REALTY REFUND TRUST, S-2/A, 1998-09-08

REALTY REFUND TRUST
S-2/A, 1998-09-08
REAL ESTATE INVESTMENT TRUSTS

Previous: PENN VIRGINIA CORP, 4, 1998-09-08

Next: RJR NABISCO INC, S-3/A, 1998-09-08

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1998

REGISTRATION NO. 333-56301

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

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

AMENDMENT NO. 1

FORM S-2

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------

REALTY REFUND TRUST
(Exact name of registrant as specified in its Declaration)
------------------------

OHIO
(State or other jurisdiction of incorporation or organization)

1750 HUNTINGTON BUILDING
925 EUCLID AVENUE
CLEVELAND, OHIO 44115
(216) 622-0046
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
34-6647590
(I.R.S. Employer Identification Number)

GREGORY D. BRUHN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
1750 HUNTINGTON BUILDING
925 EUCLID AVENUE
CLEVELAND, OHIO 44115
(216) 622-0046
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

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

COPIES TO:

JAMES B. ARONOFF, ESQ.
THOMPSON HINE & FLORY LLP
3900 KEY CENTER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 566-5504
------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

From time to time after this Registration Statement becomes effective.
------------------------

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(l)
of this form, 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, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) FEE(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest, without
par value............................. 4,182,361 (1) $18,941,222.29 $1,862.05
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c). Based on the average of the high and low sales
prices per share of $4.28 as reported on the New York Stock Exchange on June
1, 1998 with respect to 2,950,743 shares included on the Registration
Statement being amended hereby. Based on the average of the high and low
sales prices per share of $5.125 as reported on the New York Stock Exchange
on September 3, 1998 with respect to 1,231,618 additional shares included on
this Amendment No. 1.

(2) A fee of $3,725.61 was previously paid upon the filing of the Registration
Statement being amended hereby. The amount of the registration fee
hereunder, $1,862.05, has been reduced by the amount of such previously paid
fee.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

REALTY REFUND TRUST

4,182,361

SHARES OF BENEFICIAL INTEREST,
WITHOUT PAR VALUE

TO BE OFFERED BY SEVERAL HOLDERS OF THE SHARES
OF BENEFICIAL INTEREST OF REALTY REFUND TRUST

This Prospectus relates to the offering ("Offering") by certain selling
stockholders ("Selling Stockholders") named herein under "Selling Stockholders"
of up to 4,182,361 shares ("Shares") of beneficial interest, without par value
("Common Stock"), of Realty ReFund Trust ("Company"), which Shares have been or
will be issued to the Selling Stockholders in one or more private placements, or
may be issued to the Selling Stockholders upon conversion by the Selling
Stockholders of Class A Units of limited partner interests ("Units") in RRF
Limited Partnership, a Delaware limited partnership ("Partnership"). Under the
Agreement of Limited Partnership of the Partnership, as amended ("Partnership
Agreement"), the Company, as the sole general partner of the Partnership, is
obligated to convert the Units, at the option of the holders thereof, for a like
number of shares of Common Stock, except to the extent that the Ownership Limit
(as defined herein) is reached in which case the Company may elect to purchase
any Units in excess of the Ownership Limit for cash. The Units were originally
issued by the Partnership in private placements for cash or interests in
entities which owned and operated hotel properties. The distribution of the
Shares by the Selling Stockholders is not subject to any underwriting agreement.
The Company will receive none of the proceeds from the sale of Shares hereunder.
All expenses of registration incurred in connection with this Offering are being
borne by the Company, but all selling and other expenses incurred by Selling
Stockholders will be borne by such Selling Stockholders. None of the Shares
offered pursuant to this Prospectus have been registered prior to the filing of
the Registration Statement of which this Prospectus is a part.

The Common Stock of the Company, including the Shares, is listed on the New
York Stock Exchange ("NYSE") under the symbol "RRF." The Company intends to
change its name to "InnSuites Hospitality Trust" in September 1998. The Common
Stock of the Company will then be listed on the NYSE under the symbol "IHT." The
last reported sale price of Common Stock on September 4, 1998 on the NYSE was
$5.125 per share. On August 31, 1998, 2,091,504 shares of Common Stock were held
by 668 holders of record. To preserve its status as a real estate investment
trust under the Internal Revenue Code of 1986, as amended ("REIT"), the Company
limits the amount of Common Stock that may be owned by any single person or
affiliated group to 4.9% of the outstanding shares and restricts the
transferability thereof under certain circumstances.

The Shares may be sold by the Selling Stockholders from time to time on the
NYSE, or such other national securities exchange or automated interdealer
quotation system on which the Shares are then listed, through negotiated
transactions or otherwise at market prices prevailing at the time of the sale or
at negotiated prices. See "PLAN OF DISTRIBUTION."

SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES
OFFERED HEREBY.

Each Selling Stockholder and any broker executing sell orders on behalf of
the Selling Stockholders may be deemed to be an "underwriter" within the meaning
of the Securities Act of 1933, as amended ("Securities Act"). Commissions
received by any such broker may be deemed to be underwriting commissions under
the Securities Act.

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

THE DATE OF THIS PROSPECTUS IS SEPTEMBER 10, 1998.

<PAGE> 3

THE COMPANY

Realty ReFund Trust is a self-administered equity REIT that, at August 31,
1998, owned an approximate 15.4% general partner interest in the Partnership,
which presently owns directly or indirectly, together with RRF Sub Corp., a
wholly-owned subsidiary of the Company, interests in ten hotels with an
aggregate of 1,665 suites in Arizona and southern California (collectively,
"Hotels"). The Hotels are operated as InnSuites Hotels(R). Three of the Hotels
are also marketed as "Best Western(R)" and one primarily as a "Holiday
Inn(R)Hotel and Suites." All of the Hotels are managed by InnSuites
Innternational Hotels, Inc. ("ISIH"). Unless the context otherwise requires, all
references herein to the business and assets of the Company refer to Realty
ReFund Trust, the Partnership, RRF Sub Corp. and their respective subsidiaries
on a consolidated basis, and all references herein to the Partnership shall
include RRF Sub Corp.

To enable the Company to qualify as a REIT, the Partnership leases the
Hotels, and expects to lease any additional hotels acquired by it in the future,
to Realty Hotel Lessee Corp., or a wholly-owned subsidiary thereof ("Lessee"),
pursuant to leases providing for the payment of rent based primarily upon the
suite revenues of such Hotels ("Percentage Leases"). The Lessee pays rent to the
Partnership under the Percentage Leases and, in addition, pays all franchise
fees, management fees and other operating expenses of the Hotels leased by it.
The Partnership, in turn, distributes such rental payments, less expenses, to
the Company.

The Company seeks to increase operating cash flow and enhance stockholder
value through both acquisitions and internal growth. The Company believes that
InnSuites Hotels are particularly attractive investments because of the
following factors: the favorable recognition of the InnSuites Hotels brand among
consumers in the Southwest and Western regions of the United States; the
leadership position of InnSuites Hotels within the market niche of middle market
studio and two-room suite hotels and the relative strength of that market within
the hotel industry; and the Company's positive experience and expertise with
InnSuites Hotels. The Company believes that a substantial number of hotels
meeting its investment criteria remain to be acquired and repositioned at
attractive prices.

The Company's growth strategy is to utilize management's expertise and
knowledge of the hotel industry to acquire hotel assets and oversee the
refurbishment, repositioning and management of such assets and to utilize its
asset management role to improve the quality of the Hotels through upgrading and
repositioning, thereby improving their revenue performance. James F. Wirth,
Trustee, Chairman, Chief Executive Officer and President of the Company, has
been engaged in the hotel business for approximately 27 years, including serving
as Assistant to the President and Division President of Ramada Inns, where he
started in 1970.

Pursuant to the Percentage Leases, the Company will participate in any
increases in Hotel revenues, thereby improving its operating cash flow. In
addition, the Company may expand certain of its Hotel properties by constructing
additional extended-stay suites with meeting space, if market and other
conditions warrant.

The Company was formed as an unincorporated Ohio real estate investment
trust on April 28, 1971. The Company's executive offices are located at 1750
Huntington Building, 925 Euclid Avenue, Cleveland, Ohio 44115 and its telephone
number is (216) 622-0046.

BUSINESS OBJECTIVES

The Company believes that, while the lodging industry as a whole has
benefitted from an improved supply/demand dynamic, the greatest opportunities
for revenue growth and profitability will arise from the skillful acquisition,
management and repositioning of hotel properties. An integral element of this
management is the continuous evaluation of each Hotel's position in its market
and the implementation, as necessary, of changes in rates, amenities and
customer focus to maximize the continuing returns from the Hotels. The Company
attributes the historical performance of the Hotels to the implementation of
this asset management strategy.

The Company's primary business objectives are to maximize current returns
to its stockholders through increases in cash flow available for distribution
and to increase long-term total returns to stockholders through appreciation in
value of the Hotel assets and Common Stock. The Company will seek to achieve
these objectives through participation in increased revenues from the Hotels
pursuant to the Percentage Leases and by selective acquisition, ownership,
redevelopment, repositioning and expansion of hotel properties. The Company will
seek

2
<PAGE> 4

to continue to invest in properties where the Company's established industry and
marketing expertise and other resources will enable it to improve the acquired
hotel's performance.

Business Strategy.

The Company's strategies to meet its objectives include the following:

Growth. The Company believes that, based on historical operating results
and the strength of InnSuites Hotels' management team, portfolio and markets,
the Hotels should provide the Company with the opportunity for cash flow growth
through the Percentage Leases. The Company believes that the revenue and cash
flow of the Hotels will be maximized by intensive management and marketing. The
Company believes that Lessee's continued commitment to customer service and the
experience of its management team should position the Company to capitalize on
the expected continued strength in the economy and improvement in the U.S. hotel
market. The Company's objectives include enhancing its competitive market
position through the continuation of a regular program of renovation, capital
improvement and niche marketing.

Acquisitions. The Company believes that attractive opportunities exist to
acquire additional hotel properties serving the market segment served by the
Hotels. The Company plans to expand the InnSuites Hotels system in southern
California and other markets in the southwestern United States where it believes
newly acquired properties will, at stabilization, add to earnings. The Company
expects to continue to affiliate with InnSuites Hotels(R), Holiday Inn(R), Best
Western(R) and/or other franchise companies. The Company believes it has the
capacity to acquire additional hotels without significantly increasing
management and overhead expenses.

Renovation and Development. Land for the addition of "extended-stay"
suites may be available adjacent to four of the Hotels. Such additional suites
may enable the Company to avoid duplication of overhead and capitalize on
InnSuites Hotels' past success by broadening service to include weekly and/or
monthly extended-stay guests while retaining the ability to offer the additional
suites on a daily basis during peak travel season.

The Company believes that a regular program of capital improvements at the
Hotels, including replacement and refurbishment of furniture, fixtures and
equipment, will enhance its competitiveness and maximize revenue growth under
the Percentage Leases.

As part of its ongoing renovation and capital expenditures program, the
Company expects to spend approximately $1,043,000 on capital improvements at the
Hotels during the 1999 fiscal year. These expenditures will be funded from
Company contributions to a Capital Expenditures Fund and/or from the Hotels'
revenues during that period.

The Company may develop additional limited-service or extended-stay hotels
on land that the Company may acquire contiguous to the properties currently
owned or elsewhere in its current geographic markets. The Company believes that
selective development of hotels in or near its existing geographic markets will
enable it to take advantage of operating and marketing efficiencies to generate
attractive returns on investment.

Financing Strategy. As of April 30, 1998, the Company, on a consolidated
basis, had an aggregate of $33,073,388 of outstanding debt. While its
organizational documents contain no limitation on the amount of debt it may
incur, the Company intends to achieve a debt to total market capitalization
ratio or debt to appraised value of real estate ratio (measured at the time debt
is incurred) of not more than 50% to 55%. The Company may from time to time
re-evaluate its debt capitalization policy in light of economic conditions,
relative costs of debt and equity capital, market values of its properties,
acquisition, development and expansion opportunities, and other factors. Any
indebtedness may be incurred by the Company or the Partnership. Indebtedness
incurred by the Company may be in the form of bank borrowings, secured or
unsecured, and publicly or privately placed debt instruments, the proceeds of
which would be loaned or contributed to the Partnership. Indebtedness incurred
by the Partnership may be in the form of purchase money obligations to the
sellers of properties, publicly or privately placed debt instruments, further
borrowings from the Company, or financing from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by the Partnership. This
indebtedness may be with recourse to all or any part of the property of the
Company or the Partnership, or recourse may be limited to the specific property
to which the indebtedness relates. The proceeds from any borrowings by the
Company or the Partnership may be used for the

3
<PAGE> 5

payment of distributions or dividends, for working capital, or to refinance
existing indebtedness or to finance acquisitions or expansions of properties.
See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification
and -- Distribution Requirements."

The Company has entered into a $12,000,000 senior secured revolving credit
facility with Pacific Century Bank ("Credit Facility"). The Company intends to
use the Credit Facility to provide interim financing for property acquisitions
and capital improvements in anticipation of long-term financing and to fund
working capital requirements. The Credit Facility is secured by first mortgages
on three of the Hotels.

RISK FACTORS

In addition to the other information contained in, or incorporated by
reference into, this Prospectus, prospective investors should carefully consider
the following factors in evaluating an investment in the Shares offered hereby.

HOTEL INDUSTRY RISKS

OPERATING RISKS

The Hotels are subject to all operating risks common to the hotel industry.
These risks include, among other things, intense competition from other hotels;
potential over-building in the hotel industry, which has adversely affected
occupancy, average daily rate ("ADR") and revenue per available room or suite
("REVPAR") in the past; increases in operating costs due to inflation and other
factors, which increases have not always been, and may not necessarily in the
future be, offset by increased suite rates; dependence on business and
commercial travelers and tourism; increases in energy costs and other expenses
of travel; and the effects of general and local economic conditions. Such
factors could adversely affect the Lessee's ability to make lease payments and,
consequently, adversely affect the Company's ability to make any required
payments of principal and interest on indebtedness and to make distributions to
stockholders. Further, annual adjustments to the base rent and the thresholds
for the computation of percentage rent under the Percentage Leases, based upon a
formula taking into account changes in the U.S. Consumer Price Index ("CPI"),
would (in the absence of offsetting increases in suite revenue and in the event
of any decrease in suite revenue) result in decreased revenues to the
Partnership and, therefore, decreased amounts available to the Company for
required payments of principal and interest on indebtedness and to make
distributions to stockholders.

COMPETITION

Competition for Guests; Operations. The hotel industry is highly
competitive. Each of the Hotels experiences competition primarily from other
mid-market hotels in its immediate vicinity, but also competes with other hotel
properties in its geographic market. Some of the competitors of the Hotels have
substantially greater marketing and financial resources than the Company and the
Lessee. A number of additional hotel rooms have been added, are under
development or have been announced in a number of the Company's markets, and
additional hotel rooms may be developed in the future. Such additional hotel
rooms have had, and may continue to have, an adverse effect on the revenues of
the Hotels in such markets.

Competition for Acquisitions. The Company may be competing for investment
opportunities with entities that have substantially greater financial resources
than the Company. These entities may generally be able to accept more risk than
the Company prudently can manage. Competition may generally reduce the number of
suitable investment opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell.

SEASONALITY OF HOTEL BUSINESS

The hotel industry is seasonal in nature. Similarly, the Hotels' operations
historically have been seasonal in nature, reflecting relatively higher
occupancy rates at a majority of the Hotels during the first fiscal quarter of
each year, and to a lesser extent, the fourth fiscal quarter, and relatively
lower occupancy rates at a majority of the

4
<PAGE> 6

Hotels during the second fiscal quarter of each year. Accordingly, seasonality
can be expected to cause significant quarterly fluctuations in the Company's
lease revenue, to the extent it receives percentage rent. Hotels located in
southern Arizona historically experience their most profitable periods in the
winter season, whereas Hotels located in northern Arizona and California
historically experience their most profitable periods during the summer season,
providing some balance to the general seasonality in the hotel business.

INVESTMENT CONCENTRATION IN SINGLE INDUSTRY

The Company's current strategy is to acquire interests exclusively in hotel
properties. The Company will not seek to invest in assets selected to reduce the
risks associated with investments in the hotel industry and will be subject to
risks inherent in concentrating investments in a single industry. Therefore, the
adverse effect on the Company's lease revenue and amounts available for required
payments of principal and interest on indebtedness and to make distributions to
stockholders resulting from a downturn in the hotel industry will be more
pronounced than if the Company had diversified its investments outside of the
hotel industry.

EMPHASIS ON INNSUITES HOTELS; MARKET CONCENTRATION

All but one of the Hotels are marketed as InnSuites Hotels (with modest
marketing of that Hotel as an InnSuites affiliate). Accordingly, the Company is
subject to risks inherent in concentrating the Company's investments in the
InnSuites Hotels brand, such as a reduction in business following adverse
publicity related to the brand, which could have an adverse effect on the
Company's lease revenues and amounts available for required payments of
principal and interest on indebtedness and to make distributions to
stockholders.

The Hotels are located in Arizona and southern California. Therefore,
adverse events or conditions that affect those areas particularly (such as
natural disasters or adverse changes in local economic conditions) could have a
more pronounced negative impact on the operations of the Company and amounts
available for required payments of principal and interest on indebtedness and to
make distributions to stockholders than events affecting other areas.

CONSTRAINTS ON ACQUISITIONS AND IMPROVEMENTS

The Company intends to continue to pursue its current growth strategy,
which includes acquiring, repositioning and improving hotel properties. There is
a risk that the Company, due to market and other conditions beyond its control,
will not have access to sufficient equity or debt capital to pursue its
acquisition strategies. The Company generally cannot retain cash generated by
operating activities. To qualify as a REIT, the Company must distribute at least
95% of its taxable income annually. The Company's $12 million Credit Facility
currently expires in 2001. Since the Company generally cannot retain earnings
and the term and amount of the Company's Credit Facility is limited, the
Company's ability to continue to make hotel acquisitions will depend primarily
on its ability to obtain additional private or public equity or debt financing.
There can be no assurance that such financing is or will be available to make
future investments.

CONFLICTS OF INTEREST

GENERAL

Because of the direct and indirect ownership interests of Mr. Wirth in, and
his positions with, the Company, the Lessee and its affiliates, there were
inherent conflicts of interest in connection with the Company's acquisition of
hotels in which he held such an interest and in the ongoing lease and operation
of the Hotels. Accordingly, the interests of the Company's stockholders may not
have been, and in the future may not be, solely reflected in all decisions made
or actions taken by officers or Trustees of the Company.

5
<PAGE> 7

NO ARMS-LENGTH BARGAINING ON PERCENTAGE LEASES AND COMPENSATION
ARRANGEMENTS FOR OFFICERS AND TRUSTEES

The terms of the Percentage Leases and the initial compensation
arrangements for officers and Trustees of the Company were not negotiated on an
arms-length basis and, accordingly, may not reflect fair market values or terms.
Management of the Company believes, however, that the terms of such agreements
are fair to the Company. The lease payments under the Percentage Leases have
been, and future Percentage Lease rents will be, calculated with reference to
historical financial data and the projected operating and financial performance
of the Hotels to which they relate. The terms of the Percentage Leases are
believed by management of the Company to be typical of provisions found in other
leases entered into in similar transactions. Management believes that the
initial and current compensation arrangements for officers and Trustees of the
Company, as well as the substantial ownership interests in the Company held by
Mr. Wirth, provide incentives for them to seek to maximize stockholder value, by
tying incentive compensation to increases in the market value of the Common
Stock. The Percentage Leases and the employee compensation plans were approved
by the Company's independent Trustees. The Company does not own any interest in
the Lessee.

ADVERSE TAX CONSEQUENCES TO CERTAIN AFFILIATES ON A SALE OF CERTAIN HOTELS

Certain affiliates of the Company may have unrealized gain in their
investments in the seven hotels acquired by the Company on January 31, 1998
("Initial Hotels"). A subsequent sale of such Initial Hotels by the Company may
cause adverse tax consequences to such persons. Therefore, the interests of the
Company and certain of its affiliates, including Mr. Wirth, could be in
opposition in connection with the disposition of any of such Initial Hotels.
However, decisions with respect to the disposition of any of the Initial Hotels
must be approved by a majority of the independent Trustees.

RISKS OF LEVERAGE; SUBSTANTIAL AMOUNTS OF FLOATING RATE DEBT

At April 30, 1998, the Company's outstanding debt and capital lease
obligations consisted of approximately $33.07 million in principal amount
outstanding, including approximately $8.53 million under the Credit Facility, a
substantial portion of which indebtedness bears interest at floating rates.
Since the Company intends to continue to acquire additional studio and two-room
suite hotels and must distribute annually at least 95% of its taxable net income
to maintain its REIT status, it may borrow additional funds to make investments
or distributions. The Company has obtained the Credit Facility to provide, as
necessary, funds for investments in additional hotel properties, working capital
and cash for distributions. The Credit Facility is secured by a first mortgage
on the Company's interest in three of the Hotels. The majority of the Company's
floating rate debt bears interest at the 30-day London Interbank Offered Rate
("LIBOR") plus 2.75%.

There can be no assurance that the Company will be able to meet its present
or future debt service obligations and, to the extent that it cannot, it risks
the loss of some or all of its assets to foreclosure. Changes in economic
conditions could result in higher interest rates, which could increase debt
service requirements on the Company's floating rate debt and could reduce the
amounts available for distribution to stockholders. Adverse economic conditions
could cause the terms on which borrowings become available to become unfavorable
to the Company. In such circumstances, if the Company is in need of capital to
repay indebtedness in accordance with its terms or otherwise, it could be
required to liquidate one or more investments in the Hotels at times that may
not permit realization of the maximum return on such investments.

TAX RISKS

FAILURE TO QUALIFY AS A REIT

The Company operates in a manner intended to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request, a ruling from the Internal Revenue Service ("Service") that it
qualifies as a REIT, it has received an opinion of its counsel that, based on
certain assumptions and representations, it so qualifies. Investors should be
aware, however, that opinions of counsel are not binding on the Service or any
court. The REIT qualification opinion only represents the view of counsel to the
Company

6
<PAGE> 8

based on counsel's review and analysis of existing law, which includes no
controlling precedent. Furthermore, both the validity of the opinion and the
continued qualification of the Company as a REIT will depend on the Company's
continuing ability to meet various requirements concerning, among other things,
the ownership of its outstanding stock, the nature of its assets, the sources of
its income, and the amount of its distributions to stockholders of the Company.
See "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of the Company."

If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain provisions of
the Internal Revenue Code of 1986, as amended ("Code"), the Company also would
be disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost. As a result, the funds available
for required payments of principal and interest on indebtedness and to make
distributions to stockholders would be reduced for each of the years involved.
Although the Company operates in a manner designed to allow it to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Board of Trustees, with the consent of a majority
of the stockholders, to revoke the REIT election. See "FEDERAL INCOME TAX
CONSIDERATIONS."

REIT MINIMUM DISTRIBUTION REQUIREMENTS

In order to qualify as a REIT, the Company generally is required each year
to distribute to stockholders at least 95% of its net taxable income (excluding
any net capital gain). In addition, the Company is subject to a 4% nondeductible
excise tax on the amount, if any, by which certain distributions paid by it with
respect to any calendar year are less than the sum of 85% of its ordinary income
plus 95% of its capital gain net income for that year.

The Company intends to make distributions to stockholders to comply with
the 95% distribution requirement and to avoid the nondeductible excise tax. The
Company's income consists primarily of its share of the income of the
Partnership and the Company's cash available for distribution consists primarily
of its share of cash distributions from the Partnership. Differences in timing
between taxable income and cash available for distribution and the effects of
seasonality on the hospitality industry could require the Company, through the
Partnership, to borrow funds on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax. For federal income tax
purposes, distributions paid to stockholders may consist of ordinary income,
capital gains, nontaxable return of capital, or a combination thereof. The
Company provides its stockholders with an annual statement as to its designation
of the taxability of distributions.

Distributions by the Partnership will be determined by the Company's Board
of Trustees and will depend on a number of factors, including the amount of the
Partnership's cash available for distribution, the Partnership's financial
condition, any decision by the Board of Trustees to reinvest funds rather than
to distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Trustees deem relevant. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification and -- Distribution
Requirements."

FAILURE OF THE PARTNERSHIP TO BE CLASSIFIED AS A PARTNERSHIP FOR FEDERAL
INCOME TAX PURPOSES; IMPACT ON REIT STATUS

The Company believes that the Partnership will be classified as a
partnership for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Partnership as a partnership for federal
income tax purposes, the Partnership would be taxable as a corporation and would
be subject to federal income tax on its taxable income at regular corporate
rates. In such event, since the value of the Company's ownership interest in the
Partnership constitutes more than 10% of the Partnership's voting securities and
exceeds 5% of the Company's assets, the Company likely would cease to qualify as
a REIT. Furthermore, the imposition of a corporate tax on the Partnership would
substantially reduce the amount of cash available for distribution to the
Company and its stockholders.

7
<PAGE> 9

EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK

One of the factors that may influence the price of the Company's Common
Stock in public trading markets is the annual yield from distributions by the
Company on the Common Stock, as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the Common Stock.

RECENTLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING HISTORY

The Company was reorganized and the Partnership and the Lessee began
operations in 1998 and, therefore, have limited operating histories. Although
the management of the Company and the Lessee have substantial experience in
developing, financing and operating hotel properties, they have limited
experience in operating as a REIT. The Company must rely on the Lessee, and the
Lessee, in turn, will depend upon ISIH, to generate sufficient cash flow from
the operation of the Hotels to enable the Lessee to meet its rent obligations
under the Percentage Leases. All of the Hotels are managed on behalf of the
Lessee by ISIH. All management contracts extend for a term of five (5) years
from the date of acquisition of the Hotel to which such contract relates, but
ISIH does not have, or will not have, any liability or obligation to the
Partnership for the payment of rent under the Percentage Leases. The obligations
of the Lessee under the Percentage Leases are unsecured. The Lessee's only
assets are cash, receivables, inventory, supplies and prepaid expenses needed in
the operation of the Hotels, the franchise licenses for the Hotels, and its
rights and benefits under the Percentage Leases. At March 31, 1998, the Lessee
had a total stockholders' deficit of approximately $2.4 million. See "THE
COMPANY" and "PARTNERSHIP AGREEMENT."

RELIANCE ON KEY PERSONNEL AND BOARD OF TRUSTEES

Stockholders have no right or power to take part in the management of the
Company except through the election of Trustees and the exercise of voting
rights on certain specified matters. The Board of Trustees is responsible for
managing the Company. The Company's future success, including particularly the
implementation of the Company's acquisition growth strategy, is substantially
dependent on the active participation of the Company's two executive officers,
Mr. Wirth and Gregory D. Bruhn, the Company's Executive Vice President and Chief
Financial Officer. The loss of the services of either of these individuals could
have a material adverse effect on the Company.

REAL ESTATE INVESTMENT RISKS

The Company's investments are subject to varying degrees of risk generally
incident to the ownership of real property, including, in addition to the risks
discussed below, adverse changes in general or local economic conditions, zoning
laws, traffic patterns and neighborhood characteristics, tax rates, governmental
rules and fiscal policies, and by civil unrest, acts of war and other adverse
factors which are beyond the control of the Company.

ILLIQUIDITY OF REAL ESTATE

Real estate investments are relatively illiquid. The ability of the Company
to alter its portfolio in response to changes in economic and other conditions
will be limited. Also, no assurances can be given that the market value of any
of the Hotels will not decrease in the future. There can be no assurance that
the Company will be able to dispose of such investments when it finds
disposition advantageous or necessary or that the sale price realized in any
disposition will recoup or exceed the amount of the Company's investment
therein.

UNINSURED AND UNDERINSURED LOSSES

Each of the Hotels is covered by comprehensive policies of insurance,
including liability, fire and extended coverage. Management believes such
specified coverage is of the type and amount customarily obtained by owners of
similar real property assets. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, hurricanes and floods,
that may be uninsurable or not economically insurable. Three

8
<PAGE> 10

of the Hotels are located in California, which is subject to relatively higher
seismic risks. Although one of these Hotels was constructed under the more
recent and stringent post-1984 building codes that were intended to reduce the
likelihood or extent of damage from seismic activity, no assurance can be given
that an earthquake would not cause substantial damage and losses to that Hotel.
The Company's Board of Trustees may exercise discretion in determining amounts,
coverage limits and the deductibility provisions of insurance, with a view to
maintaining appropriate insurance coverage on the Company's investments at a
reasonable cost and on suitable terms. This may result in insurance coverage
that, in the event of a substantial loss, would not be sufficient to pay the
full current market value or current replacement cost of the Company's lost
investment. Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it impractical to rely on
insurance proceeds to replace property after such property has been damaged or
destroyed. Under such circumstances, the insurance proceeds received by the
Company might not be adequate to restore its economic position with respect to
such property.

ENVIRONMENTAL MATTERS

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. Liability also may extend to persons holding a
security interest in the property under certain limited circumstances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to properly remediate such contaminated property, may adversely
affect the owner's ability to dispose of such property, to fully utilize such
property without restriction or to borrow using such property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is or ever was owned or operated by such person. Certain environmental laws and
common law principles could be used to impose liability for the release of
hazardous or toxic substances, including the release of asbestos-containing
materials ("ACMs") into the air, and third parties may seek recovery from owners
or operators of real property for personal injury or property damage associated
with such releases, including exposure to released ACMs. Environmental laws also
may impose restrictions on the manner in which property may be used or
businesses may be operated, and these restrictions may require unanticipated
expenditures. Environmental laws provide for sanctions in the event of
noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. In connection with the ownership of the
Hotels and any subsequently acquired hotels, the Company may be potentially
liable for such costs. The cost of defending against claims of liability,
complying with environmental regulatory requirements or remediating a
contaminated property could materially adversely affect the business, assets or
results of operations of the Company and the Partnership and, consequently,
amounts available for required payments of principal and interest on
indebtedness and to make distributions to stockholders.

Phase I environmental audits from independent environmental engineers were
obtained with respect to each of the Hotels prior to the acquisition thereof by
the Company. The principal purpose of a Phase I audit is to identify indications
of potential environmental contamination and, secondarily, to assess, to a
limited extent, the potential for environmental regulatory compliance
liabilities. The Phase I audits of the Hotels were designed to meet the
requirements of lenders to the Hotels and the then current industry standards
governing Phase I audits, and consistent with those requirements, none of the
audits involved testing of groundwater, soil or air. Accordingly, they do not
represent evaluations of conditions at the studied sites that would be revealed
only through such testing. In addition, their assessment of environmental
regulatory compliance issues was general in scope and was not a detailed
determination of the Hotels' complete compliance status. Similarly, the audits
did not involve comprehensive analysis of potential off-site liability. The
Phase I audit reports have not revealed any environmental liability that
management believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any such
liability. Nevertheless, it is possible that these reports do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware.

9
<PAGE> 11

COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT

Under the Americans with Disabilities Act of 1990 ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While management of the Company believes
that, based upon an examination thereof and consultation with professionals, the
Hotels are substantially in compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in additional
expense, the imposition of fines and/or an award of damages to private
litigants. If the Company were required to make substantial modifications at the
Hotels to comply with the ADA, the Company's ability to make required payments
of principal and interest on indebtedness and to make distributions to
stockholders could be adversely affected.

INCREASES IN PROPERTY TAXES

Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase as property tax rates change, as the properties are improved and as the
properties are assessed or reassessed by taxing authorities. If property taxes
increase, the Company's ability to make required payments of principal and
interest on indebtedness and to make distributions to stockholders could be
adversely affected.

OWNERSHIP LIMITATION

In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding stock may be owned, actually and
constructively under the applicable attribution provisions of the Code, by five
or fewer individuals (as defined in the Code to include certain entities) during
the last half of the taxable year (other than the first year), and the Company
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year. For the purpose of preserving the Company's REIT
qualification, the Company's Second Amended and Restated Declaration of Trust
("Declaration") prohibits ownership (taking into account applicable constructive
ownership provisions of the Code) of more than 4.9% of any class of the
Company's outstanding capital stock by any person ("Ownership Limit"), and,
subject to certain exceptions, prohibits any transfer that would result in (i)
any person owning shares in excess of the Ownership Limit, (ii) the Company's
shares being beneficially owned by fewer than 100 persons (determined without
reference to any constructive ownership rules), (iii) the Company being "closely
held" within the meaning of the Code or otherwise failing to qualify as a REIT
under the Code, or (iv) the Company owning, actually and constructively under
the applicable attribution provisions of the Code, 10% or more of the ownership
interests in the Lessee or any sublessee. Any attempted transfer of shares that
would violate any one or more of such prohibitions will be void and of no force
or effect whatsoever with respect to any shares in excess of such limits (and,
in the case of the prohibition against the Company having fewer than 100
stockholders, will be entirely void) and the attempted transferee will not
acquire any right or interest in such excess shares. The Company may take any
lawful action deemed necessary or advisable to ensure compliance with the
Ownership Limit provisions and to preserve its status as a REIT, including
without limitation refusing to recognize or record any prohibited transfer.

Should any person at any time hold any shares in violation of the Ownership
Limit (other than a violation of the requirement that a REIT have at least 100
stockholders), then that number of shares in excess of the number such person
could hold without violating the Ownership Limit will be immediately designated
as "Shares-in-Trust" and transferred automatically and by operation of law to,
and be held in, a trust for the benefit of such beneficiaries as may be
designated by the trustee of such trust (which trustee shall be designated by
the Company and be a person that is unaffiliated with the Company or any
prohibited owner). The trustee will be entitled to receive all distributions on,
and to exercise all voting rights of, any Shares-in-Trust. The record holder of
any shares so designated as Shares-in-Trust and transferred to the trustee shall
have no right or interest in such shares or trust, except the right (upon
satisfaction of certain conditions) to receive from the proceeds of sale of such
shares to a qualified person or entity an amount equal to the lesser of (i) the
amount paid therefor by such record holder (if acquired by him for value), or
the market price of such shares determined as provided in the Declaration (if
acquired by him otherwise than for value), and (ii) the amount received by the
trustee from the sale of such Shares-in-Trust.

10
<PAGE> 12

The Company or its designee may elect, within specified time limits, to
purchase from the trustee any Shares-in-Trust at the lesser of (a) the amount to
which the record holder would be entitled pursuant to clause (i) of the
immediately preceding paragraph or (b) the market price of such shares,
determined as provided in the Declaration, on the date of its election to
purchase such shares. Accordingly, the record holder of any shares that are
designated as Shares-in-Trust may experience a financial loss if the price at
which such shares are sold to a qualified person or entity, or the Company, is
less than that paid by such record holder therefor. See "CERTAIN DECLARATION
PROVISIONS -- Restrictions on Ownership and Transfer" and "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification."

LIMITATION ON ACQUISITION AND CHANGE IN CONTROL

OWNERSHIP LIMIT

The Ownership Limit, which provides that no person may own more than 4.9%
in value of any class of the outstanding Common Stock of the Company, may have
the effect of precluding an acquisition of control of the Company by a third
party without the approval of the Board of Trustees, even if such change in
control were to be in the stockholders' interests.

CLASSIFICATION OF BOARD OF TRUSTEES

The Board of Trustees is presently divided into three classes, comprised of
two Trustees each. Trustees are elected to staggered three year terms. The
Declaration provides that, subject to any rights of holders of preferred stock,
if any, and unless the Board of Trustees otherwise determines, any vacancies
will be filled by the affirmative vote of a majority of the remaining Trustees,
though less than a quorum. Accordingly, the Board of Trustees could temporarily
prevent any stockholder from enlarging the Board of Trustees and filling the new
Trusteeships with such stockholder's own nominees. Any Trustee so elected shall
hold office until the next annual meeting of stockholders.

RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS

No assurance can be provided that the Company will not be required to make
and fund significant additional improvements to the Hotels in the future to
obtain or maintain its franchise and/or trademark licenses. Failure to complete
improvements, when required, in a manner satisfactory to the franchisor could
result in the failure to issue, or the cancellation of, one or more franchise
licenses. In addition, the Company may desire to operate additional hotels
acquired by it under franchise licenses, and such franchisors may require that
significant capital expenditures be made to such additional hotels as a
condition of granting such franchise licenses.

The continuation of franchise licenses for the Hotels is subject to the
maintenance of specified operating standards and other terms and conditions.
Under each Percentage Lease, the Partnership is obligated, among other things,
to pay the costs of maintaining the structural elements of each Hotel and to set
aside as a reserve 4% of gross hotel suite revenues per month, on a cumulative
basis, and to fund from that reserve, or from other sources, capital
expenditures (subject to approval by the Company's Board of Trustees) for the
periodic replacement or refurbishment of furniture, fixtures and equipment
required for the retention of such franchise licenses. The Company's
predecessors in ownership made, and in the future the Company may be obligated
or deem it advisable to make, capital investments in the Hotels of more than 4%
of the gross suite revenues thereof. Should the Company be required or elect to
do so in the future, such investments may necessitate the use of borrowed funds
or the reduction of distributions. The Lessee is responsible for routine
maintenance and repair expenditures with respect to the Hotels. The failure to
maintain the standards or adhere to the other terms and conditions of the
franchise licenses could result in the loss or cancellation of such franchise
licenses. It is possible that a franchisor could condition the continuation of a
franchise license upon the completion of substantial capital improvements, which
the Board of Trustees may determine to be too expensive or otherwise unwarranted
in light of general economic conditions or the operating results or prospects of
the affected Hotel. In that event, the Board of Trustees may elect to allow the
franchise license to lapse, in which event the Company will be obligated to
indemnify the Lessee against any loss or liability incurred by it as a
consequence of such decision. In any case, if a franchise is terminated, the
Company and the Lessee may seek to obtain a suitable replacement franchise, or
to operate the affected Hotel independent of a franchise license. The loss of
any franchise license could have a material adverse effect upon the operations
or the underlying value of the Hotel covered by such license because

11
<PAGE> 13

of the loss of associated name recognition, marketing support and centralized
reservation systems provided by the franchisor. The loss of a number of the
franchise licenses for the Hotels could have a material adverse effect on the
Company's revenues under the Percentage Leases and the Company's cash available
to make required payments of principal and interest on indebtedness and to make
distributions to its stockholders.

USE OF PROCEEDS

The Selling Stockholders will receive all of the proceeds from the sale of
Shares offered hereby. The Company will not receive any proceeds from the sale
of such Shares.

SELLING STOCKHOLDERS

The following table sets forth the name of each Selling Stockholder and (i)
the number of shares of Common Stock beneficially owned by each Selling
Stockholder as of August 10, 1998, (ii) the maximum number of Shares which may
be offered for the account of each Selling Stockholder under this Prospectus,
and (iii) the amount and percentage of Common Stock that would be owned by each
Selling Stockholder after completion of the Offering, assuming the sale of all
of the Shares which may be offered hereunder. Except as otherwise noted below,
none of the Selling Stockholders has, within the past three years, had any
position, office or other material relationship with the Company.

