PARTICIPATION AGREEMENT

                          Dated as of February 23, 1996



                                 By and Between



                    HARBOURTON RESIDENTIAL CAPITAL CO., L.P.
                    a Delaware limited partnership -- Lender



                                       and



                        RESIDENTIAL FUNDING CORPORATION,
                      a Delaware corporation -- Participant





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TABLE OF CONTENTS


Page

R E C I T A L S........................                                        1
ARTICLE I .....DEFINITIONS .............                                       2
Section 1.1 ...Defined Terms ...........                                       2
Section 1.2 ...Other Provisions ........                                      12

ARTICLE II ....PARTICIPATION INTERESTS .                                      13
Section 2.1 ...Offers and Right to Purchase Participation Interests           13
Section 2.2 ...Designation as A Loan ...                                      14
Section 2.3 ...Purchase and Sale of Participations                            14
Section 2.4 ...Lender to Maintain Records                                     15
Section 2.5 ...Participation Interest Only                                    15
Section 2.6 ...Evidence of Participation Interest                             15
Section 2.7 ...Failure of Loan to Close                                       16

ARTICLE III ...POSSESSION OF DOCUMENTS;
ABSOLUTE SALE INTENDED                                                        17
Section 3.1 ...Documents Held in Trust; Delivery of Documents to Participant  17
Section 3.2 ...Absolute Sale of Participation Interest                        17
Section 3.3 ...Custodial Documents .....                                      18
Section 3.4 ...Priority ................                                      18

ARTICLE IV ....FUNDING OF ADVANCES .....                                      19
Section 4.1 ...Funding Advances and Participation Interests                   19
Section 4.2 ...Lender's Certification ..                                      19
Section 4.3 ...Payments by Participant .                                      20
Section 4.4 ...Interest on Participations                                     20
Section 4.5 ...Undivided Interests Determined on Posting Dates                21

ARTICLE V .....ADMINISTRATION OF THE LOANS                                    22
Section 5.1 ...Administration and Servicing of Loans                          22
Section 5.2 ...Lender's Actions Requiring Participant's Consent               23
Section 5.3 ...Standard of Care and Duty to Participant                       24
Section 5.4 ...Notices of Defaults and Other Events                           24
Section 5.5 ...Management of Real Estate Owned                                25
Section 5.6 ...Reports to Participant ..                                      25
Section 5.7 ...Acquisition of Loan Collateral                                 25
Section 5.8 ...Extraordinary Servicing Expenses                               26
Section 5.9 ...Inspections by Participant                                     26

ARTICLE VI ....COLLECTIONS .............                                      27
Section 6.1 ...Collection and Payment of Collections                          27
Section 6.2 ...Order of Application of Collections                            27
Section 6.3 ...Reimbursement of Amounts Paid For Ancillary Fees and
Extraordinary Servicing Expenses                                              28
Section 6.4 ...Loan Fees ...............                                      28
Section 6.5 ...Interest and Late Payment Fees                                 28
Section 6.6 ...Principal ...............                                      28
Section 6.7 ...Returned Payments .......                                      28
Section 6.8 ...Application of Collections Upon Distribution
Adjustment Event                                                              29
Section 6.9 ...Reinstated Loans ........                                      29
Section 6.10 ..Distribution Adjustment Event Recapture                        29
Section 6.11 ..Borrower Payment Defaults and Borrower
Bankruptcy Events                                                             29

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ARTICLE VII ...DISCLAIMERS; INDEMNITIES                                       31
Section 7.1 ...Participant's Assumption of Certain Risks                      31
Section 7.2 ...Indemnification by Participant                                 31
Section 7.3 ...Indemnification by Lender                                      31
Section 7.4 ...Reimbursement Obligation                                       32
                                                                              32
Section 7.5 ...Nature of Duties of Lender                                     32

ARTICLE VIII ..ACKNOWLEDGMENTS, REPRESENTATIONS AND
COVENANT ......                                                               33
Section 8.1 ...Participant's Acknowledgments                                  33
Section 8.2 ...Participant's Representations                                  33
Section 8.3 ...Lender's Representations                                       34
Section 8.4 ...Lender's Covenants ......                                      38

ARTICLE IX ....OTHER ARRANGEMENTS ......                                      40
Section 9.1 ...Other Arrangements With Obligors                               40
Section 9.2 ...Loan Collateral Held Solely for Loans                          40

ARTICLE X .....EVENTS OF DEFAULT AND REMEDIES
Section 10.1 ..Events of Lender Default                                       41
Section 10.2 ..Participant's Remedies ..                                      42
Section 10.3 ..Events of Participant Default                                  43
Section 10.4 ..Lender's Remedies .......                                      43
Section 10.5 ..Purchase of Participant's Undivided Interest
Under Certain Circumstances                                                   44





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ARTICLE XI ....CERTAIN METHODS OF DISPUTE RESOLUTION                          45
Section 11.1 ..Choice of Dispute Resolution Methods                           45
Section 11.2 ..Identity of Arbitrator ..                                      45
Section 11.3 ..Duties of Arbitrator ....                                      46
Section 11.4 ..Collateral Appraisal Procedures                                46

ARTICLE XII ...GENERAL MATTERS .........                                      47
Section 12.1 ..No Joint Venture ........                                      47
Section 12.2. No Setoff                                                       47
                                                                              47
Section 12.3 ..Termination .............                                      47
                                                                              47
Section 12.4. Notices                                                         48
Section 12.5 ..Confidentiality .........                                      49
Section 12.6 ..Amendments, Waivers .....                                      49
Section 12.7 ..Entire Agreement ........                                      49
Section 12.8 ..Governing Law ...........                                      49
Section 12.9 ..Successors, Counterparts                                       49
                                                                              49
Section 12.10.Expenses of Document Preparation                                49
Section 12.11 .Prevailing Party                                               49
Section 12.12 .No Third Party Beneficiaries ..                                50







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EXHIBIT A         CREDIT UNDERWRITING DOCUMENTS
EXHIBIT B         OFFERING SCHEDULE
EXHIBIT C         LOAN DOCUMENTS
EXHIBIT D         FORM OF CONFIRMATION
EXHIBIT E         LENDER'S CERTIFICATION AND NOTICE OF REQUEST TO FUND
EXHIBIT F         PARTICIPATION CERTIFICATE
EXHIBIT G         FORM OF ALLONGE
EXHIBIT H         FORM OF ASSIGNMENT OF MORTGAGE
EXHIBIT I         FORM OF UCC-1 FINANCING STATEMENT
EXHIBIT J         MASTER NON-DEMAND AGREEMENT
EXHIBIT K         TABLE OF CONTENTS OF OPERATIONS MANUAL
EXHIBIT L         INTENTIONALLY OMITTED
EXHIBIT M         LOAN MONITORING DOCUMENTS
EXHIBIT N         FORM OF NOTICE OF INITIAL ADVANCE
EXHIBIT O         FORM OF GUARANTY
EXHIBIT P         FORM OF PROJECT STATUS SUMMARY REPORT




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                             PARTICIPATION AGREEMENT

     THIS PARTICIPATION AGREEMENT, dated as of February 23, 1996, is made by and
between HARBOURTON RESIDENTIAL CAPITAL CO., L.P., a Delaware limited partnership
(the "Lender"), and RESIDENTIAL FUNDING CORPORATION, a Delaware corporation (the
"Participant").
                                 R E C I T A L S

         A. The Lender  intends to enter into  commitments  from time to time to
make  acquisition and development  loans and  construction  loans to finance the
preconstruction development of residential real property and the construction of
single family residences.

         B. The parties wish to provide to the Participant a right to purchase a
participation  interest in certain of such acquisition and development loans and
construction  loans,  upon the terms and subject to the conditions  contained in
this Participation Agreement.

         C. The purchase  and sale of  participation  interests  to  Participant
hereunder shall close  immediately upon and  simultaneously  with the funding of
the related  acquisition and development loans and construction  loans, upon the
terms and subject to the conditions contained in this Participation Agreement.

         D. The Participant and the Lender desire to set forth herein certain of
the terms under which the Participant is purchasing,  and the Lender is selling,
undivided  interests in such acquisition and development  loans and construction
loans.

         E. In connection  with each  purchase of an undivided  interest in such
acquisition and development loans and construction  loans, the Lender will issue
to the Participant a participation certificate which will evidence the undivided
interest  purchased  and set  forth  the  terms  of the  sale of such  undivided
interest not previously set forth in this Participation Agreement.

                                A G R E E M E N T

         NOW, THEREFORE,  in consideration of the foregoing,  and other good and
valuable  consideration,  the  receipt  and  sufficiency  of  which  are  hereby
acknowledged,  the  Lender  and the  Participant  hereby  covenant  and agree as
follows:





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                                    ARTICLE I

                                   DEFINITIONS

     Section 1.1. Defined Terms. Capitalized terms defined below or elsewhere in
     this Participation Agreement (including the Exhibits attached hereto) shall
     have the following meanings:

                  "Acceptance"   means  the   Participant's   execution  of  its
         acceptance of the terms of an Offering Schedule, which acceptance shall
         be in the  form  included  as part of the  Offering  Schedule  attached
         hereto as Exhibit B.

                  "Acquisition  and  Development  Loan" means a loan made by the
         Lender to a  Borrower  for the  purpose  of  financing  the  Borrower's
         acquisition  of a tract of real  property  and  development  thereof to
         prepare such tract for the  subsequent  construction  of single  family
         residences.

                  "Administrative   Procedures"   means  the  (i)  the   general
         policies,  procedures and lending standards set forth in the Operations
         Manual and (ii) the Specific Administrative Procedures, as the same may
         be amended or modified with the consent of the Participant.

                  "Advances"  means the periodic  disbursements  of principal of
         the Loans by the Lender  under the Loan  Documents  and the  payment of
         draws under any Letter of Credit.

                  "Adverse  Claim"  means a  lien,  security  interest,  charge,
          encumbrance or other right or claim of any Person.

                  "Affiliate"  means,  with  respect  to any  Person,  any other
         Person controlling,  controlled by or under common control or ownership
         with such Person.

                  "Allonge" shall mean an allonge  substantially  in the form of
         Exhibit G attached hereto.

                  "Ancillary Fees" means,  with respect to a Loan,  amounts paid
         to or  received  by the Lender  other  than in  respect  of  principal,
         interest or Loan Fees, which relate to amounts payable by the Lender to
         third parties,  including, but not limited to, documentation and letter
         of credit  preparation fees,  inspection fees,  appraisal fees and like
         fees of third parties.

                  "Assignment   of   Mortgage"    shall   mean   an   assignment
         substantially in the form of Exhibit H attached hereto.

                  "Borrower"  means,  with respect to a Loan, the Person to whom
         the Lender is making the Loan.


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<PAGE>


                  "Borrower  Bankruptcy Event" means an Event of Bankruptcy with
         respect to a Borrower. The date of filing of the first legal proceeding
         referred to under the definition of "Event of Bankruptcy" shall be used
         to  determine  the  date  on  which a  Borrower  Bankruptcy  Event  has
         occurred,

                  "Borrower  Payment  Default"  means with respect to a Borrower
         and the related Loan,  the failure of such Borrower to make any payment
         of principal,  interest or any other amount owing under the Loan for 90
         days or more beyond the date such payment is due.

                  "Business Day" means any day of the year other than a Saturday
         or Sunday or day on which  either  the  Lender  or the  Participant  is
         closed for business.

                  "Claimant"  shall have the meaning  given that term in Section
          12.2.

                  "Collections"  means,  with  respect  to any  Loan,  all  cash
         payments of principal, interest, Loan Fees and other sums due under the
         Loans and all other cash collections, insurance proceeds and other cash
         proceeds of such Loan, including, without limitation, all cash proceeds
         of Related Assets with respect to such Loan.

                  "Commitment  Fees"  means,  with  respect  to  any  Loan,  the
         origination fees required to be paid by the Borrower to the Lender with
         respect  to  such  Loan  pursuant  to the  terms  of the  related  Loan
         Documents,  as such  origination  fees are set  forth  in the  Offering
         Schedule delivered with respect to such Loan.

                  "Confirmation"  means a  letter  from the  Participant  to the
         Lender substantially in the form of Exhibit D attached hereto.

                  "Construction  Loan"  means  a loan  made by the  Lender  to a
         Borrower for the purpose of financing the  Borrower's  construction  of
         single family residences on real property owned by the Borrower.

                  "Credit Underwriting Documents" shall mean, for each Loan, the
         documents set forth in Exhibit A attached hereto.

                  "Custodian" means the custodian under the Custodial Agreement,
        or its successor.

                  "Custodial  Agreement" means that certain Custodial Agreement,
         between the Lender, the Participant and the Custodian, in substantially
         the form of Exhibit N hereto.

                  "Debt" of any Person means (i) indebtedness of such Person for
         borrowed  money,  (ii)  obligations of such Person  evidenced by bonds,
         debentures,  notes or other similar  instruments,  (iii) obligations of
         such Person to pay the deferred purchase price of property or services,
         (iv) obligations of such Person as lessee under leases which shall have
         been or should be, in accordance with GAAP, recorded as capital leases,
         (v)  obligations  secured by an Adverse  Claim upon  property or assets
         owned by such Person, even though such Person has not assumed or become
         liable for the payment of such  obligations,  and (vi)  obligations  of
         such  Person  under  direct or indirect  guaranties  in respect of, and
         obligations (contingent or otherwise) to purchase or otherwise acquire,
         or  otherwise  to  assure  a  creditor  against  loss  in  respect  of,
         indebtedness  or  obligations  of others of the  kinds  referred  to in
         clauses  (i)  through  (v)  above,   including,   without   limitation,
         obligations under letters of credit,  banker acceptances and other like
         contingent obligations.

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<PAGE>

                  "Debtor"  shall  have the  meaning  given that term in Section
        12.2.

                  "Default" means,  with respect to a Loan, an occurrence of any
         event or  existence  of any  conditions  which,  but for the  giving of
         notice,  the  lapse of  time,  or both,  would  constitute  an Event of
         Default  pursuant to the terms of the Loan  Documents  relating to such
         Loan.

                  "Defaulted Loan" means, on any date of  determination,  a Loan
         with respect to which a Borrower Payment Default, a Borrower Bankruptcy
         Event or an Other Borrower Default has occurred and is continuing.

                  "Distribution Adjustment Event" means, with respect to a Loan,
         any of (i) a Title Acquisition Event, (ii) a Borrower Bankruptcy Event,
         if and only if, such Loan does not become a Reinstated  Loan within one
         year of the date of occurrence of the Borrower  Bankruptcy Event, (iii)
         an Other Borrower  Default,  if and only if, the outstanding  principal
         balance of the Loan as of the date of such default  exceeds 110% of the
         value  of the  Loan  Collateral  as of  such  date  (as  determined  in
         accordance  with Section  11.4),  (iii) a Lender  Default under Section
         10.1(a) with respect to any Loan,  (iv) a Lender Default under Sections
         10.1(b) or 10.1(c) with respect to such Loan,  or (v) a Lender  Default
         under Sections 10.1(d), 10.1(e) or 10.1(f).


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<PAGE>


                  "Eligible Loan" means an Acquisition and Development Loan or a
         Construction Loan which satisfies each of the following conditions:

1.  the  Lender  has  originated  such   Acquisition  and  Development  Loan  or
Construction  Loan, such loan is closed and the initial  Advance  thereunder has
been made,  provided that an Acquisition  and  Development  Loan or Construction
Loan  may be  designated  as an  Eligible  Loan if such  loan  meets  the  other
requirements   of  this  definition  and  within  ninety  (90)  days  after  the
Participant  notifies  the Lender of its  acceptance  of the offer to purchase a
Participation Interest therein, such loan closes and the initial Advance is made
thereunder;

     2. the Lender has  received a Title Policy that insures that the Lender has
been granted or assigned a perfected  first  priority lien on the Mortgaged Real
Property;

3. it is an Acquisition and Development Loan or a Construction Loan as to which:
(a) the  Mortgage  Note is payable or endorsed  to the order of the Lender;  (b)
each of the Mortgage Note and Mortgage is a legal,  valid and binding obligation
of the Borrower;  (c) the Mortgage Note is an "instrument" within the meaning of
Section 9-105 of the UCC of all applicable  jurisdictions;  and (d) the Mortgage
Note is denominated and payable only in United States dollars;

4. the Lender has received,  with respect to such  Acquisition  and  Development
Loan or Construction Loan, the Loan Documents;

5. the Lender owns the  Acquisition and  Development  Loan or Construction  Loan
free and  clear of any  Adverse  Claims,  other  than  the  Adverse  Claim of or
attributable to the Participant hereunder;

6.  neither the  Acquisition  and  Development  Loan or  Construction  Loan,  as
applicable,  nor the related Loan Documents  contravene in any material  respect
any law, rule or regulation  applicable thereto (including,  without limitation,
all laws,  rules and  regulations  relating to usury) if any such  contravention
would impair the  collectibility  of such loan, and no party to the related Loan
Documents is in violation of any such law,  rule or  regulation  (or  procedures
prescribed  thereby) in any material  respect if such violation would impair the
collectibility of such loan or the performance by any Obligor of its obligations
with respect thereto;

7. the sale to the Participant of a Participation  Interest in such  Acquisition
and Development Loan or Construction  Loan and any related L/C Guaranty does not
contravene or conflict with any  applicable  laws,  rules or  regulations or any
contractual or other restriction, limitation or encumbrance;

8. the  Mortgage  Note is not subject to any rights of setoff,  counterclaim  or
defense in favor of the Borrower or any other Obligor thereof;

9. the Acquisition and Development Loan or Construction Loan, as applicable,  is
not a Fraudulent Loan; and


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<PAGE>


10. the Acquisition and Development Loan or Construction Loan, as applicable, is
a loan as to which the Lender has  conducted  its  customary  due  diligence and
review.
 .
                  "Event of Bankruptcy"  means,  with respect to a Person,  such
         Person shall  generally  not pay its Debts as such Debts become due, or
         shall admit in writing its  inability  to pay its Debts  generally,  or
         shall make a general  assignment  for the benefit of creditors;  or any
         proceeding  shall be  instituted  against  such Person  (except if such
         proceeding is dismissed  within 90 days of its  institution) or by such
         Person  seeking to adjudicate  it a bankrupt or  insolvent,  or seeking
         liquidation,  winding  up,  reorganization,   arrangement,  adjustment,
         protection,  relief,  or  composition  of it or its debts under any law
         relating  to  bankruptcy,  insolvency  or  reorganization  or relief of
         debtors, or seeking the entry of an order for relief or the appointment
         of  a  receiver,  trustee,  custodian,  liquidator,  or  other  similar
         official for it or for any substantial part of its property.

