<PAGE>
 
                            PARTICIPATION AGREEMENT

                                   EXHIBIT A

                          Form of Lease and Agreement
                          ---------------------------


                              LEASE AND AGREEMENT

          THIS LEASE AND AGREEMENT dated as of _________, 1998 (as amended,
supplemented, or otherwise modified from time to time, this "Lease"), is between
                                                             -----              
SMART & FINAL REALTY TRUST 1998, a Delaware business trust, as Lessor and as
mortgagee ("Lessor"), and SMART & FINAL INC., a Delaware corporation, as Lessee
            ------                                                             
and as mortgagor ("Lessee").
                   ------   

          In consideration of the mutual agreements herein contained and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound hereby, hereby
agree as follows:

                                   ARTICLE I.
                                  DEFINITIONS

          For all purposes hereof, the capitalized terms used herein and not
otherwise defined shall have the meanings assigned thereto in Appendix 1 to that
certain Participation Agreement dated as of the date hereof, by and among
Lessee, Lessor, Investor, Trustee, the Lenders identified therein, and Agent (as
amended, supplemented, or otherwise modified from time to time, the
"Participation Agreement").
 -----------------------   

                                  ARTICLE II.
                           LEASE OF SITE; LEASE TERM

     Section 2.1.  Acceptance and Lease of Site.  Lessor, subject to the
                   ----------------------------
satisfaction or waiver of the conditions set forth in Article III and Appendix 2
of the Participation Agreement, hereby agrees to accept delivery on the Site
Acquisition Date of the Land Interest together with the Facilities thereon to be
delivered on the Site Acquisition Date pursuant to the terms of the
Participation Agreement and simultaneously to lease the Land Interest together
with the Facilities thereon to Lessee hereunder, and Lessee, subject to the
satisfaction or waiver of the conditions set forth in Article III and Appendix 2
of the Participation Agreement, hereby agrees, expressly for the direct benefit
of Lessor, to lease commencing on the Site Acquisition Date from Lessor for the
Lease Term, the Land Interest together with the Facilities thereon to be
delivered on the Site Acquisition Date, and with respect to the New Facility to
be constructed thereon pursuant to the Construction Agency Agreement, such
Facility automatically (without further act) commencing on expiration or
termination of the Construction Period, or as otherwise provided in the
Construction Agency Agreement.

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<PAGE>
 
     Section 2.2.  Acceptance Procedure.  Lessor hereby authorizes a 
                   --------------------
Responsible Officer of Lessee, to be designated by Lessee, as the authorized
representative or representatives of Lessor to accept delivery of the Site.
Lessee hereby agrees that such acceptance of delivery by such authorized
representative or representatives and the due execution and delivery of this
Lease shall, without further act, constitute the irrevocable acceptance by
Lessee of the Site for all purposes of this Lease and the other Operative
Documents on the terms set forth therein and herein. The New Facility
constructed pursuant to the Construction Agency Agreement shall be deemed to be
included in the Leasehold Estate as of the date of expiration or termination of
the Construction Period applicable to such Facility, or as otherwise provided in
the Construction Agency Agreement.


     Section 2.3.  Lease Term.  Unless earlier terminated, the term of this 
                   ----------
Lease shall consist of the Basic Term, commencing on and including the Site
Acquisition Date and ending on the date (the "Basic Term Expiration Date") which
                                              --------------------------      
is five years thereafter (but in no event after May 15, 2003), and the 
Extension Terms, if exercised and effective (collectively, the "Lease Term");
                                                                ----------  
provided, that with respect to the New Facility to be constructed pursuant to
--------                          
the Construction Agency Agreement, the commencement of the Basic Term shall be
the expiration or termination of the Construction Period and the end of the
Basic Term with respect to the New Facility shall be the Basic Term Expiration
Date.


     Section 2.4.  Lease Extension.  Subject to the consent required pursuant to
                   --------------- 
Section 2.10 of the Participation Agreement, Lessee may elect to extend this
Lease for up to ten (10) two (2)-year extensions (each, an "Extension Term"),
                                                            --------------   
commencing upon the expiration of the then Basic Term (the "Extension Term
                                                            --------------
Commencement Date") and ending on the date which is two (2) years thereafter, 
-----------------
as provided in Article VI.

                 
                                  ARTICLE III.
                                 OTHER PROPERTY

          Lessee may from time to time own or hold under lease from Persons
other than Lessor, furniture, equipment and other nonfixtures located on or
about the Site that is not subject to this Lease.  Lessor shall from time to
time, upon the reasonable request, and at the cost and expense of Lessee, which
request shall be accompanied by such supporting information and documents as
Lessor may reasonably require, acknowledge in writing to Lessee or other Persons
that the particular items of furniture, equipment and other fixtures in question
are not part of the Leasehold Estate and that, subject to the rights of Lessor
under any other Operative Documents, Lessor does not own or have any other right
or interest in or to such furniture, equipment and other fixtures.


                                  ARTICLE IV.
                                     RENT

     Section 4.1.  Basic Rent.  Lessee shall pay to Lessor the amounts of Basic
                   ----------
Rent determined in accordance with the definition of "Basic Rent," with payments
on each Payment 

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Date, commencing as of the end of the Construction Period and ending on the last
day of the Lease Term.

     Section 4.2.  Supplemental Rent.  Lessee shall pay to Lessor, or to
                   -----------------
whomever shall be entitled thereto as expressly provided herein or in any other
Operative Document (and Lessor hereby directs Lessee, on behalf of Lessor, to so
pay such other Person), any and all Supplemental Rent promptly as the same shall
become due and payable and, in the event of any failure on the part of Lessee to
pay any Supplemental Rent, Lessor shall have all rights, powers and remedies
provided for herein or by law or in equity or otherwise in the case of
nonpayment of Basic Rent. Lessee hereby reaffirms its obligation to pay as
Supplemental Rent (i) any and all Additional Costs, and (ii) any Transaction
Costs not paid by Lessor, as further described in Section 9.9 of the
Participation Agreement.

     Section 4.3.  Method and Amount of Payment.  As long as any obligations
                   ----------------------------
remain outstanding under the Loan Agreement, Basic Rent and Supplemental Rent
shall be paid to Lessor (or, in the case of Supplemental Rent, to such Person as
may be entitled thereto) on the due date therefor at such place as Lessor shall
specify in writing to Lessee at least two (2) Business Days prior to the due
date therefor. Agent, on behalf of Lessor, shall notify Lessee of the applicable
LIBO Rate or Base Rate, as applicable, promptly upon the determination thereof.
Each payment of Rent shall be made by Lessee prior to 11:00 a.m., New York City
time (and payments made after such time shall be deemed to have been made on the
next day) at the place of payment in funds consisting of lawful currency of the
United States of America which (in the case of any amount payable to Lessor,
Agent, any Participant or any Indemnitee) shall be immediately available on the
scheduled date when such payment shall be due, unless the scheduled date shall
not be a Business Day, in which case such payment shall be made on the next
succeeding Business Day (unless the result of such extension would be to carry
such payment into the next calendar month, in which event such payment shall be
made on the next preceding Business Day). Any amounts payable by Lessee to
Lessor hereunder shall be payable in accordance with Section 9.16 of the
Participation Agreement.

     Section 4.4.  Late Payment.  If any Basic Rent shall not be paid when due
                   ------------
(not taking into account any applicable grace period), Lessee shall pay to
Lessor (or as Lessor directs), or if any Supplemental Rent payable to or on
behalf or for the account of Lessor, Agent, any Participant or other Indemnitee
is not paid when due (not taking into account any applicable grace period),
Lessee shall pay to whomever shall be entitled thereto, in each case as
Supplemental Rent, interest at the Overdue Rate (to the maximum extent permitted
by law) on such overdue amount from and including the initial due date thereof
(not taking into account any applicable grace period) to but excluding the
Business Day of payment thereof at the Overdue Rate.

     Section 4.5.  Net Lease; No Setoff; Etc..  This Lease shall constitute a
                   --------------------------
net lease and, notwithstanding any other provision of this Lease, Basic Rent and
Supplemental Rent shall be paid without counterclaim, setoff, deduction or
defense of any kind and without abatement, suspension, deferment, diminution or
reduction of any kind, and Lessee's obligation to pay all such amounts
throughout the Lease Term is absolute and unconditional. The obligations and
liabilities of Lessee hereunder shall in no way be released, discharged or
otherwise affected for 

                                      A-3
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any reason, including, without limitation, to the maximum extent permitted by
law, as a result of or related to: (a) any defect in the condition,
merchantability, design, construction, quality or fitness for use of any portion
of the Site, or any failure of the Site to comply with all Applicable Laws and
Regulations, including any inability to occupy or use the Site by reason of such
non-compliance; (b) any damage to, abandonment, loss, contamination of or
Release from or destruction of or any requisition or taking of the Site or any
part thereof, including eviction; (c) any restriction, prevention or curtailment
of or interference with any use or any part thereof, including eviction; (d) any
defect in title to or rights to the Site or any Lien on such title or rights on
the Site; (e) any change, waiver, extension, indulgence or other action or
omission or breach in respect of any obligation or liability of or by Lessor,
Investor, Trustee, Agent or any Lender; (f) any bankruptcy, insolvency,
reorganization, composition, adjustment, dissolution, liquidation or other like
proceedings relating to any Lessee Party, Lessor, Investor, Trustee, Agent, any
Lender or any other Person, or any action taken with respect to this Lease by
any trustee or receiver of any Lessee Party, Lessor, Investor, Trustee, Agent,
any Lender or any other Person, or by any court, in any such proceeding; (g) any
claim that Lessee has or might have against any Person, including, without
limitation, Lessor, Investor, Trustee, Sublessee, Agent, or any Lender; (h) any
failure on the part of Lessor, Agent, any Participant or Trustee to perform or
comply with any of the terms of any Operative Document or of any other
agreement, whether or not related to the Overall Transaction; (i) any invalidity
or unenforceability or disaffirmance against or by Lessee of this Lease or any
provision hereof or any of the other Operative Documents or any provision of any
thereof; (j) the impossibility of performance by Lessee, Lessor or both; (k) any
action by any court, administrative agency or other Governmental Authority; (l)
any restriction, prevention or curtailment of or any interference with the
construction on, demolition of, or any use of Site or any part thereof; or (m)
any other occurrence whatsoever, whether similar or dissimilar to the foregoing,
whether or not Lessee shall have notice or knowledge of any of the foregoing.
Except as specifically set forth in Article XIII of this Lease, this Lease shall
                                    ------------                                
be noncancellable by Lessee for any reason whatsoever, and Lessee, to the extent
permitted by Applicable Laws and Regulations, waives all rights now or hereafter
conferred by statute or otherwise to quit, terminate or surrender this Lease, or
to any diminution, abatement or reduction of Rent payable by Lessee hereunder.
If for any reason whatsoever this Lease shall be terminated in whole or in part
by operation of law or otherwise, except as expressly provided in Article XIII
                                                                  ------------
of this Lease, Lessee shall, unless prohibited by Applicable Laws and
Regulations, nonetheless pay to Lessor (or, in the case of Supplemental Rent, to
whomever shall be entitled thereto) an amount equal to each Rent payment at the
time and in the manner that such payment would have become due and payable under
the terms of this Lease if it had not been terminated in whole or in part, and
in such case, so long as such payments are made and no Lease Event of Default
shall have occurred and be continuing, Lessor will deem this Lease to have
remained in effect.  Each payment of Rent made by Lessee hereunder shall be
final and, absent manifest error in the computation of the amount thereof,
Lessee shall not seek or have any right to recover all or any part of such
payment from Lessor, Agent, any Participant or any party to any agreements
related thereto for any reason whatsoever.  Lessee assumes the sole
responsibility for the condition, use, operation, maintenance and management of
the Site, and Lessor shall have no responsibility in respect thereof and shall
have no liability for damage to the property of Lessee or any subtenant of
Lessee on any account or for any reason whatsoever, other than by reason of
Lessor's willful misconduct or gross negligence, in either case, as determined
by a final, binding and nonappealable court order.

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<PAGE>
 
                                   ARTICLE V.
                             UTILITY CHARGES; REAL
                                 PROPERTY TAXES


     Section 5.1.  Utility Charges.  Lessee shall pay or cause to be paid all
                   --------------- 
charges for electricity, power, gas, oil, water, telephone, sanitary sewer
service and all other rents and utilities used in or on the Site during the
Lease Term. So long as no Lease Event of Default exists, Lessee shall be
entitled to receive any credit or refund with respect to any utility charge paid
by Lessee and, so long as no Lease Event of Default exists, the amount of any
credit or refund received by Lessor on account of any utility charges paid by
Lessee, net of the costs and expenses reasonably incurred by Lessor in obtaining
such credit or refund, shall be promptly paid over to Lessee. All charges for
utilities imposed with respect to the Site for a billing period during which
this Lease expires or terminates (except pursuant to Section 6.2, in which case
                                                      ----------- 
Lessee shall be solely responsible for all such charges) shall be adjusted and
prorated on a daily basis between Lessor and Lessee, and each party shall pay or
reimburse the other for each party's pro rata share thereof.


     Section 5.2.  Real Property Taxes. Lessee shall pay when due and shall be
                   ------------------- 
obligated for all real estate taxes and assessments assessed against the
Leasehold Estate or any part thereof. Such real estate taxes and assessments
shall be hereinafter referred to as "Real Estate Taxes."  Real Estate Taxes
                                     -----------------
shall also include any tax, assessment, charge or fee in substitution for or in
addition to such real estate taxes or assessments, but shall not include any
U.S. Federal income taxes imposed on the net income of Lessor, Agent or any
Participant or Taxes on or measured solely by net income (including franchise
taxes) imposed or assessed by any foreign, state or local Governmental
Authority. Lessee agrees to pay all such Real Estate Taxes on the Leasehold
Estate on or before the due date for payment of such Real Estate Taxes. Lessee
shall have the right to contest the amount or validity of the Real Estate Taxes
pursuant to the terms of the Participation Agreement. Lessee shall pay promptly
when due all personal property taxes assessed during the Lease Term upon the
Lessee's fixtures, furnishing, equipment and stock in trade or upon Lessee's
leasehold interest under this Lease Agreement or upon any other personal
property situated in or upon the Leasehold Estate.


                                  ARTICLE VI.
                          EXTENSION OPTIONS; PURCHASE,
                            RETURN AND SALE OPTIONS


     Section 6.1.  Extension Options.  Subject to the consent of Lessor, Agent 
                   -----------------
and each Participant and the other terms set forth in Section 2.10 of the
Participation Agreement, Lessee shall have the right, at its option, to request
Lessor to extend the Lease, and Agent, Lessor and Participants to extend the
financing in connection therewith, for an Extension Term, commencing immediately
following the expiration of the Basic Term and any previous Extension Terms (up
to a total of ten (10) such terms), if applicable. In order to exercise such
option, Lessee shall give irrevocable written notice thereof to Lessor and Agent
no earlier than ninety (90) days and no later than seventy-five (75) days prior
to the second anniversary of the Document Closing Date, and no Lease Default or
Lease Event of Default shall have occurred and be continuing at the time 

                                      A-5
<PAGE>
 
of exercise and at the commencement of such Extension Term. If an Extension Term
is applicable, Lessee shall continue to pay Rent, including Basic Rent, during
the Extension Term on each Payment Date occurring during the Extension Term. All
of the provisions of this Lease shall remain in effect during each Extension
Term.

     Section 6.2.  Purchase Option.  Lessee will have the right, at its option
                   ---------------
and upon delivery of prior written notice (which notice shall be irrevocable) to
Lessor and Agent provided no later than twelve (12) months prior to expiration
of the Lease Term, to purchase the entire Site at a price equal to the Purchase
Option Exercise Amount (the "Purchase Option"). If Lessee shall have elected to
                             ---------------                 
purchase the Site (or be required to purchase the Site pursuant to Section 6.4),
                                                                   ----------- 
Lessor shall, upon discharge of the Lien of the Mortgage pursuant to the
provisions thereof and the payment in full of the Purchase Option Exercise
Amount in immediately available funds, transfer by quitclaim deed all of
Lessor's right, title and interest in and to the Site to Lessee or its designee,
without recourse or warranty (except as to the absence of Lessor Liens), and re-
assign to Construction Agent any Construction Documents previously assigned
thereby to Lessor. Lessee, at its option, may assign its right to exercise the
Purchase Option by written notice thereof to Agent and Lessor; provided that (i)
                                                               --------       
Lessee shall be bound by any exercise of the Purchase Option by the assignee,
(ii) such assignee shall be bound by the provisions of this Article applicable
to the Purchase Option, and (iii) no such assignment shall release Lessee from
its obligations under this Article and, without limitation, Lessee shall remain
primarily liable to Lessor for the payment of all amounts due under this Article
in respect of the Purchase Option.

     Section 6.3.  Sale Option.  If no Lease Default or Lease Event of Default
                   -----------
shall have occurred and be continuing, then Lessee may cause the entire Site to
be sold on the last day of the Lease Term for cash to a purchaser or purchasers
not affiliated in any way with Lessee (the "Sale Option"); provided that the
                                            -----------    --------
entire Site shall be sold to the same Person in the same transaction and subject
to the other terms of this Article. In the event Lessee timely elects the Sale
Option, or in the event Lessor elects to require Lessee to sell the Site as a
result of a Construction Risk Event pursuant to Section 5.4 of the Construction
Agency Agreement, on the last day of the Lease Term (or as otherwise provided in
Section 5.4 of the Construction Agency Agreement), Lessee will pay as
Supplemental Rent to Lessor the amounts determined in accordance with Section
                                                                      -------
6.4, until the Lease Balance and all other amounts payable under the Operative
---                                                                           
Documents have been paid in full.

