<PAGE>
 
                          SUPPLEMENTAL LOAN AGREEMENT


     THIS SUPPLEMENTAL LOAN AGREEMENT (this "Agreement") is made and entered
into as of the 29th day of October, 1998 by and among SMITH PROPERTY HOLDINGS
TWO L.P. ("SPH TWO"), and SMITH PROPERTY HOLDINGS TWO (D.C.) L.P. ("SPH TWO
(DC)"), (SPH TWO and SPH TWO (DC), each a Delaware limited partnership and
sometimes hereinafter referred to collectively as "Borrowers"), and GREEN PARK
FINANCIAL LIMITED PARTNERSHIP, a District of Columbia limited partnership, its
successors, transferees and assigns ("Lender").

                                   BACKGROUND

     A.   This Agreement is being executed in connection with the making by
Lender of two separate mortgage loans to Borrowers in the amounts set forth on
                                                                              
Exhibit A attached hereto and made a part hereof (each, a "Mortgage Loan" and
---------                                                                    
collectively, the "Mortgage Loans").

     B.   The Mortgage Loans are evidenced by two separate Multifamily Notes
(collectively, the "Notes") and are secured by, among other things, thirteen
(13) separate (i) Multifamily Deeds of Trust, Assignments of Rents and Security
Agreements (collectively, the "Mortgages") encumbering the properties (and the
improvements now or hereafter existing thereon) listed on Exhibit B attached
                                                          ---------         
hereto and made a part hereof.  For purposes of this Agreement, the term
"Mortgaged Properties" means the thirteen (13) separate properties and
improvements listed on Exhibit B which from time to time are encumbered by the
                       ---------                                              
Mortgages (and each additional Multifamily Residential Property which from time
to time are encumbered by Mortgages in accordance with this Agreement).  The
Mortgaged Properties as of the date hereof (the "Initial Mortgaged Properties")
also are identified by their common names on Exhibit B.
                                             --------- 

     C.   The SPH TWO Loan (defined in Exhibit A) is secured by a Payment
                                       ---------                         
Guaranty, dated the same date as this Agreement, by SPH TWO (DC) for the benefit
of Lender.  The SPH TWO (DC) Loan (defined in Exhibit A) is secured by a Payment
                                              ---------                         
Guaranty, dated the same date as this Agreement, by SPH TWO for the benefit of
Lender.  The Payment Guaranties are hereinafter referred to as the "Payment
Guaranties."

     D.   The Mortgaged Properties identified on Exhibit C as leasehold
                                                 ---------             
mortgaged properties are hereinafter referred to collectively as the "Leasehold
Mortgaged Properties." The Notes, the Mortgages, the Payment Guaranties and all
other documents evidencing and securing the Mortgage Loans are hereinafter
referred to collectively as the "Loan Documents".

     E.   Lender requires as a condition to making the Mortgage Loans that
Borrowers enter into this Agreement for the purpose of setting forth certain
additional agreements with respect to the Mortgage Loans, the Notes, the
Mortgages, the other Loan Documents and the Mortgaged Properties.

                                      E-4
<PAGE>
 
     F.   Lender intends to sell, transfer, and deliver the Notes and assign the
Mortgages to Fannie Mae.  In consideration of such assignment, Fannie Mae will
issue to Lender Guaranteed Mortgage Pass-Through Certificates backed by mortgage
loan pools comprised solely of the Mortgage Loans.  The Mortgage Loans will be
placed in a mortgage-backed security pool.

     NOW, THEREFORE, in consideration of the above and the mutual promises
contained in this Agreement, the receipt and sufficiency of which are
acknowledged, Borrowers and Lender agree as follows:

     1.  Defined Terms.  For purposes of this Agreement, the following terms not
         -------------                                                          
otherwise defined herein shall have the respective meanings set forth below:

          "Affiliate" or "affiliated" means, when used with reference to a
           ---------      ----------                                      
specified Person, (i) any Person that, directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control
with, the specified Person, (ii) any Person that is an officer of, partner in or
trustee of, or serves in a similar capacity with respect to, the specified
Person or of which the specified Person is an officer, partner or trustee, or
with respect to which the specified Person serves in a similar capacity, (iii)
any Person that, directly or indirectly, is the beneficial owner of 10% or more
of any class of equity securities of, or otherwise has a substantial beneficial
interest in, the specified Person or of which the specified Person is, directly
or indirectly, the owner of 10% or more of any class of equity securities or in
which the specified Person has a substantial beneficial interest, and (iv) for
the specified Person, any of the individual's spouse, issue, parents, siblings
and a trust for the benefit of the individual's spouse or issue, or both.

          "Aggregate Debt Service Coverage Ratio for the Trailing 12 Month
           ----------------------------------------------------------------  
Period" means, for any specified date, the ratio (expressed as a percentage) of
------                                                                         


          (a) the aggregate of the Net Operating Income for the Trailing 12
          Month Period for the Mortgaged Properties

                                       to
                                       --

          (b) the Facility Debt Service on the specified date.


          "Aggregate Debt Service Coverage Ratio for the Trailing Three Month
           -------------------------------------------------------------------  
Period" means, for any specified date, the ratio (expressed as a percentage) 
------
                of--
                                                                         

               (a) the product obtained by multiplying--

                    (i) the aggregate of the Net Operating Income for the
               Trailing Three Month Period for the Mortgaged Properties, by

                    (ii)  four

                                       to
                                       --

               (b) the Facility Debt Service on the specified date.

                                       2
<PAGE>
 
               "Aggregate Loan to Value Ratio for the Trailing 12 Month Period"
                -------------------------------------------------------------- 
          means, for any specified date, the ratio (expressed as a percentage)
          of --

               (a) the outstanding principal balance of the Mortgage Loans (and
                   any other loans made in accordance with the provisions of
                   Section 16) on the specified date,

                                       to
                                       --

               (b)  the aggregate of the Values most recently obtained prior to
                    the specified date for the Mortgaged Properties.

               "Appraisal" means an appraisal of a Multifamily Residential
                ---------                                                 
          Property conforming to the requirements of Chapter 5 of Part III of
          the DUS Guide, and accepted by the Lender.

               "Appraised Value" means the value set forth in an Appraisal.
                ---------------                                            

               "Cap Rate" means, for each Mortgaged Property, a capitalization
                --------                                                      
          rate selected by Lender in accordance with Section 19 for use in
          determining the Values.

               "Coverage and LTV Tests" mean, for any specified date, each of
                ----------------------                                       
          the following financial tests:

          (a)  The Aggregate Debt Service Coverage Ratio for the Trailing 12
               Month Period is not less than 135%.

                                       3
<PAGE>
 
          (b) The Aggregate Loan to Value Ratio for the Trailing 12 Month Period
              does not exceed 65%.

               "DUS Guide" means the Fannie Mae Multifamily Delegated
                ---------                                            
          Underwriting and Servicing (DUS) Guide, as such Guide may be amended
          from time to time, including exhibits to the DUS Guide and amendments
          in the form of Lender Memos, Guide Updates and Guide Announcements
          (and, if such Guide is no longer used by Fannie Mae, the term "DUS
          Guide" as used in this Agreement means the Fannie Mae Multifamily
          Negotiated Transactions Guide, as such Guide may be amended from time
          to time, including amendments in the form of Lender Memos, Guide
          Updates and Guide Announcements).  All references to specific articles
          and sections of, and exhibits to, the DUS Guide shall be deemed
          references to such articles, sections and exhibits as they may be
          amended, modified, updated, superseded, supplemented or replaced from
          time to time.

