partners shall
determine that an immediate sale of part or all of the Partnership's assets
would cause undue loss to the Partners or the Unitholders, the General
Partners may, after giving Notice to all of the Limited Partners and
Unitholders, and to the extent not then prohibited by any applicable law of
any jurisdiction in which the Partnership is then formed or qualified,
defer liquidation and withhold from distribution for a reasonable time any
assets of the Partnership except those necessary to satisfy the
Partnership's debts and obligations, or transfer such assets to a
liquidating trust in accordance with Section 5.02(a)(xviii).

(e) Upon dissolution of the Partnership, if there is no General
Partner, such other Person who may be appointed in accordance with
applicable law shall be responsible to take all action related to the
winding up and distribution of assets of the Partnership and shall perform
the actions of the General Partners described in this Section 8.02.

<PAGE>

(f) Each holder of Limited Partnership Interests or Units shall look
solely to the assets of the Partnership for all distributions with respect
to the Partnership and his Capital Contribution or Contribution of
Unitholders and his share of Cash Available for Distribution, Sale Proceeds
and Profits and Losses for Tax Purposes, and shall have no recourse
therefor, upon dissolution or otherwise, against the General Partners, any
Limited Partner or Unitholder. No Partner or Unitholder shall have any
right to demand or receive property other than cash upon dissolution and
termination of the Partnership.

ARTICLE IX

BOOKS AND RECORDS, ACCOUNTING, REPORTS AND TAX ELECTIONS

Section 9.01. BOOKS AND RECORDS.

(a) The Partnership shall maintain at the principal office of the
Partnership the following records, which shall be available during ordinary
business hours for examination and copying there at the reasonable request,
and at the expense, of any Partner or Unitholder or his duly authorized
representative, or copies of such records may be requested in writing for
any proper purpose by any Partner or Unitholder or his duly authorized
representative provided that the reasonable costs of fulfilling such
request, including copying expenses, shall be paid by the Partner or
Unitholder making such request:

(i) a current list of the full name and last known home or
business address of each Partner and Unitholder, set forth in
alphabetical order;

(ii) a copy of this Agreement, together with executed copies of
any powers of attorney pursuant to which this Agreement, and any
amendments hereto, have been executed;

(iii) copies of the Partnership's federal, state and local
income tax returns and reports, if any, for the three most recent
years;

(iv) copies of (A) any effective written partnership agreements
and (B) any financial statements of the Partnership for the three most
recent years; and

(v) the Partnership books.

(b) The General Partners, at Partnership expense, shall maintain for
a period of at least four years a record of any information obtained to
indicate that a Limited Partner or Unitholder meets with the suitability
standards set forth in the Prospectus and shall retain for five years any
appraisal obtained with respect to the value of a Complex

<PAGE>

owned by an Operating Partnership in which the Partnership purchases an
Operating Partnership Interest.

Section 9.02. ACCOUNTING BASIS AND FISCAL YEAR. The books of the
Partnership initially shall be kept on the accrual method. The fiscal year of
the Partnership shall be the year ending September 30.

Section 9.03. BANK ACCOUNTS. The bank accounts of the Partnership shall
be maintained in such banking institutions as the General Partners shall
determine. All deposits and other funds not immediately needed in the operation
of the business may be invested in Permitted Interim Investments; provided,
however, that prior to the sale by the Partnership of the minimum number of
Units, no funds paid by subscribers for Units shall be invested in tax-exempt
notes or bonds. The funds of the Partnership shall not be commingled with the
funds of any other Person.

Section 9.04. REPORTS.

(a) If the Units are not registered pursuant to Section 12 of the
Securities Exchange Act of 1934, within 60 days after the end of the
Partnership's first two complete quarters of operations and, thereafter,
within 60 days after the end of each first six-month period of each
Partnership year, the General Partners shall send to each person who was a
Limited Partner or Unitholder during such period a balance sheet and
statements of operations, changes in partners' capital, changes in
financial position and Cash Available for Distribution and Sales Proceeds
for, or as of the end of, such quarter, none of which need be audited,
together with a report of the activities of the Partnership during each
six-month period.

(b) If the Units are registered pursuant to Section 12 of the
Securities Exchange Act of 1934, within 45 days after the end of each of
the first three quarters of each year, the General Partners shall send to
each person who was a Limited Partner or Unitholder during such quarter a
balance sheet and statements of operations, changes in partners' capital,
changes in financial position (all prepared in accordance with generally
accepted accounting principles) and a statement of Cash Available for
Distribution and Sales Proceeds for, or as of the end of, such quarter,
none of which need be audited, together with a report of the activities of
the Partnership during such quarter.

(c) Within 45 days after the end of each of the first three quarters
in each year and within 120 days after the end of the fourth quarter in
each year, the General Partners shall cause to be prepared and distributed
to each Person who was a Limited Partner or Unitholder at any time during
the quarter then ended (i) a detailed statement describing any new
agreement, contract or arrangement between the Partnership and the General
Partners or any of their Affiliates, (ii) the amount of all fees and other
compensation paid by the Partnership during such quarter to the General
Partners or any Affiliate of the General Partners, and (iii) until the
Capital Contributions of Unitholders shall be fully

<PAGE>

invested, a special report of all Insured Mortgage and Operating
Partnership Interest acquisitions including (A) a description of the
Insured Mortgage, (B) a description of the Property securing the Insured
Mortgage, (C) the purchase price and remaining term of the Insured
Mortgage, and (D) the amount which then remains unexpended, stated in
terms of both dollar amount and percentage of the sum of the Partners'
Capital Contributions and the Contributions of Unitholders.

(d) The General Partners shall send to each person who was a Limited
Partner or Unitholder at any time during the year then ended such tax
information as shall be necessary for the preparation by such Limited
Partner or Unitholder of his federal income tax return and required state
income and other tax returns. The General Partners shall send this
information within 75 days after the end of each calendar year.

(e) Within 120 days after the end of each year, the General Partners
shall send to each person who was a Limited Partner or Unitholder at any
time during the year then ended an annual report including (i) the balance
sheet of the Partnership as of the end of such year and statements of
operations, changes in partners' capital and changes in financial position
of the Partnership for such year, all of which shall be prepared in
accordance with generally accepted accounting principles and accompanied by
a report of the Accountants containing an opinion of the Accountants; (ii)
a statement of Cash Available for Distribution and Sale Proceeds for such
year, (iii) a report of the activities of the Partnership during such year;
(iv) a statement (which need not be audited) showing distribution per
Limited Partnership Interest and per Unit by admission date during such
year in respect of such year, which statement shall identify distributions
from (A) Cash Available for Distribution and Sale Proceeds generated during
such year, (B) Cash Available for Distribution and Sale Proceeds generated
during prior years, and (C) Reserves and other sources; (v) a detailed
statement of any transactions with the General Partners or their
Affiliates, and of fees, commissions, compensation and other benefits paid,
or accrued to the General Partners or their Affiliates for the fiscal year
completed, showing the amount paid or accrued to each recipient and the
services performed, and (vi) a breakdown of the amounts actually reimbursed
to the General Partners. Accountants to the General Partners will certify
that the amounts actually reimbursed were costs incurred in the management
of the Partnership. The methods of verification used by the accountants
will be in accordance with generally accepted auditing standards and
include such tests of the accounting records and other auditing procedures
which the accountants for the General Partners consider appropriate,
including, but not limited to, review of the time records of employees of
the General Partners and their Affiliates, and review of the nature of the
tasks performed by such employees for which the General Partners are
reimbursed.

(f) The Partnership shall send to the Limited Partners and
Unitholders the information specified by Form 10-Q within 45 days after the
end of each quarterly period for which it is required to file such a report
with the Securities and Exchange Commission.

<PAGE>

(g) A copy of each report referred to in this Section 9.04 shall be
filed with all securities commissions requiring such filing at the time
required by such commissions.

Section 9.05. SECTION 754 ELECTIONS. The Partnership shall not make an
election, pursuant to Section 754 of the Internal Revenue Code of 1954 (or any
corresponding provision of succeeding law), to adjust the basis of the
Partnership property.

Section 9.06. DESIGNATION OF TAX MATTERS PARTNER. The General Partners
hereby designate the TIG General Partner as Tax Matters Partner of the
Partnership, as provided in regulations pursuant to Section 6231 of the Code.
Each Partner and Unitholder consents to such designation of the Tax Matters
Partner and agrees to execute, certify, acknowledge, deliver, swear to, file and
record at the appropriate public offices such documents as may be necessary or
appropriate to evidence such consent.

Section 9.07. DUTIES OF TAX MATTERS PARTNER.

(a) To the extent and in the manner provided by applicable law and
regulations, the Tax Matters Partner shall furnish the name, address,
profits, interest and taxpayer identification number of each Partner and
Unitholder to the Secretary of the Treasury or his delegate (the
"Secretary").

(b) To the extent and in the manner provided by applicable law and
regulations, the Tax Matters Partner shall keep each Partner and Unitholder
informed of the administrative and judicial proceedings for the adjustment
at the Partnership level of any item required to be taken into account by a
Partner or Unitholder for income tax purposes (such administrative
proceeding being referred to hereinafter as a "tax audit" and such judicial
proceeding being referred to hereinafter as "judicial review").

Section 9.08. AUTHORITY OF TAX MATTERS PARTNER. The Tax Matters Partner
is hereby authorized, but not required:

(a) to enter into any settlement with the Internal Revenue Service or
the Secretary with respect to any tax audit or judicial review, and in the
settlement agreement the Tax Matters Partner may expressly state that such
agreement shall bind the other Partners and Unitholders, except that such
settlement agreement shall not bind any Partner or Unitholder who (within
the time prescribed pursuant to the Code and regulations thereunder) files
a statement with the Secretary providing that the Tax Matters Partner shall
not have the authority to enter into a settlement agreement on behalf of
such Partner or Unitholder;

<PAGE>

with the Tax Court, the District Court of the United States for the
district in which the Partnership's principal place of business is located,
or the United States Claims Court;

(d) to file a request for an administrative adjustment with the
Secretary at any time and, if any part of such request is not allowed by
the Secretary, to file a petition for judicial review with respect to such
request;

(e) to enter into an agreement with the Internal Revenue Service to
extend the period for assessing any tax which is attributable to any item
required to be taken into account by a Partner or Unitholder for tax
purposes, or an item affected by such item; and

(f) to take any other action on behalf of the Partners, the
Unitholders or the Partnership in connection with any administrative or
judicial tax proceeding to the extent permitted by applicable law or
regulations.

Section 9.09. EXPENSES OF TAX MATTERS PARTNER. The Partnership shall
indemnify and reimburse the Tax Matters Partner for all expenses, including
legal and accounting fees, claims, liabilities, losses and damages incurred in
connection with any administrative or judicial proceeding with respect to the
tax liability of the Partners and Unitholders. The payment of all such expenses
shall be made before any distributions are made from Cash Flow or any reserves
are set aside by the General Partners. Neither the General Partners, nor any
Affiliate, nor any other Person shall have any obligation to provide funds for
such purpose. The taking of any action and the incurring of any expense by the
Tax Matters Partner in connection with any such proceeding, except to the extent
required by law, is a matter in the sole discretion of the Tax Matters Partner
and the provisions on limitations of liability of General Partners and
indemnification set forth in Section 5.08 of this Agreement shall be fully
applicable to the Tax Matters Partner in its capacity as such.

ARTICLE X

MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS AND UNITHOLDERS

Section 10.01. MEETINGS.

(a) Meetings of the Limited Partners and Unitholders for any purpose
may be called by the General Partners at any time and shall be called by
the General Partners within 15 days after receipt of a written request for
such a meeting signed by 10% or more in Interest of the Limited Partners
considered as a class (it being understood that the Initial Limited Partner
is voting the Interests of the Unitholders in accordance with their
directions). Any such request shall state the purpose of the proposed
meeting and

<PAGE>

the matters proposed to be acted upon thereat. Meetings shall be held
at the principal office of the Partnership or at such other place as may
be designated by the General Partners. In addition, the General Partners
shall submit any matter upon which the Limited Partners (including the
Initial Limited Partner acting for and at the direction of the Unitholders)
are entitled to act to the Limited Partners for a vote by written Consent
without a meeting.

(b) Notice of any meeting to be held pursuant to Section 10.01(a)
shall be given not less than 10 days nor more than 60 days before the date
of the meeting to each Limited Partner and Unitholder at his record
address, or at such other address which he may have furnished in writing to
the General Partners. Such Notice shall state the place, date and hour of
the meeting and shall indicate that the Notice is being issued at the
direction of, or by, the Partner(s) calling the meeting. The Notice shall
state the purpose or purposes of the meeting. If a meeting is adjourned to
another time or place, and if an announcement of the adjournment of time or
place is made at the meeting, it shall not be necessary to give Notice of
the adjourned meeting. The presence in person or by proxy of a majority in
Interest of the Limited Partners (including the Initial Limited Partner
acting for and at the direction of the Unitholders) considered as a class
shall constitute a quorum at all meetings of the Limited Partners;
provided, however, that if no such quorum is present, holders of a majority
in Interest of the Limited Partners considered as a class (it being
understood that the Initial Limited Partner is voting at the direction of
the Unitholders) so present or so represented may adjourn the meeting from
time to time without further Notice, until a quorum shall have been
obtained. No Notice of the time, place or purpose of any meeting of
Limited Partners and Unitholders need be given to any Limited Partner or
Unitholder who attends in person or is represented by proxy, except for a
Limited Partner or Unitholder attending a meeting for the express purpose
of objecting at the beginning of the meeting to the transaction of any
business on the ground that the meeting is not lawfully called or convened,
or to any Limited Partner or Unitholder entitled to such Notice who, in
writing, executed and filed with the records of the meeting, either before
or after the time thereof, waives such Notice.

(c) For the purpose of determining the Limited Partners entitled to
vote on, or to vote at, and the Unitholders entitled to direct the voting
of the Initial Limited Partner on or at any meeting of the Limited Partners
and Unitholders, or any adjournment thereof, or to vote by written Consent
without a meeting, the General Partners or the Limited Partners and
Unitholders requesting such meeting or vote may fix, in advance, a date as
the record date of any such determination of Limited Partners and
Unitholders. Such date shall not be more than 60 days nor less than 10
days before any such meeting or submission of a matter to the Limited
Partners and Unitholders for a vote by written Consent.

(d) At each meeting of Limited Partners and Unitholders, the Limited
Partners present or represented by proxy shall elect such officers and
adopt such rules for the conduct of such meeting as they shall deem
appropriate.

<PAGE>

Section 10.02. VOTING RIGHTS OF LIMITED PARTNERS AND UNITHOLDERS.

(a) Subject to Section 10.03, a majority in interest of the Limited
Partners (it being understood that the Initial Limited Partner is voting at
the direction of Unitholders), without the concurrence of the General
Partners, may: (i) amend this Agreement, subject to the conditions that
such amendment (A) may not in any manner allow the Limited Partners and
Unitholders to take part in the management or control of the Partnership's
business or otherwise modify their limited liability, and (B) may not,
without the consent of the General Partner affected, alter the rights,
powers and duties of such General Partner as set forth in Article V, the
interest of such General Partner in Profits and Losses for Tax Purposes, or
Cash Available for Distribution, or Sale Proceeds as set forth in this
Agreement; (ii) sell all or substantially all of the Partnership's assets
or dissolve the Partnership; or (iii) remove any General Partner and elect
a replacement therefor, which replacement shall become a General Partner
only in accordance with Section 6.02. If the Limited Partners, voting as a
class (it being understood that the Initial Limited Partner is voting at
the direction of the Unitholders) vote to remove a General Partner pursuant
to this Section 10.02, they shall provide the removed General Partner with
Notice thereof, which Notice shall be set forth the date upon which such
removal is to become effective.

(b) Any General Partner removed pursuant to this Section shall remain
liable for all obligations and liabilities incurred by him as General
Partner before such removal becomes effective, but shall be free of any
obligation or liability as General Partner incurred on account of the
activities of the Partnership from and after the time such removal becomes
effective.

(c) A Limited Partner shall be entitled to cast one vote for each
Limited Partnership Interest which he owns, and a Unitholder shall be
entitled to direct the Initial Limited Partner to cast one vote for each
Unit which he owns (it being understood that the Initial Limited Partner is
voting at the direction of the Unitholders) (i) at a meeting, in person, by
written proxy or by a signed writing directing the manner in which he
desires that his vote be cast which writing must be received by the General
Partners prior to such meeting, or (ii) without a meeting, by a signed
writing directing the manner in which he desires that his vote be cast,
which writing must be received by the General Partners prior to the date
upon which the votes of Limited Partners are to be counted. Every proxy
must be signed by the Limited Partner or Unitholder or his
attorney-in-fact. No proxy shall be valid after the expiration of 12
months from the date thereof unless otherwise provided in the proxy. Every
proxy shall be revocable at the pleasure of the Limited Partner or the
Unitholder executing it. Only the votes of Limited Partners of record on
the Notice date (or the record date, if one is fixed pursuant to Section
10.01(c)), whether at a meeting or otherwise, shall be counted. The
General Partners shall not be entitled to vote in their capacity as General
Partners. The laws of the State of Delaware pertaining to the validity and
use of corporate proxies shall govern the validity and use of proxies given
by the Limited Partners and the Unitholders. The

<PAGE>

Unitholders may give proxies only to the Initial Limited Partner. The
Initial Limited Partner will vote in accordance with the directions of
the Unitholders so that each interest of a Unitholder will be voted
separately.

Section 10.03. CONDITIONS TO ACTION BY LIMITED PARTNERS AND UNITHOLDERS.
The voting rights of the Limited Partners set forth in Section 5.04(c) and (e)
and Section 10.02 shall not be exercised unless and until (a) the Partnership
has received an opinion of counsel, which counsel is satisfactory to a majority
in Interest of the Limited Partners (it being understood that the Initial
Limited Partner is voting at the direction of the Unitholders), that such action
is legal, (b) either (i) the Partnership has received an opinion from such
counsel that such action may be effected without subjecting the Limited Partners
and Unitholders to liability as general partners under the Delaware Revised
Uniform Limited Partnership Act, or (ii) a Delaware court having jurisdiction
over the matter enters a judgment, not subject to further appeal, to such
effect, and (c) either (i) the Partnership has received an opinion from such
counsel that such action may be effected without changing the Partnership's
status for tax purposes, or (ii) a court having jurisdiction over the matter
enters a judgment not subject to further appeal, or the Internal Revenue Service
issues a ruling to such effect. For purposes of this Section 10.03, counsel
will be deemed satisfactory to the Limited Partners if proposed by the General
Partners and not disapproved in writing within 45 days by a majority in Interest
of the Limited Partners (it being understood that the Initial Limited Partner is
voting at the direction of the Unitholders), provided that if the holders of 10%
or more of the outstanding Limited Partnership Interests propose counsel for
this purpose, such proposed counsel, and not counsel proposed by the General
Partners, shall be submitted for such approval by the Limited Partners as a
class.

Section 10.04. MANAGEMENT OF THE PARTNERSHIP. No Limited Partner or
Unitholder shall take part in the management or control of the business of the
Partnership or transact any business in the name of the Partnership. No Limited
Partner shall have the power or authority to bind the Partnership or to sign any
agreement or document in the name of the Partnership. No Limited Partner or
Unitholder shall have any power or authority with respect to the Partnership
except insofar as the Consent of the Limited Partners shall be expressly
required by this Agreement. The exercise by the Limited Partners and
Unitholders (acting through the Initial Limited Partner) of any of their voting
and other rights pursuant to and in accordance with this Agreement shall not
constitute participation in or control over Partnership business.

Section 10.05. OTHER ACTIVITIES. The Limited Partners and Unitholders may
engage in or possess interests in other business ventures of every kind and
description of their own accounts, including, without limitation, serving as
general or limited partners of other partnerships which own, either directly or
through interests in other partnerships or otherwise, FHA Insured Mortgages.
Neither the Partnership nor any of the Partners or Unitholders shall have any
rights by virtue of this Agreement in or to such business ventures or to the
income or profits derived therefrom.

<PAGE>

ARTICLE XI

ASSIGNMENT OF ASSIGNED LIMITED PARTNERSHIP INTERESTS
TO UNITHOLDERS AND RIGHTS OF UNITHOLDERS

Section 11.01. ASSIGNMENT OF ASSIGNED LIMITED PARTNERSHIP INTERESTS TO
UNITHOLDERS.

(a) The Initial Limited Partner, by the execution of this Agreement,
irrevocably transfers and assigns to the Unitholders all of the Initial
Limited Partner's rights and interest in and to the Assigned Limited
Partnership Interests, except as otherwise provided herein, as of the time
of release by the Escrow Agent to the Partnership of any payments for
Units.

(b) The General Partner, by the execution of this Agreement,
irrevocably consents to and acknowledges that (i) the foregoing transfer
and assignment pursuant to Section 11.01(a) by the Initial Limited Partner
to the Unitholders of the Initial Limited Partner's rights and interest in
the Assigned Limited Partnership Interests is effective, and (ii) the
Unitholders are intended to be third-party beneficiaries of all rights and
privileges of the Initial Limited Partner in respect of the Assigned
Limited Partnership Interests. The General Partner covenants and agrees
that, in accordance with the foregoing transfer and assignment, all the
Initial Limited Partner's rights and privileges in respect of the Assigned
Limited Partnership Interests may be exercised by the Unitholders except as
otherwise provided herein.

Section 11.02. RIGHTS OF UNITHOLDERS.

(a) Limited Partners (including the Initial Limited Partner but only
with respect to its own Interests) and Unitholders shall share PARI PASSU
on the basis of one Limited Partnership Interest for one Unit, and shall be
considered as a single class with respect to all rights to receive
distributions of Cash Available for Distribution, Sale Proceeds,
allocations of Profits and Losses for Tax Purposes, and other
determinations of allocations and distributions pursuant to this Agreement.

(b) Limited Partners, including the Initial Limited Partner voting
the Interests of the Unitholders at their direction, shall vote on all
matters in respect of which they are entitled to vote (either in person, by
proxy or by written Consent), as a single class with each Limited
Partnership Interest entitled to one vote.

<PAGE>

increased from time to time in the discretion of the General Partner). This
Agreement shall be amended at least once monthly to recognize the admission
of such persons as Limited Partners of the Partnership. Persons who effect
such an exchange shall receive one Limited Partnership Interest for each Unit
they exchange and shall not have the right thereafter to re-exchange their
Limited Partnership Interests for Units. Units which have been exchanged for
Limited Partnership Interests shall be cancelled and shall not be reissued.

Section 11.04. SUBSCRIPTIONS FOR UNITS AND CLOSING.

(a) The General Partners are authorized, from time to time or at any
time, to accept subscriptions for Units from any Person if, after the
acceptance of such subscriptions, such Person's Capital Contribution is not
less than $5,000 ($2,000 for IRAs and Keogh Plans) and not more than such
maximum amount (not to exceed $10,000,000) as the General Partners shall
determine; provided, however, that no subscriptions for Units shall be
accepted after one year from the date of the Prospectus.

(b) All subscriptions for Units shall be received by the Partnership
in trust and deposited in an escrow account with the Escrow Agent within
two business days after receipt of Subscription Agreements by the General
Partners. Subscriptions for Units shall be accepted or rejected by the
General Partners within 15 days after their receipt by the Partnership.
Upon receipt of subscriptions acceptable to the General Partners for at
least 500,000 Units, the Escrow Agent shall release such subscriptions to
the Partnership (such release of subscriptions to be treated as
contributions to the Partnership made by the Initial Limited Partner on
behalf of, and as nominee for the Unitholders). Investors shall become
Unitholders of record as of the close of business on the day of receipt of
such subscriptions by the Partnership. Any interest earned on moneys paid
by Investors during the period such moneys are held in escrow shall be paid
to Investors following release of subscriptions. All moneys deposited by
Investors whose subscriptions are rejected by the General Partner will be
returned to such Investors, with any interest earned thereon, promptly
after such rejection. If the Escrow Agent does not receive subscriptions
for at least 500,000 Units on or before 60 days from the commencement of
the Offering, which date may be extended by agreement of the General
Partner to not later than one year from the date of the Prospectus, it
shall promptly return all moneys deposited by Investors, together with any
interest earned thereon. The General Partners and their Affiliates shall
have the right to subscribe for Interests for their own accounts but any
such subscriptions shall not be included for purposes of determining
whether the minimum number of subscriptions has been received. After
Initial Closing, additional subscribers whose subscriptions for Units are
acceptable to the General Partners shall be admitted as Unitholders not
later than the fifteenth day of the month if such Unitholders'
subscriptions were accepted during the first fifteen days of the month, and
not later than the last day of the month if such subscriptions were
accepted between the sixteenth and last days of such month, or such later
date or dates as determined by the General Partners.

<PAGE>

(c) The General Partners are hereby authorized to do all things
necessary in order to accomplish the purpose of this Section 11.04,
including, but not limited to, registering the Units under the Securities
Act of 1933, as amended, pursuant to the rules and regulations of the
Securities and Exchange Commission, qualifying the Units for sale with
state securities regulatory authorities or perfecting exemptions from
qualification, and entering into such underwriting or agency arrangements
for the solicitation of the Units upon such terms and conditions as the
General Partners may deem advisable.

(d) Immediately upon the release by the Escrow Agent to the
Partnership of subscriptions of Unitholders (such release of subscriptions
to be treated as contributions to the Partnership made by the Initial
Limited Partner on behalf of, and as nominee for, the Unitholders), the
Initial Limited Partner shall be credited on the books and records of the
Partnership with additional Limited Partnership Interests and additional
Capital Contributions in the amount of such subscriptions and the Limited
Partnership Certificate of the Partnership shall be amended to reflect the
ownership by the Initial Limited Partner of Assigned Limited Partnership
Interests in the amount of such purchased Units. The Initial Limited
Partner's rights and interest in such Assigned Limited Partnership
Interests shall be deemed to have been transferred and assigned to the
Unitholders in accordance with Section 11.01(a).

(e) Subject to the provisions of Article VII, a Person shall be
treated as a Unitholder on the books and records of the Partnership as of
the close of business of the day on which the Partnership receives such
Person's subscription pursuant to Section 11.04(b) or of the day on which
the Partnership receives evidence of transfer of a Unit to such Person, and
all Unitholder rights, and all allocations in respect of Unitholders,
including allocations of Profits will vest in, and be allocable to, each
Unitholder as of the close of business of such day.

Section 11.05. PRESERVATION OF TAX STATUS. The General Partners may at
any time require the Unitholders to become Limited Partners, and may take such
other action with respect to the manner in which Units or Limited Partnership
Interests are being or may be transferred or traded, as it may deem necessary or
appropriate, in order to preserve the status of the Partnership as a partnership
rather than an association taxable as a corporation for federal income tax
purposes or to insure that Unitholders will be treated as limited partners for
federal income tax purposes.

ARTICLE XII

MISCELLANEOUS PROVISIONS

Section 12.01. APPOINTMENT OF THE GENERAL PARTNERS AS ATTORNEY-IN-FACT.

(a) Each Limited Partner, including each Unitholder who exchanges his
Units for Limited Partner Interests, by the execution of this Agreement
irrevocably constitutes

<PAGE>

and appoints, with full power of substitution, the General Partners, and
each of them acting singly, as his true and lawful attorney-in-fact with
full power and authority in his name, place and stead to execute, certify,
acknowledge, deliver, swear to, file and record at the appropriate public
offices such documents as may be necessary or appropriate to carry out the
provisions of this Agreement, including, but not limited to:

(i) all certificates and other instruments (including
counterparts of this Agreement), and any amendment thereof, which any
such Person deems appropriate to form, qualify or continue the
Partnership as a limited partnership (or a partnership in which the
Limited Partners will have limited liability comparable to that
provided by the Delaware Revised Uniform Limited Partnership Act on
the date thereof) in a jurisdiction in which the Partnership may
conduct business or in which such formation, qualification or
continuation is, in the opinion of any such Person, necessary to
protect the limited liability of the Limited Partners and Unitholders;

(ii) any other instrument or document which may be required to
be filed by the Partnership under federal law or under the laws of any
state in which any such Person deems it advisable to file;

(iii) all amendments to this Agreement adopted in accordance
with the terms hereof and all instruments which any such person deems
appropriate to reflect a change or modification of the Partnership in
accordance with the terms of this Agreement; and

(iv) any instrument or document, including amendments to this
Agreement, which may be required to effect the continuation of the
Partnership, the admission of a Limited Partner or an additional or
successor General Partner, or the dissolution and termination of the
Partnership (provided such continuation, admission or dissolution and
termination are in accordance with the terms of this Agreement) or to
reflect any reductions in amount of Capital Contributions.

(b) The appointment by each Limited Partner of each of such persons
as his attorney-in-fact is irrevocable and shall be deemed to be a power
coupled with an interest, in recognition of the fact that each of the
Partners under this Agreement will be relying upon the power of such
persons to act as contemplated by this Agreement in any filing and other
action by them on behalf of the Partnership, and such power shall survive
the removal, Bankruptcy, death, incompetence or dissolution of any Person
hereby giving such power and the transfer or assignment of all or any part
of the Limited Partnership Interests of such Person; provided, however,
that in the event of a transfer by a Limited Partner of all or any part of
his Limited Partnership Interests, the foregoing power of attorney of a
transferor Limited Partner shall survive such transfer only until such time
as the transferee is admitted to the Partnership as a Limited Partner and
all

51
<PAGE>

required documents and instruments are duly executed, filed and recorded
to effect such substitution.

Section 12.02. SIGNATURES; AMENDMENTS.

(a) Each Limited Partner, each General Partner, additional General
Partner and successor General Partner shall become a signatory hereto by
signing such number of counterpart signature pages to this Agreement and
such other instrument or instruments in such manner and at such time as the
General Partners shall determine. By so signing, each Limited Partner,
General Partner, successor General Partner or additional General Partner,
as the case may be, shall be deemed to have adopted, and to have agreed to
be bound by, all the provisions of this Agreement, as amended from time to
time; provided, however, that no such counterpart shall be binding unless
and until it has been accepted by the General Partners.

(b) In addition to any amendments otherwise authorized herein,
amendments may be made to this Agreement from time to time by the General
Partners, without the consent of the Limited Partners or Unitholders, (i)
to add to the representations, duties or obligations of the General
Partners or surrender any right or power granted to the General Partners in
this Agreement; (ii) to cure any ambiguity or correct or supplement any
provision in this Agreement which may be inconsistent with the manifest
intent of this Agreement; (iii) to delete or add any provision of this
Agreement required to be deleted or added based upon comments by the staff
of the Securities and Exchange Commission or other federal agency or by a
state "Blue Sky" commissioner or similar official; (iv) to delete, add or
revise any provision of this Agreement that may be necessary or
appropriate, in the General Partners' judgment, to insure that the
Partnership will be treated as a partnership, and that each Unitholder and
each Limited Partner will be treated as a limited partner, for federal
income tax purposes; and (v) to cause investments of the Partnership to be
exempt from the definition of "plan assets" under the Employee Retirement
Income Security Act of 1974 and any regulations promulgated thereunder;
provided, however, that no amendment shall be adopted pursuant to this
Section 12.02(b) unless the adoption thereof (A) is for the benefit of, or
not adverse to the interests of, the Limited Partners and the Unitholders;
(B) is consistent with Section 5.01(c); (C) does not affect the
distribution of Cash Available for Distribution or Sale Proceeds or the
allocation of Profits and Losses for Tax Purposes among the Limited
Partners and the Unitholders; and (D) does not affect the limited liability
of the Limited Partners or the Unitholders or the status of the Partnership
as a partnership for federal income tax purposes.

52
<PAGE>

If this Agreement shall be amended to reflect the withdrawal of a General
Partner when the business of the Partnership is being continued, such
amendment shall be signed by the withdrawing General Partner and by the
remaining or successor General Partner or Partners.

(d) In making any amendments, there shall be prepared and filed by
the General Partners for recording such documents and certificates as shall
be required to be prepared and filed under the Delaware Revised Uniform
Limited Partnership Act and under the laws of any other jurisdictions in
use under the laws of which the Partnership is then qualified.

(e) Any provision to the contrary herein notwithstanding, the General
Partners may, without the Consent of the majority in interest of Limited
Partners or Unitholders, make any amendments to Section 4.04 of this
Agreement on the advice of tax counsel and the independent public
accountant of the Partnership, to the extent necessary to insure compliance
with the Code including any changes thereof, provided that such amendments
do not materially adversely affect the interests of the Limited Partners or
Unitholders. Any amendment made by the General Partners in accordance with
this Section shall be deemed to be made pursuant to the fiduciary
obligation of the General Partners to the Partnership, the Limited Partners
and the Unitholders, and shall not give rise to any claim or cause of
action by any Limited Partner or Unitholder.

Section 12.03. OWNERSHIP BY LIMITED PARTNERS OF GENERAL PARTNERS OR
THEIR AFFILIATES. No Limited Partner or Unitholder shall at any time, either
directly or indirectly, own any stock or other interest in any General
Partner or in any Affiliate of any General Partner if such ownership by
itself or in conjunction with the stock or other interest owned by other
Limited Partners and Unitholders would, in the opinion of counsel for the
Partnership, jeopardize the classification of the Partnership as a
partnership for federal income tax purposes. Each Limited Partner and
Unitholder shall promptly supply any information requested by the General
Partners in order to establish compliance by the Limited Partner or
Unitholders with the provisions of this Section 12.03.

Section 12.04. BINDING PROVISIONS. The covenants and agreements
contained herein shall be binding upon, and inure to the benefit of, the
heirs, executors, administrators, personal representatives, successors and
assigns of the respective parties hereto.

Section 12.05. APPLICABLE LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware.

Section 12.06. COUNTERPARTS. This Agreement may be executed in several
counterparts, all of which together shall constitute one agreement binding on
all parties hereto, notwithstanding that all the parties have not signed the
same counterpart, except that no counterpart shall be binding unless signed
by the General Partners.

53
<PAGE>

Section 12.07. SEPARABILITY OF PROVISIONS. Each provision of this
Agreement shall be considered separable and if for any reason any provision
or provisions hereof are determined to be invalid and contrary to any law,
such invalidity shall not impair the operation of or affect those portions of
this Agreement which are valid.

Section 12.08. CAPTIONS. Article and Section titles are for
descriptive purposes only and shall not control or alter the meaning of this
Agreement as set forth in the text.

Section 12.09. DISALLOWANCE OF EXPENSES. Any fee paid to a General
Partner pursuant to this Agreement which is disallowed as a deductible
expense for federal income tax purposes shall constitute, for federal income
tax purposes, a special allocation of gross income to the General Partner
receiving such fee.

Section 12.10. ENTIRE AGREEMENT. This Agreement, together with the
Exhibits attached hereto, sets forth all (and is intended by all parties to
be an integration of all) of the promises, agreements and understandings
among the parties hereto with respect to the Partnership, the Partnership
business and the property of the Partnership, and there are no promises,
agreements or understandings, oral or written, express or implied, among them
other than as set forth or incorporated herein.

IN WITNESS WHEREOF, the parties have signed this Agreement as of the
24th day of March, 1986.

GENERAL PARTNERS:

TIG INSURED MORTGAGE EQUITIES INC.

By /s/ William G. Rosenberg
------------------------------------------
William G. Rosenberg, President

HUTTON INSURED MORTGAGE EQUITIES INC.

By /s/ Arthur P. Fisch
------------------------------------------
Arthur P. Fisch, President

54
<PAGE>

INITIAL LIMITED PARTNER:

H/T CORP. INC.

By /s/ William G. Rosenberg
------------------------------------------
William G. Rosenberg, President

55
<PAGE>

SCHEDULE A

<TABLE>
Capital Partnership
Contributions Interest
------------- --------
<S> <C> <C>
GENERAL PARTNERS: $1,000,000 .5%
Hutton Insured Mortgage Equities Inc.
26 Broadway, Suite 532
New York, New York 10004

TIG Insured Mortgage Equities Inc. 1,000,000 .5
1150 Seventeenth Street, N.W.
Suite 500
Washington, D.C. 20036

INITIAL LIMITED PARTNER: 2,000.00 99
H/T Corp.
1150 Seventeenth Street, N.W.
Suite 500
Washington, D.C. 20036
</TABLE>

<PAGE>

LIMITED PARTNERSHIP AGREEMENT AND
AMENDED CERTIFICATE OF LIMITED PARTNERSHIP

CAPITAL SOURCE II L.P.-____, A LIMITED PARTNERSHIP

THIS AGREEMENT is made as of ______________, 198__ by and among the
undersigned parties.

RECITALS

WHEREAS, as of ______________, 198__, Hutton Insured Mortgage Equities II
L.P., a Delaware limited partnership (the "Hutton General Partner"), the general
partner of which is Hutton CS II Housing Inc., a Delaware corporation and a
wholly owned subsidiary of The E.F. Hutton Group Inc., a Delaware corporation,
and TIG Insured Mortgage Equities II Inc. (the "TIG General Partner"), a wholly
owned subsidiary of The Investment Group Capital Corp., a Delaware corporation,
as General Partners, and H/T Corp. II-____, a Delaware corporation, as Initial
Limited Partner, executed a Certificate of Limited Partnership (the
"Certificate") forming a limited partnership under the Delaware Revised Uniform
Limited Partnership Act known as Capital Source II L.P.-__________, which
Certificate was filed in the office of the Secretary of State of the State of
Delaware on ______________, 198__; and

WHEREAS, the parties hereto desire to amend the Certificate to set forth in
full the terms and conditions of their agreements and understandings in this
Limited Partnership Agreement and Amended Certificate of Limited Partnership.

NOW, THEREFORE, in consideration of the mutual promises made herein, the
parties, intending to be legally bound, agree to continue Capital Source II
L.P.-__________ as follows:

ARTICLE I

CONTINUATION, NAME, PLACE OF BUSINESS, PURPOSE AND TERM

Section 1.02. NAME, PRINCIPAL OFFICE AND NAME AND ADDRESS OF RESIDENT
AGENT. The name of the Partnership is Capital Source II L.P.-__________. The
address of the resident office of the Partnership in the State of Delaware shall
be Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.
The name of the Partnership's registered agent for service of process at that
address is The Corporation Trust Company. The address of the principal place of
business of the Partnership, unless hereafter changed by the General Partners,
shall be 150 South Fifth Avenue, Suite A, Ann Arbor, Michigan 48104.
Notification

1
<PAGE>

of any change in the Partnership's principal office and place of business shall
be given to the Limited Partners and Unitholders.

Section 1.03. PURPOSE. The purpose and character of the business of the
Partnership is to originate, acquire, hold, sell, dispose of and otherwise deal
with Federally Insured Mortgages on multifamily rental housing complexes and to
acquire, hold, sell, dispose of and otherwise deal with limited partnership
interests in Operating Partnerships which construct and operate multifamily
rental housing complexes in order to (a) preserve and protect the Partnership's
capital by investing in Federally Insured Mortgages and Operating Partnership
Interests; (b) provide quarterly cash distributions to Investors from income
from Federally Insured Mortgages; (c) achieve increasing current income and
long-term capital appreciation through increases in the income from the
Partnership's equity investments in the Operating Partnerships; and (d) make the
Units freely transferable 24 to 36 months after the Partnership commences
operations.

Section 1.04. TERM. The Partnership was formed on ______________, 198__,
and shall continue in full force and effect until December 31, 2035, or until
sooner dissolved pursuant to the provisions of this Agreement, and upon the
filing of a Certificate of Cancellation with the Secretary of State of the State
of Delaware in accordance with Article VIII.

ARTICLE II

DEFINED TERMS

"ADJUSTED CONTRIBUTION" means, with respect to Limited Partners, the
"Adjusted Capital Contribution" and, with respect to Unitholders, the "Adjusted
Contribution of Unitholders."

"ADJUSTED CONTRIBUTION OF UNITHOLDERS" means, at any time, the Contribution
of Unitholders reduced by all distributions to Unitholders of Sale Proceeds.
Reduction of the

2
<PAGE>

Adjusted Contributions of Unitholders in accordance with the foregoing shall be
determined subsequent to calculation of any distributions to be made to
Unitholders, but shall be effective as of the date of receipt by the Partnership
of the Sale Proceeds giving rise to such distributions.

"AGREEMENT" means this Limited Partnership Agreement and Amended
Certificate of Limited Partnership, as originally executed and as amended from
time to time.

"ANNUAL ASSET MANAGEMENT AND PARTNERSHIP ADMINISTRATION FEE" means the
annual fee payable to the General Partners in accordance with
Section 5.03(b)(iii).

"ASSIGNED LIMITED PARTNERSHIP INTEREST" means a Limited Partnership
Interest which is held of record by the Initial Limited Partner as a nominee on
behalf of a Unitholder.

"BANKRUPTCY" or "BANKRUPT" as to any Person means the filing of a petition
for relief as to any such Person as debtor or bankrupt under the Bankruptcy Code
of 1978 or like provision of law (except if such petition is contested by such
Person and has been dismissed within 120 days); insolvency of such Person as
finally determined by a court proceeding; filing by such Person of a petition or
application to accomplish the same or for the appointment of a receiver or a
trustee for such Person or a substantial part of his assets; or commencement of
any proceedings relating to such Person under any other reorganization,
arrangement, insolvency, adjustment of debt or liquidation law of any
jurisdiction, whether now in existence or hereinafter in effect, either by such
Person or by another, provided that if such proceeding is commenced by another,
such Person indicates his approval of such proceeding, consents thereby or
acquiesces therein, or such proceeding is contested by such Person and has not
been finally dismissed within 120 days.

"BENEFICIAL ASSIGNMENT CERTIFICATE" means a certificate evidencing the
ownership of Units.

3
<PAGE>

"CAPITAL ACCOUNT" means the capital account of a Partner or Unitholder as
described in Section 4.05.

"CAPITAL CONTRIBUTION" means with respect to Partners, "Capital
Contribution of Partners" and with respect to Unitholders, "Capital Contribution
of Unitholders."

"CAPITAL CONTRIBUTION OF PARTNERS" means the total amount of money
contributed to the Partnership (prior to the deduction of any Selling
Commissions or Organizational, Offering and Selling Expenses) by all the
Partners or any class of Partners, or by any one Partner, as the context may
require (or the predecessor holders of the interests of such Partners or
Partner), reduced, in the case of the Limited Partners, by the amount of any
funds returned to them pursuant to Section 3.03(d).

"CAPITAL CONTRIBUTION OF UNITHOLDERS" means the total amount of money paid
to the Partnership (prior to the deduction of any Selling Commissions or
Organizational, Offering and Selling Expenses) by all Persons who purchase Units
(pursuant to the Partnership's public offering of Units effected pursuant to the
Partnership's Registration Statement filed with the Securities and Exchange
Commission) and which shall be deemed to be contributed to the Partnership by
the Initial Limited Partner on behalf of the Unitholders, reduced by the amount
of any funds returned to the Unitholders pursuant to Section 3.03(d).

"CASH AVAILABLE FOR DISTRIBUTION" means, with respect to any period, Cash
Flow less any amount set aside from Cash Flow for the creation or restoration of
Reserves.

"CASH FLOW" means, with respect to any period, (a) all cash receipts of the
Partnership from payments of principal and interest on its Federally Insured
Mortgages (exclusive of any Sale Proceeds attributable to such Federally Insured
Mortgages), plus (b) any cash distributions from Operating Partnerships
(exclusive of any Sale Proceeds attributable to the sale or exchange by the
Partnership of its interest in such Operating Partnerships and exclusive of any
Sale Proceeds attributable to the assets of the Operating Partnerships), plus
(c) cash receipts from Partnership operations (including any interest or other
income from temporary investments of the Partnership pursuant to Section
5.02(a)(xiv) and any amounts withdrawn from Reserves), but after deducting from
any such receipts amounts used to pay Operating Expenses and debt service.

"CODE" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of succeeding law.

"COMMITMENT FEE" means fees paid by an Operating Partnership to the General
Partners in an amount up to 3.54% of each Federally Insured Mortgage.

4
<PAGE>

"COMPLEX" means a multifamily, rental housing complex in a suburban or
metropolitan area which is owned or is to be constructed by an Operating
Partnership.

"DEALER MANAGER" means E.F. Hutton & Company Inc., a Delaware corporation
which is an Affiliate of the Hutton General Partner.

"EQUITY CONTRIBUTION" means the Partnership's contribution to an Operating
Partnership in exchange for an Operating Partnership Interest.

"ESCROW AGENT" means the FirsTier Bank, N.A., or any successor thereto.

"FEDERALLY INSURED MORTGAGE" means an FHA Insured Mortgage or a Coinsured
Mortgage.

"FHA" means the Federal Housing Administration of HUD.

"FHA INSURED MORTGAGE" means a first mortgage loan on a Complex, insured
pursuant to Section 221(d)(4), Section 223(f) or similar section of the National
Housing Act.

"FOREIGN PERSON" means a nonresident alien, foreign corporation, foreign
trust or foreign estate, within the meaning of Sections 897 and 1445 of the
Code.

"FRONT END FEES" means all acquisition fees, Selling Commissions,
Organizational, Offering and Selling Expenses and any other fees or expenses
paid by any party for any services rendered during the Partnership's
organizational and acquisition phases. Such expenses include but are not
limited to legal fees and expenses, travel and communication expenses, costs of
appraisals, nonrefundable option payments on property not acquired, accounting
fees and expenses, title insurance and miscellaneous expenses related to
selection and acquisition of property, whether or not acquired, including
similar fees paid by Operating Partnerships during their acquisition or
operational phases if paid directly or indirectly by the Partnership. Front End
Fees (a) shall include the Initial Advisory Fee and the Commitment Fee and
(b) shall not exceed in the aggregate the lesser of such compensation
customarily charged by others rendering similar services as an ongoing public
activity in the same geographic location and for comparable property or an
amount equal to 15.5% of the Gross Proceeds.

5
<PAGE>

"GENERAL PARTNER REIMBURSABLE EXPENSES" means expenses incurred by the
General Partner(s) in connection with the promotion, management and/or operation
of the Partnership.

"GNMA" means the Government National Mortgage Association.

"GROSS PROCEEDS" means the total proceeds from the sale of Units before
deduction for expenses incurred in organizing the Partnership and offering the
Units for sale.

"HUD" means the United States Department of Housing and Urban Development
acting through any authorized representative.

"HUTTON GENERAL PARTNER" means Hutton Insured Mortgage Equities II L.P., a
Delaware limited partnership.

"INCENTIVE FEE" means the fee payable to the General Partners in accordance
with Section 5.03(b)(v).

"INITIAL ADVISORY FEE" means the nonrecurring fee paid to the General
Partners in accordance with Section 5.03(b)(i).

"INITIAL CLOSING" means the initial closing on the sale of the minimum
number of Units to Investors in the Partnership.

"INITIAL LIMITED PARTNER" means H/T Corp. II-____, a Delaware corporation,
which (a) owns 100 Limited Partnership Interests and ____________________
Assigned Limited Partnership Interests in the Partnership, and (b) will transfer
and assign to those Persons who purchase Units certain of its rights and
interest in Assigned Limited Partnership Interests in accordance with Section
11.01(a).

"INITIAL PROSPECTUS" means the prospectus contained in the Registration
Statement (File No. 33-8252) filed pursuant to Rule 424(b) in its final form
with the Securities and Exchange Commission for the registration of the Units
under the Securities Act of 1933.

"INVESTED ASSETS" means that portion of the Net Proceeds invested from time
to time in Federally Insured Mortgages, Operating Partnership Interests and
other investments in Operating Partnerships owned by the Partnership.

6
<PAGE>

"INVESTMENT DATE" means the date or dates, from time to time, of the final
closing of the sale of Units pursuant to Section 11.04.

"INVESTOR SERVICES REIMBURSEMENT" means the amount to be reimbursed to the
General Partners and their Affiliates for performance of investor services, not
to exceed, together with all other reimbursements to the General Partners and
Affiliates of expenses incurred in the Partnership's operations, 0.5% of
Invested Assets and Permitted Interim Investments per annum.

"IRAS AND KEOGH PLANS" mean Individual Retirement Accounts formed pursuant
to Section 408 of the Code, Retirement (Keogh) plans for self-employed
individuals as described in Section 404(a)(8) of the Code, and other
tax-deferred pension and profit-sharing plans.

"LIMITED PARTNER" means any Person who is a Limited Partner, including the
Initial Limited Partner, at the time of reference thereto, in such Person's
capacity as a Limited Partner of the Partnership.

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

"NASDAQ" means the National Association of Securities Dealers Automated
Quotations, an electronic automated quotation system for a selected number of
over-the-counter securities.

"NET PROCEEDS" means the Gross Proceeds reduced by Selling Commissions and
the Organizational, Offering and Selling Expenses.

"NOTICE" means a writing, containing the information required by this
Agreement to be communicated to any Person, personally delivered to such Person
or sent by registered, certified or regular mail, postage prepaid, to such
Person at the last known address of such Person. The date of personal delivery
or the date of mailing thereof, as the case may be, shall be deemed the date of
receipt of Notice.

"OFFERING" means the offering of Units by the Partnership pursuant to the
terms and conditions described in the Prospectus.

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not limited to the Annual Asset Management and Partnership Administration Fee,
the Investor Services Reimbursement and all other fees and expense
reimbursements to the General Partners (except for the Incentive Fee and the
Termination Fee), fees paid for placing, servicing and disposition of Federally
Insured Mortgages and Operating Partnership Interests, computer costs,
insurance, brokerage fees, taxes, accounting, bookkeeping, legal, travel and
telephone expenses.

"OPERATING PARTNERSHIP" or "OPERATING PARTNERSHIPS" means any or all of the
limited partnerships which own or lease Complexes and in which the Partnership
acquires an Operating Partnership Interest.

"OPERATING PARTNERSHIP INTEREST" means the limited partnership interest of
the Partnership in an Operating Partnership.

"ORGANIZATIONAL, OFFERING AND SELLING EXPENSES" means those expenses
(exclusive of Selling Commissions) incurred in connection with or related to the
formation and qualification of the Partnership, the registration and
qualification of the Units under applicable federal and state laws and the
marketing, distribution, sale and processing of the Units, including the
following: (a) the costs of preparing, printing, filing and delivering a
registration statement with respect to the Units, the Prospectus (including any
supplements thereto), all "Blue Sky" filing fees and related expenses, a "Blue
Sky Survey" and all underwriting and sales agreements, including the cost of all
copies thereof supplied to E.F. Hutton & Company, Inc. and other soliciting
dealers, (b) the cost of preparing and printing this Agreement, other
solicitation material and related documents and the cost of filing and recording
such certificates or other documents as are necessary to comply with the laws of
the State of Delaware or for the formation of a limited partnership and
thereafter for the continued good standing of a limited partnership, (c) the
cost of any escrow arrangements, including any compensation to the Escrow Agent,
(d) filing fees payable to the Securities and Exchange Commission, to state
securities commissions and to the National Association of Securities Dealers,
Inc., and (e) fees of the Partnership's counsel and accountants.

"PARTNER" means any General Partner or any Limited Partner.

"PARTNERSHIP" means the limited partnership formed as of ______________,
198__, under the Delaware Revised Uniform Limited Partnership Act and known as
Capital Source II LP.-__________, as said limited partnership may from time to
time be constituted.

"PERMITTED INTERIM INVESTMENTS" means securities issued or fully guaranteed
by the United States Government or its agencies, Certificates of Deposit and
Time or Demand Deposits fully insured by an agency of the United States
government or in commercial banks or savings and loan associations having a net
worth of at least $200,000,000, or commercial paper rated P-1 (the highest
possible rating) by Moody's Investors Service, Inc.

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

"PRIORITY RETURN ON ADJUSTED CONTRIBUTION ACCOUNT" means a ledger account
maintained on behalf of each Limited Partner or Unitholder which shall be
credited each quarter with ____% of the Adjusted Contribution attributable to
such Limited Partner or Unitholder, as adjusted through the last day of such
quarter, and shall be charged each quarter with all Cash Available for
Distribution which is distributed to such Limited Partner or Unitholder, in
respect of such quarter.

"PROFITS FOR TAX PURPOSES" and "LOSSES FOR TAX PURPOSES" means the income
or loss of the Partnership for federal income tax purposes determined as of the
close of each calendar quarter. For these purposes Profits for Tax Purposes
will include income and gain exempt from tax and Losses for Tax Purposes shall
include expenditures which constitute, or are deemed under Treasury Regulations
to constitute, expenditures described in Section 705(a)(2)(B) of the Code.

"PROSPECTUS" means the prospectus contained in the Registration Statement
(File No. 33-8252) filed pursuant to Rule 424(b) with the Securities and
Exchange Commission for the registration of Units under the Securities Act of
1933, in the final form in which such prospectus is filed pursuant to
Rule 424(b) with such Commission and as thereafter supplemented pursuant to
Rule 424(c) under such Act.

"PROSPECTUS SUPPLEMENT" means the supplement to the Prospectus issued in
connection with commencement of the Partnership's Offering of Units.

"RESERVES" means amounts allocated to reserves maintained for working
capital of the Partnership and contingencies, which initially will not be less
than 1% of Gross Proceeds.

"SALES AGENCY AGREEMENT" means the agreement among the Partnership, General
Partners and Initial Limited Partner as described in Section 5.10 hereof.

"SALE TRANSACTION" means a transaction involving (a) the prepayment, sale,
exchange, foreclosure or other disposition of a Federally Insured Mortgage held
by the Partnership, (b) the sale, exchange or other disposition of an Operating
Partnership Interest held by the Partnership, (c) the sale, exchange or other
disposition by an Operating Partnership of any of its assets, or (d) the sale,
exchange or other disposition by the Partnership of any of its assets.

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"SELLING COMMISSIONS" means the commissions up to a maximum of 7% per Unit,
payable by the Partnership to the Dealer Manager.

"SPECIFIED INVESTMENT" means an Operating Partnership in which the
Partnership has determined to invest and which is identified and described in
the Prospectus Supplement.

"TARGET RETURN ON ADJUSTED CONTRIBUTION ACCOUNT" means a ledger account
maintained on behalf of each Limited Partner or Unitholder which shall be
credited each day with an amount equal to ____% per annum, as calculated on a
daily basis, of the Adjusted Contribution attributable to such Limited Partner
or Unitholder as adjusted through the preceding day, and shall be charged each
quarter with all Cash Available for Distribution which is distributed to such
Limited Partner in respect of such quarter and shall be further charged, as of
the day of receipt by the Partnership of Sale Proceeds, with all such Sale
Proceeds distributed to such Limited Partner or Unitholder in excess of the
amount of such Limited Partner's and Unitholder's Adjusted Contribution,
determined as of the day preceding such receipt by the Partnership of Sale
Proceeds.

"TAX MATTERS PARTNER" means the Partner designated as the Tax Matters
Partner of the Partnership by the General Partners pursuant to Section 9.05.

"TERMINATION FEE" means the fee payable to the General Partners in
accordance with Section 5.03(b)(vi).

"TIG GENERAL PARTNER" means TIG Insured Mortgage Equities II Inc., a
Delaware corporation.

"UNIT" means a Beneficial Ownership Interest representing the assignment by
the Initial Limited Partner of one Assigned Limited Partnership Interest.

"UNITHOLDER" means any Person who holds a Beneficial Ownership Interest
represented by a Unit and who is reflected as a Unitholder on the books and
records of the Partnership.

"VOLUNTARY LOAN" means a loan to the Partnership by a General Partner or
its Affiliate in accordance with Section 5.03(b)(ix).

ARTICLE III

PARTNERS AND CAPITAL

Section 3.02. INITIAL LIMITED PARTNER. The name, address, Capital
Contribution and Interest of the Initial Limited Partner are as set forth in
Schedule A. All proceeds which the

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Partnership receives from persons who purchase Units pursuant to the Offering
shall be treated as contributions to the Partnership made by the Initial Limited
Partner on behalf of, and as nominee for, the Unitholders. Except as set forth
above and with respect to its own Capital Contributions, the Initial Limited
Partner shall not be required to make any additional Capital Contribution to the
Partnership. Other than to serve as Initial Limited Partner, the Initial
Limited Partner has no other business purpose and will not engage in any other
activity or incur any debts.

Section 3.03. PARTNERSHIP CAPITAL.

(a) No Partner or Unitholder shall be paid interest on any Capital
Contribution.

(c) No Limited Partner or Unitholder shall have priority over any
other Limited Partner or Unitholder as to the return of his Capital
Contribution as or to profits, losses or distributions.

(d) Any portion of the Net Proceeds (except for any amounts utilized
to pay the Partnership's Operating Expenses or any amounts set aside for
Reserves) which is not invested or committed for investment within 24
months from the date of the Prospectus Supplement, including the amount of
the Initial Advisory Fee paid to the General Partners with respect to such
portion of Net Proceeds, shall be distributed, without interest, by the
Partnership to the Limited Partners and Unitholders, as a return of
capital; provided, however, that if 90% or more of the Net Proceeds are
committed prior to the end of the 24-month period, the Partnership may also
invest, prior to the expiration of the 24-month period, the remaining
uncommitted Net Proceeds in mortgage-backed securities issued pursuant to
the GNMA Mortgage-Backed Securities Program, provided that such investments
shall in no event violate the provisions of Section 5.01(g) of this
Agreement. Any funds with respect to the investment of which the
Partnership has executed a written agreement in principle, commitment
letter, letter of intent or understanding, option agreement or other
similar understanding or contract, within 24 months after the date of the
Prospectus Supplement, shall be deemed committed to investment on that date
and shall not subsequently be returned to the Limited Partners and
Unitholders even if the investment of such funds is not consummated.

(e) The General Partners shall have no personal liability for the
repayment of the Capital Contribution of any Limited Partner or Unitholder.

(f) A creditor who makes a nonrecourse loan to the Partnership shall
not have or acquire at any time, solely as a result of making the loan, any
direct or indirect

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interest in the profits, capital or property of the Partnership, other than
as a creditor or secured creditor, as the case may be.

Section 3.04. LIABILITY OF LIMITED PARTNERS.

(a) The liability of each Limited Partner and Unitholder for the
losses, debts, liabilities and obligations of the Partnership shall, so
long as the Limited Partner or Unitholder complies with Section 5.01(c), be
limited to his Capital Contribution and his share of any undistributed
profits of the Partnership. No Limited Partner or Unitholder shall be
required to lend any funds to the Partnership or, after his Capital
Contribution has been paid, to make any further capital or other
contribution to the Partnership. It is the intent of the Partners that no
distribution (or any part of any distribution) made to any Limited Partner
or Unitholder pursuant to Section 4.01 shall be deemed a return or
withdrawal of capital even if such distribution represents, in full or in
part, an allocation of depreciation or any other noncash item accounted for
as a loss or deduction from or offset to the Partnership's income, and that
no Limited Partner or Unitholder shall be obligated to pay any such amount
to or for the account of the Partnership or any creditor of the
Partnership. If any court of competent jurisdiction holds, however, that,
notwithstanding the provisions of this Agreement, any Limited Partner or
Unitholder is obligated to make any such payment, such obligation shall be
the obligation of such Limited Partner or Unitholder and not of the General
Partners.

(b) Notwithstanding the provisions of Section 3.04(a), in the event
the Partnership is required, pursuant to applicable provisions of any
Operating Partnership Agreement or of the limited partnership act of the
jurisdiction of organization of an Operating Partnership, to return to any
Operating Partnership any funds previously distributed by such Operating
Partnership to the Partnership, which funds have been distributed by the
Partnership, in turn, to the Limited Partners and Unitholders hereunder,
the Limited Partners and Unitholders shall be required to return promptly
to the Partnership that portion of such Partnership distribution (on a pro
rata basis) as shall be required by the Partnership to meet its obligation
to return funds to such Operating Partnership.