     Section 6.4.  Conditions for Sale of the Site.
                   -------------------------------

          (a)     In the event that the Sale Option is applicable, Lessee shall
cause the entire Site to be sold in accordance with the procedures set forth in
this Section. In order to exercise the Sale Option, Lessee shall give notice of
its election of the Sale Option effective at the expiration of the Lease Term,
not later than twelve (12) months prior to such expiration, which notice shall
be irrevocable, and any failure of Lessee to so elect the Sale Option shall be
deemed an election of the Purchase Option pursuant to Section 6.2. Subject to
                                                      -----------             
the preceding sentence, during the period commencing on the date twelve (12)
months prior to the scheduled end of the Lease Term, Lessee, on behalf of
Lessor, shall use best commercial efforts, as non-exclusive agent for Lessor
(until Lessor appoints a successor, in its sole discretion), to obtain the
highest cash bids 

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<PAGE>
 
for the purchase of the Site and, in the event it receives any bid, Lessee
shall, within five (5) Business Days after receipt thereof and at least twenty
(20) Business Days prior to the Lease Termination Date, certify to Lessor and
Agent in writing the amount and terms of such bid, and the name and address of
the party or parties (who shall not be Lessee or any Affiliate or affiliate of
Lessee or any Person with whom Lessee has an understanding or arrangement
regarding the future use of the Site by Lessee or such Affiliate or affiliate,
but who may be Lessor, Agent, Investor or a Lender, any Affiliate thereof, or
any Person contacted by Lessor, Agent, Investor or a Lender) submitting such
bid. Lessee will keep Agent and Lessor promptly informed of the material terms
of any proposed bid. Lessee shall bear its own expenses and pay, as Supplemental
Rent, the reasonable expenses of Lessor, Agent and each Participant in
connection with any such bidding and sale process pursuant to this Section
including all costs and expenses incurred by any party (including a buyer or
potential buyer) to place the Site in the condition required by Section 9.1 and
                                                                ------- ---
costs of repairs, Alterations or improvements desired by such buyer.

          (b) In the event that Lessee contemplates accepting any bid which,
upon payment of all amounts under this Section, shall result in any portion of
the Lease Balance or any other amount due under the Operative Documents
remaining outstanding (a "Loss Bid"), Lessee shall notify Agent and Lessor in
                          --------                                           
writing (a "Loss Bid Notice") of such fact and the calculation thereof prior to
            ---------------                                                    
accepting any such bid; and in the event of such bid, any Participant may submit
a bid to Lessee not later than thirty (30) days after the date of such notice
from Lessee.  On or before the Lease Termination Date, so long as no Lease
Default or Lease Event of Default shall have occurred and be continuing, and
subject to the release of the security interest with respect to the Site under
the Mortgage:  (i) Lessee shall transfer all of Lessee's right, title and
interest in the Site, or cause the Site to be transferred, to the bidder(s), if
any, which shall have submitted the highest bid therefor at least twenty (20)
(or, in the case of Lessor, Agent or a Participant, any Affiliate thereof or
Person contacted by Lessor, Agent or a Participant, five (5)) Business Days
prior to such Lease Termination Date, in the same manner and in the same
condition and otherwise in accordance with all the terms of this Lease; (ii)
subject to prior or concurrent payment by Lessee of all amounts due under clause
(iii) of this sentence, Lessor shall exercise such rights as it has to cause the
Site to be released from the Lien of the Mortgage and shall, without recourse or
warranty (except as to the absence of Lessor Liens), transfer by quitclaim deed
Lessor's right, title and interest in and to the Site for cash to such
bidder(s); and (iii) Lessee shall simultaneously pay or cause to be paid to
Lessor in immediately available funds an amount equal to the sum of (p) all
unpaid Basic Rent due on or prior to the Lease Termination Date, and all
Supplemental Rent due on or prior to such date and any other amounts due and
payable by Lessee to Lessor, Agent, Trustee, Trust Company, each Participant,
and each Indemnitee, plus (q) the gross sale proceeds of the Site sold by Lessor
(the "Proceeds"), plus (r) the Residual Guaranty Amount.  To the extent the sum
      --------                                                                 
of the Proceeds plus the Residual Guaranty Amount shall exceed the Lease
Balance, upon receipt of the amounts described in clause (p) of the preceding
sentence, Lessor shall apply the amount of Proceeds equal to such excess to the
amount payable by Lessee under clause (r); provided that, to the extent that the
                                           --------                             
Proceeds alone shall exceed the Lease Balance, upon receipt of the Proceeds and
the amounts described in clause (p) of the preceding sentence, Lessor shall pay
the amount of such excess to Lessee.  Notwithstanding any provision herein to
the contrary, in the event Lessee's exercise of the Sale 

                                      A-7
<PAGE>
 
Option would be pursuant to a bid set forth in a Lease Bid Notice, then, at the
option of Lessor and Agent, Lessee may instead be required to purchase the Site
pursuant to the Sale Option.

          (c) If Lessee exercises the Sale Option and a Loss Bid Notice is to be
provided pursuant to Section 6.4(b), then as a condition to Lessee's right to
                     --------------                                          
consummate the Sale Option pursuant to Sections 6.3 and 6.4, Lessee shall
                                       --------------------              
indemnify (without otherwise limiting other indemnities provided in the
Operative Documents), and pay to Lessor on the Lease Termination Date, and the
Lenders, an amount equal to the Shortfall Amount.

          "Shortfall Amount" means the amount by which the Site was impaired by
           ----------------                                                    
any of the following, as determined by the Appraisal Procedure set forth in
clause (d), (but in any event shall not exceed the excess, if any, of (i) the
Termination Value over (ii) the sum of the Proceeds plus the Residual Guaranty
Amount):

               (i) the existence of any Hazardous Materials, Environmental
     Concern Materials or violations of Environmental Laws with respect to the
     Site occurring or discovered after the date the Site becomes subject to the
     Lease (regardless of the Person so discovering any of the foregoing), or

              (ii) any restoration or rebuilding carried out by Lessee or any
     failure of Lessee to complete any Alterations, restoration or rebuilding,
     or

             (iii) any easements or other actions described in Section 8.3
                                                               -----------
     (i) through (viii), or
     ------------------    

              (iv) the failure of Lessor to have good and marketable title to
     the Site free and clear of all Liens (including Permitted Liens (other than
     Lessor Liens)) and exceptions to title caused by the acts or omissions of
     Lessee or any Affiliate or affiliate or Sublessee, or

               (v) greater than expected wear and tear during the Lease Term, or

              (vi) failure to maintain the Facilities or the Site pursuant to
     the terms of the Lease, or

             (vii) any other cause or condition within the power of any
     Lessee Party to control or affect, differing from ordinary wear and tear.

          (d) For determining the Shortfall Amount, Lessor and Lessee shall use
the following procedure (the "Appraisal Procedure").  Lessor and Lessee shall
                              -------------------                            
endeavor to reach a mutual agreement as to such amount for a period of ten (10)
days from commencement of the Appraisal Procedure (which shall commence upon
notice by either party), and if they cannot agree within ten (10) days, then two
(2) qualified appraisers, one chosen by Lessee and one chosen by Lessor, shall
mutually agree thereupon, but if either party shall fail to choose an appraiser
within twenty (20) days after notice from the other party of the selection of
its appraiser, then the appraisal by such appointed appraiser shall be binding
on Lessee and Lessor.  If the two (2) 

                                      A-8
<PAGE>
 
appraisers cannot agree within twenty (20) days after both shall have been
appointed, then a third (3rd) appraiser shall be selected by the two (2)
appraisers or, failing agreement as to such third (3rd) appraiser within thirty
(30) days after both shall have been appointed, by the American Arbitration
Association. The decisions of the three (3) appraisers shall be given within
twenty (20) days of the appointment of the third (3rd) appraiser and the
decision of the appraiser most different from the average of the other two (2)
shall be discarded and such average shall be binding on Lessor and Lessee;
provided that if the highest appraisal and the lowest appraisal are equidistant
--------                                                           
from the third appraisal, the third appraisal shall be binding on Lessor and
Lessee. The fees and expenses of all of the appraisers shall be paid by Lessee.

     Section 6.5.  Exercise of Options; Failure to Elect.  In order to exercise
                   -------------------------------------
any of its purchase or sale options under this Lease, Lessee shall give
irrevocable written notice to Lessor not less than twelve (12) months prior to
the end of the then current Lease Term, that Lessee intends to exercise one of
the options provided in this Article and specifying such option. If Lessee shall
fail to deliver such written notice in the time required, Lessee shall be deemed
to have elected to exercise the Purchase Option pursuant to Section 6.2.
                                                            -----------
Lessee's election (or deemed election) of the Purchase Option will be
irrevocable at the time it is made (or deemed made). If Lessee has elected the
option to sell the Site under Section 6.3, such option shall be automatically
                              -----------                      
revoked and such election shall be deemed of no effect if, on or after the date
Lessee elects such option, there exists or occurs a Lease Default or Lease Event
of Default or Lessee shall fail in any manner fully to comply with this Article,
in which case Lessee shall be automatically deemed to have elected the Purchase
Option pursuant to Section 6.2.
                   ----------- 

     Section 6.6.  Return of Site.  Unless the Site shall have been transferred
                   --------------
to Lessee pursuant to Section 6.2, Lessee shall, on the Lease Termination Date,
                      -----------                                 
and at its own expense, transfer the Site (together with the reports described
in Section 9.4 relating thereto) to the independent purchaser thereof pursuant
   -----------
to Section 6.3, free and clear of all Liens other than Permitted Exceptions and
   ----------- 
Lessor Liens, in as good condition as they were on the Document Closing Date,
ordinary wear and tear excepted, and in compliance with all Applicable Laws and
Regulations and the other requirements of Article IX (and in any event without
(x) any asbestos installed or maintained in any part of the Site, (y) any
polychlorinated biphenyl (PCBs) in, on or used, stored or located at the Site,
and (z) any other Hazardous Materials). Lessee shall cooperate with the
independent purchaser of the Site in order to facilitate the ownership and
operation by such purchaser of the Site after the Lease Termination Date,
including providing all books, reports and records regarding the maintenance,
repair and ownership of the Site and all data and technical information relating
to the physical operation and maintenance of the Site, granting or assigning (to
the extent permitted by law) all licenses necessary for the operation and
maintenance of the Site and cooperating in seeking and obtaining all necessary
Governmental Action. Lessee shall have also paid the total cost for the
completion of all Alterations commenced prior to the Lease Termination Date. The
obligation of Lessee under this Article regarding the Purchase Option shall
survive the expiration or termination of this Lease, except if Lessee duly and
timely exercises the Sale Option and performs its obligations under Sections 6.3
                                                                    ------------
and 6.4. Unless Lessee shall have exercised or been deemed to have exercised its
-------
option to purchase the Site, then after the date which is twelve (12) months
prior to the Lease Termination Date, Lessor shall at Lessee's expense be
entitled to perform such investigation, including obtaining reports of 

                                      A-9
<PAGE>
 
engineers and other experts as to the condition and state of repair and
maintenance required by this Section and as to the compliance with Environmental
Laws of the Site, as it deems appropriate. Lessee, at its sole cost and expense,
shall cause the repair or other remediation of any discrepancies between the
actual condition of the Site and the condition required under the Lease, such
repair or remediation to be completed not later than the expiration of this
Lease.

     Section 6.7.  Completion of Facilities.  In the event that the New Facility
                   ------------------------
becomes subject to this Lease prior to Completion thereof due to the termination
of the Construction Period applicable thereto under Section 5.1 of the
Participation Agreement, upon request, Lessee shall diligently pursue
construction of the New Facility in accordance with the construction-related
provisions of the Operative Documents (including those set forth in the
provisions of Article III of the Participation Agreement, notwithstanding that
the Participants shall not be obligated to make any Advances in respect of such
construction) and shall cause the Completion of such Facility not later than the
earlier to occur of (x) the date which is twelve (12) months after the Site
Acquisition Date and (y) the original expiration date of the Construction Period
for the New Facility, not taking into account the early termination of such
Construction Period.

     Section 6.8.  Failure of Lessee to Sell Site.  If Lessee shall exercise (or
                   ------------------------------
be required to exercise, pursuant to Section 5.4 of the Construction Agency
Agreement) the Sale Option and shall fail to arrange for the sale of all of the
Site on or before the Lease Termination Date in accordance with and subject to
the provisions of Sections 6.3 and 6.4, then Lessee and Lessor hereby agree as
                  -------------------- 
follows:

          (a) On the Lease Termination Date, Lessee shall (i) pay to Lessor (on
behalf of the Participants) the Residual Guaranty Amount and (ii) Lessee will do
the following:

               (1) at the option of Lessor and Agent, either (x) cancel the sale
     of the Site for which Lessee has arranged a sale (in which case, the Site
     will constitute an "unsold Site" under this Section or (y) sell the Site
     for which Lessee has arranged a sale pursuant  to the provisions of
     Sections 6.3 and 6.4; and
     --------------------     

               (2) in the event of clause 1(x) above, at the option of Lessor
     and Agent, either (x) tender to Lessor possession of the unsold Site or (y)
     continue to lease the unsold Site during a holdover period (the "Holdover
                                                                      --------
     Period") and in the case of such holdover, Lessee shall continue to market,
     ------                                                                     
     on a non-exclusive basis, the Site for sale on behalf of Lessor in
     accordance with the provisions of the Lease.  Such Holdover Period shall
     expire on the earlier of (x) the sale of the Site, (y) the reduction of the
     Lease Balance to zero and the payment by Lessee of all Basic Rent,
     Supplemental Rent and all other amounts then due and payable under the
     Operative Documents, and (z) written notice by Lessor and Agent of a date
     specified for the termination of such Holdover Period with respect to the
     Site.  The Basic Rent payable by Lessee for the Site during any  Holdover
     Period shall be applied first to payment of the portion of Basic Rent, with
     any excess being applied to reduce the Lease Balance.  Any Proceeds from
     the sale of the Site during the Holdover Period will be applied to reduce
     the Lease Balance, with such application being allocated first to Lenders
     in respect of the remaining amount of the Notes, and second to 

                                      A-10
<PAGE>
 
     the Investor Contribution. If and when the Lease Balance shall be reduced
     to zero and all other amounts due and payable under the Operative
     Documents, (i) any further Proceeds from the sale of the Site shall be
     remitted to Lessee for its own account, (ii) at the request of either
     Lessor (or Agent on Lessor's behalf) or Lessee, Lessor will transfer to
     Lessee or its designee, and Lessee will accept or cause its designee to
     accept the transfer of the Site by quitclaim deed, and Lessee shall pay or
     cause to be paid all costs and expenses (including, without limitation,
     reasonable attorneys' fees and expenses of counsel to the Participants) in
     connection with such transfer.

Lessor and Agent shall not make the elections under clause (1)(y) and clause
(2)(x) above without receiving (x) the consent of all Lenders if after giving
effect to such sale and payment by Lessee of the Residual Guaranty Amount, any
portion of the principal of and accrued interest on the Notes will remain
outstanding, and (y) the consent of Investor if after giving effect to such sale
and payment by Lessee of the Residual Guaranty Amount, any portion of the
Investor Contribution or accrued Yield will remain outstanding.

          (b) On or after the Lease Termination Date, Lessor shall have the
right, but not the obligation, to sell the Site for such purchase price and upon
such terms as Lessor shall determine in its sole discretion.  In the event that
Lessor shall so elect to sell the Site, Lessor shall notify each of Agent,
Investor, Lessee and Lenders thereof, and each shall have the right to submit a
bid and/or to cause any other Person to submit a bid to Lessor not later than
twenty (20) Business Days prior to the date Lessor desires to sell the Site (as
set forth in the aforementioned notice thereof); provided, however, that Lessor,
                                                 --------  -------              
on behalf of Lessor, Agent and Participants, shall have the right, in its sole
discretion, from time to time, to defer such proposed sale date, in which event,
the rights of Lessee, Agent, Investor and each Lender to submit a bid and/or to
cause any other Person to submit a bid to Lessor shall be extended to the date
that is twenty (20) Business Days prior to the revised proposed sale date.  At
no time shall Lessor be obligated to accept any bid for the sale of the Site
(whether such bid was obtained by Lessee, Lessor, Agent, Investor, any Lender or
otherwise) or to consummate any proposed sale.

          (c) At any time and from time to time on or after the Lease
Termination Date, Lessor, on behalf of Lessor, Agent, Investor and Lenders,
shall have the right to withdraw from any sale deposit (other than the portion
thereof constituting the Residual Guaranty Amount) amounts to pay, or reimburse
itself for the payment of, expenses of Lessor, Agent and each Participant in
connection with any bidding and sale (or proposed sale, whether or not
consummated) described in clause (b).  In the event that there are insufficient
funds remaining from the sale deposit to pay such expenses, Lessee shall pay
such expenses from time to time upon demand.