               "Facility Debt Service" means, as of any specified date, the
                ---------------------                                      
          amount of interest and principal amortization, during the 12 month
          period immediately succeeding the specified date, with respect to the
          Mortgage Loans on the specified date, except that, for these purposes,
          each Note shall be deemed to require level monthly payments of
          principal and interest (at the applicable coupon rate) in an amount
          necessary to fully amortize the original principal amount of the Note
          over a 30-year period, with such amortization to commence on the day
          of the first payment of the Note.

               "Gross Revenues" means, for any specified period, with respect to
                --------------                                                  
          any Multifamily Residential Property, all income in respect of the
          Multifamily Residential Property, as determined by Lender in
          accordance with the method described in paragraph 3 of Section 302.02
          of Part V of the DUS Guide, except that for these purposes the
          financial statements to be used need not be audited and paragraph (b)
          of such paragraph 3 shall be taken into account in Lender's
          discretion.

               "Initial Underwriting Date" means the date Lender completes its
                -------------------------                                     
          initial underwriting of the Initial Mortgaged Properties and notifies
          Borrower of Lender's initial determination of the Aggregate Debt
          Service Coverage Ratio for the Trailing 12 Month Period and Aggregate
          Loan to Value Ratio for the Trailing 12 Month Period.

               "Multifamily Residential Property" means a residential property,
                --------------------------------                               
          located in the United States, containing five or more dwelling units
          in which not more than twenty percent (20%) of the net rentable area
          is or will be rented to non-residential tenants, and conforming to the
          requirements of Sections 201 and 203 of Part III of the DUS Guide.

               "Net Operating Income" means, for any specified period, with
                --------------------                                       
          respect to any Multifamily Residential Property, the aggregate net
          income during such period equal to Gross Revenues during such period
          less the aggregate Operating Expenses during such 

                                       4
<PAGE>
 
          period. If a Multifamily Residential Property is not owned by a
          Borrower for the entire specified period, the Net Operating Income for
          the Multifamily Residential Property for the time within the specified
          period during which the Multifamily Residential Property was owned by
          the Borrower shall be the Multifamily Residential Property's pro forma
          net operating income determined by Lender in accordance with the
          underwriting procedures set forth in Part III of the DUS Guide.

               "Operating Expenses" means, for any period, with respect to any
                ------------------                                            
          Multifamily Residential Property, all expenses in respect of the
          Multifamily Residential Property, as determined by Lender in
          accordance with the method described in paragraph 3 of Section 302.02
          of Part V of the DUS Guide, including replacement reserves, if any,
          under the Replacement Reserve Agreements for the Multifamily
          Residential Properties.

               "Person" means an individual, an estate, a trust, a corporation,
                ------                                                         
          a partnership, a limited liability company or any other organization
          or entity (whether governmental or private).

               "Release Fee" means, for each Mortgaged Property released from
                -----------                                                  
          the lien of its Mortgage, a fee of $8,000 payable to Lender.
 
               "Trailing 12 Month Period" means, for any specified date, the 12
                ------------------------                                       
          month period ending with the last day of the most recent calendar
          quarter for which financial statements have been delivered by
          Borrowers to Lender pursuant to Section 10.

               "Trailing Three Month Period" means, for any specified date, the
                ---------------------------                                    
          three month period ending with the last day of the most recent
          calendar quarter for which financial statements have been delivered by
          Borrowers to Lender pursuant to Section 10.

               "Value" means, for any specified date, with respect to a
                -----                                                  
          Multifamily Residential Property, (a) if an Appraisal of the
          Multifamily Residential Property was more recently obtained than a Cap
          Rate for the Multifamily Residential Property, the Appraised Value of
          such Multifamily Residential Property, or (b) if a Cap Rate for the
          Multifamily Residential Property was more recently obtained than an
          Appraisal of the Multifamily Residential Property, the value derived
          by dividing --

               (i)  the Net Operating Income of such Multifamily Residential
                    Property for the Trailing 12 Month Period, by

               (ii) the most recent Cap Rate determined pursuant to Section 19.

          Notwithstanding the foregoing, any Value of a Multifamily Residential
          Property calculated for a date occurring before the first anniversary
          of the date on which the Multifamily Residential Property becomes
          secured by the Mortgage Loans shall equal the 

                                       5
<PAGE>
 
          Appraised Value of such Multifamily Residential Property, unless
          Lender determines that changed market or property conditions warrant
          that the value be determined as set forth in the preceding sentence.

     2.   Substitution and Release of Mortgaged Properties.
          ------------------------------------------------ 

          (a) Prior to the Initial Underwriting Date, Borrowers shall not be
permitted to release any Mortgaged Property from the lien of its Mortgage.

          (b) During the 90 day period commencing on the Initial Underwriting
Date, a Mortgaged Property (the "Release Property") may be released from the
lien of a Mortgage,  without another Multifamily Residential Property being
substituted therefor, if each of the following conditions are met :

               (1) After giving effect to the release, the Coverage and LTV
                   Tests are satisfied.

               (2) Borrowers shall cause the Release Property to be immediately
                   conveyed to a Person other than a Borrower.

               (3) All documentation relating to the foregoing is acceptable to
                   Lender in all respects, including legal opinions, release
                   documentation and any amendments to this Agreement or the
                   other Loan Documents;

               (4) Borrowers shall pay to Lender a Release Fee for each Release
                   Property;

               (5) Borrowers shall pay, with respect to each Release Property,
                   to each of Lender and Servicer, all out-of-pocket costs and
                   expenses (including reasonable legal fees and expenses)
                   incurred by Lender or Servicer in connection with the
                   foregoing. Such amounts shall be paid by Borrowers on or
                   prior to the closing date of such release, or if such release
                   fails to close, within 30 days of Borrower's receipt of
                   invoices therefor (and if requested by Borrowers, reasonable
                   supporting back-up invoices evidencing such items), and shall
                   be payable regardless whether the property is or is not (for
                   any reason) ultimately released from the lien of a Mortgage;
                   and

               (6) No Event of Default, or any event which, with the giving of
                   notice or the passage of time, or both, would constitute an
                   Event of Default, shall have occurred and be continuing.