ARTICLE IV

DISTRIBUTIONS OF CASH; ALLOCATIONS OF PROFITS AND LOSSES

Section 4.01. DISTRIBUTIONS OF CASH AVAILABLE FOR DISTRIBUTION. All Cash
Available for Distribution at the end of each month of each calendar year shall
be distributed, within 45 days after the end of such month, 99% to the Limited
Partners and Unitholders considered as a class and 1% to the General Partners;
provided, however, that after the Adjusted Contributions have been reduced to
zero and the Target Return on Adjusted Contribution Accounts has been paid on a
cumulative basis, such distributions shall be subordinated to the payment of any
accrued but unpaid Incentive Fee, Termination Fee or Annual Asset Management and
Partnership Administration Fee then owed to the General Partners in accordance
with Sections 5.03(b)(iii), 5.03(b)(v) and 5.03(b)(vi).

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Section 4.02. DISTRIBUTIONS OF SALE PROCEEDS.

(a) Except as otherwise provided in Section 8.02 in connection with
the liquidation of the Partnership, Sale Proceeds will be distributed, as
soon as practicable after the Partnership receives such proceeds, 99% to
the Limited Partners and Unitholders considered as a class and 1% to the
General Partners; provided, however, that after the Adjusted Contributions
have been reduced to zero and the Target Return on Adjusted Contribution
Accounts has been paid on a cumulative basis, any accrued but unpaid
Incentive Fee, Termination Fee or Annual Asset Management and Partnership
Administration Fee then owed to the General Partners in accordance with
Sections 5.03(b)(iii), 5.03(b)(v) and 5.03(b)(vi) shall be paid.

(b) Noncash Sale Proceeds shall not be distributed until converted
into cash by the Partnership.

Section 4.03. PROFITS AND LOSSES FOR TAX PURPOSES.

(a) Profits and Losses for Tax Purposes shall be determined in
accordance with the accounting method followed by the partnership for
federal income tax purposes.

(b) All Profits and Losses for Tax Purposes prior to the first date
on which Units are purchased pursuant to Section 11.04 shall be allocated
99% to the Initial Limited Partner and 1% to the General Partners. Such
Profits and Losses for Tax Purposes shall be determined on the basis of an
interim closing of the Partnership's books as of the first date on which
Units are purchased.

(d) Profits and Losses for Tax Purposes arising from Sale
Transactions in respect of a calendar month shall be allocated 99% to the
Limited Partners and Unitholders considered as a class and 1% to the
General Partners.

(e) Notwithstanding anything to the contrary that may be expressed or
implied in this Agreement, the aggregate interest of the General Partners
in each item of Partnership income, gain, loss, deduction or credit will be
equal to at least 1% of each of those items at all times during the
existence of the Partnership. In determining the interests of the General
Partners in these items, any Limited Partnership Interest or Unit owned by
the General Partners shall not be taken into account.

(f) Notwithstanding the foregoing provisions of Section 4.03(c) and
Section 4.03(d) and subject to the provisions of Section 4.03(e), if the
allocation of any loss for any Partnership accounting period pursuant to
this Section 4.03 would cause the

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Capital Account of a Partner or the separate subsidiary capital account of
a Unitholder to be reduced below zero (or, in the case of the General
Partner, reduced below the deficit balance which such General Partner will
be obligated to restore under Section 4.05(b)) (determined after making
appropriate adjustments to reflect (i) all distributions and Capital
Contributions made during such Partnership accounting period, and (ii)
reasonably expected allocations of loss and deduction described in Section
1.704-1(b)(2)(ii)(d)(5) of the Regulations and reasonably expected
distributions described in Section 1.704-1(b)(2)(ii)(d)(6) of the
Regulations) then the portion of such loss which would have such result
shall instead be specially allocated to Partners and Unitholders having
positive Capital Account or subsidiary capital account balances (determined
before such special allocation but after all other adjustments to their
respective Capital Accounts and subsidiary capital accounts for such
Partnership accounting period and any reasonably expected distributions and
allocations of loss and deduction described in the aforesaid sections of
the Regulations) in proportion to such positive Capital Account and
subsidiary capital account balances. Subject to the provisions of
Section 4.03(e), in the event that the Capital Account of a Partner or the
separate subsidiary capital account of a Unitholder is reduced below zero
(or, in the case of a General Partner, reduced below the deficit balance
which such General Partner will be obligated to restore under
Section 4.05(b)) (A) due to an unexpected allocation of loss or deduction
made pursuant to Section 704(e)(2) of the Code, Section 706(d) of the Code
or Paragraph (b)(2)(ii) of Treasury Regulation 1.751-1 or (B) due to an
unexpected distribution to such Partner or Unitholder which is not offset
by a corresponding increase to such Partner's Capital Account or to such
Unitholder's separate subsidiary capital account, then such Partner or such
Unitholder, as the case may be, will be allocated items of income and gain
in an amount and manner sufficient to eliminate the deficit balance in such
Partner's Capital Account or such Unitholder's separate subsidiary capital
account as quickly as possible.

Section 4.04. DETERMINATION OF ALLOCATIONS AND DISTRIBUTIONS AMONG LIMITED
PARTNERS AND UNITHOLDERS. Within 45 days after the end of each calendar month
during the term of the Partnership, a determination shall be made of (a) the
amount of the Profits and Losses for Tax Purposes (including every item of
income, gain, loss, deduction, credit or allowance entering into the computation
of such Profits and Losses for Tax Purposes) which arose during each calendar
month and which was allocable to the Limited Partners and Unitholders in
accordance with the provisions of Section 4.03, and (b) the amount of the Cash
Available for Distribution and the Sale Proceeds which were actually received by
the Partnership during each calendar month and which were allocable to the
Limited Partners and Unitholders in accordance with the provisions of
Section 4.01 or 4.02. The above-referenced amounts of tax items which were
attributable to a particular month and which were not attributable to Sale
Transactions shall be allocated among each Limited Partner and Unitholder who
held an Interest on the last day of such month (the "Monthly Record Date") and
the above-referenced amounts of Cash Available for Distribution shall be
distributed among each Limited Partner and Unitholder who held an Interest on
such Monthly Record Date, both in the ratio which (i) the number of Limited
Partnership Interests or Units held by such Limited Partner or Unitholder on
such Monthly Record Date bears to (ii) the aggregate number of Limited
Partnership Interests and Units outstanding on such Monthly Record Date;
provided, however, that such allocations and distributions with respect to any
month during which subscriptions for Units are released by the

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<PAGE>

Escrow Agent to the Partnership in accordance with Section 11.04 shall be made
pro rata to such Limited Partners and Unitholders on the basis of the number of
days of such month that they were Limited Partners or Unitholders of record.

The above-referenced amounts of tax items attributable to Sale Transactions
and the above-referenced amounts of Sale Proceeds shall be allocated or
distributed, as the case may be, to each Limited Partner and Unitholder of
record on the date of receipt by the Partnership of such Sale Proceeds (or such
other date within 10 days of such receipt as determined by the General Partner
if, due to the circumstances of such receipt, advance notice of the particular
date of receipt cannot be provided as required by the federal securities laws or
the regulations of any exchange on which the Units are traded) in the ratio
which the number of Limited Partnership Interests or Units held by such Limited
Partner or Unitholder bears to the aggregate number of Limited Partnership
Interests or Units outstanding on such date.

Section 4.05. CAPITAL ACCOUNTS.

(a) A separate Capital Account shall be maintained and adjusted for
each Partner in accordance with the Code and the Treasury Regulations
thereunder, particularly Section 1.704-1(b)(2)(iv) of the Regulations.
There shall be credited to each Partner's Capital Account the amount of his
Capital Contribution and such Partner's distributive share of the Profits
for Tax Purposes of the Partnership; and there shall be charged against
each Partner's Capital Account the amount of all Cash Available for
Distribution and Sale Proceeds distributed to such Partner and such
Partner's distributive share of all the Losses for Tax Purposes of the
Partnership. A separate subsidiary capital account with respect to the
Initial Limited Partner's Capital Account shall be maintained and adjusted
for each Unitholder in accordance with the principles contained in this
Section.

(b) Upon the dissolution and termination of the Partnership, the
General Partners will contribute to the Partnership an amount equal to the
lesser of (i) any deficit balance in their Capital Accounts or (ii) the
excess of 1.01% of the total Capital Contributions attributable to the
Limited Partners and Unitholders over the amount of capital previously
contributed by the General Partners.

ARTICLE V

RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNERS

Section 5.01. MANAGEMENT OF THE PARTNERSHIP.

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of the Partnership and shall receive no compensation from the Partnership
other than as expressly provided in this Agreement. The General Partners
shall, except as otherwise provided in this Agreement, have all the rights
and powers and shall be subject to all the restrictions and liabilities of
a partner in a partnership without limited partners or Unitholders. All
decisions of the General Partners shall be made pursuant to the unanimous
approval of the General Partners.

(b) All decisions made for and on behalf of the Partnership by the
General Partners shall be binding upon the Partnership. Except as
expressly set forth elsewhere in this Agreement, the General Partners
(acting for and on behalf of the Partnership), in extension and not in
limitation of the rights and powers given by this Section or by the other
provisions of this Agreement shall, in their sole discretion, have the full
and entire right, power and authority in the management of the Partnership
business to do any and all things necessary to effectuate the purposes of
the Partnership. Without limiting the foregoing grant of authority, but
subject to the other provisions of this Agreement, the General Partners, in
their capacity as General Partners, shall have the right, power and
authority, acting for and on behalf of the Partnership, to do all acts and
things set forth in this Article V. No Person dealing with the General
Partners shall be required to determine their authority to make any
undertaking on behalf of the Partnership or to determine any facts or
circumstances bearing upon the existence of such authority.

(d) The General Partners shall, after the release from escrow of
subscriptions for Units pursuant to Section 11.01, establish initial
Reserves out of Capital Contributions in an amount not less than 1% of the
Gross Proceeds.

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sale, exchange, foreclosure, prepayment or other disposition of Federally
Insured Mortgages; (viii) expenses of organizing, revising, amending,
converting, modifying or terminating the Partnership or this Agreement;
(ix) the cost of insurance in connection with the business of the
Partnership; (x) the costs and expenses incurred in qualifying the
Partnership to do business in any jurisdiction, including fees and expenses
of any resident agent appointed by the Partnership; (xi) the cost of
preparing and disseminating to Limited Partners and Unitholders the reports
described in Section 9.04 and the cost of preparing and filing reports and
tax returns with governmental agencies; (xii) the costs incurred in
connection with any litigation or regulatory proceedings in which the
Partnership is involved unless the General Partners are adjudged guilty of
fraud, bad faith, negligence or misconduct; (xiii) the cost of any computer
services used by the Partnership; and (xiv) amounts paid to the General
Partners or their Affiliates as reimbursements in accordance with
Section 5.01(f).

(f) Reimbursements to the General Partners or any of their Affiliates
shall not be allowed, except for reimbursement, without interest, of
(i) the actual costs incurred by the General Partners or such Affiliates in
obtaining goods and materials supplied by unaffiliated parties used for or
by the Partnership (excluding rent, depreciation, utilities and capital
equipment); (ii) direct travel, meals, lodging and telephone expenses of
employees (noncontrolling persons) relating to Partnership business and
direct out-of-pocket expenses incurred in providing legal, accounting,
bookkeeping, computer, printing and public relations services, at rates for
which such services could be performed by independent parties; and
(iii) costs incurred by the General Partners and their Affiliates in
performance of investor services, including, without limitation, salaries
of persons performing such services (the "Investor Services
Reimbursement"). Reimbursement of expenses (including the Investor
Services Reimbursement) shall not exceed the lesser of the cost of such
expenses or 90% of the competitive price which an independent party would
charge for such services, and shall in no event exceed, on an annual basis,
an amount equal to 0.5% of the sum of the Invested Assets and Permitted
Interim Investments as of the last day of each calendar year. General
overhead expenses incurred by the General Partners or their Affiliates in
connection with the administration of the Partnership shall not be charged
to the Partnership. General overhead expenses include, but are not limited
to, salaries of employees not specifically performing the services
described in this Section, rent, capital equipment and such other items
generally constituting overhead, salaries, fringe benefits, travel and
utility expenses of the General Partners, Affiliates of the General
Partners or any individual general partner or managing officers, directors
and controlling persons of the General Partners. For purposes of this
Section 5.01(f), "controlling persons" shall include any person who
performs functions for the General Partners or their Affiliates similar to
those performed by the Chairman or members of the Board of Directors,
executive management, senior management or any person who holds a 5% or
more equity interest in a General Partner or who has the power to direct or
cause the direction of the General Partners.

(g) In no event shall the total of all Front End Fees result in the
commitment of less than 84.5% of all Capital Contributions of Unitholders
to Investment in Properties.

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<PAGE>

Section 5.02. AUTHORITY OF THE GENERAL PARTNERS.

(a) Subject to Sections 5.02(c), 5.03 and 5.04, the General Partners
for, and in the name and on behalf of, the Partnership, are hereby
authorized, without limitation:

(i) to enter into the Operating Partnership Agreements and
all other agreements, instruments and documents as may be necessary or
appropriate in connection with the acquisition of Operating
Partnership Interests and the admission of the Partnership as a
limited partner of the Operating Partnerships;

(iii) to invest in, acquire, hold, foreclose, redeem, sell,
dispose of and otherwise deal with Federally Insured Mortgages, at
such prices and upon such terms as they deem to be in the best
interests of the Partnership; provided, however, that, notwithstanding
any other provision of this Agreement, the General Partners shall not
sell, dispose of or otherwise transfer (including upon liquidation or
reorganization of the Partnership) any FHA Insured Mortgage other than
to an FHA-approved mortgagee;

(iv) to acquire, hold, sell, dispose of and otherwise deal
with Operating Partnership Interests at such prices and upon such
terms as they deem to be in the best interests of the Partnership;

(v) to acquire, by purchase, lease, exchange or otherwise,
any real or personal property to be used in connection with the
business of the Partnership;

(vi) to borrow money and issue evidences of indebtedness,
and to secure the same by mortgage, deed of trust, pledge or other
lien on any assets of the Partnership;

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<PAGE>

(ix) to determine the appropriate accounting method or
methods to be used by the Partnership (the Partnership intends
initially to utilize the accrual method of accounting in maintaining
its books and records);

(x) to cause the Partnership to make or revoke any of the
elections referred to in Sections 108, 709, 732, 754 or 1017 of the
Code or any similar provisions enacted in lieu thereof;

(xi) to offer and sell Interests in the Partnership to the
public directly or through any licensed Person, including, without
limitation, the Dealer Manager, and to employ personnel, agents and
dealers for such purposes;

(xii) to establish and maintain Reserves in an initial amount
not less than 1% of Gross Proceeds for such purposes and in such
amounts as they deem appropriate from time to time;

(xiii) to amend this Agreement to reflect the addition or
substitution of Limited Partners or the reduction of Capital Accounts
upon the return of capital to Partners;

(xiv) to invest all funds not immediately needed in the
operation of the business, including, but not limited to: (A) the Net
Proceeds prior to investment in Federally Insured Mortgages and
Operating Partnership Interests, and (B) Reserves, in Permitted
Interim Investments;

(xvii) to engage in any kind of activity and to perform and
carry out contracts of any kind necessary or incidental to, or in
connection with, the accomplishment of the purposes of the
Partnership; and

(xviii) to transfer any or all Federally Insured Mortgages and
Operating Partnership Interests held by the Partnership at its
termination date to a liquidating trust (but only if at that time the
General Partners determine such transfer to be in the best interest of
the Partners and Unitholders) and to receive fees for serving as
trustee of such trust which are reasonable and consistent with their
fiduciary obligations under the circumstances, and which would not
exceed the fees which the General Partners are otherwise entitled to
receive hereunder.

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<PAGE>

(c) Notwithstanding any provision in this Agreement to the contrary,
it is understood and agreed that in making the selection and determination
of the Complexes in respect of which they will originate Federally Insured
Mortgages and obtain Operating Partnership Interests, the General Partners
shall be bound by the following investment policies which may not be
changed, altered or amended, except as provided in Section 10.02(a):

(i) except for temporary investments as described in
Section 5.02(a)(xiv) and investments in mortgage-backed securities as
described in Section 3.03(d), investments shall be limited to
Federally Insured Mortgages and Operating Partnership Interests; and

(ii) in selecting Complexes in respect of which they will
originate a Federally Insured Mortgage, the General Partners shall
evaluate, among other factors: (A) the data supplied by the owner to
HUD; and (B) the general rental market conditions in the area of the
Complexes (including vacancy rates).

(d) Any Person dealing with the Partnership or a General Partner may
rely upon a certificate signed by a General Partner as to:

(i) the identity of the General Partners or Limited
Partners or Unitholders;

(ii) the existence or nonexistence of any fact or facts
which constitute a condition precedent to acts by the General Partners
or are in any other manner germane to the affairs of the Partnership;

(iii) the Persons who are authorized to execute and deliver
any instrument or document by or on behalf of the Partnership; or

(iv) any act or failure to act by the Partnership or as to
any other matter whatsoever involving the Partnership or any Partner.

(e) Notwithstanding any other provision of this Agreement, if, as a
result of the enactment of new federal tax legislation the Partnership is
or would become or is or would be held to be taxable as a corporation, the
General Partners, with the Consent of a majority in interest of the Limited
Partners and Unitholders, may take any and all such actions they may deem
necessary or appropriate to qualify the Partnership (or a successor entity)
for taxation as a real estate investment trust under Sections 856 to 860 of
the Code

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<PAGE>

(or similar provisions). Such actions may include, but shall not be
limited to, amending this Agreement or reorganizing the Partnership into
some other form of association such as a corporation or a business trust.
The General Partners shall effectuate any such qualification, amendment or
reorganization so that, to the extent possible and legally permissible
under the circumstances, the respective interests of the Limited Partners,
Unitholders and the General Partners in the assets and income of the
Partnership (or successor entity) immediately following such qualification,
amendment or reorganization are substantially equivalent to such interests
immediately prior thereto, and the governing documents of the real estate
investment trust comply with the requirements of the applicable guidelines
of the North American Securities Administrators Association, Inc.

(f) Notwithstanding any other provision of this Agreement, at all
times the General Partners shall have designated one and only one General
Partner to represent the Partnership on an exclusive basis in all dealings
with the FHA (the "Designated FHA Partner"). The Designated FHA Partner's
concurrence shall be required in all Partnership matters involving the FHA,
including, without limitation, any sale of FHA Insured Mortgages or
dissolution of the Partnership (it being understood that the Designated FHA
Partner shall concur in any decision on such matters by vote of the
Unitholders pursuant to Article X). With respect to all such dealings with
the FHA (and only in such respect), the Designated FHA Partner shall be
deemed to be the managing partner of the Partnership and, for purposes of
this provision only, any employee of the Partnership who represents the
Partnership in dealing with the FHA will be deemed an employee of and under
the control of the Designated FHA Partner. The Designated FHA Partner
shall be the TIG General Partner. If the TIG General Partner shall cease
to be a General Partner, then, notwithstanding any other provision of this
Agreement, the remaining General Partners or the Partnership shall
designate another Designated FHA Partner which shall be a "chartered
institution" as required by the regulations of the FHA, and the FHA shall
be informed immediately of the new Designated FHA Partner. Further, if the
Partnership shall be in any way reorganized as or into another entity, the
FHA shall be informed immediately, and, if required, an application for
approval of such entity as an FHA-approved investing mortgagee shall be
submitted.

Section 5.03. AUTHORITY OF GENERAL PARTNERS AND THEIR AFFILIATES TO DEAL
WITH THE PARTNERSHIP AND OPERATING PARTNERSHIPS.

(a) Affiliates of the General Partners may, and shall have the right
to, become Operating General Partners, including the sole Operating General
Partner, of any Operating Partnership; serve as coinsured lender,
HUD-approved mortgagee or reinsurer with respect to any Mortgage on a
Complex; deal with Operating Partnerships on an administrative level
including establishing the books of the Operating Partnership and providing
other administrative services; and act as management agent of any Complex
on the terms and conditions permitted by applicable governmental
regulations; and shall be compensated for any of such services in an amount
not to exceed 90% of the competitive price which would be charged in an
arm's-length transaction by others rendering comparable services in the
locality where the Complex is located.

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(b) Without limitation upon the other powers set forth herein, the
General Partners are expressly authorized to, in the name of, and on behalf
of, the Partnership:

(i) pay to the General Partners a nonrecurring Initial
Advisory Fee in an amount equal to 1% of the Gross Proceeds, for
organizing the Partnership, analyzing and evaluating potential
investments in Federally Insured Mortgages and Operating Partnership
Interests and related matters (with any unpaid or deferred portions
thereof to be paid without interest during those succeeding years in
which the Priority Return has been paid on a noncumulative basis);

(ii) pay to the General Partners a nonaccountable
Organizational, Offering and Selling Expense Reimbursement Allowance
for those expenses incurred and payable by the General Partners in
connection with or related to the formation and qualification of the
Partnership, the registration and qualification of the Units under
applicable federal and state laws and the marketing, distribution,
sale and processing of the Units, in an amount equal to 2% of Gross
Proceeds and, except for such amount, the General Partners shall not
have recourse to the Partnership for any further reimbursement for
Organizational, Offering and Selling Expenses;

(iii) pay to the General Partners the Annual Asset Management
and Partnership Administration Fee for services rendered to the
Partnership during each fiscal year in managing and supervising the
Partnership's investments in Federally Insured Mortgages and Operating
Partnership Interests in an amount equal to 1% of Invested Assets as
of the last day of such fiscal year (to be adjusted pro rata with
respect to any fiscal years which are less than 12 months, including
the Partnership's first year of operations which, for purposes of this
provision only, shall be deemed to begin on the date of the Initial
Closing), $50,000 of which shall be payable annually, half of which
(less the $50,000 payable each year) shall be payable only during
those years in which the Priority Return on Adjusted Contribution
Accounts has been paid on a noncumulative basis with respect to such
fiscal year (with any unpaid or deferred portions thereof to be paid
during those succeeding years in which the Priority Return has been
paid on a noncumulative basis), and the second half of which shall be
payable only after the Target Return on Adjusted Contribution Accounts
has been paid on a noncumulative basis (with any unpaid or deferred
portions thereof to accrue and be payable only after the Investors
have received a return of their Adjusted Contributions and the Target
Return on Adjusted Contribution Accounts has been paid on a cumulative
basis);

(iv) agree to the payment to the General Partners by each
Operating Partnership of a Commitment Fee in an amount up to 3.54% of
the amount of each Federally Insured Mortgage, out of which the
General Planners will pay all expenses incurred in connection with the
Partnership's investments in Operating Partnerships;

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(v) pay to the General Partners an Incentive Fee equal to
9.1% of all Cash Available for Distribution and Sale Proceeds
attributable to receipts of Cash Flow and Sale Transactions subsequent
to such time as the Adjusted Contributions have been reduced to zero
and the Target Return on Adjusted Contribution Accounts has been paid
on a cumulative basis (after deduction from such Cash Available for
Distribution and/or Sale Proceeds of any Termination Fee paid
therefrom);

(vi) pay to the General Partners a Termination Fee equal to
3% of all Sale Proceeds reduced by the amount of actual costs incurred
in connection with all Sales Transactions including closing costs,
brokerage and legal fees; provided, however, that such Termination Fee
shall be paid only after the Adjusted Contributions have been reduced
to zero and the Target Return on Adjusted Contributions has been paid
on a cumulative basis;

(vii) pay to the Dealer Manager a Selling Commission for each
Unit sold in a per Unit amount which will vary depending upon the
number of Units purchased by each Investor, but not to exceed 7% of
the purchase price of the Unit; and to pay to the Dealer Manager all
other amounts required under the Sales Agency Agreement;

(ix) borrow funds from a General Partner or any of its
Affiliates (a "Voluntary Loan"); provided, however, that such
borrowings (except for interest-free loans) may only be on a
short-term basis (not to exceed 24 months) and the Partnership may not
pay in connection therewith (A) interest or other financing charges or
fees in excess of the amounts which would be charged by unrelated
lending institutions on comparable loans for the same purpose in the
same locality, or (B) any prepayment charge or penalty;

(x) reimburse the General Partners as provided in Section
5.01(f);

(xi) in their sole discretion, defer any portion of the
first half (including the $50,000 payable annually) of the Annual
Asset Management and Partnership Administration Fee otherwise payable
in accordance with Section 5.03(b)(iii), and/or defer any amount
otherwise reimbursable to the General Partners in accordance with
Section 5.01(f) until such time or times that the Priority Return on
Adjusted Contribution Accounts has been paid on a noncumulative basis
with respect to a calendar year; and defer any portion of the second
half of the Annual Asset Management and Partnership Administration Fee
otherwise payable in accordance with Section 5.03(b)(iii) until such
time as the Investors have received

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a return on their Adjusted Contributions and the Target Return on
Adjusted Contribution Accounts has been paid on a cumulative basis;
and

(xii) in their sole discretion, defer any portions of the
Initial Advisory Fee otherwise payable in accordance with Section
5.03(b)(i) until such time or times that the Priority Return on
Adjusted Contribution Accounts has been paid on a noncumulative basis
with respect to a calendar year.

(c) Any agreements, contracts and arrangements with any General
Partner or Affiliate of any General Partner permitted by this Agreement
shall be subject to the following conditions (except that
subsections (iii), (iv), (v) and (vi) shall not apply to the fees and
reimbursements set forth in Section 5.03(b) herein and subsections (v) and
(vi) shall not apply to the fees and reimbursements set forth in
Section 5.03(a) herein):

(i) any such agreements, contracts or arrangements shall be
embodied in a written contract which describes the services to be
rendered and all compensation to be paid, or the goods or materials to
be provided and the price to be paid therefor or the method of
determining such price;

(ii) any such agreements, contracts or arrangements shall be
fully and promptly disclosed to all Partners in the reports provided
for in Section 9.04(c);

(iv) all goods and services provided to the Partnership must
be necessary to the prudent operation of the Partnership and will be
provided at the lesser of actual cost or 90% of the competitive price
which would be charged for such goods or services by an independent
party; provided, however, that any services provided by Affiliates of
the TIG General Partner as coinsured lender, HUD-approved mortgagee or
reinsurer with respect to any Coinsured Mortgage on a Complex will be
compensated in an amount not to exceed 90% of the competitive price
which would be charged in an arm's-length transaction by others
rendering comparable services in the locality where the Complex is
located;

(v) the person providing such services or goods must be
previously engaged in the business of rendering such services or
selling or leasing such goods, independently of the Partnership and as
an ordinary and ongoing business, and shall represent that it has
adequate staff which it utilizes in the conduct of the business and is
able to render such services or provide such goods or materials to the
Partnership in accordance with its needs therefor; and

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(vi) any such services may be performed only in
extraordinary circumstances.

(d) In fixing the terms of the Operating Partnership Agreements, the
General Partners will not diminish the protections to the Unitholders
limiting the compensation payable to the General Partners and their
Affiliates and limiting the extent to which the General Partners and their
Affiliates may have interests that conflict with those of the Partnership.

(e) In the event that an Affiliate of the TIG General Partner is an
Operating General Partner in a Complex and will also construct the Complex,
the construction contract price is based on a firm contract price which
will not exceed the sum of the cost of the land and the cost of
construction, which includes the contractor or construction fee customarily
paid for services as a general contractor. Any overhead of the general
contractor shall not be charged to the Partnership or included in the cost
of construction. In the case of construction, the only fees paid to the
Affiliate of the TIG General Partner in connection with such project shall
consist of a construction fee for acting as a general contractor, which
fees must be comparable and competitive with the fee of disinterested
persons rendering comparable services (excluding, however, any overhead of
the contractor) and a real estate commission in connection with the
acquisition of the land, if appropriate under the circumstances. Any such
real estate commission shall be subject to the limitation set forth in this
Agreement. Such construction services may only be performed in
extraordinary circumstances. In addition, such Affiliate must be
previously engaged in the business of rendering such services independently
and as an ordinary and ongoing business. All services or goods for which
the Affiliate of the TIG General Partner is to receive compensation shall
be embodied in a written contract which describes the services to be
rendered and all compensation paid, which contract may only be modified by
a vote of the majority of the Unitholders. Said contract shall contain a
clause allowing termination without penalty on 60 days' notice.

Section 5.04. GENERAL RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNERS.
Subject to the provisions of Section 5.01(b), in exercising management and
control of the Partnership, the General Partners, on behalf of the Partnership
and in furtherance of the business of the Partnership, shall have the authority
to perform all acts which the Partnership is authorized to perform. However,
the General Partners shall not have any authority to:

(a) perform any act in violation of this Agreement or any applicable
law or regulation thereunder;

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66-2/3% or more of the book value of the assets of the Partnership, except
for (i) a liquidating sale of a final Federally Insured Mortgage and
corresponding Operating Partnership Interest remaining after the sale of
all other Federally Insured Mortgages and Operating Partnership Interests,
or (ii) sales in connection with the liquidation and winding up of
Partnership's business upon its dissolution;

(d) borrow from the Partnership except in connection with Specified
Investments as described in the Prospectus Supplement;

(f) do any act which would make it impossible to carry on the
ordinary business of the Partnership;

(g) confess a judgment against the Partnership;

(h) possess Partnership property, or assign the Partnership's rights
in specific Partnership property, for other than a Partnership purpose;

(i) admit a Person as a General Partner, except as provided in this
Agreement;

(j) admit a Person as a Limited Partner, except as provided in this
Agreement;

(k) knowingly perform any act that would subject any Limited Partner
or Unitholder to liability as a general partner in any jurisdiction;

(m) lend any funds to any Person other than in connection with the
extension of funds to the Operating Partnerships or in connection with
temporary investments as described in Section 5.02(a)(xiv);

(n) cause the Partnership to acquire interests in an Operating
Partnership owning unimproved or nonincome producing property unless it is
anticipated that such property will be developed into a Complex as
evidenced by a construction loan;

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(o) invest in the securities of other issuers, except as provided in
Sections 3.03(d), 5.02(a) or 9.03;

(p) underwrite the securities of other issuers;

(q) reinvest Sale Proceeds, other than in Permitted Interim
Investments pending distribution of such proceeds;

(r) directly or indirectly pay or award any finder's fees,
commissions or other compensation to any Person engaged by a potential
investor for investment advice as an inducement to such advisor to advise
the purchaser regarding the purchase of Units; provided, however, that the
General Partners shall not be prohibited from paying the normal sales
commissions, payable to the Dealer Manager or another dealer acting
pursuant to Hutton authority, for selling Units;

(s) acquire any Federally Insured Mortgage or Operating Partnership
Interests in exchange for Units;

(t) except for investments specified in the Prospectus Supplement,
purchase any Federally Insured Mortgage or Operating Partnership Interest
on behalf of the Partnership from the General Partners or any of their
Affiliates unless one of such Persons purchased the Federally Insured
Mortgage or Operating Partnership Interest in his or its name and
temporarily holds title thereto in order to facilitate the acquisition of
such Federally Insured Mortgage or Operating Partnership Interest by the
Partnership; provided, however, that in the event of such an acquisition
from a General Partner or one of its Affiliates, (i) the purchase price
paid by the Partnership shall not exceed the cost of such Federally Insured
Mortgage or Operating Partnership Interest to the seller, and (ii) no
compensation or other benefit from the transaction may accrue to such
General Partner or any of its Affiliates except (A) the General Partner or
any of its Affiliates may be reimbursed for the costs incurred to carry a
Federally Insured Mortgage or Operating Partnership Interest acquired for
the Partnership, and (B) as otherwise permitted by this Agreement;

(u) change the Partnership's purposes from those set forth in
Section 1.03;

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(x) cause the Partnership to invest in joint venture arrangements
with another partnership formed by the General Partners or their Affiliates
unless (i) such other partnership has investment objectives substantially
identical to the Partnership's, (ii) there are no duplicate property
management or other fees, (iii) the sponsor compensation arrangements of
such other partnership are substantially identical to the Partnership's,
(iv) the Partnership has a right of first refusal to buy if the other
partnership wishes to sell property held in the joint venture, and (v) the
investment of each partnership is on substantially the same terms and
conditions;

(z) pay any fees to a General Partner or Affiliate or any third party
for property management services unless such fees are for residential
property management and do not exceed the lesser of (i) 5% of gross
revenues from the property or (ii) fees which are competitive for similar
services in the same geographic area;

(aa) pay any fees to a General Partner or Affiliate for insurance
brokerage services in connection with obtaining insurance on the
Partnership's property unless (i) such person is independently engaged in
the business of providing such services and 75% or more of such person's
gross revenue is derived from services to non-Affiliates and (ii) the cost
of providing such service is no greater than the lowest quote obtained from
two unaffiliated insurance agencies for comparable coverage and terms; or

(bb) purchase any Federally Insured Mortgage or Operating Partnership
Interest on behalf of the Partnership from the General Partners or any of
their Affiliates unless (i) the investment is specified in the Prospectus
Supplement, (ii) the Federally Insured Mortgage or Operating Partnership
Interest is sold upon terms fair to the Partnership and at a price not in
excess of the appraised value, and (iii) the cost of the property and any
improvements thereon to the General Partners or any of their Affiliates is
clearly established. However, if the cost to the General Partner or
Affiliate was less than the price to be paid by the Partnership, the price
to be paid by the Partnership will not be deemed fair, regardless of the
appraised value, unless some material change has occurred to the property
which would increase the value since the General Partner or Affiliate
acquired the property. Material factors may include the passage of a
significant amount of time (but in no event less than two years), the
assumption by the General Partner or Affiliate of the risk of obtaining a
rezoning of the property and its subsequent rezoning or some other
extraordinary event which in fact increases the value of the property.

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Section 5.05. DUTIES AND OBLIGATIONS OF THE GENERAL PARTNERS.

(d) The General Partners shall use their best efforts to assure that
the Partnership shall not be deemed an "investment company" as such term is
defined in the Investment Company Act of 1940.

(e) The General Partners shall have fiduciary responsibility for the
safekeeping and use of all funds and assets of the Partnership, whether or
not in their immediate possession or control. The General Partners shall
not employ or permit another to employ such funds or assets in any manner
except for the exclusive benefit of the Partnership; provided, however,
that by the execution of this Agreement or acceptance of their Units, as
the case may be, each Partner and Unitholder hereby consents to the placing
by the General Partners of Partnership funds in a bank account or accounts
at banks with which the General Partners or their Affiliates have informal
banking arrangements (which may include compensating balance requirements),
and to the inclusion by such banks of such Partnership funds in calculating
compliance by the General Partners or their Affiliates with such banking
arrangements; however, Partnership funds may not be used to meet any
compensating balance requirements.

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insuring the Partnership against certain liabilities with respect to any
indemnification it is legally required or permitted to provide pursuant to
this Agreement to such General Partners, their officers, directors,
employees, shareholders and such Affiliates.

(g) The General Partners will use their best efforts to observe the
standards described under the caption "INVESTMENT OBJECTIVES AND POLICIES"
in the Prospectus. The Hutton General Partner and the TIG General Partner
shall each designate two representatives to serve on the Investment
Committee and any investment in any Operating Partnership Interest or the
sale of any Operating Partnership Interest shall be subject to the
unanimous approval of the members of the Investment Committee.

Section 5.06. DELEGATION OF AUTHORITY. Subject to the provisions of this
Article V, the General Partners may delegate all or any of their powers, rights
and obligations under this Agreement, and may appoint, employ, contract or
otherwise deal with any Person for the transaction of the business of the
Partnership, which Person may, under supervision of the General Partners,
perform any acts or services for the Partnership as the General Partners may
approve.

Section 5.07. OTHER ACTIVITIES. The General Partners and any Affiliate
may engage independently or with others in other business ventures of every
nature and description, including the rendering of advice or services of any
kind to other investors and the making or management of other investments,
including investments in Federally Insured Mortgages or Operating Partnership
Interests. Neither the Partnership nor any Partner or Unitholder shall have any
right by virtue of this Agreement or the partnership relationship created by
this Agreement in or to such other ventures or activities or to the income or
proceeds derived therefrom, and the pursuit of such ventures, even if
competitive with the business of the Partnership, shall not be deemed wrongful
or improper.

Section 5.08. LIMITATION ON LIABILITY OF THE GENERAL PARTNERS;
INDEMNIFICATION.

(a) Neither the General Partners nor their Affiliates shall be
liable, responsible or accountable in damages or otherwise to the
Partnership or to any of the Limited Partners or Unitholders for any act or
omission performed or omitted by such General Partner or Affiliate in good
faith and in a manner reasonably believed by it to be within the scope of
the authority granted to it by this Agreement and in the best interests of
the Partnership, provided that such General Partner's conduct or its
Affiliate's conduct did not constitute negligence or misconduct. The
Partnership shall indemnify and hold harmless the General Partners and
their Affiliates against and for any loss, liability or damage incurred by
any of them or the Partnership by reason of any act performed or omitted to
be performed by them in connection with the business of the Partnership,
including all judgments, costs and attorneys' fees (which attorneys' fees
may be paid as incurred, except as provided in Section 5.08(d)) and any
amounts expended in settlement of any claims of liability, loss or damage,
provided that the indemnified Person's conduct did not constitute
negligence or misconduct. The satisfaction of any indemnification
obligation shall be from and limited to Partnership assets, and no Limited
Partner or Unitholder shall have any personal liability on account thereof.
The termination of any

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action, suit or proceeding, by judgment or settlement, shall not, of
itself, create a presumption that the indemnified Person did not act in
good faith and in a manner which is reasonably believed to be in or not
opposed to be in the best interest of the Partnership. Any indemnification
under this subsection, unless ordered by a court, shall be made by the
Partnership only upon a determination by independent legal counsel in a
written opinion that indemnification of the indemnified Person is proper in
the circumstances because he has met the applicable standard of conduct set
forth in this Agreement. Notwithstanding any provision of this subsection
to the contrary, the General Partners shall be presumed to be personally
liable to creditors for the debts of the Partnership.

(b) Notwithstanding the provisions of Section 5.08(a), neither the
General Partners, or any of their Affiliates or any person acting as a
Broker-Dealer shall be indemnified with regard to any losses, liability or
expenses arising from or out of an alleged violation of federal or state
securities laws unless: (i) (A) there has been a successful adjudication on
the merits of each count involving alleged securities law violations as to
the particular indemnitee and the court approves indemnification of the
litigation costs, or (B) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the particular
indemnitee and the court approves indemnification of the litigation costs,
or (C) a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that indemnification of
the settlement and related costs should be made; and (ii) such
indemnification is specifically approved by a court of law which shall have
been advised as to the current position of the Securities and Exchange
Commission, the Massachusetts Securities Division, the Office of the
Commissioner of Securities of the State of Tennessee and of any other state
securities commission regarding indemnification for violations of
securities laws.

(c) For purposes of this Section 5.08, the term "Affiliates" shall
mean any person performing services on behalf of the Partnership who (i)
directly or indirectly controls, is controlled by or is under common
control with a General Partner; or (ii) owns or controls 10% or more of the
outstanding voting securities of a General Partner; or (iii) is an officer,
director or partner of a General Partner; or (iv) if a General Partner is
an officer, director, partner or trustee, is any company for which a
General Partner acts in any such capacity.

(d) In the event that any action, suit or proceeding is instituted
against the Partnership or a General Partner or any of their Affiliates
with respect to the business, assets, liabilities or activities of the
Partnership, such General Partner, Affiliate and the Partnership may each
obtain separate legal counsel and other expert assistance to defend or
assist in defending any such action, suit or proceeding. Such General
Partner or Affiliate shall have advanced to it by the Partnership, at its
request, funds for payment of all expenses and costs reasonably incurred in
connection with the defense or any action, suit or proceeding only if (i)
such action, suit or proceeding relates to the performance of duties or
services by such General Partner or its Affiliates on behalf of the
Partnership; (ii) such action, suit or proceeding is initiated by a third
party who is

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not a Limited Partner or Unitholder; and (iii) such General Partner or
Affiliate, as the case may be, undertakes to repay the advanced funds to
the Partnership, without interest, in cases in which such General Partner
would not be entitled to indemnification. The General Partners or
Affiliates shall not be advanced funds from the Partnership for legal
expenses and other related costs incurred as a result of any legal action,
suit or proceeding initiated by a Limited Partner or Unitholder against the
General Partners or Affiliates.

(e) The Partnership shall not incur the reasonably estimated portion
of the cost of liability insurance which insures a General Partner for any
liability as to which a General Partner is prohibited from being
indemnified under this Section 5.08.

Section 5.10. SALES AGENCY AGREEMENT. The Partnership, General Partners
and Initial Limited Partner have entered into a sales agency agreement with E.F.
Hutton & Company Inc., as Dealer Manager, pursuant to which said firm will
assist the Partnership in the sale of Units and be paid Selling Commissions
therefor and be indemnified against certain liabilities as set forth in
Section 8 of such agreement. The Unitholders accept the terms of such agreement
by their adherence to this Agreement and acceptance of their Units.

Section 5.11. RESTRICTIONS ON AUTHORITY TO DEAL WITH THE GENERAL PARTNERS
AND AFFILIATES. Except as specifically authorized in this Article V, the
General Partners are prohibited from entering into any agreements, contracts or
arrangements on behalf of the Partnership with the General Partners or any
Affiliate of the General Partners. Such prohibition shall include, without
limitation, the following: (a) the Partnership shall not loan money to a General
Partner or any Affiliate of a General Partner except in connection with
investments described in the Prospectus Supplement; (b) neither a General
Partner nor any such Affiliate shall loan money to the Partnership if interest
rates and other finance charges and fees in connection with such loan are in
excess of the amounts charged by unrelated banks on comparable loans, or make
loans with a prepayment charge or penalty; (c) no compensation or fees shall be
paid a General Partner or its Affiliates except as described in this Agreement
or in the Prospectus; and (d) the Partnership shall not sell or lease property
to a General Partner or Affiliate of a General Partner.

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ARTICLE VI

CHANGES IN GENERAL PARTNERS

Section 6.01. WITHDRAWAL OF GENERAL PARTNERS.

Section 6.02. ADMISSION OF A SUCCESSOR OR ADDITIONAL GENERAL PARTNER. A
Person shall be admitted as a General Partner of the Partnership only if each of
the following conditions is satisfied:

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(e) such Person is not an individual.

Section 6.03. CONSENT OF LIMITED PARTNERS AND UNITHOLDERS TO ADMISSION OF
SUCCESSOR OR ADDITIONAL GENERAL PARTNER. Unless otherwise prohibited by the
Delaware Revised Uniform Limited Partnership Act at the time that such Consent
is necessary, each of the Limited Partners and Unitholders, by the execution of
this Agreement by the Initial Limited Partner and the acceptance by the
Unitholders of their Units, Consents to the admission of any Person as a
successor additional General Partner to which at the time there has been given
the express consent of a majority in Interest of the Limited Partners (including
the Initial Limited Partner). Upon receipt of such Consent of a majority in
Interest of the Limited Partners (including the Initial Limited Partner voting
at the direction of the Unitholders), such admission shall, without any further
Consent or approval of the Limited Partners or Unitholders, be the act of all
the Limited Partners and Unitholders.

Section 6.04. REMOVAL OF A GENERAL PARTNER. Subject to Section 10.02, a
majority in Interest of the Limited Partners (including the initial Limited
Partner voting at the direction of the Unitholders) voting together as a class,
without the Consent or other action by the General Partner to be removed, may
remove any General Partner and may elect a replacement therefor; such
replacement shall become a General Partner only upon meeting the conditions
contained in Section 6.02.

Section 6.05. EFFECT OF REMOVAL, BANKRUPTCY, DEATH, WITHDRAWAL,
DISSOLUTION OR INCOMPETENCY OF A GENERAL PARTNER.

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shall first be assigned and transferred to each remaining or substitute
General Partner such percentage as they shall mutually determine of the
General Partner's Interest of the removed, Bankrupt, deceased, dissolved,
incompetent or withdrawn General Partner as shall be required to increase
the aggregate of all remaining General Partners' Interests to at least 1%,
in consideration for which, except in the case of a General Partner removed
for cause, the removed, Bankrupt, deceased, dissolved, incompetent or
withdrawn General Partner shall be paid the fair market value thereof. In
the event of a dispute as to fair market value of such Interest, an
independent appraiser shall be chosen by the removed General Partner and
the successor General Partner or the Limited Partners as a class (it being
understood that the Initial Limited Partner is voting at the direction of
the Unitholders), as the case may be, and the fair market value of such
Interest as determined by such appraiser shall be binding. Expenses of
appraisal shall be borne equally by the removed General Partner and the
Partnership. The payment to the removed, Bankrupt, deceased, dissolved or
incompetent General Partner under this Section 6.05(b) shall be in the form
of an interest-bearing promissory note coming due in no less than five
years with equal installments due each year. The payment to the withdrawn
General Partner will be in the form of a noninterest bearing unsecured
promissory note with principal payable, if at all, from distributions which
such withdrawn General Partner otherwise would have received had such
General Partner not withdrawn. To the extent that the Interest of the
removed, Bankrupt, deceased, dissolved, incompetent or withdrawn General
Partner is not so assigned, his Interest shall be converted to that of a
Limited Partner, but with the same rights under Article IV (except as
reduced by assignment and transfer pursuant to the first sentence of this
Section 6.05(b)) to share in the Profits and Losses for Tax Purposes, and
Cash Available for Distribution of the Partnership and the same rights
under Article IV (which shall not be reduced by reason of any assignment
and transfer pursuant to the first sentence of this paragraph) to share in
the Profits and Losses for Tax Purposes, and Cash Available for
Distribution of the Partnership and the same rights under Article IV (which
shall not be reduced by reason of any assignment and transfer pursuant to
the first sentence of this Section 6.05(b)) to receive Sale Proceeds or
proceeds from liquidation of the Partnership that he would have had if he
had remained as a General Partner; provided, however, that in the case of a
General Partner removed for cause, any such nonassigned Interest shall be
forfeited. Nothing in this Section 6.05(b) shall affect any rights or
liabilities of the removed, Bankrupt, deceased, dissolved, incompetent or
withdrawn General Partner which matured prior to the removal, Bankruptcy,
death, dissolution, incompetence or withdrawal of such General Partner.

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or conversion (as the case may be) of the Interest of the removed,
Bankrupt, deceased, dissolved, incompetent or withdrawn General Partner.

(d) All parties hereto hereby agree to take all actions and to
execute all documents necessary or appropriate to effect the foregoing
provisions of this Section 6.05.

ARTICLE VII

TRANSFERABILITY OF LIMITED PARTNERS' INTERESTS AND UNITS

Section 7.01. ASSIGNABILITY OF UNITS. The Units shall be evidenced by
Beneficial Assignment Certificates which shall be issued in registered form
only. Until such time as the Partnership qualifies the Units for quotation by
NASDAQ or for trading on a national or regional securities exchange, the
transferability of Units shall be subject to the restrictions imposed in
Section 7.02 below. Upon qualification of the Units for quotation by NASDAQ or
for trading on a national or regional securities exchange, such Units shall be
freely transferable (except when transfer is restricted under federal or state
securities laws). Notwithstanding the foregoing, the General Partners may
decide not to list the Units or may cause the delisting of the Units and the
reimposition of the restriction of Section 7.02 if (a) in their opinion, a
termination pursuant to Code Section 708 is likely to occur as a result of 50%
or more of the Units being sold or exchanged, exclusive of successive sales or
exchanges, within a 12-month period or (b) if, as a result of federal income tax
legislation or regulation, (i) partnerships with publicly traded partnership
interests would be taxable as corporations, or (ii) income to the Partnership
would not be classified as passive activity income as a result of the listing of
the Units.

Section 7.02. RESTRICTIONS ON TRANSFERS OF INTERESTS OF LIMITED PARTNERS
OR UNITHOLDERS. Except as provided in Section 7.01, a Limited Partner or (until
such time as the Partnership qualifies the Units for quotation by NASDAQ or for
trading on a national or regional securities exchange) a Unitholder may assign
his Limited Partnership Interests or Units by a duly executed written instrument
of assignment, the terms of which are not in contravention of any of the
provisions of this Agreement. Within 30 days after an assignment of a
beneficial interest in Limited Partnership Interests or Units which occurs
without a transfer of record ownership of such Limited Partnership Interests or
Units, the assignor shall give notice of such assignment to the General Partner.
Notwithstanding the foregoing, a Limited Partner or Unitholder may not sell,
assign, pledge, transfer or exchange any of his Limited Partnership Interest or
Units:

(a) until said Limited Partner or Unitholder obtains an opinion of
counsel for the Partnership stating:

(i) that such sale, assignment, pledge, transfer or
exchange would not result, when considered with all other sales,
assignments, transfers and exchanges of Interests in the Partnership
within the previous 12 months, in the Partnership being considered to
have been terminated within the meaning of Section 708 of the Code;
and

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(ii) that such sale, assignment, pledge, transfer or
exchange would not be in violation of any applicable federal or state
securities laws (including any investor suitability standards);

(b) except for transfers by gift or inheritance, intra-family
transfers, transfers resulting from family dissolutions and transfers to
Affiliates; if the transferor or the transferee would hold less than 250
(100 in the case of IRAs and Keogh Plans) Limited Partnership Interests or
Units; or

The General Partners, in their sole discretion, may waive any or all of the
requirements set forth in paragraphs (a), (b) or (c) of this Section 7.02. Any
attempted sale, assignment, pledge, transfer or exchange in contravention of the
provisions of this Article VII shall be void and ineffectual and shall not be
recognized by the Partnership.

Section 7.03. ASSIGNEES OF LIMITED PARTNERS.

(a) If a Limited Partner or Unitholder dies, his executor,
administrator or trustee, or, if he is adjudicated incompetent, his
committee, guardian or conservator, or, if he becomes Bankrupt, the trustee
or receiver of his estate, shall have all the rights of a Limited Partner
or Unitholder for the purpose of settling or managing his estate and such
power as the deceased or incompetent Limited Partner or Unitholder
possessed to assign all or any part of his Limited Partnership Interests or
Units and to join with the assignee thereof in satisfying any conditions
precedent to such assignee becoming a Limited Partner or Unitholder. The
death, dissolution, adjudication of incompetence or Bankruptcy of a Limited
Partner or Unitholder shall not dissolve the Partnership.

(b) The Partnership need not recognize for any purpose any assignment
of all or any fraction of the Limited Partnership Interests or (so long as
the transfer restrictions of Section 7.02 are applicable to Units) Units of
a Limited Partner or Unitholder unless there shall have been filed with the
Partnership and recorded on the Partnership's books a duly executed and
acknowledged counterpart of the instrument effecting such assignment, and
unless such instrument evidences the written acceptance by the assignee of
all of the terms and provisions of this Agreement, contains a
representation that such assignment was made in accordance with all
applicable laws and regulations (including any investor suitability
requirements) and in all other respects is satisfactory in form and
substance to the General Partners.

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(i) the instrument of assignment sets forth the intentions
of the assignor that the assignee succeed to the assignor's Interest
as a Limited Partner or Unitholder in his place;

(ii) the assignee shall have fulfilled the requirements of
Sections 7.03(b) and 12.02;

(iii) the assignee shall have paid all reasonable legal fees
and filing costs incurred by the Partnership in connection with his
substitution as a Limited Partner or Unitholder; and

(iv) the General Partner shall have consented to such
substitution, which consent may be granted or withheld by the General
Partners in their sole discretion.

(e) This Agreement shall be amended as soon as practicable to
recognize the admission of any Limited Partners and shall be submitted in a
timely manner for filing with the office of the Secretary of State of the
State of Delaware. Assignees of Limited Partnership Interests shall be
recognized as such, to the extent set forth in Section 7.03(b) or 7.03(d),
as of the day which the Partnership has received the instrument of
assignment and all of the other conditions to the assignment are satisfied.

Section 7.04. JOINT OWNERSHIP OF INTERESTS. Subject to the other
provisions of this Agreement, a Limited Partnership Interest or Unit may be
acquired by two or more individuals, who shall, at the time they acquire such
Limited Partnership Interest or Unit, indicate to the Partnership whether the
Limited Partnership Interest or Unit is being held by them as joint tenants with
the right of survivorship, as tenants-in-common or as community property. In
the absence of any such designation, they shall be presumed to hold such Limited
Partnership Interest or Unit as tenants-in-common. Any Consent of the Limited
Partners or Units shall require the action or vote of all owners of any such
jointly held Limited Partnership Interest or Unit.

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ARTICLE VIII

DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP

Section 8.01. EVENTS CAUSING DISSOLUTION.

(a) The Partnership shall dissolve upon the happening of any of the
following events:

(i) the Bankruptcy, death, dissolution, withdrawal, removal
or adjudication of incompetence of a General Partner, unless the
remaining General Partners (or in the case of a General Partner who is
at that time the sole General Partner, all of the remaining Partners)
agree in writing to continue the business of the Partnership within 90
days of the occurrence of such an event;

(ii) the sale, repayment or other disposition of all
Federally Insured Mortgages and Operating Partnership Interests held
by, and substantially all other assets, if any, held by the
Partnership;

(iii) the election by a majority in interest of the Limited
Partners (including the Initial Limited Partner voting on behalf of
the Unitholders) pursuant to Section 10.02 or the election by the
General Partners pursuant to Section 5.04(e);

(iv) the expiration of the term of the Partnership specified
in Section 1.04; or

(v) any other event causing the dissolution of the
Partnership under the laws of the State of Delaware.

Section 8.02. LIQUIDATION.

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assets of the Partnership and perform the functions of the General Partners
set forth in this Section 8.02.

(b) After payment of liabilities owing to creditors of the
Partnership, the General Partners shall set aside as a reserve such amount
as they deem reasonably necessary for any contingent or unforeseen
liabilities or obligations of the Partnership. Said reserve may be paid
over by the General Partners to a bank, to be held in escrow for the
purpose of paying any such contingent or unforeseen liabilities or
obligations and, at the expiration of such period as the General Partners
may deem advisable, the amount in such reserve shall be distributed among
the Partners in the manner set forth in Section 8.02(c).

(c) After paying such liabilities and providing for such reserve, the
General Partners shall cause the remaining net assets of the Partnership to
be distributed among the Partners and Unitholders. The Profits or Losses
for Tax Purposes resulting from the liquidation of the assets of the
Partnership (determined prior to any deduction attributable to the payment
to the General Partners of any Incentive Fee or Termination Fee from the
proceeds resulting from such liquidation of the assets of the Partnership)
shall be allocated among the Partners and Unitholders in accordance with
the applicable provisions of Section 4.03(d). All remaining net assets
shall then be distributed among the Partners and Unitholders in proportion
to their respective Capital Accounts including, in the case of Unitholders,
the special subaccounts established through the Initial Limited Partner's
Capital Account on behalf of such Unitholders, until the Adjusted
Contributions and the Target Return or Adjusted Contribution Accounts have
been reduced to zero. After the Adjusted Contributions and the Target
Return on Adjusted Contribution Accounts have been reduced to zero,
remaining net assets shall be applied to the payment of any accrued but
unpaid Incentive Fee or Termination Fee then owed to the General Partners
in accordance with Sections 5.03(b)(v) and (b)(vi). Any Partnership net
assets remaining after the payment of such fees shall be distributed among
the Partners and Unitholders in proportion to their respective adjusted
Capital Accounts, including, in the case of Unitholders, the special
subaccounts established through the Initial Limited Partner's Capital
Account on behalf of such Unitholders.

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Partnership and shall perform the actions of the General Partners described
in this Section 8.02.

ARTICLE IX

BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS

Section 9.01. BOOKS AND RECORDS.

(i) a current list of the full name and last known home or
business address of each Partner and Unitholder, set forth in
alphabetical order;

(ii) a copy of this Agreement, together with executed copies
of any powers of attorney pursuant to which this Agreement, and any
amendments hereto, has been executed;

(iii) copies of the Partnership's federal, state and local
income tax returns and reports, if any, for the three most recent
years;

(iv) copies of (A) any effective written partnership
agreements and (B) any financial statements of the Partnership for the
three most recent years; and

(v) the Partnership books.

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owned by an Operating Partnership in which the Partnership purchases an
Operating Partnership Interest.

Section 9.02. ACCOUNTING BASIS AND FISCAL YEAR. The books of the
Partnership initially shall be kept on the accrual method. The fiscal year of
the Partnership shall be the year ending December 31.

Section 9.04. REPORTS.

(a) If the Units are not registered pursuant to Section 12 of the
Securities Exchange Act of 1934 within 60 days after the end of the
Partnership's first two complete quarters of operations and, thereafter,
within 60 days after the end of each first six-month period of each
Partnership year, the General Partners shall send to each Person who was a
Limited Partner or Unitholder during such period a balance sheet and
statements of operations, changes in partners' capital, changes in
financial position and Cash Available for Distribution and Sales Proceeds
for, or as of the end of, such period, none of which need be audited,
together with a report of the activities of the Partnership during each
six-month period.

(b) If the Units are registered pursuant to Section 12 of the
Securities Exchange Act of 1934 within 45 days after the end of each of the
first three quarters of each year, the General Partners shall send to each
Person who was a Limited Partner or Unitholder during such quarter a
balance sheet and statements of operations, changes in partners' capital,
changes in financial position (all prepared in accordance with generally
accepted accounting principles) and a statement of Cash Available for
Distribution and Sales Proceeds for, or as of the end of, such quarter,
none of which need be audited, together with a report of the activities
of the Partnership during such quarter.

(c) Within 45 days after the end of each of the first three quarters
in each year and within 120 days after the end of the fourth quarter in
each year, the General Partner shall cause to be prepared and distributed
to each Person who was a Limited Partner or Unitholder at any time during
the quarter then ended (i) a detailed statement describing any new
agreement, contract or arrangement between the Partnership and the General
Partners or any of their Affiliates; (ii) the amount of all fees and other
compensation paid by the Partnership during such quarter to the General
Partners or any Affiliate of the General Partners; and (iii) until the
Capital Contributions of Unitholders shall be fully invested, a special
report of all Federally Insured Mortgage and Operating Partnership Interest
acquisitions including (A) a description of the Federally Insured Mortgage,
(B) a

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description of the Complex securing the Federally Insured Mortgage, (C) the
purchase price and remaining term of the Federally Insured Mortgage, and
(D) the amount which then remains unexpended, stated in terms of both
dollar amount and percentage of the sum of the Partner's Capital
Contributions and the Contributions of Unitholders.

(d) The General Partners shall send to each Person who was a Limited
Partner or Unitholder at any time during the year then ended such tax
information as shall be necessary for the preparation by such Limited
Partner or Unitholder of his federal income tax return and required state
income and other tax returns. The General Partners shall send this
information within 75 days after the end of each calendar year.

(e) Within 120 days after the end of each year, the General Partners
shall send to each Person who was a Limited Partner or Unitholder at any
time during the year then ended an annual report including (i) the balance
sheet of the Partnership as of the end of such year and statements of
operations, changes in partners' capital and changes in financial position
of the Partnership for such year, all of which shall be prepared in
accordance with generally accepted accounting principles and accompanied by
a report of the Accountants containing an opinion of the Accountants;
(ii) a statement of Cash Available for Distribution and Sale Proceeds for
such year; (iii) a report of the activities of the Partnership during such
year; (iv) a statement (which need not be audited) showing distribution per
Limited Partnership Interest and per Unit by admission date during such
year in respect of such year, which statement shall identify distributions
from (A) Cash Available for Distribution and Sale Proceeds generated during
such year, (B) Cash Available for Distribution and Sale Proceeds generated
during prior years, and (C) Reserves and other sources; (v) a detailed
statement of any transactions with the General Partners or their
Affiliates, and of fees, commissions, compensation and other benefits paid,
or accrued to the General Partners or their Affiliates for the fiscal year
completed, showing the amount paid or accrued to each recipient and the
services performed; and (vi) a breakdown of the amounts actually reimbursed
to the General Partners. Accountants to the General Partner will certify
that the amounts actually reimbursed were costs incurred in the management
of the Partnership. The methods of verification used by the accountants
will be in accordance with generally accepted auditing standards and
include such tests of the accounting records and other auditing procedures
which the accountants for the General Partners consider appropriate,
including, but not limited to, review of the time records of employees of
the General Partners and their Affiliates, and review of the nature of the
tasks performed by such employees for which the General Partners are
reimbursed.