                  "Event  of  Default"  means,   with  respect  to  a  Loan,  an
         occurrence of any event or the existence of any condition for which the
         applicable   grace  period  has  lapsed  (after  any  required  notice)
         permitting the Lender  thereunder to exercise  remedies  provided under
         the applicable Loan Documents.

                  "Extension Fees" means,  with respect to a Loan, the extension
         fees required to be paid to the Lender with respect to the extension of
         the  maturity  of such  Loan  under  the  terms  of the  relevant  Loan
         Documents, as set forth in the Offering Schedule delivered with respect
         to such Loan, or as otherwise agreed to between Participant and Lender.

                  "Extraordinary  Servicing  Expenses" means,  with respect to a
         Loan,  any  reasonable  costs and  expenses  which are  incurred by the
         Lender in  connection  with recovery on such Loan or the defense of any
         claim,  actual or  threatened,  made by any Obligor or by a receiver or
         trustee in  bankruptcy  for any Obligor,  including  but not limited to
         foreclosure fees and expenses,  legal fees and expenses,  appraisal and
         property inspection fees and expenses, and fees and expenses reasonably
         incurred in  connection  with the  maintenance,  preservation,  repair,
         protection,  operation,  rehabilitation  and  liquidation  of the  Loan
         Collateral  and the costs of  collection  under any  related  insurance
         policies.

                  "FIRREA" means the Financial Institutions Reform, Recovery and
         Enforcement  Act of  1989,  as  amended  from  time  to  time,  and the
         regulations promulgated and rulings issued thereunder.

                  "Fraudulent  Loan"  means  any  Loan  that,  for  any  reason,
         including,  without limitation,  any fraudulent activity on the part of
         the Borrower or the Lender,  does not constitute  the legal,  valid and
         binding  obligation  of the  Borrower or other  Obligor with respect to
         such Loan,  enforceable  against such Borrower or Obligor in accordance
         with its terms.


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<PAGE>


                  "GAAP"  means  generally  accepted  accounting  principles  in
         effect in the United States from time to time.

                  "General   Partner"  means  Harbourton   Residential   Capital
         Corporation, a Delaware corporation, as general partner of Lender.

                  "Guarantor" means Harbourton Financial Services L.P.,
         a Delaware limited partnership.

                  "Guaranty"  means the  Guaranty,  dated as of the date hereof,
         substantially  in the form of Exhibit O hereto,  made by  Guarantor  in
         favor of Participant.

                  "Insured Closing Letter" means, with respect to an Acquisition
         and Development Loan or a Construction  Loan, a letter commonly used in
         connection  with the closing of real  estate  loans,  addressed  to the
         Lender and the  Participant,  or by its terms inuring to the benefit of
         the Participant as well as the Lender, from the title insurance company
         who issues a Title  Commitment,  to the effect  that the title  company
         will reimburse the Lender and the  Participant  for losses  suffered in
         the closing of an Acquisition and Development Loan or Construction Loan
         as a result of the closing  agent's failure to comply with the Lender's
         written  instructions  or the  closing  agent's  fraud,  dishonesty  or
         negligence in the handling of the proceeds of such loan.

                  "L/C Guaranty"  means,  with respect to a Letter of Credit,  a
         guaranty, surety or other reimbursement obligation of the Lender and/or
         the Participant in favor of the issuer of such Letter of Credit.

                  "Late Payment Fees" means,  with respect to a Loan, the amount
         agreed to be paid by the  Borrower to the Lender under the related Loan
         Documents in the event such  Borrower  fails to make  certain  payments
         when due.

                  "Lender" means Harbourton Residential Capital Co., L.P., a
         Delaware limited partnership.


                  "Lender  Default" means any of the events specified in Section
         10.1.

                  "Lender's  Certification"  means a Lender's  Certification and
         Notice of Request to Fund in the form of Exhibit E attached  hereto and
         meeting the requirements of Section 4.2.

                  "Lender's  Override"  means,  with  respect to each Loan,  the
         percentage  of any Loan Fee or interest  which shall be retained by the
         Lender as compensation  for its origination and servicing of such Loan,
         which percentage shall be set forth in the Offering Schedule  delivered
         with respect to such Loan.

                                       6
<PAGE>


                  "Letter of Credit" means,  with respect to a Loan, a letter of
         credit,  bond or other credit  facility  arranged by the Lender for the
         account of the applicable Borrower or an Affiliate thereof, and for the
         benefit of a county,  township,  municipality  or other  governing body
         having  jurisdiction  over the related  Mortgaged Real Property,  which
         letter  of  credit,   bond  or  other  credit  facility   supports  the
         performance or payment by the Borrower in making  certain  improvements
         upon the Mortgaged Real Property.

                  "Letter of Credit  Fees" means,  with  respect to a Loan,  the
         fees agreed to be paid by the Borrower  thereunder as consideration for
         the issuance of a Letter of Credit or for the L/C Guaranty.

                  "Loan"  means  any  Eligible  Loan,  and any  Letter of Credit
         related to such Eligible  Loan, in which a  Participation  Interest has
         been purchased or approved for purchase by the Participant  pursuant to
         the terms of this Participation Agreement.

                  "Loan Collateral"  means, with respect to a Loan, the Property
         which secures repayment of such Loan.

                  "Loan Documents" means, for each Loan, the documents set forth
         in Exhibit C attached hereto.

                  "Loan Fees" means,  with respect to a Loan,  the amounts to be
         paid to the Lender (other than for principal and  interest),  no matter
         how  the  same  may  be   designated  or   calculated,   as  additional
         consideration  for the  Lender  making  the  Loan,  including,  but not
         limited to, Commitment Fees,  Extension Fees and Letter of Credit Fees,
         but  excluding  Late Payment Fees,  documentation  and letter of credit
         preparation fees, inspection fees and appraisal fees.

                  "Loan  Monitoring   Documents"   means,  for  each  Loan,  the
         documents set forth in Exhibit M attached hereto.

                  "Material  Adverse Effect" means,  (A) with respect to a Loan,
         an  effect  on  (i)  the   collectibility   of  such  Loan,   (ii)  the
         marketability  of the  related  Loan  Collateral,  or  (iii)  the  lien
         priority  of the  related  Loan  Collateral,  in each case,  that could
         reasonably be expected to directly, materially and adversely impair the
         ability of the  Participant  to receive,  with respect to its Undivided
         Interest, Collections owing to it on such Loan; and (B) with respect to
         the Lender, an effect on (i) the business or financial condition of the
         Lender,  or (ii) the ability of the Lender to perform  its  obligations
         under this Agreement,  in each case, that could  reasonably be expected
         to  directly,  materially  and  adversely  impair  the  ability  of the
         Participant  to  receive,  with  respect  to  its  Undivided  Interest,
         Collections owing to it on the Loans.

                  "Maximum  Participation Amount" means, with respect to a Loan,
         the amount  stated in dollars and  designated  as such on the  Offering
         Schedule delivered with respect to such Loan.


                                       7
<PAGE>


                  "Mortgage" means, with respect to a Loan, a mortgage,  deed of
         trust or other similar  security  instrument,  granting to the Lender a
         first  mortgage  lien on and security  interest in the  Mortgaged  Real
         Property in order to secure the  indebtedness  under the Mortgage  Note
         related to such Loan,  the form of which  Mortgage shall be approved by
         the Participant.

                  "Mortgage  Note"  means,  with respect to a Loan, a promissory
         note evidencing the indebtedness of the Borrower  incurred  pursuant to
         the terms of the Loan Documents,  the form of which Mortgage Note shall
         be approved by the Participant.

                  "Mortgaged Real Property" means, with respect to any Loan, the
         real property to be acquired,  developed  and/or  constructed upon with
         the proceeds of such Loan,  which real property  shall be encumbered by
         the Mortgage.

                  "Obligor"  means any Person liable for payment or  performance
         of a Loan or any obligations under the Loan Documents relating thereto,
         whether  primarily  or  otherwise,  including,  but not limited to, the
         Borrower and any guarantor of the Borrower's obligations.

                  "Notice of Initial  Advance" means a Notice of Initial Advance
         in the form of Exhibit N attached hereto.

                  "Offering  Schedule"  means,  with respect to each Acquisition
         and Development Loan and Construction Loan and any related L/C Guaranty
         in which the Lender offers a Participation  Interest to Participant,  a
         schedule  substantially  in the form of Exhibit B attached hereto which
         sets forth the terms applicable to the Acquisition and Development Loan
         or the Construction  Loan and any related L/C Guaranty and the terms of
         such Participation Interest.

                  "Operations  Manual" means the operations  manual  compiled by
         the   Lender  for  use  in   connection   with  the   origination   and
         administration  of the Loans,  the table of contents of which manual is
         set forth in Exhibit K attached  hereto,  as the same may be amended or
         modified with the consent of the Participant.

                  "Other  Borrower  Default"  means,  with respect to a Loan, an
         Event of Default other than a Borrower Bankruptcy Event or a Borrower's
         failure to make any payment of principal,  interest or any other amount
         owing under the Loan.

                  "Outstanding  Amount" means,  as of the date of  determination
         and with respect to a Loan, the aggregate principal balance outstanding
         under such Loan, including any amounts drawn under a Letter of Credit.


                                       8
<PAGE>


                  "Outstanding  Participation  Amount" means,  as of the date of
         determination  and with respect to a Loan,  the  outstanding  principal
         amount  of the  Participation  Interest  purchased  in such Loan by the
         Participant pursuant hereto.

                  "Participant" means Residential Funding Corporation, a
         Delaware corporation.

                  "Participant  Default"  means any of the events  specified  in
         Section 10.3.

                  "Participation  Agreement" means this Participation Agreement,
         as it may be modified,  supplemented  or amended in accordance with the
         terms hereof.

                  "Participation  Certificate"  means the certificate  which the
         Lender shall issue to the Participant, at the time of and in connection
         with each purchase of a Participation  Interest made by the Participant
         pursuant  to  the  terms  of  this   Participation   Agreement,   which
         Participation  Certificate  shall be in the  form  attached  hereto  as
         Exhibit F, and shall be duly completed as provided in Section 2.6.

                  "Participation Interest" means an Undivided Interest in a Loan
         which,   pursuant  to  and  in  accordance   with  the  terms  of  this
         Participation Agreement, the Participant purchases.

                  "Percentage  Interest"  means,  with  respect  to a Loan,  the
         percentage (i) that, with respect to the Participant, the Lender agrees
         to sell and the  Participant  agrees to purchase in such Loan, and (ii)
         that,  with respect to the Lender,  the Lender retains in such Loan, as
         such percentages are set forth in the Offering Schedule  delivered with
         respect to such Loan.

                  "Person"   means  an  individual,   partnership,   corporation
         (including  a business  trust),  joint  stock  company,  unincorporated
         association,  trust,  joint  venture,  government  (or  any  agency  or
         political  subdivision  thereof),  limited  liability  company or other
         entity.

                  "Pledged  Collateral" means the Loans, the Related Assets, all
         Collections  with  respect  thereto,  and  all  proceeds  of any of the
         foregoing,  to the  extent of the  Undivided  Interest  therein  of the
         Participant.

                  "Posting  Date"  means  each  date  during  the  term  of this
         Participation  Agreement on which the  Participant  remits funds to the
         Lender for the purchase of a Participation  Interest,  which date shall
         be the  second  Business  Day of any  week,  except  that  the  initial
         remittance under any Loan may be on any Business Day after two Business
         Day's notice from Lender to Participant.

                  "Project Status Summary Report" means a Project Status Summary
         Report in the form of Exhibit P attached hereto.


                                       9
<PAGE>


                  "Property" means any kind of property or asset,  whether real,
         personal or mixed, or tangible or intangible.

                  "Records"  means  all  documents,  books,  records  and  other
         information (including,  without limitation,  computer programs, tapes,
         disks and punch cards) maintained with respect to Loans.

                  "Reinstated Loan" means a Defaulted Loan that has been brought
         current  under the  original  terms of such Loan and,  in the case of a
         Defaulted  Loan with respect to which a Borrower  Bankruptcy  Event has
         occurred,  the applicable  bankruptcy or insolvency proceeding has been
         discharged or dismissed.

                  "Related  Assets"  means,  with  respect  to  the  Loans,  the
         following:

     1. all security,  escrow accounts,  letters of credit, guaranties and other
agreements or arrangements of whatever character from time to time supporting or
securing payment of such Loans pursuant to contract or otherwise;

     2. the Records; and

     3. all proceeds of the foregoing.

                  "Secured  Obligations"  means all obligations of the Lender to
         the  Participant  arising  under  this  Participation  Agreement  or in
         connection with the Loans, whether now or hereafter existing, due or to
         become due,  direct or indirect,  or absolute or contingent,  including
         without  limitation,  all  payments  required  to be made  pursuant  to
         Article VI, payments on account of Collections received or deemed to be
         received,  payments of fees and  interest,  and the Lender's  indemnity
         obligations under Article VII.

                  "Specific   Administrative    Procedures"   means   the   loan
         administration  procedures  for each Loan provided by the Lender at the
         time of origination of the Loan, as the same may be amended or modified
         with the consent of the Participant.

                  "Termination  Date"  means the third  anniversary  of the date
         hereof,  or such earlier  date as may be specified  pursuant to Section
         10.2 by the Participant following the occurrence of a Lender Default or
         as may be specified  pursuant to Section 10.4 by the Lender following a
         Participant Default.

               "Title  Acquisition  Event" means with respect to a Loan that has
         been subject to a Borrower Payment Default, the acquisition of title by
         the Lender (or its designee or nominee) to the related  Mortgaged  Real
         Property upon  foreclosure  sale or upon the  recordation  of a deed in
         lieu of foreclosure.

                  "Title Commitment" means a commitment for a Title Policy.


                                       10
<PAGE>


                  "Title Policy" means,  with respect to each Loan, an ALTA loan
         form of title  insurance  policy  (1970  Form),  or,  if,  after  using
         reasonable  efforts  Lender is unable to obtain such 1970 form, on such
         other ALTA loan form of title insurance policy as is generally accepted
         by  construction  lenders  in the  jurisdiction  in which  the  related
         Mortgaged  Real  Property is  located,  in the face amount of the Loan,
         insuring  the Lender  (with an  endorsement  naming  Participant  as an
         additional  insured)  that the  Mortgage is an  enforceable  first lien
         against  marketable  fee simple title to the Mortgaged  Real  Property,
         subject only to (i) matters  shown by the  subdivision  plat and by the
         most current plat of survey of the Mortgaged  Real Property and matters
         which  would  be  disclosed  by an  inspection  of the  Mortgaged  Real
         Property  subsequent  to the date of such  current  survey,  (ii)  real
         estate  taxes and  assessments  not yet due and  payable  and  possible
         supplemental  assessments for improvements constructed on the Mortgaged
         Real Property,  (iii) unfiled mechanics and materialmen's liens (to the
         extent applicable), but only if affirmative mechanics' lien coverage is
         provided,  and  (iv)  utility  easements,  rights  of way,  restrictive
         covenants,  and other matters that the Lender reasonably  determines do
         not materially and adversely affect the proposed development or sale of
         the Mortgaged Real Property.

                  "UCC" means the Uniform Commercial Code, as amended.

                  "UCC-1   Financing   Statement"  shall  mean  UCC-1  Financing
         Statements substantially in the form of Exhibit I attached hereto.

                  "Undivided   Interest"   means   (i)  with   respect   to  the
         Participant,  the  interest  of  the  Participant  in the  Loan,  which
         interest  shall  be the  ratio  (expressed  as a  percentage)  which is
         determined by dividing (A) the Outstanding  Participation Amount by (B)
         the  Outstanding  Amount,  and (ii) with  respect  to the  Lender,  the
         interest  of the  Lender  in the  Loan,  which  interest  shall  be the
         percentage  determined by subtracting from 100% the percentage interest
         of the  Participant  in the Loan,  determined  in  accordance  with the
         clause (i).

         Section 1.2.      Other Provisions.  Defined terms may be used in the
          singular or the plural, as the context requires.




