HOST FUNDING INC, S-4, 1995-06-06

HOST FUNDING INC
S-4, 1995-06-06
REAL ESTATE

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<PAGE>
As Filed with the Securities and Exchange Commission on _______, 1995
Registration No. 33-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

HOST FUNDING, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 7012 52-1907962
(State or other (Primary Standard Industrial (IRS Employer
jurisdiction of Classification Code Number) Identification
incorporation or No.)
organization)
7825 FAY AVENUE
SUITE 250
LA JOLLA, CA 92037
(619) 456-6070
(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
GUY E. HATFIELD, PRESIDENT
7825 FAY AVENUE, SUITE 250
LA JOLLA, CA 92037
(619) 456-6070
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)

Copies to:
Peter G. Aylward, Esq.
Law Office of Peter G. Aylward, APC
3250 Vista Diego Road
Jamul, CA 91935
(619) 669-4800
(619) 669-4844 (telecopier)

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.

If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. /_/

CALCULATION OF REGISTRATION FEE

- ---------------------------------------------------------------------------------------------------------------------------------
Proposed Proposed
maximum maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered (1) per share (2) offering price (2) registration fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 281,000 $10.00 $2,810,000 $969
- ---------------------------------------------------------------------------------------------------------------------------------

<FN>
(1) Represents the maximum number of shares to be issued in exchange for the
assets of Mission Bay Super 8 Ltd. pursuant to the Mission Bay Acquisition
Agreement.
(2) The filing fee has been computed based on the $10 per share exchange value
of the shares of common stock of Host Funding, Inc. to be issued pursuant to the
Mission Bay Acquisition Agreement.

</TABLE>

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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.

<PAGE>

HOST FUNDING, INC.
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)

Item Location in Prospectus/Consent Solicitation
- ---- -------------------------------------------
Statement
---------
<S> <C>
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus ............................................ Facing Page; Cross Reference Sheet; Outside Front
Cover Page of Prospectus/Consent Solicitation
Statement

2. Inside Front and Outside Back Cover Pages of Prospectus ....... Table of Contents; Available Information

3. Risk Factors, Ratio of Earnings to Fixed Charges, and Other
Information ................................................... Summary

4. Terms of the Transaction ...................................... Summary

5. PRO FORMA Financial Information ............................... Unaudited PRO FORMA Condensed Combined
Financial Statements

6. Material Contracts with the Company Being Acquired ............ Background

7. Additional Information Required for Reoffering by Persons
and Parties Deemed to be Underwriters ......................... Not Applicable

8. Interests of Named Experts and Counsel ........................ Legal Matters

9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities .................................... Not Applicable

10. Information with Respect to S-3 Registrants ................... Information Incorporated by Reference in this
Prospectus/Consent Solicitation Statement

11. Incorporation of Certain Information by Reference ............. Information Incorporated by Reference in this
Prospectus/Consent Solicitation Statement

12. Information with Respect to S-2 or S-3 Registrants ............ Not Applicable

13. Incorporation of Certain Information by Reference ............. Not Applicable

14. Information with Respect to Registrants Other than S-3
or S-2 Registrants ............................................ Not Applicable

15. Information with Respect to S-3 Companies ..................... Information Incorporated by Reference in this
Prospectus/Consent Solicitation Statement

16. Information with Respect to S-2 or S-3 Companies .............. Not Applicable

17. Information with Respect to Companies Other than S-2
or S-3 Companies .............................................. Not Applicable

18. Information if Proxies, Consents or Authorizations Are to be
Solicited ..................................................... Information Incorporated by Reference in this
Prospectus/Consent Solicitation Statement; Outside
Front Cover Page of Prospectus/Consent
Solicitation Statement; Summary

19. Information if Proxies, Consents or Authorizations Are Not to
be Solicited, or in an Exchange Offer ......................... Not Applicable

</TABLE>

<PAGE>

SUBJECT TO COMPLETION _____, 1995

PRELIMINARY COPY

GHG HOSPITALITY, INC.
3145 SPORTS ARENA BOULEVARD
SAN DIEGO, CALIFORNIA 92110

, 1995

Dear Limited Partner:

We are pleased to report that we have recently completed the negotiations
whereby Host Funding, Inc., a Maryland corporation (the "REIT"), will acquire
the Mission Bay Super 8 Motel from Mission Bay Super 8, Ltd., a California
limited partnership (the "Partnership"), pursuant to the "Mission Bay
Acquisition Agreement". Subject to the approval of the Limited Partners owning
at least 67% of the limited partnership interests and subject to the dissenting
limited partners owning not more than 5% of the limited partnership interests,
in exchange for the Mission Bay Super 8 Motel, the Limited Partners of Mission
Bay will receive shares of common stock in the REIT. The Limited Partners that
disapprove of the Mission Bay Acquisition and perfect their dissenters rights
(the "Dissenting Limited Partners") will receive cash in exchange for their
limited partnership interests.

Pursuant to Section 15.4 of the Mission Bay Super 8 Limited Partnership
Agreement, the General Partner does hereby call for a vote without a meeting as
to whether the Limited Partners approve or disapprove of the Mission Bay
Acquisition, the details of which are set forth in the Proxy
Statement/Prospectus.

I highly recommend approval of the Mission Bay Acquisition for numerous
reasons, several of which are the following:

- Upon approval, the Limited Partners will receive common stock in a
fully integrated, externally advised REIT.

- The REIT Common Stock issued to you upon the completion of the Mission
Bay acquisition will be a liquid investment -- unlike your investment
in the limited partnership interest you now hold you can choose to
sell the REIT stock whenever you wish.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

<PAGE>

- The Mission Bay Acquisition, on a PRO FORMA basis, increases funds
from operations available for payment to former Limited Partners.

- The Mission Bay Acquisition will lead to operating synergies and
additional savings, thereby increasing funds from operations of the
REIT.

- The Limited Partners will receive the benefit of a diversified
investment as the REIT owns four other Super 8 Motels throughout the
United States, and has an aggressive acquisition strategy in place for
additional hotel properties.

The Mission Bay Acquisition requires the affirmative vote of Mission Bay
Limited Partners owning at least 67% of the limited partnership interests in the
Mission Bay Limited Partnership. Accordingly, please complete, sign and date
the accompanying proxy card and return it in the enclosed prepaid envelope. You
may not revoke your proxy without the consent of Host Funding, Inc., once it has
been sent. Your prompt cooperation will be greatly appreciated.

Sincerely,

J. Mark Grosvenor, President
GHG Hospitality, Inc.
General Partner of
Mission Bay Limited Partnership

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

<PAGE>

PROSPECTUS/CONSENT SOLICITATION STATEMENT

HOST FUNDING, INC.

Host Funding, Inc., a recently organized Maryland corporation (the
"Company"), is proposing the acquisition (the "Mission Bay Acquisition") of one
hotel property from Mission Bay Super 8, Ltd., a California Limited Partnership
("Mission Bay"). The Company currently owns four Super 8 hotels (the "Hatfield
Super 8s") which were acquired by the Company pursuant to the Contribution and
Assumption Agreement entered into by and between the Company and All American
Group, Ltd., a Delaware limited partnership ("AAG") effective April 1, 1995.
The Hatfield Super 8s are the Poplar Bluff Super 8 located in Poplar Bluff,
Missouri, the Miner Super 8 located in Miner, Missouri, the Rock Falls Super 8
located in Rock Falls, Illinois, and the Somerset Super 8 located in Somerset,
Kentucky, respectively.

The Company, in exchange for its shares of Class A common stock ("Shares"),
now proposes to acquire from Mission Bay the Mission Bay Super 8 located in San
Diego, California pursuant to the Mission Bay Acquisition Agreement to be
entered into by and between Mission Bay and the Company. Upon the consummation
of the Mission Bay Acquisition, the Company will own five Super 8 hotels.
(Collectively, all the Hatfield Super 8s and the Mission Bay Super 8 will be
referred to as the "Initial Hotels".) Concurrently with the closing of the
Mission Bay Acquisition, the Company will issue 500,000 Shares in a public
offering for a gross consideration of $5,000,000 (the "Public Offering"). The
Mission Bay Acquisition, the Public Offering, and the Company's issuance of its
Common Stock to its existing Shareholders in exchange for their existing common
shares, are collectively referred to as the "Formation Transactions".)

The Company will enter into the Advisory Agreement with Host Funding
Advisors, Inc., a Delaware corporation (the "Advisor"). FOR THE DEFINITIONS OF
CERTAIN TERMS USED IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT, SEE
"GLOSSARY".

Following the Formation Transactions, the Company will own and operate the
Initial Hotels pursuant to lease agreements (the "Percentage Leases") entered
into by and between the Company and Inn Fund, LLC, a Delaware limited liability
company, (the "Lessee") and management agreements entered into by and between
the Lessee and the Manager (the"Management Agreements"). Upon the Company's
acquisition of the Mission Bay Super 8, the Company expects to qualify as a real
estate investment trust (a "REIT") and will be the sole owner of the Initial
Hotels.

Upon issuance, the Shares will be transferable, and also upon issuance, the
Shares will be approved for a listing on the American Stock Exchange. The
Company will issue the Shares pursuant to a registration statement under the
Securities Act of 1933, as amended.

This Prospectus/Consent Solicitation Statement relates solely to the
solicitation of consents to Mission Bay's approval of the Mission Bay
Acquisition from the Mission Bay Limited Partners.

THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT IS DIRECTED ONLY TO THE
1,149 LIMITED PARTNERS IN MISSION BAY WITH RESPECT TO THE 6,600 LIMITED
PARTNERSHIP UNITS DESCRIBED HEREIN AND IS NOT TO BE CONSIDERED AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES TO OR FROM ANYONE TO WHOM
DELIVERY OF THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT IS NOT AUTHORIZED BY
THE COMPANY IN CONNECTION WITH THE SOLICITATION OF CONSENTS FOR THE FORMATION
TRANSACTIONS. THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE COMMON STOCK REFERRED TO
HEREIN.

There are 1,149 Mission Bay Limited Partners. The Mission Bay Limited
Partners are either original partners who acquired their interests pursuant to a
public offering in 1986 and 1987 or persons who acquired their interests
primarily through gifts or bequests from the original partners. The original
public offering was directed primarily to individuals located in Southern
California and Arizona.

<PAGE>

THE GENERAL PARTNER OF MISSION BAY BELIEVES THAT THE TERMS OF THE FORMATION
TRANSACTIONS ARE FAIR TO THE MISSION BAY LIMITED PARTNERS AND RECOMMENDS THAT
ALL MISSION BAY LIMITED PARTNERS VOTE TO APPROVE THE FORMATION TRANSACTIONS.

The Company has conditioned the Mission Bay Acquisition upon the approval
(i) by the Mission Bay Limited Partners holding either all or at least 67% of
the outstanding limited partner interests, and (ii) by the general partner of
Mission Bay, Grosvenor Hospitality Group, Inc., a California corporation
("GHG"). The Mission Bay Acquisition is also conditioned upon completion of
the Public Offering yielding gross proceeds to the Company of at least $5.0
million and completion of the Formation Transactions on or before _____________,
1995.

ALL INFORMATION CONCERNING THE EXPECTED OFFERING PRICE AT $10.00 PER SHARE
OF THE COMMON STOCK IN THE PUBLIC OFFERING REFERRED TO HEREIN IS BASED ON MARKET
CONDITIONS AS OF THE DATE HEREOF. THE INFORMATION INCLUDED HEREIN ALSO ASSUMES
THAT, AT THE TIME OF THE CIRCULATION OF THE PRELIMINARY PROSPECTUS, THE COMPANY
EXPECTS TO SELL 500,000 SHARES IN THE PUBLIC OFFERING AND 500,000 SHARES ARE
ACTUALLY SOLD BY THE COMPANY IN THE PUBLIC OFFERING AT $10.00 PER SHARE.

Upon completion of the Formation Transactions, Mission Bay will transfer
the Mission Bay Super 8 and all other assets and liabilities to the Company in
exchange for common stock in the Company ("Common Stock") and the limited
partners of Mission Bay (the "Mission Bay Limited Partners") will become
shareholders ("Shareholders") of the Company. Mission Bay also will distribute
to the Mission Bay Limited Partners excess cash on hand at the time of the
Mission Bay Acquisition. See the Prospectus/Consent Solicitation Statement
attached hereto as Exhibit B-1 under the heading "The Formation Transactions and
the Public Offering."

The Formation Transactions have been structured to afford the Mission Bay
Limited Partners who dissent (the "Dissenting Partners") the dissenters' rights
contained in the recently enacted California legislation which is known as the
Thompson-Killea Limited Partnership Protection Act of 1992 (the "Thompson-Killea
Act"). The Thompson-Killea Act requires that the Dissenting Partners receive
the appraised value of their Interest in Mission Bay in the form of cash, freely
tradeable securities or secured or unsecured debt instruments satisfying certain
statutory requirements. The Company is satisfying this requirement by offering
Dissenting Partners the right to receive the appraised value of their Interests
in Mission Bay in the form of cash (up to an aggregate of $140,500 (or 5% of the
limited partner units at $10 per unit), subject to increase by the Company in
its sole discretion). For a detailed discussion of partners' dissenters'
rights, see "Voting Procedures - Dissenters' Rights".

As a part of the Formation Transactions and as a condition to their
consummation, the Company will make an initial Public Offering of its Shares of
Common Stock, par value $.01 per share. The gross proceeds to the Company of
the Public Offering (which are estimated to be $5.0 million, assuming market
conditions as of the date hereof and the sale of 500,000 Shares in the Public
Offering at a price of $10 per Share), will be used by the Company primarily to
repay certain costs incurred in the Formation Transactions, pay transaction
expenses, provide cash for the Mission Bay Dissenting Partners, pay down
principal on certain secured indebtedness of the Initial Hotels, and provide for
working capital for the Company. No assurances can be given, however, that the
Public Offering price, which will be dependent upon many factors beyond the
Company's control, will yield net proceeds of such an amount. The Company will
operate as an externally managed REIT, its operations will be conducted solely
through the Advisor, and its Common Stock is expected to be listed on the
American Stock Exchange (the "AMEX").

The approval of the Mission Bay Acquisition by the Mission Bay Limited
Partners is hereby solicited and the Mission Bay Limited Partners are hereby
requested to complete, sign and return the Consent Form accompanying this
Prospectus/Consent Solicitation Statement. See "Voting Procedures". Once
completed, signed and returned, a Consent Form wherein a Mission Bay Limited
Partner votes "for" the Mission Bay Acquisition is irrevocable, regardless of
the amount of time remaining in the Solicitation Period.

<PAGE>

THIS SOLICITATION OF CONSENTS EXPIRES AT 11:59 P.M., PACIFIC TIME,
ON__________, 1995, UNLESS EXTENDED. NEITHER THIS TRANSACTION NOR THESE
SECURITIES HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

THE TRANSACTION DESCRIBED IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT
WILL BE SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT")

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED OR INCORPORATED IN THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT IN CONNECTION WITH THE MATTERS REFERRED TO HEREIN
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN SO AUTHORIZED BY THE COMPANY, THE FOUNDER, THE MANAGER, THE
LESSEE, OR THE ADVISOR. THE DELIVERY OF THIS PROSPECTUS/CONSENT SOLICITATION
STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

The date of this Prospectus/Consent Solicitation Statement is __________, 1995.

This Prospectus/Consent Solicitation Statement does not constitute an offer
to sell or a solicitation of an offer to buy any securities other than the
Shares offered hereby, nor does it constitute an offer to sell or a solicitation
of an offer to buy any of the securities offered hereby to any person in any
jurisdiction in which it is unlawful to make such an offer or solicitation to
such person. Neither the delivery of this Prospectus/Consent Solicitation
Statement nor any sale made hereunder shall under any circumstances imply that
the information contained herein is correct as of any time subsequent to the
date hereof.

ADDITIONAL INFORMATION

The Company has filed with the California Department of Corporations (the
"Department") Application for Qualification of Securities (the "Application")
under the California Corporate Securities Law of 1968, as amended, with respect
to the Shares and Subordinated Shares to be issued in the Formation
Transactions. This Prospectus/Consent Solicitation Statement does not contain
all the information set forth in the Application. Copies of the exhibits and
schedules attached to the Application may be examined at the Department of
Corporations, 3700 Wilshire Boulevard, Los Angeles, CA.

The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934, as amended.
Shareholders will receive annual reports containing audited financial statements
with a report thereon by the Company's independent certified public accountants,
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.

<PAGE>

AVAILABLE INFORMATION

The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the shares of Host Funding Common Stock to be issued in
connection with the Formation Transactions. As permitted by the rules and
regulations of the Commission, this Prospectus/Consent Solicitation Statement
omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information pertaining to the securities
offered hereby, reference is made to the Registration Statement, including the
exhibits filed as part thereof.

Mission Bay is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith,
file reports, proxy statements and other information with the Commission.
Reports, proxy statements and other information filed by Mission Bay can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its
Regional Offices located at Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661; and Seven World Trade Center, New York, New York 10048. Copies
of such material can be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

All information contained in this Prospectus/Consent Solicitation Statement
with respect to Mission Bay has been supplied by Mission Bay and all
information with respect to the Company has been supplied by the Company.

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT,
OR INCORPORATED IN IT BY REFERENCE, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT, OR THE SOLICITATION OF A PROXY, IN
ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER, OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF HOST FUNDING, INC., SINCE THE
DATE OF THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT.

THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT INCORPORATES DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS
ARE AVAILABLE WITHOUT CHARGE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE
NOT SPECIFICALLY INCORPORATED BY REFERENCE THEREIN) UPON REQUEST FROM, IN THE
CASE OF DOCUMENTS RELATING TO MISSION BAY OR THE COMPANY, 7825 FAY AVENUE, SUITE
250, LAJOLLA, CA 92037. IN ORDER TO INSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE MADE BY _______, 1995.

<PAGE>

INFORMATION INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT

The following documents filed with the Commission by Mission Bay are hereby
incorporated by reference in this Prospectus/Consent Solicitation Statement:

(a) Mission Bay's Annual Report on Form 10-K (SB) for the fiscal year
ended December 31, 1994.

(b) Mission Bay's Current Report (for the quarter ended March 31,
1995) on Form 10-Q(SB) dated May 12, 1995.

Any statement contained herein or in a document incorporated by reference
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus/Consent Solicitation Statement to
the extent that a statement contained in this Prospectus/Consent Solicitation
Statement or in any other subsequently filed document that also is or is deemed
to be incorporated by reference in this Prospectus/Consent Solicitation
Statement 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/Consent Solicitation Statement.

<PAGE>

TABLE OF CONTENTS

PAGE
SUMMARY
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Mission Bay Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . 3
The Public Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Benefits of the Formation Transactions . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Hotel Industry and the Initial Hotels. . . . . . . . . . . . . . . . . . 6
Growth Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Formation Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . .11
The Company's Related Parties. . . . . . . . . . . . . . . . . . . . . . . .15
Distribution Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . .20
The Mission Bay Partnership and Its Hotel. . . . . . . . . . . . . . . . . 22
Voting Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Compliance with and Approval from Federal and
State Authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Hotel Industry Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Operating Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Investment Concentration in a Single Industry . . . . . . . . . . . . . .24
Seasonality of Hotel Business . . . . . . . . . . . . . . . . . . . . . .25
Limited Number of Initial Hotels; Emphasis on Limited
Service Hotel Market. . . . . . . . . . . . . . . . . . . . . . . . . . .25
Renewal of Leases and Reletting of Initial Hotels . . . . . . . . . . . .25
Franchise Agreement Risks . . . . . . . . . . . . . . . . . . . . . . . .26
Value of Initial Hotels and Terms of Formation
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Dependence on Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Risks of Insufficient Cash Available for Distribution. . . . . . . . . . . .27
Conflicts of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . .28
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Continuing Hotel Operation, Development and Investment
by Hatfield Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . .28
New and Continuing REIT Organizational Efforts by
Advisor Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Conflicting Demands for Management Time . . . . . . . . . . . . . . . . .28
Risks of Leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Risks of Mortgage and Participating Debt Investments . . . . . . . . . . . .29
Tax Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Failure to Qualify as a REIT. . . . . . . . . . . . . . . . . . . . . . .30
REIT Minimum Distribution Requirements. . . . . . . . . . . . . . . . . .30
Adverse Tax Consequences to Shareholders of the
Company from a Sale of Any of the Initial Hotels. . . . . . . . . . . . .31

<PAGE>

PAGE
Effect of Market Interest Rates on Price of Common Stock
and Cost of Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Newly Organized Entities; Limited Assets and Operating
History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Reliance on Board of Directors, Key Personnel and Advisor. . . . . . . . . .31
Real Estate Investment Risks . . . . . . . . . . . . . . . . . . . . . . . .32
Illiquidity of Real Estate. . . . . . . . . . . . . . . . . . . . . . . .32
Uninsured and Underinsured Losses . . . . . . . . . . . . . . . . . . . .32
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . .32
Compliance with Americans Disabilities Act. . . . . . . . . . . . . . . .33
Increase in Property Taxes. . . . . . . . . . . . . . . . . . . . . . . .34
Acquisition and Development Risks . . . . . . . . . . . . . . . . . . . .34
Changes in Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Anti-takeover Effect of Ownership Limit, Staggered Board
and Power to Issue Additional Stock. . . . . . . . . . . . . . . . . . . .34
Inability to Operate the Hotel Properties. . . . . . . . . . . . . . . . . .35
Exemptions for Mr. Hatfield from the Maryland Business
Combination Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Risks of Operating Hotels under Franchise Agreements . . . . . . . . . . . .36
No Prior Market for Common Stock . . . . . . . . . . . . . . . . . . . . . .37
Possible Adverse Effects of Shares Available for Future
Sale Upon Prices of Common Stock . . . . . . . . . . . . . . . . . . . . .37
Base Rent Under Percentage Leases Less Than Anticipated Distributions. . . .38
Historical Operating Losses. . . . . . . . . . . . . . . . . . . . . . . . .38
Ability of Board of Directors to Change Certain Policies . . . . . . . . . .38
Potential Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

THE COMPANY IN GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Growth Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Acquisition Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Internal Growth Strategy . . . . . . . . . . . . . . . . . . . . . . . . .41
Possible Refinancing Strategy . . . . . . . . . . . . . . . . . . . . . . .42

USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

DISTRIBUTION POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

PRO FORMA CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . .46

SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .47

FINANCIAL CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . .62
The Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

<PAGE>

PAGE

Seasonality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .64
The Hotel Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
The Mission Bay Partnership and Its Hotel . . . . . . . . . . . . . . . . .65
The Initial Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Limited Service Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
The Percentage Leases . . . . . . . . . . . . . . . . . . . . . . . . . . .67
In General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Percentage Lease Terms . . . . . . . . . . . . . . . . . . . . . . . .67
Amounts Payable Under the Percentage Leases . . . . . . . . . . . . . . .67
Maintenance and Modifications . . . . . . . . . . . . . . . . . . . . . .68
Insurance and Property Taxes. . . . . . . . . . . . . . . . . . . . . . .69
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Assignment and Subleasing . . . . . . . . . . . . . . . . . . . . . . . .69
Damage to Initial Hotels. . . . . . . . . . . . . . . . . . . . . . . . .70
Condemnation of Hotel . . . . . . . . . . . . . . . . . . . . . . . . . .70
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Termination of Percentage Leases on Disposition . . . . . . . . . . . . .71
Franchise License . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Breach by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
The Management Agreements. . . . . . . . . . . . . . . . . . . . . . . . . .72
Franchise Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
Americans With Disabilities Act . . . . . . . . . . . . . . . . . . . . .75

FORMATION TRANSACTIONS AND OTHER RELATED TRANSACTIONS. . . . . . . . . . . . .77
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
AAG Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
Mission Bay Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . .77
Public Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
The Advisor and The Advisory Agreement . . . . . . . . . . . . . . . . . . .78
The Acquisition Co. and The Post-Formation Acquisition Agreement . . . . . .78
The Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78
The Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
Benefits to Hatfield Affiliates. . . . . . . . . . . . . . . . . . . . . . .80
Benefits to Mission Bay Limited Partners and Affiliates. . . . . . . . . . .80
Benefits to Public Offering Purchasers . . . . . . . . . . . . . . . . . . .80
Advantages and Disadvantages of the Formation
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81

iii

<PAGE>

PAGE

ALLOCATION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
Exchange Value of Shares . . . . . . . . . . . . . . . . . . . . . . . . . .81
Appraised Value Basis of Exchange Value. . . . . . . . . . . . . . . . . . .82
Per Share Price of Public Offering . . . . . . . . . . . . . . . . . . . . .82

VOTING PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82
Distribution of Solicitation Materials . . . . . . . . . . . . . . . . . . .82
No Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . .83
Required Vote. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83
Voting Procedures and Consents . . . . . . . . . . . . . . . . . . . . . . .83
Completion Instructions. . . . . . . . . . . . . . . . . . . . . . . . . . .84
Withdrawal or Change of Vote . . . . . . . . . . . . . . . . . . . . . . . .84
Final Cash Distribution by Mission Bay . . . . . . . . . . . . . . . . . . .85
Solicitation and Tabulation of Consents by Information
Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
Special Requirements for Certain Partners. . . . . . . . . . . . . . . . . .85
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
Compliance with and Approval from Federal and
State Authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . .86

COMPARISON OF OWNERSHIP OF MISSION BAY
INTERESTS AND SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . .87
Form of Organization and Purpose . . . . . . . . . . . . . . . . . . . . . .87
Length of Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . .87
Properties and Diversification . . . . . . . . . . . . . . . . . . . . . . .88
Permitted Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . .88
Additional Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88
Borrowing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
Other Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . .89
Management Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90
Management Liability and Indemnification . . . . . . . . . . . . . . . . . .90
Anti-takeover Provisions . . . . . . . . . . . . . . . . . . . . . . . . . .91
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91
Vote Required to Amend the Mission Bay Partnership
Agreement or the Charter. . . . . . . . . . . . . . . . . . . . . . . . .92
Vote Required to Dissolve the Mission Bay Partnership . . . . . . . . . .92
Vote Required to Sell Assets. . . . . . . . . . . . . . . . . . . . . . .93
Vote Required to Merge. . . . . . . . . . . . . . . . . . . . . . . . . .93
Compensation, Fees and Distributions . . . . . . . . . . . . . . . . . . . .93
Liability of Investors . . . . . . . . . . . . . . . . . . . . . . . . . . .93
Nature of Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
Potential Dilution of Payment Rights . . . . . . . . . . . . . . . . . . . .94
Liquidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
Passive vs. Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . .95
Benefits from Depreciation . . . . . . . . . . . . . . . . . . . . . . . . .95
Reporting Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . .96
State Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96

<PAGE>

PAGE
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97
Overview of Policies and Objectives. . . . . . . . . . . . . . . . . . . . .97
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . .97
Investment in Real Estate or Interests in Real Estate . . . . . . . . . .97
Investment in Other Entities. . . . . . . . . . . . . . . . . . . . . . .97
Investment in Real Estate Mortgages . . . . . . . . . . . . . . . . . . .98
Financing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
Conflict of Interest Policies. . . . . . . . . . . . . . . . . . . . . . . .98
Limitation of Liability and Indemnification. . . . . . . . . . . . . . . . .99
Policies with Respect to Other Activities. . . . . . . . . . . . . . . . . 100
Working Capital Reserves . . . . . . . . . . . . . . . . . . . . . . . . . 100

MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . 100
Audit Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . 102

PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

THE COMPANY'S CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . 103
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . 103
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Excess Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Power to Issue Additional Shares of Common Stock . . . . . . . . . . . . . 105
Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . 105
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . 106
Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Classification of the Board of Directors . . . . . . . . . . . . . 107
Removal of the Directors . . . . . . . . . . . . . . . . . . . . . 107
Business Combinations. . . . . . . . . . . . . . . . . . . . . . . 107
Control Share Acquisitions . . . . . . . . . . . . . . . . . . . . 108
Amendment to the Charter . . . . . . . . . . . . . . . . . . . . . 109
Dissolution of the Company . . . . . . . . . . . . . . . . . . . . 109
Advance Notice of Director Nominations and New
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Anti-takeover Effect of Certain Provisions of Maryland
Law and of the Charter and Bylaws. . . . . . . . . . . . . . . . . . . 109
Shares Available for Future Sale . . . . . . . . . . . . . . . . . . . . . 109

FEDERAL INCOME TAX CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . 110
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Tax Treatment of the Formation Transactions. . . . . . . . . . . . . . . . 111
Taxation of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . 111
Requirements for Qualification . . . . . . . . . . . . . . . . . . . . . . 112
REIT Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Income Tests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

<PAGE>

PAGE

Asset Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Distribution Requirements . . . . . . . . . . . . . . . . . . . . . . . 119
Partnership Anti-Abuse Rule . . . . . . . . . . . . . . . . . . . . . . 120
Failure to Qualify . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Taxation of Taxable U.S. Shareholders. . . . . . . . . . . . . . . . . . . 120
Taxation of Shareholders on the Disposition of Common Stock. . . . . . . . 121
Information Reporting Requirements and Backup
Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Taxation of Tax-Exempt Shareholders. . . . . . . . . . . . . . . . . . . . 122
Capital Gain and Losses. . . . . . . . . . . . . . . . . . . . . . . . . . 122
Taxation of Foreign Shareholders . . . . . . . . . . . . . . . . . . . . . 123
Sale of the Company's Property . . . . . . . . . . . . . . . . . . . . . . 124

UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

REPORTS TO SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 126

LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 127

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-1

Appendix A Consent Form . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B Mission Bay Acquisition Agreement . . . . . . . . . . . . . . . B-1
Appendix C Host Funding, Inc. Selected Financial Data for
Mission Bay Super 8, Ltd . . . . . . . . . . . . . . . . . . . . . . . . . C-1

<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT (THE "PROSPECTUS").(1) UNLESS
OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT
(I) THE INITIAL PRICE PER SHARE OF THE SHARES OF COMMON STOCK IN THE PUBLIC
OFFERING WILL BE $10.00 (WHICH IS ALSO THE EXCHANGE VALUE OF THE COMMON STOCK
UTILIZED IN THE COMPANY'S ACQUISITION OF THE INITIAL HOTELS), AND (II) WITH
RESPECT TO THE OWNERSHIP OF THE INITIAL HOTELS, THE TRANSACTIONS RELATING TO THE
FORMATION OF THE COMPANY AND THE OFFERING DESCRIBED ELSEWHERE IN THIS PROSPECTUS
(THE "FORMATION TRANSACTIONS") SHALL HAVE OCCURRED. REFERENCES IN THIS
PROSPECTUS TO THE "COMPANY" SHALL MEAN HOST FUNDING, INC., A MARYLAND
CORPORATION, REFERENCES TO THE "INITIAL HOTELS" SHALL MEAN THE FOUR (4) HOTEL
PROPERTIES ACQUIRED BY THE COMPANY EFFECTIVE APRIL 1, 1995 AND THE ONE (1) HOTEL
PROPERTY TO BE ACQUIRED BY THE COMPANY IN CONNECTION WITH THE MISSION BAY
ACQUISITION, AND REFERENCES TO THE NET PROCEEDS OF THE PUBLIC OFFERING SHALL
INCLUDE THE NET PROCEEDS OF THE CONCURRENT PUBLIC OFFERING. SEE "GLOSSARY" FOR
THE DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS.

ALL INFORMATION CONCERNING THE EXPECTED OFFERING PRICE AT $10.00 PER SHARE
OF THE SHARES OF THE COMPANY'S COMMON STOCK IN THE PUBLIC OFFERING REFERRED TO
HEREIN IS BASED ON MARKET CONDITIONS AS OF THE DATE HEREOF. THE INFORMATION
INCLUDED HEREIN ALSO ASSUMES THAT, AT THE TIME OF THE CIRCULATION OF THE
PRELIMINARY PROSPECTUS, THE COMPANY EXPECTS TO SELL 500,000 SHARES IN THE PUBLIC
OFFERING AND 500,000 SHARES ARE ACTUALLY SOLD BY THE COMPANY IN THE PUBLIC
OFFERING AT $10.00 PER SHARE.

THE COMPANY

Host Funding, Inc. (the "Company"), a Maryland corporation which intends to
qualify as a real estate investment trust ("REIT"), proposes to acquire the
Mission Bay Super 8 hotel (the "Mission Bay Super 8") having 117 rooms. The
Company will be governed by a three-person Board of Directors and the Company's
Common Stock will be listed on the American Stock Exchange.

In 1995, the Company acquired a note receivable secured by real property in
an approximate principal amount of $1.8 million (the "Hatfield Note") and four
Super 8 hotels (the "Hatfield Super 8s") as a result of the transfer of certain
assets from All American Group, Ltd., a Delaware limited partnership ("AAG") to
the Company. The Hatfield Super 8s are located in Rock Falls, Illinois, Poplar
Bluff, Missouri, Miner, Missouri, and Somerset, Kentucky, respectively.
Pursuant to the "Contribution and Assumption Agreement", partners of AAG (the
"AAG Partners") received 100 shares of Common Stock of the Company (the "Initial
Shares" of Common Stock) upon the consummation of the Contribution and
Assumption Agreement effective April 1, 1995.

- ---------------------
(1) SEE "GLOSSARY" FOR THE DEFINITIONS OF CERTAIN TERMS USED IN THIS
STATEMENT.

<PAGE>

The Mission Bay Super 8 is currently owned by Mission Bay Super 8, Ltd., a
California limited partnership ("Mission Bay"). In mid-1995, the Company will
acquire the Mission Bay Super 8 from Mission Bay pursuant to an asset
acquisition agreement ("Mission Bay Acquisition Agreement") by which the Company
will acquire the hotel assets of Mission Bay in exchange for its shares of Class
A Common Stock ("Shares") and after which the Shares of the Company will be
distributed to the limited partners of Mission Bay (the "Mission Bay Limited
Partners") in a final liquidating distribution of Mission Bay. Grosvenor
Hospitality Group, Inc. ("GHG"), the general partner of Mission Bay, will no
longer manage the Mission Bay Super 8 after the acquisition. Instead, after the
acquisition, Mission Bay Super 8 will be managed by All American Group, Inc.
("Manager"), an existing affiliate of AAG, at reduced fees. Upon the
consummation of the acquisition of the Mission Bay Super 8, the Company will own
five (5) Super 8 Hotels (the "Initial Hotels").

Collectively, (i) the Company's acquisition of the Mission Bay Super 8
pursuant to the Mission Bay Acquisition Agreement, (ii) the Company's issuance
of Shares of its Common Stock for cash in the Public Offering, and (iii) the
Company's issuance of Shares and shares of its Class B Common Stock
("Subordinated Shares") to the existing Shareholders of the Company, in exchange
for the Initial Shares, are referred to as the "Formation Transactions".
Likewise, the offering by the Company of the Shares and the Subordinated Shares
in the Formation Transactions is referred to as the "Offering".(2) The
Offering in the Formation Transactions is being effected at a constant dollar
value of $10 per share (the "Exchange Value").

The Company has entered into an advisory agreement (the "Advisory
Agreement") with Host Funding, Inc., a Delaware corporation (the "Advisor").
Michael S. McNulty will be President of the Advisor. The Advisor will provide
its expertise and strategic services to the Company and consequently the Company
will be externally advised.(3) The Advisory Agreement may be canceled on sixty
(60) days notice by a majority by the Company's Board of Directors.

To enable the Company to satisfy certain requirements for qualification as
a REIT, the Company has leased the Hatfield Super 8s to Inn Fund, LLC, a
Delaware limited liability company ("Lessee") pursuant to long-term operating
leases providing for the payment of the Base Rent and Percentage Rent (the
"Percentage Leases") to the Company.(4) The Company will also lease the
Mission Bay Super 8 and any hotel properties acquired by the Company to Lessee
pursuant to agreements identical in form (with variable Percentage Lease levels)
to the Percentage Leases. The Percentage Leases are designed to allow the
Company to participate in any future growth in revenues at such Initial
Hotels.(5)

The Initial Hotels will be, and any hotel properties acquired by the
Company are expected to be managed by the Manager. Ian Gardner-Smith owns 70%
of the stock of the Manager and Guy and Dorothy Hatfield own the remaining 30%
of the stock of the Manager.

The Company will enter into a Post-Formation Acquisition Agreement with
Host Acquisition Group,

- ---------------------
(2) See "Formation Transactions and Other Related Transactions -- Overview."

(3) See "Formation Transactions and Other Related Transactions -- The Advisor
and The Advisory Agreement."

(4) See "Formation Transactions and Other Related Transactions -- The Lessee."

(5) See "Business and Properties -- The Percentage Leases."

<PAGE>

a Delaware limited liability company (the "Acquisition Co.") whereby Acquisition
Co. may earn a placement fee if and when Acquisition Co. brings future and
incremental hotel acquisitions and/or private placements to the Company which
the Company acts upon by unanimous consent of its Board of Directors including
the unanimous consent of the Independent Directors. This contract may also be
canceled by the unanimous consent of the Independent Directors of the Company's
Board of Directors on sixty (60) days notice within six months after its
adoption.

The Formation Transactions are contingent upon the Shares of Common Stock
of the Company to be issued in the Offering having been previously approved for
listing on the American Stock Exchange on a "when issued" basis. Consequently,
the Common Stock of the Company issuable in the Offering will be freely
tradeable when received by the Limited Partners of Mission Bay. The Company
intends to acquire additional hotel properties after the consummation of the
Formation Transactions.

THE MISSION BAY ACQUISITION

This Prospectus relates to the solicitation of consents from the 1,149
Mission Bay Limited Partners holding 6,600 Limited Partnership Units in Mission
Bay. The Company has conditioned the effectiveness of the Mission Bay
Acquisition upon the approval of Mission Bay Limited Partners holding at least
67% of the outstanding limited partnership interests. In addition, the Mission
Bay Acquisition is conditioned upon not more than 5% of the Mission Bay Partners
electing to be Dissenting Partners. (The Company can waive this 5% limitation).

THE PUBLIC OFFERING

The Company's acquisition of Mission Bay will be accompanied by the
concurrent closing of a Public Offering of 500,000 common Shares for $5,000,000
(i.e., a gross proceeds per share of $10). The Company will use the proceeds of
this Public Offering to pay the expenses of the Formation Transactions, to pay
off certain indebtedness on the Initial Hotels, and to provide for working
capital for the Company.

BENEFITS OF THE FORMATION TRANSACTIONS

The Company has proposed the Mission Bay Acquisition and the Public
Offering primarily because these transactions would (i) result in substantially
lower leverage and debt service requirements of the Initial Hotels, (ii) afford
the Company's Shareholders the opportunity to obtain liquidity over time by
taking advantage of the currently favorable public market valuation of REIT
equity securities, (iii) broaden and diversify the business of the Initial
Hotels through the acquisition of additional hotel properties, thereby reducing
the dependence of the Company on the performance of any single asset or group of
assets, and (iv) afford the Initial Hotels and the Mission Bay Limited Partners
the opportunity to obtain the other expected benefits of the Formation
Transactions. See "Background and Reasons for the Formation Transactions-
Expected Benefits of the Formation Transactions."

RISK FACTORS

AN INVESTMENT IN THE COMPANY'S COMMON STOCK INVOLVES VARIOUS RISKS, AND
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS,"
INCLUDING THE FOLLOWING:

1. Risks affecting the hotel industry generally, and the Company's Initial
Hotels specifically, that may

<PAGE>

adversely affect the Company's revenue and the amounts available for
distribution to Shareholders, including:

- HOTEL INDUSTRY RISKS: Investments in the hotel industry involve
certain risks, such as potential losses of franchises, changes in demand
for hospitality services, the need for capital replacements and
improvements, the cyclical and seasonal nature of the industry and the
dependence of the industry on general economic conditions.

- DEPENDENCE ON LESSEE: In order to generate revenues to enable it to
make distributions to Shareholders, the Company will rely on timely receipt
of rental payments by the Lessee of any hotel properties acquired by the
Company in the future together with the timely receipt of rental payments
from the Initial Hotels. The failure of the Lessee to generate sufficient
cash flow from the Initial Hotels to make lease payments under the
Percentage Leases could adversely affect the ability of the Company to make
anticipated distributions to Shareholders and its ability to meet the
Company's operating expenses. The Lessee is a limited purpose entity which
has been recently organized to lease and operate the Initial Hotels and
pursuant to the Percentage Leases will be required to maintain only
specified levels of net worth (equal to a minimum of nine months' Base Rent
for each of their respective Initial Hotels) during the first five (5)
years of the term of the Percentage Leases.

- ECONOMIC CONDITIONS: Economic conditions which may adversely affect
hotel investments generally and, more particularly, the demand for
hospitality services, revenues of the Initial Hotels and the Lessee's
ability to make lease payments from cash generated by the operation of the
Initial Hotels;

- COMPETITION: Intense competition, geographic concentration in the
California, Illinois, Kentucky, and Missouri markets and specifically
within the San Diego, California market, and the past and possible future
over-building of hotel properties in general;

- OVERHEAD COSTS: The effect of increases in labor costs, utilities,
employee health insurance and other expenses on the Lessee's ability to
make lease payments from cash generated by the operation of the Initial
Hotels.

- FUTURE CAPITAL INVESTMENTS: The need for future capital expenditures
to preserve competitiveness and/or franchise licenses and the potential
loss of such licenses;

2. The value at which the Initial Hotels were contributed to the Company and
the terms of certain of the Formation Transactions were primarily
established through current (i.e., December 1, 1994) independently prepared
real estate appraisals performed by Arthur Andersen LLP, a major national
consulting and accounting firm. After a short period of time, these
appraised values may not reflect the then-current fair market values;

3. Conflicts of interest exist between the Company and certain of its
Affiliates, including the Advisor, the Acquisition Co., the Lessee, and the
Manager;

4. To maintain its status as REIT, the Company must distribute annually at
least 95% of its taxable net income and, as a consequence, may be required
to borrow funds to make additional investments or distributions; all of the
Initial Hotels will be acquired by the Company subject to the existing
mortgage indebtedness; should the Company fund future investments or
distributions with borrowings, it may risk the loss of all or a portion of
its assets through foreclosure if it is unable to meet its

<PAGE>

obligations with respect to the initial indebtedness or indebtedness
subsequently incurred;

5. Tax risks, including taxation of the Company as a corporation if it fails
to qualify as a REIT, and the Company's liability for federal and state
taxes on its income in either such event, which could significantly
adversely affect the Company's funds from operations ("Funds From
Operations") and distributions to Shareholders;

6. Increase in interest rates, which may adversely affect the market price of
the Common Stock and increase the cost of funds borrowed to make additional
investments;

7. The fact that the Company has no experience operating as a REIT, and that
it, the Advisor, the Acquisition Co. and the Lessee have been recently
organized and have no operating history;

8. The substantial influence of, and reliance upon, Michael S. McNulty with
respect to the day to day affairs of the Company;

9. Risks affecting the real estate industry generally that may adversely
affect the value of the Initial Hotels and the market price of the Common
Stock, including:

- relative illiquidity of real estate;

- potential uninsured or underinsured losses;

- potential lability for unknown or future environmental
liabilities; and

- increases in assessed values or property tax rates.

10. The restriction on ownership of Common Stock intended to help assure
compliance with certain requirements related to continued qualification of
the Company as a REIT, and certain other provisions in the Company's
Charter and Bylaws, may have the effect of inhibiting a change of control
of the Company even though such change of control could be beneficial to
the Company's Shareholders;

11. The effect of any adverse developments in the business or prospects of any
of the franchisors of the Initial Hotels that would impact the Company's
Initial Hotels;

12. The potential adverse effect that the availability for future sale by Mr.
Hatfield and his Affiliates of a significant number of Shares of Common
Stock may have upon the market price of the Common Stock;

13. Base Rent under the Percentages Leases will not provide the Company with
funds sufficient to enable it to make distributions at the anticipated
initial distribution rate;

14. Had the Percentage Leases been in effect for the year ended December 31,
1994 for all the Initial Hotels, on a pro forma basis, after payment of all
pro forma expenses, the Company would not have had funds sufficient to
enable it to make distributions at the anticipated initial distribution
rate;

15. The Company's financial plan for the years 1995 and thereafter relies
heavily on increases in revenue

<PAGE>

and increases in net operating income being generated by each of the
Initial Hotels, in order to enable it to make distributions at the
anticipated initial distribution rate;

16. The Mission Bay Super 8 incurred a net loss (giving effect to an unrealized
decline in value expense) in 1994;

17. As a REIT, the Company will be restricted in its ability to operate the
Initial Hotels and any hotel properties acquired in the future. Although
the Company intends to consult with the Lessee with respect to strategic
business plans (including capital improvements, hotel repositionings and
renovations) affecting the Initial Hotels and any hotel properties, the
Lessee will be under no obligation to implement any of the Company's
recommendations with respect to such matters. No assurance can be given
that the Lessee will operate the Initial Hotels and any hotel properties
successfully or in a manner which will maximize the Company's return on its
investment in each such hotel property;

18. The Board of Directors has the ability to change the policies of the
Company, including its investment, financing and distribution policies,
without a vote of Shareholders, which could result in policies that do not
reflect the interests of all Shareholders;

19. There has been no prior market for the Common Stock and there can be no
assurance that an active trading market for the Common Stock will develop;

20. The market price of the Common Stock may be adversely affected by future or
potential sales of Common Stock by parties acquiring Shares of Common Stock
pursuant to the Formation Transactions. Certain of such parties are
subject to restrictions for specified periods on the disposition of their
Shares of Common Stock.

21. The REIT intends to be a hybrid operation in that it expects to make
mortgage loans and participate in mortgage loans. Accordingly, the future
operations of the REIT may be negatively impacted by risk and losses
resulting from real estate lending activities.

22. A default on the Hatfield Note could cause a substantial loss to the
Company, with the amount of such loss being a function of the then traded
value and dividend yield of the Shares which the Company would reaquire
pursuant to a pledge agreement associated with the Hatfield Note.

THE HOTEL INDUSTRY AND THE INITIAL HOTELS

THE HOTEL INDUSTRY

The United States hotel industry is experiencing cyclical growth. Since
1990, the hotel industry has experienced improved fundamentals as the annual
rates of growth in demand for hotel rooms have exceeded the annual rates of
growth in supply and annual average daily room rates ("ADR") have increased each
year. According to Smith Travel Research, total U.S. room demand (average daily
rooms rented for the year in 1993 increased by 3.6% over 1992 while total U.S.
room supply (average daily rooms available for the year) in 1993 increased by
only 1.0% over 1992. During each of the past ten quarters through June 30,
1994, the industry average occupancy, ADR and revenue per available room or
suite ("REVPAR") for all U.S. hotels have increased, versus the comparable prior
year period. Occupancy, ADR and REVPAR are the cost significant indicators of a
hotel's revenue performance.

<PAGE>

The table set forth below contains information with respect to average
occupancy, ADR and REVPAR for the United States hotel industry for the last five
years:

TABLE 1 Years Ended December 31
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average hotel occupancy 61.8% 60.2% 61.9% 63.3% 65.2%
Annual% growth in room supply 3.4% 2.5% 1.3% 1.0% 1.4%
Annual % growth in room demand 2.1% 0.0% 3.2% 3.6% 4.5%
ADR $58.49 $58.83 $59.65 $61.14 $63.77
REVPAR $36.15 $35.42 $36.92 $38.70 $41.58
% Change in REVPAR 1.9% (2.0)% 4.2% 4.8% 7.4%

</TABLE>

THE INITIAL HOTELS

The four Hatfield Super 8s and the Mission Bay Super 8 constitute the five
Initial Hotels. The four Hatfield Super 8s and the Hatfield Note were acquired
from AAG by the Company effective April 1, 1995, at an Exchange Value of $6.9
million for 100 shares of Common Stock ("Initial Shares"). These 100 Initial
Shares of Common Stock will, upon the closing of the Formation Transactions, be
converted into 550,000 Shares of Class A Common Stock ("Shares") and 140,000
shares of Class B Common Stock ("Subordinated Shares") of the Company. The
dividends on the Subordinated Shares will be subordinated to a $0.91 annualized
dividend on the Shares. The Hatfield Super 8s are the Poplar Bluff Super 8
located in Poplar Bluff, Missouri, the Miner Super 8 located in Miner, Missouri,
the Rock Falls Super 8 located in Rock Falls, Illinois, and the Somerset Super 8
located in Somerset, Kentucky. The Poplar Bluff Super 8 was opened in 1985, is
located on 1.71 acres of land and has 63 rooms. The Miner Super 8 was opened in
1985, is located on 2.0 acres of land and has 63 rooms. The Rock Falls Super 8
was opened in 1985, is located on 2.45 acres of land and has 63 rooms. The
Somerset Super 8 was opened in 1985, is located on 1.79 acres of land and has 63
rooms.

As part of the Formation Transactions, in mid-1995, the Company will
acquire Mission Bay Super 8 from Mission Bay and in exchange will offer 281,000
Shares of Common Stock in the Company (with an Exchange Value of $2,810,000) to
the Mission Bay Limited Partners pursuant to the Mission Bay Acquisition
Agreement. (The number of Shares will decrease proportionately by reason of the
Dissenting Partners.) The Mission Bay Super 8 was opened in 1987, is located on
1.07 acres of land and has 117 rooms.

<PAGE>

The following table sets forth certain information with respect to the five
Initial Hotels:

TABLE 2 Twelve Months Ended December 31, 1994
-------------------------------------

($s in 000) Number Pro
of Rooms Forma Revenue
at Pro Forma Lessee Average Per
Year December Pro Forma Lease Net Daily Average Available
Location Opened 1994 Revenue Payment Income(2) Rate Occupancy Room (3)
------ ------ -------- --------- --------- ------- --------- -------- ---------
Hatfield Super 8s
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Miner, MO 1985 63 $846 $340 $49 $36.73 96.2% $35.31
Poplar Bluff, MO 1985 63 619 228 52 $35.32 72.2% $25.69
Rock Falls, IL 1985 63 708 269 35 $36.37 79.4% $28.90
Somerset, KY 1985 63 561 203 23 $34.62 67.6% $23.63
-- ---- ---- --- ------ ----- ------
Subtotal 252 2,734 1,040 158 $36.00 78.8% $28.38
--- ----- ----- ---- ------ ----- ------
Mission Bay 1987 117 $1,055 $ 295 (25) $42.40 54.9% $23.18
--- ------ ------ ---- ------ ----- ------
Consolidated Totals 369 $3,789 $1,335 $134
--- ------ ------ ----
--- ------ ------ ----
Weighted Averages $37.52 71.3% $26.73
------ ----- ------
------ ----- ------

<FN>

(1) Represents lease payments from the Lessee to the Company calculated on a pro forma basis by applying the rent provisions of the
Percentage Leases to the pro forma revenues of the Initial Hotels for the twelve month period as if January 1, 1994 were the
beginning of the lease year.

(2) Represents Lessee pro forma net income which includes a reduction for pro forma lease payments from the Lessee to the Company
pursuant to the Percentage Leases. See "The Initial Hotels and Lessee-Pro Forma Combined Statements of Operations". Does not
include a 4% of gross revenue replacement reserve which the lessee must set aside for capital improvements.

(3) Determined by dividing room revenue by the number of available rooms.

</TABLE>

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

GROWTH STRATEGY

GENERAL

The Company's growth strategy is to increase cash flow and enhance
Shareholder value by acquiring additional existing hotels that meet the
Company's investment criteria and by participating, through the Percentage
Leases, in any growth in revenue at its Initial Hotels and subsequently acquired
hotels.

SELECTION OF INITIAL HOTELS

The Company's selection of the Initial Hotels for acquisition was
principally based on competitive position of each Initial Hotel in its market
and the prospects for growth in revenues and property values of such hotel
properties. In selecting the Initial Hotels, the Company considered a range of
factors with respect to each Initial Hotel, including (i) the historical and
projected cash flows, (ii) the estimated replacement cost

<PAGE>

and proposed acquisition price of each Initial Hotel, (iii) the availability of
qualified lessees, (iv) the physical condition and potential for repositioning
(including changing the franchise) or expansion or other physical improvements,
(v) the price segment, (vi) the growth potential of the market, and (vii) the
strength of the particular affiliated national hotel organization, if any. In
determining the Initial Hotels' competitive market position, the Company
examined the proximity of each of the Initial Hotels to business, retail,
academic and tourist attractions and transportation routes, the number and
characteristics of competitive hotels within the Initial Hotel's market and the
existence of any barriers to entry within that market, including zoning
restrictions and financing constraints. In addition, the Company sought to
select hotel properties which it believed would enhance the diversity of the
portfolio of Initial Hotels in respect of location, license or franchise
affiliation, lessee and price segment.

PERCENTAGE LEASES/ INTERNAL GROWTH

The Percentage Leases are designed to allow the Company to participate in
any growth in revenues at the Initial Hotels, which the Company's management
believes can be achieved through increases in both occupancy rates and ADR.
During the term of each Percentage Lease, the Lessee will be obligated to pay
(i) the Base Rent (as defined herein) or Percentage Rent (as defined herein),
and (ii) certain other amounts, including interest accrued on any late payments
or charges (the "Additional Charges"). Base Rent accrues and is required to be
paid monthly. Percentage Rent is based on percentages of room and food and
beverage rent revenues for each of the Initial Hotels. Percentage Rent (if any)
is due quarterly; however, 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.

The Company believes that the quality of hotel management will be a major
factor in any future growth in Percentage Lease revenue from the Initial Hotels
and in the hotel properties that may be acquired by the Company. The Initial
Hotels will be, and any hotel properties which may be acquired by the Company
for operation may be managed by Manager or independent unaffiliated management
companies, subject to the supervision of the Lessee. The Lessee can also
contract with a new independent unaffiliated management company. Manager
operates limited-service hotels in the Midwestern United States, including all
four of the Hatfield Super 8s in operation on December 31, 1994. Based upon
information provided by Manager, the Hatfield Super 8s operated by Manager
throughout 1994 had average occupancy, ADR and REVPAR of 78.8%, $36.00, and
$28.38, respectively, for 1994.

Combined REVPAR for the Hatfield Super 8s has increased from $24.45 for
1992 to $28.38 to 1994. (6) The Company expects that, since January 1, 1995 and
prior to the closing of the Offering, between 1% and 4% of room revenues of the
Hatfield Super 8s for such period will have been spent on upgrades and
improvement of the Hatfield Super 8s. Management of the Company believes the
growth in REVPAR at the Hatfield Super 8s reflects the impact that can result
from improved management and stronger demand in the market area.

- ---------------------
(6) See "Business and Properties -- The Hatfield Super 8s."

<PAGE>

A summary of the Percentage Leases with respect to the Initial Hotels is
set forth below.

TABLE 3
Pro Forma Percentage
Annual Annual Rent for the Twelve
Hotel Base Rent Percentage Rent Formula Months Ended 12/31/94
- ----- --------- ----------------------- ---------------------
<S> <C> <C> <C>
Hatfield Super 8s:
- -----------------
MINER $293,000 35% YTD REVENUES PLUS 10% OF REVENUES $340,310
OVER $500,000,PLUS AN ADDITIONAL 10%
OF REVENUES OVER $750,000, LESSBASE
RENT PAID YTD LESS PERCENTAGE RENT
PREVIOUSLY PAID YTD

POPLAR BLUFF $216,000 35% YTD REVENUES PLUS 10% OF REVENUES $228,488
OVER $500,000,PLUS AN ADDITIONAL 10%
BASE RENT PAID YTD LESS
OF REVENUES OVER $750,000, LESS
PERCENTAGE RENT PREVIOUSLY PAID YTD

ROCK FALLS $237,000 35% YTD REVENUES PLUS 10% OF REVENUES $268,656
OVER $500,000, PLUS AN ADDITIONAL 10%
OF REVENUES OVER $750,000, LESS BASE
RENT PAID YTD LESS PERCENTAGE RENT
PREVIOUSLY PAID YTD

SOMERSET $185,000 35% YTD REVENUES PLUS 10% OF REVENUES $202,657
OVER $500,000, PLUS AN ADDITIONAL 10%
OF REVENUES OVER $750,000, LESS
BASE RENT PAID YTD LESS PERCENTAGE RENT
PREVIOUSLY PAID YTD

Mission Bay Super 8 $281,000 28% YTD REVENUES PLUS 7% OF REVENUES $295,349
- ------------------- OVER $1,350,000, PLUS AN ADDITIONAL 10%
OF REVENUES OVER $1,550,000, LESS BASE
RENT PAID YTD LESS PERCENTAGE RENT
PREVIOUSLY PAID YTD

</TABLE>

ACQUISITION STRATEGY/EXTERNAL GROWTH

The Acquisition Co. will utilize its management's extensive experience in
the hotel industry to identify for acquisition additional existing hotel
properties that meet the Company's investment criteria. The Company intends to
place particular emphasis on the acquisition of additional high quality, limited
service hotels throughout the United States. The Company may, however, consider
hotel properties in the up-scale and mid-scale market segments in any portion of
the United States. Management of the Acquisition Co. believes that, in the near
term, the Company will have opportunities to acquire additional existing hotels,
at attractive prices because of both its unique structure and its access to
capital markets. Potential sellers of hotel properties now include not only
hotel operators but also financial institutions and government agencies that
assumed control of such properties in distressed situations.

Additional investments by the Company may be financed, in whole or in part,
from borrowings, subsequent issuances of Common Stock or other securities, or
cash flow; however, because the Company must distribute annually at least 95% of
its taxable net income to maintain its REIT status, cash flow available for
investment may be limited. After the Offering, the Company may seek to
implement a subsequent private

<PAGE>

placement of its Common Stock with a view towards generating net cash proceeds
from such an offering sufficient to discharge all or some material part of the
Company's indebtedness. Such net cash proceeds may also be able to finance
additional acquisitions by the Company.

POSSIBLE REFINANCING STRATEGY

After the Offering, the Company may seek to implement additional public
offerings and/or private placements of its Common Stock with a view towards
generating net cash proceeds from such offerings sufficient to repay a portion
or all of its indebtedness and funding additional acquisitions of hotel
properties.

DEVELOPMENT STRATEGIES

The Company intends to emphasize hotel property acquisitions over
development in pursuing its growth strategies. However, the Company may in the
future consider the development of hotel properties. More particularly, the
Company may make participating mortgage loans and/or enter into sale/leaseback
transactions with respect to its new acquisitions.

FORMATION TRANSACTIONS

The principal transactions in connection with the formation of the Company
and the acquisition of the Initial Hotels (collectively, the "Formation
Transactions"), will be as follows: (7)

- The Company acquired the Hatfield Super 8s as a result of the
acquisition of certain assets. Pursuant to the Contribution and Assumption
Agreement, the AAG Partners received Common Stock of the Company upon the
consummation of the Contribution and Assumption Agreement in exchange for
the Hatfield Super 8s and a note in the amount of $1,805,675 from Guy E.
Hatfield (the "Hatfield Note"). The Contribution and Assumption Agreement
was approved by the AAG Partners. While the actual transfers of property
pursuant to the Contribution and Assumption Agreement occurred in April,
1995, the effective date of this transaction between the parties thereto
was April 1, 1995.

- The Hatfield Note is a secured promissory note in the amount of
$1,805,675 dated March 31, 1995, which obligates the AAG Partners to make
interest and principal payments to AAG. The note provides for quarterly
interest payments at 10% per annum and a balloon principal payment on March
31, 2000. The Hatfield note was subsequently assigned by AAG to the
Company effective April 1, 1995. The Hatfield Note is secured by interests
in real property which have an appraised value in excess of the value of
the Hatfield Note and a pledge of 26.2 Initial Shares of the Company. Upon
the close of the Formation Transactions, the Hatfield Note will be secured
by 180,780 Class A Shares of the Company's Common Stock.