                                       6
<PAGE>
 
          (c) Upon 30 days' advance written notice from Borrower to Lender, a
     Mortgaged Property may be released from the lien of a Mortgage, and a New
     Property substituted therefor, if each of the following conditions are met:

               (1) Borrowers have substituted for the Mortgaged Property to be
                   released a new Multifamily Residential Property (the "New
                   Property") by granting to Lender a first lien Mortgage
                   encumbering the New Property;

               (2)  The New Property has a Value equal to or greater than the
                    Value of the Mortgaged Property to be released on the date
                    of the release;

               (3)  The New Property meets all of Fannie Mae's then applicable
                    underwriting criteria under the DUS Guide for new loans
                    secured by Multifamily Residential Properties (as determined
                    by Lender) and has a debt service coverage ratio and loan to
                    value ratio, computed in accordance with the applicable
                    underwriting criteria under the DUS Guide, equal to at least
                    135% and 65% respectively (and, for such purposes, Lender
                    shall calculate such ratios using a debt, and debt service,
                    based on the amount of debt then currently allocated to the
                    Mortgaged Property in accordance with Section 19);

               (4)  after giving effect to the substitution, the Coverage and
                    LTV Tests are satisfied;

               (5)  All documentation relating to the foregoing is acceptable to
                    Lender in its discretion in all respects, including legal
                    opinions, title insurance, Mortgages, Collateral Agreements,
                    assignments and any amendments to the other Loan Documents;

               (6)  Borrowers shall pay to Lender a fee equal to the product
                    obtained by multiplying (i) 65 basis points, by (ii) 65%, by
                    (iii) the Value of the New Property (except that, for these
                    purposes only, the Value of the New Property shall not
                    exceed an amount which, when added to the Values of the
                    other Mortgaged Properties (excluding the Mortgaged Property
                    to be released) causes the Aggregate Loan to Value Ratio to
                    equal 65%);

               (7)  With respect to the proposed New Property, Borrowers shall
                    pay Fannie Mae and Lender a due diligence fee plus all costs
                    and expenses (including legal fees and expenses) reasonably
                    incurred by Fannie Mae or Lender in connection with the
                    foregoing. Such amounts shall be paid by Borrowers promptly
                    upon receipt of invoices therefor, and shall be payable
                    regardless whether the property substitution does or does
                    not (for any reason) ultimately occur;

                                       7
<PAGE>
 
               (8)  No prior release of a Mortgaged Property has occurred within
                    the calendar quarter in which the release of the Release
                    Property is scheduled to occur; and

               (9)  No Event of Default, or any event which, with the giving of
                    notice or the passage of time, or both, would constitute an
                    Event of Default, shall have occurred and be continuing.

          (d) Special Provisions Relating to Newport Village III and Crystal
              --------------------------------------------------------------
     Square. Until such time as Lender shall have received from each of the
     ------                                                                
     ground lessors for the two Leasehold Mortgaged Properties known as Newport
     Village III and Crystal Square estoppel certificates substantially in the
     form approved by Lender, the Net Operating Income and Value of these
     Leasehold Mortgage Properties for which a satisfactory estoppel certificate
     has not been obtained shall not be included in the pool of Mortgaged
     Properties for purposes of calculation of the respective financial tests
     comprising the Coverage and LTV Tests.  The amount of any debt (and any
     debt service on such debt) allocated to these Leasehold Mortgaged
     Properties for any purpose shall not be excluded for purposes of
     calculating the Coverage and LTV Tests.

          (e) Special Provisions Relating to Fort Chaplin Park.  In the event
              ------------------------------------------------               
     that, on or before December 31, 1999, Borrower conveys the Mortgaged
     Property identified as Fort Chaplin Park on Exhibit B (the "Fort Chaplin
                                                 ---------                   
     Park Property") to a Person that is not an Affiliate of Borrower, then,
     provided that all other conditions precedent to the release of this
     Mortgaged Property set forth in this Section 2 are complied with, Lender
     shall release this Mortgaged Property from the lien of the Loan Documents.
     Notwithstanding the foregoing, Borrower shall not be required, as a
     condition to the release of the Fort Chaplin Park Property on or before
     December 31, 1999, to pay a Release Fee or pay any underwriting or due
     diligence fee (or any appraisal, inspection or other costs customarily
     incurred in underwriting) to Lender in connection with the inclusion of the
     Fort Chaplin Park Property as collateral for the Mortgage Loans or the
     release of the Fort Chaplin Park Property from the lien of its Mortgage,
     but Borrower shall be liable for any other out-of-pocket costs incurred by
     Lender in connection with the inclusion or release.  If, on or before
     December 31, 1999, the Fort Chaplin Park Property is not conveyed to a
     Person that is not an Affiliate of Borrower, (i) the provision of this
     paragraph shall no longer apply, (ii) Lender shall proceed to perform an
     underwriting on the Fort Chaplin Park Property at Borrower's expense
     (subject to the limitations set forth in Section 12) and (iii) the other
     provisions of this Agreement shall govern the release of the Fort Chaplin
     Park Property from the lien of its Mortgage.

     3.   District of Columbia Rental Housing Sale and Conversion Act of 1980.
          -------------------------------------------------------------------  
SPH TWO (DC) hereby agrees that, in the event a final, nonappealable judgment
entered by a court of competent jurisdiction determines that the residential
tenants of any Mortgaged Property owned by SPH TWO (DC), or a tenant
organization formed by such residential tenants, have the right to purchase such
Mortgaged Property, it will, upon the conveyance of legal title to such tenants
or their tenant organization effect a substitution permitted under Section 2 so
that the Coverage and LTV Tests are satisfied.

                                       8
<PAGE>
 
     4.   Ground Leases.  (a) Each Borrower which owns a Leasehold Mortgaged
          -------------                                                     
Property shall pay all rent and other sums due under the Ground Lease with
respect to its Leasehold Mortgaged Property directly to the lessor under such
ground lease (the "Ground Lessor"), and, within 20 days after the commencement
of each calendar quarter, shall deliver to Lender a written notification that
Borrower has made all payments which are required under the Ground Lease for the
immediately preceding calendar quarter, together with evidence of such payment
and an accounting of any percentage or other rent payments which are made other
than on a fixed annual, quarterly or monthly basis, all in form satisfactory to
Lender.

          (b)  Each Borrower hereby agrees to deliver to Lender promptly upon
receipt of notice of a bankruptcy or similar proceeding affecting any Ground
Lessor of a Leasehold Mortgaged Property written notice of such bankruptcy or
similar proceeding.  Furthermore, each Borrower which has an interest in a
Leasehold Mortgaged Property hereby assigns, transfers and sets over unto Lender
all rights it may have in connection with such bankruptcy or similar proceeding.
In furtherance of and not in limitation of the foregoing, each Borrower hereby
authorizes Lender to demand, sue for, collect and receive all amounts due such
Borrower, and hereby appoints Lender its attorney-in-fact, to vote in connection
with any resolution, arrangement, plan of reorganization or compromise, or
settlement, and to take any other action which would otherwise have been taken
by such Borrower in connection with such a proceeding.

     5.   Shelf Condominiums.  Except for Car Barn I, Car Barn II and Car Barn
          ------------------                                                  
III (the "Car Barn Condominia"), none of the Mortgaged Properties shall be
submitted to a condominium during the term of the Mortgage Loans.  SPH TWO (DC)
covenants and agrees that it will not sell, transfer, enter into a contract for
sale, or enter into a lease with an option for the lessee to purchase, any of
the condominium units in the Car Barn Condominia.

     6.   Covenants of the Borrowers.  Notwithstanding anything to the contrary
          --------------------------                                           
set forth in the Mortgages, Lender acknowledges and approves of Borrowers'
ownership, management and operation of the Mortgaged Properties identified as
being owned by it on Exhibit B.  Each Borrower covenants and agrees that, until
                     ---------                                                 
the principal of, interest on and all other amounts payable in connection with,
the Mortgage Loans have been paid in full, it will  (a)  not incur any
indebtedness of any kind or nature whatsoever secured by a lien on any of the
Mortgaged Properties (with the exception of the mortgages described on Exhibit
                                                                       -------
D, or (b) not incur any unsecured indebtedness for borrowed money outstanding at
-
any time in excess of $100,000.  The limitations in clauses (a) and (b) above
shall not prohibit either Borrower from becoming a party, as lessee, to
equipment leases requiring payment of an annual rent less than or equal to
$25,000 per lease provided that such Borrower is not a party to more than three
such leases at any one time in connection with each Mortgaged Property owned by
it.