(g) A copy of each report referred to in this Section 9.04 shall be
filed with all securities commissions requiring such filing at the time
required by such commissions.

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Section 9.05. DESIGNATION OF TAX MATTERS PARTNER. The General Partners
hereby designate the TIG General Partner as Tax Matters Partner of the
Partnership, as provided in regulations pursuant to Section 6231 of the Code.
Each Partner and Unitholder consents to such designation of the Tax Matters
Partner and agrees to execute, certify, acknowledge, deliver, swear to, file and
record at the appropriate public offices such documents as may be necessary or
appropriate to evidence such consent.

Section 9.06. DUTIES OF TAX MATTERS PARTNER.

Section 9.07. AUTHORITY OF TAX MATTERS PARTNER. The Tax Matters Partner
is hereby authorized, but not required:

(b) in the event that a notice of a final administrative adjustment
at the Partnership level of any item required to be taken into account by a
Partner or Unitholder for tax purposes (a "final adjustment") is mailed to
the Tax Matters Partner, to seek judicial review of such final adjustment,
including the filing of a petition for readjustment with the Tax Court, the
District Court of the United States for the district in which the
Partnership's principal place of business is located or the United States
Claims Court;

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Section 9.08. EXPENSES OF TAX MATTERS PARTNER. The Partnership shall
indemnify and reimburse the Tax Matters Partner for all expenses, including
legal and accounting fees, claims, liabilities, losses and damages incurred in
connection with any administrative or judicial proceeding with respect to the
tax liability of the Partners and Unitholders. The payment of all such expenses
shall be made before any distributions are made from Cash Flow or any reserves
are set aside by the General Partners. Neither the General Partners, any
Affiliate nor any other Person shall have any obligation to provide funds for
such purpose. The taking of any action and the incurring of any expense by the
Tax Matters Partner in connection with any such proceeding, except to the extent
required by law, is a matter in the sole discretion of the Tax Matters Partner
and the provisions on limitations of liability of General Partners and
indemnification set forth in Section 5.08 of this Agreement shall be fully
applicable to the Tax Matters Partner in its capacity as such.

ARTICLE X

MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS AND UNITHOLDERS

Section 10.01. MEETINGS.

(a) Meetings of the Limited Partners and Unitholders for any purpose
may be called by the General Partners at any time and shall be called by
the General Partners after receipt of a written request for such a meeting
signed by 10% or more in Interest of the Limited Partners considered as a
class (it being understood that the Initial Limited Partner is acting for
and at the direction of the Unitholders). Any such request shall state the
purpose of the proposed meeting and the matters proposed to be acted upon
thereat. The General Partners shall provide to all Limited Partners within
10 days of receipt of such request, written notice by certified mail of a
meeting. Meetings shall be held at the principal office of the Partnership
or at such other place as may be designated by the General Partners. In
addition, the General Partners shall submit any matter upon which the
Limited Partners (including the Initial Limited Partner acting for and at
the direction of the Unitholders) are entitled to act to the Limited
Partners for a vote by written Consent without a meeting.

(b) Any meeting to be held pursuant to Section 10.01(a) shall be held
not less than 15 days nor more than 60 days after receipt of such request.
Such Notice shall state the place, date and hour of the meeting and shall
indicate that the Notice is being issued at the direction of, or by, the
Partner(s) calling the meeting. The Notice shall state the

45
<PAGE>

purpose or purposes of the meeting. If a meeting is adjourned to another
time or place, and if an announcement of the adjournment of time or place
is made at the meeting, it shall not be necessary to give Notice of the
adjourned meeting. The presence in person or by proxy of a majority in
Interest of the Limited Partners (including the Initial Limited Partner
acting for and at the direction of the Unitholders) considered as a class
shall constitute a quorum at all meetings of the Limited Partners;
provided, however, that if no such quorum is present, holders of a majority
in Interest of the Limited Partners considered as a class (it being
understood that the Initial Limited Partner is voting at the direction of
the Unitholders) so present or so represented may adjourn the meeting from
time to time without further Notice, until a quorum shall have been
obtained. No Notice of the time, place or purpose of any meeting of
Limited Partners and Unitholders need be given to any Limited Partner or
Unitholder who attends in person or is represented by proxy, except for a
Limited Partner or Unitholder attending a meeting for the express purpose
of objecting at the beginning of the meeting to the transaction of any
business on the ground that the meeting is not lawfully called or
convened, or to any Limited Partner or Unitholder entitled to such Notice
who, in writing, executed and filed with the records of the meeting, either
before or after the time thereof, waives such Notice.

Section 10.02. VOTING RIGHTS OF LIMITED PARTNERS AND UNITHOLDERS.

(a) Subject to Section 10.03, a majority in Interest of the Limited
Partners (it being understood that the Initial Limited Partner is voting at
the direction of Unitholders), without the concurrence of the General
Partners, may: (i) amend this Agreement, subject to the conditions that
such amendment (A) may not in any manner allow the Limited Partners and
Unitholders to take part in the management or control of the Partnership's
business or otherwise modify their limited liability, and (B) may not,
without the consent of the General Partner affected, alter the rights,
powers and duties of such General Partner as set forth in Article V, the
interest of such General Partner in Profits and Losses for Tax Purposes, or
Cash Available for Distribution, or Sale Proceeds as set forth in this
Agreement; (ii) approve or disapprove the sale of all or substantially all
of the Partnership's assets; (iii) dissolve the Partnership; or (iv) remove
any General Partner and elect a replacement therefor, which replacement
shall become

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a General Partner only in accordance with Section 6.02. If the Limited
Partners, voting as a class (it being understood that the Initial Limited
Partner is voting at the direction of the Unitholders) vote to remove a
General Partner pursuant to this Section 10.02, they shall provide the
removed General Partner with Notice thereof, which Notice shall set forth
the date upon which such removal is to become effective.

(c) A Limited Partner shall be entitled to cast one vote for each
Limited Partnership Interest which he owns, and a Unitholder shall be
entitled to direct the Initial Limited Partner to cast one vote for each
Unit which he owns (it being understood that the Initial Limited Partner is
voting at the direction of the Unitholders) (i) at a meeting, in person, by
written proxy or by a signed writing directing the manner in which he
desires that his vote be cast which writing must be received by the General
Partners prior to such meeting, or (ii) without a meeting, by a signed
writing directing the manner in which he desires that his vote be cast,
which writing must be received by the General Partners prior to the date
upon which the votes of Limited Partners are to be counted. Every proxy
must be signed by the Limited Partner or Unitholder or his
attorney-in-fact. No proxy shall be valid after the expiration of 12
months from the date thereof unless otherwise provided in the proxy. Every
proxy shall be revocable at the pleasure of the Limited Partner or the
Unitholder executing it. Only the votes of Limited Partners of record on
the Notice date (or the record date, if one is fixed pursuant to
Section 10.01(c)), whether at a meeting or otherwise, shall be counted.
The General Partners shall not be entitled to vote in their capacity as
General Partners. The laws of the State of Delaware pertaining to the
validity and use of corporate proxies shall govern the validity and use of
proxies given by the Limited Partners and the Unitholders. The Unitholders
may give proxies only to the Initial Limited Partner. The Initial Limited
Partner will vote in accordance with the directions of the Unitholders so
that each interest of a Unitholder will be voted separately.

Section 10.03. CONDITIONS TO ACTION BY LIMITED PARTNERS AND UNITHOLDERS.
The voting rights of the Limited Partners set forth in Sections 5.04(c) and (e)
and Section 10.02 shall not be exercised unless and until (a) the Partnership
has received an opinion of counsel, which counsel is satisfactory to a majority
in Interest of the Limited Partners (it being understood that the Initial
Limited Partner is voting at the direction of the Unitholders), that such action
is legal, (b) either (i) the Partnership has received an opinion from such
counsel that such action may be effected without subjecting the Limited Partners
and Unitholders to liability as general partners under the Delaware Revised
Uniform Limited Partnership Act, or (ii) a Delaware court having jurisdiction
over the matter enters a judgment, not subject to further appeal, to such
effect, and (c) either (i) the Partnership has received an opinion from such
counsel that such action may be effected without changing the Partnership's
status for tax purposes, or (ii) a court having jurisdiction over the matter
enters a judgment not subject to further appeal, or the Internal

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Revenue Service issues a ruling, to such effect. For purposes of this
Section 10.03, counsel will be deemed satisfactory to the Limited Partners if
proposed by the General Partners and not disapproved in writing within 45 days
by a majority in Interest of the Limited Partners (it being understood that the
Initial Limited Partner is voting at the direction of the Unitholders), provided
that if the holders of 10% or more of the outstanding Limited Partnership
Interests and Units considered as a class propose counsel for this purpose, such
proposed counsel, and not counsel proposed by the General Partners, shall be
submitted for such approval.

Section 10.05. OTHER ACTIVITIES. The Limited Partners and Unitholders may
engage in or possess interests in other business ventures of every kind and
description of their own accounts, including, without limitation, serving as
general or limited partners of other partnerships which own, either directly or
through interests in other partnerships or otherwise, Federally Insured
Mortgages. Neither the Partnership nor any of the Partners or Unitholders shall
have any rights by virtue of this Agreement in or to such business ventures or
to the income or profits derived therefrom.

ARTICLE XI

ASSIGNMENT OF ASSIGNED LIMITED PARTNERSHIP INTERESTS
TO UNITHOLDERS AND RIGHTS OF UNITHOLDERS

Section 11.01. ASSIGNMENT OF ASSIGNED LIMITED PARTNERSHIP INTERESTS TO
UNITHOLDERS.

(b) The General Partner, by the execution of this Agreement,
irrevocably consents to and acknowledges that (i) the foregoing transfer
and assignment pursuant to Section 11.01(a) by the Initial Limited Partner
to the Unitholders of the Initial Limited Partner's rights and interest in
the Assigned Limited Partnership Interests is effective, and (ii) the
Unitholders are intended to be third party beneficiaries of all rights and
privileges of the Initial Limited Partner in respect of the Assigned
Limited Partnership Interests. The General Partner covenants and agrees
that, in accordance with the

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foregoing transfer and assignment, all the Initial Limited Partner's rights
and privileges in respect of Assigned Limited Partnership Interests may be
exercised by the Unitholders except as otherwise provided herein.

Section 11.02. RIGHTS OF UNITHOLDERS.

(a) Limited Partners (including the Initial Limited Partner but only
with respect to its own Interests) and Unitholders shall share PARI PASSU
on the basis of one Limited Partnership Interest for one Unit, and shall be
considered as a single class with respect to all rights to receive
distributions of Cash Available for Distribution, Sale Proceeds,
allocations of Profits and Losses for Tax Purposes and other determinations
of allocations and distributions pursuant to this Agreement.

(c) Unitholders shall have the same rights as Limited Partners under
the Delaware Revised Uniform Limited Partnership Act to bring derivative
actions on behalf of the Partnership.

Section 11.03. EXCHANGE OF UNITS FOR LIMITED PARTNERSHIP INTERESTS. Any
Unitholder who desires to exchange his Units for Limited Partnership Interests
may do so only with the consent of the General Partners, which shall not be
unreasonably withheld, by delivering to the Partnership executed subscription
agreements and transfer applications (which are available upon request from the
General Partners), fulfilling the requirements of Section 12.02, and paying a
fee of $100 per transaction, for legal and administrative costs and recording
(which fee may be increased from time to time in the discretion of the General
Partner). This Agreement shall be amended as soon as practicable to recognize
the admission of such persons as Limited Partners of the Partnership. Persons
who effect such an exchange shall receive one Limited Partnership Interest for
each Unit they exchange and shall not have the right thereafter to re-exchange
their Limited Partnership Interests for Units. Units which have been exchanged
for Limited Partnership Interests shall be cancelled and shall not be reissued.

Section 11.04. SUBSCRIPTIONS FOR UNITS AND CLOSINGS.

(a) The General Partners are authorized, from time to time or at any
time, to accept subscriptions for Units from any Person if, after the
acceptance of such subscriptions, such Person's Contribution of Unitholders
is not less than $5,000 ($2,000 for IRAs and Keogh Plans) and not more than
such maximum amount (not to exceed $10,000,000) as the General Partners
shall determine; provided, however, that no subscriptions for Units shall
be accepted after one year from the date of the Prospectus.

(b) All subscriptions for Units shall be received by the Partnership
in trust and deposited in an escrow account with the Escrow Agent within
two business days after

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receipt of Subscription Agreements by the General Partners. Upon receipt
of subscriptions acceptable to the General Partners for at least ____
Units, the Escrow Agent shall release such subscriptions to the Partnership
(such release of subscriptions to be treated as contributions to the
Partnership made by the Initial Limited Partner on behalf of, and as
nominee for the Unitholders). Investors shall become Unitholders of record
as of the close of business on the day of receipt of such subscriptions by
the Partnership. Any interest earned on moneys paid by Investors during
the period such moneys are held in escrow shall be paid to Investors
following release of subscriptions. All moneys deposited by Investors
whose subscriptions are rejected by the General Partners will be returned
to such Investors, with any interest earned thereon, promptly after such
rejection. If the Escrow Agent does not receive subscriptions for at least
____ Units on or before 60 days from the commencement of the Offering,
which date may be extended by agreement of the General Partners to not
later than one year from the date of the Prospectus, it shall promptly
return all moneys deposited by Investors, together with any interest earned
thereon. The General Partners and their Affiliates shall have the right to
subscribe for Interests for their own accounts but any such subscriptions
shall not be included for purposes of determining whether the minimum
number of subscriptions has been received.

(d) Immediately upon the release by the Escrow Agent to the
Partnership of subscriptions of Unitholders (such release of subscriptions
to be treated as contributions to the Partnership made by the Initial
Limited Partner on behalf of, and as nominee for, the Unitholders), the
Initial Limited Partner shall be credited on the books and records of the
Partnership with additional Limited Partnership Interests and additional
Capital Contributions in the amount of such subscriptions. The Initial
Limited Partner's rights and interest in such Assigned Limited Partnership
Interests shall be deemed to have been transferred and assigned to the
Unitholders in accordance with Section 11.01(a).

Section 11.05. PRESERVATION OF TAX STATUS. The General Partners may at
any time require the Unitholders to become Limited Partners, and may take such
other action with respect

50
<PAGE>

to the manner in which Units Limited Partnership Interests are being or may
be transferred or traded, as it may deem necessary or appropriate, in order to
preserve the status of the Partnership as a partnership rather than an
association taxable as a corporation for Federal income tax purposes or to
insure that Unitholders will be treated as limited partners for Federal income
tax purposes.

ARTICLE XII

MISCELLANEOUS PROVISIONS

Section 12.01. APPOINTMENT OF THE GENERAL PARTNERS AS ATTORNEY-IN-FACT.

(a) Each Limited Partner, including each Unitholder who exchanges his
Units for Limited Partnership Interests, by the execution of this Agreement
irrevocably constitutes and appoints, with full power of substitution, the
General Partners, and each of them acting singly, as his true and lawful
attorney-in-fact with full power and authority in his name, place and stead
to execute, certify, acknowledge, deliver, swear to, file and record at the
appropriate public offices such documents as may be necessary or
appropriate to carry out the provisions of this Agreement, including, but
not limited to:

(ii) any other instrument or document which may be required to
be filed by the Partnership under Federal law or under the laws of any
state in which any such Person deems it advisable to file;

(iii) all amendments to this Agreement adopted in accordance
with the terms hereof and all instruments which any such Person deems
appropriate to reflect a change or modification of the Partnership in
accordance with the terms of this Agreement; and

51
<PAGE>

(b) The appointment by each Limited Partner of each of such Persons
as his attorney-in-fact is irrevocable and shall be deemed to be a power
coupled with an interest, in recognition of the fact that each of the
Partners under this Agreement will be relying upon the power of such
Persons to act as contemplated by this Agreement in any filing and other
action by them on behalf of the Partnership, and such power shall survive
the removal, Bankruptcy, death, incompetence or dissolution of any Person
hereby giving such power and the transfer or assignment of all or any part
of the Limited Partnership Interests of such Person; provided, however,
that in the event of a transfer by a Limited Partner of all or any part of
his Limited Partnership Interests, the foregoing power of attorney of a
transferor Limited Partner shall survive such transfer only until such time
as the transferee is admitted to the Partnership as a Limited Partner and
all required documents and instruments are duly executed, filed and
recorded to effect such substitution.

Section 12.02. SIGNATURES; AMENDMENTS.

(b) In addition to any amendments otherwise authorized herein,
amendments may be made to this Agreement from time to time by the General
Partners, without the Consent of the Limited Partners or Unitholders,
(i) to add to the representations, duties or obligations of the General
Partners or surrender any right or power granted to the General Partners in
this Agreement; (ii) to cure any ambiguity or correct or supplement any
provision in this Agreement which may be inconsistent with the manifest
intent of this Agreement; (iii) to delete or add any provision of this
Agreement required to be deleted or added based upon comments by the staff
of the Securities and Exchange Commission or other federal agency or by a
state "Blue Sky" commissioner or similar official; (iv) to delete, add or
revise any provision of this Agreement that may be necessary or
appropriate, in the General Partners' judgment, to insure that the
Partnership will be treated as a partnership, and that each Unitholder and
each Limited Partner will be treated as a limited partner, for Federal
income tax purposes; and (v) to cause investments of the Partnership to be
exempt from the definition of "plan assets" under the Employee Retirement
Income Security Act of 1974 and any regulations promulgated thereunder;
provided, however, that no amendment shall be adopted pursuant to this
Section 12.02(b) unless the adoption thereof (A) is for the benefit of, or
not adverse to the interests of, the Limited Partners and the Unitholders;
(B) is consistent with Section 5.01; (C) does not affect the distribution
of Cash Available for Distribution or Sale Proceeds or the allocation of
Profits and Losses for Tax Purposes among the

52
<PAGE>

Limited Partners and the Unitholders; and (D) does not affect the limited
liability of the Limited Partners or the Unitholders or the status of the
Partnership as a partnership for federal income tax purposes.

(c) If this Agreement shall be amended as a result of substituting a
Limited Partner, the amendment to this Agreement shall be signed by the
General Partners, the Person to be substituted and the assigning Limited
Partner. If this Agreement shall be amended to reflect the designation of
an additional General Partner, such amendment shall be signed by the other
General Partners and by such additional General Partner. If this Agreement
shall be amended to reflect the withdrawal of a General Partner when the
business of the Partnership is being continued, such amendment shall be
signed by the withdrawing General Partner and by the remaining or successor
General Partner or Partners.

(e) Any provision to the contrary herein notwithstanding, the General
Partners may, without the Consent of the majority in interest of Limited
Partners or Unitholders, make any amendments to Section 4.04 of this
Agreement on the advice of tax counsel and the Accountants, to the extent
necessary to insure compliance with the Code, including any changes
thereof, provided that such amendments do not materially adversely affect
the interests of the Limited Partners or Unitholders. Any amendment made
by the General Partners in accordance with this Section shall be deemed to
be made pursuant to the fiduciary obligation of the General Partners to the
Partnership, the Limited Partners and the Unitholders, and shall not give
rise to a claim or cause of action by any Limited Partner or Unitholder.

Section 12.03. OWNERSHIP BY LIMITED PARTNERS OF GENERAL PARTNERS OR THEIR
AFFILIATES. No Limited Partner or Unitholder shall at any time, either directly
or indirectly, own any stock or other interest in any General Partner or in any
Affiliate of any General Partner if such ownership by itself or in conjunction
with the stock or other interest owned by other Limited Partners and Unitholders
would, in the opinion of counsel for the Partnership, jeopardize the
classification of the Partnership as a partnership for federal income tax
purposes. Each Limited Partner and Unitholder shall promptly supply any
information requested by the General Partners in order to establish compliance
by the Limited Partner or Unitholder with the provisions of this Section 12.03.

Section 12.04. BINDING PROVISIONS. The covenants and agreements contained
herein shall be binding upon, and inure to the benefit of, the heirs, executors,
administrators, personal representatives, successors and assigns of the
respective parties hereto.

53
<PAGE>

Section 12.05. APPLICABLE LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware.

Section 12.07. SEPARABILITY OF PROVISIONS. Each provision of this
Agreement shall be considered separable and if for any reason any provision or
provisions hereof are determined to be invalid and contrary to any law, such
invalidity shall not impair the operation of or affect those portions of this
Agreement which are valid.

Section 12.08. CAPTIONS. Article and Section titles are for descriptive
purposes only and shall not control or alter the meaning of this Agreement as
set forth in the text.

Section 12.09. DISALLOWANCE OF EXPENSES. Any fee paid to a General
Partner pursuant to this Agreement which is disallowed as a deductible expense
for federal income tax purposes shall constitute, for federal income tax
purposes, a special allocation of gross income to the General Partner receiving
such fee.

Section 12.10. ENTIRE AGREEMENT. This Agreement, together with the
Exhibits attached hereto, sets forth all (and is intended by all parties to be
an integration of all) of the promises, agreements and understandings among the
parties hereto with respect to the Partnership, the Partnership business and the
property of the Partnership, and there are no promises, agreements or
understandings, oral or written, express or implied, among them other than as
set forth or incorporated herein.

54
<PAGE>

IN WITNESS WHEREOF, the parties have signed this Agreement as of the ____
day of __________ 199__.

GENERAL PARTNERS:

TIG INSURED MORTGAGE EQUITIES II INC.

By
--------------------------------------
William G. Rosenberg, President

HUTTON INSURED MORTGAGE EQUITIES II L.P.

By: Hutton CS II Housing Inc.

By
---------------------------------
Arthur P. Fisch, President

INITIAL LIMITED PARTNER:

H/T CORP., II-

By
---------------------------------
William G. Rosenberg, President

55
<PAGE>

SCHEDULE A

<TABLE>
<CAPTION>
Capital Partnership
Contribution Interest
------------ ----------
<S> <C> <C>
GENERAL PARTNERS:

Hutton Insured Mortgage Equities II L.P. $ 10.10 .5%
31 West 52nd Street
New York, New York 10019

TIG Insured Mortgage Equities II Inc. $ 10.10 .5%
150 South Fifth Avenue
Suite A
Ann Arbor, Michigan 48104

INITIAL LIMITED PARTNER:

H/T Corp. II- $2,000.00 99%
1150 Seventeenth Street, N.W.
Suite 500
Washington, D.C. 20036
</TABLE>

<PAGE>

EXHIBIT 4.01

Amended and Restated Certificate of Incorporation and Bylaws of the Company
included as Exhibits 3.01 and 3.02 are incorporated herein by reference.

<PAGE>

- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
FORM OF

AMERICA FIRST REAL ESTATE
INVESTMENT COMPANY, INC.

AND

------------------
------------------
AS TRUSTEE

INDENTURE

DATED AS OF , 1998
--------------

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

VARIABLE RATE SENIOR NOTES
DUE , 2006
----------

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

<PAGE>

CROSS-REFERENCE TABLE

This Cross-Reference Table shows the location in the Indenture of the
provisions corresponding to the requirements of particular Sections of the Trust
Indenture Act of 1939, as amended ("TIA"). This Cross-Reference Table shall not
be deemed part of the Indenture.

<TABLE>
Indenture
TIA Section Section
- ----------- ----------
<S> <C>
Section 310(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.10
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.10
(a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.08; 9.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.05
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.03
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.03
Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.06
(b)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(b)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.06
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06; 12.02
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.06
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.02; 12.02
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12.04(a)
(c)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12.04(a)
(c)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12.04(b)
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.05; 12.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01(c)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.11
Section 316(a)(last sentence). . . . . . . . . . . . . . . . . . . . . . . .2.09
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.04

<PAGE>

(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.07
Section 317(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.08
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.09
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.04
Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.01
</TABLE>

- ---------------------
N.A. means Not Applicable.

<PAGE>

-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>

PAGE
----

ARTICLE I

DEFINITIONS, INCORPORATION BY REFERENCE
AND RULES OF CONSTRUCTION
<S> <C>
Section 1.01. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Incorporation by Reference of Trust Indenture Act. . . . . . 8
Section 1.03. Rules of Construction. . . . . . . . . . . . . . . . . . . . 9

ARTICLE II

THE NOTES

Section 2.01. Form, Terms and Dating . . . . . . . . . . . . . . . . . . . 9
Section 2.02. Execution and Authentication . . . . . . . . . . . . . . . . 11
Section 2.03. Registrar and Paying Agent . . . . . . . . . . . . . . . . . 11
Section 2.04. Paying Agent to Hold Money in Trust. . . . . . . . . . . . . 12
Section 2.05. Notes Register . . . . . . . . . . . . . . . . . . . . . . . 12
Section 2.06. Transfer and Exchange. . . . . . . . . . . . . . . . . . . . 12
Section 2.07. Replacement Notes. . . . . . . . . . . . . . . . . . . . . . 13
Section 2.08. Outstanding Notes. . . . . . . . . . . . . . . . . . . . . . 13
Section 2.09. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . 14
Section 2.10. Temporary Notes. . . . . . . . . . . . . . . . . . . . . . . 14
Section 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 2.12. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . 14

ARTICLE III

REDEMPTION

Section 3.01. Optional Redemption. . . . . . . . . . . . . . . . . . . . . 14
Section 3.02. Mandatory Redemption . . . . . . . . . . . . . . . . . . . . 15
Section 3.03. Notice of Redemption; Partial Redemption . . . . . . . . . . 15
Section 3.04. Effect of Notice of Redemption . . . . . . . . . . . . . . . 16
Section 3.05. Deposit of Redemption Price. . . . . . . . . . . . . . . . . 16

iii

<PAGE>

ARTICLE IV

THE PROMISSORY NOTES

Section 4.01. Form, Terms and Dating . . . . . . . . . . . . . . . . . . . 16
Section 4.02. Execution and Authentication . . . . . . . . . . . . . . . . 17
Section 4.03. Registrar and Paying Agent . . . . . . . . . . . . . . . . . 18
Section 4.04. Notes Register . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4.05. Other Provisions . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE V

PAYMENT PROVISIONS

Section 5.01. Notes Part of Senior Indebtedness. . . . . . . . . . . . . . 19
Section 5.02. Obligations of the Company Unconditional . . . . . . . . . . 19
Section 5.03. Application by Trustee of Moneys Deposited With It . . . . . 20

ARTICLE VI

COVENANTS

Section 6.01. Payment of Notes . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.02. SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.03. Waiver of Usury Defense. . . . . . . . . . . . . . . . . . . 20
Section 6.04. Liquidation. . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.05. Compliance Certificates. . . . . . . . . . . . . . . . . . . 21
Section 6.06. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . 21
Section 6.07. Payment of Taxes and Other Claims. . . . . . . . . . . . . . 22
Section 6.08. Corporate Existence. . . . . . . . . . . . . . . . . . . . . 22
Section 6.09. Maintenance of Properties. . . . . . . . . . . . . . . . . . 22
Section 6.10. Limitations on Indebtedness. . . . . . . . . . . . . . . . . 22

ARTICLE VII

SUCCESSOR CORPORATION

Section 7.01. When Company May Merge, Etc. . . . . . . . . . . . . . . . . 23
Section 7.02. Successor Corporation Substituted. . . . . . . . . . . . . . 24

<PAGE>

ARTICLE VIII

DEFAULT AND REMEDIES

Section 8.01. Events of Default. . . . . . . . . . . . . . . . . . . . . . 24
Section 8.02. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 8.03. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . 26
Section 8.04. Waiver of Default and Events of Default. . . . . . . . . . . 26
Section 8.05. Control by Majority. . . . . . . . . . . . . . . . . . . . . 26
Section 8.06. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . 27
Section 8.07. Rights of Holders to Receive Payment . . . . . . . . . . . . 27
Section 8.08. Collection Suit by Trustee . . . . . . . . . . . . . . . . . 27
Section 8.09. Trustee May File Proofs of Claim . . . . . . . . . . . . . . 27
Section 8.10. Application of Money Collected . . . . . . . . . . . . . . . 28
Section 8.11. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . 28

ARTICLE IX

TRUSTEE

Section 9.01. Duties of Trustee. . . . . . . . . . . . . . . . . . . . . . 28
Section 9.02. Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . 29
Section 9.03. Individual Rights of Trustee . . . . . . . . . . . . . . . . 30
Section 9.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . 30
Section 9.05. Notice of Defaults or Events of Default. . . . . . . . . . . 30
Section 9.06. Reports by Trustee to Holders. . . . . . . . . . . . . . . . 30
Section 9.07. Compensation and Indemnity . . . . . . . . . . . . . . . . . 30
Section 9.08. Replacement of Trustee . . . . . . . . . . . . . . . . . . . 31
Section 9.09. Successor Trustee by Merger, etc.. . . . . . . . . . . . . . 32
Section 9.10. Eligibility; Disqualification. . . . . . . . . . . . . . . . 32
Section 9.11. Preferential Collection of Claims Against Company. . . . . . 32

ARTICLE X

SATISFACTION AND DISCHARGE OF INDENTURE

Section 10.01. Termination of Company's Obligations . . . . . . . . . . . . 32
Section 10.02. Application of Trust Money . . . . . . . . . . . . . . . . . 33
Section 10.03. Repayment to Company . . . . . . . . . . . . . . . . . . . . 33
Section 10.04. Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . 33

<PAGE>

ARTICLE XI

AMENDMENTS, SUPPLEMENTS AND WAIVERS

Section 11.01. Without Consent of Holders . . . . . . . . . . . . . . . . . 34
Section 11.02. With Consent of Holders. . . . . . . . . . . . . . . . . . . 34
Section 11.03. Compliance with Trust Indenture Act. . . . . . . . . . . . . 35
Section 11.04. Revocation and Effect of Consents. . . . . . . . . . . . . . 35
Section 11.05. Notation on or Exchange of Notes . . . . . . . . . . . . . . 35
Section 11.06. Trustee to Sign Amendments, etc. . . . . . . . . . . . . . . 35

ARTICLE XII

MISCELLANEOUS

Section 12.01. Trust Indenture Act Controls . . . . . . . . . . . . . . . . 36
Section 12.02. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 12.03. Communications by Holders with Other Holders . . . . . . . . 37
Section 12.04. Certificate and Opinion as to Conditions Precedent . . . . . 37
Section 12.05. Rules by Trustee, Paying Agent, Registrar. . . . . . . . . . 37
Section 12.06. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . 37
Section 12.07. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . 37
Section 12.08. No Recourse Against Others . . . . . . . . . . . . . . . . . 37
Section 12.09. Successors . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 12.10. Multiple Counterparts. . . . . . . . . . . . . . . . . . . . 38
Section 12.11. Separability . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 12.12. Table of Contents, Headings, etc.. . . . . . . . . . . . . . 38
Section 12.13. Submission to Jurisdiction; Appointment of Agent for
Service of Process . . . . . . . . . . . . . . . . . . . . . 38

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

EXHIBIT A--Form of Note. . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
EXHIBIT B--Form of Promissory Note . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>

- ---------------------
NOTE: This Table of Contents shall not, for any purpose, be deemed to be a part
of the Indenture.

vi
<PAGE>
INDENTURE

This Indenture is dated as of _____________, 1998 and is made by and
between America First Real Estate Investment Company, Inc., a Delaware
corporation (the "Company"), and ____________________ a national banking
association duly organized and existing under the laws of the United States of
America, as Trustee (the "Trustee").

Both parties agree as follows for the benefit of each other and for the
equal and ratable benefit of the Holders of the Company's Variable Rate Senior
Notes due ________, 2006, and the Holders of the Company's Promissory Notes due
________, 2006, both of which are being issued hereunder.

ARTICLE I

DEFINITIONS, INCORPORATION BY REFERENCE
AND RULES OF CONSTRUCTION

Section 1.01. DEFINITIONS.

"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling, controlled by or under common control with such
specified Person, or any other Person owning or controlling 10% or more of the
outstanding voting securities of such Person. For the purposes of this
definition, "control" when used with respect to any 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.

"AGENT" means any Registrar or Paying Agent.

"AGGREGATE INDEBTEDNESS OF THE COMPANY" means the total aggregate principal
amount outstanding of the Company's Indebtedness.

"AMORTIZATION" means, for any period, as applied to any Person, the amount
of the amortization (other than amortization of debt discount and amortization
of capitalized financing fees) that is reflected on the financial statements of
such Person and its consolidated Subsidiaries for such period in accordance with
GAAP.

"APPLICABLE FEDERAL RATE" means that interest rate per annum determined in
accordance with Section 1274 of the Code or any successor section. As of the
date of this Indenture, the Applicable Federal Rate for debt instruments with a
term of not over three years was the "Federal short-term rate," as determined by
the Secretary of the Treasury each month for application during the following
calendar month. The Applicable Federal Rate is published each

<PAGE>

month in a Revenue Ruling issued by the Internal Revenue Service, which can be
found in the Internal Revenue Bulletin.

"APPLICABLE VARIABLE RATE" means first the Initial Interest Rate, and then,
after the Initial Interest Rate Period and for each subsequent Interest Rate
Period, the variable interest rate determined by the Trustee on each applicable
Interest Determination Date, which interest rate shall be 120% of the Applicable
Federal Rate for debt instruments with a term of not over three years.

"APPRAISED VALUE OF THE ASSETS OF THE COMPANY" means the greater of (a) the
value which is placed on all the assets of the Company as of the date of the
Transaction by an independent appraiser or (b) the value which is placed on all
the assets of the Company as of some date subsequent to the Transaction, by an
independent appraiser.

"BANKRUPTCY LAW" means Title 11, U.S. Code, or any similar federal or state
law for the relief of debtors.

"BOARD OF DIRECTORS" means the Board of Directors of the Company or any
authorized committee of the Board.

"BUSINESS DAY" means any day other than a Legal Holiday.

"CAPITALIZED LEASE OBLIGATION" means, as applied to any Person for any
period, any lease of any property (whether real, personal or mixed) by that
Person as lessee that, in conformity with GAAP, is or should be accounted for as
a capital lease on the balance sheet of that Person and the amount of such
obligation shall be the capitalized amount thereof, determined in accordance
with such principles.

"CODE" means the Internal Revenue Code of 1986, as amended, including
successor statutes thereto.

"COMPANY" means America First Real Estate Investment Company, Inc., a
newly formed Delaware corporation, and its successors or assigns.

"CONSOLIDATED COVERAGE RATIO" means, as applied to any Person, the ratio of
(i) the sum of Consolidated Net Income plus, to the extent reflected in the
computation of such Consolidated Net Income and without duplication,
Depreciation Expense, Amortization, Consolidated Income Tax Expense and
Consolidated Fixed Charges of such Person and its consolidated Subsidiaries
during the most recent four fiscal quarters next preceding the date of
determination to (ii) the sum of the Consolidated Fixed Charges of such Person
and its consolidated Subsidiaries incurred by such Person during the most recent
four fiscal quarters next preceding the date of determination

<PAGE>

"CONSOLIDATED FIXED CHARGES" of any Person means, for any period for which
the determination is to be made, the aggregate amount of interest, whether
expensed or capitalized, of such Person and its consolidated Subsidiaries
(including all non-cash interest, commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance financing
and the net cost associated with interest swap obligations) and the interest
component of Capitalized Lease Obligations, paid, accrued or scheduled to be
paid or accrued by such Person during such period, all as determined on a
consolidated basis in accordance with GAAP.

"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, as applied to any
Person, the provision for federal, state, local and foreign income taxes of such
Person and its consolidated Subsidiaries for such period, determined in
accordance with GAAP.

"CONSOLIDATED NET INCOME" means, for any period, as applied to any Person,
the Net Income (or loss) of such Person and its consolidated Subsidiaries for
such period determined in accordance with GAAP; provided, that (i) the Net
Income (loss) of any Person which is not a Subsidiary or is accounted for by
such Person by the equity method of accounting shall be included only to the
extent of the fair market value of dividends or distributions paid to such
Person or a Subsidiary, and (ii) the Net Income (loss) of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded.

"CONSOLIDATED NET WORTH" means, with respect to any Person at any date, the
consolidated stockholders' equity of such Person less the amount of such
stockholders' equity attributable to treasury stock of such Person and its
Subsidiaries, as determined in accordance with GAAP consistently applied.

"CUSTODIAN" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.

"DEFAULT" means any event which is, or after notice or passage of time, or
both, would be, an Event of Default.

"DEPRECIATION EXPENSE" means, for any period, as applied to any Person, the
provision for depreciation that is reflected on the financial statements of such
Person and its consolidated Subsidiaries in accordance with GAAP.

"DESIGNATED ASSETS" means the fee interest of the Company in its assets at
the time of the Transaction which were owned by a Partnership immediately prior
to the Transaction.

"EFFECTIVE DATE" means the date upon which the registration statement
registering the Notes under the Securities Act of 1933, as amended ("1933 Act"),
is declared effective by the Securities and Exchange Commission pursuant to
Section 8(a) of the 1933 Act.

"EVENT OF DEFAULT" means the occurrence of any event described in Section
8.01 hereof.

<PAGE>

"FISCAL YEAR" means the fiscal year of the Company, initially beginning on
January 1 and ending on December 31.

"GAAP" means generally accepted accounting principles, as in effect at the
time of any calculation or determination required by this Indenture.

"HOLDER" or "NOTEHOLDER" means the Person in whose name a Note or
Promissory Note is registered on the Registrar's books.

"INDEBTEDNESS" of any Person at any date means, without duplication, (i)
all indebtedness of such Person for borrowed money (whether or not the recourse
of the lender is to the whole of the assets of such Person or only to a portion
thereof), (ii) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments, (iii) all obligations of such Person in
respect of letters of credit or other similar instruments (or reimbursement
obligations with respect thereto), other than standby letters of credit incurred
by such Person in the ordinary course of business, (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
except trade payables and accrued expenses incurred in the ordinary course of
business, (v) all Capitalized Lease Obligations of such Person, (vi) all
Indebtedness of others secured by a Lien (other than assessment district and
similar Liens arising in connection with municipal financings) on any asset of
such Person, whether or not such Indebtedness is assumed by such Person and
(vii) all Indebtedness of others guaranteed by such Person to the extent of such
guaranty.

"INDENTURE" means this Indenture as originally executed or as amended or
supplemented from time to time.

"INITIAL INTEREST RATE" means ______% per annum.

"INITIAL INTEREST RATE PERIOD" means the period beginning on the first day
the Notes are issued and ending on the first day of the calendar year following
completion of the Transaction.

"INTEREST ACCRUAL PERIOD" means that period, with respect to any Interest
Payment Date, which begins on the preceding Interest Payment Date and ends on
the last day preceding the applicable Interest Payment Date.

"INTEREST DETERMINATION DATE" means the date which is two Business Days
prior to each Interest Payment Date.

"INTEREST PAYMENT DATE" means the fifteenth day of each January commencing
January 15, 1999, until the Principal of and interest on all the Notes and the
Promissory Notes have been fully paid, or if such date does not occur on a
Business Day, then the first Business Day thereafter.

<PAGE>

"INTEREST RATE PERIOD" means the period from and including an Interest
Payment Date to and including the day immediately preceding the next Interest
Payment Date.

"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which state or
federally chartered banking institutions in New York, New York are not required
to be open.

"LEVERAGE RATIO" means, as of any date of determination, the ratio of Total
Liabilities on that date to Shareholders' Equity on that date.

"LIEN" means, with respect to any asset, any mortgage, deed of trust,
pledge, lien, charge, security interest, adverse claim affecting title or
resulting in a charge against such asset, or encumbrance of any kind in respect
of such asset, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell).

"MATURITY DATE" means ________, 2006.

"NET INCOME" means, for any period, as applied to any Person, the net
income (loss) of such Person for such period, determined in accordance with GAAP
(except as provided in this definition), excluding from "Net Income," and
without duplication however, (i) any gain or loss, net of taxes, realized upon
any sale, transfer or other disposition (including by way of merger or
consolidation) by such Person of any property or other assets of such Person
outside the ordinary course of business, (ii) any gain or loss, net of taxes,
realized upon the termination of any employee pension benefit plan and (iii) any
extraordinary gain or loss, net of taxes, in each case determined in accordance
with GAAP.

"NET PROCEEDS OF ANY SALE OR REFINANCING OF DESIGNATED ASSETS" means the
gross proceeds of all sales, exchanges or refinancings received by the Company
or any of its Subsidiaries in connection with Designated Assets, less any and
all costs and expenses incurred by the Company or any of its Subsidiaries in
connection with such sales, exchanges or refinancings.

"NOTES" means the Variable Rate Senior Notes due ________, 2006 or any of
them, or the certificates therefor, or any of them, as amended or supplemented
from time to time, that are issued under this Indenture; provided that for all
purposes and provisions of this Indenture EXCEPT the issuance and redemption of
Notes and Promissory Notes as set forth in Articles II, III and IV hereof,
"Notes" shall include Promissory Notes.

"NOTES REGISTER" means the list of the names and addresses of the
Noteholders required to be maintained pursuant to Section 2.05 hereof.

"OFFICER" means the Chairman of the Board, the President, any Vice
President, the Chief Financial Officer, the Treasurer, the Secretary or the
Controller of the Company.

<PAGE>

"OFFICERS' CERTIFICATE" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer or Assistant Secretary of the Company.

"OPINION OF COUNSEL" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.

"OUTSTANDING," when used with respect to the Notes and Promissory Notes,
has the meaning explained in Section 2.08 hereof.

"PARTNERSHIP MERGER AGREEMENT" means an Agreement and Plan of Merger among
the Partnerships and the Company pursuant to which the merger of such entities
is to be consummated.

"PARTNERSHIPS" means, collectively, Capital Source I L.P. and Capital
Source II L.P.-A. Reference to a "Partnership" shall be understood to refer to
any one of them.

"PAYING AGENT" has the meaning set forth in Section 2.03 and Section 4.03
hereof.

"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.

"PRINCIPAL" of a debt security, including the Notes, means the principal of
the security plus, when appropriate, the premium, if any, on the security.

"PROMISSORY NOTES" means the Promissory Notes issued by the Company
pursuant to Article IV hereof, in connection with the Transaction; provided that
for all purposes and provisions of this Indenture EXCEPT the issuance and
redemption of Notes and Promissory Notes as set forth in Articles II, III and IV
hereof, "Promissory Notes" shall be referred to as "Notes."

"PROSPECTUS" means the Prospectus/Consent Solicitation Statement dated
____________, 1998, together with the supplements thereto, of the Company filed
with the Securities and Exchange Commission, as it may be further supplemented
or amended from time to time.

"RECORD DATE" for the interest payable on any Interest Payment Date or for
Principal payable on the Maturity Date, means the last day of the month
preceding the applicable Interest Payment Date.

"REDEMPTION DATE," when used with respect to any Note to be redeemed, means
the date fixed for such redemption pursuant to this Indenture, as set forth in
the form of Note annexed as Exhibit A hereto and the form of Promissory Note
annexed as Exhibit B hereto.

<PAGE>

"REDEMPTION PRICE," when used with respect to any Note to be redeemed,
means the Principal amount of the Note or Notes being redeemed plus interest
accrued thereon to the Redemption Date, without premium.

"REGISTRAR" has the meaning set forth in Section 2.03 and Section 4.03
hereof.

"SEC" means the United States Securities and Exchange Commission, as from
time to time constituted, created under the Securities Exchange Act of 1934, or,
if at any time after the execution of this Indenture such Commission is not
performing the duties now assigned to it under the TIA, then the body performing
such duties at such time.

"SENIOR INDEBTEDNESS" means the Principal of and interest (including,
without limitation, any interest accruing subsequent to the filing of a petition
or other action concerning bankruptcy or other similar proceedings) on the
following, whether presently outstanding or hereafter incurred: (a) all
indebtedness of the Company (i) for money borrowed (including that evidenced by
the Notes), (ii) which is evidenced by a note, debenture, other security or
similar instrument (including a purchase money mortgage) given in connection
with the acquisition of any property or assets (other than inventory or other
similar property acquired in the ordinary course of business), or (iii) for the
payment of money relating to a Capitalized Lease Obligation; (b) any liabilities
of others described in the preceding clause (a) which the Company has guaranteed
or which is otherwise its legal liability; and (c) renewals, extensions,
refundings, restructurings, amendments and modifications of any such
indebtedness or guarantee. Notwithstanding anything to the contrary in this
Indenture or the Notes, "Senior Indebtedness" shall not include (x) any
indebtedness of the Company to a Subsidiary, or (y) any indebtedness or
guarantee of the Company which by its terms or the terms of the instrument
creating or evidencing it is subordinate in right of payment to the Notes.

"SHAREHOLDERS' EQUITY" means, as of any date of determination,
shareholders' equity as of that date determined in accordance with GAAP;
provided that there shall be excluded from Shareholders' Equity any amount
attributable to capital stock that is, directly or indirectly, required by its
terms to be redeemed or repurchased by the Issuer thereof at a specified date or
upon the occurrence of specified events or at the election of the holder
thereof, if and to the extent that such date is, or such events or election
could occur, prior to the final maturity date of any Indebtedness.

"SHORT-TERM BORROWING" means any and all indebtedness, obligations and
liabilities of the Company, excluding trade accounts payable, taxes and other
governmental assessments, which are payable on demand or within one year from
the creation thereof, except any such indebtedness, obligations or liabilities
which can be renewed or extended at the Company's sole option to a date more
than one year from the creation thereof.

"SPECIAL RECORD DATE" for the payment of any defaulted interest or
Principal means a date fixed by the Trustee pursuant to Section 2.12 hereof.

<PAGE>

"SUBSIDIARY" means any corporation of which at least a majority of the
outstanding capital stock having voting power under ordinary circumstances to
elect directors of such corporation shall at the time be held, directly or
indirectly, by the Company, by the Company and one or more Subsidiaries or by
one or more Subsidiaries.

"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections
77aaa-77bbbb) as in effect on the date of this Indenture.

"TOTAL LIABILITIES" means, as of any date of determination, all liabilities
that should be reflected as a liability on a consolidated balance sheet of the
Company and its Subsidiaries on such date prepared in accordance with GAAP.

"TRADING DAY" means any day on which the New York Stock Exchange and the
American Stock Exchange are open for trading.

"TRANSACTION" means the merger of the Partnerships with and into the
Company pursuant to the terms and conditions set forth in the Partnership Merger
Agreement.

"TRUSTEE" means ________________________ a national banking association
organized and existing under the laws of the United States of America, until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means the successor.

"TRUST OFFICER" means any officer within the corporate trust department (or
any successor group) of the Trustee, including any vice president, assistant
vice president, assistant secretary or any other officer of the Trustee
customarily performing functions similar to those performed by the persons who
at that time shall be such officers, and also means, with respect to a
particular corporate trust matter, any other officer of the corporate trust
department (or any successor group) of the Trustee to whom such trust matter is
referred because of his knowledge of and familiarity with the particular
subject.

"UNIT" means a beneficial ownership of limited partner interest in, or
limited partner assignment interest of, a Partnership.

"U.S. GOVERNMENT OBLIGATIONS" means direct non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
payment of which guarantee or obligation the full faith and credit of the United
States is pledged.

Section 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever
this Indenture refers to a provision of the TIA, the provision is incorporated
by reference in and made a part of this Indenture. The following TIA terms used
in this Indenture have the following meanings:

(a) "Commission" means the SEC;

<PAGE>

(b) "indenture Notes" means the Notes;

(d) "indenture to be qualified" means this Indenture;

(e) "indenture trustee" or "institutional trustee" means the
Trustee;

(f) "obligor" on the indenture Notes means the Company or any other
obligor on the Notes.

All other terms used in this indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule and not otherwise
defined herein have the meanings assigned to them therein.

Section 1.03. RULES OF CONSTRUCTION. In this Indenture, unless the
context otherwise requires:

(a) a term has the meaning assigned to it;

(b) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting principles
in effect on the date hereof, and any other reference in this Indenture to
"generally accepted accounting principles" refers to generally accepted
accounting principles in effect on the date hereof;

(d) words in the singular include the plural, and words in the
plural include the singular;

(e) the masculine includes the feminine and the neuter; and

(f) "herein," "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or
other subdivision.

ARTICLE II

THE NOTES

Section 2.01. FORM, TERMS AND DATING. The Notes and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit A,
which is incorporated in and made part of this Indenture, with such insertions,
omissions, substitutions and other variations as are required or permitted by
this Indenture. The Notes may have notations, legends or endorsements required
by law, stock exchange rules, agreements to which the Company is

<PAGE>

subject or usage. The Company shall approve the form of the Notes and any
notation, legend or endorsement on them. Each Note shall be dated the date of
its authentication.

The definitive Notes shall be printed, lithographed or engraved or produced
by any combination of these methods on steel engraved borders or may be produced
in any other manner permitted by the rules of any securities exchange on which
the Notes may be listed, all as determined by the Company.

The Notes will be issued, known and designated as the Variable Rate Senior
Notes Due ________, 2006. The Maturity Date of the Notes shall be ________,
2006 and the Notes shall bear interest on the unpaid Principal at the Applicable
Variable Rate. The Notes shall be payable as follows:

(a) annual installments of accrued interest, payable on each
Interest Payment Date, commencing January 15, 1999, and continuing until
the entire interest and Principal of each Note is paid in full; and

(b) the unpaid Principal balance on the Maturity Date.

The Principal of and interest on the Notes shall be payable at the
principal corporate trust office of the Trustee in ______________________, or of
any successor or co-Paying Agent; PROVIDED, HOWEVER, that installments of
interest, and, if applicable, Principal may be payable by check mailed to the
address of the person entitled thereto as such address shall appear on the Notes
Register, or for Holders of Notes aggregating more than $__________________ in
Outstanding Principal amount who have given written notice and wire transfer
instructions to the Trustee, by wire transfer.

Interest and Principal shall be payable on any Interest Payment Date or
Maturity Date only to those Holders whose names and addresses are listed on the
Notes Register at the close of business on the applicable Record Date.

The Notes shall bear interest first, at the Initial Interest Rate during
the Initial Rate Period, payable on _________________, 1998. Thereafter, the
Notes shall bear interest for each subsequent Interest Rate Period, at the
Applicable Variable Rate, which shall be a rate per annum equal to 120% of the
Applicable Federal Rate for debt instruments with a term of not over three
years, and which interest rate shall be determined by the Trustee each Interest
Determination Date. The interest rate applicable to any Interest Rate Period,
determined on the immediately preceding Interest Determination Date, shall
become effective on the Interest Payment Date that is the first day of such
Interest Rate Period. Interest on the Notes shall be borne from and including
the date of first delivery thereof until payment of the principal or redemption
price thereof shall have been made or provided for in accordance with the
provisions hereof, whether at maturity, upon redemption prior to maturity or
otherwise. Interest on the Notes shall be computed on the basis of a year of
360 days, for the actual number of days elapsed.

<PAGE>

Section 2.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the
Notes for the Company by manual or facsimile signature. The Company's seal
shall be reproduced by facsimile on the Notes. If an Officer whose signature is
on a Note no longer holds that office at the time the Trustee authenticates the
Note, the Note shall be valid nevertheless.

A Note shall not be valid until the Trustee manually signs the certificate
of authentication on the Note. The signature shall be conclusive evidence that
the Note has been authenticated under this Indenture.

The Trustee shall authenticate Notes for original issue in an aggregate
Principal amount of up to $____________________ upon a written Officer's
Certificate of the Company. The Officer's Certificate shall specify the
Principal amount of Notes to be authenticated and the date on which the original
issue of Notes is to be authenticated. The aggregate Principal amount of Notes
Outstanding at any time may not exceed $_______________________ except as
provided in Section 2.07.

The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate the Notes. If so appointed, an authenticating agent may
authenticate Notes whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate of the Company.

The Notes shall be issuable only in registered form without coupons and
only in denominations of $1,000 and any integral multiple thereof.

Section 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an
office or agency where Notes may be presented for registration of transfer or
for exchange ("Registrar"), an office or agency where Notes may be presented for
payment ("Paying Agent"), and an office or agency where notices and demands to
or upon the Company in respect of the Notes and this Indenture may be served.
The Registrar shall keep a register of the Notes and of their transfer and
exchange (the "Notes Register"). The Company may have one or more co-Registrars
and one or more additional Paying Agents. The term "Registrar" includes any
co-Registrar and the term "Paying Agent" includes any additional Paying Agent.
Except for purposes of Article X, the Company or any Affiliate of the Company
may act as Paying Agent.

The Company shall enter into an appropriate agency agreement with any Agent
not a party to this Indenture. The agreement shall implement the provisions of
this Indenture that relate to such Agent. The Company shall notify the Trustee
of the name and address of any Agent not a party to this Indenture. If the
Company fails to maintain a Registrar, Paying Agent or agent for service of
notices and demands, or fails to give the foregoing notice, the Trustee shall
act as such.

The Company initially appoints the Trustee as Registrar, Paying Agent and
agent for service of notices and demands.

<PAGE>

Section 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. Prior to each Maturity
Date or Interest Payment Date of the Principal of or interest on any Notes, the
Company shall deposit with the Paying Agent a sum sufficient to pay such
Principal or interest so becoming due. The Paying Agent shall hold in trust for
the benefit of the Noteholders or the Trustee all money held by the Paying Agent
for the payment of Principal of or interest on the Notes, and shall notify the
Trustee of any Default by the Company (or any other obligor on the Notes) in
making any such payment. If the Company or an Affiliate of the Company acts as
Paying Agent, it shall on or before each Maturity Date or Interest Payment Date
for the Principal of or interest on any Notes segregate the money and hold it as
a separate trust fund. The Company at any time may require a Paying Agent to
pay all money held by it to the Trustee and the Trustee may at any time during
the continuance of any Default, upon written request to a Paying Agent, require
such Paying Agent to forthwith pay to the Trustee all sums so held in trust by
such Paying Agent. Upon doing so, the Paying Agent (other than the Company)
shall have no further liability for the money.

Section 2.05. NOTES REGISTER. The Trustee, as Registrar, shall preserve
in as current a form as is reasonably practicable a list of the names and
addresses of Noteholders. If the Trustee is not the Registrar, the Company
shall furnish to the Trustee on or before each Interest Payment Date and at such
other times as the Trustee may request in writing a list of such names and
addresses.

Further, the Company will furnish or cause to be furnished to the Trustee:

(a) semiannually, not more than 5 days after each Record Date, a
list, in such form as the Trustee may reasonably require, of the names and
addresses of the Holders as of such Record Date; and

(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a list
of similar form and content as of a date not more than 15 days prior to the
time such list is furnished;

EXCLUDING from any such list, names and addresses already received by the
Trustee in its capacity as Registrar.

Prior to due presentment of a Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Note is registered as the owner of such Note for the
purpose of receiving payment of Principal of and interest on such Note and for
all other purposes whatsoever, whether or not such Note be overdue, and neither
the Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.

Section 2.06. TRANSFER AND EXCHANGE. When a Note is presented to the
Registrar with a request to register a transfer thereof, the Registrar shall
register the transfer as requested and when Notes are presented to the Registrar
with a request to exchange them for an equal Principal

<PAGE>

amount of Notes of other authorized denominations, the Registrar shall make the
exchange as requested; provided that every Note presented or surrendered for
registration of transfer or exchange shall be duly endorsed or be accompanied by
a written instrument of transfer in form satisfactory to the Company and the
Registrar duly executed by the Holder thereof or his attorney duly authorized in
writing. To permit registration of transfers and exchanges, the Company shall
execute and the Trustee shall authenticate Notes at the Registrar's request.
Any exchange or transfer shall be without charge, except that the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto, but this requirement of payment
shall not apply to any exchange pursuant to Section 2.10 or 11.05 not involving
any transfer.

Section 2.07. REPLACEMENT NOTES. If a mutilated Note is surrendered to
the Trustee, or if the Holder of a Note claims that the Note has been lost,
destroyed or wrongfully taken, and neither the Company nor the Trustee has
received notice that such Note has been acquired by a bona fide purchaser, the
Company shall issue and the Trustee shall authenticate a replacement Note if the
requirements of Section 8-405, Delaware Code, Title 6, as amended (the Delaware
Uniform Commercial Code), as in effect on the date of this Indenture, are met,
and there shall have been delivered to the Company and the Trustee evidence to
their satisfaction of the loss, destruction or theft of any Note if such is the
case. An indemnity bond may be required that is sufficient in the judgment of
the Company and the Trustee to protect the Company, the Trustee or any Agent
from any loss which any of them may suffer if a Note is replaced. The Company
may charge for its expenses in replacing a Note. Every replacement Note is an
additional obligation of the Company, and shall be entitled to all the benefits
of this Indenture equally and ratably with any and all other Notes duly issued
hereunder.

In case any such mutilated, destroyed, lost or stolen Note has become or is
about to become due and payable, the Company, in its discretion, may pay such
Note instead of issuing a new Note.

Section 2.08. OUTSTANDING NOTES. Notes Outstanding at any time are all
Notes authenticated by the Trustee, except for those cancelled by it, those
delivered to it for cancellation and those described in this Section 2.08 as not
Outstanding.

If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
Outstanding until the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.

If the Paying Agent (other than the Company or an Affiliate of the Company)
holds on a Redemption Date or maturity date money sufficient to pay the
Principal of and accrued interest on Notes payable on that date, then on and
after that date such Notes cease to be Outstanding and interest on them ceases
to accrue.

A Note does not cease to be Outstanding because the Company or an Affiliate
of the Company holds the Note.

<PAGE>

Section 2.09. TREASURY NOTES. In determining whether the Holders of the
required Principal amount of Notes have concurred in any notice, direction,
waiver or consent, Notes owned by the Company or any other obligor on the Notes
or by any Affiliate of the Company or of such other obligor shall be
disregarded, except that for purposes of determining whether the Trustee shall
be protected in relying on any such notice, direction, waiver or consent, only
Notes which the Trustee knows are so owned shall be so disregarded. Notes so
owned which have been pledged in good faith shall not be disregarded if the
pledgee establishes to the satisfaction of the Trustee the pledgee's right so to
act with respect to the Notes and that the pledgee is not the Company or any
other obligor upon the Notes or any Affiliate of the Company or of such other
obligor.

Section 2.10. TEMPORARY NOTES. Until definitive Notes are ready for
delivery, the Company may prepare, and, upon the order of the Company, the
Trustee shall authenticate, temporary Notes. Temporary Notes shall be
substantially in the form of definitive Notes but may have variations that the
Company considers appropriate for temporary Notes. Without unreasonable delay,
the Company shall prepare and the Trustee shall authenticate definitive Notes,
which shall then be exchanged for the temporary Notes. Until so exchanged, the
temporary Notes shall be entitled in all respects to the same benefits under
this Indenture as definitive Notes.

Section 2.11. CANCELLATION. The Company at any time may deliver Notes to
the Trustee for cancellation. The Registrar and Paying Agent shall forward to
the Trustee any Notes surrendered to them for transfer, exchange or payment.
The Trustee and no one else shall cancel all Notes surrendered for transfer,
exchange, payment or cancellation. The Company may not issue new Notes to
replace Notes it has paid or delivered to the Trustee for cancellation.

Section 2.12. DEFAULTED INTEREST. If the Company Defaults in a payment of
interest on the Notes, it shall pay the Defaulted interest to the Persons who
are Noteholders on a subsequent Special Record Date, and such term as used in
this Section 2.12 with respect to the payment of any Defaulted interest shall
mean the fifteenth day next preceding the special payment date fixed by the
Company, whether or not such day is a Business Day. At least 15 days before any
Special Record Date, the Company shall mail to each Noteholder and the Trustee a
notice that states the Special Record Date, the special payment date and the
amount of Defaulted interest to be paid.