- The Mission Bay Super 8 is currently owned by Mission Bay. In mid-
1995, the Company will acquire the Mission Bay Super 8 from Mission Bay
pursuant to the Mission Bay Acquisition Agreement by which the Company will
acquire the hotel assets of Mission Bay in exchange for Common Stock of the
Company and after which the Common Stock of the Company will be distributed
to the Mission Bay Limited Partners in a final liquidating distribution of
Mission Bay.

- --------------------
(7) See generally "Formation Transactions and Other Related Transactions."

<PAGE>

- In order to adopt the Mission Bay Acquisition Agreement, Mission Bay
must secure the approval of (i) GHG; and (ii) the partners holding at least
67% of the outstanding limited partner interests of Mission Bay. In
addition, the Company's acquisition of Mission Bay is conditioned upon not
more than 5% of the Mission Bay Partners exercising their rights to become
"Dissenting Partners". The Company may in its discretion, waive the 5%
limitation. The Company's acquisition of the Mission Bay Super 8 has been
structured to afford Dissenting Partners the dissenters' rights contained
in the recently enacted California legislation which is known as the
Thompson-Killea Limited Partnership Protection Act of 1992 (the
"Thompson-Killea Act"). The Thompson-Killea Act requires that the
Dissenting Partners receive the appraised value of their interest in
Mission Bay in the form of cash, freely tradeable securities, or secured or
unsecured debt instruments satisfying certain statutory requirements. The
Company is satisfying this requirement by offering up to 5% of the Limited
Partners the ability to become Dissenting Partners with the right to
receive the appraised value of their interest in Mission Bay (adjusted for
certain financial transactions) in the form of cash (up to an aggregate of
$140,500, subject to increase by the Company in its sole discretion). The
acquisition of the Mission Bay Super 8 by the Company has also been
structured to comply with the other protections afforded by the
Thompson-Killea Act.

- In addition, concurrent with the issuance of Common Stock of the
Company for the Mission Bay Super 8, the Company will issue its Common
Stock in a public offering (the "Public Offering") with a required gross
cash offering proceeds of $5 million.

- The Company will enter into an Advisory Agreement with Advisor.

- The Company will enter into a Post-Formation Acquisition Agreement
with Acquisition Co.

- In order for the Company to qualify as a REIT, the Company cannot
operate hotels directly. Therefore, the Company will lease the Initial
Hotels to the Lessee for a term of fifteen years pursuant to Percentage
Leases which provide for rent equal to the greater of Base Rent or
Percentage Rent. The Lessee will hold the franchise license for each
Hatfield Super 8 with a Franchise Agreement now in place and will contract
the Manager to manage the Initial Hotels on its behalf. Under each
Percentage Lease, the Lessee will be obligated (i) to pay the costs of real
estate and personal property taxes, and property insurance, (ii) to fund
from reserves the periodic replacement or refurbishment of furniture,
fixtures and equipment which may be required for the retention of the
franchise licenses. The Lessee will also be responsible for routine
maintenance and repair expenditures and for the cost of liability insurance
with respect to the operation of the Initial Hotels.

- The Lessee may transfer its interest and some or all of the Percentage
Leases to third party lessees provided that those new lessees satisfy
certain minimal financial requirements.

- The Lessee will enter into a management contract with Manager relating
to the Initial Hotels. Pursuant to the Management Agreements, Manager will
provide the day-to-day hotel management services at the Initial Hotels,
subject to the supervision of the Lessee.

- The Lessee will enter into new franchise agreements with the Super 8s
relating to the Initial Hotels.

<PAGE>

Following consummation of the Formation Transactions, the structure and
relationships among the Company, the Initial Hotels, Advisor, the Acquisition
Co., the Lessee, and Manager will be as follows:

REIT Shareholders
- -------------------------------------------------------------------------------

Former Public
Mission Bay Hartfield Offering
Partners Affiliates Purchasers

281,000 550,000 500,000
Shares Shares Shares

HOST FUNDING
140,000 ADVISORS, INC.
Subordinated (the "Advisor")
Shares

Advisory Agreement

REIT

HOST FUNDING, INC.
(the "Company")

Percentage Leases Post-Formation
Acquisition
Agreement

INN FUND, LLC
(the "Lessee")

Management HOST ACQUISITION GROUP, LLC
Agreements (the "Acquisition Company")

ALL AMERICAN GROUP, INC.
(the "Manager")

DESCRIPTION OF DIAGRAM
----------------------

Moving clockwise from the top left corner, this diagram depicts the
Formation Transactions (which are fully described in this Prospectus Consent/
Solicitation Statement). The Company will transfer 281,000 Shares to the Former
Mission Bay Partners in exchange for their Limited Partnership interests.
Mr. Hatfield and his Affiliates will receive 550,000 Shares and 140,000
Subordinated Shares from the Company in exchange for the Hatfield Super 8's.
The Company will sell 500,000 Shares in the Public Offering. Host Funding
Advisors, Inc., and the Company will enter into the Advisory Agreement. Host
Acquisition Group, LLC, and the Company will enter into the Post-Formation
Acquisition Agreement. Inn Fund, LLC, and the Company will enter into the
Percentage Leases with respect to each of the Initial Hotels. Finally, All
American Group, Inc., and Inn Fund, LLC, will enter into the Management
Agreements with respect to each of the Initial Hotels.

<PAGE>

As a result of the Formation Transactions, Mr. Hatfield and his Affiliates
will receive the following benefits, among others:

- the Common Stock of the Company received by Mr. Hatfield and his
Affiliates will be more liquid than their prior equity interests in the
Company;

- the Company's Common Stock which Mr. Hatfield and his Affiliates will
possess after the Formation Transactions will constitute a majority of
voting rights. The net proceeds of the Public Offering will be used in part
to pay off debt which Mr. Hatfield and his Affiliates have personally
guaranteed;

- the Lessee, 7.5% of the Common Stock of which is owned by Mr.
Hatfield, will be entitled to all profits and cash flow from the Initial
Hotels after payment of rent under the Percentage Leases, management fees
and other operating expenses (8);

- the Manager, 30% of the Common Stock of which is owned by Mr. Hatfield
and his Affiliates, will be entitled to all profits and cash flow from the
Management Agreements covering the Initial Hotels after payment of all
expenses incurred by the Manager in rendering services to the Lessee
according to the terms of the Management Agreements (9); and

As a result of the Formation Transactions, the Mission Bay Limited Partners
and Affiliates of Mission Bay will receive the following benefits, among others:

- the Common Stock of the Company received by Mission Bay Limited
Partners pursuant to the Mission Bay Acquisition Agreement will be more
liquid than their prior equity interests in Mission Bay;

- the Exchange Value of the Common Stock to be offered to the Mission
Bay Limited Partners is $2,810,000. The aggregate fair market value of the
contributed net assets and liabilities of Mission Bay in the Mission Bay
Super 8 at December 31, 1994 was approximately $2,810,000, before
adjustment for the Formation Transactions.

As a result of the Formation Transactions, the purchasers of the Company's
Common Stock in the Public Offering may receive the following benefit, among
others:

- the Exchange Value (i.e., the gross purchase price) for the Common
Stock purchased in the Public Offering of $10.00 per share may be less than
the price of the Common Stock on the AMEX when it is first traded;

Management of the Company believes the Formation Transactions will have
various beneficial effects on the operation of the Initial Hotels and the lease
revenue of the Company after the closing of the Offering, including:

- --------------------
(8) See "Formation Transactions and Other Related Transactions -- The Lessee."

(9) See "Formation Transactions and Other Related Transactions -- The Lessee."

<PAGE>

- the reduction of debt service and the modification of the various
Management Agreement terms with respect to the Initial Hotels will result
in a greater amount of cash available for distribution than would be
available to the Company's Shareholders if debt service were not eliminated
and the terms of such Management Agreements were not modified; and

- access to the public capital markets and other financing alternatives,
including the ability to issue additional equity or debt securities, will
enhance the Company's ability to fund future investments in hotel
properties.

The Formation Transactions may have certain disadvantages for the investors
who acquire the Company's Common Stock in the Offering, including:

- the value at which the Hatfield Super 8s were acquired by the Company
and the terms of certain of the Formation Transactions were not established
through arms-length negotiations and, accordingly, may not reflect fair
market values or terms;

- Mr. Hatfield and his Affiliates may have conflicts of interest with
respect to the Formation Transactions and the operation and disposition of
the Initial Hotels, and Mr. Hatfield and his Affiliates will continue to
have significant influence over the affairs of the Company and the
operation of the Initial Hotels as managers and officers of the Manager;
(10)

- Messrs. Gardner-Smith, McNulty and other Affiliates of the Advisor and
the Acquisition Co. will have conflicts of interest with respect to the
Formation Transactions and the operation and growth of the Company and they
will continue to have significant influence over the affairs of the Company
by reason of their management and control of the Advisor and the
Acquisition Co.;

- the Common Stock issued in the Offering may decline significantly in
value below the Exchange Value of $10.00 per share when the Common Stock is
traded on the AMEX;

THE COMPANY'S RELATED PARTIES -- THE ADVISOR, THE ACQUISITION CO., THE LESSEE
AND THE MANAGER

THE COMPANY: HOST FUNDING, INC.

The Company will be governed by a three person Board of Directors. The two
Independent Directors will be Don W. Cockcroft and William Birdsall. The
non-Independent Director will be Michael S. McNulty. Mr. McNulty will be the
President and Treasurer of the Company. Michael P. Fedynyshyn will be the Vice
President and Secretary of the Company.

THE ADVISOR: HOST FUNDING ADVISOR, INC.

The Advisor is a newly-formed Delaware corporation. Mr. McNulty will be
the President and Treasurer of the Advisor and Mr. Ian Gardner-Smith will serve
as the Advisor's Secretary. All of the stock of the Advisor is owned by Hotel
Mortgages Resources Corp, a Maryland corporation which is controlled by Ian
Gardner-Smith ("HMR"). The Company has entered into an Advisory Agreement with
the Advisor

- --------------------
(10) See " Risk Factors -- Conflicts of Interest", "The Company in General --
Potential Dilution", and "Formation Transactions and Other Related
Transactions."

<PAGE>

pursuant to which the Advisor will provide its management and strategic business
services to the Company. The base advisory fee is $60,000 per year and the
contract may be canceled by the Company on sixty (60) days notice. (11)

THE ACQUISITION CO.: HOST ACQUISITION GROUP, LLC

Host Acquisition Group, LLC, a Delaware limited liability company, is the
acquisition company (the "Acquisition Co."). Ian Gardner-Smith is President and
Secretary of the Acquisition Co. HMR holds 93.4% of the membership interest in
the Acquisition Co. and Paul K. Richey holds 6.6% of the membership interest in
the Acquisition Co. The Company has entered into a Post-Formation Acquisition
Agreement with the Acquisition Co. pursuant to which the Acquisition Co. will be
paid up to a 6% placement fee payable in Common Stock of the Company for
services in connection with the acquisition of additional (new and incremental)
hotel properties and/or for structuring cash private placements of the Company's
Common Stock. No fees will be paid to the Acquisition Co. with respect to any
aspect of the Formation Transactions. The Post-Formation Acquisition Agreement
may be canceled by the Company on sixty (60) days notice within the first six
months of its existence. (12)

THE LESSEE: INN FUND, LLC

The Lessee is a Delaware limited liability company, the membership
interests of which is owned 7.5% by Guy E. Hatfield and 92.5% by Mr. Gardner-
Smith. Accordingly, Mr. Hatfield and his Affiliates will own less than 10% of
the equity interest in the Lessee. Ian Gardner-Smith is the CEO and Treasurer
of the Lessee. The Lessee has leased each of the Hatfield Super 8s from the
Company pursuant to the Percentage Leases and will lease the Mission Bay Super 8
pursuant to a lease agreement identical in form to the Percentage Leases. The
Lessee will not have substantial capitalization and its principal assets will
consist of inventory, supplies and nominal cash needed in the operation of the
Initial Hotels, its rights and benefits under the Percentage Leases, the
franchise licenses for the Initial Hotels, and the promissory notes of the
members equal to nine months' Base Rent due the Company under the Percentage
Leases. Due to the lack of a substantial net worth separate from its leasehold
interest in the Initial Hotels, the Lessee's ability to make lease payments
under the Percentage Leases will be primarily dependent upon the generation of
sufficient cash flow from the operation of the Initial Hotels. The Percentage
Leases require, however that during the first five (5) years of the term of each
Percentage Lease the Lessee have a minimum net worth equal to nine months' Base
Rental payments. (13)

THE MANAGER: ALL AMERICAN GROUP, INC.

The Manager is a Delaware corporation, 70% of the stock of which is owned
by Mr. Gardner-Smith and 30% of the stock of which is owned by Mr. Hatfield and
his Affiliates. Mr. Hatfield will be the President of the Manager. Emily Groce
is the Treasurer of the Manager and Mr. Gardner-Smith is the Vice President

- --------------------
(11) See "Formation Transactions and Other Related Transactions -- The Advisor
and The Advisory Agreement."

(12) See "Formation Transactions and Other Related Transactions -- The
Acquisition Co. and The Placement Agreement."

(13) See "Percentage Leases."

<PAGE>

and Secretary of the Manager. The Hatfield Super 8s are currently managed by
the Manager and, following the closing of the Offering, all of the Initial
Hotels will be managed by Manager on behalf of, and subject to the supervision
of, the Lessee. New Management Agreements have been entered into between the
Lessee and the Manager with respect to the Hatfield Super 8s and a new
management agreement identical in form to the Management Agreements will be
entered into between the Lessee and the Manager with respect to the Mission Bay
Super 8. The Management Agreement with respect to the Initial Hotels or any
hotel properties may be terminated by the Lessee if Manager fails to meet
certain performance criteria measured against the annual operating budget for
the hotel, unless Manager elects to fund a portion of such shortfall. In its
capacity as manager, the Manager will hire, train and supervise all on-site
employees and utilize its reservation and yield-management system in the
development and implementation of detailed business and marketing plans and
budgets for each Initial Hotel and in performing the day-to-day accounting and
management functions necessary for the efficient operation thereof.

Pursuant to the Management Agreements with Manager, as modified, the Lessee
will pay to Manager a base management fee of 3% of adjusted gross revenues from
the Initial Hotels. In addition to the base management fee, the Lessee will pay
Manager an accounting fee of $100 per guest room per year and an incentive fee,
equal to 20% of the Lessee's net operating income. The Lessee has agreed to
engage Manager to manage, upon similar terms, any hotel properties leased by the
Lessee from the Company.

DISTRIBUTION POLICY

The Company hopes to make regular quarterly distributions to Shareholders
of Common Stock initially equal to $0.2275 per share, which, on an annualized
basis, is expected to be equal to $0.91 per share. The Subordinated Shares will
participate in dividends in any calendar quarter once the Shares have received
$0.2275 per share. It is anticipated that the Shares will initially receive a
$.91 per share annualized dividend. On a pro forma basis, such distributions
would represent approximately 98% of the Company's estimated cash available for
distribution and 95% of the Company's Funds From Operations for the last six
months of 1995. It is further anticipated that the Subordinated Shares will
initially receive a $0.75 per share annualized dividend. Industry analysts
generally consider Funds From Operations to be an appropriate measure of the
performance of an equity REIT. Funds From Operations should not be considered
an alternative to net income as an indicator of the Company's operating
performance or to cash flow as a measure of liquidity. Approximately 45.5% of
the distributions by the Company initially will be received (directly or
indirectly) by Mr. Hatfield and Mr. Hatfield and his Affiliates. The first
distribution, for the period from the closing of the Offering to September 30,
1995, is expected to be $0.2275 per share. The Company estimates that
approximately 15% (or $0.12 per share) of the assumed initial 12 month
distribution per share will represent a return of capital for federal income tax
purposes. The Company established the initial distribution rate based upon
estimated cash available for distribution, the pro forma condensed statement of
operations and pro forma Funds From Operations of the Company as of, and for the
twelve month period ended, December 31, 1994. (14) The Company believes that
such historical financial information, with pro forma adjustments, provides a
reasonable basis for setting the initial distribution rate. However, no
assurance can be given that this level of estimated adjusted cash available for
distribution will be achieved in the future, and actual distributions may be
significantly different from expected distributions. The foregoing
notwithstanding, distributions by the Company will be at the discretion of the
Board of Directors and will depend on a number

- --------------------
(14) See "The Company in General -- Distribution Policy" for information
regarding the basis for determining the initial distribution rate and " --
Selected Financial Information" for information regarding cash flows provided by
operating, investing and financing activities.

<PAGE>

of factors, including the Company's actual cash available for distribution, the
Company's financial condition, the Company's capital requirements, and the
federal income tax requirement that in general a REIT must distribute annually
at least 95% of its net taxable income and such other factors as the Company's
Board of Directors deems relevant.

TAX STATUS

The sale of the Mission Bay Super 8 by Mission Bay in exchange for the
Company's Common Stock will be a taxable transaction which will generate a
taxable loss to Mission Bay. The extent to which a Mission Bay Limited Partner
may utilize its distributive share of the partnership loss (and the character of
such loss as a capital loss or an ordinary loss) will depend on various factors,
including the adjusted basis of the partnership interest to such Mission Bay
Limited Partner, whether such Mission Bay Limited Partner is an individual, a
pension plan or an individual retirement account.

MISSION BAY LIMITED PARTNERS SHOULD CONSULT WITH THEIR TAX ADVISORS TO
DETERMINE THE PRECISE TAX TREATMENT TO THEM RESULTING FROM THIS TRANSACTION.

The Company intends to make an election to be taxed as a REIT under
Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its first taxable year ending December 31, 1995. If the Company
qualifies for taxation as a REIT, the Company (subject to certain exceptions)
will not be subject to federal income taxation, at the corporate level, on its
taxable income that is distributed to the Shareholders of the Company. A REIT
is subject to a number of organizational and operational requirements, including
a requirement that it currently distribute at least 95% of its taxable income.
Failure to qualify as a REIT would render the Company subject to tax (including
any applicable minimum tax) on its taxable income at regular corporate rates and
distributions to the Shareholders in any such year would not be deductible by
the Company. Although the Company does not intend to request a ruling from the
Internal Revenue Service (the "IRS") as to its REIT status, the Company has
obtained the opinion of its legal counsel that it will qualify for REIT status,
which opinion is based on certain assumptions and representations and is not
binding on the IRS or any court. Even if the Company qualifies for taxation as
a REIT, the Company may be subject to certain state and local taxes on its
income and property. In connection with the Company's election to be taxed as a
REIT, the Company's Charter imposes restrictions on the transfer of shares of
Common Stock. The Company intends to adopt the calendar year as its taxable
year. (15)

- --------------------
(15) See "Risk Factors -- Tax Risks", " -- Anti-takeover Effect of Ownership
Limit, Staggered Board and Power to Issue Additional Stock", "Federal Income Tax
Considerations -- Taxation of the Company", "The Company's Capital Stock --
Description of Securities", and " -- Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws."

<PAGE>

THE OFFERING

Common Stock offered by the Company

SHARES:
For Mission Bay Hotel 266,950 Shares
(Assuming 5% Dissenting Partners)
For Cash in Public Offering 500,000 Shares
(Issued to Public Offering purchasers)
For a portion of Company's Initial Shares 550,000 Shares
(Issued to Mr. Hatfield and his Affiliates)
For Directors 30,000 Shares
(10,000 Shares per Director) ------
Total Class A Shares 1,346,950 Shares

SUBORDINATED SHARES:
For a portion of Company's Initial Shares 140,000 Shares
(Issued to Mr. Hatfield and his Affiliates) ---------

Total Shares and Subordinated Shares 1,486,950 Shares
---------
---------

Common Stock to be outstanding after the Offering. . . . . 1,486,950 Shares (16)

Use of Cash Proceeds . . . . . . . . . . . . . . . . . . . . . . . . .$5,000,000

Sales Commission on Offering $500,000
Total Costs of Formation Transactions 296,000
Mortgage Payoffs/Paydown:
Miner - pay off 1,114,000
Somerset - pay off 1,160,000
Poplar Bluff - pay off 901,000
Rock Falls - pay down (Partial) 638,000
---------
Total Payoffs 3,813,000
Mission Bay Dissenter's Rights Provision 140,500
Working Capital Reserve 250,500
----------

Total $5,000,000
----------
----------

American Stock Exchange symbol . . . . . . . . . . . . . . . . . . . . . . "HFN"

- --------------------
(16) Includes 766,950 Shares (assuming 5% Dissenting Partners) to be issued in
the Offering to Mission Bay and the Public Offering, and 690,000 Shares and
Subordinated Shares to be issued to Mr. Hatfield and his Affiliates in exchange
for their existing 100 Initial Shares in the Company, and an aggregate of 30,000
Shares to be issued 10,000 each to the three Directors of the Company in lieu of
cash directors' fees. See "Management and Various Policies and Objectives --
Executive Compensation", " -- Compensation of Directors", and "Formation
Transactions and Other Related Transactions -- Principal Shareholders."

<PAGE>

SUMMARY FINANCIAL DATA

The following tables set forth unaudited summary pro forma financial
information for the Company and unaudited summary pro forma financial
information for the Initial Hotels and Lessee and summary combined historical
financial information for the Initial Hotels. Such data should be read in
conjunction with the financial statements and the Notes thereto which are
contained elsewhere in this Prospectus. The pro forma operating information for
the Company and for the Initial Hotels and Lessee is presented as if the
consummation of the Formation Transactions had occurred on January 1, 1994. The
pro forma balance sheet data is presented as if the consummation of the
Formation Transactions had occurred on December 31, 1994.

TABLE 4 Host Funding, Inc.
Summary Pro Forma Financial Data (1)
(in thousands, except for per share data)
(unaudited)

Year
Ended
12/31/94
--------
SUMMARY OF OPERATIONS DATA:
<S> <C> <C>
Revenues:
Lease revenue (2) $1,335
Interest income (3) 212
---
Total revenues $1,547
------

Expenses:
Interest expense 90
Depreciation and amortization 184
Advisory fee (4) 60
General and administrative (5) 210
Amortization of share purchase plan costs (6) 54
------
Total expenses 598
------
Net income applicable to
common shareholders (7) $949
------
------

Per share information:
Net income per common share $0.64
------
------

Weighted average number of
common shares outstanding 1,488
------
------
BALANCE SHEET DATA:
Investment in hotel properties, at cost $5,510
Current assets 250
Mortgage note receivable 1,806
Other assets 30
------
Total assets $7,596
------
------

Total debt $ 356

Shareholders' equity $7,240
------
Total liabilities & shareholders' equity $7,596
------
------

</TABLE>

<PAGE>

TABLE 4 (CON'T)

Initial Hotels and Lessee
Summary Pro Forma Financial Data(1)(10)
(in thousands)
(unaudited)

Pro Forma Year Ended December 31, 1994
--------------------------------------
Hatfield Super 8s
-----------------

Rock Poplar Mission
Falls Miner Somerset Bluff Subtotal Bay Total
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations (8) $1,187
Net cash used in investing activities (9) 0
Net cash used in financing activities (10) $1,163
Weighted average number of
common shares outstanding 1,407

PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues:
Room revenue $664 $812 $543 $591 $2,610 $990 $3,600
Other revenue 44 34 18 28 124 65 189
--- --- --- --- ----- ----- -----
Total revenue 708 846 561 619 2,734 1,055 3,789
--- --- --- --- ----- ----- -----
Expenses:
Hotel operating expenses (11) $405 457 336 338 1,536 784 $2,320
Percentage Lease payment 269 340 203 228 1,040 295 1,335
--- --- --- --- ----- ----- -----
Total expenses 674 797 539 566 2,576 1,079 3,655
--- --- --- --- ----- ----- -----

Lessee net income $ 34 $49 $22 $53 $ 158 ($ 26) $ 134
---- --- --- --- ----- ------ ------
---- --- --- --- ----- ------ ------

ACTUAL STATEMENT OF OPERATIONS DATA:
Revenues:
Room revenue $664 $812 $543 $591 $2,610 $990 $3,600
Other revenue 44 34 18 28 124 65 189
--- --- --- --- ----- ----- -----
Total revenue 708 846 561 619 2,734 1,055 3,789
--- --- --- --- ----- ----- -----

Expenses:
Hotel expenses 418 474 347 350 1,589 816 2,405
Depreciation and amortization 34 37 33 35 139 85 224
Interest expense 102 108 102 88 400 0 400
Provision for loss 1,535 1,535
----------------------------------------------------------------
Total expenses $554 $619 $482 $473 $2,128 $2,436 $4,564
----------------------------------------------------------------
Net income (loss) $154 $227 $79 $146 $ 606 ($1,381) ($775)
---- ---- --- ---- ------ ------- -----
---- ---- --- ---- ------ ------- -----

Notes to Pro Forma Financial Data

<FN>
(1) The pro forma information does not purport to represent what the Company's
or the Initial Hotels' and the Lessee's financial position or results of
operations would actually have been if the consummation of the Formation
Transactions had, in fact, occurred on such dates, or to project the
Company's or the Initial Hotels' and Lessee's financial position or results
of operations at any future date or for any future period.

(2) Represents lease payments from the Lessee to the Partnership calculated on
a pro forma basis by applying the rent provisions in the Percentage Leases
to the pro forma room revenues. See "Initial Hotels and Lessee - Pro Forma
Combined States of Operations."

(3) Represents investment income on mortgage note receivable.

<PAGE>

(4) Represents initial fee due under advisory agreement.

(5) Estimated at $210,000 annually for executive compensation, legal and audit
and other expenses.

(6) Represents amortization of unearned directors compensation (30,000 Shares
at $1.80 per share).

(7) Assumes no federal or state income taxes will be due due to qualification
as a REIT.

(8) Represents Funds From Operations of the Company, on a consolidated basis.
Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. In accordance
with the resolution adopted by the Board of Governors of the National
Association of Real Estate Investment Trust, Inc. ("NAREIT"), Funds From
Operations represents net income (loss) (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
debt restructuring or sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and
joint ventures. For the periods presented, depreciation, and amortization
of unearned directors compensation were the only non-cash adjustments.
Funds From Operations should not be considered as an alternative to net
income or other measurements under generally accepted accounting principles
as an indicator of operating performance or to cash flows from operating
investing or financing activities as a measure of liquidity Funds From
Operations represents cash flows from operations because there are no pro
forma working capital adjustments. Funds From Operations does not reflect
cash expenditures for capital improvements or debt service with respect to
the Initial Hotels. Under the Percentage Leases, the Lessee is obligated
to pay the costs of real estate and personal property taxes, of property
insurance and of maintaining underground utilities and structural elements
of the Initial Hotels, and to fund capital expenditures for the periodic
replacement or refurbishment of furniture, fixtures and equipment required
for the retention of the franchise licenses with respect to the Initial
Hotels.

(9) Represents historical improvements and additions to hotel properties which
are assumed to equal improvements and additions to hotel properties on a
pro forma basis. Lessee is responsible for improvements or additions to
the hotel property.

(10) Represents pro forma initial dividends to be paid based on cash flow
available for distribution of $0.83 per share for Class A Common Shares and
remaining available cash flow for distribution to Class B Common Shares
(1,346,950 Class A shares and 140,000 Class B shares) plus pro forma
principal payments on the Rock Falls, Illinois debt of $44,571.

(11) Pro forma amounts as if (i) the Lessee recorded and paid real and personal
property taxes and property insurance as contemplated by the Percentage
Leases and does not reflect the current or future impact of the 4%
replacement reserve and (ii) the Formation Transactions occurred on January
1, 1994.

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

THE MISSION BAY PARTNERSHIP AND ITS HOTEL

Motels of America Series IX, a California Limited Partnership, ("Mission
Bay") was formed on February 5, 1987 pursuant to the California Revised Uniform
Limited Partnership Act. Mission Bay sold 6,600 limited partnership interests
at a public offering price of $1,000 each commencing November 19, 1986 pursuant
to a Registration Statement on Form S-18 under the Securities Act of 1933
(Registration 33-9075-LA). The offering of $6,600,00 was fully subscribed and
closed on June 15, 1987.

Guy E. Hatfield was the original Managing General Partner of Mission Bay.
Mr. Hatfield held 32.79% of the general partner interests and Mr. Ian Gardner-
Smith held 9.89% of the general partner interests. The other 57.3% of general
partner interests were held by various other individuals. On January 1, 1990,
the general partners of Mission Bay sold their general partner interests to GHG
and the name of the partnership was changed to "Mission Bay Super 8, Ltd.".
Since January 1, 1990, the Mission Bay Super 8 has been operated pursuant to a
management agreement with GHG. Mission Bay has no employees, and is not subject
to any legal proceedings.

There is no public trading market for Mission Bay's limited partnership
interests. There were approximately 1,149 holders of Mission Bay's 6,600
limited partnership interests as of December 31, 1994.

<PAGE>

Cash distributions to holders of limited partnership interests totaled $180,000
($27.27 per interest) in 1994 and $162,000 ($24.55 per interest) in 1993.
Arthur Andersen valued Mission Bay's investment property at $2,810,000 as of
December 1, 1994. Because of a significant decrease in the market value of the
Mission Bay Super 8, management elected to writedown Mission Bay's investment
property to its appraised value of $2,810,000 as of December 1, 1994.

VOTING PROCEDURES

This Prospectus, together with the accompanying Transmittal Letter, the
Partner Consent, the Statement of Election and the Power of Attorney (the
Transmittal Letter, the Partner Consent, the Statement of Election and the Power
of Attorney are referred to collectively as the "Consent Form," forms of which
are attached hereto at Appendix A), constitute the Solicitation Materials being
distributed to the Partners to obtain their votes "for" or "against" Mission
Bay's approval of the Mission Bay Acquisition.

In order to approve the Mission Bay Acquisition, (i) the Partners of
Mission Bay holding either all or at least 67% of the outstanding limited
partner interests and the general partner of Mission Bay must approve the
Mission Bay Acquisition. Each Partner, therefore, should complete and return
the Consent Form before the expiration of the Solicitation Period. The
Solicitation Period is the time period during which the Partners may vote "for"
or "against" the Mission Bay Acquisition. The Solicitation Period will commence
upon the delivery of the Solicitation Materials to the Partners (on or about
_________, 1995) and will continue until the later of (a) _________, 1995 (a
date not less than 30 calendar days from the initial delivery of the
Solicitation Materials) or (b) such later date as may be selected by the Company
and as to which notice is given to the Partners. At its discretion, the Company
may elect to extend the Solicitation Period. Under no circumstances will the
Solicitation Period be extended beyond December 31, 1995. Any Consent Form
received by the information agent (the "Information Agent") prior to 11:59 p. m.
Pacific time on the last day of the Solicitation Period will be effective
provided that such Consent Form has been properly completed and signed. Once
completed, signed and returned, a Consent Form will be irrevocable, regardless
of the amount of time remaining in the Solicitation Period.

DISSENTERS' RIGHTS

The Mission Bay Acquisition has been structured to afford Dissenting
Partners the dissenters' rights contained the recently enacted California
legislation which is known as the Thompson-Killea Limited Partnership Protection
Act of 1992 (the "Thompson-Killea Act"). The Thompson-Killea Act requires that
the Dissenting Partners receive the appraised value of their Interest in Mission
Bay in the form of cash, freely tradeable securities or secured or unsecured
debt instruments satisfying certain statutory requirements. The Company is
satisfying this requirement by offering Dissenting Partners the right to receive
the appraised value of their interests in Mission Bay (adjusted for outstanding
indebtedness) (the "Adjusted Appraised Value") in the form of cash (up to an
aggregate of $140,500, subject to increase by the Company in its sole
discretion). Accordingly, the Adjusted Appraised Value will not change. The
Mission Bay Acquisition has also been structured to comply with the other
protections afforded in the Thompson-Killea Act.

COMPLIANCE WITH AND APPROVAL FROM FEDERAL AND STATE AUTHORITIES

The Mission Bay Acquisition will not be completed if any moratorium on
transactions of its type are imposed by federal, state or regulatory authorities
or if any state blue sky or securities authority imposes any restriction upon or
prohibits any aspect of the transactions contemplated by the Formation
Transactions, which in the judgment of the Company, renders the Formation
Transactions undesirable or impractical.

<PAGE>

RISK FACTORS

Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
acquiring Shares of the Company's Common Stock in the Offering.

HOTEL INDUSTRY RISKS

OPERATING RISKS

The Initial Hotels are subject to all operating risks common to the hotel
industry. These risks include, among other things, intense competition from
other hotels; over-building in the hotel industry which has adversely affected
occupancy, ADR and REVPAR in recent years; increases in operating costs due to
inflation and other factors, which increases have not in recent years been, and
may not necessarily in the future be, offset by increased room rates; dependence
on business and commercial travelers and tourism; increases in energy costs and
other expenses of travel; and adverse effects of general and local economic
conditions. Such factors could adversely affect the Lessees' ability to make
lease payments and, consequently, the Company's ability to make expected
distributions to Shareholders. Further, a decrease in room revenues, would
result in decreased revenues to the Company under the Percentage Leases on the
Initial Hotels and decreased amounts available for distribution to the Company's
Shareholders. (17)

COMPETITION

(i) Competition for Guests. The hotel industry is highly
competitive. Each of the Initial Hotels experiences competition primarily from
other similarly priced hotels in its immediate vicinity, but each also competes
with other hotel properties in its geographic market. Some of the competitors
of the Initial Hotels have substantially greater marketing and financial
resources than the Company and the Lessee. Additional competitive hotels are in
development or could be developed in a relatively short period of time. Such
hotel properties could have an adverse effect on the revenues of the Company's
nearby hotels. (18)

(ii) Competition for Acquisitions. When the Company seeks to acquire
hotel properties, the Company will be competing for investment opportunities
with entities which 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. Further, the Company
believes that competition from entities organized for purposes substantially
similar to the Company's objectives will increase significantly over time. (19)

INVESTMENT CONCENTRATION IN SINGLE INDUSTRY

The Company's current strategy is to acquire primarily high quality limited
service hotel properties throughout the continental United States. The Company
will not seek to invest in assets selected to reduce the risks associated with
investments in the hotel industry, and therefore will be subject to risks
inherent in

- --------------------
(17) See "Business and Properties -- The Hotel Industry" and "--the Percentage
Leases."

(18) See "Business and Properties -- Competition."

(19) See "Business and Properties -- Competition."

<PAGE>

concentrating investments in a single industry. Therefore, the adverse effect
on the Company's lease revenue and amounts available for distribution to
Shareholders 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. (20)

SEASONALITY OF HOTEL BUSINESS

The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
All of the Initial Hotels typically reflect the effects of this industry
seasonality. This seasonality can be expected to cause significant quarterly
fluctuations in the Company's lease revenues. (21)

LIMITED NUMBER OF INITIAL HOTELS; EMPHASIS ON LIMITED SERVICE HOTEL MARKET

The Company initially will own only five Initial Hotels. Significant
adverse changes in the operations of any one or more of the Initial Hotels could
have a material adverse effect on lease revenues and the Company's ability to
make expected distributions to its Shareholders. In addition to the Initial
Hotels, the Company intends to place particular emphasis on the acquisition of
hotel properties that are high quality limited-service hotels. Accordingly, at
least initially, the Company will be subject to risks inherent in concentrating
investments in a single type of hotel property, which could have an adverse
effect on the Company's lease revenues and amounts available for distribution to
Shareholders. (22)

The Initial Hotels are located in areas throughout the United States. (23)
Therefore, adverse events or conditions which affect those areas particularly
(such as natural disasters or adverse changes in local economic conditions)
could have a very pronounced negative impact on the operations of the Initial
Hotels and amounts available for distribution to the Company's Shareholders.

RENEWAL OF LEASES AND RELETTING OF INITIAL HOTELS

The Company will be subject to the risks that upon expiration or
termination of the Percentage Leases, such Percentage Leases may not be renewed,
the hotel properties may not be relet or the terms of renewal or reletting
(including the cost of required renovations or concessions) may be less
favorable than previous lease terms. In addition, a default by the Lessee under
the terms of its Percentage Leases with the Company may result in the
termination of such Percentage Lease. If the Company were unable to promptly
enter into new leases for all or a substantial portion of the hotel properties
or if the rental rates upon such renewal or reletting were significantly lower
than expected due to market conditions or other factors, then the Company's cash
flow and ability to make expected distributions to Shareholders could be
adversely affected. Moreover, except with respect to a foreclosure property, as
a result of the restrictions imposed on the Company under the REIT provisions of
the Code, the Company would likely not be able to operate any hotel property
without resulting in failure to qualify as a REIT for federal income tax
purposes. All of the Percentage Leases for the Hatfield Super 8s commenced
effective January 1, 1995 and are for a term of fifteen (15) years. The
Percentage Lease for the Mission Bay Super 8 will commence on the completion of
the Mission Bay Acquisition and will have a term of 15 years.

- --------------------
(20) See "Business and Properties -- The Hotel Industry."

(21) See "Financial Considerations -- Seasonality."

(22) See "Business and Properties -- Limited Service Hotels."

(23) See "Business and Properties -- The Initial Hotels."

<PAGE>

FRANCHISE AGREEMENT RISKS

Upon completion of the Offering, all of the Initial Hotels will be operated
pursuant to existing franchise or license agreements (the "Franchise
Agreements") between the Lessee or its affiliates and Super 8 Motels, Inc. (the
"Franchisor"). In addition, the Company anticipates that the majority of any
additional hotel properties will be operated under franchise agreements. In
connection with the acquisition of the Initial Hotels, the Company may propose a
change in the franchise at one or more Initial Hotels. Franchise agreements
generally contain specific standards for, and restrictions and limitations on,
the operation and maintenance of a hotel property in order to maintain
uniformity in the system created by the franchisor. Such standards are often
subject to change over time, in some cases, at the discretion of the franchisor,
and may restrict a franchisee's ability to make improvements or modifications to
a hotel property without the consent of the franchisor. In addition, compliance
with such standards could require a franchisee to incur significant expenses or
capital expenditures. The Lessees may determine that required capital
improvements are too expensive or otherwise unwarranted in light of general
economic conditions, the prospects for an applicable hotel property or other
factors. Failure by a Lessee to make required capital improvements or to comply
with any other material terms of a franchise agreement might result in
termination of the agreement. There can be no assurance that the Lessee will
comply with the terms of the franchise agreements relating to the hotel
properties operated by it. If a franchise agreement relating to a hotel
property is terminated, the resulting loss of franchise could have a material
adverse effect on the operations or the value of the applicable hotel property,
or both. Upon any such termination, the Company could also be required to incur
significant capital expenditures and other expenses which it may not be able to
pass on to subsequent Lessees of the applicable hotel property. The Percentage
Leases require that the Lessee deposit on a monthly basis in a reserve account
an amount equal to 4% of the prior month's gross revenues from each Initial
Hotel to fund repairs and replacements of furniture, fixtures and equipment,
which replacements must in general be approved by the Company. These deposits
are designed, among other things, to help ensure the compliance by the Lessee
with the terms of the Franchise Agreements. However, there can be no assurance
that such deposits will be sufficient to cover the cost of necessary repairs and
maintenance at the Initial Hotels.

Certain of the Franchise Agreements covering the Initial Hotels expire or
terminate, without specified renewal rights, at various times. The terms of the
Franchise Agreements are also not coextensive with the terms of the underlying
Percentage Leases. As a condition to renewal, the Franchise Agreements
frequently contemplate a renewal application process, which may require
substantial capital improvements to be made to the Initial Hotel. Any such
required capital improvements would in general be the responsibility of the
Lessees. The Company, however, might agree with a Lessee to make such capital
expenditures if it believed it could recover the amount of the expenditures
through increases in rent payments. In addition, no assurance can be given that
upon termination of any Franchise Agreement, the Lessee will determine to renew
the applicable Franchise Agreement. In addition, upon termination of any
Percentage Lease for a hotel property, there can be no assurance that the
franchisor would permit a new tenant to continue under the then existing
franchise agreement.

VALUE OF INITIAL HOTELS AND TERMS OF FORMATION TRANSACTIONS

Pursuant to the Contribution and Assumption Agreement the Company has
previously acquired the Hatfield Super 8s for its Common Stock. The Company
will also acquire the Mission Bay Super 8 for Shares of its Common Stock. At
the close of the Offering, the existing Company Shareholders will receive Shares
and Subordinated Shares of the Company's Stock reflecting an aggregate value of
$6.9 million. This $6.9 million value reflects the appraised value of the
Hatfield Super 8s and the unpaid principal balance of the Hatfield note. The
valuation of all Initial Hotels was based upon individual appraisals performed
by Arthur Andersen LLP. The terms of the Percentage Leases, the Advisory
Agreement, the Management Agreements and the Post-Formation Acquisition
Agreement were not negotiated on an arms length basis. The Company believes,
however, that the terms of such agreements are fair to the Company. The lease
payments under the

<PAGE>

Percentage Leases for each of the Initial Hotels were calculated with reference
to historical financial data and projected operating and financial performance
of the Initial Hotels. 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 compensation
arrangements for officers and Directors of the Company will provide incentives
to seek to maximize shareholder value, by tying incentive compensation to
increases in the market value of the Common Stock. The Contribution and
Assumption Agreement pursuant to which the Company acquired the Hatfield Super
8s, the Mission Bay Acquisition Agreement pursuant to which the Company will
acquire the Mission Bay Super 8, the Percentage Leases, the Advisory Agreement,
the Post-Formation Acquisition Agreement and the employee compensation plans are
subject to the approval by the Independent Directors prior to the closing of the
Offering. (24) The Company will not own any interest in the Advisor, the
Lessee, the Acquisition Co. or the Manager. Seven and one half percent (7.5%)
of the membership interests in the Lessee and 30% of the stock of the Manager is
owned by Mr. Hatfield and his Affiliates. As a result, Mr. Hatfield and his
Affiliates may have a conflict of interest with the Company in the performance
of their management services to the Company in connection with the Percentage
Leases. (25)

DEPENDENCE ON LESSEE

In order to generate revenues to enable it to make distributions to
Shareholders, the Company will rely on the ability of the Lessee to make rent
payments under the Percentage Leases for the hotel properties (which will be
dependent, in part, upon the Lessee's ability to generate sufficient revenues
from the operation of the hotel properties). Reductions in revenues at the
hotel properties or in the net operating income of the Lessee may adversely
affect the financial condition of the Lessee and their ability to make rent
payments under such Percentage Leases. The failure or delay of the Lessee to
make rent payments with respect to a significant number of hotel properties
could have a material adverse effect on the financial condition and results of
operations of the Company and consequently the Company's ability to make
expected distributions to Shareholders. The Lessee is a limited purpose entity,
which has been recently formed for the purpose of leasing and operating the
Initial Hotels. In order to secure its obligations under the Percentage Leases,
the Lessee will also be required to maintain a specified net worth (equal to a
minimum of nine months' Base Rent for each of the respective Initial Hotels)
during the first five (5) years of the term of the Percentage Leases. The
Lessee will also be obligated to maintain a reserve account with the Company
into which monthly deposits of 4% of the prior month's gross revenues from each
Initial Hotel into a reserve account (the "FF&E Reserve Account") will be made
to secure the Lessee's obligation to fund replacements of furniture, fixtures
and equipment, which replacements must in general be approved by the Company.
Failure on the part of a Lessee to materially comply with the terms of a
Percentage Lease for a hotel property would likely give the Company the right
terminate such Percentage Lease, repossess the applicable hotel property and
enforce the payment obligations under such Percentage Lease. Such failure,
however, could have a material adverse effect on the Company's ability to make
distributions to its Shareholders or the value of the applicable hotel property,
or both.

RISKS OF INSUFFICIENT CASH AVAILABLE FOR DISTRIBUTION

The Company's distribution to Shareholders with respect to their Shares for
the period from the completion of the Offering through the twelve (12) months
following the completion of the Offering is expected to be $0.91 per share,
which represents approximately 98% of the Company's estimated cash available

- --------------------
(24) See "Business and Properties -- The Percentage Leases" and "Management and
Various Policies and Objectives -- Conflict of Interest Policies."

(25) See "Formation Transactions and Other Related Transactions -- The Lessee."

<PAGE>

for distribution for the twelve (12) months following the completion of the
Offering. If the Company were to incur significant unanticipated cash
expenditures, it might not be able to maintain this distribution through the
twelve (12) months following the completion of the Offering, as anticipated, or
in subsequent periods. The Company believes that the terms of the Percentage
Leases provide it with protection against unanticipated cash expenditures and
capital expenditures associated with the operation and maintenance of the
Initial Hotels. See "Dependence on Lessee" for a discussion of the risks
associated with the Company's dependence on the performance of the Lessee under
the Percentage Leases. Any failure to make, or any reduction in, anticipated
distributions could result in a decrease in the market price of the Common
Stock.

CONFLICTS OF INTEREST

GENERAL

Because of the direct and indirect ownership interests of Messrs. Hatfield,
Gardner-Smith, and McNulty in, and their positions with, the Company, the
Advisor, the Acquisition Co., the Lessee and the Manager, the entities from
which the Hatfield Super 8s were acquired, and the entities from which the
Mission Bay Super 8 will be acquired there are inherent conflicts of interests
in the Formation Transactions and in the ongoing lease and operation of the
Initial Hotels, and the interests of the Company's Shareholders may not have
been, and in the future may not be, solely reflected in all decisions made or
actions taken by officers and Directors of the Company. (26)

CONTINUING HOTEL OPERATION, DEVELOPMENT AND INVESTMENT BY HATFIELD
AFFILIATES

Mr. Hatfield and his Affiliates may (i) continue to own, develop and
operate their respective existing interests in the various other hotels they
own, primarily known as Hatfield Inns, (ii) modify, dispose of or add to such
existing interests or properties, and (iii) acquire new or additional interests
in any hotel development. Except for their existing Hatfield Inn located in
Miner, Missouri, Mr. Hatfield and his Affiliates have agreed not to develop, own
or operate any additional hotel properties located within five miles of a hotel
property owned by the Company.

NEW AND CONTINUING REIT ORGANIZATIONAL EFFORTS BY ADVISOR AFFILIATES

Certain Affiliates of the Advisor are currently considering the formation
and organization of additional equity and/or debt REITs focusing on hotel
ownership as well as additional equity REITs involving non-hotel real estate
ownership. In addition, these Affiliates of the Advisor are also considering
the formation of a mortgage or hybrid REIT. Accordingly, should any of these
additional REITs be organized by Affiliates of the Advisor, the Affiliates of
the Advisor could have a significant conflict of interest vis-a-vis the Company.

CONFLICTING DEMANDS FOR MANAGEMENT TIME

Messrs. Gardner-Smith and McNulty will be actively involved in the
ownership and management of the Advisor, the Lessee and the Manager, as well as
other activities, in addition to their functions as officers and Directors of
the Company. Such activities will include, without limitation, the ownership
and management of their interests in their other business pursuits, subject to
certain restrictions set forth in their employment agreements. Therefore,
officers and employees of the Company, some of whom are also officers or
employees of the Advisor, the Lessee, and the Manager will be subject to
competing demands on their time. Messrs.

- --------------------
(26) See "Formation Transactions and Other Related Transactions -- Options and
Rights of First Refusal" and "Management and Various Policies and Objectives --
Conflict of Interest Policies."

<PAGE>

Gardner-Smith and McNulty, however, have each agreed to devote a substantial
amount of their time to the fulfillment of their obligations to the Company, the
Advisor, the Manager, and/or the Lessee, as the case may be. (27)

RISKS OF LEVERAGE

The Company initially will have outstanding debt equal to approximately 5%
of its gross assets; however, since the Company must distribute annually at
least 95% of its taxable net income to maintain its REIT status, it may be
required to borrow funds to make additional investments or distributions. The
Board of Directors has the discretion to permit the Company to incur debt in any
amount of the Company's investment in hotel properties. The Mission Bay Super 8
will not be encumbered by any debt upon the close of the Offering. The four
Hatfield Super 8s were encumbered by $4,379,000 of debt on December 31, 1994.
As specified in "Use of Proceeds" below, the cash proceeds of the Offering will
be used to pay off approximately $1.2 million of debt on the Somerset, Kentucky
Super 8, to pay off approximately $1.1 million of debt on the Miner, Missouri
Super 8, to pay off approximately $900,000 of debt on the Poplar Bluff, Missouri
Super 8, and to pay off approximately $600,000 of debt on the Rock Falls,
Illinois Super 8. Accordingly, after the Offering, the Rock Falls, Illinois
Super 8 will be encumbered by approximately $406,000 of debt. The loan on the
Rock Falls Super 8 hotel is all due and payable on February 4, 1998. The
Company may have to refinance this loan. In addition, the Company may seek a
new line of credit after the Offering to provide, as necessary, funds for
investments in additional hotel properties, working capital and cash to make
distributions. Subject to the limitations described above, the Company may
borrow additional amounts from the same or other lenders in the future, or may
issue corporate debt securities in public or private offerings. Certain of such
additional borrowings may be secured by properties owned by the Company. (28)

There can be no assurance that the Company, upon the incurrence of debt,
will be able to meet its debt service obligations and, to the extent that it
cannot, the Company risks the loss of some or all of its assets, including the
Initial Hotels, to foreclosure. Adverse economic conditions could result in
higher interest rates which could increase debt service requirements on floating
rate debt and could reduce the amounts available for distribution to
Shareholders. The Company may obtain one or more forms of interest rate
protection (swap agreements, collars, etc.) to hedge against the possible
adverse effects of interest rate fluctuations. Adverse economic conditions
could cause the terms on which borrowings become available to be unfavorable.
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 hotel properties at times which may not
permit realization of the maximum return on such investments.

RISKS OF MORTGAGE AND PARTICIPATING DEBT INVESTMENTS

The Company may fund mortgage investment in real estate development
projects and/or in completed real estate properties. Mortgage loans to real
estate development projects generally carry a higher degree of risk than
mortgage loans to completed, income-producing projects. In that connection,
however, even mortgage loans to existing income-producing real estate properties
are higher risk than other fixed income investments since the owner's ability to
fund the debt service on such a mortgage loan is generally totally dependent on
the cash flow of the secured property and accordingly, unexpected vacancies
and/or other economic exigencies which adversely affect the property will
generally decrease the ability of the owner to fund debt service payments.

- --------------------
(27) See "Management and Various Policies and Objectives -- Executive
Compensation."

(28) See "Management and Various Policies and Objectives -- Financing."

<PAGE>

TAX RISKS

FAILURE TO QUALIFY AS A REIT

The Company intends to operate so as 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 IRS that it qualifies as a REIT, it has
received an opinion of its counsel that, based on certain assumptions and
representations, it will so qualify. Investors should be aware, however, that
opinions of counsel are not binding on the IRS or any court. The REIT
qualification opinion only represents the view of counsel to the Company 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 the Shareholders of the Company.
(29)

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 Shareholders in
computing its taxable income and would be subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates. Unless entitled to relief under certain Code provisions, 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 distribution to the Shareholders would be reduced for each
of the years involved. Although the Company currently intends to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Board of Directors,
with the consent of a majority of the Shareholders, to revoke the REIT election.
(30)

REIT MINIMUM DISTRIBUTION REQUIREMENTS

In order to qualify as a REIT, the Company generally will be required each
year to distribute to its Shareholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company will be 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 its Shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income will consist primarily of its income from the Percentage
Leases and the Company's cash available for distribution will likewise consist
primarily of its cash receipts from the Percentage Leases. Differences in
timing between taxable income and cash available for distribution and
seasonality of the hospitality industry could require the Company 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 Shareholders may consist of ordinary income, capital
gains, nontaxable return of capital, or a combination thereof. The Company will
provide its Shareholders with an annual statement as to its designation of the
taxability of distributions.

Distributions by the Company will be determined by the Company's Board of
Directors and will be dependent on a number of factors, including the amount of
the Company's cash available for distribution, the

- --------------------
(29) See "Federal Income Tax Considerations -- Taxation of the Company."

(30) See "Federal Income Tax Considerations."

<PAGE>

Company's financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute such funds, the Company's capital
expenditures, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the Board of Directors deems relevant. (31)

ADVERSE TAX CONSEQUENCES TO SHAREHOLDERS OF THE COMPANY FROM A SALE OF ANY
OF THE INITIAL HOTELS

The AAG Partners have unrealized gain in their investments in the Hatfield
Super 8s transferred to the Company. Accordingly, a subsequent sale of the
Hatfield Super 8s by the Company will cause adverse tax consequences to the
Shareholders of the Company. Therefore, the interests of the Company and
certain of its Affiliates, including Mr. Hatfield and his Affiliates could be
different in connection with the disposition of the Hatfield Super 8s. However,
decisions with respect to the disposition of all hotel properties in which the
Company invests will be made by a majority of the Board of Directors, which
majority must include a majority of the Independent Directors when the
disposition involves the Hatfield Super 8s.

EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK AND COSTS OF FUNDS

One of the factors that may influence the price of the Common Stock in
public trading markets will be 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 Shares of Common Stock.

Increases in market interest rates could also increase the Company's cost
of funds borrowed.

NEWLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING HISTORY

The Company, the Advisor and the Lessee have been recently organized and
have no operating history. Although the management of the Company and of the
Lessee have extensive experience in developing, financing and operating hotel
properties, they have no experience in operating or managing a REIT. The
Company must rely on the Lessee, and the Lessee, in turn, will depend upon the
Manager, to generate sufficient cash flow from the operation of the Initial
Hotels to enable the Lessee to meet the rent obligations under the Percentage
Leases. The Initial Hotels will be managed on behalf of the Lessee by the
Manager pursuant to the five Management Agreements, but Manager has no liability
or obligation to the Company for the payment of rent under the Percentage
Leases. The obligations of the Lessee under the Percentage Leases are
unsecured. Initially, the Lessee's only assets will be inventory and supplies
needed in the operation of the Initial Hotels, the franchise licenses for the
Initial Hotels, and its rights and benefits under the Percentage Leases, as well
as promissory notes of the members equal to nine months' Base Rent due the
Company under the five Percentage Leases. (32)

RELIANCE ON BOARD OF DIRECTORS, KEY PERSONNEL AND ADVISOR

Shareholders have no right or power to take part in the management of the
Company except through the exercise of voting rights on certain specified
matters. The Board of Directors will be responsible for managing the Company.
The Board of Directors in turn will rely upon the services and expertise of the
Advisor and its management pursuant to the Advisory Agreement for strategic
business direction.

The Company's future success, including particularly the implementation of
the Company's acquisition

- --------------------
(31) See "Federal Income Tax Considerations -- Requirements for Qualification."

(32) See "Formation Transactions and Other Related Transactions -- The Lessee",
and " -- The Manager."

<PAGE>

growth strategy, is dependent on the active participation of Messrs.
Gardner-Smith and McNulty. The loss of the services of either of these
individuals could have a material adverse effect on the Company. (33)

REAL ESTATE INVESTMENT RISKS

The Company's investments will be 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,
adverse and other 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 vary its portfolio in response to changes in economic and other
conditions will be limited. Further, although the Initial Hotels have been
recently appraised, no assurances can be given that such appraised values
reflect realizable market values. (34) Also, no assurances can be given that
the market value of any of the Initial Hotels will not decrease in the future.
Because market forces will most certainly value the Company as an ongoing
business rather than through liquidation values of the Company or the Initial
Hotels, the valuation of the Company most likely will be determined based
primarily upon a capitalization of the estimated cash flow available for
distribution and other market-related factors rather than as a summation of
property by property values. There can be no assurance that the Company will be
able to dispose of an investment 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 Initial Hotels will be 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 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. The Company's Board of Directors
will use their 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 use insurance proceeds to
replace the 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

- --------------------
(33) See "Management and Various Policies and Objectives -- Directors and
Executive Officers."

(34) See "Business and Properties -- Appraisals" herein for certain information
regarding such appraisals.

<PAGE>

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 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
properties 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 expenditures. Environmental laws
provide for sanctions in the event of non-compliance and may be enforced by
governmental agencies or, in certain circumstances, by private parties. In
connection with the ownership of the Initial Hotels and any subsequently
acquired hotels, the Company or the Company may be potentially liable for such
costs. The cost of defending against claims of liability, or compliance with
environmental regulatory requirements or of remediating the contaminated
property could materially adversely affect the business, assets or results of
operations of the Company and the Company and, consequently, amounts available
for distribution to the Company's Shareholders.

Phase I environmental audits were previously obtained for each of the
Initial Hotels (as well as for all parcels of real property securing the
Hatfield Note) from independent environmental engineers and supplemental Phase I
audits of all of the Initial Hotels (as well as for all parcels of real property
securing the Hatfield Note) have recently been prepared in connection with the
Offering. The principal purpose of Phase I audits is to identify indications of
potential environmental contamination for which the Company may be responsible
and, secondarily, to assess, to a limited extent, the potential for
environmental regulatory compliance liabilities. The supplemental Phase I
audits were designed to meet the requirements of the current industry approach
and ASTM Standard E 1527-93 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 above described properties' complete
compliance status. Similarly, the audits did not involve comprehensive analysis
of potential off-site liability. None of the Phase I audit reports revealed
that a Phase II audit was necessary or required. 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.
(35)

COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 (the "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 the Initial Hotels are substantially in compliance with these requirements,
a determination that the Company is not in compliance with the ADA could result
in imposition of fines or an award of damages to private litigants. If the
Company were required to make substantial modifications at the Initial Hotels to
comply with the ADA, the Company's ability to make expected distributions to its
Shareholders could be adversely affected.

- --------------------
(35) See "Business and Properties -- Environmental Matters."

<PAGE>

INCREASES IN PROPERTY TAXES

Each Initial 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 and as the properties are
assessed or assessed by taxing authorities. If property taxes increase, the
Company's ability to make expected distributions to its Shareholders could be
adversely affected. (36)

ACQUISITION AND DEVELOPMENT RISKS

The Company intends to pursue acquisitions of additional hotel properties
and may in the future pursue development opportunities. Acquisitions entail
risks that investments will fail to perform in accordance with expectations and
that estimates of the cost of improvements necessary to market and acquire
properties will prove inaccurate, as well as general investment risks associated
with any new real estate investment. New project development is subject to a
number of risks, including risks of construction delays or cost overruns that
may increase project costs, risks that the properties will not achieve
anticipated occupancy levels or sustain anticipated room rate levels, and new
project commencement risk such as receipt of zoning, occupancy and other
required governmental permits and authorizations and the incurrence of
development costs in connection with projects that are not pursued to
completion. In addition, the Company anticipates that any new development it
may undertake would be financed under lines of credit or other forms of secured
or unsecured construction financing that could result in a risk that permanent
financing for newly developed projects might not be available or would be
available only on disadvantageous terms. In addition, the fact that the Company
must distribute 95% of its net taxable income in order to maintain its
qualification as a REIT will limit the ability of the Company to rely upon lease
income from the hotel properties to finance acquisitions or new development. As
a result, if permanent debt or equity financing were not available on acceptable
terms to refinance acquisitions or new development undertaken without permanent
financing, further acquisitions or development activities might be curtailed or
cash available for distribution might be adversely affected.

CHANGES IN LAWS

Increased costs resulting from changes in governmental requirements will
generally be the responsibility of the Lessee. The Lessee, however, may be
unable to pass through such increased costs to their customers and substantial
increases in expenses resulting from such increased costs may affect the Lessee'
financial condition and their ability to pay rent. Such increases in expenses
will not result in adjustments of the obligations of the Lessee to pay rent
under the terms of the Percentage Leases and will not result in adjustments of
the amount of such rent, including Percentage Rents. However, certain
Percentage Leases provide that, during the latter half of the lease term, the
Company will be responsible for a portion of the costs of any capital
improvements resulting from changes in law to the extent the useful life of such
capital improvements exceeds the remaining lease term. As a consequence, any
changes in governmental requirements which result in increased costs at an
Initial Hotel subject to such a provision could adversely affect the Company's
ability to make distributions to Shareholders. In addition, changes in laws
increasing potential liability for environmental conditions may result in
significant unanticipated expenditures by the Company, which would adversely
affect the Company's ability to make distributions to Shareholders.

ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT, STAGGERED BOARD AND POWER TO ISSUE
ADDITIONAL STOCK

For the Company to maintain its qualification as a REIT under the Internal
Revenue Code of 1986 (the "Code"), not more than 50% in value of the outstanding
shares of stock of the Company may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) at any

- --------------------
(36) See "Business and Properties -- The Initial Hotels."

<PAGE>

time during the last half of the Company's taxable year (other than the first
taxable year for which the election to be treated as a REIT has been made).

To ensure that the Company will not fail to qualify as a REIT under this
and other tests under the Code, the charter, subject to certain exceptions,
authorizes the Directors to take such actions as are necessary and desirable to
preserve its qualification as a REIT and to limit any person, other than Mr.
Hatfield and the purchasers of Shares in the Public Offering, to direct or
indirect ownership of no more than the lesser of 9.9% (the "Ownership Limit") of
the number or value of the outstanding shares of stock of the Company. The
Company's Board of Directors, upon receipt of a ruling from the IRS, an opinion
of counsel or other evidence satisfactory to the Board of Directors and upon
such other conditions as the Board of Directors may establish, may exempt a
proposed transferee from the Ownership Limit. However, the Board may not grant
an exemption from the Ownership Limit to any proposed transferee whose
ownership, direct or indirect, of in excess of 9.9% of the number or value of
the outstanding shares of stock of the Company would result in the termination
of the Company's status as a REIT. (37) The Ownership Limit does not apply to
the Common Stock owned, directly or indirectly, by Mr. Hatfield or the
purchasers of Shares in the Public Offering. These restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interests of the Company to attempt
to qualify, or to continue to qualify, as a REIT.

The Ownership Limit may delay or impede a transaction or a change of
control of the Company that might involve a premium price for the Common Stock
or otherwise be in the best interest of the Shareholders.(38)

The Company's Charter authorizes the Board of Directors to cause the
Company to issue additional authorized but unissued shares of Common Stock or
Preferred Stock and to classify or reclassify any unissued shares of Common
Stock or Preferred Stock and to set the preferences, rights and other terms of
such classified or unclassified shares.(39) Although the Board of Directors has
no such intention at the present time, it could establish a series of Preferred
Stock that could, depending on the terms of such series, delay, defer or prevent
a transaction or a change of control of the Company that might involve a premium
price for the Common Stock or otherwise be in the best interest of the
Shareholders. The Charter and Bylaws of the Company also contain other
provisions that may delay, defer or prevent a transaction or a change of control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of the Shareholders.(40)

INABILITY TO OPERATE THE HOTEL PROPERTIES

Consistent with its status as a REIT, the Company will not be able to
operate the hotel properties. As a result, the Company will be unable to
implement strategic business plans with respect to the hotel properties (unless
the Lessee were to agree), such as plans with respect to the repositioning of
the franchise or license of a hotel property, even if such decisions were in the
best interests of the hotel property. In

- --------------------
(37) See "The Company's Capital Stock -- Description of Securities" and " --
Restrictions on Transfer."

(38) See "The Company's Capital Stock -- Description of Securities" and " --
Restrictions on Transfer."

(39) See "The Company's Capital Stock -- Description of Securities", " -- Common
Stock" and " -- Preferred Stock."

(40) See "The Company's Capital Stock -- Certain Provisions of Maryland Law and
of the Company's Charter and Bylaws -- Removal of Directors", " -- Control Share
Acquisitions" and " -- Advance Notice of Director Nominations and New Business."

<PAGE>

addition, the Company's interest in the hotel properties as a lessor is clearly
not as marketable and valuable as a fee interest in the hotels. Although the
Company intends to consult with the Lessee of the hotel properties with respect
to such matters, the Lessee will be under no obligation to implement any
recommendations of the Company with respect to such matters. Accordingly, there
can be no assurance that the Lessee will operate the hotel properties in manner
that is in the best interests of the Company. In addition, if there is a
default under a Percentage Lease for a hotel property which results in the
termination of such Percentage Lease, the Company would likely not be able to
operate the affected hotel property for a period in excess of 90 days following
such termination without resulting in failure to qualify as a REIT for federal
income tax purposes. This restriction might cause the Company to enter into an
operating lease with a new lessee on terms and conditions which are less
favorable to it than if the Company were not subject to this restriction.

EXEMPTIONS FOR MR. HATFIELD FROM THE MARYLAND BUSINESS COMBINATION LAW

Under the Maryland General Corporation Law, as amended ("MGCL"), certain
"business combinations" (including certain issuances of equity securities)
between a Maryland corporation and any person who beneficially owns ten percent
or more of the voting power of the corporation's shares (an "Interested
Stockholder") or an affiliate thereof are prohibited for five years after the
most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be approved by two
super-majority stockholder votes unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its common shares.
Mr. Hatfield beneficially will own more than 10% of the Company's voting Shares
upon the consummation of the transaction contemplated in the Formation
Transactions and would, therefore, be subject to the business combination
provisions of the MGCL. However, pursuant to the statute, the Company has
exempted any business combination involving Mr. Hatfield and, consequently, the
five-year prohibition and the super-majority vote requirements described above
will not apply to a business combination between Mr. Hatfield and the Company.
As a result, Mr. Hatfield may be able to enter into business combinations with
the Company, which may not be in the best interest of the Shareholders, without
compliance by the Company with the super-majority vote requirements and other
provisions of the statute. (41)

RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS

All of the Initial Hotels are subject to franchise license agreements. (42)
To the best of the Company's knowledge, the Franchisor (Super 8 Corporation)
will not require the Company to complete any significant additional capital
improvements with respect to the Initial Hotels as a condition to the transfer
to the Lessee of the franchise license. No assurance can be provided that the
Company will not be required to fund significant additional improvements to the
Initial Hotels in the future to maintain such franchise licenses. Failure to
complete improvements, when required, in a manner satisfactory to the franchisor
could result in the cancellation of the franchise license. In addition, the
Company may desire to operate hotel properties acquired by it under franchise
licenses from or another franchisor, and such franchisors may require that
significant capital expenditures be made to such acquired hotels as a condition
of granting such franchise licenses.

The continuation of the various franchise licenses is subject to the
maintenance of specified operating standards and other terms and conditions.
Franchisors periodically inspect their licensed properties to confirm

- --------------------
(41) See "The Company's Capital Stock -- Business Combinations."

(42) See "Business and Properties -- Various Franchise Agreements."

<PAGE>

adherence to its maintenance and operating standards. Under each Percentage
Lease, the Lessee will be obligated, among other things, to pay the costs of
maintaining the structural elements of each hotel and to establish the FF&E
Reserve Account by making monthly deposits in an amount equal to 4% of prior
month's revenues from the Initial Hotels for the replacement or refurbishment of
furniture, fixtures and equipment. The Company may be obligated or deem it
advisable to make additional capital investments in the Initial Hotels. Should
the Company be required or elect to do so, such investments may necessitate the
use of borrowed funds or the reduction of distributions. The Lessee will be
responsible for routine maintenance and repair expenditures with respect to the
Initial Hotels. The failure to maintain the standards or adhere to the other
terms and conditions of the other franchise license agreements 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 on the
completion of substantial capital improvements, which the Board of Directors 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 Directors 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 of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the franchisor. The loss of a franchise license for one or more of the Initial
Hotels could have a material adverse effect on the Company's revenues under the
Percentage Leases and the Company's cash available for distribution to its
Shareholders.

NO PRIOR MARKET FOR COMMON STOCK

Prior to the Offering, there has been no public market for the Shares of
Common Stock. The Shares of the Company's Common Stock have been approved for
listing, subject to notice of issuance, on the American Stock Exchange. (43)
The initial Exchange Value price of $10 per share may not be indicative of the
market price for the Shares of Common Stock after the Offering, and there can be
no assurance that an active public market for the Shares of Common Stock will
develop or continue after the Offering. (44) There can be no assurances that
the Company will continue to meet the criteria for continued inclusion of the
Shares of Common Stock on the American Stock Exchange.

POSSIBLE ADVERSE EFFECTS OF SHARES AVAILABLE FOR FUTURE SALE UPON PRICES OF
COMMON STOCK

Upon completion of the Offering, the Company will have issued, in addition
to the Shares of Common Stock and the Subordinated Shares to be issued in the
Offering, 30,000 Shares of Common Stock issued to the Independent Directors as
compensation for services performed. (45) Mr. Hatfield and his Affiliates will
have certain direct registration rights as well as piggyback rights to register
for resale Shares of Common Stock received by them in the Offering. In
addition, the Company may adopt stock option plans. No prediction can be made
as to the effect, if any, that future sales of such Shares of Common Stock, the
availability thereof for future sale, or the existence of such registration
rights and/or options may have upon the market price of the Shares of Common
Stock, from time to time, or upon the Company's ability to sell additional
Shares of Common Stock in the future.

- --------------------
(43) See "Miscellaneous -- Underwriting/Listing of Common Stock."

(44) See "Miscellaneous -- Underwriting/Listing of Common Stock."

(45) See "Management and Various Policies and Objectives -- Compensation of
Directors."

<PAGE>

BASE RENT UNDER PERCENTAGE LEASES LESS THAN ANTICIPATED DISTRIBUTIONS

The Base Rent due under the Percentage Leases is, by itself, insufficient
to enable the Company to make distributions to holders of Common Stock at the
initially anticipated rate. Accordingly, the Company will be dependent upon the
generation of sufficient Percentage Rent with respect to the Initial Hotels to
make distributions at such rate. In addition, on a pro forma basis the earnings
of all the Initial Hotels after giving effect to all of the transactions
described herein for the 12-month period ended December 31, 1994, would have
produced revenue to the Company which would have been insufficient to enable the
Company to make distributions to holders of Common Stock at the initially
anticipated rate. The Company's financial plan in 1995 and thereafter
contemplates substantial increases in revenue and substantial increases in net
operating income for the Initial Hotels. If these projected increases do not
occur, the Company will have insufficient funds to enable it to make
distributions to holders of Common Stock at the initially anticipated rate, and
accordingly, the holders of Subordinated Shares would receive less than the $.91
dividend.

HISTORICAL OPERATING LOSSES

During 1992, the Hatfield Super 8s experienced combined net losses of
approximately $49,264. The Hatfield Super 8s, since that time, have generated
combined net income of approximately $288,162 during 1993 and $605,978 during
1994.

During 1994, the Mission Bay Super 8 experienced a net loss of $1,381,028
after reflecting a $1,534,950 expense for an unrealized loss due to a decline in
value of the Mission Bay Super 8 hotel. However, net cash provided by operating
activities was $250,369 in 1994 and $160,833 in 1993.

ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES

The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, will be determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time without
a vote of the Shareholders of the Company.

POTENTIAL DILUTION

The holders of the shares of Common Stock issued in the Offering may
experience dilution in the future if the market value of the Company's shares of
Common Stock falls below the Exchange Value of $10 per share and the Company
issues new shares of Common Stock at such lower price.

HATFIELD NOTE DEFAULT

Should there be a default on the Hatfield Note, the Company's interest
income would decrease by $180,780 per year. The Company, however, could
reacquire its 180,780 shares held as collateral for the Hatfield Note. The
proposed dividends on these shares would be $164,509 or a shortfall of $16,270.
Accordingly, the loss that the Company would suffer on a default on the Hatfield
Note would be a function of the per share price and the then current dividend
policy of the shares. Depending on such amounts, the loss to the Company as a
result of a default on the Hatfield Note could be substantial.

<PAGE>
THE COMPANY IN GENERAL

OVERVIEW

The Company, a Maryland corporation formed in December, 1994, was
established to acquire the four Hatfield Super 8s. The Hatfield Super 8s are
located in Kentucky, Missouri, and Illinois. The Company acquired the Hatfield
Super 8s from AAG (an entity controlled by Mr. Hatfield) pursuant to the
Contribution and Assumption Agreement.(46)

The Company will be governed by a three person Board of Directors. The two
Independent Directors will be Don W. Cockcroft and William Birdsall. The non-
Independent Director will be Michael S. McNulty. Mr. Hatfield and his related
family trusts own 1.333% of the Mission Bay limited partnership units and
collectively they are they are the second largest holder of limited partnership
units of Mission Bay. The Company's executive offices are located at 7825 Fay
Avenue, Suite 250, La Jolla, California 92037 and its telephone number is (619)
456-6070.

The Company will be externally-advised and therefore, will rely primarily
upon the experience of the Advisor who will constitute the Company's senior
management. The Advisor is a newly-formed Delaware corporation. Mr. McNulty
will be the President and Treasurer of the Advisor, and Mr. Ian Gardner-Smith
will serve as the Advisor's Secretary. All of the stock of the Advisor is owned
by HMR. The Company has entered into an Advisory Agreement with the Advisor
pursuant to which the Advisor will provide its management and strategic business
services to the Company. The base advisory fee is $60,000 per year and the
contract may be canceled by the Company on sixty (60) days notice.(47)

Acquisition Co. is a Delaware limited liability company and its 93.4%
majority membership interest holder is HMR. Paul K. Richey owns the other 6.6%
membership interest in Acquisition Co. The Company has entered into a Post-
Formation Acquisition Agreement with the Acquisition Co. pursuant to which the
Acquisition Co. will be paid up to a 6% placement fee payable in Common Stock of
the Company for services in connection with the acquisition of additional (new
and incremental) hotel properties and/or for structuring cash private placements
of the Company's Common Stock. No fees will be paid to the Acquisition Co. with
respect to any aspect of the Formation Transactions. The Post-Formation
Acquisition Agreement may be canceled by the Company on 60 days notice within
the first six months of its existence.(48)

To enable the Company to satisfy certain requirements for qualification as
a REIT, the Company has leased the Hatfield Super 8s, to the Lessee pursuant to
the Percentage Leases and will lease the Mission Bay Super 8 to the Lessee
pursuant to a lease identical in form to the Percentage Leases. Further, the
Company will lease any hotel properties acquired by it after the completion of
the Formation Transactions and the Offering to a variety of lessees pursuant to
agreements substantially the same in form to the Percentage Leases. The
Percentage Leases are designed to allow the Company to participate in any future
growth in revenues at such Initial Hotels. The Lessee is a Delaware limited
liability company, all the stock of which will be owned by Mr. Ian Gardner-Smith
and by Mr. Hatfield and his Affiliates. Mr. Hatfield and his Affiliates own
less than 10% of the membership interests of the Lessee. Mr. Gardner-Smith (who
owns 92.5% of the

- --------------------
(46) See "Formation Transactions and Other Related Transactions -- ___________"

(47) See "Formation Transactions and Other Related Transactions -- The Advisor
and The Advisory Agreement."

(48) See "Formation Transactions and Other Related Transactions -- The
Acquisition Co. and The Placement Agreement."

39
<PAGE>
membership interest in the Lessee) will be the President and Treasurer of the
Lessee. Mr. Hatfield will be the Secretary of the Lessee.

The Lessee will not have substantial capitalization and its principal
assets will consist of inventory, supplies and nominal cash needed in the
operation of the Initial Hotels, its rights and benefits under the Percentage
Leases, the franchise licenses for the Initial Hotels, and promissory notes of
the members equal to nine months' Base Rent due the Company under the Percentage
Leases. Due to the lack of a substantial net worth separate from its leasehold
interest in the Initial Hotels, the Lessee's ability to make lease payments
under the Percentage Leases will be primarily dependent upon the generation of
sufficient cash flow from the operation of the Initial Hotels.(49)
The Manager is a Delaware corporation, 70% of the issued and outstanding
stock of which is owned by Mr. Gardner-Smith and 30% of the stock of which is
owned by Mr. Hatfield and his Affiliates. Mr. Hatfield is the President of the
Manager. Emily Groce is the Treasurer of the Manager and Mr. Gardner-Smith is
the Vice President and Secretary. The Hatfield Super 8s are currently managed
by Manager and, following the closing of the Offering, all of the Initial Hotels
will be managed by Manager on behalf of, and subject to the supervision of the
Lessee. New Management Agreements have been entered into between the Lessee and
the Manager with respect to the Hatfield Super 8s and will be entered into
between the Lessee and the Manager with respect to the Mission Bay Super 8. The
Management Agreement with respect to a particular hotel may be terminated by the
Lessee if Manager fails to meet certain performance criteria measured against
the annual operating budget for the hotel, unless Manager elects to fund a
portion of such shortfall. In its capacity as manager, Manager will hire, train
and supervise all on-site employees and utilize its reservation and
yield-management system in the development and implementation of detailed
business and marketing plans and budgets for each Initial Hotel and in
performing the day-to-day accounting and management functions necessary for the
efficient operation thereof.

Pursuant to the Management Agreements with Manager, as modified, the Lessee
will pay to Manager a base management fee of 3% of adjusted gross revenues from
the Initial Hotels. In addition to the base management fee, the Lessee will pay
Manager an incentive fee, equal to 20%. The Lessee has agreed to engage Manager
to manage, upon similar terms, any hotel properties leased by the Lessee for
operation under various franchise licenses. The Company will be
externally-advised and, therefore, will rely primarily upon the experience of
the Advisor, who will constitute the Company's senior management.

The Initial Hotels will be, and any hotel properties acquired by the
Company are expected to be, managed by Manager, subject to the supervision of
the Lessee. In the preceding five years, the Manager has operated numerous
limited service hotels throughout the Midwestern United States.

GROWTH STRATEGY

The Company's growth strategy is to increase cash flow and enhance
shareholder value by acquiring additional existing hotels that meet the
Company's investment criteria and by participating, through the Percentage
Leases, in any growth in revenue at its Initial Hotels. Currently, the Company
intends to focus its acquisition strategy primarily upon the acquisition of
additional high quality, limited service hotels in the Midwest and the Southwest
and its internal growth strategy will focus primarily upon improvements in
occupancy and ADR. Based upon recent increases in occupancy, ADR and REVPAR of
all U.S. hotels, management of the Company believes that the U.S. lodging
industry is recovering from a period of low profitability resulting from high
levels of debt, economic recession and an over-supply of hotel rooms. As a
result, management expects the Company to have opportunities to acquire
additional established limited

- --------------------
(49) See "Risk Factors - Conflicts of Interest."

40
<PAGE>
service hotels at attractive prices. Upon completion of the Offering (and the
completion of the Formation Transactions), the Company expects to have
outstanding indebtedness of approximately $406,000 representing the mortgage
loan on the Rock Falls Super 8. The Company's Charter does not limit the
consolidated indebtedness of the Company.

ACQUISITION STRATEGY

Messrs. Gardner-Smith and McNulty will utilize their extensive experience
in the hotel industry to identify for acquisition additional existing hotel
properties that meet the Company's investment criteria. The Company intends to
place particular emphasis on the acquisition of additional high quality, limited
service hotels throughout the United States. The Company may, however, consider
the acquisition of hotels in the extended-stay market segment, as well as other
full service hotel properties in the up-scale and mid-scale market segments.
The Company intends that the Manager will operate hotel properties which are
acquired. Management believes that, in the near term, the Company will have
opportunities to acquire additional existing hotels at attractive prices because
of the adverse impact of high leverage on the profitability and operations of
many hotel properties, past over-building of hotel properties and the effects of
the recent economic recession. Potential sellers of hotel properties now
include not only hotel operators but also financial institutions and government
agencies that assumed control of such properties in distressed situations.

The Company intends to consider investments in hotel properties of the
types described above that meet one or more of the following criteria: (i)
properties in markets with projected growth potential; (ii) properties which may
be under-performing due to poor management, weak franchise affiliation or a need
for renovation; (iii) properties with relatively stable operating histories; and
(iv) properties with attractive purchase prices.

Although the Company presently anticipates that additional investments in
hotel properties will be made through the Company, additional investments also
may be made indirectly by a Partnership controlled by the Company or other
entities controlled by the Company. Such investments may be financed, in whole
or in part, from borrowings, the balance of the net proceeds from the future
offerings, if any, subsequent issuances of Common Stock or other securities or
from cash flow. However, because the Company must distribute annually at least
95% of its taxable net income to maintain its REIT status, cash flow available
for investment may be limited. The Company's Charter does not limit the
consolidated indebtedness of the Company.(50)

INTERNAL GROWTH STRATEGY

The Percentage Leases are designed to allow the Company to participate in
any growth in room revenues at the Initial Hotels, which management of the
Company believes can be achieved through increases in both occupancy rates and
ADR. During the term of each Percentage Lease, the Lessee will be obligated to
pay (i) the greater of Base Rent or Percentage Rent, and (ii) certain other
amounts, including interest accrued on any late payments or charges (the
"Additional Charges"). Base Rent accrues and is required to be paid monthly.
Percentage Rent is based on percentages of room and food and beverage revenues
for each of the Initial Hotels. Both the Base Rent and the threshold room
revenue amount in each Percentage Rent formula will be adjusted annually for the
average change in the CPI during the prior 24 months. The adjustment in any
lease year may not exceed 7%. Such CPI adjustments could result in a reduction
in the total lease payments due the Company pursuant to the Percentage Leases.
Percentage Rent (if any) is due quarterly; however, the Lessee will not be in
default for non-payment of Percentage Rent due in any calendar

- --------------------
(50) See "Risk Factors -- Risks of Leverage", "Financial Considerations --
Liquidity and Capital Resources", and "Management and Various Policies and
Objectives -- Investment Policies" and " -- Financing."

41
<PAGE>
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.

The Company believes that the quality of hotel management will be a major
factor in any future growth in Percentage Lease revenue from the Initial Hotels
and in the ability of the Company to successfully put on line additional hotel
properties that may be acquired by it. The Initial Hotels will be, and all
hotel properties are expected to be, managed by Manager subject to the
supervision of the Lessee. As manager, Manager will provide the Initial Hotels
with employees, accounting services, site-based marketing and day-to-day
operations management, utilizing its proprietary state-of-the-art
yield-management system. Manager will develop detailed business and marketing
plans and budgets for each Hatfield Super 8, which will be submitted to the
Lessee for comment and approval. The Lessee routinely will measure actual
results against the business and marketing plans and budgets for each hotel to
create a goal-oriented, coordinated and site-based approach to hotel management.
The Company also believes that moderate levels of debt will enhance management's
ability to focus attention on the issues most critical to the effective
management of the Initial Hotels. The Company's Charter limits consolidated
indebtedness to 40% of the Company's investment in hotel properties, at its
cost, on a consolidated base.

Combined REVPAR for the Initial Hotels has increased from $25.60 for 1992
to $26.73 for 1994.(51) The Company expects that, since January 1, 1994 and
prior to the closing of the Offering, an amount equal to at least 4% of room
revenues of the Initial Hotels for such period will have been spent on upgrades
and improvement of the Initial Hotels; however, if less than such amount is
spent, the difference will be received by the Company, in cash, in the merger.
Management of the Company believes the growth in REVPAR at the Initial Hotels
reflects the impact that can result from improved management and operating
efficiencies.

POSSIBLE REFINANCING STRATEGY

After the Offering, the Company may seek to implement a private placement
of its Common Stock with a view towards generating net cash proceeds from the
offering sufficient to discharge all or some material part of the Company's
indebtedness. Depending on the price at which the Company can sell its Common
Stock in such a private placement, such a transaction may favorably impact cash
available for distribution. While the Company is currently considering this
strategy, there are no assurances that it will be able to sell its Common Stock
in such a private placement.

USE OF PROCEEDS

The net cash proceeds to the Company from the Public Offering portion of
the Offering are estimated to be $4.5 million based on an Exchange Value of $10
per share of Common Stock and a 10% costs of such offering. All of such net
proceeds will be held by the Company first to pay costs and expenses of the
Formation Transactions (including the cash required for the Mission Bay
Dissenting Partners); second, to establish a working capital reserve; third, to
pay off approximately $3.8 million of debt of the Hatfield Super 8s. The
following schedule provides the anticipated uses of the $5,000,000 gross
proceeds of the Public Offering:

- --------------------
(51) See "Business and Properties -- The Initial Hotels."

42
<PAGE>

USE OF PROCEEDS UPON PUBLIC OFFERING
<TABLE>
<CAPTION>

<S> <C> <C>
Sales Commission on Offering $ 500,000
Total Costs of Formation Transactions 296,000

Mortgage Payoffs/Paydown:
Miner - pay off 1,114,000
Somerset - pay off 1,160,000
Poplar Bluff - pay off 901,000
Rock Falls - pay down (Partial) 638,000
---------

Total Payoffs 3,813,000

Mission Bay Dissenter's Rights Provision 140,500

Working Capital Reserve 250,500
----------

Total $5,000,000
----------
----------
</TABLE>

Pending such uses, the net proceeds may be invested in interest-bearing
accounts and short-term, interest-bearing securities which are consistent with
the Company's intention to qualify for taxation as a REIT. Such investments may
include, for example, government and government agency securities, certificates
of deposit, interest-bearing bank deposits and mortgage loan participations.

DISTRIBUTION POLICY

After the Offering, the Company intends to make regular quarterly
distributions to holders of its Common Stock. Initially, the Company's sole
source of revenue will be from lease payments under the Percentage Leases. The
Company must rely on the Lessee, and the Lessee, in turn, will depend on the
Manager, to generate sufficient cash flow from the operation of the Initial
Hotels to meet the Lessee's rent obligations under the Percentage Leases. To
the extent base management fees payable by the Lessee to Manager increase in the
future, the Lessee will have less funds available to pay rent to the
Company.(52) The Lessee is a newly formed entity with nominal assets and its
obligations under the Percentage Leases are unsecured.(53) The Manager has no
liability or obligation with respect to the rent under the Percentage
Leases.(54) The Company intends to make regular quarterly distributions to
holders of Common Stock, initially equal to $0.2275 per share, which, on an
annualized basis, would be equal to $0.91 per share. The Subordinated Shares
will participate in dividends once the quarterly dividend on the Shares reaches
$.2275. On a pro forma basis, such distributions would represent approximately
98% of the Company's estimated cash available for distribution and 95% of its
Funds From Operations. It is further anticipated that the Subordinated Shares
will receive a $0.75 per share annualized dividend. Funds From Operations
represents cash flow from operations because there are no pro forma working
capital adjustments. Industry analysts generally consider Funds From Operations
to be an appropriate measure of the performance of an equity REIT. Funds From
Operations should not be considered an alternative to net income as an indicator
of the Company's operating performance or to cash flow as a measure of
liquidity. Approximately 45.5% of the distributions by the Company initially
will be received (directly or indirectly) by Affiliates of the Company. The
first distribution, for the period from the closing of the Offering to September
30, 1994 is anticipated to

- --------------------
(52) See "Formation Transactions and Other Related Transactions -- The
Manager."

(53) See "Formation Transactions and Other Related Transactions -- The Lessee."

(54) See "Formation Transactions and Other Related Transactions -- The
Manager."

43
<PAGE>

be $0.2275 per share, representing the full portion of the anticipated initial
quarterly distribution. The Company estimates that approximately 15% ($0.12 per
share) of the assumed initial 12 month distribution per share will represent a
return of capital for federal income tax purposes, which generally will not be
subject to federal income tax under current law. The Company established the
amount of the anticipated initial quarterly distribution based upon estimated
cash available for distribution, the pro forma condensed statement of operations
and calculation of pro forma Funds From Operations of the Company as of, and for
the twelve months ended December 31, 1994. The Company believes that historical
financial information, with pro forma adjustments, provides a reasonable basis
for setting the anticipated initial distribution rate. The Board of Directors
will determine the actual distribution rate based upon the Company's actual
results of operations, economic conditions and other factors.

The following table sets forth certain pro forma financial information of
the twelve months ended December 31, 1994, which was used to establish the
estimated initial distribution per share.
<TABLE>
<CAPTION>
TABLE 5
Twelve Months Ended
December 31, 1994
(dollars in thousands)
<S> <C>
Pro forma net income (1) $ 949
Pro forma depreciation and amortization (2) 238
Pro forma funds from operations 1,187
Estimated cash available for distribution 1,142
Estimated initial aggregate distribution (3) 1,118
Estimated initial annual distribution per Share (4)
Class A $ 0.83
Class B $ 0.00
Combined $ 0.75
Estimated payout ratio of cash available for distribution (5)(6)
Class A 8.30%
Class B 0.00%
Combined 7.52%

<FN>
- -------------
(1) The pro forma net income for the twelve months ended December 31, 1994 is
calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases for the Initial Hotels to the pro forma room revenues of the
Initial Hotels (as if January 1, 1994 were the beginning of the lease year) and
subtracting pro forma depreciation, advisory fees, interest expense, general and
administrative expenses and the amortization of unearned directors compensation.
For the combined Initial Hotels, pro forma Percentage Lease revenue for the
twelve months ended December 31, 1994 (which was used in calculating pro forma
net income) exceeded the Lessee's annual Base Rent obligation by $123,480.(55)

(2) Represents depreciation and amortization of unearned directors compensation
related to the issuance of Shares to certain Directors in the Formation
Transactions.

(3) Based on 1,486,950 (1,346,950 Class A and 148,000 Class B) Shares of Common
Stock outstanding upon completion of the Formation Transactions, including an
aggregate of 30,000 Shares to be issued to the three Directors.

- --------------------
(55) See "Business and Properties -- The Percentage Leases."

44
<PAGE>

(4) Management estimates that approximately 15% ($0.12 per share) of the
assumed initial 12 month distribution per share will represent a return of
capital for federal income tax purposes. No assurance can be given that the
portion of such 1994 distribution that is estimated to be, or constitutes, a
return of capital will be indicative of the return of capital in any future
period.

(5) Represents the anticipated initial aggregate annual distribution divided by
estimated cash available for distribution.

(6) The pro forma estimated payout ratio of Funds From Operations for the
twelve months ended December 31, 1994 is 95% and is calculated as the
anticipated initial aggregate annual distribution of $0.83 divided by the pro
forma Funds From Operations of $1,187,571.
</TABLE>
- -------------------

The Company expects to maintain the anticipated initial distribution rate
for the remainder of 1995, unless actual results of operations, economic
conditions or other factors differ from the pro forma results for the twelve
months ended December 31, 1994. The estimate of anticipated initial quarterly
distributions relates only to the remainder of the year ending December 31,
1995, and no assurance can be given as to the rate of distributions, if any,
after that date. The Company's actual cash available for distribution and Funds
From Operations will be affected by a number of factors, including changes in
occupancy, ADR and REVPAR at the Initial Hotels.

The Lessee must contribute, from its cash flow from operations, an amount
equal to 4% of the prior month revenues from the Initial Hotels to an FF&E
Reserve Account to provide for, and to fund, periodic capital expenditures and
replacements and refurbishments of furniture, fixtures and equipment at the
Initial Hotels, as required by the Percentage Leases. Such expenditures will be
in addition to normal maintenance expenses of the Lessee, which generally exceed
4% of hotel revenues. To the extent that the Company has outstanding debt,
whether from the Formation Transactions or whether from financing investments in
additional hotel properties or for other purposes, the Company may utilize a
portion of cash flow for debt service.

The Company presently anticipates that additional acquisitions, including
initial capital improvements thereto, will be financed primarily through debt
financing or the issuance of addition equity securities. To the extent that
such financing is insufficient to meet all of such cash needs, or the cost of
such financing exceeds the cash flow generated by the acquired properties for
any period, cash available for distribution could be reduced.

In order to maintain its qualification as a REIT, the Company must make
annual distributions to its Shareholders of at least 95% of its taxable income
(which does not include net capital gains). The initial minimum aggregate
distribution under applicable REIT taxation laws, assuming pro forma net income
for financial statement purposes of $949,000 is estimated to be $902,000. Under
certain circumstances, the Company may be required to make distributions in
excess of cash available for distribution in order to meet such 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.

It is presently anticipated that the Company's cash flow from operation of
the Initial Hotels will be sufficient to enable it to make distributions at the
estimated initial rate. To the extent that cash flow from operations were to be
insufficient during any quarter, due to temporary or seasonal fluctuations in
Percentage Lease revenue, the Company expects to utilize other cash on hand or
additional borrowings. No assurance can be given, however, that the Company
will made distributions in the future at the initially estimated rate, or at
all.

45
<PAGE>

The timing and amount of distributions made by the Company will be
determined by the Board of Directors and will depend on a number of factors,
including the amount of cash available for distribution, Funds 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 Directors may deem
relevant.(56)
PRO FORMA CAPITALIZATION

The following table sets forth the pro forma short-term debt and
capitalization of the Company at December 31, 1994, as adjusted to give effect
to the sale by the Company of the Shares and Subordinated Shares of Common Stock
offered in the Offering and the application of the net proceeds therefrom as
described under "Use of Proceeds."
<TABLE>
<CAPTION>
TABLE 6
Pro Forma Combined Hotels
(Dollars in Thousands)
(unaudited)
<S> <C>
Short-term debt $ 0
Long-term debt (Rock Falls Mortgage) 356

Shareholders' equity:
Common Stock, $.01 par value, 55 million shares authorized,
1,486,950 shares issued and outstanding, as adjusted (1) $1,487
Additional paid-in capital 6,053
Retained earnings 0
Share purchase notes (300)
------

Total shareholders' equity $7,240
------
------

Total capitalization $7,596
------
------

<FN>
- -----------------
(1) Includes 1,456,950 Shares issued in the Offering and 30,000 Shares to be
issued to independent and inside Directors in lieu of cash compensation.(57)
- -----------------
</TABLE>

POTENTIAL DILUTION

The Offering price per share of Common Stock offered hereby will be equal
to the net tangible book value per share as defined by appraisals on the Initial
Hotels. Therefore, the Limited Partners of Mission Bay, the Company's existing
Shareholders who own the Initial Shares and the purchasers of the Shares in the
Public Offering should realize no dilution in the net tangible book value of the
Common Stock acquired by them in the Offering. Net pro forma tangible book
value per share is determined by subtracting total liabilities from total
tangible assets and dividing the remainder by the number of shares of Common
Stock that will be outstanding after the Offering.

- --------------------
(56) See "Federal Income Tax Considerations."

(57) See "Management and Various Policies and Objectives -- Executive
Compensation" and "Formation Transactions and Other Related Transactions --
Restricted Stock Options."

46
<PAGE>

SELECTED FINANCIAL INFORMATION AND OPERATIONS DATA

The following tables set forth (a) selected unaudited, combined pro forma
balance sheet as of December 31, 1994, (b) selected unaudited combined pro forma
financial data for the Company for the years ended December 31, 1994, December
31, 1993 and December 31, 1992, (c) selected unaudited combined pro forma
financial data for the Lessee for the years ended December 31, 1994, December
31, 1993, December 31, 1992, (d) selected unaudited combined historical
financial information for the Initial Hotels for each of the years in the three
year period ended December 31, 1994, December 31, 1993, and December 31, 1992.
The selected combined historical financial data for the Initial Hotels for the
periods presented have been derived from the historical combined financial
statements and notes thereto of the Hatfield Super 8s and Mission Bay Super 8
audited by William H. Ling, Certified Public Accountant of San Diego,
California, and Levitz, Zacks & Ciceric, Certified Public Accountants of San
Diego, California, independent accounts, whose reports with respect thereto are
included elsewhere in this Prospectus. In the opinion of management, the
unaudited financial statement and the interim financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The Initial Hotels data is
derived by adding the selected combined historical financial data of the
Hatfield Super 8s and the Mission Bay Super 8.

The pro forma Statements of Operations Data is presented as if the
Formation Transactions had occurred on January 1, 1994 and therefore
incorporates certain assumptions that are included in the Notes to the Pro Forma
Condensed Consolidated Statements of Operations included elsewhere in this
Prospectus. The pro forma operating information for the Initial Hotels and
Lessee is presented to reflect the pro forma operations of the Lessee for the
period presented, which operations are the source of the Lessee's Percentage
Lease payments to the Company. The pro forma balance sheet data is presented as
if the Formation Transactions had occurred on December 31, 1994.

47
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 (a)
SELECTED COMBINED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1994
(in thousands)
(Unaudited)

<S> <C>
ASSETS
Current Assets:
Cash $ 152
Accounts receivable 98
------
Total current assets 250

Land, property and equipment-at cost
Furniture and equipment 2,035
Building and improvements 4,372
Less: Accumulated depreciation (2,242)
------
4,165
Land 1,345
------
Land, property and equipment-net 5,510
------
Mortgage note receivable 1,806
------

Other assets:
Loan commitment fee-net 30
Organization costs 0
------
Total other assets 30
------

Total assets $7,596
------
------

LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 0
Current portion of long-term debt 15
------
Total current liabilities 15

Long-term debt (net of current portion) 341
------

Total Liabilities 356
------

Shareholders' Equity
Corporate common stock, $0.01 par value;
authorized 55,000,000 shares; outstanding
1,486,950 shares 7,540
Additional paid in capital 0
Retained earnings 0
Less: Share purchase notes (300)
------

Total Shareholders' Equity 7,240
------
Total Liabilities and Shareholders' Equity $7,596
------
------
</TABLE>

48
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 (b)
SELECTED COMBINED PRO FORMA FINANCIAL DATA-HOST FUNDING
(in thousands)
(Unaudited)

PRO FORMA
-------------------------------------
1992 1993 1994
<S> <C> <C> <C>
REVENUES:
Rents:
Base $1,212 $1,212 $1,212
Percentage 120 74 123
------ ------ ------

Total rents $1,332 $1,286 $1,335

Mortgage interest income 181 181 181
Share purchase plan interest 21 21 21
Interest income-other 10 10 10
Other 0 0 0
------ ------ ------

Total revenues $1,544 $1,498 $1,547
------ ------ ------

EXPENSES:
Interest 90 90 90
Depreciation and amortization 184 184 184
Advisory fee 60 60 60
General and administrative 210 210 210
Amortization of share purchase/
stock option costs 54 54 54
Other 0 0 0
------ ------ ------

Total expenses 598 598 598
------ ------ ------

NET INCOME 946 900 949
------ ------ ------

ADD:
Depreciation and amortization 184 184 184
Amortization of share purchase/
stock option costs 54 54 54

LESS: Debt service principal payments (45) (45) (45)
------ ------ ------

CASH FLOW INCOME 1,139 1,093 1,142
------ ------ ------

ADD: Debt service principal payments 45 45 45
------ ------ ------

FUNDS FROM OPERATIONS $1,184 $1,138 $1,187
------ ------ ------
------ ------ ------
</TABLE>

49
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 (c) - 1994
SELECTED COMBINED PRO FORMA FINANCIAL DATA - LESSEE
(in thousands)
(Unaudited)

YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------------------------------------------

HATFIELD SUPER 8S
-----------------
ROCK POPLAR SUB- MISSION COMBINED
FALLS MINER SOMERSET BLUFF TOTAL BAY TOTAL
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $664 $812 $543 $591 $2,610 $ 990 $3,600
Telephone 24 23 16 17 80 41 121
Other 20 11 3 11 44 24 68
---- ---- ---- ---- ------ ------ ------
Total revenues 708 846 561 619 2,734 1,055 3,789

Expenses:
Rooms 142 165 130 126 562 302 864
Interest 102 108 101 88 400 0 400
Administrative and general 77 110 66 64 317 134 451
Depreciation and amortization 34 37 33 35 139 85 224
Management fee 35 42 28 31 135 63 199
Franchise 33 41 27 30 131 59 190
Repairs and maintenance 37 30 28 26 122 57 178
Energy cost 34 33 22 26 115 64 179
Property taxes 36 10 11 12 69 44 114
Telephone 13 11 11 10 44 11 55
Insurance 10 17 7 9 43 23 66
Marketing 2 16 16 18 52 57 109
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ------ ------
Total expenses 555 619 482 473 2,128 901 3,029
---- ---- ---- ---- ------ ------ ------

OPERATING INCOME 154 227 79 146 606 154 760
---- ---- ---- ---- ------ ------ ------
Add:
Management fee 35 42 28 31 135 63 199
Interest expense 102 108 101 88 400 0 400
Depreciation and amortization 34 37 33 35 139 85 224
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ------ ------
Adjusted operating income before
management fee, lease expense,
interest expense, depreciation &
amortization and other 324 414 242 299 1,281 302 1,583
---- ---- ---- ---- ------ ------ ------
Less:
Adjusted mgt fee (3%) (21) (25) (17) (19) (82) (32) (114)
Lease expense (269) (340) (203) (228) (1,040) (295) (1,335)
Interest expense 0 0 0 0 0 0 0
Depreciation and amortization 0 0 0 0 0 0 0
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ------ ------

ADJUSTED NET INCOME 35 49 23 52 158 (25) 134

Replacement reserve (4%) 28 34 22 25 109 42 152
---- ---- ---- ---- ------ ------ ------

CASH FLOW INCOME $ 6 $ 15 $ 0 $ 28 $ 49 ($ 67) ($ 18)
---- ---- ---- ---- ------ ------ ------
---- ---- ---- ---- ------ ------ ------
</TABLE>

50
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 (c) - 1993
SELECTED COMBINED PRO FORMA FINANCIAL DATA - LESSEE
(in thousands)
(Unaudited)

YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------------------------------------------

HATFIELD SUPER 8S
-----------------
ROCK POPLAR SUB- MISSION COMBINED
FALLS MINER SOMERSET BLUFF TOTAL BAY TOTAL
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $654 $771 $458 $559 $2,442 $ 960 $3,402
Telephone 20 21 13 13 67 28 95
Other 19 12 4 12 47 34 81
---- ---- ---- ---- ------ ------ ------
Total revenues 693 804 475 584 2,556 1,022 3,577

Expenses:
Rooms 130 155 108 127 520 317 837
Interest 119 149 136 112 516 0 516
Administrative and general 80 112 64 71 327 157 484
Depreciation and amortization 33 32 24 34 123 91 213
Management fee 34 40 24 29 127 61 188
Franchise 33 39 23 28 122 58 180
Repairs and maintenance 31 31 37 31 130 59 189
Energy cost 33 33 20 24 110 59 169
Property taxes 36 9 11 8 65 46 110
Telephone 14 11 12 10 47 15 61
Insurance 8 7 6 7 29 26 55
Marketing 4 17 17 14 51 60 111
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ------ ------
Total expenses 554 635 482 495 2,166 948 3,114
---- ---- ---- ---- ------ ------ ------

OPERATING INCOME 139 169 (7) 89 390 74 464
---- ---- ---- ---- ------ ------ ------
Add:
Management fee 34 40 24 29 127 61 188
Interest expense 119 149 136 112 516 0 516
Depreciation and amortization 33 32 24 34 123 91 213
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ---- ------
Adjusted operating income before
management fee, lease expense,
interest expense, depreciation &
amortization and other 325 390 176 264 1,156 226 1,381
---- ---- ---- ---- ------ ---- ------
Less:
Adjusted mgt fee (3%) (21) (24) (14) (18) (77) (31) (107)
Lease expense (262) (329) (185) (224) (1,000) (286) (1,286)
Interest expense 0 0 0 0 0 0 0
Depreciation and amortization 0 0 0 0 0 0 0
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ---- ------
ADJUSTED NET INCOME 43 37 (23) 22 79 (91) (12)

Replacement reserve (4%) 28 32 19 23 102 41 143
---- ---- ---- ---- ------ ---- ------

CASH FLOW INCOME $ 15 $ 5 ($ 42) ($ 1) ($ 23) ($132) ($ 155)
---- ---- ---- ---- ------ ---- ------
---- ---- ---- ---- ------ ---- ------
</TABLE>

51
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 (c) - 1992
SELECTED COMBINED PRO FORMA FINANCIAL DATA - LESSEE
(in thousands)
(Unaudited)
YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------------------------------

HATFIELD SUPER 8S
-----------------
ROCK POPLAR SUB- MISSION COMBINED
FALLS MINER SOMERSET BLUFF TOTAL BAY TOTAL
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $557 $731 $435 $532 $2,255 $1,201 $3,457
Telephone 12 9 9 6 36 30 66
Other 8 9 7 9 33 30 63
---- ---- ---- ---- ------ ------ ------
Total revenues 576 749 451 548 2,325 1,262 3,586

Expenses:
Rooms 117 146 101 113 477 299 775
Interest 150 172 151 159 631 0 631
Administrative and general 73 109 65 65 313 171 485
Depreciation and amortization 78 83 40 86 286 194 481
Management fee 17 22 13 16 68 75 144
Franchise 28 37 22 27 113 72 185
Repairs and maintenance 43 31 21 39 133 38 170
Energy cost 31 34 19 23 107 67 173
Property taxes 32 9 8 10 59 43 101
Telephone 15 10 12 9 46 18 64
Insurance 10 9 8 9 36 21 56
Marketing 2 16 13 14 45 70 115
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ------ ------
Total expenses 596 677 473 569 2,314 1,067 3,382
---- ---- ---- ---- ------ ------ ------
OPERATING INCOME (19) 72 (21) (21) 10 194 204
---- ---- ---- ---- ------ ------ ------
Add:
Management fee 17 22 13 16 68 75 144
Interest expense 150 172 151 159 631 0 631
Depreciation and amortization 78 83 40 86 286 194 481
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ------ ------
Adjusted operating income before
management fee, lease expense,
interest expense, depreciation &
amortization and other 226 349 182 239 997 464 1,461
---- ---- ---- ---- ------ ------ ------
Less:
Adjusted mgt fee (3%) (17) (22) (14) (16) (70) (38) (108)
Lease expense (245) (318) (185) (221) (968) (365) (1,333)
Interest expense 0 0 0 0 0 0 0
Depreciation and amortization 0 0 0 0 0 0 0
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ------ ------

ADJUSTED NET INCOME ( 36) 8 (16) 2 (41) 62 20

Replacement reserve (4%) 23 30 18 22 93 50 143
---- ---- ---- ---- ------ ------ ------

CASH FLOW INCOME $ 59 $22 ($34) ($20) ($134) $ 11 ($123)
---- ---- ---- ---- ------ ------ ------
---- ---- ---- ---- ------ ------ ------
</TABLE>

52
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 (d) - 1994
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(in thousands)
(Unaudited)
Year ended December 31, 1994
--------------------------------------------------------------------

Hatfield Super 8S
-----------------
ROCK SOMER- POPLAR SUB- MISSION COMBINED
FALLS MINER SET BLUFF TOTAL BAY TOTAL
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>

Revenues:
Room Sales $664 $812 $543 $591 $2,610 $ 990 $3,600
Telephone 24 23 16 17 80 41 121
Other 20 11 3 11 44 24 68
---- ---- ---- ---- ------ ----- ------
Total revenues 708 846 561 619 2,734 1,055 3,789

Expenses:
Rooms 142 165 130 126 562 302 864
Interest 102 108 101 88 400 0 400
Administrative and general 77 110 66 64 317 134 451
Depreciation and amortization 34 37 33 35 139 85 224
Management fee 35 42 28 31 135 63 199
Franchise 33 41 27 30 131 59 190
Repairs and maintenance 37 30 28 26 122 57 178
Energy cost 34 33 22 26 115 64 179
Property taxes 36 10 11 12 69 44 114
Telephone 13 11 11 10 44 11 55
Insurance 10 17 7 9 43 23 66
Marketing 2 16 16 18 52 57 109
Other 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ----- ------
Total expenses 555 619 482 473 2,128 901 3,029

---- ---- ---- ---- ------ ----- ------
OPERATING INCOME 154 227 79 146 606 154 760
---- ---- ---- ---- ------ ----- ------

OTHER INCOME(EXPENSES)
Loan restructuring costs 0 0 0 0 0 0 0
Provision for loss 0 0 0 0 0 (1,535) (1,535)
---- ---- ---- ---- ------ ----- ------

Total 0 0 0 0 0 (1,535) (1,535)
---- ---- ---- ---- ------ ----- ------

NET INCOME(LOSS) $154 $227 $79 $146 $606 ($1,381) ($ 775)
---- ---- ---- ---- ------ ----- ------
---- ---- ---- ---- ------ ----- ------
</TABLE>

53
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 (d) - 1993
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(in thousands)
(Unaudited)

Year ended December 31, 1993
---------------------------------------------------------------------------

Hatfield Super 8s
-----------------
Rock Somer- Poplar Sub- Mission Combined
Falls Miner set Bluff total Bay Total
----- ----- --- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $654 $771 $458 $559 $2,442 $960 $3,402
Telephone 20 21 13 13 67 28 95
Other 19 12 4 12 47 34 81
----- ----- ----- ----- ----- ----- -----
Total revenues 693 804 475 584 2,556 1,022 3,577

Expenses:
Rooms 130 155 108 127 520 317 837
Interest 119 149 136 112 516 0 516
Administrative and general 80 112 64 71 327 157 484
Depreciation and amortization 33 32 24 34 123 91 213
Management fee 34 40 24 29 127 61 188
Franchise 33 39 23 28 122 58 180
Repairs and maintenance 31 31 37 31 130 59 189
Energy cost 33 33 20 24 110 59 169
Property taxes 36 9 11 8 65 46 110
Telephone 14 11 12 10 47 15 61
Insurance 8 7 6 7 29 26 55
Marketing 4 17 17 14 51 60 111
Other 0 0 0 0 0 0 0
----- ----- ----- ----- ----- ----- -----
Total expenses 554 635 482 495 2,166 948 3,114
----- ----- ----- ----- ----- ----- -----

OPERATING INCOME 139 169 (7) 89 390 74 464
----- ----- ----- ----- ----- ----- -----

OTHER INCOME(EXPENSES)
Loan restructuring costs (25) (25) (25) (25) (102) 0 (102)
Provision for loss 0 0 0 0 0 0 0

----- ----- ----- ----- ----- ----- -----
Total (25) (25) (25) (25) (102) 0 (102)
----- ----- ----- ----- ----- ----- -----

NET INCOME(LOSS) $113 $144 ($32) $64 $288 $74 $362
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>

54
<PAGE>
<TABLE>
<CAPTION>

TABLE 7 (d) - 1992
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(in thousands)
(Unaudited)

Year ended December 31, 1992
---------------------------------------------------------------------------

Hatfield Super 8S
-----------------
Rock Somer- Poplar Sub- Mission Combined
Falls Miner Set Bluff Total Bay Total
----- ----- --- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $557 $731 $435 $532 $2,255 $1,201 $3,457
Telephone 12 9 9 6 36 30 66
Other 8 9 7 9 33 30 63
---- ---- ---- ---- ---- ---- ----
Total revenues 576 749 451 548 2,325 1,262 3,586

OPERATING INCOME (19) 72 (21) (21) 10 194 204
---- ---- ---- ---- ---- ---- ----

OTHER INCOME(EXPENSES)
Loan restructuring costs (15) (15) (15) (15) (60) 0 (60)
Provision for loss 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ----
Total (15) (15) (15) (15) (60) 0 (60)
---- ---- ---- ---- ---- ---- ----

NET INCOME(LOSS) ($34) $57 ($36) ($36) ($49) $ 194 $145
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
</TABLE>
55
<PAGE>

FINANCIAL CONSIDERATIONS

OVERVIEW

Upon consummation of the Mission Bay Acquisition and the Formation
Transactions, the Company will own all of the Initial Hotels. In order for the
Company to qualify as a REIT, the Company cannot operate hotels. Therefore, the
Company has leased the Hatfield Super 8s to the Lessee and will lease the
Mission Bay Super 8 to the Lessee. Accordingly, the Company's principal source
of revenue will be lease payments under the Percentage Leases. Percentage Rent
will be based upon the Initial Hotels' revenues, and the Lessee's ability to
make payments to the Company under the Percentage Leases will be dependent on
the Lessee's ability to generate cash flow from the operation of the Initial
Hotels.

All of the Hatfield Super 8s were opened in 1985, all of the Hatfield Super
8s were initially opened as Super 8s, and were acquired by AAG in 1985. The
Mission Bay Super 8 which was opened in 1987, was initially opened as a Super 8.

Average occupancy, ADR and REVPAR have each shown slight gains from 1992
through 1994. The following table sets forth information with respect to
average occupancy, ADR and REVPAR for each of the years ended December 31, 1992,
1993, and 1994. No assurance can be given that the trends reflected in the
following table will continue or that occupancy, ADR and REVPAR will not
decrease due to changes in national or local economic or hospitality industry
conditions.

Management believes the slight growth in average occupancy, ADR and REVPAR
at the Initial Hotels reflects stronger market demand. While no assurance can
be given that the Initial Hotels will continue to experience growth in all or
any of these areas, management of the Company believes that additional growth,
particularly in the areas of occupancy, ADR and REVPAR, is probable in light of
improving industry conditions.

In addition to participating in increased revenues at the Initial Hotels,
the Company's strategy is to increase cash flow and enhance shareholder value by
acquiring additional existing hotels that meet the Company's investment criteria
and by participating, through the Percentage Leases, in any revenue growth
experienced at its Initial Hotels. Management believes the U.S. lodging
industry is recovering from a period of low profitability resulting from high
levels of debt, past over-building of hotel properties and the effects of the
recent economic recession. As a result, the Company believes that, in the
short-term, it will have opportunities to acquire additional existing hotels at
attractive prices.

GENERAL

The following table sets forth certain historical financial information for
the combined Initial Hotels, as a percentage of revenue, for the periods
indicated.

56
<PAGE>
<TABLE>
<CAPTION>

TABLE 8

Twelve Months Ended December 31,
--------------------------------
1992 1993 1994

<S> <C> <C> <C>
HATFIELD SUPER 8s
Rock Falls
Average occupancy 70.0% 79.2% 79.4%
Average daily rate $34.50 $35.88 $36.37
Revenue per available room $24.15 $28.43 $28.90
Miner
Average occupancy 92.7% 94.7% 96.2%
Average daily rate $34.22 $35.40 $36.73
Revenue per available room $31.72 $33.54 $35.31
Somerset
Average occupancy 55.2% 58.9% 67.6%
Average daily rate $34.19 $33.83 $34.62
Revenue per available room $18.88 $19.92 $23.63
Poplar Bluff
Average occupancy 69.2% 71.5% 72.2%
Average daily rate $33.35 $34.00 $35.32
Revenue per available room $23.07 $24.30 $25.69

Subtotal
Average occupancy 71.8% 76.1% 78.8%
Average daily rate $34.07 $34.89 $36.00
Revenue per available room $24.45 $26.55 $28.38

Mission Bay
Average occupancy 65.2% 52.5% 54.9%
Average daily rate $43.04 $42.84 $42.40
Revenue per available room $28.06 $22.48 $23.18

COMBINED TOTALS
Average occupancy 69.7% 68.6% 71.3%
Average daily rate $36.73 $36.82 $37.52
Revenue per available room $25.60 $25.26 $26.73

</TABLE>

57
<PAGE>

The following table sets forth historical revenue for the Initial Hotels
and the percent change among the periods indicated.

TABLE 9

Year Ended December 31, 1994

Hatfield Super 8S
-----------------
Rock Somer- Poplar Sub Mission Combined
Falls Miner Set Bluff Total Bay Total
----- ----- --- ----- ----- --- -----

<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 93.8% 96.0% 96.8% 95.5% 95.5% 93.8% 95.0%
Telephone 3.4% 2.7% 2.8% 2.8% 2.9% 3.9% 3.2%
Other 2.8% 1.3% 0.5% 1.7% 1.6% 2.2% 1.8%
----- ----- ----- ----- ----- ----- -----

Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

EXPENSES:
Rooms 20.0% 19.5% 23.1% 20.4% 20.6% 28.6% 22.8%
Interest 14.4% 12.8% 18.1% 14.3% 14.6% 0.0% 10.6%
Administrative & general 10.9% 12.9% 11.8% 10.4% 11.6% 12.7% 11.9%
Depreciation & amortization 4.8% 4.4% 6.0% 5.6% 5.1% 8.1% 5.9%
Management fee 4.9% 5.0% 5.0% 5.0% 5.0% 6.0% 5.2%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6% 5.0%
Repairs and maintenance 5.3% 3.6% 5.0% 4.2% 4.4% 5.4% 4.7%
Energy cost 4.7% 3.9% 3.9% 4.2% 4.2% 6.1% 4.7%
Property taxes 5.1% 1.2% 2.0% 1.9% 2.5% 4.2% 3.0%
Telephone 1.8% 1.3% 1.9% 1.6% 1.6% 1.1% 1.5%
Insurance 1.4% 2.0% 1.3% 1.4% 1.6% 2.2% 1.7%
Marketing 0.3% 1.9% 2.9% 2.9% 1.9% 5.4% 2.9%
Other ----------------------------------------------------------------------
Total expenses 78.3% 73.1% 85.9% 76.5% 77.8% 85.4% 79.9%

OPERATING INCOME 21.7% 26.9% 14.1% 23.5% 22.2% 14.6% 20.1%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----

</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>

TABLE 9

Year Ended December 31, 1993

HATFIELD SUPER 8S
-----------------
Rock Somer- Poplar Sub Mission Combined
Falls Miner Set Bluff Total Bay Total
----- ----- --- ----- ----- --- -----

<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 94.4% 95.9% 96.5% 95.6% 95.6% 94.0% 95.1%
Telephone 2.8% 2.6% 2.7% 2.3% 2.6% 2.7% 2.6%
Other 2.8% 1.4% 0.8% 2.1% 1.8% 3.3% 2.3%
----- ----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

EXPENSES:
Rooms 18.8% 19.2% 22.8% 21.7% 20.3% 31.1% 23.4%
Interest 17.2% 18.6% 28.5% 19.2% 20.2% 0.0% 14.4%
Administrative & general 11.6% 13.9% 13.5% 12.1% 12.8% 15.3% 13.5%
Depreciation & amortization 4.8% 3.9% 5.0% 5.8% 4.8% 8.9% 6.0%
Management fee 4.9% 5.0% 5.0% 5.0% 5.0% 6.0% 5.3%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6% 5.0%
Repairs and maintenance 4.4% 3.9% 7.8% 5.3% 5.1% 5.8% 5.3%
Energy cost 4.7% 4.1% 4.3% 4.1% 4.3% 5.8% 4.7%
Property taxes 5.2% 1.1% 2.4% 1.4% 2.5% 4.5% 3.1%
Telephone 2.0% 1.4% 2.4% 1.8% 1.8% 1.4% 1.7%
Insurance 1.1% 0.9% 1.4% 1.2% 1.1% 2.5% 1.5%
Marketing 0.5% 2.1% 3.5% 2.4% 2.0% 5.9% 3.1%
Other -----------------------------------------------------------------

Total expenses 78.3% 79.0% 101.5% 84.7% 84.7% 92.8% 87.0%

OPERATING INCOME (LOSS) 20.0% 21.0% (1.5%) 15.3% 15.3% 7.2% 13.0%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>

59
<PAGE>
<TABLE>
<CAPTION>

TABLE 9

Year Ended December 31, 1992

HATFIELD SUPER 8S
-----------------
Rock Somer- Poplar Sub Mission Combined
Falls Miner Set Bluff Total Bay Total
----- ----- --- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 96.6% 97.6% 96.4% 97.1% 97.0% 95.2% 96.4%
Telephone 2.1% 1.3% 1.9% 1.2% 1.6% 2.4% 1.8%
Other 1.3% 1.1% 1.6% 1.7% 1.4% 2.4% 1.8%
----- ----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

EXPENSES:
Rooms 20.2% 19.5% 22.4% 20.6% 20.5% 23.7% 21.6%
Interest 26.1% 22.9% 33.4% 29.0% 27.2% 0.0% 17.6%
Administrative & general 12.7% 14.6% 14.5% 11.9% 13.5% 13.6% 13.5%
Depreciation & amortization 13.6% 11.0% 8.8% 15.7% 12.3% 15.4% 13.4%
Management fee 2.9% 3.0% 2.9% 2.9% 2.9% 6.0% 4.0%
Franchise 4.8% 4.9% 4.8% 4.9% 4.9% 5.7% 5.2%
Repairs and maintenance 7.4% 4.1% 4.6% 7.0% 5.7% 3.0% 4.7%
Energy cost 5.3% 4.5% 4.3% 4.1% 4.6% 5.3% 4.8%
Property taxes 5.6% 1.2% 1.7% 1.9% 2.5% 3.4% 2.8%
Telephone 2.7% 1.3% 2.6% 1.7% 2.0% 1.4% 1.8%
Insurance 1.7% 1.3% 1.8% 1.6% 1.5% 1.6% 1.6%
Marketing 0.3% 2.2% 2.9% 2.6% 1.9% 5.5% 3.2%
Other -------------------------------------------------------------------

Total expenses 103.3% 90.4% 104.7% 103.9% 99.6% 84.6% 94.3%

OPERATING INCOME (LOSS) (3.3%) 9.6% (4.7%) (3.9%) 0.4% 15.4% 5.7%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>

RESULTS OF OPERATIONS

On a pro forma basis for the year ending December 31, 1994, the Company
would have generated base and percentage lease revenue of $1,335,460 resulting
from combined occupancy of 71.3% at an average daily room rate of $37.52 from
the five leased properties. Mortgage interest income from the Hatfield Note
would have totaled $180,568, which trust deed interest income is payable
quarterly, interest only, at 10% per annum. Share purchase plan interest
income, payable quarterly at 7% per annum, would have totaled $21,000 on loans
outstanding of $300,000. Interest income on excess cash reserves averaging
$250,000 at 4% interest per annum would have totaled $10,000.