     7.   Reserve Account.  Except as otherwise provided by Section 16, each
          ---------------                                                   
Borrower shall at all times perform its obligations under that certain Reserve
Agreement (the "Reserve Agreement") of even date herewith executed by Borrowers
and Lender.

                                       9
<PAGE>
 
     8.   Restrictions on Partnership Distributions.  Each Borrower covenants
          -----------------------------------------                          
and agrees that it will not make any distributions of any nature or kind
whatsoever to its general partners or limited partners if, at the time of such
distribution, a Borrower is in default (determined without taking into account
any notice of, or grace period for curing, the default) in performing any of its
obligations under the Loan Documents.

     9.   Replacement Reserve and Security Agreements.  At the Closing of the
          -------------------------------------------                        
Mortgage Loans the Borrowers shall execute and deliver to the Lender Replacement
Reserve and Security Agreements (the "Replacement Reserve Agreements"), one for
the Virginia Mortgaged Properties and one for the District of Columbia Mortgaged
Properties, but no amounts need be funded under the Replacement Reserve
Agreements by Borrowers so long as (a) no Event of Default is existing which
remains uncured under the Loan Documents and (b) the Mortgaged Properties are
being maintained in accordance with standards acceptable to Lender and Fannie
Mae.

     10.  Additional Reporting Requirements.  In addition to the financial
          ---------------------------------                               
reporting requirements set forth in the Mortgages, Borrowers shall deliver to
Lender quarterly (or monthly if required by Lender) financial statements for
each of the Mortgaged Properties, in form and substance satisfactory to Lender,
on an individual basis by no later than 21 days after the end of each fiscal
quarter, or month, as the case may be.  In addition Borrowers shall deliver to
Lender copies of all annual reports on Form 10K, all quarterly reports on Form
10Q and all current reports on Form 8K filed by the REIT with the Securities and
Exchange Commission (the "SEC") promptly following the filing thereof with the
SEC.

     11.  Events of Default.  An "Event of Default" shall occur if:
          -----------------                                        

          (a) SPH TWO defaults in the payment of any of the interest on the SPH
TWO Note when the same becomes due and payable and the default continues for a
period of more than five days;

          (b) SPH TWO (DC) defaults in the payment of any of the interest on the
SPH TWO (DC) Note when the same becomes due and payable and the default
continues for a period of more than five days;

          (c) SPH TWO fails to perform, comply with or observe any of the terms,
covenants or conditions of this Agreement or any of the other Loan Documents
(other than a default described in subparagraph (a)) required to be performed,
complied with or observed by it;

          (d) SPH TWO (DC) fails to perform, comply with or observe any of the
terms, covenants or conditions of this Agreement or any of the other Loan
Documents (other than a default described in subparagraph (b)) required to be
performed, complied with or observed by it;

          (e) Any representation or warranty made by SPH TWO and SPH TWO (DC),
or both, in this Agreement, the Loan Closing Certifications or any of the other
Loan Documents is false or misleading in any material respect as of the date
made;

                                       10
<PAGE>
 
          (f) There is a Transfer of all or any part of the Mortgaged Properties
or any interest in the Mortgaged Properties or a Transfer of a Controlling
Interest (as those terms are defined in the Mortgages) which violates Section 21
of the Mortgages;

          (g) SPH TWO (DC) defaults in the payment of any of the principal of,
interest on, or other amounts payable under any of the four Deed of Trust Notes
in the aggregate principal amount of $10,007,006, dated June 30, 1994 and
subordinated as of the date hereof to the liens of the applicable Mortgages,
issued by SPH TWO (DC) and payable to the order of SPH TWO;

          (h) SPH TWO defaults in the payment, when due, of rent payable under,
or defaults in performing, complying with or observing any of the terms,
covenants or conditions of, any Ground Lease required to be paid, performed,
complied with or observed by it as lessee under such Ground Lease and the
default continues after the expiration of the period, if any, provided in the
Ground Lease for curing the default;

          (i) SPH TWO or SPH TWO (DC) fails to perform, comply with or observe
any of the terms, covenants or conditions of the Reserve Agreement required to
be performed, complied with or observed by it; or

          (j) If any circumstances arise with respect to the condominium regimes
for the Car Barn Condominia, or any of them, including without limitation,
changes in the law, that materially impair the value of the Car Barn Condominia,
or any of them, or Lender's security interest therein.

     A default under subparagraphs (c) or (d) shall not be an Event of Default
until the Lender notifies the Borrowers in writing of the default and the
Borrowers do not cure the default within 10 days after receipt of such notice
(or, if the default can be cured, but not within 10 days, within such additional
period, not to exceed 20 days in the aggregate, as may be required by the
Borrowers to cure the default, provided that the Borrowers commence to cure the
default within the first 10-day period and thereafter prosecute the curing of
the default with diligence, continuity and in good faith).  The preceding
sentence shall not apply to (i) a default by the Borrowers in performing or
complying with the provisions of Section 7 of the Mortgages, or (ii) a default
by the Borrowers in performing or complying with any negative covenant or
agreement in the Loan Documents which prohibits the Borrowers from taking
specified action.

     12.  Underwriting.
          ------------ 

          (a) The parties acknowledge that Lender has not completed its
underwriting with respect to the Mortgaged Properties.  Lender shall continue to
perform its underwriting of the Mortgaged Properties (other than the Fort
Chaplin Property) after the date of this Agreement and Borrowers shall cooperate
with Lender in performing such underwriting.   Provided Borrowers cooperate with
Lender, Lender shall complete its underwriting on or before December 20, 1998.
Borrowers shall pay for all fees and expenses charged or incurred by Lender or
Fannie Mae in connection with such underwriting. Notwithstanding the foregoing,
Borrowers' liability for all third party underwriting charges (other than Fannie
Mae's legal costs) shall not exceed $25,000 (including environmental,
engineering, appraisal and 

                                       11
<PAGE>
 
other due diligence costs, and Lender's legal costs). If Lender determines, in
its discretion, that any Mortgaged Properties do not meet all of Fannie Mae's
then applicable underwriting criteria under the DUS Guide for new loans secured
by Multifamily Residential Properties, then such Mortgaged Properties, at either
Borrower's or Lender's request, shall be released from the lien of its Mortgage,
without payment of a Release Fee, and shall not be taken into account in
determining the Aggregate Debt Service Coverage Ratio and Aggregate Loan to
Value Ratio.

     (b) Borrowers shall comply with all repair, replacement, operations and
maintenance or similar requirements required by Lender after the completion of
its underwriting, to the extent they are obligated to do so under the
Completion/Repair, Replacement Reserve and other Loan Documents executed in
connection with this Agreement.  The foregoing shall not modify, expand or
reduce any of the obligations set forth in the Loan Documents.   Without
limiting the foregoing, if required by Lender after completion of its
underwriting of the Mortgaged Properties identified as Crystal Place and Crystal
Square on Exhibit B, then, commencing on the first anniversary of the date of
          ---------                                                          
the Notes and on each anniversary date thereafter during the term of the
Mortgage Loans, SPH TWO will cause the parking garage structures in the
following Mortgaged Properties to be tested, at SPH TWO's sole cost and expense,
in accordance with the standards attached hereto as Exhibit E:
                                                    --------- 

                                 Crystal Place
                                 Crystal Square

The results of these tests, together with SPH TWO's written assessment of the
corrective action, if any, that should be taken, shall be delivered to Lender
within 30 days after SPH TWO receives the test results.

