<PAGE>   1
                                                                    Exhibit 99.3



                             ARTICLES SUPPLEMENTARY

                    CLASSIFYING 1,351,351 SHARES OF PREFERRED
                 STOCK AS CLASS A SENIOR CUMULATIVE CONVERTIBLE
                                 PREFERRED STOCK

                                       OF

                          PACIFIC GULF PROPERTIES INC.


                  Pursuant to Section 2-105 of the Maryland General Corporation
Law (the "M.G.C.L."), Pacific Gulf Properties Inc., a corporation organized and
existing under the M.G.C.L. (the "Corporation"), and having its principal office
in the State of Maryland located at c/o CT Corporation System, 32 South Street,
Baltimore, Maryland 21202,


          DOES HEREBY CERTIFY TO THE STATE DEPARTMENT OF ASSESSMENT AND
                           TAXATION OF MARYLAND THAT:

                  FIRST: Pursuant to authority granted to and vested in the
Board of Directors of the Corporation (the "Board") by the Charter of the
Corporation (the "Charter"), and pursuant to the provisions of Section 2-105 of
the M.G.C.L., the Board, at a meeting duly convened and held on December 11,
1996, regarding the possible sale and issuance by the Corporation of convertible
preferred stock, adopted resolutions duly classifying 1,351,351 shares of
Preferred Stock of the Corporation into a single series of Preferred Stock to be
designated as "Class A Convertible Preferred Stock, par value $.01 per share,"
and has provided for the issuance of such shares;


                  SECOND: The terms of the "Class A Senior Cumulative
Convertible Preferred Stock," as set forth by the Board, including the
preferences, conversion or other rights, voting powers, limitations as to
dividends, qualifications and terms and conditions of redemption of each such
series, are as follows (capitalized terms not otherwise defined shall have the
meanings ascribed to them in the Charter):


                  Section 1. Preferred Shares -- Designation and Amount. The
shares of such class of Preferred Stock shall be designated as "Class A Senior
Cumulative Convertible Preferred Stock" and the number of shares constituting
the series so designated shall be 1,351,351 (the "Preferred Shares").

                  Section 2. Preferred Shares -- Dividend Rights.

                  (a) General. Subject to Section 9, and in addition to any
other dividends provided for herein, the Corporation shall pay in cash, when, as
and if declared by the Board, out of funds legally available therefor as
provided by the M.G.C.L. (the "Legally Available Funds"),
<PAGE>   2
dividends at the quarterly rate equal to the Applicable Dividend Rate (as
defined below) per issued and outstanding Preferred Share, per quarter. Such
dividends shall be cumulative and payable (if declared) quarterly on each
February 15, May 15, August 15 and November 15, with respect to the prior
quarter, commencing February 15, 1997 (except that if such date is not a
Business Day (as defined below), then such dividend will be payable on the next
succeeding Business Day) to the holders of record at the close of business on
the date specified by the Board at the time such dividend is declared no more
than thirty (30) days prior to the date fixed for payment thereof; provided,
however, that the Corporation shall have the right to declare and pay dividends
at any time. Dividends shall begin to accrue and be cumulative from the date of
issuance of such Preferred Share to and including the first to occur of (i) the
date on which the Liquidation Value (as defined herein) of such Preferred Share
or Put Payment (plus all accrued and unpaid dividends thereon whether or not
declared) is paid to the holder thereof in connection with the liquidation of
the Corporation or the redemption of such Preferred Share by the Corporation,
(ii) the last day of the quarter preceding the quarter in which such Preferred
Shares are converted into shares of Common Stock hereunder if such date is after
the record date for the Regular Quarterly Dividend (as defined herein) on the
Common Stock for the quarter in which such conversion takes place, (iii) the
last day of the quarter second preceding the quarter in which such Preferred
Shares are converted into shares of Common Stock hereunder if such date is prior
to the record date for the Regular Quarterly Dividend on the Common Stock for
the quarter in which such conversion takes place, or (iv) the date on which such
share is otherwise acquired and paid for by the Corporation.