Pro forma general administrative expenses are $210,000, including office
occupancy costs, directors expenses, accounting fees, legal fees, audit fees,
public company costs and other miscellaneous expenses. Advisory fees are
contractually fixed at $60,000 per annum at current property and lease revenue
levels. Depreciation expense is calculated based upon the costs of the motel
acquisitions on a straight line basis over their estimated useful lives.
Amortization of share purchase plan costs assumes the initial independent and
insider directors will remain as directors for the pro forma year. Interest
expense is calculated based upon a refinancing of the Rock Falls, Illinois
mortgage approximating $406,000 to be paid monthly, amortizing fully

60
<PAGE>

over 15 years at 8.75% interest per annum.

Pro forma funds from operations would total $1,186,671. Pro forma
dividends are calculated at $1,117,969 or $83 per share on Class A Common Stock
only, which amount is approximately equal to 98% of funds from operations less
principal payments for debt service.

TABLE 10
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
-----------------------
Percent Percent Percent
1992 change 1993 change 1994 change
Percent/ from Percent/ from Percent/ from
Amount 1991 Amount 1992 Amount 1993
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
HATFIELD SUPER 8S
Rock Falls
Occupancy 70.0% (0.3%) 79.2% 13.2% 79.4% 0.2%
ADR $34.50 9.5% $35.88 4.0% $36.37 1.4%
REVPAR $24.15 9.5% $28.43 17.7% $28.90 1.6%
Room sales $556,939 9.5% $653,730 17.4% $664,480 1.6%

Miner
Occupancy 92.7% 2.7% 94.7% 2.2% 96.2% 1.5%
ADR $34.22 8.4% $35.40 3.4% $36.73 3.8%
REVPAR $31.72 11.7% $33.54 5.8% $35.31 5.3%
Room sales $731,293 11.7% $771,277 5.5% $811,923 5.3%

Somerset
Occupancy 55.2% (6.5%) 58.9% 6.7% 67.6% 14.8%
ADR $34.19 5.9% $33.83 (1.1%) $34.62 2.3%
REVPAR $18.88 (0.7%) $19.92 5.5% $23.63 18.6%
Room sales $435,314 (0.7%) $458,145 5.2% $543,305 18.6%

Poplar Bluff
Occupancy 69.2% 7.9% 71.5% 3.3% 72.2% 1.0%
ADR $33.35 5.7% $34.00 1.9% $35.32 3.9%
REVPAR $23.07 14.0% $24.30 5.3% $255.3 5.7%
Room sales $531,938 14.4% $558,761 5.0% $590,788 5.7%

Subtotal
Occupancy 71.8% 1.2% 76.1% 6.0% 78.8% 3.6%
ADR $34.07 7.5% $34.89 2.4% $36.00 3.2%
REVPAR $24.45 8.8% $26.55 8.6% $28.38 6.9%
Room sales $2,255,484 9.1% $2,441,913 8.3% $2,610,496 6.9%

Mission Bay
Occupancy 65.2% (3.4%) 52.5% (19.5%) 54.9% 4.6%
ADR $43.04 0.9% $42.84 ( 0.5%) $42.40 (1.5%)
REVPAR $28.06 (2.6%) $22.48 (19.9%) $23.18 3.1%
Room sales $1,201,412 (2.3%) $960,166 (20.1%) $989,703 3.1%

COMBINED TOTALS
Occupancy 69.7% (0.2%) 68.6% (1.5%) 71.3% 3.9%
ADR $36.73 4.8% $36.82 (0.2%) $37.52 1.9%
REVPAR $25.60 4.6% $25.26 (1.3%) $26.73 5.8%
Room sales $3,456,896 4.9% $3,402,079 (1.6%) $3,600,199 5.8%

</TABLE>

61
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Upon consummation of the Offering and application of net proceeds, the
Company will have approximately $406,000 of outstanding debt and approximately
$250,000 of cash. The Company intends to make additional investments in hotel
properties and may incur indebtedness to make such investments or 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 such distributions. See "Policies and Objectives With Respect to Certain
Activities - Financing" and "Description of Capital Stock - Charter and Bylaw
Provisions".

The Company in the future may seek to obtain a line of credit or a
permanent credit facilities, negotiate additional credit facilities, or issue
corporate debt instruments, all in compliance with its Charter restrictions.
Any debt incurred or issued by the Company may be secured or unsecured, long-
term or short-term, charge a fixed or variable interest rate and may be subject
to such other terms as the Board of Directors of the Company deems prudent.

The Company will invest in additional hotel properties as suitable
opportunities arise. It is expected that future investments in hotel properties
will be financed, in whole or in part, with proceeds from additional issuances
of Common Stock or other securities or borrowings. The Company currently has no
agreement or understanding to invest in any hotel property other than the
Mission Bay Super 8, and there can be no assurance that the Company will make
any investments in any other hotel properties which meet its investment
criteria.

THE LESSEE

The Lessee is a limited purpose entity which has been recently organized to
lease and operate the Initial Hotels. Upon completion of the Formation
Transactions, the Lessee will be capitalized with cash and other liquid assets
generally equal to nine (9) months of Base Rent (in accordance with the terms of
the Percentage Leases) and will have no outstanding indebtedness for borrowed
funds.

The Lessee will funds its cash needs, including monthly payments of Base
Rent and Percentage Rent, with Funds From Operation of the Initial Hotels as
well as interest income on other assets of the Lessee. The Company believes
that the Lessee will have adequate funds to meet its short-term liquidity
requirements.

THE COMPANY

The Company's principal source of cash to meet its cash requirements,
including distributions to Shareholders, will be its share of the Company's cash
flow from the Percentage Leases. The Lessee's obligations under the Percentage
Leases are unsecured and the Lessee's ability to make lease payments under the
Percentage Leases, and the Company's liquidity, including its ability to make
distributions to Shareholders, will be dependent on the ability of the Lessee
and the Manager to general sufficient cash flow from the Initial Hotels.

Upon consummation of the Offering and application of the net proceeds, the
Company will have approximately $406,000 of outstanding debt. In addition, the
Company intends to acquire additional hotel properties and may incur
indebtedness to make such acquisitions or 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 such distributions.
Any debt incurred or issued by the Company may be secured or unsecured,
long-term or short-term fixed or variable interest rate and may be subject to
such other terms as the Board of Directors of the Company deems prudent.

62
<PAGE>

The Company will invest in additional hotel properties only as suitable
opportunities arise, and the Company will not undertake investments unless
adequate sources of financing are available. It is expected that future
investments in hotel properties will be financed, in whole or in part, with
Common Stock, proceeds from additional issuances of Common Stock, or from the
issuance of other debt or equity securities.

Pursuant to the Percentage Leases, the Lessee will be required to fund the
ongoing replacement or refurbishment of furniture, fixtures and equipment at the
Initial Hotels in the amount of 4% of prior month's Revenues from the Initial
Hotels. The Company believes that such amount will be sufficient to fund
required expenditures for the term of the Percentage Leases. The Company
anticipates entering into a similar arrangement with respect to future hotel
properties in which it invests.

INFLATION

Operators of hotels, in general, possess the ability to adjust room rates
quickly. Competitive pressures may, however, limit the Lessee's ability to
raise room rates in the face of inflation. Since 1987, industry wide annual
increases in ADR have failed to keep pace with inflation.

SEASONALITY

The Initial Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Company's quarterly
lease revenue to the extent that it receives Percentage Rent. It is presently
anticipated that the Company's cash flow from operation of the Initial Hotels
will be sufficient to enable it to make distributions at the estimated initial
rate. To the extent that cash flow from operations are to be insufficient
during any quarter, due to temporary or seasonal fluctuations in lease revenue,
the Company expects to utilize other cash on hand or borrowings to make such
distributions. No assurance can be given, however, that the Company will make
distributions in the future at the initially estimated rate, or at all.

63
<PAGE>

BUSINESS AND PROPERTIES

THE HOTEL INDUSTRY

The United States hotel industry had approximately 28,930 hotel properties
with approximately 3.2 million rooms as of June 30, 1994. Of these hotel rooms,
approximately 1.9 million were affiliated with a "brand" either through a
franchise or license agreement or though ownership or management by a national
or regional hotel chain. The remainder were managed by independent operations
not affiliated with hotel chains of more than five hotel properties. The
Company believes that there are many advantages to owning hotels which are
"brand" affiliated, including access to reservation systems, quality standards,
training programs and enhanced customer recognition.

The United States hotel industry is generally comprised of two sectors:
full-service hotels and limited-service hotels. Full-service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services typically including bell service and room service. Full-
service hotels represent the largest segment of the hotel industry and
primarily attract business travelers as compared to leisure travelers. By
contrast, limited-service hotels usually only provide basic room accommodations,
but generally attract a more balanced mix of business and leisure travelers.
All five of the Initial Hotels are limited-service hotels.

The Company believes that both the Initial Hotels and the United States
hotel industry in general are experiencing cyclical growth. Since 1992, the
hotel industry has experienced improved fundamentals as the annual rates of
growth in demand for hotel rooms have exceeded the annual rates of growth in
supply of hotel room and annual ADR have increased each year. According to
Smith Travel Research, for the five-year period ended December 31, 1994, the
United States hotel industry demonstrated the following operating
characteristics:

Years Ended December 31,
------------------------
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average hotel occupancy 61.8% 60.2% 61.9% 63.3% 65.2%
Annual % growth in room supply 3.4% 2.5% 1.3% 1.0% 1.4%
Annual% growth in room demand 2.1% 0.0% 3.2% 3.6% 4.5%
ADR $58.49 $58.83 $59.65 $61.14 $63.77
REVPAR $36.15 $35.42 $36.92 $38.70 $41.58
% Change in REVPAR 1.9% (2.0%) 4.2% 4.8% 7.4%

</TABLE>
The improvement in industry fundamental has likewise resulted in an
improvement in operating statistics for both full-service and limited-service
hotels. According to Smith Travel Research, the average hotel occupancy rate
for full-service hotels in the United States increased from 62.8% in 1992 to
65.2% in 1993 while ADR increased by 1.7%. The average hotel occupancy rate for
limited-service hotels in the United States decreased from 63.6% in 1992 to
63.3% in 1993 while ADR increased by 1.9%. On the same property basis, the ADR
at the five (5) Initial Hotels, which are limited-service hotels, owned by their
Sellers as of January 1, 1993 increased from $36.82 in 1993 to $37.52 in 1994,
an increase of 1.9%, and the average hotel occupancy rate of such Initial Hotels
increased from 68.6% in 1993 to 71.3% in 1994.

The Company believes that improvements in performance in the United States
hotel industry since 1992 are primarily due to an improved economic environment
and a low rate of growth in room supply. The Company attributes the low rate of
growth in room supply to constraints on the availability of financing for new
hotel development from traditional sources and an excess supply of hotel rooms
resulting from high levels of hotel construction activity in prior years. The
Company anticipates that growth in room supply will continue to be limited,
except in certain select markets experiencing rapid economic growth, due to
continued

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restraints on the availability of institutional funds for hotel construction.

THE MISSION BAY PARTNERSHIP AND ITS HOTEL

The Partnership received $5,761,115 (net of offering costs of $838,885)
from the sale of limited partnership interests. These funds were available for
investment in property, to pay legal fees and other costs related to the
investments, to pay operating expenses, and for working capital. The majority
of the proceeds were used to acquire a 1.056 acre parcel of property in the
Mission Bay area of San Diego, California for $2,352,000 and to build and
operate thereon a 117 room "economy" motel as a franchise of Super 8 Motels,
Inc. The motel was opened for business in November 1987 under a twenty-year
franchise agreement with Super 8 Motels, Inc., which required the payment of
initial franchise fees of $20,000 and requires ongoing royalties equal to 4% of
gross room revenues and chain-affiliated advertising fees equal to 2% of gross
room revenues.

Guy E. Hatfield was the original Managing General Partner of Mission Bay.
Mr. Hatfield held 32.79% of t he general partner interests and Mr. Ian Gardner-
Smith held 9.89% of the general partner interests. The other 57.3% of general
partner interests were held by various other individuals. On January 1, 1990,
the general partners of Mission Bay sold their general partner interests to GHG
Hospitality, Inc., ("GHG") and the name of the partnership was changed to
"Mission Bay Super 8, Ltd.". Since January 1, 1990, the Mission Bay Super 8 has
been operated pursuant to a management agreement with GHG. Mission Bay has no
employees, and is not subject to any legal proceedings.

There is significant competition in the San Diego lodging market. Mission
Bay is in competition either directly or indirectly with a large number of
hotels and motels of varying quality and sizes, including other motels which are
part of national or regional chains. Some of such competitive hotels and motels
have greater financial resources and personnel with more experience than Mission
Bay and the general partner. The San Diego area in particular has a large
number of hotel and motel projects that in the aggregate dilute average
occupancy and affect profitability. Mission Bay's motel does not compete
directly with any large budget motel chains, but competes indirectly in the
greater San Diego area with such budget motels as Comfort Inns and "E-Z 8"
Motels.

There is no public trading market for the Partnership's limited partnership
interests. There were approximately 1,149 holders of Mission Bay's 6,600
limited partnership interests as of December 31, 1994. Cash distributions to
holders of limited partnership interests totaled $180,000 ($27.27 per interest)
in 1994 and $162,000 ($24.55 per interest) in 1993. Arthur Andersen valued
Mission Bay's investment property at $2,810,000 as of December 1, 1994. Because
of a significant decrease in the market value of the Mission Bay Super 8,
management elected to writedown Mission Bay's investment property to its
appraised value of $2,810,000 as of December 31, 1994.

Net income (loss) was ($1,381,028) in 1994 and $73,760 in 1993. Total
revenues were $1,054,819 in 1994 and $1,021,785 in 1993. The property operated
at an occupancy rate of 54.9% in 1994 and 52.5% in 1993. The average daily room
rate was $42.20 in 1994 and $42.84 in 1993. The net loss for 1994 resulted from
an unrealized loss due to decline in value of investment property of $1,534,950
as discussed above.

A leading industry publication has reported that, in the economy and budget
market, occupancies in

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the San Diego region are expected to increase by 1% and average daily room rates
are expected to increase by $2.00 in 1995. San Diego is hosting several city-
wide conventions during the summer months that should boost occupancy and
average daily room rates.

THE INITIAL HOTELS

The Initial Hotels are diversified by geographic location (4 states).
However, the Initial Hotels share the same (i) franchise affiliation (Super 8),
(ii) Lessee (Inn Fund, LLC), and (iii) approximate price segment in the hotel
industry (budget price segment). There are five Initial Hotels. The Initial
Hotels are the: Rock Falls Super 8 located in Rock Falls, Illinois, Poplar
Bluff Super 8 located in Poplar Bluff, Missouri, Miner Super 8 located in Miner,
Missouri, the Somerset Super 8 located in Somerset, Kentucky, and the Mission
Bay Super 8 located in San Diego, California. The Company believes that the
geographic diversity of its initial portfolio will moderate the potential
effects on the Company of adverse regional economic conditions and changes in
local market competitive conditions.

The Company acquired the four Hatfield Super 8s effective April 1, 1995 and
will acquire the Mission Bay Super 8 in early 1995 pursuant to the Mission Bay
Acquisition Agreement. The Rock Falls Super 8 has 63 rooms, is located on 2.45
acres of land, and is located in a primarily rural area. The Poplar Bluff Super
8 has 63 rooms, is located on 1.71 acres of land, and is located in a primarily
rural area. The Miner Super 8 has 63 rooms, is located on 2.00 acres of land,
and is located in a primarily rural area. The Somerset Super 8 has 63 rooms, is
located on 1.29 acres of land, and is located in a primarily rural area. The
Mission Bay Super 8 has 117 rooms, is located on 1.07 acres of land, and is
located in a primarily urban area. The average acquisition price of the
Hatfield Super 8s was approximately $27,380 per room. The Company believes that
the Initial Hotels are in good operating condition and meet the current quality
and appearance standards required by their respective Franchise Agreements.

LIMITED SERVICE HOTELS

The Initial Hotels do not offer a full variety of accommodations. They
offer daily and nightly occupancies, but do not offer food, room service,
restaurants, or laundry services.

APPRAISAL

Arthur Andersen LLP (the "Appraiser"), was recently retained by the Company
and by Mission Bay to appraise the Hatfield Super 8s as well as the Mission Bay
Super 8. While the final appraisals are dated December 1, 1994, the field work
for the appraisals of the Initial Hotels was performed in the fall of 1994. The
appraised values of the Initial Hotels generally were based on consideration of
the cost, market, and income valuation approaches. The cost approach considers
the land value of the sites and the depreciated replacement cost of the
improvements. The market approach analyzes sales of other going concern
properties in comparison to the subject properties. The income valuation
approach develops a going concern value of the subject properties by
capitalizing the projected operating income. Operating data, financial data,
and legal descriptions of the Hatfield Super 8s and the Mission Bay Super 8
provided to the Appraiser by the owners thereof were assumed by the Appraiser to
be accurate and correct, and no audit or verification thereof was undertaken by
the Appraiser. Further, the Appraiser did not assume responsibility for matters
of title. Caution should be exercised in evaluating appraisal results. An
appraisal is only an estimate of value and should not be relied upon as a
precise measure of realizable value. The appraisals assume that the properties
would be sold on an orderly basis under stable market conditions. The
appraisals for the five hotels were completed using the same methodology for
each hotel (i.e., all appraisals were performed on a consistent basis). See
"Risk Factors--Real Estate Investment Risk".

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THE PERCENTAGE LEASES

IN GENERAL

In order for the Company to qualify as a REIT, the Company cannot directly
or indirectly operate hotels. Therefore, each Initial Hotel is separately
leased by the Company to the Lessee under a Percentage Lease. The Lessee was
recently formed as a Delaware limited liability company. Other than the
inventory, working capital sufficient to operate the Initial Hotels, the
franchise licenses, and the promissory notes of the members equal to nine
months' Base Rent due the Company under the Percentage Leases, the Lessee has
only nominal assets in addition to its rights and benefits under the (i)
franchise licenses, (ii) the Percentage Leases, (iii) the Management Agreements,
and (iv) the promissory notes of the members equal to nine months' Base Rent of
the Initial Hotels. Each Percentage Lease for the Initial Hotels contains the
provisions described below, and the Company intends that future leases with
respect to its hotel property investments will contain substantially similar
provisions, although the Company's Board of Directors may, in its discretion,
alter any of these provisions with respect to any particular lease, depending on
the purchase price paid, economic conditions and other factors deemed relevant
at the time, and consistent with maintaining the Company's status as a REIT
under the Code. The following summary is qualified in its entirety by the
Percentage Leases, the form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.

PERCENTAGE LEASE TERMS

The Percentage Leases with respect to the Hatfield Super 8s commenced
effective as of January 1, 1995 between AAG and Lessee and on April 1, 1995 the
Company assumed the Percentage Leases as lessor. The Percentage Lease with
respect to the Mission Bay Super 8 will commence on the closing of the Formation
Transactions. Each Percentage Lease has an initial term of not less than
fifteen years, subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Lease (including, particularly, the
provisions described herein under "Damage to Hotels," "Condemnation of Hotels"
and "Termination of Percentage Leases on Disposition of Hotels").

AMOUNTS PAYABLE UNDER THE PERCENTAGE LEASES

During the term of each Percentage Lease, the Lessee is obligated to pay
the greater of the Base Rent or the Percentage Rent plus certain other amounts,
including interest accrued on any late payments or charges (the "Additional
Charges"). Base Rent accrues and is required to be paid monthly. Percentage
Rent is based on percentages of room revenues for each of the Initial Hotels.
Percentage Rent is due quarterly; however, the Lessee will not be in default for
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. The Lessee must also make
monthly deposits into a reserve account (the "FF&E Reserve Account") of an
amount equal to 4% of the prior month's gross revenues from each Initial Hotel
to fund repairs and replacements of furniture, fixtures and equipment in the
Initial Hotels which replacements and repairs must be generally approved by the
Company.

The following table sets forth (i) the annual Base Rent, (ii) the annual
Percentage Rent formulas, (iii) room revenue for the twelve months ended
December 31, 1994 and (iv) the pro forma Percentage Rent that would have been
paid for each Initial Hotel currently owned by the Company pursuant to the terms
of the Percentage Leases based on historical revenues for the twelve months
ended December 31, 1994, as if the Company had owned those Initial Hotels and
the Percentage Leases had been in effect since January 1, 1994. For each such
Initial Hotel, Percentage Rent would have been greater than Base Rent, and the
pro forma rents shown below represent such Percentage Rent.

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<TABLE>
<CAPTION>
Pro Forma
Room Revenue Percentage Rent
for the 12 for the 12
Annual Base Annual Percentage Months Ended Months Ended
Rent Rent Formula December 31, 1994 December 31, 1994
---- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Initial Hotels:

Miner $293,000 35% YTD Revenues plus 10% of Revenues over $500,000, $846,019 $340,310
plus an additional 10% of Revenues over $750,000, less
Base Rent previously paid YTD less
Percentage Rent paid YTD

Poplar Bluff $216,000 35% YTD Revenues plus 10% of Revenues over $500,000, $618,862 $228,488
plus an additional 10% of Revenues over $750,000, less
Base Rent previously paid YTD less
Percentage Rent paid YTD

Rock Falls $237,000 35% YTD Revenues plus 10% of Revenues over $500,000, $708,125 $268,656
plus 10% of Revenues over $750,000, less
Base Rent previously paid YTD less
Percentage Rent paid YTD

Somerset $185,000 35% YTD Revenues plus 10% of Revenues over $500,000, $561,459 $202,657
plus an additional 10% of Revenues over $750,000, less
Base Rent previously paid YTD less
Percentage Rent paid YTD

Mission Bay $281,000 28% YTD Revenues plus 7% of Revenues over $1,350,000, $1,054,819 $295,349
-------- plus an additional 10% of Revenues over $1,550,000, less ---------- --------
Base Rent previously paid YTD less
Percentage Rent paid YTD

Consolidated
Total for
Initial Hotels $1,212,000 $3,789,284 $1,335,460
---------- ---------- ----------
---------- ---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases using historical room revenue of the Initial Hotels for the
year as if January 1, 1994 were the beginning of the lease year.

Other than real estate and personal property taxes and maintenance of
underground utilities and structural elements, which are obligations of the
Company, the Percentage Leases require the Lessee to pay rent, insurance, all
costs and expenses and all utility and other charges incurred in the operation
of the Initial Hotels. The Percentage Leases also provide for rent reductions
and abatements in the event of damage or destruction or a partial taking of any
Initial Hotel as described under "Damage to Hotels" and "Condemnation of
Hotels."

MAINTENANCE & MODIFICATIONS

Under the Percentage Leases, the Lessee is required to maintain the
underground utilities and the structural elements of the improvements, including
exterior walls (including plate glass) and the roof of each Initial Hotel. In
addition, the Percentage Leases obligate the Lessee to fund the repair,
replacement and refurbishment of furniture, fixtures and equipment in the
Initial Hotels. The Lessee is required to establish an FF&E Reserve Account by
making monthly deposits in an amount equal to 4% of the prior month's

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Revenues from the Initial Hotels. Upon expiration of the Term, any amounts
remaining in the FF&E Reserve Account shall be paid to the Lessee provided there
is no Event of Default. Generally, the Lessee is required to maintain the
Initial Hotels in good order and repair, except for ordinary wear and tear, and
to make non-structural, foreseen and unforeseen, and ordinary and extraordinary,
repairs which may be necessary and appropriate to keep the Initial Hotels in
good order and repair.

The Lessee, at its expense, may make non-capital and capital additions,
modifications or improvements to the Initial Hotels, provided that such action
does not significantly alter the character or purposes of the Initial Hotels or
significantly detract from the value or operating efficiencies of the Initial
Hotels. All such alterations, replacements and improvements shall be subject to
all the terms and provisions of the Percentage Leases and will become the
property of the Company upon termination of the Percentage Leases. The Company
will own substantially all personal property (other than inventory, linens and
other nondepreciable personal property) not affixed to, or deemed a part of, the
real estate or improvements thereon, except to the extent that ownership of such
personal property would cause the Rents under a Percentage Lease not to qualify
as "rents from real property" for REIT income test purposes.(58)

INSURANCE AND PROPERTY TAXES

The Lessee is responsible for paying all Impositions including real estate
and personal property taxes on the Initial Hotels. The Lessee is required to
pay for all insurance on the Initial Hotels, with extended coverage, including
business interruption, casualty, comprehensive general public liability,
workers' compensation and other insurance as described in the Percentage Leases,
and must name the Company as the insured or an additional named insured.

INDEMNIFICATION

Under each of the Percentage Leases, the Lessee is obligated to indemnify,
and is obligated to hold harmless, the Company from and against all liabilities,
costs and expenses (including reasonable attorneys' fees and expenses) incurred
by, imposed upon or asserted against the Company on account of, among other
things, (i) any accident or injury to person or property on or about the Initial
Hotels, (ii) any misuse by the Lessee or any of its agents of the leased
property, (iii) any environmental liability resulting from conditions disclosed
in the environmental audits received by the Company before it acquired or
acquires the Initial Hotels or caused or resulting thereafter from any action or
negligence of the Lessee (59), (iv) taxes and assessments in respect of the
Initial Hotels, (v) the sale or consumption of alcoholic beverages on or in the
real property or improvements thereon, or (vi) any breach of the Percentage
Leases by Lessee; provided, however, that such indemnification will not be
construed to require the Lessee to indemnify the Company against the Company's
own grossly negligent acts or omissions or willful misconduct. The Lessee has
only nominal assets with which to indemnify the Company.(60)

ASSIGNMENT AND SUBLEASING

The Lessee is permitted, in its sole discretion, to sublet all or any part
of the Initial Hotels or assign its interest under any of the Percentage Leases
to an Affiliate of the Lessee. The Lessee shall have the right to assign this
Lease to an unaffiliated third party transferee if (i) such transferee meets
certain net worth

- ----------------------
(58) See "Federal Income Tax Considerations - Requirement for Qualification"

(59) See "Business and Properties - Environmental Factors"

(60) See "Risk Factors - Newly Organized Entities; Limited Assets and Operating
History"

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requirements (as described in the Percentage Leases), (ii) such transferee
assumes all of the Lessee's obligations and rights under the assigned Percentage
Lease, and (iii) the Lessee and/or the unaffiliated third party transferee pays
any and all outstanding Percentage Rent to the Company prior to the consummation
of the assignment or sublet. No assignment or subletting will release the
Lessee from any of its obligations under the Percentage Leases.

DAMAGE TO INITIAL HOTELS

In the event of damage to or destruction of any Initial Hotel covered by
insurance which renders the Initial Hotel unsuitable for the Lessee's use and
occupancy, the Lessee will have the following options: (a) to repair, rebuild,
or restore the Initial Hotel, (b) to offer to acquire the Initial Hotel on the
terms set forth in the applicable Percentage Lease, or (c) terminate the
Percentage Lease. If the Lessee rebuilds the Initial Hotel, the Company is
obligated to disburse to the Lessee, from time to time and upon satisfaction of
certain conditions, any insurance proceeds actually received by the Company as a
result of such damage or destruction, and any excess costs of repair or
restoration will be paid by the Lessee. If the Lessee decides not to rebuild
and the Company exercises its right to reject the Lessee's mandatory offer to
purchase the Initial Hotel on the terms set forth in the Percentage Lease, the
Percentage Lease will terminate and the insurance proceeds will be retained by
the Company. If the Company accepts the Lessee's offer to purchase the Initial
Hotel, the Percentage Lease will terminate and the Lessee will be entitled to
the insurance proceeds. In the event that damage to or destruction of an
Initial Hotel which is covered by insurance does not render the hotel wholly
unsuitable for the Lessee's use and occupancy, the Lessee generally will be
obligated to repair or restore the Initial Hotel. In the event of damage to or
destruction of any Initial Hotel which is not covered by insurance, the Lessee
will have the following options: (a) repair, rebuild, or restore the Initial
Hotel, (b) offer to purchase the Initial Hotel on the terms and conditions set
forth in the Percentage Lease, (c) give the Lessor notice of termination of the
Percentage Lease. The Percentage Lease shall remain in full force and effect
during the first three months of any period required for repair or restoration
of any damaged or destroyed Initial Hotel, after which time, rent will be
equitably abated.

CONDEMNATION OF HOTEL

In the event of a total condemnation of an Initial Hotel, the relevant
Percentage Lease will terminate with respect to such Initial Hotel as of the
date of Taking, and the Company and the Lessee will be entitled to their shares
of the condemnation award in accordance with the provisions of the Percentage
Lease. In the event of a Partial Taking which does not render the Initial Hotel
unsuitable for the Lessee's use, the Lessee shall restore the untaken portion of
the Initial Hotel to a complete architectural unit and the Company shall
contribute to the cost of such restoration that part of the condemnation award
specified for restoration.

EVENTS OF DEFAULT

Events of Default under the Percentage Leases include, among others, the
following:

(i) the occurrence of an Event of Default under any other lease
between the Company and the Lessee or any Affiliate of the
Lessee;

(ii) the failure by the Lessee to pay Base Rent when due and the
continuation of such failure for a period of 10 days thereafter;

(iii) the failure by the Lessee to pay the excess of Percentage Rent
over Base Rent within 90 days after the end of the calendar year
in which such payment was due;

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(iv) the failure by the Lessee to observe or perform any other term of a
Percentage Lease and the continuation of such failure for a period
of 30 days after receipt by the Lessee of notice from the Company
thereof, unless such failure cannot be cured within such period and
the Lessee commences appropriate action to cure such failure within
said 30 days and thereafter acts, with diligence, to correct such
failure within such time as is necessary;

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

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

(vii) if the franchise agreement with respect to an Initial Hotel is
terminated by the Franchisor as a result of any action or failure
to act by the Lessee or its agents.

If an Event of Default occurs and continues beyond any curative period, the
Company will have the option of terminating the Percentage Lease or any or all
other Percentage Leases by giving the Lessee ten days' written notice of the
date for termination of the Percentage Leases and, unless such Event of Default
is cured prior to the termination date set forth in said notice, the Percentage
Leases shall terminate on the date specified in the Company's notice and the
Lessee is required to surrender possession of the affected Initial Hotels.

TERMINATION OF PERCENTAGE LEASES ON DISPOSITION

In the event the Company enters into an agreement to sell or otherwise
transfer an Initial Hotel, the Company is exonerated from all future liabilities
and obligations under the Percentage Leases provided that the transferee
expressly assumes all obligations of Lessor under the Percentage Leases.

FRANCHISE LICENSE

The Lessee is the licensee under the franchise licenses on the Initial
Hotels. Upon the occurrence of certain events of default by the Lessee under a
franchise license, the franchisor has agreed to transfer the franchise license
for the relevant hotel to the Company (or its designee).(61)

BREACH BY COMPANY

If the Company fails to cure a breach by it under a Percentage Lease, the
Lessee may purchase the relevant Initial Hotel from the Company for a purchase
price equal to that Initial Hotel's then fair market

- ----------------------
(61) See "Business and Properties - Various Franchise Agreements"

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value. Upon notice from Lessee that the Company has breached the Lease, the
Company has 30 days to cure the breach or proceed to cure the breach, which
period may be extended in the event of certain specified, unavoidable delays.

INVENTORY

All inventory required in the operation of the Initial Hotels is purchased
and owned by the Lessee at its expense. The Company has the option to purchase
all inventory related to a particular Initial Hotel at fair market value upon
termination of the related Percentage Lease.

THE MANAGEMENT AGREEMENTS

The Lessee and the Manager are parties to the Management Agreements with
respect to the Initial Hotels, which Management Agreements are for terms
coinciding with the terms of the Leases. See "The Manager". Pursuant to the
terms of the Management Agreements, the Manager receives from the Lessee a base
management fee equal to 3% of the adjusted gross revenue of the Initial Hotels,
an incentive fee equal to 20% of the Lessee's net operating income of each
Initial Hotel, and an accounting fee of $100 per guest room per year. In
addition, the Manager is reimbursed by the Lessee for all out-of-pocket expenses
in connection with the management and operation of the Initial Hotels.

FRANCHISE AGREEMENTS

All of the Initial Hotels are currently operated pursuant to a Franchise
Agreement. The Company expects that a majority of any additional hotel
properties it may acquire will also be subject to similar agreements. The
Company believes that franchises (including hotel licenses) generally provide
advantages to hotel operators (such as the Lessee) through the use of
advertising on a much broader scale than would be possible for an individual
hotel or small group of hotels, nationally recognized brand names, nationally
accessible reservations systems, technical and business assistance to the
individual franchisee and substantial buying power over approved suppliers.

The Franchise Agreements generally require the Lessee to pay a monthly
royalty fee based on gross sales and to pay various other marketing fees
associated with certain marketing or advertising and centralized reservation
service funds, usually based on gross sales. Such fees may vary between
individual hotels within a franchise system based on the type of marks,
restaurants or other aspects of the franchise system used.

The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the Initial
Hotels which are established by the Franchisors to maintain uniformity in the
system created by each such Franchisor. Such standards generally regulate the
hours of operation, maintenance, appearance and cleanliness, quality and type of
goods and services offered, signage, protection of marks and advancement of
marks. Compliance with such standards could require significant expenditures by
the Lessee for capital improvements at the Initial Hotels. Any such
improvements would likely increase the value of the applicable Initial Hotels to
the benefit of the Company. Pursuant to the Percentage Leases, the Lessee is
required to maintain the FF&E Reserve Account in the Company's name to fund
replacements of furniture, fixtures and equipment.

Ongoing training costs, requirements to purchase only from approved
suppliers, financial reporting requirements, insurance requirements and various
covenants not to compete imposed upon the franchisee are other common terms in
the Franchise Agreements. Such financial reporting requirements often stipulate
the maintenance of books and records, the monthly reporting of sales and other
operating data, quarterly or semi-annual unaudited financial statements and, in
some cases, annual financial statements audited by an independent certified
public accountant. Required insurance usually must cover both the Franchisor
and

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franchisee with respect to certain specified liabilities, must fall within
certain approved coverage limits and be written by an approved insurance
company. Covenants not to compete include prohibitions against engaging in a
similar business within a certain geographical area, hiring employees away from
the Franchisor or other unrelated franchisees otherwise diverting business from
other franchisees.

The Franchise Agreements generally require the consent of the Franchisor to
a transfer of an interest in the applicable franchise, and both the consent of
the Franchisor and the execution of a new franchise agreement in the event of a
transfer of all or a controlling portion of the franchisee under the relevant
Franchise Agreement. The Company has obtained the consent of the Franchisor to
the transfer of the Franchise Agreements and executed the "Substitute Franchise
Agreement" which substituted Lessee, as the current franchisee, for the original
franchisee.

Each of the Initial Hotels is a party to a Franchise Agreement with Super 8
Motels, Inc., a South Dakota corporation ("Super 8"), as franchisor. Each of
the various Franchise Agreements has a term of twenty (20) years. The following
are the commencement dates of the various Franchise Agreements:

Hotel Commencement Date
----- -----------------
Rock Falls 7/25/85
Poplar Bluff 7/26/85
Miner 1/3/85
Somerset 7/29/85
Mission Bay 7/15/87

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances,
regulations and common law, a current or previous owner or operation 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, ordinances and
regulations often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic substances and
the liability under such laws, ordinances and regulations has been interpreted
to be strict, joint and several unless the harm is divisible and there is a
reasonable basis for allocation of responsibility. In addition, the presence of
hazardous or toxic substances, or the failure to remediate such property
properly, may adversely affect the market value of the property, as well as, the
owner's ability to sell or lease the real property or to borrow using such real
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 owned or operated by such person. In addition,
certain environmental laws and common law principles govern the responsibility
for the removal, encapsulation or disturbance of ACMs when these ACMs are in
poor condition or when a property with ACMs is undergoing remodeling, renovation
or demolition. Such laws and common law principles could also be used to impose
liability upon owners or operators of real properties for release of ACMs that
cause personal injury or other damage.

The Company has received a Phase I environmental assessment report for each
of the Initial Hotels, prepared by an independent environmental consultant. The
purpose of each such report was to identify, to the extent reasonably possible
and based on reasonably available information, any existing and potential
conditions resulting from hazardous or toxic substances, including petroleum
products and asbestos, at the Initial Hotels. The scope of the Phase I
environmental assessment for each Initial Hotel generally included: (i) a
review of available maps, aerial photographs and past and present uses of the
site; (ii) limited inquiries of federal, state and local agencies having
jurisdiction over certain environmental matters and (iii) an inspection of
appropriate public record. Each Phase I environmental assessment also included
an on-site

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inspection of the Initial Hotels to determine evidence of past or present on-
site waste disposal, visible surface contamination, potential sources of soil
and containers, current waste streams and management practices, ACMs and PCB
transformers. In addition, as part of Phase I environmental assessment,
abutting properties and nearby sources of potential contamination were
identified and evaluated for potential impact to the Initial Hotels, to the
extent reasonably possible.

Certain of the Initial Hotels are located on, adjacent to or in the
vicinity of properties (including gasoline stations) that contain or have
contained storage tanks or that have engaged, or may in the future engage, in
activities that may release petroleum products or other hazardous substances
into the soil or groundwater. Although there can be no assurance that petroleum
products from such properties or other hazardous substances have not been
released or have not migrated, or in the future will not be released or will not
migrate into the Initial Hotels, the Company is not aware of any such releases
or migrations and the Phase I environmental assessment reports described above
did not reveal any information which would indicate that the Initial Hotels have
been materially adversely affected by such storage tanks or activities. None of
the Phase I audit reports revealed that a Phase II audit was necessary or
required. The Company does not believe that it will have any material liability
as a result of such activities; however there can be no assurance that the
Company will not incur future environmental liabilities arising out such
activities or that any such liability would not have a material adverse effect
on the future financial condition or result of operations of the Company.

Based on the Phase I environmental assessments of the Initial Hotels and
the representations of AAG under the Contribution and Assumption Agreement and
the representative of Mission Bay under the Mission Bay Acquisition Agreement,
the Company is not aware of any environmental condition with respect to the
Initial Hotels that could have had a material adverse effect on the Company's
financial condition or results of operations. No assurances can be given,
however, that (i) the Phase I environmental assessments undertaken with respect
to the Initial Hotels have revealed all potential environmental liabilities,
(ii) any prior owner or operator of the real property on which the Initial
Hotels are located did not create any material environmental condition not known
to the Company, or (iii) a material environmental condition does not otherwise
exist as to any one or more Initial Hotels. Pursuant to the Contribution and
Assumption Agreement and Mission Bay Acquisition Agreement, AAG and the Partners
of Mission Bay, respectively, represented to the Company that, except as
disclosed in the Phase I environmental assessments for certain of the Initial
Hotels, they have no knowledge or reason to believe hazardous substances exist
in or on the Initial Hotels. As previously noted, pursuant to the Percentage
Leases, the Lessee has agreed to comply with applicable environmental
regulations. However, in the event that the Company is held liable for costs
and expenses in connection with a site clean-up or in connection with ACMs, and
the Company is unable to enforce or obtain recoveries under the indemnity
provisions of the Percentage Leases, the Contribution and Assumption Agreement,
and the Mission Bay Acquisition Agreement, as the case may be, such costs and
expenses could have a material adverse effect on the Company's ability to make
distributions to its Shareholders.

EMPLOYEES

The Company expects to employ one person as of the completion of the
Offering, who will not be represented by a union.

COMPETITION

The hotel industry is highly competitive. All of the Initial Hotels are
located in developed areas. There are numerous other hotel properties within
the market area of each Initial Hotel. The number of competitive hotel
properties in an area could have a material and adverse effect on the rental
market for the room units at each Initial Hotel and the rates which may be
charged for such room units. In addition, the

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Initial Hotels must compete for occupants with new hotels in the area that have
not yet opened as of the date of this Prospectus.

DEPRECIATION

In exchange for Common Stock, the Company (i) acquired a 100% interest in
the Hatfield Super 8s and (ii) will acquire a 100% interest in the Mission Bay
Super 8. To that extent, the Company's initial basis in the Initial Hotels for
federal income tax purposes generally is or will be equal to the value of the
stock at the time it was issued by the Company. The Company plans to depreciate
such depreciable hotel property for federal income tax purposes under either the
modified accelerated cost recovery system of depreciation ("MACRS") or the
alternative depreciation system of depreciation ("ADS"). The Company plans to
use MACRS for fixtures and equipment. Under MACRS, the Company generally will
depreciate such fixtures and equipment over a seven-year recovery period using a
200% declining balance method and a half-year convention. If, however, the
Company places more than 40% of its fixtures and equipment in service during the
last three months of a taxable year, a mid-quarter depreciation convention must
be used for the fixtures and equipment placed in service during that year. The
Company plans to use ADS for buildings and improvements over a 40-year recovery
period using a straight line method and a mid-month convention. For financial
statement purposes the Company intends to use the straight-line-method of
depreciation over the remaining estimated useful lives of all assets acquired.

LEGAL PROCEEDINGS

The Company has a very short operating history and is not currently a party
to any legal proceedings. Under the Contribution and Assumption Agreement and
the Mission Bay Acquisition Agreement, AAG and the Partners of Mission Bay,
respectively, have represented to the Company that there are no condemnation,
eminent domain or other actions, suits or proceedings involving the Initial
Hotels, except for certain real estate taxation disputes, certain matters
covered by insurance maintained by AAG and Mission Bay and certain immaterial
matters not covered by such insurance. The Company is not aware of any legal
proceeding affecting the Initial Hotels for which it might potentially become
liable.

INSURANCE

Pursuant to the Percentage Leases, the Lessee will be obligated to pay the
costs of insurance maintained on the Initial Hotels covering commercial general
liability for injury to property, person or loss of life arising out of the
ownership, use, occupancy or maintenance of the Initial Hotels, commercial
property liability for damage to the improvements, merchandise, trade fixtures,
fixtures, equipment and personal property, workers' compensation benefits,
alcoholic beverage and liquor liability, business interruption and other losses
customarily insured by businesses similar to the Company. The Company believes
that the coverages specified in the Percentage Leases are consistent with
industry practice.

REGULATORY MATTERS

GENERAL

Hotel properties are subject to various laws, ordinances and regulations,
including regulations relating to recreational facilities such as swimming
pools, activity centers and other common areas. The Company believes that each
Initial Hotel has the necessary permits and approvals required to enable the
Lessee to operate the Initial Hotels in the manner contemplated by the
Percentage Leases.

AMERICANS WITH DISABILITIES ACT
The hotel properties must comply with Title III of the ADA to the extent
that such properties are

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<PAGE>

"public accommodations" and/or "commercial facilities" as defined by the ADA.
Under the public accommodations provisions of the ADA, the Company as owner of
the hotel properties, will be obligated to reasonably accommodate the patrons of
the hotel properties who have physical, mental or other disabilities. This will
include the obligation to remove architectural and communication barriers at the
hotel properties when doing so is "readily achievable." In addition, under the
commercial facilities provisions of the ADA, the Company will be obligated to
ensure that alterations to the hotel properties made after January 26, 1992,
conform to the specific requirements of the ADA implementing regulations.
Noncompliance could result in the imposition of fines, injunctive relief, and an
award of damages and attorneys' fees. The Lessee generally is obligated to
remedy any ADA compliance matters pursuant to the Percentage Leases. However,
if required changes were to involve significantly greater expenditures or
expenditures on a more accelerated basis than is currently anticipated, the
ability of the Lessee to pay rent could be adversely affected which in turn
could adversely affect the Company's ability to make expected distributions to
its Shareholders. Currently, the Company believes that the Initial Hotels are
in compliance with the ADA in all material respects.

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<PAGE>

FORMATION TRANSACTIONS AND OTHER RELATED TRANSACTIONS

OVERVIEW

The Formation Transactions will result in the ownership of the Mission Bay
Super 8 by the Company. The Company acquired the Hatfield Super 8s pursuant to
the Contribution and Assumption Agreement. The Company will acquire the Mission
Bay Super 8 pursuant to the Mission Bay Acquisition Agreement. Upon acquisition
of the Mission Bay Super 8, the Company will elect REIT status. The Company has
entered into four Percentage Leases with the Lessee leasing each of the Hatfield
Super 8s to the Lessee. The Lessee has entered four Management Agreements with
the Manager for each of the Hatfield Super 8s. Upon acquisition of the Mission
Bay Super 8, the Company will enter into a lease agreement with the Lessee
identical in form to the Percentage Leases and the Lessee will enter into a
management agreement with the Manager identical in form to the Management
Agreements. The Shares of the Company, as a REIT, when offered to the public
will be approved for listing on AMEX.

AAG ACQUISITION

On March 31, 1995, Mr. Hatfield transferred the Hatfield Note in the amount
of $1,805,675 to AAG. Thereafter, on April 1, 1995, AAG transferred the
Hatfield Note and the Hatfield Super 8s to the Company, in exchange for which
the Company issued 100 Initial Shares of Common Stock to the AAG Partners
representing 100% of the equity interest in the Company.

The Hatfield Note is a secured promissory note in the amount of $1,805,675
dated March 31, 1995, which obligates the AAG Partners to make interest and
principal payments to AAG. The note provides for quarterly interest payments at
10% per annum and a balloon principal payment on March 31, 2000. The Hatfield
note was subsequently assigned by AAG to the Company effective April 1, 1995.
The Hatfield Note is secured by an interest in real property which has an
appraised value in excess of the value of the Hatfield Note and a pledge of 26.2
of the 100 Initial Shares of the Company. Upon the close of the Formation
Transactions, the Hatfield Note will be secured by 180,780 Class A Shares of the
Company's Common Stock.

Finally, AAG transferred the financial assets of the Hatfield Super 8s to
the Lessee and a note in the amount of $60,195 payable to the Lessee pursuant to
the "Financial Asset Acquisition Agreement", in exchange, the Lessee fully
assumed the liabilities of the Hatfield Super 8s. The result of the AAG
acquisition is that the four Hatfield Super 8s are now owned by the Company.

MISSION BAY ACQUISITION

In mid 1995, the Company will acquire the Mission Bay Super 8 pursuant to
the "Mission Bay Acquisition Agreement". The Mission Bay Limited Partners will
receive 281,000 Shares (assuming no Dissenting Partners) of Common Stock from
the Company representing 19% of the equity interest in the Company in
consideration for Mission Bay's transfer of the Mission Bay Super 8. (The
281,000 Shares will be reduced by the Shares attributable to the Dissenting
Partners.)

PUBLIC OFFERING

The Company will issue 500,000 Shares of Common Stock in a Public Offering
at a gross sales price of $10 per share (the "Public Offering"). In connection
with such Public Offering, the Company may or may not use an underwriter to
place said Shares. The Company anticipates that the total sales commission and
other expenses associated with such sale will equal 10% of the gross sales
proceeds. Accordingly, the Company anticipates that the Public Offering will
generate net proceeds to it of $4.5 million.

<PAGE>

THE ADVISOR AND THE ADVISORY AGREEMENT

The Advisor is Host Funding Advisors, Inc., a Delaware corporation. The
Advisor was incorporated in June, 1994. HMR owns all of the stock in the
Advisor. The three directors of the Advisor are Michael S. McNulty, Ian
Gardner-Smith, and Don W. Cockcroft. The Advisor's principal office is located
at 7825 Fay Avenue, Suite 250, La Jolla, California 92037.

The Company entered into the Advisory Agreement with the Advisor on
_________, 1995. Pursuant to the Advisory Agreement, the Advisor will provide
information, advice, assistance, and facilities to the Company in connection
with the Company's future investment in hotel properties. Additionally, the
Advisor will administer the daily operations of the Company, negotiate on the
Company's behalf, act as agent for the Company in collecting funds and paying
debts, and generally manage and operate the Company. In consideration for such
services, the Company will compensate the Advisor in the amount of $60,000 per
year. The Advisory Agreement may be terminated by either the Company or the
Advisor on 60 days written notice.

THE ACQUISITION CO. AND THE POST-FORMATION ACQUISITION AGREEMENT

The Acquisition Co. is Host Acquisition Group, a Delaware limited liability
company. Ian Gardner-Smith is the President and Secretary of the Acquisition
Co. HMR owns 93.4% of the membership interest in the Acquisition Co. and Paul
K. Richey owns 6.6%. The Acquisition Co. was formed on ______, 1995. The
Company entered into the Post-Formation Acquisition Agreement with the
Acquisition Co. on _____, 1995.

Pursuant to the Post-Formation Acquisition Agreement, the Acquisition Co.
will manage, coordinate, and supervise the Company's acquisition program for the
acquisition of additional hotel properties. The Acquisition Co. will have
authority to negotiate for and prepare acquisition documentation for the
Company's acquisition of additional hotel properties. In exchange for such
services, the Company will pay the Acquisition Co. six percent (6%) of the gross
purchase price of any hotel properties acquired by the Company during the term
of the Post-Formation Acquisition Agreement.

THE LESSEE

GENERAL

The Lessee is Inn Fund, LLC, a Delaware limited liability company. Ian
Gardner-Smith is President and Treasurer of the Lessee. Guy E. Hatfield is the
Secretary of the Lessee. Mr. Gardner-Smith owns ninety two and one-half percent
(92.5%) of the equity interest in the Lessee and Mr. Hatfield owns seven and
one-half percent (7.5%) of the equity interest in the Lessee. The Lessee is
currently operating the Hatfield Super 8s pursuant to the Percentage Leases.
Upon completion of the Mission Bay Acquisition, the Lessee will operate the
Mission Bay Super 8 pursuant to a lease agreement identical in form to the
Percentage Leases.

The Lessee employs approximately sixty people in the operation of the
Hatfield Super 8s and expects to employ additional employees in the operation of
all the Initial Hotels after the consummation of the Mission Bay Acquisition.
Under the Percentage Leases, the Lessee generally is required to perform all
operational functions necessary to operate the Initial Hotels. Such functions
include accounting, periodic reporting, ordering supplies, advertising and
marketing, maid service, laundry, and maintenance. The Lessee is entitled to
all profits and cash flow from the Initial Hotels after payment of Base Rent or
Percentage Rent, Additional Charges, the FF&E Reserve Account monthly deposits,
and other operating expenses under the Percentage Leases.

The Company must rely on the Lessee to generate sufficient cash flow from
the operation of the Initial Hotels to enable the Lessee to meet its obligations
under the Percentage Leases. The obligations of

<PAGE>

the Lessee under the Percentage Leases are unsecured. Other than working
capital sufficient to operate the Initial Hotels, inventory, its rights and
benefits under the Percentage Leases, its rights and benefits under the
franchise licenses for the Initial Hotels, and the promissory notes of the
members equal to nine (9) months' Base Rent due the Company under the Percentage
Leases, the Lessee has only nominal assets.

THE MANAGER

GENERAL

The Manager manages the Hatfield Super 8s pursuant to the Management
Agreements. Upon completion of the Mission Bay Acquisition, the Manager will
manage the Mission Bay Super 8 pursuant to an agreement identical in form to the
Management Agreements. Guy E. Hatfield is President of the Manager. Emily
Groce is Treasurer of the Manager. Mr. Gardner-Smith is Vice President and
Secretary of the Manager. Mr. Hatfield, Mr. Gardner-Smith and Ms. Groce are the
directors of the Manager. Mr. Hatfield owns 30% of the stock of the Manager and
Mr. Gardner-Smith owns 70% of the stock of the Manager. Mr. Hatfield has
extensive experience in hotel management and operations. The Manager currently
employs approximately four people. Under the Management Agreements, the Manager
generally is required to perform all operational and management functions
necessary to operate the Initial Hotels. Such functions include accounting,
periodic reporting to and coordinating generally with the Lessee, ordering
supplies, advertising and marketing, maid service, laundry, and maintenance.
The Manager is paid a Management Fee, an Incentive Fee, and an Accounting Fee
pursuant to the Management Agreements, plus reimbursement for all out-of-pocket
expenses. The Manager is not required to devote all of its time and efforts to
the Initial Hotels. The Advisor has agreed that it will not permit the Manager
to subsequently acquire any management rights to or ownership rights in any
hotel property (other than for the Company or the Partnership) located within a
5 mile radius of any hotel property in which the Company has invested. The
Manager also has agreed to this limitation in the Management Agreements.

MANAGEMENT TEAM

Certain information with respect to key personnel of the Manager is set
forth below.

Guy E. Hatfield, age 61, has been President of the Manager since 1989. Mr.
Hatfield earned a Bachelor of Science degree from Bradley University in 1955 and
shortly thereafter, enlisted in the U.S. Navy where he eventually served as a
Lieutenant Commander. In 1962, Mr. Hatfield graduated with a Juris Doctorate
from University of San Diego. From 1962 to 1965, Mr. Hatfield was Senior
Partner of Hatfield & Wasserman, a law firm specializing in Real Estate law.
From 1965 to 1968, Mr. Hatfield was President of Guy Hatfield Homes a real
estate development company that built 940 single family homes. From 1968 to
1973, he was President and Chairman of the Board of Empire Equities, Inc., a
public corporation that was a conglomerate composed of six title offices and
three mortgage offices. From 1973 to 1979, Mr. Hatfield was President and Owner
of All American Development Company, which built 3,250 single family homes.
From 1980 to 1982, he was President and Chairman of the Board of a computer
manufacturing company by the name of Itron, Inc., a publicly held company whose
shares were traded on the NASDAQ. Mr. Hatfield was Assistant Convention Manager
of the 1984 Republican National Convention. Also in 1984, Mr. Hatfield was a
Committee Member of the Committee of the 50th American Presidential Inaugural
Guaranty Fund. From 1984 to 1989, Mr. Hatfield was Chairman of the Board and
Chief Executive Officer of Motels of America, Inc., a corporation which built
and managed 107 Super 8 motels and had gross annual sales of $80,000,000.
Currently, Mr. Hatfield is President of Hatfield Inns, Inc., a corporation which
owns and manages five motels and has annual sales of $2,600,000.

<PAGE>

BENEFITS TO HATFIELD AFFILIATES

As a result of the Formation Transactions and the Offering, certain
officers and employees of the Company, AAG, and the Lessee will receive the
following benefits:

- the Common Stock of the Company received by Mr. Hatfield and his
Affiliates will be more liquid than their prior equity interests in the
Company;

- the Company's Common Stock which Mr. Hatfield and his Affiliates will
possess after the Formation Transactions will constitute a majority of
voting rights;

- the net proceeds of the Public Offering will be used in part to pay
off debt which Mr. Hatfield and his Affiliates have personally guaranteed;

- the Lessee, 7.5% of the Membership Interest of which is owned by Mr.
Hatfield, will be entitled to all profits and cash flow from the Initial
Hotels after payment of rent under the Percentage Leases, management fees
and other operating expenses (62);

BENEFITS TO MISSION BAY LIMITED PARTNERS AND AFFILIATES

As a result of the Formation Transactions, the Mission Bay Limited Partners
and Affiliates of Mission Bay will receive the following benefits, among others:

- the Common Stock of the Company received by Mission Bay Limited
Partners pursuant to the Mission Bay Acquisition Agreement will be more
liquid than their prior equity interests in Mission Bay;

- the Exchange Value of the Common Stock to be issued to the Mission Bay
Limited Partners is $2,810,000. The aggregate fair market value of the
contributed net assets and liabilities of Mission Bay in the Mission Bay
Super 8 at December 31, 1994 was approximately $2,810,000, before
adjustment for the Formation Transactions.

BENEFITS TO PUBLIC OFFERING PURCHASERS

As a result of the Formation Transactions, the purchasers of the Company's
Common Stock in the Public Offering may receive the following benefit, among
others:

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

(62) See "Formation Transactions and Other Related Transactions -- The
Lessee."

(63) See "Formation Transactions and Other Related Transactions -- The
Lessee."

<PAGE>

ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS

ADVANTAGES

There are several advantages to the Formation Transactions, such as the
following: (i) they will result in substantially lower leverage and debt
service requirements and thereby address the refinancing requirements of the
Initial Hotels through the currently favorable market for secured public debt
securities, (ii) afford the opportunity to obtain liquidity over time by taking
advantage of the currently favorable public market valuation of REIT equity
securities in a transaction that generally will not result in current federal
income tax liability, (iii) broaden and diversify the business of the Initial
Hotels through the inclusion of the Manager's management and other businesses,
thereby reducing the dependence of Shareholders on the performance of any single
asset or group of assets, and (iv) afford the Initial Hotels and the
Shareholders the opportunity to obtain the other expected benefits of the
Formation Transactions.

The structure being proposed by the Company in the Formation Transactions
represents the most efficient and practical structure to achieve the goals of
the Formation Transactions. After consultation with their Advisor, the Manager
concluded that this structure will permit formation of a business entity that
(i) allows Shareholders the opportunity to participate in the Formation
Transactions in a tax-advantaged manner (See "Federal Income Tax
Considerations"), (ii) allows a high degree of flexibility in the operation of
the Company through the Advisor, (iii) permits the Company to realize the
advantages of internal management, (iv) permits the long-range goal of achieving
liquidity for the AAG Partners and the Mission Bay Limited Partners through
future exchanges of Shares and (v) allows the combination of the Initial Hotels
with the other businesses of the Manager that will make a material contribution
to growth of Funds From Operations.

DISADVANTAGES

The Formation Transactions may have certain disadvantages for Shareholders
who acquire Shares of Common Stock in the Formation Transactions including:

Conflict of Interest: As a result of the Formation Transactions, Mr.
McNulty, the Chief Executive Officer and President of the Company, who is also
the President of the Advisor, may be subject to a conflict of interest.
Additionally, Mr. Hatfield is President of the Manager, and is also Secretary of
the Lessee, may be subject to a conflict of interest. Further, Mr. Hatfield
owns interests in a limited number of hotel properties which are not being
acquired by the Company.

Costs of Transaction: The aggregate expenses of the Formation
Transactions, including the underwriters' discount and commissions, and expenses
of the transactions involved in the Formation Transactions, are expected to be
approximately $296,000.