12
<PAGE> 14

<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
Andrew G. Isbell...................... 9 1,021 1,021 *
Elizabeth D. Isbell................... 9 1,021 1,021 *
John B. Isbell........................ 9 1,021 1,021 *
M. William Isbell II.................. 60 7,108 7,108 *
Diane Jones........................... 345 42,595 42,595 *
Madeline B. Jones..................... 9 1,021 1,021 *
Thomas T. Koziol...................... 69 8,091 8,091 *
Kriz Family Trust
James & Evelyn Kriz, Ttees.......... 102 10,220 10,220 *
Paul & Margaret Larmour............... 78 7,460 7,460 *
Murray Leonard........................ 102 10,220 10,220 *
Timothy Lewis......................... 99 9,327 9,327 *
David A. Lindley...................... 129 12,570 12,570 *
Delvin Lindley........................ 360 36,338 36,338 *
Kay Lindley........................... 78 7,460 7,460 *
John B. Lynch......................... 39 3,730 3,730 *
Chastine Mangelsdorf.................. 180 16,790 16,790 *
Aubrey Maze........................... 99 12,171 12,171 *
Dr. Charles S. Meinstein.............. 168 10,154 10,154 *
Dennis & Jeanie Merideth.............. 180 16,790 16,790 *
Richard Minor & Deborah Kerr-Minor,
Ttees............................... 1,371 150,449 150,449 3.09
Richard & Jacqueline Olness........... 651 71,455 71,455 1.47
Dr. Charles Parker.................... 396 37,307 37,307 *
Lorance Pemble and Phyllis Pemble Liv.
Rev. Trust.......................... 396 37,307 37,307 *
James & Joanne Retzer................. 198 18,653 18,653 *
Simran Limited Partnership Dr.
Charanjit S. Dhillon................ 51 5,110 5,110 *
George M. Thornton.................... 198 18,653 18,653 *
Mr. & Mrs. Glen Volkenant............. 51 5,110 5,110 *
Dr. E. B. Waldman..................... 75 9,129 9,129 *
Zemer Investments an AZ Pship Dr.
James C. Zemer...................... 747 76,978 76,978 1.58
Christian Collet...................... 102 10,005 10,005 *
Miranda Collet........................ 102 10,005 10,005 *
Paul Collet........................... 21 2,542 2,542 *
Myra Ann Goodwin, Ttee
Myra Ann Goodwin Family Trust....... 51 5,110 5,110 *
Serena C. Murray...................... 102 10,005 10,005 *
Olive B. Schwartz Trust
Olive B. Schwartz, Tee.............. 225 31,685 31,685 *
Southard Revocable Liv. Trust
Fred & Lois Southard, Ttees......... 297 30,824 30,824 *
Michael Vekasi........................ 99 9,327 9,327 *
Michael Schuette...................... 201 20,438 20,438 *
Patrick R. Deren...................... 48 6,084 6,084 *
Lee J. Flory(3)....................... 1,173 149,216 149,216 3.07
Robert & Carol Slanicky............... 501 67,503 67,503 1.39
Donald & Jere Brunson................. 48 6,084 6,084 *
Victor C. Smith Jr.................... 396 37,307 37,307 *
Jay Dee Conrad........................ 15 1,904 1,904 *
BRZ Partnership
Jim Zazanis......................... 396 37,307 37,307 *
John H. Lankester..................... 396 37,307 37,307 *
</TABLE>

13
<PAGE> 15

<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
Dr. David S. Trump.................... 549 58,251 58,251 1.20
Gerald Gabel.......................... 345 29,069 29,069 *
Tracey Schecht........................ 357 33,577 33,577 *
PFI LC, Dr. Robert & Bette Lyn
Peterson, Mgrs...................... 303 30,658 30,658 *
David Ben Collet...................... 21 2,542 2,542 *
James R. Conrad....................... 15 1,898 1,898 *
Hospitality Corporation
International(4).................... 3,194 3,194 3,194 *
InnSuites Innternational Inns &
Resorts, Inc.(AZ)(4)................ 8,280 8,280 8,280 *
Innternational Suites Corp.(4)........ 5,847 5,847 5,847 *
Steve Robson(5)....................... 6,500 311,326 317,826 6.54
Marc E. Berg(3)....................... 0 107,675 107,675 2.21
James F. & Gail J. Wirth(6)........... 660,378 800,378 800,378 16.46
FBO Brian Wirth(7)
F. L. Wirth, Custodian.............. 396 396 396 *
FBO Christopher Wirth(7)
F. L. Wirth, Custodian.............. 396 396 396 *
FBO Eric Wirth(7)
F. L. Wirth, Custodian.............. 396 396 396 *
FBO Pam Wirth(7)
F. L. Wirth, Custodian.............. 396 396 396 *
Gerald J. or Jeanne A. Charland....... 0 7,516 7,516 *
Classic & Contemporary Amerind Art,
Inc.
Profit Sharing Plan #001............ 0 9,394 9,394 *
Classic & Contemporary Amerind Art,
Inc.
Money Purchase Pension Plan #002.... 0 5,637 5,637 *
Francene & James Deer, Jr............. 0 1,255 1,255 *
Chas Fuenning......................... 0 15,031 15,031
Donna Fuller.......................... 0 7,516 7,516 *
Gifford A. James...................... 0 7,516 7,516 *
FBO Mimmack Fmly. Educ. Trust
Virginia A. Mimmack................. 0 7,516 7,516 *
FBO Olympia Glass & Metal Inc. Profit
Sharing............................. 0 7,516 7,516 *
FBO Guy C. Hayden III
Retirement Accounts & Co............ 0 7,516 7,516 *
FBO Judith E. Peterson
Retirement Accounts & Co............ 0 376 376 *
Ted Turpin............................ 0 3,758 3,758 *
Kathleen Sulivan...................... 0 3,758 3,758 *
Valley Ear, Nose & Throat Surgeons
Ltd.
Profit Sharing Plan & Trust, Dr. K.
Nowak............................ 0 3,758 3,758 *
FBO Adam J. Cherevka
Nicholas Cherevka, Custodian........ 0 2,480 2,480 *
Kenneth J. Cherevka................... 0 2,480 2,480 *
FBO Lindsay K. Cherevka
Nicholas Cherevka, Custodian........ 0 2,555 2,555 *
Carole E. Gray........................ 0 1,879 1,879 *
The Heller Fund c/o Williams C.
Heller, Jr.......................... 0 37,578 37,578 *
Edith Wing............................ 0 1,879 1,879 *
Shirley Randolph...................... 0 7,516 7,516 *
Margaret Allen Rev. Trust............. 0 21,883 21,883 *
George C. Beakley Ph.D. Family Trust
D................................... 0 7,891 7,891 *
</TABLE>

14
<PAGE> 16

<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
FBO John Wright
Everen Clearing Corp................ 0 3,126 3,126 *
John C. Bull, Jr. & Ann B. Bull,
Ttees............................... 0 48,544 48,544 *
Dr. Robert W. Croddy.................. 0 10,942 10,942 *
Dennis Edwards........................ 0 6,252 6,252 *
Eugenia E. Kraus...................... 0 7,628 7,628 *
Neurological Phys. of AZ Money Pension
Plan #001........................... 0 3,126 3,126 *
Neurological Phys. of AZ Profit
Sharing Plan #002................... 0 3,126 3,126 *
Lawrence or Mary Pelegrin, Ttees
1992 Intervivos Trust............... 0 3,870 3,870 *
FBO Dr. James Zemer
Phoenix Anesthesiologists Grp.
Ltd.............................. 0 21,883 21,883 *
Dennis Brydon MD PC Restated Profit
Sharing Plan........................ 0 10,942 10,942 *
John J. Bayer, Jr. or Judith A.
Bayer............................... 0 3,126 3,126 *
FBO Dennis D. Edwards
Retirement Accounts & Co............ 0 419 419 *
Roadrunner Properties................. 75 11,392 11,392 *
Ronnie Chase.......................... 0 1,563 1,563 *
Edward G. Hill, Jr.(3)................ 2,000 6,252 8,252 *
Kathlene A. Koziol.................... 0 1,563 1,563 *
Elizabeth Kratzenberg................. 0 1,438 1,438 *
Robert & Janette Grant................ 0 1,563 1,563 *
T. Jerome Holleran.................... 0 2,074 2,074 *
Bancone & Co. F/A/O Krogstad T/A...... 0 3,126 3,126 *
Yashavant V. & Mukta Y. Kulkarni...... 0 1,563 1,563 *
Lyle E. & Mary G. Minkler............. 0 3,126 3,126 *
The Hugh M. & Sallyann Caldwell Trust
Hugh M. & Sallyann Caldwell,
CoTtees............................. 0 1,563 1,563 *
Joseph Cesare......................... 0 1,563 1,563 *
Nadine Rodriguez...................... 0 1,563 1,563 *
Michael A. Chatham.................... 0 312 312 *
Franklin E. Custard................... 0 312 312 *
Ronald L. Frey........................ 0 312 312 *
Ronald L. Miller...................... 0 312 312 *
Robert L. Munari...................... 0 468 468 *
Mary Stroud........................... 0 468 468 *
Edward L. Waidelich................... 0 468 468 *
Jim Walters........................... 0 468 468 *
Don Schwatken......................... 120 10,805 10,805 *
Dr. Gerald Miller..................... 795 72,025 72,025 1.48
Stephen Jacobs........................ 168 9,943 9,943 *
Leonard & Thomas Harper............... 33 3,540 3,540 *
Chris Cochran......................... 99 99 99 *
Wm. Michael & Beth Cochran
Living Trust........................ 60 60 60 *
Deer Family Trust, Elsie &
James A. Deer, Sr., Tees............ 1,200 137,396 137,396 2.83
Murray Hollenberg..................... 200 18,008 18,008 *
Mackenzie & Alma Lathrop.............. 75 75 75 *
Dr. Holly Marten...................... 150 5,787 5,787 *
RRF Sub Corp. ........................ 4,500 4,500 4,500 *
</TABLE>

15
<PAGE> 17

<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
Ontario Hospitality Properties Limited
Partnership......................... 13,590 13,590 13,590 *
Hulsey Hotels Corporation(4) ......... 5,100 5,100 5,100 *
Yuma Hospitality Properties Limited
Partnership......................... 11,400 11,400 11,400 *
Tucson Hospitality Properties Limited
Partnership......................... 18,800 18,800 18,800 *
Northern Phoenix Investment Limited
Partnership......................... 6,207 6,207 6,207 *
Baseline Hospitality Properties
Limited Partnership................. 15,100 15,100 15,100 *
Ruth Anderson......................... 600 600 600 *
Mary Fabre............................ 600 600 600 *
Dan Michael Rasmussen................. 300 300 300 *
Larry Ferguson........................ 2,400 2,400 2,400 *
Ash Beshay............................ 900 900 900 *
Maria Casillo......................... 600 600 600 *
Vangie Estaban........................ 600 600 600 *
Ed Gonzales........................... 300 300 300 *
Margaret Maldonado.................... 600 600 600 *
Crystal Cantu......................... 300 300 300 *
Dolores De Avila...................... 300 300 300 *
Estela Rosillo........................ 300 300 300 *
Juaquin Serrano....................... 300 300 300 *
Jose Serrato.......................... 300 300 300 *
Martha Torres......................... 300 300 300 *
Graciela Aldama....................... 300 300 300 *
Imelda Gandara........................ 300 300 300 *
Joel Gandara.......................... 300 300 300 *
Victor Munoz.......................... 300 300 300 *
Frank L. Wirth(8)..................... 1,500 1,500 1,500 *
Joel Wirth(9)......................... 1,500 1,500 1,500 *
Gerry Thornton........................ 1,500 1,500 1,500 *
Chris Thornton........................ 900 900 900 *
Marc Thornton......................... 900 900 900 *
Craig Thornton........................ 900 900 900 *
John Phillips......................... 600 600 600 *
Alejandro Melchor..................... 300 300 300 *
Maria Babylonia....................... 300 300 300 *
Ruth Lay.............................. 900 900 900 *
Toni Lindner.......................... 600 600 600 *
Freda Zapanta......................... 300 300 300 *
Reyes Garcia.......................... 300 300 300 *
Michelle Orion........................ 1,500 1,500 1,500 *
Saralee Rahm.......................... 600 600 600 *
Marie Reyes Lorudes................... 300 300 300 *
Ken Sliwa............................. 3,303 12,166 12,166 *
Cindy Sennings........................ 300 300 300 *
Ed Meyer.............................. 300 300 300 *
Calvin Quick.......................... 6,600 6,600 6,600 *
Martha Gomez.......................... 1,500 1,500 1,500 *
Judy Correll.......................... 300 300 300 *
Mary Valencia......................... 1,200 1,200 1,200 *
Almadelia Verdugo..................... 600 600 600 *
John Hardin........................... 600 600 600 *
</TABLE>

16
<PAGE> 18

- ---------------
* Less than 1%

(1) Beneficial ownership of Common Stock as of August 10, 1998.

(2) Assumes conversion of all Units into Shares. Assumes sale of all Shares
registered hereunder, although Selling Stockholders are under no obligation
known to the Company to sell any Shares at this time.

(3) Trustee of the Company since January 30, 1998.

(4) Owned or controlled by James F. Wirth.

(5) Trustee of the Company since June 16, 1998.

(6) Trustee, Chairman, President and Chief Executive Officer of the Company
since January 30, 1998, and his wife.

(7) Child of James F. Wirth.

(8) Father of James F. Wirth.

(9) Brother of James F. Wirth.

17
<PAGE> 19

PLAN OF DISTRIBUTION

The Shares may be sold pursuant to the offer made hereby from time to time
by the Selling Stockholders. The Selling Stockholders may sell the Shares being
offered hereby: (i) in ordinary brokerage transactions and in transactions in
which brokers solicit purchasers; (ii) in privately negotiated direct sales or
sales effected through agents not involving established trading markets; or
(iii) through transactions in put or call options or other rights (whether
exchange-listed or otherwise) established after the effectiveness of the
Registration Statement of which this Prospectus is a part. The Shares may be
sold at prices and on terms then prevailing or at prices related to the then
current market price of the Common Stock on the NYSE or at other negotiated
prices. In addition, any of the Shares that qualify for sale pursuant to Rule
144 may be sold in transactions complying with such rule, rather than pursuant
to this Prospectus.

The Shares consist of (i) Common Stock issued to Selling Stockholders in
private transactions exempt from the registration requirements of the Securities
Act and (ii) Common Stock issued or to be issued to Selling Stockholders upon
conversion by the Selling Stockholders of Units previously issued to such
persons in private transactions exempt from the registration requirements of the
Securities Act. Upon the exercise of a Selling Stockholder's conversion rights
in Units then held by such Selling Stockholder, the Company will convert each
Unit into a share of Common Stock and, consequently, the Company's interest in
the Partnership will increase.

In the case of sales of the Shares effected to or through broker-dealers,
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
the Shares sold by or through such broker-dealers, or both. The Company has
advised the Selling Stockholders that the anti-manipulative Rules 10b-6 and
10b-7 under the Securities Exchange Act of 1934, as amended ("Exchange Act"),
may apply to their sales in the market and has informed them of the need to
deliver copies of this Prospectus. The Company is not aware as of the date of
this Prospectus of any agreements between any of the Selling Stockholders and
any broker-dealers with respect to the sale of the Shares offered by this
Prospectus. The Selling Stockholders and any broker-dealer or other agent
executing sell orders on behalf of the Selling Stockholders may be deemed to be
"underwriters" within the meaning of the Securities Act, in which case the
commissions received by any such broker-dealer or agent and profit on any resale
of the Shares may be deemed to be underwriting commissions under the Securities
Act. The commissions received by a broker-dealer or agent may be in excess of
customary compensation. The Company will receive no part of the proceeds from
the sale of any Shares hereunder.

The Selling Stockholders will pay their costs and expenses of selling the
Shares hereunder, including commissions and discounts of underwriters, brokers,
dealers or agents, while the Company has agreed to pay the costs and expenses
incident to the registration and qualification of the Shares offered hereby,
including applicable filing fees and legal and accounting fees and expenses. In
addition, the Company has agreed to indemnify the Selling Stockholders against
certain liabilities, including certain liabilities arising under the Securities
Act.

The Selling Stockholders may elect to sell all, a portion or none of the
Shares offered by them hereunder.

18
<PAGE> 20

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of an unlimited number
of shares of Common Stock. The following summary description does not purport to
be complete and is qualified in its entirety by reference to the Company's
Declaration. See "CERTAIN DECLARATION PROVISIONS."

COMMON STOCK

Under the Declaration, the Company has authority to issue an unlimited
number of shares of Common Stock. Under Ohio law, stockholders generally are not
responsible for a corporation's debts or obligations. At August 31, 1998, the
Company had outstanding 2,091,504 shares of Common Stock. In addition, 2,771,443
shares of Common Stock are issuable upon conversion of outstanding Units by the
Selling Stockholders.

The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including the election of Trustees. The
Company's Declaration does not provide for cumulative voting in the election of
Trustees. Matters subject to a vote by the stockholders, including the election
of Trustees, generally require the affirmative vote of a majority of the
outstanding Common Stock present in person or by proxy at a stockholder's
meeting. Amendments to the Declaration require the affirmative vote of
two-thirds of the outstanding Common Stock whether or not present in person or
by proxy at a stockholder's meeting. Except as otherwise required by law, the
holders of Common Stock exclusively possess all voting power.

The Company's Board of Trustees is divided into three classes, comprised of
two Trustees each, which have staggered three-year terms. At least two years
would be required in order to change the membership of a majority of the Board
of Trustees.

In order to maintain its qualification as a REIT, the Company must make
annual distributions to stockholders of at least 95% of its taxable income
(which does not include net capital gains). For the year ended January 31, 1998,
the Company had distributions totaling $.15 per share, none of which was
required to satisfy the 95% REIT distribution test. Under certain circumstances,
the Company may be required to make distributions in excess of cash available
for distribution in order to meet such REIT distribution requirements. In such
event, the Company presently would expect to borrow funds, or to sell assets for
cash, to the extent necessary to obtain cash sufficient to make the
distributions required to retain its qualification as a REIT for federal income
tax purposes.

On July 10, 1998, the Company declared a dividend of $0.10 per share of
Common Stock payable August 31, 1998 to stockholders of record on August 10,
1998. The Company currently anticipates that it will maintain at least a
dividend rate of $0.40 per share of Common Stock per year or $0.10 per share of
Common Stock per quarter for the immediate future, unless actual results of
operations, economic conditions or other factors differ from its current
expectations.

To the extent that cash flow from operations is insufficient during any
quarter, due to temporary or seasonal fluctuations in Percentage Lease revenue,
the Company expects to utilize other cash on hand or borrowings under the Credit
Facility to make such distributions. No assurance can be given, however, that
the Company will make distributions in the future at the current rate, or at
all.

The timing and amount of future distributions, if any, made by the Company
will be determined by the Board of Trustees and will depend on a number of
factors, including the amount of cash available for distribution, funds
available from operations, the Company's financial condition, capital
expenditure requirements for the Company's properties, the annual distribution
requirements under the REIT provisions of the Code and such other factors as the
Board of Trustees may deem relevant.

The holders of Common Stock are entitled to such dividends, if any, as may
be declared from time to time by the Board of Trustees from funds legally
available therefor and, upon liquidation, are entitled to receive, pro rata, all
assets of the Company available for distribution to such holders. All shares of
Common Stock are or, when issued upon conversion of Units, will be fully paid
and nonassessable and will have no preemptive rights.

The primary source of proceeds to be used for distributions to stockholders
is the Company's share of the rents due pursuant to the Percentage Leases. The
anticipated revenue may or may not be realized or collected.

19
<PAGE> 21

Accordingly, the statements set forth above with regard to distributions are
forward-looking statements involving certain risks and uncertainties that could
cause actual results to differ materially from those expressed in such
statements. Important factors that could cause such different results include,
but are not limited to, competition from other hotels, increases in operating
costs, seasonality effects in hotel occupancy and revenues, and the potential
loss of a franchise or liquor license in respect of any Hotel or acquired hotel.
See "FORWARD-LOOKING STATEMENTS."

MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

The following table sets forth, for the periods indicated, the high and low
sales prices of the Company's Common Stock, as quoted by the NYSE, as well as
dividends declared thereon:

<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
FISCAL YEAR 1999
First Quarter...................................... 4 3/8 4 1/8 --
Second Quarter..................................... 5 3/16 4 1/4 .10
FISCAL YEAR 1998
First Quarter...................................... 5 3/8 4 1/2 .10
Second Quarter..................................... 4 7/8 4 3/8 .05
Third Quarter...................................... 5 4 5/8 --
Fourth Quarter..................................... 4 11/16 4 1/4 --
FISCAL YEAR 1997
First Quarter...................................... 7 1/4 5 3/4 .10
Second Quarter..................................... 6 5 3/8 .10
Third Quarter...................................... 6 5 3/8 .10
Fourth Quarter..................................... 5 5/8 4 7/8 .10
</TABLE>

RESTRICTIONS ON OWNERSHIP AND TRANSFER

The Common Stock is subject to certain restrictions upon the ownership and
transfer thereof that were adopted for the purpose of enabling the Company to
preserve its status as a REIT. For a description of such restrictions, see
"CERTAIN DECLARATION PROVISIONS -- Restrictions on Ownership and Transfer."

EXCHANGE LISTING

The Company's Common Stock is listed on the NYSE under the symbol "RRF."
The Company intends to change its name to "InnSuites Hospitality Trust" in
September 1998. The Company's Common Stock will then be listed on the NYSE under
the symbol "IHT".

TRANSFER AGENT

The transfer agent and registrar for the Common Stock is National City
Bank, Cleveland, Ohio.

20
<PAGE> 22

SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION AND OPERATING DATA

The following tables set forth (i) selected unaudited pro forma condensed
consolidated financial information for the Company for the year ended January
31, 1998 and for the quarter ended April 30, 1998, and (ii) selected unaudited
pro forma condensed financial information for the Lessee for the year ended
December 31, 1997 and for the quarter ended March 31, 1998.

The Pro Forma Condensed Consolidated Statements of Income for the Company
for the year ended January 31, 1998 and for the quarter ended April 30, 1998 (i)
are presented as if the acquisitions of the Hotels (except for the Buena Park,
California hotel which was acquired June 1, 1998) had occurred on February 1,
1997; and (ii) adjusts the historical operating results of the Company for the
year ended January 31, 1998 and for the quarter ended April 30, 1998 for the
effects of those acquisitions. The pro forma information is not necessarily
indicative of what the actual results of operations of the Company would have
been, assuming these transactions had been consummated as of February 1, 1997,
nor does it purport to represent the future results of operations of the
Company.

The Pro Forma Condensed Statements of Operations of the Lessee for the year
ended December 31, 1997 and for the quarter ended March 31, 1998 are presented
as if the acquisitions of the Hotels (except for the Buena Park, California
hotel) and the beginning of the relevant lease years had occurred on January 1,
1997, and therefore incorporates certain assumptions that are included in the
Notes to the Pro Forma Condensed Statements of Operations. The pro forma
operating information for the Lessee is presented to reflect the pro forma
operations of the Lessee for 1997 and for the first quarter of 1998, which
operations are the source of funds for the Percentage Lease payments to the
Partnership.

The following selected financial information and the financial statements
contained in the Company's Form 10-K for the year ended January 31, 1998 and
Form 10-Q for the quarter ended April 30, 1998 should be read in conjunction
with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and all other historical financial statements and notes included
elsewhere in this Prospectus. See pages F-1 through F-50 for certain historical
financial statements and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."

21
<PAGE> 23

REALTY REFUND TRUST

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1998

(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
ST. MARY'S SAN DIEGO
TRUST FORMATION PRO FORMA PRO FORMA PRO
HISTORICAL TRANSACTIONS ADJUSTMENTS ADJUSTMENTS FORMA
---------- ------------ ----------- ----------- ----------
(A) (B) (B) (B)
<S> <C> <C> <C> <C> <C>
PERCENTAGE LEASE REVENUE...... $ -- $ 7,902 $ 995 $ 500 $ 9,397
OTHER RENTAL REVENUE.......... 1,367 (1,367) -- -- --
INTEREST INCOME............... 55 -- -- -- 55
---------- ------- ------ ----- ----------
TOTAL REVENUES...... 1,422 6,535 995 500 9,452
---------- ------- ------ ----- ----------
LOSS ON SALE OF REAL ESTATE... 36 (36) -- -- --
INTEREST EXPENSE ON MORTGAGE
AND OTHER NOTES PAYABLE..... 118 1,492 630 413 2,653
ADVISORY FEE TO RELATED PARTY
ADVISOR..................... -- 576 112 59 747
OPERATING EXPENSES OF REAL
ESTATE HELD FOR SALE........ 1,379 (1,379) -- -- --
DEPRECIATION AND
AMORTIZATION................ 21 1,689 360 164 2,234
GENERAL AND ADMINISTRATIVE.... 441 137 70 90 738
REAL ESTATE AND PERSONAL
PROPERTY TAXES, CASUALTY
INSURANCE AND GROUND RENT... -- 820 230 49 1,099
MINORITY INTEREST............. -- 2,396 (356) (241) 1,799
---------- ------- ------ ----- ----------
TOTAL EXPENSES AND
MINORITY
INTEREST.......... 1,995 5,695 1,046 534 9,270
---------- ------- ------ ----- ----------
NET INCOME (LOSS) ATTRIBUTABLE
TO SHARES OF BENEFICIAL
INTEREST.................... $ (573) $ 840 $ (51) $ (34) $ 182
========== ======= ====== ===== ==========
NET INCOME (LOSS) PER SHARE... $ (0.34) $ 0.11
========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING.......... 1,667,817 1,667,817
</TABLE>

The accompanying notes to pro forma condensed consolidated statements of
income are an integral part of this statement.

22
<PAGE> 24

REALTY REFUND TRUST

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

FOR THE THREE MONTHS ENDED APRIL 30, 1998

(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
SAN DIEGO
TRUST PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ----------
(A) (B)
<S> <C> <C> <C>
PERCENTAGE LEASE REVENUE............................... $ 3,771 $115 $ 3,886
INTEREST INCOME........................................ 11 -- 11
---------- ---- ----------
TOTAL REVENUES............................... 3,782 115 3,897
---------- ---- ----------
INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE... 629 99 728
ADVISORY FEE TO RELATED PARTY ADVISOR.................. 144 15 159
DEPRECIATION AND AMORTIZATION.......................... 519 41 560
GENERAL AND ADMINISTRATIVE............................. 431 23 454
REAL ESTATE AND PERSONAL PROPERTY TAXES, CASUALTY
INSURANCE AND GROUND RENT............................ 229 12 241
MINORITY INTEREST...................................... 1,395 (66) 1,329
---------- ---- ----------
TOTAL EXPENSES AND MINORITY INTEREST......... 3,347 124 3,471
---------- ---- ----------
NET INCOME (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL
INTEREST............................................. $ 435 $ (9) $ 426
========== ==== ==========
NET INCOME PER SHARE................................... $ 0.26 $ 0.26
==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 1,667,817 1,667,817
</TABLE>

The accompanying notes to pro forma condensed consolidated statements of
income are an integral part of this statement.

23
<PAGE> 25

REALTY REFUND TRUST

NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEAR ENDED JANUARY 31, 1998 AND THE THREE MONTHS ENDED APRIL 30, 1998

(UNAUDITED) (DOLLARS IN THOUSANDS)

(A) Derived from the historical statement of operations for the Company for the
applicable period.

(B) Represents pro forma adjustments to reflect the acquisitions of the Hotels
as of February 1, 1997. The pro forma adjustments include the following:

1. Pro forma percentage rent as calculated pursuant to the terms of the
Percentage Leases between the Partnership and the Hotels.

2. Pro forma adjustments to other rental revenue, loss on sale of real
estate and operating expenses of real estate held for sale assume the
sale of the related real estate occurred as of February 1, 1997. The
real estate was sold on September 4, 1997 for $6,000.

3. Pro forma interest expense includes interest on existing mortgage
indebtedness assumed by the Partnership. The interest rates on the
mortgage debt range from 8.0% to 9.75%. With respect to the acquisition
of the San Diego hotel, includes interest on notes payable to the seller
at 8% on note principal of $750 and 8.5% on note principal of $2,950.
For both seller notes, the principal is to be amortized based on a
25-year amortization. In connection with the San Diego hotel
acquisition, pro forma interest expense at 8.5% has been computed on
$1,348 of revolving line of credit borrowings used to fund the cash
portion of the purchase price. For the year ended January 31, 1998,
historical interest expense on $2,300 is eliminated as that loan from
related party was retired with proceeds from the sale of the real
estate.

4. Pro forma advisory fee to related party advisor (equal to 1% of the
appraised value of the Company's invested assets) reflects assets under
management having a total appraised value of $74,800.

5. Pro forma depreciation and amortization represents (i) the elimination
of historical amortization of the Company related to the real estate
held for sale, and (ii) depreciation of the properties owned and
acquired by the Company. Depreciation is computed using the
straight-line method and is based upon the estimated useful lives of 40
years for building and improvements and 7 years for furniture and
equipment. These estimated useful lives are based on management's
knowledge of the properties and hotel industry in general.

The Company's pro forma investment in hotel properties, at cost, consists
of the following:

<TABLE>
<CAPTION>
ST. MARY'S SAN DIEGO
FORMATION PRO FORMA PRO FORMA
TRANSACTIONS ADJUSTMENTS ADJUSTMENTS
------------ ----------- -----------
<S> <C> <C> <C>
Land....................................... $ 3,440 $ 900 $ 700
Building and improvements.................. 31,395 3,615 3,973
Furniture, fixtures and equipment.......... 6,406 1,800 458
------- ------ ------
$41,241 $6,315 $5,131
======= ====== ======
</TABLE>

6. Pro forma general and administrative expense reflects expenses related
to salaries and wages, professional fees, directors expenses and other
operating expenses of the properties assumed by the Company.

7. Pro forma real estate and personal property taxes, property and casualty
insurance and ground rent expense paid by the Company based on
historical amounts.

8. Pro forma minority interest represents 87.6% of net income of the
Partnership attributable to minority interest holders who hold 7,191,847
limited partnership units (including non-exchanging minority partners
representing the equivalent of 299,622 limited partnership units). The
Company holds 1,020,586 units of general partner interests or 12.4% of
the total.

24
<PAGE> 26

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998
------------------------------------------ THREE MONTHS ENDED
ST. MARY'S SAN DIEGO APRIL 30, 1998
FORMATION PRO FORMA PRO FORMA SAN DIEGO
TRANSACTIONS ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENT
------------ ----------- ----------- --------------------
<S> <C> <C> <C> <C>
Pro forma income
before minority
interest:
Company............... $ 55 $ -- $ -- $ --
RRF Sub Corp.......... (128) -- -- --
Partnership........... 2,736 (407) (275) (75)
------- ------ ----- -----
2,663 (407) (275) (75)
Minority interest in
pro forma net income
of the
Partnership at
87.6%............... 2,396 (356) (241) (66)
------- ------ ----- -----
$ 267 $ (51) $ (34) $ (9)
======= ====== ===== =====
</TABLE>

25
<PAGE> 27

LESSEE

PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997

(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
HISTORICAL ST. MARY'S SAN DIEGO PRO FORMA PRO FORMA
HOTEL COMPANIES HOTEL HOTEL ADJUSTMENTS LESSEE
--------------- ----------- ---------- ----------- ---------
(A) (B) (B)
<S> <C> <C> <C> <C> <C>
REVENUES:
Room revenue................... $18,801 $2,562 $1,398 $ -- $22,761
Food and beverage revenue...... 519 814 130 -- 1,463
Other revenue.................. 591 166 80 -- 837
------- ------ ------ ------- -------
Total Revenues............... 19,911 3,542 1,608 -- 25,061
------- ------ ------ ------- -------
EXPENSES:
Departmental expenses of
Hotels:
Rooms........................ 4,915 1,119 716 -- 6,750
Food and beverage............ 921 611 82 -- 1,614
General and administrative..... 3,056 168 91 180(C) 3,495
Advertising and promotion...... 871 120 93 -- 1,084
Utilities...................... 934 350 119 -- 1,403
Management fees................ 833 59 48 (313)(D) 627
Franchisor royalties and other
charges...................... 582 101 93 295(E) 1,071
Repairs and maintenance........ 2,473 457 82 -- 3,012
Real estate and personal
property taxes, insurance,
and ground rent.............. 912 204 49 (1,071)(F) 94
Interest expense............... 1,854 556 229 (2,639)(G) --
Depreciation and
amortization................. 1,226 248 165 (1,639)(H) --
Percentage Lease payments...... -- -- -- 9,397(I) 9,397
------- ------ ------ ------- -------
Total Expenses............ 18,577 3,993 1,767 4,210 28,547
------- ------ ------ ------- -------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS.......... $ 1,334 $ (451) $ (159) $(4,210) $(3,486)
======= ====== ====== ======= =======
</TABLE>

The accompanying notes to pro forma condensed statements of operations are
an integral part of this statement of operations.

26
<PAGE> 28

LESSEE

PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998

(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL
LESSEE AND ST. MARY'S SAN DIEGO PRO FORMA PRO FORMA
HOTEL COMPANIES HOTEL HOTEL ADJUSTMENTS LESSEE
--------------- ----------- ---------- ----------- ---------
(A) (B) (B)
<S> <C> <C> <C> <C> <C>
REVENUES:
Room revenue................... $7,513 $ 261 $327 $ -- $ 8,101
Food and beverage revenue...... 396 69 31 -- 496
Other revenue.................. 222 12 25 -- 259
------ ----- ---- ----- -------
Total Revenues............... 8,131 342 383 -- 8,856
------ ----- ---- ----- -------
EXPENSES:
Departmental expenses of
Hotels:
Rooms........................ 1,765 153 143 -- 2,061
Food and beverage............ 461 61 18 -- 540
General and administrative..... 1,572 12 19 30(C) 1,633
Advertising and promotion...... 285 18 16 -- 319
Utilities...................... 350 33 26 -- 409
Management fees................ 203 17 14 (13)(D) 221
Franchisor royalties and other
charges...................... 335 -- 23 (5)(E) 353
Repairs and maintenance........ 878 42 32 -- 952
Real estate and personal
property taxes, insurance,
and ground rent.............. -- 16 15 (31)(F) --
Interest expense............... -- 75 57 (132)(G) --
Depreciation and
amortization................. -- 35 41 (76)(H) --
Percentage Lease payments...... 2,779 -- -- 985(I) 3,764
------ ----- ---- ----- -------
Total Expenses............ 8,628 462 404 758 10,252
------ ----- ---- ----- -------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS.......... $ (497) $(120) $(21) $(758) $(1,396)
====== ===== ==== ===== =======
</TABLE>

The accompanying notes to pro forma condensed statements of operations are
an integral part of this statement of operations.

27
<PAGE> 29

LESSEE

NOTES TO PRO FORMA CONDENSED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997 AND

FOR THE THREE MONTHS ENDED MARCH 31, 1998

(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)

(A) Derived from the historical financial statements of the Hotels and Lessee
for the applicable period.

(B) Derived from the historical financial statements of St. Mary's and San
Diego, as applicable. For the three months ended March 31, 1998, the
Historical St. Mary's Hotel amounts represent historical revenues and
expenses of that hotel for the month of January 1998. As the St. Mary's
Hotel was acquired by the Partnership on February 1, 1998 and leased to the
Lessee commencing that same date, its historical results of operations for
the months of February and March 1998 are included in the Lessee's
historical operating results for the three months ended March 31, 1998.

(C) Increase reflects the estimated incremental expenses to be incurred by
Lessee in connection with administrative salaries and occupancy expenses,
net of historical general and administrative expenses of the Lessee which
will be incurred by the Partnership.
(D) Reflects the adjustment of management fee expense of the Hotels to a
standard 2.5% of revenues per year pursuant to the management agreement
entered into between the Lessee and the Partnership.
(E) Reflects the adjustment of franchise fees paid to InnSuites to a standard
2.5% of revenues per year (1.25% at four existing properties with dual
franchises).
(F) Reflects the elimination of real estate and personal property taxes,
property and casualty insurance, and ground rent expenses to be paid by the
Partnership.
(G) Reflects the elimination of interest expense related to debt assumed by the
Partnership.
(H) Reflects the elimination of depreciation expense related to the investments
in hotel properties of the Hotels which were acquired by the Partnership.
(I) Represents lease payments calculated on a pro forma basis by applying the
rent provisions of the Percentage Leases to the pro forma room and other
revenues of the Hotels.

28
<PAGE> 30

SELECTED FINANCIAL DATA

The following selected financial data of the Company for the five fiscal
years ended January 31, 1998 have been derived from the audited financial
statements of the Company, which have been audited by Arthur Andersen LLP,
independent public accountants. The following selected financial data of the
Company for the quarter ended April 30, 1998 have been derived from the
unaudited financial statements of the Company. All of the data should be read in
conjunction with the respective financial statements and related notes included
therein.

<TABLE>
<CAPTION>
QUARTER
ENDED
APRIL 30,
1998 1998 1997 1996 1995 1994
----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues....... $ 3,782,584 $ 1,421,979 $3,915,506 $ 5,430,006 $ 6,592,051 $ 7,645,790
=========== =========== ========== =========== =========== ===========
Net income (loss).... $ 435,169 $ (573,509) $ (888,365) $(7,554,351) $ 670,945 $ 955,121
=========== =========== ========== =========== =========== ===========
Earnings (loss) per
share -- basic and
diluted............ $ .26 $ (.56) $ (.87) $ (7.40) $ .66 $ .94
=========== =========== ========== =========== =========== ===========
Cash dividends paid
and declared per
share.............. $ .00 $ .15 $ .40 $ .50 $ .80 $ .86
=========== =========== ========== =========== =========== ===========
Total assets......... $57,034,045 $43,619,639 $6,416,123 $24,555,330 $45,165,356 $65,264,638
=========== =========== ========== =========== =========== ===========
Bank and other
borrowings......... $33,073,388 $22,428,880 $2,300,000 $10,795,000 $16,810,000 $24,575,000
=========== =========== ========== =========== =========== ===========
</TABLE>

29
<PAGE> 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW

In September 1997, the Company sold its interests in the Carbon & Carbide
Building in Chicago, Illinois for $6,000,000, before consideration of closing
and other costs related to the sale. A loss of approximately $36,000 was
recorded as a result of the sale. The Carbon & Carbide Building was originally
acquired in July 1992 when the Company accepted title in lieu of foreclosure. At
the time of title acceptance, the Company recorded a provision to write down its
investment to estimated net realizable value as it was the Company's intention
to sell the real estate. Since that time, the carrying value of the investment
increased as a result of considerable investment in building and tenant
improvements. Based on both market conditions for similar commercial property in
Chicago and the operating performance of the property, the Company recorded a
$3,000,000 provision in the fourth quarter of fiscal 1996 to reduce the carrying
value of the property to its then estimated net realizable value. The amount of
the writedown was based upon the Company's best estimate of the amount of net
proceeds which would be realized upon sale of the real estate. In the fourth
quarter of fiscal 1997, the Company entered into a contract to sell the building
for $6,000,000. Accordingly, the Company recorded an additional provision of
$1,085,000 to reduce the carrying value of the real estate held for sale to its
estimated net realizable value based upon the pending contract price and
estimated costs associated with the potential sale.

Having liquidated all of its other investments (primarily wrap-around
mortgages) prior to January 31, 1997, the Company's principal asset after the
sale of the Carbon & Carbide Building consisted of cash and cash equivalents. On
January 31, 1998, the Company contributed $2,081,000 to the Partnership in
exchange for a 13.6% general partner interest therein. The Company is the sole
general partner of the Partnership. The Partnership issued limited partnership
interests representing 86.4% of the Partnership to acquire six hotel properties
from various entities. In addition, through RRF Sub Corp., the Company issued
647,231 shares of Common Stock in exchange for all of the outstanding shares of
a corporation which owned a hotel located in Scottsdale, Arizona. On February 1,
1998, the Partnership acquired 100% of the ownership interests in the Tucson St.
Mary's hotel for $10,820,000. The Partnership assumed $7,803,000 in mortgage
debt and other obligations and issued 699,933 limited partnership units to James
and Gail Wirth (of which 28,800 Units were subsequently paid to third parties as
advisory fees), who each held a 50% equity ownership interest in the Tucson St.
Mary's hotel. On April 29, 1998, the Partnership acquired 100% of the ownership
of the InnSuites Hotel San Diego for $5,148,000. The Partnership invested
$1,448,000 in cash (of which $1,348,000 was drawn under the Credit Facility) and
became obligated for $3,700,000 in seller financing in the form of two
promissory notes secured by mortgage trust deeds on the property. On June 1,
1998, the Partnership acquired 100% of the ownership of the InnSuites Hotel
Buena Park for $7,100,000. The Partnership assumed $4,116,754 in mortgage debt
and other obligations and issued 628,052 limited partnership units to James
Wirth and Steven Robson (of which 13,034 Units were subsequently paid to a third
party as an advisory fee) who each held a 50% equity ownership interest in the
Buena Park hotel. On August 11, 1998, the Company satisfied a $2.65 million
participating mortgage obligation related to the Ontario hotel through the
issuance of 423,687 shares of Common Stock to former partners in Ontario
Hospitality Properties Limited Partnership and 133,492 Class B Units in the
Partnership to James Wirth and his affiliates for their respective interests.

Having completed the acquisitions of the Hotels and having satisfied the
Ontario participating mortgage, the Company now owns a 15.4% interest in nine of
the Hotels through its interest in the Partnership and 100% of the Scottsdale
hotel through RRF Sub Corp. In order for the Company to qualify as a REIT,
neither the Company nor the Partnership can operate the Hotels. Therefore, each
of the Hotels are leased to the Lessee pursuant to a Percentage Lease. Each
Percentage Lease obligates the Lessee to pay rent equal to the greater of the
minimum rent or a percentage rent based on the gross revenues of each Hotel. The
Lessee holds the franchise agreement for each Hotel. The Lessee is owned 9.8% by
ISIH, an entity owned by Mr. Wirth and his wife. The Company's principal source
of revenue is lease payments from the Lessee pursuant to the Percentage Leases.
Lease revenue is based upon the room and other revenues of the Hotels leased to
the Lessee. The Lessee's ability to make payments to the Partnership pursuant to
the Percentage Leases is dependent primarily upon the operations of the Hotels.
Therefore, management believes that a discussion of the pro forma operating
results of the Lessee and the historical operating results of the Hotels are
important to an understanding of the business of the Company. The

30
<PAGE> 32

following discusses (i) the Company's pro forma results of operations for the
years ended January 31, 1997 and January 31, 1998 and the quarters ended April
30, 1997 and April 30, 1998; (ii) the Lessee's pro forma results of operations
for the year ended December 31, 1997 and the quarters ended March 31, 1997 and
March 31, 1998; and (iii) the historical results of the Initial Hotels for the
years ended December 31, 1997, 1996 and 1995.

GENERAL

Results of operations are best explained by three key performance
indicators: occupancy, ADR and REVPAR. Increases in REVPAR attributable to
increases in occupancy are accompanied by increases in most categories of
variable operating costs. Increases in REVPAR attributable to increases in ADR
are accompanied by increases in limited categories of operating costs, such as
management fees and franchise and licenses fees.

PRO FORMA RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY

The following tables set forth key indicators for (i) all of the Hotels
combined, and (ii) all fully-operational Hotels (which excludes the Flagstaff,
Tucson St. Mary's, Buena Park and San Diego hotels, which were under
renovation), and are useful in understanding the underlying changes in the
percentage rent during the Company's pro forma years ended January 31, 1997 and
January 31, 1998.

<TABLE>
<CAPTION>
ALL FULLY-OPERATIONAL HOTELS ALL HOTELS
(EXCLUDES HOTELS (INCLUDES HOTELS
UNDER RENOVATION) UNDER RENOVATION)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- ----------------------------
KEY FACTORS 1997 1996 1995 1997 1996(1) 1995(1)
----------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Occupancy.......................... 74.3% 71.9% 72.2% 59.6% 68.4% 67.6%
ADR................................ $71.80 $69.17 $64.50 $61.82 $65.71 $62.80
REVPAR............................. $52.57 $49.75 $46.57 $38.30 $45.79 $42.45
</TABLE>

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

(1) Does not include information regarding the Tucson St. Mary's, San Diego and
Buena Park hotels.

<TABLE>
<CAPTION>
ALL FULLY-OPERATIONAL
HOTELS ALL HOTELS
(EXCLUDES HOTELS (INCLUDES HOTELS
UNDER RENOVATION) UNDER RENOVATION)
QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31,
---------------------- ------------------
KEY FACTORS 1998 1997 1998 1997
----------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
Occupancy............................................. 87.6% 85.2% 68.6% 69.4%
ADR................................................... $83.93 $87.12 $72.69 $69.56
REVPAR................................................ $73.70 $73.87 $52.96 $51.80
</TABLE>

The pro forma financial information set forth below is presented as if the
acquisitions of the Hotels (except for the Buena Park hotel) had been
consummated as of February 1, 1997. The pro forma financial information is not
necessarily indicative of what actual results of operations of the Company would
have been assuming the acquisitions of the Hotels had been consummated as of
February 1, 1997, nor does it purport to represent the results of operations for
future periods. Financial information for Tucson St. Mary's and San Diego, which
InnSuites did not own in the fiscal year ended January 31, 1997, is not
available and, therefore, is not included in the pro forma results for the year
ended January 31, 1997.