                  (b) Cumulative Dividends. Each of such dividends shall be
fully cumulative, to the extent not previously paid. Any accrued dividend that
is not paid, or made available for payment, on the date set forth in Section
2(a) above shall accrue dividends at a rate of (i) 2.297% per fiscal quarter for
any quarter which ends on or prior to December 31, 1997 and (ii) for any
subsequent fiscal quarter the greater of (x) 2.297% per quarter and (y) the
product of 1.04 and the per share quarterly dividend paid in that quarter in
respect of the common stock, par value $.01 per share, of the Corporation (the
"Common Stock"), divided by $18.50, per quarter until such amount has been paid.
Any dividend payment with respect to the Preferred Shares shall first be
credited against any prior accrued and unpaid dividend. No dividends shall be
set apart for or paid upon the Common Stock or any other shares of stock ranking
junior to the Preferred Shares unless all such cumulative dividends on the
Preferred Shares have been paid.

                  (c) Applicable Dividend Rate. With respect to any Preferred
Share then issued and outstanding the "Applicable Dividend Rate" shall be (i)
$0.425 per Preferred Share, per fiscal quarter for any quarter which ends on or
prior to December 31, 1997 and (ii) for any subsequent fiscal quarter the
greater of (x) $0.425 per Preferred Share, per quarter, and (y) the product of
1.04 and the per share quarterly dividend paid in that quarter in respect of the
Common Stock, per fiscal quarter. If any of the events described under Section 7
requiring the adjustment of the Conversion Price (as defined herein) occurs,
such dividends payable thereafter on the Common Stock shall be calculated for
purposes of the foregoing clause (y) so as to reverse the effect of such events.
The Applicable Dividend Rate shall be pro rated for the actual number of days in
any partial quarter.



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                  (d) Pro Rata Distribution. All dividends paid with respect to
Preferred Shares pursuant to this Section 2 shall be paid pro rata in respect of
each Preferred Share entitled thereto. In the event that the Legally Available
Funds available for the payment of dividends shall be insufficient for the
payment of the entire amount of dividends payable with respect to Preferred
Shares on any date on which the Board has declared the payment of a dividend or
otherwise, the amount of any available surplus shall be allocated for the
payment of dividends with respect to the Preferred Shares and any other shares
of capital stock that are pari passu as to dividends pro rata based upon the
amount of accrued and unpaid dividends of such shares of capital stock.

                  (e) Business Day. For purposes hereof, the term "Business Day"
shall mean any Monday, Tuesday, Wednesday, Thursday or Friday which is not a day
on which banking institutions in New York City are authorized or obligated by
law or executive order to close.

                  Section 3. Preferred Shares -- Certain Restrictions. Unless
the dividends (including accrued and unpaid dividends in arrears whether or not
declared) described above in Section 2, which pursuant to their terms should
have been paid, have been paid in full or declared and set apart for payment,
the Corporation shall be prohibited from paying dividends on, making any other
distributions on, or redeeming or purchasing or otherwise acquiring for
consideration any capital stock of the Corporation (without regard to its rank,
either as to dividends or upon liquidation, dissolution or winding up). The
Corporation shall not permit any subsidiary or subpartnership of the Corporation
to purchase or otherwise acquire for consideration or make any payment with
respect to any shares of capital stock of the Corporation if the Corporation is
prohibited from purchasing or otherwise acquiring for consideration or making
any payment with respect to such shares at such time and in such manner pursuant
to the prior sentence, provided, however, that the Corporation shall not be
prohibited from making a capital contribution of capital stock of the
Corporation to any of its subsidiaries or subpartnerships.

                  Section 4. Preferred Shares -- Voting Rights.

                  (a) General. Except as limited by law the holders of the
Preferred Shares shall be entitled to vote or consent on all matters submitted
to the holders of Common Stock together with the holders of the Common Stock as
a single class.

                  (b) Calculation of Votes. For the purposes of calculating the
votes cast for a particular matter when voting or consenting pursuant to Section
4(a), each Preferred Share will entitle the holder thereof to one vote for each
share of Common Stock into which such Preferred Share is convertible as provided
in Section 7(c) herein as of the record date for such vote or consent or, if no
record date is specified, as of the date of such vote or consent.