                                       11
<PAGE>




                                   ARTICLE II

                             PARTICIPATION INTERESTS

         Section 2.1.      Offers and Right to Purchase Participation Interests.
                           ----------------------------------------------------

         (a) From the date hereof  until the  Termination  Date,  the Lender may
offer to the  Participant  from time to time a right to purchase a Participation
Interest in certain  Acquisition and Development  Loans and  Construction  Loans
made or proposed to be made by the Lender, and any related L/C Guaranty. In each
case,  the  Participant  shall have the right to  purchase  only the  Percentage
Interest  in each Loan as may be  offered  by the  Lender or as the  Lender  may
otherwise  agree as  reflected  in the Offering  Schedule.  Notwithstanding  the
foregoing or anything to the contrary contained in this Participation Agreement,
and subject to the  Participant's  right to decline to purchase a  participation
interest in any Acquisition and Development  Loan or any  Construction  Loan and
any  related  L/C  Guaranty,   in  no  event  shall  the  Participant   purchase
Participation  Interests  which, in the aggregate,  exceed Fifty Million Dollars
($50,000,000).

         (b)  With  respect  to  any  Acquisition   and   Development   Loan  or
Construction  Loan and any related L/C  Guaranty as to which  Lender  desires to
sell a  Participation  Interest  to  Participant,  the Lender will submit to the
Participant an Offering Schedule and the Credit Underwriting Documents after the
Lender's  loan or credit  committee  has  approved  such loan.  The Lender  will
promptly  furnish such  additional  information,  data or materials to which the
Lender has access  concerning the matters set forth in the Offering  Schedule or
the Credit Underwriting Documents as the Participant shall reasonably request.

         (c) After  receiving  the Offering  Schedule,  the Credit  Underwriting
Documents and any other requested documents,  the Participant will have ten (10)
Business  Days to notify  the Lender of its  acceptance  or  declination  of the
Lender's offer to sell a Participation  Interest in the proposed Acquisition and
Development  Loan or  Construction  Loan and any  related L/C  Guaranty.  If the
Participant  does not accept  the  Lender's  offer to sell such a  Participation
Interest, then the Acquisition and Development Loan or Construction Loan and any
related  L/C  Guaranty  shall not be  designated  or  included as a Loan and the
Lender will, following such declination be free to offer participation interests
in such  Acquisition and Development  Loan or Construction  Loan and any related
L/C Guaranty to other investors.

         (d) If the  Participant  shall  accept  the  Lender's  offer  to sell a
Participation  Interest in the  proposed  Acquisition  and  Development  Loan or
Construction  Loan and any related L/C  Guaranty,  it shall notify the Lender of
such acceptance by executing the Acceptance  contained in the Offering Schedule.
The Participant may determine that its acceptance of a Participation Interest is
contingent  upon its review of the related  Loan  Documents  and the  Acceptance
shall specify this contingency. In such event, the Lender shall immediately, but
in no event later than five (5)  Business  Days prior to the first  Posting Date
with  respect  to such  loan,  forward  to  Participant  the Loan  Documents  in
substantially  final form.  The  Participant  shall  review such Loan  Documents
within  five  (5)  Business  Days of  receipt  of such  documents  and,  if such
documents  are  satisfactory  to  Participant,  shall  deliver to the Lender the
Confirmation  within such five (5) Business Days,  time being of the essence for


                                       12
<PAGE>


such review and approval.

         (e) Upon the  Lender's  receipt of the  Participant's  Acceptance,  the
purchase of a Participation Interest in such Acquisition and Development Loan or
Construction  Loan  and  any  related  L/C  Guaranty  shall  be  consummated  in
accordance with the terms of Section 2.3;  provided  however,  that in the event
that the Participant's acceptance of a Participation Interest is contingent upon
its review of the related Loan  Documents,  such  purchase of the  Participation
Interest shall not be  consummated  unless and until the Lender has received the
Confirmation.

         Section 2.2. Designation as a Loan. If the Participant shall accept the
Lender's  offer  to  sell  a  Participation  Interest  in  any  Acquisition  and
Development Loan or any Construction  Loan and any related L/C Guaranty pursuant
to Section 2.1, then such purchase shall be made in accordance with this Article
II  and,  upon  such  purchase,   such   Acquisition  and  Development  Loan  or
Construction  Loan and any related L/C Guaranty shall become a Loan for purposes
of this Participation Agreement.

         Section 2.3.      Purchase and Sale of Participations.

         (a) Subject to the terms,  provisions and conditions  hereof and of the
Offering Schedules,  the Lender hereby agrees to sell to the Participant and the
Participant hereby agrees to purchase from the Lender,  from time to time during
the term of this Participation  Agreement,  Participation Interests equal to the
Participant's Percentage Interest of the Loan; provided, however, that (i) in no
event shall the Participant be obligated to purchase Participation  Interests to
the extent such purchase would cause the Participant's Outstanding Participation
Amount to exceed the Maximum  Participation  Amount;  (ii) in no event shall the
Participant  purchase  Participation  Interests which, in the aggregate,  exceed
Fifty Million Dollars  ($50,000,000);  (iii) the Lender shall retain for its own
account  an  Undivided  Interest  in each  Loan;  and (iv) in the event that the
Participant's  acceptance of the Lender's offer to sell a Participation Interest
is contingent  upon its review of the related Loan  Documents,  such purchase of
the  Participation  Interest  shall  not be  consummated  unless  and  until the
Participant has delivered the Confirmation to the Lender.

         (b) The Lender and the  Participant  may agree that the  purchase  of a
Participation  Interest  in a Loan is to be  accomplished  by the payment to the
Lender of one  payment  or by a series of  payments  to the Lender as the Lender
makes  Advances;  provided  however,  that in no event shall the  Participant be
required to make any  additional  payments  with  respect to such  Participation
Interest  if,  after  giving  effect  thereto,  the  Participant's   Outstanding
Participation Amount would exceed the Maximum Participation Amount.

         (c) As of  the  date  of  each  purchase  of a  Participation  Interest
hereunder,  the Lender hereby  assigns,  conveys and otherwise  transfers to the
Participant,  and  will be  deemed  to have  assigned,  conveyed  and  otherwise
transferred to the Participant,  undivided percentage ownership interests in the
Related Assets and the Collections equal to the Undivided  Interests held by the
Participant in the Loans from time to time.


                                       13
<PAGE>


         (d) The Lender agrees that, from time to time, it will promptly execute
and deliver all further instruments and documents,  and take all further action,
that the  Participant  may reasonably  request in order to protect or more fully
evidence the purchase of  Participation  Interests  hereunder  and the Undivided
Interests  acquired by the Participant  hereby,  or to enable the Participant to
exercise or enforce any of its rights hereunder. Without limiting the generality
of the foregoing, the Lender will, upon the request of the Participant, mark its
master  data  processing  records  with  respect  to the  Loans  with  a  legend
indicating that the  Participant has purchased a Participation  Interest in such
Loans in accordance with the terms of this Participation Agreement.

         Section 2.4.      Lender to Maintain Records

         (a)  Each  Undivided  Interest  with  respect  to  the  Loans  and  the
Percentage  Interests with respect thereto shall be initially computed as of the
close  of  business  of the  Lender  on the  date  of the  first  purchase  of a
Participation  Interest  by  the  Participant  pursuant  to  this  Participation
Agreement. Thereafter, each Undivided Interest shall be automatically recomputed
as of the close of business on each day that there is a change therein.

         (b) The Lender shall at all times  maintain  information  sufficient to
make the  computations  and  recomputations  required by paragraph (a) above. In
addition, the Lender shall maintain books and records in which shall be recorded
the following information:

     (1) the  date  and  amount  of each  Advance  made  under a Loan  and  each
acquisition  of  a  Participation   Interest  pursuant  to  the  terms  of  this
Participation Agreement;

     (2) the Collections received and the distribution of such Collections;

     (3) the amount of any Loan Fees, Late Payment Fees or other amounts due and
payable or to become due to the Lender or the Participant hereunder; and

     (4) the amount and date of any change in the Undivided Interests.

         Section  2.5.  Participation  Interest  Only.  In no  event  shall  the
Participant  have any  obligation  or  liability  to any Obligor or other Person
(except the Lender pursuant to this Participation Agreement) with respect to any
Loan nor shall the Participant be obligated to perform any of the obligations of
the Lender in connection  therewith  (except  following  the express  assumption
thereof by the Participant pursuant to Section 10.2).

         Section  2.6.  Evidence of  Participation  Interest.  To  evidence  the
Participation  Interest of the  Participant in each Loan, the Lender shall issue
to the  Participant,  at the time of and in  connection  with the  Participant's
funding of its Percentage Interest of each Advance, a Participation Certificate,
duly completed.  Each such Participation Certificate shall be transmitted by the
Lender to the  Participant  by facsimile  and the original  shall be sent on the
same day for receipt by Participant on the next Business Day.


                                       14
<PAGE>


         Section 2.7. Failure of Loan to Close. If for any reason an Acquisition
and Development Loan or a Construction Loan as to which the Participant  accepts
the  Lender's  offer to sell a  Participation  Interest  does  not  close or the
initial  Advance  thereunder  is not made  within  ninety  (90)  days  after the
Participant  executes  the  Acceptance,  then such loan  shall not be a Loan and
neither  party  shall have any  further  rights or  liabilities  hereunder  with
respect to the  purchase of a  Participation  Interest in such  Acquisition  and
Development Loan or Construction Loan and any related L/C Guaranty.





                                       16
<PAGE>




                                   ARTICLE III

                 POSSESSION OF DOCUMENTS; ABSOLUTE SALE INTENDED

         Section  3.1.  Documents  Held  in  Trust;  Delivery  of  Documents  to
Participant.  Subject to Section 3.2 and Section 3.3, the Lender  covenants  and
agrees that it will hold the Loans and the Loan  Documents  relating  thereto as
trustee on express trust for the Participant as to the  Participant's  Undivided
Interest in effect from time to time in the Loans.

         In the  event  that  in  accordance  with  the  option  granted  to the
Participant in Section 2.1(d) the Participant accepts the Participation Interest
contingent  upon its review of the  related  Loan  Documents,  the Lender  shall
immediately,  but in no event  later  than five (5)  Business  Days prior to the
first Posting Date with respect to such loan,  forward to  Participant  the Loan
Documents in  substantially  final form. Any such Loan Documents  which have not
been executed at the time of such delivery to the Participant shall be furnished
to Participant  promptly after the execution thereof,  but in any event no later
than forty five (45) days after execution.  In the event that the  Participant's
acceptance of a Participation  Interest is not contingent upon its review of the
Loan  Documents,  the  Lender  shall  provide to the  Participant  copies of the
executed Loan Documents as soon as possible after the execution thereof,  but in
any event no later than forty five (45) days after execution,  but such delivery
of the  Loan  Documents  to  Participant  shall  not be  required  prior  to the
Participant's  purchase of the Participation  Interest.  The Participant  shall,
upon  request to the Lender,  have the right to copies of the  originals  of any
other documents executed and delivered in connection with the Loans.

         Section 3.2. Absolute Sale of Participation Interest. It is the express
intention  of  the  parties   that  the   transactions   contemplated   by  this
Participation Agreement be, and be construed as, a sale of an Undivided Interest
in the Loans by the Lender to the  Participant  and not a pledge of the Loans by
the Lender to secure a debt or other obligation of the Lender.  However,  in the
event  that the  Participant's  Undivided  Interest  in the Loans are held to be
property of the Lender,  or if for any reason this  Participation  Agreement  is
held or deemed to create a security  interest  in the Loans then it is  intended
that (a) this  Participation  Agreement  shall  also be deemed to be a  security
agreement  within the meaning of the Uniform  Commercial  Code of any applicable
jurisdiction;  (b) the conveyance of Participant's  Percentage  Interest in each
Loan  shall  be  deemed  to be a grant by the  Lender  to the  Participant  of a
security  interest in all of the Lender's  right  (including the power to convey
title thereto), title and interest,  whether now owned or hereafter acquired, in
and to the Pledged  Collateral;  (c) the  possession  by the  Custodian  for the
benefit of the  Participant of Mortgage Notes or such other items of property as
constitute  instruments,  money,  negotiable documents or chattel paper shall be
deemed to be "possession by the secured party",  or possession by a purchaser or
a person  designated  by such  secured  party,  for purposes of  perfecting  the
security  interest  pursuant to the Uniform  Commercial  Code of any  applicable
jurisdiction  (including,  without  limitation,  Section  9-305,  8-313 or 8-321
thereof);   and  (d)  notifications  to  persons  holding  such  property,   and
acknowledgments,  receipts or confirmations  from persons holding such property,
shall be deemed notifications to, or acknowledgments,  receipts or confirmations
from,  financial  intermediaries,  bailees  or  agents  (as  applicable)  of the
Participant  for  the  purpose  of  perfecting  such  security   interest  under
applicable law.

                                       17
<PAGE>

         Section 3.3. Custodial Documents.  After the first Advance is made with
respect to a Loan,  the Lender shall  deliver to the  Custodian  pursuant to the
Custodial  Agreement  each of the  following  documents  within the time periods
specified:

     (a) Within  three (3)  Business  Days after the first  Advance is made with
respect to a Loan, the original Mortgage Note duly endorsed with an Allonge;

     (b) With respect to the  Mortgage,  the Lender shall  provide the Custodian
with each of the  following:  (i) within five (5) Business  Days after the first
Advance is made with  respect to a Loan,  a certified  true copy of the Mortgage
submitted  for  recording;  (ii) within five (5) Business  Days after its return
from the appropriate  recording office,  the original recording receipt or other
evidence of the recording  office's  receipt of the  Mortgage,  and (iii) within
five (5) Business Days after its return from the appropriate  recording  office,
the original Mortgage,  with evidence of recording thereon,  or, if the original
Mortgage is lost or destroyed or not returned from the recording office,  within
180 days of the submission of the Mortgage for recording, a copy of the Mortgage
certified by the appropriate  public  recording office to be a true and complete
copy of the original.

     (c) A duly executed (and, where  appropriate,  acknowledged)  Assignment of
Mortgage and a UCC-1  Financing  Statement,  which  documents  the  Custodian is
irrevocably  authorized  to record and/or file in such offices or records as the
Participant deems necessary or appropriate. and

     (d)  Such  other  documents  and  instruments  as  the  Participant   deems
reasonably  necessary  or proper or upon which the Lender  and  Participant  may
agree.

         Section 3.4. Priority.  Except as otherwise  expressly provided in this
Participation  Agreement, all income, gains, profits, and losses with respect to
each of the Loans shall be apportioned between the Lender and the Participant on
a pari passu basis in accordance with their  respective  Undivided  Interests in
such Loans. The respective Undivided Interests of the Lender and the Participant
in each Loan shall be equally and ratably  secured,  benefited and guaranteed by
the Loan Documents and the Pledged Collateral relating thereto.


                                       18
<PAGE>







                                   ARTICLE IV

                               FUNDING OF ADVANCES

         Section 4.1.      Funding Advances and Participation Interests.

         (a) The  Lender  shall  supervise  and  coordinate  the  making  of all
Advances of the Loans. As Advances of the Loans are to be made, the Lender shall
fund such Advances.  The Lender will not fund any Advances  unless the Lender is
required to do so by the terms of the related Loan Documents.

         (b) On each Posting Date as to which the  Participant  has received the
documents in the form and at the time  required by Section 4.2, the  Participant
shall remit  funds to the Lender in the amount  specified  in the  corresponding
Notice of Initial Advance or Lender's Certification, as applicable.

         Section 4.2.      Lender's Certification.

         (a) With respect to the initial  Advance for any Loan, the Lender shall
deliver to the  Participant a Notice of Initial  Advance no later than 2:00 p.m.
(Minneapolis time) on the Business Day immediately preceding the Posting Date on
which the Lender is requesting payment from the Participant.  At or before 10:00
a.m. (Minneapolis time) on the Posting Date, and upon confirming the matters set
forth in paragraph (c) below,  the Lender shall deliver to the  Participant  the
Lender's   Certification   relating  to  such  initial  Advance.   The  Lender's
Certification  shall be based on  information  available to the Lender as of the
time of delivery of the  Lender's  Certification.  Upon  receipt of the Lender's
Certification, the Participant shall remit payment of its Percentage Interest in
the initial Advance, in accordance with and subject to the terms of Section 4.3.

         (b) For each Advance for any Loan, other than the initial Advance, upon
confirming the matters set forth in paragraph (c) below,  the Lender shall remit
to the Participant its signed Lender's Certification; provided however, that the
Lender's  Certification shall be delivered to the Participant no later than 2:00
p.m.  (Minneapolis  time) on the Business Day immediately  preceding the Posting
Date on which  the  Lender  is  requesting  payment  from the  Participant.  The
Lender's  Certification shall be based on information  available as of the close
of business on the  Business  Day prior to the date of delivery of the  Lender's
Certification.

         (c)      With respect to each Advance under a Loan, the Lender shall
         confirm that on their faces:

                           (1) each  Mortgage  and Mortgage  Note  relating to a
         Loan bears an original  signature or  signatures  purporting  to be the
         signature or  signatures  of the Person or Persons named as the grantor
         and maker;

                                       19
<PAGE>

                  (2) no Mortgage or Mortgage  Note  relating to a Loan contains
         evidence of any claims,  liens,  security  interests,  encumbrances  or
         restrictions  on transfer of the  holder's  or  beneficiary's  interest
         (other  than  normal  title   exceptions,   generally   acceptable   to
         construction lenders under similar loans);

                           (3)      the  original  principal  amount  of each
         Mortgage  Note  relating  to a Loan is not less than the
         Outstanding Amount of the Loan to which it relates;

                           (4)  the  rate  of  interest  accruing  on  the  Loan
         evidenced  by each  Mortgage  Note is  equal  to or  greater  than  the
         contract note rate of interest  specified in the related Mortgage Note;
         and

                           (5) the Loan Documents reviewed by the Lender, in the
          Lender's judgment, appear regular on their face.