31
<PAGE> 33

<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
JANUARY 31, APRIL 30,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
(UNAUDITED, IN (UNAUDITED, IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C>
Percentage Lease Revenue............................... $9,397 $7,376 $3,886 $3,670
Interest Income........................................ 55 1,638 11 --
------ ------ ------ ------
Total Revenues............................... 9,452 9,014 3,897 3,670
------ ------ ------ ------
Provision for Writedowns of Loan Receivable............ -- 111 -- --
Interest on Loans Underlying Wrap Mortgages............ -- 239 -- --
Interest Expense on Mortgage and Other Notes Payable... 2,653 1,929 728 663
Advisory Fee to Related Party Advisor.................. 747 576 159 187
Depreciation and Amortization.......................... 2,234 1,710 560 559
General and Administrative............................. 738 578 454 132
Real Estate and Personal Property Taxes and Casualty
Insurance and Ground Rent............................ 1,099 942 241 275
Minority Interest...................................... 1,799 1,625 1,329 1,349
------ ------ ------ ------
Total Expenses and Minority Interest......... 9,270 7,710 3,471 3,165
------ ------ ------ ------
Net Income Attributable to Shares of Beneficial
Interest............................................. $ 182 $1,304 $ 426 $ 505
====== ====== ====== ======
Net Income Per Share -- basic and diluted.............. $ .11 $ .78 $ .26 $ .30
====== ====== ====== ======
</TABLE>

For the year ended January 31, 1998, the Company had pro forma revenues of
$9.4 million from the Percentage Leases that would have been in place at the
Hotels (except for the Buena Park hotel). The Company had only $.55 million in
interest income compared to $1.6 million in interest income from mortgage
investments in 1997 due to loan repayments during fiscal 1997. Other rental
revenue of $1.4 million and operating expenses of $1.4 million and amortization
of $.02 million related to the Carbon & Carbide Building (the sale of which
closed on September 4, 1997) have been eliminated. Net income to stockholders
(after minority interest) declined to $.18 million from $1.3 million due to the
elimination of the positive spread on the mortgage investments and presentation
of $2.3 million in cash realized from the sale of the Carbon & Carbide Building
without reflecting any pro forma income or return from investment of that cash.

For the year ended January 31, 1997, the Company had pro forma revenues of
$7.4 million from the Percentage Leases that would have been in place at the
Hotels (except for the San Diego, Buena Park and Tucson St. Mary's hotels). The
Company also had $1.6 million in interest income from mortgage investments which
were repaid during fiscal 1997. Expenses included interest expense related to
the mortgage investments and a note payable to an affiliated party. Other rental
revenue of $2.3 million and operating expenses of $2.1 million and amortization
of $.04 million related to the Carbon & Carbide Building (the sale of which
closed on September 4, 1997) have been eliminated.

For the quarter ended April 30, 1998, the Company had pro forma revenues of
$3.9 million from the Percentage Leases that would have been in place at the
Hotels (except for the Buena Park hotel) compared to $3.7 million for the
quarter ended April 30, 1997. The increase is due to improved REVPAR which
increased from $51.80 to $52.96 despite a modest decline in occupancy from 69.4%
to 68.6% at all of the Hotels (including those under renovation). Total expenses
and minority interest of $3.5 million for the quarter ended April 30, 1998
reflects a $.3 million increase over the quarter ended April 30, 1997, primarily
due to increased general and administrative expenses, mainly administrative
payroll and legal and accounting fees related to activity following the
formation of the Partnership on January 30, 1998. Net income attributable to
Common Stock declined slightly from $.51 million for the quarter ended April 30,
1997 to $.43 million for the quarter ended April 30, 1998 due to the increase of
expenses over revenues.

PRO FORMA RESULTS OF OPERATIONS OF LESSEE

For the year ended December 31, 1997, the Lessee had pro forma revenues of
$25.1 million compared to $18.3 million for the year ended December 31, 1996, an
increase of $6.8 million (37.2%). This was due to the

32
<PAGE> 34

inclusion of San Diego's and Tucson St. Mary's revenue in 1997 and an increase
in occupancy at all fully-operational Hotels from 71.9% in 1996 to 74.3% in 1997
and an increase in ADR at the same Hotels from $69.17 in 1996 to $71.80 in 1997.
Total expenses increased $8.3 million from $20.2 million in the year ended
December 31, 1996 to $28.5 million in the year ended December 31, 1997 primarily
due to the inclusion of expenses of Tucson St. Mary's and San Diego in 1997 and
increased general and administrative expenses related to the formation of the
Partnership. Repairs and maintenance of $3.0 million in 1997 ($.4 million more
than in 1996) remained high due to costs of the ongoing refurbishment program
which was substantially completed by the end of calendar 1997 and the inclusion
of Tucson St. Mary's expenses. The larger increase in expenses ($8.3 million) as
compared to the $6.8 million increase in revenues resulted in a $1.65 million
increased loss to $3.5 million in the year ended December 31, 1997 as compared
to the $1.8 million loss for the year ended December 31, 1996.

The pro forma net loss of Lessee for 1997 was $3.5 million, primarily due
to having incurred $3.0 million of maintenance expense as part of a multi-year
refurbishment program. The refurbishment program was substantially completed as
of the end of calendar 1997. Mr. and Mrs. Wirth's management and trademark
corporations have agreed to subordinate their receipt of management fees and
trademark fees from the Lessee, to the extent that the Flagstaff hotel does not
generate sufficient operating cash flow to meet its $250,000 minimum annual rent
payment, until the Flagstaff hotel has generated sufficient operating cash flow
to meet its $250,000 minimum annual rent payment in two consecutive years. The
elimination of the maintenance expense associated with refurbishment and Mr.
Wirth's subsidy of the Flagstaff hotel should enable Lessee to generate a
positive cash flow.

For the quarter ended March 31, 1998 the Lessee had pro forma revenues of
$8.9 million compared to $8.5 million for the quarter ended March 31, 1997. The
$.4 million increase in revenue was due to an increase in REVPAR at all Hotels
from $51.80 for the quarter ended March 31, 1997 to $52.96 for the quarter ended
March 31, 1998 despite a slight .8% decline in occupancy from 1997 to 1998.
Percentage Lease expense increased approximately $.1 million due to increased
room and other revenues. Departmental and other expenses increased $2.2 million
in the quarter ended March 31, 1998 as compared to the corresponding period of
1997 due to significantly higher levels of legal and accounting expenses and
increased departmental rooms expenses and maintenance costs.

RESULTS OF OPERATIONS OF THE HOTELS

The following table sets forth certain combined historical financial
information for the Initial Hotels, as a percentage of revenues, for the years
ended December 31, 1997, 1996 and 1995, and pro forma financial information for
all of the Hotels (excluding the Buena Park hotel) for the quarters ended March
31, 1998 and 1997.

33
<PAGE> 35

<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1997 1996 1995 1998 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
Room revenue............................. 94.4% 96.1% 96.4% 91.5% 92.2%
Food and beverage revenue................ 2.6 1.1 0.8 5.6 6.4
Other revenue............................ 3.0 2.8 2.8 2.9 1.4
------- ------- ------- ------- -------
Total revenue.......................... 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Departmental and other expenses.......... 73.2 70.1 69.6 73.3 51.1
Real estate and personal property taxes,
insurance and rent..................... 4.6 4.8 4.1 -- --
Depreciation and amortization............ 6.2 6.3 6.6 -- --
Interest expense......................... 9.3 8.6 12.5 -- --
Percentage Lease expense................. -- -- -- 42.5 43.4
------- ------- ------- ------- -------
Income (loss) before extraordinary
items.................................. 6.7 10.2 7.2 (15.8) 5.5
Extraordinary item -- gain on early
extinguishment of debt................. -- 1.7 40.6 -- --
------- ------- ------- ------- -------
Net income (loss)........................ 6.7% 11.9% 47.8% (15.8)% 5.5%
======= ======= ======= ======= =======
OTHER DATA
EBITDA(1), as a % of revenue............. 22.2% 25.0% 26.3% -15.8% 5.5%
Cash Flow from Operating Activities, as a
% of revenue........................... 19.7% 14.4% 13.2% N/A N/A
Cash Flow from Investing Activities, as a
% of revenue........................... -8.4% -10.9% -2.5% N/A N/A
Cash Flow from Financing Activities, as a
% of revenue........................... -13.8% -6.4% -11.9% N/A N/A
KEY FACTORS(2)
Occupancy................................ 70.6% 68.4% 67.6% 68.6% 69.4%
ADR...................................... $ 68.73 $ 65.71 $ 62.80 $ 72.69 $ 69.56
REVPAR................................... $ 48.62 $ 45.79 $ 42.45 $ 52.96 $ 51.80
</TABLE>

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

(1) Represents income (loss) before extraordinary items, excluding interest
expense, depreciation and amortization. The Company believes that EBITDA,
defined as net income before interest, depreciation, amortization, taxes and
extraordinary items, provides a good indicator of the financial performance
of the Hotels and will be a significant factor in determining the Lessee's
ability to make lease payments to the Partnership. This indicator should
not, however, be considered as an alternative to net income as an indication
of Lessee's performance or to cash flow as a measure of liquidity.

(2) No assurance can be given that the trends reflected in this data will
continue or that occupancy, ADR and REVPAR will not decrease as a result of
changes in national or local economic or hospitality industry conditions.
The figures for 1997, 1996 and 1995 include the Flagstaff hotel, acquired in
June 1996 and under renovation during the remainder of 1996 and the first
half of 1997, which renovation was substantially completed as of October 15,
1997, but do not include figures for Hotels (Tuscon St. Mary's, Buena Park
and San Diego) which were acquired in 1998. The figures for the quarters
ending March 31, 1998 and 1997 include all the Hotels (except for the Buena
Park hotel) on a pro forma basis as if they had been acquired on January 1,
1997.

"N/A" means not applicable.

34
<PAGE> 36

Comparison of the year ended December 31, 1997 with 1996 for the Initial
Hotels

Room revenues increased $1.19 million, or 6.7%, from 1996 to 1997. This was
driven by increases in ADR at almost all of the Initial Hotels, along with an
increase in occupancy of 3.0%. These were attributable to the general
improvement in the business travel and tourism industries, lack of any new
competition in the markets where the Initial Hotels operate and the InnSuites'
refurbishment program. Food and beverage revenue grew $.32 million or 163.5%
from 1996 to 1997, relating to the increase in occupancy and expansion of food
service, including room service at two of the Initial Hotels. The composition of
revenue remained consistent between the periods, with only a slight increase in
food and beverage revenues, from 1.1% of the total to 2.6%, which reflects that
most of the gains in revenue occurred in occupancy and room rates during this
period.

Departmental and other expenses grew by $1.73 million, or 13.4%, between
the years because of expansion of food service, increased payroll costs, general
inflationary pressures and increased occupancy. These costs increased as a
percentage of revenues from 70.1% in 1996 to 73.2% in 1997, as expenses grew
faster than revenues, primarily through increased payroll. Depreciation and
amortization increased slightly between 1996 and 1997.

Interest expense increased by $.28 million in 1997 compared to 1996 due to
refinancing costs of capital improvements.

Income before extraordinary items decreased $.54 million primarily due to
increased expenses discussed above.

A gain on early extinguishment of debt of $.3 million recorded in May 1996
related to the extinguishment of debt at the Flagstaff property. No gains or
losses related to the extinguishment of debt were realized in 1997.

Net income declined $.85 million due to the extinguishment of debt income
realized in 1996 and increased expenses in 1997.

EBITDA declined $.17 million, or 3.8%, from 1996 to 1997. This decline is
attributable to the increase in expenses during the periods.

Comparison of the year ended December 31, 1996 with 1995 for the Initial
Hotels

Total revenues increased $2.38 million, or 14.9%, from 1995 to 1996. Room
revenues increased $2.2 million, or 14.6%, from 1995 to 1996. As can be seen by
the growth of REVPAR, revenues as reported were driven by increases in ADR which
occurred at five of the Initial Hotels, while occupancy increased 1.4% overall.
This was attributable in part to the general improvement in the business travel
and tourism industries as well as to InnSuites' refurbishment program which was
substantially completed at all the Initial Hotels by the end of calendar 1997.
The continuation of InnSuites' focus on maximizing REVPAR by focusing on
increasing ADR while maintaining stable occupancy during this period had
significant effects. Food and beverage revenue grew $.066 million, or 50.8%,
from 1995 to 1996. The composition of revenue stayed consistent between the
periods, with only a slight increase in food and beverage revenues, from .8% of
the total to 1.1%.

Departmental and other expenses increased by $1.77 million, or 16.0%,
between the years substantially because of a $.68 million increase in
maintenance associated with the refurbishment program, the inclusion of the
operating results of the Flagstaff hotel from January 1, 1996, increases in
management and franchise fees due to increased revenues and general inflationary
pressures. These costs increased slightly as a percentage of revenues from 69.6%
in 1995 to 70.1% in 1996, due to the effect of expenses growing at a faster pace
than revenues, in particular maintenance expenses, and the less-profitable
operating results of the Flagstaff hotel acquired in 1996. In addition,
management fees increased from 3.8% of revenues in 1995 to 4.6% of revenues in
1996 because of higher revenues and increases in the management fee rate
implemented in the second quarter of 1996 at four of the Initial Hotels. Real
estate and personal property taxes, insurance and rent increased 33.6% from 1995
to 1996. This is primarily attributable to real estate taxes which increased
40.3% due to increased property valuations based on improved revenues.

Depreciation and amortization expense increased by $.088 million, or 8.3%,
primarily due to the additional depreciation associated with the increased rate
of refurbishment at the Initial Hotels.
35
<PAGE> 37

Interest expense decreased $0.42 million, or 21.1%, in 1996 due to (i)
principal payments on mortgage notes payable of $2.2 million in 1995 and $.62
million in 1996, net of new mortgage debt of $.99 million in 1996.

Income before extraordinary items increased $.72 million primarily due to
increases in ADR at the Initial Hotels and decreased interest expense.

The gain on early extinguishment of debt of $.3 million recorded in May
1996 related to the extinguishment of debt in Hulsey Hotels (the Flagstaff
property) in the form of forgiveness of advances from affiliates and was
substantially less than the $6.5 million gain recorded in May 1995 related to
the extinguishment of debt at the Ontario property in the form of forgiveness of
mortgage debt.

Net income declined $5.44 million due to substantially larger forgiveness
of debt income in 1995, which was offset partially by the improvement in ADR and
reduced interest expense in 1996.

EBITDA grew $.39 million or 9.3% from 1995 to 1996. This improvement was
attributable to the increase in revenues due to growth in ADR during the periods
which was partially offset by increases in franchise and management fees.

LIQUIDITY AND CAPITAL RESOURCES

The Company, through its ownership interest in the Partnership, will have
its proportionate share of the benefits and obligations of the Partnership's
ownership interests in the Hotels. The Company's principal sources of cash to
meet its cash requirements, including distributions to stockholders, will be its
share of the Partnership's cash flow. The Partnership's principal source of
revenue will be rent payments under the Percentage Leases. Lessee's obligations
under the Percentage Leases are unsecured and Lessee's ability to make rent
payments to the Partnership under the Percentage Leases, and the Company's
liquidity, including its ability to make distributions to stockholders, will be
dependent on the Lessee's ability to generate sufficient cash flow from the
operation of the Hotels, particularly the Scottsdale hotel, which represents, on
a pro forma basis, 36% of the Company's cash flow in fiscal 1998 and 51% in the
quarter ended April 30, 1998.

For a discussion of the abatement of management and trademark fees at the
Flagstaff hotel, see "Pro Forma Results of Operations of Lessee" above. Beyond
the 4% reserve for refurbishment and replacements set aside annually, and
$450,000 in anticipated refurbishing costs at the recently acquired InnSuites
Hotel San Diego, the Company has no present commitments for extraordinary
capital expenditures.

At April 30, 1998, outstanding mortgage and revolving credit debt had
increased from $17.9 million at January 31, 1998 to $28.9 million due to
indebtedness assumed or incurred in connection with Hotel acquisitions. The
Company intends to acquire and develop additional hotels and will incur
indebtedness to fund those acquisitions and developments. The Company may also
incur indebtedness to meet distribution requirements imposed on a REIT under the
Code to the extent that working capital and cash flow from the Company's
investments are insufficient to make the required distributions. The terms of
the line of credit discussed below permit borrowings for that purpose, but
impose certain limitations on the Company's ability to engage in other
borrowings.

On April 16, 1998, the Company obtained the $12,000,000 Credit Facility to
assist it in its funding of acquisition and development of additional hotels and
for certain other business purposes. Borrowings under the Credit Facility are
secured by first mortgages on three of the Hotels. The Company may seek to
increase the amount of its Credit Facility, negotiate additional credit
facilities, or issue debt instruments. Any debt incurred or issued by the
Company may be secured or unsecured, long-term, medium-term or short-term, bear
interest at a fixed or variable rate, and be subject to such other terms as the
Company considers prudent.

The Company will acquire or develop additional hotels only as suitable
opportunities arise, and the Company will not undertake acquisition or
redevelopment of properties unless adequate sources of financing are available.
Funds for future acquisitions or development of hotels are expected to be
derived, in whole or in part, from borrowings under the Credit Facility or other
borrowings or from the proceeds of additional issuances of Common Stock or other
securities. There is no agreement or understanding to invest in any other
properties, and there can be no assurance that the Company will successfully
acquire or develop additional hotels.

36
<PAGE> 38

The Partnership will contribute to a Capital Expenditures Fund on a
continuing basis, from the rent paid under the Percentage Leases, an amount
equal to 4% of the Lessee's revenues from operation of the Hotels. The Capital
Expenditures Fund is intended to be used for capital improvements to the Hotels
and refurbishment and replacement of furniture, fixtures and equipment, in
addition to other uses of amounts in the Fund considered appropriate from time
to time. The Partnership anticipates making similar arrangements with respect to
future hotels that it may acquire or develop. During the period from January 1,
1995 through December 31, 1997, the Hotels spent approximately $2.0 million for
capital expenditures, excluding hotel acquisitions. The Company considers the
majority of these improvements to be revenue producing and therefor these
amounts have been capitalized and are being depreciated over their estimated
useful lives. The Hotels also spent $7.0 million during the period from January
1, 1995 through December 31, 1997 on repairs and maintenance and these amounts
have been charged to expense as incurred.

INFLATION

The Company's revenues initially will be based on the Percentage Leases,
which will result in changes in the Company's revenues based on changes in the
underlying Hotel revenues. Therefore, the Company initially will be relying
entirely on the performance of the Hotels and the Lessee's ability to increase
revenues to keep pace with inflation. Operators of hotels in general, and the
Lessee in particular, can change room rates quickly, but competitive pressures
may limit the Lessee's ability to raise rates faster than inflation.

The Company's largest fixed expense is the depreciation of the investment
in Hotel properties. The Company's variable expenses, which are subject to
inflation, represented approximately 19.4% of pro forma revenues in fiscal 1998.
These variable expenses (general and administrative costs, as well as real
estate and personal property taxes, property and casualty insurance and ground
rent) are expected to grow with the general rate of inflation.

SEASONALITY

The Hotels' operations historically have been seasonal. The six southern
Arizona hotels experience their highest occupancy in the first fiscal quarter
and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter
tends to be the lowest occupancy period at those six southern Arizona hotels.
This seasonality pattern can be expected to cause fluctuations in the Company's
quarterly lease revenue under the Percentage Leases. The Company anticipates
that its cash flow from the Lessee's operation of the Hotels will be sufficient
to enable the Company to make quarterly distributions at the estimated rate of
$.10 per share of Common Stock for at least the next twelve months. To the
extent that cash flow from operations is insufficient during any quarter,
because of temporary or seasonal fluctuations in lease revenue, the Company
expects to utilize other cash on hand or borrowings to make those distributions.
No assurance can be given that the Company will make distributions in the future
at the initially estimated rate, or at all.

YEAR 2000 COMPLIANCE

The Year 2000 problem is the result of computer programs having been
written using two digits instead of four digits to define the applicable year.
Any of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could potentially result in a system failure or miscalculations, causing
disruptions of operations and normal business activity.

The Company is currently in the process of identifying and evaluating its
computer programs that could be affected by the Year 2000 problem and, if
necessary, will develop a plan to make its computer programs Year 2000
compliant. If the Company determines that modifications and conversions are
necessary, the failure to complete such modifications and conversions in a
timely manner may have a material impact on the operations of the Company. The
Company has not determined with certainty the total cost which will be incurred
by the Company in connection with Year 2000 compliance. However, the Company
believes that such costs will not result in a material adverse effect on its
financial condition or results of operations. Costs related to the Year 2000
problem are being expensed as incurred.

37
<PAGE> 39

The Company cannot predict the effect of the Year 2000 problem on vendors,
customers and other entities with which the Company transacts business, and
there can be no assurance that the effect of the Year 2000 problem on such
entities will not adversely effect the Company's operations.

NEW ACCOUNTING PRONOUNCEMENT

In May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods."
This issue addresses lessor revenue and lessee expense recognition in interim
periods related to rental agreements which provide for minimum rental payments,
plus contingent rents based on the lessee's operations, such as a percentage of
sales in excess of an annual specified sales target. The EITF reached a final
consensus that lessors, such as the Company, should defer recognition of
contingent rental income until specified targets are met. The Company is
evaluating the impact of the provisions of this EITF consensus on its interim
revenue recognition. Upon completion of this evaluation, it is possible that
application of the consensus may have a material impact on the revenue to be
recognized in future interim periods. However, it should be noted that the EITF
consensus will have no effect on amounts of lease revenue to be recognized on an
annual basis or on cash flows from the Percentage Leases on an interim or annual
basis.

38
<PAGE> 40

BUSINESS AND PROPERTIES

THE PROPERTIES.

The following table sets forth certain information in respect of each of
the Hotels:

<TABLE>
<CAPTION>
NUMBER NUMBER OF YEAR OF MOST NUMBER OF
OF PARKING CONSTRUCTION/ RECENT RESTAURANTS/ MEETING
PROPERTY SUITES SPACES BUILDING STRUCTURE ADDITION RENOVATION LOUNGES ROOMS
-------- ------ --------- ------------------ ------------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
InnSuites 123 153 Metal stud construction 1980 1995/1996 0 2-total
Hotel Phoenix with stucco exterior of 1,000
Best Western sq. ft.

InnSuites Hotel 170 200 Metal stud construction 1982/1985 1995/1996 1 6-total
Tempe/Phoenix with stucco exterior of 4,065
Airport/South sq. ft.
Mountain

InnSuites Hotel 159 189 Metal stud construction 1981/1983 1995/1996 1 10-total
Tucson, Catalina with stucco exterior of 4,500
Foothills sq. ft.
Best Western

InnSuites Hotel 166 196 Metal stud construction 1982/1984 1995/1996 1 11-total
Yuma Best Western with stucco exterior of 8,900
sq. ft.

Holiday Inn Airport 150 180 Wood construction, stucco 1990 1995/1996 1 9-total
Hotel and exterior, concrete floors of 5,850
Suites/Ontario
sq. ft.

InnSuites Hotel 134 158 Masonry construction 1966-67/ 1996/1997 1 3-total
Flagstaff/ 1972 of 1,111
Grand Canyon sq. ft.

InnSuites Hotel 134 163 Metal stud construction 1980 1995/1996 1 2-total
Scottsdale El with stucco exterior of 1,424
Dorado Park Resort sq. ft.

InnSuites Hotel Tucson 297 352 Concrete block construction 1960/1967/ 1997 2 10-total
St. Mary's with stucco exterior 1971 of 14,252
sq. ft.

InnSuites Hotel 147 129 Wood construction 1946/1989 1996 1 7-total
San Diego with stucco exterior of 12,000
sq. ft.

InnSuites Hotel 185 214 Wood construction 1972/1980 1997/1998 1 3-total
Buena Park with stucco exterior of 1,941
----- sq. ft.
Total Suites 1,665
=====

FITNESS POOL/
PROPERTY CENTER JACUZZI OTHER
-------- ------- ------- -----
<S> <C> <C> <C>
InnSuites Yes Yes
Hotel Phoenix
Best Western
InnSuites Hotel Yes Yes 2 tennis
Tempe/Phoenix courts
Airport/South
Mountain
InnSuites Hotel Yes Yes 2 tennis
Tucson, Catalina courts
Foothills
Best Western
InnSuites Hotel Yes Yes 2 tennis
Yuma Best Western courts
Holiday Inn Airport Yes Yes basketball
Hotel and court
Suites/Ontario
InnSuites Hotel Yes Yes
Flagstaff/
Grand Canyon
InnSuites Hotel Yes Yes
Scottsdale El
Dorado Park Resort
InnSuites Hotel Tucson Yes Yes
St. Mary's
InnSuites Hotel Yes Yes
San Diego
InnSuites Hotel Yes Yes
Buena Park
Total Suites
</TABLE>

General. Each of the Hotels is under the direction of a general manager and
an executive committee, who are accountable for, and compensated in part based
on, the property's performance. This group oversees day-to-day operations and
develops annual budgets and long-term capital and human resource development
plans for the respective Hotel. Each Hotel is also responsible for developing
its own comprehensive marketing plan, which analyzes local market conditions and
the Hotel's competition, determines Hotel positioning, identifies consumer
needs, and outlines marketing objectives and strategies. Each plan will continue
to be evaluated quarterly by the Lessee to maintain effectiveness under changing
market conditions.

The Lessee and ISIH stress comprehensive financial management and revenue
reporting and believe their management teams are skilled at anticipating
business needs and changes. All Hotel departments, including rooms, food and
beverage, accounting, sales and marketing, and maintenance, will continue to
receive regular on-site performance reviews and have open lines of communication
directly to the Lessee's and ISIH's management. These performance reviews will
enable the Lessee and ISIH to maintain an in-depth understanding of each Hotel's
marketing opportunities and to insure that the Company's properties receive the
direction necessary to enable on-site management to maximize profits.

39
<PAGE> 41

<TABLE>
<CAPTION>
REVENUE PER
AVERAGE DAILY RATE AVAILABLE ROOM
OCCUPANCY(1) (ADR)(2) (REVPAR)(3)
------------- ------------------- ---------------
PROPERTY 1997 1996 1997 1996 1997 1996
-------- ----- ----- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
InnSuites................... 68.2% 72.3% $78.57 $76.04 $53.57 $54.97
Hotel Phoenix
Best Western

InnSuites Hotel............. 76.0% 73.1% $69.43 $68.43 $52.74 $49.99
Tempe/Phoenix
Airport/South
Mountain

InnSuites Hotel............. 81.5% 84.4% $76.42 $73.87 $62.32 $62.33
Tucson, Catalina
Foothills
Best Western

InnSuites Hotel............. 75.1% 73.7% $64.24 $62.12 $48.28 $45.81
Yuma Best Western

Holiday Inn Airport......... 76.6% 66.2% $76.20 $68.35 $56.57 $45.28
Hotel and Suites/Ontario

InnSuites Hotel............. 45.9% 45.2% $48.07 $42.40 $22.08 $19.14
Flagstaff/
Grand Canyon

InnSuites Hotel............. 65.3% 59.0% $67.53 $67.89 $40.68 $39.58
Scottsdale El
Dorado Park Resort

InnSuites Hotel Tucson...... 38.1% 37.3% $56.67 $45.99 $21.59 $17.16
St. Mary's(4)

InnSuites Hotel............. 51.8% 51.2% $50.24 $45.54 $26.02 $23.32
San Diego(5)

InnSuites Hotel............. 38.6% 36.4% $42.84 $38.39 $16.52 $13.96
Buena Park(6)
</TABLE>

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

(1) Occupancy is calculated by dividing the actual number of rooms rented by the
actual number of rooms available for rent and is expressed as a percentage.

(2) Average Daily Rate (ADR) is calculated by dividing actual room revenues by
the actual number of rooms rented.

(3) Revenue per Available Room (REVPAR) is calculated by dividing actual room
revenues by the actual number of rooms available for rent.

(4) Occupancy, ADR and REVPAR for the InnSuites Hotel Tucson St. Mary's in 1996
are based on partial year data (June through December).

(5) Occupancy, ADR and REVPAR for the InnSuites Hotel San Diego in 1996 are
based on partial year data (May through December).

(6) Occupancy, ADR and REVPAR for the InnSuites Hotel Buena Park in 1996 are
based on partial year data (August through December).

40
<PAGE> 42

The following discussion sets forth additional information for each Hotel.

Holiday Inn Hotel and Suites Airport Ontario, an InnSuites Hotel

Located at the foot of California's San Gabriel Mountains and Mt. Baldy,
this Hotel is situated minutes from the Ontario, California International
Airport and the newly-opened Ontario Mills Mall. Dining and entertainment are
centered around P.J.'s Winery Cafe and Lounge, serving breakfast, lunch and
dinner, with a complimentary breakfast buffet and a free daily afternoon social
hour. On Wednesdays, guests are treated to a complimentary manager's barbeque.

In addition to the customary risks of hotel ownership, within the Ontario,
California submarket there are several new hotels that have either been
completed or are under construction. The additional supply has or will create
moderate competitive pressure as one or more of these properties are expected to
be directly competitive with the Hotel. Concurrently, southern California is
experiencing an increase in general economic activity which has served to
enhance lodging demand in this submarket. As compared to the year ended December
31, 1996, the average occupancy for the period from January 1, 1997 through
December 31, 1997 was 76.6% versus 66.2% and the average daily rate for the
period from January 1, 1997 through December 31, 1997 was $76.20 versus $68.35.
To the knowledge of the Company, this Hotel is in compliance with all relevant
environmental regulations. The Company is unaware of any specific fuel or energy
requirements with which the Hotel must comply. Finally, as a hotel, this
property is not subject to rent control regulations.

InnSuites Hotel Tucson/Catalina Foothills Best Western

This Hotel is located in northwest Tucson's Catalina Foothills resort area,
five miles east of I-10, convenient to downtown and the Tucson International
Airport. The Tucson Mall and Foothills Mall and a variety of restaurants and
golf courses are within minutes of the property. Many Tucson attractions,
including Biosphere II, the Old Tucson movie studio, the Arizona Sonora Desert
Museum, the arts district and the University of Arizona are conveniently located
for access by the Hotel's guests.

In addition to the customary risks of hotel ownership, within the Tucson,
Arizona submarket there are several new hotels that have either been completed
or are under construction. The additional supply has or will create moderate
competitive pressure as one or more of these properties are expected to be
directly competitive with the Hotel. As an offset to the increase in supply, the
general Arizona marketplace has experienced renewed economic strength during the
past several years, generally boosting lodging demand throughout the state. As
compared to the year ended December 31, 1996, the average occupancy for the
period from January 1, 1997 through December 31, 1997 was 81.5% versus 84.4% and
the average daily rate for the period from January 1, 1997 through December 31,
1997 was $76.42 versus $73.87. To the knowledge of the Company, this Hotel is in
compliance with all relevant environmental regulations. The Company is unaware
of any specific fuel or energy requirements with which the Hotel must comply.
Finally, as a hotel, this property is not subject to rent control regulations.

InnSuites Hotel & Resort/Tucson St. Mary's

Conveniently located off of I-10 at the St. Mary's Road exit, this
297-suite property occupies 11 acres and is centrally located in the heart of
Tucson's art and historic downtown district. Attractions include the Tucson
Mall, the Tucson Convention Center, the Old Tucson movie studio, the Arizona
Sonora Desert Museum, Biosphere II and golfing, and is minutes away from the
University of Arizona.

In addition to the customary risks of hotel ownership, within the Tucson,
Arizona submarket there are several new hotels that have either been completed
or are under construction. The additional supply has or will create moderate
competitive pressure as one or more of these properties are expected to be
directly competitive with the Hotel. As an offset to the increase in supply, the
general Arizona marketplace has experienced renewed economic strength during the
past several years, generally boosting lodging demand throughout the state. The
average occupancy for the period from January 1, 1997 through December 31, 1997
was 38.1% versus 37.3% for the last seven months of 1996 (the only data
available) and the average daily rate for the period from January 1, 1997
through December 31, 1997 was $56.67 versus $45.99 for the last seven months of
1996. To the knowledge

41
<PAGE> 43

of the Company, this Hotel is in compliance with all relevant environmental
regulations. The Company is unaware of any specific fuel or energy requirements
with which the Hotel must comply. Finally, as a hotel, this property is not
subject to rent control regulations.

InnSuites Hotel Tempe/Phoenix Airport

This Hotel is located on Baseline Road at I-10, less than eight minutes
from Phoenix Sky Harbor International Airport with easy access to the Phoenix
East Valley and the Tempe/Mesa/Chandler area. Area attractions include spring
training baseball, Arizona State University, Firebird Raceway, Old Towne Mill
Avenue shopping and dining and South Mountain Resort golf.

In addition to the customary risks of hotel ownership, within the Tempe,
Arizona submarket there are several new hotels that have either been completed
or are under construction, including one or more properties that will be
directly competitive with the Hotel. As an offset to the increase in supply, the
general Arizona marketplace has experienced renewed economic strength during the
past several years, generally boosting lodging demand throughout the state.
Additionally, within this specific submarket, a large outlet shopping mall was
opened across the street from this Hotel in 1997, which the Company expects will
further enhance this submarket's lodging demand. As compared to the year ended
December 31, 1996, the average occupancy for the period from January 1, 1997
through December 31, 1997 was 76.0% versus 73.1% and the average daily rate for
the period from January 1, 1997 through December 31, 1997 was $69.43 versus
$68.43. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.

InnSuites Hotel Yuma Best Western

This Hotel is located on Castle Dome Avenue, just off the 16th Street exit
of I-8, convenient to the Yuma International Airport, restaurants, golf,
shopping and boating on the nearby Colorado River. Many attractions of Yuma and
the Colorado River Park, including Fort Yuma, the Yuma Art Center, Yuma
Territorial Prison Park and Martinez Lake, are convenient to this property.

In addition to the customary risks of hotel ownership, within the Yuma,
Arizona submarket, although there have not been in recent years any new hotels
added to the supply of lodging, all hotels within the submarket, including the
Hotel, are dependent to some extent upon demand from surrounding U.S. military
facilities. With no supply growth and only modest demand expansion, the Company
has worked to gain market share for this Hotel. As compared to the year ended
December 31, 1996, the average occupancy for the period from January 1, 1997
through December 31, 1997 was 75.1% versus 73.7% and the average daily rate for
the period from January 1, 1997 through December 31, 1997 was $64.24 versus
$62.12. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.

InnSuites Hotel Flagstaff/Grand Canyon

This Hotel's hillside location in Arizona Mountain Country is located 90
minutes west of the Grand Canyon. Situated on historic Route 66, hotel guests
can conveniently visit downtown Flagstaff's restaurants and pubs, as well as
many Native American shops. Other attractions include the Snow Bowl ski resort,
the cliffs of Walnut Canyon, the Lowell Observatory and Oak Creek Canyon.

In addition to the customary risks of hotel ownership, within the
Flagstaff, Arizona submarket there is an abundance of hospitality capacity
attempting to capture the Grand Canyon visitor demand. There are also several
new hotels that have either been completed or are under construction, including
one or more properties that will be directly competitive with the Hotel. As an
offset to the increase in supply, the general Arizona marketplace has
experienced renewed economic strength during the past several years, generally
boosting lodging demand throughout the state. That factor is, however, less
relevant to this Hotel than to other of the Hotels, as this Hotel relies more
heavily on the tourist trade than on the business traveler. As compared to the
year ended

42
<PAGE> 44

December 31, 1996, the average occupancy for the period from January 1, 1997
through December 31, 1997 was 45.9% versus 45.2% and the average daily rate for
the period from January 1, 1997 through December 31, 1997 was $48.07 versus
$42.40. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.

InnSuites Hotel Phoenix Best Western

This property is located just off the Squaw Peak Parkway, in the North
Phoenix resort area, convenient to Phoenix Sky Harbor International Airport and
downtown central Phoenix. The resort area offers golf, tennis, jogging and Squaw
Peak hiking trails as well as a variety of restaurants. Nearby attractions
include Turf Paradise Racing and shopping at the Biltmore Fashion Park, Metro
Center and Paradise Valley Mall.

In addition to the customary risks of hotel ownership, within the Phoenix,
Arizona submarket there are several new hotels that have either been completed
or are under construction, including one or more properties that will be
directly competitive with the Hotel. As an offset to the increase in supply, the
general Arizona marketplace has experienced renewed economic strength during the
past several years, generally boosting lodging demand throughout the state. As
compared to the year ended December 31, 1996, the average occupancy for the
period from January 1, 1997 through December 31, 1997 was 68.2% versus 72.3% and
the average daily rate for the period from January 1, 1997 through December 31,
1997 was $78.57 versus $76.04. To the knowledge of the Company, this Hotel is in
compliance with all relevant environmental regulations. The Company is unaware
of any specific fuel or energy requirements with which the Hotel must comply.
Finally, as a hotel, this property is not subject to rent control regulations.

InnSuites Hotel Scottsdale El Dorado Park Resort

This Hotel is located in the heart of Scottsdale, adjacent to El Dorado
Park and 15 minutes from Phoenix Sky Harbor International Airport. Due to its
location next to El Dorado Park, guests of this hotel are offered many
attractions, including paddle boats, hiking, golf, and walking and jogging
trails. Other nearby attractions include the Island of Big Surf, the Phoenix
Zoo, the Desert Botanical Gardens, Papago Park Golf and the Scottsdale Art
Galleries. The Fiesta Bowl, Arizona State University's Sun Devil Stadium and the
homes of football's Arizona Cardinals and baseball's San Francisco Giants and
Chicago Cubs (spring training) are also easily accessible.

In addition to the customary risks of hotel ownership, within the
Scottsdale, Arizona submarket there are several new hotels that have either been
completed or are under construction, including one or more properties that will
be directly competitive with the Hotel. These new properties could significantly
enhance this submarket's lodging capacity, creating an increase in competitive
pressure. As an offset to the increase in supply, the general Arizona
marketplace has experienced renewed economic strength during the past several
years, generally boosting lodging demand throughout the state. As compared to
the year ended December 31, 1996, the average occupancy for the period from
January 1, 1997 through December 31, 1997 was 65.3% versus 59.0% and the average
daily rate for the period from January 1, 1997 through December 31, 1997 was
$67.53 versus $67.89. To the knowledge of the Company, this Hotel is in
compliance with all relevant environmental regulations. The Company is unaware
of any specific fuel or energy requirements with which the Hotel must comply.
Finally, as a hotel, this property is not subject to rent control regulations.

InnSuites Hotels San Diego Balboa Park Suite Resort

Located in San Diego, California, this Hotel is conveniently located near
many major attractions in San Diego, including Balboa Park, the San Diego Zoo,
the Convention Center, Sea World, Old Town and beaches. The elegant, colonial
style mansion has 147-suites, many of which have fireplaces. Additional
amenities include an Olympic-size, terrazzo tile swimming pool and a choice of
studio, one, two and three bedroom suites.

In addition to the customary risks of hotel ownership, within the San
Diego, California submarket there are several new hotels that have either been
completed or are under construction. The additional supply has or will create
moderate competitive pressure as one or more of these properties are expected to
be directly competitive with the Hotel. Concurrently, southern California is
experiencing an increase in general economic activity which

43
<PAGE> 45

has served to enhance lodging demand in this submarket. The average occupancy
for the period from January 1, 1997 through December 31, 1997 was 51.8% versus
51.2% for the last eight months of 1996 (the only data available) and the
average daily rate for the period from January 1, 1997 through December 31, 1997
was $50.24 versus $45.54 for the last eight months of 1996. To the knowledge of
the Company, this Hotel is in compliance with all relevant environmental
regulations. The Company is unaware of any specific fuel or energy requirements
with which the Hotel must comply. Finally, as a hotel, this property is not
subject to rent control regulations.

InnSuites Hotel Buena Park

Located in northern Orange County, this Hotel is situated only minutes from
six major attractions, Knott's Berry Farm, Disneyland, Movieland Wax Museum,
Ripley's Believe It or Not, Wild Bill's and Medieval Times. The Hotel is also
only a short drive from Southern California's beaches. Dining and entertainment
for the area begin with PJ's Cafe where a deluxe breakfast buffet is served
every morning, as well as a social hour every afternoon and the manager's
barbeque every Wednesday night.

In addition to the customary risks of hotel ownership, within the Buena
Park, California submarket there is only one hotel planned to begin construction
within the next year. This additional hotel as well as a flag change on another
will create moderate competitive pressure as these properties are expected to be
directly competitive with this Hotel. Concurrently, Orange County is
experiencing an increase in general economic activity, which has served to
enhance lodging demand in this submarket. The expansion of Disneyland and the
renovation of the Anaheim Convention Center will cause a further increase in
this area's activity and will enhance lodging demand in this submarket. The
average occupancy for the period from January 1, 1997 through December 31, 1997
was 38.6% versus 36.4% for the last five months of 1996 (the only data
available) and the average daily rate for the period from January 1, 1997
through December 31, 1997 was $42.84 versus $38.39 for the last five months of
1996. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.

LEASING AND MANAGEMENT OF THE HOTELS

The Lessee entered into substantially identical Percentage Leases for each
Hotel with the Partnership. In addition, ISIH provides property management
services to the Hotels, and InnSuites Licensing Corp. provides trademark and
licensing services to the Hotels. Additional information regarding the
Percentage Leases is set forth below:

Each of the Hotels is leased by the Partnership to the Lessee. The
following table sets forth (i) the percentage rent formulas, (ii) the annual
minimum rent, and (iii) the pro forma percentage rent and total rent that would
have been paid for each Hotel pursuant to the terms of the Percentage Leases
based upon historical revenues for the twelve months ended December 31, 1997 as
if the Partnership had owned the Hotels and the Percentage Leases had been in
effect since January 1, 1997 (amounts in thousands of dollars).