ARTICLE III

REDEMPTION

Section 3.01. OPTIONAL REDEMPTION. The Company, at its option exercised
at any time after the execution of this Indenture, may redeem all, or from time
to time any part of, the Notes or the Promissory Notes upon written notice as
set forth in Sections 3.03 and 12.02. The Redemption Price for the Notes or the
Promissory Notes to be redeemed shall be paid by the

<PAGE>

Company to the Trustee on or before the Redemption Date, and by the Trustee to
the Noteholder(s) on the Redemption Date.

Section 3.02. MANDATORY REDEMPTION. The Company shall utilize 80% of the
Net Proceeds of any Sale or Refinancing of Designated Assets, which occurs after
the Transaction, to redeem the maximum number of Promissory Notes and Notes
which can be redeemed with such Net Proceeds; provided, that such Net Proceeds
of any Sale or Refinancing of Designated Assets shall be accumulated by the
Trustee in a segregated trust account until the amount therein is at least
$5,000,000 before calling Promissory Notes and Notes for redemption. The
Company shall fix a Redemption Date pursuant to this Section 3.02 which is no
later than 90 days following receipt of such net proceeds or the accumulation of
$5,000,000, as the case may be.

This mandatory redemption will be made first with respect to Promissory
Notes, chosen by lot by the Trustee, until all the Promissory Notes are paid in
full and redeemed, and thereafter of the Notes, chosen by lot by the Trustee,
until all the Notes are paid in full and redeemed.

Such mandatory redemption is not at the discretion of the Company or of the
Holders of the Notes or the Promissory Notes.

Section 3.03. NOTICE OF REDEMPTION; PARTIAL REDEMPTION. At least 30 days
but not more than 60 days before a Redemption Date, the Company, or the Trustee
at the written direction of the Company, shall mail a notice of redemption by
first-class mail, postage prepaid, to each Holder of Promissory Notes or Notes,
as the case may be, which are to be redeemed pursuant to Section 3.01 or
Section 3.02 hereof.

The notice shall state:

(a) the Redemption Date;

(b) the Redemption Price;

(d) that Promissory Notes or Notes, as the case may be, must be
surrendered to the Paying Agent to collect the Redemption Price; and

(e) that, unless the Company Defaults in making the redemption
payment, interest on the Promissory Notes or Notes called for redemption
ceases to accrue on and after the Redemption Date and the only remaining
right of the Holder is to receive payment of the Redemption Price upon
surrender to the Paying Agent of the Promissory Notes or Notes.

<PAGE>

At the Company's written request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense.

If less than all the Promissory Notes or Notes, as the case may be, are to
be redeemed, the Trustee shall select the Promissory Notes or Notes to be
redeemed by lot in whatever manner the Trustee determines to be efficient and
fair. The Trustee shall promptly notify the Company in writing of the
Promissory Notes or Notes selected for redemption. For all purposes of this
Indenture, unless the context otherwise requires, all provisions relating to the
redemption of Promissory Notes or Notes shall relate, in the case of any
Promissory Note or Note redeemed or to be redeemed only in part, to the portion
of the Principal amount of such Promissory Note or Note which has been or is to
be redeemed.

Section 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption
is mailed, the subject Promissory Notes or Notes will become due and payable on
the Redemption Date at the Redemption Price. Upon surrender to the Paying
Agent, such Promissory Notes or Notes shall be paid at the Redemption Price.

Any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the Holder
receives the notice. Failure to give notice by mail, or any defect in the
notice to the Holder of any Promissory Note or Note designated for redemption as
a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Promissory Note or Note.

Section 3.05. DEPOSIT OF REDEMPTION PRICE. On or before the Redemption
Date, the Company shall deposit with the Paying Agent (or, if the Company is its
own Paying Agent, shall segregate and hold in trust) money sufficient to pay the
Redemption Price of all Promissory Notes or Notes to be redeemed on that date,
other than Promissory Notes or Notes or portions thereof called for redemption
on that date which have been delivered by the Company to the Trustee for
cancellation.

On and after the Redemption Date (unless the Company shall Default in the
payment of such Promissory Notes or Notes at the Redemption Price), interest on
the Promissory Notes or Notes or portions of Promissory Notes or Notes so called
for redemption shall cease to accrue and, except as provided in Section 10.01
hereof, such Promissory Notes or Notes shall cease from and after the Redemption
Date to be entitled to any benefit or security under this Indenture, and the
Holders thereof shall have no right in respect of such Promissory Notes or Notes
except the right to receive the Redemption Price thereof.

ARTICLE IV

THE PROMISSORY NOTES

Section 4.01. FORM, TERMS AND DATING. The Promissory Notes and the
Trustee's certificate of authentication shall be substantially in the form of
Exhibit B, which is incorporated

<PAGE>

in and made part of this Indenture, with such insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture. The Promissory Notes may have notations, legends or endorsements
required by law, stock exchange rules, agreements to which the Company is
subject or usage. The Company shall approve the form of the Promissory Notes
and any notation, legend or endorsement on them. Each Promissory Note shall be
dated the date of its authentication.

The Promissory Notes will be issued, known and designated as the Promissory
Notes Due ________, 2006. The Maturity Date of the Promissory Notes shall be
________, 2006 and the Promissory Notes shall bear interest on the unpaid
Principal at the Applicable Variable Rate. The Promissory Notes shall be
payable as follows:

(b) the unpaid Principal balance on the Maturity Date.

The Principal of and interest on the Promissory Notes shall be payable at
the principal corporate trust office of the Trustee in ______________________,
or of any successor or co-Paying Agent; PROVIDED, HOWEVER, that installments of
interest, and, if applicable, Principal may be payable by check mailed to the
address of the person entitled thereto as such address shall appear on the Notes
Register.

The Promissory Notes shall bear interest first, at the Initial Interest
Rate during the Initial Rate Period, payable on ________________________, 1998.
Thereafter, the Promissory Notes shall bear interest for each subsequent
Interest Rate Period, at the Applicable Variable Rate, which shall be a rate per
annum equal to 120% of the Applicable Federal Rate for debt instruments with a
term of not over three years, and which interest rate shall be determined by the
Trustee each Interest Determination Date. The interest rate applicable to any
Interest Rate Period, determined on the immediately preceding Interest
Determination Date, shall become effective on the Interest Payment Date that is
the first day of such Interest Rate Period. Interest on the Promissory Notes
shall be borne from and including the date of first delivery thereof until
payment of the principal or redemption price thereof shall have been made or
provided for in accordance with the provisions hereof, whether at maturity, upon
redemption prior to maturity or otherwise. Interest on the Promissory Notes
shall be computed on the basis of a year of 360 days, for the actual number of
days elapsed.

Section 4.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the
Promissory Notes for the Company by manual or facsimile signature. The
Company's seal shall be

<PAGE>

reproduced by facsimile on the Promissory Notes. If an Officer whose signature
is on a Promissory Note no longer holds that office at the time the Trustee
authenticates the Promissory Note, the Promissory Note shall be valid
nevertheless.

A Promissory Note shall not be valid until the Trustee manually signs the
certificate of authentication on the Promissory Note. The signature shall be
conclusive evidence that the Promissory Note has been authenticated under this
Indenture.

The Trustee shall authenticate Promissory Notes for original issue in an
aggregate Principal amount of up to $_______________ upon a written Officer's
Certificate of the Company. The Officer's Certificate shall specify the
Principal amount of Promissory Notes to be authenticated and the date on which
the original issue of Promissory Notes is to be authenticated. The aggregate
Principal amount of Promissory Notes Outstanding at any time may not exceed
$_________________ except as provided in Section 2.07.

The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate the Promissory Notes. If so appointed, an authenticating agent
may authenticate Promissory Notes whenever the Trustee may do so. Each
reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same rights as an
Agent to deal with the Company or an Affiliate of the Company.

The Promissory Notes shall be issuable only in registered form without
coupons, in denominations of such amounts less than $1,000 as the Company shall
direct.

Section 4.03. REGISTRAR AND PAYING AGENT. The provisions of Section 2.03
and Section 2.04 hereof, governing the Registrar and the Paying Agent for the
Notes, shall also apply in connection with the Promissory Notes.

The Company initially appoints the Trustee as Registrar, Paying Agent and
agent for service of notices and demands in connection with the Promissory
Notes.

Section 4.04. NOTES REGISTER. The Trustee, as Registrar, shall preserve
in as current a form as is reasonably practicable a list of the names and
addresses of the Holders of the Promissory Notes. For purposes of the Notes
Register, the Promissory Notes shall be considered "Notes." If the Trustee is
not the Registrar, the Company shall furnish to the Trustee on or before each
Interest Payment Date and at such other times as the Trustee may request in
writing a list of such names and addresses.

Further, the Company will furnish or cause to be furnished to the Trustee:

(a) semiannually, not more than 5 days after each Record Date, a
list, in such form as the Trustee may reasonably require, of the names and
addresses of the Holders of Promissory Notes as of such Record Date; and

<PAGE>

EXCLUDING from any such list, names and addresses already received by the
Trustee in its capacity as Registrar.

Prior to due presentment of a Promissory Note for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Promissory Note is registered as the owner of such
Promissory Note for the purpose of receiving payment of Principal of and
interest on such Promissory Note and for all other purposes whatsoever, whether
or not such Promissory Note be overdue, and neither the Company, the Trustee nor
any agent of the Company or the Trustee shall be affected by notice to the
contrary.

Section 4.05. OTHER PROVISIONS. For purposes of transfer and exchange or
replacement of Promissory Notes, whether Promissory Notes are considered to be
Outstanding, the definition and treatment of Promissory Notes which are
"Treasury" Promissory Notes, the cancellation of Promissory Notes, the use of
temporary Promissory Notes and provisions concerning any Defaulted interest on
the Promissory Notes, the Promissory Notes shall be treated as "Notes" pursuant
to Sections 2.06, 2.07, 2.08, 2.09, 2.10, 2.11 and 2.12 hereof.

ARTICLE V

PAYMENT PROVISIONS

Section 5.01. NOTES PART OF SENIOR INDEBTEDNESS. The Notes and the
Promissory Notes shall be on a par with, and part of, the Senior Indebtedness of
the Company. In addition, all Notes and the Promissory Notes rank as to payment
of Principal and interest equally and ratably, without priority one over the
other.

Section 5.02. OBLIGATIONS OF THE COMPANY UNCONDITIONAL. Nothing contained
in this Article V or elsewhere in this Indenture or in any Note is intended to
or shall impair, as among the Company, its creditors and the Holders, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders the Principal of and interest on the Notes, as and when the same shall
become due and payable in accordance with the terms of the Notes, or to affect
the relative rights of the Holders and other creditors of the Company nor shall
anything herein or therein prevent the Trustee or any Holder from exercising all
remedies otherwise permitted by applicable law upon the happening of an Event of
Default under this Indenture, subject to the provisions of Article VIII.
Nothing contained in this Article V or elsewhere in this Indenture or in the
Notes shall, except during the pendency of any dissolution, winding-up,
liquidation or reorganization of the Company, affect the obligation of the
Company to make, or prevent the Company from making, at any time (except under
the circumstances described in Section 5.05) payment of Principal of or interest
on the Notes.

<PAGE>

The Company shall give prompt notice to the Trustee of any dissolution,
winding-up, liquidation or reorganization of the Company.

Section 5.03. APPLICATION BY TRUSTEE OF MONEYS DEPOSITED WITH IT. Money
or U.S. Government Obligations deposited in trust with the Trustee pursuant to
and in accordance with Sections 6.04 and 10.01 hereof shall be for the sole
benefit of Noteholders.

ARTICLE VI

COVENANTS

Section 6.01. PAYMENT OF NOTES. The Company shall pay the Principal of
and interest on the Notes on the dates and in the manner provided in the Notes
and this Indenture. An installment of Principal or interest shall be considered
paid on the date it is due if the Paying Agent (other than the Company or an
Affiliate of the Company) holds on that date money designated for and sufficient
to pay the installment. The Company shall pay interest on overdue Principal at
the interest rate per annum borne by the Notes; it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.

Section 6.02. SEC REPORTS. The Company shall file all reports and other
information and documents which it is required to file with the SEC pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and within 15 days after it files them with the SEC, the
Company shall file copies of all such reports, information and other documents
with the Trustee. The Company will cause any quarterly and annual reports which
it mails to its stockholders to be mailed to the Holders of the Notes.

If the Company is not subject to the reporting requirements of Section 13
or Section 15(d) of the Exchange Act, the Company will prepare, for the first
three quarters of each fiscal year, quarterly financial statements substantially
equivalent to the financial statements required to be included in a report on
Form 10-Q under the Exchange Act. The Company will also prepare, on an annual
basis, complete audited consolidated financial statements including, but not
limited to, a balance sheet, a statement of income and retained earnings, a
statement of changes in financial position and all appropriate notes, along with
a "Management's Discussion and Analysis of Financial Condition and Results of
Operations." All such financial statements will be prepared in accordance with
generally accepted accounting principles consistently applied, except for
changes with which the Company's independent accountants concur, and except that
quarterly statements may be subject to year-end adjustments. The Company will
cause a copy of such financial statements to be filed with the Trustee and
mailed to the Holders of the Notes within 15 days after the date the Company
would have been required to file such information with the SEC. The Company
will also comply with the other provisions of TIA Section 314(a).

Section 6.03. WAIVER OF USURY DEFENSE. The Company agrees that it will
not assert, plead (as a defense or otherwise) or in any manner whatsoever claim
(and will actively resist any attempt to compel it to assert, plead or claim) in
any action, suit or proceeding that the interest

<PAGE>

rate on the Notes violates present or future usury or other laws relating to the
interest payable on any indebtedness and will not otherwise avail itself (and
will actively resist any attempt to compel it to avail itself) of the benefits
or advantage of such laws.

Section 6.04. LIQUIDATION. The Board of Directors or the stockholders of
the Company may not adopt a plan of liquidation which plan provides for,
contemplates or the effectuation of which is preceded by (a) the sale, lease,
conveyance or other disposition of all or substantially all of the assets of the
Company otherwise than substantially as an entirety (Article 7 of this Indenture
being the Article which governs any such sale, lease, conveyance or other
disposition substantially as an entirety), and (b) the distribution of all or
substantially all of the proceeds of such sale, lease, conveyance or other
disposition and of the remaining assets of the Company to the holders of the
capital stock of the Company, unless the Company shall in connection with the
adoption of such plan make provision for, or agree that prior to making any
liquidating distributions it will make provision for, the satisfaction of the
Company's obligations hereunder and under the Notes as to the payment of the
Principal and interest. The Company shall be deemed to make provision for such
payments only if (1) the Company irrevocably deposits in trust with the Trustee
money and/or U.S. Government Obligations maturing as to Principal and interest
in such amounts and at such times as are sufficient, without consideration of
any reinvestment of such interest, to pay the Principal of and interest on the
Notes then Outstanding to maturity and to pay all other sums payable by it
hereunder, or (2) there is an express assumption of the due and punctual payment
of the Company's obligations hereunder and under the Notes and the performance
and observance of all covenants and conditions to be performed by the Company
hereunder, by the execution and delivery of a supplemental indenture in form
satisfactory to the Trustee by a Person who acquires, or will acquire (otherwise
than pursuant to a lease) a portion of the assets of the Company, and which
Person will have assets (immediately after the acquisition) and aggregate
earnings (for such Person's four full fiscal quarters immediately preceding the
acquisition) equal to not less than the assets of the Company (immediately
preceding the acquisition) and the aggregate earnings of the Company (for its
four full fiscal quarters immediately preceding such acquisition), respectively,
and which Person is a corporation organized under the laws of the United States,
any state thereof or the District of Columbia; provided, however, that the
Company shall not make any liquidating distribution until after the Company
shall have certified to the Trustee with an Officers' Certificate at least five
days prior to the making of any liquidating distribution that it has complied
with the provisions of this Section 6.04.

Section 6.05. COMPLIANCE CERTIFICATES. The Company shall deliver to the
Trustee within 120 days after the end of each fiscal year of the Company, an
Officers' Certificate stating whether or not the signers know of any Default or
Event of Default. If they do know of such a Default or Event of Default, the
Certificate shall describe the Default or Event of Default and the efforts to
remedy the same. The Certificate need not comply with Section 12.04.

Section 6.06. NOTICE OF DEFAULTS. In the event that any indebtedness of
the Company is declared due and payable before its maturity because of the
occurrence of any Default under such indebtedness, the Company will promptly
give written notice to the Trustee of such

<PAGE>

declaration or of the occurrence of any event which, with the giving of notice
or the passage of time, or both, would entitle the holder or holders of such
indebtedness to declare such indebtedness due and payable before its maturity.

Section 6.07. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (1) all material taxes, assessments and governmental charges levied
or imposed upon the Company, directly or by reason of its ownership of any
Subsidiary or upon the income, profits or property of the Company; and (2) all
material lawful claims for labor, materials, and supplies, which, if unpaid,
might by law become a lien upon the property of the Company; provided, however,
that the Company shall not be required to pay or discharge or cause to be paid
or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which adequate provision has been made.

Section 6.08. CORPORATE EXISTENCE. Subject to Section 6.04 and Article 7
hereof, the Company will do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence and rights (charter
and statutory); provided, however, that the Company shall not be required to
preserve any right if the Board of Directors shall determine that the
preservation is no longer desirable in the conduct of the Company's business and
that the loss thereof is not, and will not be, adverse in any material respect
to the Holders.

Section 6.09. MAINTENANCE OF PROPERTIES. Subject to Section 6.04, the
Company will cause all material properties owned, leased or licensed in the
conduct of its business to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof and thereto, all as in the judgment of the Company may be necessary so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times while any Notes are Outstanding; provided,
however, that nothing in this Section 6.09 shall prevent the Company from
distinguishing the maintenance of any such properties if such discontinuance is,
in the judgment of the Board of Directors, desirable in the conduct of the
Company's business and is not, and will not be, adverse in any material respect
to the Holders.

Section 6.10. LIMITATIONS ON INDEBTEDNESS. Notwithstanding any provision
herein to the contrary, the Company shall not incur any indebtedness if such new
indebtedness would cause the Aggregate Indebtedness of the Company then
outstanding to exceed 70% of the Appraised Value of the Assets of the Company.

<PAGE>

ARTICLE VII

SUCCESSOR CORPORATION

Section 7.01. WHEN COMPANY MAY MERGE, ETC. The Company will not, in any
transaction or series of transactions, merge or consolidate with or into, or
sell, assign, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets as an entirety to, any Person or Persons, and the
Company will not permit any of its wholly owned Subsidiaries to enter into any
such transaction or series of transactions if such transactions or series of
transactions, in the aggregate, would result in a sale, assignment, transfer,
lease or other disposition of all or substantially all of the properties and
assets of the Company and its Subsidiaries on a consolidated basis to any other
Person or Persons, unless at the time and after giving effect thereto (i) either
(A) if the transaction or transactions is a merger or consolidation, the Company
shall be the surviving Person of such merger or consolidation, or (B) the Person
formed by such consolidation or into which the Company or such Subsidiary is
merged or to which the properties and assets of the Company or such Subsidiary,
as the case may be, substantially as an entirety, are transferred (any such
surviving Person or transferee Person being the "Surviving Entity") shall be a
corporation organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and shall expressly
assume by a supplemental indenture executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under the
Notes and this Indenture, and in each case, this Indenture shall remain in full
force and effect; (ii) immediately before and immediately after giving effect to
such transaction or series of transactions on a pro forma basis (including,
without limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions), no
Default or Event of Default shall have occurred and be continuing, and the
Company or the surviving entity, as the case may be, after giving effect to such
transaction or series of transactions on a pro forma basis, could incur $1.00 of
additional indebtedness under the first paragraph of Section 6.10 hereof
(assuming a market rate of interest with respect to such additional
Indebtedness); and (iii) immediately after giving effect to such transaction or
series of transactions on a pro forma basis, the Consolidated Net Worth of the
Company or the Surviving Entity, as the case may be, is at least equal to the
Consolidated Net Worth of the Company immediately before such transaction or
series of transactions.

<PAGE>

The Company shall deliver to the Trustee prior to the proposed transaction
an Officers' Certificate and an Opinion of Counsel, each of which shall comply
with Section 12.04 and each of which shall state in effect that such
consolidation, merger or transfer comply with this Article 7 and that all
conditions precedent herein provided for relating to such transaction have been
complied with.

Section 7.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation
or merger, or any transfer of all or substantially all of the assets of the
Company in accordance with Section 7.01, the successor corporation formed by
such consolidation or into which the Company is merged or to which such transfer
is made shall succeed to, and be substituted for, and may exercise every right
and power of, the Company under this Indenture with the same effect as if such
successor corporation had been named as the Company herein.

ARTICLE VIII

DEFAULT AND REMEDIES

Section 8.01. EVENTS OF DEFAULT. An "Event of Default" shall occur
hereunder if:

(1) the Company Defaults in the payment of interest on any Note
when the same becomes due and payable and the Default continues for a
period of 30 days;

(2) the Company Defaults in the payment of the Principal of any
Note when the same becomes due and payable at maturity, upon redemption or
otherwise;

(3) the Company fails to comply with any of its other agreements
contained in the Notes or this Indenture and the Default continues for the
period and after the notice specified below;

(4) there shall be a Default under any bond, debenture, note or
other evidence of indebtedness for money borrowed or under any mortgage,
indenture or other instrument under which there may be issued or by which
there may be secured or evidenced any indebtedness for money borrowed by
the Company or under any guarantee of payment by the Company of
indebtedness for money borrowed, whether such indebtedness or guarantee now
exists or shall hereafter be created, which Default relates to (A) the
obligation to pay the Principal of or interest on any such indebtedness or
guarantee or (B) an obligation other than the obligation to pay the
Principal of or interest on any such indebtedness and the effect of such
Default is to cause such indebtedness to become due prior to its stated
maturity; provided, however, that no Default under this Section 8.01(4)
shall exist unless all such Defaults relating to such indebtedness or such
guarantees aggregate to a Principal amount in excess of $25,000,000;

<PAGE>

(5) the Company or any Subsidiary pursuant to or within the meaning
of any Bankruptcy Law: (A) commences a voluntary case or proceeding; (B)
consents to the entry of an order for relief against it in an involuntary
case or proceeding; (C) consents to the appointment of a Custodian of it or
for all or substantially all of its property; or (D) makes a general
assignment for the benefit of its creditors; or

(6) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that: (A) is for relief against the Company or any
Subsidiary in an involuntary case or proceeding; (B) appoints a Custodian
of the Company or any Subsidiary or for all or substantially all of the
property of any of them; or (C) orders the liquidation of the Company or
any Subsidiary;and in each case the order or decree remains unstayed and in
effect for 60 days.

A Default under clause (3) of this Section 8.01 shall not become an Event
of Default until the Trustee notifies the Company, or the Holders of at least
25% in Principal amount of the Notes then Outstanding notify the Company and the
Trustee, of the Default, and the Company does not cure the Default within
30 days after receipt of such notice; provided, that the 30-day cure period may
be extended for a reasonable time in the discretion of the Trustee or shall be
extended for up to a maximum of 180 days until a cure is accomplished if the
Company begins work on a cure during the 30-day period and diligently proceeds
to accomplish the cure. The notice given pursuant to this Section 8.01 must
specify the Default, demand that it be remedied and state that the notice is a
"Notice of Default." When a Default is cured, it ceases.

Defaults under clauses (2), (4) and (5) of this Section 8.01 shall become
Events of Default immediately, with no waiting period.

Subject to the provisions of Sections 9.01 and 9.02, the Trustee shall not
be charged with knowledge of any Event of Default unless written notice thereof
shall have been given to a Trust Officer at the corporate trust office of the
Trustee by the Company, the Paying Agent, any Holder or an agent of any Holder.

Section 8.02. ACCELERATION. If an Event of Default (other than an Event
of Default specified in Section 8.01(5) or (6)) occurs and is continuing, the
Trustee may, by notice to the Company, or the Holders of at least 25% in
Principal amount of the Notes then Outstanding may, by notice to the Company and
the Trustee, and the Trustee shall, upon the request of such Holders, declare
all unpaid Principal of and accrued interest to the date of acceleration on the
Notes then Outstanding (if not then due and payable) to be due and payable and
upon any such declaration, the same shall become and be immediately due and
payable. If an Event of Default specified in Section 8.01(5) or (6) occurs, all
unpaid Principal and accrued interest on the Notes then Outstanding shall
IPSO FACTO become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Noteholder. The Holders of a
majority in Principal amount of the Notes then Outstanding by notice to the
Trustee may rescind an acceleration and its consequences if (i) all existing
Events of Default, other than the non-payment of the Principal of the Notes
which has become due solely by such declaration of acceleration,

<PAGE>

have been cured or waived; (ii) to the extent the payment of such interest is
lawful, interest on overdue installments of interest and overdue Principal,
which has become due otherwise than by such declaration of acceleration, has
been paid; (iii) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction; and (iv) all payments due to the Trustee
and any predecessor Trustee under Section 9.07 have been made. Anything herein
contained to the contrary notwithstanding, in the event of any acceleration
pursuant to this Section 8.02, the Company shall not be obligated to pay any
premium which it would have had to pay if it had then elected to redeem the
Notes pursuant to paragraph 5 of the Notes. No such rescission shall affect any
subsequent default or impair any right consequent thereon.

Section 8.03. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy by proceeding at law or
in equity to collect the payment of the Principal of or interest on the Notes or
to enforce the performance of any provision of the Notes or this Indenture.

The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Noteholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.

If the Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case, subject to any determination in
such proceeding, the Company, the Trustee and the Holders shall be restored
severally and respectively to their former positions hereunder and thereafter
all rights and remedies of the Trustee and the Holders shall continue as though
no such proceeding had been instituted.

Section 8.04. WAIVER OF DEFAULT AND EVENTS OF DEFAULT. Subject to
Sections 8.07 and 11.02 hereof, the Holders of a majority in Principal amount of
the Notes then outstanding by notice to the Trustee may waive an existing
Default or Event of Default and its consequences, except a Default in the
payment of the Principal of or interest on any Note as specified in clauses (1)
and (2) of Section 8.01 hereof. When a Default or Event of Default is waived,
it is cured and ceases.

Section 8.05. CONTROL BY MAJORITY. The Holders of a majority in Principal
amount of the Notes then Outstanding may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on it. However, the Trustee may refuse to follow
any direction that conflicts with law or this Indenture, that the Trustee
determines may be unduly prejudicial to the rights of another Noteholder, or
that may involve the Trustee in personal liability; provided that the Trustee
may take any other action deemed proper by the Trustee which is not inconsistent
with such direction.

<PAGE>

Section 8.06. LIMITATION ON SUITS. A Noteholder may not pursue any remedy
with respect to this Indenture or the Notes unless:

(a) the Holder has given to the Trustee written notice of a
continuing Event of Default;

(b) the Holders of at least 25% in Principal amount of the
Outstanding Notes have made a written request to the Trustee to pursue the
remedy;

(d) the Trustee has not complied with the request within 60 days
after receipt of the request and the offer of indemnity; and

(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority
in Principal amount of the Notes then Outstanding.

A Noteholder may not use this Indenture to prejudice the rights of another
Noteholder or to obtain a preference or priority over such other Noteholder.

Section 8.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder of a Note to receive
payment of the Principal of or the interest on the Note, on or after the
respective due dates expressed in the Note, or to bring suit for the enforcement
of any such payment on or after such respective dates, is absolute and
unconditional and shall not be impaired or affected without the consent of the
Holder.

Section 8.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default in the
payment of Principal or interest specified in Section 8.01(1) or (2) hereof
occurs and is continuing, the Trustee may recover judgment in its own name and
as trustee of an express trust against the Company or any other obligor on the
Notes for the whole amount of Principal and accrued interest remaining unpaid,
together with interest on overdue Principal and, to the extent that payment of
such interest is lawful, interest on overdue installments of interest, in each
case at the rate per annum borne by the Notes, and such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and legal counsel.

Section 8.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and legal counsel) and the Noteholders allowed in any judicial
proceedings relative to the Company (or any other obligor on the Notes), its
creditors or its property and shall be entitled and empowered to collect and
receive any

<PAGE>

moneys or other property payable or deliverable on any such claims and to
distribute the same, and any Custodian in any such judicial proceeding is hereby
authorized by each Noteholder to make such payments to the Trustee and, in the
event that the Trustee shall consent to the making of such payments directly to
the Noteholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and legal counsel, and any other amounts due the Trustee under Section 9.07
hereof. Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Noteholder any plan
of reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Noteholder in any such proceeding.

Section 8.10. APPLICATION OF MONEY COLLECTED. If the Trustee collects any
money pursuant to this Article 8, it shall pay out the money in the following
order:

FIRST: to the Trustee for amounts due under Section 9.07 hereof;

SECOND: to Noteholders for amounts due and unpaid on the Notes for
Principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for Principal
and interest, respectively; and

THIRD: to the Company.

The Trustee may fix a Special Record Date and payment date for any payment to
Noteholders pursuant to this Section 8.10.

Section 8.11. UNDERTAKING FOR COSTS. All parties to this Indenture agree,
and each Holder of any Note, by his acceptance thereof shall be deemed to have
agreed, that in any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 8.11 does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 8.06 hereof or a suit by Holders of more than 10% in
Principal amount of the Notes then outstanding.

ARTICLE IX

TRUSTEE

Section 9.01. DUTIES OF TRUSTEE.

(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture and use the same

<PAGE>

degree of care and skill in their exercise as a prudent Person would
exercise or use under the circumstances in the conduct of his own affairs.

(b) Except during the continuance of an Event of Default: (i) the
Trustee need perform only those duties as are specifically set forth in
this Indenture and no others; and (ii) in the absence of bad faith on its
part, the Trustee may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon certificate or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. The Trustee, however, shall examine the certificates and
opinions to determine whether or not they conform to the requirements of
this Indenture.

(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that: (i) this paragraph does not limit the effect of
paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable
for any error of judgment made in good faith by a Trust Officer, unless it
is proved that the Trustee was negligent in ascertaining the pertinent
facts; and (iii) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 8.05 hereof.

(d) The Trustee may refuse to perform any duty or exercise any
right or power unless it receives indemnity satisfactory to it against any
loss, liability, expense or fee, unless the reasonably expected amount of
any such loss, liability, expense or fee is under $10,000.

(e) Every provision of this Indenture that in any way relates to
the Trustee is subject to paragraphs (a), (b) (c) and (d) of this
Section 9.01.

(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree with the Company. Money
held in trust by the Trustee need not be segregated from other funds except
to the extent required by law.

Section 9.02. RIGHTS OF TRUSTEE. Subject to Section 9.01 above:

(a) The Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document.

(b) Before the Trustee acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel, which shall conform to
Section 12.04(b) hereof. The Trustee shall not be liable for any action it
takes or omits to take in good faith in reliance on such Certificate or
Opinion.

(c) The Trustee may act through its agents and shall not be
responsible for the misconduct or negligence of any agent appointed with
due care.

<PAGE>

(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it reasonably believes to be authorized
or within its rights or powers.

(e) The Trustee may consult with counsel and the advice or opinion
of such counsel as to matters of law shall be full and complete
authorization and protection in respect of any action taken, omitted or
suffered by it hereunder in good faith and in accordance with the advice or
opinion of such counsel.

Section 9.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual
or any other capacity may become the owner or pledgee of Notes and may otherwise
deal with the Company or an affiliate of the Company with the same rights it
would have if it were not Trustee. Any Agent may do the same with the like
rights. However, the Trustee is subject to Sections 9.10 and 9.11 hereunder.

Section 9.04. TRUSTEE'S DISCLAIMER. The Trustee makes no representation
as to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Company's use of the proceeds from the Notes and it shall
not be responsible for any statement in the Notes other than the Trustee's
certificate of authentication.

Section 9.05. NOTICE OF DEFAULTS OR EVENTS OF DEFAULT. If a Default or an
Event of Default occurs and is continuing and if it is known to the Trustee, the
Trustee shall mail to each Noteholder written notice of the Default or Event of
Default within 90 days after it occurs. Except in the case of a Default or an
Event of Default in payment of the Principal of (including payment of sinking
fund installments) or interest on any Note, the Trustee may withhold the notice
if and so long as a committee of its Trust Officers in good faith determines
that withholding the notice is in the interest of Noteholders.

Section 9.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each
May 15 beginning with the May 15 following the date of this Indenture, the
Trustee shall mail to each Noteholder a brief report dated as of such May 15
that complies with TIA Section 313(a). The Trustee also shall mail to each
Noteholder reports which comply with TIA Section 313(b).

A copy of each report at the time of its mailing to Noteholders shall be
mailed to the Company and filed with the SEC and each stock exchange, if any, on
which the Notes are listed or, in the event the Notes are listed on NASDAQ, with
the National Association of Notes Dealers, Inc., if such filing is required.
The Company shall notify the Trustee whenever the Notes become listed on any
stock exchange or on NASDAQ.

Section 9.07. COMPENSATION AND INDEMNITY. The Company shall pay to the
Trustee from time to time reasonable compensation for its services (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust). The Company shall reimburse the
Trustee upon request for all reasonable disbursements, expenses and advances
incurred or made by it. Such expenses may include the reasonable compensation,
disbursements and expenses of the Trustee's agents and counsel.

<PAGE>

The Company shall indemnify the Trustee for, and hold it harmless against,
any loss, liability or expense incurred by it in connection with its duties
under this Indenture. The Trustee shall notify the Company promptly of any
claim asserted against the Trustee for which it may seek indemnity. The Company
shall defend the claim and the Trustee shall cooperate in the defense. The
Trustee may have separate counsel and the Company shall pay the reasonable fees
and expenses of such counsel. The Company need not pay for any settlement made
without its written consent.

The Company need not reimburse the Trustee for any expense or indemnify it
against any loss or liability incurred by it through its negligence, bad faith
or willful misconduct.

To secure the Company's payment obligations in this Section 9.07, the
Trustee shall have a senior claim to which the Notes are hereby made subordinate
on all money or property held or collected by the Trustee, except such money or
property held in trust to pay the Principal of and interest on particular Notes.

When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 8.01(5) and (6) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.

Section 9.08. REPLACEMENT OF TRUSTEE. The Trustee may resign by so
notifying the Company; provided, that such resignation shall become effective
only upon the appointment of a successor trustee and such successor's acceptance
of the appointment. The Holders of a majority in Principal amount of the Notes
then Outstanding may remove the Trustee by so notifying the Trustee and may
appoint a successor Trustee with the Company's written consent. The Company may
remove the Trustee if: (a) the Trustee fails to comply with Section 9.10
hereof; (b) the Trustee is adjudged a bankrupt or an insolvent; (c) a receiver
or other public officer takes charge of the Trustee or its property; or (d) the
Trustee otherwise becomes incapable of acting hereunder.

If the Trustee resigns, is removed by the Company, or is removed by Holders
of a majority in Principal amount of the Notes then Outstanding and such Holders
do not appoint a successor Trustee, or if a vacancy exists in the office of
Trustee for any other reason, the Company shall promptly appoint a successor
Trustee.

If a successor Trustee does not take office within 45 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of 10% in Principal amount of the Notes then Outstanding may petition
any court of competent jurisdiction for the appointment of a successor Trustee.

If the Trustee at any time fails to comply with Section 9.10 hereof, the
Trustee shall resign. If the Trustee fails to resign after such an occurrence,
any Noteholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee. If the Trustee has
or shall acquire any conflicting interest within the meaning of

<PAGE>

Section 310(b) of the TIA with respect to the Notes, it shall either eliminate
such conflicting interest or resign with respect to the Notes, to the extent and
in the manner provided by, and subject to the provisions of, the TIA and this
Indenture.

A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Immediately after that, the
retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee, the resignation or removal of the retiring Trustee shall
become effective, and the successor Trustee shall have all the rights, powers
and duties of the Trustee under this Indenture. A successor Trustee shall mail
notice of its succession to each Noteholder.

Notwithstanding replacement of the Trustee pursuant to this Section 9.08,
the Company's obligations under Section 9.07 hereof shall continue for the
benefit of the retiring Trustee.

Section 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust assets to, another corporation, the resulting,
surviving or transferee corporation without any further act shall be the
successor Trustee, provided such transferee corporation shall qualify and be
eligible under Section 9.10 hereof.

Section 9.10. ELIGIBILITY; DISQUALIFICATION. This Indenture shall always
have a Trustee that satisfies the requirements of TIA Section 310(a)(1). The
Trustee shall have a combined capital and surplus of at least $50,000,000 as set
forth in its most recent published annual report of condition. No obligor upon
the Notes or person directly or indirectly controlling, controlled by, or under
common control with, such obligor shall serve as Trustee for the Notes. The
Trustee shall comply also with TIA Section 310(b).

Section 9.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. If and
when the Trustee becomes a creditor of the Company (or any other obligor on the
Notes), the Trustee shall comply with TIA Section 311(a), excluding from the
operation of TIA Section 311(a) any creditor relationship listed in TIA Section
311(b). A trustee who has resigned or been removed shall be subject to TIA
Section 311(a) to the extent indicated therein.

ARTICLE X

SATISFACTION AND DISCHARGE OF INDENTURE

Section 10.01. TERMINATION OF COMPANY'S OBLIGATIONS. The Company may
terminate all of its obligations under the Notes and this Indenture (except
those obligations referred to in the immediately succeeding paragraph) if all
Notes previously authenticated and delivered (other than destroyed, lost or
stolen Notes which have been replaced or paid or Notes for whose payment money
has theretofore been held in trust and thereafter repaid to the Company, as
provided in Section 10.03 hereof) have been delivered to the Trustee for
cancellation and the Company has paid all sums payable and to be paid by it
hereunder, or if the Company

<PAGE>

irrevocably deposits in trust with the Trustee within 10 days of the applicable
payment date, money or U.S. Government Obligations maturing as to Principal and
interest in such amounts and at such times as are sufficient, without
consideration of any reinvestment of such interest, to pay the Principal of and
interest on the Notes then Outstanding to maturity and to pay all other sums
payable by it hereunder.

The Company's obligations in paragraph 12 of the Notes and in
Sections 2.03, 2.04, 2.05, 2.06, 2.07, 6.01, 9.07, 9.08 and 10.04 and in Article
IV hereof shall survive until the Notes are no longer Outstanding. Thereafter,
the Company's obligations in such paragraph 12 and in Section 9.07 hereof shall
survive.

After an irrevocable deposit by the Company under this Section 10.01, the
Trustee upon request shall acknowledge in writing the discharge of the Company's
obligations under the Notes and this Indenture, except for those surviving
obligations specified above.

Section 10.02. APPLICATION OF TRUST MONEY. The Trustee or Paying Agent
shall hold in trust, for the benefit of the Holders, money or U.S. Government
Obligations deposited with it pursuant to Section 10.01 hereof, and shall apply
the deposited money and the money from U.S. Government Obligations in accordance
with this Indenture to the payment of the Principal of and interest on the
Notes.

Section 10.03. REPAYMENT TO COMPANY. Subject to Section 10.01, the
Trustee and the Paying Agent shall promptly pay to the Company upon request any
excess money or U.S. Government Obligations held by them at any time after no
Notes remain Outstanding.

The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of Principal or interest that
remains unclaimed for two years after a right to such money on the part of
Holders of the Notes has matured; provided, however, that the Trustee or such
Paying Agent, before being required to make any such payment, may at the expense
of the Company cause to be published once in a newspaper of general circulation
in the City of New York or mail to each Holder entitled to such money, notice
that such money remains unclaimed and that after a date specified therein, which
shall be at least 30 days from the date of such publication or mailing, any
unclaimed balance of such money then remaining will be repaid to the Company.
After payment to the Company, Noteholders entitled to money must look to the
Company for payment as general creditors unless otherwise prohibited by law.

Section 10.04. REINSTATEMENT. If the Trustee or Paying Agent is unable to
apply any money or U.S. Government Obligations in accordance with Section 10.01
hereof by reason of any legal proceeding or by reason of any order or judgment
of any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, the Company's obligations under this Indenture and
the Notes shall be revived and reinstated as though no deposit had occurred
pursuant to Section 10.01 hereof until such time as the Trustee or Paying Agent
is permitted to apply all such money or U.S. Government Obligations in
accordance with

<PAGE>

Section 10.01 hereof; provided, however, that if the Company has made any
payment of the Principal of or interest on any Notes because of the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money or U.S.
Government Obligations held by the Trustee or Paying Agent.

ARTICLE XI

AMENDMENTS, SUPPLEMENTS AND WAIVERS

Section 11.01. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee
may amend or supplement this Indenture or the Notes without notice to or consent
of any Noteholder:

(a) to comply with Section 6.04 or 7.01 hereof;

(b) to provide for uncertificated Notes in addition to or in place
of certificated Notes;

(d) to evidence the acceptance of appointment by a successor
trustee; or

(e) to cure any ambiguity, defect or inconsistency, or to make any
other change that does not adversely affect the rights of any Noteholder.

Section 11.02. WITH CONSENT OF HOLDERS. The Company and the Trustee may
amend or supplement this Indenture or the Notes without notice to any Noteholder
but with the written consent of the Holders of a majority in Principal amount of
the Notes then Outstanding. The Holders of a majority in Principal amount of
the Notes then Outstanding may waive compliance in a particular instance by the
Company with any provision of this Indenture or the Notes without notice to any
Noteholder. Subject to Section 11.04 hereof, without the consent of each
Noteholder affected, however, an amendment, supplement or waiver, including a
waiver pursuant to Section 8.04 hereof, may not:

(a) reduce the amount of Notes whose Holders must consent to an
amendment, supplement or waiver;

(b) reduce the rate of or change the time for payment of interest
on any Note;

(c) reduce the Principal of or change the fixed maturity of any
Note or alter the redemption provisions with respect thereto;

(d) waive a Default in the payment of the Principal of or interest
on any Note;

<PAGE>

(e) make any changes in Section 8.04 or 8.07 or this sentence;

(f) modify the provisions of Article V hereof in a manner adverse
to the Holders; or

(g) make any Note payable in money other than that stated in the
Note.

It shall not be necessary for the consent of the Holders under this Section
11.02 to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof.

After an amendment, supplement or waiver under this Section 11.02 becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of such amendment, supplement or waiver,
provided that the failure to mail notice does not impair the rights of the
Holders affected thereby.

Section 11.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to or
supplement of this Indenture or the Notes shall comply with the TIA as then in
effect.

Section 11.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment or
waiver becomes effective, a consent to it by a Holder is a continuing consent by
the Holder and every subsequent Holder of a Note or portion of a Note that
evidences the same debt as the consenting Holder's Note, even if notation of the
consent is not made on any Note. However, any such Holder or subsequent Holder
may revoke the consent as to his Note or portion of a Note if the Trustee
receives the notice of revocation before the date the amendment, supplement or
waiver becomes effective.

After an amendment, supplement or waiver becomes effective, it shall bind
every Noteholder, unless it makes a change described in any of clauses (a)
through (g) of Section 11.02. In that case the amendment, supplement or waiver
shall bind each Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note.

Section 11.05. NOTATION ON OR EXCHANGE OF NOTES. If an amendment,
supplement or waiver changes the terms of a Note, the Trustee may require the
Holder of the Note to deliver it to the Trustee. The Trustee may place an
appropriate notation on the Note about the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Note shall issue and the Trustee shall authenticate a new
Note that reflects the changed terms.

Section 11.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign
any amendment or supplement authorized pursuant to this Article XI if the
amendment or supplement does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does,

<PAGE>

the Trustee may but need not sign it. In signing or refusing to sign such
amendment or supplement, the Trustee shall be entitled to receive and, subject
to Section 9.01 hereof, shall be fully protected in relying upon an Opinion of
Counsel stating that such amendment or supplement is authorized or permitted by
this Indenture. The Company may not sign an amendment or supplement until its
Board of Directors approves it.

ARTICLE XII

MISCELLANEOUS

Section 12.01. TRUST INDENTURE ACT CONTROLS. If any provision of this
Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control; provided, however, that if any provision of this Indenture
modifies or excludes any provision of the TIA that may be so modified or
excluded, such provision as so modified or excluded, as the case may be, shall
control.

Section 12.02. NOTICES. Any notice or communication shall be given in
writing and delivered in person or mailed by certified or registered mail,
return receipt requested, addressed as follows:

If to the Company: America First Real Estate
Investment Company, Inc.

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

------------------------------
Attention: President

If to the Trustee:
----------------------------------------

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

Attention:
------------------------------

Such notice or communication shall be effective when received.

The Company or the Trustee by notice to the other may designate additional
or different addresses for subsequent notices or communications.

Any notice or communication mailed to a Noteholder shall be mailed by
first-class mail to him at his address shown on the Notes Register kept by the
Registrar.

Failure to mail a notice or communication to a Noteholder or any defect in
it shall not affect its sufficiency with respect to other Noteholders. If a
notice or communication to a Noteholder is mailed in the manner provided above,
it is duly given, whether or not the addressee receives it.

<PAGE>

Section 12.03. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS. Noteholders
may communicate pursuant to TIA Section 312(b) with other Noteholders with
respect to their rights under this Indenture or the Notes and the Trustee shall
provide the information required by TIA Section 312(b) under the circumstances
required. The Company, the Trustee, the Registrar and any other Person shall
have the protection of TIA Section 312(c).

Section 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.

(a) Upon any request or application by the Company to the Trustee
to take any action under this Indenture, the Company shall furnish to the
Trustee at the request of the Trustee: (i) an Officers' Certificate
stating that, in the opinion of the signers, all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have
been complied with; and (ii) an Opinion of Counsel stating that, in the
opinion of such counsel, all such conditions precedent have been complied
with.

(b) Each Officers' Certificate and Opinion of Counsel with respect
to compliance with a condition or covenant provided for in this Indenture
shall include: (i) a statement that the Person making such certificate or
opinion has read such covenant or condition; (ii) a brief statement as to
the nature and scope of the examination or investigation upon which the
statements or opinions contained in such certificate or opinion are based;
(iii) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and (iv) a statement as to whether or not, in the opinion of
such Person, such condition or covenant has been complied with; provided,
however, that with respect to matters of fact an Opinion of Counsel may
rely on an Officers' Certificate or certificates of public officials.

Section 12.05. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR. The Trustee may
make reasonable rules for action by or at a meeting of Noteholders. The
Registrar or Paying Agent may make reasonable rules for its functions.

Section 12.06. LEGAL HOLIDAYS. If a payment date is a Legal Holiday at a
place of payment, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period.

Section 12.07. GOVERNING LAW. The laws of the State of Delaware shall
govern this Indenture and the Notes without regard to principles of conflicts of
law. Each of the parties hereto agrees (a) that this Indenture involves at
least $100,000 and (b) that this Indenture has been entered into by the parties
hereto in express reliance upon 6 DEL. C. Section 2708.

Section 12.08. NO RECOURSE AGAINST OTHERS. As stated in paragraph 17 of
the Notes, any and all liability of any director, officer, employee or
stockholder, as such, of the Company under or because of the Notes is waived and
released by the Holders upon their acceptance of the Notes.

<PAGE>

Section 12.09. SUCCESSORS. All agreements of the Company in this
Indenture and the Notes shall bind its successor. All agreements of the Trustee
in this Indenture shall bind its successor.

Section 12.10. MULTIPLE COUNTERPARTS. The parties may sign multiple
counterparts of this Indenture. Each signed counterpart shall be deemed an
original, but all of them together represent the same agreement.

Section 12.11. SEPARABILITY. In case any provision in this Indenture or
in the Notes shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.

Section 12.12. TABLE OF CONTENTS, HEADINGS, ETC. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not to be
considered a part hereof and shall in no way modify or restrict any of the terms
or provisions hereof.

Section 12.13. SUBMISSION TO JURISDICTION; APPOINTMENT OF AGENT FOR
SERVICE OF PROCESS. Each party hereto irrevocably and unconditionally agrees
(a) to be subject to the jurisdiction of the courts of the State of Delaware and
of the federal courts sitting in the State of Delaware, and (b)(1) to the extent
that such party is not otherwise subject to service of process in the State of
Delaware, to appoint and maintain an agent in the State of Delaware as such
party's agent for acceptance of legal process, and (2) that service of process
may also be made on such party by prepaid certified mail with a proof of mailing
receipt validated by the United States Postal Service constituting evidence of
valid service, and that service made pursuant to (b)(1) or (2) above shall have
the same legal force and effect as if served upon such party personally within
the State of Delaware. For purposes of implementing the parties' agreement to
appoint and maintain an agent for service of process in the State of Delaware,
each such party does hereby appoint ______________________________, as such
agent.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of
_________________, 1998.

AMERICA FIRST REAL ESTATE INVESTMENT
COMPANY, INC.

By
---------------------------------
Paul L. Abbott, President

[SEAL]

Attest:
------------------------
Secretary

as Trustee
---------------------------

By
---------------------------------
[SEAL]

Attest:
------------------------

<PAGE>

EXHIBIT A

[FACE OF NOTE]

Number $
-------------- -----------------

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

VARIABLE RATE SENIOR NOTE due ________, 2006

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC., a Delaware corporation
(the "Company"), promises to pay to ________________________ or registered
assigns the Principal sum of __________ Dollars on ________, 2006.

Interest Payment Date: January 15
Record Date: December 31

Additional provisions of this Note are set forth on the reverse side of
this Note. All capitalized terms not otherwise defined herein shall have the
definitions set forth in the Indenture dated as of __________, 1998 (the
"Indenture"), between the Company and ____________________ as trustee (the
"Trustee").

Dated: AMERICA FIRST REAL ESTATE INVESTMENT
------------------ COMPANY, INC.

By
[SEAL] ---------------------------------
, President
--------------------

By
---------------------------------
,Secretary
--------------------

Certificate of Authentication:

- ----------------------------
as Trustee, certifies that
this is one of the Notes
referred to in the Note.

- ----------------------------
Authorized Signature

A-1

<PAGE>

[REVERSE SIDE]

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

VARIABLE RATE SENIOR NOTE due ________, 2006

1. INTEREST. America First Real Estate Investment Company, Inc., a
Delaware corporation (the "Company"), promises to pay interest on the Principal
amount of this Note at the Applicable Variable Rate, annually on the fifteenth
day of each January of each year, commencing on January 15, 1999, until the
Principal amount of this Note has been fully paid or provided for pursuant to
the Indenture, or if such date is not a Business Day, then the first Business
Day thereafter. The Applicable Variable Rate shall be ______% during the
Initial Rate Period, and thereafter shall be, for each subsequent Interest Rate
Period, a rate per annum equal to 120% of the Applicable Federal Rate for debt
instruments with a term of not over three years, which interest rate shall be
determined by the Trustee on each Interest Determination Date. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of first issuance of the Notes under
the Indenture; provided that, if there is no existing Default in the payment of
interest, and if this Note is authenticated between a Record Date referred to on
the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such Interest Payment Date. The interest rate applicable to any
Interest Rate Period, determined on the immediately preceding Interest
Determination Date shall become effective on the Interest Payment Date, which is
the first day of such Interest Rate Period. Interest shall be computed on the
basis of a 360-day year for the actual number of days elapsed.

2. METHOD OF PAYMENT. The Company will pay interest on this Note (except
Defaulted interest) to the Person who is the registered Holder of this Note as
listed on the Notes Register maintained by the Registrar, at the close of
business on the Record Date next preceding the Interest Payment Date. The
Holder must surrender this Note to the Paying Agent to collect payment of
Principal. Payment of Principal of and interest on the Notes will be made in
money of the United States that at the time of payment is legal tender for
payment of public and private debts. Interest will be paid by means of mailing
a check to the Holder's registered address as listed on the Notes Register;
provided, that Holders of Notes having $__________ or more in aggregate
outstanding Principal amount of Notes may elect to have payments of interest on
the Notes made by wire transfer by providing to the Trustee a notice, together
with wire transfer instructions, in form acceptable to the Trustee.

3. PAYING AGENT AND REGISTRAR. Initially, the Trustee will act as Paying
Agent and Registrar. The Company may change any Paying Agent or Registrar
without notice to the Noteholders. The Company or any of its Subsidiaries may
act as Paying Agent or Registrar.

A-2

<PAGE>

4. INDENTURE, LIMITATIONS. The Company issued this Note under the
Indenture. The terms of this Note include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture.
This Note is subject to all such terms, and the Holder of this Note is referred
to the Indenture and said Trust Indenture Act for a statement of them. The
Notes are unsecured obligations of the Company limited to $__________ aggregate
Principal amount. Promissory Notes of the Company are also being issued
pursuant to the Indenture, in a Principal amount of $__________. Such
Promissory Notes are being issued on a parity with the Notes.

5. OPTIONAL REDEMPTION. The Notes may be redeemed in whole or in part,
at any time, or from time to time, at the option of the Company, at a price
equal to the Principal amount thereof plus accrued and unpaid interest to the
date fixed for redemption.

6. MANDATORY REDEMPTION. The Company shall utilize 80% of any Net
Proceeds of any Sale or Refinancing of Designated Assets, occurring at any time
after the Transaction, to redeem: (a) first, Promissory Notes by lot, to the
extent of such Net Proceeds and (b) second, Notes by lot, to the extent of such
Net Proceeds; provided, that such Net Proceeds of any Sale or Refinancing of
Designated Assets shall be accumulated by the Trustee in a segregated trust
account until the amount therein is at least $5,000,000 before calling
Promissory Notes and/or Notes for redemption. The Company shall fix a
Redemption Date pursuant to the Indenture which is no later than 90 days
following receipt of such net proceeds or the accumulation of $5,000,000, as the
case may be.

Such mandatory redemption is not at the discretion of the Company or of the
Holders of the Promissory Notes or the Notes.

7. NOTICE OF REDEMPTION. Notice of redemption will be mailed by
first-class mail at least 30 days but not more than 60 days before a redemption
date to each Holder of Notes to be redeemed at the Holder's registered address.
On and after the Redemption Date, interest ceases to accrue on Notes or portions
of them called for redemption.

8. SENIOR DEBT. The indebtedness evidenced by the Notes is on a par
with, and part of, the Senior Indebtedness of the Company, as defined in the
Indenture.

9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples thereof. A
Holder may register the transfer of or exchange Notes in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay any taxes or other
governmental charges that may be imposed by law or permitted by the Indenture.

10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated
as the owner of it for all purposes.

A-3

<PAGE>

11. UNCLAIMED MONEY. If money for the payment of Principal or interest
remains unclaimed for two years, the Trustee or Paying Agent will pay the money
back to the Company at its request. After that, Holders entitled to money must
look to the Company for payment.

12. AMENDMENT, SUPPLEMENT, WAIVER. Subject to certain exceptions, the
Indenture may be amended or supplemented with the consent of the Holders of a
majority in Principal amount of the Notes and Promissory Notes then Outstanding,
and any existing Default or compliance with any provision may be waived in a
particular instance with the consent of the Holders of a majority in Principal
amount of the Notes and Promissory Notes then Outstanding. Without the consent
of or notice to any Noteholder, the Company and the Trustee may amend or
supplement the Indenture to, among other things, provide for uncertificated
Notes in addition to or in place of certificated Notes, to cure any ambiguity,
defect or inconsistency or make any other change that does not adversely affect
the rights of any Noteholder.

13. SUCCESSOR COMPANY. When a successor Company assumes all the
obligations of its predecessor Company under the Notes, the Promissory Notes and
the Indenture, the predecessor Company will be released from those obligations.

14. DEFAULTS AND REMEDIES. An Event of Default is defined in the
Indenture generally as: Default for 30 days in payment of interest on the Notes
or the Promissory Notes; Default in payment of Principal on them; failure by the
Company for 30 days after notice to it to comply with any of its other
agreements in the Indenture or the Notes or the Promissory Notes; certain events
of bankruptcy or insolvency of the Company or any of its Subsidiaries; and
certain Defaults on other indebtedness. If an Event of Default (other than as a
result of certain events of bankruptcy or insolvency) occurs and is continuing,
the Trustee or the Holders of at least 25% in Principal amount of the Notes and
Promissory Notes then Outstanding may declare all unpaid Principal of and
accrued interest to the date of acceleration on the Notes and Promissory Notes
then Outstanding to be due and payable immediately, all as and to the extent
provided in the Indenture. If an Event of Default occurs as a result of certain
events of bankruptcy or insolvency, all unpaid Principal of and accrued interest
on the Notes and Promissory Notes then Outstanding shall become due and payable
immediately without any declaration or other act on the part of the Trustee or
any Noteholder, all as and to the extent provided in the Indenture. Noteholders
may not enforce the Indenture or the Notes except as provided in the Indenture.
The Trustee may require indemnity satisfactory to it before it takes action to
enforce the agreements in the Indenture or the Notes. Subject to certain
limitations, Holders of a majority in Principal amount of the Notes and
Promissory Notes then Outstanding may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from Noteholders notice of any
continuing Default (except a Default in payment of Principal or interest) if it
determines that withholding notice is in their interests.

15. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from and perform services
for the Company or an Affiliate of the Company, and may otherwise deal with the
Company or an Affiliate of the Company, as if it were not Trustee.

A-4

<PAGE>

16. NO RECOURSE AGAINST OTHERS. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Notes, the Promissory Notes or the
Indenture or for any claim based on, or in respect or by reason of, such
obligations or their creation. The holder of this Note by accepting this Note
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of this Note.

17. DISCHARGE PRIOR TO MATURITY. If the Company deposits with the Trustee
or Paying Agent within 10 days of the payment date, money or U.S. Government
Obligations sufficient to pay the Principal of and interest on the Notes to
maturity, the Company will be discharged from the Indenture except for certain
Sections thereof.

18. AUTHENTICATION. This Note shall not be valid until the Trustee or an
authenticating agent signs the certificate of authentication on the other side
of this Note.

19. ABBREVIATIONS AND DEFINITIONS. Customary abbreviations may be used in
the name of a Noteholder or an assignee, such as: TEN COM (=tenants in common),
TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of
survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A
(=Uniform Gifts to Minors Act).

20. INDENTURE TO CONTROL. In the case of any conflict between the
provisions of this Note and the Indenture, the provisions of the Indenture shall
control.

The Company will furnish to any Noteholder, upon written request and
without charge, a copy of the Indenture. Requests may be made to: America First
Real Estate Investment Company, Inc., __________________ Attention: Secretary.

A-5

<PAGE>

FORM OF ASSIGNMENT

To assign this Note, fill in the form below:

I or we assign and transfer this Note to
----------------------------------------

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

- --------------------------------------------------------------------------------
(Print or type name, address, zip code and social security or other identifying
number of assignee)

and irrevocably appoint(s)
------------------------------------------------------
(agent)

to transfer this Note on the books of the Company. The agent may substitute
another to act for him.

Dated: Signed:
-------------- -------------------------------------

--------------------------------------------
(Sign exactly as name appears on the other
side of this Note)

A-6
<PAGE>

EXHIBIT B

[FACE OF PROMISSORY NOTE]

Number $
-------------- -----------------

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

PROMISSORY NOTE due ________, 2006

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC., a Delaware corporation
(the "Company"), promises to pay to ______________________ or registered assigns
the Principal sum of ________________ Dollars on ________, 2006.

Interest Payment Date: January 15
Record Date: December 31

Additional provisions of this Promissory Note are set forth on the reverse
side of this Promissory Note. All capitalized terms not otherwise defined
herein shall have the definitions set forth in the Indenture dated as of
______________, 1998 (the "Indenture"), between the Company and _______________
as trustee (the "Trustee").

Dated: AMERICA FIRST REAL ESTATE INVESTMENT
------------------ COMPANY, INC.