     13.  Waivers; Consents.  Borrowers hereby waive the benefit of any laws or
          -----------------                                                    
decisions requiring the marshaling of assets and consent to Lender's exercise of
its remedies under the Loan Documents by foreclosure of any of the Mortgaged
Properties in any order as Lender may determine, or all at one time.

     14.  Lender's Approval.  Unless otherwise expressly provided in the Loan
          -----------------                                                  
Documents, wherever the Loan Documents provide that the consent or approval of
Lender is required, Lender may give or withhold such consent or approval in its
sole and absolute discretion.

     15.  Operations and Maintenance Agreements.  Borrowers agree at any time or
          -------------------------------------                                 
from time to time during the term of the Mortgage Loans, within 30 days after
demand by Lender, to enter into an agreement with Lender (or to enter into a
written program of operations and maintenance satisfactory to Lender and
governed by the Mortgages), under which Borrowers will agree to comply with any
reasonable program of operations and maintenance relating to the Mortgaged
Properties requested by Lender.

     16.  Revolving Facility.
          ------------------ 

     (a) As contemplated in that certain letter executed by Lender and Charles
E. Smith Residential Realty, L.P. dated October 22, 1998, a copy of which is
attached hereto as Exhibit F, Borrowers, Lender and Fannie Mae have entered into
                   ---------                                                    

                                       12
<PAGE>
 
and, at their discretion, may continue discussions pursuant to which Borrowers
and Lender would execute a Master Credit Facility Agreement (a "Master
                                                                ------
Agreement") providing for a Base Facility and a Revolving Facility under the
Fannie Mae Base/Revolver Credit Facility Product Line in an aggregate amount
(the "Commitment") not to exceed $200,000,000 (except as may be increased
pursuant to Section 16(b)(9)).  In the event that Borrowers and Lender execute a
Master Agreement, it is contemplated that the Notes shall thereupon constitute
Base Facility Notes under the Base Facility and that the Mortgages shall be part
of the Collateral Pool securing the Notes.  It is further contemplated that any
Advances made under the Base Facility or the Revolving Facility shall be deemed
secured under the Mortgages, and shall be considered Future Advances currently
contemplated by the Mortgages.  Accordingly, upon the execution of such a Master
Agreement, the Mortgages shall secure the Notes, any other Base Facility Notes,
the Revolving Facility Note and all other Obligations under the Master Agreement
or the other loan documents executed by a party to the Master Agreement from
time to time in connection with the Master Agreement or the transactions
contemplated by the Master Agreement.   Nothing in this paragraph shall impose
any obligation whatsoever on Borrowers, Fannie Mae or the Lender to enter into
the Master Agreement or any other transaction or to enter into discussions or
negotiations with respect to the Master Agreement or any other transaction.
Capitalized terms used in this paragraph shall have the meanings set forth in
the form Master Agreement prescribed by Fannie Mae from time to time under the
Fannie Mae Base/Revolver Credit Facility Product Line.

     (b) In addition to the provisions of paragraph (a), if and when the Master
Agreement is executed, then the following terms shall apply:

     (1) Any Advances (other than the Mortgage Loans described in this
Agreement) shall be secured by additional separate Multifamily Deeds of Trust,
Assignment of Rents and Security Agreements encumbering each Mortgaged Property
(collectively, the "Additional Mortgages").  Each Additional Mortgage
encumbering a Mortgaged Property shall be equal in priority to the lien of each
Mortgage encumbering the Mortgaged Property and shall contain such terms and
conditions as may be agreed upon by Lender and Borrowers.  Lender and Borrowers
agree to enter into such amendments as may be necessary to the Mortgages or
other Loan Documents in order to accomplish the equality of lien priority as
between the Mortgages and the Additional Mortgages.

     (2) If and when the Master Agreement is executed, Lender and Borrowers
shall terminate the Reserve Agreement and enter into a cash management agreement
(the "Cash Management Agreement"). The Cash Management Agreement shall include
the current Fannie Mae requirements regarding the establishment and maintenance
of cash management accounts pledged to Lender into which all Gross Revenues from
all Mortgaged Properties will be deposited, together with the following terms
and conditions: Borrowers shall not be required to deposit Gross Revenues into
the cash management accounts pledged to Lender unless the Aggregate Debt Service
Coverage Ratio for the Trailing 12 Month Period is less than 120%, assuming, for
purposes of this paragraph (2) only, that Facility Debt Service for term loans
shall be actual debt service and debt service for loans made under the Revolving
Facility shall be calculated at the rate at which each loan made under the
Revolving Facility is capped pursuant to the Cap Agreement executed by Borrowers
in connection with each loan made under the Revolving Facility.

                                       13
<PAGE>
 
     (3) At Borrower's request, a Mortgaged Property shall be released from the
lien of its Mortgage and all collateral derived from such Mortgaged Property
shall be released to Borrowers, without another Multifamily Residential Property
being substituted therefor, if each of the following conditions are met:

          (a) After giving effect to the release, the Modified Coverage and LTV
              Tests are satisfied.

          (b) Borrowers shall cause the Release Property to be immediately
              conveyed by Borrowers to a Person other than a Borrower;

          (c) All documentation relating to the foregoing is acceptable to
              Lender in all respects, including legal opinions, release
              documentation and any amendments to this Agreement or the other
              Loan Documents;

          (d) Borrowers shall pay to Lender the Release Fee for each Release
              Property;

          (e) Borrowers shall pay, with respect to each Release Property, to
              each of Lender and Servicer, all out-of-pocket costs and expenses
              (including reasonable legal fees and expenses) incurred by Lender
              or Servicer in connection with the foregoing. Such amounts shall
              be paid by Borrowers on or prior to the closing date of such
              release, or if such release fails to close, within 30 days of
              Borrower's receipt of invoices therefor (and if requested by
              Borrowers, reasonable supporting back-up invoices evidencing such
              items), and shall be payable regardless whether the property is or
              is not (for any reason) ultimately released from the lien of a
              Mortgage; and

          (f) No Event of Default, or any event which, with the giving of notice
              or the passage of time, or both, would constitute an Event of
              Default, shall have occurred and be continuing.

          For these purposes the following terms shall have the respective
meanings set forth below:

          "Modified Coverage and LTV Tests" mean, for any specified date, each
           -------------------------------                                    
          of the following financial tests:

               (a)  The Aggregate Debt Service Coverage Ratio for the Trailing
                    12 Month Period is not less than (i) 10 basis points in
                    excess of the Initial Aggregate Debt Service Coverage Ratio
                    (if the specified date occurs prior to the tenth anniversary
                    of the date of this Agreement) or (ii) 15 basis points in
                    excess of the Initial Debt Service Coverage Ratio (if the
                    specified date occurs on or after the tenth anniversary of
                    the date of this Agreement).