44
<PAGE> 46

<TABLE>
<CAPTION>
FOR THE 12 MONTHS
ENDED 12/31/97
----------------------
FRANCHISE HISTORICAL
LEASE RENEWAL ANNUAL ROOMS & OTHER ROOMS & PRO FORMA
EXPIRATION EXPIRATION MINIMUM PERCENTAGE OTHER ANNUAL
HOTEL DATE DATE RENT RENT FORMULA(1) REVENUE RENT(2)
----- ---------- ---------- ------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
InnSuites Hotel 5/31/07 12/31/98 $ 800 37% under $1,800, $ 2,444 $ 996
Phoenix Best Western 50% from $1,800 to $2,400,
68% over $2,400

InnSuites Hotel 5/31/07 N/A $1,000 37.5% under $1,800, $ 3,480 $ 1,671
Tempe/Phoenix 50% from $1,800 to $2,700,
Airport/South Mountain 70% over $2,700

InnSuites Hotel Tucson, 5/31/07 12/31/98 $1,000 37.5% under $2,000, $ 3,913 $ 1,848
Catalina Foothills 50% from $2,000 to $3,000,
Best Western 70% over $3,000

InnSuites Hotel Yuma 5/31/07 12/31/98 $ 800 32% under $2,100, $ 3,003 $ 1,214
Best Western 50% from $2,100 to $2,500,
68% over $2,500

Holiday Inn Airport 5/31/07 6/30/04 $ 600 34% under $2,700, $ 3,341 $ 1,300
Hotel and Suites/Ontario 50% from $2,700 to $3,000,
68% over $3,000

InnSuites Hotel 5/31/07 N/A $ 250 25% under $1,300, $ 1,106 $ 250
Flagstaff/Grand Canyon 40% from $1,300 to $1,500,
58% over $1,500

InnSuites Hotel 5/31/07 N/A $ 600 35% under $1,600, $ 2,105 $ 623
Scottsdale El Dorado Park 50% from $1,600 to $2,000,
Resort 68% over $2,000

InnSuites Hotel Tucson 5/31/07 N/A $ 800 35% under $3,500, $ 2,728 $ 995
St. Mary's 50% from $3,500 to $5,000,
68% over $5,000

InnSuites Hotel 5/31/07 N/A $ 500 35% under $1,700, $ 1,478 $ 500
San Diego 50% from $1,700 to $2,200,
70% over $2,200

InnSuites Hotel 5/31/07 N/A $ 500 37.5% under $2,000, $ 2,105 $ 623
------ ------- -------
Buena Park 50% from $2,000 to $3,000,
70% over $3,000

Total $6,850 $25,703 $10,020
====== ======= =======
</TABLE>

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

(1) Shown as a percentage of revenues.

(2) Calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases to historical revenues of the properties for the
twelve-month period as if January 1, 1997 was the beginning of the lease
year.

The following summary of the Percentage Leases, and the descriptions of
certain provisions thereof set forth herein, are qualified in their entirety by
reference to the form of Percentage Lease, which is an exhibit to the
Registration Statement of which this Prospectus is a part.

Duration. The Percentage Leases have initial terms ending on May 31, 2007,
subject to earlier termination on the occurrence of certain contingencies
described in the Percentage Leases (including, particularly, the provisions
described herein under "-- Damage to Properties," "-- Condemnation of
Properties" and "--Termination of Percentage Leases on Disposition of the
Hotels").

Amounts Payable Under the Percentage Leases. Lessee is obligated to pay (i)
the higher of minimum rent or percentage rent and (ii) certain other amounts,
including interest accrued on any late payment or charge ("Additional Charges").
Minimum rent is a fixed amount determined by negotiation between the Partnership
and the Lessee. Percentage rent is calculated by multiplying fixed percentages
by gross room and other revenues exceeding specified threshold amounts. Minimum
rent is payable monthly in arrears, and percentage rent is payable for each
quarter within 30 days after the end of the quarter.

Both minimum rent and the threshold gross room and other revenue amounts
used in computing percentage rent will be adjusted for changes in the CPI. The
changes will be calculated at the beginning of each calendar year beginning with
1999, based on the average annual change in the CPI during the prior 12 months.

45
<PAGE> 47

Each Percentage Lease requires Lessee to pay rent, all costs and expenses,
and all utility and other charges incurred in the operation of the respective
Hotel. All capital expenditures (as defined in the Percentage Lease) will be the
responsibility of the Partnership. Each Percentage Lease also provides for rent
reductions and abatements in the event of damage or destruction or a partial
taking of the Hotel as described under "-- Damage to Properties" and
"-- Condemnation of Properties." Lessee is required to carry insurance to cover
rental interruption for a period of up to one year.

Maintenance and Modifications. The Partnership is required to maintain the
underground utilities and the structural elements, including exterior walls
(excluding plate glass) and the roof, of the Hotels. The Partnership will also
fund the repair, replacement and refurbishment of furniture, fixtures and
equipment in the Hotels, when and as considered necessary by the Partnership,
and will maintain a Capital Expenditures Fund to help provide funds to cover
such expenses. See "THE COMPANY -- Business Objectives -- Business
Strategy -- Renovations and Development." The Partnership will make a quarterly
contribution to the Capital Expenditures Fund in an amount equal to 4% of
Lessee's aggregate gross revenues generated from the Hotels. Lessee will be
required, at its expense, to maintain the Hotels in good order and repair,
except for ordinary wear and tear, and to make nonstructural, foreseen and
unforeseen, and ordinary and extraordinary, repairs which may be necessary and
appropriate to keep the Hotels in good order and repair. Capital expenses and
furniture, fixture and equipment replacements will be paid for by the
Partnership generally out of the Capital Expenditures Fund. The Partnership and
Lessee will agree on an annual budget for each Hotel.

Lessee, at its expense, may make noncapital and capital additions,
modifications or improvements to the Hotels, so long as doing so does not
significantly alter the character or purposes of the Hotels or significantly
detract from their value or operating efficiencies. All such additions,
modifications and improvements will be subject to all of the terms of the
Percentage Leases and will become the property of the Partnership upon
termination of the Percentage Leases. The Partnership will own the furniture,
fixtures and equipment, except in limited circumstances under which the
Partnership may require Lessee to purchase certain furniture, fixtures and
equipment, and Lessee will own substantially all other personal property not
affixed to, or considered a part of, the real estate or improvements thereon.
Any purchase of furniture, fixtures and equipment by Lessee will be made on
terms negotiated between the Partnership and the Lessee.

Insurance and Property Taxes. The Partnership is responsible for paying
real estate and personal property taxes on the Hotels and for maintaining
property insurance, including casualty insurance. The Lessee is required to
maintain comprehensive general public liability, workers' compensation, 12-month
rental interruption insurance and any other insurance customary for properties
similar to the Hotels or required by any relevant franchisor, and to have the
Partnership named as an additional insured. The Partnership believes that the
insurance coverage carried by each Hotel is adequate in scope and amount.

Indemnification. Under each Percentage Lease, the Lessee will indemnify the
Partnership against all liabilities, costs and expenses (including reasonable
attorneys' fees and disbursements) incurred by, imposed on or asserted against
the Partnership on account of, among other things, (i) any accident or injury to
person or property on or about a Hotel; (ii) any negligence by Lessee or any of
its agents as to the leased property; (iii) any environmental liability
resulting from conditions caused or resulting thereafter from any action,
inaction or negligence of Lessee; (iv) taxes and assessments in respect of a
Hotel (other than real estate taxes and income taxes of the Partnership on
income attributable to a Hotel); (v) the sale or consumption of alcoholic
beverages on or in the real property or improvements thereon; or (vi) any breach
of the Percentage Lease by Lessee. The Lessee will not be required, however, to
indemnify the Partnership against the Partnership's gross negligence or willful
misconduct.

Assignment and Subleasing. The Lessee will not be permitted to sublet all
or any part of a Hotel or assign its interest under a Percentage Lease, other
than to an affiliate of Lessee, without the prior written consent of the
Partnership. No assignment, subletting or management agreement will release
Lessee from any of its obligations under the Percentage Leases.

Management Agreements. Lessee entered into a management agreement with ISIH
for the management and operation of the Hotels. Lessee will pay ISIH an annual
management fee equal to two and one-half percent (2.5%) of gross revenues.

46
<PAGE> 48

Damage to Properties. If damage to or destruction of any Hotel renders such
Hotel unsuitable for Lessee's use and occupancy and is covered by insurance, the
Partnership will be obligated to repair, rebuild or restore such Hotel, but only
to the extent of available insurance proceeds. The Percentage Lease will remain
in full force and effect during the first 12 months of any period required for
repair or restoration of a Hotel, after which time rent will be equitably
abated.

Condemnation of Properties. In the event of a total condemnation of a
Hotel, each of the Partnership and the Lessee will be entitled to terminate the
Percentage Lease as of the date of the taking. The resulting condemnation award
will be allocated between the Partnership and the Lessee as set forth in the
Percentage Lease. In the event of a partial taking that does not render a Hotel
unsuitable for Lessee's use, Lessee must restore the untaken portion of such
Hotel to a complete architectural unit. In such a case, the Partnership must
provide the required funds to cover the cost of that restoration, which may
include that part of the condemnation award specified for restoration.

Events of Default. Events of Default under each Percentage Lease include,
among others, the following:

(i) the failure by Lessee to pay minimum rent when due and the
continuation of such failure for a period of 10 days;

(ii) the failure by Lessee to pay the percentage rent for any quarter
within 10 days after the end of such quarter;

(iii) the failure by Lessee to observe or perform any other term of
the Percentage Lease and the continuation of such failure beyond any
applicable cure period;

(iv) an Event of Default under any other Percentage Lease;

(v) if Lessee files a petition in bankruptcy or reorganization under
any federal or state bankruptcy law or any similar federal or state law, or
is adjudicated a bankrupt or makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts generally as
they become due, or if a petition or answer proposing the adjudication of
Lessee as a bankrupt or its reorganization pursuant to any federal or state
bankruptcy law or any similar federal or state law is filed in any court
and Lessee is adjudicated a bankrupt and that adjudication is not vacated
or set aside or stayed within 60 days after the entry of an order in
respect thereof, or if a receiver of Lessee, or of the whole or
substantially all of the assets of Lessee, is appointed in any proceeding
brought by Lessee, or any such receiver, trustee or liquidator is appointed
in any proceeding brought against Lessee and that appointment is not
vacated or set aside or stayed within 60 days after that appointment is
made;

(vi) if Lessee voluntarily discontinues operations of a Hotel for more
than 30 days, except as a result of damage, destruction or condemnation; or

(vii) if the franchise agreement in respect of any Hotel is terminated
by the franchisor as a result of any action or failure to act by Lessee or
its agents and is not replaced within 90 days after the date of termination
by a new franchise agreement that is acceptable to the Partnership acting
in its reasonable discretion.

If an Event of Default occurs and continues beyond any curative period, the
Partnership may terminate the Percentage Lease and any or all of the other
Percentage Leases by giving Lessee 30 days' written notice of the date for
termination thereof and, unless that Event of Default is cured prior to that
termination date, the specified Percentage Leases will terminate on that date
and Lessee will be required to surrender possession of the affected Hotels.

Termination of Percentage Leases on Disposition of the Hotels. If the
Partnership enters into an agreement to transfer a Hotel to a non-affiliate, the
Partnership may terminate that Hotel's Percentage Lease by giving Lessee 30
days' prior notice and paying it the fair market value of its leasehold interest
in the remaining term of that Percentage Lease.

Franchise Agreements. Lessee and/or the relevant Hotel are the franchisee
under any franchise agreements for the Hotels. The current franchise agreements
for the three Best Western(R) Hotels (located in Phoenix, Tucson

47
<PAGE> 49

and Yuma, Arizona), which are renewable annually, expire on December 31, 1998.
The current franchise agreement for the Holiday Inn(R) Hotel (located in
Ontario, California) expires on June 30, 2004. There can be no assurance that
such franchise agreements will be renewed upon their expiration or as to the
effect on the Company of any non-renewal.

Trademark/License Agreements. Lessee and/or the relevant Hotel are each a
licensee under the license agreements pursuant to which InnSuites Licensing
Corp. will receive an annual licensing fee equal to 2.5% of gross room revenues
from each of the Hotels. Those Hotels which carry a third-party franchise
(currently Best Western(R) and Holiday Inn(R)) will have their licensing fee
reduced to 1.25% so long as the third-party franchise is in place.

Inventory. All working capital assets required in the operation of the
Hotels will be purchased by the Lessee at its expense.

EMPLOYEES

The Company has no employees. The Company's external advisor, Mid-America
ReaFund Advisors, Inc. ("MARA") performs, directly or through the Partnership,
various acquisition, development, redevelopment and management functions. The
Company intends to acquire MARA in September 1998 and, thereafter, perform the
functions now performed by MARA. The Lessee has approximately 490 employees
engaged in the operation of the Hotels. The Lessee will continue InnSuites'
ongoing recruiting efforts to attract quality talent at all levels of sales and
management.

None of the persons who will be employees of the Company or the Lessee are
represented by a union. The Company believes that its and the Lessee's relations
with their respective employees are good.

LEGAL PROCEEDINGS

Neither the Company, the Lessee nor the Partnership is currently involved
in any material litigation nor, to the Company's knowledge, is any material
litigation currently threatened against the Company, the Lessee or the
Partnership.

POLICIES AND OBJECTIVES WITH RESPECT
TO CERTAIN ACTIVITIES

The following supplements the discussion of the Company's growth,
acquisition, development and financing strategies set forth under the heading
"THE COMPANY." The Company's policies with respect to those activities and the
matters discussed below have been established by the Board of Trustees of the
Company and may be amended or revised from time to time at the discretion of the
Board of Trustees without a vote of the stockholders of the Company, except that
changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements.

INVESTMENT POLICIES

Investments in Real Estate. The Company may acquire equity interests in
hotel properties other than the Hotels through the Partnership or other entities
controlled by the Partnership, or through joint ventures or other types of
co-ownership. These investments may be subject to existing mortgage financing
and other indebtedness that may have priority over the equity interest of the
Company.

The Company's current policy is to not invest more than 25% of its total
assets (at the time of the investment) in any one property.

Investments in Real Estate Mortgages. While the Company will emphasize
equity real estate investments, it may invest in mortgage and other real estate
interests, including securities of other REITs, and in nonperforming mortgages
in order to acquire the underlying property. The Company may invest in
participating or convertible mortgages (which are similar to equity
participation) if it may benefit from the cash flow or any appreciation in

48
<PAGE> 50

the value of the subject property. The Company does not currently intend to
invest in mortgages or securities of other REITs.

FINANCING

While its organizational documents contain no limitation on the amount of
debt it may incur, the Company, subject to the discretion of the Board of
Trustees, intends to maintain a debt to total market capitalization ratio or
debt to appraised value of real estate ratio (measured at the time the debt is
incurred) of not more than 50% to 55%. The Company may from time to time
re-evaluate its debt capitalization policy in light of economic conditions,
relative costs of debt and equity capital, the market value of its properties,
acquisition, development and expansion opportunities, and other factors. Any
indebtedness may be incurred by the Partnership or the Company. Indebtedness
incurred by the Company may be in the form of bank borrowings, secured or
unsecured, and publicly or privately placed debt instruments, the proceeds of
which would be loaned or contributed to the Partnership. Indebtedness incurred
by the Partnership may be in the form of purchase money obligations to the
sellers of properties, publicly or privately placed debt instruments, further
borrowings from the Company, or financing from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by the Partnership. This
indebtedness may be recourse to all or any part of the property of the Company
or the Partnership, or may be limited to the specific property to which the
indebtedness relates. The proceeds from any borrowings by the Company or the
Partnership may be used for the payment of distributions or dividends, for
working capital, or to refinance existing indebtedness or to finance
acquisitions or expansions of properties. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification and -- Distribution
Requirements."

If the Board of Trustees determines to raise additional equity capital, the
Board has the authority, without stockholder approval, to issue additional
Common Stock of the Company in any manner (and generally on such terms and for
such consideration) as it deems appropriate, including in exchange for property.
Any such offering might cause a dilution of the existing stockholders'
investment in the Company.

The Company has obtained the Credit Facility. See "THE COMPANY -- Business
Objectives -- Business Strategy -- Financing Strategy" for a description of the
terms of the Credit Facility.

POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES

The Company has authority to offer capital shares or other securities and
to repurchase or otherwise reacquire its shares or any other securities, and may
engage in such activities in the future. The Company has no outstanding loans to
other entities or persons, including its officers and directors, and except as
described above under "-- Investment Policies," does not currently intend to
make loans to other entities. The Company has not engaged, and does not
currently intend to engage, in trading, underwriting or agency distribution or
sale of securities of other issuers, and has not invested, and does not
currently intend to invest, in the securities of other issuers (other than the
Partnership or in connection with the acquisition of hotel properties) for the
purpose of exercising control. The Company intends to make investments in such a
way that it will not be treated as an investment company under the Investment
Company Act of 1940.

The Company intends to make investments at all times in a manner consistent
with the requirements of the Code in order for the Company to qualify as a REIT
unless, because of changing circumstances or changes in the Code or Treasury
Regulations, or in the interpretation of either, the Company's Board of Trustees
determines that it is no longer in the best interests of the Company and its
stockholders to qualify as a REIT.

CONFLICT OF INTEREST POLICY

Neither the Company's governing instruments nor Company policy prohibit any
Company Trustee, officer, stockholder or affiliate from having a pecuniary
interest in any investment to be acquired or disposed of by the Company or in
any transaction to which the Company is a party or in which it has an interest.

Determinations to be made on behalf of the Company with respect to
relationships or opportunities that represent a conflict of interest for any
Company officer or Trustee as such will be subject to the approval of the

49
<PAGE> 51

independent Trustees. See "RISK FACTORS -- Conflicts of Interest." In addition,
Mr. Wirth and the other affiliates of InnSuites Hotels have agreed that they
will conduct all of their hotel ownership, development and acquisition
activities through the Company.

The Partnership Agreement requires the Company to resolve in favor of the
Company's stockholders any conflict of interest between those stockholders, on
the one hand, and the limited partners of the Partnership, on the other hand, if
the conflict cannot be resolved in a manner not adverse to the interests of
either group. The Partnership Agreement also exonerates the Company from
monetary damages for losses sustained, liabilities incurred or benefits not
derived by limited partners in connection with any such resolution, so long as
the Company has acted in good faith.

CERTAIN DECLARATION PROVISIONS

RESTRICTIONS ON OWNERSHIP AND TRANSFER

For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding stock. Specifically,
not more than 50% in value of the Company's outstanding stock may be owned,
actually and constructively under the applicable attribution provisions of the
Code, by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year (other than the first year),
and the Company must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification." For the purpose of preserving
the Company's REIT qualification, the Company's Declaration contains the
"Ownership Limitation Provisions," which restrict the ownership and transfer of
the Company's capital stock under certain circumstances.

The Ownership Limitation Provisions provide that, subject to certain
exceptions specified in the Declaration, no person may own, or be deemed to own
by virtue of the applicable attribution provisions of the Code, more than 4.9%
of any class of the Company's outstanding capital stock. The Board of Trustees
may, but in no event will be required to, waive the Ownership Limit if it
determines that such ownership will not jeopardize the Company's status as a
REIT. As a condition of such waiver, the Board of Trustees may require opinions
of counsel satisfactory to it and/or undertakings or representations from the
applicant with respect to preserving the REIT status of the Company. The
Ownership Limitation Provisions will not apply if the Board of Trustees and the
holders of two-thirds of the outstanding shares of capital stock entitled to
vote on such a matter determine that it is no longer in the best interests of
the Company to attempt to qualify, or to continue to qualify, as a REIT.

Any purported transfer of capital stock of the Company and any other event
that would otherwise result in any person or entity violating the Ownership
Limit will be void and of no force or effect as to that number of shares in
excess of the Ownership Limit, and the purported transferee ("Prohibited
Transferee") shall acquire no right or interest (or, in the case of any event
other than a purported transfer, the person or entity holding record title to
any such shares in excess of the Ownership Limit ("Prohibited Owner") shall
cease to own any right or interest) in such excess shares. In addition, if any
purported transfer of capital stock of the Company or any other event otherwise
would cause the Company to become "closely held" under the Code or otherwise
fail to qualify as a REIT under the Code (other than as a result of a violation
of the requirement that a REIT have at least 100 stockholders), then any such
purported transfer will be void and of no force or effect as to that number of
shares in excess of the number that could have been transferred without such
result, and the Prohibited Transferee shall acquire no right or interest (or, in
the case of any event other than a transfer, the Prohibited Owner shall cease to
own any right or interest) in such excess shares. Also, if any purported
transfer of capital stock of the Company or any other event would otherwise
cause the Company to own, or be deemed to own by virtue of the applicable
attribution provisions of the Code, 10% or more of the ownership interests in
the Lessee or in any sublessee, then any such purported transfer will be void
and of no force or effect as to that number of shares in excess of the number
that could have been transferred without such result, and the Prohibited
Transferee shall acquire no right or interest (or, in the case of any event
other than a transfer, the Prohibited Owner shall cease to own any right or
interest) in such excess shares.

50
<PAGE> 52

Any such excess shares described above will be transferred automatically,
by operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by the Company ("Beneficiary"). The trustee of
the trust who shall be designated by the Company and be unaffiliated with the
Company and any Prohibited Owner, will be empowered to sell such excess shares
to a qualified person or entity and distribute to the Prohibited Transferee an
amount equal to the lesser of the price paid by the Prohibited Transferee for
such excess shares or the sales proceeds received by the trust for such excess
shares. In the case of any excess shares resulting from any event other than a
transfer, or from a transfer for no consideration, the trustee will be empowered
to sell such excess shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value of such
excess shares on the date of such event or the sales proceeds received by the
trust for such excess shares. Prior to a sale of any such excess shares by the
trust, the trustee will be entitled to receive, in trust for the benefit of the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all voting
rights with respect to such excess shares.

Any purported transfer of capital stock of the Company that would otherwise
cause the Company to be beneficially owned by fewer than 100 persons will be
null and void in its entirety, and the intended transferee will acquire no
rights in such stock.

All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.

Every owner of more than 4.9% (or such lower percentage as may be required
by the Code or Treasury Regulations) of the outstanding shares of capital stock
of the Company must file a written notice with the Company containing the
information specified in the Declaration no later than January 30 of each year.
In addition, each stockholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of such stockholder's actual and constructive
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limit.

The Ownership Limitation Provisions may have the effect of precluding an
acquisition of control of the Company without approval of the Board of Trustees.

NUMBER OF TRUSTEES; REMOVAL; FILLING VACANCIES

The Declaration provides that the Board of Trustees consist of not less
than five persons, subject to increase by the affirmative vote of a majority of
the members of the entire Board of Trustees. At all times a majority of the
Trustees shall be independent Trustees, except that upon the death, removal or
resignation of an independent Trustee, such requirement shall not be applicable
for 60 days. Currently, there are six Trustees, four of whom are independent
Trustees. The stockholders shall be entitled to vote on the election of
Trustees, with each share entitled to one vote. The Board of Trustees is
presently divided into three classes, comprised of two Trustees each. Trustees
are elected to staggered three year terms. Any Trustee may be removed for cause
by the vote of two-thirds of the remaining Trustees. The Declaration provides
that, subject to any rights of holders of preferred stock, if any, and unless
the Board of Trustees otherwise determines, any vacancies will be filled by the
affirmative vote of a majority of the remaining Trustees, though less than a
quorum. Any Trustee so elected may qualify as an independent Trustee only if he
has received the affirmative vote of at least a majority of the remaining
independent Trustees, if any. Accordingly, the Board of Trustees could
temporarily prevent any stockholder from enlarging the Board of Trustees and
filling the new Trusteeships with such stockholder's own nominees. Any Trustee
so elected shall hold office until the next annual meeting of stockholders.

LIMITATION OF LIABILITY

The Declaration provides that to the maximum extent that Ohio law in effect
from time to time permits the limitation of liability of Trustees and officers,
no Trustee or officer of the Company shall be liable to the Company or its
stockholders for money damages.

51
<PAGE> 53

INDEMNIFICATION OF TRUSTEES AND OFFICERS

The Declaration and Bylaws require the Company to indemnify its Trustees,
officers, employees and agents to the fullest extent permitted from time to time
by Ohio law. Ohio law permits a corporation to indemnify its trustees, officers,
employees and agents against judgments, penalties, fines, settlements and
reasonable expenses (including attorneys fees) actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is established
that (i) the act or omission of the indemnified party was material to the matter
giving rise to the proceeding and the act or omission was committed in bad faith
or was the result of active and deliberate dishonesty, (ii) the indemnified
party actually received an improper personal benefit in money, property or
services, or (iii) in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was unlawful.
Indemnification is mandatory if the indemnified party has been successful on the
merits or otherwise in the defense of any proceeding unless such indemnification
is not otherwise permitted as provided in the preceding sentence. In addition to
the foregoing, a court of competent jurisdiction, under certain circumstances,
may order indemnification if it determines that the person is fairly and
reasonably entitled thereto in view of all the relevant circumstances, unless
the proceeding was an action by or in the right of the corporation or involved a
determination that the person received an improper personal benefit.

AMENDMENT

The Declaration may be amended by the affirmative vote of the holders of
two-thirds of the outstanding shares of Common Stock, with the stockholders
voting as a class with one vote per share.

PARTNERSHIP AGREEMENT

The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth herein, are qualified in their entirety by
reference to the Partnership Agreement, which is an exhibit to the Registration
Statement of which this Prospectus is a part.

MANAGEMENT

The Partnership is a Delaware limited partnership and was formed pursuant
to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Partnership ("General
Partner"), has full, exclusive and complete responsibility and discretion in the
management and control of the Partnership, and the limited partners of the
Partnership ("Limited Partners", together with the General Partner, "Partners")
have no authority to transact business for, or participate in the management
activities or decisions of, the Partnership. However, any amendment to the
Partnership Agreement that would (i) affect the conversion rights described
under "-- Conversion Rights" below, (ii) adversely affect the Limited Partners'
rights to receive cash distributions, (iii) alter the Partnership's allocations
of income, or (iv) impose on the Limited Partners any obligations to make
additional contributions to the capital of the Partnership, requires the consent
of the Limited Partners holding at least a majority of the Units and Class B
Units.

TRANSFERABILITY OF INTERESTS

The Company may not voluntarily withdraw from the Partnership or transfer
or assign its interest in the Partnership unless the transaction in which such
withdrawal or transfer occurs results in the Limited Partners receiving property
in an amount equal to the amount they would have received had they exercised
their conversion rights immediately prior to such transaction, or unless the
successor to the Company contributes substantially all of its assets to the
Partnership in return for an interest in the Partnership. The Limited Partners
may not transfer their interests in the Partnership without the consent of the
Company, which the Company may withhold in its sole discretion. The Company may
not consent to any transfer that would cause the Partnership to be treated as a
separate corporation for federal income tax purposes.

52
<PAGE> 54

CAPITAL CONTRIBUTIONS

The Company and the Limited Partners contributed cash or interests in
certain of the Hotels to the Partnership in exchange for partnership interests
in the Partnership. As required by the Partnership Agreement, immediately prior
to a capital contribution by the Company, the Partners' capital accounts and the
Carrying Value (as that term is defined in the Partnership Agreement) of the
Partnership property shall be adjusted to reflect the unrealized gain or
unrealized loss attributable to the Partnership property as if such items had
actually been recognized immediately prior to such issuance and had been
allocated to the Partners at such time.

The Partnership Agreement provides that if the Partnership requires
additional funds at any time or from time to time in excess of funds available
to the Partnership from borrowing or capital contributions, the Company may
borrow such funds from a financial institution or other lender and lend such
funds to the Partnership on the same terms and conditions as are applicable to
the Company's borrowing of such funds. As an alternative to borrowing funds
required by the Partnership, the Company may contribute the amount of such
required funds as an additional capital contribution to the Partnership. If the
Company so contributes additional capital to the Partnership, the Company will
receive additional partnership interests in the Partnership and the Company's
percentage interest in the Partnership will be increased on a proportionate
basis with the amount of such additional capital contributions and the value of
the Partnership at the time of such contributions. Conversely, the percentage
interests of the Limited Partners will be decreased on a proportionate basis in
the event of additional capital contributions by the Company.

CONVERSION RIGHTS

Pursuant to the Partnership Agreement, the Limited Partners holding Units
are entitled to conversion rights, which enable them to cause the Partnership to
convert their interests in the Partnership (subject to certain restrictions)
into shares of Common Stock, except to the extent that the Ownership Limit is
reached in which case the Company may elect to purchase any Units in excess of
the Ownership Limit for cash. The conversion rights may not be exercised if the
issuance of shares of Common Stock by the Company, as General Partner, for any
part of the interest in the Partnership sought to be converted would (i) result
in any person violating the Ownership Limit contained in the Company's
Declaration, (ii) cause the Company to be "closely held" within the meaning of
the Code, (iii) cause the Company to be treated as owning 10% or more of the
Lessee or any sublessee within the meaning of the Code, or (iv) otherwise cause
the Company to fail to qualify as a REIT; unless, in any case, the Partnership
or the Company (as the case may be) elects, in its sole and absolute discretion,
to pay the conversion amount in cash. The conversion rights may be exercised by
the Limited Partners, in whole or in part (in either case, subject to the above
restrictions), at any time or from time to time, following the satisfaction of
any applicable holding period requirements. At August 31, 1998, the aggregate
number of shares of Common Stock issuable upon exercise of the conversion rights
by the Limited Partners was 2,771,443. The number of shares issuable upon the
exercise of the conversion rights will be adjusted upon the occurrence of stock
splits, mergers, consolidations or similar pro rata share transactions, which
otherwise would have the effect of diluting the ownership interests of the
Limited Partners or the stockholders of the Company.

TAX MATTERS

Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Partnership and, as such, has authority to make tax elections
under the Code on behalf of the Partnership.

Profit and loss of the Partnership generally are allocated among the
Partners in accordance with their respective interests in the Partnership based
on the number of partnership interests held by the Partners.

OPERATIONS

The Partnership Agreement requires that the Partnership be operated in a
manner that enables the Company to satisfy the requirements for being classified
as a REIT and to avoid any federal income tax liability.

53
<PAGE> 55

DISTRIBUTIONS

The Partnership Agreement provides that the Partnership will distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the Partnership's property in connection with the
liquidation of the Partnership) quarterly, in amounts determined by the Company
in its sole discretion, to the Partners in accordance with their respective
percentage interests in the Partnership. Upon liquidation of the Partnership,
after payment of, or adequate provision for, debts and obligations of the
Partnership, including any Partner loans, any remaining assets of the
Partnership will be distributed to all Partners with positive capital accounts
in accordance with their respective positive capital account balances. If any
Partner, including the Company, has a negative balance in its capital account
following a liquidation of the Partnership, it will be obligated to contribute
cash to the Partnership equal to the negative balance in its capital account.

TERM

The Partnership will continue until December 31, 2047, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company as
General Partner (unless the Limited Partners elect to continue the Partnership),
(ii) the sale or other disposition of all or substantially all the assets of the
Partnership, (iii) the conversion of all limited partnership interests in the
Partnership (other than those held by the Company, if any), or (iv) the election
of the General Partner.

FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the material federal income tax
considerations relevant to a prospective holder of Common Stock. The discussion
does not purport to deal with all aspects of taxation that may be relevant to a
holder of Common Stock in light of their personal investment or tax
circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.

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

TAXATION OF THE COMPANY

The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code. The Company currently is qualified as a REIT and
intends to continue to operate in such manner, but no assurance can be given
that the Company will operate in a manner so as to remain qualified as a REIT.

The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retrospectively. Thompson Hine & Flory LLP has acted as counsel to the Company
commencing January 30, 1998.

The Company believes that it will continue to be qualified to be taxed as a
REIT for its taxable year ended January 31, 1998, and that its organization and
current and proposed method of operation will enable it to continue to qualify
as a REIT for its taxable year ended January 31, 1999 and in the future. The
Company has obtained an opinion of Thompson Hine & Flory LLP as to its REIT
qualifications beginning with its fiscal year ended January 31, 1999. Investors
should be aware, however, that opinions of counsel are not binding upon the
Service or any court. It must be emphasized that the opinion of Thompson Hine &
Flory LLP is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters,

54
<PAGE> 56

including representations regarding the nature of the Company's properties and
the future conduct of its business. Such factual assumptions and representations
are described below. Moreover, such continued qualification and taxation as a
REIT depends upon the Company's ability to meet on a continuing basis, through
actual annual operating results, distribution levels, and stock ownership, the
various qualification tests imposed under the Code discussed below. Thompson
Hine & Flory LLP will not review the Company's compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that the actual results
of the Company's operation for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "-- Failure to Qualify."

If the Company continues to qualify for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on its net income that is
distributed currently to the stockholders. That treatment substantially
eliminates the "double taxation" (i.e., taxation at both the corporate and
stockholder levels) that generally results from investment in a corporation.
However, the Company will be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" under Section 55 of the Code. Third, if the Company
has (i) net income from the sale or other disposition of "foreclosure property"
that is held primarily for sale to customers in the ordinary course of business
or (ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the Company has
net income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income tests. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from a
C corporation (i.e. , a corporation generally subject to full corporate-level
tax) in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such asset
was acquired by the Company, then to the extent of such asset's built-in gain
(i.e. , the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
built-in gain assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.

REQUIREMENTS FOR QUALIFICATION

The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year ("5/50 Rule"); (vii)
that makes an election to be a REIT (or has made such election for a previous
taxable year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met in order to elect and
to maintain REIT status; (viii) that uses a calendar year for federal income tax
purposes unless the REIT (such as the Company) uses a fiscal year and was in
existence as a REIT for any taxable year beginning on or before October 4, 1976,
and complies with the recordkeeping requirements of the Code and Treasury
Regulations promulgated thereunder; and (ix) that meets certain other tests,
described below, regarding the nature of its

55
<PAGE> 57

income and assets. The Code provides that conditions (i) to (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v) and
(vi) will not apply until after the first taxable year for which an election is
made by the Company to be taxed as a REIT. The Company has issued and will issue
sufficient Common Stock in sufficient diversity of ownership to allow it to
satisfy requirements (v) and (vi). In addition, the Company's Declaration
provides for restrictions regarding transfer of the Common Stock that are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above.

For purposes of determining stock ownership under the 5/50 Rule, a (i)
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual, and (ii) stock held by a trust
that is a qualified trust under Section 401(a) of the Code is treated as held by
the Company's beneficiaries in proportion to their actuarial interests in the
pension trust for purposes of the 5/50 Rule.

The Company owns a corporate subsidiary, RRF Sub Corp., which the Company
believes to be a "qualified REIT subsidiary". (A qualified REIT subsidiary is
any corporation wholly-owned by a REIT.) As such, RRF Sub Corp. is disregarded
for federal income tax purposes and all assets, liabilities and items of income,
deduction and credit of RRF Sub Corp. are treated as assets, liabilities and
items of the Company itself.

In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the character
of the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income and asset tests, described below. Thus, the
Company's proportionate share of the assets, liabilities and items of income of
the Partnership (and any lower tier partnership) will be treated as assets and
gross income of the Company for purposes of applying the requirements described
herein.

INCOME TESTS

In order for the Company to maintain its qualification as a REIT, there are
two requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of Common Stock that do not
constitute dealer property, or from any combination of the foregoing.

Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts of sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the Company, or an owner of 10% or more of the Company, directly
or constructively owns 10% or more of such tenant (a "Related Party Tenant")
(including in such 10% calculation the attribution of certain interests held by
family members, corporations (in which such owner owns more than 10% of the
value of the outstanding shares) and a partnership in which such person owns 25%
or more of the capital or profits, or held by certain partners of any such
person). Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for rents received to
qualify as "rents from real property," the Company generally must not operate or
manage the property or furnish or render more than a de minimis amount

56
<PAGE> 58

of services to the tenants of such property, other than through an "independent
contractor" from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by the Company are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant."

Pursuant to the Percentage Leases, the Lessee leases from the Partnership
and the Subsidiary Partnerships (as defined below) and RRF Sub Corp. the land,
buildings, improvements, furnishings, and equipment comprising the Hotels for a
ten-year period. The Percentage Leases provide that the Lessee is obligated to
pay to the Partnership or RRF Sub Corp., as the case may be, (i) the greater of
a fixed rent ("Base Rent") or a percentage rent ("Percentage Rent")
(collectively, "Rents") and (ii) certain other amounts, including interest
accrued on any late payments or charges ("Additional Charges"). The Percentage
Rent is calculated by multiplying fixed percentages by the gross suite revenues
and food and beverage rent revenues for each of the Hotels in excess of certain
levels. The Base Rent accrues and is required to be paid monthly. Although
Percentage Rent is due quarterly, the Lessee will not be in default for
non-payment of Percentage Rent due in any calendar year if the Lessee pays,
within 90 days of the end of the calendar year, the excess of Percentage Rent
due and unpaid over the Base Rent with respect to such year. For purposes of
this section, the term "Partnership" includes the Subsidiary Partnerships and
RRF Sub Corp. when the context requires.

In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).

In addition, Section 7701(e) of the Code provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient, and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination whether a service
contract should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.

The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes. Such belief is based, in part, on the
following facts: (i) the Partnership and the Lessee intend for their
relationship to be that of a lessor and lessee and such relationship will be
documented by lease agreements, (ii) the Lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (iii) the Lessee bears the cost of, and will be responsible
for, day-to-day maintenance and repair of the Hotels, other than the cost of
maintaining underground utilities and structural elements, and will dictate how
the Hotels are operated, maintained and improved, (iv) the Lessee bears all of
the costs and expenses of operating the Hotels (including the cost of any
inventory and supplies used in their operation) during the term of the
Percentage Leases (other than real and personal property taxes, and the cost of
replacement or refurbishment of furniture, fixtures and equipment, to the extent
such costs do not exceed the allowance for such costs provided by the
Partnership under each Percentage Lease), (v) the Lessee benefits from any
savings in the

57
<PAGE> 59

costs of operating the Hotels during the term of the Percentage Leases, (vi) in
the event of damage or destruction to a Hotel, the Lessee will be at economic
risk because it will be obligated either (A) to restore the property to its
prior condition, in which event it will bear all costs of such restoration or
(B) purchase the Hotel for an amount generally equal to the Partnership's
investment in the property, (vii) the Lessee will indemnify the Partnership
against all liabilities imposed on the Partnership during the term of the
Percentage Leases by reason of (A) injury to persons or damage to property
occurring at the Hotels or (B) the Lessee's use, management, maintenance or
repair of the Hotels, (viii) the Lessee is obligated to pay substantial fixed
rent for the period of use of the Hotels, and (ix) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully it
operates the Hotels.

INVESTORS SHOULD BE AWARE THAT THERE ARE NO CONTROLLING TREASURY
REGULATIONS, PUBLISHED RULINGS, OR JUDICIAL DECISIONS INVOLVING LEASES WITH
TERMS SUBSTANTIALLY THE SAME AS THE PERCENTAGE LEASES THAT DISCUSS WHETHER SUCH
LEASES CONSTITUTE TRUE LEASES FOR FEDERAL INCOME TAX PURPOSES. THEREFORE, THE
RELATIONSHIP BETWEEN THE PARTNERSHIP AND THE LESSEE IS BASED UPON ALL OF THE
FACTS AND CIRCUMSTANCES AND UPON RULINGS AND JUDICIAL DECISIONS INVOLVING
SITUATIONS THAT ARE CONSIDERED TO BE ANALOGOUS. THERE CAN BE NO COMPLETE
ASSURANCE THAT THE SERVICE WILL NOT ASSERT SUCCESSFULLY A CONTRARY POSITION. If
the Percentage Leases are recharacterized as service contracts or partnership
agreements, rather than true leases, part or all of the payments that the
Partnership receives from the Lessee may not be considered rent or may not
otherwise satisfy the various requirements for qualification as "rents from real
property." In that case, the Company likely would not be able to satisfy either
the 75% or 95% gross income tests and, as a result, would lose its REIT status.

In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in a Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of the such taxable year
("Adjusted Basis Ratio"). The initial adjusted basis of the personal property in
each Hotel was less than 15% of the initial adjusted bases of both the real and
personal property comprising such hotel. There can be no assurance, however,
that the Service would not challenge such Adjusted Basis Ratio. If such a
challenge were successfully asserted, the Company could fail the 15% Adjusted
Basis Ratio as to one or more of the Percentage Leases, which in turn
potentially could cause it to fail to satisfy the 95% or 75% gross income tests
and thus lose its REIT status.

Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(iii) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases and the Company represented that the percentages (i) will
not be renegotiated during the terms of the Percentage Leases in a manner that
has the effect of basing the Percentage Rent on income or profits and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company represented that, with respect to other hotel
properties that it acquires in the future, it will not charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross revenues,
as described above).

58
<PAGE> 60

A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the stock of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the
ownership interests in any lessee that are owned, directly or indirectly, by or
for such person. The Company does not currently own, directly or constructively,
any ownership interest in the Lessee. In addition, the Partnership Agreement
provides that a converting Limited Partner will not be permitted to convert
Units (unless the Company elects, in its sole discretion, to pay cash in lieu of
Common Stock) to the extent that the acquisition of Common Stock by such partner
would result in the Company being treated as owning, directly or constructively,
10% or more of the ownership interests of the Lessee or of the ownership
interests in any sublessee. Thus, the Company should never own, directly or
constructively, 10% or more of the Lessee or any sublessee. Furthermore, the
Company represents that, with respect to other hotel properties that it acquires
in the future, it will not rent any property to a Related Party Tenant. However,
because the Code's constructive ownership rules for purposes of the Related
Party Tenant rules are broad and it is not possible to monitor continually
direct and indirect transfers of shares of Common Stock, no absolute assurance
can be given that such transfers or other events of which the Company has no
knowledge will not cause the Company to own constructively 10% or more of the
Lessee at some future date.

A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render (i) impermissible
services to the Lessee or the tenants of the Hotels, or manage or operate the
Hotels, other than through an independent contractor from whom the Company
itself does not derive or receive any income, or (ii) unpermitted services to
the Lessee, except in either case to a de minimis extent. Provided that the
Percentage Leases are respected as true leases, the Company should satisfy this
requirement because the Partnership is not performing any services other than
customary ones for the Lessee. Furthermore, the Company represents that, with
respect to other hotel properties that it acquires in the future, it will not
perform noncustomary services with respect to the tenant of the property. As
described above, however, if the Percentage Leases are recharacterized as
service contracts or partnership agreements, the Rents likely would be
disqualified as "rents from real property" because the Company would be
considered to furnish or render services to the occupants of the Hotels and to
manage or operate the Hotels other than through an independent contractor who is
adequately compensated and from whom the Company derives or receives no income.