Dilution: Events occurring after the Offering may cause dilution of the
Company's Shares of Common Stock.

ALLOCATION OF SHARES

EXCHANGE VALUE OF SHARES

The Exchange Value of both the Shares and the Subordinated Shares which
will be utilized in the Formation Transactions will be $10 per share. This
Exchange Value was picked in order to optimize the potential for an increase in
the traded value of the stock on the AMEX.

<PAGE>

APPRAISED VALUE BASIS OF EXCHANGE VALUE

As to the Exchange Value for the Company's net equity and for the net
equity of Mission Bay, appraised values as of December 1, 1994 together with the
book value of the other financial assets of such entities have been used to
determine the net values for such entities.

PER SHARE PRICE OF PUBLIC OFFERING

While the purchasers of the Shares of Common Stock in the Public Offering
will pay $10 per Share, the costs associated with the Public Offering will
reduce the estimated net proceeds of the Company to approximately $9 per Share.
Accordingly, the Company will realize net proceeds of approximately $4.5 million
from the Public Offering.

VOTING PROCEDURES

DISTRIBUTION OF SOLICITATION MATERIALS

In order to approve the Mission Bay Acquisition, (i) the Partners of
Mission Bay holding either all or at least 67% of the outstanding limited
partner interests, and (ii) the general partner of Mission Bay must approve the
Mission Bay Acquisition. Each Partner, therefore, should complete and return
the Consent Form before the expiration of the Solicitation Period. The
Solicitation Period is the time period during which the Partners may vote "for"
or "against" the Mission Bay Acquisition. The Solicitation Period will commence
upon the delivery of the Solicitation Materials to the Partners (on or about
_________, 1995) and will continue until the later of (a) _________, 1995 (a
date not less than 30 calendar days from the initial delivery of the
Solicitation Materials) or (b) such later date as may be selected by the Company
and as to which notice is given to the Partners. At its discretion, the Company
may elect to extend the Solicitation Period. Under no circumstances will the
Solicitation Period be extended beyond December 31, 1995. Any Consent Form
received by the information agent (the "Information Agent") prior to 11:59 p. m.
Pacific time on the last day of the Solicitation Period will be effective
provided that such Consent Form has been properly completed and signed.

If you have interests in more than one capacity (e.g., (i) as husband and
wife, (ii) individually, (iii) in trust, or (iv) in an IRA), you will receive a
separate Consent Form for each capacity.

The Consent Form consists of four parts. The first part is the Transmittal
Letter, which highlights the procedures for completing the Consent Form. For a
more detailed discussion of these procedures, see "--Voting Procedures and
Consents" and "Completion Instructions" below. The second part (the Partner
Consent) seeks your consent to the Mission Bay Acquisition and certain related
matters (including any amendment to the Mission Bay Partnership Agreement, as
required).

The third part of the Consent Form is a Statement of Election wherein a
Partner can elect to acquire a certain number of Shares for cash at the time of
the Public Offering. Only one Statement of Election should be returned (if at
all) by Partners (determined by how title is held) who hold interests in Mission
Bay. The Statement of Election must be signed separately. See "Acquisition of
Shares for Cash by Partners at the Time of the Public Offering."

<PAGE>

The fourth part of the Consent Form is a Power of Attorney, which must be
signed separately. The power of attorney appoints the Company as your
attorney-in-fact for the purposes of executing (1) any document required to
terminate and liquidate the assets of Mission Bay and distribute the assets of
Mission Bay to its Partners, and (2) all other documents and instruments
advisable or necessary to complete the Mission Bay Acquisition as contemplated
hereto, including any amendment to the partnership agreement of Mission Bay, as
required, and including any documents to elect a dissolution of Mission Bay.
The Power of Attorney is intended solely to ease the administrative burden of
completing the Mission Bay Acquisition without needing to obtain signatures of
Partners on multiple documents. The Power of Attorney is not a consent to
approval by any Partner of the Mission Bay Acquisition. You should therefore
sign the Power of Attorney regardless of whether you are in favor of or opposed
to the Mission Bay Acquisition. Only one Power of Attorney needs to be signed
and returned by a Partner (determined by how title is held) with respect to the
interests held by such Partner.

PARTNERS WHO RETURN A SIGNED CONSENT FORM BUT FAIL TO INDICATE THEIR
APPROVAL OR DISAPPROVAL WILL BE DEEMED TO HAVE VOTED TO APPROVE.

Consent of a partner for (i.e., a vote "for") constitutes apprroval of the
Mission Bay Acquisition and all the transactions contemplated in the Formation
Transactions.

NO SPECIAL MEETINGS

Mission Bay has not scheduled a special meeting of its Partners to discuss
the Solicitation Materials or the terms of the Mission Bay Acquisition. Members
of the Company's management (and their Affiliates) and the Information Agent
intend to solicit actively the support of the Partners for the Mission Bay
Acquisition and, subject to applicable federal and state securities laws, hold
informal meetings with Partners, answer questions about the Mission Bay
Acquisition and the Solicitation Materials and explain the reasons for the
recommendation that Partners vote to approve the Mission Bay Acquisition.

REQUIRED VOTE

The Company has conditioned Mission Bay's approval of the Mission Bay
Acquisition upon the approval by Partners holding either all or at least 67% of
the outstanding limited partner interests and the approval of the general
partner of Mission Bay.

VOTING PROCEDURES AND CONSENTS

Only Partners of record as of April 30, 1995 will receive notice of and be
entitled to vote with respect to, the Mission Bay Acquisition. However, if
Mission Bay partnership interests are transferred after the record date but
before the expiration of the Solicitation Period, and the holders of the
transferred interests are admitted as substitute limited partners of Mission
Bay, such substitution will terminate the right of the prior holder of the
interests to vote in the Mission Bay Acquisition, and any votes as to the
transferred interests must be made by the substitute limited partner. The
Solicitation Materials will be sent to the substitute limited partners along
with notice of their admission as substitute limited partners in Mission Bay.

The second part of the Consent Form includes a Partner Consent to be used
by each Partner in casting has votes "for" or "against" the Mission Bay
Acquisition. The Partner may mark the proxy card ("Proxy Card") to vote "for,"
"against" or "abstain" as to his or her participation in the Mission Bay
Acquisition. A Partner electing to vote "for" participation in the Mission Bay
Acquisition must vote with respect to the interests owned by the Partner in
Mission Bay.

A PARTNER WHO SUBMITS A SIGNED PROXY CARD BUT FAILS TO MAKE ONE OR MORE OR
THE THREE ELECTIONS

<PAGE>

REQUIRED BY THE PROXY CARD WILL BE DEEMED TO HAVE VOTED "FOR" THE MISSION BAY
ACQUISITION. IF THE PROXY CARD IS UNDATED, YOUR SIGNATURE WILL BE AUTHORITY FOR
THE COMPANY TO ENTER THE DATE OF RECEIPT.

CONSENT OF A PARTNER (I.E., A VOTE "FOR") CONSTITUTES APPROVAL OF THE
MISSION BAY ACQUISITION AND ALL THE TRANSACTIONS CONTEMPLATED IN THE FORMATION
TRANSACTIONS.

Any questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal (if permitted) of the Proxy Cards will be
determined by the Information Agent, whose determination will be final and
binding. The Information Agent reserves the absolute right to reject any or all
Proxy Cards that are not in proper form or the acceptance of which, in the
opinion of the Information Agent's counsel, would be unlawful. Unless waived,
any irregularities in connection with the Proxy Cards must be cured within such
time as the Information Agent shall determine. Neither the Company nor the
Information Agent shall be under any duty to give notification of defects in
such Proxy Cards or shall incur liabilities for failure to give such
notification. The delivery of the Proxy Cards will not be deemed to have been
made until such irregularities have been cured or waived.

COMPLETION INSTRUCTIONS

Each Partner is requested to complete and execute each part of the Consent
Form in accordance with the instructions contained therein. Once you have
completed the Proxy Card, sign and date it on the signature pages. If you have
questions regarding the Proxy Card or how to fill it out, you may call Elaine
Ruff at (619) 226-1212.

For the Proxy Card to be effective, each Partner must deliver the executed
Consent Form at any time prior to 11:59 p m. Pacific time on ____________, 1995
to the Information Agent at the following address:

Host Funding, Inc.
Attn: Information Agent
7825 Fay Avenue, Suite 250
La Jolla, CA 92037

A self-addressed stamped envelope for return of the Proxy Card has been
included with the Solicitation Materials. The Consent Forms will be effective
only upon actual receipt by the Information Agent at the address specified
above. The method of delivery of the Consent Form to the Information Agent is
at the election and risk of the Partner, but if such delivery is by mail, it is
suggested that Partners use certified or registered mail return receipt
requested and that the mailing be made sufficiently in advance of ____________,
1995 to permit delivery to the Information Agent on or before ____________,
1995.

WITHDRAWAL OR CHANGE OF VOTE

ONCE DELIVERED TO THE INFORMATION AGENT, PROXY CARDS, WHEREIN A PARTNER
VOTES "FOR" THE MISSION BAY ACQUISITION, ARE IRREVOCABLE REGARDLESS OF THE
AMOUNT OF TIME REMAINING IN THE SOLICITATION PERIOD AND MAY BE CHANGED OR
WITHDRAWN ONLY WITH THE CONSENT OF THE COMPANY.

Upon the Company's consent to a withdrawal or change of vote, a written or
facsimile transmission notice of withdrawal or change of vote must be timely
received by the Information Agent prior to the expiration of the Solicitation
Period at its address set forth under "-Completion Instructions" above and must
specify the name of the person who executed the Proxy Card that is to be
withdrawn or changed and the name of the registered holder, if different from
that of the person who executed the Consent Form.

<PAGE>

FINAL CASH DISTRIBUTION BY MISSION BAY

As part of the Mission Bay Acquisition, Participating Partners will receive
a final distribution from Mission Bay of all excess cash. Excess cash shall
equal the excess of current assets (excluding cash) over current liabilities
plus the cash on hand at the time of the close of the Mission Bay Acquisition.

SOLICITATION AND TABULATION OF CONSENTS BY INFORMATION AGENT

The Information Agent will use its best efforts to solicit Partners to
approve the Mission Bay Acquisition. The Information Agent also will be
responsible for receipt of the Proxy Cards. The Information Agent and the
Company's CPA -- William H. Ling -- will tabulate the Proxy Cards. The final
voting tabulation will be made available upon request after the expiration of
the Solicitation Period.

SPECIAL REQUIREMENTS FOR CERTAIN PARTNERS

Some Partners are entities rather than individuals, such as estates,
trusts, corporations, limited partnerships and general partnerships. With
respect to Consent Forms received on behalf of any such entity, the Company may
elect, at its option, to require that each Consent Form be accompanied by
evidence (which may include an opinion of counsel acceptable to the Company)
that such entity has met all requirements of its governing instruments, such as
applicable partnership agreements, and is authorized to execute such Consent
Form under the laws of the jurisdiction in which such entity was organized.

DISSENTERS' RIGHTS

The Mission Bay Acquisition has been structured to afford Dissenting
Partners the dissenters' rights contained the recently enacted California
legislation which is known as the Thompson-Killea Limited Partnership Protection
Act of 1992 (the "Thompson-Killea Act"). The Thompson-Killea Act requires that
the Dissenting Partners receive the appraised value of their Interest in Mission
Bay in the form of cash, freely tradeable securities or secured or unsecured
debt instruments satisfying certain statutory requirements. The Company is
satisfying this requirement by offering Dissenting Partners the right to receive
the appraised value of their interests in Mission Bay (adjusted for outstanding
indebtedness) (the "Adjusted Appraised Value") in the form of cash (up to an
aggregate of $140,500, subject to increase by the Company in its sole
discretion). The Mission Bay Acquisition has also been structured to comply
with the other protections afforded in the Thompson-Killea Act.

A Dissenting Partner who perfects his or her dissenter's rights with
respect to Mission Bay as described below will be entitled to receive its
allocable percentage of the Adjusted Appraised Value of Mission Bay, if Mission
Bay approves the transaction. The effect of such perfection of dissenter's
rights with respect to Mission Bay is that the Company purchases the Dissenting
Partner's Interest in Mission Bay. The estimated value of the Shares (at $10
per share) and the Excess Cash to be received by each Participating Partner of
Mission Bay equals the Adjusted Appraised Value of Mission Bay (i.e., the amount
that would be applied to a Dissenting Partner's allocated portion determined in
accordance with the distribution provisions of the partnership agreement).

In the event a Partner of Mission Bay elects to exercise his or her right
to dissent, such Partner must do the following to perfect his or her rights as a
Dissenting Partner:

- The Dissenting Partner must file a written request with the Company at
7825 Fay Avenue, Suite 250, La Jolla, California 92037, attention:
Michael S. McNulty, Dissenters' Rights, prior to the earlier of (i)
the date such Dissenting Partner's completed Consent Form is received

<PAGE>

by the Company, and (ii) the expiration of the Solicitation Period.
The request must state the interests owned in Mission Bay for which
the Dissenting Partner is requesting dissenters' rights. Only persons
who vote against the Mission Bay Acquisition with respect to their
interests can be Dissenting Partners. NEITHER THE DELIVERY OF A
CONSENT FORM DIRECTING A VOTE AGAINST THE MISSION BAY ACQUISITION NOR
A FAILURE TO VOTE FOR THE MISSION BAY ACQUISITION CONSTITUTES A
WRITTEN REQUEST FOR DISSENTERS' RIGHTS.

If Mission Bay approves the Mission Bay Acquisition, and the other
conditions of the Formation Transactions are satisfied so that the Mission Bay
Acquisition closes, then a Dissenting Partner who requests dissenters' rights
will be sent a check within 30 days following the closing of the Mission Bay
Acquisition for his or her interests in the amount as determined above.

LIMITED PARTNERS WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS ARE CAUTIONED
THAT FAILURE TO FOLLOW THE ABOVE PROCEDURES PRECISELY MAY RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.

COMPLIANCE WITH AND APPROVAL FROM FEDERAL AND STATE AUTHORITIES

<PAGE>

COMPARISON OF OWNERSHIP OF MISSION BAY INTERESTS AND SHARES

The information below highlights a number of the significant differences
between Mission Bay and the Company relating to, among other things, form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure compensation and fees, and
investor rights, and compares certain legal rights associated with the ownership
of Mission Bay partnership Interests, and Shares, respectively. These
comparisons are intended to assist the Mission Bay Limited Partners in
understanding how their investments will be changed if, as a result of the
Mission Bay Acquisition, their Mission Bay Limited Partner Interests are
exchanged for Shares. Following some of the captioned sections is a summary
discussion of the expected effects of the Mission Bay Acquisition upon Partners
receiving Shares in exchange for their Interests. THIS DISCUSSION IS SUMMARY IN
NATURE AND DOES NOT CONSTITUTE A COMPLETE DISCUSSION OF THESE MATTERS, AND
PARTNERS SHOULD CAREFULLY REVIEW THE BALANCE OF THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT, THE MISSION BAY PARTNERSHIP AGREEMENT AND THE FORM OF
CHARTER OF THE COMPANY FILED AS AN EXHIBIT TO THE APPLICATION FOR ADDITIONAL
IMPORTANT INFORMATION.

The following discussion primarily refers to the rights, privileges and
obligations of the Limited Partners in Mission Bay which is a California limited
partnership. As used herein, the term "Partnership Agreement" means the limited
partnership agreement of Mission Bay, as amended.

FORM OF ORGANIZATION AND PURPOSE

MISSION BAY Mission Bay is a limited partnership which was organized under
the laws of the State of California in 1987. Mission Bay was formed to acquire a
parcel of land in San Diego, California, to construct and operate a hotel
thereon, and to sell the hotel property within 6 to 10 years. Mission Bay has
been treated as a partnership for federal income tax purposes.

COMPANY The Company is a Maryland corporation. The Company will own five
hotels. The Company intends to qualify as a REIT under the Code and to operate
as an externally managed REIT with its assets managed by the Advisor.

COMPARISON Mission Bay is a limited partnership organized under California
law. The Company is a Maryland corporation. For tax purposes, the Company
intends to qualify as a REIT under the Code.

LENGTH OF INVESTMENT

MISSION BAY An investment in Mission Bay is a finite life investment with
the Partner to receive regular cash distributions out of Mission Bay's net
operating income and to receive cash distributions upon liquidation of Mission
Bay's real estate investments. Mission Bay's term of existence (as stated in
the Partnership Agreement) expires on December 31, 2026.

COMPANY The Company has a perpetual term and intends to continue its
operations for an indefinite time period. The Company has no specific plans for
disposition of the assets acquired through Formation Transactions or those that
may be subsequently acquired. To the extent the Company sells or refinances its
assets, the net proceeds therefrom generally will be retained by the Company for
working capital and new investments rather than being distributed to
Shareholders in the form of dividends. In contrast to Mission Bay, the Company
will constitute a vehicle for taking advantage of future investment
opportunities that may be available in the real estate markets.

COMPARISON Mission Bay is structured to dissolve when the assets of
Mission Bay are liquidated. In contrast, Shareholders of the Company are
expected to achieve liquidity of their investments by trading the Shares in the
secondary market, and the Company will generally reinvest the proceeds of asset
dispositions,

<PAGE>

if any, in new property or other appropriate investments consistent with the
Company's objectives.

PROPERTIES AND DIVERSIFICATION

MISSION BAY The investment portfolio of the Mission Bay consists of one
Hotel property. The Mission Bay Partnership Agreement provides that the
exclusive purpose of the partnership is to acquire, improve, hold, operate, deal
with and/or sell a specific property, and does not allude to the possibility of
other ventures. Consequently, without unanimous consent of the Partners,
Mission Bay is limited in its ability to expand its investment portfolios.

COMPANY As a result of the Formation Transactions, the Company will own
five hotels and it intends to acquire additional hotel properties.

COMPARISON The investment portfolio of Mission Bay consists of one hotel
property. Through the Formation Transactions, and through additional
investments that may be made from time-to-time, the Company intends to create an
investment portfolio substantially larger and more diversified than the
individual portfolio of Mission Bay.

PERMITTED INVESTMENTS

MISSION BAY Mission Bay is authorized to acquire, develop, improve, own
and operate its real property as an investment for income-producing purposes.

COMPANY Under its Charter, the Company may engage in any lawful activity
permitted by the General Corporation Law of Maryland. Consequently, the may
purchase or lease income-producing properties for long-term investment, expand
and improve the properties presently owned, or sell such properties, in whole or
in part, when it deems appropriate. However, the Company may not take any
action which could adversely affect the ability of the Company to qualify as a
REIT. As to hotel properties, the REIT qualification rules require that the
Company lease the hotels to a third party lessee.

COMPARISON Mission Bay has concentrated its investments solely in one
hotel property. The Company intends initially to limit its investments
primarily to similar properties. However, other than restrictions relating to
the protection of the Company's REIT status, the Company is not restricted under
its Charter from diversifying its portfolio to protect the value of its assets
or diversifying as a prudent hedge against the risk of having all its
investments limited to a single asset group.

ADDITIONAL EQUITY

MISSION BAY The Mission Bay Partnership Agreement generally is silent as
to the authority of Mission Bay to issue equity securities other than the
limited partner interests ("Mission Bay Partnership Interests") already issued
to Partners. However, under California limited partnership law applicable to
Mission Bay, with the consent of all Partners, Mission Bay may issue additional
partnership interests in the circumstances of the admission of an additional
limited partner.

COMPANY The Board of Directors may issue, in its discretion, additional
equity securities consisting of Common Stock or any other class of capital stock
(which may be classified and issued as a variety of equity securities, including
one or more classes of common or preferred stock, in the discretion of the Board
of Directors), provided that the total number of shares issued does not exceed
the authorized number of shares of capital stock set forth in the Company's
Charter. The Company expects to issue approximately 1.5 million shares of its
Common Stock in the Formation Transactions. The Company does not have any
current plans to issue additional Shares or other equity securities.

<PAGE>

COMPARISON Unlike Mission Bay, the Company has substantial flexibility to
raise equity, through the sale of additional common stock to finance the
business and affairs of the Company

BORROWING POLICIES

MISSION BAY Generally, Mission Bay is authorized to borrow funds for the
acquisition and development of real estate and to obtain loans required for
Partnership purposes.

COMPANY The Company is permitted to borrow, on a secured or unsecured
basis, funds to finance its business, without any Charter limitations.

COMPARISON In conducting its business, the Company may incur indebtedness
to the extent deemed appropriate by the Board of Directors.

OTHER INVESTMENT RESTRICTIONS

MISSION BAY The Mission Bay Partnership Agreement provides that the
exclusive purpose of the Partnership is to acquire, improve, hold, operate, deal
with, and/or sell a specific property, thereby imposing a general restriction on
the partners' authority to make additional investments outside the specific
property. Aside from the general restrictions contained in the business purpose
provisions, however, the Partnership Agreement also prohibits the Partnership
from making investments and entering into transactions with its partners.

COMPANY Neither the Company's Charter nor its Bylaws impose any
restrictions upon the types of investments of the Company, except that under the
Charter, the Board of Directors is prohibited from taking any action that would
terminate the Company's REIT status, unless a majority of the Shareholders vote
to terminate such REIT status. The Company's Charter and Bylaws do not impose
any restrictions upon dealings between the Company and directors, officers and
Affiliates thereof. Applicable corporate law, however, requires that the
material facts of the relationship, the interest and the transaction must (1) be
disclosed to the Board of Directors and approved by the affirmative vote of a
majority of the Disinterested Directors; (2) be disclosed to the Shareholders
and approved by the affirmative vote of a majority of the disinterested
Shareholders; or (3) be in fact fair and reasonable. In addition, the Company
has adopted a policy which requires that all contracts and transactions between
the Company and directors, officers or Affiliates thereof must be approved by
the affirmative vote of a majority of the Disinterested Directors and a majority
of the Independent Directors.

COMPARISON Aside from the general restrictions in business purpose
provisions, the Mission Bay Partnership Agreement implicitly limits the
investments as well as Mission Bay's ability to enter into transactions with
interested persons. The Charter and Bylaws of the Company contain no
restrictions limiting the types of investments that may be made except those
investments which would terminate the Company's REIT status. Maryland law
requires disclosure of transactions with directors, officers and Affiliates and
the Company has adopted a policy requiring approval of such transactions by a
majority of either Disinterested Directors or its Shareholders.

MANAGEMENT CONTROL

MISSION BAY Under the Mission Bay Partnership Agreement, the general
partner is, subject to certain narrow limitations, vested with all management
authority to conduct the business of the Partnership, including authority and
responsibility for overseeing all executive, supervisory and administrative
services rendered to the Partnership. Under the Partnership Agreement, the
Limited Partners have no right to participate in the management and control of
the Partnership and have no voice in its affairs except for certain limited
matters

<PAGE>

that may be submitted to a vote of the Limited Partners under the terms of the
Partnership Agreement. In general, the Limited Partners may remove a general
partner upon the affirmative vote of a majority.

COMPANY The Board of Directors will have exclusive control over the
Company's business and affairs subject only to the restrictions in the Charter
and Bylaws. The Board of Directors is classified into three classes of
directors. At each annual meeting of the Shareholders, the successors of the
class of directors whose terms expires at that meeting will be elected. The
policies adopted by the Board of Directors may be altered or eliminated without
a vote of the Shareholders. Accordingly, except for their vote in the elections
of directors, Shareholders will have no control over the ordinary business
policies of the Company. The Board of Directors cannot change the Company's
policy of maintaining its status as a REIT, however, without the approval of the
Shareholders.

COMPARISON Because a portion of the Board of Directors will be elected
each year by the Shareholders at the Company's annual meeting, the Shareholders
will have greater control over the management of the Company than the Limited
Partners have over Mission Bay.

FIDUCIARY DUTIES

MISSION BAY In Mission Bay, the general partner is accountable as a
fiduciary to the Partnership and is required to operate the business for the
benefit of all members and to not do any act detrimental to the best interests
of the Partnership. However, the Mission Bay Partnership Agreement generally
allows the general partner to conduct independent activities which may be
competitive with the business of the Partnership.

COMPANY Under Maryland law, the directors must perform their duties in
good faith, in a manner that they reasonably believe to be in the best interests
of the Company and with the care of an ordinarily prudent person in a like
position. Directors of the Company who act in such a manner will generally not
be liable to the Company for monetary damages arising from their activities.

COMPARISON In both Mission Bay and the Company, the general partner of the
Partnership, and the Board of Directors of the Company, respectively, owe
fiduciary duties to their constituent parties. Some courts have interpreted the
fiduciary duties of the Board of Directors in the same way as the duties of a
general partner in a limited partnership. Other courts, however, have indicated
that the fiduciary obligations of a general partner to the limited partners are
greater than those that a director owes to stockholders. Therefore, although it
is unclear whether, or to what extent, there are differences in such fiduciary
duties, it is possible that the fiduciary duties of the directors of the Company
to the Shareholders may be less than those of the general partners of the
Partnership to the Limited Partners of the Partnership.

MANAGEMENT LIABILITY AND INDEMNIFICATION

MISSION BAY As a matter of California law, the general partners have
liability for the payment of Partnership obligations and debts, unless
limitations upon such liability are expressly stated in the instrument or
document evidencing the obligation. In general, the Partnership Agreement
provides that the general partner will not be liable to the partnership or its
Limited Partners for any loss suffered by the partnership which arises out of
any action or inaction of the general partner if the general partner, in good
faith, determines that such course of conduct was in the best interest of the
Partnership and such course of conduct did not constitute fraud, negligence or
misconduct of the general partner. In addition, the Partnership Agreement
indemnifies the general partner for any losses, liabilities, expenses and
amounts paid in settlement of any claims sustained by it in connection with the
Partnership, provided that the same were not the result of fraud, negligence or
misconduct on the part of the general partner, and provided further, that the
general partner determines, in good faith, that such course of action was in the
best interest of the Partnership.

<PAGE>

COMPANY The Company's Charter provides that the liability of the Company's
directors and officers to the Company and its Shareholders for money damages is
limited to the fullest extent permitted under Maryland law. The Charter and
state law provide broad indemnification to directors and officers and indemnify
any person who is, or any personal representative of a deceased person who was,
a director or officer of the Company against any judgments, penalties,
settlements and reasonable expenses.

COMPARISON The general partner in the Partnership generally has limited
liability to the Partnership for acts or omissions undertaken by it when
performed in good faith, in a manner reasonably believed to be within the scope
of its authority and in the best interests of the Partnership. In some cases,
the general partner of the Partnership also has, under specified circumstances,
a right to be reimbursed for liability, loss, expenses and amounts incurred by
such general partner by virtue of serving as general partner. Although the
standards are expressed somewhat differently, there are similar limitations upon
the liability of the Directors and officers of the Company when acing on behalf
of the Company and upon the rights of such persons to seek indemnification from
the Company. The Company believes that the scope of the liability and
indemnification provisions in the Company's Charter and Bylaws, while similar to
those contained in the Partnership Agreement, provides greater protection
against claims for personal liability against the Company's Directors and
officers than the protection afforded to the general partner under the
Partnership Agreement.

ANTITAKEOVER PROVISIONS

MISSION BAY In Mission Bay, changes in management can be effected only by
removal of the general partner. The Limited Partners have a right to vote on
the removal of the partnership's general partner. In addition, due to transfer
restrictions in the Mission Bay Partnership Agreement, the general partner may
restrict transfers of the interests of Limited Partners. Under the Partnership
Agreement, an assignee of a limited partner interest may not become a substitute
limited partner, entitling him to vote on a matter that may be submitted to the
Limited Partners for approval, unless the general partner consents to such
substitution. The general partner may exercise these rights of approval to
deter, delay or hamper attempts by persons to acquire a majority interest in the
Partnership.

COMPANY The Charter and Bylaws of the Company contain a number of
provisions that may have the effect of delaying or discouraging an unsolicited
proposal for the acquisition of the Company or the removal of incumbent
management. These provisions include, among others, (1) a classified Board of
Directors, (2) authorized capital stock that may be classified and issued as a
variety of equity securities in the discretion of the Board of Directors,
including securities having superior voting rights to the Common Stock, (3)
restrictions on business combinations with persons who acquire more than a
certain percentage of Common Stock, (4) a requirement that directors may be
removed with or without cause only by a vote of at least two-thirds of the
outstanding Common Stock, and (5) provisions designed to avoid concentration of
share ownership in a manner that would jeopardize the Company's status as a
qualified real estate investment trust under the Code.

COMPARISON Certain provisions of the Mission Partnership Agreement and the
Charter and Bylaws of the Company could be used to deter attempts to obtain
control of the Partnership, and the Company, in transactions not approved by the
general partners of the Partnership, or the Board of Directors, respectively.

VOTING RIGHTS

MISSION BAY Generally, under the Partnership Agreement and applicable
California law, the Limited Partners, have voting rights only as to major
partnership transactions (e.g., amendment of the Partnership Agreement, sale of
all the assets of, dissolution of or merger of the partnership). Otherwise, all
decisions relating to the operation and management of the Partnership are made
by the general partner.

COMPANY The Company will be managed and controlled by a Board of Directors
consisting of three

<PAGE>

classes having staggered terms of office. Each class is to be elected by the
Shareholders at annual meetings of the Company. Maryland law requires that
certain major corporate transactions, including most amendments to the Charter,
may not be consummated without the approval of Shareholders holding two-thirds
of the outstanding voting stock, but permits the Charter to provide for a lesser
vote requirement, but not less than a majority of the outstanding shares
entitled to vote. The Company's Charter provides for a majority vote with
respect to most matters, with certain exceptions in which a two-thirds vote is
required. Subject to the provisions of the Company's Charter regarding Excess
Stock and to matters discussed under "Description of Capital Stock -- Special
Statutory Requirements for Certain Transactions -- Control Share Acquisition
Statute," all Shares and Subordinated Shares will have one vote, and the Charter
permits the Board of Directors to classify and issue capital stock in one or
more classes having voting power which may differ from that of the Shares.

COMPARISON The Limited Partners of the Partnership have only limited
voting rights. The Shareholders of the Company will have voting rights that
permit them to elect the Board of Directors and to approve or disapprove certain
major corporate transactions.

The following is a comparison of the voting rights of the Limited Partners of
the Mission Bay and the Shareholders of the Company as they relate to certain
major transactions.

VOTE REQUIRED TO AMEND THE PARTNERSHIP AGREEMENT OR THE CHARTER

MISSION BAY A majority vote of the Limited Partners may amend the
Partnership Agreement, provided that the general partner must consent to such
amendment if the amendment adversely affects the general partner.

COMPANY Amendments to the Company's Charter must be approved by the Board
of Directors and by the vote of at least a majority of the votes entitled to be
cast at a meeting of Shareholders, except that an amendment of the provisions
relating to the classified Board of Directors, the power to remove directors,
the amendment of Bylaws, preemptive rights, indemnification and limitation of
liability, and the share ownership limits designed to maintain qualified REIT
status must be approved by a two-thirds vote, and any provision, the amendment
of which would jeopardize the Company's REIT status for tax purposes, or adding
cumulative voting in the election of directors requires for adoption the
approval of holders of two-thirds of the votes entitled to be cast. An
amendment relating to termination of REIT status requires a majority vote of
Shareholders.

COMPARISON The Shareholders of the Company will have significantly fewer
rights to authorize and approve amendments to the Charter and Bylaws of the
Company (the "Governing Documents") than do the Limited Partners with respect to
the Mission Bay Partnership Agreement.

VOTE REQUIRED TO DISSOLVE MISSION BAY PARTNERSHIP OF THE COMPANY

MISSION BAY The Partnership Agreement requires a vote of holders of
greater than 50% of the Interests, to dissolve the Partnership.

COMPANY Under the Charter, the Board of Directors must obtain approval of
holders of a majority of the outstanding Common Stock in order to voluntarily
dissolve the Company.

COMPARISON The Limited Partners' rights to vote to dissolve the
Partnership are relatively similar to the corresponding rights of the
Shareholders of the Company.

<PAGE>

VOTE REQUIRED TO SELL ASSETS

MISSION BAY The Mission Bay Partnership Agreement provides that a majority
vote of the Limited Partners is necessary to approve or disapprove a sale of the
Partnership's assets, once such sale has been approved and proposed by the
general partner.

COMPANY Under the Charter, the Board of Directors is required to obtain
approval of a majority of the outstanding Shares of Common Stock in order to
sell all or substantially all the assets of the Company.

COMPARISON The Partnership Agreement provides that a sale of all or
substantially all the assets of the Partnership requires the consent of the
general partner. Under the Partnership Agreement, the sale of all or
substantially all the assets of the Partnership also requires a majority consent
of the Limited Partners. In the case of the Company, the Board of Directors
must obtain the consent of a majority of Shareholders in order to sell all or
substantially all the assets of the Company.

VOTE REQUIRED TO MERGE

MISSION BAY The Partnership Agreement is silent as to merger. Under
California law applicable to the Partnership Agreement, the Partnership and the
other business entity which desires to merge must approve an agreement of
merger. The agreement must be approved by the general partner and the principal
terms of the agreement must be approved by a majority in Interest of each class
of Limited Partners.

COMPANY Under the Charter, the Board of Directors is required to obtain
approval of a Shareholders holding a majority of the votes entitled to be cast
on the matter in order to merge or consolidate the Company.

COMPARISON Limited Partners have voting rights to approve or disapprove a
merger of the Partnership which are similar to the corresponding rights of the
Shareholders of the Company.

COMPENSATION, FEES AND DISTRIBUTIONS

MISSION BAY Generally, under the Partnership Agreement, the general
partner receives no compensation for its services, except fees it receives for
services provided to the Partnership pursuant to a management agreement.
However, the general partner has the same rights to distributions according to
its partnership interest as the Limited Partners. The general partner also
receives reimbursement for expenses incurred by it for the benefit of the
Partnership.

COMPANY The directors of the Company will receive compensation for their
services as described herein under "Management."

COMPARISON Under the Partnership Agreement, fees, distributions and
reimbursements are payable to the general partner and its Affiliates. The
directors of the Company will receive compensation for their services as
described herein under "Management."

LIABILITY OF INVESTORS

MISSION BAY Under the Partnership Agreement and California law, the
liability of Limited Partners for the Partnership's debts and obligations is
limited to the amount of their investment in the Partnership together with an
interest in undistributed income, if any. The Interests are fully paid and
nonassessable. Under the Partnership Agreement and California law, the general
partner is jointly liable for the debts and obligations of the Partnership.

<PAGE>

COMPANY Under Maryland law, Shareholders are not personally liable for the
debts or obligations of the Company. The Shares and Subordinated Shares, upon
issuance, will be fully paid and nonassessable.

COMPARISON The personal liability of the Shareholders of the Company for
the debts and obligations of the Company is comparable to that of the Limited
Partners in the Partnership.

NATURE OF INVESTMENT

The following compares certain of the investment attributes and legal rights
associated with the ownership of Interests by Limited Partners and Shares by
Shareholders of the Company.

MISSION BAY The Interests of the Partnership constitute equity interests
entitling each Partner to his pro rata share of cash distributions made to the
Partners of the Partnership. The Partnership generally maintains a policy of
long-term ownership for current cash flow and long term appreciation. The
Partnership Agreement specifies how the cash available for distribution, whether
arising from operations or sales or refinancing, is to be shared among the
general and Limited Partners. The distributions payable to the Partners are not
fixed in amount and depend upon the operating results and net sale or
refinancing proceeds available from the disposition of the Partnership's assets.

COMPANY The Shares constitute equity interests in the Company. Each
stockholder will be entitled to his pro rata share of any dividends or
distributions paid with respect to the Common Stock except that the Subordinated
Shares are subordinated to a $.91 annual dividend on the Shares. The dividends
payable to the stockholders are not fixed in amount and are only paid if, when
and as declared by the Board of Directors. The Company generally intends to
retain and reinvest proceeds of the sale of property or excess refinancing
proceeds in its business. In order to qualify as a REIT, the Company must
distribute at least 95% of its taxable income (excluding capital gains), and any
taxable income (including capital gains) not distributed will be subject to
corporate income tax.

COMPARISON The Interests, and the Shares each represent equity interests
entitling the holders thereof to participate in the growth and income of the
Partnership, and the Company, respectively. The Partnership and the general
partner are required to distribute available cash and proceeds of sales to
Partners. In the Company, distributions of available cash and proceeds payable
with respect to the Shares are payable in the discretion of the Board of
Directors. The Company intends to reinvest proceeds of any sale of property and
refinancing. Thus, Shareholders will not be able to realize upon their
investments through distributions of sale and refinancing proceeds as in the
Partnership. Instead, Partners will be able to realize upon their investments
primarily through the sale of Shares of the Company received upon exchange of
their Interests.

POTENTIAL DILUTION OF PAYMENT RIGHTS

MISSION BAY Because generally the Partnership may issue additional equity
securities only in narrow circumstances and only upon the unanimous consent of
the Partners, there is little chance for dilution of the Limited Partners' share
of cash available for distribution.

COMPANY The Board of Directors may issue, in its discretion, additional
Shares and have the authority to issue from the authorized capital stock a
variety of other equity securities of the Company with such powers, preferences
and rights as the Board of Directors may at the time designate. The issuance of
additional shares of either Common Stock or other similar equity securities
beyond the Shares to be issued in the Formation Transactions, may result in the
dilution of the interests of the Shareholders.

COMPARISON The Limited Partners are not subject to dilution of their
distributive shares with respect to cash available for distribution. The
Shareholders will be subject to potential dilution if the Board of

<PAGE>

Directors, in its discretion, decides to issue additional Shares. Furthermore,
the Board of Directors will have the authority to issue from the authorized
capital stock a variety of other equity securities, which may subject
Shareholders to additional dilution.

LIQUIDITY

MISSION BAY The transfer of the Limited Partner's Interests is subject to
a number of restrictions imposed by the Partnership Agreement which are designed
in part to preserve the tax status of the Partnership as a "partnership" under
the Code. The transferee of a Limited Partner's Interest does not have the
right to become a substitute Limited Partner (entitling such person to vote on
matters submitted to a vote of the Limited Partners of the Partnership) unless,
among other things, such substitution is approved by the general partner of the
Partnership.

COMPANY The Shares will be freely transferable once registered under the
Securities Act. The Shares of Common Stock are expected to be listed on the
American Stock Exchange, and the Company expects a public market for the Shares
to develop. The breadth and strength of this secondary market will depend among
other things, upon the number of shares outstanding, the Company's financial
results and prospects, the general interest in the Company's and other real
estate investments, and the Company's dividend yield compared to that of other
debt and equity securities.

COMPARISON One of the primary objectives of the Mission Bay Acquisition is
to provide increased liquidity to the Limited Partners. The Shares are expected
to be listed on the American Stock Exchange and there is expected to be a public
market for the Shares following the Formation Transactions. The breadth of such
market cannot yet be determined, but it is expected that the market for such
Shares will be significantly broader than the current market, if any, for the
Interests held by the Limited Partners.

TAXATION

MISSION BAY The Partnership is not subject to federal income taxes.
Instead each partner in the partnership includes its allocable share of the
partnership's taxable income or loss in determining such Partner's individual
federal income tax liability. The maximum effective federal tax rate for
individuals under current law in 39.6%

COMPANY The Company will elect to be taxed as a REIT. So long as it
qualifies as a REIT, the Company will be permitted to deduct distributions paid
to its shareholders, which effectively will reduce the "double taxation" that
typically results when a corporation earns income and distributes that income to
its shareholders in the form of dividends.

PASSIVE VS. PORTFOLIO

MISSION BAY As to the Limited Partners, income and loss from the
Partnership generally is subject to the "passive activity" limitations. Under
the "passive activity" rules, income and loss from the Partnership generally can
be offset against income and loss from other investments that constitute
"passive activities."

COMPANY Dividends paid by the Company to its shareholders will be treated
as "portfolio" income and cannot be offset with losses from "passive
activities."

BENEFITS FROM DEPRECIATION

MISSION BAY Cash distributions from the Partnership are not taxable to a
Partner except to the extent they exceed a Partner's basis in its interest in
the Partnership. Because of depreciation dedications, in many

<PAGE>

cases the cash distributed to a Limited Partner in a particular year will exceed
the Limited Partner's share of the taxable income of the Partnership for that
year, with the result that such excess cash is not currently taxable to such
Limited Partner.

COMPANY Distributions made by the Company to its taxable domestic
Shareholders out of current or accumulated earnings and profits will be taken
into account by them as ordinary income. Distributions that are designated as
capital gains dividends generally will be taxed as long-term capital gains.
Distributions in excess of current or accumulated earnings and profits will be
treated as a nontaxable return of basis to the extent of a stockholder's
adjusted basis in its Shares, with the excess taxed as capital gain.

REPORTING PROCEDURES

MISSION BAY Each year, Partners receive a Schedule K-1 tax form containing
detailed tax information for inclusion in preparing their federal income tax
returns.

COMPANY Each year, Shareholders will receive Form 1099 used by
corporations to report dividends paid to their Shareholders.

STATE TAXATION

MISSION BAY Partners are required in some cases to file state income tax
returns and/or pay state income taxes in the state in which the Partnership owns
property, even if they are not residents of that state.

COMPANY Shareholders who are individuals generally will not be required to
file state income tax returns and/or pay state income taxes outside of their
state of residence with respect to the Company's operations and distributions
(although it is possible that the State of California or other states may seek
to impose tax on nonresidents with respect to distributions to nonresidents).
The Company may be required to pay state income taxes in certain states.

<PAGE>

POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES

OVERVIEW OF POLICIES AND OBJECTIVES

The following is a discussion of the Company's policies with respect to
investment, financing, real estate mortgages, and certain other activities. The
policies with respect to these activities have been determined by the Board of
Directors of the Company and may be amended or revised from time to time at the
discretion of the Board of Directors without a vote of the Shareholders of the
Company, except that (i) changes in certain policies with respect to conflicts
of interest must be consistent with legal requirements, (ii) certain policies
with respect to competition are imposed pursuant to contracts that cannot be
amended without the consent of all parties thereto, (iii) the Company cannot
amend its Charter limitation on indebtedness without the approval of the holders
of a majority of the outstanding shares of Common Stock and (iv) the Company
cannot take any action intended to terminate its qualification as a REIT without
the approval of the holders of a majority of the outstanding shares of Common
Stock.

INVESTMENT POLICIES

INVESTMENT IN REAL ESTATE OR INTERESTS IN REAL ESTATE

In addition to the Initial Hotels, the Company intends to acquire equity
interests in other hotel properties. Additional acquisitions could be made
directly or involve other entities controlled by the Company. The Company's
investment objective is to increase cash available for distribution to
Shareholders. The Company intends to pursue this objective by acquiring
additional hotel properties that meet the Company's investment criteria and by
contracting to have the equity interests of the Initial Hotels and other
subsequently acquired hotel properties, managed efficiently and effectively.

The Company intends to consider investments in hotel properties which meet
one or more of the following criteria:

- Relatively stable operating histories and reasonable bases of
commercial business.

- Nationally franchised, well-maintained properties with preference
given to economy, limited service hotels such as Super 8, Hampton Inn,
and Comfort Inn.

- Properties in attractive locations which, after renovation, would
qualify for a franchise which the Company believes will strengthen the
acquired hotel's competitive position.

- Purchase prices, which, coupled with the elimination or significant
reduction of debt, may allow the Company to realize the attractive
profitability.

- Geographic diversity with general emphasis throughout the United
States.

The Company's present policy is to not invest in luxury properties or
resorts. Such policies may be changed from time to time by the Company's Board
of Directors. There can be no assurance that the Company will be able to
acquire hotels which meet its investment criteria.

INVESTMENTS IN OTHER ENTITIES

The Company also may participate with other entities in property ownership,
through joint ventures

<PAGE>

or other types of co-ownership. Equity investment may be subject to existing
mortgage financing and other indebtedness which may have priority over the
equity interest of the Company.

INVESTMENTS IN REAL ESTATE MORTGAGES

While the Company will emphasize equity real estate investments, it may, in
its discretion, invest in mortgage and other real estate interest, including
securities of other REITs. The Company does not presently intend to invest in
mortgages or securities of other REITs. The Company may invest in participating
or convertible mortgages if it concludes that it may benefit from the cash flow
or any appreciation in the value of the subject property. Such mortgages are
similar to equity participation.

FINANCING POLICIES

The Company's Charter does not limit the Company's ability to incur
indebtedness. Accordingly, borrowings may be incurred through the Company.
Indebtedness incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt instruments.
Indebtedness incurred by the Company may be in the form of purchase money
obligations to the sellers of properties, publicly or privately placed debt
instruments, 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 Company. Such indebtedness may be
recourse to all or any part of the property of the Company, or may be limited to
the particular property to which the indebtedness relates. The proceeds from
any borrowings by the Company may be used for the payment of distributions or
dividends, working capital, to refinance existing indebtedness or to finance
acquisitions or expansions of properties.

If the Board of Directors determines to raise additional equity capital,
the Board has the authority, without Shareholder approval, to issue additional
shares of Common Stock in any manner (and on such terms and for such
consideration as it deems appropriate, including in exchange for property).
Existing Shareholders have no preemptive rights to purchase shares issued in any
offering, and any such offering might cause a dilution of a Shareholder's
investment in the Company.

The Company may make investments other than as previously described,
although it does not currently intend to do so.

CONFLICT OF INTEREST POLICIES

The Company has adopted certain policies and entered into agreements with
Messrs. McNulty and Gardner-Smith with respect to certain areas of conflict of
interest. In addition, the Company's Board of Directors is subject to
provisions of Maryland law designed to address conflicts of interest. There can
be no assurance, however, that these policies and provisions or the agreements
always will be successful in eliminating the influence of such conflicts. If
they are not successful, decisions could be made that fail to reflect fully the
interests of all the Shareholders.

ARM'S-LENGTH NEGOTIATIONS

Pursuant to the law of Maryland, where the Company is incorporated, all
contracts and transactions between the Company and a director or any entity in
which the director has a material financial interest must (i) be approved by the
affirmative vote of the directors not having such an interest ("Disinterested
Directors") or by the affirmative vote of the majority of votes cast by
disinterested stockholders, or (ii) be in fact fair and reasonable to the
Company. Such transactions include, but are not limited to, the provision of
management or other services by the Company to properties or entities which
Messrs. McNulty and/or Gardner-Smith, or their Affiliates have an interest but
which are not owned by the Company; the acquisition or sale of properties

<PAGE>

by the Company from or to Messrs. McNulty and/or Gardner-Smith or their
Affiliates; or the provisions of services to the Company by entities owned or
controlled directly or indirectly by Messrs. McNulty and/or Gardner-Smith. The
Company has adopted a policy which requires that all contracts and transactions
between the Company, on the one hand, and a director or executive officer of the
Company or any entity in which such director or executive officer has a material
financial interest, on the other hand, must be approved by the affirmative vote
of a majority of the Disinterested Directors and a majority of the Independent
Directors.

BUSINESS OPPORTUNITIES/ LACK OF NONCOMPETITION ARRANGEMENTS

Pursuant to the law of Maryland, each director is obligated to offer to the
Company any business opportunity (with certain limited exceptions) that comes to
him and that the Company could reasonable be expected to have an interest in
pursuing. Messrs. McNulty and Gardner-Smith will not be subject to a covenant
not to compete with the Company. Accordingly, subject to the business
opportunities limitations discussed above, Messrs. McNulty and Gardner-Smith
will not be prohibited from rendering services to or owning an interest in
(directly or indirectly, whether as an advisor, principal, agent, partner,
officer, director, employee, stockholder, associate, or consultant to) any
person, partnership, corporation, or any other business entity, which is
competitive, directly or indirectly, with any business carried on, directly or
indirectly, by the Company.

LIMITATION OF LIABILITY AND INDEMNIFICATION

CHARTER AND BYLAWS PROVISIONS

The Company's Charter limits the liability of the Directors and officers to
the maximum extent that Maryland law permits. Any amendment to the Charter or
Bylaws provisions which provide otherwise shall not apply to any act or failure
to act which occurred prior to such amendment.

MARYLAND LAW -- LIMITATIONS OF LIABILITY AND INDEMNIFICATION

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

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

<PAGE>

Company or a predecessor of the Company.

The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.

POLICIES WITH RESPECT TO OTHER ACTIVITIES

The Company has authority to offer Shares of its Common Stock 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 expects
to issue Shares of Common Stock to holders of limited partnership interests in
Mission Bay upon the completion of the Mission Bay Acquisition. Except for the
Initial Shares of Common Stock issued in connection with the formation of the
Company, the Company has not issued shares of Common Stock or any other
securities to date. The Company has no outstanding loans to other entities or
persons, including its officers and Directors. The Company may in the future
make loans to joint ventures and partnerships in which it participates in order
to meet working capital needs. The Company has not engaged in trading,
underwriting or sale of securities of other issuers, nor has the Company
invested in the securities of other issuers. 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.

At all times, the Company intends to make investments in such a manner
consistent with the requirements of the Code so that the Company will qualify as
a REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Company's Board of Directors, with the consent of a
majority of the Shareholders, determines that it is no longer in the best
interests of the Company to qualify as a REIT.

WORKING CAPITAL RESERVES

The Company will maintain working capital reserves in amounts that the
Board of Directors determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's Board of Directors consists of three members, two of whom are
Independent

100

<PAGE>

Directors. The Board of Directors is divided into three classes. The term of
each class of directors is three years except that the initial term of the Class
I director is one year and the initial term of the Class II director is three
years. The Company has four executive officers and no employees. Certain
information regarding the Directors and executive officers of the Company is set
forth below.

Director
Name Position Class
- ---- -------- -----
<S> <C> <C>

Michael S. McNulty President, Treasurer, and Director Class III
Michael P. Fedynyshyn Vice-President and Secretary N/A
Don W. Cockcroft Independent Director Class II
William Birdsall Independent Director Class I
</TABLE>

Michael S. McNulty is President of the Company and has extensive experience
in the Real Estate Law. In 1973, he received his J.D. from Southern Methodist
University. In May, 1977, Mr. McNulty joined the real estate development
company of a multi-national family with business interests in various countries.
In that period, Mr. McNulty was responsible for developing partnerships for
investments in over thirty real estate projects with gross investments exceeding
$200,000,000. In 1987, he served as a consultant to the Herbert Hunt family.
Mr. McNulty represented United Inns, Inc., in a $60,000,000 debt restructure.
From 1990 to 1993, he assisted other clients in various debt restructures
involving over $400,000,000 in debt. In 1994, Mr. McNulty prepared due
diligence materials, coordinated due diligence efforts, and met with potential
suitors when the majority shareholder family of United Inns, Inc., decided to
sell its interests. In November, 1994, a group introduced by Mr. McNulty
purchased the shares. According to BUSINESS WEEK, page 156, (December 26, 1994
issue), United Inns, Inc. was the best performing NYSE stock in 1994. Mr.
McNulty is President and director of a controlling venturer in a Napa Valley
based winery.

Michael P. Fedynyshyn is an attorney at law, licensed to practice in the
State of California since 1986. Mr. Fedynyshyn specializes in Hospitality law.
He is a member of the San Diego Convention and Visitors Bureau and the San Diego
Hotel & Motel Association. From December, 1993 to January, 1995, Mr. Fedynyshyn
was Head of a hospitality group, consisting of four attorneys. From July, 1992
to December, 1993, Mr. Fedynyshyn was senior partner in a law firm specializing
in Commercial law, Insolvency law, and Hospitality law. From May, 1985 to July,
1992, Mr. Fedynyshyn was a partner in a law firm that specialized in Commercial
Law, Insolvency Law, and Corporate Law. The Company believes that Mr.
Fedynyshyn's extensive knowledge and experience in the hospitality industry will
contribute positively to the Company.

Don W. Cockcroft joined United Inns, Inc., in the early 1960's. Mr.
Cockcroft occupied a variety of positions in his over 25 years with United Inns,
Inc. Eventually, he became Chairman of the Board and President of United Inns,
Inc. He resigned from these positions upon the recent purchase of United Inns,
Inc., by Hampstead, Ltd. United Inns, Inc. was traded on the New York Stock
Exchange and in 1994 it achieved the New York Stock Exchange's largest
percentage gain. Mr. Cockcroft's duties with United Inns, Inc. included asset
development, acquisitions, dispositions, and debt restructure. United Inns,
Inc. was the initial franchisee of Holiday Inns and also opened the initial
Hampton Inn in Jackson, Mississippi and Atlanta, Georgia.

William Birdsall is President of Birdsall & Co., a real estate investment
and finance firm located in Del Mar, California. Before starting at Birdsall &
Co. in 1993, Mr. Birdsall was Chairman and CEO of the Price REIT, a public
company which he co-founded with Mr. Sol Price and took public in 1991 in the
form of a Real Estate Investment Trust trading on NASDAQ. Mr. Birdsall has been
involved with real estate development since 1978. He was Chief Operating
Officer of Estes Properties, Inc., where he was responsible for operations of
the Lowes Ventana Canyon Resort and Golf Club in Tucson, Arizona, a 2000-acre
planned community and resort hotel. From 1982 through 1987 he was Senior Vice
President of Real Estate for Ramada, Inc., the international hotel chain. Prior
to 1978, he served as legal counsel to the Interior

101

<PAGE>

Committee of the U.S. House of Representatives and as an Assistant Attorney
General for the State of Arizona where he specialized in environmental
legislation and enforcement. He now serves on the Scripps Memorial Hospitals
Foundation Board and is a member of the Young Presidents Organization, Arizona
Bar Association, Urban Land Institute, and International Council of Shopping
Centers.

AUDIT COMMITTEE

The Audit Committee consists of the two Independent Directors. The Audit
Committee makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.

COMPENSATION COMMITTEE

The Compensation Committee consists of the two Independent Directors. The
Company has not previously compensated its executive officers and does not plan
to compensate such officers while the Advisory Agreement is in effect. The
Company anticipates terminating the Advisory Agreement when its asset base
reaches a size which renders it more cost effective to employ Company employees
to perform management functions than to retain the Advisor. Subsequent to such
termination, the compensation paid to the officers and employees shall be
commensurate with their position and determined with reference to compensation
paid to similarly situated employees and officers of companies which are deemed
by the Compensation Committee to be comparable to the Company.

The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated by
the Board of Directors.

COMPENSATION OF DIRECTORS

The Company intends to pay to its Independent Directors an annual fee of
$6,000 during its first year of operation. Directors who are employees of the
Company will not be paid any directors' fees. In addition, the Company will
reimburse directors for travel expenses incurred in connection with their
activities on behalf of the Company. Immediately after consummation of the
Formation Transactions, the Company will sell to each of the three Directors of
the Company then in office, 10,000 Shares of Common Stock at a price per share
equal to $10 per share (i.e., the per share price of the Shares of Common Stock
in the Public Offering). The purchase price will be paid by them through
delivery of a five year promissory note executed in favor of the Company by each
purchaser, which shall bear interest, payable quarterly, at a fixed rate equal
to 7% per annum. The Shares of Common Stock purchased by each Independent
Director will be pledged to the Company to secure payment of the $100,000
promissory note, which shall be non-recourse to the maker. Principal payments
on the note will be 2% per year. In addition, the Company has agreed to forgive
the promissory notes issued in exchange for the Shares of Common Stock (i) in
increments of 18% of the principal amount per annum for each year that the maker
remains a director of the Company, and (ii) upon the death, disability, or
resignation of the Director (except for a voluntary resignation or failure to
serve). Accordingly, after five years the notes will be satisfied. In
addition, as a class, the Directors, shall be granted similar stock purchase
rights for 0.5% of the value of subsequent public issuances of the Company's
Stock.

PRINCIPAL SHAREHOLDERS

The following table sets forth the beneficial ownership of Shares and
Subordinated Shares of Common Stock upon consummation of the Formation
Transactions for (1) each person who is expected to hold more

102

<PAGE>

than a 5% interest in the Company, (2) directors of the Company, (3) the
executive officers, and (4) the directors and executive officers of the Company
as a group. Unless otherwise indicated in the footnotes, all such interests are
owned directly, and the indicated person or entity has sole voting and
investment power (or shares with spouse). The "Percentage of all Shares"
represents the number of Shares the person is expected to hold immediately after
the Formation Transactions as a percentage of the total number of Shares to be
outstanding immediately after the Formation Transactions. The table assumes the
following ownership:

Name and Address of Number of Shares Percentage of
Beneficial Owner Beneficially Owned All Shares
---------------- ------------------ ----------
<S> <C> <C>
______________
Guy E. and Dorothy Hatfield
Route 1, Box 162
Ridgeland, SC 29936

Julia Hatfield King _________ 693,737 46.7%
63 Bigwood Drive
Hilton Head Island, SC 29926

Scott Jeffrey Hatfield
1243 16th Avenue East
Seattle, WA 98112_____________

William Birdsall 10,000 .67%
2325 Del Mar Heights Road, Suite 225
San Diego, CA 92130

Don W. Cockcroft 10,000 .67%
United Inns
5100 Poplar Avenue, Suite 2300
Memphis, TN 38137

Michael S. McNulty 10,000 .67%
Hunt Properties
8235 Douglas Avenue, Suite 1300
Dallas, TX 75225

</TABLE>

THE COMPANY'S CAPITAL STOCK

DESCRIPTION OF SECURITIES

The following summary of the terms of the stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and the Company's Bylaws, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."

IN GENERAL

The Charter provides that the Company may issue up to 50,000,000 shares of
its Class A common stock, $.01 par value per share ("Shares"); up to 5,000,000
shares of its Class B common stock, $.01 par value per share ("Subordinated
Shares"); and up to 20,000,000 shares of its preferred stock, $.01 par value per
share ("Preferred Stock"). Collectively, the Shares and the Subordinated Shares
are referred to as Common Stock.

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<PAGE>

Upon completion of the Formation Transactions, 1,486,950 Shares of Common Stock
will be issued and outstanding of which 140,000 will be Subordinated Shares and
the remainder will be Shares of the Company's Class A Common Stock. No
Preferred Stock will be outstanding. Under Maryland law, stockholders generally
are not liable for the corporation's debts or obligations.

COMMON STOCK

All Shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Shareholders of Common Stock are entitled to receive
dividends on such stock if, as and when authorized and declared by the Board of
Directors out of assets legally available therefor and to share ratably in the
assets of the Company legally available for distribution to its Shareholders in
the event of its liquidation, dissolution or winding up after payment of or
adequate provision for all known debts and liabilities of the Company.

Each outstanding Share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of Shareholders, including the election of
Directors and, except as provided with respect to any other class or series of
stock, the holders of such Shares will possess the exclusive voting power.
There is no cumulative voting in the election of Directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all of
the Directors then standing for election and the holders of the remaining shares
will not be able to elect any Directors.

Shareholders of Common Stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Except for the subordination of
the Subordinated Shares to the Company's Class A Common Stock discussed above,
all Shares of Common Stock will have equal dividend, liquidation and other
rights.

Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Company's Charter
does not provide for a lesser percentage (i.e., 51%) in such situations.

The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock and to
establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.

PREFERRED STOCK

The Board of Directors is authorized to provide for the issuance of shares
of Preferred Stock in one or more series, to establish the number of shares in
each series and to fix the designation, powers, preferences and rights of each
such series and the qualifications, limitations or restrictions thereof.
Because the Board of Directors has the power to establish the preferences and
rights of each class or series of Preferred Stock, the Board of Directors may
afford the holders of any series or class of Preferred Stock preferences, powers
and rights, voting or otherwise, senior to the rights of holders of Common
Stock. The issuance of Preferred Stock could have the effect of delaying or
preventing a change in control of the Company. The Company has no present
intention to issue shares of Preferred Stock.