By
[SEAL] ---------------------------------
President

By
---------------------------------
Secretary

Certificate of Authentication:

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

as Trustee, certifies that
this is one of the Promissory Notes
referred to in the Promissory Note.

- ----------------------------
Authorized Signature

B-1
<PAGE>

[REVERSE SIDE]

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

PROMISSORY NOTE due ________, 2006

1. INTEREST. America First Real Estate Investment Company, Inc. , a
Delaware corporation (the "Company"), promises to pay interest on the Principal
amount of this Promissory Note at the Applicable Variable Rate, annually on the
fifteenth day of each January of each year, commencing on January 15, 1999,
until the Principal amount of this Promissory Note has been fully paid or
provided for pursuant to the Indenture, or if such date is not a Business Day,
then the first Business Day thereafter. The Applicable Variable Rate shall be
______% during the Initial Rate Period, and thereafter shall be, for each
subsequent Interest Rate Period, a rate per annum equal to 120% of the
Applicable Federal Rate for debt instruments with a term of not over three
years, which interest rate shall be determined by the Trustee on each Interest
Determination Date. Interest on the Promissory Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of first issuance of the Promissory Notes under the Indenture;
provided that, if there is no existing Default in the payment of interest, and
if this Promissory Note is authenticated between a Record Date referred to on
the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such Interest Payment Date. The interest rate applicable to any
Interest Rate Period, determined on the immediately preceding Interest
Determination Date shall become effective on the Interest Payment Date, which is
the first day of such Interest Rate Period. Interest shall be computed on the
basis of a 360-day year for the actual number of days elapsed.

2. METHOD OF PAYMENT. The Company will pay interest on this Promissory
Note (except Defaulted interest) to the Person who is the registered Holder of
this Promissory Note as listed on the Notes Register maintained by the
Registrar, at the close of business on the Record Date next preceding the
Interest Payment Date. The Holder must surrender this Promissory Note to the
Paying Agent to collect payment of Principal. Payment of Principal of and
interest on the Promissory Notes will be made in money of the United States that
at the time of payment is legal tender for payment of public and private debts.
Interest will be paid by means of mailing a check to the Holder's registered
address as listed on the Notes Register.

3. PAYING AGENT AND REGISTRAR. Initially, the Trustee will act as Paying
Agent and Registrar. The Company may change any Paying Agent or Registrar
without notice to the Holders of the Promissory Notes. The Company or any of
its Subsidiaries may act as Paying Agent or Registrar.

4. INDENTURE, LIMITATIONS. The Company issued this Promissory Note under
the Indenture. The terms of this Promissory Note include those stated in the
Indenture and those

B-2
<PAGE>

made part of the Indenture by reference to the Trust Indenture Act of 1939 (15
U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture. This
Promissory Note is subject to all such terms, and the Holder of this Promissory
Note is referred to the Indenture and said Trust Indenture Act for a statement
of them. The Promissory Notes are unsecured obligations of the Company limited
to $__________ aggregate Principal amount. Notes of the Company are also being
issued pursuant to the Indenture, in a Principal amount of $__________. Such
Notes are also unsecured obligations of the Company, and are therefore pari
passu with the Promissory Notes.

5. OPTIONAL REDEMPTION. The Promissory Notes may be redeemed in whole or
in part, at any time, or from time to time, at the option of the Company, at a
price equal to the Principal amount thereof plus accrued and unpaid interest to
the date fixed for redemption.

6. MANDATORY REDEMPTION. The Company shall utilize 80% of any Net
Proceeds of any Sale or Refinancing of Designated Assets, occurring at any time
after the Transaction, to redeem: (a) first, Promissory Notes by lot, to the
extent of such Net Proceeds, and (b) second, Notes by lot, to the extent of such
Net Proceeds; provided, that such Net Proceeds of any Sale or Refinancing of
Designated Assets shall be accumulated by the Trustee in a segregated trust
account until the amount therein is at least $5,000,000 before calling
Promissory Notes and/or Notes for redemption. The Company shall fix a
Redemption Date pursuant to the Indenture which is no later than 90 days
following receipt of such net proceeds or the accumulation of $5,000,000, as the
case may be.

Such mandatory redemption is not at the discretion of the Company or of the
Holders of the Promissory Notes or the Promissory Notes.

7. NOTICE OF REDEMPTION. Notice of redemption will be mailed by
first-class mail at least 30 days but not more than 60 days before a redemption
date to each Holder of Promissory Notes to be redeemed at the Holder's
registered address. On and after the Redemption Date, interest ceases to accrue
on Promissory Notes or portions of them called for redemption.

8. SENIOR DEBT. The indebtedness evidenced by the Promissory Notes is on
a par with, and part of, the Senior Indebtedness of the Company, as defined in
the Indenture.

9. DENOMINATIONS, TRANSFER, EXCHANGE. The Promissory Notes are in
registered form without coupons in denominations of such amounts less than
$1,000 as the Company shall direct. A Holder may register the transfer of or
exchange Promissory Notes in accordance with the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes or other governmental charges that may
be imposed by law or are permitted by the Indenture.

10. PERSONS DEEMED OWNERS. The registered Holder of a Promissory Note may
be treated as the owner of it for all purposes.

B-3
<PAGE>

12. AMENDMENT, SUPPLEMENT, WAIVER. Subject to certain exceptions, the
Indenture may be amended or supplemented with the consent of the Holders of a
majority in Principal amount of the Promissory Notes and Promissory Notes then
Outstanding, and any existing Default or compliance with any provision may be
waived in a particular instance with the consent of the Holders of a majority in
Principal amount of the Promissory Notes and Promissory Notes then Outstanding.
Without the consent of or notice to any Promissory Noteholder, the Company and
the Trustee may amend or supplement the Indenture to, among other things,
provide for uncertificated Promissory Notes in addition to or in place of
certificated Promissory Notes, to cure any ambiguity, defect or inconsistency or
make any other change that does not adversely affect the rights of any
Promissory Noteholder.

13. SUCCESSOR COMPANY. When a successor Company assumes all the
obligations of its predecessor Company under the Promissory Notes, the
Promissory Notes and the Indenture, the predecessor Company will be released
from those obligations.

14. DEFAULTS AND REMEDIES. An Event of Default is defined in the
Indenture generally as: Default for 30 days in payment of interest on the
Promissory Notes or the Promissory Notes; Default in payment of Principal on
them; failure by the Company for 30 days after notice to it to comply with any
of its other agreements in the Indenture or the Promissory Notes or the
Promissory Notes; certain events of bankruptcy or insolvency of the Company or
any of its Subsidiaries; and certain Defaults on other indebtedness. If an
Event of Default (other than as a result of certain events of bankruptcy or
insolvency) occurs and is continuing, the Trustee or the Holders of at least 25%
in Principal amount of the Promissory Notes and the Promissory Notes then
Outstanding may declare all unpaid Principal of and accrued interest to the date
of acceleration on the Promissory Notes and the Promissory Notes then
Outstanding to be due and payable immediately, all as and to the extent provided
in the Indenture. If an Event of Default occurs as a result of certain events
of bankruptcy or insolvency, all unpaid Principal of and accrued interest on the
Promissory Notes and the Promissory Notes then Outstanding shall become due and
payable immediately without any declaration or other act on the part of the
Trustee or any Promissory Noteholder, all as and to the extent provided in the
Indenture. Noteholders may not enforce the Indenture or the Promissory Notes
except as provided in the Indenture. The Trustee may require indemnity
satisfactory to it before it takes action to enforce the agreements in the
Indenture or the Promissory Notes. Subject to certain limitations, Holders of a
majority in Principal amount of the Promissory Notes and the Promissory Notes
then Outstanding may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Noteholders notice of any continuing Default
(except a Default in payment of Principal or interest) if it determines that
withholding notice is in their interests.

15. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from and perform services
for the Company or an

B-4
<PAGE>

Affiliate of the Company, and may otherwise deal with the Company or an
Affiliate of the Company, as if it were not Trustee.

16. NO RECOURSE AGAINST OTHERS. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Notes, the Promissory Notes or the
Indenture or for any claim based on, or in respect or by reason of, such
obligations or their creation. The holder of this Promissory Note by accepting
this Promissory Note waives and releases all such liability. The waiver and
release are part of the consideration for the issue of this Promissory Note.

17. DISCHARGE PRIOR TO MATURITY. If the Company deposits with the Trustee
or Paying Agent within 10 days of the payment date, money or U.S. Government
Obligations sufficient to pay the Principal of and interest on the Promissory
Notes to maturity, the Company will be discharged from the Indenture except for
certain Sections thereof.

18. AUTHENTICATION. This Promissory Note shall not be valid until the
Trustee or an authenticating agent signs the certificate of authentication on
the other side of this Promissory Note.

19. ABBREVIATIONS AND DEFINITIONS. Customary abbreviations may be used in
the name of a Promissory Noteholder or an assignee, such as: TEN COM (=tenants
in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with
right of survivorship and not as tenants in common), CUST (=Custodian), and
U/G/M/A (=Uniform Gifts to Minors Act).

20. INDENTURE TO CONTROL. In the case of any conflict between the
provisions of this Promissory Note and the Indenture, the provisions of the
Indenture shall control.

The Company will furnish to any Promissory Noteholder, upon written request
and without charge, a copy of the Indenture. Requests may be made to: America
First Real Estate Investment Company, Inc., _____________________________
Attention: Secretary.

B-5
<PAGE>

FORM OF ASSIGNMENT

To assign this Promissory Note, fill in the form below:

I or we assign and transfer this Promissory Note to
----------------------------

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

- --------------------------------------------------------------------------------
(Print or type name, address, zip code and social security or other identifying
number of assignee)

and irrevocably appoint(s)
------------------------------------------------------
(agent)

to transfer this Promissory Note on the books of the Company. The agent may
substitute another to act for him.

Dated: Signed:
------------------- --------------------------------------

---------------------------------------------
(Sign exactly as name appears on the other
side of this Promissory Note)

B-6

<PAGE>

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED AS TO TRANSFER AS
STATED ON THE REVERSE SIDE HEREOF

Incorporated under the laws
of the State of Delaware

NUMBER SHARES

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.

Shares are with $.001 par value

This Certifies that ________________________________________ is the registered
holder of __________________________________________________________ Shares
FULLY PAID AND NON-ASSESSABLE
of common stock of America First Real Estate Investment Company, Inc.
transferable only on the books of the Corporation by the holder hereof
in person or by Attorney upon surrender of this Certificate properly
endorsed.

In Witness Whereof, the said Corporation has caused this
Certificate to be signed by its duly authorized officers and its
Corporate Seal to be hereunto affixed this ____ day of _____ A.D. ___

- ---------------------------------- -----------------------------------
SECRETARY PRESIDENT

<PAGE>

For Value Received,_______hereby sell, assign and transfer unto
________________________ Shares represented by the within Certificate, and do
hereby irrevocably constitute and appoint ________________________ Attorney to
transfer the said Shares on the books of the within named Corporation with full
power of substitution in the premises.
Dated ___________________________
In presence of _______________________________

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

<PAGE>

EXHIBIT 4.04

Form of Variable Rate Senior Notes due _______, 2006 and Promissory Notes of
the Company included in Exhibit 4.02

<PAGE>
FORM OF
ADVISORY AGREEMENT

THIS ADVISORY AGREEMENT is entered into as of ______________, 1998 (the
"Effective Date") by and between AMERICA FIRST REAL ESTATE INVESTMENT COMPANY,
INC., a Delaware corporation (the "Company"), and AMERICA FIRST REAL ESTATE
ADVISORS LLC, a Delaware limited liability company (the "Advisor").

WHEREAS, the Company is a newly-formed corporation;

WHEREAS, the Company, directly or through its Subsidiaries, invests in real
estate operating companies, under-performing commercial real estate properties,
and other real estate related investments meeting the investment criteria
established from time to time by its Board of Directors; and

WHEREAS, the Company desires to retain the Advisor to manage the operations
and investments of the Company and its Subsidiaries and to perform
administrative services for the Company and its Subsidiaries, each in the manner
and on the terms set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto agree as follows:

Section 1. DEFINITIONS. Capitalized terms used herein shall have the
respective meanings assigned them in this Section 1:

"ADJUSTED ORIGINAL ASSET VALUE" means, with respect to each individual
Original Asset owned by the Company, (i) for each Equity Interest in an
Operating Partnership, the amount set forth in Exhibit A which represents an
equity interest in an Operating Partnership reduced to zero upon the sale or
redesignation as a New Asset of such asset or (ii) for each GNMA as set forth in
Exhibit A, the aggregate outstanding principal amount of such GNMA decreased by
(A) borrowings which are directly or indirectly secured by such GNMA and (B)
principal repayments with respect to such GNMA.

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"ADVISOR" means America First Real Estate Advisors LLC, a Delaware limited
liability company.

"AGREEMENT" means this Advisory Agreement between the Company and the
Advisor, as amended from time to time.

"BEGINNING NEW ASSET VALUE" means with respect to each individual New Asset
owned by the Company, (a) with respect to any asset directly owned by the
Company, the total consideration paid by the Company for such asset, including
all payments made in respect of equity and all debt incurred or assumed with
respect to such asset, plus any costs related to the acquisition or financing of
such asset or (b) with respect to any asset indirectly owned by the Company
through an interest in a joint venture, partnership or similar entity, the total
consideration paid by the Company for such interest, including all payments in
respect of such interest and all debt incurred, assumed or allocated with
respect to such interest, plus any costs related to the acquisition or financing
of such interest.

"BOARD OF DIRECTORS" means the board of directors of the Company.

"CASH" means cash and cash equivalents and amounts invested on a short-term
basis by the Company.

"COMMON STOCK" means the common stock, par value $0.001 per share, of the
Company.

"COMPANY" means America First Real Estate Investment Company, Inc., a
Delaware corporation.

"EFFECTIVE DATE" means the effective date of the Merger under Delaware law.

"GNMA" or "GNMAS" means the mortgage-backed securities listed on Exhibit A
to this Agreement that are guaranteed as to principal and interest by the United
States Government

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National Mortgage Association or first mortgage loans insured by the Federal
Housing Administration.

"GOVERNING INSTRUMENTS" means the articles of incorporation and bylaws, in
the case of a corporation, the limited liability company operating agreement, in
the case of a limited liability company, and the partnership agreement, in the
case of a partnership.

"INDEPENDENT DIRECTORS" means those members of the Board of Directors of
the Company who are neither executive officers of the Company nor executive
officers or directors of the Advisor.

"MERGER" means the merger of Capital Source, L.P., and Capital Source II,
L.P.-A, a Delaware limited partnership, with and into the Company pursuant to
the terms and conditions described in the Company's Prospectus/Consent
Solicitation Statement dated __________, 1998.

"NEW ASSETS" means any and all assets acquired by the Company after the
Effective Date and prior to the termination of this Agreement, and any Original
Asset designated by the Board of Directors as a redevelopment project.

"OPERATING PARTNERSHIPS" means the limited partnerships set forth in
Exhibit A to this Agreement.

"ORIGINAL ASSETS" means the assets contributed to the Company on the
Effective Date as set forth in Exhibit A, excluding any Original Asset that is
subsequently classified as a New Asset because of its classification as a
redevelopment project.

"PERSON" or "PERSONS" means an individual, partnership, corporation, trust
or other entity.

"RESTRICTED STOCK" means Common Stock issued to the Advisor for the
Incentive Fee on New Assets, which contain the restrictions described in
Section 7 hereof.

"RETURNS OF CAPITAL" means net proceeds, net of all closing costs
(including without limitation any real estate or selling commissions) but
without deduction for any applicable mortgage indebtedness, from any partial
sale or a whole sale of any asset, and principal repayments on debt obligations;
provided, however, this amount shall not be greater than the Adjusted New Asset
Value with respect to such assets.

"SEC" means the Securities and Exchange Commission.

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

"SUBSIDIARY" means any corporation, whether now existing or in the future
established, of which the Company, directly or indirectly, owns more than 50% of
the outstanding voting

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securities of any class or classes, any business trust, partnership or similar
non-corporate form in which the Company, directly or indirectly, owns more than
50% of the beneficial interests.

Section 2. GENERAL DUTIES OF THE ADVISOR. Subject to the supervision of
the Board of Directors, the Advisor shall provide services to the Company and,
to the extent directed by the Board of Directors, shall provide similar services
to any Subsidiary of the Company, as follows:

(a) serve as the Company's consultant with respect to the formulation
of investment criteria and preparation of policy guidelines by the Board of
Directors;

(b) represent the Company in connection with the acquisition and
disposition of assets;

(c) represent the Company in monitoring the performance of its assets
and recommending strategies to improve such performance;

(d) furnish reports and statistical and economic research to the
Company regarding the investment activities and results of operations of
the Company and the services performed by the Advisor for the Company;

(e) provide the executive and administrative personnel, office space
and services required in rendering services to the Company;

(f) administer the day-to-day operations of the Company and perform
and supervise the performance of such administrative functions necessary in
the management of the Company as may be agreed upon by the Advisor and the
Board of Directors, including collection of revenues and payment of the
expenses, debts and obligations and maintenance of appropriate computer
services to perform such administrative functions;

(g) communicate on behalf of the Company with the holders of equity
and debt securities of the Company as required to satisfy the reporting and
other requirements of any governmental or regulatory bodies or agencies and
maintain effective relations with such holders;

(h) counsel the Company in connection with policy decisions to be
made by the Board of Directors;

(i) upon request by, and in accordance with the directions of, the
Board of Directors, invest or reinvest any money of the Company;

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(j) qualify and cause the Company to qualify to do business in all
applicable jurisdictions;

(k) cause the Company to retain qualified accountants and tax experts
to assist in developing appropriate accounting procedures and testing
systems and conduct quarterly compliance reviews;

(l) maintain exemption from the Investment Company Act of 1940, as
amended;

(m) arrange for the preparation and timely filing of all reports
required to be filed by the Company under the Securities Exchange Act of
1934, as amended, and under any other applicable securities laws or
regulations;

(n) comply with and use its best efforts to cause the Company to
comply with all applicable laws; and

(o) as approved and directed by the Board of Directors, perform such
other services as may be required from time to time for management and
other activities relating to the assets of the Company and its Subsidiaries
as the Advisor shall deem appropriate under the circumstances.

Without limiting the supervision of the Advisor by the Board of Directors,
the Advisor shall not sell, lease or acquire any assets, shall not make any
capital improvements or renovations to assets or borrow money on behalf of the
Company unless and to the extent authorized by the Board of Directors, whether
authorized as part of a business plan or by separate authorization.

Notwithstanding anything to the contrary contained herein, the Company may
enter into separate agreements with the Advisor or affiliates for additional
services to be provided to the Company on terms and conditions to be negotiated
by the parties to such agreements. The fees to be paid by the Company for such
additional services will be negotiated and approved by the Independent Directors
on behalf of the Company.

Section 3. ADDITIONAL ACTIVITIES. Nothing herein shall prevent affiliates
or employees of the Advisor from engaging in other businesses or from rendering
services of any kind to any other person or entity, including investment in or
advisory service to others investing in any type of real estate investment,
including investments which meet the principal investment objectives of the
Company and its Subsidiaries. Directors, officers, employees and agents of the
Advisor or affiliates of the Advisor may serve as directors, officers,
employees, agents, nominees or signatories for the Company or any of its
Subsidiaries, to the extent permitted by its Governing Instruments, as from time
to time amended, or by any resolutions duly adopted by the Board of Directors
pursuant to the Company's Governing Instruments. When executing documents or

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otherwise acting in such capacities for the Company, such persons shall use
their respective titles in the Company.

Section 4. BANK ACCOUNTS. At the direction of the Board of Directors, the
Advisor may establish and maintain one or more bank accounts in the name of the
Company or any of its Subsidiaries, and may collect and deposit into any such
account or accounts, and disburse funds from any such account or accounts, under
such terms and conditions as the Board of Directors may approve; and the Advisor
shall from time to time render appropriate accounting of such collections and
payments to the Board of Directors and, upon request, to the auditors of the
Company or any of its Subsidiaries.

Section 5. RECORDS; CONFIDENTIALITY. The Advisor shall maintain
appropriate books of account and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any of its Subsidiaries at any
time during normal business hours. The Advisor shall keep confidential any and
all information it obtains from time to time in connection with the services it
renders under this Agreement and shall not disclose any portion thereof to
non-affiliated third parties except with the prior written consent of the
Company or any of its Subsidiaries.

Section 6. OBLIGATIONS OF ADVISOR.

(a) The Advisor shall require each seller or transferor of assets to
the Company to make such representations and warranties regarding such
assets as may, in the judgment of the Advisor, be necessary and
appropriate. In addition, the Advisor shall take such other action as it
deems necessary or appropriate with regard to the protection of the
Company's assets and other investments.

(b) The Advisor shall refrain from any action which, in its sole
judgment made in good faith, would violate any law, rule or regulation of
any governmental or regulatory body or agency having jurisdiction over the
Company or any such Subsidiary or which would otherwise not be permitted by
the Company's or any such Subsidiary's Governing Instruments. If the
Advisor is ordered to take any such action by the Board of Directors, the
Advisor shall promptly notify the Board of Directors of the Advisor's
judgment that such action would violate any such law, rule or regulation or
the Governing Instruments. Notwithstanding the foregoing, the Advisor, its
directors, officers, stockholders and employees shall not be liable to the
Company, any Subsidiary of the Company, the Independent Directors or the
Company's or any Subsidiary's stockholders for any act or omission by the
Advisor, its directors, officers, stockholders or employees except as
provided in Section 10 of this Agreement.

(c) The Advisor shall maintain a fidelity bond with a responsible
surety company in such amount as may be required by the Board of Directors
from time to time, covering all directors, officers, employees and agents
of the Advisor handling funds of the Company and any investment documents
or records pertaining to investments of

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the Company. Such bonds shall inure to the benefit of the Company in
respect to losses of any such property, and the premium for this bond is to
be at the expense of the Company.

(d) No later than December 15 of the year preceding the budget year,
the Advisor shall prepare and shall submit to the Board of Directors, an
annual budget and also a written business plan for such fiscal year of the
company in a form acceptable to the Board of Directors. Upon approval by
the Board of Directors, the Advisor shall be authorized to conduct the
business of the Company in accordance with the explicit provisions of the
business plan, including the borrowing, leasing, maintenance, capital
improvements, renovations and sales of assets as set forth in the business
plan. Any transaction or investment not explicitly provided in the
approved business plan shall require the prior approval of the Board of
Directors unless made pursuant to other authority expressly given to the
Advisor.

Section 7. COMPENSATION.

(a) The Company shall pay to the Advisor, for services rendered under
this Agreement, an Acquisition Fee which shall be payable each month in
arrears, commencing with the month in which the Effective Date occurs. For
purposes of this Agreement, the Acquisition Fee means an amount equal to 1%
of the increase in the Company's actual investment in all New Assets,
including any costs related to the acquisition or financing of New Assets
but excluding debt which is incurred or assumed in connection therewith.
The Acquisition Fee shall be calculated by the Advisor within 15 days after
the end of each month, and such calculation shall be promptly delivered to
the Company. The Company shall pay the fees payable pursuant to this
Section 7(a) for each month within 30 days after the end of each month.

(b) The Company shall pay to the Advisor, for services rendered under
this Agreement, an Asset Management Fee which shall be payable each month
(pro rated based on the number of days elapsed during any partial month) in
arrears, commencing with the month in which the Effective Date occurs. For
purposes of this Agreement, the Asset Management Fee means an amount equal
to .475%, on an annual basis, of the Company's Total Assets, calculated as
of the last day of each month. The Asset Management Fee shall be
calculated by the Advisor within 15 days after the end of each month, and
such calculation shall be promptly delivered to the Company. The Company
shall pay the fees payable pursuant to this Section 7(b) for each month
within 30 days after the end of each month.

(c) The Company shall pay the Advisor, for services rendered under
this Agreement, the Incentive Fee on New Assets, which shall be payable
annually in the form of Restricted Stock. For purposes of this Agreement,
the Incentive Fee on New Assets means 10% of any Capital Gain on New
Assets; provided, however, that the calculation of Capital Gain for
purposes of determining the Incentive Fee on New Assets

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shall be reduced by any Capital Loss incurred in the fiscal year for which
such fee is payable. The amount of such Restricted Stock to be issued to
the Advisor for purposes of this Section 7(c) shall be based on the average
closing price of the Common Stock for the 20 days preceding the last day of
the year for which the Incentive Fee on New Assets is payable. The Advisor
may not sell, transfer or otherwise dispose of the Restricted Stock issued
pursuant to this Section 7(c) until the earlier of: (i) the termination of
this Agreement as provided herein or (ii) five years following the issuance
of the Restricted Stock. Upon the termination of this Agreement without
cause, the Advisor shall be entitled to certain registration rights with
respect to the Restricted Stock as set forth in Section 17.

Section 8. EXPENSES OF THE COMPANY. The Company or any of its
Subsidiaries shall pay all of its expenses, including all costs associated with
third party services provided to it, and, subject to the provisions of Section 9
of this Agreement, shall reimburse the Advisor for documented expenses of the
Advisor incurred on its behalf.

Section 9. REIMBURSEMENT OF EXPENSES INCURRED BY THE ADVISOR. Subject to
the provisions of this Section 9, the Advisor shall pay all of the costs of
providing services to the Company, including personnel costs. In connection
with providing services to the Company, the Advisor shall be reimbursed by the
Company only for (i) rent, utilities, capital equipment and related expenses
associated with any office which is established and maintained by the Advisor
exclusively to provide services to the Company, (ii) expenses of third parties
which derive 25% or less of their gross revenues from providing services to the
Company, and (iii) travel expenses incurred by employees of the Advisor in
connection with travel at the request or on behalf of the Company; provided that
the Company's reimbursement of these expenses shall be limited to amounts for
them in the annual budget as approved by the Board of Directors, with any
subsequent changes approved by the Board of Directors. In addition, no
reimbursement shall be permitted for services for which the Advisor is entitled
to compensation by way of a separate fee.

Reimbursable expenses incurred by the Advisor on behalf of the Company
shall be reimbursed monthly to the Advisor within 30 days after the end of each
month. The Advisor shall prepare a statement documenting the expenses of the
Company and those incurred by the Advisor on behalf of the Company during each
month, and shall deliver such statement to the Company within 15 days after the
end of each month.

Section 10. LIMITS OF ADVISOR RESPONSIBILITY.

(a) The Advisor assumes no responsibility under this Agreement other
than to render the services called for hereunder in good faith and without
negligence, willful misconduct or breach of this Agreement, and shall not
be responsible for any action of the Board of Directors in following or
declining to follow any advice or recommendations of the Advisor, including
as set forth in Section 6(b) of this Agreement. The Advisor and its
directors, officers, stockholders and employees will not

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be liable to the Company, any of its Subsidiaries, the Independent
Directors or the Company's or its Subsidiary's stockholders for any acts or
omissions by the Advisor, its directors, officers, stockholders or
employees under or in connection with this Agreement, if the acts or
omissions were made in good faith and were not the result of negligence,
willful misconduct or breach of this Agreement by the Advisor or these
related parties. However, in no event will a director, officer,
stockholder or employee of the Advisor have any personal monetary liability
for any act or failure to act under this Agreement unless the liability
results from that person's bad faith, willful misconduct, gross negligence
or reckless disregard of that person's duties. The Company or its
Subsidiary shall reimburse, indemnify and hold harmless the Advisor and its
stockholders, directors, officers and employees of and from any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever (including, without limitation, reasonable attorneys'
fees) in respect of or arising from any acts or omissions of the Advisor or
its stockholders, directors, officers and employees made in good faith in
the performance of the Advisor's duties under this Agreement and, in the
case of the Advisor, not constituting negligence, willful misconduct or a
breach of this Agreement by the Advisor or, in the case of any stockholder,
director, officer or employee of the Advisor, not constituting bad faith,
willful misconduct, gross negligence or reckless disregard of that person's
duties.

(b) The Advisor shall reimburse, indemnify and hold harmless the
Company, any Subsidiary or any of their stockholders, directors, officers
and employees from any and all expenses, losses, damages, liabilities,
demands, charges and claims (including, without limitation, reasonable
attorneys' fees) arising out of any intentional misstatements of fact made
by the Advisor in connection with this Agreement and the services to be
rendered hereunder or arising out of acts or omissions by the Advisor not
in good faith or constituting negligence, willful misconduct or a breach of
this Agreement.

Section 11. NO JOINT VENTURE. The Company and the Advisor are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.

Section 12. TERM. This Agreement shall commence on the Effective Date.
Prior to the third annual anniversary of the Effective Date, this Agreement may
only be terminated by the Company for cause as provided in Section 13 of this
Agreement or by the Advisor for cause as provided in Section 15 of this
Agreement. After such third anniversary, this Agreement shall automatically
renew for successive one-year periods unless written notice of termination is
delivered 180 days prior to the expiration of the initial three-year term or any
successive annual term by the Company to the Advisor or the Advisor to the
Company.

Section 13. TERMINATION BY COMPANY FOR CAUSE. At the option of the
Company, this Agreement shall be and become terminated upon 60 days' written
notice of termination from the Board of Directors to the Advisor if any of the
following events shall occur:

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(a) if the Advisor shall materially breach any provision of this
Agreement and, after written notice of such breach, shall not cure such
breach within 30 days or such longer period as may be reasonably necessary
to cure such breach if the Advisor is diligently pursuing all reasonable
actions necessary to cure such breach, provided, however, in no event shall
such longer period be greater than 180 days after written notice of such
breach; or

(b) there is entered an order for relief or similar decree or order
with respect to the Advisor by a court having competent jurisdiction in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency
or other similar laws; or the Advisor (i) ceases or admits in writing its
inability to pay its debts as they become due and payable, or makes a
general assignment for the benefit of, or enters into any composition or
arrangement with, creditors, (ii) applies for or consents (by admission of
material allegations of a petition or otherwise) to the appointment of a
receiver, trustee, assignee, custodian, liquidator or sequestrator (or
other similar official) for itself or for any substantial part of its
assets or authorizes such an application or consent, (iii) authorizes or
files a voluntary petition in bankruptcy, or applies for or consents (by
admission of material allegations of a petition or otherwise) to the
application of any bankruptcy, reorganization, arrangement, readjustment of
debt, insolvency, dissolution, liquidation or other similar law of any
jurisdiction, or authorizes such application or consent, or (iv) permits or
suffers all or any substantial part of its assets to be sequestered or
attached by court order and the order remains undismissed for 30 days; or
proceedings seeking the appointment of a receiver, trustee, assignee,
custodian, liquidator or sequestrator (or other similar official) for the
Advisor or for any substantial part of its assets are commenced without
authorization, consent or application against the Advisor and continue
undismissed for 30 days; or proceedings to sequester or attach all or any
substantial part of the Advisor's assets are instituted against the Advisor
without authorization, consent and application and are approved as properly
instituted and remain undismissed for 30 days or result in adjudication of
bankruptcy or insolvency.

(d) If this Agreement is terminated by the Company for cause pursuant
to this Section 13, the Advisor shall be entitled to receive no additional
amounts from the Company.

If any of the events specified in this Section 13 shall occur, the Advisor shall
give prompt written notice thereof to the Board of Directors upon the happening
of such event.

Section 14. TERMINATION BY COMPANY WITHOUT CAUSE. The Company may
terminate this Agreement without cause at any time after the third annual
anniversary of the Effective Date by delivering 180 days prior written notice of
termination.

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(a) In the case of termination of this Agreement by the Company
without cause or a non-renewal of this Agreement by the Company, the
termination or non-renewal must be approved by a majority vote of the
Independent Directors or by a vote of the holders of a majority of the
outstanding shares of the Company's Common Stock.

(b) In the event this Agreement is terminated by the Company without
cause or this Agreement shall not be renewed by the Company, the Company
shall pay the Advisor a termination fee equal to the sum of: (i) the amount
of the Acquisition Fee and the Asset Management Fee for the previous
twelve-month period, and (ii) the fair value of any Incentive Fee on New
Assets that would be earned on any New Assets owned by the Company on the
date of the termination. The parties shall use their best efforts to reach
a mutual agreement with respect to the amount of the Incentive Fee on New
Assets for purposes of this Section 14. If the parties are unable to agree
upon such amount within 30 days following the notice of termination, the
amount shall be determined by an independent valuation. Such valuation
shall be conducted by a valuation firm mutually agreed upon by the parties
and the costs of such valuation shall be borne equally by the parties. If
the parties are unable to agree upon such valuation firm within 60 days
following notice of termination, then each party shall as soon as
reasonably practicable, but in no event more than 75 days following notice
of termination, choose an independent valuation firm to conduct a
valuation. In such event, (x) the fee shall be deemed to be the average of
the valuations as conducted by each party's chosen valuation firm and (y)
each party shall pay the costs of its valuation firm so chosen. If one
party is unable to select a valuation firm within the time specified
herein, the valuation shall be conducted by the valuation firm chosen by
the other party. Any valuation conducted hereunder shall be performed no
later than 45 days following selection of the valuation firm or firms. Any
amounts due under this Section 14(b) shall be due and payable on the
effective date of the termination.

Section 15. TERMINATION BY ADVISOR FOR CAUSE. At the option of the
Advisor, this Agreement shall be and become terminated upon 60 days' written
notice of termination from the Advisor to the Company if any of the following
shall occur:

(a) if the Company shall materially breach any provision of this
Agreement including, without limitation, the failure to pay to the Advisor
any fee or expense when due and payable, and, after written notice of such
breach, shall not cure such breach (i) within 10 days for any monetary
default or (ii) within 30 days for all other defaults or such longer period
as may be reasonably necessary to cure such breach if the Company is
diligently pursuing all reasonable actions necessary to cure such breach,
provided, however, in no event shall such longer period be greater than 180
days after written notice of such breach;

(b) there is entered an order for relief or similar decree or order
with respect to the Company by a court having competent jurisdiction in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable

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federal or state bankruptcy, insolvency or other similar laws; or the
Company (i) ceases or admits in writing its inability to pay its debts as
they become due and payable, or makes a general assignment for the benefit
of, or enters into any composition or arrangement with, creditors,
(ii) applies for or consents (by admission of material allegations of a
petition or otherwise) to the appointment of a receiver, trustee, assignee,
custodian, liquidator or sequestrator (or other similar official) for
itself or for any substantial part of its assets or authorizes such an
application or consent, (iii) authorizes or files a voluntary petition in
bankruptcy, or applies for or consents (by admission of material
allegations of a petition or otherwise) to the application of any
bankruptcy, reorganization, arrangement, readjustment of debt, insolvency,
dissolution, liquidation or other similar law of any jurisdiction, or
authorizes such application or consent, or (iv) permits or suffers all or
any substantial part of its assets to be sequestered or attached by court
order and the order remains undismissed for 30 days; or proceedings seeking
the appointment of a receiver, trustee, assignee, custodian, liquidator or
sequestrator (or other similar official) for the Company or for any
substantial part of its assets are commenced without authorization, consent
or application against the Company and continue undismissed for 30 days; or
proceedings to sequester or attach all or any substantial part of the
Company's assets are instituted against the Company without authorization,
consent and application and are approved as properly instituted and remain
undismissed for 30 days or result in adjudication of bankruptcy or
insolvency;

(c) fraud or willful misconduct by the Company in connection with the
business of the Company, other than as a result of acts or omissions caused
by employees of the Advisor.

(d) in the case of termination of this Agreement by the Advisor with
cause, the Company shall pay the Advisor a termination fee equal to the sum
of: (i) the amount of the Acquisition Fee and the Asset Management Fee for
the previous twelve-month period, and (ii) the fair value of any Incentive
Fee on New Assets that would be earned on any New Assets owned by the
Company on the date of the termination. The parties shall use their best
efforts to reach a mutual agreement with respect to the amount of the
Incentive Fee on New Assets for purposes of this Section 15. If the
parties are unable to agree upon such amount within 30 days following the
notice of termination, the amount shall be determined in the manner set
forth in Section 14(b) above. Any amounts due under this Section 15 shall
be due and payable on the effective date of the termination.

If any of the events specified in this Section 15 shall occur, the Advisor shall
give prompt written notice thereof to the Board of Directors upon the happening
of such event.

Section 16. TERMINATION BY ADVISOR WITHOUT CAUSE. The Advisor may
terminate this Agreement without cause at any time after the third annual
anniversary of the Effective Date by delivering 180 days prior written notice of
termination. In the event this Agreement is terminated by the Advisor without
cause, the Advisor shall be entitled to receive twenty-five

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percent of the fair value of any Incentive Fee on New Assets that would be
earned on any New Asset owned by the Company on the date of termination. All
amounts payable to the Advisor under this Section 16 shall be paid on the third
annual anniversary of the date of termination of the Advisor, provided, however,
that if any new Asset is sold during such three-year period, the Advisor shall
be paid, at the time of sale, twenty-five percent of the Incentive Fee on New
Assets which would have been payable to the Advisor, pursuant to the terms of
this Agreement, until the Advisor receives the total amount payable under this
Section 16. The parties shall use their best efforts to reach a mutual
agreement with respect to such fee. If the parties are unable to agree upon the
fee within 30 days following the notice of termination, the amount shall be
determined in the manner set forth in Section 14(b) above.

Section 17. REGISTRATION RIGHTS. In the event of a termination of this
Agreement, any Restricted Stock held by the Advisor shall become freely
transferable, subject to any restrictions on transfer under the Securities Act
of 1933, as amended (the "Securities Act"). In such event, the Advisor shall be
entitled to the following registration rights with respect to the Restricted
Stock:

(a) DEMAND FOR REGISTRATION. The Advisor may, at its option, at any
time after termination, require the Company to use its reasonable efforts
to effect a registration of Restricted Securities under the Securities Act
(the "Demand Registration"); PROVIDED, however, that (i) the Company shall
not be required to effect such Demand Registration unless the Company is
requested to do so with respect to Restricted Securities having a market
value of not less than $1,000,000; (ii) at its option, the Company shall
not be required to effect such registration prior to three (3) months
immediately following the date on which an underwritten public offering of
equity securities (pursuant to an effective registration statement under
the Securities Act) is commenced, if such public offering is commenced
prior to the date of a request for the Demand Registration; and (iii) the
Company shall not be required to use its reasonable efforts to effect a
registration of Restricted Securities under this Section 17(a) more than
two times or, if the Company is eligible to register the Restricted Stock
on Form S-3 (or any successor Form which incorporates by reference
information about the Company and its business) three times. If, after a
Demand Registration becomes effective, the offering of securities
thereunder is or becomes subject to any stop order, injunction or other
order or requirement of the Securities and Exchange Commission (the "SEC")
that prevents or limits the sale of securities thereunder for a period of
more than five (5) Business Days, then such Demand Registration shall be
deemed not to have been effected for purposes of this Section 17(a). If
the offering is underwritten, the underwriter must be reasonably acceptable
to the Company.

(b) PIGGY-BACK REGISTRATION. Each time the Company proposes to file
a registration statement under the Securities Act with respect to an
offering by the Company for its own account or for the account of any of
its securityholders of any class of equity security (except, (i) a
registration statement on Form S-4 or S-8 (or any substitute form that is
adopted by the Commission), (ii) a registration statement filed in

13
<PAGE>

connection with a dividend reinvestment plan, employee option plan or unit
investment trusts, or (iii) a registration statement filed in connection
with an exchange offer or offering of securities solely to the Company's
existing securityholders), and the form of registration statement to be
used permits the registration of Restricted Securities, then the Company
shall give written notice of such proposed filing to the Advisor as soon as
reasonably practicable (but in no event less than 20 days before the
anticipated filing date and no less than 30 days before the anticipated
effective date), and such notice shall offer the Advisor the opportunity to
register such Restricted Securities as the Advisor may request (which
request shall specify the Restricted Securities intended to be disposed of
by the Advisor and the intended method of distribution thereof) up to 20
days before the anticipated effective date (a "Piggy-Back Registration").
The Company shall cause the managing underwriter or underwriters of a
proposed underwritten offering to permit the Restricted Securities
requested to be included in a Piggy-Back Registration to be included on
substantially the same terms and conditions as any similar securities of
the Company or any other securityholder included therein and to permit the
sale or other disposition of such Restricted Securities in accordance with
the intended method of distribution thereof. The Advisor shall have the
right to withdraw its request for inclusion of its Restricted Securities in
any Registration Statement pursuant to this Section 17(b) by giving written
notice to the Company of such withdrawal no later than two Business Days
prior to the anticipated effective date. The Company may withdraw a
Piggy-Back Registration at any time prior to the time it becomes effective,
provided that the Company shall give prompt notice of such withdrawal to
the Advisor.

If the managing underwriter or underwriters of an underwritten
offering with respect to which Piggy-Back Registration has been requested
as provided herein shall have informed the Company, in writing, that in the
opinion of such underwriter or underwriters the total number of shares
which the Company, the Advisor and any other Persons participating in such
registration intend to include in such offering is such as to materially
and adversely affect the success of such offering (including without
limitation any material decrease in the proposed public offering price),
then the number of shares to be offered for the account of the Advisor and
all Persons (other than the Company) participating in such registration
shall be reduced or limited (to zero if necessary) pro rata in proportion
to the respective number of shares requested to be registered by such
Persons to the extent necessary to reduce the total number of shares
requested to be included in such offering to the number of shares, if any,
recommended by such managing underwriter or underwriters.

If the Company has determined to enter into an underwriting agreement
in connection therewith, all Restricted Securities to be included in such
Registration Statement shall be subject to such underwriting agreement, and
the Advisor may participate in such Registration only if it agrees to sell
its Restricted Securities on the basis provided for in such underwriting
arrangements approved by the Company and completes and/or executes all
reasonable and customary questionnaires, powers of

14
<PAGE>

attorney, indemnities, underwriting agreements and other reasonable
documents which must be executed under the terms of such underwriting
arrangements.

(i) Anything in this Agreement to the contrary
notwithstanding, if at any time following termination of this
Agreement, the Company shall obtain an opinion of legal counsel (which
shall not be the Company's internal counsel), which opinion shall be
addressed to the Company and the Advisor and shall be reasonably
satisfactory to the Company and the Advisor and its counsel, that the
Registered Stock may be publicly offered in a single transaction
exempt from the registration and prospectus delivery requirements of
the Securities Act so that all transfer restrictions and restrictive
legends with respect thereto are or may be removed immediately prior
to such sale, the Company shall no longer be obligated to register the
Registered Stock.

(ii) Anything in this Agreement to the contrary
notwithstanding, the Company shall be entitled to postpone for a
period of time in its reasonable judgment, but not to exceed 120 days
(a "Blackout Period"), the filing of any registration statement in
accordance with this Section, and the preparation and/or filing of any
prospectus or any amendments or supplements to any registration
statement or prospectus, if the Company reasonably determines that any
such filing or the offering of any Registered Stock would (A) impede,
delay or otherwise interfere with any financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction involving the Company or any of its affiliates, or
(B) require disclosure of material information which, if disclosed at
that time, would be harmful to the interests of the Company and its
stockholders; provided, however, that, in the Blackout Period pursuant
to (B) above, the Blackout Period shall earlier terminate upon public
disclosure by the Company or public admission by the Company of such
material information. Upon notice by the Company to the Advisor of
such determination, the Advisor covenants that it shall (x) keep the
fact of any such notice strictly confidential, (y) promptly halt any
offer, sale, trading or transfer by it or any of its affiliates of any
of the Registered Stock for the duration of the Blackout Period set
forth in such notice (or until earlier terminated in writing by the
Company) and (z) promptly halt any use, publication, dissemination or
distribution of the Registration (as defined below), each prospectus
included therein, and any amendment or supplement thereto by it and
any of its affiliates for the duration of the Blackout Period set
forth in such notice (or until earlier terminated in writing by the
Company). As used in this Section 17(c), "Registration" shall mean
collectively the Demand Registration and the Piggyback Registration.

(iii) In connection with the Company's obligations with respect
to any Registration, and in accordance with the intended method or
methods of

15
<PAGE>

distribution of the Registered Stock as described in a Registration,
the Company shall, as soon as reasonably practicable (and, in any
event, subject to the terms of this Section 17, at or before the time
required by applicable laws and regulations):

(A) furnish to the Advisor copies of the Registration,
each amendment and supplement thereto (in each case including all
exhibits thereto), the prospectus included in such Registration
and any documents incorporated therein by reference after the
initial filing of the Registration and such other documents as
the Advisor may reasonably request in order to facilitate the
disposition of the Registered Stock, and to change the
Registration as it specifically relates to the Advisor as
reasonably requested by the Advisor; as to documents incorporated
by reference, the Company shall provide such documents to the
Advisor upon the request of the Advisor;

(B) use its reasonable efforts to keep each
Registration effective for no more than 90 days; prepare and file
with the SEC post-effective amendments to such Registration as
may be necessary to maintain the effectiveness of such
Registration for this period; cause the related prospectus to be
supplemented by any required prospectus supplement, and as so
supplemented to be filed pursuant to Rules 424 and 430A under the
Securities Act and/or any successor rules that may be adopted by
the SEC, as such rules may be amended from time to time; and
comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such Registration
during the applicable period in accordance with the intended
method or methods of distribution thereof, as specified in
writing by the Advisor;

(C) except during the Blackout Period, make available
for inspection by the Advisor or by any attorney, accountant or
other agent retained by the Advisor and attorneys and
representatives of any underwriter retained by the Advisor
(collectively, the "Inspectors") all financial and other records
and pertinent corporate documents of the Company (collectively,
the "Records"), and such opportunities to discuss the business of
the Company with its officers, and use its reasonable efforts to
make available, to discuss the business of the Company, the
independent public accountants who have certified its most recent
annual financial statements to the extent reasonably necessary to
enable each Inspector to exercise its due diligence
responsibility, and cause the officers, directors and employees
of the Company to supply all information reasonably requested by
any such Inspector in connection with the Registration. Records
which the Company determines, in good faith, to be confidential
and which it notifies the Inspectors are confidential shall

16
<PAGE>

not be disclosed by the Inspector unless (1) the disclosure of
such Records is necessary to avoid or correct a material
misstatement or omission in the Registration, (2) the release of
such Records is ordered pursuant to a subpoena or other order
from a court of competent jurisdiction or a governmental body,
(3) the disclosure of such Records is required by any
governmental regulatory body with jurisdiction over the Advisor
that had retained the Inspector, or (4) the information in such
Records has been made generally available to the public. Each
seller of Registered Stock agrees that it will, upon learning
that disclosure of such Records is sought in a court of competent
jurisdiction or by any governmental body, promptly give prior
notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of those
Records deemed confidential;

(D) promptly notify the Advisor, the sales or
placement agent or agents, if any, for the Registered Stock and
the managing underwriter or underwriters, if any, thereof, after
becoming aware thereof, (1) when the Registration or the
prospectus included therein or any prospectus amendment or
supplement or post-effective amendment has been filed, and, with
respect to the Registration or any post-effective amendment, when
the same has become effective, (2) of any request by the SEC for
amendments or supplements to the Registration or related
prospectus or for additional information, (3) of the issuance by
the SEC of any stop order suspending the effectiveness of the
Registration or the initiation of any proceedings for that
purpose, (4) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the
Registered Stock for sale in any jurisdiction or the initiation
of any proceeding for such purpose, or (5) within the 90-day
period specified above in this Section 17 of the happening of any
event which makes any statement in the Registration or any
post-effective amendment thereto, prospectus or any amendment or
supplement thereto, or any document incorporated therein by
reference untrue in any material respect or which requires the
making of any changes in the Registration or post-effective
amendment thereto or prospectus or amendment or supplement
thereto so that they will not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein (in
the case of any prospectus, in the light of the circumstances
under which they were made) not misleading;

(E) use its reasonable efforts to obtain the
withdrawal of any order suspending the effectiveness of the
Registration or any post-effective amendment thereto;

17
<PAGE>

(F) use its reasonable efforts to (1) register or
qualify the Registered Stock for offer and sale under such
securities or blue sky laws of such jurisdictions in the United
States as the Advisor shall reasonably request in writing and
(2) take such other actions as may be reasonably necessary or
advisable in order to enable the Advisor to consummate the
disposition in such jurisdictions of such Registered Stock;
provided, however, that the Company shall not be required for any
such purpose to (I) qualify as a foreign corporation in any
jurisdiction where it would not otherwise be required to qualify
but for the requirements of this Section, (II) consent to general
service of process in any such jurisdiction, (III) subject itself
to taxation in any such jurisdiction or (IV) make any changes its
certificate of incorporation or bylaws or enter into any
undertakings with respect to its corporate affairs;

(G) use its reasonable efforts to cause the Registered
Stock to be registered with or approved by such other
governmental agencies or authorities within the United States as
may be necessary by virtue of the business and operations of the
Company to enable the Advisor to consummate the disposition of
such Registered Stock;

(H) upon written notice from the Advisor that it
intends to publicly offer and sell the Registered Stock,
cooperate with the Advisor to facilitate the timely preparation
and delivery of certificates representing Registered Stock to be
sold, which certificates shall not bear any restrictive legends
except as required by law or otherwise.

(d) In the event that the Company would be required, pursuant to this
Section 17, to notify the Advisor, the sales or placement agent or agents,
if any, for the Registered Stock and the managing underwriters, if any,
thereof, the Company shall, subject to the other provisions of Section 17,
as soon as practicable, prepare and furnish to the Advisor, to each
placement or sales agent, if any, and to each underwriter, if any, a
reasonable number of copies of a prospectus supplemented or amended so
that, as thereafter delivered to purchasers of Registered Stock, such
prospectus shall not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The Advisor agrees that, upon receipt of any
notice from the Company pursuant to this Section 17, the Advisor shall
forthwith discontinue disposition of any Registered Stock until it shall
have received copies of such amended or supplemented prospectus and, if so
directed by the Company, such seller shall deliver to the Company all
copies, other than permanent file copies, then in its possession of the
prospectus covering such Registered Stock at the time of receipt of such
notice.

18
<PAGE>

(e) The Advisor shall furnish to the Company in writing such
information regarding the Advisor and its intended method of distribution
of the Registered Stock as the Company may from time to time reasonably
request in writing, but only to the extent that such information is
required in order for the Company to comply with its obligations under all
applicable securities and other laws and to ensure that the prospectus
relating to such Registered Stock conforms to the applicable requirements
of the Securities Act and the rules and regulations thereunder. The
Advisor shall notify the Company as promptly as practicable of any
inaccuracy or change in information previously furnished by the Advisor to
the Company or of the occurrence of any event, in either case as a result
of which any prospectus relating to the Registered Stock contains or would
contain an untrue statement of a material fact regarding the Advisor or its
intended method of distribution of such Registered Stock or omits to state
any material fact regarding the Advisor or its intended method of
distribution of such Registered Stock required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and promptly furnish to the
Company any additional information required to correct and update any
previously furnished information or required so that such prospectus shall
not contain, with respect to the Advisor or the distribution of the
Registered Stock, an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

(f) Registration Expenses. Except as set forth in the last sentence
of this (f) of Section 17, the Company agrees to bear and to pay, or cause
to be paid, promptly upon request being made therefor all expenses incident
to the Company's performance of or compliance with this Agreement,
including, without limitation: (i) all registration and filing fees and
expenses of the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., (ii) all fees and expenses in
connection with the qualification of the Registered Stock for offering and
sale under state securities or blue sky laws referred to above, including
reasonable fees and disbursements of counsel for any placement or sales
agent or underwriter (or, at the Company's option, its counsel) in
connection with such qualifications, (iii) all expenses relating to the
preparation, printing, distribution and reproduction of the Registration,
each prospectus included therein or prepared for distribution pursuant
hereto, each amendment or supplement to the foregoing, the certificates
representing the Registered Stock and all other documents relating hereto,
(iv) internal expenses (including, without limitation, all salaries and
expenses of the Company's officers and employees performing legal or
accounting duties), (v) fees, disbursements and expenses of the Company's
counsel and its other advisors and experts and independent certified public
accountants of the Company, (vi) the fees and expenses incurred in
connection with the listing of the Registered Stock on any national
exchange, including The New York Stock Exchange, and (vii) Securities Act
liability insurance (if the Company elects to obtain such insurance).
Notwithstanding the foregoing, the Advisor shall pay or cause to be paid,
as appropriate, all agency fees and commissions and underwriting discounts
and commissions attributable to the sale of

19
<PAGE>

the Registered Stock by or on behalf of the Advisor and the fees and
disbursements of any counsel or other advisors or experts retained by the
Advisor.

Section 18. ASSIGNMENTS.

(a) This Agreement shall terminate automatically in the event of its
assignment, in whole or in part, unless such assignment is consented to in
writing by (i) the Company, with the approval of a majority of the
Independent Directors, in the case of assignment by the Advisor, and (ii)
the Advisor in the case of assignment by the Company. Any such assignment
shall bind the assignee hereunder in the same manner as the assignor is
bound. In the case of assignment by the Advisor, the assignee shall
execute and deliver to the Company a joinder agreement to this Agreement
naming such assignee as Advisor.

(b) If an assignment of this Agreement by the Company is not
consented to in writing by the Advisor, the Advisor shall be entitled to
the fees set forth under Section 14 with respect to termination of this
Agreement by Advisor for cause. If an assignment of this Agreement by the
Advisor is not consented to in writing by the Company, the Company shall be
entitled to terminate this Agreement for cause as set forth in Section 13.

(c) The acquisition of control of the Company or Advisor by any
person singly or as part of "a partnership, limited partnership, syndicate
or other group" as those terms are used within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, shall not
constitute an assignment for purposes of this Section 18.

Section 19. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, the Advisor shall not be entitled to compensation
for further services hereunder, but shall be paid all compensation accruing to
the date of termination or provided in this Agreement. Upon such termination,
the Advisor shall forthwith:

(a) after deducting any accrued compensation and reimbursement for
its expenses to which it is then entitled, pay over to the Company or any
of its Subsidiaries all money collected and held for the account of the
Company or any of its Subsidiaries pursuant to this Agreement;

(b) deliver to the Board of Directors a full accounting, including a
statement showing all payments collected by it and a statement of all money
held by it, covering the period following the date of the last accounting
furnished to the Board of Directors with respect to the Company or any of
its Subsidiaries; and

(c) deliver to the Board of Directors all property and documents of
the Company any of its Subsidiaries then in the custody of the Advisor.

20
<PAGE>

Section 20. RELEASE OF MONEY OR OTHER PROPERTY UPON WRITTEN REQUEST. The
Advisor agrees that any money or other property of the Company or any of its
Subsidiaries held by the Advisor under this Agreement shall be held by the
Advisor as custodian for the Company or any such Subsidiary, and the Advisor's
records shall be appropriately marked clearly to reflect the ownership of such
money or other property by the Company or any such Subsidiary. Upon the receipt
by the Advisor of a written request signed by a duly authorized officer of the
Company requesting the Advisor to release to the Company or any of its
Subsidiaries any money or other property then held by the Advisor for the
account of the Company or any of its Subsidiaries under this Agreement, the
Advisor shall release such money or other property to the Company or any of its
Subsidiaries within a reasonable period of time, but in no event later than 10
days following such request. The Advisor shall not be liable to the Company,
any Subsidiary of the Company, the Independent Directors, or the Company's or
its Subsidiary's stockholders for any acts performed or omissions to act by the
Company or any of its Subsidiaries in connection with the money or other
property released to the Company or any of its Subsidiaries in accordance with
this Section 20. The Company and any of its Subsidiaries shall indemnify the
Advisor, its directors, officers, stockholders and employees against any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever, which arise in connection with the Advisor's release of such
money or other property to the Company or any of its Subsidiaries in accordance
with the terms of this Section 20. Indemnification pursuant to this provision
shall be in addition to any right of the Advisor to indemnification under
Section 10 of this Agreement.

Section 21. REPRESENTATIONS AND WARRANTIES.

(a) The Company hereby represents and warrants to the Advisor as
follows:

(i) The Company is duly incorporated, validly existing and in
good standing under the laws of Delaware, has full corporate power and
authority to own its assets and to transact the business in which it
is now engaged and is duly qualified or registered as a foreign
corporation and in good standing under the laws of each jurisdiction
where its ownership or lease of property or the conduct of its
business requires such qualification or registration, except where the
failure to be so qualified or registered would not in the aggregate
have a material adverse effect on the business, operations, assets or
financial condition of the Company and its Subsidiaries, taken as a
whole. The Company does not do business under any fictitious business
name.

(ii) The Company has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations
required hereunder and has taken all necessary corporate action to
authorize this Agreement on the terms and conditions hereof and the
execution, delivery and performance of this Agreement and all
obligations required hereunder. No consent of any other person
including, without limitation, stockholders and creditors of the
Company, and no license, permit, approval or authorization of,
exemption by, notice or

21
<PAGE>

report to, or registration, filing or declaration with, any
governmental or regulatory authority or agency is required by the
Company in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each
instrument or document required hereunder will be, executed and
delivered by a duly authorized officer of the Company, and this
Agreement constitutes, and each instrument or document required
hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency, moratorium or
similar laws now or hereafter in effect relating to the rights and
remedies of creditors generally, and general principles of equity.

(iii) The execution, delivery and performance of this Agreement
and the documents or instruments required hereunder, will not violate
any provision of any existing law or regulation binding on the
Company, or any order, judgment, award or decree or any court,
arbitrator or governmental or regulatory authority or agency binding
on the Company, or the Governing Instruments of, or any securities
issued by, the Company or any of its subsidiaries, or any mortgage,
indenture, lease, contract or other agreement, instrument or
undertaking to which the Company or any of its Subsidiaries is a party
or by which the Company, any Subsidiary of the Company or any of their
assets may be bound, the violation of which would have a material
adverse effect on the business operations, assets or financial
condition of the Company and its Subsidiaries, taken as a whole, and
will not result in, or require, the creation or imposition of any lien
on any of their property, assets or revenues pursuant to the
provisions of any such mortgage, indenture, lease, contract or other
agreement, instrument or undertaking.

(b) The Advisor hereby represents and warrants to the Company as
follows:

(i) The Advisor is duly organized, validly existing and in
good standing under the laws of Delaware, has full power and authority
to own its assets and to transact the business in which it is now
engaged and is duly qualified or registered to do business and is in
good standing under the laws of each jurisdiction where its ownership
or lease of property or the conduct of its business requires such
qualification or registration, except where the failure to be so
qualified or registered would not in the aggregate have a material
adverse effect on the business, operations, assets or financial
condition of the Advisor and its Subsidiaries, taken as a whole. The
Advisor does not do business under any fictitious business name.

(ii) The Advisor has the power and authority to execute,
deliver and perform this Agreement and all obligations required
hereunder and has taken all necessary partnership action to authorize
this Agreement on the terms and

22
<PAGE>

conditions hereof and the execution, delivery and performance of this
Agreement and all obligations required hereunder. No consent of any
other person including, without limitation, partners and creditors of
the Advisor, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or
declaration with, any governmental or regulatory authority or agency
is required by the Advisor in connection with this Agreement or the
execution, delivery, performance, validity or enforceability of this
Agreement and all obligations required hereunder. This Agreement has
been and each instrument or document required hereunder will be
executed and delivered by a duly authorized agent of the Advisor, and
this Agreement constitutes, and each instrument or document required
hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of the Advisor enforceable
against the Advisor in accordance with its terms.

(iii) The execution, delivery and performance of this Agreement
and the documents or instruments required hereunder, will not violate
any provision of any existing law or regulation binding on the
Advisor, or any order, judgment, award or decree of any court,
arbitrator, or governmental or regulatory authority or agency binding
on the Advisor, or the partnership agreement of, or any securities
issued by, the Advisor or any of its Subsidiaries, or any mortgage,
indenture, lease, contract or other agreement, instrument or
undertaking to which the Advisor or any of its Subsidiaries is a party
or by which the Advisor or any Subsidiary of the Advisor or any of its
assets may be bound, the violation of which would have a material
adverse effect on the business operations, assets or financial
condition of the Advisor and its Subsidiaries, taken as a whole, and
will not result in, or require, the creation or imposition of any lien
on any of their property, assets or revenues pursuant to the
provisions of any such mortgage indenture, lease, contract or other
agreement, instrument or undertaking.