         Section 4.3.      Payments by Participant.


         (a) Provided  that the Lender has met all the terms and  conditions  of
this Participation  Agreement,  on each Posting Date the Participant shall cause
to be  transmitted  to the Lender the  Participant's  payment for its Percentage
Interest  in the  Advances  in the  amount  set forth in the  Notice of  Initial
Advance  or  Lender's  Certification,   as  applicable.  Such  amount  shall  be
transmitted by wire transfer in accordance  with the  instructions  set forth on
the signature page hereto, or according to such other instructions as shall have
been designated by written notice from such Lender to the  Participant  given in
accordance  with Section 12.4, so that it will be transmitted by the Participant
in federal or other immediately available funds by 12:00 noon (Minneapolis time)
on such Posting Date.

         (b)  Notwithstanding  anything to the contrary  herein  contained,  the
Participant shall not be required to fund its Percentage Interest of any Advance
if (i) an Event of Default has  occurred  and is  continuing  under the relevant
Loan  Documents and has not been waived in accordance  with the terms of Section
5.2, (ii) any of the representations or warranties set forth in Section 8.3 with
respect to the related  Loan are false or  incorrect  as of the Posting Date and
the  Participant  reasonably  determines  that such event has had or will have a
Material  Adverse  Effect,  (iii) if a Lender Default of the type referred to in
Section 10.1(b) or 10.1(c)  relating to such Loan has occurred and is continuing
as of the Posting  Date or (iv) if a Lender  Default of the type  referred to in
Section 10.1(a),  10.1(d), 10.1(e), or 10.1(f) has occurred and is continuing as
of the Posting Date.

         Section  4.4.  Interest on  Participations.  The  Participant  shall be
entitled to interest  accrued on the funds  remitted by it  hereunder,  from the
date such funds are remitted to the Lender pursuant to Section 4.3 above,  until
such Advances are repaid and such  repayment is received by the  Participant  in
accordance with Article VI. The Participant's rights to payment of such interest
shall be determined in accordance with the provisions of Section 6.5.

                                       20
<PAGE>

         Section 4.5.  Undivided  Interests  Determined  on Posting  Dates.  The
Undivided  Interests  of the Lender and the  Participant  in the Loans  shall be
determined  and  adjusted  on each  Posting  Date,  after  giving  effect to any
Participation  Interests  purchased on such Posting Date.  Funds advanced by the
Lender to any Obligor with respect to which the Participant has not yet remitted
payment with respect to its Participation Interest pursuant to Section 4.1 shall
not affect the Undivided  Interests of the Lender and the Participant  until the
next succeeding Posting Date. All repayments and other matters shall, until such
Posting Date and  purchase,  be  calculated on the basis of the Lender's and the
Participant's  Undivided  Interests  as in effect on the  immediately  preceding
Posting Date.




                                       21
<PAGE>



                                    ARTICLE V

                           ADMINISTRATION OF THE LOANS

         Section 5.1.      Administration and Servicing of Loans.
                           -------------------------------------

         (a) Unless the Participant  shall have exercised its rights pursuant to
Section 10.2,  the Lender shall  administer  and service the Loans in accordance
with the  Administrative  Procedures  in effect from time to time.  The Specific
Administrative  Procedures  that the Lender  proposes to use in connection  with
each Loan shall be included in the Credit Underwriting  Documents to be provided
to the  Participant  at the time  the  Lender  offers a Loan to the  Participant
pursuant to Section 2.1 or otherwise shall be provided to the Participant before
the Participant  funds its Percentage  Interest of the initial  Advance.  If the
Participant does not approve the Specific Administrative  Procedures proposed by
the Lender,  the  Participant  shall not be required to purchase a Participation
Interest in the Loan. The Lender shall not modify the Administrative  Procedures
as they apply to any loan in a manner that would have a Material  Adverse Effect
without the prior approval of the Participant.

         (b) Except as to matters requiring the consent of the Participant under
Section  5.2 and  Section  5.5 and as to matters  which  Participant  determines
require its consent in order to prevent  irreparable  harm to the  interests  or
rights of the Participant, the Lender shall have the sole authority, without the
necessity of obtaining  the approval or consent of the  Participant,  to service
and administer the Loans, to exercise its rights and carry out its duties as the
lender under the Loan  Documents,  and to make all decisions in connection  with
the administration and collection of the Loans.

         (c) In connection with  administering  each Loan and in addition to the
covenants of the Lender elsewhere contained in this Participation Agreement, the
Lender agrees as follows:

                           (1) The Lender may demand,  collect and receive  from
         any Obligor,  and give  acquittance  for, all sums  received  from such
         Obligor and others under the terms of the related Loan Documents.

                           (2) The Lender may accept  full or partial  repayment
         of any Loan in accordance with the terms of the Loan Documents relating
         thereto and shall hold,  apply and  distribute  the same in  accordance
         with the provisions hereof and of the Participation Certificates.

                           (3) In case of  payment  in  full  of any  Loan,  the
         Lender may  execute and  deliver a full  release of the Loan  Documents
         relating  thereto or an  assignment  of such Loan and the related  Loan
         Documents,  without  recourse,  representation or warranty of any kind.
         Upon request of the Lender to the Participant,  and provided that there
         are no  Lender  Defaults  or  Defaults  by  any  related  Obligor,  the
         Participant will execute and deliver to the appropriate title companies
         and escrow holders a Master Non-Demand  Agreement  substantially in the
         form of Exhibit J attached hereto.

                                       22
<PAGE>

                           (4) The  Lender may  demand of the  Borrower  and any
         other  Obligor  full  performance  of all of the terms,  covenants  and
         conditions  of such Loan  Documents  on the part of the Borrower or any
         such other Obligor to be performed.

                           (5) The Lender shall  advance from its own monies all
         necessary  Extraordinary  Servicing  Expenses with respect to any Loan,
         which amounts  shall be deemed  advanced by the Lender for the accounts
         of the Lender and the Participant in accordance  with their  respective
         Undivided  Interests in such Loan  (determined  as of the date on which
         the Extraordinary Servicing Expenses are paid by the Lender).

         (d) Subject to Section 3.2, the Lender shall have review and  custodial
responsibility  for all  Loan  Documents  which  have  been  delivered  to it in
connection with the Loans.

         Section  5.2  Lender's   Actions   Requiring   Participant's   Consent.
Notwithstanding anything to the contrary herein contained, the Lender shall not,
without the prior written  consent of the  Participant  (which consent or denial
shall not unreasonably be delayed):

                  (a)      forgive or reduce the  indebtedness  (principal  or
                       interest or Loan Fees) of any Loan, or any part thereof,
                   or waive any Default by any Obligor in the payment thereof;

                  (b)      waive any Event of Default by any Obligor;

                  (c)      extend  the due date of any  principal  payment or of
          any  interest  payment or Loan Fees due under the Loan
         Documents relating to any Loan;

                  (d)  release any Loan  Collateral  for any Loan  (except  upon
         corresponding   payment  or  reduction  of  such  Loan  or  receipt  of
         substitute Loan Collateral  acceptable to the  Participant),  or reduce
         any  release  price  required  for the release of Loan  Collateral,  or
         subordinate  the lien in favor of the Lender in any Loan  Collateral to
         any Adverse Claim;

                  (e)      release any Obligor;

                  (f)      decrease the interest rate or Loan Fees on any
          Participated Loan;

                  (g)  extend  the  period or term  during  which the  Lender is
         committed to make  Advances of any Loan, if such  extension  would also
         extend the Participant's obligation to remit payments to the Lender for
         its Participation Interest in such Loan;

                  (h) agree to any amendments,  modifications  or waivers of any
         Loan  Documents  relating  to any Loan  that  would  have a  materially
         adverse effect on the collectibility of the related Loan;

                                       23
<PAGE>

                  (i)      institute or commence  foreclosure or other
         proceedings under the Loan Documents relating to any Loan in the
         event of a Default thereunder by the Obligor;

                  (j)      accept a deed or other conveyance from any Obligor
          in lieu of foreclosure; or

         (k) apply any insurance or  condemnation  proceeds in excess of $25,000
         with respect to a Loan for any purpose  other than to pay down the Loan
         or as required to be applied by the terms of the Loan Documents.

         In the event the  Participant  and the Lender are unable to agree as to
the  actions to be taken with  respect  to any of the  matters  set forth in the
preceding paragraphs (a) through (k), the matter shall be resolved in accordance
with the provisions of Article XI.

         Section 5.3. Standard of Care and Duty to Participant.  The standard of
care to be exercised by the Lender in the  performance  of its duties under this
Participation  Agreement shall not be less than that which would be exercised by
a  reasonably  prudent  construction  lender of good  reputation  with a lending
volume at least comparable to that of the Lender, and in any event not less than
the standard of care the Lender exercises in  administering  and servicing other
acquisition,  development or  construction  loans and the related loan documents
held entirely for the Lender's own account.  While  performing  its duties under
the Participation Agreement, the Lender shall be acting on its own behalf and on
behalf of the Participant,  responsible to protect its rights and the rights and
interests  of  the  Participant  with  respect  to the  Participant's  Undivided
Interest in the Loans and the  Participants  rights to the  Collections  and the
Related Assets.

         Section 5.4.      Notices of Defaults and Other Events.  The Lender
          shall,  promptly  following the Lender's  discovery of the
           occurrence thereof, notify the Participant of any of the following:

                  (a)      the existence and nature of any Default in payment
          by any Obligor under the Loan  Documents  relating to any
         Loan, or any other Default under any such Loan Documents;

                  (b)      condemnation  proceedings,  damage or destruction
         of any Loan  Collateral in an amount greater than $25,000;
         or

                  (c) any  other  matter  which,  in the  best  judgment  of the
         Lender, prudently exercised, materially affects the Undivided Interests
         of the Participant in any Loan or the security therefor.

         The Lender shall furnish the Participant with a written  recommendation
as to the exercise of any and all rights in  connection  with the affected  Loan
and the security  therefor,  which  recommendation  shall be made within fifteen
(15) days of the Lender's  discovery of the applicable  Default,  or within such
other period of time as the Lender and the Participant agree to in writing.  The
Participant  shall have a period of fifteen (15)  Business Days from the date of
receipt of the Lender's written recommendation,  or such other period of time as
the Lender and the Participant agree to in writing, in which to accept or reject
the  recommendations of the Lender. The parties will attempt to take all actions
with  respect  to each  Loan as to which  there  has been a  Default  by  mutual
consent;  in the event the  parties  are unable to agree as to the actions to be
taken, the matter shall be resolved in accordance with the provisions of Article


                                       24
<PAGE>

XI.

         Section 5.5.  Management of Real Estate Owned. During the period of any
ownership of Loan  Collateral,  the Lender and the  Participant  shall  promptly
consult  with  each  other  with  respect  to  the  management,   completion  of
construction  (if  required),  maintenance,  repair or  improvement of such Loan
Collateral,  and  mutually  consent to a plan or plans for any such  management,
completion of said construction, maintenance, repair or improvement of said Loan
Collateral, or as to any sale, transfer, or other disposition thereof.

         Section 5.6.      Reports to Participant.
                           ----------------------

         (a)  On a  weekly  basis,  the  Lender  shall  provide  advice  to  the
Participant of the date and amount of all Collections for such week. Within five
(5) Business  Days after  receiving a request from the  Participant,  the Lender
will furnish to the Participant a statement,  certified by the Lender to be true
and correct, setting forth the Outstanding Participation Amount, the Outstanding
Amount, the Participant's Undivided Interest and the Lender's Undivided Interest
in the Loans,  in each case as of the date such  statement  is  furnished to the
Participant.

         (b)  With  respect  to  each  Loan,  the  Lender  will  deliver  to the
Participant  (i)  the  Credit  Underwriting  Documents  and the  Loan  Documents
pursuant to Section 2.1 and Section 3.1, (ii) the Loan Monitoring Documents,  on
a quarterly  and annual basis as detailed in the listing of the Loan  Monitoring
Documents,  and  (iii)  upon the  Participant's  request,  copies  of all  other
materials  received by the Lender in  connection  with a Loan or the  Obligor(s)
thereunder  and not  previously  delivered  to the  Participant,  including  any
financial statements and marketing position reports.

         (c) The Lender shall give notice to the  Participant  of the occurrence
of any  Default  and any other  matter set forth in Section 5.4 at the times set
forth in Section 5.4. The Lender shall also advise the  Participant of any other
matter  known to the Lender and  relating to the Obligor or the Loan  Collateral
which, in the Lender's reasonable judgment, has a material adverse effect on the
Participant's Undivided Interest.

         (d) The Lender will from time to time deliver to the  Participant  such
other  information,  materials  and  advice as the  Participant  may  reasonably
request.

         Section 5.7.  Acquisition of Loan  Collateral.  Subject to the terms of
Section 5.2, the Lender may acquire,  or cause to be acquired on its behalf, any
of the Loan  Collateral  by  foreclosure  or by  acceptance  of a conveyance  or
assignment in lieu of  foreclosure.  Such Loan  Collateral may, at the option of
the Lender,  be held in the name of the Lender or its designee,  for the benefit
of the Lender and the Participant in accordance with their respective  Undivided
Interests in the applicable Loan, as in effect from time to time,  provided that
no such Loan Collateral shall be held in the name of the Participant  unless the
prior written consent of the Participant shall have been obtained.

                                       25
<PAGE>

         If the Lender shall  acquire title to any of the Loan  Collateral,  all
moneys  received or collected by it (including,  but not limited to, proceeds of
title insurance claims) from the operation or sale of such Loan Collateral shall
be allocated and distributed as provided in Article VI.

         Section 5.8.  Extraordinary  Servicing Expenses and Ancillary Fees. The
Lender shall use its best efforts to recover from each Obligor all Extraordinary
Servicing  Expenses  and  Ancillary  Fees  that are the  responsibility  of such
Obligor under the related Loan Documents. In the event any such Obligor fails to
pay the Lender for any such Extraordinary  Servicing Expenses or Ancillary Fees,
the  Participant  shall,  upon  demand of the  Lender,  remit to the  Lender its
proportionate share of such expenses or fees, which proportionate share shall be
equal to the Participant's Undivided Interest in the applicable Loan (determined
as of each date on which the Extraordinary Servicing Expenses and Ancillary Fees
are paid by the Lender). In the event any such Extraordinary  Servicing Expenses
or Ancillary Fees are thereafter  paid to the Lender by any Obligor,  the Lender
shall repay the Participant its share thereof pursuant to Section 6.3.

         Section  5.9.  Inspections  by  Participant.  The  Participant  or  its
representatives  shall have the right to visit the offices and properties of the
Lender upon reasonable prior notice during normal business hours for the purpose
of examining any Records and systems and to discuss matters  relating thereto or
to the Lender's  performance  hereunder with any of the officers or employees of
the Lender  having  knowledge  of such  matters.  The  Lender  will at all times
maintain and  implement  administrative  and  operating  procedures  (including,
without  limitation,  an ability to recreate records evidencing the Loans in the
event of the  destruction of the originals  thereof),  and keep and maintain all
documents,  books,  records and other information  reasonably  necessary for the
collection of all Loans.  In addition,  the  Participant or its  representatives
shall have the right to, in the  presence of the  Lender,  visit the offices and
properties of the Borrowers upon reasonable  prior notice during normal business
hours for the purpose of examining any documents or discussing any other matters
relating to the Loan.




                                       26
<PAGE>



                                   ARTICLE VI

                                   COLLECTIONS

         Section 6.1.  Collection and Payment of  Collections.  The Lender shall
have the exclusive  right and obligation to collect  interest,  principal,  Late
Payment Fees,  Loan Fees,  Ancillary Fees and other sums due in connection  with
the Loans;  provided,  however,  that in the event the Obligor cures its payment
default  within  thirty (30) days of the original date such payment was due, the
Lender shall have no  obligation to collect Late Payment Fees or default rate of
interest from such Obligor.

         On the day the Lender  receives  the  Collections  with  respect to any
Loan,  the Lender shall  account for and pay to the  Participant  its  Undivided
Interest in the Collections determined in accordance with the provisions of this
Article  VI;  provided  however,  that in the  event  the  Lender  receives  the
Collections in immediately available funds after 2:00 p.m. (Minneapolis time) on
any day, the Lender shall account for and pay to the  Participant  its Undivided
Interest in the Collections not later than the close of business on the Business
Day following the day of receipt. The Lender shall not be liable for interest on
Collections  paid to the  Participant  within the time  period  required by this
Participation Agreement.

         The  Participant  shall  have  the  right  to  an  accounting  for  all
Collections  received by the Lender, and the Lender shall hold the Participant's
Undivided  Interest  in the  Collections  in  trust  for the  Participant  until
delivered to the Participant.

         Section 6.2.      Order of Application of Collections.