                  (c) Section 4(c) Directors. In addition to the other voting
rights described herein, upon the issuance to Five Arrows Realty Securities
L.L.C. of Preferred Shares such that, and until Five Arrows Realty Securities
L.L.C., Rothschild Realty Inc. or the ninety-nine percent (99%) member of Five
Arrows Realty Securities L.L.C., ceases to own either (A) all of the outstanding
Preferred Shares or (B) an amount of voting securities of the Corporation which,
if converted into shares of Common Stock, would exceed 10% of the outstanding
Common Stock



                                      -3-
<PAGE>   4
on a fully diluted basis (determined on the basis of then convertible,
exercisable or exchangeable securities, warrants or options issued by the
Corporation (such amount as set forth in clauses (A) and (B) above, the "Minimum
Threshold"), (i) the number of directors constituting the Board shall be
automatically increased by one (1) member and (ii) upon the first to occur, or
from time to time following the Dividend/Earnings Cure (as defined herein) upon
the first to occur, of (x) the Corporation's failure to pay the Regular
Quarterly Dividend on the Common Stock for any quarter in an amount of at least
$.40 per share (adjusted to reverse the effect of any event set forth in Section
7 that would require an adjustment to the Conversion Price (the "Dividend
Reduction Default"), (y) the Corporation's financial results reflecting that the
ratio of its Combined EBITDA to its reported interest expense (as described in
clause (2) under the definition of Combined EBITDA below) for each of three
consecutive fiscal quarters was less than 1.25 to 1.00 (the "Earnings Default"),
or (z) the Corporation's failure to pay in full the quarterly dividend payable
hereunder (whether or not declared) at any time in respect of the Preferred
Shares (the "Dividend Payment Default"), the Board shall be automatically
increased by an additional one (1) member for an aggregate maximum increase
pursuant hereto of two directors. The position on the Board established pursuant
to clause (i) of this Section 4(c) shall remain available until the Minimum
Threshold is no longer satisfied. The position on the Board established pursuant
to clause (ii) of this Section 4(c) shall remain available until the first to
occur of such time as (i) the Minimum Threshold fails to be satisfied and (ii)
the Dividend/Earnings Cure (as defined herein). Any director elected pursuant to
this section shall be deemed to have resigned upon the position created hereby
not being available.

                  The term "Regular Quarterly Dividend" means any cash dividend
or dividends paid in any calendar quarter that do not in the aggregate exceed
the Corporation's reported Funds From Operations (as defined by the National
Association of Real Estate Investment Trusts prior to 1996) for the quarter
relating to such dividend.

                  The term "Combined EBITDA" means the combined net income of
the Corporation (before extraordinary income or gains) as reported in its
Quarterly Report on Form 10-Q under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or otherwise furnished to holders of Preferred
Shares pursuant to Section 4(j) increased (to the extent deducted in determining
consolidated net income) by the sum of the following (without duplication):

                           (1) all income and state franchise taxes paid or
                  accrued according to generally accepted accounting principals
                  in the United States ("GAAP") for such period (other than
                  income taxes attributable to extraordinary, unusual or
                  non-recurring gains or losses except to the extent that such
                  gains were not included in Combined EBITDA),

                           (2) all interest expense paid or accrued in
                  accordance with GAAP for such period (including financing fees
                  and amortization of deferred financing fees and amortization
                  of original issue discount),

                           (3) depreciation and depletion reflected in such
                  reported net income,



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<PAGE>   5
                           (4) amortization reflected in such reported net
                  income including, without limitation, amortization of
                  capitalized debt issuance costs (only to the extent that such
                  amounts have not been previously included in the amount of
                  Combined EBITDA pursuant to clause (2) above), and

                           (5) any other non-cash charges to the extent deducted
                  from combined net income (including, but not limited to,
                  income allocated to minority interests, non-recurring or
                  one-time GAAP non-cash income, gains, expenses or losses).