Section 22. NOTICES. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested. The
parties may deliver to each other notice by electronically transmitted facsimile
copies provided that such facsimile notice is followed within 24 hours by any
type of notice otherwise provided for in this Section. Any notice shall be duly
addressed to the parties as follows:

If to the Company:
--------------------------------
--------------------------------
--------------------------------
Attention:
---------------------
Telephone:
---------------------
Fax:
---------------------------

23
<PAGE>

with a copy given in the manner prescribed above, to:

--------------------------------
--------------------------------
--------------------------------
Attention:
---------------------
Telephone:
---------------------
Fax:
---------------------------

If to the Advisor:
--------------------------------
--------------------------------
--------------------------------
Attention:
---------------------
Telephone:
---------------------
Fax:
---------------------------

with a copy given in the manner prescribed above, to:

--------------------------------
--------------------------------
--------------------------------
Attention:
---------------------
Telephone:
---------------------
Fax:
---------------------------

Either party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 19 for the giving of notice.

Section 23. BINDING NATURE OF AGREEMENT: SUCCESSORS AND ASSIGNS. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.

Section 24. ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding among the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or written,
of any nature whatsoever with respect to the subject matter hereof. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof.

Section 25. CONTROLLING LAW. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the State
of Delaware, notwithstanding any Delaware or other conflict of law provisions to
the contrary.

24
<PAGE>

Section 26. SCHEDULES AND EXHIBITS. All Schedules and Exhibits referred
to herein or attached hereto are hereby incorporated by reference into, and made
a part of, this Agreement.

Section 27. NO WAIVER. Neither the failure nor any delay on the part of a
party to exercise any right, remedy, power or privilege under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege preclude any other or further exercise of
the same or of any other right, remedy, power or privilege, nor shall any waiver
of any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.

Section 28. AMENDMENTS. This Agreement may not be modified or amended
other than by an agreement in writing. Any amendment or modification to this
Agreement must be approved by a majority of the Independent Directors or by the
affirmative vote of the holders of a majority of the outstanding shares of the
Company's Common Stock.

Section 29. TITLES NOT TO AFFECT INTERPRETATION. The titles of paragraphs
and subparagraphs contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.

Section 30. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.

Section 31. PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.

Section 32. GENDER. Words used herein regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.

Section 33. COMPUTATION OF INTEREST. Interest will be computed on the
basis of a 360-day year consisting of twelve months of thirty days each.

25
<PAGE>

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

Company:

AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC., a
Delaware corporation

By
-----------------------------------------------
Name: Paul L. Abbott
Title: President and Chief Executive Officer

Advisor:

AMERICA FIRST REAL ESTATE ADVISORS LLC, a Delaware
limited liability company

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

26
<PAGE>

EXHIBIT A

LIST OF OPERATING PARTNERSHIPS
AND CORRESPONDING ORIGINAL ASSET VALUES

OUTSTANDING
EQUITY INTEREST AGGREGATE PRINCIPAL
IN OPERATING BALANCE OF MORTGAGE
PARTNERSHIP(1) NOTES (2)
<S> <C> <C>

Bluff Ridge $ 0 $ 3,510,035

Waterman's Crossing
(Oyster Cove) 1,172,814 10,927,186

Misty Springs (Cypress
Landing II) 478,036 4,271,964

Water's Edge 1,033,464 5,066,536

Ponds @ Georgetown 0 7,300,416

Highland Park 2,173,990 9,001,010

Fox Hollow 843,267 N/A

Crane's Landing 2,520,696 10,229,304

Delta Crossing 1,361,576 6,538,424

Monticello 421,570 5,328,430
----------- -----------

TOTALS $10,005,413 $62,173,305
----------- -----------
----------- -----------

</TABLE>

- ---------------
(1)Determined as of December 31, 1997 based upon the midpoint of the appraisals
prepared by Valuation Research.

(2)Figures are as of December 31, 1997 and will be adjusted to actual principal
balances as of date of execution of this agreement.

<PAGE>

INDEPENDENT AUDITORS' CONSENT

We consent to the inclusion in this Registration Statement on Form S-4
of our reports dated March 26, 1998 on our audits of the consolidated
financial statements and consolidated financial statement schedules of
Capital Source L.P. and Capital Source II L.P.-A, as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997,
and our report dated April 22, 1998 on our audit of the balance sheet of
America First Real Estate Investment Company, Inc. as of April 16, 1998. We
also consent to the references to our firm under the captions "Independent
Public Accountants" and "Selected Financial Data of the Partnerships."

/s/ Coopers & Lybrand L.L.P.

COOPERS & LYBRAND L.L.P.

Omaha, Nebraska
May 7, 1998

<PAGE>
EXHIBIT 23.02

Consent of Kutak Rock (included in Exhibits 5.01 and 8.01)

<PAGE>

CONSENT OF SUTRO & CO., INC.

We hereby consent to the use of our Fairness Opinion included in this
Registration Statement on Form S-4 and related Prospectus/Consent Solicitation
Statement, and we further consent to all references to our firm under the
headings "FAIRNESS OPINION AND APPRAISALS" in the Prospectus/Consent
Solicitation Statement, and to the use of our name wherever appearing in this
Registration Statement and the related Prospectus/Consent Solicitation
Statement.

Dated: May 7, 1998

SUTRO & CO., INC.

<PAGE>

CONSENT OF VALUATION RESEARCH CORPORATION

We hereby consent to any references to our name, or to any references to
our reports, wherever appearing, in this Registration Statement and the
related Prospectus/Consent Solicitation Statement which is a part of this
Registration Statement, and any amendments thereto.

Dated: May 1, 1998 VALUATION RESEARCH CORPORATION

/s/ C. Ann Kramer
---------------------------
C. Ann Kramer
Senior Vice President

<PAGE>

EXHIBIT 24.01

Power of Attorney (included on Page II-5 of the Registration Statement)

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> APR-16-1998
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 999
<TOTAL-LIABILITY-AND-EQUITY> 1,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>

<PAGE>

EXHIBIT 99.01

The Fairness Opinion of Sutro & Co., Incorporated, is incorporated herein by
reference from Appendix B to the Prospectus/Consent Solicitation Statement.

<PAGE>

CAPITAL SOURCE L.P. AND

CAPITAL SOURCE II L.P. - A

OMAHA, NEBRASKA

MARKET VALUE REPORT

AS OF DECEMBER 31, 1997

VARIOUS PROPERTIES

Engagement Number: 04-2824-00

<PAGE>

VALUATION RESEARCH CORPORATION

April 30, 1998

Capital Source L.P. and Capital Source II L.P. - A
1004 Farnam Street
Omaha, Nebraska 68102

Ladies and Gentlemen:

At your request, we have completed a limited scope appraisal of the multi-family
apartment complexes owned by Capital Source L.P. and Capital Source II L.P. - A.
We submit this restricted appraisal report relative to our findings.

The appraised property consists of various multi-family apartment complexes
located throughout the Midwest and Southeast. The properties are typical
apartment complexes, which are usually two story multi-building complexes
situated on campus type settings with common area swimming pool, parking area,
etc.

The appraisal was conducted for the purpose of expressing an opinion of the
market value of the property as of December 31, 1997. The function of the
appraisal is to serve as a basis for management planning purposes.

Market Value is defined as follows:

The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming
the price is not affected by undue stimulus and that the assets will
continue to function in their present capacity as part of an ongoing
business enterprise at their present location. Implicit in this
definition is the assumption that the earnings generated from
operations are sufficient to justify the investment in the assets
appraised and that the consummation of a sale as of a specified date
and the passing of title from the seller to buyer under conditions
whereby:

<PAGE>

Capital Source L.P. and Capital Source II L.P. - A April 30, 1998
Page 2

- Both parties are well informed or well advised, and acting in
what they consider their own best interests;

- A reasonable time is allowed for exposure in the open market;

- Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and

- The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.

Source: UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE,
Published by the Appraisal Foundation, 1994.

PROPERTY RIGHTS APPRAISED are the fee simple estate which is defined as:

Absolute ownership unencumbered by any other interest or estate,
subject only to the limitations imposed by the governmental powers of
taxation, eminent domain, police power, and escheat.

The appraised property is the fee-simple ownership interest in land, land
improvements, the building, and building service systems. Machinery and
equipment, furniture and fixtures, and any other tangible or intangible assets
are excluded from consideration in this report.

Our investigation included a personal inspection of the property in the month of
December 1997 and an analysis of recent sales and rentals of comparable property
in the subject's area.

This is a restricted appraisal report which is intended to comply with the
reporting requirements set forth under Standard Rule 2-2(c) of the Uniform
Standards of Professional Appraisal Practice. As such, it does not include
full discussions of the data, reasoning, and analyses that were used in the
appraisal process to develop the appraiser's opinion of value. Supporting
documentation concerning the data,

<PAGE>

Capital Source L.P. and Capital Source II L.P. - A April 30, 1998
Page 3

reasoning, and analyses is retained in our files. The information contained in
this report is specific to the needs of the client and for the intended use
stated in this report. Other users of appraisal services and the public may find
such a restricted report misleading without this file memorandum.

Valuation Research Corporation does not conduct or provide environmental
liability assessments of any kind in performing its appraisals so that our
opinion of the appraised value will not reflect any actual or contingent
environmental liabilities except to the extent we are provided with a specific
monetary assessment of such liabilities in writing. In any event, Valuation
Research Corporation will not verify such monetary assessment and will offer no
warranty or representation as to its accuracy or completeness.

All portions of this appraisal are to be used only in conjunction with the full
report, which is subject to the assumptions and limiting conditions contained
herein.

We have not investigated the title to, nor the liabilities against the appraised
property and assume no responsibility concerning these matters. Neither
Valuation Research Corporation nor any of its personnel have any present or
contemplated financial interest in the property appraised, and we certify that
the compensation received for this study is not contingent on the conclusions
stated. Additionally, the appraisal assignment was not based on a requested
minimum valuation, a specific valuation, or the approval of a loan.

Respectfully submitted,

VALUATION RESEARCH CORPORATION

Engagement Number: 04-2824-00

<PAGE>

PROPERTY/VALUE RANGE SCHEDULE
<TABLE>
<CAPTION>

VALUE RANGE
<S> <C>
Bluff Ridge (108 Units)
Jacksonville, North Carolina $3,250,000 - $3,700,000

Waterman's Crossing (260 Units)
Newport News, Virginia $11,700,000 - $12,500,000

Water's Edge (108 Units)
Lake Villa, Illinois $5,700,000 - $6,500,000

Ponds at Georgetown (134 Units)
Ann Arbor, Michigan $7,250,000 - $7,375,000

Highland Park (252 Units)
Reynoldsburg, Ohio $11,000,000 - $11,350,000

Fox Hollow (184 Units)
High Point, North Carolina $6,770,000 - $7,550,000

Crane's Landing (252 Units)
Winter Park, Florida $12,500,000 - $13,000,000

Delta Crossing (178 Units)
Charlotte, North Carolina $7,500,000 - $8,300,000

Misty Springs (128 Units)
Daytona Beach, Florida $4,500,000 - $5,000,000

Monticello (106 Units)
Southfield, Michigan $5,500,000 - $6,000,000

</TABLE>

<PAGE>

TABLE OF CONTENTS

Page
----
<S> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
IDENTIFICATION OF THE PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . 1
STATEMENT OF OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LEGAL DESCRIPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PROPERTY RIGHTS APPRAISED . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PURPOSE OF THE APPRAISAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FUNCTION OF THE APPRAISAL . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DEFINITION OF VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DATE OF THE APPRAISAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SCOPE OF THE APPRAISAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FLOOD ZONE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ZONING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ENVIRONMENTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
MARKETING PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

VALUATION THEORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
APPRAISAL PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE THREE APPROACHES TO VALUE. . . . . . . . . . . . . . . . . . . . . . 5
COST APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SALES COMPARISON APPROACH. . . . . . . . . . . . . . . . . . . . . . . . 5
INCOME APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
RECONCILIATION AND CONCLUSION. . . . . . . . . . . . . . . . . . . . . . 6
APPROACHES USED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
HIGHEST AND BEST USE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DEFINITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
HIGHEST AND BEST USE AS IF VACANT . . . . . . . . . . . . . . . . . . . . . . 7
PHYSICALLY POSSIBLE. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
LEGALLY PERMITTED USES . . . . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIALLY FEASIBLE USES. . . . . . . . . . . . . . . . . . . . . . . . 8
MAXIMALLY PRODUCTIVE USE . . . . . . . . . . . . . . . . . . . . . . . . 8
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
HIGHEST AND BEST USE AS IMPROVED. . . . . . . . . . . . . . . . . . . . . . . 8
PHYSICALLY POSSIBLE. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
LEGALLY PERMITTED. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIALLY FEASIBLE . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MAXIMALLY PRODUCTIVE USE . . . . . . . . . . . . . . . . . . . . . . . . 9

<PAGE>

VALUATION METHODOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
COST APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 10
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
IMPROVED COMPARABLE SALES DISCUSSION AND ANALYSIS. . . . . . . . . . . . 11
PROPERTY RIGHTS - FINANCING - CONDITIONS OF SALE - MARKET
CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PHYSICAL CHARACTERISTICS . . . . . . . . . . . . . . . . . . . . . . . . 11
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
DIRECT CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . 13
DISCUSSION OF MARKET RENT. . . . . . . . . . . . . . . . . . . . . . . . 14
POTENTIAL GROSS RENT . . . . . . . . . . . . . . . . . . . . . . . . . . 14
VACANCY AND COLLECTION LOSS. . . . . . . . . . . . . . . . . . . . . . . 14
EFFECTIVE GROSS INCOME . . . . . . . . . . . . . . . . . . . . . . . . . 14
OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
RESERVE FOR REPLACEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 15
NET OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CAPITALIZATION OF NOI. . . . . . . . . . . . . . . . . . . . . . . . . . 15
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
DIRECT CAPITALIZATION COMPUTATION. . . . . . . . . . . . . . . . . . . . 17
DISCOUNTED CASH FLOW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
CALCULATION OF INCOME AND EXPENSES . . . . . . . . . . . . . . . . . . . 18
DISCOUNT RATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 21
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . . 21
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 31
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . . 31
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 41
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . . 41
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 51
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . . 51
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

<PAGE>

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 61
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . . 61
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 71
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . . 71
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 81
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . . 81
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . 91
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . . 91
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . .101
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . .101
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . .111
IMPROVED COMPARABLE SALES ANALYSIS . . . . . . . . . . . . . . . . . . .111
INCOME APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .118

LIMITING FACTORS AND ASSUMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . .119
</TABLE>

<PAGE>

INTRODUCTION

IDENTIFICATION OF THE PROPERTIES
The properties, which are the subject of this appraisal assignment, are owned by
Capital Source, L.P. and Capital Source II, L.P. - A. These properties are
primarily garden style residential apartment complexes located in the states of
Michigan, North Carolina, Florida, Ohio, Virginia, and Illinois.

The apartment buildings have an average age of approximately 10 years, are
typically of wood frame with brick and wood veneer construction, are located in
a campus type setting, and include typical amenities such as swimming pools, in
unit appliances, ample open parking areas, adequate landscaping, etc. Following
is a listing of the subject properties.

Bluff Ridge
215 Valencia Drive
Jacksonville, North Carolina

Waterman's Crossing
638 Riverbend Court
Newport News, Virginia

Water's Edge
705 Water's Edge Drive
Lake Villa, Illinois

Ponds at Georgetown
2511 Packard Road
Ann Arbor, Michigan

Highland Park
2796 Prendergast Place
Reynoldsburg, Ohio

Fox Hollow
177 West Hartley Drive
High Point, North Carolina

Crane's Landing
3440 Goldenrod Road
Winter Park, Florida

Delta Crossing
6000 Delta Crossing Lane
Charlotte, North Carolina

Misty Springs
1420 New Bellevue Avenue
Daytona Beach, Florida

Monticello
22700 Civic Center Drive
Southfield, Michigan

STATEMENT OF OWNERSHIP
The subject properties are owned by Capital Source L.P. and/or Capital Source
II, L.P. - A which have owned the properties for a minimum of three years prior
to the appraisal date.

1
<PAGE>

LEGAL DESCRIPTIONS
Legal descriptions of the subject properties were not provided.

PROPERTY RIGHTS APPRAISED
The property rights appraised are that bundle of rights afforded to the most
complete form of property ownership, the fee simple estate (subject to existing
tenancies). Fee simple ownership allows the owner to use, dispose of, and
exclude others from using the property.

FEE SIMPLE OWNERSHIP is further defined as follows:

Absolute ownership unencumbered by any other interest or estate,
subject only to the limitations imposed by the government powers of
taxation, eminent domain, police power, and escheat.

Source: THE DICTIONARY OF REAL ESTATE APPRAISAL, Third Edition, pate
140, published by the Appraisal Institute, 1993.

PURPOSE OF THE APPRAISAL
The purpose of the appraisal is to express our opinion of the market value of
the fee simple estate in the subject property, subject to existing tenancies, as
of December 31, 1997.

FUNCTION OF THE APPRAISAL
The results of this appraisal and this appraisal report will be used by
management for planning purposes.

DEFINITION OF VALUE
MARKET VALUE is defined for purposes of this report as:

- Buyer and seller are typically motivated;

- Both parties are well informed or well advised, and acting in
what they consider their best interests;

2
<PAGE>

- A reasonable time is allowed for exposure in the open market;

- Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and

- The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.

Source: UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE,
Published by the Appraisal Foundation, 1997.

DATE OF THE APPRAISAL
The date of this appraisal is December 31, 1997. Our inspection of the
properties and our investigation of the comparable sales and rentals used in our
analysis took place during the month of December 1997.

SCOPE OF THE APPRAISAL
Valuation Research Corporation has been retained by the American First
Properties to assist in estimating the value of the underlying assets of two
limited partnerships.

The scope of this assignment included an inspection of each property and an
analysis of recent comparable sales and rental rates of similar property in each
of the subject's specific area. The data gathered and the sources that were
utilized are listed as follows:

1. Personal inspection of the property and neighborhood

2. Review of the local apartment real estate market

3. Demographic Information
a. Local Chamber of Commerce
b. Local Convention and Visitors Bureau
c. Area Planning Commission
d. Area Planning Board
e. Urban Land Institute
f. National Sources

4. Cost Data
a. Ownership
b. Cost Manuals -- Marshall Valuation Service and Boeckh Commercial
Building Valuation System

3
<PAGE>

5. Sales Data
a. Office files
b. Local Assessor's Office
c. Various Service Bureaus
d. Society of Industrial and Office Realtors
e. Urban Land Institute
f. Real Estate Brokers and Appraisers

6. Rental Data
a. Society of Industrial and Office Realtors
b. Institutions of Real Estate Management
c. Urban Land Institute
d. Real Estate Brokers and Appraisers

7. Confirmation of data -- endeavored to verify all data used in this
report with at least one source.

FLOOD ZONE
Based on our site inspections there did not appear to be any apparent flood
hazards with respect to any of the subject properties. Most are located in
developed neighborhoods with similar apartment complexes in the subject's
proximity.

ZONING
All of the subject properties are assumed to be a legal conforming use. This is
based on our observance of the surrounding land usage which, in most cases, is
similar to that of the subjects'.

ENVIRONMENTAL
Valuation Research Corporation has not determined independently whether the
subject properties are subject to any environmental liabilities. During the
course of our inspection we did not notice anything that would lead us to
believe that an environmental liability existed on the subject properties.

MARKETING PERIOD
Because of the strength of the current multi-family real estate market and based
on an analysis of the comparable sales information used in this appraisal, the
typical marketing period for any of the subject properties would be less than
twelve months if appropriately priced and aggressively marketed. This is
considered to be a normal marketing period and thus would not affect the
subject's value.

4
<PAGE>

VALUATION THEORY

APPRAISAL PROCESS

THE THREE APPROACHES TO VALUE
The appraised value as set forth in this report is supported with consideration
and use of standard accepted appraisal practices and valuation procedures. The
Uniform Standards of Professional Appraisal Practice require that the appraiser
consider three basic approaches to value: the cost approach, the direct sales
comparison approach, and the income approach. These approaches are based on the
cost to replace assets, market exchanges for comparable properties and the
capitalization of income. Each approach is defined and explained as follows:

COST APPROACH
The cost approach is a valuation technique that uses the concept of replacement
as a value indicator. This approach is based on the principle of substitution,
which states that a prudent investor would pay no more for an asset than the
amount for which he could replace the asset new. Reproduction or replacement
cost is estimated for the property being appraised and then adjusted for losses
in value (appraised depreciation) due to a variety of factors.

The first step in this process is the valuation of the site as if vacant. This
valuation is based on a comparative analysis of the most recent land sales
suitable for comparability. As in the sales comparison approach, adjustments are
made to reflect differences between the subject and the various comparables,
with the final result being a land value estimate. The next step is a detailed
analysis of the replacement cost new of the improvements based upon market
derived costs for similarly constructed properties. Finally, accrued
depreciation from physical deterioration and obsolescence of all causes is
estimated and subtracted from the replacement cost new to arrive at the present
value. Combining the land value estimate with the depreciated value of the
improvements results in a total indicated property value using the cost
approach.

SALES COMPARISON APPROACH
The sales comparison approach is a valuation technique in which value is
estimated on the basis of market prices in actual transactions. The technique
consists of studying available market comparable information and adjusting for
comparability differences. This process is essentially that of comparison and
correlation. The Principle of Substitution is particularly applicable to this
approach since a prudent purchaser would pay no more for a particular property
than he would have to pay for a substitute property which offers equal utility.

5
<PAGE>

INCOME APPROACH
The income approach is a valuation technique that capitalizes the anticipated
income stream from the appraised assets. This approach is predicated on
developing either cash flow or income projections, which are then discounted for
risk and time value. Additionally, the present value of a projected residual
value is estimated and added to the present value of the income stream.

RECONCILIATION AND CONCLUSION
The use of more than one approach is desirable because it provides a check on
the approaches to value. In some cases all three approaches are used, but
normally only one or two are employed. In the final analysis, the appraiser must
evaluate the relative merit of each approach in light of the property appraised
and must place heavy emphasis on the approach that offers the greatest degree of
reliability for the type of property appraised. Land is usually valued by the
sales comparison approach, with other tangible assets valued by the cost, sales
comparison and income approach.

APPROACHES USED
In this appraisal we have considered all three approaches to value. However, due
to the income-producing nature of the property and current market conditions, we
have placed more emphasis on the income approach using the direct sales
comparison approach as a check on the reasonableness of the results obtained
using the income approach.

HIGHEST AND BEST USE
Central to the concept of value is the theory of highest and best use. The
theory is based on the observation that properties in the market tend to be
priced according to their most profitable likely use. The highest and best use
conclusions are drawn from an economic study of market forces and form the basis
of the appraisal process.

DEFINITION
HIGHEST AND BEST USE for the purposes of this report is defined as:

THE REASONABLE AND PROBABLE USE THAT SUPPORTS THE HIGHEST PRESENT
VALUE OF VACANT LAND OR IMPROVED PROPERTY, AS DEFINED, AS OF THE DATE
OF THE APPRAISAL. ALTERNATELY, IT IS DEFINED AS THE REASONABLE
PROBABLE AND LEGAL USE OF LAND OR SITES AS THOUGH VACANT, FOUND TO BE
PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED, FINANCIALLY FEASIBLE,
AND THAT RESULTS IN THE HIGHEST PRESENT LAND VALUE.

THE DEFINITION IMMEDIATELY PRECEDING APPLIES SPECIFICALLY TO THE HIGHEST AND
BEST USE OF LAND. IT IS TO BE RECOGNIZED THAT IN CASES WHERE A SITE HAS EXISTING
IMPROVEMENTS ON IT, THE HIGHEST AND BEST USE MAY VERY WELL BE

6
<PAGE>

DETERMINED TO BE DIFFERENT FROM THE EXISTING USE. THE EXISTING USE WILL
CONTINUE, HOWEVER, UNLESS AND UNTIL LAND VALUE IN ITS HIGHEST AND BEST USE
EXCEEDS THE TOTAL VALUE OF THE PROPERTY IN ITS EXISTING USE.

THE HIGHEST AND BEST USE IS ARRIVED AT BY TESTING POTENTIAL USES OF THE
PROPERTY, BOTH AS IMPROVED AND AS THOUGH VACANT, TO FIND THE USE WHICH MEETS THE
CRITERIA DISCUSSED BELOW. IMPROVED PROPERTIES ARE CONSIDERED ALSO AS THOUGH
VACANT TO REFLECT THE FACT THAT ANY EXISTING IMPROVEMENT CAN BE DEMOLISHED.

PHYSICALLY POSSIBLE -- Those uses of vacant land which are possible
after considering physical characteristics such as area, shape,
dimensions, topography, frontage, access, soil conditions and other
physical factors which are physically possible.

LEGALLY PERMITTED USE -- Legally permitted uses after considering
local, state and federal regulations and private restrictions.
Local zoning is often one of the key factors affecting land use
within an area and includes restrictions on uses permitted, such
as lot size and dimension, coverage, set backs, building height,
and floor area ratio among other zoning regulations.

FINANCIALLY FEASIBLE -- Those uses which are physically possible and
legally permitted which meet the test for financial feasibility.
For a use to be financially feasible it must produce a positive
return beyond operating expenses, financial obligations, and
capital amortization.

MAXIMALLY PRODUCTIVE -- Those uses which are physically possible,
legally permissible, and financially feasible which produces
the highest price, or value is the highest and best use.

HIGHEST AND BEST USE AS IF VACANT

PHYSICALLY POSSIBLE
All of the subject properties are improved with apartment buildings. The sites'
size, shape, topography, access to utilities, street frontage, soil and subsoil
conditions are conducive to development. None appeared to suffer from any
adverse physical conditions, encroachments, easements or restrictions which
would affect its potential development. Indeed, the fact that the sites are
currently improved indicates that the parcels are buildable.

7
<PAGE>

LEGALLY PERMITTED USES
Because the sites are buildable, allowable development would be any use that
conforms to the current zoning ordinance governing the site.

FINANCIALLY FEASIBLE USES
The fact that the current developed use is generating an adequate return on
invested capital indicates that a financially feasible use is the current use as
a site for an apartment complex.

MAXIMALLY PRODUCTIVE USE
For the majority of the properties, development of the subject sites for
multi-family apartment units is probably the most productive use. The
predominant use in each of the subject's neighborhoods is some sort of apartment
development. Given the character of the surrounding neighborhoods and the
current zoning, apartment development is the only likely use that would be
legally permissible and financially feasible.

CONCLUSION
Based on the above, it is our opinion that the highest and best use of the
subject sites, as if vacant, is for multi- family residential development.

HIGHEST AND BEST USE AS IMPROVED

PHYSICALLY POSSIBLE
As outlined under the highest and best use as if vacant discussion, the subject
sites are suitable for any legally permitted uses which could be developed on
them. The existing improvements, however, are well suited for their intended use
as apartment complexes. Other physically possible uses include retirement
community complex or office development.

LEGALLY PERMITTED
As discussed under zoning, legally permitted uses include a number of uses
including the current use. In general, subject sites and current improvements
conform to the municipal zoning ordinance and are thus legally permitted uses.

No other unusual legal limitations to development are known to exist.

FINANCIALLY FEASIBLE
Of those uses identified as legally and physically possible, only those that are
capable of generating a return sufficient to justify the risk for the investment
are considered financially feasible alternate uses.

8
<PAGE>

The current improvements, because of their location and demand, are capable of
generating a return on invested capital and are thus considered to be
financially feasible. Converting the subject to any other legally permitted use
would be too costly to be financially feasible.

MAXIMALLY PRODUCTIVE USE
Based on the discussions above, it is our opinion that the highest and best use
of the subject properties as improved is continued use as currently configured
as either apartment complexes or retirement community complexes.

9
<PAGE>

VALUATION METHODOLOGY

COST APPROACH
The cost approach to value is one of the three approaches in the appraisal
process. The principle of substitution provides the basic foundation for the
cost approach and affirms the principle that no prudent person would pay more
for a property than the amount for which the site can be acquired and on which
improvements that have equal desirability and utility can be constructed without
undue delay.

However, because the value of property such as the subject(s) is normally
determined based on the revenue it is capable of generating for its owner, the
cost approach is not a significant factor in establishing value. As a result, it
is not used in this assignment.

SALES COMPARISON APPROACH

INTRODUCTION
The sales comparison approach to value is based on an analysis of actual sales
of other similar properties which are compared to the subject. Comparable sales
represent the actions of typical buyers and sellers in the marketplace and their
actions in the market will determine a price for the subject. When there is an
adequate number of sales of truly similar properties with sufficient information
for comparison, a range of values for the subject property can be developed.

The range of values developed by using units of comparison such as sales price
per square foot or any of several other units can be studied and necessary
adjustments made to provide for the differences between all the comparable sales
and the subject. An analysis of the adjusted units of comparison can then form
the basis of the market value of the subject property. Only unit factors
considered by the subject market are relevant.

The degree to which the appraiser can rely on the sales comparison approach
depends on an adequate number and similarity of the circumstances involved in
the comparable sales. Differences always exist between properties even though
they may be almost identical. Adjustments for these differences serve to define
more clearly the price that could reasonably be expected, subject to the
limitations of the definition of market value.

Some adjustments that may prove important are: 1) conditions of sale, 2)
financing terms, 3) market conditions (time), 4) location, 5) physical
characteristics, and 6) income characteristics.

10
<PAGE>

Pertinent details and pictures of the sales considered most comparable to the
subject property are kept in our file. A summary of the most important facts is
presented, along with a discussion pertaining to the adjustments made to the
unit selling price, in the specific property valuation section found later in
this report.

IMPROVED COMPARABLE SALES DISCUSSION AND ANALYSIS
Because of the strong apartment complex real estate market during the past few
years, comparable sale activity is readily available. Most apartments in the
metropolitan areas in which the subject properties are located have experienced
stable occupancy with slowly rising rental rates. However, that trend may be
moderating. Projections indicate a slowing of rental rate increases and
occupancy rates will either hold steady or perhaps decrease slightly as supply
begins to outpace demand. Potential investors in multi-family residential
property look to the income potential of the investment and negotiate an
exchange price accordingly. All of these factors must be considered when
adjusting the actual sales price of comparable sales so that the resulting range
of prices most accurately reflect what a potential investor in the subject
property would be willing to pay.

PROPERTY RIGHTS - FINANCING - CONDITIONS OF SALE - MARKET CONDITIONS
All of the sales used in this analysis were reported to involve the transfer of
the fee simple estate, (fee simple subject to existing short term tenancies),
were sold for cash or with financing terms that were at market, and were arms
length transactions. As a result, adjustments for real property rights,
financing and conditions of sale are not required. In addition, because the
apartment real estate market seems to be stabilizing and because most, if not
all, of the comparable sales information pertains to sales that occurred within
the past 12 - 18 months, the affects of changing market conditions are not
considered to be significant.

PHYSICAL CHARACTERISTICS

LOCATION
The location of an apartment complex is extremely important when setting
transaction prices. Apartments located in quiet, easily accessible neighborhood
settings with good linkage to shopping areas, schools, churches, and highway
systems are perceived to be more valuable than others. Each property was
analyzed in light of these location amenities vis-a-vis the comparable sales.
Based on the perceived differences in location desirability, the comparable unit
sale price was adjusted upward for less desirable locations and downward for
more desirable locations.

SIZE
All of the comparable apartment complexes are relatively close to the subject
properties in size and thus size is often not considered to be a significant
factor.

11
<PAGE>

AGE
The age of a building has a significant impact in determining the selling price.
Potential purchasers perceive older buildings as having higher maintenance costs
and less appeal from a renter's standpoint. As a result, the comparable sales
prices were adjusted based on the age of the building vs. the age of the
subject, using a straight line depreciation approach. Older building are
adjusted upward while newer buildings warrant a downward adjustment.

LAND TO BUILDING RATIO (SITE COVERAGE RATIO)
A given comparable's land to building ratio (site coverage) was compared to the
subject with the difference, if positive, necessitating a positive, or upward
adjustment and visa versa if negative. The adjustment is based on the difference
between the comparable's and the subject's land to building (site coverage)
ratio applied to the comparable's site coverage.

QUALITY
The quality of construction is an important element in the setting of sales
prices. Masonry veneer buildings are usually of higher quality than buildings
with aluminum or wood siding. As a result, adjustments were made based on the
differences in construction type

CONDITION
The actual physical condition of the comparable complex compared to that of the
subject is important. Although the age adjustment reflects a portion of this
influencing factor, the actual physical appearance and deferred maintenance at
the time of the sale is the basis for this adjustment.

CONCLUSION
In this appraisal a minimum of three comparable sales were used to form the
basis for estimating the market value of the subject properties. Each of the
comparable unit sale price was adjusted after taking into consideration the
physical differences that affect value vis-a-vis the subject. The resulting
range of adjusted unit prices was then analyzed and, based on the comparable
sale that most closely resembled the subject, a single adjusted unit price was
estimated and applied to the subject resulting in an estimate of market value
using

INCOME APPROACH

INTRODUCTION
The income approach to value is considered to be one of the better approaches in
the valuation of income-producing properties and is still the primary factor in
investment decisions for today's apartment investors. The basic premise of the
income approach is that the earning power of a real estate investment is the
critical element affecting

12
<PAGE>

its value. Value is often defined as the present worth of anticipated future
income. All income capitalization methods, techniques, and procedures represent
attempts to quantify expected future benefits.

The two accepted methods of applying the income approach are:

DIRECT CAPITALIZATION - A method by which an estimate of a single year's income
expectancy or an annual average of several years' income expectancies are
converted to an indication of value by one direct step, either by dividing
the income estimate by an appropriate rate or by multiplying the income
estimate by an appropriate factor.

DISCOUNTED CASH FLOW ANALYSIS - A set of procedures in which the quantity,
variability, timing, and duration of periodic income, as well as the
quantity and timing of reversions, are specified and discounted to a
present value at a specified yield rate.

The principle of anticipation has a crucial role in this approach. This
principle states that value is created by the expectations of benefits to be
derived in the future. The relevance of anticipation to the approach cannot be
overstated. Since value is created by the expectation of benefits to be derived
in the future, value may be defined as the present worth of all rights to future
benefits. As stated earlier, all income capitalization methods, techniques, and
procedures represent attempts to quantify expected future benefits.

With adequate information and proper use, direct capitalization and yield
capitalization methods should produce similar value indications. In choosing
which of the two (or both) methods to apply, the appraiser considers the typical
investor's view of market value.

DIRECT CAPITALIZATION
The first step in the direct capitalization approach is the determination of a
proper rental or revenue value that one would expect to be able to obtain for
the subject property based on actual historical operations and a study of
comparable leased properties with respect to rent levels, location, and
amenities offered. Adjustments based on differences between the comparable
rentals and the subject are set forth and analyzed so that an estimated current
economic rent for the subject can be established. A similar analysis of
operating expenses further aids in constructing an operating statement by
providing an allowance for vacancy and collection loss, and deductions for all
operating expenses. The end result is a net operating income (NOI)

13
<PAGE>

for the first year income that can be converted into an indicated property value
through the overall capitalization process.

This approach begins with an estimate of the subject's market rent potential
based on an analysis of comparable properties and their current rental rates and
an analysis of the actual rentals in place with the subject property. The unit
of comparison is typically the rent per unit. From this is deducted an amount
estimated to reflect the operating expenses attributable to the subject
property. This operating expense deduction is based on published market surveys
and actual historical data.

DISCUSSION OF MARKET RENT
In arriving at an opinion of the appropriate market rent for the subject, we
have analyzed several apartments in the immediate area of the subject. All are
considered to be direct competition and are similar in condition, utility and
amenities to that of the subject. Although each apartment complex is reasonably
similar to the subject, adjustments are necessary to reflect size of space,
exposure, rent concessions, amenities, etc.

POTENTIAL GROSS RENT
Gross potential rent is estimated from both the historical revenue trends taken
from the financial statements and/or existing lease contracts which currently
encumber the subject and the market surveys mentioned above.

VACANCY AND COLLECTION LOSS
The subject's market area has been analyzed with respect to current and future
apartment rental trends for the purpose of estimating the appropriate vacancy
and collection loss over the projection period. In addition, the historical
vacancy and collection loss experience of the subject was analyzed along with
projections based on discussions with the operating manager and published data.

EFFECTIVE GROSS INCOME
Effective gross income is the result of gross income from all sources including
rent, income from parking and storage space, less the vacancy and collection
allowance. We have used the historical income information provided along with
the market rental information to estimate this amount.

OPERATING EXPENSES
To account for the expense element, the information published by the Institute
of Real Estate Management (IREM) along with the actual historical experience of
the subject was used to assess this expense.

14
<PAGE>

MANAGEMENT
A management fee of 5% of effective gross income (potential net rental minus
vacancy and collection loss), including miscellaneous income, is generally
charged for properties such as the subject, and is the amount most often used in
our analysis.

RESERVE FOR REPLACEMENT
A reserve for replacement, based on the replacement of major structural and
mechanical elements of the building plus the roof, is also included in the
analysis. This cost is relatively uniform throughout our analysis and ranges
from $425 to $450 per unit. This cost includes an allowance for the replacement
of kitchen appliances, air conditioning units, carpeting, etc.

NET OPERATING INCOME
Using the above information and analysis, the estimated net operating income for
the subject is calculated as follows:

EXAMPLE
<TABLE>
<CAPTION>
<S> <C>
Potential Gross Rental Income $000,000
Less: Vacancy & Collection Loss (00,000)
-----------

Effective Gross Rental Income 000,000
Less: Operating Expenses (0,000)
Management Fee (0,000)
Reserve for Replacement @ $____/Unit (0,000)
-----------

Net Operating Income (NOI) $0,000,000
-----------
-----------

</TABLE>

CAPITALIZATION OF NOI
The relationship between net operating income and value can be expressed in its
overall rate of return (OAR), or capitalization rate. Capitalization rates were
abstracted from market surveys conducted by reputable national firms for each of
the major metropolitan areas in which the subject properties are located. The
National Real Estate Index for the Third Quarter, 1997, reports on recent
transactions and the resulting average capitalization rate. In addition, KORPACZ
REAL ESTATE INVESTOR SURVEY reports national apartment capitalization rates in
its Fourth Quarter 1997 report. Finally, the American Council of Life Insurance
reports current capitalization rates for apartment buildings in various regions
and major metroplexes.

15
<PAGE>

To check these ranges, we calculated an overall rate by the Mortgage-Equity
technique. In general, the mortgage-equity analysis involves estimating a
capitalization rate based on both mortgage and equity returns requirements.
Because of the size of the subject investments, we looked to the national
mortgage debt market and reviewed a survey published by the American Council of
Life Insurance which reported mortgage debt rates, for the second quarter of
1997, for the various regions in which the subject properties are located. Using
this information, a market mortgage rate can be estimated. The American Council
Life Insurance also reports typical market holding periods and loan to value
ratios.

In order to determine a proper equity yield, we analyzed the perceived risk of
the equity investor in the general marketplace as well as for our particular
property. We reviewed a survey published by the Korpacz Real Estate Investor
Survey, fourth quarter, National Apartment Market which detailed internal rates
of return required by large investors during the fourth quarter of 1997. Desired
yield rates for apartment properties were found to range from 10.0% to 13.0%
with a 11.20% average. Further, a Real Estate Research Corporation investor
survey for the third quarter of 1997 showed expected returns of 11.0% for
apartment property.

The final component of the Mortgage Equity technique is the property value
change over the course of the equity holding period. As noted in the market
analysis section of this report, current market conditions indicate that value
growth for properties similar to the subject is guarded optimism for the long
term. Therefore, it is our opinion that the value growth due to the rising
apartment market will equal its physical depreciation over the next 15-20 years.
Thus, our overall capitalization rate according to the Mortgage-Equity Analysis
Technique is computed as follows:

CAPITALIZATION RATE DERIVATION
(EXAMPLE)
<TABLE>
<CAPTION>
ASSUMPTIONS:
<S> <C>
Mortgage Interest Rate 8.0%
Mortgage Term 20
Loan-to-Value Ratio 70.00%
Annual Loan Constant 0.1004
Yield Rate 12.00%
Annual Appreciation 0%
Holding Period - Years 20
Sinking Fund Factor - Holding Period 0.01388
% of Principal Paid during Holding Period 1.00000

</TABLE>

16
<PAGE>

COMPONENT WEIGHT WEIGHTED AVERAGE
<S> <C> <C> <C>
Mortgage 0.10037 0.7 0.07026
Equity 0.12 0.3 0.0360
--------
Weighted Average 0.1063
Less: Equity Build-up 0.0097
-------

Basic Rate 0.0965
Appreciation (or Depreciation) 0
-------

Capitalization Rate 0.0966

Rounded 9.5%
-----
-----

</TABLE>

SUMMARY
Using the market data and techniques described above, a unique market
capitalization rate that would be appropriate for the subject properties can be
derived.

DIRECT CAPITALIZATION COMPUTATION
Using the data compiled above, the market value for the subject property using
the direct capitalization method of value analysis is calculated as follows:

EXAMPLE

Net Operating Income DIVIDED BY Capitalization Rate = Indicated Value

$000,000 DIVIDED BY 0.0% = $000,000

Rounded $000,000
--------
--------

DISCOUNTED CASH FLOW
In the subject market, the typical investor often values income producing
properties by the application of a discounted cash flow analysis which has two
components. The first component equals the sum of the present value of cash
flows over a selected holding period. For purpose of analysis the cash flows
will be projected for a ten-year period, a common length utilized by investment
analysts. The second component, a residual, equals the present value of a
perpetuity paying income equal to net income in year eleven and capitalized with
the appropriate capitalization rate. The residual reflects the property's
ongoing potential after the tenth year.

17
<PAGE>

CALCULATION OF INCOME AND EXPENSES
The estimated annual income is determined based on the historical experience of
the subject. Market rent for future vacant space and roll overs is estimated. An
income estimate is then produced and projected over the holding period.

In the discounted cash flow model for the subject, income and expense
projections have been based on historical operating data, information provided
by local lessors, and published data sources. Income and expense statements,
furnished by the building management, were reviewed and adjusted, where
necessary, to reflect more typical market expenses as reported by IREM in its
annual INCOME EXPENSE ANALYSIS FOR CONVENTIONAL APARTMENTS.

These operating results were cross-checked for reasonableness with market
information obtained from area lessors, leasing agents and brokers who also
provided data relating to current rental rates, vacancy levels, and typical
lease terms. Any adjustments to the actual reported expenses are noted and
explained in the individual valuation section of this report.

DISCOUNT RATE
Because the subject property is income producing, the value of the property is
based on the present value of the expected future benefits derived from rentals.
Basic to this concept is the fact that future earnings are not available as
current earnings. As a result, the anticipated earnings received in the future
must be discounted to a present value using a discount rate derived from current
market rates for alternative investments.

To determine the current discount rate applicable for real estate investment, we
reviewed market surveys of large institutional real estate investors. The
Appraisal Institute reports discount rates for apartment complex investments
range from 10.0% to 14.0%, with an 11.69% average. The Real Estate Research
Corporation reports national apartment building investments at 11.0%, and the
Korpacz Real Estate Investor Survey reports fourth quarter, 1997, apartment
market, discount rates of 10.0% to 13.0%.

Again, using this market derived data, and adjusting it based on the specific
risks involved with investing in each of the subject properties, a unique
discount rate can be estimated and used to discount the projected cash flows to
a present value for each of the subject properties.

Using the discounted cash flows for the subject property, as presented in the
specific valuation section of this report, an estimate of value for each
property has been made.

18
<PAGE>

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

BLUFF RIDGE APARTMENTS

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

19
<PAGE>

[PHOTO]

BLUFF RIDGE APARTMENTS
215 Valencia Drive
Jacksonville, North Carolina

<TABLE>
<CAPTION>
<S><C>
OWNERSHIP
- --------------------------------------------------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- --------------------------------------------------------------------------------------------------------------------------

PROPERTY STATISTICS
- --------------------------------------------------------------------------------------------------------------------------
Land Plan Three-story, walk-up garden style apartment buildings

Land Area 8.56 Acres Number of Units 108
Density 12.62 Units/Acre Average Unit Size 1,078 Sq. Ft.
Net Rentable Area 116,460 Sq. Ft. Year Built 1998
- --------------------------------------------------------------------------------------------------------------------------

CONSTRUCTION TYPE
- --------------------------------------------------------------------------------------------------------------------------
Masonite siding on wood frame
- --------------------------------------------------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------------------------------------------------
Washer/dryer, fireplace, dishwasher, microwave oven, patios with sliding doors, mini blinds, walk-in closets, carpeting
- --------------------------------------------------------------------------------------------------------------------------

PROJECT AMENITIES
- --------------------------------------------------------------------------------------------------------------------------
Swimming pool, parking, tennis court, playground, picnic area, fitness center
- --------------------------------------------------------------------------------------------------------------------------

VALUATION SUMMARY
-------------------------------------------------------------
Indicated Value $3,250,000 - $3,700,000
Value per Sq. Ft. of NRA $27.91 - $31.77
Value Per Unit $30,093 - $34,259
-------------------------------------------------------------

</TABLE>
20
<PAGE>

SALES COMPARISON APPROACH
BLUFF RIDGE

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject property is located within the proximity of a highly
traveled major thoroughfare in Jacksonville, North Carolina. The neighborhood is
a developing residential neighborhood with good access to U. S. Highway 17,
surrounding retail/commercial pockets and the Jacksonville Mall.

All of the comparable sales are superior to the subject in terms of location and
all were adjusted upward for this factor.

SIZE - The subject is much larger than Comparable Sales 2 & 3. Because there is
a tendency in most real estate markets for smaller parcels of land or improved
real estate to sell for a higher unit price, we have adjusted each of these
sales downward appropriately. Comparable Sale 1 to too similar to the subject to
warrant any adjustment.

AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate we have tempered this 2.22% factor downward.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.

L/B RATIO - As was discussed earlier, the adjustment for land to building ratio
is based on the current land value in the subject's market. Based on this land
value and the difference in land to building ratio (site coverage) an adjustment
is made and expressed as a percentage of the time adjusted selling price of the
comparable sale.

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average/fair condition
while the

21
<PAGE>

comparable buildings were judged to be in about the same or equal condition,
except for Comparable Sale 1. This complex was reported to be in poor condition
at the time of its sale and a 10% upward adjustment is deemed warranted.

AMENITIES - The subject is adequately equipped with amenities including swimming
pool, tennis court, volleyball pad, etc. Each of the comparable sales is
equipped with similar amenities, although Comparable Sales 2 & 3 seem to offer a
lower level of exterior amenity. Each was adjusted slightly upward to
compensate.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

<PAGE>

BLUFF RIDGE APARTMENTS
IMPROVED SALES ADJUSTMENT GRID

<TABLE>
<CAPTION>
SUBJECT
<S> <C> <C> <C> <C>
Land Value/Sq. Ft. $1.39 SALE 1 SALE 2 SALE 3
Sale Date: Nov-95 Jul-95 Sep-94

Net Rentable Area: 116,460 174,880 22,383 12,430
Land Area - sq. ft. 372,874 583,704 82,764 37,290
Lnd/Bld Ratio: 9.61 6.68 7.40 6.00
Stories: 3 2 2 2
Age: 11 21 5 0
Units 108 176 34 16
Price: $4,375,000 $850,000 $495,000

Price/Ft. - NRA $25.02 $37.98 $39.82
Price/Unit $24,858 $25,000 $30,938
GIM 3.50 7.13 7.68
OAR: 9.98% 9.05%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $25.02 $37.98 $39.82

FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $25.02 $37.98 $39.82

MARKET CONDITIONS 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $25.02 $37.98 $39.82
PHYSICAL CHARACTERISTICS
Location 5% Inferior 5% Inferior 5% Inferior
Size 0% Similar (10%) Smaller (10%) Smaller
Age 10% Older (6%) Newer (11%) Newer

L/B Ratio 11% Inferior 8% Inferior 13% Inferior
Quality 0% Similar 0% Similar 0% Similar
Condt. 10% Inferior 0% Similar 0% Similar
Amenities 0% Similar 5% Inferior 5% Inferior
Other 0% Similar 0% Similar 0% Similar
Composite Adjustment 36% Inferior 2% Inferior 2% Inferior
Adjustment $9.01 $0.79 $0.63

INDICATED VALUE PER NRA $34.02 $38.77 $40.45
INDICATED VALUE PER UNIT $33,807 $25,522 $31,427
</TABLE>

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

23
<PAGE>

INCOME APPROACH
BLUFF RIDGE

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted if dramatically
different from the surveys or deviated from the historical trend. In addition,
market based management fees were used rather than the actual so that the income
would more closely reflect typical market expectations.

Because of the recent financial history of the subject with a steady revenue
stream which is increasing at a relatively nominal 2.+/- % rate and an equally
nominal operating expense rate, plus the subject's location within the
Jacksonville area and its reliance on the economic impact of Camp Lejeune, a
capitalization and discount rate that is slightly above the average was used in
this analysis. The terminal capitalization rate is standard for the Jacksonville
area.

24
<PAGE>

BLUFF RIDGE APARTMENTS
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 700,373 94% $ 680,664 102% $ 670,110 104% $ 658,816 106%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 669,191 90% $ 625,525 94% $ 621,490 97% $ 607,282 98%

Other Income $ 74,551 10% $ 41,671 6% $ 20,168 3% $ 14,318 2%

TOTAL RECEIPTS $ 743,741 100% $ 667,196 100% $ 641,658 100% $ 621,600 100%

EXPENSES:

Management Fee $ 13,051 $ 32,768 $ 33,140 $ 33,295
Other Admin $ 16,047 $ 9,600 $ 12,191 $ 9,451
Subtotal Admin $ 29,097 3.9% $ 42,368 6.4% $ 45,331 7.1% $ 42,746 6.9%

Supplies
Utilities $ 47,371 $ 53,868 $ 44,907 $ 58,839
Building Services
Other Operating $ 18,583 $ 40,849 $ 50,714 $ 49,296
Subtotal Operating $ 65,953 9% $ 94,717 14% $ 95,621 15% $ 108,135 17%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 192,879 $ 120,780 $ 69,814 $ 111,137
Painting/Decorating
Subtotal Maint. $ 192,879 26% $ 120,780 18% $ 69,814 11% $ 111,137 18%

R.E. Taxes $ 37,567 $ 34,831 $ 31,776 $ 28,593
Insurance $ 7,405 $ 6,876 $ 7,501 $ 7,397
Other $ -
Subtotal Taxes-insur $ 44,972 6% $ 41,707 6% $ 39,277 6% $ 35,990 6%

TOTAL EXPENSES $ 332,901 45% $ 299,572 45% $ 250,043 39% $ 298,008 48%

NET OPERATING INCOME $ 410,840 55% $ 367,624 55% $ 391,615 61% $ 323,592 52%
</TABLE>

25
<PAGE>

BLUFF RIDGE
DIRECT CAPITALIZATION

PROPERTY:

Bluff Ridge
215 Valencia Drive
Jacksonville, North Carolina

<TABLE>
<CAPTION>
DIRECT CAPITALIZATION:
<S> <C> <C> <C>
Number of Units 108

Revenue @ $560 per Unit $725,760
Expenses @ $2.81 per Sq. Ft. 327,250
--------
Net Income 398,510

Replacement Reserves @ $425 45,900
--------
Net Operating Income (NOI) $352,610

Cap Rate @ 9.5% $3,711,685

ESTIMATED VALUE:

$3,700,000
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
BLUFF RIDGE APARTMENTS
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 721,384 $ 743,026 $ 765,316 $ 788,276 $ 811,924
Vacancy Loss ($ 36,069) ($ 37,151) ($ 38,266) ($ 39,414) ($ 40,596)
Rent Concessions $ -
Other $ 40,000 $ 41,200 $ 42,436 $ 43,709 $ 45,020
EFFECTIVE INCOME $ 725,315 $ 747,074 $ 769,487 $ 792,571 $ 816,348

EXPENSE
Management Fee $ 36,266 $ 37,354 $ 38,474 $ 39,629 $ 40,817
Other Admin $ 13,000 $ 13,390 $ 13,792 $ 14,205 $ 14,632
Subtotal Admin $ 49,266 $ 50,744 $ 52,266 $ 53,834 $ 55,449

Supplies $ - $ - $ - $ - $ -
Utilities $ 48,791 $ 50,255 $ 51,762 $ 53,315 $ 54,915
Building Services $ - $ - $ - $ - $ -
Other Operating $ 50,000 $ 51,500 $ 53,045 $ 54,636 $ 56,275
Subtotal Operating $ 98,791 $ 101,755 $ 104,807 $ 107,952 $ 111,190

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 150,000 $ 154,500 $ 159,135 $ 163,909 $ 168,826
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 150,000 $ 154,500 $ 159,135 $ 163,909 $ 168,826

R.E. Taxes $ 38,317 $ 39,467 $ 40,651 $ 41,870 $ 43,126
Insurance $ 7,553 $ 7,780 $ 8,013 $ 8,253 $ 8,501
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 45,870 $ 47,247 $ 48,664 $ 50,124 $ 51,628

TOTAL EXPENSES $ 343,927 $ 354,245 $ 364,872 $ 375,819 $ 387,093

NON-OPERATING EXPENSES
Capital Improvements $ 45,900 $ 47,277 $ 48,695 $ 50,156 $ 51,661
Other $ -

NET CASH FLOW $ 335,488 $ 345,552 $ 355,919 $ 366,596 $ 377,594

P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674
P.V. Cash Flow $ 299,543 $ 275,472 $ 253,336 $ 232,979 $ 214,257

<CAPTION>
2003 2004 2005 2006 2007

REVENUE
Gross Potential $ 836,282 $ 861,370 $ 887,212 $ 913,828 $ 941,243
Vacancy Loss ($ 41,814) ($ 43,069) ($ 44,361) ($ 45,691) ($ 47,062)
Rent Concessions
Other $ 46,371 $ 47,762 $ 49,195 $ 50,671 $ 52,191
EFFECTIVE INCOME $ 840,839 $ 866,064 $ 892,046 $ 918,807 $ 946,372

EXPENSE
Management Fee $ 42,042 $ 43,303 $ 44,602 $ 45,940 $ 47,319
Other Admin $ 15,071 $ 15,523 $ 15,988 $ 16,468 $ 16,962
Subtotal Admin $ 57,113 $ 58,826 $ 60,591 $ 62,408 $ 64,281

Supplies $ - $ - $ - $ - $ -
Utilities $ 56,562 $ 58,259 $ 60,007 $ 61,807 $ 63,661
Building Services $ - $ - $ - $ - $ -
Other Operating $ 57,964 $ 59,703 $ 61,494 $ 63,339 $ 65,239
Subtotal Operating $ 114,526 $ 117,962 $ 121,501 $ 125,146 $ 128,900

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 173,891 $ 179,108 $ 184,481 $ 190,016 $ 195,716
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 173,891 $ 179,106 $ 184,481 $ 190,016 $ 195,716

R.E. Taxes $ 44,420 $ 45,753 $ 47,125 $ 48,539 $ 49,995
Insurance $ 8,756 $ 9,019 $ 9,289 $ 9,568 $ 9,855
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 53,176 $ 54,772 $ 56,415 $ 58,107 $ 59,850

TOTAL EXPENSES $ 398,706 $ 410,667 $ 422,987 $ 435,677 $ 448,747

NON-OPERATING EXPENSES
Capital Improvements $ 53,211 $ 54,807 $ 56,451 $ 58,145 $ 59,889
Other

NET CASH FLOW $ 388,922 $ 400,590 $ 412,608 $ 424,966 $ 437,735

P.V. Factor 0.5066 0.4523 0.4039 0.3606 0.3220
P.V. Cash Flow $ 197,040 $ 181,207 $ 166,645 $ 153,254 $ 140,939

SUM P.V. $2,114,672
RESIDUAL $1,364,572

TOTAL VALUE $3,479,244
</TABLE>

27
<PAGE>

SUMMARY
BLUFF RIDGE

PROPERTY:

Bluff Ridge
215 Valencia Drive
Jacksonville, North Carolina

<TABLE>
<CAPTION>
VALUE ESTIMATE:
<S> <C> <C> <C>
Sales Comparison Approach $3,250,000

Income Approach:
Direct Capitalization $3,700,000
DCF $3,500,000

FINAL VALUE:

$3,250,000 - $3,700,000
</TABLE>

28
<PAGE>

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

WATERMAN'S CROSSING APARTMENTS

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

29
<PAGE>

[PHOTO]

WATERMAN'S CROSSING
638 RIVERBEND COURT
NEWPORT NEWS, VIRGINIA

OWNERSHIP
- --------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- --------------------------------------------------------------------------------

PROPERTY STATISTICS

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Land Plan Two and three-story garden style apartment buildings.
<S> <C> <C> <C>
Land Area 20.00 Acres Number of Units 260
Density 13.00 Units/Acre Average Unit Size 945 Sq. Ft.
Net Rentable Area 245,732 Sq. Ft. Year Built 1987
- --------------------------------------------------------------------------------
</TABLE>

CONSTRUCTION TYPE
- --------------------------------------------------------------------------------
Vinyl siding on wood frame
- --------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------
Washer/dryer in each unit, wood doors and windows, slate fireplace, large
walk-in closet space, mini blinds, microwave oven, ceiling fans in all bedrooms,
private patios and decks

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

PROJECT AMENITIES
- --------------------------------------------------------------------------------
Swimming pool, parking, clubhouse, fitness center, two lighted tennis courts,
sand volleyball court, car wash area, two playground areas

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

<TABLE>
<CAPTION>
VALUATION SUMMARY
----------------------------------------------------------------
<S> <C> <C> <C>
Indicated Value $11,700,000 - $12,500,000
Value per Sq. Ft. of NRA $47.61 - $50.87
Value Per Unit $45,000 - $48,077
----------------------------------------------------------------
</TABLE>

30
<PAGE>

SALES COMPARISON APPROACH
WATERMAN'S CROSSING

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject property is located in close proximity to a highly
traveled major thoroughfare in Newport News, Virginia. The neighborhood is a
developing residential neighborhood with good access to I-64 and the Patrick
Henry Mall. In addition, it is within the region dominated by the Oyster Point
Industrial Park, the site of numerous high-tech businesses, and directly south
of the complex known as the Oyster Point Master Plan Development Community, a
700-acre industrial business park.

All of the comparable sales used in this appraisal are located in equally
desirable areas. No adjustments for location differences are warranted.

SIZE - Although the size of the subject is larger than two of the comparable
sales and smaller than the third, the size differential is not large enough to
warrant any type of adjustment.

AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate, we have tempered this 2.22% factor downward.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.

QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered good. Comparable Sales 1 & 2 are judged to be of equal quality and
adjustments are not required. Sale 3 is of all brick construction and the
overall quality is slightly better than the subject. A slight negative
adjustment should be made.

31
<PAGE>

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in very good condition as
were the comparable buildings. Adjustments for condition are not required.