          (d) Contemporaneously with the consummation of any sale of the Site by
Lessee or Lessor pursuant to this Section, (i) Lessee will transfer all of
Lessee's right, title and interest in the Site to be transferred to the
purchaser, (ii) subject to prior or concurrent payment by Lessee of all amounts
due under clause (iii) of this sentence and receipt by Lessor of Proceeds from
such sale, Lessor shall exercise such rights as it has to cause the Site to be
released from the Lien of the Mortgages and shall, without recourse or warranty
(except as to the absence of Lessor 

                                      A-11
<PAGE>
 
Liens), transfer by quitclaim deed Lessor's right, title and interest in and to
the Site for cash to such purchaser; and (iii) Lessee shall simultaneously pay
or cause to be paid to Lessor, on behalf of Lessor, Agent, Participants, Trustee
and Trust Company, in immediately available funds an amount equal to all unpaid
Basic Rent and all Supplement Rent due on or prior thereto and any other amounts
due and payable by Lessee to Lessor, Agent, each Participant, Trustee and Trust
Company. Any Proceeds in excess of the sum of (x) the Lease Balance, plus (y)
all unpaid Basic Rent and all Supplemental Rent due on or prior thereto and any
other amounts due and payable by Lessee to Lessor, Agent, each Participant,
Trustee and Trust Company shall, so long as no Lease Default or Lease Event of
Default exists, be remitted to Lessee promptly after receipt.

          (e) Until a sale of the Site by Lessee or Lessor pursuant to this
Section, Lessee shall be bound by all of the obligations and duties of Lessee
under this Lease, notwithstanding the occurrence of the Lease Termination Date.

          (f) Lessor reserves all rights under this Lease and the other
Operative Documents arising out of Lessee's breach of any provisions of this
Lease (including Article VI), whether occurring prior to, on or after the Lease
                 ----------                                                    
Termination Date, including Lessee's breach of any of its obligations under
Sections 6.3 and 6.4, including the right to sue Lessee for damages.
--------------------                                                

          (g) To the greatest extent permitted by law, Lessee hereby
unconditionally and irrevocably waives, and releases Lessor, each Participant
and Agent from, any right to require Lessor, each Participant or Agent to sell
the Site at all or for any minimum purchase price or on any particular terms and
conditions, Lessee hereby agreeing that if Lessee shall elect, or be required to
elect, the Sale Option, its ability to sell the Site on or prior to the Lease
Termination Date and its right thereafter to submit a bid or to cause any other
Person to submit a bid pursuant to Section 6.8(b) in the event Lessor shall
                                   --------------                          
elect to sell the Site, shall constitute full and complete protection of
Lessee's interest hereunder.

                                  ARTICLE VII.
                           CONDITION AND USE OF SITE

     Section 7.1.  Waivers.  LESSEE ACKNOWLEDGES AND AGREES THAT, ALTHOUGH
                   -------
LESSOR WILL OWN AND HOLD TITLE TO THE SITE, CONSTRUCTION AGENT IS SOLELY
RESPONSIBLE UNDER THE TERMS OF THE CONSTRUCTION AGENCY AGREEMENT FOR THE DESIGN,
DEVELOPMENT, BUDGETING, CHANGE ORDERS AND CONSTRUCTION OF THE FACILITIES AND ANY
ALTERATIONS. The Site is let by Lessor "AS IS" in their present or then
condition, as the case may be, subject to (a) any rights of any parties in
possession thereof, (b) the state of the title thereto existing at the time
Lessor acquired its interest in the Site, (c) any state of facts which an
accurate survey or physical inspection might show (including any survey
delivered on or prior to the Document Closing Date or the Completion Date), (d)
all Applicable Laws and Regulations, and (e) any violations of Applicable Laws
and Regulations which may exist at the commencement of the Lease Term. Lessee
has examined the Site and (insofar as Lessor is concerned) has found the same to
be satisfactory. NEITHER LESSOR, INVESTOR, AGENT NOR ANY LENDER HAS MADE OR
SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR 

                                      A-12
<PAGE>
 
WARRANTY, EXPRESS OR IMPLIED, OR SHALL BE DEEMED TO HAVE ANY LIABILITY
WHATSOEVER AS TO THE TITLE TO THE SITE OR TO THE VALUE, MERCHANTABILITY,
HABITABILITY, CONDITION, OR FITNESS FOR USE OF THE SITE, OR ANY PART THEREOF, OR
ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH
RESPECT TO THE SITE, OR ANY PART THEREOF, AND NEITHER LESSOR, INVESTOR, AGENT
NOR ANY LENDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN
OR THE FAILURE OF THE SITE, OR ANY PART THEREOF, TO COMPLY WITH ANY APPLICABLE
LAWS AND REGULATIONS, except that Lessor hereby represents and warrants that the
Site is and shall be free of Lessor Liens. Lessee has been afforded full
opportunity to inspect the Site, is satisfied with the results of its
inspections and is entering into this Lease solely on the basis of the results
of its own inspections, and all risks incident to the matters discussed in the
preceding sentence (other than Lessor Liens), as between Lessor, Investor, Agent
and the Lenders, on the one hand, and Lessee, on the other, are to be borne by
Lessee. The provisions of this Article have been negotiated, and, except to the
extent otherwise expressly stated, the foregoing provisions are intended to be a
complete exclusion and negation of any representations or warranties by any of
Lessor, Investor, Agent or the Lenders, express or implied, with respect to the
Site (or any interest therein), that may arise pursuant to any law now or
hereafter in effect or otherwise.

                                 ARTICLE VIII.
                               LIENS; EASEMENTS

     Section 8.1.  Liens.  Lessee shall not directly or indirectly create,
                   -----
incur, assume or suffer to exist any Lien, defect, attachment, levy, title
retention agreement or claim upon the Site or Alteration, or with respect to the
Site, any Rent, the title thereto, or any interest therein, including all Liens
which arise out of the possession, use, occupancy or construction of the Site or
by reason of labor or materials furnished or claimed to have been furnished to
Lessee, or any of its contractors or agents or by reason of the financing of any
Alterations constructed by or for the benefit of Lessee and not financed by
Lessor, except in all cases Permitted Liens. With respect to all Liens other
than Permitted Liens, Lessee shall promptly, but not later than twenty (20) days
(or, in the case of non-consensual Liens, forty-five (45) days) after the filing
thereof, at its own expense, take such action as may be necessary duly to
discharge or eliminate or bond in a manner reasonably satisfactory to Lessor any
such Lien if the same shall arise at any time.

     Section 8.2.  No Lessor Consent or Liability.  Nothing contained in this
                   ------------------------------
Lease shall be construed as constituting the consent or request of the Lessor,
expressed or implied, to or for the performance by any contractor, mechanic,
laborer, materialman, supplier or vendor of any labor or services or for the
furnishing of any materials for any construction, alteration, addition, repair
or demolition of or to the Site or any part thereof. NOTICE IS HEREBY GIVEN THAT
NONE OF LESSOR, ANY PARTICIPANT NOR AGENT IS OR SHALL BE LIABLE FOR ANY LABOR,
SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE
HOLDING THE SITE OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO
MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, 

                                      A-13
<PAGE>
 
SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR,
INVESTOR, AGENT OR ANY LENDER IN AND TO THE SITE.

     Section 8.3.  Easements.  Subject to Section 3.4 of the Construction 
                   ---------
Agency Agreement (which shall take precedence over these provisions during the
Construction Period) and notwithstanding the foregoing Section, at the request
of Lessee, Lessor shall, from time to time during the Lease Term and upon at
least fifteen (15) days prior written notice to Lessor and Agent from Lessee,
and receipt of the materials specified in the next succeeding sentence (as well
as the receipt of written instructions from Agent directing Lessor to take such
action as it deems appropriate), consent to and join in any (i) grant of
easements, licenses, rights of way, party wall rights and other rights in the
nature of easements, with or without consideration, (ii) release or termination
of easements, licenses, rights of way, party wall rights or other rights in the
nature of easements which are for the benefit of the Site or any portion
thereof, with or without consideration, (iii) dedication or transfer of portions
of the Site, not improved with a building, for road, highway or other public
purposes, with or without consideration, (iv) execution of petitions to have the
Site or any portion thereof annexed to any municipal corporation or utility
district, (v) execution of agreements for the use and maintenance of common
areas, for reciprocal rights of parking, ingress and egress and amendments to
any covenants and restrictions affecting the Site or any portion thereof, with
or without consideration, (vi) request to any Governmental Authority for
platting or subdivision or replatting or resubdivision approval with respect to
the Site or any portion thereof or any parcel of land of which the Site or any
portion thereof forms a part or a request for any variance from zoning, (vii)
creation of a governmental special benefit district for public improvements and
collection of special assessments in connection therewith, in lump sum or
installments, and (viii) execution and delivery of any instrument appropriate to
confirm or effect such grant, release, dedication, transfer request or such
other matter, document or proceeding. Lessor's obligations pursuant to the
preceding sentence shall be subject to the requirements that:

          (a) any such action shall be at the sole cost and expense of Lessee,
and Lessee shall pay all out-of-pocket costs of Lessor, Agent and Participants
in connection therewith (including, without limitation, the fees of attorneys
(including allocated costs of internal counsel of Agent);

          (b) Lessee shall have delivered to Lessor and Agent a certificate of a
Responsible Officer of Lessee stating that:

               (1) such action will not cause the Site or any portion thereof to
     fail to comply in any respect with the provisions of the Lease or any other
     Operative Documents and in any material respect with all Applicable Laws
     and Regulations (including, without limitation, all applicable zoning,
     planning, building and subdivision ordinances, all applicable restrictive
     covenants and all applicable architectural approval requirements);

               (2) all governmental consents or approvals required prior to such
     action have been obtained, and all filings required prior to such action
     have been made;

                                      A-14
<PAGE>
 
               (3) such action will not result in any material down-zoning of
     the Site or any portion thereof or a material reduction in the maximum
     density or development rights available to the Site under all Applicable
     Laws and Regulations;

               (4) this Lease and Lessee's obligations hereunder shall continue
     in full force and effect, without abatement, suspension, deferment,
     diminution, reduction, counterclaim, setoff, defense or deduction;

               (5) such action will not materially reduce the Fair Market Sales
     Value, utility, remaining economic useful life or residual value of the
     Site or Lessor's interest therein; and

               (6) such action will not impose or create any liability or
     obligation on Lessor;

          (c) all consideration received in connection with such action shall be
paid to Lessor; and

          (d) no Lease Default or Lease Event of Default shall have occurred and
be continuing.

                                  ARTICLE IX.
               MAINTENANCE AND REPAIR; ALTERATIONS AND ADDITIONS

     Section 9.1.  Maintenance and Repair; Compliance With Law.  Lessee, at its
                   -------------------------------------------
own expense, shall at all times (a) maintain the Site in good repair and
condition (which condition shall be no less than consistent with industry
standards for similar facilities), subject to ordinary wear and tear, and in
safe repair and condition (all whether involving interior or exterior,
structural or nonstructural, ordinary or extraordinary, and foreseen or
unforeseen circumstances); (b) except to the extent Section 9.5 shall apply,
                                                    -----------
maintain, manage and monitor the Site in accordance with all Applicable Laws and
Regulations, whether or not such maintenance requires structural modifications,
noncompliance with which (i) would have a material adverse effect on the Site,
Lessee's right to use the Site or Lessee's business or financial condition, (ii)
would cause any of the results enumerated in Section 9.5 hereof, (iii) would
                                             -----------        
materially adversely affect the Fair Market Sales Value, utility, remaining
economic useful life or residual value of the Site, or (iv) would materially
adversely affect Lessor's interest in the Site; (c) comply with the standards
imposed by any insurance required to be maintained hereunder which are in effect
at any time with respect to the Site or any part thereof; (d) maintain, manage
and monitor the Site in accordance with all applicable contracts, including
service contracts and insurance contracts; (e) conduct maintenance and repair
under the same programs and subject to the same standards as Lessee or its
Affiliates shall maintain and repair other facilities owned, leased or operated
by Lessee or its Affiliates; (f) cause the Site to continue to have at all times
the capacity and functional ability to be used for, on a continuing basis
(subject to normal interruption in the ordinary course of business for
maintenance, inspection and repair) and in commercial operation, the purposes
for which it was specifically designed; (g) maintain appropriate and customary
written environmental operations and maintenance plans (including, where
appropriate for asbestos-containing materials) 

                                      A-15
<PAGE>
 
for the Site; and (h) procure, maintain and comply in all material respects with
all material licenses, permits, orders, approvals, consents and other
authorizations required for the construction, use, maintenance and operation of
the Site and for the use, operation, maintenance, repair and restoration of the
Facilities. Lessee waives any right that it may now have or hereafter acquire to
(x) require Lessor to maintain, repair, replace, alter, remove or rebuild all or
any part of the Site or (y) make repairs at the expense of Lessor pursuant to
any Applicable Laws and Regulations or other agreements.

     Section 9.2.  Alterations.
                   -----------

          (a) At Lessee's own cost and expense, (i) Lessee shall make
alterations, renovations, improvements and additions to the Site or any part
thereof and substitutions and replacements therefor (collectively,
                                                                  
"Alterations"), so long as such Alterations are (a) made to repair or maintain
 -----------                                                                  
the Site in the condition required by Section 9.1; (b) necessary in order for
                                      -----------                            
the Site to be in compliance with Applicable Laws and Regulations; or (c)
necessary or advisable to restore the Site to its condition existing prior to a
Casualty or Condemnation; and (ii) so long as no Lease Default or Lease Event of
Default has occurred and is continuing, Lessee may undertake Alterations so long
as such Alterations comply with Applicable Laws and Regulations and with Section
                                                                         -------
9.1 and subsection (b) of this Section.
---                                    

          (b) The making of any Alterations must be in compliance with the
following requirements (provided that, in the case of any Alteration required by
                        --------                                                
an emergency or by Applicable Laws and Regulations, Lessee shall (x) promptly
notify Lessor and Agent thereof, and (y) effect such Alteration in a manner to
avoid (or minimize if it is not possible to avoid) any violation of clause (4)
below):

               (1) Lessee shall not make any Alterations in violation of the
     terms of any restriction, easement, condition or covenant or other matter
     affecting title to the Site.

               (2) No Alterations shall be undertaken until Lessee shall have
     procured and paid for, so far as the same may be required from time to
     time, all permits and authorizations relating to such Alterations of all
     municipal and other Governmental Authorities having jurisdiction over the
     Site.  Lessor, at Lessee's expense, shall join in the application for any
     such permit or authorization and execute and deliver any document in
     connection therewith, whenever such joinder is necessary or advisable.

               (3) The Alterations shall be expeditiously completed in a good
     and workmanlike manner and in compliance with all Applicable Laws and
     Regulations then in effect and the standards imposed by any insurance
     policies required to be maintained hereunder.

               (4) All Alterations shall, when completed, be of such a character
     as to not materially adversely affect the Fair Market Sales Value, utility,
     remaining economic useful life or residual value of the Site from its Fair
     Market Sales Value, utility, remaining economic useful life or residual
     value immediately prior to the making thereof or, in the 

                                      A-16
<PAGE>
 
     case of Alterations being made by virtue of a Casualty or Condemnation,
     immediately prior to the occurrence of such Casualty or Condemnation.

               (5) Lessee shall have made adequate arrangements for payment of
     the cost of all Alterations when due so that the Site shall at all times be
     free of Liens for labor and materials supplied or claimed to have been
     supplied to the Site, other than Permitted Liens; provided, that Lessee
                                                       --------             
     shall have the right to contest the amount claimed by any such supplier of
     labor or materials in accordance with the applicable provisions of Section
                                                                        -------
     9.5.
     --- 

     Section 9.3.  Title to Alterations.  Title to Alterations shall without
                   --------------------
further act vest in Lessor and shall be deemed to constitute a part of the Site
and be subject to this Lease in the following cases:

          (a) such Alterations shall be in replacement of or in substitution for
a portion of the Facilities and/or the Site, or otherwise financed with
Advances;

          (b) such Alterations shall be required to be made pursuant to the
terms of Section 9.1 or 9.2(a)(i) hereof; or
         ------------------------           

          (c) such Alterations shall be Nonseverable.

          Lessee, at Lessor's request, shall execute and deliver any deeds,
bills of sale, assignments or other documents of conveyance reasonably necessary
to evidence the vesting of title in and to such Alterations to Lessor.

          If such Alterations are not within any of the categories set forth in
                                                                               
Section 9.3(a) through (c), then title to such Alterations shall vest in Lessee
--------------------------                                                     
and such Alterations shall not be deemed to be Alterations which are part of the
Site.

          All Alterations to which Lessee shall have title may, so long as
removal thereof shall not result in the violation of any Applicable Laws and
Regulations and no Lease Default or Lease Event of Default is continuing, be
removed at any time by Lessee.  Any such Alterations shall be removed by Lessee
at its expense if Lessor shall so request prior to the return of the Site to
Lessor or sale of the Site in accordance with the provisions of this Lease, and
Lessee shall at its expense repair any damage to the Site caused by the removal
of such Alterations.  Lessor (or the purchaser of the Site) may purchase from
Lessee Alterations (if not already owned by Lessor) which Lessee notifies Lessor
that Lessee intends to remove from the Site prior to the return of the Site to
Lessor or sale of the Site, which purchase shall be at the Fair Market Sales
Value of such Alterations.  Title to any Alterations shall vest in Lessor (or
the purchaser of the Site) if not removed from the Site by Lessee prior to the
return of the Site to Lessor or sale of the Site.