EXCESS STOCK

For a description of Excess Stock, see "Restrictions on Transfer"

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<PAGE>

POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK

The Company believes that the power of the Board of Directors to issue
additional authorized but unissued Shares of Common Stock and to classify or
reclassify unissued shares of Common and thereafter to cause the Company to
issue such classified or reclassified shares of stock will provide the Company
with increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the Common Stock, will be available for issuance
without further action by the Company's Shareholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
Although the Board of Directors has no intention at the present time of doing
so, it could authorize the Company to issue a class or series that could,
depending upon the terms of such class or series, delay, defer or prevent a
transaction or a change of control of the Company that might involve a premium
price for holders of Common Stock or otherwise be in their best interest.

RESTRICTIONS ON TRANSFER

For the Company to qualify as a REIT under the Code, its shares of Common
Stock must be beneficially owned by 100 or more persons during at least 335 days
of a taxable year of twelve months (other than the first year for which an
election to be a REIT has been made) or during a proportionate part of a shorter
taxable year. Also, not more than 50% of the value of the outstanding shares of
Common Stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities such as qualified pension
plans) during the last half of a taxable year (other than the first year for
which an election to be a REIT has been made).

Because the Board of Directors believes it is essential for the Company to
qualify as a REIT, the Charter, subject to certain exceptions, contains certain
restrictions on the number of shares of Common Stock of the Company that a
person may own. The Charter provides that no person may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than the lesser of
9.9% (the "Ownership Limit") of the number or value of the outstanding shares of
Common Stock of the Company. The Company's Board of Directors, upon receipt of
a ruling from the IRS, an opinion of counsel or other evidence satisfactory to
the Board and upon such other conditions as the Board of Directors may
establish, may exempt a proposed transferee from the Ownership Limit. However,
the Board may not grant an exemption from the Ownership Limit to any proposed
transferee whose ownership, direct or indirect, of in excess of 9.9% of the
value of the outstanding shares of Common Stock of the Company would result in
the termination of the Company's status as a REIT. The Ownership Limit does not
apply to the Common Stock owned, directly or indirectly, by Mr. Hatfield. As a
condition of such exemption, the intended transferee must give written notice to
the Company of the proposed transfer no later than the fifteenth day prior to
any transfer which, if consummated, would result in the intended transferee
owning shares in excess of the Ownership Limit. The Board of Directors may
require such opinions of counsel, affidavits, undertakings or agreements as it
may deem necessary or advisable in order to determine or ensure the Company's
status as a REIT. Any transfer of shares of stock that would (a) create a
direct or indirect ownership of shares of stock in excess of the Ownership
Limit, (b) result in the shares of stock being owned by fewer than 100 persons
or (c) result in the Company being "closely held" within the meaning of Section
856(h) of the Code, will be null and void and the intended transferee will
acquire no rights to the shares. The foregoing restrictions on transferability
and ownership will not apply if the Board of Directors determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT.

Any purported transfer of shares that would result in a person owning
shares in excess of the Ownership Limit or cause the Company to become "closely
held" under Section 856(h) of the Code that is not

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otherwise permitted as provided above will constitute shares of Excess Stock,
which will be transferred by operation of law to the Company as trustee for the
exclusive benefit of the person or persons to whom the shares of Excess Stock
are ultimately transferred until such time as the intended transferee
retransfers the shares of Excess Stock. While these shares of Excess Stock are
held in trust, they will not be entitled to vote or to share in any dividends or
other distributions (except upon liquidation). Subject to the Ownership Limit,
the shares of Excess Stock may be retransferred by the intended transferee to
any person (if the shares of Excess Stock would not be shares of Excess Stock in
the hands of such person) at a price not to exceed the price paid by the
intended transferee or, if the intended transferee did not give value for such
shares of Excess Stock (e.g., a transfer by gift or devise), the fair market
value (as described below) at the time of the proposed transfer that resulted in
the shares of Excess Stock, at which point the Excess Stock will automatically
be exchanged for the stock to which the shares of Excess Stock are attributable.
In addition, such shares of Excess Stock held in trust are subject to purchase
by the Company at a purchase price equal to the lesser of the price paid for the
stock by the intended transferee (or, in the case of a devise or gift, the fair
market value at the time of such devise or gift) and the fair market value of
the shares of Excess Stock on the date the Company exercises its right to
purchase. Fair market value shall be the last sales price reported on the
American Stock Exchange on the trading day immediately preceding the relevant
date, or if not then traded on the American Stock Exchange, the last sales price
of such shares of stock on the trading day immediately preceding the relevant
date as reported on any exchange or quotation system over which such shares of
stock may be traded, or if not then traded over any exchange or quotation
system, then the market price of such shares of stock on the relevant date as
determined in good faith by the Board of Directors of the Company. From and
after the intended transfer to the intended transferee of the shares of Excess
Stock, the intended transferee shall cease to be entitled to distributions
(except upon liquidation), voting rights and other benefits with respect to such
shares of the stock except the right to payment of the purchase price for the
shares of stock or the retransfer of shares as provided above. Any dividend or
distribution paid to a proposed transferee on shares of Excess Stock prior to
the discovery by the Company that such shares of stock have been transferred in
violation of the provisions of the Charter shall be repaid to the Company upon
demand. If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
intended transferee of any shares of Excess Stock may be deemed, at the option
of the Company, to have acted as an agent on behalf of the Company in acquiring
such shares of Excess Stock and to hold such shares of Excess Stock on behalf of
the Company.

All certificates representing shares of Common Stock and Preferred Stock
will bear a legend referring to the restrictions described above.

All persons who own, directly or by virtue of the attribution provisions of
the Code, more than the lesser of 5% (or such other percentage between one half
of 1% and 5%, as provided in the rules and regulations promulgated under the
Code) of the number or value of the outstanding shares of Common Stock of the
Company must give a written notice to the Company by January 31 of each year.
In addition, each stockholder shall upon demand be required to disclose to the
Company in writing such information with respect to the direct, indirect and
constructive ownership of shares of Common Stock as the Board of Directors deems
reasonably necessary to comply with the provisions of the Code applicable to a
REIT, to comply with the requirements of any taxing authority or governmental
agency or to determine any such compliance.

This Ownership Limit could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the Shareholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Bank of America,
San Francisco, California.

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

The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of the Company does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and the Charter
and Bylaws of the Company.

CLASSIFICATION OF THE BOARD OF DIRECTORS

The Bylaws provide that the number of Directors of the Company may be
established by the Board of Directors but may not be fewer than three (3) nor
more than nine (9). Any vacancy will be filled, at any regular meeting or at
any special meeting called for that purpose, by a majority of the remaining
Directors, except that a vacancy resulting from an increase in the number of
Directors must be filled by a majority of the entire Board of Directors.

Pursuant to the Charter, the Board of Directors is divided into three
classes of Directors. The initial terms of the first and second classes will
expire in 1996 and 1997 respectively. Beginning in 1998, directors of each
class will be chosen for three-year terms upon the expiration of their current
terms and each year one class of Directors will be elected by the Shareholders.
The Company believes that classification of the Board of Directors will help to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Directors. Shareholders will have no
right to cumulative voting in the election of directors. Consequently, at each
annual meeting of Shareholders, the holders of a majority of the shares of
Common Stock will be able to elect all of the successors of the class of
directors whose terms expire at that meeting.

The classified board provision could have the effect of making the
replacement of incumbent Directors more time consuming and difficult. At least
two annual meetings of Shareholders, instead of one, will generally be required
to effect a change in a majority of the Board of Directors. Thus, the
classified board provision could increase the likelihood that incumbent
Directors will retain their positions. The staggered terms of Directors may
reduce the possibility of a tender offer or an attempt to change control of the
Company, even though a tender offer or change of control might be in the best
interests of the Shareholders.

REMOVAL OF DIRECTORS

The Charter provides that a director may be removed only for cause (as
defined in the Charter) and only by the affirmative vote of at least two-thirds
of the votes entitled to be cast in the election of Directors. This provision,
when coupled with the provision in the Bylaws authorizing the Board of Directors
to fill vacant directorships, precludes Shareholders from removing incumbent
Directors except upon the existence of cause for removal and a substantial
affirmative vote and filling the vacancies created by such removal with their
own nominees.

BUSINESS COMBINATIONS

Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate thereof are prohibited for five years after the most recent date
on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be cast by holders of

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outstanding shares of voting stock of the corporation and (b) two-thirds of the
votes entitled to be cast by holders of voting stock of the corporation other
than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's Common Shareholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. Mr. Hatfield beneficially will own more than ten
percent of the Company's voting shares and would, therefore, be subject to the
business combination provision of the MGCL. However, pursuant to the statute,
the Company has exempted any business combinations involving Mr. Hatfield and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between Mr. Hatfield and the Company.
As a result, Mr. Hatfield may be able to enter into business combinations with
the Company, which may not be in the best interest of the Shareholders, without
compliance by the Company with the super-majority vote requirements and the
other provisions of the statute.

CONTROL SHARE ACQUISITIONS

The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquirer, by officers or by directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquirer, or in respect of which the acquirer is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquirer to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control Shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.

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

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

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

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The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of stock. There can be no assurance that such provision will
not be amended or eliminated at any time in the future.

AMENDMENT TO THE CHARTER

The Charter, including its provisions on classification of the Board of
Directors and removal of Directors, may be amended only by the affirmative vote
of the holders of not less than two thirds of all of the votes entitled to be
cast on the matter.

DISSOLUTION OF THE COMPANY

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

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

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

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

The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on classification of the Board of Directors and
removal of Directors and the advance notice provisions of the Bylaws could
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for holders of Common Stock or otherwise be in
their best interest.

SHARES AVAILABLE FOR FUTURE SALE

Upon the completion of the Offering, the Company will have outstanding
1,486,950 shares of Common Stock, of which 1,346,950 Shares will be held by
former Mission Bay Limited Partners, Directors, the Public Offering purchasers,
and Mr. Hatfield and his Affiliates and 140,000 Subordinated Shares will be held
by Mr. Hatfield and his Affiliates. The shares of Common Stock issued in the
Offering to the Mission Bay Limited Partners and to the purchasers of Common
Stock in the Public Offering will be freely tradeable by persons other than
Affiliates of the Company without restriction under the Securities Act of 1933,
as amended (the "Securities Act"), subject to certain limitations on ownership
set forth in the Charter. (64)

Shares and Subordinated Shares of Common Stock issued to the AAG Partners
in exchange for their Initial Shares which they received pursuant to the
Contribution and Assumption Agreement and Shares issued

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(64) See "The Company's Capital Stock -- Description of Securities --
Restrictions on Transfer."

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to the Independent Directors may be "restricted" securities under the
meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may
not be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including exemptions contained in Rule
144. As described below, the Company has granted certain holders registration
rights with respect to their shares of Common Stock.

In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquirer or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Stock or the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 also are subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. If three years have elapsed since the date of acquisition of
restricted shares from the Company or from any "Affiliate" of the Company, and
the acquirer or subsequent holder thereof is deemed not to have been an
"Affiliate" of the Company at any time during the 90 days preceding a sale, such
person would be entitled to sell such shares in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.

The Company has granted the AAG Partners who will acquire Shares and
Subordinated Shares pursuant to the Formation Transactions "primary" and
"piggyback" registration rights with respect to the Initial Shares of Common
Stock issued to them. Such registration rights, which become effective on the
sixth month anniversary of the closing of the Offering, grant the holders
thereof, with certain limitations, the right to have such shares registered
under any registration statement by the Company either separately or in
conjunction with the issuance of other Common Stock or securities substantially
similar to Common Stock. The Company will bear expenses incident to its
registration requirements, except that such expenses shall not include any
underwriting discounts or commissions, Securities and Exchange Commission or
state securities registration fees or transfer taxes relating to such shares.
Registration rights may be granted to future sellers of hotel properties to the
Company who elect to receive, in lieu of cash, Common Stock or other securities
convertible into Common Stock.

Prior to the date of this Statement, there has been no public market for
the Common Stock. Trading of the Common Stock on the American Stock Exchange is
expected to commence following the completion of the Offering. No prediction
can be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amount of Common Stock, or the
perception that such sales could occur, may affect adversely prevailing market
prices of the Common Stock. (65)

FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The following is a summary of the material federal tax income tax
considerations relevant to a prospective Shareholder of the Common Stock. The
discussion does not purport to deal with all aspects of taxation that may be
relevant to particular Shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, Exempt Organizations,

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(65) See "Risk Factors -- No Prior Market for Common Stock" and "The
Company's Capital Stock -- Shares Available for Future Sale."

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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 SHARES OF 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.

TAX TREATMENT OF THE FORMATION TRANSACTIONS

The sale of the Mission Bay hotel by Mission Bay in exchange for the
Company's Shares of Common Stock will be a taxable transaction which will
generate a taxable loss to Mission Bay. The extent to which a Mission Bay
Limited Partner may utilize its distributive share of the partnership loss (and
the character of such loss as a capital loss or an ordinary loss) will depend on
various factors, including the adjusted basis of the partnership interest to
such Mission Bay Limited Partner, whether such Mission Bay Limited Partner is an
individual, a pension plan or an individual retirement account.

MISSION BAY LIMITED PARTNERS SHOULD CONSULT WITH THEIR TAX ADVISORS TO
DETERMINE THE PRECISE TAX TREATMENT TO THEM RESULTING FROM THIS TRANSACTION.

TAXATION OF THE COMPANY

The Company plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Code, commencing with its second taxable year ending
December 31, 1995. (During the Company's initial, short taxable year ending
December 31, 1994 the Company anticipates little, if any, taxable income.) The
Company believes that, commencing with such taxable year, it will be organized
and will operate in such a manner so as to qualify for taxation as a REIT under
the Code, and the Company intends to continue to operate in such a manner, but
no assurance can be given that the Company will operate in a manner so as to
qualify or 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 for 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.

The law office of Peter G. Aylward, of San Diego, California ("Aylward")
has acted as counsel to the Company in connection with the Offering and the
Company's election to be taxed as a REIT. In the opinion of Aylward, commencing
with the Company's first taxable year ending December 31, 1995, and assuming
that the elections and other procedural steps described in this discussion of
"Federal Income Tax Considerations" are completed by the Company in a timely
fashion, the Company will be organized in conformity with the requirements for
qualification as 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.
Investors should be aware, however, that opinions of counsel are not binding
upon the IRS or any court. It must be emphasized that the opinion of Aylward is
based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters, including representations regarding
the nature of the Company's properties and the future conduct of its business.
Such factual assumptions and representations are described below in this
discussion of "Federal Income Tax Considerations" and are set out in the federal
income tax opinion that

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will be delivered by Aylward at the closing of the Offering. Moreover, such
qualification and taxation as a REIT depends upon (i) the Company's ability to
meet on a continuing basis, (ii) actual annual operating results, (iii)
distribution levels, (iv) stock ownership, and (v) various qualification tests
imposed under the Code discussed below. 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 quality as a REIT, see "-- Failure to Qualify."

If the Company qualifies 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 Shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
that generally results for investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First,
the Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the "alternative minimum
tax" on its items of tax preference. 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
non-qualifying 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 test. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, 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 assets 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 10-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 Hatfield Super 8s have built-in gain due to the Company's tax
free acquisition of those properties from AAG. Accordingly, the Company may
incur substantial tax liabilities in the future if the Company sells some or all
of the Initial Hotels within the next ten years.

REQUIREMENTS FOR QUALIFICATION

REIT QUALIFICATIONS

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 years (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the IRS that must

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be met in order to elect and to maintain REIT status; (viii) that uses a
calendar year for federal income tax purposes and complies with the record
keeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. 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 or 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
anticipates issuing Common Stock in sufficient proportions pursuant to the
Offering to allow it to satisfy requirement (v). Upon the completion of the
Formation Transactions, the Company intends to issue sufficient Common Stock so
that by June 30, 1996 (i.e., the testing date for item (vi) above) the ownership
of the Company's Common Stock on such date will satisfy the requirements of item
(vi). However, no assurances can be given that the actual ownership of the
Company's Common Stock will satisfy such requirements. In addition, the
Company's Charter will provide 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. Such transfer
restrictions are described in "Description of Capital Stock -- Charter and Bylaw
Provisions -- Restrictions on Transfer."

For purposes of determining stock ownership under the 5/50 Rule, a pension
trust generally is considered an individual. However, for taxable years
beginning on or after January 1, 1994, beneficiaries of certain pension trusts
are treated as holding shares of a REIT in proportion to their actuarial
interests in the pension trust for purposes of the 5/50 Rule.

The Company does not currently have any subsidiaries, nor will it have any
subsidiaries immediately after completion of the Offering, although it may have
subsidiaries in the future. Code Section 856(i) provides that a corporation
that is a "qualified REIT subsidiary" shall not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction, and
credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities,
and items of income, deduction, and credit of the REIT. Thus, in applying the
requirements described herein, the Company's "qualified REIT subsidiaries" will
be ignored, and all assets liabilities, and items of income, deduction, and
credit of such subsidiaries will be treated as assets, liabilities and items of
income, deduction, and credit of the Company.

In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the Company and will be deemed to be entitled to the gross
income of the Company attributable to such share. In addition, the character of
the assets and gross income of the Company 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 any
partnerships in which it holds an interest 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
three 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 of temporary investments, and from any combination of the
foregoing. Third, not more than 30% of the Company's gross income (including
gross income from prohibited transactions) for each taxable year may be gain
from the sale

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or other disposition of (i) stock or securities held for less than one year,
(ii) dealer property that is not foreclosure property, and (iii) certain real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property). The specific application of these tests to the
Company is discussed below.

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 directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). 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 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 will lease from the Company
the land, buildings, improvements, furnishing, and equipment comprising the
Initial Hotels for a 15-year period. The Percentage Leases provide that the
Lessee will be obligated to pay to the Company (i) the Base Rent; (ii) the
Percentage Rent; and (iii) certain other amounts, including interest accrued
on any late payments or charges (the "Additional Charges"). The Percentage Rent
is calculated by multiplying fixed percentages by the gross room revenues and
food and beverage rent revenues for each of the Initial 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 to 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.

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, Code Section 7701(e) 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 the 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,

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the recipient shares in savings in the property's operating cots, 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 entitles 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.

Aylward is of the opinion that the Percentage Leases will be treated as
true leases for federal income tax purposes. Such opinion is based, in part, on
the following facts: (i) the Company 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 will have the right to exclusive
possession and use and quiet enjoyment of the Initial Hotels during the term of
the Percentage Leases, (iii) the Lessee will bear the cost of, and be
responsible for, day-to-day maintenance and repair of the Initial Hotels, other
than the cost of maintaining underground utilities and structural elements, and
will dictate how the Initial Hotels are operated, maintained, and improved, (iv)
the Lessee will bear all of the costs and expenses of operating the Initial
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 Company under each Percentage Lease),
(v) the Lessee will benefit from any savings in the costs of operating the
Initial Hotels during the term of the Percentage Leases, (vi) in the event of
damage or destruction to an Hatfield Super 8', 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 Hatfield Super 8s for an amount generally equal to the
Company's investment in the Property, (vii) the Lessee will indemnify the
Company against all liabilities imposed on the Company during the term of the
Percentage Leases by reason of (A) injury to persons or damage to property
occurring at the Initial Hotels or (B) the Lessee's use, management, maintenance
or repair of the Initial Hotels, (viii) the Lessee is obligated to pay
substantial fixed rent for the period of use of the Initial Hotels, and (ix) the
Lessee stands to incur substantial losses (or reap substantial gains) depending
on how successfully it operates the Initial 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
opinion of Aylward with respect to the relationship between the Company and the
Lessee is based upon all of the facts and circumstances and upon rulings and
judicial decision involving situations that are considered to be analogous.
Opinions of counsel are not binding upon the IRS or any court, and there can be
no complete assurance that the IRS will not assert successfully a contrary
position. If the Percentage Leases are recharacterized as service contracts or
partnership agreement, rather than true leases, part or all of the payments that
the Company 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 an Initial Hotel must not be greater than 15% of the
Rents received under the Percentage Lease. The Rents attributable to the
personal property in an Initial Hotel is the amount that bears the same ratio to
total rent for the taxable year as the average of the adjusted basis of the
personal property in the Initial Hotel at the beginning and at the end of the
taxable years to the average of the aggregate adjusted basis of both the real
and personal property comprising the Initial Hotel at the beginning and at the
end of the such taxable year (the "Adjusted Basis Ratio"). The initial adjusted
basis of the personal property is each Initial Hotel (which will be a carryover
of the basis of AAG in the Hatfield Super 8s as of

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January 1, 1995, and a basis equal to the aggregate Exchange Value of the
Company's Shares of Common Stock issuable for the Mission Bay Super 8) will be
less than 15% of the initial adjusted basis of both the real and personal
property comprising such hotel. The basis of such personal property, to the
extent it was included in the Initial Hotels will be based on appraisals. The
Company anticipates that any additional personal property that the Company
acquires with a portion of the proceeds of the Offering likewise will not cause
the Adjusted Basis Ratio under any Percentage Lease to exceed 15%. Further, in
no event will the Company acquire additional personal property for an Initial
Hotel to the extent that such acquisition would cause the Adjusted Basis Ratio
for the hotel to exceed 15%. There can be no assurance, however, that the IRS
would not assert that the personal property originally acquired by AAG and
Mission Bay had a value in excess of the appraised value, or that a court would
not uphold such assertion. If such a challenge were successfully asserted, the
Company would 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 test 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 Initial Hotels that
are established in the Percentage Leases, and the Company has 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 has 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).

A third requirement for qualification of the Rents as "rents from real
Partnership" 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 stock
owned, directly or indirectly, by or for such person. The Company initially
will not own, directly or constructively, stock of the Lessee. Furthermore, the
Company has represented that with respect to other hotel properties that it
acquires in the future, it will not rent any property to a Related Party Tenant.

A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render non-customary services to
the tenants of the Initial Hotels, or manage or operate the Initial Hotels,
other than through an independent contractor from whom the Company itself does
not derive or receive any income. Provided that the Percentage Leases are
respected as true leases, the Company should satisfy that requirement because
the Company is not performing any services other than customary ones for the
Lessee. Furthermore, the Company has represented that, with respect to other
hotel properties that it acquires in the future, it will not perform non-
customary services with respect to the tenant of the property. As described
above, however if the Percentage Leases are recharacterized as service contracts
or Company 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 Initial Hotels and to manage or operate the
Initial Hotels other than through an independent contractor from whom the
Company derives or receives

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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
non-qualifying 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 non-customary services to the tenants of the Initial
Hotels, or manages or operates the Initial Hotels, other than through a
qualifying independent contractor, 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 Company 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.

Based on the foregoing, Aylward is of the opinion 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). As described above, the opinion of Aylward is based upon
an analysis of all the facts and circumstances and upon rulings and judicial
decisions involving situations that are considered to be analogous, as well as
representations by the Company and assumptions that are described above and set
out in the federal tax opinion of Aylward, which is attached as an Exhibit to
this Prospectus. Opinions of counsel are not binding upon the IRS or a court.
Accordingly, there can be no complete assurance that the IRS will not assert
successfully a contrary position and, therefore, prevent the Company from
qualifying as a REIT.

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.

Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. All inventory required
in the operation of the Initial Hotels will be purchased by the Lessee or its
designee as required by the terms of the Percentage Leases. Accordingly, the
Company and the Lessee believe that no asset owned by the Company or the Lessee
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 Lessee. Whether property
is held "primarily for sale to customers in the ordinary course of a trade or
business" depends, however, on the facts and

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circumstances in effect from time to time, including those related to the
particular property. Nevertheless, the Company and the Lessee 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 Lessee 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.

It is possible that, from time to time, the Company or the Lessee will
enter into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or
the Lessee enters into an interest rate swap or cap contract to hedge any
variable rate 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. Furthermore, any
such contract would be considered a "security" for purposes of applying the 30%
gross income test. To the extent that the Company or the Lessee 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. No such relief is available for
violations of the 30% income test.

ASSETS TESTS

The Company, at the close of each quarter of its taxable 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 receivable), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the 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 other 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 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 any partnership of which it owns an
interest, rather than its general partnership interest in the Company. The
Company has represented that, as of the date of the Offering, (i) at least 75%
of the value

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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 has
represented that it will not acquire or dispose, or cause the Company to acquire
or dispose, of assets in the future in a way that would cause it to violate
either asset requirement. Based on the foregoing, Aylward is of the opinion
that the Company will satisfy 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 its 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 arouse
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.

DISTRIBUTION REQUIREMENTS

The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its Shareholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and (B)
95% of the net income (after tax), if any from foreclosure property, minus (ii)
the sum of certain items of noncash income. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its 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. Furthermore, if the 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 intends 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 Company 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 requirement for a year by paying "deficiency dividends"
to its Shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the IRS

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interest based upon the amount of any deduction taken for deficiency dividends.

Pursuant to applicable Treasury regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its Shareholders 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 recently issued a proposed regulation (the
"Proposed Regulation") which would authorize the IRS, in the case of a certain
abusive transaction involving partnerships, to disregard the form of the
transaction and recast it for federal tax purposes as appropriate. The Proposed
Regulation would apply only where a partnership is formed or availed of in
connection with a transaction (or series of related transactions) with a
principal purpose of substantially reducing the present value of the partners'
aggregate federal tax liability in a manner that is inconsistent with the intent
of the tax provisions that govern the taxation of partnerships and partners
under the Code. The Proposed Regulation states that such partnership tax
provisions are intended to permit taxpayers to conduct business for joint
economic profit through a flexible arrangement that accurately reflects the
partners' economic agreement without incurring an entity-level tax, but are not
intended to permit taxpayers to (i) structure transactions using partnerships to
achieve tax results that are inconsistent with the underlying economic
arrangements of the parties or the substance of the transactions, or to (ii) use
the existence of the partnerships to avoid the purposes of other provisions of
the Code.

If the conditions of the Proposed Regulation are met, the IRS is authorized
to take appropriate remedial action, including disregarding the partnership for
federal tax purposes or treating one or more partners as non-partners. The
Proposed Regulation is proposed to be effective for all transactions relating to
a partnership occurring on or after May 12, 1994. Subsequent to the issuance of
the Proposed Regulation, representatives of the IRS and the Treasury Department
have stated publicly that the Proposed Regulation is not intended to affect a
corporation, such as the Company, that is seeking to qualify as a REIT and whose
Affiliates own an interest in a partnership. Based on the foregoing, Aylward is
of the opinion that such Proposed Regulation, if it were to be issued as a final
regulation in its present form, would not adversely affect the Company's
qualification 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 will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to Shareholders will be taxable as
ordinary income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which the Company ceased to qualify as a REIT. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.

TAXATION OF TAXABLE U.S. SHAREHOLDERS

As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Shareholders as ordinary income and will not be eligible
for the

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dividends received deduction generally available to corporations. As used
herein, the term "U.S. Shareholder" means a holder of Common Stock that for U.S.
federal income tax purposes is (i) a citizen or resident of the United States,
(ii) a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof, or
(iii) an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source. Distributions that are designated as capital
gain dividends will be taxed as long-term capital gains (to the extent they do
not exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the Shareholder has held his Common Stock.
However, corporate Shareholders may be required to treat up to 20% of certain
capital gains dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a Shareholder to the
extent that they do not exceed the adjusted basis of the Shareholder's Common
Stock, but rather 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 Shareholder's Common Stock, such distributions
will be included in income as long-term capital gain (or short-term capital gain
if the Common Stock has been held for one year or less) assuming the Common
Stock is a capital asset in the hands of the Shareholder. In addition, any
distribution declared by the Company in October, November, or December of any
year and payable to a Shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
Shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.

Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distribution from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, Shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which the Shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company and gain from the
disposition of Common Stock generally will be treated as investment income for
purposes of the investment interest limitations. The Company will notify the
Shareholders after the close of the Company's taxable year as to the portions of
the distributions attributable to the year that constitute ordinary income,
return of capital, and capital gain.

TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK

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

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

The Company will report to its U.S. Shareholders and the IRS the amount of
distributions paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a Shareholder may be subjected to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A Shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against

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the Shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distribution to any Shareholders
who fail to certify their non-foreign status to the Company. (66)

TAXATION OF TAX-EXEMPT SHAREHOLDERS

Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the IRS has issued a published ruling
that dividend distributions by a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used in
an unrelated trade or business of the exempt employee pension trust. Based on
that ruling and on the intention of the Company to invest its assets in a manner
that will avoid the recognition of UBTI by the Company, amounts distributed by
the Company to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of the Common Stock
with debt, a portion of its income from the Company will constitute UBTI
pursuant to the "debt-financed property" rules. Furthermore, social clubs,
voluntary employee benefits associations, supplemental unemployment benefit
trust, and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17), and (20), respectively, of Code Section 501(c)
are subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. In addition, for taxable
years beginning on or after January 1, 1994, a pension trust that owns more than
10% of the Company is required to treat a percentage of the dividends from the
Company as UBTI (the "UBTI Percentage") in certain circumstances. The UBTI
Percentage is the gross income derived from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross income
of the Company for the year in which the dividends are paid. The UBTI rule
applies only if (i) the UBTI Percentage is at least 5%, (ii) the Company
qualifies as a REIT by reason of the modification of the 5/50 Rule that allows
the beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust, and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's stock or (B) a group of pension trusts individually holding more than
10% of the value of the Company's stock collectively own more than 50% of the
value of the Company's stock.

While an investment in the Company by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described in the
preceding paragraph, any gross UBTI that does arise from such an investment will
be combined with all other gross UBTI of the Exempt Organization for a taxable
year and reduced by all deductions attributable to the UBTI plus $1,000. Any
amount then remaining will constitute UBTI on which the Exempt Organization will
be subject to tax. If the gross income taken into account in computing UBTI
exceeds $1,000 the Exempt Organization is obligated to file a tax return for
such year on an IRS Form 990-T. Neither the Company, the Board of Directors,
nor any of their Affiliates expects to undertake the preparation or filing of
IRS Form 990-T for any Exempt Organization in connection with an investment by
such Exempt Organization in the Common Stock. Generally, IRS Form 990-T must be
filed with the IRS by April 15 of the year following the year to which it
relates.

CAPITAL GAIN AND LOSSES

A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The Omnibus Budget Reconciliation Act of 1993 increased
the highest marginal individual income tax rate to 39.6%, but generally did not
change the tax rate on net capital gains applicable to individuals. Thus the
tax rate differential between capital gain and ordinary income for individuals
may be significant. In addition, the characterization of income as capital or

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(66) See "Federal Income Tax Considerations -- Taxation of Foreign
Shareholders."

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ordinary may affect the deductibility of capital losses. Capital losses not
offset by capital gains may be deducted against an individual's ordinary income
only up to a maximum annual deduction of $3,000. Unused capital losses may be
carried forward. All net capital gain of a corporate taxpayer is subject to tax
at ordinary corporate rates. A corporate taxpayer can deduct capital losses
only to the extent of capital gains, with unused losses being carried back three
years and forward five years.

TAXATION OF FOREIGN SHAREHOLDERS

UNITED STATES TAXATION RULES

The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.

Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. Shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a foreign corporation). The
Company expects to withhold U.S. income tax at the rate of 30% of the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income. Distributions in excess of current and accumulated earnings
and profits of the Company will not be taxable to a Shareholder to the extent
that such distributions do not exceed the adjusted basis of the Shareholder's
Common Stock, but rather 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 Non-U.S. Shareholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.

For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at
the normal capital gain rates applicable to U.S. Shareholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions also may be subject to a
30% branch profits tax in the hands of a foreign corporate Shareholder not
entitled to treaty relief or exemption. The Company is required by currently
applicable Treasury

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Regulations to withhold 34% of any distribution that is designated by the
Company as a capital gains dividend. However, because of Omnibus Budget
Reconciliation Act of 1993 provides for an increase in the rate of withholding
for distributions made by certain domestic partnerships, trust, and estates to
35%, it is likely that the Treasury Regulations will be amended to impose a
similar withholding rate on REIT capital gain dividends. The amount withheld is
creditable against the Non-U.S. Shareholder's FIRPTA tax liability.

Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT" and, therefore, the sale of the Common
Stock will not be subject to taxation under FIRPTA. However, because the Common
Stock will be publicly traded, no assurance can be given that the Company will
continue to be a "Domestically controlled REIT." Furthermore, gain not subject
to FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in the
Common Stock is effectively connected with the Non-U.S. Shareholder's U.S. trade
or business, in which case the Non-U.S. Shareholder will be subject to the same
treatment as U.S. Shareholders with respect to such gain, or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable and certain other conditions
apply, in which case the nonresident alien individual will be subject to a 30%
tax on the individual's capital gains. If the gain on the sale of the Common
Stock were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder will
be subject to the same treatment as U.S. Shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals). IN ADDITION, NON-U.S.
SHAREHOLDERS SHOULD BE AWARE THAT LEGISLATIVE PROPOSALS HAVE BEEN MADE TO
SUBJECT FOREIGN PERSONS TO U.S. TAX IN CERTAIN CIRCUMSTANCES ON THEIR GAINS FROM
THE SALE OF STOCK IN U.S. CORPORATIONS. THERE CAN BE NO ASSURANCE THAT SUCH A
PROPOSAL WILL NOT BE ENACTED INTO LAW IN A FORM DETRIMENTAL TO FOREIGN HOLDERS
OF THE COMMON STOCK.

OTHER TAX CONSEQUENCES

The Company and its Shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its Shareholders may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN
INVESTMENT IN THE COMPANY.

SALE OF THE COMPANY'S PROPERTY

Generally, any gain realized by the Company on the sale of property by the
Company held for more than one year will be long-term capital gain, except for
any portion of such gain that is treated as depreciation or cost recovery
recapture. However, as indicated above, a sale by the Company of any of the
Initial Hotels will also generate the "built-in gain" inherent in the Hatfield
Super 8s as of January 1, 1995, and in the Mission Bay Super 8 at the date of
the Company's acquisition of the Mission Bay Super 8. The Board of Directors
has adopted a policy that any decision to sell the Initial Hotels will be made
by a majority of the Independent Directors. (67)

The Company's share of any gain realized by the Company on the sale of any
property held by the Company as inventory or other property held primarily for
sale to customers in the ordinary course of the

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(67) See "Risk Factors -- Conflicts of Interest."

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Company'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. (68)

UNDERWRITING

The Company has not entered into an Underwriting Agreement with respect to
any of the transactions described in this Statement. The Advisor has agreed,
however, to use its best efforts to sell the Common Stock to be offered for sale
in the Public Offering with a placement fee of up to 10% being charged to the
Company by the Advisor for any such sales.

Prior to this Offering, there has been no public market for the Common
Stock. The initial Exchange Value of the Common Stock being offered in the
Formation Transactions will be $10 per share. Once the shares are listed and
traded on the AMEX, the value of the Common Stock will be established by a
market mechanism. Since this traded value will be lower (or possibly higher)
than the Exchange Value, the value of the Common Stock after trading commences
will be different than the Exchange Value. The factors which will underlie this
traded value, in addition to prevailing market conditions, will be dividend
yields and certain financial characteristics of publicly traded REITs that are
comparable to the Company, the expected results of operations of the Company
(which are based on the results of operations of the Initial Hotels in recent
periods), the current state of the hotel industry and an assessment of the
Company's management.

The Company's Common Stock has been approved for listing on the AMEX. The
Common Stock will trade under the symbol - HFN. Notwithstanding the listing of
the Company's Common Stock on the AMEX, there can be no assurance that an active
public market for the Common Stock will develop and continue after the Offering.

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

(68) See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests."

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EXPERTS

The Financial Statements of AAG as of December 31, 1994 and 1993 and for
the year ended December 31, 1994, 1993, and 1992 included in this Statement and
the related financial statement schedules included elsewhere in the Registration
Statement have been audited by William H. Ling, Certified Public Accountant, San
Diego, California, an independent accountant, as set forth in his reports
thereon included elsewhere herein and in the Registration Prospectus. Such
Financial Statements and financial statement schedules are included in reliance
upon such reports given on his authority as an expert in accounting and
auditing.

The results of the appraisals of the Initial Hotels by Arthur Andersen LLP,
are included herein on the authority of said firm as an expert in valuations and
appraisals of hotel properties.

REPORTS TO SHAREHOLDERS

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

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by attorney Peter G. Aylward, San Diego, California. In
that connection, Mr. Aylward is relying upon an opinion of Ballard Spahr Andrews
& Ingersoll of Baltimore, Maryland as to certain matters of Maryland law. In
addition, the description of federal income tax consequences contained in the
section of the Prospectus entitled "Federal Income Tax Considerations" is based
on the opinion of attorney Peter G. Aylward, San Diego, California.

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ADDITIONAL INFORMATION

The Company has filed with the SEC a Registration Statement on Form S-4
under the Securities Act with respect to the securities offered hereby. The
Prospectus does not contain all of the information set forth in the Offering
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the SEC. Descriptions and summaries contained in this
Prospectus as to the content of any contract or other document 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 Offering Statement, each
such statement being qualified in all respects by such reference and the
exhibits and schedules hereto. For further information regarding the Company
and the Common Stock offered hereby, reference is hereby made to the Prospectus
and such exhibits and schedules.

The Offering Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Commission can be inspected and copies
obtained from the Commission at Room 1204, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.

GLOSSARY

Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.

"AAG" means All American Group, Ltd. a Delaware limited partnership.

"AAG AFFILIATES" means Guy and Dorothy Hatfield and their respective
Affiliates.

"AAG PARTNERS" means the partners of AAG who have received Common Stock of
the Company upon the consummation of the Contribution and Assumption Agreement.

"ACQUISITION CO." means Host Acquisition Group, LLC, a Delaware limited
liability company.

"ADDITIONAL CHARGES" means certain other amounts, including interest
accrued on any late payments or charges, due under the Percentage Leases.

"ADJUSTED APPRAISED VALUE" means the appraised value of Mission Bay
determined by William H. Ling as adjusted for outstanding indebtedness, security
deposits, prepayment penalties and selling costs.

"ADVISOR" means Host Funding Advisors, Inc., a Delaware corporation.

"ADVISORY AGREEMENT" means an Advisory Agreement between the Company and
the Advisor pursuant to which the Advisor will provide management and investment
services to the Company.

"AFFILIATE" means (i) any person that, directly or indirectly, controls or
is controlled by or is under common control with such person, (ii) any other
person that owns, beneficially, directly or indirectly, five percent (5%) or
more of the outstanding capital stock, shares or equity interests of such
person, or (iii) any officer, director, employee, partner or trustee of such
person or any person controlling, controlled by or under common control with
such person (excluding trustees and persons serving in similar capacities who
are not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations, companies, trusts,
banks trust companies, land trusts, business trusts, or other entities and
governments and agencies and

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political subdivisions thereof. For the purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, through the ownership
of voting securities, partnership interests or other equity interests.

"AMEX" means the American Stock Exchange.

"APPLICATION" means the Applications for Qualification of Securities, as
amended (of which this Prospectus/Consent Solicitation is a part) under the
California Corporate Securities Law of 1968, with respect to the Shares to be
issued in the Mission Bay Acquisition and Shares which are issuable in exchange
for Limited Partnership Interests. See "Description of Shares - Exchange of
Shares.

"BASE RENT" means the fixed obligation of the Lessee to pay a sum certain
in monthly rent under each of the Percentage Leases.

"BOARD OF DIRECTORS" means the Board of Directors of the Company, as
constituted from time to time.

"BYLAWS" means the Bylaws of the Company, as in effect from time to time,
including the proposed Restated Bylaws to be effective prior to the consummation
of the Mission Bay Acquisition.

"CASH AVAILABLE FOR DISTRIBUTION" means the pro forma net income increased
by amortization and depreciation and decreased by estimated non-development
related capital expenditures and estimated debt repayments plus adjustments for
certain known events occurring after December 31, 1994 that are not reflected in
the pro forma results of operations. Cash available for distribution should not
be considered as an alternative to net income (determined in accordance with
generally accepted accounting principles) as an indication of performance or to
cash flow from operating activities as a measure of liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all the Company's needs.

"CHARTER" means the Articles of Incorporation of the Company, together with
the proposed Articles of Amendment and Restatement to be effective prior to the
consummation of the Mission Bay Acquisition.

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

"COMMISSION" means the Securities and Exchange Commission.

"COMMON STOCK" means the Common Stock of the Company, par value, $.01 per
share, including both the Class A common shares and the Class B common shares.

"COMPANY" means Host Funding, Inc., a Maryland corporation.

"CONSENT FORM" means the Transmittal Letter, the Partner Consent, the
Statement of Election and the Power of Attorney, which, together with the
Prospectus/Consent Solicitation Statement and partner information schedule
constitute the Solicitation Materials. A form of CONSENT FORM is attached
hereto as Appendix A.

"CONTRIBUTION AND ASSUMPTION AGREEMENT" means the agreement entered into by
and between AAG and the Company effective as of January 1, 1995, whereby the
Company acquired the Hatfield Super 8s and the Hatfield Note from AAG in
exchange for 100 Shares of Common Stock in the Company.

"CPI" means the United States Consumer Price Index.

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"DEPARTMENT" means the California Department of Corporations.

"DIRECTORS" means the members of the Company's Board of Directors.

"DISINTERESTED DIRECTORS" means, with respect to any transaction proposed
between the Company and another party (the "Contracting Party"), those directors
who:

(a) do not serve as directors, officers, partners or trustees of, or in any
similar capacity of control with respect to, the Contracting Party;

(b) do not own, directly or indirectly, have a beneficial interest in, or
have the right to vote, any of the equity and/or debt security of the
Contracting Party; PROVIDED, HOWEVER, that the ownership, control or interest in
less than 1% of the outstanding debt and/or equity securities of the Contracting
Party shall not cause a director to lose his status as a Disinterested Director
is the Contracting Party is a public company and the director's interest is
disclosed to the Board of Directors before any action is taken with respect to
the proposed transaction;

(d) have not received, and have no expectations or understanding with
respect to the future receipt of compensation, fees, remuneration, commissions
or other financial gain from the Contracting Party with respect to the proposed
transaction or as to any other transaction if such financial gain is or could be
construed as a reciprocal business arrangement.

"DISSENTING PARTNER" means, with respect to Mission Bay, a Partner in
Mission Bay who casts a vote against the Mission Bay Acquisition (and Mission
Bay ultimately approves and closes said Mission Bay Acquisition), and elects to
receive cash in lieu of Shares in accordance with "Voting Procedures--
Dissenters' Rights."

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

"EXCESS STOCK" means Common Stock owned directly or indirectly by a person
in excess of the 9.9% Ownership Limit as set forth in the Company's Articles of
Incorporation, with such Excess Stock being transferred by operation of law to
the Company as trustee for the exclusive benefit of the transferee of the
original holder of said excess shares; and while held in trust, the shares of
Excess Stock will not be entitled to vote or share in any dividends.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
applicable regulations thereunder.

"EXCHANGE VALUE" means the constant dollar value of $10 per share based on
which the Company will issue its Common Stock in the Formation Transactions.

"EXEMPT ORGANIZATIONS" means tax-exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.

"FINANCIAL ASSET ACQUISITION AGREEMENT" means the agreement entered into by
and between AAG and the Lessee effective as of January 1, 1995, whereby the
Lessee acquired the financial assets of the Hatfield Super 8s from AAG in
exchange for the Lessee's assumption of liabilities and transfer of a promissory
note to AAG in the amount of $60,135.

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

"FORMATION TRANSACTIONS" means the principal transactions in connection
with the formation of the Company as a REIT, the acquisition of the Mission Bay
Super 8 by the Company in exchange for its Shares of Common Stock, and the
Public Offering of Shares of Common Stock of the Company for cash.

"FUNDS FROM OPERATIONS" means net income (loss) before gain on sale of
property plus certain non-cash items such as depreciation and amortization.
Funds From Operations should not be considered as an alternative to net income
(determined in accordance with generally accepted accounting principles), as an
indication of performance or to cash flow from operating activities as a measure
of liquidity, nor is it necessarily indicative of sufficient cash flow to fund
all of the Company's needs.

"GOVERNING DOCUMENTS" means the Charter and Bylaws of the Company.

"HATFIELD NOTE" means the secured promissory note for the amount of
$1,805,675 of Guy Hatfield and certain of his Affiliates on to AAG which was
assigned by AAG to the Company as part of the Contribution and Assumption
Agreement.

"HATFIELD SUPER 8S" means the four hotel properties acquired by the Company
from AAG pursuant to the Contribution and Assumption Agreement; specifically
the Poplar Bluff Super 8 located in Poplar Bluff, Missouri, the Rock Falls Super
8 located in Rock Falls, Illinois, the Miner Super 8 located in Miner, Missouri,
and the Somerset Super 8 located in Somerset, Kentucky.

"HMR" means Hotel Mortgage Resources Corp., a Maryland corporation which is
controlled by Mr. Ian Gardner-Smith.

"INDEPENDENT DIRECTOR" means a director of the Company who is not an
officer or employee of the Company, any Affiliate of an officer or employee or
any Affiliate of (i) any advisor to the Company under an advisory agreement,
(ii) any lessee of any property of the Company, (iii) any subsidiary of the
Company, or (iv) any partnership which is an Affiliate of the Company.

"INFORMATION AGENT" means the Company or such other person or persons that
have been engaged by the Company to solicit and/or tabulate Partner Consents
from the Partners and to perform certain consulting, administrative and clerical
work in connection with the Mission Bay Acquisition.

"INITIAL HOTELS" means the four Hatfield Super 8s and the Mission Bay Super
8 collectively.

"INITIAL SHARES" means the 100 Shares of the Company's Common Stock
presently held by Mr. Hatfield and his Affiliates.

"IRS" means the Internal Revenue Service.

"LESSEE" means Inn Fund, LLC, a Delaware limited liability company which
has leased the Hatfield Super 8s from the Company pursuant to the Percentage
Leases and which will lease the Mission Bay Super 8 pursuant to a Percentage
Lease and any lessee of a hotel property owned by the Company including the
Lessee and any and all other parties that become lessees of hotel properties
owned by the Company at any time after the Formation Transactions and the
Offering.

"MANAGEMENT AGREEMENT" means the management agreements between the Lessee
and Manager pursuant to which Manager will operate the Initial Hotels on behalf
of the Lessee.

130

<PAGE>

"MANAGER" means All American Group, Inc., a Delaware corporation which will
manage the Initial Hotels for the Lessee pursuant to Management Agreements.

"MGCL" means the General Corporation Law of Maryland.

"MISSION BAY" means Mission Bay Super 8 Ltd., a California limited
partnership, sometimes referred to as the "Partnership".

"MISSION BAY ACQUISITION AGREEMENT" means the asset acquisition agreement
by and between Mission Bay and the Company upon the consummation of which the
Company will acquire the assets of Mission Bay (i.e., the Mission Bay Super 8)
in exchange for Shares of Common Stock of the Company and after which the Shares
of Common Stock of the Company will be distributed to the Limited Partners of
Mission Bay in a final liquidating distribution of Mission Bay.

"MISSION BAY SUPER 8" means the Super 8 hotel owned by Mission Bay, which
is located in San Diego, California.

"MISSION BAY LIMITED PARTNERS" means the limited partners of Mission Bay
Super 8, Ltd, sometimes referred to simply as Limited Partners.

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

"NONQUALIFYING INCOME" means income not described in Section 856(c)(2) of
the Code, or any successor provisions.

"NON-U.S. SHAREHOLDERS" means nonresident alien individuals, foreign
corporations, foreign partnership and foreign trusts and estates.

"OFFERING" means the offerings of Shares of Common Stock to the purchasers
in the Public Offering as well as the offerings of Shares of Common Stock to the
Mission Bay Limited Partners pursuant to the Mission Bay Acquisition Agreement
as well as the issuance of the Shares and Subordinated Shares to Mr. Hatfield
and his Affiliates in exchange for the Initial Shares in the Formation
Transactions.

"OWNERSHIP LIMIT" means the direct or constructive ownership by any
stockholder or group of affiliated stockholders of more than 9.8% of the
outstanding Shares.

"OWNERSHIP LIMITATION" means the ownership of more than 9.9% of the Common
Stock.

"OWNERSHIP LIMITATION PROVISION" means a provision of the Articles of
Incorporation restricting the ownership of share of Common Stock to the
Ownership Limitation.

"PARTICIPATING PARTNER" means a Partner of Mission Bay who participates in
the Mission Bay Acquisition and who is not a Dissenting Partner.

"PARTNERS" means the general partners and the limited partners of Mission
Bay and reference to a "PARTNER" shall be to any one of the Partners.

"PARTNERSHIP AGREEMENT" means the partnership agreement of Mission Bay as
amended and restated.

"PERCENTAGE LEASES" means the operating leases between the Lessee and the
Company pursuant to which the Lessee leases the four Hatfield Super 8s from the
Company and which the Lessee will lease the

131

<PAGE>

Mission Bay Super 8 from the Company.

"PERCENTAGE RENT" means rent based on percentages of revenue payable by the
Lessee pursuant to the Percentage Leases.

"PREFERRED STOCK" means the preferred stock, par value $.01 per share, of
the Company.

"PROSPECTUS/CONSENT SOLICITATION STATEMENT" means this Prospectus/Consent
Solicitation Statement of the Company, as it may be further supplemented or
amended from time to time.

"PUBLIC OFFERING" means the public offering of Shares of Common Stock by
the Company with a minimum required gross cash offering proceeds of $5,000,000.

"QUALIFIED PLANS" means qualified pension, profit-sharing and other
employee retirement benefit plans (including Keogh plans) and trusts, bank
commingled trust funds for such plans and individual retirement accounts.

"QUALIFYING DISTRIBUTIONS" means distributions made by the Company
attributable to any calendar year to the extent they do not exceed 100% of REIT
Taxable Income for such year.

"REIT" means a real estate investment trust as defined in Section 856 of
the Code or any successor provisions.

"REIT QUALIFYING INCOME" means income described in Section 856(c)(3) of the
Code, or any successor provision.

"REIT QUALIFYING INVESTMENT" means an investment in assets described in
Section 856(c)(5) of the Code, or any successor provision.

"REIT TAXABLE INCOME" means "real estate investment trust taxable income"
as computed under Section 857 of the Code.

"RENTS" mean the Base Rent and the Percentage Rent, collectively.

"REVPAR" means revenue per available room.

"RULE 144" means the rule promulgated under the Securities Act that permits
holders of restricted securities as well as affiliates of an issuer of the
securities, pursuant to certain conditions and subject to certain restrictions,
to sell their securities publicly without registration under the Securities Act.

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

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

"SHARES" means the Company's shares of Class A Common Stock, $.01 par
value.

"SHAREHOLDERS" mean the holders of the Company's Common Stock.

"SOLICITATION MATERIALS" means the Prospectus/Consent Solicitation
Statement together with the Consent Form and any other materials approved for
use in the solicitation, which will be used by the Company to solicit the votes
of the Partners to the Mission Bay Acquisition.

132

<PAGE>

"SOLICITATION PERIOD" means the period during which the Mission Bay
Partners may vote "for" or "against" the Mission Bay Acquisition which commences
upon the delivery of the Prospectus to the Mission Bay Limited Partners (on or
about ____, 1995) and will continue until the later of thirty (30) calendar days
after the initial delivery of the Prospectus or such later date as may be
selected by the Company and as to which notice is given to the Partner.

"SUBORDINATED DEBT" means the aggregate principal mortgage indebtedness
which currently is owed by AAG and which is secured by financing of the various
Hatfield Super 8s.

"TRANSACTION EXPENSES" means all costs and expenses incurred by Mission Bay
or the Company in the preparation for, and in the consummation of, each of the
transactions contemplated by this Prospectus/Consent Solicitation Statement.

"TREASURY REGULATIONS" means the United States Treasury Regulations
promulgated under the Code, as such Treasury Regulations may be amended from
time to time (including corresponding provisions of succeeding regulations)
whether in final, temporary or proposed form.

"UBTI" means unrelated business taxable income under the Code.

"VOTING STOCK" means, at any time, all of the then outstanding stock of the
Company entitled to vote generally in the election of Directors.

133

<PAGE>

INDEX TO FINANCIAL STATEMENTS

I HOST FUNDING, INC.:

*Balance Sheet as of April 1, 1995 (unaudited). . . . . . . . . . . . . F-2
*Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-3

II ALL AMERICAN GROUP, LTD.:

Cover Page -- Independent Auditor's Report. . . . . . . . . . . . . . . F-4
Independent Auditor's Report on Financial Statements. . . . . . . . . . F-5
Balance Sheet as of December 31, 1994 and 1993 . . . . . . . . . . . . F-6
Statements of Operations Years Ended December 31, 1994, 1993 and 1992 . F-7
Statements of Changes in Partners' Equity (Deficit) Years
Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . F-8
Statements of Cash Flows Years Ended December 31, 1994, 1993 and 1992 . F-9
Notes to Financial Statements Years Ended December 31, 1994,
1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . . F-10 - F-14
Independent Auditor's Report on Supplementary Information . . . . . . .F-15
Supplemental Statement of Operations Year Ended December 31, 1994 . . .F-16
Supplemental Statement of Operations Year Ended December 31, 1993 . . .F-17
Supplemental Statement of Operations Year Ended December 31, 1992 . . .F-18

III MISSION BAY SUPER 8, LTD.:

The following documents filed with the Commission by Mission Bay are hereby
incorporated by reference in this Prospectus:

(A) Mission Bay's Annual Reports on Form 10-K (SB) for the fiscal years
ended December 31, 1992, 1993 and 1994.

(B) Mission Bay's Current Report (for the quarter ended March 31, 1995)
on Form-Q (SB) dated May 12, 1995.

* To be filed by Amendment

F-1

<PAGE>

HOST FUNDING, INC.

BALANCE SHEET
AS OF APRIL 1, 1995
(UNAUDITED, IN THOUSANDS)

The following unaudited Pro Forma Condensed Consolidated Balance Sheet of
Host Funding, Inc., is presented as if the acquisition of the Initial Hotels and
the consummation of the Public Offering and other Formation Transactions and the
application of the proceeds of the Public Offering had occurred on March 31,
1995. Such information is based upon the consolidated balance sheet of the
Company and it should be read in conjunction with Financial Statements listed
in the Index at page F-1 of this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made.

This following unaudited Pro Forma Condensed Consolidated Balance Sheet is
not necessarily indicative of what the actual financial position would have
been assuming such transactions had been completed as of April 1, 1995, nor does
it purport to represent the future financial position of the Company.

F-2

<PAGE>

[To be filed by amendment]

HOST FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS

F-3

<PAGE>

ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A Limited Partnership)
(formerly M.A.C. Development Limited Partnership)

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1994, 1993 and 1992

F-4

<PAGE>
INDEPENDENT AUDITOR'S REPORT

To the Partners
All American Group Limited Partnership (a Limited Partnership)

I have audited the accompanying balance sheets of All American Group Limited
Partnership (a Limited Partnership) as of December 31, 1994, 1993 and 1992 and
the related statements of operations, changes in partners' equity (deficit), and
cash flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. My responsibility is to express
an opinion on these financial statements based on my audit.

I have conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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 disclosure 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.
I believe that my audit provides a reasonable basis for my opinion.