                  (d) Section 4(d) Directors. In addition to the other voting
rights described herein, at any time after the Minimum Threshold ceases to be
satisfied and a Dividend Payment Default occurs for three consecutive fiscal
quarters, the number of directors constituting the Board shall be automatically
increased by a maximum of two (2) members. The position on the Board created
pursuant to this Section 4(d) shall continue to be available until the earlier
to occur of such time as (i) there are no Preferred Shares of the Corporation
outstanding and (ii) the Dividend Payment Cure (as defined herein). Any director
elected pursuant to this section shall be deemed to have resigned upon the
position created hereby not being available.

                  (e) Election of Preferred Directors. The holders of the
Preferred Shares shall have the special right, voting separately as a single
class, to elect as soon as practical, a director to fill each vacancy created
pursuant to Section 4(c) or 4(d) and to elect their respective successors at
each succeeding annual meeting of the Corporation thereafter at which such
successor is to be elected. The director so elected from time to time in respect
of clause (i) of Section 4(c) shall be referred to herein as the "Section
4(c)(i) Director." The director so elected from time to time in respect of
clause (ii) of Section 4(c) shall be referred to herein as the "Section 4(c)(ii)
Director." The directors so elected from time to time in respect of Section 4(d)
shall be referred to herein as the "Section 4(d) Directors." As used herein, the
term "Preferred Director" shall refer to each of the Section 4(c)(i) Director,
the Section 4(c)(ii) Director or a Section 4(d) Director, as appropriate, and
the term "Preferred Directors" shall refer to all such directors. At no time
shall there be more than two Preferred Directors on the Board.

                  (f) Classification of Board. Each vacancy created upon the
Board from time to time pursuant to clause (i) or (ii) of Section 4(c) or
Section 4(d), as the case may be, shall be apportioned among the classes of
directors, if any, so that the number of directors in each of the classes of
directors is as nearly equal in number as possible. The Preferred Directors
shall be classified accordingly.

                  (g) Cure. Upon the occurrence of a Dividend Reduction Default
or an Earnings Default, the same shall be deemed to continue to exist until such
time as (the "Dividend/Earnings Cure") (i) the Regular Quarterly Dividend paid
in the immediately preceding quarter on the Common Stock shall be greater than
$.40 per share (adjusted to reverse the effect of any event set forth in Section
7 that would require an adjustment to the Conversion Price), (ii) the
Corporation reports for the prior three consecutive fiscal quarters that the
ratio of its Combined EBITDA to its reported interest expense (as described in
clause (2) under the definition of Combined EBITDA above) for each such quarter
was greater than 1.25 to 1.00, and



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(iii) all dividends, and all other accrued and unpaid dividends whether or not
declared, on the Preferred Shares have been paid or made available for payment.
Upon the occurrence of the Dividend Payment Default, the same shall be deemed to
continue and exist until (the "Dividend Payment Cure") such time as the earlier
to occur of (i) none of the Preferred Shares shall remain outstanding or (ii)
all dividends, including accrued and unpaid dividends on the Preferred Shares
whether or not declared, have been paid or made available for payment.

                  (h) Board Committees. The 4(c)(i) Director shall be designated
as a member of every committee of the Board, other than two committees, such two
committees to be specified by such 4(c)(i) Director. During such period of time
as a 4(c)(ii) Director shall be a member of the Board, such 4(c)(ii) Director
shall be designated as a member of each committee of the Board on which the
4(c)(i) Director is not a member.

                  (i) Voting Procedures. At each meeting of the stockholders of
the Corporation at which the holders of the Preferred Shares shall have the
right to vote as a single class, as provided in this Section 4, the presence in
person or by proxy of the holders of record of a majority of the total number of
Preferred Shares then outstanding shall be necessary and sufficient to
constitute a quorum of such class for such election by such stockholders as a
class. At any such meeting or adjournment thereof the absence of a quorum of
holders of Preferred Shares shall not prevent the election of directors other
than the Preferred Directors, and the absence of a quorum of the holders of any
other class or series of stock for the election of such other directors shall
not prevent the election of any Preferred Directors by the holders of the
Preferred Shares.