                                       14
<PAGE>
 
               (b) The Aggregate Loan to Value Ratio for the Trailing 12 Month
                   Period does not exceed (i) 5 basis points lower than the
                   Initial Aggregate Loan to Value Ratio (if the specified date
                   occurs prior to the tenth anniversary of the date of this
                   Agreement) or (ii) 10 basis points lower than the Initial
                   Aggregate Loan to Value Ratio (if the specified date occurs
                   on or after the tenth anniversary of the date of this
                   Agreement).

          For example, if the Initial Aggregate Debt Service Coverage Ratio were
     140% and the Initial Loan To Value Ratio were 60%, (i) the Modified
     Coverage and LTV Tests for a date that occurs prior to the tenth
     anniversary of the date of this Agreement would be satisfied if the
     Aggregate Debt Service Coverage Ratio for the Trailing 12 Month Period is
     not less than 150% and the Aggregate Loan to Value Ratio for the Trailing
     12 Month Period does not exceed 55% and (ii) the Modified Coverage and LTV
     Tests for a date that occurs on or after the tenth anniversary of the date
     of this Agreement would be satisfied if the Aggregate Debt Service Coverage
     Ratio for the Trailing 12 Month Period is not less than 155% and the
     Aggregate Loan to Value Ratio for the Trailing 12 Month Period does not
     exceed 50%.

               "Initial Aggregate Debt Service Coverage Ratio" means the
                ---------------------------------------------           
               Aggregate Debt Service Coverage Ratio for the Trailing 12 Month
               Period for the Initial Mortgaged Properties, as determined by
               Lender as of the Initial Underwriting Date, but determined after
               giving effect to any releases, if any, of any Mortgaged
               Properties pursuant to Section 2(b) hereof.  For these purposes,
               Facility Debt Service for term loans shall be actual debt service
               and debt service for the Revolving Facility shall be calculated
               on the full amount of the Revolving Facility Commitment (whether
               or not the full amount of advances under the Revolving Facility
               have been, or may be, drawn) at the rate at which each loan made
               under the Revolving Facility is capped pursuant to the Cap
               Agreement executed by Borrowers in connection with the
               establishment of the Revolving Facility.

               "Initial Aggregate Loan to Value Ratio" means the Aggregate Loan
                -------------------------------------                          
               to Value Ratio for the Trailing 12 Month Period, as determined by
               Lender as of the Initial Underwriting Date, but determined after
               giving effect to any releases, if any, of any Mortgaged
               Properties pursuant to Section 2(b) hereof.  For these purposes,
               the outstanding principal balance of term loans shall be the
               actual outstanding amount of the term loans and the outstanding
               principal balance of revolving loans shall be calculated on the
               full amount of the Revolving Facility Commitment (whether or not
               the full amount of advances under the Revolving Facility have
               been, or may be, drawn)

                                       15
<PAGE>
 
     (4) Borrowers shall be required to maintain an interest rate cap in the
amount of the maximum commitment under the Revolving Facility, at a strike rate
which will yield an Aggregate Debt Service Coverage Ratio for the Trailing 12
Month Period of 110%;

     (5) Commencing in the seventh month of the term of the Revolving Facility,
Borrowers shall be required to pay a monthly standby fee equal to the product
obtained by multiplying (i) 1/12 by (ii) 25 basis points, by (iii) the Unused
Capacity for the month.  The term "Unused Capacity" means, for any month, the
                                   ---------------                           
sum of the daily average during such month of the undrawn amount of the
Revolving Facility Commitment available under the Master Agreement for the
making of Revolving Advances, without regard to any unclosed Requests or to the
fact that a Request must satisfy conditions precedent.

     (6)  On and after the date of the Master Agreement, "Facility Debt Service"
                                                          --------------------- 
shall mean, as of any specified date, the sum of --

          (a) the amount of interest and principal amortization, during the 12
month period immediately succeeding the specified date, with respect to the
Advances outstanding on the specified date, except that, for these purposes:

                (i) each Revolving Advance shall be deemed to require level
                     monthly payments of principal and interest (at the Coupon
                     Rate for the Revolving Advance in an amount necessary to
                     fully amortize the original principal amount of the
                     Revolving Advance over a 30-year period, with such
                     amortization deemed to commence on the first day of the 12
                     month period; and

                (ii) each Base Facility Advance shall be deemed to require level
                     monthly payments of principal and interest (at the Coupon
                     Rate for the Base Facility Advance) in an amount necessary
                     to fully amortize the original principal amount of the Base
                     Facility Advance over a 30-year period, with such
                     amortization to commence on the day of the first payment of
                     the Notes; and

          (b) the amount of the standby fees payable to the Lender during such
     12 month period (assuming, for these purposes, that the Advances
     Outstanding throughout the 12 month period are always equal to the amount
     of Advances Outstanding on the specified date).

     (7) On and after the date of the Master Agreement, the definition of
                                                                         
"Coverage and LTV Tests" shall be modified to mean, for any specified date, each
-----------------------                                                         
of the following financial tests:

          (a)  The Aggregate Debt Service Coverage Ratio for the Trailing 12
               Month Period is not less than 135%.

                                       16
<PAGE>
 
          (b)  The Aggregate Debt Service Coverage Ratio for the Trailing Three
               Month Period is not less than 125%.

          (c) The Aggregate Loan to Value Ratio for the Trailing 12 Month Period
     does not exceed 65%.

     (8) Borrowers shall, subject to certain conditions to be set forth in the
Master Agreement, have the right, but not the obligation, to convert all or a
portion of the Revolving Facility Commitment to Base Facility Commitment.
Borrowers shall not be permitted to convert a portion of the Revolving Facility
Commitment to Base Facility  Commitment unless it obtains a simultaneous term
loan in the amount of the Revolving Facility Commitment being converted.

     (9) Borrowers shall, subject to certain conditions to be set forth in the
Master Agreement, have the right, but not the obligation, to expand the
Commitment by $100,000,000.

     (10) The occurrence of any event which constitutes an "Event of Default",
as defined in the Master Agreement, shall also constitute an Event of Default
under this Agreement, the Notes, the Mortgages and every other Loan Document.

     17.  General Conditions.  The obligation of Lender to either release a
          ------------------                                               
Mortgaged Property or substitute an additional Mortgaged Property shall be
subject to the following conditions precedent in addition to any other
conditions precedent set forth in this Agreement:
 
          (a) Payment of Expenses.  The payment by Borrowers of Lender's fees
              -------------------                                            
and expenses payable in accordance with the Agreement for which Lender has
presented an invoice on or before the applicable Closing Date.

          (b) No Material Adverse Change.  There has been no material adverse
              --------------------------                                     
change in the financial condition, business or prospects of Borrowers or in the
physical condition, operating performance or value of any of the Mortgaged
Properties since the date of this Agreement.

          (c) No Default.  There shall exist no Event of Default on the Closing
              ----------                                                       
Date and, after giving effect to the intended transaction, no Event of Default
shall have occurred.

          (d) No Insolvency.  Receipt by Lender on the Closing Date of evidence
              -------------                                                    
of satisfactory to Lender that Borrowers are not insolvent (within the meaning
of any applicable federal or state laws relating to bankruptcy or fraudulent
transfers) or will be rendered insolvent by the transactions contemplated by the
Loan Documents, or, after giving effect to the intended transactions, will be
left with an unreasonably small capital with which to engage in their business
or undertakings, or will have intended to incur, or believe that it has
incurred, debts beyond their ability to pay such debts as they mature or will
have intended to hinder, delay or defraud any existing or future creditor.