     Section 9.4.  Maintenance and Repair Reports. Lessee shall keep maintenance
                   ------------------------------
and repair reports in sufficient detail, and as customary for owners of
commercial real estate, to indicate the nature and date of major work done.
Lessee shall prepare and maintain appropriate and customary written operations
and maintenance plans (including, where appropriate for 

                                      A-17
<PAGE>
 
asbestos-containing materials) for the Site. Such reports and plans shall be
kept on file by Lessee at its offices during the Lease Term, and shall be made
available to Lessor, Agent or any Participant upon reasonable request. Lessee
shall give notice to Lessor and Agent of any Condemnation or Casualty the cost
to repair which is reasonably expected by Lessee to exceed Five Hundred Thousand
Dollars ($500,000), promptly after Lessee has knowledge thereof.

     Section 9.5.  Permitted Contests.  If, to the extent and for so long as (a)
                   ------------------
a test, challenge, appeal or proceeding for review of any Applicable Laws and
Regulations or any Governmental Action relating to the Site or to the operation
or maintenance of any Facility shall be prosecuted diligently and in good faith
in appropriate proceedings by Lessee or (b) compliance with such Applicable Laws
and Regulations or such Governmental Action shall have been excused or exempted
by a valid nonconforming use permit, waiver, extension or forbearance, Lessee
shall not be required to comply with such Applicable Laws and Regulations or
such Governmental Action but, only if and so long as any such test, challenge,
appeal, proceeding or noncompliance shall not, in the reasonable opinion of
Lessor and Agent, involve (a) any meaningful risk of (1) foreclosure, forfeiture
or loss of any part of the Site, (2) criminal liability being imposed on Lessor,
Agent, any Participant or the Site or (3) the nonpayment of Rent or (b) any
substantial danger of (1) the sale of, or the creation of any Lien (other than a
Permitted Lien) on, any part of the Site, (2) material civil liability being
imposed on Lessor, Agent, any Participant or the Site, (3) the extension of the
ultimate imposition of such Applicable Laws and Regulations or such Governmental
Action beyond the last day of the Lease Term, or (4) enjoinment of, or
interference with, the use, possession or disposition of the Site in any
material respect. Lessee shall provide Lessor and Agent with notice of any
contest of the type described in clause (a) above in detail sufficient to enable
Lessor to ascertain whether such contest may have an effect of the type
described in clauses (a) and (b) above.

          Lessor will not be required to join in any proceedings pursuant to
this Section, unless a provision of any Applicable Laws and Regulations
requires, or, in the good faith opinion of Lessee, it is helpful to Lessee that
such proceedings be brought by or in the name of Lessor and Lessor in good faith
believes that it will not incur liability as a result; and in that event Lessor
will join in the proceedings or permit them or any part thereof to be brought in
its name if and so long as no Lease Default or Lease Event of Default is
continuing and Lessee pays all related expenses.

                                   ARTICLE X.
                                      USE

          The Site shall be used, during its Construction Period, in a manner
consistent with the Construction Agency Agreement, and thereafter, Lessee may
use the Site as an office building and distribution center and for related
ancillary purposes, or in such other manner reasonably acceptable to Lessor and
Agent in their sole discretion.  Lessee shall not use the Site or any part
thereof for any purpose or in any manner that would materially adversely affect
the Fair Market Sales Value, utility, remaining useful life or residual value of
the Site or that would create a materially increased risk of environmental
liability or that would violate or conflict with, or constitute or result in a
violation or default under (a) any Applicable Laws and Regulations whether now
existing or hereafter in effect, foreseen or unforeseen, except to the extent
permitted 

                                      A-18
<PAGE>
 
by Section 9.5, (b) any insurance policies required by Article XI, or (c) any
   -----------                                         ----------    
Operative Document. Lessee shall pay, or cause to be paid, all charges and costs
required in connection with the use of the Site as contemplated by this Lease
and the Construction Agency Agreement. Lessee shall not commit or permit any
waste of the Site or any part thereof.

                                  ARTICLE XI.
                                   INSURANCE

     Section 11.1.  Required Coverages.  Lessee will keep insured all property
                    ------------------
of a character usually insured by corporations engaged in the same or similar
business similarly situated against loss or damage of the kinds and in the
amounts customarily insured against by such corporations, and carry such other
insurance as is usually carried by such corporations; provided that, in any
                                                      --------
event, Lessee will maintain:

          (a) Commercial General Liability Insurance. Combined single limit
              --------------------------------------                       
insurance against claims for bodily injury, death or third-party property damage
occurring on, in or about the Site (including adjoining streets and sidewalks)
and any claims arising out of the ownership, operation, maintenance, condition
and use of the Site in the minimum amount of Fifty Million Dollars ($50,000,000)
per person and Fifty Million Dollars ($50,000,000) per occurrence and Ten
Million Dollars ($10,000,000) for property damage per occurrence; provided,
                                                                  -------- 
however, that Lessee may provide for commercial general liability insurance
-------                                                                    
against such claims under an umbrella liability policy.

          (b) Property Insurance. Insurance against all risks of direct physical
              ------------------                                                
loss, including loss by fire, lightning, windstorm (if commercially reasonable
to obtain), hail, explosion, riot and civil commotion, aircraft and vehicles,
smoke, flood (if commercially reasonable to obtain), earthquake and other risks
which at the time are included under usual and customary extended coverage
endorsements in amounts sufficient to prevent the Lessor and the Lessee from
becoming a co-insurer of any loss, but in any event not less than the actual
replacement value of the buildings and improvements on the Site or the amount
sufficient to retire the Notes and pay in full the Investor Contribution, and
the payment of all accrued but unpaid Basic Rent, Lease Balance and all other
amounts (including, without limitation, all Supplemental Rent), fees and
expenses then due and payable by a Lessee Party under any of the Operative
Documents,  whichever is greater; provided, however, that any deductible under
                                  --------  -------                           
such insurance policies shall not be in excess of an amount acceptable to Lessor
and the Agent; and, provided further, that the Lessee may provide for property
                    -------- -------                                          
insurance against such claims under a blanket property insurance policy of at
least One Hundred Million Dollars ($100,000,000) coverage per occurrence and One
Hundred Million Dollars ($100,000,000) aggregate per annum covering all premises
owned, leased or occupied by the Lessee including the Site; and provided,
                                                                -------- 
finally that earthquake coverage shall be in amount equal to the probable
-------                                                                  
maximum loss coverage as determined by a nationally recognized broker.

          (c) Workers' Compensation Insurance.  Lessee shall, in the
              -------------------------------                       
construction of the New Facility (including in connection with any Alterations
thereof) and the operation of the Site, 

                                      A-19
<PAGE>
 
comply with the applicable Workers' Compensation laws and protect Lessor, Agent
and the Participants against any liability under such laws.

          (d) Builder's Risk Insurance. During the construction of any
              ------------------------                                
Alteration, Lessee shall also maintain, for the benefit of Lessor, all-risk
Builders' Risk Insurance in an amount equal to the greater of the replacement
value of the New Facility and Alteration and the then outstanding Termination
Value; provided, however, that any deductible amounts exceeding Twenty Five
       --------  -------                                                   
Thousand Dollars ($25,000) under the policy be subject to the approval of the
Lessor and Agent; and provided, further that earthquake coverage shall be in the
                      --------  -------                                         
amount equal to the probable maximum loss coverage as determined by a nationally
recognized broker.

          (e) Flood Insurance. If the Site is located in a special flood hazard
              ---------------                                                  
area (as defined in National Flood Insurance Reform Act), Lessee shall maintain
flood insurance, for the benefit of Lessor, Agent and Participants, in an amount
at least equal to the then outstanding Termination Value.  Prior to the date
hereof and from time to time upon Lessor's request, Lessee shall deliver to
Lessor evidence reasonably satisfactory to Lessor for the Site establishing
whether the Site is located in a special flood hazard area.

          (f) Other Insurance. Such other insurance, including malpractice or
              ---------------                                                
professional liability insurance, automobile liability (if applicable) and
business interruption insurance, in each case as is generally carried by owners
of similar properties in such amounts and against such risks as are then
customary for properties similar in use.

          Such insurance shall be written by reputable insurance companies that
are financially sound and solvent and otherwise reasonably appropriate
considering the amount and type of insurance being provided by such companies.
Any insurance company selected by Lessee shall be rated in A.M. Best's Insurance
Guide or any successor thereto (or if there be none, an organization having a
similar national reputation) and shall have a general policyholder rating of "A-
" (or comparable rating for a rating by an organization other than A.M. Best)
and a financial rating of at least "X" (or comparable rating for a rating by an
organization other than A.M. Best) or be otherwise acceptable to the Lessor and
Agent.  In the case of liability insurance maintained by Lessee, it shall name
Agent, together with Lessor, as additional insureds and, in the case of property
insurance maintained by Lessee, it shall name Agent, together with Lessor, as
mortgagees and loss payees.  Lessee agrees that it will furnish Lessor and Agent
with certificates or, if requested by Lessor, copies of policies showing the
insurance required to be in effect hereunder.  Each policy referred to in this
Section shall provide that:  (i) it will not be canceled, materially modified or
its limits reduced, or allowed to lapse without renewal, except after not less
than thirty (30) days prior written notice to Agent and Lessor; (ii) the
interests of Agent and Lessor shall not be invalidated by any act or negligence
of or breach of warranty or representation by Lessee or any Person having an
interest in the Site or the Facility thereon; (iii) such insurance is primary
with respect to any other insurance carried by or available to Agent and Lessor;
(iv) the insurer shall waive any right of subrogation, setoff, counterclaim, or
other deduction, whether by attachment or otherwise, against Agent or Lessor;
and (v) such policy shall contain a cross-liability clause providing for
coverage of Agent and Lessor as if separate policies had been issued to each of
them.  Lessee will notify Agent and Lessor promptly of any policy cancellation,

                                      A-20
<PAGE>
 
reduction in policy limits, modification or amendment.  The term "Peril" shall
                                                                  -----       
mean, collectively, fire, lightning, flood, windstorm, hail, explosion, riot and
civil commotion, vandalism and malicious mischief, damage from aircraft,
vehicles and smoke and all other perils covered by the "all risk endorsement"
then in use in the State of California.

     Section 11.2.  Delivery of Insurance Certificates.  On or before the 
                    ----------------------------------
Document Closing Date, Lessee shall deliver to Agent and Lessor certificates of
insurance satisfactory to Agent and Lessor evidencing the existence of all
insurance required to be maintained hereunder and setting forth the respective
coverages, limits of liability, carrier, policy number and period of coverage.
Thereafter, throughout the Lease Term, at the time each of Lessee's insurance
policies is renewed (but in no event less frequently than once each year),
Lessee shall deliver to Agent and Lessor certificates of insurance evidencing
that all insurance required by Section 11.1 to be maintained by Lessee with
                               ------------
respect to the Site is in effect.

                                 ARTICLE XII.
                                  SUBLEASING

     Section 12.1.  Subletting.  (a) Lessee may not sublease, in whole or in
                    ----------
part, any of its right, title or interest in, to or under this Lease or any
portion of the Site to any Person at any time, and any such sublease shall be
void and of no force or effect; provided, however, that without the consent of
                                --------  -------                    
Lessor, Lessee may sublease the Site to Sublessee pursuant to the Sublease.
Regardless of Lessor's consent, no subletting shall release Lessee of Lessee's
obligation or alter the primary liability of Lessee to pay Rent hereunder
(including, without limitation, Basic Rent and Supplemental Rent) and to perform
all other obligations to be performed by Lessee hereunder. The acceptance of
Rent by Lessor or Agent from any other Person shall not be deemed to be a waiver
by Lessor of any provision hereof. Consent to one subletting of the Site shall
not be deemed consent to any subsequent or further subletting of the Site or any
other Site. Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said successor.

          (b) Lessee hereby assigns to Lessor all of Lessee's right, title and
interest in and to the Sublease, now or hereafter in effect, including, but not
limited to, all rents and other sums payable to Lessee under such Sublease.
Lessor shall have no obligation to perform, and Lessee shall not by reason of
such assignment be relieved of its obligation to perform, any of Lessee's
covenants or agreements under this Lease or covenants or agreements of Lessee,
as sublessor, under the Sublease; provided that, upon the termination of this
                                  --------                                   
Lease or upon termination of Lessee's right to possess the Site following a
Lease Event of Default (the date of such termination shall be referred to herein
as the "Turnover Date") the following shall apply:  (a) if Lessee acquires
        -------------                                                     
ownership of the Site in accordance with the terms of this Lease or if Lessee's
right to possess the Site has been terminated following a Lease Event of Default
then, subject to the provisions of Article XVIII, Lessee shall continue to be
                                   -------------                             
liable for all obligations under the Sublease; or (b) if Lessee does not acquire
ownership of the Site, (i) Lessee shall continue to be liable for any
obligations under the Sublease accruing or arising prior to the Turnover Date
and for any tenant improvement obligations arising or accruing prior to the
later of (x) the Turnover Date and (y) the scheduled termination date of the
Lease Term and (ii) if the 

                                      A-21
<PAGE>
 
Sublease is not terminated in accordance with Section 12.2(b), Lessor (or any
                                              ------- -------        
successor owner of the Site (the "Designated Owner")) shall assume and be liable
                                  ----------------   
for, subject to the limitations on the liability of the Designated Owner set
forth in Section 12.2 and subject to the limitations on the liability of Lessee
set forth in Article XVIII, Lessee's obligations under the Sublease other than
             -------------                            
those referred to in clause (i) above. Prior to the Turnover Date, Lessee shall
have the right to collect and enjoy all rents and other sums of money payable
under any Sublease and Lessee shall have the right to modify, extend, amend or
terminate any or all of the Sublease, so long as such modification, extension,
amendment or termination could not have a Material Adverse Effect or conflict
with or violate any of the Operative Documents.

     Section 12.2.  Sublease Subordination.
                    ----------------------

          (a) As of or prior to the Document Closing Date, Lessee shall deliver
to Lessor an executed copy of the Sublease. The Sublease shall contain the
following language:

     "Sublessee hereunder agrees that this Sublease is subject and subordinate
     to the lease under which the Lessee hereunder occupies the Property (the
     "Lease," with the landlord under the Lease and its successors and assigns
     ------                                                                   
     in interest to the Property or this Sublease being hereinafter referred to
     as the "Lessor") and in the event of the termination of the Lease or in the
             ------                                                             
     event the Lessor terminates the Lessee's right of possession under the
     Lease (the date on which either such termination becomes effective being
     referred to herein as the "Turnover Date"), the Lessor shall have (i) the
                                -------------                                 
     right to terminate this Sublease and the Sublessee's right of possession
     hereunder, or, in the alternative (at the Lessor's option), (ii) the right
     to require the Sublessee hereunder to attorn to the Lessor; and in the case
     of such required attornment election, the Sublessee hereunder will attorn
     to the Lessor and pay the Lessor all of the rents and other monies required
     to be paid by the Sublessee hereunder, and perform all of the terms,
     covenants, conditions and obligations contained in this Sublease, and this
     Sublease shall continue as a direct lease between the Sublessee hereunder
     and the Lessor upon all of the terms and conditions hereof except that in
     no event shall the Lessor have any obligation to perform any obligation of
     the Lessee hereunder with respect to obligations of the Lessee hereunder
     accruing prior to the Turnover Date and that any obligations of the Lessor
     (or any successor Lessor) hereunder arising after the Turnover Date shall
     be without recourse to Lessor (other than the interest of the Lessor in the
     property demised by this Sublease).

          (b) Following the Turnover Date, the Designated Owner shall have the
right to terminate the Sublease and Sublessee's right of possession thereunder
or, in the alternative (at the Designated Owner's option), the Designated Owner
may require the Sublessee to attorn to the Designated Owner; and in the case of
such required attornment, the rights (including, without limitation, the right
of possession) of Sublessee shall not be disturbed or affected by the Designated
Owner so long as no default by Sublessee exists under the terms of the Sublease
as would enable Lessee (as sublessor) to terminate the Sublease or would cause
termination of the Sublease or would entitle Lessee (as sublessor) to dispossess
Sublessee under the Sublease.

                                      A-22
<PAGE>
 
                                 ARTICLE XIII.
                   LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE

     Section 13.1.  Event of Loss; Condemnation or Casualty.
                    ---------------------------------------

          (a) If an Event of Loss shall occur or a Casualty event as described
in the first sentence of Section 13.4, Lessee shall give Lessor and Agent prompt
                         ------------                                           
written notice of such occurrence and the date thereof and Lessee shall purchase
the Site affected thereby from Lessor on the next succeeding Payment Date after
the date such Event of Loss shall have occurred at a purchase price equal to the
sum of (a) the Lease Balance, plus (b) all accrued but unpaid Rent, plus (c) all
other sums due and payable by Lessee to Lessor, Investor, Agent or any Lender
with respect to such affected Site under any of the Operative Documents.

          (b) Upon payment in full of all amounts payable pursuant to Section
                                                                      -------
13.1(a) and the discharge of the Lien of the Mortgage pursuant thereto, (i) the
-------                                                                        
Lease Term shall end, and (ii) the obligations of Lessee hereunder (other than
any obligations expressed herein as surviving termination of this Lease) shall
terminate as of the date of such payment.