                  (j) Vacancy. In case any vacancy shall occur among the
directors elected by the holders of the Preferred Shares such vacancy shall be
filled by the vote of holders of the Preferred Shares, voting as a single class,
at a special meeting of such stockholders called for that purpose.

                  (k) Written Consent. Notwithstanding the foregoing, any action
required or permitted to be taken by holders of Preferred Shares at any meeting
of stockholders may be taken without a meeting, without prior notice and without
a vote, if a unanimous consent, in writing, setting forth the action so taken,
shall be signed by each of the holders of Preferred Shares and shall be executed
and delivered to the Secretary of the Corporation for placement among the
minutes of proceedings of the stockholders of the Corporation.

                  (l) Approval by the Corporation. The Corporation acting
through a majority of its Directors shall have the right to approve the
nomination of any Section 4(c)(i) Director or Section 4(c)(ii) Director, such
approval not to be unreasonably withheld; provided, however, that such right
shall not apply to any of John D. McGurk, James E. Quigley 3rd, Matthew W.
Kaplan, and D. Pike Aloian.

                  (m) Restrictions. So long as Preferred Shares of the
Corporation are outstanding, without the consent of the holders of at least the
majority of the Preferred Shares at the time outstanding, given in person or by
proxy, at a meeting called for that purpose at which the holders of the
Preferred Shares shall vote separately as a class, or by the unanimous consent



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<PAGE>   7
in writing of all of the holders of the Preferred Shares (in addition to any
other vote or consent of stockholders required by law or by the Charter), the
Corporation may not (i) effect or validate the amendment, alteration or repeal
of any provision of these Articles Supplementary, (ii) effect or validate the
amendment, alteration or repeal of any provision of the Charter of the
Corporation which would adversely effect the rights of the holders of the
Preferred Shares as such, (iii) effect or validate the amendment, alteration or
repeal of any provision of the Charter of the Corporation which would increase
in any respect the restrictions or limitations on ownership applicable to the
Preferred Shares pursuant thereto, (iv) effect or validate the amendment,
alteration or repeal of any provision of the Charter of the Corporation or
By-Laws of the Corporation so as to limit the right to indemnification provided
to any present or future member or members of the Board elected by the holders
of the Preferred Shares, (v) other than the 1,351,351 Preferred Shares
authorized herein, issue Preferred Shares (or a series of preferred stock that
would vote as a class with the Preferred Shares with respect to the election of
any Preferred Director) or shares of stock ranking senior or equal to the
Preferred Shares (as to dividends or upon liquidation, dissolution or winding
up), or (vi) effect or validate the amendment, alteration or repeal of any
provision of the Charter of the Corporation or By-Laws of the Corporation so as
to increase the number of members of the Board beyond ten (10) members (not
including any Preferred Directors). Nothing in this Section 4(m) shall prevent
the Corporation from issuing any shares of stock of the Corporation which rank
junior (as to dividends and upon liquidation, dissolution or winding up) to the
Preferred Shares upon such terms as the Board shall authorize from time to time.

                  (n) Reports. The Corporation shall mail to each holder of
record of Preferred Shares, at such holder's address in the records of the
Corporation, within 45 days after the end of the first three fiscal quarters of
each fiscal year and within 90 days after the end of each fiscal year, its
financial reports for such fiscal period in such form and containing such
independent accountants report as set forth under the rules of the Securities
and Exchange Commission (together with the report of the Corporation's
independent accountants with respect to such fiscal period) irrespective of
whether the Corporation is then required to file reports under such rules.

                  Section 5. Preferred Share --Redemption Rights.

                  (a) General. The Corporation may, at its option, to the extent
it shall have Legally Available Funds therefor, redeem all or any portion (on a
pro rata basis) of the outstanding Preferred Shares, at any time on or after the
date which is the fifth anniversary of the original date of issuance of
Preferred Shares.