If the Rents do not qualify as "rents from real property" because the rents
attributable to personal property exceed 15% of the total Rents for a taxable
year, the portion of the Rents that is attributable to personal property will
not be qualifying income for purposes of either the 75% or 95% gross income
tests. Thus, if the Rents attributable to personal property, plus any other
nonqualifying income, during a taxable year exceeds 5% of the Company's gross
income during the year, the Company would lose its REIT status. If, however, the
Rents do not qualify as "rents from real property" because either (i) the
Percentage Rent is considered based on income or profits of the Lessee, (ii) the
Company owns, directly or constructively, 10% or more of the Lessee, or (iii)
the Company furnishes noncustomary services to the Lessee (other than through a
qualified independent contractor) or manages or operates the Hotels, none of the
Rents would qualify as "rents from real property." In that case, the Company
likely would lose its REIT status because it would be unable to satisfy either
the 75% or 95% gross income tests.

In addition to the Rents, the Lessee is required to pay to the Partnership
the Additional Charges. To the extent that the Additional Charges represent
either (i) reimbursements of amounts that the Lessee is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such amounts,
the Additional Charges should qualify as "rents from real property." To the
extent, however, that the Additional Charges represent interest that is accrued
on the late payment of the Rents or the Additional Charges, the Additional
Charges should not qualify as "rents from real property," but instead should be
treated as interest that qualifies for the 95% gross income test.

The Company believes that the Rents and the Additional Charges will qualify
as "rents from real property" for purposes of the 75% and 95% gross income
tests, except to the extent that the Additional Charges represent interest that
is accrued on the late payment of the Rents or the Additional Charges (which
will be qualifying gross income for the 95% test but not the 75% test). However,
there can be no complete assurance that the Service will not assert successfully
a contrary position and, therefore, prevent the Company from qualifying as a
REIT.
59
<PAGE> 61

The term "interest," as defined for purposes of the 75% gross income test,
generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales.
Furthermore, to the extent that interest from a loan that is based on the
residual cash proceeds from sale of the property securing the loan constitutes a
"shared appreciation provision" (as defined in the Code), income attributable to
such participation feature will be treated as gain from the sale of the secured
property.

The net income from any prohibited transaction entered into by the Company
is subject to a 100% tax. The term "prohibited transaction" generally includes a
sale or other disposition of property (other than foreclosure property) that is
held primarily for sale to customers in the ordinary course of a trade or
business. All inventory required in the operation of the Hotels will be
purchased by the Lessee or its designee as required by the terms of the
Percentage Leases. Accordingly, the Company and the Partnership believe that no
asset owned by the Company or the Partnership is held for sale to customers and
that a sale of any such asset will not be in the ordinary course of business of
the Company or the Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to the particular property. Nevertheless, the Company and the Partnership will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company or
the Partnership can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."

The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real property)
and any personal property incident to such real property (i) that is acquired by
a REIT as the result of such REIT having bid on such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness that such property secured and (ii)
for which such REIT makes a proper election to treat such property as
foreclosure property. However, a REIT will not be considered to have foreclosed
on a property where such REIT takes control of the property as a mortgagee-in-
possession and cannot receive any profit or sustain any loss except as a
creditor of the mortgagor. Under the Code, property generally ceases to be
foreclosure property as of the close of the third taxable year following the
taxable year in which the REIT acquired such property (or longer if an extension
is granted by the Secretary of the Treasury). The foregoing grace period is
terminated and foreclosure property ceases to be foreclosure property on the
first day (i) on which a lease is entered into with respect to such property
that, by its terms, will give rise to income that does not qualify under the 75%
gross income test or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise to
income that does not qualify under the 75% gross income test, (ii) on which any
construction takes place on such property (other than completion of a building,
or any other improvement, where more than 10% of the construction of such
building or other improvement was completed before default became imminent) or
(iii) which is more than 90 days after the day on which such property was
acquired by the REIT and the property is used in a trade or business that is
conducted by the REIT (other than through an independent contractor from whom
the REIT itself does not derive or receive any income). As a result of the rules
with respect to foreclosure property, if the Lessee defaults on its obligations
under a Percentage Lease for a Hotel, the Company terminates the Lessee's
leasehold interest, and the Company is unable to find a replacement lessee for
such Hotel within 90 days of such foreclosure, gross income from hotel
operations conducted by the Company from such Hotel would cease to qualify for
the 75% and 95% gross income tests. In such event, the Company likely would be
unable to satisfy the 75% and 95% gross income tests and, thus, would fail to
qualify as a REIT.

It is possible that, from time to time, the Company or the Partnership will
enter into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of

60
<PAGE> 62

forms, including interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts and options. To the extent that the
Company or the Partnership enters into an interest rate swap or cap contract to
hedge any interest rate risk with respect to indebtedness incurred to acquire or
carry real estate assets, any periodic income or gain from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test. To the extent that the Company or the Partnership hedges with other types
of financial instruments or in other situations, it may not be entirely clear
how the income from those transactions will be treated for purposes of the
various income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as REIT.

If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions will be generally available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "-- Taxation of the Company," even if those relief provisions
apply, a tax would be imposed with respect to the net income attributable to the
excess of 75% or 95% of the Company's gross income over its qualifying income in
the relevant category, whichever is greater.

ASSET TESTS

The Company, at the close of each quarter of its tax year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets" and, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the mortgage balance does
not exceed the value of the associated real property, and shares of other REITs.
For purposes of the 75% asset requirement, the term "interest in real property"
includes an interest in land and improvements thereon, such as buildings or
other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold in real property and an
option to acquire real property (or a leasehold in real property). Second, of
the investments not included in the 75% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its ownership interest in the
Partnership and Subsidiary Partnership or the stock of a subsidiary with respect
to which it has held 100% of the stock at all times during the subsidiary's
existence).

For purposes of the asset requirements, the Company will be deemed to own
its proportionate share of the assets of the Partnership (and any Subsidiary
Partnership), rather than its general partnership interest in the Partnership.
The Company represents that, at all relevant times, (i) at least 75% of the
value of its total assets will be represented by real estate assets, cash and
cash items (including receivables), and government securities and (ii) it will
not own any securities that do not satisfy the 75% asset requirement (except for
the stock of subsidiaries with respect to which it has held 100% of the stock at
all times during the subsidiary's existence). In addition, the Company
represents that it will not acquire or dispose, or cause the Partnership to
acquire or dispose, of assets in a way that would cause it to violate either
asset requirement. The Company believes that it satisfies both asset
requirements for REIT status.

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

61
<PAGE> 63

DISTRIBUTION REQUIREMENTS

The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and (B)
95% of the net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of noncash income. Such dividends must be paid in the
tax year to which they relate, or in the following tax year if declared before
the Company timely files its tax return for such year and if paid on or before
the first regular dividend payment after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gains corporate
tax rates (in the case of capital gains taxes paid by the Company, each
shareholder shall be entitled to claim a tax credit based on the amount of such
taxes. See "Taxation of Taxable Domestic Stockholders"). Furthermore, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed. The
Company has made, and intends to continue to make, timely distributions
sufficient to satisfy all annual distribution requirements.

It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, under the
Percentage Leases, the Lessee may defer payment of the excess of the Percentage
Rent over the Base Rent for a period of up to 90 days after the end of the
calendar year in which such payment was due. In that case, the Partnership still
would be required to recognize as income the excess of the Percentage Rent over
the Base Rent in the calendar quarter to which it relates. Further, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property which exceeds its
allocable share of cash attributable to that sale. Therefore, the Company may
have less cash available for distribution than is necessary to meet its annual
distribution requirements to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of additional shares of common or
preferred stock.

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

RECORDKEEPING REQUIREMENT

Pursuant to applicable Treasury Regulations, in order to elect to be taxed
as a REIT, the Company must maintain certain records and request on an annual
basis certain information from its stockholders designed to disclose the actual
ownership of its outstanding stock. The Company intends to comply with such
requirements.

PARTNERSHIP ANTI-ABUSE RULE

The Treasury Department has issued a final regulation ("Anti-Abuse Rule"),
under the partnership provisions of the Code ("Partnership Provisions"), that
would authorize the Service, in certain abusive transactions involving
partnerships, to disregard the form of the transaction and recast it for federal
tax purposes as the Service deems appropriate. The Anti-Abuse Rule would apply
where a partnership is formed or availed of in connection with a transaction (or
series of related transactions), a principal purpose of which is to reduce
substantially the present value of the partners' aggregate federal tax liability
in a manner inconsistent with the intent of the Partnership Provisions. The
Anti-Abuse Rule states that the Partnership Provisions are intended to permit
taxpayers to conduct joint business (including investment) activities through a
flexible economic arrangement that accurately reflects the partners' economic
agreement and clearly reflects the partners' income

62
<PAGE> 64

without incurring an entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions. The Anti-Abuse Rule is generally
effective for all transactions relating to a partnership occurring on and after
May 12, 1994.

The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partner interest. The
limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. The
Company believes that the Anti-Abuse Rule will not have any adverse impact on
its ability to qualify as a REIT. However, because the Anti-Abuse Rule is
extraordinarily broad in scope and is applied based on an analysis of all of the
facts and circumstances, there can be no assurance that the Service will not
attempt to apply the Anti-Abuse Rule to the Company. If the conditions of the
Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Partnership for federal tax
purposes or treating one or more of its partners as nonpartners. Any such action
potentially could jeopardize the Company's status as a REIT.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Dividends to the stockholders in any year in which the
Company fails to qualify would not be deductible by the Company, nor would they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all dividends to stockholders would be taxable as ordinary
income and, subject to certain limitations of the Code, corporate distributees
may be eligible for the dividends received deduction. Unless entitled to relief
under specific statutory provisions, the Company also would be disqualified from
taxation as a REIT for the four taxable years following the year during which
the Company ceased to qualify as a REIT. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief. In
addition, President Clinton's 1999 Federal Budget Proposal contains a provision
which, if enacted in its present form, would result in the immediate taxation of
all gain inherent in a C corporation's assets upon an election by the
corporation to become a REIT in taxable years beginning after January 1, 1999,
and thus could effectively preclude the Company from re-electing to be taxed as
a REIT following a loss of REIT status.

TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS

Provided the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. stockholders as ordinary income and will not be eligible
for the dividends received deduction for corporations. Each year the Company
will designate a certain amount of income as capital gains. Such amount will be
taxed as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held its Common Stock and will be subject to a credit
if it is not currently distributed to such stockholder. Corporate stockholders,
however, may be required to treat up to 20% of certain capital gain dividends as
ordinary income. Distributions in excess of current and accumulated earnings and
profits will not be taxable to a stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's stock, but rather such
distributions will reduce the adjusted basis of such stock. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a stockholder's stock, they will be included in income as
long-term capital gain (or short-term capital gain if the shares have been held
for one year or less or mid-term capital gain if the shares have

63
<PAGE> 65

been held for more than one year but less than 18 months). Any dividend
distribution declared by the Company in October, November, or December of any
year payable to a stockholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the stockholder on
December 31 of such year, provided that the dividend distribution is actually
paid by the Company during January of the following calendar year. Stockholders
may not include in their individual income tax returns any net operating losses
or capital losses of the Company.

The Company is permitted under the Code to elect to retain and pay income
tax on its net capital gain for any taxable year. Under the Taxpayer Relief Act
of 1997 (the "1997 Act"), however, if the Company so elects, a stockholder must
include in income such stockholder's proportionate share of the Company's
undistributed capital gain for the taxable year, and will be deemed to have paid
such stockholder's proportionate share of the income tax paid by the Company
with respect to such undistributed capital gain. Such tax would be credited
against the stockholder's tax liability and subject to normal refund procedures.
In addition, each stockholder's basis in its shares of Common Stock would be
increased by the amount of undistributed capital gain (less the tax paid by the
Company) included in the stockholder's income.

The 1997 Act and the IRS Restructuring and Reform Act of 1998 (the "1998
Act") also alter the taxation of capital gain income for individuals (and for
certain trusts and estates). Gain from the sale or exchange of certain
investments held for more than 12 months will be taxed at a maximum capital gain
rate of 20% if such sale or exchange occurred either (i) after May 6, 1997 and
before July 29, 1997, or (ii) in tax years ending after December 31, 1997. Gain
from the sale or exchange of such investments held for 18 months or less, but
for more than one year, will be taxed at a maximum capital gain rate of 28% if
such sale or exchange occurred either (i) before May 7, 1997, or (ii) after July
28, 1997 and before January 1, 1998. The 1997 Act also provides a maximum rate
of 25% for "unrecaptured section 1250 gain" recognized on the sale or exchange
of certain real estate assets, introduces special rules for "qualified 5-year
gain," and makes certain other changes to prior law. On November 10, 1997, the
Service issued Notice 97-64, which provides generally that the Company may
classify portions of its designated capital gain dividend as (i) a 20% rate gain
distribution (which would be taxed as capital gain in the 20% group), (ii) an
unrecaptured Section 1250 gain distribution (which would be taxed as capital
gain in the 25% group), or (iii) a 28% rate gain distribution (which would be
taxed as capital gain in the 28% group). If no designation is made, the entire
designated capital gain dividend will be treated as a 28% rate capital gain
distribution. Notice 97-64 provides that a REIT must determine the maximum
amounts that it may designate as 20% and 25% rate capital gain dividends by
performing the computation required by the Code as if the REIT were an
individual whose ordinary income was subject to a marginal tax rate of at least
28%.

In general, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such Common Stock for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions from the Company required to be treated by
that stockholder as long-term capital gain.

BACKUP WITHHOLDING

The Company will report to its U.S. stockholders and the Service the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
the holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that 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 stockholder's income tax liability.

OTHER TAX CONSEQUENCES

The 1997 Act modifies many of the provisions relating to the requirements
for qualification as, and the taxation of, a REIT. Among other things, the 1997
Act (i) replaces the rule that disqualifies a REIT for any year

64
<PAGE> 66

in which the REIT fails to comply with Treasury Department regulations that are
intended to enable a REIT to ascertain its ownership, with an intermediate
penalty for failing to do so; (ii) permits a REIT to render a de minimis amount
of impermissible services to tenants, or in connection with the management or
operation of property, and still treat amounts received with respect to that
property as rents from real property; (iii) permits a REIT to elect to retain
and pay income tax on net long-term capital gains; (iv) repeals a rule that
required that less than 30% of a REIT's gross income be derived from gain from
the sale or other disposition of stock or securities held for less than one
year, certain real property held for less than four years, and property that is
sold or disposed of in a prohibited transaction; (v) lengthens the original
grace period for foreclosure property from two years after the REIT acquired the
property to a period ending on the last day of the third full taxable year
following the tax year in which the property was acquired; (vi) treats income
from all hedges that reduce the interest rate risk of REIT liabilities, not just
interest rate swaps and caps, as qualifying income under the 95% gross income
test; and (vii) permits any corporation wholly-owned by a REIT to be treated as
a qualified subsidiary, regardless of whether the corporation has always been
owned by a REIT. The changes are effective for taxable years beginning after
August 5, 1997. Thus, these changes will apply to the operation of the Company.

The Clinton Administration proposals would also eliminate the ability of an
existing C corporation which elects REIT status to defer recognition of built-in
gain on assets until such assets are disposed of during a 10 year period (under
current law, thereafter no gain is recognized). The proposal would limit the
availability of that built-in gain deferral provision to small C corporations
(i.e., corporations the value of whose stock is $5,000,000 or less). This
proposal, if enacted, could adversely affect the ability of the Company to
acquire substantially all of the assets of existing C corporations and thus
potentially limit the Company's growth. No prediction can be made as to the
likelihood of passage into law of the administration's REIT proposals or as to
the effective date of any changes.

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

The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above.

CONSEQUENTLY, PROSPECTIVE HOLDERS OF COMMON STOCK SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT
IN THE COMPANY.

TAX ASPECTS OF THE PARTNERSHIP

The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Partnership. The
partnerships in which the Partnership has made an investment are collectively
referred to herein as the "Subsidiary Partnerships." The discussion does not
cover state or local tax laws or any federal tax laws other than income tax
laws.

CLASSIFICATION AS A PARTNERSHIP

The Company is entitled to include in its income its distributive share of
the Partnership's income (including the Partnership's distributive share of
income of a Subsidiary Partnership) and to deduct its distributive share of the
Partnership's losses (including the Partnership's distributive share of losses
of a Subsidiary Partnership) only if the Partnership (and each Subsidiary
Partnership) is classified for federal income tax purposes as a partnership

65
<PAGE> 67

rather than as an association taxable as a corporation. An organization formed
as a partnership will be treated as a partnership if it (i) is organized under
state law as a partnership and (ii) is not a "publicly traded" partnership. The
Partnership is organized under Delaware limited partnership law. A publicly
traded partnership is a partnership whose interests are traded on an established
securities market or are readily tradable on a secondary market (or the
substantial equivalent thereof). A publicly traded partnership will not,
however, be treated as a corporation for any taxable year if 90% or more of the
partnership's gross income for such year consists of certain passive-type
income, including real property rents, gains from the sale or other disposition
of real property, interest, and dividends. Whether, for any particular period,
the Partnership or a Subsidiary Partnership will satisfy this passive income
exception will depend upon the facts and circumstances applicable to the
Partnership or the Subsidiary Partnership for such period.

The Service has issued Notice 88-75, providing limited safe harbors from
the definition of a publicly traded partnership in advance of the issuance of
Treasury Regulations. Pursuant to one of those safe harbors (the "Private
Placement Exclusion"), interests in a partnership will not be treated as readily
tradeable on a secondary market or the substantial equivalent thereof if (i) all
of the partnership interests are issued in a transaction that is not registered
under the Securities Act of 1933, as amended, and (ii) the partnership does not
have more than 500 partners (taking into account as a partner each person who
indirectly owns an interest in the partnership through a partnership, grantor
trust, or S corporation). The Partnership and each Subsidiary Partnership
satisfies the Private Placement Exclusion.

The Treasury Department recently issued regulations ("PTP Regulations")
that limit the Private Placement Exclusion to partnerships that have no more
than 100 partners at any time during the taxable year. The Partnership and the
Subsidiary Partnerships do not have more than 100 partners (taking into account
indirect ownership of such partnerships through partnerships, grantor trusts,
and S corporations). Thus, the Partnership and each Subsidiary Partnership
should satisfy the Private Placement Exclusion, as modified by the PTP
Regulations. If, however, the Partnership or any Subsidiary Partnership were
treated as publicly traded and the 90% passive income exception did not apply,
the Company would not be able to satisfy the income and assets requirements for
REIT status.

The Company believes that the Partnership and each Subsidiary Partnership
is properly treated as a partnership for federal income tax purposes and is not
an association taxable as a corporation. The Partnership has not requested, and
does not intend to request, a ruling from the Service that it or any of the
Subsidiary Partnership will be classified as a partnership for federal income
tax purposes.

EFFECT OF FAILURE TO QUALIFY AS A PARTNERSHIP

If for any reason the Partnership or a Subsidiary Partnership were taxable
as a corporation, rather than as a partnership, for federal income tax purposes,
the Company would not be able to satisfy the income and asset requirements for
REIT status. See "FEDERAL INCOME TAX CONSIDERATIONS -- Income Tests" and
"FEDERAL INCOME TAX CONSIDERATIONS -- Asset Tests." In addition, any change in
the Partnership's or a Subsidiary Partnership's status for tax purposes might be
treated as a taxable event, in which case the Company might incur a tax
liability without any related cash distribution. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Distribution Requirements." Further, items of income and
deduction of the Partnership and the Subsidiary Partnerships would not pass
through to its partners, and its partners would be treated as stockholders for
tax purposes. Consequently, the Partnership or a Subsidiary Partnership would be
required to pay income tax at corporate tax rates on its net income, and
distributions to its partners would constitute distributions that would not be
deductible in computing the Partnership's or a Subsidiary Partnership's taxable
income.

INCOME TAXATION OF THE PARTNERSHIP, THE SUBSIDIARY PARTNERSHIPS AND THEIR
PARTNERS

Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of the Partnership's income, gains,
losses, deductions, and credits for any taxable year of the Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution of the

66
<PAGE> 68

Partnership. Such items will include the Partnership's available share of
income, gain, loss, deductions and credits of the Subsidiary Partnerships.

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

Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department recently
issued regulations requiring partnerships to use a "reasonable method" for
allocating items affected by Section 704(c) of the Code and outlining certain
reasonable allocation methods.

The Partnership intends to use the "traditional method" of allocation under
Section 704(c) of the Code. The traditional method is the least favorable method
from the Company's perspective because of certain technical limitations. Under
the traditional method, depreciation with respect to a contributed property for
which there is a Book-Tax Difference first will be allocated to the Company and
other partners who did not have an interest in such property until they have
been allocated an amount of depreciation equal to what they would have been
allocated if the Partnership had purchased such property for its fair market
value at the time of contribution. In addition, if such a property is sold, gain
equal to the Book-Tax Difference at the time of sale will be specially allocated
to the partner who contributed the property. These allocations will tend to
eliminate the Book-Tax Differences with respect to the contributed Hotels over
the life of the Partnership. However, they may not always entirely eliminate the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. This could cause the Company (i) to be allocated
lower amounts of depreciation deductions for tax purposes than would be
allocated to the Company if each of the Hotels were to have a tax basis equal to
its fair market value at the time of contribution and (ii) to be allocated lower
amounts of taxable loss in the event of a sale of such contributed interests in
the Hotels at a book loss than the economic or book loss allocated to the
Company as a result of such sale, with a corresponding benefit to the other
partners in the Partnership. These allocations might adversely affect the
Company's ability to comply with REIT distribution requirements, although the
Company does not anticipate that this will occur. These allocations may also
affect the earnings and profits of the Company for purposes of determining the
portion of distributions taxable as dividend income. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Taxation of Taxable Domestic Stockholders". The application of
these rules over time may result in a higher portion of distributions being
taxed as dividends than would have occurred had the Company purchased its
interests in the Hotels at their agreed values.

Under the Partnership Agreement, depreciation or amortization deductions of
the Partnership generally will be allocated among the Partners in accordance
with their respective interests in the Partnership, except to the extent that
Section 704(c) of the Code requires that the Company receive a
disproportionately large share of such deductions. In addition, gain on sale of
a Hotel will be specially allocated to the Limited Partners to the extent of any
built-in gain with respect to such Hotel for federal income tax purposes. The
application of Section 704(c) of the Code to the Partnership is not entirely
clear, however, and may be affected by Treasury Regulations promulgated in the
future. Similar provisions are included in the partnership agreements of the
Subsidiary Partnerships.

67
<PAGE> 69

Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally (i) equals the amount of cash
and the basis of any other property contributed to the Partnership by the
Company, (ii) is increased by (A) its allocable share of the Partnership's
income and (B) its allocable share of indebtedness of the Partnership and (iii)
is reduced, but not below zero, by the Company's allocable share of (A) the
Partnership's loss and (B) the amount of cash distributed to the Company and by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Partnership. Similar rules apply to the Partnership's tax
basis in the Subsidiary Partnerships.

If the allocation of the Company's distributive share of the Partnership's
loss would reduce the adjusted tax basis of the Company's partnership interest
in the Partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce the Company's
adjusted tax basis below zero. To the extent that the Partnership's
distributions, or any decrease in the Company's share of the indebtedness of the
Partnership (such decrease being considered a constructive cash distribution to
the Partners), would reduce the Company's adjusted tax basis below zero, such
distributions (including such constructive distributions) constitute taxable
income to the Company. Such distributions and constructive distributions
normally will be characterized as capital gain, and, if the Company's
partnership interest in the Partnership has been held for longer than the
long-term capital gain holding periods, the distributions and constructive
distributions will be subject to favorable capital gains tax rates. See "FEDERAL
INCOME TAX CONSIDERATIONS -- Taxation of Taxable Domestic Stockholders".

Depreciation Deductions Available to the Partnership. Immediately after
the acquisition of the Initial Hotels, the Company made a cash contribution to
the Partnership in exchange for a general partner interest in the Partnership.
The Partnership's initial basis in the Initial Hotels for federal income tax
purposes generally is a carryover of the basis of the previous ownership
entities in the Initial Hotels on the date of such merger. Although the law is
not entirely clear, the Partnership has depreciated such depreciable hotel
property for federal income tax purposes under the same methods used by the
transferors. The Partnership's tax depreciation deductions will be allocated
among the Partners in accordance with their respective interests in the
Partnership, except to the extent that Section 704(c) of the Code requires that
the Company receive a disproportionately large share of such deductions. The
Partnership plans to depreciate, for federal income tax purposes, any
depreciable hotel property which it may acquire for cash in the future under
either the modified accelerated cost recovery system of depreciation ("MACRS")
or the alternative depreciation system of depreciation ("ADS"). The Partnership
plans to use MACRS for subsequently acquired furnishings and equipment. Under
MACRS, the Partnership generally will depreciate such furnishings and equipment
over a seven-year recovery period using a 200% declining balance method and a
half-year convention. If, however, the Partnership places more than 40% of its
furnishings and equipment in service during the last three months of a taxable
year, a mid-quarter depreciation convention must be used for the furnishings and
equipment placed in service during that year. The Partnership plans to use ADS
for the depreciation of subsequently acquired buildings and improvements. Under
ADS, the Partnership generally will depreciate such buildings and improvements
over a 40-year recovery period using a straight line method and a mid-month
convention.

To the extent that the Partnership acquires additional hotels in exchange
for Partnership units, the Partnership's initial basis in each such hotel, for
federal income tax purposes, should be the same as the transferor's basis in
that hotel on the date of acquisition.

SALE OF THE PARTNERSHIP'S PROPERTY

Generally, any gain realized by the Partnership or the Subsidiary
Partnerships on the sale of property held for more than the applicable holding
period will be subject to favorable capital gains tax rates (See "FEDERAL INCOME
TAX CONSIDERATIONS-- Taxation of Taxable Domestic Stockholders"), except for any
portion of such gain that is treated as depreciation or cost recovery recapture.
Any gain recognized by the Partnership on the disposition of the Initial Hotels
will be allocated first to the Limited Partners under Section 704(c) of the Code
to the extent of their built-in gain on those Hotels. The Limited Partners'
built-in gain on the Initial Hotels sold will equal the excess of the Limited
Partners' proportionate share of the book value of those Initial Hotels over the
Limited Partners' tax basis allocable to those Initial Hotels at the time of
sale. Any remaining gain recognized by the Partnership on the disposition of the
Initial Hotels will be allocated among the Partners in accordance with

68
<PAGE> 70

their respective percentage interests in the Partnership. The Board of Trustees
has adopted a policy requiring that any decision to sell the Initial Hotels will
be made by a vote of a majority of the independent Trustees.

The Company's share of any gain realized by the Partnership or a Subsidiary
Partnership on the sale of any property held as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's or a
Subsidiary Partnership's trade or business, however, will be treated as income
from a prohibited transaction that is subject to a 100% penalty tax. Such
prohibited transaction income also may have an adverse effect upon the Company's
ability to satisfy the income test for REIT status. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Income Tests" above.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission ("SEC") a
Registration Statement on Form S-2 ("Registration Statement") under the
Securities Act with respect to the Shares. This Prospectus, which constitutes
part of the Registration Statement, omits certain of the information contained
in the Registration Statement and the exhibits thereto on file with the SEC
pursuant to the Securities Act and the rules and regulations of the SEC
thereunder. The Registration Statement, including the exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the SEC's Regional Offices at 7 World Trade
Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center,
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be
obtained by mail at the prescribed rates from the Public Reference Room of the
SEC at its principal office in Washington, D.C. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.

The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and proxy statements and other
information with the SEC. Such reports, proxy statements and other information
can be inspected and copied at the locations described above. Copies of such
materials can be obtained by mail from the Public Reference Room of the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
Information regarding the Public Reference Room may be obtained by calling the
SEC at 1-800-SEC-0300. In addition, certain of such materials can be inspected
at the New York Stock Exchange, Inc., 20 Broad Street, New York, New York.
Further, the SEC maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission, including the Company. The address of such
Web site is http://www.sec.gov.

No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in this
Prospectus, in connection with the offering of Shares described herein and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Selling Stockholder. This
Prospectus does not constitute an offer to sell, or the solicitation of an offer
to buy, nor shall there be any sale of the Shares by any person in any
jurisdiction in which it is unlawful for such person to make such offer,
solicitation or sale. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that the
information contained herein is correct as of any time subsequent to the date
hereof.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which have been previously filed by the Company
with the SEC under the Exchange Act (File No. 1-7062), are incorporated herein
by reference:

1. Annual Report on Form 10-K for the year ended January 31, 1998,
filed on May 18, 1998;

2. Quarterly Report on Form 10-Q/A for the quarter ended April 30,
1998, filed on June 24, 1998;

3. Current Report on Form 8-K dated February 17, 1998, as amended by
Form 8-K/A filed on April 20, 1998;

69
<PAGE> 71

4. Current Report on Form 8-K dated March 16, 1998, as amended by Form
8-K/A filed on May 15, 1998, as further amended by Form 8-K/A filed on June
30, 1998;

5. Current Report on Form 8-K dated May 14, 1998, as amended by Form
8-K/A filed on May 27, 1998;

6. Current Report on Form 8-K dated June 24, 1998; and

7. Current Report on Form 8-K dated September 2, 1998.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Shares made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents.

Any statement contained herein, or in any document incorporated or deemed
to be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that also is or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

The Company will provide, without charge, to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, on the written
or oral request of any such person, a copy of any or all of the documents
incorporated herein by reference, except the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to the Company at 1750 Huntington
Building, 925 Euclid Avenue, Cleveland, Ohio 44115, Attention: Investor
Relations; (216) 622-0046.

FORWARD-LOOKING STATEMENTS

Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. The Company intends that such forward-looking
statements be subject to the safe harbors created by such Acts. Those
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company, its Trustees or its officers in respect of
(i) the declaration or payment of dividends; (ii) the leasing, management or
operation of the Hotels; (iii) the adequacy of reserves for renovation and
refurbishment; (iv) the Company's financing plans; (v) the Company's position
regarding investments, acquisitions, financings, conflicts of interest and other
matters; (vi) the Company's continued qualification as a REIT; and (vii) trends
affecting the Company's or any Hotel's financial condition or results of
operations. The words and phrases "looking ahead", "we are confident", "should
be", "will be", "predicted", "believe", "expect", "anticipate" and similar
expressions identify forward-looking statements.

These forward-looking statements reflect the Company's current views in
respect of future events and financial performance, but are subject to many
uncertainties and factors relating to the operations and business environment of
the Hotels which may cause the actual results of the Company to differ
materially from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties include, but are not limited to:
fluctuations in hotel occupancy rates; changes in room rental rates which may be
charged by the Lessee in response to market rental rate changes or otherwise;
interest rate fluctuations; changes in Federal income tax laws and regulations;
competition; any changes in the Company's financial condition or operating
results due to acquisitions or dispositions of hotel properties; real estate and
hospitality market conditions; and local or national economic and business
conditions, including, without limitation, conditions which may affect public
securities markets generally, the hospitality industry, or the markets in which
the Company operates or will operate. The Company undertakes no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of
the Exchange Act, the qualifications set forth hereinabove are inapplicable to
any forward-looking statements in this Prospectus relating to the operations of
the Partnership.

70
<PAGE> 72

LEGAL MATTERS

The validity of the Shares will be passed upon for the Company by Thompson
Hine & Flory LLP, Cleveland, Ohio. In addition, the description of federal
income tax consequences contained in the Prospectus under the caption "FEDERAL
INCOME TAX CONSIDERATIONS" is based upon the opinion of Thompson Hine & Flory
LLP.

EXPERTS

The audited Consolidated Financial Statements and schedule of Realty ReFund
Trust included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein upon the authority of said firm as experts in giving said
reports.

The audited Combined Financial Statements of InnSuites Hotels System
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Michael Maastricht, C.P.A., independent public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein upon the authority of said firm as experts in giving said
reports.

Any financial statements and schedules hereafter filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act and
incorporated by reference in the registration statement, of which this
Prospectus is a part, that have been examined and are the subject of a report by
independent accountants will be so incorporated by reference in reliance upon
such reports given and upon the authority of such firms as experts in accounting
and auditing to the extent covered by consents filed with the SEC.

71
<PAGE> 73

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To InnSuites Innternational Hotels, Inc.:

We have audited the accompanying combined balance sheets of the InnSuites
Hotels System as defined in Note 1 to the combined financial statements, as of
December 31, 1996 and 1997 and January 30, 1998, and the related combined
statements of operations, equity and cash flows for each of the three years in
the period ended December 31, 1997 and the thirty days ended January 30, 1998.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of the InnSuites
Hotels System as of December 31, 1996 and 1997 and January 30, 1998, and the
combined results of their operations, equity, and cash flows for each of the
three years in the period ended December 31, 1997 and the thirty days ended
January 30, 1998, in conformity with generally accepted accounting principles.

MICHAEL MAASTRICHT, CPA

February 19, 1998

Phoenix, Arizona

F-1
<PAGE> 74

INNSUITES HOTELS

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JANUARY 30,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES, at cost:
Land.............................................. $ 3,439,738 $ 3,439,738 $ 3,439,738
Buildings and improvements........................ 24,831,670 24,831,670 24,831,670
Furniture and equipment........................... 9,175,834 10,845,586 10,958,829
----------- ----------- -----------
37,447,242 39,116,994 39,230,237
Less- Accumulated depreciation.................... 10,958,581 12,184,479 12,322,787
----------- ----------- -----------
Net investment in hotel properties................ 26,488,661 26,932,515 26,907,450
CASH AND CASH EQUIVALENTS........................... 628,797 129,871 322,095
ACCOUNTS RECEIVABLE................................. 344,882 571,301 591,869
INVENTORIES......................................... 347,252 415,575 397,807
OTHER ASSETS........................................ 638,265 295,440 121,691
CASH HELD IN ESCROW................................. 253,056 296,099 297,811
DEFERRED EXPENSES, net.............................. 513,610 252,430 248,227
----------- ----------- -----------
$29,214,523 $28,893,231 $28,886,950
=========== =========== ===========

LIABILITIES AND COMBINED EQUITY
MORTGAGE NOTES PAYABLE.............................. $16,405,945 $17,776,627 $17,709,589
ACCOUNTS PAYABLE:
Trade............................................. 357,089 678,637 621,073
Affiliates........................................ 582,145 1,260,601 1,699,601
Bank overdrafts................................... 149,372 121,052 409,196
PARTNERS' CAPITAL PURCHASES PAYABLE................. -- 275,366 218,063
LINES OF CREDIT..................................... 100,000 131,000 155,000
CAPITAL LEASE OBLIGATION............................ 71,707 22,437 20,226
LAND LEASE PAYABLE.................................. 75,842 80,441 88,286
ACCRUED EXPENSES AND OTHER LIABILITIES.............. 418,596 867,267 1,622,317
PARTICIPATION INVESTORS CONTINGENT LIABILITY........ 2,646,627 2,646,627 2,646,627
----------- ----------- -----------
20,807,323 23,860,055 25,189,978
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY:
General Partners'................................. 56,032 (43,823) (113,338)
Limited Partners'................................. 8,049,434 7,337,403 6,276,374
Corporate......................................... 301,734 (2,260,404) (2,466,064)
----------- ----------- -----------
8,407,200 5,033,176 3,696,972
----------- ----------- -----------
$29,214,523 $28,893,231 $28,886,950
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-2
<PAGE> 75

INNSUITES HOTELS

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 30,
1995 1996 1997 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES FROM HOTEL OPERATIONS:
Room revenue......................... $15,366,788 $17,613,618 $18,800,566 $1,833,441
Food and beverage revenue............ 130,708 197,064 519,440 61,623
Other revenue........................ 445,761 513,143 591,135 60,999
----------- ----------- ----------- ----------
Total revenues....................... 15,943,257 18,323,825 19,911,141 1,956,063
EXPENSES:
Departmental expenses:
Rooms............................. 4,193,048 4,629,652 4,915,019 667,892
Food and beverage................. 349,981 487,367 921,514 84,590
General and administrative........... 3,134,257 3,500,161 4,470,820 1,393,290
Advertising and promotion............ 706,372 724,887 870,732 76,619
Utilities............................ 765,721 894,121 933,994 90,416
Repairs and maintenance.............. 1,938,523 2,621,472 2,473,074 233,804
Real estate, personal property taxes,
and insurance..................... 656,544 876,816 911,870 79,518
Interest expense..................... 1,990,762 1,569,850 1,853,800 137,580
Depreciation......................... 1,058,931 1,147,326 1,225,898 110,155
Other -- land lease.................. -- -- -- 13,678
----------- ----------- ----------- ----------
Total expenses....................... 14,794,139 16,451,652 18,576,721 2,887,542
Income before extraordinary items...... 1,149,118 1,872,173 1,334,420 (931,479)
EXTRAORDINARY ITEMS
Gain on early extinguishment of
debt.............................. 6,465,305 307,000 -- --
----------- ----------- ----------- ----------
NET INCOME............................. $ 7,614,423 $ 2,179,173 $ 1,334,420 $ (931,479)
=========== =========== =========== ==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-3
<PAGE> 76

INNSUITES HOTELS

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 30,
1995 1996 1997 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................ $ 7,614,424 $ 2,179,173 $ 1,334,420 $(931,479)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization...... 1,084,325 1,175,804 1,264,424 114,361
Gain on early extinguishment of
debt............................. (6,465,305) (307,000) -- --
(Increase) decrease in:
Accounts receivable................ (113) 56,431 (226,419) (20,568)
Inventories........................ (53,014) (17,610) (68,323) 17,768
Cash held in escrow................ -- -- (30,039) (1,712)
Other assets....................... (376,921) (231,090) 581,474 173,749
Increase (decrease) in:
Accounts payable................... (191,596) 38,764 321,975 (57,564)
Bank overdraft..................... -- -- -- 288,144
Accrued expenses................... 496,240 (251,944) 737,618 791,045
----------- ----------- ----------- ---------
Net cash provided by operating
activities....................... 2,108,040 2,642,528 3,915,130 373,744
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures,
and equipment.................... (406,289) (753,741) (281,998) (113,243)
Acquisition of land, building and
equipment........................ -- (1,250,000) (79,707) --
Guest room remodeling.............. -- -- (565,471) --
Capitalization of partners'
capital.......................... -- -- (742,576) --
----------- ----------- ----------- ---------
Net cash used by investing
activities....................... (406,289) (2,003,741) (1,669,752) (113,243)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of mortgage notes
payable.......................... (2,185,926) (1,612,687) (636,524) (60,147)
Refinancing of mortgage notes
payable.......................... -- -- (5,017,226) --
Increase in loans from
affiliates....................... (91,500) 587,853 (115,000) 439,000
Increase in loans to affiliates.... -- (87,500) 793,456 --
Increase of mortgage notes
payable.......................... -- 990,000 7,000,000 --
Increase in bank overdrafts........ -- -- -- --
Partners' contributions............ 266,000 -- -- --
Purchases of partners' capital..... -- -- 157,907 (57,303)
Distributions...................... (120,000) (969,375) (4,866,351) --
Distribution of REIT shares........ -- -- -- (404,725)
Lines of credit.................... -- -- (6,728) 24,000
Loan fees.......................... (139,279) (251,711) (29,000) --
Other.............................. 275,584 (31,715) -- --
Capital lease obligations.......... 103,742 (24,838) (9,102)
Capitalization of common stock..... -- 200,000 -- --
----------- ----------- ----------- ---------
Net cash (used) by financing
activities....................... (1,891,379) (1,175,135) (2,744,304) (68,277)
NET CHANGE IN CASH AND CASH
EQUIVALENTS........................... (189,628) (536,348) (498,926) 192,224
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 1,354,773 1,165,145 628,797 129,871
----------- ----------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 1,165,145 $ 628,797 $ 129,871 $ 322,095
=========== =========== =========== =========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-4
<PAGE> 77

INNSUITES HOTELS

COMBINED STATEMENTS OF EQUITY

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS' PARTNERS' COMMON RETAINED COMBINED
CAPITAL CAPITAL STOCK(1) EARNINGS EQUITY
--------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.... $ (2,525) $6,766,832 $ 5,000 $ 58,095 $ 6,827,402
NET INCOME.................... 107,025 2,033,509 -- 38,639 2,179,173
CONTRIBUTIONS................. -- 170,000 -- -- 170,000
ISSUANCE OF COMMON STOCK...... -- -- 200,000 -- 200,000
DISTRIBUTIONS................. (48,468) (920,907) -- -- (969,375)
--------- ---------- -------- ----------- -----------
BALANCE, December 31, 1996.... 56,032 8,049,434 205,000 96,734 8,407,200
NET INCOME.................... 117,283 1,829,275 -- (612,138) 1,334,420
DISTRIBUTIONS................. (217,138) (2,699,213) -- (1,950,000) (4,866,351)
PARTNERS' CAPITAL PURCHASES... -- 157,907 -- -- 157,907
--------- ---------- -------- ----------- -----------
BALANCE, December 31, 1997.... (43,823) 7,337,403 205,000 (2,465,404) 5,033,176
NET INCOME.................... (46,304) (722,215) -- (162,960) (931,479)
DISTRIBUTIONS................. (23,211) (338,814) -- (42,700) (404,725)
--------- ---------- -------- ----------- -----------
BALANCE, January 30, 1998..... $(113,338) $6,276,374 $205,000 $(2,671,064) $ 3,696,972
========= ========== ======== =========== ===========
</TABLE>

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

(1) Hulsey Hotels Corporation -- Common stock, no par value, 1,000,000 shares
authorized, 1,000,000 issued and outstanding

(1) Buenaventura Properties, Inc. -- Common stock, no par value, 10,000,000
shares authorized, 1,000,000 issued and outstanding

The accompanying notes are an integral part of these combined financial
statements.

F-5
<PAGE> 78

INNSUITES HOTELS SYSTEM

NOTES TO COMBINED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:

The InnSuites Hotels System consists of the following full-service hotels:

<TABLE>
<CAPTION>
NUMBER OF
PROPERTY NAME LOCATION SUITES
- ------------- -------- ---------
<S> <C> <C>
InnSuites Phoenix Best Western ("Phoenix")............ Phoenix, Arizona 123
InnSuites Tempe/Airport ("Tempe")..................... Tempe, Arizona 170
InnSuites Tucson Best Western ("Tucson").............. Tucson, Arizona 159
InnSuites Yuma Best Western ("Yuma").................. Yuma, Arizona 166
Holiday Inn Airport InnSuites Ontario ("Ontario")..... Ontario, California 150
InnSuites Flagstaff Grand Canyon ("Flagstaff")........ Flagstaff, Arizona 134
InnSuites Scottsdale ("Scottsdale")................... Scottsdale, Arizona 134
</TABLE>

InnSuites International Hotels, Inc., ("InnSuites") and its affiliates,
officers and employees were involved in the development of each of the above
hotels, except Flagstaff which was purchased January 1, 1996, and have managed
all of the InnSuites Hotels since their respective inceptions. The hotels with
two exceptions, are owned by partnerships ("InnSuites Partnerships") in which
the shareholders of InnSuites and certain officers of InnSuites (collectively,
InnSuites Affiliates) have significant direct and indirect ownership interests.
Flagstaff and Scottsdale are owned by corporations controlled by principals of
InnSuites. The partnerships and corporations are referred to collectively as the
InnSuites System Entities.