     Section 13.2.  Application of Payments Relating to an Event of Loss.  All
                    ----------------------------------------------------
Net Condemnation Proceeds and property insurance proceeds received at any time
by Lessor, Lessee, Investor or Agent from any Governmental Authority or other
Person with respect to any Event of Loss or Casualty described in the first
sentence of Section 13.4 shall be promptly remitted to Lessor and, after Lessee
has purchased the Site pursuant to Section 13.1(a), such amount shall be 
                                   --------------- 
applied against the purchase price payable by Lessee pursuant to Section 
                                                                 -------
13.1(a), and any such Net Condemnation Proceeds and property insurance proceeds 
-------
remaining thereafter shall, so long as no Lease Default or Lease Event of 
Default exists, be paid over to, or retained by, Lessee, or as Lessee may 
direct.

     Section 13.3.  Application of Certain Payments Relating to a Condemnation.
                    ----------------------------------------------------------
In case of a requisition for temporary use of all or a portion of the Site which
is not an Event of Taking, this Lease shall remain in full force and effect,
without any abatement or reduction of Rent, and the proceeds received from any
Governmental Authority relating to a Condemnation for the Site shall, so long as
there is no Lease Default or Lease Event of Default, be paid to Lessee, except
that any portion of such proceeds that is awarded with respect to the time
period after the expiration or termination of the Lease Term (unless Lessee
shall have exercised an option to purchase the Site and no Lease Default or
Lease Event of Default shall have occurred and be continuing) shall be paid to
Lessor; provided, that if Lessee has paid the Lease Balance to Lessor, such
        --------                                                           
proceeds (or the portion of such proceeds in excess of the portion thereof
applied to payment of the Lease Balance) shall, so long as there is no Lease
Default or Lease Event of Default, be paid over to Lessee.

     Section 13.4.  Casualty.  Upon any Casualty with respect to the Site, the
                    --------
cost of repair of which would exceed Five Hundred Thousand Dollars ($500,000),
Lessee shall give to Lessor and Agent written notice thereof. If, after a
Casualty, (x) the Site cannot be repaired and/or rebuilt to the condition
required by Section 9.1, prior to the earlier of the Final Rent Payment Date or
            ----------- 
one 

                                      A-23
<PAGE>
 
(1) year after the Payment Date next following the Casualty event, or (y)
Lessee opts to not make such repairs, then Lessee shall acquire the Site
pursuant to Section 13.1.  Otherwise, as soon as practicable after a Casualty, 
            ------------  
Lessee shall repair and rebuild the affected portions of the Site suffering such
Casualty (or cause such affected portions to be repaired and rebuilt) to the
condition required to be maintained by Section 9.1 hereof; provided that the
                                       -----------         --------      
value and functional capability of such item as restored is at least equivalent
to the value and functional capability of such item as in effect immediately
prior to the occurrence of such Casualty. Such repairs shall be completed upon
the earlier of the dates set forth in clause (x) above. Except as provided in
Section 13.3, if any insurance proceeds received with respect to any Casualty
------------ 
shall be in excess of twenty-five percent (25%) of the then-outstanding Lease
Balance, the insurance proceeds received with respect to such Casualty shall be
paid over to or retained by Agent, to be distributed to Lessee upon completion
of such repairs and rebuilding of the affected portions of the Site in
accordance with the conditions set forth in this Section.

     Section 13.5.  Other Dispositions. Notwithstanding the foregoing provisions
                    ------------------
of this Article, as long as a Lease Default or Lease Event of Default shall have
occurred and be continuing, any amount that would otherwise be payable to or for
the account of, or that would otherwise be retained by, Lessee pursuant to this
Article shall be paid to Agent (or to Lessor after the Loan Agreement shall have
been satisfied and discharged) as security for the obligations of Lessee under
this Lease, shall be invested by Agent (or Lessor) in accordance with Section
                                                                      -------
21.18 in Permitted Investments and, if a Lease Event of Default is continuing,
-----   
may be applied to the obligations of Lessee hereunder, and, at such time
thereafter as no Lease Default or Lease Event of Default shall be continuing,
such amount and gain thereon shall be paid promptly to Lessee to the extent not
previously applied in accordance with the terms of this Lease.

     Section 13.6.  Negotiations.  In the event any part of the Site becomes
                    ------------
subject to condemnation or requisition proceedings, Lessee shall give notice
thereof to Lessor and Agent promptly after Lessee has knowledge thereof and, to
the extent permitted by any Applicable Laws and Regulations, Lessee shall
control the negotiations with the relevant Governmental Authority unless a Lease
Default or Lease Event of Default shall be continuing, in which case Lessor
shall control such negotiations; provided that in any event Lessor may
                                 --------                         
participate, at Lessee's expense, in such negotiations; and provided no
                                                            --------      
settlement will be made without Lessor's prior written consent. Lessee shall
give to Lessor and Agent such information, and copies of such documents, which
relate to such proceedings, or which relate to the settlement of amounts due
under insurance policies required by Article XI, as are reasonably requested by
                                     ---------- 
Lessor or Agent. If the proceedings relate to an Event of Taking, Lessee shall
act diligently in connection therewith.

     Section 13.7.  No Rent Abatement.  Rent shall not abate hereunder by reason
                    -----------------
of any Casualty, any Event of Loss, any Event of Taking or any Condemnation of
the Site, and Lessee shall continue to perform and fulfill all of Lessee's
obligations, covenants and agreements hereunder notwithstanding such Casualty,
Event of Loss, Event of Taking or Condemnation until the Lease Termination Date.

                                      A-24
<PAGE>
 
                                  ARTICLE XIV.
                                NON-INTERFERENCE

     Section 14.1.  Non-Interference.  Lessor covenants that it will not
                    ----------------
interfere in Lessee's or Sublessee's use of the Site in accordance with this
Lease during the Lease Term, so long as no Lease Default or Lease Event of
Default has occurred and is continuing; it being agreed that Lessee's remedies
for breach of the foregoing covenant shall be limited to a claim for damages or
the commencement of proceedings to enjoin such breach. Such right is independent
of and shall not affect Lessor's rights otherwise to initiate legal action to
enforce the obligations of Lessee under this Lease.

     Section 14.2.  Certain Duties and Responsibilities of Lessor.  Lessor 
                    ---------------------------------------------
undertakes to perform such duties and only such duties as are specifically set
forth herein and in the other Operative Documents, and no implied covenants or
obligations shall be read into this Lease against Lessor, and Lessor agrees that
it shall not, nor shall it have a duty to, manage, control, use, sell, maintain,
insure, register, lease, operate, modify, dispose of or otherwise deal with the
Site in any manner whatsoever, except as required by the terms of the Operative
Documents and as otherwise provided herein; provided that during the continuance
                                            --------           
of a Lease Default or Lease Event of Default, Lessor shall have no obligation to
Lessee to perform any such duties.

                                  ARTICLE XV.
                            INSPECTION AND REPORTS

     Section 15.1.  Inspection.  Upon five (5) Business Days prior notice to 
                    ----------
Lessee, each of Agent, Investor, Lessor, any Lender and their respective
authorized representatives (the "Inspecting Parties") may inspect (a) the Site
                                 ------------------ 
and (b) the books and records of Lessee relating directly and primarily to the
Site and make copies and abstracts therefrom. If a Lease Event of Default or
Lease Default has occurred and is continuing, Lessee shall reimburse the
Inspecting Parties for the reasonable costs of such inspections, and all
inspections shall be at Lessee's risk. Lessee shall furnish to the Inspecting
Parties statements accurate in all material respects regarding the condition and
state of repair of the Site, all at such times and as often as may be reasonably
requested. No inspection shall unreasonably interfere with Lessee's operations
or the operations of any other occupant of the Site. None of the Inspecting
Parties shall have any duty to make any such inspection or inquiry, and none of
the Inspecting Parties shall incur any liability or obligation by reason of not
making any such inspection or inquiry. None of the Inspecting Parties shall
incur any liability or obligation by reason of making any such inspection or
inquiry unless and to the extent, so long as no Lease Default or Lease Event of
Default has occurred and is continuing at the time of inspection, such
Inspecting Party causes damage to the Site or any property of Lessee or any
other Person during the course of such inspection and such damage was a direct
result of such Inspecting Party's gross negligence or willful misconduct.

     Section 15.2.  Reports.  To the extent permissible under Applicable Laws
                    -------
and Regulations, Lessee shall prepare and file in timely fashion, or, where
Lessor shall be required to file, Lessee shall prepare and make available to
Lessor and Agent within a reasonable time prior to 

                                      A-25
<PAGE>
 
the date for filing and Lessor shall file, any reports with respect to the
condition or operation of the Site that shall be required to be filed with any
Governmental Authority.

                                  ARTICLE XVI.
          OWNERSHIP, GRANT OF SECURITY INTEREST AND FURTHER ASSURANCES

     Section 16.1.  Grant of Security Interest.  Lessee hereby assigns, grants 
                    --------------------------
and pledges to Lessor for the benefit of Agent and Lenders a security interest
in and Lien against all of Lessee's right, title and interest, whether now or
hereafter existing or acquired, in the Site (including the Facilities and
improvements thereon) and proceeds therefrom, to secure the payment and
performance of all obligations of Lessee now or hereafter existing under this
Lease or any other Operative Document. Lessee shall, at its expense, do any
further act and execute, acknowledge, deliver, file, register and record any
further documents which Lessor or any Lender may reasonably request in order to
protect Lessor's title to and their perfected Lien in the Site, subject to no
Liens other than Permitted Liens, and Lessor's rights and benefits under this
Lease. Lessee shall promptly and duly execute and deliver to Lessor such
documents and assurances and take such further actions as Lessor, Agent or any
Lender may from time to time reasonably request in order to carry out more
effectively the intent and purpose of this Lease and the other Operative
Documents, to establish and protect the rights and remedies created or intended
to be created in favor of Lessor and Agent hereunder and thereunder, and to
establish, perfect and maintain the right, title and interest of Lessor, Agent
and Lenders in and to the Site, subject to no Lien other than Permitted Liens,
or of such financing statements or fixture filings or other documents with
respect hereto as Lessor, Agent or any Lender may from time to time reasonably
request, and Lessee agrees to execute and deliver promptly such of the foregoing
financing statement and fixture filings or other documents as may require
execution by Lessee. To the extent permitted by Applicable Laws and Regulations,
Lessee hereby authorizes any such financing statement and fixture filings to be
filed without the necessity of the signature of Lessee. Upon Lessee's request,
Lessor shall at such time as all of the obligations of Lessee under this Lease
or any other Operative Documents have been indefeasibly paid or performed in
full (other than Lessee's contingent obligations, if any, under Article VII of
the Participation Agreement) execute and deliver termination statements and
other appropriate documentation reasonably requested by Lessee, all at Lessee's
expense, to evidence Lessor's release of its Lien against the Site, otherwise
without representation or warranty.

     Section 16.2.  Attorney-in-Fact.  Lessee hereby irrevocably appoints 
                    ----------------
Lessor as Lessee's attorney-in-fact, with full authority in the place and 
stead of Lessee and in the name of Lessee or otherwise, from time to time in
Lessor's discretion, upon the occurrence and during the continuance of a Lease
Event of Default, to take any action (including any action that Lessee is
entitled to take) and to execute any instrument which Lessor may deem necessary
or advisable to accomplish the purposes of this Lease (subject to any
limitations set forth in the Operative Documents), including, without
limitation:

          (a) to ask, demand, collect, sue for, recover, compromise, receive and
give acquittance and receipts for money due and to become due under or in
connection with the Site;

                                      A-26
<PAGE>
 
          (b) to receive, endorse and collect any drafts or other instruments,
documents and chattel paper in connection with the foregoing clause (a);

          (c) to file any claim or take any action or institute any proceedings
which Lessor may deem to be necessary or advisable for the collection thereof or
to enforce compliance with the terms and conditions of the Lease; and

          (d) to perform any affirmative obligations of Lessee hereunder.

Lessee hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section is irrevocable and coupled with an interest.

                                 ARTICLE XVII.
                            LEASE EVENTS OF DEFAULT

          The occurrence of any one or more of the following events, whether any
such event shall be voluntary or involuntary or come about or be effected by
operation of law or pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any administrative or
governmental body, shall constitute a "Lease Event of Default":
                                       ----------------------  

          (a) Lessee shall fail to make any payment (i) of any Supplemental Rent
payable to Lessor, Agent or any Participant or Basic Rent when due and such
failure shall continue for a period of three (3) days, or (ii) of amounts
payable pursuant to the exercise of the Sale Option, or amounts payable pursuant
to Section 13.1, when due, or (iii) of Supplemental Rent payable to any Person
   ------------                                                               
other than Lessor, Agent or a Participant and such failure under this Lease
Agreement clause (iii) shall continue for a period of three (3) days after
notice to Lessee from any Person of such failure; provided that Lessee shall not
                                                  --------                      
be entitled to any three (3)-day grace or cure period under this clause (a) with
respect to any payment of the Lease Balance, Residual Guaranty Amount or any
Proceeds under Article VI;
               ---------- 

          (b) any Lessee Party shall fail to make any payment of any other
amount payable hereunder or under any of the other Operative Documents and such
failure shall continue for a period of ten (10) days after such amount first
became due and payable (or in the case of any payment to any Person other than
Lessor, Agent or any Participant, such failure shall continue for a period of
ten (10) days after notice to Lessee from any Person of such failure);

          (c) Lessee shall (i) fail to maintain insurance as required by Section
                                                                         -------
11.1, or (ii) default in the performance or observance of any term, covenant,
----                                                                         
condition or agreement on its part to be performed or observed under Section
5.2, 5.3, 5.4, 5.5, 5.7, 5.8, 5.11, 5.14 or 5.17 of the Participation Agreement;

          (d) any representation or warranty by any Lessee Party in any
Operative Document or in any certificate or document (including any Advance
Request) delivered to Lessor, Agent or any Participant pursuant to any Operative
Document shall have been incorrect in any material respect when made;

                                      A-27
<PAGE>
 
          (e) any Lessee Party shall fail in any material respect timely to
perform or observe any covenant, condition or agreement (not included in any
other clause of this Article) to be performed or observed by it hereunder or
under any other Operative Document and, (other than with respect to Construction
Agency Events of Default) if Lessor has provided Lessee with timely notice of
such Lease Default in accordance with the Operative Documents, such failure
shall continue for a period of ten (10) days after written notice is delivered
by Lessor thereof;

          (f) (i) any Lessee Party shall generally fail to pay, or admit in
writing its inability to pay, its debts as they become due, or shall voluntarily
commence any case or proceeding or file any petition under any bankruptcy,
insolvency or similar law or seeking dissolution, liquidation or reorganization
or the appointment of a receiver, trustee, custodian or liquidator for itself or
a substantial portion of its property, assets or business or to effect a plan or
other arrangement with its creditors, or shall file any answer admitting the
jurisdiction of the court and the material allegations of any involuntary
petition filed against it in any bankruptcy, insolvency or similar case or
proceeding, or shall be adjudicated bankrupt, or shall make a general assignment
for the benefit of creditors, or shall consent to, or acquiesce in the
appointment of, a receiver, trustee, custodian or liquidator for itself or a
substantial portion of its property, assets or business, or (ii) corporate
action shall be taken by any Lessee Party for the purpose of effectuating any of
the foregoing;

          (g) involuntary proceedings or an involuntary petition shall be
commenced or filed against any Lessee Party under any bankruptcy, insolvency or
similar law or seeking the dissolution, liquidation or reorganization of such
Lessee Party or the appointment of a receiver, trustee, custodian or liquidator
for any Lessee Party or of a substantial part of the property, assets or
business of any Lessee Party or, any writ, judgment, warrant of attachment,
execution or similar process shall be issued or levied against a substantial
part of the property, assets or business of any Lessee Party, and such
proceedings or petition shall not be dismissed, or such writ, judgment, warrant
of attachment, execution or similar process shall not be released, vacated or
fully bonded, within thirty (30) days after commencement, filing or levy, as the
case may be;

          (h) a judgment or judgments for the payment of money are entered by a
court or courts of competent jurisdiction against any Lessee Party, and such
judgment or judgments remain undischarged, unbonded, unstayed or unsatisfied for
a period (during which execution shall be effectively stayed) of sixty (60)
days; provided that the aggregate of all such judgments exceeds Five Million
      --------                                                              
Dollars ($5,000,000) (excluding any insured parties);

          (i) Lessee or any Guarantor shall directly or indirectly contest, or
threaten to contest, the validity of any Operative Document in any manner in any
court of competent jurisdiction or the Lien granted by this Lease or any
Mortgage;

          (j) a default or event of default, the effect of which is to permit
the lender or lenders of any instrument, (including, without limitation, the
lenders under that certain Revolving Credit Agreement, dated as of November 20,
1995 among Lessee, the banks listed therein and Agent, as agent thereunder, as
amended), or a trustee or agent on behalf of such lender or lenders, to cause
the indebtedness evidenced by such instrument to become due prior to its stated
maturity 

                                      A-28
<PAGE>
 
shall occur under the provisions of any instrument evidencing indebtedness for
borrowed money of the Lessee or any Affiliate thereof (or under the provisions
of any agreement pursuant to which such instrument was issued) or any obligation
of the Lessee or any Affiliate thereof for the payment of such indebtedness
shall become or be declared to be due and payable prior to its stated maturity,
or shall not be paid when due;

          (k) Any one or more Pension-Related Events referred to in subsection
(a)(ii), (b) or (e) of the definition of "Pension-Related Event" shall have
                                          ---------------------            
occurred; or any one or more other Pension-Related Events shall have occurred
and Lessor and Agent shall determine in good faith (which determination shall be
conclusive) that such other Pension-Related Events, individually or in the
aggregate, could have a Material Adverse Effect; or

          (l) the Guaranty shall no longer be in full force and effect.