                  (b) Notice. The option of the Corporation to redeem the
Preferred Shares pursuant to this Section 5 shall be exercised by mailing of a
written notice of election (a "Redemption Notice") by the Corporation to the
holders of the Preferred Shares at such holder's address appearing on the
records of the Corporation, which notice shall be mailed at least 30 days prior
to the date specified therein for the redemption of the Preferred Shares. Such
notice shall state, at a minimum, the amount of Preferred Shares to be redeemed,
the date on which such redemption shall occur and the last date on which such
holder can exercise the conversion rights provided for in Section 7 herein (the
"Final Conversion Date"). Any notice which was mailed in



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<PAGE>   8
the manner herein provided shall be conclusively presumed to have been given on
the date mailed whether or not the holder receives such notice.

                  (c) Conversion. During the period beginning on the date on
which the Corporation mailed to each holder of the Preferred Shares a written
notice of election pursuant to subsection (b) above and ending on the thirtieth
day following the date of such mailing, each holder of the Preferred Shares may
exercise its rights pursuant to Section 7 herein.

                  (d) Redemption Price. Upon the thirtieth day following the
mailing to the holder of the Preferred Shares of a written notice of election
pursuant to subsection (b) above, the Corporation shall be required, unless such
holder of Preferred Shares has exercised its rights pursuant to subsection (c)
above, to purchase from such holder of Preferred Shares (upon surrender by such
holder at the Corporation's principal office of the certificate representing
such Share), such Preferred Shares specified in the Redemption Notice, at a
price equal to the product of (i) $18.50 per share plus accrued and unpaid
dividends (whether or not declared and accrued through the date of payment for
redemption or the date payment is made available for payment to the holder
thereof) plus a premium equal to the following percentage of $18.50:

<TABLE>
<CAPTION>
Redemption Occurs
On or After                    But Prior to                       % Premium
-----------                    ------------                       ---------
<S>                            <C>                                <C>
December 31, 2001              December 31, 2002                      6.0
December 31, 2002              December 31, 2003                      5.0
December 31, 2003              December 31, 2004                      4.0
December 31, 2004              December 31, 2005                      3.0
December 31, 2005              December 31, 2006                      2.5
December 31, 2006              December 31, 2007                      2.0
December 31, 2007              December 31, 2008                      1.5
December 31, 2008              December 31, 2009                      1.0
December 31, 2009                                                     0.0
</TABLE>

and (ii) the number of Preferred Shares to be redeemed as provided in the
Redemption Notice (the "Redemption Price").

                  (e) Dividends. No Preferred Share is entitled to any dividends
accruing thereon after the date on which the payments provided by and in
accordance with Section 5(d) are paid or made available for payment to the
holder thereof. On such date all rights of the holder of such Preferred Share
shall cease, and such Preferred Share shall not be deemed to be outstanding.

                  Section 6. Preferred Shares -- Liquidation Rights.

                  (a) Liquidation Payment. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
then out of the assets of the Corporation before any distribution or payment to
the holders of shares of capital stock of the Corporation ranking junior to the
Preferred Shares (as to dividends or upon liquidation,



                                      -8-
<PAGE>   9
dissolution or winding up), the holders of the Preferred Shares shall be
entitled to be paid $18.50 per share (the "Liquidation Value") plus accrued and
unpaid dividends whether or not declared, if any, (or a pro rata portion thereof
with respect to fractional shares), to the date of final distribution or the
distribution is made available; provided, however, that if such liquidation,
dissolution or winding up of the Corporation occurs in connection with or
subsequent to a Change of Control (as defined in Section 8(e)), then the holders
of the Preferred Shares shall be entitled to be paid the Put Payment (as defined
herein). Except as provided in this Section 6, the holders of the Preferred
Shares shall be entitled to no other or further distribution in connection with
such liquidation, dissolution or winding up.

                  (b) Pro Rata Distribution. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation
available for distribution to the holders of Preferred Shares shall be
insufficient to permit payment in full to such holders the sums which such
holders are entitled to receive in such case, then all of the assets available
for distribution to the holders of the Preferred Shares shall be distributed
among and paid to the holders of Preferred Shares, ratably in proportion to the
respective amounts that would be payable to such holders if such assets were
sufficient to permit payment in full.