         (a)  Except as  provided  in  Section  6.8,  with  respect to any Loan,
Collections shall be applied by the Lender in the following order to payment of:

FIRST: Ancillary Fees and Extraordinary  Servicing Expenses for which the Lender
has not received  reimbursement  from the related  Obligor (to be distributed as
provided in Section 6.3);

SECOND:  Loan Fees then due and payable from the related  Obligor (to be
distributed as provided in Section 6.4);

THIRD:   Accrued  interest  and related  Late  Payment  Fees then due and
payable on the related Loan (to be distributed as provided in Section 6.5); and

FOURTH:  Unpaid principal of the related Loan (to be distributed as provided in
Section 6.6).


         (b) If the Collections received by the Lender are insufficient to fully
pay the  amounts  due to the  Lender  and the  Participant  with  respect to the
related Loan, such  Collections  shall be applied to the payment in full of each
such  category,  in the order  specified  with respect to such Loan,  before any
portion of such  amount is applied to any  succeeding  categories.  If there are
insufficient  funds to pay  fully  the  amounts  due in any such  category  with
respect to the related Loan, then such  Collections  shall be paid to the Lender
and the  Participant  pro rata on the basis of the  respective  amounts  due the
Lender  and the  Participant  with  respect to such Loan  pursuant  to the terms
hereof in such category.

                                       27
<PAGE>

         (c) In the event the  Borrower  makes a payment to the Lender after the
date on which such payment is due, and the Lender has previously made payment of
the insufficient  Collections in accordance with the preceding subparagraph (b),
the  Lender  shall  calculate  and pay to the  Participant  an amount  from such
additional  Collections so as to pay pro rata to the Lender and the Participant,
on the basis of the respective  amounts due the Lender and the Participant,  all
amounts owing to Lender and  Participant in the order set forth in  subparagraph
(a) above.

         Section  6.3.  Reimbursement  of Amounts  Paid For  Ancillary  Fees and
Extraordinary  Servicing  Expenses.  Collections  which are to be applied to the
payment of the amounts  specified in the paragraph  labeled FIRST in Section 6.2
shall be paid to the Lender unless the  Participant  has previously  paid to the
Lender a portion of the Extraordinary  Servicing  Expenses and Ancillary Fees as
called  for  by  Section  5.8,  in  which  event   Collections   in  respect  of
Extraordinary  Servicing Expenses and Ancillary Fees shall be paid to the Lender
and the Participant in accordance with their respective  percentage interests in
such expenses and fees.

         Section  6.4.  Loan  Fees.  Collections  which are to be applied to the
payment of the amounts  specified in the paragraph labeled SECOND in Section 6.2
shall be paid as  follows:  first,  to the Lender to the extent of the  Lender's
Override; and second, to the Lender and the Participant in accordance with their
respective  Undivided  Interests in the related Loan  (determined as of the time
such Collections are received by the Lender).

         Section 6.5.  Interest and Late Payment Fees.  Collections which are to
be applied to the  payment of the amounts  specified  in the  paragraph  labeled
THIRD in  Section  6.2 shall be paid as  follows:  first,  to the  Lender to the
extent of the Lender's  Override;  and second, to the Lender and the Participant
in  accordance  with their  respective  Undivided  Interests in the related Loan
(determined as of the time such Collections are received by the Lender).

         Section  6.6.  Principal.  Collections  which are to be  applied to the
payment of the amounts  specified in the paragraph labeled FOURTH in Section 6.2
shall be applied  pro rata to reduce the  Advances  funded by the Lender and the
Participant, in accordance with the respective Undivided Interests of the Lender
and  the  Participant  in the  related  Loan  (determined  as of the  time  such
Collections are received by the Lender).

         Section 6.7. Returned Payments.  If any of the Collections  received by
the Lender and  distributed or credited to the Participant are later required to
be  returned  or repaid by the  Lender to an Obligor  or its  representative  or
successor  in  interest,  by reason of a court order or, with the  Participant's
approval,  settlement of a dispute or otherwise,  the  Participant  shall,  upon
notice thereof from the Lender, promptly repay to the Lender the amount received
by the  Participant in respect of the  Collections so required to be returned or
repaid.

                                       28
<PAGE>

     Section 6.8. Application of Collections Upon Distribution Adjustment Event.
Notwithstanding any other provision contained in Section 6.1 through Section 6.6
of this  Participation  Agreement,  for so long as any  Distribution  Adjustment
Event  shall be  continuing  with  respect  to a Loan,  upon the  receipt of any
Collections  relating to such Loan such collections shall be applied and paid as
follows:

FIRST: Ancillary Fees and Extraordinary  Servicing Expenses for which the Lender
has not received reimbursement from an Obligor (to be distributed as provided in
Section 6.3);


SECOND All accrued interest then due and payable to the Participant with respect
to the related Loan shall be paid to the Participant;

THIRD:  All unpaid  principal then due and owing to the Participant with respect
to the Loan (as determined as of the time such  Collections  are received by the
Lender) shall be paid to the Participant;

FOURTH: All unpaid Lender's Override shall be paid to the Lender;

FIFTH:  All  accrued  interest  and unpaid  principal  then due and owing to the
Lender with respect to the Loan (as  determined as of the time such  Collections
are received by the Lender) shall be paid to the Lender;

SIXTH:  Loan Fees and Late Payment Fees then due and payable (to be  distributed
as provided in Section -------- 6.4); and

SEVENTH: All remaining Collections shall be retained by the Lender.

     Section 6.9.  Reinstated  Loans.  If a Defaulted  Loan becomes a Reinstated
Loan after a  Distribution  Adjustment  Event has occurred,  then upon such Loan
becoming a Reinstated Loan, Participant shall purchase from the Lender a portion
of  Lender's  Participation  Interest in such Loan such that  immediately  after
giving effect to such purchase,  Participant's  Percentage Interest in such Loan
is equal to the Percentage  Interest it held in such Loan  immediately  prior to
the occurrence of the Distribution Adjustment Event.

     Section  6.10.  Distribution  Adjustment  Event  Recapture.  If, upon final
liquidation of a Loan that has been subject to a Distribution  Adjustment  Event
(and has not become a Reinstated Loan),  Participant has not received payment in
full of all amounts owed to Participant with respect to such Loan,  Lender shall
pay to Participant any Collections  received by Lender with respect to such Loan
pursuant to Section 6.8 (other  than  Collections  applied to payment of amounts
specified in the paragraph  labeled FIRST in Section 6.8) during the period that
the Distribution  Adjustment Event was in effect with respect to that Loan up to
the  amount of  Participant's  loss on that  Loan.  In no event  shall  Lender's
liability  under this Section 6.10 exceed the amount of Collections  received by
Lender with respect to such Loan pursuant to Section 6.8 (other than Collections
applied to  payment  of amounts  specified  in the  paragraph  labeled  FIRST in


                                       29
<PAGE>

Section 6.8).

     Section 6.11.  Borrower  Payment Defaults and Borrower  Bankruptcy  Events.
Upon the occurrence of a Borrower Payment Default or a Borrower Bankruptcy Event
with respect to any Loan, all  Collections  (other than  Collections  applied to
payment of amounts  specified  in the  paragraph  labeled  FIRST in Section 6.2)
receivable by Lender  pursuant to Sections 6.2, 6.4, 6.5 and 6.6 with respect to
such Loan after the date of such Borrower Payment Default or Borrower Bankruptcy
Event,  as  applicable,  shall be paid into and held in  escrow by an  attorney,
title company or other third party acceptable to Lender and Participant pursuant
to escrow  instructions  mutually  agreed upon by Lender and  Participant  until
either (i) such Loan becomes a Reinstated Loan, (ii) a Title  Acquisition  Event
occurs  or  (iii)  in the  case of a Loan  that  is the  subject  of a  Borrower
Bankruptcy Event, such Loan does not become a Reinstated Loan within one year of
the date of occurrence of the Borrower  Bankruptcy  Event. If a Loan that is the
subject of a Borrower  Payment Default becomes a Reinstated Loan (without regard
to any time period),  or if a Loan that is the subject of a Borrower  Bankruptcy
Event becomes a Reinstated Loan within one year of the date of occurrence of the
Borrower  Bankruptcy Event,  then, in either case, all funds in the escrow shall
be released to Lender.  If a Title  Acquisition  Event  occurs with respect to a
Loan that is the subject of a Borrower Payment Default, or if a Loan that is the
subject of a Borrower  Bankruptcy Event does not become a Reinstated Loan within
one year of the date of occurrence of the Borrower  Bankruptcy  Event,  then, in
either case, all escrowed  funds shall be treated as Collections  and applied in
accordance  with  Section 6.8. The escrow shall be held by the escrow agent in a
federally  insured (to the maximum  extent  permitted  by law)  interest-bearing
deposit  account,  or in such  other  form as may be agreed  upon by Lender  and
Participant. All interest earned on any escrowed funds shall belong to Lender.

              Lender and  Participant  may  mutually  agree in writing  that the
provisions  of Section 6.8 or this Section  6.11,  as the case may be, shall not
apply to any Defaulted Loan if, in Participant's  absolute discretion,  an Event
of Default does not have a Material Adverse Effect.

              With respect to any Loan that is or would be subject to the escrow
requirements of this Section 6.11, Lender, in its sole discretion, may elect, in
lieu of the escrow  requirements  of this Section  6.11, to subject such Loan to
Section 6.8 directly,  in which case all funds that have been or would be placed
in escrow under this Section 6.11 shall be treated as Collections and applied in
accordance with Section 6.8.




                                       30
<PAGE>



                                   ARTICLE VII

                            DISCLAIMERS; INDEMNITIES

         Section 7.1.  Participant's  Assumption  of Certain  Risks.  Subject to
Section  7.3,  the  Lender  shall  not  be  responsible  to the  Participant  in
connection with, and the Participant assumes the full risk of nonpayment of, its
Participation  Interest in the Loans, and the Participant agrees that the Lender
will have no  responsibility  for:  (i) the  performance  or  observance  by any
Obligor of any of the  terms,  covenants  or  conditions  of the Loan  Documents
relating to the Loans or the accuracy of any information provided by any Obligor
to the Lender to the Participant,  (ii) the financial  condition of any Obligor,
(iii) the value of any Loan  Collateral or the  performance  of any appraisal or
inspections with respect thereto by a reputable appraiser or inspector, provided
that any written  appraisal or inspection  reports appear regular on their face,
(iv) legal  opinions of counsel to any Obligor or the Lender with respect to the
validity,  enforceability,  or  legal  effect  of  any  Loan  Documents  or  the
perfection and priority of any liens granted thereby,  (v) any title commitment,
Title Policy,  title run-down report, or certified survey furnished to Lender by
or on behalf of any Obligor,  or the accuracy,  validity or effectiveness of the
examination  thereof,  provided that such  policies,  reports and surveys appear
regular on their face. The Lender makes no  representations  or warranties  with
respect to the solvency,  financial  condition or future financial  condition of
any Obligor or the value of any Loan Collateral.

         The Lender shall be entitled to rely,  and shall be fully  protected in
relying, upon any note, writing,  resolution,  notice,  statement,  certificate,
telex,  teletype or telecopier  message,  cablegram,  radiogram,  order or other
documentary or teletransmission message believed by it to be genuine and correct
and to have been  signed,  sent or made by the  proper  Person.  The  Lender may
consult with legal  counsel  (including  counsel for any  Obligor),  independent
public  accountants  (including those retained by any Obligor) and other experts
selected  by it and shall not be liable  for any  action  taken or omitted to be
taken  by it in good  faith  in  accordance  with the  advice  of such  counsel,
accountants or experts.

         Section 7.2.  Indemnification  by Participant.  Subject to Section 7.3,
the Participant  shall indemnify,  defend,  protect and hold the Lender harmless
from and against any and all liabilities,  obligations, losses, damages, claims,
penalties,  actions,  judgments,  suits, costs, expenses or disbursements of any
kind or nature  whatsoever  (including  reasonable  attorneys' fees) that may be
imposed upon, incurred by, or asserted against the Lender in any way relating to
or arising out of (i) a Participant  Default,  (ii) the Lender's reliance on any
representation,  warranty or  certification  made by the  Participant in Section
8.2, which shall have been false or incorrect in any material  respect when made
or delivered, or (iii) any right of offset, defense or counterclaim with respect
to any Loan created by, or arising from,  transactions  between the  Participant
and the related Obligor other than the related Loan.

         Section  7.3.  Indemnification  by Lender.  Subject to Section  7.1 and
Section  7.2,  the  Lender  shall  indemnify,   defend,  protect  and  hold  the
Participant  harmless  from and  against any and all  liabilities,  obligations,
losses, damages, claims, penalties,  actions,  judgments, suits, costs, expenses
or  disbursements  of  any  kind  or  nature  whatsoever  (including  reasonable
attorneys' fees) that may be imposed upon,  incurred by, or asserted against the
Participant in any way relating to or arising out of any of the following:

                                       31
<PAGE>

                  (a)      a Lender Default;

                  (b) reliance on any representation,  warranty or certification
         made by the Lender  hereunder or in connection with this  Participation
         Agreement,  which shall have been false or  incorrect  in any  material
         respect when made or delivered;

                  (c) any right of offset,  defense or counterclaim with respect
         to any Loan  created  by, or arising  from,  transactions  between  the
         Lender and the related Obligor other than the related Loan.


         Notwithstanding the foregoing,  to the extent that any loss indemnified
hereunder  may be  recovered  from any  third  party  title  insurer,  surveyor,
appraiser, counsel, or other party that the Lender or Participant relied upon in
making a Loan or any Advance thereunder, Lender shall have no obligation to make
any indemnification payment to Participant until such third party claim has been
resolved,  but  in no  event  to  exceed  12  months  from  the  date  that  the
Participant's right to indemnification arose hereunder.

         Section 7.4. Reimbursement Obligation.  Except as otherwise provided in
the next sentence,  if either the Lender or the Participant (the "paying party")
at any time pays any liability,  obligation,  loss, damage,  penalty,  judgment,
cost or expense (including reasonable attorneys' fees) in any way relating to or
arising out of any Loans or the Loan  Documents  relating  thereto or any action
taken or not taken by the paying party (including  actions taken or not taken by
the Lender and the Participant pursuant to Section 5.2 or Section 5.5, or by the
Lender or the  Participant  on behalf of both of them  following an  arbitration
pursuant to Article XI), the non-paying  party shall reimburse the paying party,
on demand,  for the  non-paying  party's pro rata share,  based on the  parties'
respective Undivided Interests in the applicable Loan (determined as of the date
such  payment by the  paying  party is made),  of the amount  paid by the paying
party.  The preceding  sentence  shall not apply to any amount against which one
party is obligated to indemnify  and hold  harmless the other party  pursuant to
Sections 7.2 or 7.3 or to Extraordinary Servicing Expenses.

         Section 7.5. Nature of Duties of Lender.  The Lender shall not have any
duties  or   responsibilities   except  those   expressly   set  forth  in  this
Participation  Agreement and the Loan  Documents.  Neither the Lender nor any of
its officers,  directors,  partners, employees or agents shall be liable for any
action taken or omitted  hereunder or thereunder  or in  connection  herewith or
therewith, unless caused by its or their negligence or willful misconduct.





                                       32
<PAGE>



                                  ARTICLE VIII

                 ACKNOWLEDGMENTS, REPRESENTATIONS AND COVENANTS

         Section 8.1.      Participant's Acknowledgments.
         The Participant hereby acknowledges that:


                  (a) It will,  independently,  and  without  reliance  upon the
         Lender  or upon any  representations  made or to be made by the  Lender
         regarding  the  financial  condition of any Obligor,  and based on such
         financial  statements,  documents and  information  as the  Participant
         deems  appropriate  at the  time,  make  and rely  upon its own  credit
         decisions  in taking or not  taking  action  under  this  Participation
         Agreement.

                  (b) The offering and sale of the investment represented by the
         Participation  Interests and of the  Participation  Certificates  to be
         issued pursuant to the terms of this  Participation  Agreement have not
         been  registered  under  the  Securities  Act of 1933  and  need not be
         registered thereunder.

         Section 8.2.      Participant's Representations.  The Participant
         hereby represents and warrants to the Lender that:


                  (a)  The  Participant  is  a  corporation  duly  incorporated,
         validly   existing  and  in  good  standing   under  the  laws  of  the
         jurisdiction  named  in  the  first  paragraph  of  this  Participation
         Agreement  and  is  duly  qualified  to do  business,  and  is in  good
         standing,  in every  jurisdiction  in which the nature of its  business
         requires it to be so qualified.

                  (b) The execution, delivery and performance by the Participant
         of this Participation  Agreement are within the Participant's corporate
         powers, have been duly authorized by all necessary corporate action, do
         not contravene (i) the Participant's  charter or by-laws, (ii) any law,
         rule or regulation applicable to the Participant, (iii) any contractual
         restriction binding on or affecting the Participant or its property, or
         (iv) any order, writ, judgment,  award, injunction or decree binding on
         or affecting the  Participant or its property,  and do not result in or
         require the creation of any lien,  security interest or other charge or
         encumbrance upon or with respect to any of its properties.

                  (c) No  authorization  or approval or other  action by, and no
         notice to or filing with, any governmental authority or regulatory body
         is required  for the due  execution,  delivery and  performance  by the
         Participant of this Participation Agreement.

                  (d) This Participation  Agreement constitutes the legal, valid
         and  binding  obligation  of the  Participant  enforceable  against the
         Participant in accordance with its terms, subject to general principles
         of equity and  applicable  bankruptcy,  insolvency,  reorganization  or
         similar laws affecting creditors' rights generally.