In my opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership at December 31, 1994, 1993
and 1992 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 6 to the
financial statements, the Partnership, on April 1, 1995, has transferred
substantially all of their assets to Host Funding, Inc., a Maryland corporation,
in exchange for common stock. It is the present intention of management of the
Partnership to distribute the Host Funding, Inc. common stock to the Partners
resulting in a substantial liquidation of the Partnership. Management's plans
concerning these matters are also described in Note 6. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

April 4, 1995
San Diego, California

F-5

<PAGE>
ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A Limited Partnership)
(formerly M.A.C. Development Limited Partnership)

BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------

1994 1993
- --------------------------------------------------------------------------------

ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 83,846 $ 60,361
Accounts receivable 68,411 66,017
Prepaid expenses 42,672 43,808
------------- -------------

Total current assets 194,929 170,186
------------- -------------

LAND, PROPERTY AND EQUIPMENT - At cost:
Building and improvements 3,551,352 3,526,331
Hotel furnishings and equipment 2,452,338 2,278,400
Less accumulated depreciation (3,016,957) (2,833,179)
------------- -------------
2,986,733 2,971,552
Land 907,287 924,627
------------- -------------

Land, property and equipment - net 3,894,020 3,896,179
------------- -------------

OTHER ASSETS:
Loan commitment fees - net 129,799 40,973
Restricted cash 18,950 18,950
Due from related parties 393,655 239,820
------------- -------------

Total other assets 542,404 299,743
------------- -------------

Total $ 4,631,353 $ 4,366,108
------------- -------------
------------- -------------

LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
------------------------------------------

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 256,828 $ 276,835
Accounts payable - related parties 26,165 26,065
Current portion of long-term debt 1,270,674 348,112
------------- -------------

Total current liabilities 1,553,667 651,012

LONG-TERM DEBT (net of current portion) 4,819,423 5,978,854
------------- -------------

Total liabilities 6,373,090 6,629,866
------------- -------------

COMMITMENTS (notes 2, 3, 4, 5 and 6)

PARTNERS' EQUITY (DEFICIT):
General Partner 5,220 -
Limited Partners (1,746,957) (2,263,758)
------------- -------------

Total Partners' equity (deficit) (1,741,737) (2,263,758)
------------- -------------

Total $ 4,631,353 $ 4,366,108
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------

F-6
<PAGE>
ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A Limited Partnership)
(formerly M.A.C. Development Limited Partnership)

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Room Sales $ 3,389,674 $ 3,389,734 $ 4,545,142
Telephone 105,088 95,424 74,572
Other - principally vending 53,079 53,208 56,093
------------- ------------- -------------

Total 3,547,841 3,538,366 4,675,807
------------- ------------- -------------

EXPENSES:
Rooms 746,891 736,546 989,574
Interest 542,432 830,404 1,374,894
Administrative and general 411,177 490,431 672,555
Depreciation and amortization 195,784 217,131 559,194
Management fee 175,730 175,980 138,016
Franchise 169,515 169,505 227,273
Repairs and maintenance 166,572 167,777 239,083
Energy cost 164,329 177,082 241,487
Property taxes 88,904 89,108 111,942
Telephone 61,260 69,244 101,441
Insurance 54,230 44,147 76,809
Marketing 53,996 62,312 79,714
------------- ------------- -------------

Total (includes reimbursed costs and payments
for services to related parties of $378,602,
$389,225, and $523,182, during 1994, 1993 and
1992 respectively) 2,830,820 3,229,667 4,811,982
------------- ------------- -------------

OPERATING INCOME (LOSS) 717,021 308,699 (136,175)
------------- ------------- -------------

OTHER INCOME (EXPENSES):
Gain (Loss) on disposition of properties - 876,106 (119,881)
Loan restructuring costs - (135,844) (119,056)
------------- ------------- -------------

Total - 740,262 (238,937)
------------- ------------- -------------

NET INCOME (LOSS) $ 717,021 $ 1,048,961 $ (375,112)
------------- ------------- -------------
------------- ------------- -------------

ALLOCATION OF NET INCOME (LOSS):
General Partner $ 7,170 $ - $ (37,511)
Limited Partners 709,851 1,048,961 (337,601)
------------- ------------- -------------

Total $ 717,021 $ 1,048,961 $ (375,112)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

See accompanying notes to financial statements.
- --------------------------------------------------------------------------------

F-7
<PAGE>

ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A Limited Partnership)
(formerly M.A.C. Development Limited Partnership)

STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
GENERAL LIMITED
PARTNERS' PARTNERS'
EQUITY (DEFICIT) (DEFICIT) TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1992 $ (830,311) $ (2,017,296) $ (2,847,607)

NET LOSS (75,022) (300,090) (375,112)
--------------- -------------- --------------

BALANCE, DECEMBER 31, 1992 (905,333) (2,317,386) (3,222,719)

TRANSFER 905,333 (905,333) 0

NET INCOME - 1,048,961 1,048,961

DISTRIBUTIONS TO PARTNERS - (90,000) (90,000)
--------------- -------------- --------------

BALANCE, DECEMBER 31, 1993 0 (2,263,758) (2,263,758)

NET INCOME 7,170 709,851 717,021

DISTRIBUTIONS TO PARTNERS (1,950) (193,050) (195,000)
--------------- -------------- --------------

BALANCE, DECEMBER 31, 1994 $ 5,220 $ (1,746,957) $ (1,741,737)
--------------- -------------- --------------
--------------- -------------- --------------
</TABLE>

See accompanying notes to financial statements.
- --------------------------------------------------------------------------------

F-8
<PAGE>

ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A Limited Partnership)
(formerly M.A.C. Development Limited Partnership)

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 717,021 $ 1,048,961 $ (375,112)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 195,784 217,131 559,194
(Gain) loss on disposition of properties - (876,106) 119,881
Changes in operating assets and liabilities
Accounts receivable (2,394) (15,401) 34,705
Prepaid expenses 1,136 14,407 39,012
Accounts payable and accrued expenses (20,007) 24,030 535
Accounts payable - related parties 100 2,899 -
--------------- -------------- --------------

Net cash provided by operating activities 891,640 415,921 378,215
--------------- -------------- --------------

INVESTING ACTIVITIES:
Purchases of property and equipment (198,959) (279,474) (170,263)
Loan commitment fees (100,413) (49,570)
Restricted cash - (18,950)
Due from related parties - net (136,495) (223,784) (493,283)
Net proceeds from disposition of land, property
and equipment - 2,295,968 1,635,000
--------------- -------------- --------------

Net cash provided by (used in) investing activities (435,867) 1,724,190 971,454
--------------- -------------- --------------

FINANCING ACTIVITIES:
Distributions to Partners (195,000) (90,000) -
Borrowings on long-term debt 1,719,000 3,456,156 -
Payments on long-term debt (1,955,869) (5,520,037) (1,428,815)
Other (419) 6,112 39,772
--------------- -------------- --------------

Net cash used in financing activities (432,288) (2,147,769) (1,389,043)
--------------- -------------- --------------

NET INCREASE (DECREASE) IN CASH 23,485 (7,658) (39,374)

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 60,361 68,019 107,393
--------------- -------------- --------------

CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 83,846 $ 60,361 $ 68,019
--------------- -------------- --------------
--------------- -------------- --------------

SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION -
Cash paid during the year for interest $ 525,321 $ 841,085 $ 1,324,936
--------------- -------------- --------------
--------------- -------------- --------------
</TABLE>

See accompanying notes to financial statements.
- --------------------------------------------------------------------------------

F-9

<PAGE>
ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A LIMITED PARTNERSHIP)
------------------------
(formerly M.A.C. Development Limited Partnership)

NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION

The accompanying financials include the accounting of All American Group
Limited Partnership, a Delaware limited partnership (the "Partnership"), of
M.A.C. Development Limited Partnership, a previous Wyoming limited
partnership (the "M.A.C."), and of Florence LLC, a Delaware limited
liability company (the "Florence LLC"). The Partnership was formed on
January 27, 1993 for the purpose of owning, maintaining, operating,
managing, mortgaging, creating security interests in, refinancing, leasing,
improving and/or eventually disposing of seven motel properties (five
remaining as of December 31, 1993 and four as of 1995 (see notes 5 and 6)
located in Illinois (1), Kentucky (1) and Missouri (2) (previously Nevada),
and such other property as may be received by the Partnership from time to
time, and engaging in any and all activities related or incidental thereto.
The motel properties owned by the Partnership were acquired via transfer of
the assets, liabilities and capital accounts of M.A.C. Development Limited
Partnership, a Wyoming limited partnership ("MAC") formed in April 1984.
The transfer occurred concurrent with the formation of the Partnership in
January 1993. MAC disposed of two properties located in Kentucky in 1992.
Florence Corporation was formed on April 4, 1994 and merged into Florence
LLC on December 20, 1994, for the purpose of holding the real estate assets
of a motel located in Florence, Kentucky, to enable the Partnership to
refinance and obtain a new first mortgage payable on these assets.
Florence LLC commenced operating the motel on January 1, 1995. As of
December 31, 1994, Florence LLC was 99% owned by the Partnership and 1%
owned by Guy E. Hatfield (see note 6).

The General Partner of the Partnership is All American Group, Inc., a
Delaware corporation ("the General Partner"), who during 1993 did not own a
capital or net profits and losses interest, which remaining interests are
owned 100% collectively by the Limited Partners. Effective January 1,
1994, the General Partner re-acquired a 1% interest in the Partnership via
transfer from the Limited Partners. Prior to 1992, the General Partner was
M.A.C. Development, Inc., who owned a 20% interest in the Partnership,
which interest was transferred to the Limited Partners in January 1993.
The General Partner has the sole and exclusive control of the management of
the business and affairs of the Partnership. The term of the Partnership
is until December 31, 2010, unless the term is earlier terminated or
extended by unanimous written agreement of all the Partners as provided in
the Partnership Agreement ("the Agreement") (see notes 2 and 6).

Net profits, losses and cash flows from operations of the Partnership are
allocated to the Partners in proportion to their respective Partnership
interests as provided in the Agreement.

Cash equivalents represent the Partnership's undivided interest in cash
accounts managed by the General Partner (see Note 2) on behalf of General
Partner-managed properties. Funds transferred to the cash account are held
primarily in business checking and merchant credit card accounts. The cash
accounts are used to pay substantially all outstanding bills and to
accumulate substantially all receipts on behalf of the Partnership.

Buildings and improvements are being depreciated over useful lives of 35
years using the straight-line method. Hotel furnishings and equipment are
being depreciated using primarily straight-line methods over useful lives
ranging from 3 to 7 years.

F-10
<PAGE>
The loan commitment fees are net of accumulated amortization of $20,607 in
1994 and $8,601 in 1993. No loan commitment fees were outstanding in 1992.
The amortization periods are the terms of the loans.

Restricted cash represents a certificate of deposit held by a bank as
security for the State of Missouri to assure sales tax is timely paid.

In accordance with the provisions of the Internal Revenue Code, the
Partnership is not subject to the payment of income taxes, and no provision
therefore is required to be made herein. At December 31, 1994 and 1993,
the Partnership's net assets for Federal tax reporting purposes totalled
approximately $3,760,000 and $3,725,000, respectively.

2. MANAGEMENT AND RELATED PARTY TRANSACTIONS

The Partnership has entered into a Management Agreement ("Management
Agreement") with the General Partner for a term of ten (10) years from
January 1, 1992, with three (3) successive ten (10) year options to extend,
to manage the motel operations. The Management Agreement may be terminated
early upon the occurrence of certain events as specified in the Management
Agreement. On January 1, 1995, in connection with the Partnership's
leasing of the motel properties described in note 6, the Partnership
terminated the Management Agreement with the General Partner.

All of the outstanding stock of the General Partner is owned by Guy E.
Hatfield. Prior to December 31, 1994, Guy E. Hatfield, his wife and two
children were directly or indirectly owners of approximately 83% of the
General and Limited Partner interest in the Partnership. Effective January
1, 1995, the Hatfields acquired the remaining limited partners' approximate
17% interest (see note 6).

Under the Management Agreement, the General Partner is paid a management
fee equal to 5% of motel revenues, as defined. In 1992, the General
Partner, agreed to accept a reduced management fee equal to 3% of motel
revenues as defined. Management fees paid in 1994, 1993 and 1992 totalled
$175,728, $175,980 and $138,017.

The Partnership has reimbursed or accrued a payable to the General Partner
(based on actual costs incurred by the General Partner) for certain costs
paid on behalf of the Partnership. These costs include insurance and
workmen's compensation premiums, travel, legal costs and other expenses.
The total of such costs reimbursed in 1994, 1993 and 1992 totalled
$202,874, $213,245 and $321,401. In addition, the General Partner
presently provides bookkeeping, refurbishment and capital addition advisory
and partnership administration services to the Partnership at no charge.

In February 1994, the Partnership sold land adjacent to one of the motels
located in Missouri to an entity substantially owned by Guy E. Hatfield for
$17,340, which was equal to its cost.

Other assets as of December 31, 1994 and 1993 include interest-free net
advances made to the General Partner or affiliates totalling $393,655 and
$239,820, respectively.

3. FRANCHISE AGREEMENTS

The Partnership has been granted license agreements by Super 8 Motels, Inc.
for 20-year terms expiring in 2005. Pursuant to the terms of the
agreement, the Partnership is required to pay a royalty fee and an
advertising fee equal to 4% and 1%, respectively, of gross room revenue.

F-11

<PAGE>
4. LONG-TERM DEBT AND LOAN RESTRUCTURING COSTS

A summary of the Partnership's long-term debt as of December 31, 1994 and
1993 follows:
<TABLE>
<CAPTION>

1994 1993
---- ----
<S> <C> <C>
First mortgage note payable; 8.5% interest
until March 1994, prime plus 1.5% but not
less than 8.5% thereafter, adjusted annually;
payments of $11,823 monthly, due March 1998;
personal guarantees of Guy E. and Dorothy
Hatfield. $1,121,406 $1,165,914

First mortgage note payable; 8.75% interest;
payments of $11,244 monthly; due February
1998. 1,051,351 1,091,098

First mortgage note payable; prime plus 2%,
adjusted quarterly; payments of $9,174 monthly,
due March 1998. 901,301 930,167

Modified first mortgage note payable; interest
at greater of prime or six (6) month commercial
paper rates plus 3%, but not less than 9%;
variable monthly payment of interest plus
principal to amortize over ten (10) years from
July 1993; due August 1995 (see below). 1,061,656 1,154,871

Three (3) modified second mortgage notes
payable; interest at greater of prime or six
(6) month commercial paper rate plus 3%,
but not less than 9%; variable monthly
payments of interest plus principal to
amortize over five (5) years from
July 1993; due July 1998 (see below). 242,835 324,613

First mortgage note payable; 11.57% interest;
payments of $18,515 monthly; due
September 2014. 1,711,548 -

Modified first mortgage note payable;
interest at greater of prime or six (6)
month commercial paper rate plus 3%, but
not less than 9%; variable monthly payment
of interest plus principal to amortize
over fifteen (15) years from July 1993;
due August 1995. - 1,660,303
---------- ----------

6,090,097 6,326,966

Less current portion 1,270,674 348,112
---------- ----------

$4,819,423 $5,978,854
---------- ----------
---------- ----------
</TABLE>

F-12
<PAGE>

Aggregate principal payments for the next five years and thereafter
subsequent to December 31, 1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $1,270,674
1996 237,034
1997 230,682
1998 2,756,023
1999 38,376
Thereafter 1,557,308
----------

Total $6,090,097
----------
----------

</TABLE>
Substantially all of the assets of the Partnership are pledged as security
for the above debt.

The Partnership was in default under their Loan Agreement ("Loan
Agreement") with the lender that held first mortgage notes payable on all
of the motel properties in 1992, with a combined balance outstanding of
$8,390,847 as of December 31, 1992. In August 1992, March 1993 and July
1993, the Partnership entered into agreements to modify the original Loan
Agreement whereby: four (4) of the motel properties were sold for cash in
1993 and 1992 (see note 5) and the net proceeds totalling $2,292,139 and
$1,438,816, respectively, were applied to reduce debt outstanding; three
motels in 1993 and one motel in August 1994 were refinanced, with the
proceeds totalling $3,059,433 and $1,622,212, respectively, applied to
reduce debt outstanding; and, the remaining debt outstanding was modified
into a first mortgage note payable on one motel and three modified second
mortgage notes payable on three motels, as described above. Under the Loan
Agreement, the Partnership was required to refinance or sell the property
located in Somerset, Kentucky by August 1995 and retire the debt
outstanding. In March 1995, the modified first mortgage note payable
totalling $1,061,656 and the three modified second mortgage notes payable
totalling $242,835 were refinanced into a first mortgage note payable
totalling $1,160,000 at an annual interest rate of prime plus 1/2%,
adjusted daily, payable monthly with the outstanding principal and any
accrued interest due September 30, 1995.

As part of the Loan Agreement, the Partnership agreed to pay costs and
expenses of the lenders totalling $135,844 and $119,056, which amounts were
expensed as loan restructuring costs in 1993 and 1992, respectively.

5. PROPERTY SALES

In March and May 1993, the Partnership sold for cash two motel properties
located in Elizabethtown, Kentucky and Elko, Nevada, respectively.
Substantially all of the net cash proceeds from the sales of $2,295,968
were used to retire outstanding debt via previous agreement with the
Partnership's lender (see note 4). As result of the property sales, the
Partnership recognized gain on disposition of properties of $876,106 in
1993.

In May and September 1992, the Partnership sold for cash two motels located
in Richmond and Bowling Green, Kentucky, respectively. Substantially all
of the net cash proceeds from the sales of $1,552,541 were used to retire
outstanding debt via previous agreement with the Partnership's lender (see
note 4). As a result of the property sales, the Partnership recognized
loss on disposition of properties of $97,750 in 1992.

F-13
<PAGE>

6. SUBSEQUENT EVENTS AND POSSIBLE PARTNERSHIP LIQUIDATION

On February 28, 1995, the minority limited partner, James R. Vickery
("Vickery") and the Hatfield family general and limited partner interests
agreed to exchange the Partnership's 99% interest in Florence LLC for
Vickery's 16.85% limited partnership interest in the Partnership.

On January 1, 1995, the partnership agreed to lease the four remaining
motel properties located in Somerset, Kentucky; Rock Falls, Illinois; and
Poplar Bluff and Sikeston, Missouri to Inn Fund, LLC, a Delaware limited
liability company ("Inn Fund"). Guy E. Hatfield owns 7.5% and Ian Gardner-
Smith owns 92.5% equity interest in Inn Fund. The lease terms are for a
period of 15 years at combined total annual base rents of $1,212,000 or
percentage rentals ranging from 28% to 55% for each individual property
based upon gross revenue levels, whichever is greater.

On March 31, 1995, Guy E. Hatfield, his wife and two children, via a
capital contribution, contributed a mortgage note receivable in the amount
of $1,805,675 to the Partnership. This mortgage note receivable is secured
by ______________________ and bears interest at 10% per annum, payable
quarterly commencing on __________________, 1995, with remaining
outstanding principal and unpaid interest due and payable on March 31,
2000.

On April 1, 1995, the Partnership entered into an agreement with Host
Funding, Inc., a Maryland corporation ("Host Funding") to contribute
certain assets of the Partnership's four remaining motel properties located
in Somerset, Kentucky; Rock Falls, Illinois; and Poplar Bluff and Sikeston,
Missouri; and the mortgage note receivable (the "Contribution and
Assumption Agreement") for 100% of the common stock in Host Funding. Host
Funding assumed the Partnership's lease with Inn Fund concurrent with the
transfer.

Host Funding intends to qualify as a real estate investment trust ("REIT").
In addition, Host Funding intends to acquire certain assets of Mission Bay
Super 8, Ltd., a California limited partnership ("Mission Bay"), the owner
of a 117 room Super 8 motel located in San Diego, California, pursuant to
an asset acquisition agreement (the "Mission Bay Acquisition Agreement") by
which Host Funding will acquire the hotel assets of Mission Bay. The
Mission Bay Acquisition Agreement will exchange common stock in Host
Funding for limited and general partnership interest in a final liquidating
distribution by Mission Bay.

It is the present intention of management of the Partnership to distribute
the Host Funding common stock to the Partners resulting in a substantial
liquidation of the Partnership. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

F-14
<PAGE>

INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION

To the Partners
All American Group Limited Partnership (a Limited Partnership)

My audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplemental statements of operations are
presented for purposes of additional analysis and are not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements, and in my
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.

April 4, 1995
San Diego, California

F-15

<PAGE>
ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A Limited Partnership)
(formerly M.A.C. Development Limited Partnership)

SUPPLEMENTAL STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Sub-total
Rock Poplar Continuing Discontinued
Falls Miner Somerset Bluff Operations Operations Total
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales $664,480 $811,923 $543,305 $590,789 $2,610,497 $779,177 $3,389,674
Telephone 23,830 23,181 15,539 17,449 79,999 25,089 105,088
Other - principally vending 19,815 10,915 2,615 10,626 43,971 9,108 53,079
-------------------------------------------------- --------------- ------------- --------------

Total 708,125 846,019 561,459 618,864 2,734,467 813,374 3,547,841
-------------------------------------------------- --------------- ------------- --------------

EXPENSES:
Rooms 141,790 164,653 129,895 126,012 562,350 184,541 746,891
Interest 102,258 108,044 101,447 88,253 400,002 142,430 542,432
Administrative and general 77,473 109,542 66,036 64,141 317,192 93,985 411,177
Depreciation and amortization 33,925 36,899 33,428 34,860 139,112 56,672 195,784
Management fee 34,618 42,108 28,083 30,669 135,478 40,252 175,730
Franchise 33,224 40,606 27,182 29,542 130,554 38,961 169,515
Repairs and maintenance 37,186 30,088 28,227 26,044 121,545 45,027 166,572
Energy cost 33,534 32,962 21,908 26,133 114,537 49,792 164,329
Property taxes 36,209 9,899 11,444 11,735 69,287 19,617 88,904
Telephone 12,557 10,607 10,898 9,686 43,748 17,512 61,260
Insurance 9,883 17,123 7,287 8,501 42,794 11,436 54,230
Marketing 1,862 16,198 16,186 17,643 51,889 2,107 53,996
-------------------------------------------------- --------------- ------------- --------------

Total 554,519 618,729 482,021 473,219 2,128,488 702,332 2,830,820
-------------------------------------------------- --------------- ------------- --------------

OPERATING INCOME (LOSS) 153,606 227,290 79,438 145,645 605,979 111,042 717,021
-------------------------------------------------- --------------- ------------- --------------

OTHER INCOME (EXPENSES):
Gain on disposition of properties - - - - - - -
Loan restructuring costs - - - - - - -
-------------------------------------------------- --------------- ------------- --------------

Total 0 0 0 0 0 0 0
-------------------------------------------------- --------------- ------------- --------------

NET INCOME $153,606 $227,290 $79,438 $145,645 $605,979 $111,042 $717,021
-------------------------------------------------- --------------- ------------- --------------
-------------------------------------------------- --------------- ------------- --------------

ALLOCATION OF NET INCOME:
General Partner $7,170
Limited Partners 709,851
--------------
Total $717,021
--------------
--------------
</TABLE>

See accompanying notes to financial statements.
- --------------------------------------------------------------------------------

F-16

<PAGE>
ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A Limited Partnership)
(formerly M.A.C. Development Limited Partnership)

SUPPLEMENTAL STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sub-total
Rock Poplar Continuing Discontinued
Falls Miner Somerset Bluff Operations Operations Total
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales $653,730 $771,277 $458,145 $558,761 $2,441,913 $947,821 $3,389,734
Telephone 19,641 21,077 12,804 13,460 66,982 28,442 95,424
Other - principally vending 19,210 11,580 3,872 12,052 46,714 6,494 53,208
--------------------------------------------------- -------------- ------------- ---------------

Total 692,581 803,934 474,821 584,273 2,555,609 982,757 3,538,366
--------------------------------------------------- -------------- ------------- ---------------

EXPENSES:
Rooms 129,945 154,536 108,210 127,071 519,762 216,784 736,546
Interest 119,062 149,387 135,506 112,161 516,116 314,288 830,404
Administrative and general 80,147 112,146 63,912 70,832 327,037 163,394 490,431
Depreciation and amortization 33,102 31,708 23,859 33,906 122,575 94,556 217,131
Management fee 34,070 40,209 23,764 29,018 127,061 48,919 175,980
Franchise 32,688 38,567 22,917 27,940 122,112 47,393 169,505
Repairs and maintenance 30,534 31,405 37,138 30,693 129,770 38,007 167,777
Energy cost 32,839 32,828 20,364 23,690 109,721 67,361 177,082
Property taxes 36,209 8,856 11,444 8,075 64,584 24,524 89,108
Telephone 13,611 11,158 11,597 10,409 46,775 22,469 69,244
Insurance 7,849 7,473 6,459 6,934 28,715 15,432 44,147
Marketing 3,786 16,612 16,674 14,264 51,336 10,976 62,312
--------------------------------------------------- -------------- ------------- ---------------

Total 553,842 634,885 481,844 494,993 2,165,564 1,064,103 3,229,667
--------------------------------------------------- -------------- ------------- ---------------

OPERATING INCOME (LOSS) 138,739 169,049 (7,023) 89,280 390,045 (81,346) 308,699
--------------------------------------------------- -------------- ------------- ---------------

OTHER INCOME (EXPENSES):
Gain on disposition of properties - - - - - 876,106 876,106
Loan restructuring costs (25,470) (25,471) (25,471) (25,471) (101,883) (33,961) (135,844)
--------------------------------------------------- -------------- ------------- ---------------

Total (25,470) (25,471) (25,471) (25,471) (101,883) 842,145 740,262
--------------------------------------------------- -------------- ------------- ---------------

NET INCOME $113,269 $143,578 ($32,494) $63,809 $288,162 $760,799 $1,048,961
--------------------------------------------------- -------------- ------------- ---------------
--------------------------------------------------- -------------- ------------- ---------------

ALLOCATION OF NET INCOME:
General Partner $0
Limited Partners 1,048,961
--------------
Total $1,048,961
--------------
--------------
</TABLE>

See accompanying notes to financial statements.

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

F-17

<PAGE>
ALL AMERICAN GROUP LIMITED PARTNERSHIP
(A Limited Partnership)
(formerly M.A.C. Development Limited Partnership)

SUPPLEMENTAL STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sub-total
Rock Poplar Continuing Discontinued
Falls Miner Somerset Bluff Operations Operations Total
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales $556,939 $731,293 $435,314 $531,938 $2,255,484 $2,289,658 $4,545,142
Telephone 11,817 9,402 8,677 6,441 36,337 38,235 74,572
Other - principally vending 7,581 8,603 7,373 9,269 32,826 23,267 56,093
--------------------------------------------------- -------------- ------------- --------------

Total 576,337 749,298 451,364 547,648 2,324,647 2,351,160 4,675,807
--------------------------------------------------- -------------- ------------- --------------

EXPENSES:
Rooms 116,533 146,095 101,094 112,848 476,570 513,004 989,574
Interest 150,421 171,758 150,645 158,665 631,489 743,405 1,374,894
Administrative and general 73,080 109,477 65,491 65,388 313,436 359,119 672,555
Depreciation and amortization 78,192 82,675 39,618 85,949 286,434 272,760 559,194
Management fee 16,961 22,153 13,272 16,096 68,482 69,534 138,016
Franchise 27,848 36,568 21,777 26,598 112,791 114,482 227,273
Repairs and maintenance 42,808 30,505 20,607 38,608 132,528 106,555 239,083
Energy cost 30,721 33,772 19,434 22,714 106,641 134,846 241,487
Property taxes 32,023 8,636 7,787 10,284 58,730 53,212 111,942
Telephone 15,432 10,056 11,577 9,231 46,296 55,145 101,441
Insurance 9,708 9,444 7,908 8,640 35,700 41,109 76,809
Marketing 1,786 16,173 13,314 14,013 45,286 34,428 79,714
--------------------------------------------------- -------------- ------------- --------------

Total 595,513 677,312 472,524 569,034 2,314,383 2,497,599 4,811,982
--------------------------------------------------- -------------- ------------- --------------

OPERATING INCOME (LOSS) (19,176) 71,986 (21,160) (21,386) 10,264 (146,439) (136,175)
--------------------------------------------------- -------------- ------------- --------------

OTHER INCOME (EXPENSES):
Gain on disposition of properties - - - - - (119,881) (119,881)
Loan restructuring costs (14,882) (14,882) (14,882) (14,882) (59,528) (59,528) (119,056)
--------------------------------------------------- -------------- ------------- --------------

Total (14,882) (14,882) (14,882) (14,882) (59,528) (179,409) (238,937)
--------------------------------------------------- -------------- ------------- --------------

NET INCOME ($34,058) $57,104 ($36,042) ($36,268) ($49,264) ($325,848) ($375,112)
--------------------------------------------------- -------------- ------------- --------------
--------------------------------------------------- -------------- ------------- --------------
ALLOCATION OF NET INCOME:
General Partner ($37,511)
Limited Partners (337,601)
--------------
Total ($375,112)
--------------
--------------

</TABLE>

See accompanying notes to financial statements.

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

F-18

<PAGE>

APPENDIX A--FORM OF CONSENT FORM

CONSENT FORM

Please read this entire Consent Form. You should receive and complete
separate Consent Forms (Parts 1 through 2) (including this cover note) if you
have interests in different capacities (e.g., (i) as husband and wife, (ii)
individually, (Information Agent) in trust, or (iv) in an IRA).

You should receive and complete separate Partner Consents (Part 2) within
each separate Consent Form (Parts 1 through 2). YOUR SPOUSE MUST SIGN AS WELL
(REGARDLESS OF HOW TITLE IS HELD AND REGARDLESS OF WHETHER YOUR SPOUSE'S NAME IS
INDICATED ABOVE) IF YOUR INTEREST IS COMMUNITY PROPERTY.

The Transmittal Letter (Part 1) explains the 2 parts to the Consent Form
included. Please read the Transmittal Letter.

A-1
<PAGE>

PART 1
TRANSMITTAL LETTER

This Consent Form (the "Consent Form") contains materials that must be
completed by every Partner of Mission Bay Super 8 Ltd., a California limited
partnership who has received a Prospectus/Consent Solicitation Statement with
respect to the acquisition of assets of the Mission Bay Partnership by Host
Funding, Inc. Capitalized terms used herein and not otherwise defined herein
shall have the respective meaning as set forth in the Prospectus/Consent
Solicitation Statement of Host Funding, Inc. dated ____________, 1995.

You should complete and return this Consent Form. If you have interests in more
than one capacity (e.g., (i) as husband and wife, (ii) individually,
(Information Agent) in trust, or (iv) in an IRA), you will receive a separate
Consent Form for each capacity.

THE CONSENT FORM CONSISTS OF TWO PARTS:

1. TRANSMITTAL LETTER. (PINK PAPER) The first part is this Transmittal
Letter, which highlights the procedures for completing the Consent
Form. For a more detailed discussion of these procedures, see the
section entitled "Voting Procedures" in the Prospectus/Consent
Solicitation Statement.

2. PARTNER CONSENT. (PROXY CARD) The second part is the Partner Consent
which seeks your consent to the Mission Bay Acquisition and certain
related matters. A Partner who submits a signed Proxy Card but fails
to make one or more of the three elections required by the Partner
Consent will be deemed to have voted "for" the Mission Bay
Acquisition. You should receive and complete separate Partner
Consents for each capacity in which you serve as a Partner. You may
receive multiple versions of the Partner Consent in this Consent Form
package.

WHEN SIGNING AS A GENERAL PARTNER, CORPORATE OFFICER, ATTORNEY-IN-FACT,
EXECUTOR, TRUSTEE, ADMINISTRATOR, GUARDIAN, CORPORATE OFFICER, ETC., PLEASE GIVE
YOUR FULL TITLE AND SEND PROPER EVIDENCE OF AUTHORITY WITH THE CONSENT FORM.
FOR JOINT OWNERS, EACH JOINT OWNER MUST SIGN. YOUR SPOUSE MUST SIGN AS WELL
(REGARDLESS OF HOW TITLE IS HELD AND REGARDLESS OF WHETHER YOUR SPOUSE'S NAME IS
INDICATED ABOVE) IF YOUR INTEREST IS COMMUNITY PROPERTY. FOR IRAS, BOTH THE
BENEFICIARY AND TRUSTEE MUST SIGN. BY SIGNING THE CONSENT FORM, YOU HEREBY
AGREE TO ALL THE PROVISIONS CONTAINED IN THIS TRANSMITTAL LETTER. IF ANY PART
OF THE CONSENT FORM IS UNDATED, YOUR SIGNATURE WILL BE AUTHORITY FOR THE COMPANY
TO ENTER THE DATE OF RECEIPT.

If the Partner whose name is printed hereon is not an individual, the
person signing the Consent Form hereby represents that he or she is, in his or
her representative capacity, empowered and duly authorized by the governing
documents, trust instruments, pension plan, charter, certificate or articles of
incorporation, bylaw provision or board or stockholder resolution to complete
and execute this Consent Form in such capacity on behalf of the Partner. The
Company reserves the right to require from such partner evidence or an opinion
of counsel, acceptable to the Company, that the entity has met all of the
requirements of its governing instruments and is authorized to vote on the
proposal. If the Partner is an Individual Retirement Account or pension plan
pursuant to which the beneficiary thereof is permitted to direct the investment,
the person signing this Consent Form further represents that such document has
been completed pursuant to direction of such beneficiary.

A-2

<PAGE>

CONSENT OF A PARTNER (I.E., A VOTE "FOR") CONSTITUTES APPROVAL OF THE
MISSION BAY ACQUISITION BY THE COMPANY AND ALL THE TRANSACTIONS CONTEMPLATED IN
THE SECTION OF THE PROSPECTUS/CONSENT SOLICITATION STATEMENT ENTITLED "THE
FORMATION TRANSACTIONS".

Before filling out this Consent Form, you and your advisor if any, should
carefully review the Prospectus/Consent Solicitation Statement, including
appendices.

If you have any questions regarding the Mission Bay Acquisition or if you
would like assistance in completing this Consent Form, please contact Elaine
Ruff at (619) 226-1212.

FOR THE CONSENT FORM TO BE EFFECTIVE, THE EXECUTED CONSENT FORM MUST BE
RETURNED TO, AND RECEIVED AT ANY TIME PRIOR TO 11:59 P.M. PACIFIC TIME ON
___________, 1995 BY THE INFORMATION AGENT AT THE FOLLOWING ADDRESS:

The Consent Forms will be effective only upon actual receipt by the
Information Agent at the address specified above. A self-addressed stamped
envelope for return of the Consent Form has been included. However, the method
of delivery of the Consent Form to the Information Agent is at the election and
risk of the Partner, but if such delivery is by mail, it is suggested that
Partners use certified or registered mail, return receipt requested, and that
the mailing be made sufficiently in advance of __________ 19__ to permit
delivery to the Information Agent on or before ___________, 1995.

ONCE DELIVERED TO THE INFORMATION AGENT, CONSENT FORMS WHEREIN A PARTNER
VOTES "FOR" THE MISSION BAY ACQUISITION BY THE COMPANY ARE IRREVOCABLE
REGARDLESS OF THE AMOUNT OF TIME REMAINING IN THE SOLICITATION PERIOD AND MAY BE
CHANGED OR WITHDRAWN ONLY WITH THE CONSENT OF THE COMPANY. Upon the Company's
consent to a withdrawal or change of vote, a written or facsimile transmission
notice of withdrawal or change of vote must be timely received by the
Information Agent prior to the expiration of the Solicitation Period at its
address set forth above and must specify the name of the person who executed the
Consent Form that is to be withdrawn or changed and the name of the registered
holder, if different from that of the person who executed the Consent Form.

A-3

<PAGE>

PART 2
PARTNER CONSENT

LABEL WHICH INCLUDES THE FOLLOWING INFORMATION:

[NAME AND ADDRESS OF PARTNER] Mission Bay Super 8, Ltd., a
California limited partnership

[SOCIAL SECURITY NUMBER OR
TAX I.D. NUMBER]

____% of Total Limited Partner Interest

____ Units of Limited Partner Interest

MESSRS. HATFIELD AND GROSVENOR RECOMMEND THAT YOU VOTE "FOR" THE MISSION BAY
ACQUISITION.

Vote "for" or "against" participation by the Company of the Mission Bay
Acquisition or "abstain" by marking "X" in the appropriate box on the attached
proxy card ("Proxy Card"). A vote to approve the Mission Bay Acquisition also
operates as an approval of all the transactions contemplated in the section of
the Prospectus/Consent Solicitation Statement entitled "The Formation
Transactions", including approval of the Mission Bay Acquisition Agreement in
substantially the form set forth in Appendix B to the Prospectus/Consent
Solicitation Statement, and including the liquidation and/or dissolution of
Mission Bay. Partners who return a signed Partner Consent but fail to indicate
their approval or disapproval will be deemed to have voted to approve.

ONCE DELIVERED TO THE INFORMATION AGENT, CONSENT FORMS WHEREIN A PARTNER
VOTES "FOR" THE MISSION BAY ACQUISITION ARE IRREVOCABLE REGARDLESS OF THE AMOUNT
OF TIME REMAINING IN THE SOLICITATION PERIOD AND MAY BE CHANGED OR WITHDRAWN
ONLY WITH THE CONSENT OF THE COMPANY. Upon the Company's consent to a
withdrawal or change of vote, a written or facsimile transmission notice of
withdrawal or change of vote must be timely received by the Information Agent
prior to the expiration of the Solicitation Period at its address set forth
above and must specify the name of the person who executed the Consent Form that
is to be withdrawn or changed and the name of the registered holder, if
different from that of the person who executed the Consent Form.

Under penalty of perjury, the Partner whose name is printed herein, by
executing and returning the enclosed Proxy Card, certifies that the following,
to the best of his/her/its knowledge and belief, is true, correct and complete:
(1) My address and social security or tax identification number are as provided
on the Transmittal Letter; (2) I am not subject to backup withholding under
Internal Revenue Code ("Code") section 3406(a)(1) either because (a) I have not
been notified by the Internal Revenue Service that I am subject to backup
withholding as a result of a failure to report all interest and dividends or (b)
the Internal Revenue Service has notified me that I am no longer subject to
backup withholding; and (3) I am a citizen or resident of a State of the United
States and am NOT a nonresident alien, nor is the entity for which I am signing
this document (if applicable) a foreign corporation, foreign partnership,
foreign trust, or foreign estate (as those terms are defined in the Code and
Income Tax Regulations).

A-4

<PAGE>

PART 2 - PARTNER CONSENT

If the Partner whose name is printed on the Partner Consent is not an
individual, the person signing this Proxy Card hereby represents that he or she
is, in his or her representative capacity, empowered and duly authorized by the
governing documents, trust instruments, pension plan, charter, certificate or
articles of incorporation, bylaw provision or board or stockholder resolution to
complete and execute this Partner consent in such capacity on behalf of the
Partner. The Company reserves the right to require from such Partner evidence
or an opinion of counsel, acceptable to the Company, that the entity has met all
of the requirements of its governing instruments and is authorized to vote on
the proposal. If the Partner is an Individual Retirement Account or pension
plan pursuant to which the beneficiary thereof is permitted to direct the
investment, the person signing this Proxy Card further represents that such
document has been completed pursuant to direction of such beneficiary.

By executing the Proxy Card the undersigned represents and warrants that as
of the date hereof and the date of the consummation of the Mission Bay
Acquisition (i) the undersigned has received a copy of the Prospectus/Consent
Solicitation Statement, (ii) the undersigned is the owner of the Mission Bay
percentage indicated on the Partner Consent and the undersigned has good,
marketable and unencumbered title to such interests, and (iii) the undersigned
has full legal right, power and authority to execute an deliver the Proxy Card.
BY SIGNING THE PROXY CARD, THE UNDERSIGNED HEREBY AGREES TO ALL THE PROVISIONS
CONTAINED IN THE TRANSMITTAL LETTER. If any of this information is incorrect,
please notify the Information Agent at the address set forth in the Transmittal
Letter as soon as possible.

WHEN SIGNING AS A GENERAL PARTNER, CORPORATE OFFICER, ATTORNEY-IN-FACT,
EXECUTOR, TRUSTEE, ADMINISTRATOR, GUARDIAN, CORPORATE OFFICER, ETC., PLEASE GIVE
YOUR FULL TITLE AND SEND PROPER EVIDENCE OF AUTHORITY WITH THE CONSENT FORM.
FOR JOINT OWNERS, EACH JOINT OWNER MUST SIGN. YOUR SPOUSE MUST SIGN AS WELL
(REGARDLESS OF HOW TITLE IS HELD AND REGARDLESS OF WHETHER YOUR SPOUSE'S NAME IS
INDICATED ABOVE) IF YOUR INTEREST IS COMMUNITY PROPERTY. FOR IRAS, BOTH THE
BENEFICIARY AND TRUSTEE MUST SIGN. IF NO SPECIFICATION IS MADE, YOU WILL HAVE
VOTED "FOR" THE CONSOLIDATION AS SET FORTH ABOVE. IF THIS PARTNER CONSENT IS
UNDATED, YOUR SIGNATURE WILL BE AUTHORITY FOR THE OPERATING PARTNERSHIP TO ENTER
THE DATE OF RECEIPT.

PROXY CARD

The undersigned hereby acknowledges receipt of the Prospectus/Consent
Solicitation Statement of Host Funding, Inc., dated ______________, 1995, for
the acquisition of the assets of Mission Bay in exchange for Shares of the
Company and the undersigned votes as follows as to such transactions:

VOTE HERE:

FOR AGAINST ABSTAIN

SIGN HERE:
_________________________________________ ________
Sign exactly as your name(s) appear(s) on Date
prior page

Print Name: _________________________________________

Social Security Number or Tax I.D.:__________________

TELEPHONE NUMBER:_______________________

_______________________________________ ________
Sign exactly as your name(s) appears on Date
prior page

Print Name: ______________________________________

A-5

<PAGE>

APPENDIX B
MISSION BAY ACQUISITION AGREEMENT

THIS MISSION BAY ACQUISITION AGREEMENT (this "Agreement") is made and
entered into as of _______________, 1995, by and between Host Funding, Inc., a
Maryland corporation (the "Company") and Mission Bay Super 8, Ltd., a California
limited partnership (the "Partnership").

RECITALS

WHEREAS, the Company currently owns four hotels and it wishes to acquire a
hotel owned by the Partnership and to close certain transactions in connection
therewith;

WHEREAS, in connection with the public offering of its Shares of Common
Stock on the American Stock Exchange and its election of REIT status for federal
income tax purposes (the "Formation Transactions"), the partners of the
Partnership have approved the sale of all of the Property (as hereinafter
defined) of the Partnership to the Company pursuant to the terms of the
Prospectus/Consent Solicitation Statement dated ________, 1995, with such sale
to be effected through the transfer of all of the applicable assets and certain
of the liabilities of the Partnership to the Company upon the terms and
conditions provided herein;

WHEREAS, the Partnership owns the real and personal property comprising the
Mission Bay Super 8 hotel (the "Hotel") located in San Diego, California; and

WHEREAS, upon consummation of this Agreement, the Company will lease the
Hotel to Inn Fund, LLC, a Delaware limited liability company (the "Lessee"),
pursuant to a Percentage Lease identical in form to the Percentage Leases which
were entered into by and between the Company and the Lessee with respect to the
four hotels the Company currently owns.

NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants set forth herein, the parties hereto hereby agree as follows:

SECTION I
DEFINITIONS

Certain of the terms used in this Agreement that are not otherwise defined
herein shall have the meanings set forth below:

"ACCOUNTANTS" shall have the meaning set forth in Subsection 7.7 of this
Agreement.

"ACQUIRED ASSETS" shall have the meaning set forth in Subsection 2.1 of
this Agreement.

"AFFILIATE" - with respect to any entity, any natural person or firm,
corporation, partnership, association, trust or other entity which controls is
controlled by, or is under common control with, the subject entity; a natural
person or entity which controls an Affiliate under the foregoing shall also be
deemed to be an Affiliate of such entity. For purposes hereof, the term
"control" shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of any such entity,
or the power to veto major policy decisions of any such entity, whether through
the ownership of voting

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<PAGE>

securities, by contract, or otherwise.

"AGREEMENT" shall mean this Mission Bay Acquisition Agreement, as the name
may be amended from time to time.

"APPLICATION" means the Application for Qualification of Securities under
the Corporate Securities Law of 1968 filed by the Company with the California
Department of Corporations on ______________, 1995 in connection with the
Formation Transactions, as such application is amended.

"APPURTENANCES" shall mean all rights, privileges, interests, licenses,
claims, easements, benefits, covenants, conditions and servitudes of any type of
nature which are appurtenant to or otherwise benefit the Land (as such term is
defined below) and/or Improvements (as such term is defined below), including
without limitation, all minerals, oil, gas and other hydrocarbon substances on
or under the Land, to the extent such rights, privileges, easements, benefits,
covenants, conditions and servitudes are owned by the Partnership, as well as
all development rights, air rights, water, water rights and water stock relating
to the Land and any other easements, rights of way or appurtenances owned by the
Partnership and used in connection with the beneficial operation, use and
enjoyment of the Land, the Improvements (as such term is defined below), the
Miscellaneous Hotel Assets (as such term is defined below) or any other
appurtenance, together with all rights of the Partnership in and to streets,
sidewalks, alleys, gores, strips, driveways, parking areas and areas adjacent
thereto or used in connection therewith, and all rights of the Partnership in
any land lying in the bed of any existing or proposed street adjacent to the
Land.

"ASSET TRANSFER CONDITIONS" shall have the meaning set forth in Section VI
of this Agreement.

"ASSUMED LIABILITIES" shall have the meaning set forth in Subsection 2.1 of
this Agreement.

"BOOKINGS" shall mean the contracts for the use or occupancy of guest rooms
and/or the meeting facilities of the Hotel.

"CLOSING" shall have the meaning set forth in Subsection 2.4 hereof.

"CLOSING DATE" shall have the meaning set forth in Subsection 2.4 hereof.

"CLOSING REPRESENTATIVES" shall have the meaning set forth in Subsection
7.6 hereof.

"CLOSING STATEMENTS" shall mean the Preliminary Closing Statement and Final
Closing Statement as required under the provisions of Section VII.

"COMMON STOCK" shall mean the shares of the Common Stock of the Company as
that term is described in the Prospectus/Consent Solicitation Statement and the
attachment thereto.

"COMPANY" shall mean Host Funding, Inc., a Maryland corporation.

"CONSIDERATION" shall have the meaning set forth in Subsection 2.3 of this
Agreement.

"CONSUMABLES" shall mean all engineering, maintenance and housekeeping
supplies, including soap, cleaning materials and matched; stationery and
printing; stock for in-room servi-bars; and other supplies of all kinds, whether
used, unused or held in reserve storage for future use in connection with the
maintenance and operation of the Hotel, which are on hand on the date hereof,
subject to such depletion and including such resupplies as shall occur and be
made in the normal course of business, excluding, however, (i) Operating
Equipment and (ii) all items of personal property owned by guests, employees, or
other persons furnishings,

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<PAGE>

goods or services to the Hotel.

"CONTRACTS" shall mean all written or oral management, architectural,
engineering, leasing, insurance, bonding, construction, financing, guarantee,
indemnity, service, maintenance, operating, repair, collective bargaining,
employment, employee benefit, equipment leasing, supply, warranty, purchase,
consulting, professional service, advertising, promotion, public relations and
other contracts and commitments to which the Partnership is a party in any way
relating to the Property or Hotel (such terms are defined below) or any part
thereof and which are material to the Partnership or the operations of the
Property or Hotel, but excluding, however: (i) the Operating Leases; (ii)
Excluded Contracts, and (iii) Bookings.

"CUT-OFF TIME" shall mean 12:01 a.m. on the day of the Closing Date.

"DEPOSITS AND REIMBURSEMENTS" shall mean, with respect to the Land,
Improvements and the Property, or any part thereof or interest therein, (a)
deposits made with or tendered to utility companies to secure service or to
permit the Partnership or its predecessors in interest to tie in to existing
service grids or to cause a utility company to install connections or extensions
necessary to provide service, (b) deposits made by the Partnership or its
predecessors in interest with any bonding or surety company or deposits, bonds
or other financial security devices posted with or for the benefit of any
governmental or quasi-governmental agency, in connection with subdivision or
public improvement bonds obtained by the Partnership or its predecessors in
interest or map, and (c) any refundable fees, payments or reimbursements which
the Partnership or its predecessors in interest or the then-current owner or
occupant of the Land or Improvements is entitled to receive from any
governmental or quasi-governmental or private body in respect of the ownership
and development of the Land or Improvements or any public improvements made in
connection with the Land or Improvements.

"DISCLOSURE SCHEDULE" shall mean the document labeled "Disclosure Schedule"
and attached hereto. The Disclosure Schedule shall include and incorporate by
reference the Title Policy with respect to the Real Property.

"ENGINEERING/ARCHITECTURAL REPORTS" shall mean the
Engineering/Architectural Reports dated ____________ prepared by _____________
relating to the Real Property (as such term is defined below) owned by the
Partnership.

"ENVIRONMENT REQUIREMENTS" shall mean all applicable present statutes,
regulations, rules, ordinances, codes, licenses, permits, orders, approvals,
plans, authorizations, concessions, franchises and similar items, of all
governmental agencies, departments, commissions, boards, bureaus or
instrumentalities of the United States, states and political subdivisions
thereof and all applicable judicial and administrative and regulatory decrees,
judgments and orders relating to the protection of human health or the
environment, including, without limitation: (i) all requirements, including but
not limited to those pertaining to reporting, licensing, permitting,
investigation and remediation of emissions, discharges, releases or threatened
releases of Hazardous Materials (as such term is defined below), chemical
substances, pollutants, contaminants or hazardous or toxic substances, materials
or wastes whether solid, liquid or gaseous in nature, into the air, surface
water, groundwater or land, or relating to the manufacture, processing,
distribution, use treatment, storage, disposal, transport or handling of
chemical substances, pollutants, condiments or hazardous or toxic substances,
materials, or wastes, whether solid, liquid gaseous in nature; and (ii) all
requirements pertaining to the protection of the health and safety of employees
or the public.

"ESCROW" shall mean an escrow opened with Escrow Agent to facilitate the
transactions contemplated by this Agreement.

"ESCROW AGENT" shall be _________________ at the following address:
_______________.

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<PAGE>

"EXCESS CASH" shall mean, at any time, all cash and cash equivalents of the
Partnership not to exceed the amount, if any, by which the current assets of
such entity exceed the current liabilities of the Partnership at such time.

"EXCLUDED CONTRACTS" shall mean the contracts pertaining to the ownership,
maintenance, operation, provisioning, or equipping of the Hotel (a) between
either the Franchisor and/or the Management Company or any of its Affiliates on
the one hand, and the Partnership, on the other, (i) pertaining only to this
Hotel including the Management Agreement and the Franchise Agreement, or (ii)
which provide services to the Hotel on the same or similar basis as that
provided to other hotels owned or managed by the Management Company, including
insurance, the furnishing of credit cards, advertising, Software Programs and
software maintenance and reservation services; and (b) which provide the
benefits of group incentive, profit-sharing, retirement, welfare and employee
benefit plan to sharing, retirement, welfare and employee benefit plans to
employees of the Hotel and to employees of other hotels owned or managed by the
Management Company; and (c) any union or employment contracts (including pension
and benefit plans between the Management Company, as manager of the Hotel, and
any other person or entity.

"EXCLUDED PERMITS" shall mean the non-transferable permits and licenses and
other Permits that are indicated as Excluded Permits on Exhibit C.

"FF&E" shall mean all fixtures, furniture, furnishings, fittings,
equipment, machinery, apparatus, appliances, and other articles of Personal
Property now located on the Real Property and used or usable in connection with
any part of the Hotel, subject to such depletions, resupplies, substitutions and
replacements as shall occur and be made in the ordinary course of business and
in accordance with Subsection 5.8 excluding, however (i) Consumables, (ii)
Operating Equipment, (iii) equipment and property leased pursuant to Contracts,
(iv) property owned by guests, employees or other persons furnishing goods or
services to the Hotel, (v) Improvements, and (vi) Software Programs.

"FORMATION TRANSACTIONS" shall have the meaning set forth in the first
paragraph of the Recitals herein.

"FRANCHISE AGREEMENT" shall mean the agreement between Franchisor and the
Partnership.

"FRANCHISOR" shall mean Super 8, Inc.

"GENERAL PARTNER" shall mean Grosvenor Hospitality Group, Inc., a
California corporation, the existing general partner of the Partnership.

"HAZARDOUS MATERIALS" shall mean (i) any flammables, explosive or
radioactive materials, hazardous wastes, toxic substances or related materials
including, without limitation, substances defined as "hazardous substances,"
"hazardous materials," "toxic substances" or "solid waste" in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Sec. 9601, ET SEQ.; the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, ET SEQ.; the Toxic Substances Control Act, 15 U.S.C., Section 2601
ET SEQ.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C., Section
6901 ET SEQ.; and in the regulations adopted and publications promulgated
pursuant to said laws; (ii) those substances listed in the United States
Department of Transportation Table (49 C.F.R. 172.101 and amendments thereto) or
by the Environmental Protection Agency (or any successor agency) as hazardous
substances (40 C.F.R. Part 302 and amendments thereto); (iii) those substances
defined as "hazardous wastes," "hazardous substances" or "toxic substances" in
any similar federal, state or local laws or in the regulations adopted and
publications promulgated pursuant to any of the foregoing laws or which
otherwise are regulated by any governmental authority, agency, department,
commission, board of instrumentality of the United States of America, the State
of California or any political subdivision thereof; (iv) any pollutant or
contaminant or hazardous dangerous or toxic chemicals, materials, or substances
within the meaning of any other applicable federal, state, or local

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<PAGE>

law, regulation, ordinance, or requirement (including consent decrees and
administrative orders) relating to or imposing liability or standards of conduct
concerning any hazardous, toxic, or dangerous waste, substance or material, all
as amended; (v) petroleum or any by-products thereof; (vi) any radioactive
material, including any source, special nuclear or by-product material as
defined at 42 U.S.C. Sections 2011 ET SEQ., as amended, and in the regulations
adopted and publications promulgated pursuant to said law; (vii) asbestos in any
form or condition; and (viii) polychlorinated biphenyls.

"HOTEL" shall mean the hotel referred to in the third paragraph of the
Recitals.

"HOTEL NAMES" shall mean any names, logos and designs (other than those
owned by the Management Company) used in the ownership or operation of the
Hotel, including without limitation, any such set forth on Exhibit B hereto and
the names, logos and designs now used in connection with the restaurants,
cocktail lounges, night clubs, banquet rooms and meeting rooms in and/or about
the Hotel, together with the good will appurtenant to each of such names, logos
and designs.

"IMPROVEMENTS" shall mean all improvements, structures or fixtures
constructed upon the Land, including without limitation, all buildings and
structures presently located on the Land, all apparatus, equipment and
appliances presently located on the Land and used in connection with the
operation or occupancy thereof, such as parking services, refrigeration,
ventilation, garbage disposal, recreation or other services thereto, and all
landscaping and leasehold improvements of tenants, if any, which become the
property of the lessor upon termination of a Operating Lease.

"LAND" shall mean that certain real property with respect to the
Partnership described in the Disclosure Schedule.

"LEASES" shall mean all leases, subleases, licenses, franchises,
concessions, and other occupancy agreements, whether or not of record, oral or
written, for the use or occupancy of any portion of the Real Property,
excluding, however, (i) Bookings, (ii) the Management Agreement, and (iii) the
Franchise Agreement.

"LESSEE" shall mean Inn Fund, LLC, a Delaware limited liability company.

"LICENSES AND ENTITLEMENTS" shall mean all licenses, franchises,
certifications, authorizations, approvals, rights, privileges, entitlements and
permits issued or approved by any governmental or quasi-governmental authority
or other person or entity having authority over the Property, and all
applications, filings and submittals therefor, in each case relating to the
operation, ownership, subdivision, development, use or maintenance of the
Property or any part thereof, including, without limitation, construction
permits, grading permits, elevator permits, machinery permits, business
licenses, ingress and egress permits, development agreements, subdivision,
parcel and tract maps and approvals thereof, plans and/or permits required under
the applicable zoning regulations, variances, utility agreements and
commitments, improvement agreements, certificates of occupancy and the like, but
excluding therefrom for all purposes of this Agreement any licenses issued to or
solely on behalf of any Tenant.

"MANAGEMENT AGREEMENT" shall mean the Hotel Management Agreement, the terms
and provisions of which are being observed and performed by and between the
Management Company and the Partnership regarding the present management of the
Hotel by the Management Company.

"MANAGEMENT COMPANY" shall mean Grosvenor Hospitality Group, Inc., a
California Corporation.

"MISCELLANEOUS HOTEL ASSETS" shall mean all contract rights, leases,
concessions, trademarks, service

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<PAGE>

marks, trade names, inventions, patents, trade secrets, know-how, copyrights,
(including any registration or applications for registration of any of the
foregoing), Deposits and Reimbursements, Licenses and Entitlements,
environmental and hazardous and toxic waste reports and studies, surveys, maps,
correspondence, inspection reports, management reports, marketing reports,
marketing displays and brochures, insurance policies, proceeds and unearned
premiums, all books and records, assignable warranties, and other items of
intangible personal property relating to the ownership or operation of the
Hotel, but such term shall not include (i) Contracts, (ii) the items
specifically enumerated as exclusions from the definition of Contracts, (iii)
Permits, (iv) Hotel Names, (v) cash or other funds, whether in petty cash or
house banks, or on deposit in bank accounts or in transit for deposit, (vi)
books and records (except as provided in Subsection 5.13), (vii) receivables,
(viii) refunds, rebates, or other claims, or any interest thereon, for periods
or events occurring prior to the Cut-Off Time, (ix) utility and similar
deposits, or (x) prepaid insurance or other prepaid items, and (xi) the Software
Programs.

"NOTICE" shall have the meaning as set forth in Subsection 8.4.

"OFFERING" shall mean the offering of the Company's Shares as the term
"Offering" is defined in the Prospectus/Consent Solicitation Statement.

"OPERATING EQUIPMENT" shall mean all china, glassware, linens, silverware
and uniforms (if owned), whether in use or held in reserve storage for future
use in connection with the operations of the Hotel, which are on hand on the
date hereof, subject to such depletion and including such resupplies as shall be
made in the normal course of business and in accordance with Subsection 4.19.

"OPERATING LEASES" shall mean all leases, occupancy agreements and other
similar agreements, together with all modifications, extensions and renewals
thereof, and any guarantees of any of the foregoing with respect to or demising
any part of the Real Property.

"PARTNERSHIP" shall have the meaning set forth in the first paragraph of
this Agreement.

"PARTNERSHIP AGREEMENT" shall mean the Agreement of Limited Partnership of
the Partnership as amended through and including January 1, 1990 by an
"AMENDMENT OF AGREEMENT OF LIMITED PARTNERSHIP OF MOTELS OF AMERICA, SERIES IX,
a California Limited Partnership".

"PERMITS" shall mean all licenses, franchises and permits owned by the
Partnership and used in or relating to the ownership, occupancy or operation of
any part of the Hotel.

"PERMITTED EXCEPTIONS" shall mean San Diego County secured real property
taxes and assessments, the matters shown as recorded in the official records of
San Diego County, California by the Title Commitments as well as those matters
which would be disclosed by a physical inspection of the land as shown on the
Survey all approved or deemed approved by the Company pursuant to Subsection 2.9
hereof to which title to the Property may be subject on the Closing Date.

"PERMITTED LIENS" shall mean with respect to the respective Property, those
liens described on the Disclosure Schedule which included liens for real
property taxes and assessments for utilities not yet delinquent, the outstanding
principal balance of mortgage debt, rights of tenants under the Operating
Leases, and obligations arising under the Contracts.

"PERSONAL PROPERTY" shall mean and include any and all tangible personal
property owned by the respective Partnership located at, upon or about, or
affixed or attached to, or installed in the Real Property or used or to be used
in connection with or incorporated into or otherwise relating to the Real
Property or its ownership, use, development, construction, maintenance,
management, operation, marketing, leasing,

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<PAGE>

occupancy, sale or financing, including, but not limited to, fixtures,
furniture, furnishings, tools, machinery, appliances and other apparatus and
equipment supplies and other inventories, office equipment, communications
equipment, vehicles, storage tanks, spare and replacement parts, fuel, plans,
specifications, operational handbooks, machinery and/or equipment operational
instructions and/or specifications, surveys, drawings, and records, files and
papers, whether in hard copy or computer format, including, without limitation,
structural and engineering information, sales and promotional literature,
manuals and data, sales and purchase correspondence, lists of present and former
suppliers, lists of present and former leases and clients, personnel and
employment records, and any information relating taxes imposed on the Property.

"PROPERTY" shall mean the Real Property, Personal Property, and the
Miscellaneous Hotel Assets.

"PROSPECTUS/CONSENT SOLICITATION STATEMENT" shall mean the
Prospectus/Consent Solicitation Statement filed with the Application.

"REAL PROPERTY" shall mean the Land, the Appurtenances and the
Improvements.

"SHARES" shall mean Class A shares of the Company's Common Stock.

"SOFTWARE PROGRAMS" shall mean the computer software programs for
accounting functions for the Hotel's general ledger, accounts payable, accounts
receivable and payroll.

"SURVEY" as defined in Subsection 2.8.

"TENANT" shall mean each lessee, tenant or other entity occupying any
portion of the Property.

"TITLE COMMITMENTS" shall have the meaning set forth in Subsection 2.6 of
this Agreement.

"TITLE COMPANY" shall have the meaning set forth in Subsection 2.6 of this
Agreement.

"TITLE POLICY" shall have the meaning set forth in Subsection 2.6 of this
Agreement.

"TRANSACTION" shall have the meaning set forth in Subsection 2.1 of this
Agreement.

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SECTION II
THE TRANSACTION

2.1 ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED. When the Asset
Transfer Conditions are satisfied through the requisite vote of holders of
partnership interests of the Partnership, and subject to the terms and
conditions set forth herein, on the Closing Date:

(a) The Partnership shall sell, transfer, deliver to the Company, and
the Company shall acquire from the Partnership, all of the Partnership's right,
title and interest in each of the following items (herein collectively called
the "Acquired Assets"):

(i) the Real Property;

(ii) the Personal Property;

(iii) the FF&E;

(iv) the Consumables and Operating Equipment;

(v) the Hotel Names and the Franchise Agreement;

(vi) the Permits (other than Excluded Permits);

(vii) the transferable contract rights, title and
interest of the Partnership in, to and under
all the Bookings and Contracts; and

(viii) all Miscellaneous Hotel Assets.

(b) The Company shall assume, and therefore be responsible for paying
and satisfying, to the extent not discharged prior to Closing, all of the debts,
liabilities and obligations of the Partnership of every kind, character or
description, whether accrued, contingent or otherwise (collectively, the
"Assumed Liabilities").

(c) Notwithstanding anything in this Subsection 2.1 to the contrary,
the Partnership shall retain all of its right, title and interest in and to the
Excess Cash such Partnership may hold at the time of Closing, and such Excess
Cash shall be excluded from the transfers to the Company contemplated herein.

(d) The transfer and conveyance of the Acquired Assets and the
assumption of the Assumed Liabilities of the Partnership and the related
transactions contemplated herein are collectively referred to as the
"Transaction."