                                 ARTICLE XVIII.
                                  ENFORCEMENT

     Section 18.1.  Remedies.  Upon the occurrence of a Lease Event of Default,
                    --------
at Lessor's option and without limiting Lessor in the exercise of any other
right or remedy, Lessor may have on account of such default (including, without
limitation, the obligation of Lessee to purchase the Site as set forth below),
and without any further demand or notice, Lessor may cause the following to
occur:

               (i) By notice to Lessee, Lessor may terminate Lessee's right to
     possession of the Site.  A notice given in connection with unlawful
     detainer proceedings specifying a time within which to cure a default shall
     terminate Lessee's right to possession if Lessee fails to cure the default
     within the time specified in the notice.

               (ii) Upon termination of Lessee's right to possession and without
     further demand or notice, Lessee shall surrender possession and vacate the
     Site and deliver possession thereof, and Lessor may re-enter the Site and
     remove any persons not in lawful possession thereof.

               (iii)  Upon termination of Lessee's right to possession, this
     Lease shall terminate and Lessor may declare to be immediately due and
     payable, and Lessor shall be entitled to (x) recover from Lessee the
     following amounts and (y) take the following actions:

                    (A) Lessee shall pay all accrued and unpaid Rent hereunder
          (including, without limitation, Basic Rent and Supplemental Rent)
          which had been earned at the time of termination;

                    (B) Lessor may elect any of the following:  (1) Lessor may
          demand, by written notice to the Lessee specifying a Payment Date (the
          "Final Rent Payment Date") not earlier than five (5) days after the
           -----------------------                                           
          date of such notice, that Lessee pay to Lessor, and Lessee shall pay
          to Lessor, on the Final Rent 

                                      A-29
<PAGE>
 
          Payment Date (in lieu of Basic Rent due after the Final Rent Payment
          Date), an amount equal to the sum of (a) the Lease Balance computed as
          of the Final Rent Payment Date, plus (b) all accrued and unpaid Rent
          due and unpaid to and including the Final Rent Payment Date, and upon
          payment of such amount, and the amount of all other sums due and
          payable by Lessee under this Lease and the other Operative Documents
          (and interest at the Overdue Rate on the amounts payable under this
          clause (B)(1) from the Final Rent Payment Date to the date of actual
          payment), Lessor shall transfer by quitclaim deed to Lessee all of
          Lessor's right, title and interest in and to the Site without recourse
          or warranty, but free and clear of Lessor Liens; or

                    (2) Lessor may sell its interest in the Site, in which event
          Lessee shall pay to Lessor an amount equal to the excess, if any, of
          (x) all amounts due Lessor under clause (B)(1) above over (y) the net
          sale proceeds received by Lessor from the  foregoing sale (provided
                                                                     --------
          that, in calculating such net sale proceeds, all expenses and taxes
          incurred by Lessor, Agent or any Participant in connection with such
          sale, including, without limitation, legal fees, shall be deducted
          from such sales proceeds);

                    (C) Any other amount necessary to compensate Lessor for all
          actual damages caused by Lessee's failure to perform Lessee's
          obligation under this Lease or which in the ordinary course of things
          would be likely to result therefrom, including, but not limited to,
          the costs and expenses (including without limitation, reasonable
          attorneys' fees, advertising costs and brokers' commissions) of
          recovering possession of the Site, removing persons or property
          therefrom, placing the Site in good order, condition, and repair,
          preparing and altering the Site for reletting, and all other costs and
          expenses of reletting; and

                    (D) Such other amounts in addition to or in lieu of the
          foregoing as may be permitted from time to time by applicable law.

               (iv) Lessor may enforce the Lien given hereunder pursuant to
     Section 16.1 hereof, the Memorandum of Lease, the Uniform Commercial Code
     ------------                                                             
     or any other law.

               (v) If Lessee has breached this Lease and abandoned the Site,
     this Lease shall continue in effect for so long as Lessor does not
     terminate Lessee's right to possession, and Lessor may enforce all of
     Lessor's rights and remedies under this Lease, including the right to
     recover the Rent hereunder (including, without limitation, Basic Rent and
     Supplemental Rent) as it becomes due under this Lease.  Lessee's right to
     possession shall not be deemed to have been terminated by Lessor except
     pursuant to clause (i) above.  The following do not constitute a
     termination of Lessee's right to possession:

                                      A-30
<PAGE>
 
                    (A) Acts of maintenance or preservation or efforts to relet
          the Site;

                    (B) The appointment of a receiver upon the initiative of
          Lessor to protect Lessor's interest under this Lease;

                    (C) Reasonable withholding of consent to an assignment or
          subletting, or terminating a subletting or assignment by Lessee.

               (vi) In the event that Lessor elects to continue this Lease in
     full force and effect, Lessor may enforce all its rights and remedies under
     this Lease, including, but not limited to, the right to recover Rent
     hereunder (including, without limitation, Basic Rent and Supplemental Rent)
     as it becomes due.  During the continuance of a Lease Event of Default,
     Lessor may enter the Site in accordance with applicable law without
     terminating this Lease and sublet all or any part of the Site for Lessee's
     account to any Person, for such term (which may be a period beyond the
     remaining Lease Term), at such rents and on such other terms and conditions
     as are commercially reasonable.  In the event of any such subletting, rents
     received by Lessor from such subletting shall be applied (i) first, to the
     payment of the reasonable costs incurred by Lessor in maintaining,
     preserving, altering and preparing the Site for subletting and other costs
     of subletting, including, but not limited to, brokers' commissions and
     attorneys' fee; (ii) second, to the payment of Rent hereunder (including,
     without limitation, Basic Rent and Supplemental Rent) then due and payable;
     (iii) third, to the payment of future Rent hereunder (including, without
     limitation, Basic Rent and Supplemental Rent) as the same may become due
     and payable hereunder; (iv) fourth, to the payment of all other obligations
     of Lessee hereunder, and (v) fifth, the balance, if any, shall be paid to
     Lessee upon (but not before) expiration of the Lease Term.  If the rents
     received by Lessor from such subletting, after application as provided
     above, are insufficient in any period to pay the Rent (including, without
     limitation, Basic Rent and Supplemental Rent) due and payable hereunder for
     such period, Lessee shall pay such deficiency to Lessor upon demand.
     Notwithstanding any such subletting for Lessee's account without
     termination, Lessor may at any time thereafter, by written notice to
     Lessee, elect to terminate this Lease by virtue of a previous Lease Event
     of Default.

               (vii)  Lessor may exercise any other right or remedy that may be
     available to it under Applicable Laws and Regulations or in equity, or
     proceed by appropriate court action (legal or equitable) to enforce the
     terms or to recover damages for the breach hereof.  Separate suits may be
     brought to collect any such damages for any Rent Installment Period(s), and
     such suits shall not in any manner prejudice Lessor's right to collect any
     such damages for any subsequent Rent Installment Period(s), or Lessor may
     defer any such suit until after the expiration of the Lease Term, in which
     event such suit shall be deemed not to have accrued until the expiration of
     the Lease Term.

                                      A-31
<PAGE>
 
               (viii)  Lessor may retain and apply against Lessor's damages all
     sums which Lessor would, absent such Lease Event of Default, be required to
     pay to, or turn over to, Lessee pursuant to the terms of this Lease.

               (ix) Lessor may exercise the remedies described in Sections 11
     and 12 of the Memorandum of Lease.

     Section 18.2.  Final Liquidated Damages.
                    ------------------------ 

          (a) LESSOR AND LESSEE AGREE AND ACKNOWLEDGE THAT IT WOULD BE
IMPRACTICAL AND EXTREMELY DIFFICULT TO ESTIMATE THE ACTUAL DAMAGES WHICH LESSOR
WOULD SUFFER IN THE EVENT THAT LESSEE DEFAULTS HEREUNDER AND DOES NOT OTHERWISE
PURCHASE THE SITE IN ACCORDANCE WITH THE TERMS OF THIS LEASE.  THE PARTIES
HEREBY AGREE THAT A REASONABLE ESTIMATE OF THE TOTAL NET DETRIMENT THAT LESSOR
WOULD SUFFER IN THE EVENT OF LESSEE'S DEFAULT AND FAILURE TO PURCHASE THE SITE
IS AND SHALL BE AN AMOUNT EQUAL TO THE TERMINATION VALUE.

          (b) Upon payment of the amount specified pursuant to the previous
clause, Lessee shall be entitled to receive from Lessor, at Lessee's request and
cost, an assignment of Lessor's right, title and interest in the Site, in
recordable form and otherwise in conformity with local custom and free and clear
of the Lien of the Mortgage.  The Site shall be quitclaimed to Lessee (or
Lessee's designee) "AS IS" and in its then present physical condition.  If any
statute or rule of law shall limit the amount of such final liquidated damages
to less than the amount agreed upon, Lessor shall be entitled to the maximum
amount allowable under such statute or rule of law; provided, that Lessee shall
                                                    --------                   
not be entitled to receive an assignment of Lessor's interest in the Site,
unless Lessee shall have paid in full the Termination Value.

     Section 18.3.  Proceeds; Deficiency.  All payments received and amounts
                    --------------------
held or realized by Lessor at any time when a Lease Event of Default shall have
occurred and be continuing and after the Lease Balance shall have been
accelerated pursuant to this Article as well as all payments or amounts then
held or thereafter received by Lessor, except for rents received by Lessor from
subletting pursuant to Section 18.1(vi) and the proceeds of sale pursuant to
                       ----------------
Section 11 of the Memorandum of Lease, shall be distributed forthwith upon
receipt by Lessor in the following order of priority:

          first:  so much of such payments or amounts as shall be required to
     reimburse Lessor for any tax (other than any income tax payable on Basic
     Rent or interest and on fees and other compensation of Lessor), expense or
     other amount owed to Lessor in connection with the collection or
     distribution of such payments or amounts to the extent not previously
     reimbursed by Lessee (including, without limitation, the expenses of any
     sale, taking or other proceeding, expenses in connection with realizing on
     any of the Sites, reasonable attorneys' fees and expenses (including the
     allocated costs of internal counsel), court costs and any other reasonable
     expenditures incurred or reasonable expenditures or 

                                      A-32
<PAGE>
 
     advances made by Lessor in the protection, exercise or enforcement of any
     right, power or remedy upon such Lease Event of Default, whether pursuant
     to Article XVII or otherwise) shall be so applied by Lessor;
        ------------   

          second:  so much of such payments or amounts (except those specified
     in clauses third and fourth below), which under the terms of this Lease and
     the other Operative Documents have accrued, shall be so applied;

          third:  so much of such payments or amounts remaining as shall be
     required to pay Agent (on behalf of itself and Lenders) in full the
     aggregate unpaid Lease Balance and all Basic Rent, which is payable to
     Agent and Lenders (including, to the extent permitted by applicable law,
     interest on interest) shall be so applied (to be distributed by Agent
     pursuant to the Loan Agreement);

          fourth:  so much of such payments or amounts remaining as shall be
     required to pay Lessor in full the aggregate unpaid Lease Balance and all
     Basic Rent which is payable to Investor (including, to the extent permitted
     by applicable law, interest on interest) shall be so applied; and

          fifth:  so much of such payments or amounts as shall remain shall be
     distributed to Lessee.

     Section 18.4.  Grant and Foreclosure on Lessee's Estate.  The Memorandum 
                    ----------------------------------------
of Lease contains a provision by which Lessee grants to a trustee, in trust,
with power of sale, or grants a mortgage lien to Lessor in, all of Lessee's
right, title and interest in and to the Site, subject to the terms of the
Memorandum of Lease, and upon the occurrence of a Lease Event of Default,
granting Lessor the power and authority, after fulfillment of certain
conditions, to cause the mortgage trustee to sell, or foreclose its mortgage
lien against, the Site. The Memorandum of Lease, including such grant, are
incorporated herein by reference.

     Section 18.5.  Remedies Cumulative; No Waiver; Consents.  To the extent
                    ----------------------------------------
permitted by, and subject to the mandatory requirements of, Applicable Laws and
Regulations, each and every right, power and remedy herein specifically given to
Lessor or otherwise in this Lease shall be cumulative and shall be in addition
to every other right, power and remedy herein specifically given or now or
hereafter existing at law, in equity or by statute, and each and every right,
power and remedy whether specifically herein given or otherwise existing may be
exercised from time to time and as often and in such order as may be deemed
expedient by Lessor, and the exercise or the beginning of the exercise of any
power or remedy shall not be construed to be a waiver of the right to exercise
at the same time or thereafter any right, power or remedy. No delay or omission
by Lessor in the exercise of any right, power or remedy or in the pursuit of any
remedy shall impair any such right, power or remedy or be construed to be a
waiver of any default on the part of Lessee or be an acquiescence therein.
Lessor's consent to any request made by Lessee shall not be deemed to constitute
or preclude the necessity for obtaining Lessor's consent, in the future, to all
similar requests. No express or implied waiver by Lessor of any Lease Event of
Default shall in any way be, or be construed to be, a waiver of any future or
subsequent Lease 

                                      A-33
<PAGE>
 
Default or Lease Event of Default. To the extent permitted by Applicable Laws
and Regulations, Lessee hereby waives any rights now or hereafter conferred by
statute or otherwise that may require Lessor (i) to provide any notice to
Lessee, or (ii) to sell, lease or otherwise use the Site or part thereof in
mitigation of Lessor's damages, or (iii) to take any other action, upon the
occurrence of a Lease Event of Default, or that may otherwise limit or modify
any of Lessor's rights or remedies under this Article.

                                  ARTICLE XIX.
                          RIGHT TO PERFORM FOR LESSEE

          If Lessee shall fail to perform or comply with any of its agreements
contained herein, Lessor may, but shall not be obligated to, on five (5)
Business Days prior notice to Lessee (except in the event of an emergency, in
which case only one (1) Business Day's prior notice shall be required), perform
or comply with such agreement, and Lessor shall not thereby be deemed to have
waived any default caused by such failure, and the amount of such payment and
the amount of the expenses of Lessor (including attorneys' fees and expenses)
incurred in connection with such payment or the performance of or compliance
with such agreement, as the case may be, together with interest thereon at the
Overdue Rate, shall be deemed Supplemental Rent, payable by Lessee to Lessor
upon demand; provided that in the case of an emergency,  Lessee shall permit
             --------                                                       
Lessor so to perform or comply on less than one Business Day's notice if Lessor
has determined in good faith that such emergency did not permit additional time.

                                  ARTICLE XX.
                                 LESSOR LIENS

          In the event that Lessor shall be obligated to remove any Lessor Liens
from the Site and shall fail to do so, Lessee shall have a claim against Lessor
for such failure, but shall not have any right of offset.

                                  ARTICLE XXI.
                                 MISCELLANEOUS

     Section 21.1.  Binding Effect; Successors and Assigns; Survival.  The terms
                    ------------------------------------------------
and provisions of this Lease, and the respective rights and obligations
hereunder of Lessor, Lessee, Agent and Participants shall be binding upon them
and their respective successors, legal representatives and assigns (including,
in the case of Lessor, any Person to whom Lessor may transfer the Site or any
interest therein in accordance with the provisions of the Deed of Trust or other
Operative Documents), and inure to their benefit and the benefit of their
respective permitted successors, legal representatives and assigns.

     Section 21.2.  Severability.  Any provision of this Lease that shall be
                    ------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction, and Lessee shall remain
liable to perform its obligations hereunder except to the extent of such
unenforceability. To the extent permitted by Applicable 

                                      A-34
<PAGE>
 
Laws and Regulations, Lessee hereby waives any provision of law that renders any
provision hereof prohibited or unenforceable in any respect.

     Section 21.3.  Notices.  Unless otherwise specified herein, all notices,
                    -------
requests, demands or other communications to or upon the respective parties
hereto shall be in writing and shall be delivered and shall be deemed to have
been given in accordance with the Participation Agreement.

     Section 21.4.  Amendment; Complete Agreements.  Neither this Lease nor any
                    ------------------------------
of the terms hereof may be terminated, amended, supplemented, waived or modified
orally, but only by an instrument in writing signed by the party against which
the enforcement of the termination, amendment, supplement, waiver or
modification shall be sought and such other parties as required by Section 9.5
of the Participation Agreement. This Lease, together with the other Operative
Documents, is intended by the parties as a final expression of their agreement
and as a complete and exclusive statement of the terms thereof, all
negotiations, considerations and representations between the parties having been
incorporated herein and therein. No course of prior dealings between the parties
or their officers, employees, agents or Affiliates shall be relevant or
admissible to supplement, explain, or vary any of the terms of this Lease or any
other Operative Document. Acceptance of, or acquiescence in, a course of
performance rendered under this or any prior agreement between the parties or
their Affiliates shall not be relevant or admissible to determine the meaning of
any of the terms of this Lease or any other Operative Document. No
representations, undertakings, or agreements have been made or relied upon in
the making of this Lease other than those specifically set forth in the
Operative Documents.

     Section 21.5.  Headings.  The Table of Contents and headings of the 
                    --------
various Articles and Sections of this Lease are for convenience of reference
only and shall not modify, define or limit any of the terms or provisions
hereof.