                                       33
<PAGE>

                  (e) There is no pending  or  threatened  action or  proceeding
         affecting the Participant or any of its subsidiaries  before any court,
         governmental agency or arbitrator that may materially  adversely affect
         the  Participant  or any  of its  subsidiaries  or the  ability  of the
         Participant  to  perform  its  obligations  under  this   Participation
         Agreement.  Neither the Participant  nor any of its  subsidiaries is in
         default  with  respect  to  any  order  of  any  court,  arbitrator  or
         governmental  body  except  for  defaults  with  respect  to  orders of
         governmental  agencies  which defaults are not material to the business
         or operations of the Participant or any such subsidiary.

                  (f)  The  Participant  is  in  material  compliance  with  all
         statutes,  laws, rules and regulations  governing its existence and the
         performance of its obligations under this Participation Agreement.

                  (g) The  acquisition of the  Participation  Interests shall be
         made by the  Participant  solely  for its own  account  for  investment
         purposes  and with no  intention  of selling or  distributing  the same
         publicly or making any further public distribution thereof in violation
         of the Securities Act of 1933.

         Section 8.3.      Lender's Representations.The Lender hereby represents
         and warrants to the Participant that:


                  (a)  The  Lender  is a  limited  partnership  duly  organized,
         validly   existing  and  in  good  standing   under  the  laws  of  the
         jurisdiction of its  organization and is duly qualified to do business,
         and is in good standing,  in every  jurisdiction in which the nature of
         its business  requires it to be so qualified,  except where the failure
         to be so  qualified  would  not have a  Material  Adverse  Effect.  The
         General Partner is a corporation  duly organized,  validly existing and
         in good standing under the laws of the jurisdiction of its organization
         and is duly qualified to do business, and is in good standing, in every
         jurisdiction  in which the nature of its business  requires it to be so
         qualified, except where the failure to be so qualified would not have a
         Material Adverse Effect.

                  (b) The execution,  delivery and  performance by the Lender of
         this  Participation  Agreement  are  within  the  Lender's  partnership
         powers,  have been duly authorized by all necessary  partnership action
         (including  the  action or  consent  of the board of  directors  of the
         General  Partner),  do not  contravene  (i)  the  Lender's  partnership
         agreement or certificate of limited partnership,  (ii) any law, rule or
         regulation applicable to the Lender, (iii) any contractual  restriction
         binding on or affecting the Lender or its property,  or (iv) any order,
         writ, judgment, award, injunction or decree binding on or affecting the
         Lender or its property, and do not result in or require the creation of
         any lien, security interest or other charge or encumbrance upon or with
         respect  to  any  of  its  properties  (other  than  in  favor  of  the
         Participant with respect to the Loans and Related Assets).

                                       34
<PAGE>

                  (c) No  authorization  or approval or other  action by, and no
         notice to or filing with, any governmental authority or regulatory body
         is required  for the due  execution,  delivery and  performance  by the
         Lender of this Participation Agreement.

                  (d) This Participation  Agreement constitutes the legal, valid
         and binding obligation of the Lender enforceable  against the Lender in
         accordance with its terms,  subject to general principles of equity and
         applicable  bankruptcy,  insolvency,  reorganization  or  similar  laws
         affecting creditors' rights generally.

                  (e) There is no pending  or  threatened  action or  proceeding
         affecting  the  Lender or any of its  subsidiaries  before  any  court,
         governmental  agency or arbitrator  that could have a Material  Adverse
         Effect.  Neither the Lender nor any of its  subsidiaries  is in default
         with respect to any order of any court, arbitrator or governmental body
         except for  defaults  with respect to orders of  governmental  agencies
         which  defaults are not material to the business or  operations  of the
         Lender or any such subsidiary.

                  (f) The Lender  is,  and at all times  during the term of this
         Agreement  will be, in material  compliance  with all  statutes,  laws,
         rules and  regulations  governing its existence and the  performance of
         its obligations under this Participation Agreement.

                  (g)  Upon  each  purchase  of  a  Participation   Interest  in
         accordance  with  the  terms  of  this  Participation   Agreement,  the
         Participant shall acquire a valid Undivided  Interest in each Loan then
         existing  or  thereafter   arising  and  in  the  Related   Assets  and
         Collections with respect  thereto,  free and clear of any Adverse Claim
         created by or attributable to Lender except as provided hereunder.

                  (h) The principal place of business and chief executive office
         of the Lender and the offices where the Lender keeps all the Records is
         at 7926 Jones Branch Drive,  Suite 700,  McLean,  Virginia  22102.  The
         Lender will not change the foregoing unless the Participant  shall have
         been given ten (10) days' prior written  notice,  and no change therein
         will be made  to an  office  that is  outside  the  continental  United
         States.

                  (i)  All  Loans  will be  Eligible  Loans  at the  time of the
         closing  thereof  and,  if  subsequent  thereto,  the date on which the
         Participation  Interests  therein  are  purchased  by  the  Participant
         pursuant  to  the  terms  of  this  Participation   Agreement.  If  any
         Acquisition and Development  Loan or Construction  Loan and any related
         L/C Guaranty  submitted to the Participant for its approval pursuant to
         Section 2.1 is not an Eligible  Loan, the Lender will clearly so advise
         the Participant at the time it is submitted and provide the Participant
         with a detailed written description  specifying all of the reasons such
         Acquisition and Development  Loan or Construction  Loan and any related
         L/C Guaranty is not an Eligible Loan.

                  (j) Immediately  prior to any Acquisition and Development Loan
         or any Construction Loan becoming a Loan, the Lender had good title to,
         and was the sole owner of, such Acquisition and Development Loan or any
         Construction  Loan free and clear of any pledge,  lien,  encumbrance or
         security  interest,  and no action has been taken or failed to be taken
         by the  Lender  since the  closing  of the Loan that  would  materially
         adversely affect the  enforceability of any Acquisition and Development
         Loan or any  Construction  Loan or the related  Loan  Documents  or the
         interests therein of the Lender and the Participant.

                                       35
<PAGE>

                  (k) No Acquisition  and Development  Loan or any  Construction
         Loan will be  delinquent  in payment  (whether in respect of principal,
         interest or fees),  as of the last day of the month preceding the month
         in which such Acquisition and Development Loan or any Construction Loan
         becomes  a  Loan;  and  no  Acquisition  and  Development  Loan  or any
         Construction  Loan will have been so delinquent  prior to the date such
         Acquisition and  Development  Loan or any  Construction  Loan becomes a
         Loan.

                  (l) To Lender's  knowledge  (based solely in reliance upon the
         Title Policy),  at the time any Acquisition and Development Loan or any
         Construction  Loan becomes a Loan,  there shall be no delinquent tax or
         delinquent assessment lien against any Mortgaged Property securing such
         Loan.

                  (m) At the time any Acquisition  and  Development  Loan or any
         Construction  Loan becomes a Loan, no Obligor with respect to such Loan
         shall  have any right of  offset,  defense  or  counterclaim  as to the
         related Mortgage Note or Mortgage.

                  (n) To Lender's  knowledge  (based solely in reliance upon the
         Title Policy),  at the time any Acquisition and Development Loan or any
         Construction  Loan  becomes a Loan,  the lien of the  related  Mortgage
         shall be a first lien upon the related Mortgaged Real Property, subject
         to no liens  which are or may be a lien prior to or equal with the lien
         of the Mortgage,  including,  without  limitation,  mechanics' liens or
         claims  for  work,  labor or  material  affecting  the  Mortgaged  Real
         Property,  except such liens that are insured or indemnified against by
         a title  insurance  policy  described  under clause (r) below or bonded
         over by an appropriate  payment bond.  The Lender shall  administer the
         Loans in a manner  that will not impair the first lien  priority of the
         Mortgages and other security  instruments  relating thereto in the Loan
         Collateral.

                  (o) Each  Acquisition and Development Loan or any Construction
         Loan as of the time of their origination and as of the date they become
         a Loan,  shall  comply in all  material  respects  with all  applicable
         local, state and federal laws.

                  (p) Each Mortgage  securing a Loan shall contain customary and
         enforceable  provisions  which render the rights of the holder adequate
         to realize the benefits of the security against the Mortgaged Property,
         including  (i) in the case of a  Mortgage  that is a deed of trust,  by
         trustee's  sale,  (ii)  by  summary  foreclosure,  if  available  under
         applicable  law, and (iii)  otherwise by  foreclosure,  subject in each
         case to applicable federal and state laws and judicial  precedents with
         respect to bankruptcy and right of redemption.

                                       36
<PAGE>

                  (q) With respect to each Mortgage relating to a Loan that is a
         deed of trust, a trustee duly qualified  under  applicable law to serve
         as such is  properly  named,  designated  and  serving,  and  except in
         connection with a trustee's sale after default by a mortgagor,  no fees
         or expenses  are  payable by the Lender to the  trustee  under any such
         Mortgage.

                  (r) A Title  Policy  insuring  each  Mortgage  securing a Loan
         shall be  effective  as of the  closing of such Loan,  in an amount not
         less than the amount of such Loan,  and such policy  shall be valid and
         binding  and  remain  in full  force  and  effect at the time such Loan
         becomes a Loan.

                  (s) Subject to Section  3.3,  the Lender will  maintain in its
         possession  the original  executed  counterparts  of all Loan Documents
         relating to each Loan,  which shall in each case be in exactly the same
         form and content as the certified copies delivered by the Lender to the
         Participant.  Such original  counterparts  will be held at all times in
         the Lender's  fire-rated storage vault. The Lender maintains a fidelity
         bond  and  document  hazard  insurance  in  sufficient  amount  (or  is
         otherwise  adequately  self-insured)  to cover  loss of  original  Loan
         Documents.

                  (t) The Lender  will not sell,  pledge,  assign,  encumber  or
         subparticipate  any portion of its interest in or rights or obligations
         under the Loans or its interest in or rights or obligations  under this
         Participation  Agreement to any Person without the Participant's  prior
         written consent;  provided,  however, that the Lender may sell, assign,
         or  subparticipate  any  portion  of  its  interest  in  or  rights  or
         obligations under the Loans or its interest in or rights or obligations
         under this  Participation  Agreement to any Person that is an Affiliate
         of  the  Lender  without  the  Participant's   prior  written  consent;
         provided,  further,  that in any such case the Lender  shall retain all
         voting and control rights with respect to any Loans so sold,  assigned,
         or subparticipated and will advise the Participant of the occurrence of
         such transfer and the identity of the transferee.

                  (u) The Lender  will  timely and fully  observe,  perform  and
         comply  with all  material  provisions,  covenants  and other  promises
         required to be observed or performed  or complied  with by it under the
         terms of the Loans and the Loan Documents relating thereto.

                  (v) The Lender  will not make any change in the  character  of
         its business or its  practices in the general  administration  of loans
         which, in either case, would have a Material Adverse Effect. The Lender
         will service and administer the Loans in accordance  with the standards
         specified in Section 5.3.

                  (w) If a Lender Default shall occur and the Lender's servicing
         responsibilities  are terminated by the Participant pursuant to Section
         10.2,   then  the  Lender  will  promptly   execute  all   assignments,
         instructions and documents  necessary to transfer to the Participant or
         the Participant's  designee the responsibility for servicing the Loans,
         and shall  cooperate  to effect an  orderly  transition  in  servicing,
         including  the  delivery of all Loan  Documents  and  Records  relating
         thereto.

                                       37
<PAGE>

         Section 8.4.      Lender's Covenants.  The Lender hereby covenants
         and agrees with the Participant that:


                  (a)         Lender shall furnish or cause to be furnished to
         the Participant:
                           (i) As  soon as  available  and in any  event  within
         ninety (90) days after the end of each  fiscal  year of the  Lender,  a
         statement  of income,  changes in  partners'  capital and cash flow for
         such year and the related  statement of  financial  condition as at the
         end of such year of the Lender,  as  applicable,  setting forth in each
         case in comparative  form the figures for the previous  fiscal year (to
         the extent such figures are available),  all in reasonable  detail,  in
         accordance  with  GAAP,  consistently  applied,  and  certified  by the
         president or chief  financial  officer of the General  Partner that, to
         the best of such officer's knowledge, they are complete and correct and
         present  fairly the  financial  condition  as at the end of such fiscal
         year,  and the  results of  operations  for such  fiscal  year,  of the
         Lender, in accordance with GAAP, consistently applied;
                           (ii) As soon as  available  and in any  event  within
         forty-five  (45)  days  after  the end of each  fiscal  quarter  of the
         Lender,  a statement of  operations,  changes in partners'  capital and
         cash flow for such quarter and for the portion of the fiscal year ended
         of the Lender,  all in reasonable detail and certified by the president
         or chief financial  officer of the General Partner that, to the best of
         such  officer's  knowledge,  they are  complete and correct and present
         fairly the financial  condition as at the end of such quarter,  and the
         results of  operations  for such quarter and such portion of the fiscal
         year, of the Lender,  in accordance  with GAAP,  consistently  applied,
         subject to normal year-end adjustments.
                           (iii) As soon as  available  and in any event  within
         ten (10) Business Days of receipt from the applicable Borrower,  annual
         and quarterly financial  statements of each Borrower in accordance with
         the  requirements of the applicable Loan Documents and annual financial
         statements  from  each  guarantor  of any Loan in  accordance  with the
         requirements of the applicable Loan Documents.
                           (iv) As soon as  available  and in any  event  within
         thirty (30) days after the end of each calendar  month a Project Status
         Summary Report with respect to each Construction Loan.
                  (b) For so long as Kevin J. Ryan is  employed by Lender or any
of its Affiliates he shall continue to oversee the  relationship  between Lender
and Participant under this Agreement.  Any replacement for Kevin Ryan shall have
significant  experience  and  expertise  in the  management  of a  full  service
construction lending operation.




                                       38
<PAGE>



                                   ARTICLE IX

                               OTHER ARRANGEMENTS

         Section  9.1.  Other  Arrangements  With  Obligors.  The  Lender or the
Participant  may now or in the  future  have  other  credit  or  other  business
arrangements with any of the Obligors.  Subject to Section 2.1 and the following
provisions of this Article IX,  nothing  herein shall in any manner be deemed to
limit or preclude the right of the Lender or the  Participant to enter into such
other arrangement or to exercise any rights or remedies  available in connection
therewith,  including  the  exercise  of any  right of  setoff  or other  rights
available as a matter of law,  deemed by it to be in its own best  interest with
respect to any such other arrangement.  Except as expressly provided herein, the
Participant  shall  have no  interest  in any  other  guaranty  or in any  other
Property  taken as  collateral  security for any other loan or loans made by the
Lender to any  Obligor  or in any  Property  now or  hereafter  in the  Lender's
possession or control which may be or become collateral security for any Loan by
reason of a general provision  contained in any loan or collateral  agreement or
note held by the  Lender or by  reason  of any  right of  setoff,  counterclaim,
banker's lien or otherwise.

         Notwithstanding  the  foregoing or any other  provision to the contrary
contained  herein, no party hereto shall obtain any payment or payments (whether
voluntary or  involuntary,  through the exercise of any right of setoff or other
remedy) to be applied on account of its Undivided  Interest in any Loan,  unless
such  payment or  payments  shall be shared by all  parties  hereto  (subject to
Article VI) in accordance with their respective Undivided Interests in the Loans
as in effect from time to time.  Until such  payment is shared as  aforesaid  it
shall be deemed to be held in trust for the  benefit  of the party  entitled  to
share therein. If any such payment or payments are later rescinded, set aside or
otherwise  recovered  by or on behalf of the  Person  against  whom the right of
setoff or other remedy is exercised,  or by or for the creditors of such Person,
any such payment or payments which has been shared with the other parties hereto
pursuant to the preceding  sentence  shall be returned to the party against whom
such recovery is made.

         Section 9.2. Loan Collateral  Held Solely for Loans.  The Lender hereby
agrees that all Loan Collateral held and/or received by the Lender  specifically
as  security  for the  payment  of a Loan  shall be held by the  Lender  only as
security  for the  payment of such Loan and shall not be used or applied  toward
the payment of other obligations of any Obligor to the Lender (if any) otherwise
evidenced  or  incurred  so long  as any of such  Loan  remains  unpaid  and the
Participant has an interest therein.