                                       17
<PAGE>
 
          (e) No Untrue Statement.  The Loan Documents shall not contain any
              -------------------                                           
untrue or misleading statement of a material fact and shall not fail to state a
material fact necessary in order to make the information contained therein not
misleading.

          (f) Representations and Warranties.  All representations and
              ------------------------------                          
warranties made by Borrowers in the Loan Documents shall be true and correct in
all material respects on the Closing Date with the same force and effect as if
such representations and warranties had been made on and as of the Closing Date.

          (g) No Condemnation or Casualty.  There shall not be pending or
              ---------------------------                                
threatened any condemnation or other taking, whether direct or indirect, against
any Mortgaged Property and there shall not have occurred any unrestored casualty
to any improvements located on any Mortgaged Property.

          (h) Delivery of Closing Documents.  The receipt by Lender of the
              -----------------------------                               
following, each dated as of the Closing Date, in form and substance satisfactory
to Lender in all respects:

              (i)  A Compliance Certificate;

              (ii) An Organizational Certificate; and

              (iii) Such other documents, instruments, approvals (and, if
     requested by the Lender, certified duplicates of executed copies thereof)
     and opinions as Lender may request.

          (i) Opinion. A favorable opinion of local counsel to Borrowers as to
              -------
              the enforceability of the Mortgage, and any other Loan Documents,
              executed in connection with the intended transaction.

          (j) Title Insurance. A commitment for the title insurance policy
              ---------------
              applicable to only Mortgaged Property being substituted and the
              pro forma title insurance policy based on the commitment of title
              insurance.

          (k) Insurance.  The insurance policy (or a certified copy of the
              ---------                                                   
insurance policy) applicable to the Mortgaged Property.

          (l) Survey.  The survey applicable to the Mortgaged Property.
              ------                                                   

          (m) DUS Guide Compliance.  Evidence satisfactory to Lender of
              --------------------                                     
compliance of the Mortgaged Property with property laws as required by Sections
205 and 206 of Part III of the DUS Guide.

          (n) Appraisal.  An Appraisal of the Mortgaged Property.
              ---------                                          

                                       18
<PAGE>
 
          (o) Replacement Reserve Agreement.  A Replacement Reserve Agreement,
              -----------------------------                                   
providing for the establishment of a replacement reserve account, to be pledged
to Lender, in which the owner shall (unless waived by Lender) periodically
deposit amounts for replacements for improvements at the Mortgaged Property and
as additional security for the Borrowers' obligations under the Loan Documents.

          (p) Completion/Repair and Security Agreement.  A Completion/Repair and
              ----------------------------------------                          
Security Agreement, on the standard form required by the DUS Guide.

          (q) Assignment of Management Agreement.  An Assignment of Management
              ----------------------------------                              
Agreement, on the standard form required by the DUS Guide.

          (r) Operations and Maintenance Agreement.  An Operations and
              ------------------------------------                    
Maintenance Agreement, if Lender determines one to be necessary or desirable.

          (s) Cash Management Agreement.  With respect to requested substitution
              -------------------------                                         
of a Mortgaged Property, an amendment to the Cash Management Agreement, adding
the new owner as a party, if necessary, and adding a property account for the
Mortgaged Property.

     18.  Expenses.  In addition to the other fees incurred by Lender and Fannie
          --------                                                              
Mae to be paid by Borrowers pursuant to this Agreement, Borrowers shall also pay
all third-party costs incurred by Lender and Fannie Mae in connection with this
Agreement and the transactions described herein, including fees and expenses of
environmental consultants, engineering firms, appraisal companies, Lender's
counsel, Fannie Mae's counsel, and all other due diligence and other fees
incurred by Lender and Fannie Mae.

     19.  Capitalization Rate.  For purposes of calculating the value of any
          -------------------                                               
Mortgaged Property, from time to time, including the value of any Mortgage
Property for which a request for a substitution or release has been transmitted
to Lender, the value of such Mortgaged Property shall be determined by
capitalizing the Net Operating Income for the Trailing 12 Month Period at the
capitalization rate utilized by Fannie Mae in the annual facility assessment
most recent to the date of the proposed substitution or release. Once such
values have been determined, if for any purpose, including that in Section
2(c)(3) of this Agreement, an amount of debt is allocated to each Mortgaged
Property, such amount shall be allocated pro rata to each Mortgaged Property, in
accordance with the respective values of such Mortgaged Properties determined by
Lender, and the debt service shall equal a pro rata portion of the Facility Debt
Service allocable to such debt.

     20.  Maximum Collateral Value.  The term "Maximum Collateral Value" of each
          ------------------------                                              
of the Mortgaged Properties, as such term may be used in the Loan Documents,
shall be the Maximum Collateral Value ascribed to such Mortgaged Property on
Exhibit B.
--------- 

                                       19
<PAGE>
 
     IN WITNESS WHEREOF, Borrowers and Lender have executed this Agreement or
caused the same to be executed by its representatives hereunto duly authorized.

                         BORROWERS:

                         SMITH PROPERTY HOLDINGS TWO L.P., a Delaware limited
                         partnership, by and through its managing general
                         partner

                              SMITH TWO, INC., a Delaware corporation

                              By: /s/ Gregory Samay
                                 -------------------
                                 Gregory Samay
                                 Treasurer


                         SMITH PROPERTY HOLDINGS TWO (D.C.) L.P., a Delaware
                         limited partnership, by and through its managing
                         general partner

                              SMITH PROPERTY HOLDINGS TWO L.P., a Delaware
                              limited partnership, by and through its managing
                              general partner

                                    SMITH TWO, INC., a Delaware corporation


                                    By: /s/ Gregory Samay
                                       ------------------
                                       Gregory Samay
                                       Treasurer



                    [Signatures continued on following page]

<PAGE>
 
                   [Signatures continued from preceding page]



                         LENDER:

                         GREEN PARK FINANCIAL LIMITED PARTNERSHIP,
                         A District of Columbia limited partnership

                         By:  Walker & Dunlop Multifamily, GP, LLC, a Delaware
                              limited liability company


                              By: /s/ Mary Ellen Slavinskas
                                 ---------------------------
                                 Mary Ellen Slavinskas
                                 Vice President


                    [Signatures continued on following page]

                                       21
<PAGE>
 
                   [Signatures continued from preceding page]


           UNDERTAKING OF CHARLES E. SMITH RESIDENTIAL REALTY, L.P.
           --------------------------------------------------------

The undersigned, Charles E. Smith Residential Realty, L.P. (the "Operating
Partnership"), a general partner of each of the Borrowers, hereby makes the
following covenants for the benefit of Lender, acknowledges that Lender would
not make the Mortgage Loans without the Operating Partnership's execution of
these covenants, and acknowledges that it will benefit by the Lender's making of
the Mortgage Loans to Borrowers:

In the event that, as of the Initial Underwriting Date, the Coverage and LTV
Tests are not satisfied, the Operating Partnership shall execute a guaranty of
the Mortgage Loans, in form and substance acceptable to Lender.  The guaranty
shall provide that the maximum amount which Lender may recover under the
guaranty shall be limited to the sum of--

          (i)  all costs, including attorneys' fees, to collect or enforce the
               guaranty, and

          (ii)  the lesser of--

               (x) $20,000,000, or

               (y) the excess, if any, of--

                     (1)  $140,000,000, over

                     (2) the maximum principal amount of debt (as determined by
                         Lender), bearing interest at 6.75% per annum (the
                         interest rate set forth in the Notes) at which the
                         Coverage and LTV Tests would be satisfied.