As of December 31, 1997, the InnSuites System Entities are owned as
follows:

<TABLE>
<CAPTION>
ENTITY INTEREST
-------------------
INNSUITES THIRD
AFFILIATES PARTY
---------- -----
<S> <C> <C>
InnSuites Phoenix Best Western.............................. 96% 4%
InnSuites Tempe/Airport..................................... 46% 54%
InnSuites Tucson Best Western............................... 28% 72%
InnSuites Yuma Best Western................................. 33% 67%
Holiday Inn Airport InnSuites Ontario....................... 100% 0%
InnSuites Flagstaff Grand Canyon............................ 100% 0%
InnSuites Scottsdale........................................ 100% 0%
</TABLE>

Realty ReFund Trust is an unincorporated Ohio real estate investment trust
("REIT") which agreed to acquire equity interests in existing hotel properties
on January 31, 1998 and to consider selectively the purchase or development of
additional hotels. The REIT acquired the general partnership interest,
representing a 13.6% equity interest in RRF Limited Partnership, a Delaware
limited partnership (the Partnership), as of January 31, 1998. The partners and
shareholders of the entities owning the InnSuites Hotels contributed their
respective partnership and corporate interests to the Partnership, or a
subsidiary of the REIT in exchange for cash, partnership interests or REIT stock
on January 31, 1998. All of the InnSuites Hotels will be leased to Realty Hotel
Lessee Corporation (the InnSuites Lessee) pursuant to operating leases which
contain provisions for rent based on the revenues of the InnSuites Hotels. The
Lessee is an affiliate of InnSuites.

Management believes that these combined financial statements result in a
more meaningful presentation of the InnSuites Hotel System businesses acquired
by the Partnership or REIT and thus appropriately reflect the historical
financial position and results of operations of the predecessor of the Lessee.
All significant intercompany balances and transactions have been eliminated.

F-6
<PAGE> 79

INNSUITES HOTELS SYSTEM

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Accounting Periods

For annual reporting purposes, all of the InnSuites System Entities have
been included in the accompanying combined financial statements based on a
December 31 year-end.

Hotel Properties

Hotel properties are stated at cost. Depreciation is computed using
primarily the straight-line method based upon estimated useful lives, 40 years
for buildings and improvements, 7 years for furniture and equipment.

The partners and management of the InnSuites System Entities review the
hotel properties for impairment when events or changes in circumstances indicate
the carrying amounts of the hotel properties may not be recoverable. When such
conditions exist, management estimates the future cash flows from operations and
disposition of the hotel properties. If the estimated undiscounted future cash
flows from operations and disposition of the hotel properties are less than the
carrying amount of the asset, an adjustment to reduce the carrying amount to the
related hotel property's estimated fair market value would be recorded and an
impairment loss would be recognized. No such impairment losses have been
recognized.

Deferred Expenses

Deferred expenses consist principally of deferred loan costs. Deferred loan
costs are amortized over the terms of the related loan agreements. The
amortization of deferred loan costs of $51,377, $42,187, and $37,925, and $4,203
for the years ended December 31, 1995, 1996, and 1997, and the month ended
January 30, 1998 is included in interest expense in the accompanying combined
statements of operations. Accumulated amortization of deferred expenses was
$385,651 and $258,673 at December 31, 1996 and 1997, respectively, and $262,876
at January 30, 1998.

Concentration of Credit Risk

Financial instruments which potentially subject the InnSuites System
Entities to credit risk consist primarily of trade receivables. Credit
evaluations of guest's accounts are performed regularly. The receivables are
unsecured.

Revenue Recognition

Revenue is recognized as earned. Ongoing credit evaluations are performed
and credit losses are charged off when deemed to be uncollectible. Such losses
have been minimal and within management's expectations.

Income Taxes

The InnSuites Partnerships, Scottsdale and Flagstaff (S-Corporations in
1997) are not subject to federal or state income taxes; however, they must file
informational income tax returns and the partners and stockholders must take
income or loss of the InnSuites Partnerships and S-Corporations into
consideration when filing their respective tax returns. Flagstaff, was a
C-Corporation in 1996, and had no income tax liability for that year.

Management's Use of Estimates in the Preparation of Financial Statements

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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

F-7
<PAGE> 80

INNSUITES HOTELS SYSTEM

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Maintenance and Repairs

Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. The hotel properties have scheduled
guest room refurbishing programs, the cost of which is expensed as incurred.
Upon the sale or disposition of a fixed asset, the asset and related accumulated
depreciation are removed from the accounts, and the gain or loss is included in
the determination of net income or loss.

Advertising and Promotion

The Innsuites System Entities expense the cost of advertising and promotion
as incurred which approximates the time such advertising takes place. There are
no capitalized advertising costs.

Cash and Cash Equivalents

All highly liquid investments with an original maturity date of three
months or less when purchased are considered to be cash equivalents. Management
believes that the fair value of cash equivalents approximates carrying value due
to the relatively short maturity of these instruments.

Inventories

Inventories consisting primarily of linen, food, and beverages and gift
store merchandise are stated at the lower of first-in, first-out cost or market.

Cash Held in Escrow

Cash held in escrow consists of amounts for real estate taxes and property
insurance remitted to the lenders which hold the mortgages on the hotel
properties and amounts deposited for the replacement of hotel real and personal
property pursuant to the terms of certain mortgage and franchise agreements.

F-8
<PAGE> 81

INNSUITES HOTELS SYSTEM

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

3. MORTGAGE NOTES PAYABLE:

Mortgage notes payable consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JANUARY 30,
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $38,436 at
rate of 8.5%; the unpaid principal matures with a
balloon payment due in March 2007; collateralized by
real and personal property having a net book value
of $2,766,938 at December 31,1997. ................. $3,152,590 2,947,434 2,929,875
Mortgage note payable to a bank in aggregate
installments of principal and interest of $27,572 at
a rate of 8.5%; the unpaid principal is due January
2006; collateralized by real and personal property
having a net book value of $3,816,504 at December
31, 1997. .......................................... 2,711,786 2,607,412 2,598,308
Mortgage note payable to a finance company in
aggregate monthly installments of principal and
interest of $41,168 at a rate of 9.25%; the unpaid
principal is due August 2011; collateralized by real
and personal property having a net book value of
$3,094,443 at December 31, 1997. ................... 3,958,182 3,824,738 3,812,963
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $33,581 at
a rate of 8.75%; the unpaid principal due March
2011, collateralized by real and personal property
having a net book value of $6,834,154 at December
31, 1997; requires an escrow reserve of 4% of
revenues for the replacement or refurbishing of
furniture, fixtures and equipment. ................. 3,739,308 3,653,520 3,646,629
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $12,919 at
a rate of 9.75%; the unpaid principal due June 2001;
collateralized by real and personal property having
a net book value of $2,122,233 at December 31,
1997. .............................................. 956,612 891,983 886,524
Mortgage note payable to a finance company in
aggregate monthly installments of principal of
$45,701 plus interest at a rate of 9%; the unpaid
principal due February 1998; collateralized by real
and personal property having a net book value of
$1,920,889 at December 31, 1997. ................... 1,887,467 3,851,540 3,835,290
----------- ---------- ----------
$16,405,945 17,776,627 17,709,589
=========== ========== ==========
</TABLE>

Aggregate scheduled annual principal payments for the above mortgage notes
payable at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------------------------- -----------
<S> <C>
1998................................................ $ 4,504,838
1999................................................ 723,492
2000................................................ 779,853
2001................................................ 1,321,003
2002................................................ 799,639
Thereafter.......................................... 9,647,802
-----------
$17,776,627
===========
</TABLE>

F-9
<PAGE> 82

INNSUITES HOTELS SYSTEM

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Debt Extinguishment

In 1995 Tempe and Ontario realized net extraordinary gains of $5,994,473 on
early extinguishment of debt and Scottsdale realized an extraordinary gain
related to the forgiveness of principal on debt of $470,832 due to a related
party. In 1996 Flagstaff refinanced its existing mortgage indebtedness,
realizing a net extraordinary gain of $112,780 and an extraordinary gain related
to the forgiveness of debt of $194,220 due to a related party.

4. RELATED PARTY TRANSACTIONS:

A substantial portion of the hotels' management functions are performed by
two InnSuites management companies for a fee computed as specified in each
hotel's management agreement. The management fee is based on a percentage of
hotel revenues of 4.5%.

In addition, InnSuites has trademark license agreements with the hotels,
excluding Ontario which operates under licensing with Holiday Inns, for which
the fees are .5% of revenues. InnSuites also operates an advertising trust to
which the hotels contribute 1% of revenues, 1.9% for a portion of 1995. Certain
properties paid different rates or no fees during certain periods. All
agreements expire in 2000. The payable to affiliates represents amounts due
primarily for working capital advances. There are no terms or covenants
connected with the advances.

The InnSuites System Entities paid fees to InnSuites affiliates for various
services as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JANUARY 30,
1995 1996 1997 1998
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
Management fees
(4.5% of total revenues)............... $611,421 840,518 902,938 90,051
Trademark license fees
(0.5% of total revenues)............... 66,246 80,596 81,935 9,785
Advertising trust fees
(1% of total revenues)................. 232,023 189,231 201,296 16,594
</TABLE>

5. CHANGES IN OWNERSHIP:

On January 1, 1996 the principals of InnSuites became sole shareholders of
Hulsey Hotels Corporation (Flagstaff) and purchased the hotel from a
sole-proprietorship for the assumption of $200,000 of outstanding debt, certain
other considerations plus the outstanding mortgage indebtedness. The property
was refinanced on June 19, 1996 in the amount of $1,004,000.

The purchase accounting adjustment recorded was an aggregate increase in
the carrying value of the investments in hotel property was as follows:

<TABLE>
<S> <C>
Land, buildings and improvements............................ $1,050,000
Furniture and equipment..................................... 200,000
----------
$1,250,000
==========
</TABLE>

6. COMMITMENTS AND CONTINGENCIES:

Claims and Legal Matters

Certain of the hotels are involved in claims and legal matters incidental
to their business. In the opinion of management, the ultimate resolution of
these matters will not have a material impact on the financial position or the
results of operations of the hotels.

F-10
<PAGE> 83

INNSUITES HOTELS SYSTEM

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Trademark License Agreements

Under the terms of hotel trademark license agreements, annual payments for
trademark royalties and reservation and advertising services are due from the
hotels. Fees are computed based upon a percentage of total revenues. At December
31, 1997, the trademark license royalty fees are payable by the hotels at .5% of
revenues to InnSuites affiliates while the fees for advertising services are 1%
of revenues. The franchise agreements expire in 2000. The Best Western and
Holiday Inn hotels have additional franchise agreements in which fees are
charged on a per room basis and generally approximate 3% of revenues for Best
Western and 9% for Holiday Inn.

Other

The land on which the Tucson Hotel is located is leased under an operating
lease agreement expiring in 2010 which can be extended to 2051. The lease
requires minimum annual rentals of $70,000 for 1997-2000, $75,000 through 2002,
plus percentage rentals based on hotel revenues. Tucson is responsible for all
taxes, insurance and maintenance on the property. Rental expense charged to
operations for the land lease were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------ JANUARY 30,
1995 1996 1997 1998
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
Minimum rent............................. $ 60,000 70,000 70,000 5,833
Percentage rent.......................... 70,689 74,632 80,437 7,845
-------- ------- ------- ------
$130,689 144,632 150,437 13,678
======== ======= ======= ======
</TABLE>

7. FAIR VALUE OF FINANCIAL INSTRUMENTS:

Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments, whether or not recognized for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1997 and January 30, 1998. Considerable judgment is necessary to
interpret market data and develop estimated fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts which
could be realized on disposition of the financial instruments. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.

Long-Term Debt

Management estimates that the fair values of mortgage and other long-term
debt approximate carrying values based upon the hotels' effective borrowing rate
for issuance of debt with similar terms and remaining maturities.

8. PARTICIPATION INVESTORS CONTINGENT LIABILITY:

For the Ontario property, participation investors rights to repayment were
converted to the right to receive forty-five percent of the profits from any
future sale of the hotel property, over a fixed base amount of approximately
$4,100,000, after payment of all outstanding liabilities. The contingent
liability approximates the participants original investment plus certain accrued
interest and management's estimate of the potential liability upon a future sale
of the hotel property. The balance consists of the original $1,950,000 of loan
participation units subscribed to by investors, plus $745,035 of accrued but
unpaid interest during the construction period, as defined. During 1996 the
Partnership purchased units from participation investors for $48,408.

F-11
<PAGE> 84

INNSUITES HOTELS SYSTEM

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

9. LINES OF CREDIT:

Flagstaff, Scottsdale, Ontario and Tucson each carried an unsecured line of
credit of $50,000 at December 31, 1997. Interest rates are 10% to 10.25%; and
due dates are March 1 to April 30, 1998. The lines of credit are guaranteed by a
principal of InnSuites.

10. CAPITAL LEASE OBLIGATION:

Ontario owns equipment under a capital lease arrangement for $39,752. The
lease liability carries interest at a rate of 10.5% and is payable through
October 1999 with monthly payments of $1,433. Future payments required by the
lease as of December 31, 1997 follow:

11. PARTNERS' CAPITAL PURCHASES PAYABLE:

Certain partners of entities owning the InnSuites Hotels are redeeming
their interests for cash in lieu of exchanging their interests for partnership
interests or REIT stock. Three properties purchased such interests effective
January 1, 1997 aggregating $584,669. The purchases are payable monthly through
December 1998.

12. PREACQUISITION COSTS:

On January 31, 1998 the InnSuites System Entities were acquired by RRF
Limited Partnership, the general partner of which is Realty ReFund Trust, an
unincorporated Ohio real estate investment trust ("REIT"). In accordance with
the acquisition agreements the InnSuites System Entities are bearing certain
preacquisition costs, primarily professional fees, which will not be reimbursed
by the REIT and will not be a part of the purchase price. These costs of
$445,414 in 1997 and $651,198 in January 1998 are expensed and included in
professional services. As part of the acquisition, the InnSuites System Entities
purchased for $950,000 certain shares from the REIT's prior owners. It then
distributed $404,725 in shares to the partners of RRF Limited Partnership and
$545,275 in shares to certain employees which is included in wages and salaries.

F-12
<PAGE> 85

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Trustees,

Realty ReFund Trust:

We have audited the accompanying consolidated balance sheets of Realty
ReFund Trust (an Ohio unincorporated business trust) and subsidiaries as of
January 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended January 31, 1998. These financial statements and the schedule
referred to below are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 financial statements referred to above present fairly,
in all material respects, the financial position of Realty ReFund Trust as of
January 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 1998 in conformity
with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)1. of
this Form 10-K is the responsibility of the Trust's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Cleveland, Ohio,

May 13, 1998.

F-13
<PAGE> 86

REALTY REFUND TRUST

CONSOLIDATED BALANCE SHEETS

JANUARY 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
INVESTMENTS IN HOTEL PROPERTIES, net........................ $41,241,241 $ --
CASH AND CASH EQUIVALENTS................................... 2,378,398 531,997
INTEREST RECEIVABLE AND OTHER ASSETS........................ -- 285,004
REAL ESTATE HELD FOR SALE, net of $4,085,000 valuation
allowance................................................. -- 5,599,122
----------- ----------
TOTAL ASSETS................................................ $43,619,639 $6,416,123
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
MORTGAGE NOTES PAYABLE...................................... $17,709,589 $ --
NOTES PAYABLE TO BANKS...................................... 155,000 --
OTHER NOTES PAYABLE......................................... 2,864,690 --
ADVANCES PAYABLE TO RELATED PARTIES......................... 1,699,601 2,300,000
DUE TO LESSEE............................................... 944,234 --
ACCOUNTS PAYABLE AND ACCRUED EXPENSES....................... 572,031 864,903
MINORITY INTEREST IN PARTNERSHIP............................ 14,075,523 --
SHAREHOLDERS' EQUITY:
Shares of beneficial interest without par value; unlimited
authorization; 1,667,817 and 1,020,586 shares issued
and outstanding in 1998 and 1997, respectively......... 5,598,971 3,251,220
----------- ----------
$43,619,639 $6,416,123
=========== ==========
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

F-14
<PAGE> 87

REALTY REFUND TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES:
Interest income from loans receivable............... $ -- $1,077,757 $ 2,199,600
Interest income from loan receivable from related
party............................................ -- 560,139 932,605
Rental revenue from real estate held for sale....... 1,367,366 2,277,610 2,297,801
Interest income..................................... 54,613 -- --
---------- ---------- -----------
1,421,979 3,915,506 5,430,006
---------- ---------- -----------
EXPENSES:
Provision for writedown of loan receivable from
related party.................................... -- 111,498 5,000,000
Provision for writedown of real estate held for
sale............................................. -- 1,085,000 3,000,000
Loss on sale of real estate......................... 35,620 -- --
Interest on loans underlying wrap-around
mortgages........................................ -- 150,184 617,123
Interest on loan underlying wrap-around mortgage to
related party.................................... -- 89,223 209,872
Interest on note payable to bank.................... -- 381,368 717,550
Interest on note payable to related party........... 118,082 332,308 427,445
Fee to related party investment advisor............. -- 169,961 223,278
Legal expense to related party...................... 84,000 56,000 20,000
Operating expenses of real estate held for sale..... 1,379,389 2,085,807 2,144,150
Depreciation of building held for sale.............. -- -- 264,873
Amortization of tenant improvements and deferred
leasing commissions.............................. 21,724 43,080 192,719
Other operating expenses............................ 356,673 299,442 167,347
---------- ---------- -----------
1,995,488 4,803,871 12,984,357
---------- ---------- -----------
NET LOSS.............................................. $ (573,509) $ (888,365) $(7,554,351)
========== ========== ===========
LOSS PER SHARE -- Basic and diluted................... $ (.56) $ (.87) $ (7.40)
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING......................................... 1,022,359 1,020,586 1,020,586
CASH DIVIDENDS PER SHARE:
Paid................................................ $ .15 $ .30 $ .40
Declared............................................ .00 .10 .10
---------- ---------- -----------
$ .15 $ .40 $ .50
========== ========== ===========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-15
<PAGE> 88

REALTY REFUND TRUST

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, JANUARY 31, 1995................................... $12,714,542
Net loss.................................................. (7,554,351)
Cash dividends paid....................................... (612,372)
-----------
BALANCE, JANUARY 31, 1996................................... 4,547,819
Net loss.................................................. (888,365)
Cash dividends paid....................................... (408,234)
-----------
BALANCE, JANUARY 31, 1997................................... 3,251,220
Issuance of shares........................................ 3,074,348
Net loss.................................................. (573,509)
Cash dividends paid....................................... (153,088)
-----------
BALANCE, JANUARY 31, 1998................................... $ 5,598,971
===========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-16
<PAGE> 89

REALTY REFUND TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (573,509) $ (888,365) $(7,554,351)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities --
Provision for writedown of loan receivable
from related party........................ -- 111,498 5,000,000
Provision for writedown of real estate held
for sale.................................. -- 1,085,000 3,000,000
Depreciation of building held for sale....... -- -- 264,873
Amortization of tenant improvements and
deferred leasing commissions.............. 21,724 43,080 192,719
Amortization of deferred loan fees........... -- (15,000) (18,000)
Decrease in interest receivable and other
assets.................................... 263,280 392,587 220,781
Decrease in accounts payable and accrued
expenses.................................. (676,274) (600,158) (45,767)
----------- ----------- -----------
Net cash (used for) provided by operating
activities.............................. (964,779) 128,642 1,060,255
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on mortgage loans
receivable..................................... -- 14,569,483 13,087,769
Principal payments on mortgage loans payable...... -- (4,991,421) (6,364,536)
Payments for tenant and building improvements..... -- -- (1,178,904)
Payment of transaction costs...................... (334,854) -- --
Proceeds from sale of real estate, net............ 5,599,122 -- --
Purchase of fee interest in land.................. -- (287,758) --
----------- ----------- -----------
Net cash provided by investing
activities.............................. 5,264,268 9,290,304 5,544,329
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings................................... -- 625,000 2,550,000
Bank repayments................................... -- (6,920,000) (8,065,000)
Payment of cash dividends......................... (153,088) (408,234) (612,372)
Principal payments on note payable to related
party.......................................... (2,300,000) (2,200,000) (500,000)
----------- ----------- -----------
Net cash used for financing activities.... (2,453,088) (8,903,234) (6,627,372)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH..................... 1,846,401 515,712 (22,788)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 531,997 16,285 39,073
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 2,378,398 $ 531,997 $ 16,285
=========== =========== ===========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-17
<PAGE> 90

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 1998, 1997 AND 1996

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION:

Prior to fiscal 1998, Realty ReFund Trust (the Trust) specialized in
mortgage financing as its investment vehicle, refinancing existing
income-producing commercial, industrial and multi-unit residential real property
by supplementing or replacing existing financing. The primary refinancing
technique which the Trust employed was wrap-around mortgage lending, which is
discussed in Note 2. As of January 31, 1997, the Trust's remaining real estate
asset was a wholly owned commercial office building in Chicago, which was sold
in September 1997.

On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited
Partnership (the Partnership), a Delaware limited partnership, in exchange for a
13.6% general partnership interest therein. The Trust is the sole general
partner of the Partnership. The Partnership issued limited partnership interests
representing 86.4% of the Partnership to acquire six hotel properties from
various entities. In addition, through a wholly-owned subsidiary, the Trust
issued 647,231 shares of beneficial interest in exchange for all of the
outstanding shares of Buenaventura Properties, Inc. (BPI), which owned a hotel
located in Scottsdale, Arizona. The Scottsdale, Arizona hotel together with the
six hotel properties acquired by the Partnership, are the Initial Hotels. The
Initial Hotels are leased to Realty Hotel Lessee Corp. (the Lessee) pursuant to
leases which contain provisions for rent based on revenues of the Initial Hotels
(the Percentage Leases). Each Percentage Lease obligates the Lessee to pay rent
equal to the greater of the minimum rent or a percentage rent based on the gross
revenues of each hotel. The Lessee holds the franchise agreement for each hotel.
The Lessee is owned 9.8% by InnSuites Innternational Hotels, Inc. an entity
owned by James F. Wirth, Chairman, President and Chief Executive Officer of the
Trust, (Wirth) and his spouse.

Partnership Agreement

Pursuant to the Partnership Agreement, the partners in five partnerships
(the Exchanging Partners) exchanged their respective partnership interests for
limited partnership interests in the Partnership. The corporation which owned a
hotel property in Flagstaff, Arizona (one of the Initial Hotels) contributed the
hotel to the Partnership in exchange for limited partnership interests therein.
The Partnership Agreement provides for the issuance of two classes of limited
partnership units, Class A and Class B. Such Classes are identical in all
respects, except that each Class A limited partnership unit in the Partnership
shall be convertible into a like number of shares of beneficial interest of the
Trust, at any time at the option of the particular limited partner, if the Trust
determines that such conversion would not cause the Trust to fail to qualify as
a REIT. A total of 2,174,931 Class A limited partnership units were issued to
the Exchanging Partners. Additionally, 299,622 Class A partnership units were
reserved for issuance to those partners who did not accept the formation
exchange offer. A total of 4,017,361 Class B limited partnership units were
issued to Wirth and his affiliates, in lieu of the issuance of Class A limited
partnership units. If all of the Class A limited partnership units were to be
converted, the limited partners in the Partnership would hold 2,174,931 shares
of beneficial interest of the Trust. The Class B limited partnership units may
be converted at the discretion of the Board of Trustees provided that such
conversion would not cause the Trust to fail to qualify as a REIT.

Basis of Presentation

As general partner, the Trust exercises unilateral control over the
Partnership. Therefore, the financial statements of the Trust, its wholly-owned
subsidiaries and the Partnership are consolidated. All significant intercompany
transactions and balances have been eliminated.

F-18
<PAGE> 91

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Investments in Hotel Properties

Hotel properties are stated at cost and are depreciated using the
straight-line method over estimated lives of 40 years for buildings and
improvements and 7 years for furniture and equipment.

In accounting for the acquisitions of the Initial Hotels discussed in Note
1, purchase accounting was applied. The historical carrying values of the assets
and liabilities of BPI were adjusted to their respective fair market values
based upon the aggregate fair market value of shares of beneficial interest
issued to acquire the outstanding shares of BPI. The Trust's purchase of its
13.6% general partnership interest in the Partnership and the Partnership's
acquisition of interests in the Initial Hotels other than BPI held by Exchanging
Partners other than Wirth and his affiliates resulted in adjustments to the
historical net carrying values of such hotel properties in amounts equal to 34%
of the difference between the fair market values and the historical net carrying
values of the respective hotel properties. The Partnership's acquisition of
interests in the Initial Hotels other than BPI held by Wirth and his affiliates
did not result in purchase accounting adjustments to historical net carrying
values as such transactions were between entities under common control. The
purchase price allocation resulting from the formation transactions remains
preliminary as of January 31, 1998 pending final determination of assumed
liabilities and allocation of cost among categories of investments in hotel
properties.

The Trust does not believe that there are any factors or circumstances
indicating impairment of any of its investments in hotel properties at January
31, 1998.

In the first quarter of fiscal 1997, the Trust adopted FAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Pursuant to this standard, long-lived assets to be disposed of
are to be reported at the lower of carrying amount or fair value less
incremental direct costs to sell. Long-lived assets to be disposed of shall not
be depreciated while being held for disposal. The Trust's real estate held for
sale was within the scope of FAS No. 121. As the Trust established a $3,000,000
valuation allowance at January 31, 1997 to reduce the carrying value of the real
estate held for sale to its estimated net realizable value, adoption of FAS No.
121 did not have a material impact on the Trust's financial position or results
of operations except that no depreciation expense was recorded on the real
estate held for sale during fiscal 1998 and 1997. Accumulated depreciation and
amortization of the real estate held for sale at January 31, 1996 was $793,000.

Interest Receivable and Other Assets

Included in interest receivable and other assets at January 31, 1997 were
deferred leasing commissions related to the Chicago office building of $312,000,
which were being amortized on a straight-line basis over the related lease
terms. Accumulated amortization of such deferred costs at January 31, 1997 was
$74,000.

Investments in Wrap-Around Mortgages and Related Underlying Loans

In a wrap-around mortgage structure, the principal amount secured by the
mortgage note held by the Trust was equal to the outstanding balance under the
prior mortgage loan plus the amount of funds advanced by the Trust. The notes
held by the Trust were subordinate to the underlying prior indebtedness. The
Trust agreed with the borrower to make principal and interest payments to the
holder of the existing prior mortgage, but only to the extent scheduled payments
were received from the borrower and no other default existed. Generally, the
Trust had the right to pay off the prior indebtedness and succeed to its
priority.

In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." This standard allows a creditor to measure the impairment
of a loan based on the fair value of the collateral if a loan is collateral
dependent. FAS No. 118 "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures," issued in October 1994, amended FAS
No. 114 to allow a creditor to use existing methods for recognizing interest
income

F-19
<PAGE> 92

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on impaired loans. The Trust adopted the provisions of FAS Nos. 114 and 118 in
fiscal 1996. See Note 4 for a discussion of the impairment of the Trust's loan
on the Toledo, Ohio property.

Dividends/Distributions

The Trust expects to pays dividends which will be dependant upon the
receipt of distributions from the Partnership.

Revenue Recognition

The Trust recognizes lease revenue on a accrual basis over the terms of the
respective Percentage Leases. No percentage rent was earned in fiscal 1998 from
the Initial Hotels.

Minority Interest

Minority interest in the Partnership represents the limited partners'
actual proportionate share of the equity in the Partnership. Income will be
allocated to minority interest based on the weighted average limited partnership
percentage ownership throughout the period.

Fair Value of Financial Instruments

For disclosure purposes, fair value is determined by using available market
information and appropriate valuation methodologies. Cash and cash equivalents,
due to their short maturities, are carried at amounts which reasonably
approximate fair value.

For mortgage notes payable, notes payable to banks, other note payables and
advances to related parties, the fair value is estimated by discounting the
future cash flows using the current rates which would be available for similar
loans having the same remaining maturities.

Earnings Per Share

In February 1997, FAS No. 128, "Earnings per Share" was issued which
eliminated the concept of common stock equivalents and replaces "primary" and
"fully diluted" earnings per share with "basic" and "diluted" earnings per
share. For all periods presented there were no dilutive securities.

Basic earnings per share has been computed based on the weighted average
number of shares outstanding during the periods. The calculation of basic
earnings per share for 1998 was based upon 1,022,359 shares and in 1997 and 1996
was based upon 1,020,586 shares.

Statements of Cash Flows

The Trust considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents. Interest paid
amounted to $118,000, $995,000 and $2,018,000 for fiscal years 1998, 1997 and
1996, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

In July 1995, the Trust established a valuation allowance of $5,000,000 on
its investment in the Toledo, Ohio wrap-around mortgage loan. The loan was
retired in fiscal 1997 and an additional loss of $111,000 was recorded.

F-20
<PAGE> 93

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the fourth quarter of fiscal 1996, the Trust established a valuation
allowance of $3,000,000 to writedown the Chicago real estate held for sale to
its estimated net realizable value. The Trust recorded an additional valuation
allowance of $1,085,000 at January 31, 1997 to further reduce the real estate
held for sale to its estimated net realizable value. The building was sold
during fiscal 1998.

3. INVESTMENT IN HOTEL PROPERTIES:

Investment in hotel properties as of January 31, 1998 consist of the
following:

<TABLE>
<S> <C>
Land........................................................ $ 3,439,738
Building and improvements................................... 31,395,305
Furniture and equipment..................................... 6,406,198
-----------
41,241,241
Less-Accumulated depreciation............................... --
-----------
$41,241,241
===========
</TABLE>

The Initial Hotels are located in Arizona (6) and California (1) and are
subject to Percentage Leases as described in Note 11.

4. LOAN IMPAIRMENT:

In July 1995, the Trust recorded a $5,000,000 loss provision on its
investment in the Toledo, Ohio wrap-around mortgage loan. The owner of the
property was pursuing, among other things, the sale of the property. As the
Trust's loan was made on a nonrecourse basis, the Trust had written down its
investment to reflect the estimated sale price of the property and the estimated
net proceeds to be received by the Trust as repayment of its loan as of January
31, 1996.

The commercial building that secured the loan was owned by a partnership of
which a corporation owned by the former Chairman of the Trust was the general
partner. The building was sold by the partnership in fiscal 1997. In connection
with that sale, the Trust was released by the new owner from any claims or
liabilities relating to that property, and the Trust released its rights to any
obligations from the partnership. As a result, in the fourth quarter of fiscal
1997, the Trust recorded a $111,000 loss provision on the Toledo, Ohio loan
based on its final actual net realized value.

5. REAL ESTATE HELD FOR SALE:

In July 1992, the Trust accepted title in lieu of foreclosure on a
commercial building in Chicago, Illinois. At the time of title acceptance, the
Trust recorded a provision to write down its investment to estimated net
realizable value as it was the Trust's intention to sell the real estate. The
carrying value of the investment increased as a result of considerable
investment in building and tenant improvements.

Based on both market conditions for similar commercial property in Chicago
and the operating performance of the property, the Trust recorded a $3,000,000
provision in the fourth quarter of fiscal 1996 to reduce the carrying value of
the property to its then estimated net realizable value. The amount of the
writedown was based upon the Trust's best estimate at January 31, 1996 of the
amount of net proceeds which would be realized upon sale of the real estate in
the near term future.

In the fourth quarter of fiscal 1997, the Trust entered into a contract to
sell the Chicago building for $6,000,000. Accordingly, the Trust recorded an
additional provision of $1,085,000 to reduce the carrying value of the real
estate held for sale to its estimated net realizable value based upon a pending
contract price and estimated costs associated with the potential sale.

F-21
<PAGE> 94

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the third quarter of fiscal 1998, the Trust sold the Chicago building
and received approximately $6,000,000 before consideration of closing and other
costs related to the sale. A loss of approximately $36,000 was recorded as a
result of the sale.

6. MORTGAGE NOTES PAYABLE:

At January 31, 1998, the Trust had mortgage notes payable outstanding with
respect to six of the Initial Hotels. The mortgage notes payable have various
repayment terms and have scheduled maturity dates ranging from fiscal 1999 to
2012. Interest rates on the mortgage notes range from 8.50% to 9.75%. The
mortgage notes payable are guaranteed by Wirth and certain of his affiliates.
The net book value of properties securing the mortgage notes payable at January
31, 1998 was $35,179,000.

Scheduled minimum payments of mortgage notes payable as of January 31, 1998
are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- -----------
<S> <C>
1999.................................................... $ 4,496,000
2000.................................................... 729,000
2001.................................................... 785,000
2002.................................................... 1,317,000
2003.................................................... 781,000
Thereafter.............................................. 9,602,000
-----------
$17,710,000
===========
</TABLE>

7. NOTE PAYABLE TO BANKS:

At January 31, 1998, the Trust had various lines of credit totaling
$350,000 with outstanding balances totaling $155,000 at interest rates floating
with the banks' respective reference rates plus 1.5% to 3.0%.

Prior to January 31, 1997, the Trust had a separate bank credit facility.
During fiscal 1997, the proceeds from the repayment of the Forth Worth, Texas
loan were utilized, in part, to retire all outstanding borrowings under the
Trust's bank credit agreement. Upon retirement of all outstanding borrowings
thereunder, the Trust's former bank credit agreement expired.

For the years ended January 31, 1997 and 1996, the average daily bank
borrowings were $5,519,000 and $9,431,000, respectively, with a weighted average
interest rate (actual interest expense divided by average daily borrowings) of
6.9% and 7.6%, respectively.

8. OTHER NOTES PAYABLE:

For one of the Initial Hotels, participation investors' rights to repayment
were converted into the right to receive forty-five percent of the profits from
any future sale of that hotel property, over a fixed base amount of
approximately $4,100,000 and after payment of all outstanding liabilities. Other
notes payable at January 31, 1998 includes a contingent liability of $2,647,000
which represents the participants' original investment plus certain accrued
interest and management's estimate of the potential liability upon a future sale
of the hotel property. The balance consists of the original $1,950,000 of loan
participation units subscribed to by investors, plus $745,000 of accrued but
unpaid interest during the construction period, as defined. During 1996 certain
units were purchased from participation investors for $48,000.

Prior to the formation transactions, certain partners of the partnerships
that previously owned the Initial Hotels sold their interests therein in
exchange for notes. These notes are payable over 2 years. At January 31, 1998
$218,000 principal amounts of such notes is outstanding.

F-22
<PAGE> 95

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. ADVANCES PAYABLE TO RELATED PARTIES:

Advances payable to related parties at January 31, 1998 consists of funds
provided to fund working capital and capital improvement needs. The aggregate
amount outstanding was approximately $1,700,000 as of January 31, 1998.

In March 1993, the Trust sold a $5,000,000 secured note to the former
Chairman of the Trust, at par. The note bore interest at the prime lending rate
and had a stated maturity date of August 1994. The Trust exercised its option to
extend the maturity of the note. Pursuant to the terms of the note, the Trust
made scheduled principal payments of $500,000 for each of the years ended
January 31, 1997 and 1996. In addition, $1,700,000 of the proceeds from the
repayment of the Fort Worth, Texas loan was utilized to reduce the note. The
remaining $2,300,000 of the note was retired with proceeds from the sale of the
Chicago property.

10. DESCRIPTION OF CAPITAL STOCK:

Holders of the Trust's shares are entitled to receive dividends when, as
and if declared by the Board of Directors of the Trust out of funds legally
available therefor. The holders of shares, upon any liquidation, dissolution or
winding-up of the Trust, are entitled to share ratably in any assets remaining
after payment in full of all liabilities of the Trust. The shares possess
ordinary voting rights, each share entitling the holder thereof to one vote.
Holders of shares do not have cumulative voting rights in the election of
directors and do not have preemptive rights.

11. PERCENTAGE LEASE AGREEMENTS:

The Percentage Leases have noncancellable terms which expire at various
dates through May 31, 2007, subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each Percentage Lease is
the greater of minimum rent, as defined, or percentage rent. Percentage rent
applicable to room and other hotel revenue varies by lease and is calculated by
multiplying fixed percentages by the total amounts of such gross revenues in
excess of specified threshold amounts. Both the minimum rent and the revenue
thresholds used in computing percentage rents are subject to annual adjustments
beginning January 1, 1999, based on increases in the United States Consumer
Price Index. Percentage rent applicable to food and beverage revenues is
calculated as 5% of such revenues over a minimum threshold.

Future minimum rentals (ignoring CPI increases) to be received by the Trust
from the Lessee pursuant to the Percentage Leases for each of the next five
years and in total thereafter are as follows:

<TABLE>
<S> <C>
1999....................................................... $ 5,850
2000....................................................... 5,850
2001....................................................... 5,850
2002....................................................... 5,850
2003....................................................... 5,850
Thereafter................................................. 25,347
-------
$54,597
=======
</TABLE>

12. FEDERAL INCOME TAXES:

No provision for current or deferred income taxes has been made by the
Trust. The Trust has elected to be a real estate investment trust (REIT) and is
therefore subject to the requirements of Sections 856-860 of the Internal
Revenue Code, all of the requirements of which management believes have been met
for the year ended January 31, 1998. As a REIT, the Trust normally distributes
all of its taxable income to its shareholders. For the year ended January 31,
1998, the Trust had a taxable loss of approximately $4,000,000. The primary
difference

F-23
<PAGE> 96

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

between the timing of book provisions for write downs and when such amounts are
allowed as deductions for Federal income tax purposes is attributable to the
foreclosure property described in Note 5. In fiscal 1998, the net tax deductions
related to such property were $3,570,000 that related primarily to amounts that
had been expensed in previous years for book purposes.

The total dividends per share applicable to operating results for the year
ended January 31, 1998, amount to $.15 per share, totaling $153,088.

An income tax net operating loss of approximately $9,533,000 of which
$4,476,000, originated in fiscal 1993 and $5,057,000 originated in fiscal 1997,
is available for carryforward to fiscal 2008 and fiscal 2012, respectively. In
addition, the taxable loss for fiscal 1998 of $4,000,000 will be available for
carryforward to fiscal 2013. The calendar 1997 dividends were 100% return of
capital due to the fiscal 1998 taxable loss. The quarterly allocation of cash
dividends paid per share for individual shareholders' income tax purposes was as
follows:

<TABLE>
<CAPTION>
CALENDAR 1997 CALENDAR 1996 CALENDAR 1995
----------------------------- ----------------------------- -----------------------------
ORDINARY RETURN TOTAL ORDINARY RETURN TOTAL ORDINARY RETURN TOTAL
MONTH PAID INCOME OF CAPITAL PAID INCOME OF CAPITAL PAID INCOME OF CAPITAL PAID
- ---------- -------- ---------- ----- -------- ---------- ----- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March............................. $-- $.10 $.10 $-- $.10 $.10 $.195 $.005 $.20
June.............................. -- .05 .05 -- .10 .10 .195 .005 .20
September......................... -- -- -- -- .10 .10 .097 .003 .10
December.......................... -- -- -- -- .10 .10 .097 .003 .10
-- ---- ---- -- ---- ---- ----- ----- ----
$-- $.15 $.15 $-- $.40 $.40 $.584 $.016 $.60
== ==== ==== == ==== ==== ===== ===== ====
</TABLE>

The tax status of distributions to shareholders in calendar 1998 will be
dependent on the level of the Trust's earnings in that year. If taxable income
of the Trust exceeds dividends paid in calendar 1998, such dividends will
represent ordinary income to the recipients irrespective of the net operating
loss carryforward.

13. ADVISORY AGREEMENT/EMPLOYMENT AGREEMENTS:

On January 31, 1998, Wirth and his spouse purchased the stock of
Mid-America ReaFund Advisors, Inc. (the Advisor) which provides the
administration of the day-to-day investment operations of the Trust and the
Partnership. The Advisor was formerly owned by the former Chairman and President
of the Trust. Under the terms of the advisory agreement, the Advisor is to
receive, subject to certain limitations, a monthly fee equal to 1/12 of 1% of
invested assets, as defined in the advisory agreement, and an annual incentive
fee equal to (a) 10% of the amount by which the net income of the Trust exceeds
8% of the average net worth for the year and (b) 10% of the difference between
net realized capital gains less accumulated net realized capital losses, as
defined. For any fiscal year in which operating expenses of the Trust exceed
certain thresholds specified in the advisory agreement, the Advisor is required
to refund to the Trust the amount of such excess. For fiscal years 1997 and
1996, operating expenses exceeded the specified thresholds by approximately
$6,000 and $18,000, respectively. There was no fee to the Advisor during fiscal
year 1998 due to the reduction in the Trust's investment in mortgage loans.

Wirth has an employment agreement with the Trust which expires in December
2007. The employment agreement provides that Wirth will receive no compensation
from the Trust as long as the advisory agreement is in effect. However, pursuant
to the terms of the employment agreement, should the Advisor no longer provide
services to the Trust, Wirth will then be compensated, upon the same annual
basis as the Advisor would have been compensated under the current terms of the
advisory agreement had it remained in effect.

Certain employment agreements with the former Chairman and President of the
Trust were terminated at January 30, 1998.

F-24
<PAGE> 97

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. INVESTMENTS IN LOANS RECEIVABLE:

RECONCILIATION OF MORTGAGE LOANS RECEIVABLE

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
BALANCE, beginning of period.............................. $17,422,010 $35,509,779
----------- -----------
COLLECTIONS OF PRINCIPAL:
Office buildings........................................ 14,569,483 7,255,186
Shopping centers........................................ -- 2,029,068
Motels.................................................. -- 3,803,515
Apartments.............................................. -- --
----------- -----------
14,569,483 13,087,769
----------- -----------
ELIMINATION OF UNDERLYING MORTGAGE (Note 15).............. 2,741,029 --
WRITEDOWN OF LOAN RECEIVABLE FROM RELATED PARTY (Note
4)...................................................... 111,498 5,000,000
----------- -----------
BALANCE, end of period.................................. $ -- $17,422,010
=========== ===========
</TABLE>

15. OTHER RELATED PARTY TRANSACTIONS:

Wirth is a 9.8% shareholder of the Lessee. At January 31, 1998, the Trust
has a payable to the Lessee of $944,000 primarily for the reimbursement of costs
and expenses incurred on behalf of the Trust.