AMENITIES - The subject is adequately equipped with amenities including swimming
pools, tennis courts, exercise facility, etc. Comparable Sales 1 is equipped
with similar amenities and an adjustment is not necessary. Although Sale 2 has
many of the same facilities, it appears to require a slight upward adjustment
vis-a-vis the subject. Sale 3 is limited in its external amenities, having only
a pool. It was adjusted upward 10%.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

32
<PAGE>

WATERMAN'S CROSSING
IMPROVED SALES ADJUSTMENT GRID

<TABLE>
<CAPTION>
SUBJECT
SALE 1 SALE 2 SALE 3
Sale Date: May-96 Apr-96 Apr-96
<S> <C> <C> <C> <C> <C> <C> <C>
Net Rentable Area: 245,732 142,800 221,216 123,284
Land Area - sq. ft. 871,200 421,661 522,459 337,590
Lnd/Bld Ratio: 10.64 5.91 5.90 5.48
Stories: 3 2 2.5 2
Age: 10 8 9 12
Units 260 174 300 148
Price: $8,420,000 $11,590,000 $5,000,000

Price/Ft. - NRA $58.96 $52.39 $40.56
Price/Unit $48,391 $38,633 $33,784
GIM 6.45 6.45 5.49
OAR: 9.23% 9.11% 9.94%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $58.96 $52.39 $40.56

FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $58.96 $52.39 $40.56

MARKET CONDITIONS 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $58.96 $52.39 $40.56
PHYSICAL CHARACTERISTICS
Location 0% Similar 0% Similar 0% Similar
Size 0% Similar 0% Similar 0% Similar
Age (2%) Newer (1%) Newer 2% Older

L/B Ratio 8% Inferior 9% Inferior 13% Inferior
Quality 0% Similar 0% Similar (5%) Superior
Condt. 0% Similar 0% Similar 0% Similar
Amenities 0% Similar 5% Inferior 10% Inferior
Other 0% Similar 0% Similar 0% Similar
Composite Adjustment 6% Inferior 13% Inferior 20% Inferior
Adjustment $3.55 $6.83 $8.00

INDICATED VALUE PER NRA $62.51 $59.22 $48.56
INDICATED VALUE PER UNIT $51,305 $43,668 $40,446
</TABLE>

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

33
<PAGE>

INCOME APPROACH
WATERMAN'S CROSSING

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

Because of the recent financial history of the subject with revenue increasing
at a nominal 2.0 +/- % rate and expenses coming down, plus the optimistic
economic outlook for the Newport News area, a capitalization and discount rate
that is at, or slightly below the average was used in this analysis. The
historical gross revenue trend is extended in our model because we don't see
anything that would cause it to change in the near future. The terminal
capitalization rate is standard for the Newport News/Norfolk area.

34
<PAGE>

<TABLE>
<CAPTION>
WATERMAN'S CROSSING
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,947,012 102% $ 1,926,053 102% $ 1,875,005 101% $ 1,837,212 100%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,869,299 98% $ 1,778,570 94% $ 1,751,635 94% $ 1,710,717 93%

Other Income $ 45,714 2% $ 107,025 6% $ 110,186 6% $ 132,350 7%

TOTAL RECEIPTS $ 1,915,013 100% $ 1,885,595 100% $ 1,861,821 100% $ 1,843,067 100%

EXPENSES:

Management Fee $ 78,049 $ 75,424 $ 74,472 $ 73,834
Other Admin $ 40,132 $ 48,672 $ 74,359 $ 80,066
Subtotal Admin $ 118,181 6.2% $ 124,096 6.6% $ 148,831 8.0% $ 153,900 8.4%

Supplies $ -
Utilities $ 111,900 $ 114,264 $ 114,184 $ 125,496
Building Services $ -
Other Operating $ 206,792 $ 208,299 $ 188,422 $ 172,806
Subtotal Operating $ 318,692 17% $ 322,563 17% $ 302,606 16% $ 298,302 16%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 87,649 $ 83,018 $ 97,151 $ 108,555
Painting/Decorating $ -
Subtotal Maint. $ 87,649 5% $ 83,018 4% $ 97,151 5% $ 108,555 6%

R.E. Taxes $ 131,268 $ 131,263 $ 142,055 $ 141,564
Insurance $ 20,532 $ 20,766 $ 21,901 $ 27,579
Other $ -
Subtotal Taxes-insur $ 151,800 8% $ 152,029 8% $ 163,956 9% $ 169,143 9%

TOTAL EXPENSES $ 676,323 35% $ 681,706 36% $ 712,544 38% $ 729,900 40%

NET OPERATING INCOME $ 1,238,690 65% $ 1,203,889 64% $ 1,149,277 62% $ 1,113,167 60%
</TABLE>

35
<PAGE>

WATERMAN'S CROSSING
DIRECT CAPITALIZATION

PROPERTY:

Waterman's Crossing
638 Riverbend Court
Newport News, Virginia

<TABLE>
<CAPTION>
DIRECT CAPITALIZATION:
<S> <C> <C> <C>
Number of Units 260

Revenue $1,981,200
Expenses 725,000
----------
Net Income 1,256,200

Replacement Reserves @ $425 110,500
----------
Net Operating Income (NOI) $1,145,700

Cap Rate @ 9.25% $12,385,945

ESTIMATED VALUE:

$12,385,000
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
WATERMAN'S CROSSING
APARTMENTS
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,985,952 $ 2,035,601 $ 2,066,491 $ 2,138,653 $ 2,192,120
Vacancy Loss ($ 99,298) ($ 101,780) ($ 104,325) ($ 106,933) ($ 109,606)
Rent Concessions $ -
Other $ 95,000 $ 96,900 $ 98,838 $ 100,815 $ 102,831
EFFECTIVE INCOME $ 1,981,655 $ 2,030,721 $ 2,081,005 $ 2,132,535 $ 2,185,345

EXPENSE
Management Fee $ 99,083 $ 101,536 $ 104,050 $ 106,627 $ 109,267
Other Admin $ 50,000 $ 51,000 $ 52,020 $ 53,060 $ 54,122
Subtotal Admin $ 149,083 $ 152,536 $ 156,070 $ 159,687 $ 163,389

Supplies $ - $ - $ - $ - $ -
Utilities $ 114,000 $ 116,280 $ 118,606 $ 120,978 $ 123,397
Building Services $ - $ - $ - $ - $ -
Other Operating $ 205,000 $ 209,100 $ 213,282 $ 217,548 $ 221,899
Subtotal Operating $ 319,000 $ 325,380 $ 331,888 $ 338,525 $ 345,296

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 89,500 $ 91,290 $ 93,116 $ 94,978 $ 96,878
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 89,500 $ 91,290 $ 93,116 $ 94,978 $ 96,878

R.E. Taxes $ 133,893 $ 136,571 $ 139,303 $ 142,089 $ 144,930
Insurance $ 20,580 $ 20,992 $ 21,411 $ 21,840 $ 22,276
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 154,473 $ 157,563 $ 160,714 $ 163,928 $ 167,207

TOTAL EXPENSES $ 712,056 $ 726,769 $ 741,788 $ 757,119 $ 772,769

NON-OPERATING EXPENSES
Capital Improvements $ 110,500 $ 113,815 $ 117,229 $ 120,746 $ 124,369
Other $ -

NET CASH FLOW $ 1,159,099 $ 1,190,137 $ 1,221,987 $ 1,254,670 $ 1,288,207

P.V. Factor 0.9009 0.8116 0.7312 0.6587 0.5935
P.V. Cash Flow $ 1,044,233 $ 965,942 $ 893,507 $ 826,490 $ 764,488

<CAPTION>
2003 2004 2005 2006 2007

REVENUE
Gross Potential $ 2,246,923 $ 2,303,096 $ 2,360,673 $ 2,419,690 $ 2,480,182
Vacancy Loss ($ 112,346) ($ 115,155) ($ 118,034) ($ 120,984) ($ 124,009)
Rent Concessions
Other $ 104,888 $ 106,985 $ 109,125 $ 111,308 $ 113,534
EFFECTIVE INCOME $ 2,239,464 $ 2,294,926 $ 2,351,765 $ 2,410,013 $ 2,469,707

EXPENSE
Management Fee $ 111,973 $ 114,746 $ 117,588 $ 120,501 $ 123,485
Other Admin $ 55,204 $ 56,308 $ 57,434 $ 58,583 $ 59,755
Subtotal Admin $ 167,177 $ 171,054 $ 175,023 $ 179,084 $ 183,240

Supplies $ - $ - $ - $ - $ -
Utilities $ 125,865 $ 128,383 $ 130,950 $ 133,569 $ 136,241
Building Services $ - $ - $ - $ - $ -
Other Operating $ 226,337 $ 230,863 $ 235,481 $ 240,190 $ 244,994
Subtotal Operating $ 352,202 $ 359,246 $ 366,431 $ 373,759 $ 381,235

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 98,815 $ 100,792 $ 102,807 $ 104,864 $ 106,961
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 98,815 $ 100,792 $ 102,807 $ 104,864 $ 106,961

R.E. Taxes $ 147,829 $ 150,786 $ 153,801 $ 156,877 $ 160,015
Insurance $ 22,722 $ 23,176 $ 23,640 $ 24,113 $ 24,595
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 170,551 $ 173,962 $ 177,441 $ 180,990 $ 184,610

TOTAL EXPENSES $ 788,745 $ 805,054 $ 821,702 $ 838,697 $ 856,045

NON-OPERATING EXPENSES
Capital Improvements $ 128,100 $ 131,943 $ 135,901 $ 139,978 $ 144,177
Other

NET CASH FLOW $ 1,322,619 $ 1,357,930 $ 1,394,162 $ 1,431,338 $ 1,469,484

P.V. Factor 0.5346 0.4817 0.4339 0.3909 0.3522
P.V. Cash Flow $ 707,126 $ 654,058 $ 604,964 $ 559,546 $ 517,530

SUM P.V. $7,537,883
RESIDUAL $5,120,819

TOTAL VALUE $12,658,701
</TABLE>

37
<PAGE>

SUMMARY
WATERMAN'S CROSSING

PROPERTY:

Waterman's Crossing
638 Riverbend Court
Newport News, Virginia

<TABLE>
<CAPTION>
VALUE ESTIMATE:
<S> <C> <C> <C>
Sales Comparison Approach $11,700,000

Income Approach:
Direct Capitalization $12,385,000
DCF $12,660,000

FINAL VALUE:

$11,700,000 - $12,500,000
</TABLE>

38
<PAGE>

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

WATER'S EDGE APARTMENTS

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

39
<PAGE>
[PHOTO]

WATER'S EDGE
705 Water's Edge Drive
Lake Villa, Illinois
<TABLE>
<CAPTION>
OWNERSHIP
- --------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- --------------------------------------------------------------------------------

PROPERTY STATISTICS
- --------------------------------------------------------------------------------
Land Plan Three story garden style apartments

<S> <C> <C> <C>
Land Area 34.57 Acres Number of Units 108
Density 3.12 Units/Acre Average Unit Size 883 Sq. Ft.
Net Rentable Area 95,400 Sq. Ft. Year Built 1988
- --------------------------------------------------------------------------------
</TABLE>

CONSTRUCTION TYPE
- --------------------------------------------------------------------------------
Aluminum siding, wood frame
- --------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------
Patio and balcony, washer/dryer, microwave oven, mini blinds, frost free
refrigerator, range with vented hood, disposal, dishwasher

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

PROJECT AMENITIES
- --------------------------------------------------------------------------------
Private sand beach and boat launching facilities, basketball courts, Metra
station within walking distance, 24 hour maintenance

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

<TABLE>
<CAPTION>
VALUATION SUMMARY
----------------------------------------------------------------
<S> <C> <C> <C>
Indicated Value $5,700,000 - $6,500,000
Value per Sq. Ft. of NRA $59.75 - $68.13
Value Per Unit $52,778 - $60,185
----------------------------------------------------------------
</TABLE>

40
<PAGE>

SALES COMPARISON APPROACH
WATER'S EDGE

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject property is located approximately fifty minutes northwest
of Chicago's central business district in a small lake side community. The
complex is extensively landscaped with 950 feet of lake frontage. Linkage to
residential support facilities is good while access to major highways leading
into Chicago is fair. There is a Metra rail station within walking distance
which partially offsets the lack of easy commuting to Chicago's downtown.

Comparable Sale 1, although not in as rural a setting, is closer to the central
business district and has much better linkage to typical metropolitan amenities.
It was adjusted down 5%. Both Sale 2 & 3 are located in the highly desirable
northshore area with excellent linkage to Chicago. Both were adjusted downward
10%.

SIZE - Although the size of the subject is smaller than all three of the
comparable sales used in this appraisal, size adjustments are needed for only
sale 2 & 3. Both of these are substantially larger and should be adjusted upward
vis-a-vis the subject.

AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land which does not depreciate we have tempered this 2.22 factor downward. Newer
structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.

L/B RATIO - Because the land area for the comparable sales is not available,
this adjustment is not germane.

QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered average/good. Comparable Sales 1, although of brick and wood siding,
is judged to be of slightly inferior quality and was adjusted up 5%. Both of the
remaining comparable sales are of superior quality and were adjusted down 10%.

41
<PAGE>

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition.
Sale 1 was reported to be in below average condition at the time of the sale and
was adjusted upward 5%. Sale 2 & 3 were in very good condition and were adjusted
down 10%.

AMENITIES - The subject is located on the shores of an inland lake which is a
very desirable feature. It does not have any other exterior features that would
cause it to stand out from any of the other properties used in this analysis.
Sale 1 is void of any meaningful exterior amenities and was adjusted upward 5%.
Sale 2 has an outdoor pool, but not lake frontage. No adjustment is deemed
necessary. Sale 3 has numerous features that would make it more appealing than
the subject and was adjusted downward 5%.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

42
<PAGE>

<TABLE>
<CAPTION>
WATER'S EDGE
IMPROVED SALES ADJUSTMENT GRID
SUBJECT
<S> <C> <C> <C> <C> <C> <C> <C>
LAND VALUE/SQ. FT. $1.00 SALE 1 SALE 2 SALE 3
Sale Date: Mar-95 Nov-97 Oct-96
Net Rentable Area: 95,400 109,000 218,243 254,680
Land Area - sq. ft.
Lnd/Bld Ratio: 0.00 0.00 0.00 0.00
Stories: 3 2 2.5 2
Age: 8 5 5 5
Units 108 120 236 340
Price: $6,750,000 $21,000,000 $30,849,900
Price/Ft. - NRA $61.93 $96.22 $121.13
Price/Unit $56,250 $88,983 $90,735
GIM 6.20 6.40
OAR: 10.00% 9.00% 9.25%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $61.93 $96.22 $121.13
FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $61.93 $96.22 $121.13
MARKET CONDITIONS 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $61.93 $96.22 $121.13
PHYSICAL CHARACTERISTICS
Location (5%) Superior (10%) Superior (10%) Superior
Size 0% Similar 5% Larger 10% Larger
Age (3%) Newer (3%) Newer (3%) Newer
L/B Ratio 0% Similar 0% Similar 0% Similar
Quality 5% Inferior (10%) Superior (10%) Superior
Condt. 5% Inferior (10%) Superior (10%) Superior
Amenities 5% Inferior 0% Similar (5%) Superior
Other 0% Similar 0% Similar 0% Similar
Composite Adjustment 7% Inferior (28%) Superior (28%) Superior
Adjustment $4.33 ($26.94) ($33.92)
INDICATED VALUE PER NRA $66.26 $69.28 $87.22
INDICATED VALUE PER UNIT $60,188 $64,068 $65,329
</TABLE>

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

43
<PAGE>

INCOME APPROACH
WATER'S EDGE

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

Because of the size and recent financial history of the subject with revenue
increasing at a relatively strong 5.0 + %, but expenses also escalating at a
health pace, 12 +/- %, plus the lackluster apartment market in the greater
Chicago area, a capitalization and discount rate that is at or slightly above
the national and regional average was used in this analysis. The historical
gross revenue and expense trend is extended in our model because we don't see
anything that would cause it to change in the near future. The terminal
capitalization rate is standard for the Chicago area.

44
<PAGE>

<TABLE>
<CAPTION>
WATER'S EDGE
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,012,933 99% $ 974,648 104% $ 948,595 96% $ 844,805 96%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 939,419 91% $ 882,276 94% $ 924,417 94% $ 877,234 100%

Other Income $ 88,459 9% $ 57,281 6% $ 62,726 6% $ 1,625 0%

TOTAL RECEIPTS $ 1,027,877 100% $ 939,557 100% $ 987,143 100% $ 878,859 100%

EXPENSES:

Management Fee $ 47,607 $ 44,478 $ 46,441 $ 44,213
Other Admin $ 21,359 $ 11,872 $ 13,202 $ 10,153
Subtotal Admin $ 68,965 6.7% $ 56,350 6.0% $ 59,643 6.0% $ 54,366 6.2%

Supplies $ -
Utilities $ 51,972 $ 47,293 $ 41,760 $ 49,002
Building Services $ -
Other Operating $ 64,813 $ 60,506 $ 52,353 $ 52,859
Subtotal Operating $ 116,785 11% $ 107,799 11% $ 94,113 10% $ 101,861 12%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 133,407 $ 107,140 $ 97,168 $ 102,097
Painting/Decorating $ -
Subtotal Maint. $ 133,407 13% $ 107,140 11% $ 97,168 10% $ 102,097 12%

R.E. Taxes $ 132,793 $ 116,009 $ 124,112 $ 61,996
Insurance $ 10,407 $ 10,315 $ 9,217 $ 7,977
Other $ -
Subtotal Taxes-insur $ 143,200 14% $ 126,324 13% $ 133,329 14% $ 69,973 8%

TOTAL EXPENSES $ 462,357 45% $ 397,613 42% $ 384,253 39% $ 328,297 37%

NET OPERATING INCOME $ 565,520 55% $ 541,944 58% $ 602,890 61% $ 550,562 63%
</TABLE>

45
<PAGE>

WATER'S EDGE
DIRECT CAPITALIZATION

PROPERTY:

Water's Edge
705 Water's Edge Drive
Lake Villa, Illinois

DIRECT CAPITALIZATION:

<S> <C> <C> <C>
Number of Units 108

Revenue @ $815 per Unit $1,056,240
Expenses @ $4.63 per Sq. Ft. 441,700
----------
Net Income 614,540

Replacement Reserves @ $425 45,900
--------
Net Operating Income (NOI) 568,640

Cap Rate @ 9.25% $6,147,460

ESTIMATED VALUE:

$6,150,000
</TABLE>

46
<PAGE>

WATER'S EDGE APARTMENTS
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $1,043,321 $1,064,187 $1,085,471 $1,107,181 $1,129,324
Vacancy Loss ($ 52,166) ($ 53,209) ($ 54,274) ($ 55,359) ($ 56,466)
Rent Concessions $ -
Other $ 90,228 $ 92,935 $ 95,723 $ 98,594 $ 101,552
EFFECTIVE INCOME $1,081,383 $1,103,913 $1,126,920 $1,150,416 $1,174,410

EXPENSE
Management Fee $ 54,069 $ 55,196 $ 56,346 $ 57,521 $ 58,721
Other Admin $ 15,000 $ 15,450 $ 15,914 $ 16,391 $ 16,883
Subtotal Admin $ 69,069 $ 70,646 $ 72,260 $ 73,912 $ 75,603

Supplies $ - $ - $ - $ - $ -
Utilities $ 53,011 $ 54,602 $ 56,240 $ 57,927 $ 59,665
Building Services $ - $ - $ - $ - $ -
Other Operating $ 65,000 $ 66,950 $ 68,959 $ 71,027 $ 73,158
Subtotal Operating $ 118,011 $ 121,552 $ 125,198 $ 128,954 $ 132,823

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 110,000 $ 113,300 $ 116,699 $ 120,200 $ 123,806
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 110,000 $ 113,300 $ 116,699 $ 120,200 $ 123,806

R.E. Taxes $ 135,449 $ 139,513 $ 143,698 $ 148,009 $ 152,449
Insurance $ 10,615 $ 10,933 $ 11,261 $ 11,599 $ 11,947
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 146,064 $ 150,446 $ 154,959 $ 159,608 $ 164,396

TOTAL EXPENSES $ 443,144 $ 455,943 $ 469,116 $ 482,674 $ 496,628

NON-OPERATING EXPENSES
Capital Improvements $ 45,900 $ 47,277 $ 48,695 $ 50,156 $ 51,661
Other $ -

NET CASH FLOW $ 592,338 $ 600,692 $ 609,109 $ 617,586 $ 626,121

P.V. Factor 0.8969 0.8044 0.7214 0.6470 0.5803
P.V. Cash Flow $ 531,245 $ 483,173 $ 439,410 $ 399,575 $ 363,316

SUM P.V. $3,593,805
RESIDUAL $2,119,286

TOTAL VALUE $5,713,091

2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $1,151,911 $1,174,949 $1,198,448 $1,222,417 $1,246,865
Vacancy Loss ($ 57,596) ($ 58,747) ($ 59,922) ($ 61,121) ($ 62,343)
Rent Concessions
Other $ 104,599 $ 107,737 $ 110,969 $ 114,298 $ 117,727
EFFECTIVE INCOME $1,198,914 $1,223,938 $1,249,494 $1,275,594 $1,302,249

EXPENSE
Management Fee $ 59,946 $ 61,197 $ 62,475 $ 63,780 $ 65,112
Other Admin $ 17,389 $ 17,911 $ 18,448 $ 19,002 $ 19,572
Subtotal Admin $ 77,335 $ 79,108 $ 80,923 $ 82,781 $ 84,684

Supplies $ - $ - $ - $ - $ -
Utilities $ 61,455 $ 63,298 $ 65,197 $ 67,153 $ 69,168
Building Services $ - $ - $ - $ - $ -
Other Operating $ 75,353 $ 77,613 $ 79,942 $ 82,340 $ 84,810
Subtotal Operating $ 136,808 $ 140,912 $ 145,139 $ 149,493 $ 153,978

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 127,520 $ 131,346 $ 135,286 $ 139,345 $ 143,525
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 127,520 $ 131,346 $ 135,286 $ 139,345 $ 143,525

R.E. Taxes $ 157,023 $ 161,733 $ 166,585 $ 171,583 $ 176,730
Insurance $ 12,305 $ 12,675 $ 13,055 $ 13,446 $ 13,850
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 169,328 $ 174,408 $ 179,640 $ 185,029 $ 190,580

TOTAL EXPENSES $ 510,991 $ 525,773 $ 540,988 $ 556,649 $ 572,768

NON-OPERATING EXPENSES
Capital Improvements $ 53,211 $ 54,807 $ 56,451 $ 58,145 $ 59,889
Other

NET CASH FLOW $ 634,713 $ 643,358 $ 652,055 $ 660,800 $ 669,592

P.V. Factor 0.5204 0.4667 0.4186 0.3754 0.3367
P.V. Cash Flow $ 330,315 $ 300,282 $ 272,951 $ 248,083 $ 225,456
</TABLE>

47
<PAGE>

SUMMARY
WATER'S EDGE

PROPERTY:

Water's Edge
705 Water's Edge Drive
Lake Villa, Illinois

VALUE ESTIMATE:
<S> <C> <C> <C>
Sales Comparison Approach $6,480,000

Income Approach:
Direct Capitalization $6,150,000
DCF $5,715,000

FINAL VALUE:

$5,700,000 - $6,500,000
</TABLE>

48
<PAGE>

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

PONDS AT GEORGETOWN APARTMENTS

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

49
<PAGE>

[PHOTO]

PONDS AT GEORGETOWN
2511 PACKARD ROAD
ANN ARBOR, MICHIGAN

<TABLE>
<CAPTION>
PROPERTY STATISTICS
- --------------------------------------------------------------------------------
Land Plan Eight, two and three story garden style apartment buildings
<S> <C> <C> <C>
Land Area 13.08 Acres Number of Units 134
Density 10.24 Units/Acre Average Unit Size 1,050 Sq. Ft.
Net Rentable Area 143,400 Sq. Ft. Year Built 1988
- --------------------------------------------------------------------------------
</TABLE>

CONSTRUCTION TYPE
- --------------------------------------------------------------------------------
Brick, aluminum siding
- --------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------
Washer/dryer, pantry, microwave, self-cleaning oven, frost-free refrigerator,
dishwasher, gas fireplace, cable connections, two full-size bathrooms, marble
window sills, window blinds, carpeting, central air, balconies or patios,
carports, alarm system. Some units have cathedral ceilings
- --------------------------------------------------------------------------------

PROJECT AMENITIES
- --------------------------------------------------------------------------------
Clubhouse fitness center, swimming pool, tennis and platform tennis courts,
limited access entryways with intercom system, play area, jacuzzi, and 24 hour
emergency
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUATION SUMMARY
-------------------------------------------------------------
<S> <C> <C> <C>
Indicated Value $7,250,000 - $7,375,000
Value per Sq. Ft. of NRA $50.56 - $51.43
Value Per Unit $54,104 - $55,037
-------------------------------------------------------------
</TABLE>

50
<PAGE>

SALES COMPARISON APPROACH
PONDS AT GEORGETOWN

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject property is centrally located in a residential
neighborhood within two miles of the downtown area of Ann Arbor, and within easy
reach of two or three major shopping malls, Arborland Consumer Mall, Carpenter
Plaza, and University Square.

All of the comparable sales used in this analysis are located in neighborhoods
that are similar to the subject's and thus no adjustments are necessary.

SIZE - Although the size of the subject is equal to or smaller than each of the
comparable improved sales used in this analysis, the size differential is not
significant enough to warrant any type of adjustment.

L/B RATIO - Because the land size associated with the comparable sales is
unknown, this adjustment factor is not relevant.

QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered average. Comparable Sale 1 has simple aluminum siding and the overall
quality appears to be slightly less than the subject. An upward adjustment is
appropriate. Comparable Sale 3 is of far superior quality and should be adjusted
downward 10%. Comparable Sale 2 is deemed to be of equal construction quality
and is unchanged.

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average/fair condition.
Comparable Sale 1 was reported to require dramatic improvements at the time of
its sale and was

51
<PAGE>

adjusted upward 15% because of the extensive remodeling that took place. Sale 3
is in excellent condition and was adjusted down slightly.

AMENITIES - The subject is adequately equipped with amenities including a
swimming pool, tennis courts, exercise facility, etc. Both Comparable Sale 2 & 3
are equipped with similar amenities and need not be adjusted. Sale 1, however,
is void of any external recreational amenities and is adjusted upward 10%.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

52
<PAGE>

<TABLE>
<CAPTION>
THE PONDS AT GEORGETOWN
IMPROVED SALES ADJUSTMENT GRID
SUBJECT
<S> <C> <C> <C> <C> <C> <C> <C>
Land Value/sq. ft. $1.00 SALE 1 SALE 2 SALE 3
Sale Date: May-97 Mar-95 Jan-95
Net Rentable Area: 143,400 102,950 173,472 185,392
Land Area - sq. ft.
Lnd/Bld Ratio: 0.00 0.00 0.00 0.00
Stories: 2 3 2.5 2
Age: 10 33 18 7
Units 134 175 216 168
Price: $5,230,000 $11,262,397 $8,900,000
Price/Ft. - NRA $50.80 $64.92 $48.01
Price/Unit $29,886 $52,141 $52,976
GIM 4.83 6.40 6.47
OAR: 9.27% 8.70% 9.50%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $50.80 $64.92 $48.01
FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $50.80 $64.92 $48.01
MARKET CONDITIONS 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $50.80 $64.92 $48.01
PHYSICAL CHARACTERISTICS
Location 0% Similar 0% Similar 0% Similar
Size 0% Similar 0% Similar 0% Similar
Age 23% Older 8% Older (3%) Newer
L/B Ratio 0% Similar 0% Similar 0% Similar
Quality 5% Inferior 0% Similar (10%) Superior
Condt. 15% Inferior 0% Similar (5%) Superior
Amenities 10% Inferior 0% Similar 0% Similar
Other 0% Similar 0% Similar 0% Similar
Composite Adjustment 53% Inferior 8% Inferior (18%) Superior
Adjustment $26.92 $5.19 ($8.64)
INDICATED VALUE PER NRA $77.73 $78.12 $39.37
INDICATED VALUE PER UNIT $45,725 $56,312 $43,440
</TABLE>

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

53
<PAGE>

INCOME APPROACH
PONDS AT GEORGETOWN

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

Because of the recent financial history of the subject with revenue increasing
at a nominal 1.25% rate but expenses escalating at a higher 12.8% rate, plus
the current apartment market in the Ann Arbor area where most are granting one
months free rent, a capitalization and discount rate that is above the average
was used in this analysis. The perception of apartment supply out pacing the
demand contributed to this slightly above average choice and the use of a modest
2.5% revenue growth rate. The terminal capitalization rate, is slightly higher
than the national average, but within reason for the expectations of the future
market in the Ann Arbor area.

54
<PAGE>

<TABLE>
<CAPTION>
THE PONDS AT GEORGETOWN
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,406,375 99% $ 1,363,342 103% $ 1,346,560 108% $ 1,354,652 111%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,322,577 93% $ 1,275,013 97% $ 1,229,258 98% $ 1,199,915 99%

Other Income $ 103,945 7% $ 45,178 3% $ 19,464 2% $ 15,719 1%

TOTAL RECEIPTS $ 1,426,523 100% $ 1,320,191 100% $ 1,248,722 100% $ 1,215,634 100%

EXPENSES:

Management Fee $ 42,797 $ 40,272 $ 37,985 $ 36,502
Other Admin $ 125,223 $ 84,681 $ 56,858 $ 99,816
Subtotal Admin $ 168,020 11.8% $ 124,953 9.5% $ 94,841 7.6% $ 136,318 11.2%

Supplies $ -
Utilities $ 59,839 $ 68,596 $ 66,098 $ 73,884
Building Services $ -
Other Operating $ 113,519 $ 111,487 $ 123,199 $ 122,741
Subtotal Operating $ 173,357 12% $ 180,083 14% $ 189,297 15% $ 196,625 16%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 83,855 $ 118,480 $ 101,909 $ 88,427
Painting/Decorating $ -
Subtotal Maint. $ 83,855 6% $ 118,480 9% $ 101,909 8% $ 88,427 7%

R.E. Taxes $ 201,733 $ - $ 89 $ 13,897
Insurance $ 7,144 $ 18,765 $ 13,214 $ 6,453
Other $ -
Subtotal Taxes-insur $ 208,877 15% $ 18,765 1% $ 13,303 1% $ 20,350 2%

TOTAL EXPENSES $ 634,109 44% $ 442,281 34% $ 399,350 32% $ 441,720 36%

NET OPERATING INCOME $ 792,413 56% $ 877,910 66% $ 849,372 68% $ 773,914 64%
</TABLE>

55
<PAGE>

PONDS AT GEORGETOWN
DIRECT CAPITALIZATION

PROPERTY:

Ponds at Georgetown
2511 Packard Road
Ann Arbor, Michigan

<TABLE>
<CAPTION>
DIRECT CAPITALIZATION:
<S> <C> <C> <C>
Number of Units 134

Revenue @ $885.00 per Unit $1,423,080
Expenses @ $4.64 per Sq. Ft. 665,500
----------
Net Income 757,580

Replacement Reserves @ $425 56,950
----------
Net Operating Income (NOI) $700,630

Cap Rate @ 9.5% $7,375,000

ESTIMATED VALUE:

$7,375,000
</TABLE>

56
<PAGE>

<TABLE>
<CAPTION>
THE PONDS AT GEORGETOWN
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $1,448,566 $1,484,780 $1,521,900 $1,559,947 $1,598,946
Vacancy Loss ($ 72,428) ($ 74,239) ($ 76,095) ($ 77,997) ($ 79,947)
Rent Concessions $ -
Other $ 75,000 $ 76,500 $ 78,030 $ 79,591 $ 81,182
EFFECTIVE INCOME $1,451,138 $1,487,041 $1,523,835 $1,561,541 $1,600,181

EXPENSE
Management Fee $ 72,557 $ 74,352 $ 76,192 $ 78,077 $ 80,009
Other Admin $ 128,979 $ 131,558 $ 134,189 $ 136,873 $ 139,611
Subtotal Admin $ 201,536 $ 205,910 $ 210,381 $ 214,950 $ 219,620

Supplies $ - $ - $ - $ - $ -
Utilities $ 61,035 $ 62,255 $ 63,501 $ 64,771 $ 66,066
Building Services $ - $ - $ - $ - $ -
Other Operating $ 115,000 $ 117,300 $ 119,646 $ 122,039 $ 124,480
Subtotal Operating $ 176,035 $ 179,555 $ 183,147 $ 186,809 $ 190,546

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 90,000 $ 91,800 $ 93,636 $ 95,509 $ 97,419
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 90,000 $ 91,800 $ 93,636 $ 95,509 $ 97,419

R.E. Taxes $ 205,768 $ 209,883 $ 214,061 $ 218,362 $ 222,730
Insurance $ 7,287 $ 7,433 $ 7,581 $ 7,733 $ 7,888
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 213,055 $ 217,316 $ 221,662 $ 226,095 $ 230,617

TOTAL EXPENSES $ 680,625 $ 694,581 $ 708,826 $ 723,364 $ 738,201

NON-OPERATING EXPENSES
Capital Improvements $ 56,950 $ 58,659 $ 60,418 $ 62,231 $ 64,096
Other $ -

NET CASH FLOW $ 713,563 $ 733,801 $ 754,591 $ 775,946 $ 797,882

P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674
P.V. Cash Flow $ 637,110 $ 584,982 $ 537,103 $ 493,128 $ 452,740

SUM P.V. $4,469,357
RESIDUAL $2,774,810

TOTAL VALUE $7,244,167

2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $1,638,920 $1,679,893 $1,721,890 $1,764,937 $1,809,061
Vacancy Loss ($ 81,946) ($ 83,995) ($ 86,095) ($ 88,247) ($ 90,453)
Rent Concessions
Other $ 82,806 $ 84,462 $ 86,151 $ 87,874 $ 89,632
EFFECTIVE INCOME $1,639,780 $1,680,360 $1,721,947 $1,764,565 $1,808,240

EXPENSE
Management Fee $ 81,989 $ 84,018 $ 86,097 $ 88,228 $ 90,412
Other Admin $ 142,403 $ 145,251 $ 148,156 $ 151,119 $ 154,141
Subtotal Admin $ 224,392 $ 229,269 $ 234,253 $ 239,347 $ 244,563

Supplies $ - $ - $ - $ - $ -
Utilities $ 67,387 $ 68,735 $ 70,110 $ 71,512 $ 72,942
Building Services $ - $ - $ - $ - $ -
Other Operating $ 126,969 $ 129,509 $ 132,099 $ 134,741 $ 137,436
Subtotal Operating $ 194,357 $ 198,244 $ 202,209 $ 206,253 $ 210,378

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 99,367 $ 101,355 $ 103,382 $ 105,449 $ 107,558
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 99,367 $ 101,355 $ 103,382 $ 105,449 $ 107,558

R.E. Taxes $ 227,184 $ 231,728 $ 236,362 $ 241,090 $ 245,911
Insurance $ 8,045 $ 8,206 $ 8,370 $ 8,538 $ 8,708
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 235,229 $ 239,934 $ 244,733 $ 249,627 $ 254,620

TOTAL EXPENSES $ 753,345 $ 768,801 $ 784,576 $ 800,677 $ 817,109

NON-OPERATING EXPENSES
Capital Improvements $ 66,021 $ 68,001 $ 70,041 $ 72,143 $ 74,307
Other

NET CASH FLOW $ 820,414 $ 843,558 $ 867,329 $ 891,746 $ 916,823
$ $ $ $ $
P.V. Factor 0.5066 0.4523 0.4039 0.3606 0.3220
P.V. Cash Flow $ 415,647 $ 381,583 $ 350,300 $ 321,572 $ 295,193
</TABLE>

57
<PAGE>

SUMMARY
PONDS AT GEORGETOWN

PROPERTY:

Ponds at Georgetown
2511 Packard Road
Ann Arbor, Michigan

<TABLE>
<CAPTION>
VALUE ESTIMATE:
<S> <C> <C> <C>
Sales Comparison Approach $7,370,0000

Income Approach:
Direct Capitalization $7,375,000
DCF $7,250,000

FINAL VALUE:

$7,250,000 - $7,375,000
</TABLE>

58
<PAGE>

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

HIGHLAND PARK APARTMENTS

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

59
<PAGE>

[PHOTO]

HIGHLAND PARK APARTMENTS
2796 PRENDERGAST PLACE
REYNOLDSBURG, OHIO

<TABLE>
<CAPTION>
PROPERTY STATISTICS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Land Plan Garden style apartment buildings

Land Area 20.83 Acres Number of Units 252
Density 12.10 Units/Acre Average Unit Size 907 Sq. Ft.
Net Rentable Area 228,690 Sq. Ft. Year Built 1988
- --------------------------------------------------------------------------------
</TABLE>

CONSTRUCTION TYPE
- --------------------------------------------------------------------------------
Wood frame, brick and vinyl siding, three levels
- --------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------
Fireplace, gas heat, cable television, washer/dryer, range, dishwasher, patio
or balcony
- --------------------------------------------------------------------------------

PROJECT AMENITIES
- --------------------------------------------------------------------------------
Tennis courts, swimming pool
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUATION SUMMARY
-------------------------------------------------------------
<S> <C> <C> <C>
Indicated Value $11,000,000 - $11,350,000
Value per Sq. Ft. of NRA $48.10 - $49.63
Value Per Unit $43,651 - $45,040
-------------------------------------------------------------
</TABLE>

60
<PAGE>

SALES COMPARISON APPROACH
HIGHLAND PARK

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject is located with frontage along Tussing and Prendergast
Road in a developing area along the I-70 corridor.

Comparable Sales 1 & 2 are fairly similar in location, however they do not
benefit from the I-70 access, thus requiring an upward adjustment. Comparable
Sale 3 is very similar to the subject in location attributes and thus no
adjustment is necessary.

SIZE - All of the comparable sales are smaller than the subject and require
downward adjustments for this factor.

AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate we have tempered this 2.22 % factor downward.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.

L/B RATIO - Sales 1 & 3 have lower land to building ratios requiring upward
adjustments. Sale 2 has a larger land to building ratio and is thus adjusted
downward.

QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered average/fair. Comparable Sales 1 was judged to be of slightly
inferior quality and adjusted 5% upward. Sale 2 has all vinyl siding which is
judged to be inferior to the subject's brick and has been adjusted upward 15%.

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are the comparable sales. No adjustment is warranted.

AMENITIES - The subject has fireplaces in each unit and offers tennis courts.
Upward adjustments are required for Sales 2 & 3.

61
<PAGE>

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

62
<PAGE>

HIGHLAND PARK APARTMENTS
IMPROVED SALES ADJUSTMENT GRID
SUBJECT
SALE 1 SALE 2 SALE 3
<S> <C> <C> <C> <C> <C> <C> <C>
Sale Date: Dec-96 Feb-95 Sep-96

Net Rentable Area: 228,690 172,606 140,400 79,906
Land Area - acre 21 14 15 6
Lnd/Bld Ratio: 7.93 6.86 9.31 6.54
Stories: 2 2 2 2
Age: 8 9 2 2
Units 252 180 156 96
Price: $8,131,000 $5,460,000 $4,100,000
Price/Ft. - NRA $47.11 $38.89 $51.31
Price/Unit $45,172 $35,000 $42,708
GIM 7.06 6.10 6.90
OAR: 8.70% 9.60% 8.50%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $47.11 $38.89 $51.31
FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $47.11 $38.89 $51.31
MARKET CONDITIONS 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $47.11 $38.89 $51.31
PHYSICAL CHARACTERISTICS
Location 5% Inferior 5% Inferior 0% Similar
Size (5%) Smaller (10%) Smaller (5%) Smaller
Age 1% Older (6%) Newer (6%) Newer
L/B Ratio 3% Inferior (5%) Superior 4% Inferior
Quality 5% Inferior 15% Inferior 0% Similar
Condt. 0% Similar 0% Similar 0% Similar
Amenities 0% Similar 10% Inferior 10% Inferior
Other 0% Similar 0% Similar 0% Similar
Composite Adjustment 9% Inferior 9% Inferior 3% Inferior
Adjustment $4.32 $3.54 $1.42
INDICATED VALUE PER NRA $51.43 $42.42 $52.73
INDICATED VALUE PER UNIT $49,314 $38,182 $43,892
</TABLE>

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

63
<PAGE>

INCOME APPROACH
HIGHLAND PARK

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

Because of the size and recent solid financial history of the subject with
revenue increasing at a relatively steady 3.0 +/- % and the expenses apparently
under control, although increasing slightly faster than revenues, plus the
stable to strong apartment market in the Columbus area, a capitalization and
discount rate that is at the national and regional average was used in this
analysis. The historical gross revenue and expense trend is extended in our
model at a slightly moderated level for we feel that rental rate increases in
the future will moderate to the 3.0 +/- % level and the expenses incurred by the
subject will probably only increase at the rate of inflation, 2.0 + %. The
terminal capitalization rate is standard or slightly higher than normal for the
Columbus area but in line with the national average.

64
<PAGE>

HIGHLAND PARK
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,738,372 108% $ 1,662,082 105% $ 1,594,090 103% $ 1,562,782 103%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,592,932 99% $ 1,555,212 99% $ 1,529,957 99% $ 1,505,433 100%

Other Income $ 20,621 1% $ 23,415 1% $ 10,342 1% $ 5,541 0%

TOTAL RECEIPTS $ 1,613,553 100% $ 1,578,627 100% $ 1,540,299 100% $ 1,510,974 100%

EXPENSES:

Management Fee $ 80,553 $ 79,500 $ 78,176 $ 76,103
Other Admin $ 25,689 $ 27,166 $ 39,750 $ 26,958
Subtotal Admin $ 106,243 6.6% $ 106,666 6.8% $ 117,926 7.7% $ 103,061 6.8%

Supplies $ -
Utilities $ 77,051 $ 81,183 $ 59,825 $ 58,893
Building Services $ -
Other Operating $ 158,668 $ 141,300 $ 131,558 $ 130,039
Subtotal Operating $ 235,719 15% $ 222,483 14% $ 191,383 12% $ 188,932 13%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 109,323 $ 95,328 $ 90,206 $ 66,819
Painting/Decorating $ -
Subtotal Maint. $ 109,323 7% $ 95,328 6% $ 90,206 6% $ 66,819 4%

R.E. Taxes $ 112,277 $ 109,700 $ 118,172 $ 112,853
Insurance $ 12,996 $ 16,405 $ 12,110 $ 14,144
Other $ -
Subtotal Taxes-insur $ 125,273 8% $ 126,105 8% $ 130,282 8% $ 126,997 8%

TOTAL EXPENSES $ 576,557 36% $ 550,582 35% $ 529,797 34% $ 485,809 32%

NET OPERATING INCOME $ 1,036,996 64% $ 1,028,045 65% $ 1,010,502 66% $ 1,025,165 68%
</TABLE>

65
<PAGE>

HIGHLAND PARK
DIRECT CAPITALIZATION

PROPERTY:

Highland Park
2796 Prendergast Place
Reynoldsburg, Ohio

<TABLE>

DIRECT CAPITALIZATION:
<S> <C> <C> <C>
Number of Units 252

Revenue @ 570 per Unit $1,723,680
Expenses @ 2.71 per Sq. Ft. 620,000
-----------
Net Income 1,103,680

Replacement Reserves @ $425 107,100
-----------
Net Operating Income (NOI) $996,580

Cap Rate @ 9.0% $11,073,110

ESTIMATED VALUE:

$11,100,000
</TABLE>

66
<PAGE>

HIGHLAND PARK APARTMENTS
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,790,523 $ 1,844,239 $ 1,899,566 $ 1,956,553 $ 2,015,250
Vacancy Loss ($ 89,526) ($ 92,212) ($ 94,978) ($ 97,828) ($ 100,762)
Rent Concessions $ -
Other $ 25,000 $ 25,500 $ 26,010 $ 26,530 $ 27,061
EFFECTIVE INCOME $ 1,725,997 $ 1,777,527 $ 1,830,598 $ 1,885,256 $ 1,941,548

EXPENSE
Management Fee $ 86,300 $ 88,876 $ 91,530 $ 94,263 $ 97,077
Other Admin $ 26,203 $ 26,460 $ 26,460 $ 26,460 $ 26,460
Subtotal Admin $ 112,503 $ 115,336 $ 117,990 $ 120,722 $ 123,537

Supplies $ - $ - $ - $ - $ -
Utilities $ 78,591 $ 80,163 $ 81,766 $ 83,401 $ 85,069
Building Services $ - $ - $ - $ - $ -
Other Operating $ 162,635 $ 165,887 $ 169,205 $ 172,589 $ 176,041
Subtotal Operating $ 241,226 $ 246,050 $ 250,971 $ 255,991 $ 261,110

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 111,510 $ 113,740 $ 116,015 $ 118,335 $ 120,702
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 111,510 $ 113,740 $ 116,015 $ 118,335 $ 120,702

R.E. Taxes $ 114,523 $ 116,813 $ 119,149 $ 121,532 $ 123,963
Insurance $ 13,256 $ 13,521 $ 13,791 $ 14,067 $ 14,349
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 127,778 $ 130,334 $ 132,941 $ 135,600 $ 138,312

TOTAL EXPENSES $ 593,017 $ 605,460 $ 617,916 $ 630,648 $ 643,661

NON-OPERATING EXPENSES
Capital Improvements $ 107,100 $ 109,242 $ 111,427 $ 113,655 $ 115,928
Other $ -

NET CASH FLOW $ 1,025,880 $ 1,062,824 $ 1,101,254 $ 1,140,952 $ 1,181,958

P.V. Factor 0.8969 0.8044 0.7214 0.6470 0.5803
P.V. Cash Flow $ 920,072 $ 854,893 $ 794,444 $ 738,190 $ 685,848

2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 2,075,707 $ 2,137,978 $ 2,202,118 $ 2,268,181 $ 2,336,227
Vacancy Loss ($ 103,785) ($ 106,899) ($ 110,106) ($ 113,409) ($ 116,811)
Rent Concessions
Other $ 27,602 $ 28,154 $ 28,717 $ 29,291 $ 29,877
EFFECTIVE INCOME $ 1,999,524 $ 2,059,233 $ 2,120,729 $ 2,184,064 $ 2,249,293

EXPENSE
Management Fee $ 99,976 $ 102,962 $ 106,036 $ 109,203 $ 112,465
Other Admin $ 26,460 $ 26,460 $ 26,460 $ 26,460 $ 26,460
Subtotal Admin $ 126,436 $ 129,421 $ 132,496 $ 135,663 $ 138,924

Supplies $ - $ - $ - $ - $ -
Utilities $ 86,771 $ 88,506 $ 90,276 $ 92,082 $ 93,924
Building Services $ - $ - $ - $ - $ -
Other Operating $ 179,562 $ 183,153 $ 186,816 $ 190,552 $ 194,364
Subtotal Operating $ 266,333 $ 271,659 $ 277,093 $ 282,634 $ 288,287

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 123,116 $ 125,578 $ 128,090 $ 130,652 $ 133,265
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 123,116 $ 125,578 $ 128,090 $ 130,652 $ 133,265

R.E. Taxes $ 126,442 $ 128,971 $ 131,550 $ 134,181 $ 136,865
Insurance $ 14,636 $ 14,928 $ 15,227 $ 15,531 $ 15,842
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 141,078 $ 143,899 $ 146,777 $ 149,713 $ 152,707

TOTAL EXPENSES $ 656,962 $ 670,558 $ 684,456 $ 698,662 $ 713,183

NON-OPERATING EXPENSES
Capital Improvements $ 118,247 $ 120,612 $ 123,024 $ 125,485 $ 127,994
Other

NET CASH FLOW $ 1,224,314 $ 1,268,063 $ 1,313,249 $ 1,359,917 $ 1,408,115

P.V. Factor 0.5204 0.4667 0.4186 0.3754 0.3367
P.V. Cash Flow $ 637,153 $ 591,857 $ 549,728 $ 510,550 $ 474,121

SUM P.V. $6,756,856
RESIDUAL $4,456,740

TOTAL VALUE $11,213,596
</TABLE>

67
<PAGE>

SUMMARY
HIGHLAND PARK

PROPERTY:

Highland Park
2796 Prendergast Place
Reynoldsburg, Ohio

VALUE ESTIMATE:
<S> <C> <C>
Sales Comparison Approach $11,340,000

Income Approach:
Direct Capitalization $11,100,000
DCF $11,215,000

FINAL VALUE:

$11,000,000 - $11,350,000
</TABLE>

68
<PAGE>

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

FOX HOLLOW APARTMENTS

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

69
<PAGE>

[PHOTO]

FOX HOLLOW APARTMENTS
177 West Hartley Drive
High Point, North Carolina

<TABLE>
PROPERTY STATISTICS
- --------------------------------------------------------------------------------
Land Plan Two story garden style apartment buildings
<S> <C> <C> <C>
Land Area 26.00 Acres Number of Units 184
Density 7.08 Units/Acre Average Unit Size 880 Sq. Ft.
Net Rentable Area 161,712 Sq. Ft. Year Built 1987
- --------------------------------------------------------------------------------
</TABLE>

CONSTRUCTION TYPE
- --------------------------------------------------------------------------------
Aluminum siding
- --------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------
Cable ready, air conditioning, dishwasher, microwave oven, disposal, balcony
or patio, fireplace, washer/dryer
- --------------------------------------------------------------------------------

PROJECT AMENITIES
- --------------------------------------------------------------------------------
Swimming pool, fitness center, tennis courts, clubhouse, courtyard area, paid
utilities, storage
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUATION SUMMARY
------------------------------------------------------
<S> <C> <C> <C>
Indicated Value $6,770,000 - $7,550,000
Value per Sq. Ft. of NRA $41.86 - $46.69
Value Per Unit $36,793 - $41,033
------------------------------------------------------
</TABLE>

70
<PAGE>

SALES COMPARISON APPROACH
FOX HOLLOW

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject is located three miles north of downtown High Point with
good access to Hwy 311, North Main Street. It is situated on 26 acres of land
with frontage along Hartley Avenue

Comparable Sale 1 is located in a more rural setting and is adjusted downward
5%. Sale 2 is located on the edge of a very affluent neighborhood and warranted
a 10% negative adjustment for this feature. Sale 4 has good exposure and access
to and from I-40 and thus was adjusted downward 10%.

SIZE - All of the comparable sales are about the same size as the subject and
thus no adjustments were necessary.

L/B RATIO - Because the land size of the comparable sales is not available, this
factor is not germane to this analysis.

QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are of average quality construction as is Comparable Sales 4. Sales
1, 2 & 3, however, are judged to be of higher quality, and were adjusted
downward accordingly.

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are three of the four comparable sales. No adjustment is warranted. The
fourth, Comparable Sale 3, was reported to be in excellent condition at the time
of the sale and is adjusted downward 5%.

71
<PAGE>

AMENITIES - The subject has fireplaces in each unit and offers tennis courts and
other outdoor features. Sale 1 had two pools and thus was adjusted down 5%. Sale
2 offers both an outdoor and indoor pool. A 10% negative adjustment is
warranted. Sale 3 is void of unit fireplaces. It was adjusted upward 5%.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

72
<PAGE>

- -----------------------------------------------------------------------------------------------------------------------------------
FOX HOLLOW
IMPROVED SALES ADJUSTMENT GRID
SUBJECT
SALE 1 SALE 2 SALE 3 SALE 4
Sale Date: Mar-96 Feb-95 Mar-97 Nov-96
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Rentable Area: 161,712 244,750 167,886 233,728 170,696
Land Area - acre
Lnd/Bld Ratio: 0.00 0.00 0.00 0.00 0.00
Stories: 2 2 2 3 2
Age: 10 7 10 4 12
Units 184 244 198 256 216
Price: $13,450,000 $10,825,000 $14,050,000 $9,600,000
Price/Ft. - NRA $54.95 $64.48 $60.11 $56.24
Price/Unit $55,123 $54,672 $54,883 $44,444
GIM 7.17 7.01 6.89 5.96
OAR: 8.66% 8.69% 8.90% 9.33%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price* $54.95 $64.48 $60.11 $56.24
FINANCING Market Market Market Market
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price** $54.95 $64.48 $60.11 $56.24
MARKET CONDITIONS 0% Similar 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price*** $54.95 $64.48 $60.11 $56.24
PHYSICAL CHARACTERISTICS
Location (5%) Superior (10%) Superior 0% Similar (10%) Superior
Size 0% Similar 0% Similar 0% Similar 0% Similar
Age (3%) Newer 0% Similar (6%) Newer 3% Older
L/B Ratio 0% Similar 0% Similar 0% Similar 0% Similar
Quality (10%) Superior (5%) Superior (10%) Superior 0% Similar
Condt. 0% Similar 0% Similar (5%) Superior 0% Similar
Amenities (5%) Superior (10%) Superior 5% Inferior 0% Similar
Other 0% Similar 0% Similar 0% Similar 0% Similar
Composite Adjustment (23%) Superior (25%) Superior (16%) Superior (7%) Superior
Adjustment ($12.64) ($16.12) ($9.62) ($3.94)
INDICATED VALUE PER NRA $42.31 $48.36 $50.49 $52.30
INDICATED VALUE PER UNIT $42,445 $41,004 $46,102 $41,333
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

73
<PAGE>

INCOME APPROACH
FOX HOLLOW

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

A review of the subject's recent financial statements indicates a relatively
stable increase in rental rates and a trend to bring operating costs under
control. Its location in the Greensboro/Winston-Salem "Piedmont Triad" is of
some concern for it is reported that the multifamily sector has become
moderately oversupplies, as is evidenced by the flattening of rents over the
past 12 months. Therefore we have used a modest 2.5% rental increase (similar to
the trend over the past three years) in our model along with a slightly above
average 12.5% discount rate which reflects the uncertainty of the market's
future in this area. The terminal capitalization rate is normal for the area but
slightly higher than the national average.

74
<PAGE>

FOX HOLLOW
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,305,880 101% $ 1,285,085 101% $ 1,257,020 105% $ 1,209,700 106%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,196,872 92% $ 1,170,314 92% $ 1,136,354 95% $ 1,122,739 98%

Other Income $ 98,995 8% $ 107,796 8% $ 58,717 5% $ 21,249 2%

TOTAL RECEIPTS $ 1,295,867 100% $ 1,278,110 100% $ 1,195,071 100% $ 1,143,988 100%

EXPENSES:

Management Fee $ 59,344 $ 56,235 $ 56,121 $ 58,124
Other Admin $ 77,371 $ 91,607 $ 57,870 $ 48,420
Subtotal Admin $ 136,715 10.6% $ 147,842 11.6% $ 113,991 9.5% $ 106,544 9.3%

Supplies $ -
Utilities $ 75,837 $ 70,488 $ 60,146 $ 57,376
Building Services $ -
Other Operating $ 153,863 $ 141,921 $ 150,752 $ 147,061
Subtotal Operating $ 229,700 18% $ 212,409 17% $ 210,898 18% $ 204,437 18%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 76,469 $ 78,541 $ 82,232 $ 79,251
Painting/Decorating $ -
Subtotal Maint. $ 76,469 6% $ 78,541 6% $ 82,232 7% $ 79,251 7%

R.E. Taxes $ 85,807 $ 73,766 $ 91,249 $ 49,197
Insurance $ 14,160 $ 14,328 $ 7,387 $ 10,033
Other $ -
Subtotal Taxes-insur $ 99,967 8% $ 88,094 7% $ 98,636 8% $ 59,230 5%

TOTAL EXPENSES $ 542,851 42% $ 526,886 41% $ 505,757 42% $ 449,462 39%

NET OPERATING INCOME $ 753,016 58% $ 751,224 59% $ 689,314 58% $ 694,526 61%
</TABLE>

75
<PAGE>

FOX HOLLOW
DIRECT CAPITALIZATION

PROPERTY:

Fox Hollow
177 West Hartley Drive
High Point, North Carolina

<TABLE>

DIRECT CAPITALIZATION:
<S> <C> <C> <C>
Number of Units 184

Revenue @ $585 per Unit $1,290,000
Expenses @ $3.27 per Sq. Ft. 528,800
----------
Net Income 761,200

Replacement Reserves @ $450 82,800
-----------
Net Operating Income (NOI) $678,400

Cap Rate @ 9.5% $7,141,050

ESTIMATED VALUE:

$7,150,000
</TABLE>

76
<PAGE>

HIGHLAND PARK APARTMENTS
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,325,468 $ 1,358,605 $ 1,392,570 $ 1,427,384 $ 1,463,069
Vacancy Loss ($ 66,273) ($ 67,930) ($ 69,629) ($ 71,369) ($ 73,153)
Rent Concessions $ -
Other $ 70,000 $ 72,100 $ 74,263 $ 76,491 $ 78,786
EFFECTIVE INCOME $ 1,329,195 $ 1,362,775 $ 1,397,205 $ 1,432,506 $ 1,468,701

EXPENSE
Management Fee $ 53,168 $ 54,511 $ 55,888 $ 57,300 $ 58,748
Other Admin $ 78,917 $ 81,285 $ 83,723 $ 86,235 $ 88,822
Subtotal Admin $ 132,085 $ 135,796 $ 139,612 $ 143,535 $ 147,570

Supplies $ - $ - $ - $ - $ -
Utilities $ 77,354 $ 79,674 $ 82,065 $ 84,527 $ 87,062
Building Services $ - $ - $ - $ - $ -
Other Operating $ 153,865 $ 158,481 $ 163,235 $ 168,132 $ 173,176
Subtotal Operating $ 231,219 $ 238,155 $ 245,300 $ 252,659 $ 260,239

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 80,000 $ 82,400 $ 84,872 $ 87,418 $ 90,041
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 80,000 $ 82,400 $ 84,872 $ 87,418 $ 90,041

R.E. Taxes $ 87,522 $ 90,148 $ 92,852 $ 95,638 $ 98,507
Insurance $ 14,443 $ 14,876 $ 15,323 $ 15,782 $ 16,256
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 101,965 $ 105,024 $ 108,175 $ 111,420 $ 114,763

TOTAL EXPENSES $ 545,269 $ 561,375 $ 577,959 $ 595,033 $ 612,613

NON-OPERATING EXPENSES
Capital Improvements $ 78,200 $ 80,546 $ 82,962 $ 85,451 $ 88,015
Other $ -

NET CASH FLOW $ 705,726 $ 720,853 $ 736,284 $ 752,022 $ 768,074

P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674
P.V. Cash Flow $ 630,112 $ 574,660 $ 524,072 $ 477,924 $ 435,826

2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,499,646 $ 1,537,137 $ 1,575,565 $ 1,614,954 $ 1,655,328
Vacancy Loss ($ 74,982) ($ 76,857) ($ 78,778) ($ 80,748) ($ 82,766)
Rent Concessions
Other $ 81,149 $ 83,584 $ 86,091 $ 88,674 $ 91,334
EFFECTIVE INCOME $ 1,505,813 $ 1,543,864 $ 1,582,878 $ 1,622,880 $ 1,663,896

EXPENSE
Management Fee $ 60,233 $ 61,755 $ 63,315 $ 64,915 $ 66,556
Other Admin $ 91,487 $ 94,232 $ 97,058 $ 99,970 $ 102,969
Subtotal Admin $ 151,719 $ 155,986 $ 160,374 $ 164,885 $ 169,525

Supplies $ - $ - $ - $ - $ -
Utilities $ 89,674 $ 92,364 $ 95,135 $ 97,989 $ 100,929
Building Services $ - $ - $ - $ - $ -
Other Operating $ 178,372 $ 183,723 $ 189,235 $ 194,912 $ 200,759
Subtotal Operating $ 268,046 $ 276,087 $ 284,370 $ 292,901 $ 301,688

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 92,742 $ 95,524 $ 98,390 $ 101,342 $ 104,382
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 92,742 $ 95,524 $ 98,390 $ 101,342 $ 104,382

R.E. Taxes $ 101,462 $ 104,508 $ 107,641 $ 110,870 $ 114,197
Insurance $ 16,744 $ 17,246 $ 17,763 $ 18,296 $ 18,845
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 118,206 $ 121,752 $ 125,404 $ 129,167 $ 133,042

TOTAL EXPENSES $ 630,713 $ 649,349 $ 668,538 $ 688,295 $ 708,627

NON-OPERATING EXPENSES
Capital Improvements $ 90,655 $ 93,375 $ 96,176 $ 99,061 $ 102,033
Other

NET CASH FLOW $ 784,444 $ 801,139 $ 818,164 $ 835,524 $ 853,226

P.V. Factor 0.5066 0.4523 0.4039 0.3606 0.3220
P.V. Cash Flow $ 397,424 $ 362,395 $ 330,433 $ 301,298 $ 274,716

SUM P.V. $4,308,869
RESIDUAL $2,459,362

TOTAL VALUE $6,768,231
</TABLE>

77
<PAGE>

SUMMARY
FOX HOLLOW

PROPERTY:

Fox Hollow
177 West Hartley Drive
High Point, North Carolina

<TABLE>

VALUE ESTIMATE:
<S> <C> <C>
Sales Comparison Approach $7,550,000

Income Approach:
Direct Capitalization
$7,150,000
DCF
$6,770,000

FINAL VALUE:

$6,770,000 - $7,550,000
</TABLE>

78
<PAGE>

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

CRANE'S LANDING APARTMENTS

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

79
<PAGE>

[PHOTO]

CRANE'S LANDING
3440 Goldenrod Road
Winter Park, Florida

PROPERTY STATISTICS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Land Plan Two and three-story walk up apartments
<S> <C> <C> <C>
Land Area 14.00 Acres Number of Units 252
Density 18.00 Units/Acre Average Unit Size 797 Sq. Ft.
Net Rentable Area 200,824 Sq. Ft. Year Built 1990
- --------------------------------------------------------------------------------
</TABLE>

CONSTRUCTION TYPE
- --------------------------------------------------------------------------------
Wood frame, stucco
- --------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------
Air conditioning, deluxe bedrooms, washer/dryer, vaulted ceilings in upper
units, dishwasher, disposal, electric stove, double security door locks,
sliding glass patio doors, ceiling fan in living room, carpeting
- --------------------------------------------------------------------------------

PROJECT AMENITIES
- --------------------------------------------------------------------------------
Two swimming pools, clubhouse, exercise room, pool table, jacuzzi, lighted
tennis court, sand volleyball court, children's playground
- --------------------------------------------------------------------------------

VALUATION SUMMARY

<TABLE>
<CAPTION>
-------------------------------------------------------
<S> <C> <C> <C>
Indicated Value $12,500,000 - $13,000,000
Value per Sq. Ft. NRA $62.24 - $64.73
Value per Unit $49,603 - $51,587
-------------------------------------------------------
</TABLE>

80
<PAGE>

SALES COMPARISON APPROACH
CRANE'S LANDING

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject is located approximately five miles northeast of
Orlando's central business district in the proximity of the Florida 417 toll
road which is a short distance to the east. It is in a neighborhood of numerous
multi-family apartment complexes just south of the major intersection of
Goldenrod Road, Highway 551, and University Blvd. Access to the downtown area is
fair using the toll road.