                                       39
<PAGE>



                                    ARTICLE X

                         EVENTS OF DEFAULT AND REMEDIES

         Section 10.1.     Events of Lender Default.  Each of the following
         events shall constitute a "Lender Default" hereunder:

                  (a) The  Lender  shall fail to remit the  Lender's  Percentage
         Interest  in an  Advance  as and  when  due  hereunder  and  under  the
         applicable  Loan  Documents  and  such  failure  continues  for one (1)
         Business Days following such failure;

                  (b) The  Lender  shall fail to  perform  its  responsibilities
         hereunder or as lender under the Loans (other than a failure  described
         in subsection (a) above) and such failure shall not be remedied  within
         thirty (30) days after notice from the Participant;  provided, however,
         that if such failure  cannot  reasonably  be remedied  within such time
         period,  a Lender  Default shall not occur for so long as the Lender is
         diligently prosecuting such remedy to completion, but in no event shall
         such cure  period  exceed  beyond 150 days from the end of such  thirty
         (30) day period; provided further, however, that if (i) the Participant
         reasonably  determines that the failure to immediately declare a Lender
         Default would have a Material  Adverse Effect,  or (ii) the Participant
         reasonably  determines  that the  failure by the Lender to perform  its
         responsibilities  hereunder  or as lender  under  the  Loans  cannot be
         remedied  with the  passage of time,  then  Participant  may declare an
         immediate Lender Default pursuant to this Section 10.1(b); or

                  (c) Any  representation  or warranty  made by the Lender under
         Sections   8.3(i)   through   8.3(s),   8.3(u)  or  8.3(v)  or  in  any
         certification  made by the Lender hereunder or in writing in connection
         with this  Participation  Agreement  shall  prove to have been false or
         incorrect  when  made  or  delivered,  which  misrepresentation  (i) if
         capable of cure,  shall not be remedied  within  thirty (30) days after
         notice from the Participant, and (ii) has a Material Adverse Effect; or

                  (d) Any  representation  or warranty  made by the Lender under
         Sections  8.3(a) through  8.3(h),  8.3(t) or 8.3(w) shall prove to have
         been false or incorrect when made or delivered, which misrepresentation
         (i) if capable of cure,  shall not be remedied  within thirty (30) days
         after  notice  from the  Participant,  and (ii) has a Material  Adverse
         Effect; or

                  (e) Any failure by the Guarantor to make any payment under the
         Guaranty within ten (10) days of demand  therefor,  or any other breach
         by the Guarantor of its obligations  under the Guaranty,  which breach,
         if capable of cure, shall not be remedied within thirty (30) days after
         notice from the Participant; or

                  (f) An Event of  Bankruptcy  shall  occur with  respect to the
         Lender or the  Guarantor,  or either the Lender or the Guarantor  shall
         take any  corporate  or  partnership  action to  authorize  an Event of
         Bankruptcy.

                                       40
<PAGE>

         Section 10.2.  Participant's  Remedies. Upon the occurrence of a Lender
Default,  if the  Participant  desires to  exercise  any  remedy(ies)  available
hereunder or at law or in equity, the Participant shall notify the Lender of the
action the  Participant  intends to take at least ten (10)  Business Days before
exercising such  remedy(ies).  In conjunction with exercising such  remedy(ies),
Participant shall specify whether this Participation  Agreement is to terminate,
and if so the Termination  Date.  Subject to the provisions of Section 10.5, the
following  remedies shall be available to the Participant upon the occurrence of
a Lender Default:

                  (a) The  Participant  may  direct  the Lender to assign to the
         Participant  or the  Participant's  designee all of the Loan  Documents
         relating to the Loans  (provided  however,  that if the Lender  Default
         relates only to particular  Loans,  the  Participant  may only exercise
         remedies under this  subsection (a) with respect to such Loans) and the
         Participant  shall have the right  thereafter  to  exercise  all of the
         powers and rights of the Lender under this Participation  Agreement, in
         which case the  Participant  shall assume the  responsibilities  of the
         Lender under this Participation  Agreement,  relating to the collection
         and  enforcement  of the Loans and the related Loan  Documents  and the
         allocation and  application of  Collections  hereunder,  and the Lender
         shall thereupon be and become a Participant  hereunder to the extent of
         its  Undivided  Interest in the Loans and  entitled to  participate  in
         Collections  (provided that the priority of distribution of Collections
         and Lender's rights to receive  Collections shall remain subject to the
         provisions of Sections 6.8, 6.9 and 6.10 as if a servicing transfer had
         not taken place  hereunder),  subject to Article VI; provided that such
         assignment  by the Lender and the  transfer to the  Participant  of the
         Lender's  powers and rights  hereunder shall be deemed to have occurred
         automatically  upon the  occurrence  of an event  described  in Section
         10.1(e).  In the event of a servicing transfer pursuant to this Section
         10.2(a), the Participant (or such other Person as the Participant shall
         designate to service the Loans) shall be entitled to retain for its own
         account all amounts  reserved to the Lender hereunder in respect of the
         Lender's  Override  after the date of such servicing  transfer.  If the
         Participant  shall designate  another Person to be servicer,  then such
         third party shall also be permitted to retain out of  Collections  such
         additional commercially reasonable servicing fees as shall be agreed to
         by the Participant;

                  (b)  The  Participant  may  purchase  the  Lender's  Undivided
         Interests  in the  Loans at a  purchase  price  equal  to the  Lender's
         Undivided  Interest in the  aggregate  Outstanding  Amount of the Loans
         plus  accrued and unpaid  interest  thereon to the date of purchase and
         plus all Loan Fees,  unreimbursed  Extraordinary Servicing Expenses and
         Ancillary Fees; provided however,  that in the event the Lender Default
         relates only to one or more particular  Loans, the Participant may only
         purchase  the  Lender's  Undivided  Interest in the Loans to which such
         Lender Default relates;

                  (c) Unless the  Participant  elects to transfer the  servicing
         rights and duties pursuant to (a) above,  the Participant may terminate
         its obligation to fund its Percentage  Interest in additional  Advances
         of the Loans to which such Lender  Default  relates.  In such case, the
         Lender  shall fund 100% of all future  Advances  and shall  continue to
         administer the Loans in accordance with this Agreement; or

                                       41
<PAGE>

                  (d)      The  Participant  may  exercise  any other right or
         remedy  available  at law or in equity on account of the
         Lender Default.

         Section 10.3.  Events of Participant Default.  Each of the following
         shall constitute a "Participant Default" hereunder:


                  (a) The  Participant  shall  fail to  remit  to a  Lender  the
         Participant's  Percentage  Interest  in an  Advance  as  and  when  due
         hereunder  and  such  failure  continues  for  one  (1)  Business  Days
         following written notice from the Lender;

                  (b) The  Participant  shall fail to  perform  any of its other
         obligations under this  Participation  Agreement and such failure shall
         not be remedied  within  thirty (30) days after notice from the Lender,
         provided,  however,  that if such failure cannot reasonably be remedied
         within such time period,  a Participant  Default shall not occur for so
         long as the  Participant  is  diligently  prosecuting  such  remedy  to
         completion;

                  (c) Any representation,  warranty or certification made by the
         Participant   hereunder   or  in  writing  in   connection   with  this
         Participation  Agreement shall prove to have been false or incorrect in
         any material respect when made or delivered,  which  misrepresentation,
         if capable of cure, shall not be remedied within thirty (30) days after
         notice from the Lender, and the Lender reasonably  determines that such
         event  has  had  or  will  have  a  materially  adverse  effect  on the
         performance by the Participant or the Lender of its  obligations  under
         this Participation Agreement; or

                  (d) An Event of  Bankruptcy  shall  occur with  respect to the
         Participant  or the  Participant  shall  take any  corporate  action to
         authorize an Event of Bankruptcy.

         Section 10.4.  Lender's Remedies.  Upon the occurrence of a Participant
Default,  if the Lender desires to exercise any remedy(ies)  available hereunder
or at law or in equity, the Lender shall notify the Participant of the action it
intends  to  take at  least  ten  (10)  Business  Days  before  exercising  such
remedy(ies).  In conjunction  with  exercising  such  remedy(ies),  Lender shall
specify  whether this  Participation  Agreement is to  terminate,  and if so the
Termination  Date. The following  remedies shall be available to the Lender upon
the occurrence of a Participant Default:

                  (a)  The  Lender  may  purchase  the  Participant's  Undivided
         Interests in the Loans at a purchase  price equal to the  Participant's
         Undivided  Interest in the aggregate  Outstanding  Amount of the Loans,
         plus  accrued and unpaid  interest  thereon to the date of purchase and
         plus all Loan Fees,  unreimbursed  Extraordinary Servicing Expenses and
         Ancillary Fees due to Participant;  provided however, that in the event
         the  Participant  Default  relates  only to one Loan,  Lender  may only
         purchase the Participant's Undivided Interest in the Loan to which such
         Participant Default relates;

                                       42
<PAGE>

                  (b)      The Lender may terminate the Participant's right to
         purchase Participation Interests in other Loans;

                  (c) The Lender may  refuse to permit the  Participant  to fund
         additional Advances under the Loans. In such case, (i) the Lender shall
         fund 100% of all future  Advances and shall  continue to administer the
         Loans in  accordance  with this  Participation  Agreement  and (ii) the
         Lender shall be entitled to take any of the action specified in Section
         5.2 without the Participant's consent; or

                  (d)      The  Lender  may  exercise  any other right or remedy
         available at law or in  equity  on  account of the Participant Default.

         Section  10.5.  Purchase  of  Participant's  Undivided  Interest  Under
Certain  Circumstances.  In the event of a Lender Default, prior to the exercise
of the  Participant's  rights under  Section  10.2(a) or (b), the Lender may, at
Lender's option,  purchase the Participant's  Undivided  Interests in the Loans;
provided however,  that if the Lender Default relates only to one or more Loans,
the Lender may only purchase the Participant's  Undivided  Interest in the Loans
to which such Lender Default  relates.  In addition,  in the event of a Borrower
Bankruptcy  Event with respect to any Loan, the Lender may, at Lender's  option,
purchase the Participant's Undivided Interests in the related Loan. Any purchase
of the Participant's Undivided Interests in a Loan under this paragraph shall be
at a  purchase  price  equal  to the  Participant's  Undivided  Interest  in the
Outstanding  Amount of the Loan plus accrued and unpaid interest  thereon to the
date of purchase and plus all Loan Fees,  unreimbursed  Extraordinary  Servicing
Expenses and Ancillary Fees due to Participant.




                                       43
<PAGE>



                                   ARTICLE XI

                      CERTAIN METHODS OF DISPUTE RESOLUTION

         Section 11.1.  Choice of Dispute  Resolution  Methods.  If a dispute or
disagreement  shall arise between the Lender and the Participant  concerning any
matter set forth in  Section  5.2 or  Section  5.5 for which the  consent of the
Lender and the  Participant is required,  the parties shall pursue the following
dispute resolutions methods:

                  (a) The  Lender  shall  have the right,  within  fifteen  (15)
         Business  Days from the date such  dispute or  disagreement  arose,  to
         purchase  the  Participant's  Participation  Interest in the Loan as to
         which  the  dispute  has  arisen,  at a  purchase  price  equal  to the
         Participant's  Undivided Interest in the Outstanding Amount of the Loan
         plus  accrued and unpaid  interest,  Late Payment  Fees,  Extraordinary
         Servicing Expenses and Ancillary Fees due to Participant, and Loan Fees
         thereon to the date of purchase.

                  (b) In the event that the Lender shall not have  exercised the
         purchase right granted pursuant to paragraph (a) above, the Participant
         shall have the right,  within  fifteen (15) Business Days from the date
         the  Lender's  repurchase  right  expires,  to  purchase  the  Lender's
         Undivided Interest in the Loan as to which the dispute has arisen, at a
         purchase  price  equal  to  the  Lender's  Undivided  Interest  in  the
         Outstanding  Amount of the Loan plus accrued and unpaid interest,  Late
         Payment Fees,  Extraordinary  Servicing Expenses and Ancillary Fees due
         to Lender, and Loan Fees thereon to the date of purchase.

                  (c) In the event that  neither the Lender nor the  Participant
         exercise  their rights  pursuant to paragraph (a) or (b) above,  either
         the Lender or the Participant may give the other party a written notice
         demanding that the dispute be submitted to arbitration pursuant to this
         Article XI and the arbitrator  shall  determine  which of the positions
         advocated by the Lender and the  Participant is the most prudent course
         of action to be followed based on prudent lending policies.

         Section 11.2. Identity of Arbitrator. Within thirty (30) days after the
date of this  Participation  Agreement,  the  Lender and the  Participant  shall
endeavor  in good  faith  to  agree  on a  person  or  firm  to act as the  sole
arbitrator under this Participation Agreement. If the Lender and the Participant
are unable to agree within thirty (30) days after the date of this Participation
Agreement on the sole arbitrator,  the sole arbitrator under this  Participation
Agreement shall be Arthur  Andersen Real Estate Services Group.  If, at any time
during the term of this  Participation  Agreement,  Arthur  Andersen Real Estate
Services  Group,  or any  other  person  or  firm  then-designated  as the  sole
arbitrator,  is unable for any reason to serve as sole arbitrator and the Lender
and the Participant  are unable,  within thirty (30) days after learning of such
inability  to act,  to agree on a  successor  sole  arbitrator,  then either the
Lender  or the  Participant  shall  have the  right  to  apply  to the  American
Arbitration  Association  for the appointment of a person or firm to act as sole
arbitrator under this Participation  Agreement.  Any person or firm appointed as
the sole arbitrator  under this  Participation  Agreement must be experienced in
the  management of  financially-distressed  real property in the state where the
Mortgaged Property for the Construction Loan in question is located.

                                       44
<PAGE>

         Section  11.3.  Duties of  Arbitrator.  The sole  arbitrator  chosen in
accordance  with  Section  11.2  shall  afford  to  each of the  Lender  and the
Participant the right to submit written  statements of its views,  together with
any supporting documentation,  with respect to the business issue to be decided,
to review the written statement and supporting documentation,  if any, submitted
by the other party,  prior to a hearing and shall  conduct a hearing at the sole
arbitrator's  office. Each party shall be entitled to receive reasonable advance
notice of the hearing and to be represented by counsel at the hearing.  The fees
and expenses of the sole arbitrator  shall be divided equally between the Lender
and the Participant.

         The sole arbitrator shall, as expeditiously as possible, make a written
determination of the resolution of the issue in dispute.

         In the  exercise of his or her duties  under this  Article XI, the sole
arbitrator shall not be liable or accountable for any decision made or any other
action taken by him or her under this Participation Agreement in good faith. The
award rendered by the arbitrator  shall be final and binding upon the Lender and
the  Participant,  and  judgment  upon the award may be  entered in any court of
competent jurisdiction.

         Section 11.4. Collateral Appraisal Procedures.  If after the occurrence
of an Other Borrower  Default it is necessary to ascertain the fair market value
of any Loan Collateral in order to determine  whether a Distribution  Adjustment
Event has occurred,  Lender and  Participant  shall  promptly  consult with each
other in good faith in an  attempt to agree on the value of the Loan  Collateral
based upon  applicable  current sales and other relevant market  conditions.  If
within thirty (30) days of the Other Borrower  Default,  Lender and  Participant
are unable to agree on the value of the Loan  Collateral,  the  valuation of the
Loan  Collateral  shall be submitted  to Arthur  Andersen  Real Estate  Services
Group, or any other person or firm  then-designated as the sole arbitrator under
Section 11.2 for  determination.  If the sole arbitrator does not, in his or her
judgment,  have sufficient expertise to properly value the Loan Collateral,  the
arbitrator may appoint an independent  MAI real estate  appraiser to perform the
valuation.  The determination of the fair market value of the Loan Collateral by
the sole arbitrator or the appraiser  selected by the sole  arbitrator  shall be
final and binding upon the parties. The fees and expenses of the sole arbitrator
and  any  appraiser  shall  be  divided  equally  between  the  Lender  and  the
Participant,  subject to recoupment from the applicable  Obligor pursuant to the
Loan  Documents.   The  sole  arbitrator  and  appraiser,   if  any,  shall,  as
expeditiously as possible, make a written determination of the resolution of the
issue in dispute.




                                       45
<PAGE>



                                   ARTICLE XII

                                 GENERAL MATTERS


         Section 12.1.     No Joint  Venture.  The  relationship  between  the
         Participant  and the  Lender  is and shall be that of a
         purchaser and seller of a property interest and the Lender and the
         Participant hereby acknowledge and agree as follows:

                  (a) The Lender and the  Participant  are not partners or joint
         venturers in  connection  with the Loans and nothing  herein  contained
         shall create or be deemed to create any such relationship.

                  (b)      The  Lender  is not  authorized  to act and  shall
         not act or be  deemed  to be  acting  as  agent  for the
         Participant.  The Lender shall act and be deemed to act in all matters
         hereunder as an independent contractor.

                  (c) The Lender is not the  Participant's  borrower despite the
         grant  of the  security  interest  set  forth  in  Section  3.2.  Funds
         disbursed  and remitted by the  Participant  to the Lender  pursuant to
         Section  4.3  shall  not under any  circumstances  be  construed  as an
         unsecured  loan by the  Participant  to the Lender,  it being  intended
         hereby  that  the  Participant  shall at all  times be a fully  secured
         participant as to its Participation Interest and its Undivided Interest
         in the Loans. Any sums so remitted by the Participant  shall be part of
         and construed as a Participation Interest in the Loans.

         Section 12.2. No Setoff.  It is hereby  expressly  agreed that no party
hereto (a "Claimant")  shall setoff,  appropriate or apply any deposits (general
or special,  time or demand,  provisional  or final),  in any currency,  nor any
other credits,  indebtedness  or claims,  in any currency,  in each case whether
direct or indirect or contingent  or matured or  unmatured,  at any time held or
owing by such Claimant to or for the credit or the account of the other party (a
"Debtor"),  or any part  thereof,  against  and on  account  of the  obligations
(including,   without  limitation,  the  obligation  to  purchase  Participation
Interest  in  Advances   pursuant   hereto  and  the  obligation  to  distribute
Collections to the Participant pursuant hereto) and liabilities, if any, of such
Debtor to such Claimant hereunder.

         Section 12.3.     Termination.  This Participation Agreement shall
         terminate upon the first to occur of:


                  (a) such  date on or after the  Termination  Date on which all
         Loans  shall have been paid in full,  or all  remedies  to collect  the
         obligations  owing in  respect  thereof  (including  all  Extraordinary
         Servicing Expenses and Loan Fees) shall have been exhausted,  including
         the foreclosure  and/or  disposition of the related Loan Collateral and
         the pursuit of any Obligor  liable  thereon to the extent  permitted by
         applicable law; or

                  (b)      the agreement of the parties hereto.