The Initial Hotels were acquired by the Partnership from entities in which
Wirth and his affiliates had substantial ownership interests. Wirth and his
affiliates received 4,017,361 Class B limited partnership units and 647,231
shares of beneficial interest in the Trust in exchange for their interests in
the Initial Hotels.

The Trust recorded provisions of approximately $84,000, $56,000 and $20,000
in fiscal years 1998, 1997 and 1996, respectively, for legal services provided
by a law firm of which the former President of the Trust and another former
Trustee are principals.

The Toledo, Ohio loan investment was secured by a commercial building owned
by a partnership of which the former Chairman of the Trust was the general
partner. In September 1996, the Toledo, Ohio loan investment was converted from
a wrap-around mortgage loan to a junior mortgage loan. Accordingly, the Trust's
loan receivable from related party and loan payable underlying mortgage to
related party were reduced by approximately $2,741,000, representing the balance
of the underlying mortgage loan at the time the status of the Toledo loan was
changed. In addition, a principal prepayment of $600,000 was received and
approximately $401,000 of escrow funds held by the Trust was applied against the
mortgage loan receivable balance. The remaining portion ($111,498) of the loan
was written off in the fourth quarter of fiscal 1997.

In the years ended January 31, 1997 and 1996, the Trust earned
approximately $560,000 and $933,000 of interest income on this loan,
respectively. The Trust incurred interest expense of approximately $89,000 and
$210,000 in connection with the related underlying loan payable for the years
ended January 31, 1997 and 1996, respectively.

F-25
<PAGE> 98

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts and fair values of the Trust's significant financial
instruments at January 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
1998 1997
----------------------------- ----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ----------- --------------- ----------
<S> <C> <C> <C> <C>
Mortgage notes payable.......... $17,709,589 $18,103,824 $ -- $ --
Notes payable to banks.......... 155,000 155,000 -- --
Other notes payable............. 2,864,690 2,864,690 -- --
Advances payable to related
parties....................... 1,699,601 1,699,601 2,300,000 2,300,000
</TABLE>

17. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:

In connection with the formation of the Partnership, approximately
$24,899,000 of historical net book value in hotel properties was contributed to
the Partnership in exchange for Partnership units and the Partnership assumed
approximately $16,844,000 of debt.

The Trust acquired all of the outstanding shares of BPI in exchange for
647,231 shares of beneficial interest having an aggregate value of $3,074,000.

18. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):

The pro forma financial information set forth below is presented as if the
formation transactions had been consummated as of February 1, 1996. The pro
forma financial information is not necessarily indicative of what actual results
of operations of the Trust would have been assuming the formation transactions
had been consummated as of February 1, 1996 nor does it purport to represent the
results of operations for future periods.

<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
----------------
1998 1997
------ ------
(UNAUDITED, IN
THOUSANDS)
<S> <C> <C>
PERCENTAGE LEASE REVENUE.................................... $7,902 $7,376
INTEREST INCOME............................................. 55 1,638
------ ------
TOTAL REVENUES.................................... 7,957 9,014
------ ------
PROVISION FOR WRITEDOWNS OF LOAN RECEIVABLE................. -- 111
INTEREST ON LOANS UNDERLYING WRAP MORTGAGES................. -- 239
INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE........ $1,668 $1,929
ADVISORY FEE TO RELATED PARTY ADVISOR....................... 576 576
DEPRECIATION AND AMORTIZATION............................... 1,710 1,710
GENERAL AND ADMINISTRATIVE.................................. 578 578
REAL ESTATE AND PERSONAL PROPERTY TAXES AND CASUALTY
INSURANCE AND GROUND RENT................................. 820 942
MINORITY INTEREST........................................... 2,314 1,625
------ ------
TOTAL EXPENSES AND MINORITY INTEREST.............. 7,666 7,360
------ ------
NET INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST.... $ 291 $1,304
====== ======
NET INCOME PER SHARE -- basic and diluted................... $ .17 $ .78
====== ======
</TABLE>

F-26
<PAGE> 99

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. SUBSEQUENT EVENTS:

In the first quarter of fiscal 1999, the Partnership completed the
acquisition of the InnSuites Hotel Tucson/ St. Mary's located in Tucson,
Arizona, and the acquisition of the Lafayette Hotel Ramada Inn and Conference
Center located in San Diego, California. Total consideration for the
acquisitions were $10,820,000 and $5,148,000, respectively.

In the first quarter of fiscal 1999, the Trust established a $12,000,000
secured revolving line of credit with Pacific Century Bank. The credit facility
will require, among other things, the Trust to maintain a minimum net worth, a
specified coverage ratio of EBITDA to debt service, and a specified coverage
ratio of EBITDA to debt service and fixed charges. Further, the Trust will be
required to maintain its franchise agreement at each of the hotel properties and
to maintain its REIT status.

20. NEW ACCOUNTING PRONOUNCEMENTS:

In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Development or Obtained for
Internal Use," which is effective for the Trust as of February 1, 1999. This SOP
requires capitalization of the development costs of software to be used
internally. The Trust plans to adopt this SOP as of February 1, 1999. The effect
of adopting this SOP will not be material.

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which is effective for the Trust as of February 1, 1999.
This SOP requires start-up and organization costs to be expensed as incurred and
also requires previously deferred start-up costs to be recognized as a
cumulative effect adjustment in the statement of income. The Trust will adopt
this SOP when required, but the effect of adoption will not be material.

21. QUARTERLY RESULTS (UNAUDITED):

The following is an unaudited summary of the results of operations, by
quarter, for the fiscal years ended January 31, 1998 and 1997. Management
believes that all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of such interim results have been included.
The results of operations for any interim period are not necessarily indicative
of those for the entire fiscal year.

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
FISCAL 1998 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Total revenues........................... $ 558,933 $ 545,926 $ 262,507 $ 54,613
========== ========== ========== ===========
Total revenues less interest expense on
mortgage loans and operating expenses,
and amortization expense of real estate
held for sale.......................... $ 14,423 $ 55,036 $ (127,379) $ (187,447)
========== ========== ========== ===========
Net loss................................. $ (90,973) $ (48,889) $ (246,200) $ (187,447)
========== ========== ========== ===========
Loss per share -- basic and diluted...... $ (.09) $ (.05) $ (.24) $ (.18)
========== ========== ========== ===========
Dividends declared per share............. $ .05 $ .00 $ .00 $ .00
========== ========== ========== ===========
</TABLE>

F-27
<PAGE> 100

REALTY REFUND TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
FISCAL 1997 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Total revenues........................... $1,082,334 $1,107,406 $1,064,527 $ 661,239
========== ========== ========== ===========
Total revenues less interest expense on
mortgage loans and operating expenses,
depreciation and amortization expense
of real estate held for sale........... $ 408,457 $ 445,805 $ 529,278 $ 163,671
========== ========== ========== ===========
Provision for writedown of loan
receivable from related party.......... $ -- $ -- $ -- $ (111,498)
========== ========== ========== ===========
Provision for writedown of real estate
held for sale.......................... $ -- $ -- $ -- $(1,085,000)
========== ========== ========== ===========
Net income (loss)........................ $ 101,775 $ 98,464 $ 102,258 $(1,190,862)
========== ========== ========== ===========
Earnings (loss) per share -- basic and
diluted................................ $ .10 $ .10 $ .10 $ (1.17)
========== ========== ========== ===========
Dividends declared per share............. $ .10 $ .10 $ .10 $ .10
========== ========== ========== ===========
</TABLE>

F-28
<PAGE> 101

SCHEDULE III

REALTY REFUND TRUST

REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF JANUARY 31, 1998

<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO TRUST ACQUISITION
-------------------------- -------------------
BUILDINGS AND BUILDING AND
ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------ ---------- ------------- ---- ------------
<S> <C> <C> <C> <C> <C>
InnSuites Hotels
Phoenix Best Western
Phoenix, Arizona..................... $ 2,929,875 $ 418,219 $ 2,922,884 $-- $--
InnSuites Hotels
Tempe/Phoenix Airport/South Mountain
Tempe, Arizona....................... 2,598,308 686,806 6,548,348 -- --
InnSuites Hotels Tucson,
Catalina Foothills Best Western
Tucson, Arizona...................... -- -- 4,220,820 -- --
InnSuites Hotels Yuma Best Western
Yuma, Arizona........................ 3,812,963 251,649 4,983,292 -- --
Holiday Inn Airport
Ontario Hotel and Suites
Ontario, California.................. 6,293,256 1,633,064 5,450,872 -- --
InnSuites Hotels
Flagstaff/Grand Canyon
Flagstaff, Arizona................... 886,524 100,000 1,194,691 -- --
InnSuites Hotels Scottsdale/
El Dorado Park Resort
Scottsdale, Arizona.................. 3,835,290 350,000 6,074,398 -- --
----------- ---------- ----------- -- --
$20,356,216 $3,439,738 $31,395,305 $-- $--
=========== ========== =========== == ==
</TABLE>

F-29
<PAGE> 102

<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED AT
CLOSE OF PERIOD
--------------------------- NET BOOK VALUE
BUILDINGS AND ACCUMULATED LAND AND BUILDINGS
LAND IMPROVEMENTS TOTAL (A) DEPRECIATION AND IMPROVEMENTS
---------- ------------- ----------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
InnSuites Hotels
Phoenix Best Western
Phoenix, Arizona............ $ 418,219 $ 2,922,884 $ 3,341,103 $-- $ 3,341,103
InnSuites Hotels
Tempe/Phoenix Airport/South
Mountain
Tempe, Arizona.............. 686,806 6,548,348 7,235,154 -- 7,235,154
InnSuites Hotels Tucson,
Catalina Foothills Best
Western
Tucson, Arizona............. -- 4,220,820 4,220,820 -- 4,220,820
InnSuites Hotels Yuma Best
Western
Yuma, Arizona............... 251,649 4,983,292 5,234,941 -- 5,234,941
Holiday Inn Airport
Ontario Hotel and Suites
Ontario, California......... 1,633,064 5,450,872 7,083,936 -- 7,083,936
InnSuites Hotels
Flagstaff/Grand Canyon
Flagstaff, Arizona.......... 100,000 1,194,691 1,294,691 -- 1,294,691
InnSuites Hotels Scottsdale/El
Dorado Park Resort
Scottsdale, Arizona......... 350,000 6,074,398 6,424,398 -- 6,424,398
---------- ----------- ----------- -- -----------
$3,439,738 $31,395,305 $34,835,043 $-- $34,835,043
========== =========== =========== == ===========
</TABLE>

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

(A) Aggregate cost for federal income tax reporting purposes at January 31, 1998
is as follows:

<TABLE>
<S> <C>
Land.................................................... $ 3,439,738
Building and improvements............................... 10,026,664
-----------
$13,466,402
===========
</TABLE>

F-30
<PAGE> 103

<TABLE>
<CAPTION>
DEPRECIATION IN
DATE OF DATE OF INCOME STATEMENT IS
CONSTRUCTION ACQUISITION COMPUTED
------------ ----------- -------------------
<S> <C> <C> <C>
InnSuites Hotels
Phoenix Best Western
Phoenix, Arizona................................. 6/1/84 1998 40 years
InnSuites Hotels
Tempe/Phoenix Airport/South Mountain
Tempe, Arizona................................... 12/1/82 1998 40 years
InnSuites Hotels Tucson, Catalina Foothills Best
Western
Tucson, Arizona.................................. 11/1/81 1998 40 years
InnSuites Hotels Yuma Best Western
Yuma, Arizona.................................... 4/1/82 1998 40 years
Holiday Inn Airport
Ontario Hotel and Suites
Ontario, California.............................. 12/1/90 1998 40 years
InnSuites Hotels
Flagstaff/Grand Canyon
Flagstaff, Arizona............................... 1966(1) 1998 40 years
InnSuites Hotels Scottsdale/
El Dorado Park Resort
Scottsdale, Arizona.............................. 12/1/80 1998 40 years
</TABLE>

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

(1) Purchased by InnSuites 1/1/96

F-31
<PAGE> 104

REALTY REFUND TRUST

BALANCE SHEETS

APRIL 30, AND JANUARY 31, 1998

<TABLE>
<CAPTION>
APRIL 30, 1998 JANUARY 31, 1998
-------------- ----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES.............................. $52,256,717 $41,241,241
CASH AND CASH EQUIVALENTS................................... 1,856,501 2,378,398
RENT RECEIVABLE FROM LESSEE................................. 2,510,532 --
OTHER ASSETS................................................ 410,295 --
----------- -----------
$57,034,045 $43,619,639
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
MORTGAGE NOTES PAYABLE...................................... $25,270,898 $17,709,589
NOTES PAYABLE TO BANKS...................................... 3,635,000 155,000
OTHER NOTES PAYABLE......................................... 2,653,252 2,864,690
ADVANCES PAYABLE TO RELATED PARTIES......................... 1,514,238 1,699,601
DUE TO LESSEE............................................... 3,007,431 944,234
ACCOUNTS PAYABLE AND ACCRUED EXPENSES....................... 864,746 572,031
MINORITY INTEREST IN PARTNERSHIP............................ 14,054,340 14,075,523
SHAREHOLDERS' EQUITY:
Shares of beneficial interest without par value; unlimited
authorization; 1,667,817 shares outstanding at April 30
and January 31, 1998................................... 6,034,140 5,598,971
----------- -----------
$57,034,045 $43,619,639
=========== ===========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-32
<PAGE> 105

REALTY REFUND TRUST

UNAUDITED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED APRIL 30, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES:
Lease revenue............................................. $3,771,239 $ --
Interest income........................................... 11,345 --
Rental revenue from real estate held for sale............. -- 558,933
---------- ----------
3,782,584 558,933
---------- ----------
EXPENSES:
Real estate depreciation.................................. 519,269 --
Real estate and personal property taxes, insurance and
ground rent............................................ 229,495 --
General and administrative................................ 430,625 57,911
Interest on mortgage notes payable........................ 628,512 --
Interest on note payable to related party................. -- 47,485
Advisory fee paid to related party........................ 144,153 --
Operating expenses of real estate held for sale........... -- 533,649
Amortization of deferred leasing commissions.............. -- 10,861
---------- ----------
1,952,054 649,906
---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST...................... 1,830,530 (90,973)
MINORITY INTEREST........................................... 1,395,361 --
---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES............... $ 435,169 $ (90,973)
========== ==========
EARNINGS PER SHARE -- basic and diluted..................... $ .26 $ (.09)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 1,667,817 1,020,586
========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-33
<PAGE> 106

REALTY REFUND TRUST

UNAUDITED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED APRIL 30, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 435,169 $ (90,973)
Adjustments to reconcile net income (loss) to net cash
used for operating activities --
Depreciation and amortization.......................... 519,269 --
Minority interest...................................... 1,395,361 --
Amortization of deferred leasing commissions........... -- 10,861
Increase in rent receivable from lessee................ (2,510,532) --
Increase in other assets............................... (410,295) (16,375)
Increase in amounts due to lessee...................... 2,063,197 --
Increase in accounts payable and accrued expenses...... 292,715 (114,033)
----------- ---------
Net cash provided by (used for) operating
activities...................................... 1,784,884 (210,520)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties........................... (5,148,000) --
----------- ---------
Net cash used for investing activities............ (5,148,000) --
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank borrowings....................................... 3,430,000 --
Borrowing under mortgage notes payable.................... 1,561,309 --
Payment of cash dividends................................. -- (102,059)
Payment of other notes payable............................ (211,438) --
Payment to related parties................................ (1,938,652) --
----------- ---------
Net cash provided by (used for) financing
activities...................................... 2,841,219 (102,059)
----------- ---------
NET DECREASE IN CASH........................................ (521,897) (312,579)
CASH AT BEGINNING OF PERIOD................................. 2,378,398 531,997
----------- ---------
CASH AT END OF PERIOD....................................... $ 1,856,501 $ 219,418
=========== =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-34
<PAGE> 107

REALTY REFUND TRUST

NOTES TO UNAUDITED FINANCIAL STATEMENTS

APRIL 30, 1998 AND 1997

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION:

Prior to fiscal 1999, Realty ReFund Trust (the Trust or the Company)
specialized in mortgage financing as its investment vehicle, refinancing
existing income-producing commercial, industrial and multi-unit residential real
property by supplementing or replacing existing financing. The primary
refinancing technique which the Trust employed was wrap-around mortgage lending.

On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited
Partnership (the Partnership), a Delaware limited partnership, in exchange for a
13.6% general partnership interest therein. The Trust is the sole general
partner of the Partnership. The Partnership issued limited partnership interests
representing 86.4% of the Partnership to acquire six hotel properties from
various entities. In addition, in order to acquire a seventh hotel property
through a wholly owned subsidiary, the Trust issued 647,231 shares of beneficial
interest in exchange for all of the outstanding shares of Buenaventura
Properties, Inc. (BPI), which owned a hotel located in Scottsdale, Arizona. The
Scottsdale, Arizona hotel together with the six hotel properties acquired by the
Partnership, are the Initial Hotels. The Initial Hotels are leased to Realty
Hotel Lessee Corp. (the Lessee) pursuant to leases which contain provisions for
rent based on revenues of the Initial Hotels (the Percentage Leases). Each
Percentage Lease obligates the Lessee to pay rent equal to the greater of the
minimum rent or a percentage rent based on the gross revenues of each hotel. The
Lessee holds the franchise agreement for each hotel. The Lessee is owned 9.8% by
InnSuites Innternational Hotels, Inc. an entity owned by James F. Wirth,
Chairman, President and Chief Executive Officer of the Trust (Wirth), and his
spouse.

Partnership Agreement

Pursuant to the Partnership Agreement, the partners in five partnerships
(the Exchanging Partners) exchanged their respective partnership interests for
limited partnership interests in the Partnership. A corporation which owned a
hotel property in Flagstaff, Arizona (one of the Initial Hotels), contributed
the hotel to the Partnership in exchange for limited partnership interests
therein. The Partnership Agreement provides for the issuance of two classes of
limited partnership units, Class A and Class B. Such Classes are identical in
all respects, except that each Class A limited partnership unit in the
Partnership shall be convertible into a like number of shares of beneficial
interest of the Trust, at any time at the option of the particular limited
partner, if the Trust determines that such conversion would not cause the Trust
to fail to qualify as a REIT. At January 31, 1998, a total of 2,174,931 Class A
limited partnership units were issued to the Exchanging Partners. Additionally,
299,622 Class A limited partnership units were reserved for issuance to those
partners who did not accept the formation exchange offer. A total of 4,017,361
Class B limited partnership units were issued to Wirth and his affiliates, in
lieu of the issuance of Class A limited partnership units. If all of the Class A
limited partnership units were to be converted, the limited partners in the
Partnership would hold 2,174,931 shares of beneficial interest of the Trust. The
Class B limited partnership units may only become convertible with the approval
of the Board of Trustees, in its sole discretion.

Basis of Presentation

As general partner, the Trust exercises unilateral control over the
Partnership. Therefore, the financial statements of the Trust, its wholly owned
subsidiaries and the Partnership are consolidated. All significant intercompany
transactions and balances have been eliminated.

F-35
<PAGE> 108

REALTY REFUND TRUST

NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

year ended January 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the period ended January 31, 1998.

2. NET INCOME PER SHARE AND PARTNERSHIP UNITS:

Pursuant to FAS No. 128 "Earnings Per Share", the concept of common stock
equivalents was eliminated, and "primary" and "fully diluted" earnings per share
were replaced by "basic" and "diluted" earnings per share. For the periods
presented there were no dilutive securities.

Basic earnings per share has been computed based on the weighted average
number of shares outstanding during the periods presented. The calculation of
basic earnings per share for three month period ended April 30, 1998 and 1997
was based upon 1,667,817 and 1,020,586 shares, respectively.

3. ACQUISITIONS:

On February 1, 1998, the Partnership acquired 100% of the ownership
interests in the Tucson St. Mary's Hotel and Resort for $10,820,000. The
Partnership issued 699,933 Class B limited partnership units to Wirth and his
spouse, who each held a 50% equity ownership interest in the Tucson St. Mary's
hotel. This property was leased to the Lessee, which will operate the property
under a long-term Percentage Lease.

On April 29, 1998, the Trust acquired a hotel property located in San
Diego, California for an aggregate consideration of $5,148,000, which was funded
with cash, proceeds from the Trust's credit facility and two promissory notes
secured by mortgage trust deeds on the property. This property was leased to the
Lessee, which will operate the property under a long-term Percentage Lease.

4. CREDIT FACILITY:

In the first quarter of fiscal 1999, the Trust established a $12,000,000
secured revolving line of credit with Pacific Century Bank. The credit facility
requires, among other things, the Trust to maintain a minimum net worth, a
specified coverage ratio of EBITDA to debt service, and a specified coverage
ratio of EBITDA to debt service and fixed charges. Further, the Trust is
required to maintain its franchise agreement at each of the hotel properties and
to maintain its REIT status.

5. PERCENTAGE LEASE AGREEMENTS:

The Percentage Leases have noncancellable terms, which expire at various
dates through May 31, 2007, subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each Percentage Lease is
the greater of minimum rent, as defined, or percentage rent. Percentage rent
applicable to room and other hotel revenue varies by lease and is calculated by
multiplying fixed percentages by the total amounts of such gross revenues in
excess of specified threshold amounts. Both the minimum rent and the revenue
thresholds used in computing percentage rents are subject to annual adjustments
beginning January 1, 1999, based on increases in the United States Consumer
Price Index. Percentage rent applicable to food and beverage revenues is
calculated as 5% of such revenues over a minimum threshold.

F-36
<PAGE> 109

REALTY REFUND TRUST

NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum rentals (ignoring CPI increases) to be received by the Trust
from the Lessee pursuant to the Percentage Leases for nine hotels, including San
Diego, for each of the next five years and in total thereafter are as follows:

<TABLE>
<S> <C>
Fiscal 1999............................................. $ 4,888,000
2000.................................................... 6,350,000
2001.................................................... 6,350,000
2002.................................................... 6,350,000
2003.................................................... 6,350,000
Thereafter.............................................. 27,514,000
-----------
$57,802,000
===========
</TABLE>

6. RELATED PARTY TRANSACTIONS:

Wirth beneficially owns 9.8% of the common stock of the Lessee. The Lessee
was the sole source of the Trust's Percentage Lease revenue during the quarter
ended April 30, 1998. At April 30, 1998, the Trust had rent receivable of
$2,511,000 due from the Lessee.

At January 31, 1998 and April 30, 1998, the Trust had a payable to the
Lessee of $944,000 and 3,007,000, respectively, primarily for the reimbursement
of costs incurred on behalf of the Trust.

7. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:

In connection with the acquisition of the Tucson St. Mary's hotel,
approximately $6,387,000 of historical net book value in hotel properties was
contributed to the Partnership in exchange for Partnership units and the
Partnership assumed approximately $7,803,000 of debt.

8. SUBSEQUENT EVENT:

On June 9, 1998, a majority of the Company's independent Trustees voted to
exercise, as of June 1, 1998, an option held by the Company to acquire all of
the ownership interests in an 185-suite InnSuites Hotel located in Buena Park,
California. The total consideration for the ownership interests that will be
contributed to the Partnership will be the greater of (i) $6,900,000 or (ii)
fair market value as determined by an independent appraisal. Mr. Wirth owns a
50% interest in the Buena Park hotel.

9. PRO FORMA FINANCIAL INFORMATION:

The pro forma financial information set forth below is presented as if (i)
the formation transactions discussed in Note 1 and (ii) the acquisition of the
membership interests in the Tucson St. Mary's hotel had been consummated as of
February 1, 1997. The acquisition of the San Diego hotel on April 29, 1998 has
been excluded based on its lack of materiality to the Partnership for the
periods presented. The pro forma financial information is not necessarily
indicative of what actual results of operations of the Trust would have been
assuming the formation transactions and the acquisitions had been consummated as
of February 1, 1997 nor does it purport to represent the results of operations
for future periods.

F-37
<PAGE> 110

REALTY REFUND TRUST

NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
------------------
1998 1997
------- -------
<S> <C> <C>
LEASE REVENUE............................................... $3,771 $3,563
INTEREST INCOME............................................. 11 --
------ ------
Total revenue..................................... 3,782 3,563
------ ------
DEPRECIATION AND AMORTIZATION............................... 519 518
REAL ESTATE AND PERSONAL PROPERTY TAXES, INSURANCE AND
GROUND RENT............................................... 229 263
GENERAL AND ADMINISTRATIVE.................................. 431 162
INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE........ 629 560
ADVISORY FEE TO RELATED PARTY ADVISOR....................... 144 172
MINORITY INTEREST........................................... 1,395 1,681
------ ------
TOTAL EXPENSES AND MINORITY INTEREST........................ 3,347 3,356
------ ------
NET INCOME APPLICABLE TO COMMON SHARES...................... $ 435 $ 207
====== ======
NET INCOME PER SHARE -- basic and diluted................... $ .26 $ .12
====== ======
</TABLE>

10. NEW ACCOUNTING PRONOUNCEMENT:

F-38
<PAGE> 111

REALTY HOTEL LESSEE CORP.

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
PREDECESSOR
---------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ ----------- ----------
<S> <C> <C> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES, at cost:
Land............................................... $ 3,439,738 $ 3,439,738 $ --
Buildings and improvements......................... 24,831,670 24,831,670 --
Furniture and equipment............................ 10,845,586 9,175,834 --
----------- ----------- ----------
39,116,994 37,447,242 --
Less- Accumulated depreciation..................... 12,184,479 11,259,483 --
----------- ----------- ----------
Net investment in hotel properties................. 26,932,515 26,187,759 --
Cash and cash equivalents............................ 129,871 1,459,483 516,301
Accounts receivable.................................. 571,301 592,167 896,559
Payments on behalf of RRF............................ -- -- 320,668
Inventories.......................................... 415,575 366,242 560,132
Other assets......................................... 295,440 854,125 152,454
Cash held in escrow.................................. 296,099 259,684 --
Deferred expenses, net............................... 252,430 502,508 --
----------- ----------- ----------
$28,893,231 $30,221,968 $2,446,114
=========== =========== ==========

LIABILITIES AND COMBINED EQUITY
Mortgage notes payable............................... $17,776,627 $16,281,613 $ --
Accounts payable
Trade.............................................. 678,637 367,988 790,108
Affiliates......................................... 1,260,601 784,144 --
Bank overdrafts.................................... 121,052 -- 347,005
Partners' capital purchases payable.................. 275,366 -- --
Lines of credit...................................... 131,000 -- --
Percentage rent payable.............................. -- -- 2,373,108
Capital lease obligation............................. 22,437 68,502 --
Land lease payable................................... 80,441 25,681 --
Accrued expenses and other liabilities............... 867,267 598,039 1,332,650
Participation investors contingent liability......... 2,646,627 2,646,627 --
----------- ----------- ----------
23,860,055 20,772,594 4,842,871
COMBINED EQUITY:..................................... 5,033,176 9,449,374 (2,396,757)
----------- ----------- ----------
$28,893,231 $30,221,968 $2,446,114
=========== =========== ==========
</TABLE>

See accompanying notes to financial statements.

F-39
<PAGE> 112

REALTY HOTEL LESSEE CORP.

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PREDECESSOR
--------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ ---------- ----------
<S> <C> <C> <C>
REVENUES FROM HOTEL OPERATIONS:
Room revenue........................................ $18,800,566 $6,432,009 $7,513,400
Food and beverage revenue........................... 519,440 178,183 396,270
Other revenue....................................... 591,135 29,021 221,708
----------- ---------- ----------
Total revenues...................................... 19,911,141 6,639,213 8,131,378
EXPENSES:
Departmental expenses:
Rooms............................................ 4,915,019 1,057,092 1,764,755
Food and beverage................................ 921,514 178,383 461,468
General and administrative.......................... 4,470,820 1,027,876 2,109,610
Advertising and promotion........................... 870,732 199,679 284,948
Utilities........................................... 933,994 216,943 350,585
Repairs and maintenance............................. 2,473,074 629,782 878,276
Real estate, personal property taxes, and
insurance........................................ 911,870 209,864 --
Percentage rent..................................... -- -- 2,779,004
Interest expense.................................... 1,853,800 425,330 --
Depreciation........................................ 1,225,898 309,294 --
----------- ---------- ----------
Total expenses...................................... 18,576,721 4,254,243 8,628,646
----------- ---------- ----------
NET INCOME (LOSS)..................................... $ 1,334,420 $2,384,970 $ (497,268)
=========== ========== ==========
</TABLE>

See accompanying notes to financial statements.

F-40
<PAGE> 113

REALTY HOTEL LESSEE CORP.

COMBINED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 1998

<TABLE>
<CAPTION>
PREDECESSOR
---------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss).................................. $ 1,334,420 $ 2,384,970 $ (497,268)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 1,264,424 300,901 --
(Increase) decrease in:
Accounts receivable............................. (226,419) (247,285) (325,258)
Inventories..................................... (68,323) (18,990) (144,557)
Cash held in escrow............................. (30,039) -- --
Other assets.................................... 581,474 (211,385) 142,986
Payments on behalf of RRF....................... -- -- (320,668)
Increase (decrease) in:
Accounts payable................................ 321,975 63,526 111,471
Bank overdraft.................................. -- -- 225,953
Accrued expenses................................ 737,618 26,077 465,383
Percentage rent payable......................... -- -- 2,373,108
----------- ----------- -----------
Net cash provided by operating
activities............................... 3,915,130 2,297,814 2,031,150
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures, and equipment..... (281,998) -- --
Acquisition of land, building and equipment........ (79,707) -- --
Guest room remodeling.............................. (565,471) -- --
Transfer of net assets............................. -- -- (1,644,720)
Capitalization of partners' capital................ (742,576) -- --
----------- ----------- -----------
Net cash used by investing activities...... (1,669,752) -- (1,644,720)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of mortgage notes payable.................. (636,524) (115,896) --
Refinancing of mortgage notes payable.............. (5,017,226) -- --
Increase in loans from affiliates.................. 678,456 -- --
Increase of mortgage notes payable................. 7,000,000 -- --
Purchases of partners' capital..................... 157,907 -- --
Distributions...................................... (4,866,351) (1,342,796) --
Lines of credit.................................... (6,728) -- --
Loan fees.......................................... (29,000) -- --
Capital lease obligations.......................... (24,838) (8,436) --
----------- ----------- -----------
Net cash (used) by financing activities.... (2,744,304) (1,467,128) --
Net change in cash and cash equivalents.............. (498,926) 830,686 386,430
Cash and cash equivalents at beginning of year....... 628,797 628,797 129,871
=========== =========== ===========
Cash and cash equivalents at end of year............. $ 129,871 $ 1,459,483 $ 516,301
=========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-41
<PAGE> 114

REALTY HOTEL LESSEE CORP.

NOTES TO COMBINED FINANCIAL STATEMENTS

MARCH 31, 1998

(UNAUDITED)

1. DESCRIPTION OF BUSINESS:

Realty Hotel Lessee Corp. (the Lessee) manages and operates full and
limited service hotels located in Arizona and California.

2. ORGANIZATION:

The Lessee commenced operations on January 31, 1998 as the exclusive lessee
of an Ohio real estate investment trust ("REIT"). The Lessor is RRF Limited
Partnership, which owns the hotel properties as of January 31, 1998 and of which
the REIT is the sole general partner.

3. BASIS OF PRESENTATION:

These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The Lessee
operates on a calendar year basis, and accordingly, its financial information is
presented on that basis. The financial statements for 1997 and March 31, 1997
represent the predecessor's financial statements and are not comparable in all
respects with the financial statements of the Lessee. Operating results for the
three-month period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. For further
information, refer to the predecessor's consolidated financial statements and
footnotes thereto included in the REIT's annual report on Form 10-K for the
period ended January 31, 1998.

4. PERCENTAGE LEASE AGREEMENTS:

At April 30, 1998, the Lessee leases nine hotels (the Hotels) from RRF
Limited Partnership and, in the case of one of the Hotels, RRF Sub Corp.,
pursuant to long-term leases (Percentage Leases). The Hotels are located in
Phoenix, Tempe, Scottsdale, Flagstaff, Tucson (2), and Yuma, Arizona; and San
Diego and Ontario, California.

The Percentage Leases end on May 31, 2007, subject to earlier termination
on the occurrence of certain contingencies, as defined. The Percentage Leases do
not contain renewal terms. The Lessee is required to pay the greater of minimum
rent, as defined, or a percentage rent. Percentage rent applicable to room and
other hotel revenue varies by lease and is calculated by multiplying fixed
percentages by the total amounts of such revenues over specified threshold
amounts. Percentage rent related to food and beverage revenues is at 5% of such
revenues in excess of $200,000 in all of the Percentage Leases. Both the
threshold amounts used in computing percentage rent and minimum rent are subject
to annual adjustments beginning January 1, 1999 based on increases in the United
States Consumer Price Index.

Other than real estate and personal property taxes, casualty insurance and
capital improvements, which are obligations of the Partnership, the Percentage
Leases require the Lessee to pay all costs and expenses incurred in the
operation of the Hotels.

The Percentage Leases require the Lessee to indemnify each lessor against
all liabilities, costs and expenses incurred by, imposed on or asserted against
each lessor in the normal course of operating the Hotels.

F-42
<PAGE> 115

REALTY HOTEL LESSEE CORP.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum rent (ignoring CPI increases) to be paid by the Lessee under
the Percentage Leases for nine hotels, including San Diego, at March 31, 1998
for each of the years in the period 1998 to 2002 and in total thereafter is as
follows:

<TABLE>
<S> <C>
Calendar 1998......................................... $ 4,888,000
1999......................................... 6,350,000
2000......................................... 6,350,000
2001......................................... 6,350,000
2002......................................... 6,350,000
Thereafter................................... 27,514,000
-----------
$57,802,000
===========
</TABLE>

Rent expense for the two months ended March 31, 1998 was $2,779,004 of
which approximately $923,044 was in excess of minimum rent.

5. PRO FORMA FINANCIAL INFORMATION:

The following unaudited pro forma condensed statements of operations for
the three-month periods ended March 31, 1998 and 1997 are presented as if the
Lessee leased and operated from January 1, 1997 all of the Hotels owned by the
Partnership as of March 31, 1998 (in thousands).

The pro forma condensed statements of operations do not purport to present
what actual results of operations would have been if the Hotels were operated by
the Lessee pursuant to the Percentage Leases from January 1, 1997 or to project
results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Room revenue................................................ $ 7,513 7,457
Food and beverage revenue................................... 396 503
Other revenue............................................... 222 95
------- ------
Total revenues.................................... 8,131 8,055
------- ------
Departmental expenses of hotels............................. 2,226 1,844
Percentage lease expense.................................... 3,933 3,932
Other expenses.............................................. 3,610 2,657
------- ------
Net loss.......................................... $(1,638) (378)
======= ======
</TABLE>

6. SUBSEQUENT EVENT:

In April 1998, the Partnership purchased a hotel located in San Diego,
California which was leased to the Lessee pursuant to a long-term percentage
lease.

F-43
<PAGE> 116

INDEPENDENT AUDITOR'S REPORT

The Members
Tucson Saint Mary's Suite Hospitality, LLC:

We have audited the accompanying balance sheet of Tucson Saint Mary's Suite
Hospitality, LLC (An Arizona Limited Liability Company) as of December 31, 1997,
and the related statements of operations and members' deficit and cash flows for
the year ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tucson Saint Mary's Suite
Hospitality, LLC as of December 31, 1997, and the results of its operations and
cash flows for the year ended in conformity with generally accepted accounting
principles.

February 27, 1998 Michael Maastricht, C.P.A.
Phoenix, Arizona

F-44
<PAGE> 117

TUCSON SAINT MARY'S SUITE HOSPITALITY, LLC

BALANCE SHEET
DECEMBER 31, 1997

<TABLE>
<S> <C>
ASSETS
Cash........................................................ $ 16,617
Accounts receivable......................................... 51,999
Inventory................................................... 95,643
Land........................................................ 900,000
Buildings and equipment pledged, at cost, net of accumulated
depreciation.............................................. 5,415,062
Deferred loan fees, net of accumulated amortization......... 85,000
Cash held in escrow......................................... 90,452
Other assets................................................ 11,277
----------
$6,666,050
==========
LIABILITIES AND MEMBERS' DEFICIT
Accounts payable............................................ $ 391,484
Accrued expenses............................................ 298,403
Deed of trust............................................... 6,000,000
Line of credit.............................................. 50,000
Advances from affiliates.................................... 1,140,428
----------
7,880,315
----------
Members' deficit:
Members' capital.......................................... 25,000
Distributions to prior owners............................. (788,256)
Accumulated losses........................................ (451,009)
----------
(1,214,265)
----------
$6,666,050
==========
</TABLE>

See accompanying notes to financial statements

F-45
<PAGE> 118

TUCSON SAINT MARY'S SUITE HOSPITALITY, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Revenues:
Room rentals.............................................. $2,562,155
Restaurant and banquet.................................... 813,651
Telephone................................................. 100,698
Other..................................................... 65,144
----------
3,541,648
----------
Department costs:
Wages and salaries:
Salaries.................................................. 206,457
Front desk................................................ 139,182
Housekeeping.............................................. 224,374
Laundry and houseman...................................... 85,297
Maintenance and other..................................... 146,069
Taxes and benefits........................................ 129,684
----------
931,063
----------
Rooms department:
Guest supplies............................................ 60,305
Complimentary items....................................... 92,692
Telephone................................................. 65,824
Cleaning supplies......................................... 36,776
Office and desk supplies.................................. 11,707
Linen..................................................... 18,952
Travel agent commissions.................................. 25,217
Reservations.............................................. 4,147
Other rooms department.................................... 18,357
----------
334,157
----------
Other operating expenses:
Administrative and general:
Professional services..................................... 83,054
Licenses, dues and subscriptions.......................... 12,274
Bank charges and credit card discount..................... 51,045
Management fees........................................... 58,372
Trademark license fees.................................... 100,414
Other administrative...................................... 21,767
----------
326,926
----------
Advertising and sales promotion:
Travel and promotion...................................... 18,434
Advertising trust fees.................................... 14,189
Publications and newspapers............................... 48,458
Billboards................................................ 18,949
Guest mail and postage.................................... 6,685
Supplies and sales printing............................... 13,608
----------
120,323
----------
</TABLE>

(continued)

F-46
<PAGE> 119

TUCSON SAINT MARY'S SUITE HOSPITALITY, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Repairs and maintenance:
Landscaping and pool...................................... $ 55,229
Mechanical and electrical................................. 42,611
Supplies.................................................. 31,544
Refurbishing.............................................. 181,658
-----------
311,042
-----------
Restaurant and banquet:
Food and beverage......................................... 224,016
Wages..................................................... 292,261
Benefits and taxes........................................ 51,500
Supplies.................................................. 28,893
Other..................................................... 14,404
-----------
611,074
-----------
Utilities:
Electric.................................................. 242,926
Gas....................................................... 35,433
Water and sewer........................................... 71,940
-----------
350,299
-----------
Other fixed charges:
Property insurance........................................ 35,165
Property taxes............................................ 168,872
Depreciation.............................................. 247,548
Interest.................................................. 556,188
-----------
1,007,773
-----------
Total expenses.................................... $ 3,992,657
-----------
Net loss.................................................... (451,009)
Members' capital contributions.............................. 25,000
Distributions to prior owners............................... (788,256)
Members' deficit, beginning of year......................... --
-----------
Members' deficit, end of year............................... $(1,214,265)
===========
</TABLE>

See accompanying notes to financial statements.

F-47
<PAGE> 120

TUCSON SAINT MARY'S SUITE HOSPITALITY, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ (451,009)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation......................................... 247,548
Amortization......................................... 35,000
(Increase) decrease in:
Accounts receivable.................................. (51,999)
Inventories.......................................... (95,643)
Cash held in escrow.................................. (90,452)
Other assets......................................... (11,277)
Increase (decrease) in:
Accounts payable..................................... 391,484
Accrued expenses..................................... 298,403
-----------
Net cash provided by operating activities......... 272,055
-----------
Cash flows from investing activities:
Acquisition of land, buildings and equipment.............. (6,562,610)
-----------
Net cash used by investing activities............. (6,562,610)
-----------
Cash flows from financing activities:
Deferred loan fees........................................ (120,000)
Increase in line of credit................................ 50,000
Increase in advances from affiliates...................... 1,140,428
Addition of deed of trust: payable........................ 6,000,000
Members' capital contributions............................ 25,000
Distributions to prior owners............................. (788,256)
-----------
Net cash provided by financing activities......... 6,307,172
-----------
Net increase in cash.............................. 16,617
Cash, beginning of period................................. --
-----------
Cash, end of period....................................... $ 16,617
===========
</TABLE>

See accompanying notes to financial statements.

F-48
<PAGE> 121

NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997

1. OPERATIONS AND SUMMARY OF SIGNIFICANT POLICIES:

Tucson Saint Mary's Suite Hospitality, LLC ("The Company") (An Arizona
Limited Liability Company) was organized in May 1997 to purchase and operate a
hotel property in Tucson, Arizona. The financial statements are presented for
the purpose of presenting the property's operations for a full year and include
operations of the prior owners for the period January 1 to May 20, 1997. The
property is operated under the InnSuites trademark ("InnSuites") of Hospitality
Corporation International ("Hospitality"). An affiliate, InnSuites Hotels, LLC
provides management services to the Company. The property is located in a
developed area that includes other hotel properties some of which may have
greater financial resources than the Company.