The guaranty shall be released at such time as the Coverage and LTV Tests are
satisfied.

                                       22
<PAGE>
 
                              CHARLES E. SMITH RESIDENTIAL REALTY, L.P., a
                              Delaware limited partnership, by and through its
                              managing general partner

                                    Charles E. Smith Residential Realty, Inc., a
                                    Maryland corporation, its general partner


                                    By:  /s/ Ernest A. Gerardi
                                       ----------------------- 
                                         Ernest A. Gerardi
                                         President

                                       23
<PAGE>
 
                                   Exhibit A
                                   ---------
 
 
              Borrower              Amount            Designation
            --------------     ------------      -----------------
                               
            SPH TWO            $125,334,060      SPH TWO Loan
            SPH TWO (DC)       $ 14,665,940      SPH TWO (DC) Loan

                                       24
<PAGE>
 
                                   Exhibit B
                                   ---------
<TABLE> 
<CAPTION> 

     Property Common Name
     and Property Address                            Maximum Collateral Value
     --------------------                            ------------------------
<S>                                                   <C>
     Bedford Village             
     8301 Anderson Drive         
     Fairfax, Virginia 22031                                $46,540,293
                                                          
     Car Barn I                                                
     One 14th Street, N.E.                                
     Washington, D.C. 20002                                 $ 3,186,543
                                                          
     Car Barn II                                               
     One 14th Street, N.E.                                
     Washington, D.C. 20002                                 $ 2,616,320
                                                          
     Car Barn III                                              
     One 14th Street, N.E.                                
     Washington, D.C. 20002                                 $ 1,677,128
                                                          
     Concord Village                                           
     4155 S. Four Mile Run                                
     Arlington, Virginia 22204                              $20,497,962
                                                          
     Crystal Place                                             
     1801 Crystal Drive                                   
     Arlington, Virginia 22202                              $19,295,353
                                                          
     Crystal Square                                            
     1515 Jefferson Davis Highway                         
     Arlington, Virginia 22202                              $23,253,375
                                                          
     Executive Central                                         
     1201 S. Scott Street                                 
     Arlington, Virginia 22204                              $10,515,591
                                                          
     Executive South                                           
     1301 S. Scott Street                                 
     Arlington, Virginia 22204                              $13,081,596
</TABLE>                                                  

                                       25
<PAGE>
 
<TABLE>
<CAPTION>
<S>                                                     <C>
     Fort Chaplin Park                                                  
     4212 E. Capitol Street
     Washington, D.C. 20019                                 $14,518,920

     Newport Village III
     4757 W. Braddock Road
     Alexandria, Virginia 22311                             $ 8,888,778
 
     Orleans Village North
     6340 Wingate Street
     Fairfax County, Virginia 22312                         $21,987,144
 
     Orleans Village South
     6340 Wingate Street
     Fairfax County, Virginia 22312                         $23,940,997
</TABLE>

                                       26
<PAGE>
 
<TABLE> 
<CAPTION> 

                                   Exhibit C
                                   ---------

ORLEANS NORTH:
------------- 
<S>                          <C>    
          Landlord:            Orleans Associates Limited
                               Partnership
                           
          Document:            Indenture of Lease
          Date:                August 1, 1965
                           
          Document:            Lease (Short Form)
          Date:                August 1, 1965
          Recorded:            December 27, 1979 in Book 5387,
                               Page 669

<CAPTION>
 
 
CRYSTAL SQUARE:
---------------------
        <S>                    <C>
 
          Landlord:            South Washington Land
                               Corporation
                           
          Document:            Indenture of Lease
          Date:                December 1, 1972
                           
          Document:            Lease (Short Form)
          Date:                December 1, 1972
          Recorded:            Book 1805, Page 287
                              
          Document:            Amendment to Indenture of Lease
          Date:                August 6, 1974
                           
          Document:            Agreement
          Date:                December 23, 1966
          Recorded             Book 1639, Page 324
                              
          Document:            Agreement
          Date:                December 23, 1966
          Recorded:            Book 1640, Page 318
 
          Document:            Second Supplemental Agreement
          Date:                February 1, 1967
</TABLE>

<PAGE>
 
<TABLE>
<CAPTION>
        <S>                 <C> 
         Document:             Amended Agreement
         Date:                 December 2, 1985
         Recorded:             Book 2200, Page 268
              
         Document:             Second Amended Agreement
         Date:                 August 28, 1990
          
         Document:             Amendment to Indenture of Lease
         Date:                 May 5, 1994
         Recorded:             Deed Book 2680, Page 136
 
<CAPTION> 

NEWPORT III:
----------- 
        <S>                 <C>      
          Landlord:            Washington Forrest Foundation
                             
          Document:            Lease
          Date:                August 31, 1970
                             
          Document:            Lease (Short Form)
          Date:                October 1, 1970
          Recorded:            November 19, 1970 in Book 716,
                               Page 683

<CAPTION> 

CONCORD:
------- 
        <S>                   <C>   

          Landlord:            Benjamin M. Smith, Jr. and
                               Howard W. Smith, Jr., Trustees
       
          Document:            Indenture of Lease
          Date:                January 1, 1966
       
          Document:            Lease (Short Form)
          Date:                January 1, 1966
          Recorded:            February 25, 1966 in Book 1614,
                               Page 594
 
          Document:            Agreement
          Date:                December 23, 1966
          Recorded:            Book 1639, Page 324
</TABLE>

<PAGE>
 
<TABLE>
<CAPTION>
        <S>                    <C>
          Document:            Agreement
          Date:                December 23, 1966
          Recorded:            Book 1640, Page 318
 
          Document:            Second Supplemental Agreement
          Date:                February 1, 1967
 
          Document:            Amended Agreement
          Date:                December 2, 1985
          Recorded:            Book 2200, Page 268
 
          Document:            Second Amended Agreement
          Date:                August 28, 1990
 
          Document:            Third Amendment to Indenture of Lease
          Date:                June 30, 1994
          Recorded:            Book 2685, Page 645
</TABLE>

<PAGE>
 
                                   Exhibit D
                                   ---------

                                   Amount of Second
Borrower                             Mortgage Loan
--------                             -------------

Smith Property Holdings Two (D.C.) L.P.


Breakdown By Property
------------------------
 
Fort Chaplin
4212 E. Capitol Street
Washington, D.C. 20019                 $6,591,328
                                   
Car Barn I                         
One 14th Street, N.E.              
Washington, D.C. 20002                 $  947,500
                                   
Car Barn II                        
One 14th Street, N.E.              
Washington, D.C. 20002                 $  663,101
                                   
Car Barn III                       
One 14th Street, N.E.              
Washington, D.C. 20002                 $1,805,077

<PAGE>
 
                                   Exhibit E
                                   ---------

                           [Garage Testing Standards]

<PAGE>
 
                                   Exhibit F
                                   ---------

                                  [Term Sheet]