     Section 21.6.  Original Lease.  The single executed original of this Lease
                    --------------
containing the receipt of Agent therefor on or following the signature page
thereof shall be the "original executed counterpart" of this Lease. To the
extent that this Lease constitutes chattel paper, as such term is defined in the
Uniform Commercial Code as in effect in any applicable jurisdiction, no security
interest in this Lease may be created through the transfer or possession of any
counterpart other than the "original executed counterpart."

     Section 21.7.  GOVERNING LAW.  THIS LEASE HAS BEEN DELIVERED IN, AND SHALL
                    -------------
IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY
WITHIN SUCH STATE, EXCEPT AS TO MATTERS RELATING TO THE CREATION, PERFECTION AND
ENFORCEMENT OF LIENS AND SECURITY INTERESTS AND THE EXERCISE OF REMEDIES WITH
RESPECT THERETO, WHICH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE IN WHICH THE APPLICABLE SITE IS LOCATED.

                                      A-35
<PAGE>
 
     Section 21.8.  Discharge of Lessee's Obligations by its Affiliates.  Lessor
                    ---------------------------------------------------
agrees that performance of any of Lessee's obligations hereunder by one or more
of its Affiliates or affiliates or one or more sublessees of the Site or any
part thereof shall constitute performance by Lessee of such obligations to the
same extent and with the same effect hereunder as if such obligations were
performed by Lessee, but no such performance shall excuse Lessee from any
obligation not performed by it or on its behalf under the Operative Documents.

     Section 21.9.  Liability of Lessor, Trustee and Trust Company Limited.  The
                    ------------------------------------------------------
parties hereto agree that none of Lessor, Trustee and Trust Company shall have
any personal liability whatsoever to Lessee or their respective successors and
assigns for any Claim based on or in respect of this Lease or any of the other
Operative Documents or arising in any way from the transactions contemplated
hereby or thereby; provided, however, that (i) Lessor shall be liable in its
                   --------  -------                 
individual capacity for Lessor Liens required to be removed by Lessor under
Section 6.2(a) of the Participation Agreement, and (ii) Lessor, Trustee and
Trust Company shall each be liable in their individual capacities for their own
willful misconduct or gross negligence as determined in a final and
nonappealable decision from a court of competent jurisdiction. It is understood
and agreed that, except as provided in the preceding proviso: (i) none of
Lessor, Trustee or Trust Company shall have any personal liability under any of
the Operative Documents; (ii) all obligations of Lessor to Lessee are solely
nonrecourse obligations, recourse being limited to its interest in the Site and
the Operative Documents (excluding Excluded Amounts); and (iii) all such
personal liability of each of Lessor, Trustee and Trust Company is expressly
waived and released as a condition of, and as consideration for, the execution
and delivery of the Operative Documents by each of Lessor, Trustee and Trust
Company.

     Section 21.10.  Estoppel Certificates.  Each party hereto agrees that at 
                     ---------------------
any time and from time to time during the Lease Term, it will promptly, but in
no event later than thirty (30) days after request by the other party hereto,
execute, acknowledge and deliver to such other party or to any prospective
purchaser (if such prospective purchaser has signed a commitment letter or
letter of intent to purchase the Site or any part thereof or to purchase any
Note or Trust Certificate), assignee or mortgagee or third party designated by
such other party, a certificate stating (a) that this Lease is unmodified and in
force and effect (or if there have been modifications, that this Lease is in
force and effect as modified, and identifying the modification agreements); (b)
the date to which Basic Rent has been paid; (c) in the case of an estoppel
certificate to be given by Lessee, whether or not there is any existing default
by Lessee in the payment of Basic Rent or any other sum of money hereunder, and
whether or not there is any other existing Lease Default or Lease Event of
Default with respect to which a notice of default has been served, and, if there
is any such default, specifying the nature and extent thereof; (d) in the case
of an estoppel certificate to be given by Lessee, whether or not, to the
knowledge of Lessee after due inquiry and investigation, there are any purported
setoffs, defenses or counterclaims against enforcement of the obligations to be
performed hereunder existing in favor of Lessee; and (e) other items that may be
reasonably requested; provided that no such certificate may be requested unless
                      --------
the requesting party has a good faith reason for such request. In addition,
Lessee, promptly, but in no event later than thirty (30) days after request by
any other party hereto, shall obtain and deliver to such other party or to any
prospective purchaser (if such prospective purchaser has signed a commitment
letter or letter of intent to purchase the Site or any part thereof or to
purchase any 

                                      A-36
<PAGE>
 
Note or Trust Certificate), assignee, mortgagee or third party designated by
such other party, an estoppel certificate from Sublessee containing such items
as reasonably requested by the party requesting the same; provided that no such
                                                          --------            
certificate may be requested unless the requesting party has a good faith reason
for such request.

     Section 21.11.  No Joint Venture.  Any intention to create a joint venture
                     ----------------
or partnership relation between Lessor and Lessee is hereby expressly
disclaimed.

     Section 21.12.  No Accord and Satisfaction.  The acceptance by or on 
                     --------------------------
behalf of Lessor of any sums from Lessee (whether as Basic Rent or otherwise) in
amounts which are less than the amounts due and payable by Lessee hereunder is
not intended, nor shall be construed, to constitute an accord and satisfaction
of any dispute between Lessor and Lessee regarding sums due and payable by
Lessee hereunder, unless the requisite consent has been obtained pursuant to the
terms of the Participation Agreement.

     Section 21.13.  No Merger.  In no event shall the Leasehold Estate of
                     ---------
Lessee hereunder, or the rights and interests of Agent, any lender or the holder
of any Notes secured by a Lien in this Lease, merge with any interests, estates
or rights of Lessor in or to the Site, it being understood that such Leasehold
Estate of Lessee hereunder, and the rights and interests of Agent, any Lender or
the holder of any Notes secured by a Lien in this Lease, shall be deemed to be
separate and distinct from Lessor's interests, estates and rights in or to the
Site, notwithstanding that any such interests, estates or rights shall at any
time or times be held by or vested in the same Person.

     Section 21.14.  Successor Lessor.  Lessee agrees that, in the case of any
                     ----------------
transfer of the Site to a successor Lessor in accordance with the provisions of
Section 6.3 of the Participation Agreement from time to time, such successor
Lessor shall, upon written notice by such successor Lessor to Lessee, succeed to
all the rights, powers and title of Lessor hereunder and shall be deemed to be
Lessor for all purposes hereof and without in any way altering the terms of this
Lease or Lessee's obligations hereunder. Such transfer to a successor Lessor
shall not exhaust the right to any further transfer to another successor Lessor
pursuant to said Section 6.3, but such right may be exercised repeatedly as long
as this Lease shall be in effect.

     Section 21.15.  Survival.  The obligations of Lessee to be performed under
                     --------
this Lease prior to the Lease Termination Date and the obligations of Lessee
pursuant to Sections 4.1, 4.2, 4.4, 4.5, Article XVIII and Section 21.1, as well
            ---------------------------  -------------     ------------    
as any indemnities under any of the Operative Documents, shall survive the
expiration or termination of this Lease. The extension of any applicable statute
of limitations by Lessor, Agent, any Participant, Lessee or any other Indemnitee
shall not affect such survival.

     Section 21.16.  Transfer of Site to Lessee or any other Person.  Whenever
                     ----------------------------------------------
pursuant to any provision of this Lease Lessor is required to transfer the Site
to Lessee or to any other Person, such transfer shall be made at Lessee's
expense (including, without limitation, all costs of conveyance, applicable
transfer taxes and recording fees without regard to local custom) by the
quitclaim transfer of all of Lessor's right, title and interest in and to the
Site on an "as is, where is, 

                                      A-37
<PAGE>
 
with all faults" basis, free and clear of all Lessor Liens, but subject to the
Lien of the Loan Agreement if and to the extent it is attached, and otherwise
without recourse, representation or warranty of any kind, and together with the
due assumption by Lessee (or such third party) of, and due release of Lessor
from, all obligations relating to the Site or the Operative Documents. Any
provision in this Lease or other Operative Document to the contrary
notwithstanding, Lessor shall not be obligated to make any such transfer until
Lessor has received all Rent and other amounts due and owing hereunder.

     Section 21.17.  Enforcement of Certain Warranties.
                     --------------------------------- 

          (a) Unless a Lease Default or Lease Event of Default shall have
occurred and be continuing, Lessor authorizes Lessee (directly or through
agents), at Lessee's expense, to assert, during the Lease Term, all of Lessor's
rights (if any) under any applicable warranty and any other claim that Lessee or
Lessor may have under the warranties provided to Lessor in connection with the
purchase, of the Site and Lessor agrees to cooperate, at Lessee's expense, with
Lessee and its agents in asserting such rights.  So long as there is no Lease
Default or Lease Event of Default, any amount recovered by Lessee under any such
warranties shall be retained by Lessee.

          (b) Notwithstanding the foregoing provisions of this Section, so long
as a Lease Default or Lease Event of Default shall have occurred and be
continuing, any amount that would otherwise be retained by Lessee pursuant to
Section 21.17(a) shall be paid to Lessor as security for the obligations of
----------------                                                           
Lessee under this Lease, and, if a Lease Event of Default is continuing, may be
applied to the obligations of Lessee hereunder, and, at such time thereafter as
no Lease Default or Lease Event of Default shall be continuing, such amount and
gain thereon shall be paid promptly to Lessee to the extent not previously
applied in accordance with the terms of this Lease.

     Section 21.18.  Investment of Security Funds.  Any amounts not payable to
                     ----------------------------
Lessee and paid to or retained by Lessor pursuant to any provision hereof solely
because a Lease Default or Lease Event of Default shall have occurred and be
continuing or because Lessee shall not have performed in full its obligations
under Article XIII shall be held by Lessor as security for the obligations of
      ------------                 
Lessee under this Lease and the other Operative Documents. At such time as no
Lease Default or Lease Event of Default, or failure to perform shall be
continuing, such amounts, net of any amounts previously applied to Lessee's
obligations hereunder or under any other Operative Documents, shall be paid to
Lessee. Any such amounts which are held pending payment to Lessee or application
hereunder shall be invested by Lessor (or Agent) as directed from time to time
in writing by Lessee (provided, however, that if a Lease Event of Default has 
                      --------  -------                            
occurred and is continuing it will be directed by Lessor), and at the expense
and risk of Lessee, in Permitted Investments. Any gain (including interest
received) realized as the result of any such investment (net of any fees,
commissions and other expenses, if any, incurred in connection with such
investment) shall be applied from time to time in the same manner as the
principal invested. Lessee will promptly pay to Lessor on demand, the amount of
any loss realized as the result of any such investment (together with any fees,
commissions and other expenses, if any, incurred in 

                                      A-38
<PAGE>
 
connection with such investment), such amount to be held, paid and applied in
the same manner as other amounts subject to this Section.

     Section 21.19.  Recording of Memorandum of Lease.  Concurrently with the
                     --------------------------------
execution and delivery of this Lease, Lessor and Lessee shall execute,
acknowledge and cause to be recorded a Memorandum of Lease substantially in the
form attached hereto as Exhibit A, in the official records of the County where
                        ---------                 
the Site is located. Notwithstanding the execution, delivery and recording of
any such Memorandum of Lease, the terms, covenants and conditions of this Lease
shall control.

     Section 21.20.  Nature of Transaction.
                     ---------------------

          (a) It is the intent of the parties hereto that:  (i) the transaction
contemplated hereby constitutes an operating lease from Lessor to Lessee for
purposes of Lessee's financial reporting, (ii) the transaction contemplated
hereby preserves ownership in the Site to Lessee for purposes of Federal and
state tax and bankruptcy purposes, (iii) Lessee, pursuant to the Lease, grants a
security interest or lien, as the case may be, in the Site and the other
Collateral to Lessor, (iv) for purposes of Federal and state tax and bankruptcy
purposes, the payment by Lessee of the portions of Basic Rent shall be treated
as payments of interest, and any other payments in respect of the Lease Balance
shall be treated as repayments of principal, and (v) the Collateral Documents
create a lien and security interest in the Site, subject to certain limited
exceptions.  Nevertheless, Lessee acknowledges and agrees that none of Lessor,
Agent or any Participant has provided or will provide tax, accounting or legal
advice to Lessee regarding the Overall Transaction or made any representations
or warranties concerning the tax, accounting or legal characteristics of the
Operative Documents and that Lessee has obtained and relied upon such tax,
accounting and legal advice concerning the Operative Documents as it deems
appropriate.

          (b) Specifically, without limiting the generality of subsection (a) of
this Section, but understanding that the parties' characterization is not the
sole determinant of the issue, the parties hereto intend and agree that with
respect to the nature of the transactions evidenced by this Lease in the context
of the exercise of remedies under the Operative Documents, relating to and
arising out of any insolvency or receivership proceedings or a petition under
the United States bankruptcy laws or any other applicable insolvency laws or
statute of the United States of America or any State thereof affecting Lessee,
Lessor, Agent or any Participant or any enforcement or collection actions, the
transactions evidenced by the Operative Documents are loans made by unrelated
third party lenders to Lessee secured by the Site.

                                      A-39
<PAGE>
 
          IN WITNESS WHEREOF, the undersigned have each caused this Lease and
Agreement to be duly executed and delivered in New York, New York by their
respective officers thereunto duly authorized, as of the day and year first
above written.

                              SMART & FINAL REALTY TRUST 1998,
                              as Lessor

                              By:  Wilmington Trust Company, not in its
                                   individual capacity but solely as Trustee


                                   By:   
                                         ---------------------------------------
                                         Name:
                                         Title:


                              SMART & FINAL INC.,
                              as Lessee


                              By:
                                    ------------------------
                                    Name:
                                    Title:


                              RECEIPT FOR COUNTERPART NO. 1 ONLY


                              CREDIT LYONNAIS LOS ANGELES BRANCH, 
                              as Agent


                              By:   
                                    ------------------------
                                    Name:
                                    Title:

Acknowledged and agreed to
as of the date first above written:


SMART & FINAL STORES CORPORATION,
as Sublessee


By:
      ---------------------------
      Name:
      Title:
<PAGE>
 
                              LEASE AND AGREEMENT

                                  SCHEDULE I

                              Description of Site
                              -------------------
                                        
                                 See attached.




                                      I-1
<PAGE>
 
                              LEASE AND AGREEMENT

                                   EXHIBIT A

                   FORM OF MEMORANDUM OF LEASE AND AGREEMENT
                   -----------------------------------------

          THIS MEMORANDUM OF LEASE AND AGREEMENT dated as of May __, 1998 (this
"Memorandum of Lease"), is entered into between SMART & FINAL REALTY TRUST 1998,
 -------------------                                                            
a Delaware business trust, as lessor (the "Lessor"), and SMART & FINAL INC., a
                                           ------                             
Delaware corporation, as lessee (the "Lessee").
                                      ------   

                              W I T N E S S E T H:

          WHEREAS, Lessee and Lessor shall have heretofore entered into that
certain Lease and Agreement dated as of May 20, 1998 (as amended, supplemented,
or otherwise modified from time to time, the "Lease");
                                              -----   

          WHEREAS, the Lease provides for the execution and delivery of a
Memorandum of Lease on the Site Acquisition Closing Date, substantially in the
form hereof, for the purpose of confirming the acceptance and lease of the Site,
all as required pursuant to the Lease; and

          WHEREAS, unless otherwise defined herein, capitalized terms used
herein shall have the meanings ascribed thereto in the Participation Agreement
dated as of May 20, 1998 (as amended, supplemented, or otherwise modified from
time to time, the "Participation Agreement"), among Lessee, Lessor, Smart &
                   -----------------------                                 
Final Stores Corporation, as Sublessee, Wilmington Trust Company, as Trustee,
Credit Lyonnais Leasing Corp., as Investor, financial institutions party hereto
from time to time, as Lenders, and Credit Lyonnais Los Angeles Branch, as Agent.

          NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, Lessor and Lessee hereby agree as follows:

          1.   Delivery and Acceptance. Pursuant to the terms of the Lease,
               -----------------------                 
Lessor hereby delivers and leases to, and confirms delivery and lease to,
Lessee, and Lessee hereby accepts delivery and leases, and confirms acceptance
of delivery and lease, from Lessor, under the Lease as hereby supplemented, of
the Site more particularly described on Schedule I attached hereto. The term
                                        ----------
"Site" includes, without limitation, all of the right, title and interest of
 ----                                          
each of Lessor or Lessee in and to the following and any proceeds (including,
without limitation, insurance and condemnation proceeds) thereof:

          (a) the real property described in Schedule I attached hereto (the
"Land"); all buildings, structures and other improvements now or in the future
 -----                                                                         
located on the Land (the "Improvements"; the Improvements and the Land are
                          ------------                                    
sometimes collectively referred to herein as the "Property");
                                                  --------   

          (b) all the estate, right, title, claim or demand whatsoever of such
Person, in possession or expectancy, in and to the Property or any part thereof;


                                       1
<PAGE>
 
          (c) all right, title and interest of such Person in and to all of the
fixtures, furnishings and fittings of every kind and nature whatsoever, and all
appurtenances and additions thereto and substitutions or replacements thereof
(together with, in each case, attachments, components, parts and accessories)
currently owned or subsequently acquired by such Person and now or subsequently
attached to, or contained in or used or usable in any way in connection with any
operation or letting of the Property (all of the foregoing in this paragraph (c)
being referred to as the "Fixtures");
                          --------   

          (d) all right, title and interest of such Person in and to all of the
fixtures, chattels, business machines, machinery, apparatus, equipment,
furnishings, fittings and articles of personal property of every kind and nature
whatsoever, and all appurtenances and additions thereto and substitutions or
replacements thereof (together with, in each case, attachments, components,
parts and accessories) currently owned or subsequently acquired such Person and
now or subsequently attached to, or contained in or used or usable in any way in
connection with any operation or letting of the Property, including, but without
limiting the generality of the foregoing, all screens, awnings, shades, blinds,
curtains, draperies, artwork, carpets, rugs, storm doors and windows, furniture
and furnishings, heating, electrical, and mechanical equipment, lighting,
switchboards, plumbing, ventilating, air conditioning and air-cooling apparatus,
refrigerating, and incinerating equipment, escalators, refrigerators, elevators,
loading and unloading equipment and systems, stoves, ranges, laundry equipment,
cleaning systems (including window cleaning apparatus), telephones,
communication systems (including satellite dishes and antennae), televisions,
computers (excluding software), sprinkler systems and other fire prevention and
extinguishing apparatus and materials, security systems, motors, engines,
machinery, pipes, pumps, tanks, conduits, appliances, fittings and fixtures of
every kind and description (all of the foregoing in this paragraph (d) being
referred to as the "Equipment");
                    ---------   

          (e) all right, title and interest of such Person in and to all
substitutes and replacements of, and all additions and improvements to, the
Improvements and the Fixtures and Equipment, subsequently acquired by such
Person or constructed, assembled or placed by such Person on the Land,
immediately upon such acquisition, release, construction, assembling or
placement, including, without limitation, any and all building materials whether
stored at the Property or offsite, and, in each such case, without any further
mortgage, conveyance, assignment or other act by such Person;

          (f) all right, title and interest of such Person in, to and under all
books and records relating to or used in connection with the operation of the
Property or the Fixtures or any part thereof; and all general intangibles
related to the operation of the Improvements now existing or hereafter arising;

          (g) all right, title and interest of such Person in and to all
insurance policies (including title insurance policies) required to be
maintained by such Person pursuant to Article XI of the Lease, including the
right to collect and receive such proceeds; and all awards and other
compensation, including the interest payable thereon and the right to collect
and receive the same, made to the present or any subsequent owner of the
Property for the taking by eminent domain, condemnation or otherwise, of all or
any part of the Property or any easement or other right therein; and


                                       2
<PAGE>
 
          (h) all right, title and interest of such Person in and to (to the
extent assignable) (i) all consents, licenses, building permits, certificates of
occupancy and other governmental approvals relating to construction, completion,
occupancy, use or operation of the Property or any part thereof and (ii) all
plans and specifications relating to the Property;

provided, however, that the Site shall exclude Equipment and Fixtures the
--------  -------                                                        
acquisition of which were not financed with Advances.

          2.  Warranty.  Lessee hereby represents and warrants that no event
              --------                               
which would constitute a Casualty or an Event of Taking and no notice of such
Casualty or Event of Taking has been given to Lessee or any of its Affiliates as
of the date hereof. Lessee hereby reaffirms each of the representations and
warranties set forth at Section 4.1 of the Participation Agreement as if made on
the date hereof (except to the extent any such representation and warranty
relates to an earlier date), including the Site is free and clear of all Liens
other than Permitted Liens.

          3.  Term.  The term of this Memorandum of Lease shall commence on the
              ----                                       
date hereof and end on the Lease Termination Date. The Basic Term shall end no
later than May 15, 2003.

          4.  Confirmation.  Lessee hereby confirms its agreement, in accordance
              ------------                             
with the Lease as supplemented by this Memorandum of Lease, to pay Rent for the
benefit of Participants. Nothing herein shall reduce Lessee's obligation to make
all other payments required under the Lease, including those payments to be made
on the last day of the Lease Term pursuant to Article VI of the Lease.

          5.  Incorporation into Lease.  This Memorandum of Lease shall be
              ------------------------                  
construed in connection with and as part of the Lease, and all terms, conditions
and covenants contained in the Lease, as supplemented by this Memorandum of
Lease, shall be and remain in full force and effect.

          6.  References.  Any and all notices, requests, certificates and other
              ----------                                 
instruments executed and delivered concurrently with or after the execution and
delivery of this Memorandum of Lease may refer to the "Lease Agreement, dated as
of May 20, 1998," or may identify the Lease in any other respect without making
specific reference to this Memorandum of Lease, but nevertheless all such
references shall be deemed to include this Memorandum of Lease, unless the
context shall otherwise require.

          7.  Recording.  Lessor and Lessee agree that this Memorandum of Lease
              ---------                               
shall be recorded at Lessee's sole cost and expense as required under Section
21.19 of the Lease.

          8.  Counterparts.  This Memorandum of Lease may be executed in any
              ------------                               
number of counterparts, each executed counterpart constituting an original but
all together one and the same instrument.

          9.  Nature of Transaction.  (A) IT IS THE INTENT OF THE PARTIES HERETO
              ---------------------                       
THAT: (I) THE TRANSACTION CONTEMPLATED HEREBY CONSTITUTES 


                                       3
<PAGE>
 
AN OPERATING LEASE FROM LESSOR TO LESSEE FOR PURPOSES OF LESSEE'S FINANCIAL
REPORTING, (II) THE TRANSACTION CONTEMPLATED HEREBY PRESERVES OWNERSHIP IN THE
SITE TO LESSEE FOR PURPOSES OF FEDERAL AND STATE TAX AND BANKRUPTCY, (III)
LESSEE, PURSUANT TO THE LEASE, GRANTS A SECURITY INTEREST OR LIEN, AS THE CASE
MAY BE, IN THE SITE AND THE OTHER COLLATERAL TO LESSOR, (IV) FOR PURPOSES OF
FEDERAL AND STATE TAX, THE PAYMENT BY LESSEE OF BASIC RENT SHALL BE TREATED AS
PAYMENTS OF INTEREST, AND THE PAYMENT BY LESSEE OF ANY AMOUNTS IN RESPECT OF THE
LEASE BALANCE SHALL BE TREATED AS REPAYMENTS OF PRINCIPAL, AND (V) THE
COLLATERAL DOCUMENTS CREATE A LIEN AND SECURITY INTEREST IN THE COLLATERAL,
SUBJECT TO CERTAIN LIMITED EXCEPTIONS. NEVERTHELESS, LESSEE ACKNOWLEDGES AND
AGREES THAT NONE OF LESSOR, AGENT OR ANY PARTICIPANT HAS PROVIDED OR WILL
PROVIDE TAX, ACCOUNTING, REGULATORY OR LEGAL ADVICE TO LESSEE REGARDING THE
OVERALL TRANSACTION OR MADE ANY REPRESENTATIONS OR WARRANTIES CONCERNING THE
TAX, ACCOUNTING, REGULATORY OR LEGAL CHARACTERISTICS OF THE OPERATIVE DOCUMENTS
OR THE OVERALL TRANSACTION AND THAT LESSEE HAS OBTAINED AND RELIED UPON SUCH
TAX, ACCOUNTING, REGULATORY AND LEGAL ADVICE CONCERNING THE OPERATIVE DOCUMENTS
AND THE OVERALL TRANSACTION AS IT DEEMS APPROPRIATE.

          (B) SPECIFICALLY, WITHOUT LIMITING THE GENERALITY OF CLAUSE (A) ABOVE,
BUT UNDERSTANDING THAT THE PARTIES' CHARACTERIZATION IS NOT THE SOLE DETERMINANT
OF THE ISSUE, THE PARTIES HERETO INTEND AND AGREE THAT WITH RESPECT TO THE
NATURE OF THE TRANSACTIONS EVIDENCED BY THE LEASE IN THE CONTEXT OF THE EXERCISE
OF REMEDIES UNDER THE OPERATIVE DOCUMENTS, RELATING TO AND ARISING OUT OF ANY
INSOLVENCY OR RECEIVERSHIP PROCEEDINGS OR A PETITION UNDER THE UNITED STATES
BANKRUPTCY LAWS OR ANY OTHER APPLICABLE INSOLVENCY LAWS OR STATUTE OF THE UNITED
STATES OF AMERICA OR ANY STATE THEREOF AFFECTING LESSEE, LESSOR, AGENT OR ANY
PARTICIPANT OR ANY ENFORCEMENT OR COLLECTION ACTIONS, THE TRANSACTIONS EVIDENCED
BY THE OPERATIVE DOCUMENTS ARE LOANS MADE BY UNRELATED THIRD PARTIES TO LESSEE
SECURED BY THE SITE AND OTHER COLLATERAL.

          10. Grant and Foreclosure on Lessee's Estate.  Lessee hereby grants to
              ----------------------------------------  
Old Republic Title Company, as trustee (together with all successor trustees,
"Mortgage Trustee") for the benefit of Lessor, Agent, Lenders and Investor, IN
TRUST, WITH POWER OF SALE, all of Lessee's right, title and interest in and to
the Site and, upon the occurrence of a Lease Event of Default, Lessor shall have
the power and authority, after proper notice and lapse of such time as may be
required by law, to cause Mortgage Trustee to sell the Site by notifying
Mortgage Trustee of that election and depositing with Mortgage Trustee this
instrument and receipts and evidence of expenditures made and secured hereby as
Mortgage Trustee may reasonably require. Upon receipt of any such notice from
Lessor, Mortgage Trustee shall cause to be recorded, published and delivered to
Lessee such Notice of Default and Election to Sell as is then required by
applicable statutory authority and by this instrument, which notice shall set
forth, among other 


                                       4
<PAGE>
 
things, the nature of the breach(es) or default(s), the action(s) required to
effect a cure thereof and the time period within which that cure may be
effected. If no cure is effected within the statutory time limits following
recordation of the Notice of Default and Election to Sell and after Notice of
Sale has been given as required by the above-referenced statutes, Mortgage
Trustee may without further notice or demand sell and convey the Site in
accordance with the above-referenced statutes. The Site may be sold as a whole
or in separate lots, parcels or items and in such order as Lessor may direct, at
public auction to the highest bidder for cash in lawful money of the United
States payable at the time of sale. Lessee acknowledges that sales for cash or
on credit to a wholesaler, retailer or user of the Site, at a public or private
auction, are all commercially reasonable. Mortgage Trustee shall deliver to the
purchaser(s) a good and sufficient deed or deeds conveying the property so sold,
but without any covenant or warranty express or implied. The recitals in such
deed of any matter or fact shall be conclusive proof of the truthfulness
thereof. Any Person, including Lessee, Mortgage Trustee, Lessor, Agent or any
Participant, may purchase at any sale. After deducting all costs, fees and
expenses of Lessor and Mortgage Trustee, including costs of evidence of title in
connection with any sale, Lessor shall apply the proceeds of sale, in the
following order of priority, to payment of the following (collectively, the
"Obligations"): (i) first, all amounts expended by or for the account of Lessor
under the terms hereof and not then repaid, with accrued interest at the Overdue
Rate; and (ii) second, all other amounts then due and owing hereunder including,
without limitation, all Basic Rent, Supplemental Rent, the full amount of the
Lease Balance as of the date of sale as if this Lease had been terminated, and
all other amounts then payable by Lessee under the Lease and the other Operative
Documents (excluding however, the Lessee's Environmental Indemnity), with Lessor
having the right to apply the proceeds of sale to the amounts described above in
this clause (ii) in such order, proportion and priority as Lessor may elect in
its sole and absolute discretion. To the extent permitted by applicable
statutes, Mortgage Trustee may postpone the sale of all or any portion of the
Site by public announcement at the time and place of sale, and from time to time
thereafter may again postpone that sale by public announcement or subsequently
noticed sale, and without further notice may make such sale at the time fixed at
the last postponement or may, in its discretion, give a new notice of sale. A
sale of less than all of the Site or any defective or irregular sale made
hereunder shall not exhaust the power of sale provided for herein, and
subsequent sales may be made hereunder until all of the Obligations have been
satisfied or the entire Site sold, without defect or irregularity. No action of
Lessor, Mortgage Trustee, Agent or any Participant based upon the provisions
contained herein or contained in the applicable statutes, including, without
limitation, the giving of the Notice of Default and Election to Sell or the
Notice of Sale, shall constitute an election of remedies which would preclude
Lessor from pursuing judicial foreclosure before a completed sale pursuant to
the power of sale contained herein. Lessor shall have the right, with the
irrevocable consent of Lessee hereby given and evidenced by the execution of
this instrument, to obtain appointment of a receiver by any court of competent
jurisdiction without further notice to Lessee, which receiver shall be
authorized and empowered to enter upon and take possession of the Site,
including all personal property constituting a permanent part of the Site and
fixtures thereto used upon or in connection with the real property herein
conveyed (and any other personal property constituting a part of the Site which
Lessee acquired with the funds of any Participant), to let the Site, to receive
all the rents, issues and profits, if any, which may be due or become due in
respect to the leasing of the Site to another party and apply the rents after
payment of all necessary charges and expenses to reduction of the Obligations in
such order, proportion and priority as Lessor may elect. At the option of
Lessor, the receiver shall accomplish entry and 


                                       5
<PAGE>
 
taking possession of the Site by actual entry and possession or by notice to
Lessee. The receiver so appointed by a court of competent jurisdiction shall be
empowered to issue receiver's certificates for funds advanced by Lessor for the
purpose of protecting the value of the Site as security for the Obligations. The
amounts evidenced by receiver's certificates shall bear interest at the Overdue
Rate and may be added to the Obligations if Lessee or a junior lienholder
purchases the Site at the trustee's sale. Mortgage Trustee or any successor
acting hereunder may resign and thereupon be discharged of the trusts hereunder
upon thirty (30) days prior written notice to Lessor. Regardless of whether
Mortgage Trustee resigns, Lessor may, from time to time, substitute a successor
or successors to any Mortgage Trustee named herein or acting hereunder in
accordance with any statutory procedure for such substitution; or if Lessor, in
its sole and absolute discretion, so elects, and if permitted by law, Lessor may
substitute such successors or successors by recording, in the office of the
recorder of the county or counties where the Site is located, a document
executed by Lessor and containing the name of the original Lessee and Lessor
hereunder, the book and page where this instrument (or a memorandum hereof) is
recorded (and/or instrument number, as applicable) and the name of the new
Mortgage Trustee, which instrument shall be conclusive proof of proper
substitution of such successor Mortgage Trustee or Mortgage Trustees, who shall,
without conveyance from the predecessor Mortgage Trustee, succeed to the rights,
powers and duties hereunder. In addition to the foregoing, Lessor shall have
those rights and remedies identified in Paragraph B(1)(a)-(d) and (f)-(j) of the
Deed of Trust as if set forth herein, which rights and remedies are hereby
incorporated by reference; provided, however, that (i) all capitalized terms
                           --------  -------                                
therein shall have the meaning assigned to such terms set forth herein, (ii) all
references to "Trustor" and "Beneficiary" shall be deemed references to "Lessee"
and "Lessor," respectively, (iii) all references to "Loan Events of Default"
shall be deemed references to "Lease Events of Default," (iv) all references to
the "Loan Agreement," the "Notes" and/or the "Loan Documents" shall be deemed
references to the "Operative Documents," (v) all references to the "Deed of
Trust" shall be deemed references to this "Memorandum of Lease," and (v) the
reference to "Paragraph A.17" shall be deemed a reference to "the Lease."  It is
              --------------                                                    
acknowledged that A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT; A POWER
OF SALE MAY ALLOW LESSOR TO SELL THE SITE WITHOUT GOING TO COURT IN A
FORECLOSURE ACTION UPON DEFAULT BY LESSEE UNDER THIS INSTRUMENT.

          11.  Assignment of Leases and Rents. The hypothecation effected hereby
               ------------------------------      
includes an encumbrance of the Lessee's rights, as sublandlord, in, to or under
any subleases from time to time affecting the Site (and to any other rights of
Lessee to any rents, issues or profits arising out of the Site). As a
consequence, the parties intend for the Lessor to enjoy all rights with respect
to such subleases, rents, issues and profits of an "assignee" under California
Civil Code Section 2938 (including the right to appointment of a receiver in
accordance with California Code of Civil Procedure 564).

          12.  Governing Law.  THIS MEMORANDUM OF LEASE HAS BEEN DELIVERED IN,
               -------------                               
AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, EXCEPT THAT 


                                       6
<PAGE>
 
FORECLOSURE OF THE SITE SUBJECT TO THIS MEMORANDUM OF LEASE SHALL BE GOVERNED BY
THE LAWS OF THE STATE OF CALIFORNIA.

                  [Remainder of page intentionally left blank]


                                       7
<PAGE>
 
          IN WITNESS WHEREOF, Lessor and Lessee have caused this Memorandum of
Lease and Agreement to be duly executed and delivered on the day and year first
above written.

                              SMART & FINAL REALTY TRUST 1998,
                              a Delaware business trust, as Lessor


                              By:   Wilmington Trust Company, not in its
                                    individual capacity but solely as Trustee


                                    By:
                                          ---------------------------
                                          Name:
                                          Title:
                                          Address:



                                          Attention:



                              SMART & FINAL INC.,
                              a Delaware corporation, as Lessee

                              By:   
                                    -----------------------------
                                    Name Printed:
                                    Title:
                                    Address:



                                    Attention:
<PAGE>
 
                   Form of Memorandum of Lease and Agreement
                   -----------------------------------------

                                   SCHEDULE I


                              Description of Site
                              -------------------

                                 See attached.


                                       1