Significant accounting policies of the Company follow:

Property and Equipment. Buildings and equipment are stated at cost.
Depreciation is provided principally using the straight-line method for
financial reporting and income tax purposes over the estimated useful lives of
the assets which range from 7 years for equipment to 40 years for the buildings.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense including regular guest room refurbishing. Loan fees are
amortized over the term of the note. Property accounts consist of the following:

<TABLE>
<S> <C>
Buildings................................................... $3,780,087
Equipment and furnishings................................... 1,882,523
----------
5,662,610
Accumulated depreciation.................................... 247,548
----------
$5,415,062
==========
</TABLE>

Management of the Company reviews the hotel property for impairment when
events or changes in circumstances indicate the carrying amounts of the hotel
properties may not be recoverable. When such conditions exist, management
estimates the future cash flows from operations and disposition of the hotel
property. If the estimated undiscounted future cash flows from operations and
disposition of the hotel property are less than the carrying amount of the
asset, an adjustment to reduce the carrying amount to the related hotel
property's estimated fair market value would be recorded and an impairment loss
would be recognized. No such impairment losses have been recognized.

Cash and Cash Equivalents. All highly liquid investments with an original
maturity date of three months or less when purchased are considered to be cash
equivalents.

Cash Held in Escrow. Cash held in escrow consists of amounts for real
estate taxes remitted to the lender which holds the deed of trust on the hotel
property and amounts deposited for the replacement of hotel real and personal
property pursuant to the terms of the loan agreement.

Deferred Loan Fees. Deferred loan fees are amortized over the terms of the
related loan agreement. Amortization expense of $35,000 for the period ended
December 31, 1997 is included in interest expense in the accompanying statements
of operations. Accumulated amortization of deferred expenses was $35,000 at
December 31, 1997.

Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and credit losses are charged off when deemed to be
uncollectible. Such losses have been minimal and within management's
expectations.

Inventories. Inventories, which consist primarily of linen, operating
supplies, and food and beverage, are stated at the lower of cost or market. Cost
is determined by the first in, first out method.

F-49
<PAGE> 122

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

YEAR ENDED DECEMBER 31, 1997

Income Taxes. All income and expense is passed through the Company for tax
purposes and reported on the income tax returns of the individual members.
Accordingly, the financial statements include no provision or liabilities for
income taxes.

Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.

2. RELATED PARTY TRANSACTIONS:

The Company, Hospitality and its affiliates are related through common
ownership and management. The Company accrued fees to Hospitality or its
affiliates during 1997 for services rendered as follows (fees in excess of these
amounts were paid by the property to the prior management company and trademark
owner):

<TABLE>
<S> <C>
Management fees (2.5% of total revenues).................... $ 35,472
Trademark license fees (2.5% of total revenues)............. 35,472
InnSuites Trust -- advertising (1% of total revenues)....... 14,189
Advances from affiliates are as follows:
Hospitality Corporation International....................... $ 825,000
Rare Earth Development Company.............................. 52,500
Managing member............................................. 262,928
----------
$1,140,428
==========
</TABLE>

Advances from affiliates are working capital advances generally advanced
during slower periods and repaid by the property during the busy season and
advances connected with guest room refurbishing and improvements. There are no
terms or covenants connected with the advances.

3. DEED OF TRUST:

The deed of trust payable matures in May of 1999. Monthly payments of
interest only of $70,000 are at a rate of 14%. The note is secured by all
property and equipment of the Company and collateral assignment of all operating
agreements. Interest paid in 1997 was $521,188. Annual principal payment
requirements of the mortgage are as follows:

F-50
<PAGE> 123

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

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE SELLING
STOCKHOLDERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company........................... 2
Risk Factors.......................... 4
Use of Proceeds....................... 12
Selling Stockholders.................. 12
Plan of Distribution.................. 18
Description of Capital Stock.......... 19
Selected Historical and Pro Forma
Financial and Operating Data........ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 30
Business and Properties............... 39
Policies and Objectives With Respect
to Certain Activities............... 48
Certain Declaration Provisions........ 50
Partnership Agreement................. 52
Federal Income Tax Considerations..... 54
Tax Aspects of the Partnership........ 65
Available Information................. 69
Incorporation of Certain Documents by
Reference........................... 69
Forward-Looking Statements............ 70
Legal Matters......................... 71
Experts............................... 71
Historical Financial Statements....... F-1
</TABLE>

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

4,182,361 SHARES

LOGO

REALTY REFUND TRUST

SHARES OF BENEFICIAL INTEREST,
WITHOUT PAR VALUE
------------------------

PROSPECTUS
------------------------

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 124

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting discounts and commissions) payable by the
Registrant in connection with the issuance and distribution of the Shares.

<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee........ $ 5,588
Printing and mailing........................................ 85,000
Accountant's fees and expenses.............................. 45,000
Legal fees and expenses..................................... 65,300
Miscellaneous............................................... 5,000
--------
Total..................................................... $205,888
========
</TABLE>

ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS

The Declaration of the Company generally limits the liability for money
damages of the Company's Trustees and officers to the Company and its
stockholders to the fullest extent permitted from time to time by the laws of
the State of Ohio. The Declaration also provides generally for the
indemnification of Trustees and officers, among others, against judgments,
settlements, penalties, fines and reasonable expenses actually incurred by them
in connection with any proceeding to which they have been made a party by reason
of their service in those or other capacities except in respect of any matter as
to which they shall have been adjudicated to have acted in bad faith or with
willful misconduct or reckless disregard of their duties or gross negligence or
not to have acted in good faith in the reasonable belief that their action was
in the best interests of the Company.

The Company may purchase Trustee and officer liability insurance for the
purpose of providing a source of funds to pay any indemnification described
above.

ITEM 16. EXHIBITS

<TABLE>
<C> <S> <C>
4.1 -- Form of Common Stock Certificate.**
5.1 -- Opinion of Thompson Hine & Flory LLP.***
8.1 -- Opinion of Thompson Hine & Flory LLP as to Tax Matters.***
10.1 -- First Amended and Restated Agreement of Limited Partnership
of RRF Limited Partnership dated January 31, 1998.**
10.2 -- Advisory Agreement dated as of January 31, 1998, between RRF
Limited Partnership and Mid-America ReaFund Advisors, Inc.
(incorporated by reference to Exhibit 10(a) of the
Registrant's Form 10-K for the year ended January 31, 1998,
filed with the Securities and Exchange Commission on May 18,
1998).*
10.3 -- Employment Agreement dated as of January 31, 1998, between
the Company and James F. Wirth (incorporated by reference to
Exhibit 10(b) of the Registrant's Form 10-K for the year
ended January 31, 1998, filed with the Securities and
Exchange Commission on May 18, 1998).*
10.4 -- Formation Agreement among the Company, Mid-America ReaFund
Advisors, Inc., Alan M. Krause, James H. Berick, Hospitality
Corporation International, InnSuites Hotels, L.L.C., James
F. Wirth, Tucson Hospitality Properties, Ltd., Yuma
Hospitality Properties, Ltd., Baseline Hospitality
Properties, Ltd., Northern Phoenix Investment Limited
Partnership, Ontario Hospitality Properties Limited
Partnership, Hulsey Hotels Corporation and Buenaventura
Properties, Inc. (incorporated by reference to Exhibit 2.1
of the Registrant's Form 8-K, filed with the Securities and
Exchange Commission on February 17, 1998).
</TABLE>

II-1
<PAGE> 125

<TABLE>
<C> <S> <C>
10.5 -- Contribution Agreement dated as of February 1, 1998, between
James F. Wirth, Gail J. Wirth and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on March 16, 1998).
10.6 -- Agreement of Purchase and Sale and Joint Escrow Instructions
dated March 20, 1998, between Lafayette Hotel, LLC and RRF
Limited Partnership (incorporated by reference to Exhibit
2.1 of the Registrant's Form 8-K/A, filed with the
Securities and Exchange Commission on May 27, 1998).
10.7 -- Contribution Agreement dated as of June 1, 1998, among James
F. Wirth, Steven S. Robson and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on September 2, 1998.
23.1 -- Consent of Thompson Hine & Flory LLP (included in Exhibits
5.1 and 8.1).***
23.2 -- Consent of Arthur Andersen LLP.***
23.3 -- Consent of Michael Maastricht, CPA.***
24.1 -- Power of Attorney.**
99.1 -- Form of Percentage Lease.**
</TABLE>

- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto.

** Previously filed.

*** Filed herewith.

ITEM 17. UNDERTAKINGS.

Rule 415 Offering. The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) 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. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(iii) 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.

Filings Incorporating Subsequent Exchange Act Documents by Reference. The
undersigned Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed
II-2
<PAGE> 126

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.

Request For Acceleration of Effective Date. 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
provisions referred to in Item 15 of this registration statement, 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 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted 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 Act and will
be governed by the final adjudication of such issue.

II-3
<PAGE> 127

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cleveland, State of Ohio, on the 8th day of
September, 1998.

REALTY REFUND TRUST
an unincorporated Ohio real estate
investment trust (Registrant)

By: /s/ JAMES F. WIRTH
------------------------------------
James F. Wirth
Chairman, President and Chief
Executive Officer

By: /s/ GREGORY D. BRUHN
------------------------------------
Gregory D. Bruhn
Executive Vice President, Chief
Financial Officer,
Treasurer and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ JAMES F. WIRTH Trustee, Chairman, President and September 8, 1998
- ----------------------------------- Chief Executive Officer
James F. Wirth

/s/ GREGORY D. BRUHN Trustee, Executive Vice President, September 8, 1998
- ----------------------------------- Chief Financial Officer,
Gregory D. Bruhn Treasurer and Secretary

* Trustee September 8, 1998
- -----------------------------------
Marc E. Berg

* Trustee September 8, 1998
- -----------------------------------
Lee J. Flory

* Trustee September 8, 1998
- -----------------------------------
Edward G. Hill

* Signature by Gregory D. Bruhn as Attorney-in-Fact under Power of September 8, 1998
Attorney-in-Fact under Power of Attorney
Attorney

/s/ GREGORY D. BRUHN
----------------------------------
Gregory D. Bruhn
</TABLE>

II-4
<PAGE> 128

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
4.1 -- Form of Common Stock Certificate.**
5.1 -- Opinion of Thompson Hine & Flory LLP.***
8.1 -- Opinion of Thompson Hine & Flory LLP as to Tax Matters.***
10.1 -- First Amended and Restated Agreement of Limited Partnership
of RRF Limited Partnership dated January 31, 1998.**
10.2 -- Advisory Agreement dated as of January 31, 1998, between RRF
Limited Partnership and Mid-America ReaFund Advisors, Inc.
(incorporated by reference to Exhibit 10(a) of the
Registrant's Form 10-K for the year ended January 31, 1998,
filed with the Securities and Exchange Commission on May 18,
1998).*
10.3 -- Employment Agreement dated as of January 31, 1998, between
the Company and James F. Wirth (incorporated by reference to
Exhibit 10(b) of the Registrant's Form 10-K for the year
ended January 31, 1998, filed with the Securities and
Exchange Commission on May 18, 1998).*
10.4 -- Formation Agreement among the Company, Mid-America ReaFund
Advisors, Inc., Alan M. Krause, James H. Berick, Hospitality
Corporation International, InnSuites Hotels, L.L.C., James
F. Wirth, Tucson Hospitality Properties, Ltd., Yuma
Hospitality Properties, Ltd., Baseline Hospitality
Properties, Ltd., Northern Phoenix Investment Limited
Partnership, Ontario Hospitality Properties Limited
Partnership, Hulsey Hotels Corporation and Buenaventura
Properties, Inc. (incorporated by reference to Exhibit 2.1
of the Registrant's Form 8-K, filed with the Securities and
Exchange Commission on February 17, 1998).
10.5 -- Contribution Agreement dated as of February 1, 1998, between
James F. Wirth, Gail J. Wirth and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on March 16, 1998).
10.6 -- Agreement of Purchase and Sale and Joint Escrow Instructions
dated March 20, 1998, between Lafayette Hotel, LLC and RRF
Limited Partnership (incorporated by reference to Exhibit
2.1 of the Registrant's Form 8-K/A, filed with the
Securities and Exchange Commission on May 27, 1998).
10.7 -- Contribution Agreement dated as of June 1, 1998, among James
F. Wirth, Steven S. Robson and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on September 2, 1998).
23.1 -- Consent of Thompson Hine & Flory LLP (included in Exhibits
5.1 and 8.1).***
23.2 -- Consent of Arthur Andersen LLP.***
23.3 -- Consent of Michael Maastricht, CPA.***
24.1 -- Power of Attorney.**
99.1 -- Form of Percentage Lease.**
</TABLE>

- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto.

** Previously filed.

*** Filed herewith.

<PAGE> 1
Exhibit 5.1

[Letterhead of Thompson Hine & Flory LLP]

September 8, 1998

Realty ReFund Trust
1750 Huntington Building
925 Euclid Avenue
Cleveland, Ohio 44115

Re: 4,182,361 Shares of Beneficial Interest Registered Pursuant to Realty
ReFund Trust's Registration Statement on Form S-2, No. 333-56301

Ladies and Gentlemen:

In connection with the filing by Realty ReFund Trust (the "Company") with the
Securities and Exchange Commission, under the provisions of the Securities Act
of 1933, as amended, of a Registration Statement on Form S-2 and an Amendment
No. 1 to Registration Statement on Form S-2 (collectively, the "Registration
Statement"), registering 4,182,361 shares of beneficial interest, without par
value, of the Company (the "Shares") for reoffer and resale by certain Selling
Stockholders named therein, we have examined the following:

1. The Second Amended and Restated Declaration of Trust and the
By-laws of the Company as currently in effect.

2. Such records of corporate proceedings and such other
documents, and such questions of law, as we deemed necessary
to examine as a basis for the opinions hereinafter expressed.

3. The Registration Statement.

In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as certified, photostatic or
conformed copies, and the authenticity of the originals of all such latter
documents. We have also assumed the due execution and delivery of all documents
where due execution and delivery are prerequisites to the effectiveness thereof.

Based on the foregoing and subject to effectiveness of the Registration
Statement with the Securities and Exchange Commission and to registration or
qualification under the securities laws of the states in which the securities
may be sold, we are of the opinion that when the Shares registered pursuant to
the Registration Statement are sold in the manner

<PAGE> 2

Realty ReFund Trust
September 8, 1998
Page 2

contemplated by the Registration Statement, they will be validly issued, fully
paid and nonassessable.

We express no opinion as to the applicability or effect of any laws, orders or
judgments of any state or jurisdiction other than federal securities laws and
the substantive laws of the State of Ohio. Further, our opinion is based solely
upon existing laws, rules and regulations, and we undertake no obligation to
advise you of any changes that may be brought to our attention after the date
hereof.

We consent to the use of our name under the caption "Legal Matters" in the
Prospectus, constituting part of the Registration Statement, and to the filing
of this opinion as an exhibit to the Registration Statement.

Very truly yours,

/s/ THOMPSON HINE & FLORY LLP
- -------------------------------
Thompson Hine & Flory LLP

<PAGE> 1

Exhibit 8.1
[Letterhead of Thompson Hine & Flory LLP]

September 8, 1998

216-566-5500

Realty ReFund Trust
Suite 1750
925 Euclid Avenue
Cleveland, Ohio 44115

Dear Sir:

We have acted as your counsel in connection with the registration (the
"Registration") under the Securities Act of 1933, as amended (the "Securities
Act"), of 4,182,361 Shares of Beneficial Interest, without par value, of
Realty ReFund Trust (the "Company"). In connection with the Registration, we
have been asked to provide opinions on certain federal income tax matters
related to the Company and the Partnership. Capitalized terms used in this
letter and not otherwise defined herein have the meaning set forth in the
Registration Statement No. 333-56301 on Form S-2 under the Securities Act filed
by the Company with the Securities and Exchange Commission of the United States
on June 8, 1998 and subsequent amendments thereto (the "Registration
Statement").

The opinions set forth herein are given on the date hereof and are based upon
the relevant statutory provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder (including
Proposed and Temporary Regulations), and interpretations of the foregoing as
expressed in court decisions, administrative determinations, and legislative
history as of the date hereof. These provisions and interpretations are subject
to changes prospectively or retroactively that might result in modifications of
our opinions.

For purposes of rendering the opinions contained herein, we have reviewed and,
with your approval, relied upon (i) the Registration Statement, (ii) the
Agreement of Limited Partnership as amended, for the Partnership, (iii) the
Company's Second Amended and Restated Declaration of Trust, (iv) as to certain
factual matters upon the statements and representations contained in the
certificate provided us by the Company and related parties dated September 8,
1998 (the "Company's Certificate") attached as Exhibit A hereto, and (v) such
other documents, records, instruments, representations, and matters of fact and
law as we have deemed necessary in order to enable us to render the opinions
expressed herein.

<PAGE> 2

September 8, 1998
Page 2

For purposes of, and in rendering, the opinions contained herein, we have
assumed, with your approval that (i) the documents listed above that have been
reviewed in proposed form will be executed in substantially the form of the
proposed agreements that we have reviewed, that all photocopies are authentic
copies of the original documents, that all signatures are genuine, that all of
the representations and statements set forth in the documents listed above,
including, without limitation, the factual assumptions and representations of
the Company set forth in the Registration Statement under the caption "Federal
Income Tax Considerations," and in the Company Certificate, are true and
correct, and that all obligations imposed by any such documents on the parties
thereto, including obligations imposed under the organizational documents of the
Company, have been and will be performed or satisfied in accordance with their
terms; (ii) the Company's qualification as a real estate investment trust
("REIT") under the Code will depend upon the Company's continuing satisfaction
of the income, asset, ownership, distribution, source of income, recordkeeping
and other requirements for REIT qualification which are discussed in the
Registration Statement under the caption "Federal Income Tax Considerations";
and (iii) upon completion of the public offering of the Company's Common Stock,
beneficial ownership of the Company's Common Stock will be held by 100 or more
persons, and more than 50% of the Company's Common Stock will not be owned,
actually or constructively (within the meaning of Section 544 of the Code), by
or for any five or fewer individuals. Because the Company's satisfaction of
these requirements will depend upon future events, and Thompson Hine & Flory LLP
will not review annually whether the Company has fulfilled such requirements, no
assurance can be given, and we express no opinion, that the actual results of
the Company's operation for any one taxable year actually has satisfied or will
satisfy the requirements of a REIT under the Code.

Based upon and subject to the foregoing and subject to the qualification stated
below, as of the date hereof, for federal income tax purposes, we are of the
opinion that (i) commencing with the Company's taxable year ending January 31,
1999, and assuming that the elections and other procedural steps described in
the discussion of "Federal Income Tax Considerations" of the Registration
Statement were completed by the Company in a timely fashion, the Company has
been organized in conformity with the requirements for qualification of a REIT,
and its proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code, and (ii) that the
Partnership will be treated as a partnership for federal income tax purposes and
not as a "publicly traded partnership" within the meaning of Section 7704(b)of
the Code.

No opinion is expressed as to any matter not discussed herein.

<PAGE> 3

September 8, 1998
Page 3

This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing with the Securities and
Exchange Commission of this letter as an exhibit to the Registration Statement
and the reference to us in the Registration Statement under the caption "Federal
Income Tax Considerations" and "Legal Matters." In giving such consent, we do
not thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act.

Very truly yours,

/s/ THOMPSON HINE & FLORY LLP

Thompson Hine & Flory LLP

<PAGE> 4
[Letterhead of Realty ReFund Trust]

September 8, 1998

Thompson Hine & Flory LLP
3900 Key Center
127 Public Square
Cleveland, Ohio 44114-1216

Ladies and Gentlemen:

Realty ReFund Trust (the "Company"), an Ohio unincorporated real estate
investment trust, and RRF Limited Partnership, a Delaware limited partnership
(the "Partnership") have requested your opinion with respect to certain federal
income tax consequences in connection with the registration statement on Form
S-2, Registration No. 333-56301, originally filed with the Securities and
Exchange Commission on June 8, 1998, and subsequent amendments (which
registration statement is hereinafter referred to as the "Registration
Statement"). Capitalized terms used herein and not otherwise defined have the
meanings set forth in the Registration Statement.

In connection with your opinion, the Company makes the following
representations to you in its own capacity and its capacity as General Partner
of the Partnership:

1. The Company has and will continue to operate in accordance with Ohio
law and its Second Amended and Restated Declaration of Trust.

2. The Partnership has and will continue to operate in accordance with
Delaware law and the First Amended and Restated Agreement of Limited Partnership
(the "Partnership Agreement"). The Partnership Agreement has been duly executed
and the Certificates of Limited Partnership of the Partnership and all
amendments thereto have been duly executed and filed. The Company's wholly-owned
subsidiary, RRF Sub Corp., will operate in accordance with (i) its organization
documents and (ii) the laws of the jurisdiction in which it is organized.

3. The Company has duly and timely made the election specified in
Section 856(c)(1) of the Internal Revenue Code of 1954 (the "1954 Code") to be a
real estate investment trust under the Code commencing with its taxable year
ending January 31, 1972, such election has not been terminated or revoked under
either the 1954 Code or the

<PAGE> 5

Thompson Hine & Flory LLP
September 8, 1998
Page 2

Internal Revenue Code of 1986, as amended (the "Code"), and the Company has
adopted a fiscal year ending January 31.

4. The Company has been, and will be, managed by one or more of its
trustees, and beneficial ownership in the Company will be evidenced by
transferable shares. The Company will not impose any transfer restrictions on
the shares other than those designed to enable the Company to qualify as a
real estate investment trust for federal income tax purposes. As of the close of
its first taxable year and each taxable year thereafter, the Company will have
no undistributed earnings and profits accumulated in any non-REIT year.

5. The Company expects, and the Company has taken, and will take, all
measures within its control to ensure, that at no time during the last half of
any taxable year after the first taxable year for which the election has been
made to be a real estate investment trust will more than 50 percent in value of
the Company's outstanding shares be owned, directly or indirectly, by or for
five or fewer individuals (as defined in Section 542(a)(2) of the Code, as
modified by Section 856(h) of the Code, to include certain entities) for
purposes of Section 856(a)(6) of the Code. Indirect ownership for purposes of
this representation is determined by reference to the attribution rules of
Section 544 of the Code, as modified by Section 856(h) of the Code.

6. The Company expects, and the Company has taken, and will take, all
measures within its control to ensure, that at all times after the first taxable
year for which the election has been made to be a real estate investment trust,
the beneficial ownership of the Company will be held by 100 or more persons.

7. The projections and analysis set forth in the Pro Forma Financial
and Operating Data contained in the Registration Statement prepared by the
Company and its advisers and presented to you with respect to the Company's
qualification under the income and asset tests set forth in Section 856 of the
Code represent the Company's best estimate of the gross income to be derived by
the Company, the Partnership and any qualified REIT subsidiary and the assets
to be held by those entities.

8. The Company expects, and the Company has taken, and will take, all
reasonable measures within its control to ensure, that at least 95 percent of
the gross income for federal income tax purposes derived by the Company in any
taxable year will consist of: (i) dividends; (ii) interest; (iii) rents from
real property derived by the Company, the Partnership and any qualified REIT
subsidiary from rental of the Properties or properties acquired in the future,
including rents attributable to personal property as described in the
representation set forth in paragraph (18) below and including charges for
services customarily furnished or rendered in connection with the rental of real
property, whether or not such charges are separately stated, but excluding for
such purposes rents received from related parties as defined in Section
856(d)(2)(B) of the Code; (iv) gain from the sale or

<PAGE> 6

Thompson Hine & Flory LLP
September 8, 1998
Page 3

other disposition of stock, securities, and real property (including interests
in real property and interests in mortgages on real property), which is not
stock in trade of the Company or other property that would properly be included
in the inventory of the Company if on hand at the close of the taxable year, or
property held by the Company primarily for sale to customers in the ordinary
course of its trade or business; (v) abatements and refunds of taxes on real
property; (vi) income and gain derived from foreclosure property, as defined in
Section 856(e) of the Code; (vii) amounts (other than amounts the determination
of which depends in whole or in part on the income or profits of any person)
received or accrued as consideration for entering into agreements (a) to make
loans secured by mortgages on real property or on interests in real property or
(b) to purchase or lease real property (including interests in real property and
interests in mortgages on real property); (viii) gain from sale or other
disposition of a real estate asset which is not a prohibited transaction (as
defined in Section 857(b)(6)(B)(iii) of the Code) solely by reason of Section
857(b)(6) of the Code; and (ix) (a) for taxable years beginning on or before
August 5, 1997, income derived from payments to the Company or any qualified
REIT subsidiary of the Company on a bona fide interest rate swap or cap
agreement entered into to hedge any variable rate indebtedness of the Company or
such subsidiary incurred or to be incurred to acquire or carry real estate
assets or gain from the sale or other disposition of such an agreement (an
"Interest Rate Agreement") and (b) for taxable years beginning after August 5,
1997, income derived from payments to the Company or any qualified REIT
subsidiary of the Company on interest rate swap or cap agreements, options,
futures contracts, forward rate agreements and other similar financial
instruments entered into to reduce the interest rate risks with respect to any
indebtedness incurred or to be incurred to acquire or carry real estate assets,
or gain from the sale or other disposition of such an investment.

9. The Company expects, and the Company has taken, and will take, all
reasonable measures within its control to ensure, that at least 75 percent of
the gross income derived by the Company in any taxable year will consist of: (i)
rents from real property derived by the Company, the Partnership and any
qualified REIT subsidiary from rental of the Properties or properties acquired
in the future, including rents attributable to personal property as described in
the representation set forth in paragraph (18) below and including charges for
services customarily furnished or rendered in connection with the rental of real
property, whether or not such charges are separately stated, but excluding for
such purposes rents received from related parties as defined in Section
856(d)(2)(B) of the Code; (ii) interest on obligations secured by mortgages on
real property or on interests in real property; (iii) gain from the sale or
other disposition of real property (including interests in real property and
interests in mortgages on real property), which is not stock in trade of the
Company or other property that would properly be included in the inventory of
the Company if on hand at the close of the taxable year, or property held by the
Company primarily for sale to customers in the ordinary course of its trade or
business; (iv) dividends or other distributions on, and gain (other than gain
from prohibited transactions as defined in Section 857(b)(6)(B)(iii) of the
Code) from the sale or other disposition of, transferable

<PAGE> 7

Thompson Hine & Flory LLP
September 8, 1998
Page 4

shares (or transferable certificates of beneficial interest) in other real
estate investment trusts which meet the requirements of Sections 856-859 of the
Code; (v) abatements and refunds of taxes on real property; (vi) income and gain
derived from foreclosure property, as defined in Section 856(e) of the Code;
(vii) amounts (other than amounts the determination of which depends in whole or
in part on the income or profits of any person) received or accrued as
consideration for entering into agreements (a) to make loans secured by
mortgages on real property or on interests in real property or (b) to purchase
or lease real property (including interests in real property and interests in
mortgages on real property); (viii) gain from the sale or other disposition of a
real estate asset which is not a prohibited transaction (as defined in Section
857(b)(6)(B)(iii) of the Code) solely by reason of Section 857(b)(6) of the
Code; and (ix) qualified temporary investment income (as defined in Section
856(c)(5)(D) of the Code).

10. For each of the Company's taxable years other than taxable years
beginning after August 5, 1997, less than 30 percent of the Company's gross
income was derived from the sale or other disposition of (a) stock or securities
(including Interest Rate Agreements) held for less than one year, (b) property
in a transaction which is a "prohibited transaction" (as defined in Section
857(b)(6)(B)(iii) of the Code), and (c) real property (including interests in
real property and interests in mortgages on real property) held for less than
four years other than property compulsorily or involuntarily converted within
the meaning of Section 1033 of the Code, and property which is foreclosure
property as defined in Section 856(e) of the Code.

11. The Company has exercised, and will exercise, ordinary business
care and prudence in attempting to comply with the 95 percent and 75 percent
gross income tests described in paragraphs (8) and (9) above at the time of each
transaction.

12. The Company expects, and the Company has taken, and will take, all
reasonable measures within its control to ensure, that no amount received or
accrued, directly or indirectly, by the Company with respect to any real or
personal property is dependent in whole or in part on the income or profits
derived by any person as defined in Section 7701(a)(1) of the Code, except (a)
amounts based on a fixed percentage or percentages of receipts or sales and
amounts received from a tenant which derives substantially all of its gross
income with respect to subleasing substantially all of such property where such
amounts are attributable to qualified rentals as defined in Section 856(d)(6)(B)
of the Code and (b) percentage rentals permitted under Section 856(d)(4) of the
Code.

13. The Company has no knowledge of any amounts received or accrued by
the Company, the Partnership or any qualified REIT subsidiary as rent or
otherwise pursuant to any lease or other arrangement with respect to any real or
personal property which are derived from a tenant which receives or accrues,
directly or indirectly, from subtenants any

<PAGE> 8

Thompson Hine & Flory LLP
September 8, 1998
Page 5

amount the determination of which depends in whole or in part on the income or
profits derived by any person from such property.

14. The Company expects, and the Company has taken, and will take all
reasonable measures within its control to ensure, that no amount received or
accrued, directly or indirectly, by the Company as interest on obligations
secured by mortgages on real property or interest in real property are or will
be dependent in whole or in part on the income or profits derived by any person
from such property (including amounts received or accrued by the debtor the
determination of which depends in whole or in part on the income or profits of
any person), except amounts based on a fixed percentage or percentages of
receipts or sales and amounts received from a debtor which derives substantially
all of its gross income with respect to such property from subleasing
substantially all of such property where such amounts are attributable to
qualified rentals as defined in Section 856(d)(6)(B) of the Code.

15. The Company expects to derive, and the Company has taken, and will
take, all reasonable measures within its control to ensure that it derives,
amounts with respect to interest on obligations secured by mortgages on real
property or interests in real property only where the loan value of the real
property is equal to or exceeds the amount of the loan, so that the entire
amount of interest earned is apportioned to the real property.

16. For taxable years beginning before August 6, 1997, within two years
of any acquisition of foreclosure property (as defined in the Code and including
space reacquired by dispossessing defaulted tenants) and for taxable years
beginning after August 5, 1997, by the close of the third (3rd) taxable year
following the taxable year in which the Company acquired foreclosure property,
or within such period as the Company may obtain by extension from the Internal
Revenue Service, the Company will take all reasonable measures within its
control to sell such foreclosure property or will seek to take such actions as
are necessary including the election under Section 856(e)(5) of the Code to
ensure that income derived or accrued from such foreclosure property will
qualify for the REIT gross income and asset tests. Specifically, the Company
will take all reasonable measures within its control not: (i) to enter into any
lease which will result in the receipt or accrual by the Company of any income
that will not qualify under the gross income tests; (ii) to cause construction
to take place on such property unless such construction involves completion of a
building or improvement where more than 10 percent of the construction of such
building or improvement was completed before default became imminent; and (iii)
after 90 days from the date of acquisition of such property, to use such
property in a trade or business conducted by the Company, other than through an
independent contractor from whom the Company derives no income.

17. All of the proposed activities and services in which each of the
Company and the Partnership intends to engage will be those that are ordinary,
necessary and usual to the operation and management of the Company's, the
Partnership's and any qualified REIT

<PAGE> 9

Thompson Hine & Flory LLP
September 8, 1998
Page 6

subsidiary's rental properties. These activities and services will include only
those customarily furnished or rendered in connection with the rental of real
property in the geographic areas in which the Company, Partnership and any
qualified REIT subsidiary will rent property, including those properties
acquired by the Company, the Partnership and any qualified REIT subsidiary in
the future.

18. Any amounts received by the Company, the Partnership or any
qualified REIT subsidiary that are attributable to personal property leased
under or in connection with a lease of the Company's real property do not and
will not exceed 15 percent of the total rent for any taxable year attributable
to both the real and personal property leased under or in connection with such
leases, within the meaning of Section 856(d)(1)(C) of the Code. Any amounts
received by the Company, the Partnership or any qualified REIT subsidiary
attributable to personal property that is leased with real property are and will
continue to be an incidental amount of the total rents received or accrued with
respect to such real property.

19. For each of the Company's taxable years, the Company, the
Partnership and any qualified REIT subsidiary has not received or accrued and
they will not in the future receive or accrue any amount (herein "service
consideration"), directly or indirectly, with respect to any real or personal
property in any case in which the Company or any qualified REIT subsidiary of
the Company or any partnership in which the Company has an interest (or any
agent of any of the foregoing) furnishes or renders services to the tenants of
such property, or manages or operates such property, other than either (a)
through an "independent contractor" (within the meaning of Section 856(d)(3) of
the Code) from whom or which the Company (or such subsidiary or partnership, as
the case may be), does not derive or receive any income or (b) services usually
or customarily rendered in connection with the rental of space for occupancy
only within the meaning of Treasury Regulations Section 1.512(b)-1(c)(5), or not
rendered primarily for the convenience of the occupant of the real property,
within the meaning of Treasury Regulations Section 1.512(b)-1(c)(5), except that
for taxable years beginning after August 5, 1997, the Company may receive or
accrue a de minimis amount of service consideration which does not (a) cause any
amount included in the Company's gross income, other than such service
consideration, to fail to qualify as "rents from real property" under Section
856(d) of the Code and (b) materially adversely affect the Company's ability to
satisfy the standards relating to 95 percent and 75 percent of its gross income
as set forth in paragraphs 8 and 9 hereof.

20. The Company, the Partnership and any qualified REIT subsidiary
expect, and has taken, and will take, all reasonable measures within their
respective control to ensure that none of them receives or accrues, directly or
indirectly, any "impermissible tenant service income" as defined in Section
856(d)(7) of the Code.

<PAGE> 10

Thompson Hine & Flory LLP
September 8, 1998
Page 7

21. The Company has used, and will use, all reasonable efforts not to
receive or accrue, directly or indirectly, any amount from a "Related Party
Tenant," defined as follows: (i) if a corporation, one in which the Company owns
stock possessing 10 percent or more of the total combined voting power of all
classes of stock entitled to vote or 10 percent or more of the total number of
shares of all classes of stock of such person, or (ii) if not a corporation, a
person in which the Company owns an interest of 10 percent or more in the assets
or net profits of such person. For purposes of this representation, ownership
will be determined by taking into account the attribution rules of Section 318
of the Code (as modified by Section 856(d)(5) of the Code).

22. The Company expects, and the Company has taken, and will take, all
reasonable measures within its control to ensure, that at least 75 percent of
the total value of the assets of the Company, the Partnership and any qualified
REIT subsidiary will at all times consist of real estate assets within the
meaning of Section 856(c)(5)(B) of the Code, cash and cash items (including
receivables) and government securities, and not more than 25 percent of the
value of its total assets will be represented by securities (other than
government securities), limited for this purpose in respect of any one issuer to
an amount not greater in value than 5 percent of the value of total assets of
the Company and to not more than 10 percent of the outstanding voting securities
of any such issuer.

23. The Company, the Partnership and any qualified REIT subsidiary, has
not owned, does not own, and they will take all measures within their control in
the future not to own securities in any one issuer having an aggregate value in
excess of five percent of the value of the total assets of the Company, the
Partnership and any qualified REIT subsidiary, respectively, as determined in
accordance with Treasury Regulations Section 1.856-2(d)(2).

24. The Company, the Partnership and any qualified REIT subsidiary has
not owned, does not own, and they will take all measures within their control
not to, own any securities in any other issuer representing in excess of 10
percent of the outstanding voting securities of such issuer.

25. The Company, the Partnership and any qualified REIT subsidiary has
held, and will at all times hold, the Properties (and all other assets of the
Partnership or such subsidiary) for investment purposes and not as (i) stock in
trade or other property of a kind which would properly be includible in
inventory if on hand at the close of the taxable year, or (ii) property held
primarily for sale to customers in the ordinary course of the trade or business
of the Company, the Partnership or any qualified REIT subsidiary.

26. The Company, the Partnership and any qualified REIT subsidiary has
not owned, does not own, and they will not own, directly or indirectly, any
REMIC residual interests.

<PAGE> 11

Thompson Hine & Flory LLP
September 8, 1998
Page 8

27. The Company has not held, and will not hold, a partnership interest
unless such partnership is treated at all times for federal income tax purposes
as a partnership and not as an association taxable as a corporation (including a
publicly-traded partnership that is treated as a corporation under Section 7704
of the Code).

28. The Company has, expects, and the Company will continue to take all
reasonable measures within its control to be treated as a
"domestically-controlled REIT" within the meaning of Section 897(h)(4)(B) of the
Code.

29. The Company has never been, nor does the Company expect to be
treated in the future as a "pension-held REIT" within the meaning of Section
856(h)(3)(D) of the Code. The Company will continue to take all reasonable
measures within its control to ensure that it will not be treated as a
"pension-held REIT" in the future.

30. The Company has, expects, and the Company will continue to take all
measures within its control to make timely distributions sufficient to satisfy
the annual distribution requirements of Sections 857 and 4981 of the Code.

31. The Company will revalue its assets at the end of each quarter in
which stock or other property is acquired and will eliminate within 30 days
after the end of such quarter any discrepancy between the Code requirements and
the value of its investments attributable in whole or in part to an acquisition
during such quarter.

32. The Company will mail to its shareholders by March 2 of each year
(commencing March 2, 1999) demands for written statements from its shareholders
of record relating to the previous taxable year and disclosing the actual owners
of Company shares in the following circumstances: (i) if the Company has 200 or
less shareholders of record of its shares on any dividend record date, demands
shall be made from each record holder of one-half of one percent or more of its
shares; (ii) if the Company has between 201 and 1,999 shareholders of record of
its shares on any dividend record date, demands shall be made from each record
holder of one percent or more of its shares; and (ii) if the Company has 2,000
or more shareholders of record on any dividend record date, demands shall be
made from each record holder of five percent or more of its shares. Such written
statements will be mailed certified, return receipt requested, in the U.S. mail;
copies of such statements and U.S. postal receipts showing the mailing date will
be kept available for inspection in the Internal Revenue District in which the
Company is required to file its tax return, will be maintained permanently, and
will show the maximum number of shares actually or constructively owned by each
of the actual owners of any of its shares at any time during the last half of
the Company's taxable year. Further, the written statements will inform the
shareholder that if it fails to supply the Company with the required
information, it will be under a duty to submit at the time its tax return is
filed information relating to the actual owner of REIT shares including the
Company as follows: (i) in the case of any person holding shares of stock in any
REIT who is not the actual owner of such stock, the

<PAGE> 12

Thompson Hine & Flory LLP
September 8, 1998
Page 9

name and address of each actual owner, the number of shares owned by each actual
owner at any time during such person's taxable year, and the amount of dividends
belonging to each actual owner; or (ii) in the case of an actual owner of shares
of stock in any REIT, (a) the name and address of each such REIT, the number of
shares actually owned by it at any and all times during its taxable year, and
the amount of dividends from each such REIT received during such shareholder's
taxable year, (b) if shares of any REIT were acquired or disposed of during such
person's taxable year, the name and address of the REIT, the number of shares
acquired or disposed of, the dates of acquisition or disposition, and the names
and addresses of the persons from whom such shares were acquired or to whom they
were transferred, (c) if any shares of REIT stock including securities
convertible into REIT stock are also owned by any member of such person's family
or by any of its partners, the name and address of the REIT, the name and
address of such family member or partner and the number of shares owned by each
such person at any and all times during such person's taxable year, and (d) the
name and address of any corporation, partnership, association, or trust in which
such person had a beneficial interest of 10 percent or more at any time during
its taxable year. The Company will maintain, as required by Treasury
Regulations, a permanent record of all persons failing or refusing to comply in
whole or in part with the Company's demand for the statements relating to actual
ownership.

33. Representations herein as to the Properties will also be true with
respect to properties acquired by the Partnership and any qualified REIT
subsidiary after the date hereof.

34. Any payments made pursuant to the terms of the Advisory Agreement
by either the Company or the Partnership to Mid-America ReaFund Advisors, Inc.
("MARA") have been and will continue to be made on an arm's-length basis at an
amount which represents the fair market value of services provided by MARA.

35. Any payments made pursuant to the terms of the Management Agreement
by Realty Hotel Lessee Corp. to InnSuites Innternational Hotels, Inc. have been
and will continue to be made on an arm's-length basis at an amount which
reflects the fair market value of management services performed by InnSuites
Innternational Hotels, Inc.

36. Any payments made pursuant to the terms of the Trademark/License
Agreements by Realty Hotel Lessee Corp. to InnSuites Licensing Corp. have been
and will continue to be made on an arm's-length basis at an amount which
reflects the fair market value of the use of the intellectual property which is
the subject of such Trademark/License Agreements.

In addition to those representations set forth in this officer's
certificate relating to the qualification of the Company as a real estate
investment trust for federal income tax purposes, the Company will comply with
all other requirements under the Code (including, without limitation, Sections
856 through 860 of the Code) in order to maintain its

<PAGE> 13

Thompson Hine & Flory LLP
September 8, 1998
Page 10

qualification as a REIT. The foregoing statements are made to you at your
request and are given solely in connection with your opinion. They may not be
relied upon by you for any other purpose or by any other person. They may not be
assigned by you to any other person.

Very truly yours,

REALTY REFUND TRUST

By: /s/ JAMES F. WIRTH
----------------------------------
Title: President
-------------------------------

REALTY REFUND TRUST
General Partner of
RRF Limited Partnership

By: /s/ JAMES F. WIRTH
----------------------------------
Title: President
-------------------------------

RRF Sub Corp.

By: /s/ JAMES F. WIRTH
----------------------------------
Title: President
-------------------------------

REALTY HOTEL LESSEE CORP.
(only as to paragraphs 35 and 36 hereof)

By: /s/ J. R. CHASE
----------------------------------
Title: President
-------------------------------

<PAGE> 1
Exhibit 23.2

Consent of Independent Public Accountants
-----------------------------------------

As independent public accountants, we hereby consent to the use of our report
included in this Registration Statement (Registration No. 333-56301) and to the
incorporation by reference in this Registration Statement of our report dated
May 13, 1998 included in Realty ReFund Trust's Form 10-K for the year ended
January 31, 1998 and to all references to our Firm included in this Registration
Statement.

ARTHUR ANDERSEN LLP

Cleveland, Ohio,
September 4, 1998.

<PAGE> 1
Exhibit 23.3

Consent of Independent Public Accountants
-----------------------------------------

As independent public accountants, we hereby consent to the inclusion in this
Registration Statement of our report dated February 19, 1998 included in Realty
ReFund Trust's Form 10-K for the year ended January 31, 1998 and our report
dated February 27, 1998 included in Realty ReFund Trust's Form 8-K filed June
30, 1998, and to all references to our Firm in this Registration Statement.

Michael Maastricht, C.P.A.

Phoenix, Arizona
September 4, 1998