2.2 "AS IS" SALE. THE COMPANY ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY
PROVIDED IN THIS AGREEMENT OR IN ANY DOCUMENT DELIVERED BY THE PARTNERSHIP TO
THE COMPANY AT CLOSING, THE PARTNERSHIP HAS MADE NO REPRESENTATION OR WARRANTY,
AND THE COMPANY IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY MADE (WHETHER
ORALLY OR IN WRITING) BY ANY PERSON ACTING ON THE PARTNERSHIP'S BEHALF,
PERTAINING TO ALL OR ANY PART OF THE PROPERTY OR THE PHYSICAL CONDITION, INCOME
POTENTIALS, EXPENSES OF OPERATION, CURRENT USES OR

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<PAGE>

PRIOR USES THEREOF OR THE PRESENCE OF HAZARDOUS OR TOXIC MATERIALS OR CONDITIONS
WITHIN OR ABOUT THE PROPERTY.

THE COMPANY HAS EXAMINED THE PROPERTY AND, EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT OR IN ANY DOCUMENT DELIVERED BY THE PARTNERSHIP TO THE COMPANY AT
CLOSING, WILL PURCHASE THE PROPERTY "AS IS" ON THE DATE OF THIS AGREEMENT,
ORDINARY WEAR AND TEAR THEREAFTER EXCEPTED, AND SUBJECT TO ANY SUBSEQUENT
CHANGES WHICH MAY BE PERMITTED UNDER SECTION V HEREOF.

2.3 PURCHASE PRICE. The Consideration to be paid by the Company to the
Partnership for the Property shall be the following:

(i) ___ shares of the Company's Common Stock ("Shares") as determined
in accordance with the methodology described in the Prospectus/Consent
Solicitation Statement. The Partnership may request prior to Closing
that such Shares to be paid to it pursuant to this Subsection 2.3 be
issued for and in the name of its partners in accordance with the
terms of the Partnership Agreement or other governing document; and

(ii) Upon Closing, cash equal to the amount of the excess of the total
current assets (excluding cash) of the Partnership over total current
liabilities ("Cash"). Such amount of Cash shall be computed at
Closing and in accordance with General Accounting Principles. In
order to avoid post-Closing adjustments and to determine the amount of
Cash, the parties shall agree to a reasonable estimate of total
current assets and total current liabilities as the parties reasonably
expect them to be upon the Closing of Escrow.

2.4 CLOSING TIME AND PLACE. Unless another date or place is agreed to by
the parties, the closing of the Transaction (the "Closing") shall take place
(the "Closing Date") at the offices of Host Funding, Inc., 7825 Fay Avenue,
Suite 250, La Jolla, CA 92037 upon the satisfaction or waiver of all conditions
to Closing set forth in Sections VI and VII hereof.

2.5 TITLE. On the Closing Date, the Partnership will convey to the
Company marketable, fee simple title to the Real Property (and title to the
Personal Property), free and clear of all liens, encumbrances, judgments
tenancies, adverse interests, easements, encroachments, rights-of-way, and
restrictions, other than the Permitted Liens.

2.6 TITLE INSURANCE

(a) The Company has obtained preliminary title reports or commitments
for title insurance (collectively, the "Title Commitments") for the Real
Property issued by a recognized national title insurance company (the "Title
Company") licensed to do business in California, upon which the Title Company
will issue a standard ALTA Form B (1992) owner's policy of title insurance (the
"Title Policy") in the policy amount of not less than the amount specified on
the Disclosure Schedule. The Title Policy shall included (i) as exceptions to
coverage only the applicable Permitted Liens, and (ii) appropriate endorsements,
including without limitation, access, covenant, condition and restriction,
contiguity, encroachment, improvement, mineral rights, subdivision map act, and
other endorsements, in each case to the extent applicable.

(b) If, as of the Closing Date, the Partnership cannot convey title
subject only to Permitted Liens or any other liens of encumbrances on the
Property which do not materially effect the value or marketability thereof, the
Company shall have as its sole remedy the option, exercisable immediately, to
terminate this Agreement with respect to the Partnership. Notwithstanding the
existence of any title defect

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<PAGE>

that may arise with respect to any Real Property, the Company shall have, at any
time on or prior to the Closing Date, the right to waive such title defect and
proceed to Closing, in which case the Company shall be deemed to have waived all
claims, actions and rights against the Partnership affected by such title
defect.

2.7 DUE DILIGENCE Prior to the execution and delivery hereof, the Company
and its agents and representatives have had access to the Property to study,
survey and investigate the Property and the Partnership's ownership and the
Management Company's management and operation of the Property and to interview
the employees and consultants of the Partnership and the Management Company
regarding the Property. The investigation included an examination of all books
and records of the Hotel, other documents relating to the ownership and
operation of the Property, and one or more on-site physical inspections of the
Property. In the course of such investigation, the Partnership has delivered
all material books, records, reports and studies in the possession or under the
control of the Partnership or the Management Company and has disclosed all
material facts and information known to the Partnership, relevant to the
ownership, operation or financial condition of the Property.

2.8 SURVEY. As soon as practicable after the date hereof, the Company, at
the Partnership's sole cost and expense, shall obtain an ALTA survey of current
date ("Survey"), showing the location of (i) all Improvements, (ii) all
easements, roads and rights-of-way (together with related recording
information), (iii) the 100-year flood plain, if applicable, (iv) any
encroachments or protrusions over boundary lines to the Real Property, and (v)
all dedicated streets adjoining the Real Property and the distances thereto.
The Survey shall contain a legal description of the Land, and the surveyor shall
certify to the Title Company and to the Company that the Survey was made on the
ground of the Real Property, that the Survey is correct, and that there are no
encroachments, improvements, or visible uses except as are shown on the Survey.

2.9 PERMITTED EXCEPTIONS. The Company has approved the title matters set
forth on Exhibit E hereto and agrees that such matters shall be "Permitted
Exceptions" hereunder. The Company shall have five (5) days after the receipt
by the Company of the Survey or any supplement to the Title Report to approve or
disapprove any items shown thereon. Such notice of approval or disapproval
shall specify (i) any objections the Company has to the sufficiency of the
Survey or any matters shown on any supplement to the Title Report, (ii) a list
of the matters approval of which is conditioned upon receipt at Closing of an
endorsement as to such exceptions and (iii) a list of all endorsements to the
Company of the title policy shall require at Closing. In the event that the
Company shall object to any matter or require any endorsement as provided
herein, the Partnership shall have two (2) days to approve the Company's notice,
in which case each item disapproved by the Company shall be corrected, and as a
condition to Closing, the Title Policy shall include each of the endorsements
specified by the Company, or to disapprove the Company's notice, in which case
this Agreement shall terminate and be of no further force and effect (except as
provided below), and the deposit and interest accrued thereon shall be returned
to the Company. Failure by the Partnership to give notice of its approval or
disapproval of the Company's notice shall be deemed to be an approval of the
Company's notice. If the Partnership shall disapprove the Company's notice
hereunder, the Partnership shall specify the matters resulting in such
disapproval of the Company's notice. Notwithstanding the foregoing, if after
receipt of Seller's notice disapproving the Company's notice, that the Company
waives its disapproval of the subject matter or its requirement of the subject
endorsement, this Agreement shall remain in full force and effect and such
matter shall be deemed to be a Permitted Exception or such endorsement shall not
be required as a condition to Closing.

2.10 MANAGEMENT AGREEMENT TERMINATION. As a condition to Closing, the
Partnership agrees to secure written certification from the Management Company
and the Partnership that the Management Agreement will terminate upon
consummation of the Transaction.

2.11 FRANCHISOR CONSENT. As a condition to Closing, the Partnership will
secure written certification from the Franchisor stating that: (i) the
Franchisor consents to the assignment by the Partnership

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<PAGE>

of the Hotel to the Company, (ii) the Franchisor will enter an agreement similar
to the Franchise Agreement with the Company.

SECTION III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY

The Company hereby represents and warrants to the Partnership as
follows:

3.1 ORGANIZATION, POWER AND AUTHORITY, AND QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Maryland. The Company has the requisite power and
authority to carry on its respective business as it is now being conducted. The
Company is now or by the Closing Date will be qualified to do business and is
now or by the Closing date will be in good standing in each jurisdiction in
which the character of its property owned or leased or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified and in good standing would not have a material adverse effect on the
business or financial condition of the Company, as the case may be.

3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has taken all
action necessary to authorize the execution, delivery and performance of this
Agreement by the Company and no other proceedings on the part of the Company are
necessary to authorize the execution and delivery of this Agreement and the
consummation of the Transaction.

None of the execution and delivery of this Agreement by the Company, the
consummation by the Company of the Transaction or compliance by the Company with
any of the provisions hereof will (a) conflict with or result in any breach of
any provisions of the charter or bylaws of the Company; (b) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which the Company is a party or by which it or any
of its properties or assets may be bound; or (c) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company or any
of the properties or assets of the Company; except in the case of (b) or (c) for
violations, breaches, or defaults (A) that would not in the aggregate have a
material adverse effect on the business or financial condition of the Company,
as the case may be, and that will not impair the effectiveness of the
Transaction contemplated hereby, or (B) for which waivers or consents have been
or will be obtained prior to the Closing Date.

3.3 BINDING OBLIGATION. This Agreement has been duly and validly executed
and delivered by the Company to the Partnership, and constitutes a valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms, except that such enforcement may be subject to bankruptcy,
conservatorship, receivership, insolvency, moratorium, or similar laws affecting
creditors' rights generally or the rights of creditors of limited partnerships
and to general principles of equity.

3.4 INSOLVENCY. There are not attachments, executions or assignments for
the benefit of creditors, or voluntary or involuntary proceedings in bankruptcy,
or under any other debtor relief laws, contemplated by or pending or threatened
against the Company.

3.5 BROKERS. The Company has employed no broker or finder, or incurred
any liability therefore, in connection with the Transaction.

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3.6 VALID CONSIDERATION. The Shares, when issued in accordance with this
Agreement and the Articles of Incorporation of the Company, will be duly and
validly issued, fully paid and nonassessable, and the issuance thereof will not
be subject to preemptive or other similar rights.

SECTION IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP

The Partnership represents and warrants to the Company (with respect only
to the Partnership and the Acquired Assets of such Partnership), except as
disclosed in the Prospectus/Consent Solicitation Statement or on the Disclosure
Schedule, that:

4.1 AUTHORITY; NO VIOLATION. The Partnership is a partnership duly
organized, validly existing, and in good standing under the laws of the State of
California, and has the power to own all of its properties and assets and to
carry on its business as presently conducted. The execution, delivery and
performance of this Agreement has been duly and validly authorized by all
necessary action of the Partnership and this Agreement is a valid and binding
obligation of the Partnership, enforceable against the Partnership in accordance
with its terms. To the knowledge of the Partnership, the execution and delivery
of this Agreement by the Partnership and the consummation of the transactions
contemplated hereby will not result in or constitute any of the following except
as would not have a material adverse effect on the Partnership or the Property:
(i) a default or an event that, with notice or lapse of time or both would be a
default, breach, or violation of the partnership agreement of the Partnership or
any Contract or any Operating Lease, License or Entitlement, promissory note,
conditional sales contract, commitment, indenture, mortgage, deed of trust, or
other agreement, instrument or arrangement to which the Partnership is a party
or by which it or the Property is bound, (ii) an event that would permit any
party to terminate any Contract by which the Partnership is bound or to
accelerate the maturity of any indebtedness or other obligation of the
Partnership, except with respect to indebtedness which the Company has
identified as indebtedness which it intends to satisfy with the proceeds of the
Initial Private Placement and listed on the Disclosure Schedule, (iii) a
violation or conflict with any term or provision of any judgment, decree, order,
statute, injunction, rule or regulation of a governmental unit applicable to the
Partnership or the Property, or (iv) the creation or imposition of any lien,
charge or encumbrance on the Property.

4.2 COMPLIANCE WITH LAWS. In connection with its Property, to the
knowledge of the Partnership, the Partnership has complied in all material
respects with all applicable laws, ordinances, rules and regulations (including
without limitation those relating to zoning), except as would not have a
material adverse effect on the Partnership or the Property, and the Partnership
has not received any written notice of a violation of any such laws, rules or
regulations which individually or in the aggregate would have a material adverse
effect on the Partnership or the value of the Property. The Partnership has not
received written notice or knowledge that any government agency or any
government employee or official considers the construction of the Property or
its operation or use to have failed to comply with any law, ordinance,
regulation or order or that any investigation has been commenced or is
contemplated respecting any such possible failure of compliance which
individually or in the aggregate would have a material adverse effect on the
Partnership or the use of the Property. To the knowledge of the Partnership,
there are no unsatisfied requirements for repairs, restorations or improvements
from any person (other than from any Tenant), entity or authority, including,
but not limited to, any lender, insurance carrier or governmental authority.
The Partnership has not received from any insurance company or board of fire
underwriters any written or actual notice, which remains uncured, of any defect
or inadequacy in connection with the Property or its operation.

4.3 LICENSES, PERMITS, CERTIFICATES OF OCCUPANCY, ZONING, ETC. To the
knowledge of the Partnership, all Licenses and Entitlements required in
connection with the construction, use, or occupancy of the Property have been
obtained and are in full force and effect and in good standing, except as such
would

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not have a material adverse effect on the Partnership or the Property. To the
knowledge of the Partnership, such Partnership has not taken any action or
failed to take any action that would result in the revocation of such License
and Entitlements nor has it received written notice that any governmental entity
has revoked or intends to revoke any of them as to a violation that has not been
cured or otherwise resolved to the satisfaction of such governmental entity,
except as such would not have a material adverse effect on the Partnership or
the Property.

4.4 NO CONSENTS OR APPROVALS. No consent, waiver, approval or
authorization of, or filing, registration or qualification with, or notice to,
any governmental unit or any other person is required to be made, obtained or
given by the Partnership in connection with the execution, delivery or
performance of this Agreement, except those which have already been obtained or
those which individually or in the aggregate would not have a material adverse
effect on the Partnership or the Property or those identified on the Disclosure
Schedule.

4.5 ENVIRONMENTAL MATTERS. Except as disclosed in the Phase i
Environmental Reports, copies of which have been delivered to the Company, to
the knowledge of the Partnership: (i) neither the Partnership nor any previous
owner, tenant, occupant or user of the Property, nor any other person, has
engaged in or permitted any operations or activities upon, or any use or
occupancy of the Property, or any portion thereof, for the purpose of or in any
way involving the handling, manufacture, treatment, storage, use, generation,
release, discharge, refining, dumping or disposal of any Hazardous Materials
(whether legal or illegal, accidental or intentional) on, under, in or about the
Property, or transported any Hazardous Materials to, from or across the
Property, except in all cases in compliance with Environmental Requirements,
except where failure to do so would not have a material adverse effect on the
Partnership or the Property, and only in the course of legitimate business
operations at the Property (which shall not include any business primarily or
substantially devoted to the handling, manufacture, treatment, storage, use,
generation, release, discharge, refining, dumping or disposal of Hazardous
Materials); and (ii) no Hazardous Materials are presently constructed,
deposited, stored, or otherwise located on, under, in or about the Property,
except in all cases in compliance with Environmental Requirements.

4.6 TAXES AND ASSESSMENTS. All real and personal property taxes relating
to the Partnership, excepting those for the current tax year which are not yet
overdue (i.e., which are still payable without interest or penalty), have been
paid in full. The Partnership has not received written or actual notice of and
does not have any actual knowledge of (i) any proposed increase in the assessed
valuation of the Property, or (ii) any existing or proposed assessment that has
or may become a lien on the Property.

4.7 PHYSICAL CONDITION. Except as disclosed in the
Engineering/Architectural Reports, the Partnership has no knowledge of any
structural defects or deficiencies in the improvements comprising any portion of
the Land which individually or in the aggregate would have a material adverse
effect on the Partnership or on the value of the Property. To the knowledge of
the Partnership, the improvements and tangible Personal Property (including,
without limitation, plumbing equipment, HVAC, electric wiring and fixtures, gas
distribution system, and water and sewage drainage systems presently on or in
the Property) are in good working order and condition, except as such would not
individually or in the aggregate have a material adverse effect on the
operations of the Partnership.

4.8 THE OPERATING LEASES. A list of the current Operating Leases in
effect as of the date hereof is provided on the Disclosure Schedule. Except for
the Operating Leases, there are no other leases, licenses or other agreements
affecting the occupancy of the Property which would become an obligation of the
Company after the Closing except as provided on the Disclosure Schedule. With
respect to each Operating Lease, except as individually or in the aggregate
would not have a material adverse effect on the Partnership or the Property:
(i) there is no default by the Partnership under any Operating Lease and to the
best of the Partnership's knowledge, there is no existing or threatened default
by any Tenant under any Operating Lease

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and (ii) the Operating Lease is assignable by the Partnership to the Company.

4.9 NO DEFAULTS AFFECTING THE PROPERTY. To the knowledge of the
Partnership, neither the Partnership, nor to the best of the Partnership's
knowledge, any other party is in material default under any agreement affecting
the Property, and, to the knowledge of the Partnership, no event exists which,
with the passage of time or the giving of notice or both, will become a material
default thereunder on the part of the Partnership or, to the best of the
Partnership's knowledge, any other party thereto. To the knowledge of the
Partnership, the Partnership is in full compliance with the terms and provisions
of the covenants, conditions, restrictions, rights-of-way or easements affecting
the Property, except as such would not have a material adverse effect on the
Partnership or the Property.

4.10 NO LITIGATION OR ADVERSE EVENTS. There are no investigations,
actions, liens, proceedings or claims pending or, to the knowledge of the
Partnership, threatened against or affecting the Partnership or the Property, at
law or in equity brought before or by any federal, state, municipal or other
governmental department, commission, board, agency, or instrumentality, domestic
or foreign, except for such arising in the ordinary course of business or such
that would not have a material adverse effect on the Partnership or the
Property. To the knowledge of the Partnership, it is not subject to any order,
writ, injunction or decree of any court or federal, state, municipal or other
governmental agency or department, commission, board, agency or instrumentality.

4.11 EMINENT DOMAIN. There is no existing or, to the knowledge of the
Partnership, proposed or threatened eminent domain, condemnation or similar
proceeding, or private purchase in lieu of such a proceeding, which would affect
the Property in any way whatsoever.

4.12 CONTRACTS AND AGREEMENTS. All Contracts (other than Operating Leases)
are listed on the Disclosure Schedule, and there are no other Contracts which
would become an obligation of the Company after the Closing. With respect to
each Contract: (1) the Contract has been duly and validly executed and
delivered by the Partnership, (ii) the contract is in full force and effect,
(iii) the copy of the Contract delivered by the Partnership to the Company is
true and accurate and is unmodified except as shown therein, and (iv) to the
knowledge of the Partnership, neither the Partnership nor any other party
thereto is in material default under the Contract.

4.13 NON-FOREIGN PERSON. The Partnership is not a "foreign person" as such
term is defined in Section 1445(f) of the Internal Revenue Code of 1986, as
amended, and the Partnership is not subject to withholding under Section 26131
of the California Revenue and Taxation Code.

4.14 EMPLOYEES. No employee employed by the Partnership in connection with
the Property is covered by a collective bargaining agreement and there are no
retroactive increases or other accrued and unpaid sums owed to any such
employee. There is no labor trouble, dispute, grievance, controversy or strike
pending or, to the knowledge of the Partnership, threatened against the
Partnership or any Tenant which, individually or in the aggregate, would have a
material adverse effect on the Partnership or the Property, and the Partnership
does not know of any basis for any such trouble, dispute, grievance, controversy
or strike which, individually or in the aggregate, would have a material adverse
effect on the Partnership or the Property.

4.15 OPERATING STATEMENTS. The Application contains audited statements of
profit and loss of the Partnership with respect to the Property for calendar
years 1992 and 1993 and unaudited statements for the six months ended June 30,
1994 (the "Operating Statements"). These statements properly reflect the profit
or loss from the management and operation of the Property for such periods and,
in all material respects, accurately reflect all rents and other gross receipts,
and all amounts paid by the Partnership for electricity, water, sewer, other
utility services, insurance, fuel, maintenance and repairs (whether capitalized
or expensed),

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real estate taxes, payroll and payroll taxes and all other operating and other
expenses associated with the Property. Since the end of the latest period
covered by such financial statements, there have been no transactions or
occurrences materially affecting the operating expenses (or items thereof)
associated with the Property.

4.16 DISCLOSURE. No representation or warranty of the Partnership in this
Agreement, or any information, statement or certificate furnished or to be
furnished by or on behalf of the Partnership pursuant to this Agreement or in
connection with the transactions contemplated hereby, contains or shall contain
any untrue statement of a material fact or omits or shall omit to state a
material fact necessary to make the statements contained therein not misleading.

4.17 KNOWLEDGE OF THE PARTNERSHIP. As used in this Section IV, the phrase
"to the knowledge of the Partnership" shall mean to the actual knowledge of the
General Partner, without the obligation to perform any investigation, research
or due diligence whatsoever into the accuracy or truth of the subject matter of
such representation.

4.18 BOOKINGS. Exhibit D attached hereto identifies (i) all Bookings
with groups or with corporate clients which provide for the occupancy of a room
or rooms at the Hotel by an individual or individuals such that such occupancy
would, in the aggregate, exceed ten (10) room-nights (i.e., one room for ten
nights, two rooms for five nights, etc.), and (ii) all contracts, agreements, or
other arrangements, oral or written, pursuant to which rooms in the Hotel are
provided at a discount below posted room rates.

4.19 INVENTORIES. The inventories of Consumables, Operating Equipment, and
FF&E issued to operating departments of the Hotel are at levels generally
consistent with levels carried by the Management Company in the normal operation
of a comparable hotel under the Management Company's management.

4.20 HOTEL NAMES. Exhibit B identifies all Hotel Names which are used in
the business of operating the Hotel and is true, complete and correct in all
material respects.

4.21 PERMITS. With regard to Permits: (i) Exhibit C identifies all
extant Permits; (ii) The Partnership has delivered true and correct copies of
all such Permits to the Company; (iii) to the best knowledge of the
Partnership, no default has occurred in the Company's due observance or
condition of any Permit, except as disclosed in Exhibit C; and (iv) The
Partnership has not received any notice from any source to the effect that there
is lacking any Permit needed in connection with the operation of the Hotel, nor
is the Partnership aware that such is the case.

4.22 CONTRACTS. Exhibit A identifies all Contracts, excluding any purchase
order with an unpaid balance less than $200.00 the Partnership has delivered
copies true and correct in all material respects, of all Contracts to the
Company. There are no material defaults under any Contract by the Partnership,
or to the best knowledge of the Partnership by any other party thereto, other
than disclosed in Exhibit A hereto.

SECTION V
COVENANTS AND AGREEMENTS OF THE PARTNERSHIP

The Partnership hereby covenants and agrees with the Company that
subsequent to the execution of this Agreement and prior to the Closing Date:

5.1 ACTIONS AFFECTING ASSETS. The Partnership shall not sell, assign,
lease, pledge, transfer or

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encumber any of the Property, or enter into any other consent, commitment,
understanding or other agreement, or incur any material obligation or liability
(contingent or absolute) with respect to the Property or merge or consolidate
with or into any other entity or enter into any agreements relating thereto,
other than in the ordinary course of business.

5.2 ACCESS TO PROPERTY AND RECORDS. Upon reasonable notice and during
regular business hours, the Partnership shall give the Company, and authorized
representatives of the Company, full access to the Partnership's personnel,
properties, documents, contracts, facilities, books, equipment and records.

5.3 LICENSES AND ENTITLEMENTS. The Partnership shall maintain all
Licenses and Entitlements in full force and effect, shall file timely all
reports, statements, renewal applications and other filings, and shall pay
timely all fees and charges in connection therewith that are required to keep
the Licenses and Entitlements in full force and effect.

5.4 MATERIAL CONTRACTS. Except for agreements (including Operating Leases
with prospective Tenants) entered into in the ordinary course of the
Partnership's business and terminable without penalty on not more than 90 days'
notice, the Partnership will not enter into any new contracts or agreements
without in each case obtaining the Company's prior written consent.

5.5 INSURANCE. The Partnership shall maintain in full force and effect
substantially the same public liability and casualty insurance coverage now in
effect with respect to the Property.

5.6 TAXES AND ASSESSMENTS. The Partnership shall pay or discharge before
delinquent all tax liabilities and obligations, including, without limitation,
those for federal, state or local income, property, unemployment, withholding,
sales, use and other taxes.

5.7 BINDING COMMITMENTS. The Partnership shall not make any material
commitments or representations to any applicable government authorities, any
adjoining or surrounding property owners, any civic association, any utility or
any other similar person or entity that would in any manner be binding upon the
Company or the Property without the Company's prior written consent in each
case.

5.8 OPERATION OF PROPERTY. The Partnership shall continue to operate and
maintain the Property in the ordinary course of its business and shall maintain
inventories in the operating departments at present levels.

5.9 NO NEW LEASES. The Partnership will not enter into any new Leases,
without the prior written consent of the Company.

5.10 PERMITS. The Partnership will execute, and the Company, where
necessary, will join in the execution of, all applications and instruments
required in connection with the transfer of all Permits (other than Excluded
Permits) in order to transfer the benefits of such Permits to the Company on or
prior to the Closing Date. Seller, subject to the next succeeding sentence,
shall use its commercially reasonable efforts to preserve in force all existing
Permits and to cause all those expiring to be renewed prior to the Closing Date.
If any such Permit shall be suspended or revoked, the Partnership shall promptly
so notify the Company and shall take all measures necessary to cause the
reinstatement of such Permit without any additional limitation or condition.

5.11 REPRESENTATIONS AND WARRANTIES. The Partnership shall provide prompt
Notice to the Company if the Partnership becomes aware of any transaction or
occurrence prior to the Closing Date which would make any of the
representations, warranties and agreements of the Partnership contained in
Section IV not true in any material respect. The receipt by the Company of any
such Notice shall not negate or

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impair any of Purchaser's rights hereunder.

5.12 ZONING. The Partnership shall not make any application for a change
in zoning or platting for the Real Property nor consent to or apply for the
creation of a special taxing district including the Real Property.

5.13 BOOKS AND RECORDS. Although the Transaction hereby does not include
any sale or transfer of the books and records of the Partnership with respect to
the Hotel, the Partnership agrees that all books, records, files and
correspondence pertaining to the business of the Hotel will remain in the Hotel
for use by the Company for such reasonable time as the Company may desire;
provided, however, that the above shall not include general ledgers, general
journals, voucher registers and other records not pertaining to the business of
the Hotel, all of which may be removed by the Partnership within a reasonable
time after the Closing Date. The Partnership agrees to preserve all books and
records, files and correspondence described in the first sentence of this clause
(i) remaining at the Hotel after the Closing Date, and not to destroy or dispose
of the same for at least seven (7) years after the Closing Date, and then only
after 60 days prior to written Notice to the Company, and the Company and its
representatives shall have access to such books, records, correspondence and
files at all reasonable times.

SECTION VI
CONDITIONS TO CONSUMMATION OF TRANSACTION

The respective obligations of each party to consummate the Transaction
shall be subject to fulfillment (or waiver) at or prior to the Closing Date of
the following conditions (the "Asset Transfer Conditions"):

6.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations,
warranties and covenants, including, without limitation, the mutual covenants
contained in Section II hereof, made by the Partnership and the Company in this
Agreement or in any document delivered by either of them pursuant to this
Agreement shall be true and correct in all material respects when made and on
and as of the Closing Date as though such representations, warranties and
covenants were made on and as of such date, except as otherwise permitted by the
terms of this Agreement (including Subsection 7.2(f) and Subsection 7.3(d)).

6.2 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the value or condition of the Partnership or its Property since the
date hereof, except for changes contemplated by this Agreement and changes in
the ordinary course of business that do not have a material adverse effect on
the business or financial condition of such Partnership or its Property.

6.3 CONSENTS. With respect to a Partnership, the equity owners of the
Partnership shall have approved the Formation Transactions with the requisite
vote as set forth in and contemplated by the Prospectus/Consent Solicitation
Statement.

6.4 NO ORDER OR INJUNCTION. The consummation of the Transaction shall not
have been restrained, enjoined or prohibited by any order or injunction of any
court or governmental authority of competent jurisdiction.

6.5 FORMATION TRANSACTIONS. In addition to the conditions set forth in
this Section VI, all conditions to the closing of the Formation Transactions set
forth in Prospectus/Consent Solicitation Statement shall have been satisfied on
terms satisfactory to the Company in its sole discretion.

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SECTION VII
THE CLOSING

Subject to the terms and conditions of this Agreement, the Closing shall
take place promptly after satisfaction or waiver of the conditions set forth in
this Section VII hereof.

7.1 CLOSING. Within five (5) days after the execution and delivery
hereof, the Company and Seller shall deliver a fully executed copy of this
Agreement to Escrow Agent. This Agreement, together with any supplemental
instructions jointly executed by the Company and Seller and delivered to Escrow
Agent, shall constitute the escrow instructions by which the transactions
contemplated herein shall be consummated, provided that in the event of an
inconsistency between any such supplemental instructions and the terms of this
Agreement, the terms of this Agreement shall prevail. Subject to adjournments
as provided elsewhere in this Agreement, the closing (the "Closing") of the
within transaction shall take place upon the satisfaction or waiver of all
conditions to Closing set forth in Section VI and the recordation of the grant
deed of the Property to the Company, which shall occur on ___________, 1995, or
on such other date as the parties shall mutually approve (the "Closing Date").
Time is expressly declared to be of the essence. On the business day before the
anticipated Closing Date, a pre-closing shall occur at the offices of the
Partnership, at which the actions specified in Subsections 7.2 and 7.3 below
shall be taken, all of which will be deemed taken simultaneously at the Closing
and no one of which will be deemed completed until all have been completed and
the Closing shall have occurred.

7.2 DELIVERIES BY THE PARTNERSHIP. At Closing, the Partnership shall
deliver or cause to be delivered the following:

(a) A special warranty deed conveying good and marketable fee simple
title to the Real Property (subject only to Permitted Liens);

(b) Appropriate recording and transfer tax returns and related
documents necessary or appropriate;

(c) Such assignment and assumption agreements, or confirmatory
instruments with respect thereto, as may be deemed necessary and appropriate by
the Partnership and the Company pursuant to which the Partnership shall assign
to the Company the Acquired Assets, and pursuant to which the Company shall
assume the Assumed Liabilities, if any;

(d) A certificate duly executed by the Partnership under penalty of
perjury, setting forth the Partnership's address and federal tax identification
number and certifying that the Partnership is not a "foreign person" in
accordance with the provisions of Section 1445 (as may be amended prior to the
date hereof) of the Internal Revenue Code of 1986, as amended, any regulations
promulgated thereunder;

(e) A certificate from the Partnership certifying that the
representations and warranties of the Partnership set forth herein are true and
accurate in all material respects as of the Closing Date, or if not true and
correct because of events or circumstances occurring since the date hereof,
stating such changes as appropriate and certifying that the revisions to such
representations and warranties are true and accurate in all material respects as
of the Closing Date; and

(f) Such other documents and instruments as the Company and the
Partnership agree are necessary or appropriate.

7.3 DELIVERIES BY THE COMPANY. At Closing, the Company shall deliver or
cause to be delivered the following:

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(a) The Shares in the names and denominations specified by the
Partnership;

(b) A certificate from a duly authorized representative of the
Company certifying that the representations and warranties of the Company, set
forth herein are true and accurate as of the Closing Date, or if not true and
correct because of events or circumstances occurring since the date hereof,
stating such changes as appropriate and certifying that the revisions to such
representations and warranties are true and accurate in all material respects as
of the Closing Date;

(c) The assignment and assumption agreements or confirmatory
instruments with respect thereto referenced in Subsection 7.2(c) above; and

(d) Such other documents and instruments as the Partnership and the
Company agree are necessary or appropriate.

7.4 CLOSING COSTS. The Company will pay or provide for all costs
associated with the closing of the acquisition of the Property of the
Partnership pursuant to this Agreement, including (i) costs of obtaining a title
insurance policy for the benefit of the Company and (ii) all documentary and
transfer fees and taxes and all recording charges, fees and taxes imposed on or
in connection with the Transaction.

7.5 POSSESSION. At Closing, the Partnership shall deliver possession of
its Property to the Company or its designee (subject to the rights of Tenants
under the Operating Leases), which Property shall be in the same condition as of
the date of execution of this Agreement, reasonable wear and tear excepted.

7.6 NOTICES TO TENANTS. The Partnership at the Company's expense shall
cause the manager of each parcel of Real Property to mail via first-class mail
(postage prepaid) or personally deliver to each Tenant under such Partnership's
Operating Leases, within 20 days after the Closing, a letter in substantially
the form reached hereto as Exhibit F advising each tenant of the applicable
change of ownership and the holding of security deposits, all in conformity with
the requirements of California Civil Code Section 1950.5(g)(1). If the notice
to the Tenant is made by personal delivery, the Tenant shall acknowledge receipt
of the notice and sign his or her name on the Partnership's copy of the notice.

7.7 THE ACCOUNTANTS CLOSING STATEMENTS. The Partnership shall provide
such preliminary inventories and schedules necessary to make the prorations and
adjustments necessary to accurately reflect the inventories as of the Closing.
Thereafter, the parties hereto authorize J. Mark Grosvenor, as the Partnership's
representative, and Ian Gardner-smith, as the Company's representative
(collectively the "Closing Representatives") to enter the Hotel at all
reasonable times, both before and after the Closing Date, for the purpose of
making such additional inventories, examinations and audits of the Hotel, and of
the books and records of the Hotel, as the Closing Representatives may deem
necessary in order to verify such preliminary inventories and schedules provided
by the Partnership and to make the adjustments and prorations required to
accurately reflect the inventories as of the Closing. Based upon such
preliminary schedules and inventories and the Closing Representatives'
verifications thereof, at the Closing the Closing Representatives will prepare
and deliver to each of the parties a Preliminary Closing Statement, which will
show the net amount due either to the Partnership or to the Company as the
result thereof, and such net amount will be added to or subtracted from the
payment of the cash portion of the purchase price to be paid to the Partnership
pursuant to Subsection 2.1 hereof. Within thirty (30) days following the
Closing Date, the Closing Representative shall deliver a Final closing Statement
to each of the parties setting forth the final determination of all items to be
included on the Closing Statements. The net amount due the Partnership or the
Company, if any, by reason of adjustments in the Preliminary Closing Statement
as shown in the Final Closing Statement, shall be paid in cash by the party
obligated therefor within ten (10) days following that party's receipt of the
Final Closing Statement.

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If the Closing Representatives are unable to agree on the Preliminary
Closing Statement or the Final Closing Statement, the dispute shall be submitted
to William H. Ling, C.P.A., 3655 Ruffin Road, Suite 320, San Diego, California,
92123 (the "Accountant") for resolution. If so submitted, the adjustments,
prorations and determinations of the Accountants shall be conclusive and binding
on the parties hereto. Notwithstanding the foregoing, if, at any time within
one (1) year following the Closing Date, either party discovers any items which
should have been included in the Closing Statements but were omitted therefrom,
then such items shall be adjusted in the same manner as if their existence had
been known at the time of the preparation of the Closing Statement. The
foregoing limitations shall not apply to any items which, by their nature,
cannot be finally determined within the periods specified.

The Company shall have the right to have its representatives present, both
before and after the Closing Date, for the purpose of observing the taking of
any inventories (including the counting of house funds), and such
representatives shall be given reasonable access to the books and records of the
Hotel which are relevant to the preparation of the Closing Statements.

In connection with the preparation of the Preliminary Closing Statement, if
it is determined upon the basis of reasonable information that there is a
deficiency in any item or items of Operating Equipment or Consumables in the
operating departments of the Hotel as of the Cut-Off Time, then the Partnership
shall make up such deficiency by either issuing additional Operating Equipment
or Consumables out of reserve storage or by giving the Company an appropriate
credit on the Preliminary Closing Statement, such credit to be determined by the
Closing Representatives or the Accountants.

SECTION VIII
GENERAL PROVISIONS

8.1 LIMITATIONS ON LIABILITY. Notwithstanding anything in this Agreement
or applicable law to the contrary, in the event of liability under this
Agreement, the Company hereby waives the right to assert a claim for breach
against the Partnership or any Partner of the Partnership, or against any
proceeds of the Transaction distributed or distributable to the Partners of the
Partnership, the intent being that no Partner of the Partnership shall have any
personal liability to the Company under this Agreement or applicable law.

Notwithstanding anything to the contrary in this Agreement, no officer,
director, employee or stockholder of the Company shall have any personal
liability to the Partnership under this Agreement.

8.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties shall survive the Closing. Any claim, action, suit or proceeding
with respect to the truth, accuracy or completeness of the representations and
warranties shall be commenced or made, if at all, within one year after the
Closing in the case of any and all representations and warranties other than in
connection with the representations and warranties set forth in Subsection 4.5
"Environmental Matters," and three years after the Closing in the case of any
and all representations and warranties set forth in Section 4.5 "Environmental
Matters."

8.3 EXPENSES. All costs and expenses incurred in connection with the
consummation of the Transaction and the Formation Transactions shall be paid by
the Company.

8.4 NOTICE. All notices, demands, requests or other communications that
may be or are required to be given or made by any party pursuant to this
Agreement shall be in writing and shall be hand delivered or transmitted by
certified mail, express overnight mail or delivery service, telegram, telex, or
facsimile transmission.

B-20

<PAGE>

(a) to the Partnership at:

Grosvenor Hospitality Group, Inc.
3145 Sports Arena Boulevard
San Diego, CA 92110
Attention: J. Mark Grosvenor

(b) with a copy to:

Steven D. Burchett, Esq.
Grosvenor Hospitality Group, Inc.
3145 Sports Arena Boulevard
San Diego, CA 92110

Host Funding, Inc.
7825 Fay Avenue, Suite 250
La Jolla, CA 92037
Attention: Ian Gardner-Smith

(d) with a copy to:

Peter G. Aylward, Esq.
3250 Vista Diego Road
Jamul, CA 91935

or such other address as the addressee may indicate by written notice to the
other parties.

Each notice, demand, request or communication that is given or made in the
manner described above shall be deemed sufficiently given or made for all
purposes at such time as it is delivered to the addressee (with the delivery
receipt, the affidavit of messenger time (with respect to a telex) the answer
back being deemed conclusive but not exclusive evidence of such delivery) or at
such time as delivery is refused by the addressee upon presentation.

8.5 GOVERNING LAW. This Agreement, the rights and obligations of the
parties hereto and any claims or disputes relating to such rights and
obligations shall be governed by and construed under the laws of the State of
California, without giving effect to its choice of law principles.

8.6 HEADINGS. Section and subsection headings contained in this Agreement
are inserted for convenience of reference only, shall not be deemed to be a part
of this Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.

8.7 FURTHER ASSURANCES. Each party agrees to cooperate fully with the
other parties and to prepare, execute, and deliver such further instruments of
conveyance, sale, assignment, or transfer and shall take or cause to be taken
such other or further action as either party shall reasonably request at any
time or from time to time in order to consummate the terms and provisions and to
carry into effect the intents and purposes of this Agreement.

8.8 BENEFIT AND ASSIGNMENT. Neither party shall assign this Agreement, in
whole or in part, whether by operation of law or otherwise, without the prior
written consent of the other party hereto. Any

B-21

<PAGE>

purported assignment contrary to the terms hereof shall be null, void and of no
force and effect. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns as
permitted hereunder. No Affiliate of either party, no person, nor any other
entity other than the parties hereto is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants and agreements set forth in this Agreement shall be solely for
the benefit of, and shall be enforceable only by, the parties hereto or their
respective successors and assigns as permitted hereunder.

8.9 RISK OF LOSS. The Partnership shall bear the risk of loss or damage
to all or any part of its Property by fire or other casualty prior to the
Closing. Notwithstanding the foregoing, in the event all or part of the
Partnership's Property is damaged by a fire or other casualty subsequent to the
execution hereof but prior to the Closing Date, the Company shall not be
relieved of its obligation to consummate the Transaction when and as required to
do so hereunder so long as the Partnership has in place, at the time of the
casualty, casualty insurance in an amount equal to the full replacement cost of
the improvements located on its Property. In the event of such damage to all or
part of its Property, the Partnership shall assign to the Company at Closing all
of the Partnership's right, title and interest in and to all of the proceeds of
insurance payable by virtue of such casualty.

8.10 COUNTERPARTS. To facilitate execution, this Agreement may be executed
in as many counterparts as may be required. It shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures of all
persons required to bind any party appear on each counterpart, but it shall be
sufficient that the signature of, or on behalf of, each party, appear on one or
more of the counterparts. All counterparts shall collectively constitute a
single agreement. It shall not be necessary in making proof of this Agreement
to produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereof.

8.11 SEVERABILITY. If any part of any provision of this Agreement or any
other agreement, document or writing given pursuant to or in connection with
this Agreement shall be invalid or unenforceable under applicable law, such part
shall be ineffective to the extent of such invalidity or unenforceability only,
without in any way affecting the remaining parts of such provisions or the
remaining provisions of said agreement so long as the economic and legal
substance of the Transaction is not affected in any manner materially adverse to
either party.

8.12 ENTIRE AGREEMENT: AMENDMENT. The Exhibits and the Schedules attached
hereto are hereby incorporated into the Agreement as if fully set forth herein.
This Agreement and the Exhibits and Schedules attached hereto (each of which
shall be deemed incorporated herein and made a part hereof) contain the final
and entire agreement between the parties hereto with respect to the Transaction,
supersede all prior oral and written memoranda and agreements with respect to
the matters contemplated herein, and are intended to be an integration of all
prior negotiations and understandings. Neither the Partnership nor the Company
shall be bound by any terms, conditions, statements, warranties or
representations, oral or written, not contained or referred to herein or
therein. No change or modification of this Agreement shall be valid unless the
same is in writing and signed by the parties hereto.

8.13 NO WAIVER. No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Agreement or under any other
instrument or attachment given in connection with or pursuant to this Agreement
shall impair any such right, power or privilege or be construed as a waiver of
any default or any acquiescence herein. No single or partial exercise of any
such right, power or privilege shall preclude the further exercise of such
right, power or privilege. No waiver shall be valid against any party hereto
unless made in writing and signed by the party against whom enforcement of such
waiver is sought and then only to the extent expressly specified therein.

B-22

<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed and delivered on its behalf as of the date first above written.

"PARTNERSHIP" MISSION BAY SUPER 8, LTD.
By: Grosvenor Hospitality Group, Inc.
Its: General Partner

--------------------------------------------------
By: J. Mark Grosvenor
Its: President

"COMPANY" HOST FUNDING, INC.

--------------------------------------------------
By: Michael S. McNulty
Its: President

B-23

<PAGE>

DISCLOSURE SCHEDULE
TO
PARTNERSHIP ACQUISITION AGREEMENT

[To be completed prior to execution and Closing]

B-24

<PAGE>

EXHIBIT LIST

CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A

HOTEL NAMES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B

PERMITS/EXCLUDED PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . C

BOOKINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D

PERMITTED EXCEPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . E

B-25
<PAGE>
APPENDIX C

Host Funding, Inc.
Selected Financial Data
For Mission Bay Super 8, Ltd.,
a California Limited Partnership

(Not Covered by Report of Independent Public Accountants)
<TABLE>
<CAPTION>

12/31/92 12/31/93 12/31/94
DESCRIPTION (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE FROM HOTEL ROOMS $1,201,412 $960,166 $989,703

TOTAL REVENUES 1,261,616 1,021,785 1,054,819

NET INCOME (LOSS) 194,197 73,760 (1,381,028)

DISTRIBUTIONS 340,996 180,000 200,000

PER 1% PARTNERSHIP INTEREST:
NET INCOME(LOSS) 1,942 738 (13,810)

DISTRIBUTIONS 3,410 1,800 2,000

TOTAL ASSETS AT BOOK VALUE 4,624,683 4,507,605 2,938,036

CASH AND CASH EQUIVALENTS 121,933 9,501 43,260

TOTAL DEBT 31,425 20,587 32,046

PARTNERS' EQUITY (DEFICIT) 4,593,258 4,487,018 2,905,990

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS, FOR THE
PERIOD THEN ENDED (9,419) (112,432) 33,759

TOTAL ASSETS AT BOOK VALUE PER
1% PARTNERSHIP INTEREST 46,247 45,076 29,380
- --------------------------------------------------------------------------------

<FN>
*/ Net income after unrealized loss of $1,534,950 attributable to decline in
value of hotel property.
</TABLE>

C-1
<PAGE>

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

No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or the solicitation of any offer to buy any
security other than the Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of an offer to buy the Common
Stock by anyone in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof.

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

SUMMARY TABLE OF CONTENTS

Page
----

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The Company in General . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Pro Forma Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . 47
Financial Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Formation Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Allocation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Voting Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Comparison of Ownership of Mission Bay Interests
and Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Policies and Objectives With Respect to Certain
Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 102
The Company's Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 103
Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . 110
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Appendix C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1

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

281,000 SHARES

HOST FUNDING, INC.

Common Stock

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

PROSPECTUS/CONSENT

SOLICITATION STATEMENT

, 1995
-----------

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

<PAGE>

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

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

The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statement Schedules

See Index to Financial Statements.

II-1

<PAGE>

(b) Exhibits:

Exhibit
Number Exhibit
- ------ -------
3.1 Amended and Restated Charter of the Registrant (previously filed as
Exhibit 3.1 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by reference)
3.2 Amended and Restated By-Laws of the Registrant (previously filed as
Exhibit 3.2 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by reference)
4.1 Form of Share Certificate (previously filed as Exhibit 4.1 to the
Company's Form S-11 Registration Statement, Registration No. 33-________
and incorporated herein by reference)
5.1 Form of Opinion of Peter G. Aylward
5.2 Form of Opinion of Ballard Spahr Andrews & Ingersoll
8.1 Form of Opinion of Peter G. Aylward as to Tax Matters (previously filed
as Exhibit 8.1 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by reference)
10.1 Form of Percentage Leases (previously filed as Exhibit 10.1 to the
Company's Form S-11 Registration Statement, Registration No. 33-________
and incorporated herein by reference)
10.2 Variable Pages of Percentage Leases for Various Initial Hotels
(previously filed as Exhibit 10.2 to the Company's Form S-11 Registration
Statement, Registration No. 33-________ and incorporated herein by
reference)
10.3 Form of Management Agreements (previously filed as Exhibit 10.3 to the
Company's Form S-11 Registration Statement, Registration No. 33-________
and incorporated herein by reference)
10.4 Variable Pages of Management Agreements for Various Initial Hotels
(previously filed as Exhibit 10.4 to the Company's Form S-11 Registration
Statement, Registration No. 33-________ and incorporated herein by
reference)
10.5 Advisory Agreement (previously filed as Exhibit 10.5 to the Company's
Form S-11 Registration Statement, Registration No. 33-________ and
incorporated herein by reference)
10.6 Mission Bay Acquisition Agreement (previously filed as Exhibit 10.6 to
the Company's Form S-11 Registration Statement, Registration No. 33-
________ and incorporated herein by reference)
10.7 Appraisal Report for Super 8 Motel in Miner, Missouri (previously filed
as Exhibit 10.7 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by reference)
10.8 Appraisal Report for Super 8 Motel in Poplar Bluff, Missouri (previously
filed as Exhibit 10.8 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by reference)
10.9 Appraisal Report for Super 8 Motel in Rock Falls, Illinois (previously
filed as Exhibit 10.9 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by reference)
10.10 Appraisal Report for Super 8 Motel in Somerset, Kentucky (previously
filed as Exhibit 10.10 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by reference)
10.11 Appraisal Report for the Mission Bay Super 8 Motel in San Diego,
California (previously filed as Exhibit 10.11 to the Company's Form S-11
Registration Statement, Registration No. 33-________ and incorporated
herein by reference)
10.12 Post-Formation Acquisition Agreement (previously filed as Exhibit 10.12
to the Company's Form S-11 Registration Statement, Registration No. 33-
________ and incorporated herein by reference)
23.1 Consent of Peter G. Aylward, APC (included in Exhibit 5.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in 5.2)
23.3 Consent of Peter G. Aylward, APC (included in Exhibit 8.1)
23.4 Form of Consent of William H. Ling, C.P.A.
23.5 Form of Consent of Arthur Andersen LLP
99.1 Form of Proxy Card for Vote without a Meeting by Mission Bay Limited
Partners
99.2* Consents of persons named to become directors

(c) The opinions provided in reference to Item 4(b) are furnished as part
of the Prospectus/Consent Solicitation Statement and such opinions are attached
as Exhibits to the Registration Statement.

<PAGE>

ITEM 22. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.

(b) The registrant undertakes that every prospectus (A) that is filed
pursuant to paragraph (a) immediately preceding, or (B) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be anew registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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.

(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporation documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.

(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.

(f) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus us sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.

II-3

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of San Diego, State of California on the 24TH day of May, 1995.

HOST FUNDING, INC.
a Maryland corporation

/s/ Guy E. Hatfield
-------------------------------------------------

By: Guy E. Hatfield
Its: Chairman of the Board and President

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
Guy E. Hatfield as his or her true and lawful attorney-in-fact, for him or her
and in his or her name, place and stead, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to
cause the same to be filed with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact full power and authority to do and perform
all and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact may do or cause to be done by virtue of these presents.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 24TH day of MAY, 1995 by the
following persons in the capacities indicated.

Signature Title
--------- -----

\s\ Guy E. Hatfield Chairman of the Board and President
- ----------------------------
Guy E. Hatfield

\s\ Dorothy Hatfield Secretary and Director
- ----------------------------
Dorothy Hatfield

\s\ Emily Groce Director
- ----------------------------
Emily Groce

II-4

<PAGE>

Registration No. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_____________

EXHIBITS
TO
FORM S-4

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

___________________

HOST FUNDING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)

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

<PAGE>

EXHIBIT INDEX

Exhibit Sequential
Number Exhibit Page No.**
- ------- ------- -----------
3.1 Amended and Restated Charter of the Registrant (previously filed as
Exhibit 3.1 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by
reference)
3.2 Amended and Restated By-Laws of the Registrant (previously filed as
Exhibit 3.2 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated herein by
reference)
4.1 Form of Share Certificate (previously filed as Exhibit 4.1 to the
Company's Form S-11 Registration Statement, Registration No. 33-
________ and incorporated herein by reference)
5.1 Form of Opinion of Peter G. Aylward
5.2 Form of Opinion of Ballard Spahr Andrews & Ingersoll
8.1 Form of Opinion of Peter G. Aylward as to Tax Matters (previously
filed as Exhibit 8.1 to the Company's Form S-11 Registration Statement,
Registration No. 33-________ and incorporated
herein by reference)
10.1 Form of Percentage Leases (previously filed as Exhibit 10.1 to the
Company's Form S-11 Registration Statement, Registration No. 33-
________ and incorporated herein by reference)
10.2 Variable Pages of Percentage Leases for Various Initial Hotels
(previously filed as Exhibit 10.2 to the Company's Form S-11
Registration Statement, Registration No. 33-________ and incorporated
herein by reference)
10.3 Form of Management Agreements (previously filed as Exhibit 10.3 to the
Company's Form S-11 Registration Statement, Registration No. 33-
________ and incorporated herein by reference)
10.4 Variable Pages of Management Agreements for Various Initial Hotels
(previously filed as Exhibit 10.4 to the Company's Form S-11
Registration Statement, Registration No. 33-________ and incorporated
herein by reference)
10.5 Advisory Agreement (previously filed as Exhibit 10.5 to the Company's
Form S-11 Registration Statement, Registration No. 33-________ and
incorporated herein by reference)
10.6 Mission Bay Acquisition Agreement (previously filed as Exhibit 10.6 to
the Company's Form S-11 Registration Statement, Registration No. 33-
________ and incorporated herein by reference)
10.7 Appraisal Report for Super 8 Motel in Miner, Missouri (previously
filed as Exhibit 10.7 to the Company's Form S-11 Registration
Statement, Registration No. 33-________ and incorporated
herein by reference)
10.8 Appraisal Report for Super 8 Motel in Poplar Bluff, Missouri
(previously filed as Exhibit 10.8 to the
Company's Form S-11 Registration Statement, Registration No. 33-
________ and incorporated herein by reference)
10.9 Appraisal Report for Super 8 Motel in Rock Falls, Illinois (previously
filed as Exhibit 10.9 to the Company's Form S-11 Registration
Statement, Registration No. 33-________ and incorporated
herein by reference)
10.10 Appraisal Report for Super 8 Motel in Somerset, Kentucky (previously
filed as Exhibit 10.10 to the Company's Form S-11 Registration
Statement, Registration No. 33-________ and incorporated
herein by reference)
10.11 Appraisal Report for the Mission Bay Super 8 Motel in San Diego,
California (previously filed as Exhibit 10.11 to the Company's Form S-
11 Registration Statement, Registration
No. 33-________ and incorporated herein by reference)
10.12 Post-Formation Acquisition Agreement (previously filed as Exhibit 10.12
to the Company's Form S-11 Registration Statement, Registration No. 33-
________ and incorporated herein by reference)
23.1 Consent of Peter G. Aylward, APC (included in Exhibit 5.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in 5.2)

<PAGE>

23.3 Consent of Peter G. Aylward, APC (included in Exhibit 8.1)
23.4 Form of Consent of William H. Ling, C.P.A.
23.5 Form of Consent of Arthur Andersen LLP
99.1 Form of Proxy Card for Vote without a Meeting by Mission Bay Limited
Partners
99.2* Consents of persons named to become directors

____________________
* To be filed by amendment
** Only in manually signed copy

<PAGE>

[Peter G. Aylward Letterhead]

May ___, 1995

Host Funding, Inc.
7825 Fay Avenue, Suite 250
La Jolla, CA 92037

Gentlemen:

We refer to the Form S-4 Registration Statement of Host Funding, Inc., a
Maryland corporation (the "Company"), filed with the Securities and Exchange
Commission under file number 33-_______ and the Prospectus contained therein
(the "Prospectus"), for the purpose of registering under the Securities Act of
1933, as amended, 281,000 shares of the Company's Common Stock, par value $.01
(the "Shares").

We have examined copies, certified or otherwise identified to our
satisfaction, of the Charter and Bylaws of the Company, as amended to date, and
minutes of applicable meetings, or written consents in lieu of meetings, of the
stockholders and the Board of Directors of the Company, together with such other
corporate records, certificates of public officials and of officers of the
Company as we have deemed relevant for the purposes of this opinion. We have
also received an opinion of Ballard Spahr Andrews & Ingersoll of Baltimore,
Maryland dated _______, 1995 a copy of which is attached hereto.

Based upon the foregoing and having regard to the legal considerations
which we deem relevant, it is our opinion that if and when the Shares are issued
sold and delivered in accordance with, as contemplated by and for the
consideration stated in the aurhorizing resolutions and the Prospectus, the
Shares will be legally issued, fully paid and nonassessable.

We hereby consent to the reference to us under the caption "Legal Matters"
in the Prospectus which constitutes a part of the Registration Statement
referred to above. We also consent to the inclusion in the Registration
Statement of this opinion as Exhibit 5.1 thereto.

Very truly yours,

Peter G. Aylward

<PAGE>

[Ballard Spahr Andrews & Ingersoll Letterhead]

May __, 1995

Host Funding, Inc.
Suite 250
7825 Fay Avenue
La Jolla, California 92037

Re: Host Funding, Inc.
------------------
Registration Statement on Form S-4
----------------------------------

Ladies and Gentlemen:

We have acted as Maryland counsel to Host Funding, Inc., a Maryland
corporation (the "Company"), in connection with certain matters of Maryland law
arising out of the registration of up to 281,000 shares (the "Shares") of Common
Stock, $.01 par value per share (the "Common Stock"), by the Company, covered by
the above-referenced Registration Statement, and all amendments thereto (the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"1933 Act"). Unless otherwise defined herein, capitalized terms used herein
shall have the meanings ascribed to them in the Registration Statement.

In connection with our representation of the Company, and as a basis for
the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (hereinafter collectively referred to as the "Documents"):

1. The Registration Statement and the related form of prospectus included
therein (the "Prospectus");

2. The charter of the Company (the "Charter"), certified as of a recent
date by the State Department of Assessments and Taxation of Maryland (the
"SDAT");

3. The Bylaws of the Company, certified as of a recent date by its
Secretary;

4. Resolutions adopted by the Board of Directors of the Company relating
to the sale and issuance of the Shares, certified as of a recent date by the
Secretary of the Company;

5. A certificate as of a recent date of the SDAT as to the good standing
of the Company;

6. A certificate executed by Dorothy Hatfield, Secretary of the Company,
dated May __, 1995; and

7. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth in this letter, subject to the
assumptions, limitations and qualifications noted below.

In expressing the opinion set forth below, we have assumed, and so far as is
known to us there are no facts inconsistent with, the following:

1. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding and are enforceable in accordance with all stated
terms except as limited (a) by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other laws relating to or affecting the
enforcement of creditors' rights or (b) by general equitable principles.

<PAGE>

Host Funding, Inc.
May __, 1995
Page 2

2. Each individual executing any of the Documents on behalf of a party
(other than the Company is duly authorized to do so.

3. Each individual executing any of the Documents is legally competent to
do so.

4. All Documents submitted to us as originals are authentic. All
Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all Documents are genuine. All public
records reviewed or relied upon by us or on our behalf are true and complete.
All statements and information contained in the Documents are true and complete.

5. None of the Shares have been or will be issued or transferred in
violation of any restriction or limitation contained in the Charter.

The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.

Based on the foregoing, and subject to the assumptions, limitations and
qualifications stated herein, it is our opinion that:

1. The Company is a corporation duly incorporated and existing under and
by virtue of the laws of the State of Maryland and is in good standing with the
SDAT.

2. All necessary corporate actions have been taken to authorize the
issuance of the Shares in accordance with and for the consideration set forth in
the Prospectus.

The foregoing opinion is limited to the laws of the State of Maryland and
we do not express any opinion herein concerning any other law.

We assume no obligation to supplement this opinion if any applicable law
changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.

This opinion is being furnished to you solely for your benefit.
Accordingly, it may not be relied upon by, quoted in any manner to or delivered
to any other person or entity without, in each instance, our prior written
consent.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the 1933 Act.

Very truly yours,

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANT

I consent to the inclusion in Host Funding, Inc.'s Registration Statements
on Form S-4 (File No. __________) and S-11 (File No. __________) of our report
dated May ___, 1995, on our audit of the balance sheet of All American Group,
Ltd. dated December 31, 1994, and on our audits of the Financial Statements and
Financial Statement Schedule of All American Group, Ltd. for the years ended
December 31, 1992, 1993, and 1994. I also consent to the reference to my Firm
under the caption "Experts".

San Diego, California
---------------------------------------------
May ___, 1995 William H. Ling
Certified Public Accountant

<PAGE>

CONSENT OF APPRAISERS
---------------------

As appraisers, we, Arthur Andersen LLP, hereby consent to the use of our
Appraisal Reports and to all references to our Firm subject to the statement of
assumptions and limiting conditions and indemnifications attached to our
appraisal reports, included in or made a part of the Host Funding, Inc. S-4 and
S-11 Registration Statements.

ARTHUR ANDERSEN LLP

________________________________

Chicago, Illinois

<PAGE>

PROXY CARD

The undersigned hereby acknowledges receipt of the Prospectus/Consent
Solicitation Statement of Host Funding, Inc., dated __________, 1995, for the
acquisition of the assets of Mission Bay in exchange for Shares of the Company
and the undersigned votes as follows as to such transactions:

VOTE HERE:

FOR AGAINST ABSTAIN

SIGN HERE:

___________________________________________ _______________
Sign exactly as your name(s) appear(s) on Date
prior page

Print Name: _________________________________________
Social Security Number or Tax I.D.:__________________

TELEPHONE NUMBER:_______________________

__________________________________________ ______
Sign exactly as your name(s) appears Date
prior page

Print Name: ______________________________________