Comparable Sale 1 is located in a newly developing neighborhood with excellent
access to the toll road in the proximity of the University of Central Florida.
Because of its easier toll road access, it was adjusted downward 5%. The other
two comparable sales are judged to be in neighborhoods that are similar to the
subject.

SIZE - All of the comparable sales are about the same size as the subject and
thus no adjustments were necessary.

L/B RATIO - The adjustment for land to building ratio is based on the difference
in land to building ratio (site coverage). Those comparable sales having lower
land to building ratio require an upward adjustment while those having a larger
ratio are adjusted downward.

QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are of average quality construction as are Comparable Sales 1 & 3.
Sale 2, however is judged to be of slightly superior quality and is adjusted
downward 5%.

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are the three comparable sales . No adjustment is required.

81
<PAGE>

AMENITIES - The subject has interior features that are relatively common in the
Orlando area. Its common amenities are also rather common and similar to the
comparable sales with the exception of Sale 1 which has the additional feature
of a private lake. It was adjusted downward 5% to compensate.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

<PAGE>

CRANE'S LANDING
IMPROVED SALES ADJUSTMENT GRID
SUBJECT
SALE 1 SALE 2 SALE 3
<S> <C> <C> <C> <C> <C> <C> <C>
Sale Date: Apr-97 Aug-96 May-97

Net Rentable Area 200,824 270,000 290,112 169,288
Land Area - acre 18 20 26 20
Lnd/Bld Ratio: 9.60 9.73 7.81 10.14
Stories: 2.5 3 2 2
Age: 7 7 9 8
Units 252 308 360 200
Price: $16,000,000 $17,900,000 $9,800,000
Price/Ft. - NRA $59.26 $61.70 $57.89
Price/Unit $51,948 $49,722 $49,000
GIM
OAR:
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $59.26 $61.70 $57.89
FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $59.26 $61.70 $57.89
MARKET CONDITIONS 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $59.26 $61.70 $57.89
PHYSICAL CHARACTERISTICS
Location (5%) Superior 0% Similar 0% Similar
Size 0% Similar 0% Similar 0% Similar
Age 0% Similar 2% Older 1% Older
L/B Ratio 0% Similar 0% Similar 0% Similar
Quality 0% Similar (5%) Superior 0% Similar
Condt. 0% Similar 0% Similar 0% Similar
Amenities (5%) Superior 0% Similar 0% Similar
Other 0% Similar 0% Similar 0% Similar
Composite Adjustment (10%) Superior (3%) Superior 1% Inferior
Adjustment ($5.93) ($1.85) $0.58
INDICATED VALUE PER NRA $53.33 $59.85 $58.47
INDICATED VALUE PER UNIT $46,753 $48,231 $49,490
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

83
<PAGE>

INCOME APPROACH
CRANE'S LANDING

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

A review of the subject's recent financial statements indicates a relatively
stable increase in rental income, although at a minimal 1.0 +/- % rate over the
past three years. Total revenue has increased at a higher 4.9% due to the
increase in "other" income. Because of the optimistic outlook for the apartment
market in the Orlando area, we have used a more optimistic 3% rental revenue
growth along with a similar expense growth rate. The discount rate used is
slightly below the nations average and reflects the optimistic outlook for
Orlando. The terminal cap rate is the standard 10% based on the market's 9.0%
going-in cap rate.

84
<PAGE>

CRANE'S LANDING
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,962,940 101% $ 1,937,940 105% $ 1,907,145 113% $ 1,893,450 113%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,840,681 95% $ 1,752,401 95% $ 1,594,374 94% $ 1,593,093 95%

Other Income $ 96,261 5% $ 95,966 5% $ 93,807 6% $ 82,335 5%

TOTAL RECEIPTS $ 1,936,943 100% $ 1,848,367 100% $ 1,688,181 100% $ 1,675,428 100%

EXPENSES:

Management Fee $ 68,783 $ 79,593 $ 60,738 $ 67,760
Other Admin $ 73,245 $ 81,733 $ 71,202 $ 63,136
Subtotal Admin $ 142,028 7.3% $ 161,326 8.7% $ 131,940 7.8% $ 130,896 7.8%

Supplies $ -
Utilities $ 67,023 $ 68,152 $ 63,766 $ 57,101
Building Services $ -
Other Operating $ 215,672 $ 163,474 $ 162,259 $ 167,220
Subtotal Operating $ 282,695 15% $ 231,626 13% $ 226,025 13% $ 224,321 13%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 91,557 $ 89,499 $ 92,668 $ 95,969
Painting/Decorating $ -
Subtotal Maint. $ 91,557 5% $ 89,499 5% $ 92,668 5% $ 95,969 6%

R.E. Taxes $ 188,320 $ 176,228 $ 179,982 $ 188,087
Insurance $ 12,148 $ 13,013 $ 12,414 $ 11,292
Other $ -
Subtotal Taxes-insur $ 200,468 10% $ 189,241 10% $ 192,396 11% $ 199,379 12%

TOTAL EXPENSES $ 716,748 37% $ 671,692 36% $ 643,029 38% $ 650,565 39%

NET OPERATING INCOME $ 1,220,195 63% $ 1,176,675 64% $ 1,045,152 62% $ 1,024,863 61%
</TABLE>

85
<PAGE>

CRANE'S LANDING
DIRECT CAPITALIZATION

PROPERTY:

Crane's Landing
3440 Goldenrod Road
Winter Park, Florida

DIRECT CAPITALIZATION:
<S> <C> <C> <C>
Number of Units 262

Revenue @ $640 per Unit $2,012,160
Expenses @ $3.73 per Sq. Ft. 750,000
----------
Net Income 1,262,160

Replacement Reserves @ $425 111,350
----------
Net Operating Income (NOI) $1,150,810

Cap Rate @ 9.0% $12,786,777

ESTIMATED VALUE:

$12,800,000
</TABLE>

86
<PAGE>

CRANE'S LANDING APARTMENTS
Cash Flow Analysis
30-Nov-97
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 2,021,828 $ 2,082,483 $ 2,144,958 $ 2,209,306 $ 2,275,585
Vacancy Loss ($ 101,091) ($ 104,124) ($ 107,248) ($ 110,465) ($ 113,779)
Rent Concessions $ -
Other $ 98,187 $ 101,132 $ 104,166 $ 107,291 $ 110,510
EFFECTIVE INCOME $ 2,018,923 $ 2,079,491 $ 2,141,876 $ 2,206,132 $ 2,272,316

EXPENSE
Management Fee $ 100,946 $ 103,975 $ 107,094 $ 110,307 $ 113,616
Other Admin $ 75,443 $ 77,706 $ 80,037 $ 82,438 $ 84,911
Subtotal Admin $ 176,389 $ 181,680 $ 187,131 $ 192,745 $ 198,527

Supplies $ - $ - $ - $ - $ -
Utilities $ 68,363 $ 70,414 $ 72,526 $ 74,702 $ 76,943
Building Services $ - $ - $ - $ - $ -
Other Operating $ 170,000 $ 175,100 $ 180,353 $ 185,764 $ 191,336
Subtotal Operating $ 238,363 $ 245,514 $ 252,879 $ 260,466 $ 268,280

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 94,304 $ 97,133 $ 100,047 $ 103,048 $ 106,140
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 94,304 $ 97,133 $ 100,047 $ 103,048 $ 106,140

R.E. Taxes $ 192,086 $ 197,849 $ 203,784 $ 209,898 $ 216,195
Insurance $ 12,391 $ 12,763 $ 13,146 $ 13,540 $ 13,946
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 204,477 $ 210,612 $ 216,930 $ 223,438 $ 230,141

TOTAL EXPENSES $ 713,533 $ 734,939 $ 756,967 $ 779,697 $ 803,088

NON-OPERATING EXPENSES
Capital Improvements $ 107,100 $ 110,313 $ 113,622 $ 117,031 $ 120,542
Other $ -

NET CASH FLOW $ 1,198,290 $ 1,234,239 $ 1,271,266 $ 1,309,404 $ 1,348,686

P.V. Factor 0.8989 0.8080 0.7263 0.6528 0.5868
P.V. Cash Flow $ 1,077,115 $ 997,239 $ 923,286 $ 854,818 $ 791,427

SUM P.V. $ 7,803,016
RESIDUAL $ 5,060,865

TOTAL VALUE $ 12,863,881

2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 2,343,853 $ 2,414,169 $ 2,486,594 $ 2,561,191 $ 2,638,027
Vacancy Loss ($ 117,193) ($ 120,708) ($ 124,330) ($ 128,060) ($ 131,901)
Rent Concessions
Other $ 113,825 $ 117,240 $ 120,757 $ 124,380 $ 128,111
EFFECTIVE INCOME $ 2,340,485 $ 2,410,700 $ 2,483,021 $ 2,557,512 $ 2,634,237

EXPENSE
Management Fee $ 117,024 $ 120,535 $ 124,151 $ 127,876 $ 131,712
Other Admin $ 87,459 $ 90,082 $ 92,785 $ 95,569 $ 98,436
Subtotal Admin $ 204,483 $ 210,617 $ 216,936 $ 223,444 $ 230,147

Supplies $ - $ - $ - $ - $ -
Utilities $ 79,252 $ 81,629 $ 84,078 $ 86,600 $ 89,198
Building Services $ - $ - $ - $ - $ -
Other Operating $ 197,077 $ 202,989 $ 209,079 $ 215,351 $ 221,811
Subtotal Operating $ 276,328 $ 284,618 $ 293,156 $ 301,951 $ 311,010

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 109,324 $ 112,604 $ 115,982 $ 119,461 $ 123,045
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 109,324 $ 112,604 $ 115,982 $ 119,461 $ 123,045

R.E. Taxes $ 222,681 $ 229,361 $ 236,242 $ 243,329 $ 250,629
Insurance $ 14,365 $ 14,795 $ 15,239 $ 15,696 $ 16,167
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 237,045 $ 244,157 $ 251,481 $ 259,026 $ 266,797

TOTAL EXPENSES $ 827,180 $ 851,996 $ 877,556 $ 903,882 $ 930,999

NON-OPERATING EXPENSES
Capital Improvements $ 124,158 $ 127,883 $ 131,719 $ 135,671 $ 139,741
Other

NET CASH FLOW $ 1,389,147 $ 1,430,821 $ 1,473,746 $ 1,517,958 $ 1,563,497

P.V. Factor 0.5275 0.4741 0.4262 0.3831 0.3443
P.V. Cash Flow $ 732,737 $ 678,399 $ 628,091 $ 581,513 $ 538,390

</TABLE>

87
<PAGE>

SUMMARY
CRANE'S LANDING

PROPERTY:

Crane's Landing
3440 Goldenrod Road
Winter Park, Florida

VALUE ESTIMATE:
<S> <C> <C> <C>
Sales Comparison Approach $12,500,000

Income Approach:
Direct Capitalization $12,800,000
DCF $12,865,000

FINAL VALUE:

$12,500,000 - $13,000,000
</TABLE>

88
<PAGE>

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

DELTA CROSSING APARTMENTS

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

89
<PAGE>

[PHOTO]

DELTA CROSSING
6000 Delta Crossing Lane
Charlotte, North Carolina

PROPERTY STATISTICS
- --------------------------------------------------------------------------------
Land Plan Two and three-story apartment homes
<S> <C> <C> <C>
Land Area 22.00 Acres Number of Units 178
Density 8.09 Units/Acre Average Unit Size 894 Sq. Ft.
Net Rentable Area 159,132 Sq. Ft. Year Built 1989
- --------------------------------------------------------------------------------
</TABLE>

CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Aluminum siding on wood frame
- -------------------------------------------------------------------------------

UNIT FEATURES
- -------------------------------------------------------------------------------
Woodburning fireplace, cathedral ceilings, gourmet kitchen, microwave, private
patio or balcony, washer/dryer, outdoor storage area
- -------------------------------------------------------------------------------

PROJECT AMENITIES
- -------------------------------------------------------------------------------
Complete fitness center, swimming pool, tennis court, outdoor spa, recycling,
courtyard entrance, social activities, convenience to University area and
Uptown Charlotte
- -------------------------------------------------------------------------------

VALUATION SUMMARY
-----------------------------------------------------------------
<S> <C> <C> <C>
Indicated Value $7,500,000 - $8,300,000
Value per Sq. Ft. of NRA $47.13 - $52.16
Value Per Unit $42,135 - $46,629
-----------------------------------------------------------------
</TABLE>

90
<PAGE>

SALES COMPARISON APPROACH
DELTA CROSSING

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject property is located within two miles of a major regional
mall in Charlotte's southeast quadrant. The central business district is
approximately seven miles northwest of the complex and the University of North
Carolina is approximately five miles north. Access to the downtown area and U.S.
Highway 74 (Independence Boulevard) is fair.

Comparable Sale 2 is in the subject's proximity but it has slightly better
access to the downtown area and its neighborhood is considered to be slightly
better. It is adjusted downward 5%. Comparable Sales 1 & 3 are both located on
the northern edge of the city limit with excellent access to I-77 and thus the
downtown area. The neighborhood is a newer area which warrants downward
adjustment, vis-a-vis the subject.

SIZE - Although the size of the subject equal to or smaller than each of the
comparable improved sales used in this analysis, the size differential is not
significant enough to warrant any type of adjustment.

91
<PAGE>

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average/fair condition
while the comparable buildings were judged to be in above average condition.
Each was adjusted downward according the difference in condition vis-a-vis the
subject.

AMENITIES - The subject is adequately equipped with amenities including swimming
pools, tennis courts, exercise facility, etc. Each of the comparable sales is
equipped with similar amenities, although all seem to offer a higher level of
exterior amenity. Each was adjusted down to compensate.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

92
<PAGE>

DELTA CROSSING
IMPROVED SALES ADJUSTMENT GRID

SUBJECT
SALE 1 SALE 2 SALE 3
<S> <C> <C> <C> <C> <C> <C> <C>
Sale Date: Jun-97 Dec-96 May-97

Net Rentable Area 159,132 280,946 164,724 321,190
Land Area - acre 22 27 15 25
Lnd/Bld Ratio: 12.04 8.22 10.02 8.48
Stories: 2 2 2.5 2.5
Age: 9 2 9 2
Units 178 318 178 288
Price: $20,250,000 $11,250,000 $23,500,000
Price/Ft. - NRA $72.08 $68.30 $73.17
Price/Unit $63,679 $63,202 $81,597
GIM 7.23 7.10 7.93
OAR: 8.99% 9.18% 8.75%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $72.08 $68.30 $73.17
FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $72.08 $68.30 $73.17
MARKET CONDITIONS 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $72.08 $68.30 $73.17
PHYSICAL CHARACTERISTICS
Location (10%) Superior (5%) Superior (10%) Superior
Size 0% Similar 0% Similar 0% Similar
Age (7%) Newer 0% Similar (7%) Newer
L/B Ratio 0% Similar 0% Similar 0% Similar
Quality 0% Similar 0% Similar 0% Similar
Condt. (5%) Superior (5%) Superior (5%) Superior
Amenities (10%) Superior (10%) Superior (10%) Superior
Other 0% Similar 0% Similar 0% Similar
Composite Adjustment (32%) Superior (32%) Superior (32%) Superior
Adjustment ($23.06) ($13.66) ($23.41)
INDICATED VALUE PER NRA $49.01 $54.64 $49.75
INDICATED VALUE PER UNIT $43,302 $50,562 $55,486
</TABLE>

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

93
<PAGE>

INCOME APPROACH
DELTA CROSSING

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

Because of the recent financial history of the subject with revenue increasing
at a nominal 2.7% rate but expenses escalating at a higher 7% rate, plus the
subject location within the Charlotte community, a capitalization and discount
rate that is slightly above the average was used in this analysis. The
perception of apartment supply out pacing the demand contributed to this
slightly above average choice and the use of a modest 2.5% (similar to the
historical) revenue growth rate. The terminal capitalization rate is standard
for the Charlotte area.

94
<PAGE>

DELTA CROSSING
Historical Financial statement
Year Ending December 31

1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,444,709 107% $ 1,423,282 108% $ 1,356,902 106% $ 1,195,083 98%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,280,447 95% $ 1,263,199 96% $ 1,222,183 95% $ 1,135,567 93%

Other Income $ 73,475 5% $ 58,958 4% $ 59,196 5% $ 82,198 7%

TOTAL RECEIPTS $ 1,353,921 100% $ 1,322,157 100% $ 1,281,379 100% $ 1,217,765 100%

EXPENSES:

Management Fee $ 53,857 $ 52,685 $ 51,279 $ 48,497
Other Admin $ 60,477 $ 57,507 $ 41,405 $ 16,950
Subtotal Admin $ 114,335 8.4% $ 110,192 8.3% $ 92,684 7.2% $ 65,447 5.4%

Supplies $ -
Utilities $ 58,207 $ 61,621 $ 58,653 $ 60,077
Building Services $ -
Other Operating $ 159,248 $ 139,535 $ 122,814 $ 123,604
Subtotal Operating $ 217,455 16% $ 201,156 15% $ 181,467 14% $ 183,681 15%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 144,412 $ 127,529 $ 107,496 $ 95,006
Painting/Decorating $ -
Subtotal Maint. $ 144,412 11% $ 127,529 10% $ 107,496 8% $ 95,006 8%

R.E. Taxes $ 98,160 $ 98,447 $ 94,988 $ 92,357
Insurance $ 12,299 $ 11,551 $ 10,790 $ 9,473
Other $ -
Subtotal Taxes-insur $ 110,459 8% $ 109,998 8% $ 105,778 8% $ 101,830 8%

TOTAL EXPENSES $ 586,660 43% $ 548,875 42% $ 487,425 38% $ 445,964 37%

NET OPERATING INCOME $ 767,261 57% $ 773,282 58% $ 793,954 62% $ 771,801 63%
</TABLE>

95
<PAGE>

DELTA CROSSING
DIRECT CAPITALIZATION

PROPERTY:

Delta Crossing
6000 Delta Crossing Lane
Charlotte, North Carolina
<TABLE>
<CAPTION>

DIRECT CAPITALIZATION:
<S> <C> <C> <C>
Number of Units 178

Revenue @ $650 per Unit $1,388,400
Expenses (incl. Mgmt. Fee) @ $3.55 per Sq. Ft. 565,000
----------
Net Income 823,400

Replacement Reserves @ $425 75,650
----------
Net Operating Income (NOI) $747,750

Cap Rate @ 9.75% $7,669,230

ESTIMATED VALUE:
$7,670,000
</TABLE>

96
<PAGE>

DELTA CROSSING
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,390,500 $ 1,425,263 $ 1,460,894 $ 1,497,416 $ 1,534,852
Vacancy Loss ($ 69,525) ($ 71,263) ($ 73,045) ($ 74,871) ($ 76,743)
Rent Concessions $ -
Other $ 74,944 $ 77,192 $ 79,508 $ 81,893 $ 84,350
EFFECTIVE INCOME $ 1,395,919 $ 1,431,192 $ 1,467,358 $ 1,504,439 $ 1,542,459

EXPENSE
Management Fee $ 55,836.76 $ 57,247.67 $ 58,694.30 $ 60,177.56 $ 61,698.38
Other Admin $ 62,291 $ 64,160 $ 66,085 $ 68,067 $ 70,109
Subtotal Admin $ 118,128 $ 121,408 $ 124,779 $ 128,245 $ 131,808

Supplies $ - $ - $ - $ - $ -
Utilities $ 59,370 $ 61,151 $ 62,986 $ 64,875 $ 66,822
Building Services $ - $ - $ - $ - $ -
Other Operating $ 125,766 $ 129,539 $ 133,425 $ 137,428 $ 141,551
Subtotal Operating $ 185,136 $ 190,691 $ 196,411 $ 202,304 $ 208,373

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 144,412 $ 148,744 $ 153,207 $ 157,803 $ 162,537
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 144,412 $ 148,744 $ 153,207 $ 157,803 $ 162,537

R.E. Taxes $ 100,123 $ 103,127 $ 106,221 $ 109,407 $ 112,690
Insurance $ 12,545 $ 12,921 $ 13,309 $ 13,708 $ 14,119
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 112,668 $ 116,048 $ 119,529 $ 123,115 $ 126,809

TOTAL EXPENSES $ 560,344 $ 576,890 $ 593,926 $ 611,467 $ 629,526

NON-OPERATING EXPENSES
Capital Improvements $ 76,650 $ 77,920 $ 80,257 $ 82,665 $ 85,145
Other $ -

NET CASH FLOW $ 759,925 $ 776,382 $ 793,174 $ 810,308 $ 827,789

P.V. Factor 0.8989 0.7972 0.7118 0.6355 0.5674
P.V. Cash Flow $ 678,504 $ 618,927 $ 564,566 $ 514,965 $ 469,710

2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,573,223 $ 1,612,554 $ 1,652,868 $ 1,694,189 $ 1,736,544
Vacancy Loss ($ 78,661) ($ 80,628) ($ 82,643) ($ 84,709) ($ 86,827)
Rent Concessions
Other $ 86,881 $ 89,487 $ 92,172 $ 94,937 $ 97,785
EFFECTIVE INCOME $ 1,581,443 $ 1,621,413 $ 1,662,396 $ 1,704,417 $ 1,747,502

EXPENSE
Management Fee $ 63,257.71 $ 64,856.53 $ 66,495.84 $ 68,176.67 $ 69,900.07
Other Admin $ 72,213 $ 74,379 $ 76,610 $ 78,909 $ 81,276
Subtotal Admin $ 135,470 $ 139,236 $ 143,106 $ 147,085 $ 151,176

Supplies $ - $ - $ - $ - $ -
Utilities $ 68,826 $ 70,891 $ 73,018 $ 75,208 $ 77,465
Building Services $ - $ - $ - $ - $ -
Other Operating $ 145,798 $ 150,172 $ 154,677 $ 159,317 $ 164,096
Subtotal Operating $ 214,624 $ 221,063 $ 227,694 $ 234,525 $ 241,561

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 167,413 $ 172,435 $ 177,609 $ 182,937 $ 188,425
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 167,413 $ 172,435 $ 177,609 $ 182,937 $ 188,425

R.E. Taxes $ 116,070 $ 119,552 $ 123,139 $ 126,833 $ 130,638
Insurance $ 14,543 $ 14,979 $ 15,428 $ 15,891 $ 16,368
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 130,613 $ 134,531 $ 138,567 $ 142,724 $ 147,006

TOTAL EXPENSES $ 648,120 $ 667,265 $ 686,976 $ 707,272 $ 728,168

NON-OPERATING EXPENSES
Capital Improvements $ 87,699 $ 90,330 $ 93,040 $ 95,831 $ 98,706
Other

NET CASH FLOW $ 845,623 $ 863,818 $ 882,380 $ 901,314 $ 920,628

P.V. Factor 0.5066 0.4523 0.4039 0.3606 0.3220
P.V. Cash Flow $ 428,419 $ 390,748 $ 356,378 $ 325,023 $ 296,418

SUM P.V. $4,643,657
RESIDUAL $2,786,325

TOTAL VALUE $7,429,981
</TABLE>

97
<PAGE>

SUMMARY
DELTA CROSSING

PROPERTY:

Delta Crossing
6000 Delta Crossing Lane
Charlotte, North Carolina
<TABLE>
<CAPTION>

VALUE ESTIMATE:
<S> <C> <C> <C>
Sales Comparison Approach $8,000,000

Income Approach:
Direct Capitalization
$7,670,000
DCF
$7,500,000
FINAL VALUE:

$7,500,000 - $8,300,000
</TABLE>

98
<PAGE>

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

MISTY SPRINGS APARTMENTS

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

99
<PAGE>

[PHOTO]

MISTY SPRINGS
1420 New Bellevue Avenue
Daytona Beach, Florida

OWNERSHIP
- --------------------------------------------------------------------------------
Partnership Name Capital Source LLP
Percentage Ownership
- --------------------------------------------------------------------------------

PROPERTY STATISTICS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Land Plan

Land Area Acres Number of Units 128
Density N/A Units/Acre Average Unit Size 800 Sq. Ft.
Net Rentable Area 102,400 Sq. Ft. Year Built 1988
</TABLE>

CONSTRUCTION TYPE
- --------------------------------------------------------------------------------
Wood exterior
- --------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------
Microwave oven, ceiling fans, reserved parking, outside storage areas,
washer/dryer
- --------------------------------------------------------------------------------

PROJECT AMENITIES
- --------------------------------------------------------------------------------
Lakeside swimming pool, lighted tennis court, racquet ball courts, car wash, 24
hour emergency maintenance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

VALUATION SUMMARY
---------------------------------------------------------------
<S> <C> <C> <C>
Indicated Value $4,500,000 - $5,000,000
Value per Sq. Ft. of NRA $43.95 - $48.83
Value Per Unit $35,156 - $39,063
---------------------------------------------------------------
</TABLE>

100
<PAGE>

SALES COMPARISON APPROACH
MISTY SPRINGS

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject is located approximately three-and-a-half miles west of
Daytona Beach's Central Business District in the proximity of the Daytona Beach
International Airport with good access to I-95 and I-4. It is located in a
neighborhood that is predominately developed with other multi-family apartment
complexes.

Two of the comparable sales used in this appraisal are located in the subject's
neighborhood and thus do not require adjustments. Sale 3, however, is located
closer to the Humana and Halifax hospital complexes, the Volusia Mall, etc. As a
result, it was adjusted downward 5%.

SIZE - Two of the comparable sales are about the same size as the subject and
thus no adjustments were necessary. Sale 2, however, is much smaller and
required a downward adjustment.

AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.

L/B RATIO - Because the land size of the comparable sales was not available,
this factor was not germane to the analysis.

QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are of average quality construction as is Comparable Sales 1.
Comparable Sale 2 is far inferior to the subject and was adjusted upward 15%.
Sale 3 is of slightly superior quality and is adjusted downward 5%.

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are Comparable Sale 1 & 3. Sale 2, however, was reported to be in fair/poor
condition at the time of its sale and the unit price is adjusted upward 10%.

101
<PAGE>

AMENITIES - Comparable Sales 1 & 3 have amenities that are equal to those of the
subject and did not require adjustments. Sale 2 is void of any meaningful common
amenities and was adjusted upward 10%.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

102
<PAGE>

MISTY SPRINGS
IMPROVED SALES ADJUSTMENT GRID
SUBJECT
SALE 1 SALE 2 SALE 3
<S> <C> <C> <C> <C> <C> <C> <C>
Sale Date: Aug-95 Mar-95 Sep-94
Net Rentable Area: 102,400 174,880 45,000 194,480
Land Area - sq. ft
Lnd/Bld Ratio: 0.00 0.00 0.00 0.00
Stories: 2 2 1 2
Age: 10 15 25 15
Units 128 108 60 208
Price: $3,760,000 $1,075,000 $7,100,000
Price/Ft. - NRA $21.50 $23.89 $36.51
Price/Unit $34,815 $17,917 $34,135
GIM
OAR:
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $21.50 $23.89 $36.51
FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $21.50 $23.89 $36.51
MARKET CONDITIONS 0% Similar 0% Market 0% Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $21.50 $23.89 $36.51
PHYSICAL CHARACTERISTICS
Location 0% Similar 0% Similar (5%) Superior
Size 0% Similar (5%) Smaller 0% Similar
Age 5% Older 15% Older 5% Older
L/B Ratio 0% Similar 0% Similar 0% Similar
Quality 0% Similar 15% Inferior (5%) Superior
Condt. 0% Similar 10% Inferior 0% Similar
Amenities 0% Similar 10% Inferior 0% Similar
Other 0% Similar 0% Similar 0% Similar
Composite Adjustment 5% Inferior 45% Inferior (5%) Superior
Adjustment $1.08 $10.75 ($1.83)
INDICATED VALUE PER NRA $22.58 $34.64 $34.68
INDICATED VALUE PER UNIT $36,556 $25,979 $32,428

</TABLE>

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

103
<PAGE>

INCOME APPROACH
MISTY SPRINGS

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

The subject has experienced a rapid growth in rental income over the past three
years, although total receipts has grown at a nominal 3% over that same period.
We have modified that rental income rate somewhat to a more manageable 3% in our
model. The expense growth rate is a modest 2% reflecting the modest 2.3% actual
growth over the past three years.

Because of the subject's location, in the westward growth path of Daytona Beach,
and the relatively optimistic outlook for the area in general, we have used a
discount rate that is slightly below the nation's average and a terminal
capitalization rate that reflects this long term optimism.

104
<PAGE>

MISTY SPRINGS
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 821,441 102% $ 801,864 108% $ 776,268 102% $ 645,476 87%
Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 775,217 97% $ 713,441 96% $ 743,598 97% $ 715,258 97%

Other Income $ 27,969 3% $ 28,002 4% $ 19,472 3% $ 22,668 3%

TOTAL RECEIPTS $ 803,187 100% $ 741,443 100% $ 763,070 100% $ 737,926 100%

EXPENSES:

Management Fee $ 32,125 $ 29,659 $ 30,523 $ 29,404
Other Admin $ 19,944 $ 21,093 $ 20,581 $ 14,152
Subtotal Admin $ 52,069 6.5% $ 50,752 6.8% $ 51,104 6.7% $ 43,556 5.9%

Supplies $ -
Utilities $ 64,311 $ 69,422 $ 63,647 $ 58,606
Building Services $ -
Other Operating $ 66,616 $ 65,884 $ 64,479 $ 67,600
Subtotal Operating $ 130,927 16% $ 135,306 18% $ 128,126 17% $ 126,206 17%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 66,740 $ 62,950 $ 59,507 $ 56,244
Painting/Decorating $ -
Subtotal Maint. $ 66,740 8% $ 62,950 8% $ 59,507 8% $ 56,244 8%

R.E. Taxes $ 82,621 $ 98,719 $ 82,028 $ 83,858
Insurance $ 9,396 $ 10,342 $ 12,928 $ 9,268
Other $ -
Subtotal Taxes-insur $ 92,017 11% $ 109,061 15% $ 94,956 12% $ 93,126 13%

TOTAL EXPENSES $ 341,753 43% $ 358,069 48% $ 333,693 44% $ 319,132 43%

NET OPERATING INCOME $ 461,433 57% $ 383,374 52% $ 429,377 56% $ 418,794 57%

</TABLE>

105
<PAGE>

MISTY SPRINGS
DIRECT CAPITALIZATION

PROPERTY:

Misty Springs
1420 New Bellevue Avenue
Daytona Beach, Florida

DIRECT CAPITALIZATION:

<S> <C> <C> <C>
Number of Units 128

Revenue @ $550 per Unit $844,800
Expenses @ $3.88 per Sq. Ft. 397,310
---------
Net Income 447,490

Replacement Reserves @ $425 54,400
--------
Net Operating Income (NOI) $393,090

Cap Rate @ 9.0% $4,367,666

ESTIMATED VALUE:

$4,350,000

</TABLE>

106
<PAGE>

MISTY SPRINGS APARTMENTS
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 846,084 $ 871,467 $ 897,611 $ 924,539 $ 952,275
Vacancy Loss ($ 42,304) ($ 43,573) ($ 44,881) ($ 46,227) ($ 47,614)
Rent Concessions $ -
Other $ 28,528 $ 29,099 $ 29,681 $ 30,275 $ 30,880
EFFECTIVE INCOME $ 832,308 $ 856,992 $ 882,411 $ 908,587 $ 935,542

EXPENSE
Management Fee $ 41,615 $ 42,850 $ 44,121 $ 45,429 $ 46,777
Other Admin $ 20,542 $ 20,953 $ 21,372 $ 21,800 $ 22,236
Subtotal Admin $ 62,158 $ 63,803 $ 65,493 $ 67,229 $ 69,013

Supplies $ - $ - $ - $ - $ -
Utilities $ 65,596 $ 66,908 $ 68,246 $ 69,611 $ 71,003
Building Services $ - $ - $ - $ - $ -
Other Operating $ 67,948 $ 69,307 $ 70,693 $ 72,107 $ 73,549
Subtotal Operating $ 133,545 $ 136,215 $ 138,940 $ 141,719 $ 144,553

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 68,075 $ 69,436 $ 70,825 $ 72,242 $ 73,686
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 68,075 $ 69,436 $ 70,825 $ 72,242 $ 73,686

R.E. Taxes $ 84,273 $ 85,959 $ 87,678 $ 89,432 $ 91,220
Insurance $ 9,584 $ 9,776 $ 9,971 $ 10,171 $ 10,374
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 93,857 $ 95,734 $ 97,649 $ 99,602 $ 101,594

TOTAL EXPENSES $ 357,634 $ 365,189 $ 372,907 $ 380,791 $ 388,846

NON-OPERATING EXPENSES
Capital Improvements $ 54,400 $ 55,488 $ 56,598 $ 57,730 $ 58,884
Other $ -

NET CASH FLOW $ 420,274 $ 436,315 $ 452,907 $ 470,066 $ 487,811

P.V. Factor 0.8989 0.8080 0.7263 0.6528 0.5868
P.V. Cash Flow $ 377,774 $ 352,534 $ 328,934 $ 306,873 $ 286,254

2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 980,844 $ 1,010,269 $ 1,040,577 $ 1,071,794 $ 1,103,948
Vacancy Loss ($ 49,042) ($ 50,513) ($ 52,029) ($ 53,590) ($ 55,197)
Rent Concessions
Other $ 31,498 $ 32,128 $ 32,770 $ 33,426 $ 34,094
EFFECTIVE INCOME $ 963,299 $ 991,883 $ 1,021,318 $ 1,051,630 $ 1,082,845

EXPENSE
Management Fee $ 48,165 $ 49,594 $ 51,066 $ 52,582 $ 54,142
Other Admin $ 22,680 $ 23,134 $ 23,597 $ 24,069 $ 24,550
Subtotal Admin $ 70,845 $ 72,728 $ 74,663 $ 76,650 $ 78,692

Supplies $ - $ - $ - $ - $ -
Utilities $ 74,424 $ 73,872 $ 75,439 $ 76,856 $ 78,394
Building Services $ - $ - $ - $ - $ -
Other Operating $ 75,020 $ 76,521 $ 78,051 $ 79,612 $ 81,205
Subtotal Operating $ 147,444 $ 150,393 $ 153,401 $ 156,469 $ 159,598

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 75,160 $ 76,663 $ 78,197 $ 79,760 $ 81,356
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 75,160 $ 76,663 $ 78,197 $ 79,760 $ 81,356

R.E. Taxes $ 93,045 $ 94,906 $ 96,804 $ 98,740 $ 100,715
Insurance $ 10,581 $ 10,793 $ 11,009 $ 11,229 $ 11,454
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 103,626 $ 105,699 $ 107,813 $ 109,969 $ 112,168

TOTAL EXPENSES $ 397,075 $ 405,483 $ 414,072 $ 422,848 $ 431,814

NON-OPERATING EXPENSES
Capital Improvements $ 60,062 $ 61,263 $ 62,489 $ 63,738 $ 65,013
Other

NET CASH FLOW $ 506,162 $ 525,137 $ 544,757 $ 565,044 $ 586,017

P.V. Factor 0.5275 0.4741 0.4262 0.3831 0.3443
P.V. Cash Flow $ 266,986 $ 248,985 $ 232,168 $ 216,168 $ 201,795

SUM P.V. $2,818,765
RESIDUAL $1,996,708

TOTAL VALUE 4,815,473

</TABLE>

107
<PAGE>

SUMMARY
MISTY SPRINGS

PROPERTY:

Misty Springs
1420 New Bellevue Avenue
Daytona Beach, Florida

VALUE ESTIMATE:
<S> <C> <C> <C>
Sales Comparison Approach $4,500,000

Income Approach:
Direct Capitalization $4,350,000
DCF $4,800,000

FINAL VALUE:

$4,500,000 - $5,000,000

</TABLE>

108
<PAGE>

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

MONTICELLO APARTMENTS

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

109
<PAGE>

[PHOTO]

MONTICELLO APARTMENTS
22700 CIVIC CENTER DRIVE
SOUTHFIELD, MICHIGAN

PROPERTY STATISTICS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Land Plan
Land Area 9.18 Acres Number of Units 106
Density 11.54 Units/Acre Average Unit Size 912 Sq. Ft.
Net Rentable Area 96,732 Sq. Ft. Year Built 1989
- --------------------------------------------------------------------------------
</TABLE>
CONSTRUCTION TYPE
- --------------------------------------------------------------------------------
Bric Brick, stucco, aluminum siding
- --------------------------------------------------------------------------------

UNIT FEATURES
- --------------------------------------------------------------------------------
Vaulted ceiling, microwave oven, dishwasher, blinds, balcony or patio, full
size washer/dryer, central air conditioning, walk-in closets, pre-wired for
cable television, covered parking area

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

PROJECT AMENITIES
- --------------------------------------------------------------------------------
Clubhouse with swimming pool, sundeck, weight room, aerobics studio, fireplace
lounge, boardwalk path system

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

<TABLE>
<CAPTION>
VALUATION SUMMARY
--------------------------------------------------------
<S> <C> <C>
Indicated Value $5,500,000 - $6,000,000
Value per Sq. Ft. NRA $56.86 - $62.03
Value Per Unit $51,887 - $56,604
--------------------------------------------------------
</TABLE>

110
<PAGE>

SALES COMPARISON APPROACH
MONTICELLO

IMPROVED COMPARABLE SALES ANALYSIS

PHYSICAL CHARACTERISTICS
LOCATION - The subject is located approximately ten miles from Detroit's central
business district which is easily accessible via the Northwestern Highway.

Comparable Sale 1 is located in a neighborhood that is similar to the subject's
and no adjustment is necessary. Sale 2 is in a slightly better neighborhood and
a slight downward adjustment is deemed appropriate, while Sale 4 is in a much
superior to the subject. Sale 3 is in an inferior neighborhood and should be
adjusted upward.

SIZE - Comparable Sales 1 & 4 are similar to the subject in terms of size. Sale
2, however is much smaller and should be adjusted downward while Sale 3 its much
larger and should be adjusted upward.

AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
Newer structures have been adjusted downward at between 1.5% and 2.0% per year
depending on the quality of the building while older buildings have been
adjusted upward.

L/B RATIO - Because the land size of the comparable sales was not available,
this factor was not germane to the analysis.

QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are of average quality construction as is Comparable Sales 2.
Comparable Sale 4 is far superior to the subject and was adjusted downward. Sale
1 and 3 are of inferior quality and require upward adjustments.

CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are Comparable Sale 2 & 3. Sale 1, however, was reported to be in fair/poor
condition at the time of its sale and the unit price is adjusted upward 10%.
Sale 4 was in excellent condition and should be adjusted down.

111
<PAGE>

AMENITIES - Comparable Sales 3 & 4 have amenities that are slightly superior to
the subject and should be adjusted downward as a result. Sale 1 and 2, on the
other hand, have few amenities and should be adjusted upward vis--vis the
subject.

A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.

112

<PAGE>

MONTICELLO
Improved Sales Adjustment Grid
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUBJECT
SALE 1 SALE 2 SALE 3 SALE 4
Sale Date: Sep-95 Apr-97 Jul-96 Feb-96
Net Rentable Area 96,732 97,700 162,870 274,400 70,055
Land Area - acre 9 5
Lnd/Bld Ratio: 8.27 4.69 0.00 0.00 0.00
Stories: 2 2 2.5 2 2
Age: 8 23 9 15 25
Units 106 96 178 280 72
Price: $3,700,000 $11,250,00 $12,450,00 $4,700,000
0 0
Price/Ft. - NRA $37.87 $69.07 $45.37 $67.09
Price/Unit $38,542 $63,202 $44,464 $65,278
GIM 7.23 7.10
OAR: 8.99% 9.18% 9.31% 9.31%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price* $37.87 $69.07 $45,37 $67.09
FINANCING Market Market Market Market
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Arm's Arm's Arm's
Length Length Length Length

Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price** $37.87 $69.07 $45.37 $67.09
MARKET CONDITIONS 0% Similar 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price*** $37.87 $69.07 $45.37 $67.09
PHYSICAL CHARACTERISTICS
Location 0% Similar (10%) Superior 10% Inferior (10%) Superior
Size 0% Similar (10%) Smaller 10% Larger 0% Similar
Age 23% Older 2% Older 11% Older 26% Older
L/B Ratio 0% Similar 0% Similar 0% Similar 0% Similar
Quality 10% Inferior 0% Similar 10% Inferior (10%) Superior
Condt. 10% Inferior 0% Similar 0% Similar (10%) Superior
Amenities 5% Inferior 5% Inferior (5%) Superior (5%) Superior
Other 0% Similar 0% Similar 0% Similar 0% Similar
Composite Adjustment 48% Inferior (13%) Superior 36% Inferior (10%) Superior
Adjustment $17.99 ($8.98) $16.11 ($6.37)
INDICATED VALUE PER NRA $55.86 $60.09 $61.48 $60.72
INDICATED VALUE PER UNIT $56,849 $54,986 $60,249 $59,076

* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions

</TABLE>

113
<PAGE>

INCOME APPROACH
MONTICELLO

Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.

The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.

The subject has experienced moderate growth in rental income over the past three
years, although total receipts has grown at a nominal 2.2% over that same
period.. We have modified that rental income rate somewhat to a more typical
2.5% in our model. The expense growth rate is equal to a 3% inflationary rate
increase, somewhat faster than the anticipated revenue increase, but in line
with the historical trend.

Because of the subject's location, which is influenced to a great degree by
Detroit's economy, we have used market averages pertaining to that area, which
is judged to be only fair in the apartment real estate market. As a result, a
slightly above average 12% discount rate and a 9.75% capitalization rate were
used in our models.

114
<PAGE>

MONTICELLO APARTMENTS
Historical Financial statement
Year Ending December 31
1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 996,237 106% $ 970,531 103% $ 960,535 104% $ 948,744 108%

Vacancy Loss $ - 0% $ - 0% $ - 0% $ - 0%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 937,531 100% $ 933,171 99% $ 914,746 99% $ 878,437 100%

Other Income $ 696 0% $ 4,947 1% $ 11,520 1% $ 1,465 0%

TOTAL RECEIPTS $ 938,227 100% $ 938,118 100% $ 926,266 100% $ 879,902 100%

EXPENSES:

Management Fee $ 33,052 $ 31,974 $ 37,937 $ 21,767
Other Admin $ 20,117 $ 20,416 $ 16,921 $ 16,338
Subtotal Admin $ 53,169 5.7% $ 52,390 5.6% $ 54,858 5.9% $ 38,105 4.3%

Supplies $ -
Utilities $ 37,168 $ 40,782 $ 30,872 $ 35,822
Building Services $ -
Other Operating $ 64,960 $ 55,907 $ 52,075 $ 56,762
Subtotal Operating $ 102,128 11% $ 96,689 10% $ 82,947 9% $ 92,584 11%

Security $ -
Grounds Maint $ -
Maint-Repairs $ 43,313 $ 36,013 $ 37,748 $ 36,561
Painting/Decorating $ -
Subtotal Maint. $ 43,313 5% $ 36,013 4% $ 37,748 4% $ 36,561 4%

R.E. Taxes $ 122,448 $ 119,450 $ 115,004 $ 124,017
Insurance $ 9,309 $ 9,135 $ 10,788 $ 12,486
Other $ -
Subtotal Taxes-insur $ 131,757 14% $ 128,585 14% $ 125,792 14% $ 136,503 16%

TOTAL EXPENSES $ 330,368 35% $ 313,677 33% $ 301,345 33% $ 303,753 35%

NET OPERATING INCOME $ 607,859 65% $ 624,441 67% $ 624,921 67% $ 576,149 65%

</TABLE>

115
<PAGE>

MONTICELLO
DIRECT CAPITALIZATION

PROPERTY:

Monticello
22700 Civic Center Drive
Southfield, Michigan

DIRECT CAPITALIZATION:
<S> <C> <C> <C>
Number of Units 106

Revenue @ $780 per Unit $990,000
Expenses @ $3.67 per Sq. Ft. 355,000
-----------
Net Income 635,000

Replacement Reserves @ $425 45,050
----------
Net Operating Income (NOI) $589,950

Cap Rate @ 9.75% $6,050,770

ESTIMATED VALUE:

$6,000,000

</TABLE>

116
<PAGE>

MONTICELLO APARTMENTS
Cash Flow Analysis
30-Nov-97

1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,016,162 $ 1,041,566 $ 1,067,605 $ 1,094,295 $ 1,121,652
Vacancy Loss ($ 50,808) ($ 52,078)($ 53,380) ($ 54,715) ($ 56,083)
Rent Concessions $ -
Other $ 710 $ 731 $ 753 $ 776 $ 799
EFFECTIVE INCOME $ 966,064 $ 990,219 $ 1,014,978 $ 1,040,356 $ 1,066,369

EXPENSE
Management Fee $ 48,303 $ 49,511 $ 50,749 $ 52,018 $ 53,318
Other Admin $ 20,519 $ 21,135 $ 21,769 $ 22,422 $ 23,095
Subtotal Admin $ 68,823 $ 70,646 $ 72,518 $ 74,440 $ 76,413

Supplies $ - $ - $ - $ - $ -
Utilities $ 40,485 $ 41,700 $ 42,951 $ 44,239 $ 45,566
Building Services $ - $ - $ - $ - $ -
Other Operating $ 55,000 $ 56,650 $ 58,350 $ 60,100 $ 61,903
Subtotal Operating $ 95,485 $ 98,350 $ 101,300 $ 104,339 $ 107,469

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 43,313 $ 44,612 $ 45,951 $ 47,329 $ 48,749
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 43,313 $ 44,612 $ 45,951 $ 47,329 $ 48,749

R.E. Taxes $ 124,897 $ 128,644 $ 132,503 $ 136,478 $ 140,573
Insurance $ 9,495 $ 9,780 $ 10,073 $ 10,376 $ 10,687
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 134,392 $ 138,424 $ 142,577 $ 146,854 $ 151,260

TOTAL EXPENSES $ 342,013 $ 352,032 $ 362,345 $ 372,962 $ 383,891

NON-OPERATING EXPENSES
Capital Improvements $ 45,050 $ 46,402 $ 47,794 $ 49,227 $ 50,704
Other $ -

NET CASH FLOW $ 579,001 $ 591,786 $ 604,839 $ 618,167 $ 631,774

P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674
P.V. Cash Flow $ 516,965 $ 471,768 $ 430,512 $ 392,856 $ 358,485

2003 2004 2005 2006 2007
REVENUE
<S> <C> <C> <C> <C> <C>
Gross Potential $ 1,149,694 $ 1,178,436 $ 1,207,897 $ 1,238,094 $ 1,269,047
Vacancy Loss ($ 57,485) ($ 58,922) ($ 60,395) ($ 61,905) ($ 63,452)
Rent Concessions
Other $ 823 $ 848 $ 873 $ 899 $ 926
EFFECTIVE INCOME $ 1,093,032 $ 1,120,362 $ 1,148,375 $ 1,177,089 $ 1,206,521

EXPENSE
Management Fee $ 54,652 $ 56,018 $ 57,419 $ 58,854 $ 60,326
Other Admin $ 23,788 $ 24,501 $ 25,236 $ 25,993 $ 26,773
Subtotal Admin $ 78,439 $ 80,519 $ 82,655 $ 84,848 $ 87,099

Supplies $ - $ - $ - $ - $ -
Utilities $ 46,933 $ 48,341 $ 49,791 $ 51,285 $ 52,824
Building Services $ - $ - $ - $ - $ -
Other Operating $ 63,760 $ 65,673 $ 67,643 $ 69,672 $ 71,783
Subtotal Operating $ 110,693 $ 114,014 $ 117,435 $ 120,958 $ 124,586

Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 50,212 $ 51,718 $ 53,270 $ 54,868 $ 56,514
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 50,212 $ 51,718 $ 53,270 $ 54,868 $ 56,514

R.E. Taxes $ 144,790 $ 149,134 $ 153,608 $ 158,216 $ 162,962
Insurance $ 11,008 $ 11,338 $ 11,678 $ 12,028 $ 12,389
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 155,797 $ 160,471 $ 165,285 $ 170,244 $ 175,351

TOTAL EXPENSES $ 395,141 $ 406,723 $ 418,644 $ 430,917 $ 443,550

NON-OPERATING EXPENSES
Capital Improvements $ 52,225 $ 53,792 $ 55,406 $ 57,068 $ 58,780
Other

NET CASH FLOW $ 645,665 $ 659,847 $ 674,325 $ 689,104 $ 704,190

P.V. Factor 0.5066 0.4523 0.4039 0.3608 0.3220
P.V. Cash Flow $ 327,114 $ 298,481 $ 272,349 $ 248,498 $ 226,730

SUM P.V. $3,543,759
RESIDUAL $2,029,777

TOTAL VALUE $5,573,537

</TABLE>

117

<PAGE>

SUMMARY
MONTICELLO

PROPERTY:

Monticello
22700 Civic Center Drive
Southfield, Michigan

<S> <C> <C> <C>
VALUE ESTIMATE:

Sales Comparison Approach $5,830,000

Income Approach:
Direct Capitalization $6,000,000
DCF $5,575,000

FINAL VALUE:

$5,500,000 - $6,000,000

</TABLE>

118
<PAGE>

LIMITING FACTORS AND ASSUMPTIONS

In accordance with recognized professional ethics, the professional fee for this
service is not contingent upon our conclusion of value, and neither Valuation
Research Corporation nor any of its employees have a present or intended
material financial interest in the subject company appraised.

The opinion of value expressed herein is valid only for the stated purpose as of
the date of the appraisal.

Financial statements and other related information provided by the subject
company or its representatives in the course of this investigation have been
accepted, without further verification, as fully and correctly reflecting the
company's business conditions and operating results for the respective periods,
except as specifically noted herein.

Public information and industry and statistical information has been obtained
from sources we deem to be reliable; however, we make no representation as to
the accuracy or completeness of such information, and have accepted the
information without further verification.

The conclusions of value are based upon the assumption that the current level of
management expertise and effectiveness would continue to be maintained and that
the character and integrity of the enterprise through any sale, reorganization,
exchange, or diminution of the owners' participation would not be materially or
significantly changed.

This report and the conclusions arrived at herein are for the exclusive use of
our client for the sole and specific purposes as noted herein. Furthermore, the
report and conclusions are not intended by the author, and should not be
construed by the reader, to be investment advice in any manner whatsoever. The
conclusions reached herein represent the considered opinion of Valuation
Research Corporation, based upon information furnished to them by the company
and other sources.

Neither all nor any part of the contents of this report (especially any
conclusions as to value, the identity of any appraiser or appraisers, or the
firm with which such appraisers are connected, or any reference to any of their
professional designations) should be disseminated to the public through
advertising media, public relations, news media, sales media, mail, direct
transmittal, or any other public means of communication, without the prior
written consent and approval of Valuation Research Corporation.

119
<PAGE>

Future services regarding the subject matter of this report, including, but not
limited to, testimony or attendance in court, shall not be required of Valuation
Research Corporation, unless previous arrangements have been made in writing.

The appraiser assumes no responsibility for matters legal in nature, nor does
the appraiser render any opinion as to the title, which is assumed to be
marketable.

The appraiser assumes that the property will be responsibly owned and properly
maintained.

The appraiser has not made a land survey of the property. The boundaries used in
this report are taken from records believed to be accurate. The sketches
included in this report are provided to assist the reader in visualizing the
property, and no responsibility is assumed for their accuracy.

The allocation of the total value between land and improvements stated in this
report is invalid if used separately or in conjunction with any other appraisal.
This report is to be used in its entirety and only for the purpose for which it
was prepared.

The appraiser assumes that there are no hidden or unapparent conditions of the
property, subsoil, or structures which would render the property more or less
valuable. The appraiser assumes no responsibility for any such conditions or for
any engineering surveys which might be required to discover such conditions.

Any information furnished by others and included in this report is from sources
deemed to be reliable and believed to be true and accurate; however, no
responsibility is assumed for its accuracy.

It is assumed that there is full compliance with all applicable federal, state,
and local environmental regulations and laws unless noncompliance is stated,
defined, and considered in the appraisal report.

Valuation Research Corporation is not an environmental consultant or auditor,
and it takes no responsibility for any actual or potential environmental
liabilities. Any person entitled to rely on this report wishing to know whether
such liabilities exist, or their scope, and the effect on the value of the
property is encouraged to obtain a professional environmental assessment.
Valuation Research Corporation does not conduct or provide environmental
assessments and has not performed one for the subject property.

Valuation Research Corporation has asked the Managers of the apartment complexes
whether it is subject to any present or future liability relating to
environmental matters

120
<PAGE>

(including but not limited to CERCLA/Superfund liability). Valuation Research
Corporation has not determined independently whether any of the apartment
complexes or their owners are subject to any such liabilities, nor the scope of
any such liabilities. Valuation Research Corporation's appraisal takes no such
liabilities into account except as they have been reported expressly to
Valuation Research Corporation by the Managers of the apartment complexes, or by
an environmental consultant working for the Managers of the apartment complexes,
and then only to the extent that the liability was reported to us in an actual
or estimated dollar amount. Such matters are noted in the report. To the extent
such information has been reported to us, Valuation Research Corporation has
relied on it without verification and offers no warranty or representation as to
its accuracy or completeness.

It is assumed that all applicable zoning and use regulations and restrictions
have been complied with, unless a nonconformity has been stated, defined, and
considered in the appraisal report.

It is assumed that all required licenses, certificates of occupancy, consents,
or other legislative or administrative authority from any local, state, or
national government or private entity or organization have been or can be
obtained or renewed for any use on which the value estimate contained in this
report is based.

We have not made a specific compliance survey or analysis of the subject
property to determine whether it is subject to or in compliance with the
Americans with Disabilities Act of 1990 (ADA) and this opinion does not consider
the impact, if any, of noncompliance in estimating the value of the property.

121

<PAGE>

99.03 Form of Consent Card for Cap Source I and Cap Source II.(1)

<PAGE>

<TABLE>
<S> <C> <C>
MAILING LABEL CONSENT FRONT SIDE
[Includes name of
Partnership]
</TABLE>

THIS CONSENT IS SOLICITED ON BEHALF OF THE GENERAL PARTNERS OF [CAPITAL
SOURCE, L.P.][CAPITAL SOURCE II, L.P.-A]

Reference is made to the Prospectus/Consent Solicitation Statement dated
, 1998, sent with this Consent Card relating to the proposed
consolidation by merger (the "Transaction") of Capital Source L.P. and Capital
Source II, L.P-A (the "Partnerships") into America First Real Estate Investment
Company, Inc., a Delaware corporation (the "Company"). The undersigned hereby
votes as set forth below with respect to all Partnership Units which the
undersigned may be entitled to vote. Please put an "X" in the appropriate box to
vote "YES" in favor of the Transaction, "NO" against the Transaction or to
"ABSTAIN" from voting.

/ / "YES" I approve of my Partnership's participation in the Transaction.

/ / "NO" I do not approve of my Partnership's participation in the
Transaction.

/ / I wish to "ABSTAIN" from voting.

<TABLE>
<S> <C>
- ------------------------------------------------------------------ ---------------------------------------------------------------
Signature of Investor Signature of Co-Owner (if any)

Dated: ------------------------------------------------------------ Dated:
------------------------------------------------------------
</TABLE>

PLEASE DATE; SIGN EXACTLY AS YOUR NAME APPEARS ON THE MAILING LABEL, UNLESS
YOUR NAME IS PRINTED INCORRECTLY; AND MAIL THIS CONSENT CARD IN THE ENVELOPE
PROVIDED. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.

THIS CONSENT WHEN PROPERLY EXECUTED, WILL BE VOTED BY THE LIMITED PARTNER IN
THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, THIS
CONSENT WILL BE VOTED FOR THE MERGER.

(Continued on reverse side)
<PAGE>
REVERSE SIDE

INVESTORS WILL RECEIVE COMMON STOCK OF THE COMPANY UNLESS THE FOLLOWING ELECTION
IS MARKED:

/ / I wish to receive Variable Rate Senior Notes of the Company as
described in the Prospectus/Consent Solicitation Statement.

If you sign and return this Consent Card without indicating a vote, you will
be deemed to have voted "YES" in favor of the Transaction and you will receive
Common Stock of the Company if the Transaction is consummated.

By signing this Consent Card, you hereby acknowledge receipt of the
Prospectus/Consent Solicitation Statement dated , 1998 and furnished
herewith.

IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE IN COMPLETING THE CONSENT CARD,
PLEASE CALL , TOLL-FREE AT (800) .

PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT CARD USING THE ENCLOSED ENVELOPE
SO THAT IT ARRIVES NO LATER THAN 5:00 P.M. CENTRAL TIME ON , 1998.