                                       46
<PAGE>

         Section  12.4.  Notices.  All  notices,  demands,  requests,  or  other
communications  which may be or are required to be given, served, or sent to any
party  hereto  pursuant  to  this  Participation  Agreement,  shall,  except  as
otherwise specifically provided herein, be in writing and delivered in person or
mailed by first-class,  registered, or certified mail, return receipt requested,
postage prepaid, or transmitted by facsimile,  addressed (until a new address is
designated hereunder) as follows:

         If to Participant:         Residential Funding Corporation
                                    8400 Normandale Lake Boulevard
                                    Suite 600
                                    Minneapolis, MN  55437-1083
                                    Attn:   Executive Vice President
                                            Construction Lending
                                    Facsimile Number: (612) 832-7585

         with a copy to:            Residential Funding Corporation
                                    8400 Normandale Lake Blvd.
                                    Suite 600
                                    Bloomington, Minnesota 55437
                                    Attn:  General Counsel
                                    Facsimile Number:  (612) 832-7190

         If to Lender:              Harbourton Residential Capital Co., L.P.
                                    7926 Jones Branch Drive
                                    Suite 700
                                    McLean, VA 22102
                                    Attn:  President
                                    Facsimile Number:  (703) 761-1431

         with a copy to:            Harbourton Financial Services L.P.
                                    2530 South Parker Road
                                    5th Floor
                                    Aurora, CO 80014
                                    Attn:  Chief Executive Officer
                                    Facsimile Number:  (303) 745-3688

         with a further copy to:

                                    Lowenstein, Sandler, Kohl, Fisher & Boylan
                                    65 Livingston Avenue
                                    Roseland, NJ 07068
                                    Attn:  Allen B. Levithan, Esq. (H2287-10)
                                    Facsimile Number:  (201) 992-5820

                                       47
<PAGE>

         Each  party may  designate  by such  notice to all other  parties a new
address for itself for purposes of any notice,  demand, request or communication
hereunder.

         Each notice, demand, request, or communication which shall be delivered
in person or mailed,  telexed or sent by facsimile in the manner described above
shall be deemed sufficiently given, served, or sent and received at such time as
it is delivered to the addressee (with the return receipt, the delivery receipt,
or with respect to a facsimile,  evidence on the document stamped by the machine
showing that it was sent shall be  conclusive  evidence of such  delivery) or at
such time as delivery is refused by the addressee upon presentation.

         Section 12.5.  Confidentiality.  Lender and Participant  shall mutually
agree on the contents of any press release,  public announcement or other public
disclosure   regarding  this   Participation   Agreement  and  the  transactions
contemplated  hereunder and Participant  agrees that it shall not make any press
release, public announcement or other public disclosure regarding any Loans made
hereunder, or regarding any related Obligor or Loan Documents,  without Lender's
consent.

         Section  12.6.  Amendments,  Waivers.  No  amendment,  modification  or
discharge of this Participation Agreement and no waiver hereunder shall be valid
or binding  unless set forth in writing and duly  executed by the party  against
whom enforcement of the amendment, modification,  discharge or waiver is sought.
No  failure  on the  part of any  party  hereto  to  exercise,  and no  delay in
exercising, any right hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any right hereunder  preclude any other or further
exercise  thereof  or the  exercise  of any other  right.  The  remedies  herein
provided are cumulative and not exclusive of any remedies provided by law.

         Section 12.7. Entire Agreement.  This Participation Agreement as of the
date hereof and (including the Exhibits attached hereto)  constitutes the entire
agreement  between the parties  hereto as of the date hereof and with respect to
the transactions  contemplated  herein, and supersedes all prior oral or written
agreements,  commitments or understandings  with respect to the matters provided
for herein.

         Section 12.8. Governing Law. This Participation  Agreement,  the rights
and  obligations  of the  parties  hereto,  and any claims or  dispute  relating
thereto,  shall be governed by and construed in accordance  with the laws of the
State of Virginia, without regard to the conflict of laws principles thereof.

         Section 12.9. Successors,  Counterparts.  This Participation  Agreement
shall be binding  upon and inure to the benefit of the parties  hereto and their
respective  successors and assigns;  provided,  however, that neither party will
assign  or  otherwise  dispose  of any of its  interest  in  this  Participation
Agreement or any Loan in violation of the relevant  provisions  of Article VIII.
This Participation Agreement may be executed in counterparts each of which shall
be deemed to be an original and all of which shall together shall constitute but
one and the same instrument.

                                       48
<PAGE>

         Section  12.10.  Expenses of Document  Preparation.  The Lender and the
Participant  each  agree  to pay  their  own  costs  and  expenses  incurred  in
connection with the  preparation,  execution and delivery of this  Participation
Agreement.

         Section 12.11. Prevailing Party. In the event either party hereto shall
employ legal counsel or bring an action at law or commence any other  proceeding
against  the other party to enforce any of the terms,  covenants  or  provisions
hereof,  the party  prevailing in any such action or other  proceeding  shall be
paid all  reasonable  attorneys'  fees by the other party,  as determined by the
court  and not the  jury,  and in the  event any  judgment  is  secured  by such
prevailing party, all such attorneys' fees shall be included in such judgment.

         Section  12.12.  No  Third  Party  Beneficiaries.   This  Participation
Agreement is made and entered into for the sole  protection and legal benefit of
the Lender and the Participant  and their  respective  permitted  successors and
assigns, and no other Person shall be a direct or indirect legal beneficiary of,
or have any direct or indirect cause of action or claim in connection with, this
Participation  Agreement.  Without limiting the generality of the foregoing, the
Participant  shall not have any  obligation  to any  Person  not a party to this
Participation Agreement.




                                       49
<PAGE>



         IN  WITNESS  WHEREOF,  each  of the  parties  hereto  has  caused  this
Participation Agreement to be duly executed and delivered in its name and on its
behalf, all as of the day and year first above written.

                          LENDER:

                          HARBOURTON RESIDENTIAL
                          CAPITAL CO., L.P.,
                          a Delaware limited partnership
                          By Harbourton Residential
                          Capital Corporation,
                          a Delaware corporation,
                          its general partner



                         By:/s/ J. Kenneth McLendon
                            -----------------------
                           Name:  J. Kenneth McLendon
                                 Its: President


                          PARTICIPANT:

                          RESIDENTIAL FUNDING
                          CORPORATION,
                          a Delaware corporation


                         By:/s/ Kenneth Markel
                         ------------------------
                            Name:  Kenneth Markel
                                  Its: Director

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<PAGE>

INVESTOR CONSENT



RESIDENTIAL  FUNDING  CORPORATION,  a  Delaware  corporation  (the  "Investor"),
pursuant  to the  terms  of that  certain  Participation  Agreement  dated as of
February 23, 1996 (the  "Participation  Agreement'),  by and between  Harbourton
Residential  Capital Co., L.P., a Delaware  limited  partnership (the ''Seller")
and the Investor, hereby agrees as follows,  effective as of the closing date of
the  transactions  contemplated  by that certain Asset Purchase  Agreement dated
August 17,  1998 (the  "Asset.  Purchase  Agreement"),  by and among  Harbourton
Financial  Corp., a Delaware  corporation (the "Buyer),  the Seller,  Harbourton
Residential Capital Corporation,  a Delaware corporation and the general partner
of the Seller, and Harbourton Holdings, L.P., a Delaware limited partnership and
a limited partner of the Seller (the "Limited Partner"):

The Investor consents to the assignment of the Participation  Agreement to Buyer
and the transfer by the Seller to Buyer of the Seller's contractual  obligations
to act as servicer under the Participation Agreement.

(b) The Investor  agrees that Buyer shall succeed to all  obligations  of Seller
under the  Participation  Agreement,  and Seller  shall have no  obligations  or
liability  under the  Participation  Agreement for actions taken on or after the
closing date for the transaction  evidenced by the Asset Purchase Agreement (the
"Closing Date"), provided however that nothing shall serve to relieve the Seller
of its  obligations and liability to the Investor for actions taken prior to the
Closing Date

(c) The Investor  hereby  releases the Limited  Partner from its obligations and
liability  under  the  guaranty  agreement  given  by  the  Limited  Partner  in
connection  with the Seller's  obligations  under the  Participation  Agreement,
provided  that such  release  relates  solely to  actions  taken on or after the
Closing  Date,  and nothing  shall  serve to relieve the Limited  Partner of its
obligations and liability to the Investor for actions taken prior to the Closing
Date.

IN WITNESS  WHEREOF,  the undersigned  has executed this Investor  Consent as of
this 26th day of August, 1998.

RESIDENTIAL FUNDING CORPORATION
a Delaware Corporation
By: /S/ Donald V. Pierce
_____________________
Printed Name: Donald V. Pierce
Title:  Managing Director

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<PAGE>

AGREEMENT AMENDING PARTICIPATION AGREEMENT

THIS AGREEMENT  AMENDING  PARTICIPATION  AGREEMENT (the  "Agreement") is entered
into as of the 15th day of October, 2000 (the "Effective Date") by and
among RESIDENTIAL FUNDING CORPORATION,  a corporation  organized pursuant to the
laws of the State of Delaware ("Participant"), and HARBOURTON FINANCIAL CORP., a
corporation   organized   pursuant   to  the  laws  of  the  State  of  Delaware
("Harbourton").

WHEREAS Participant, as the "Participant," and Harbourton Residential Capital Co
L.P., a Delaware limited partnership ("Old Harbourton"), as the "Lender," are
parties to a Participation Agreement dated as of February 23, 1996
(the "Participation Agreement").

WHEREAS,  Harbourton is successor in interest by corporate reorganization to Old
Harbourton  and has  succeeded  to all of Old  Harbourton's  rights,  interests,
obligations  and  liabilities  as  the  Lender  pursuant  to  the  Participation
Agreement.

WHEREAS, by its stated terms, the Participation Agreement formally terminated as
of February 23, 1999,  although  neither  Participant  nor  Harbourton  took any
action  to  terminate  the  business   relationship   between   Participant  and
Harbourton.

WHEREAS,   despite  the  formal  termination  of  the  Participation  Agreement,
Participant  and Harbourton  entered into several  transactions  pursuant to the
terms and conditions set forth in the  Participation  Agreement and continuously
treated  the  Participation  Agreement  as an ongoing  agreement  between  them.
WHEREAS  Participant  and Harbourton  desire to amend certain  provisions of the
Participation Agreement to extend the term of the Participation Agreement and to
increase,  on a  temporary  basis,  Participant's  maximum  commitment  for  the
purchase  of   Participation   Interests   (as  such  term  is  defined  in  the
Participation Agreement) pursuant to the Participation Agreement.

WHEREAS  Participant and Harbourton desire to ratify the transactions into which
they  have  entered  pursuant  to the  Participation  Agreement  from and  after
February 23, 1999,

NOW,  THEREFORE,  Participant and  Harbourton,  in  consideration  of the mutual
promises contained in this Agreement and other good and valuable  consideration,
the receipt and  sufficiency  of which are  acknowledged,  and  intending  to be
legally bound, hereby do covenant and agree as follows:

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<PAGE>

I .    The foregoing recitals are incorporated into this Section I as operative
provisions of this Agreement as if the foregoing recitals were set forth at
length in this Section I.

2. Capitalized terms that are used in this Agreement but are not defined in this
Agreement  will  have  the  meanings  ascribed  to  them  in  the  Participation
Agreement.

3. Harbourton  acknowledges to and agrees with Participant that it has succeeded
to and  has  assumed  fully  and  completely  all of  Old  Harbourton's  rights,
interests,   obligations   and   liabilities  as  the  Lender  pursuant  to  the
Participation  Agreement.  Participant and Harbourton acknowledge and agree that
all  references  in the  Participation,  as  amended by this  Agreement,  to the
"Lender" will be taken to refer to  Harbourton,  as successor in interest to Old
Harbourton.

4. Participant and Harbourton acknowledge and agree that, effective as of
February 23, 1999, the term of the  Participation  Agreement is extended through
11:59 P.M.,  Eastern time, on September 30, 2003, subject in all respects to the
other terms and conditions of the  Participation  Agreement,  including (but not
limited to) the provisions of Section 10.2 of the Participation  Agreement (with
respect to a Lender  Default)  and Section 10.4 of the  Participation  Agreement
(with  respect  to a  Participant  Default).  To that  end,  Section  1.1 of the
Participation  Agreement  is  amended by  deleting  the  definition  of the term
"Termination Date" from that Section and substituting in its place the following
definition of the term "Termination Date":

"Termination  Date" means  September  30, 2003, or such earlier date as might be
specified  pursuant to Section 10.2 by the Participant  following the occurrence
of a Lender  Default or as might be  specified  pursuant to Section  10.4 by the
Lender following the occurrence of a Participant Default.

5. Participant and Harbourton  ratify and con-firm all of the transactions  into
which they have entered pursuant to the  Participation  Agreement from and after
February  23,  1999  through  the  Effective  Date  and  acknowledge  that  such
transactions  are their mutual bindina  obligations in accordance with the terms
of 6e Participation  Agreement,  notwithstanding any possible formal termination
of the Participation Agreement that might have occurred on or about February 23,
1999.

6.  Participant  and Harbourton  acknowledge  and agree that, for an eight-month
period  from and after the  Effective  Date(the  "Commitment  Increase  Period")
Participant's  maximum  commitment for the purchase of  Participation  Interests
pursuant to the Participation Agreement (the "Commitment Limit will be increased
from  Fifty  Million  Dollars   ($50,000,000)  to  Fifty-Five   Million  Dollars
($55,000,000). Participant and Harbourton further acknowledge and agree that the
aforesaid  increase in the Commitment Limit is a temporary  increase and that at
the  expiration of the Commitment  Increase  Period,  the Commitment  Limit will
revert  to Fifty  Million  Dollars  ($50,000,000)  unless  the  Participant  and
Harbourton  agree  otherwise  in  writing.  To that  end,  with  respect  to the
Commitment Increase Period all references in the Participation  Agreement to the
Commitment Limit (including,  but not limited to, the references in Paragraph 2.
1 (a) and Paragraph  2.3 (a) of the  Participation  Agreement)  will be taken to
refer to a Commitment Limit of Fifty-Five Million Dollars ($55,000,000).

                                       53
<PAGE>

7.  Participant  and  Harbourton  acknowledge  and agree that the  addresses for
notices set forth in Section 12.4 of the  Participation  Agreement are no longer
correct. To that end, Section 12.4 Of the Participation  Agreement is amended by
deleting the addresses for notices set forth in that Section and substituting in
their place the following addresses for notices:

If to Participant:

       Residential I. Funding Corporation
       8400 Normandale Lake Boulevard
       Minneapolis, Minnesota 55437-1083
       Attention:      Executive Vice President Construction Lending
       Facsimile Number: 952-857-6960

       with a copy to:

       Residential Funding Corporation
       8400 Normandale Lake Boulevard
       Minneapolis, Minnesota
       55437-1083
       Attention:     General Counsel
       Facsimile Number: 952-857-6958

       If to Lender:

       Harbourton Financial Corp.
       8180 Greensboro Drive
       McLean, Virginia 22102
       Attention: J. Kenneth McLendon, President
       Facsimile Number: 703-821-2815

       and

       Harbourton Financial Corp.
       Suite 140
       7250 Parkway Drive
       Hanover, Maryland 21076
       Attention: Paula M. Morgan, Vice President
       Facsimile Number: 410-712-4254

                                       54
<PAGE>

       with a copy to:

       Searle E. Mitnick, Esquire
       Tydings & Rosenberg LLP 26th Floor
       100 East Pratt Street
       Baltimore, Maryland 21202
       Facsimile Number: 410-727-5460

8.  Except  as  otherwise  provided  in this  Agreement,  all of the  terms  and
conditions of the Participation  Agreement will remain in full force and effect.
Participant  and Harbourton  ratify their  agreement to and acceptance of all of
the terms and  conditions of the  Participation  Agreement,  as modified by this
Agreement.

9.  Each  person  who  executes  this  Agreement  in a  representative  capacity
represents  and warrants to the other parties to this Agreement that such person
is duly  authorized  to execute  this  Agreement on behalf of the Party in whose
name the person executes this Agreement.

10. This Agreement may be executed in counterpart  copies, each of which will be
deemed an original,  but all of which taken  together will  constitute  the same
Agreement.

11. This  Agreement  supersedes  any and all prior  discussions  and  agreements
between Participant and Harbourton with respect to the matters contained in this
Agreement, and this Agreement contains the sole and entire understanding between
the parties to this  Agreement  with  respect to the matters  contained  in this
Agreement.

11. This Agreement may not be changed, modified, discharged or terminated orally
or in any  other  manner  other  than  by an  agreement  in  writing  signed  by
Participant and Harbourton.

12. This Agreement will be governed by the internal laws of the  Commonwealth of
Virginia, without giving effect to the principles thereof relating to conflicts


                                       55
<PAGE>


IN WITNESS WHEREOF, the parties have executed this Agreement as Of the Effective
Date.


PARTICIPANT:
RESIDENTIAL FUNDING CORPORATION, a
Corporation Organized pursuant to the Laws of the State of Delaware

By: /s/ David H. Peterson
Name: David H. Peterson
Title: Director


HARBOURTON:
HARBOURTON FINANCIAL CORP., a
Corporation Organized pursuant to the Laws of the State of Delaware

By: /s/ J. Kenneth McLendon
Name: J. Kenneth McLendon
Title: President


                                       56
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