                  Section 7. Preferred Shares--Conversion.

                  (a) Conversion Rights. Subject to and upon compliance with the
provisions of this Section 7, a holder of Preferred Shares shall have the right,
at such holder's option, at any time to convert all or a portion of such shares
into the number of fully paid and non-assessable shares of Common Stock obtained
by dividing the number of Preferred Shares being converted by the Conversion
Ratio (as defined below and as in effect at the time and on the date provided
for in this Section 7(b)(iv)) by surrendering such Preferred Shares to be
converted. Such surrender shall be made in the manner provided in Section 7,
paragraph (b); provided, however, that the right to convert any Preferred Shares
called for redemption pursuant to Section 5 shall terminate at the close of
business on the Final Conversion Date, unless the Corporation shall default in
making payment of any cash payable upon such redemption under Section 5 hereof.
The "Conversion Ratio" with respect to any Preferred Shares will initially be
equal to 1, subject to adjustment as described below.

                  (b) Manner of Conversion.

                      (i) In order to exercise the conversion right, the holder
of each Preferred Share to be converted shall surrender to the Corporation the
certificate representing such share, duly endorsed or assigned to the
Corporation or in blank, accompanied by written notice to the Corporation that
the holder thereof elects to convert Such Preferred Shares. Unless the shares of
Common Stock issuable on conversion are to be issued in the same name as the
name in which such Preferred Shares are registered, each Preferred Share
surrendered for conversion shall be accompanied by instruments of transfer, in
form satisfactory to the Corporation, duly executed by the holder or such
holder's duly authorized attorney and an amount sufficient to pay any transfer
or similar tax (or evidence reasonably satisfactory to the Corporation
demonstrating that such taxes have been paid).



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<PAGE>   10
                      (ii) As promptly as practicable after the surrender of
certificates of Preferred Shares as aforesaid, the Corporation shall issue and
shall deliver at such office to such holder, or on such holder's written order,
a certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such Preferred Shares in accordance with the
provisions of this Section 7, and any fractional interest in respect of a share
of Common Stock arising upon such conversion shall be settled as provided in
paragraph (c) of this Section 7.

                      (iii) Each conversion shall be deemed to have been
effected immediately prior to the close of business on the date on which
certificates for Preferred Shares have been surrendered and such notice received
by the Corporation as aforesaid, and the person or persons in whose name or
names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time on such date
and such conversion shall be at the Conversion Ratio in effect at such time on
such date unless the stock transfer books of the Corporation shall be closed on
that date, in which event such conversion shall have been deemed to have been
effected and such person or persons shall be deemed to have become the holder or
holders of record at the close of business on the next succeeding day on which
such stock transfer books are open, but such conversion shall be at the
Conversion Ratio in effect on the date on which such shares shall have been
surrendered and such notice received by the Corporation.

                  (c) Fractional Shares. No fractional shares or scrip
representing fractions of shares of Common Stock shall be issued upon conversion
of the Preferred Shares. Instead of any fractional interest in a share of Common
Stock that would otherwise be deliverable upon the conversion of Preferred
Shares, the Corporation shall pay to the holder of such share an amount in cash
based upon the Current Market Price of Common Stock on the Trading Day
immediately preceding the date of conversion. If more than one Preferred Share
shall be surrendered for conversion at one time by the share holder, the number
of full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of Preferred Shares so
surrendered.

                  (d) Adjustment of Conversion Ratio. The Conversion Ratio shall
be adjusted from time to time as follows:

                      (i) If the Corporation shall, while any Preferred Shares
are outstanding, (A) pay a dividend or make a distribution with respect to its
capital stock in shares of its Common Stock, (B) subdivide its outstanding
Common Stock into a greater number of shares, (C) combine its outstanding Common
Stock into a smaller number of shares or (D) issue any shares of capital stock
by reclassification of its Common Stock, the Conversion Ratio in effect at the
opening of business on the day next following the date fixed for the
determination of shareholders entitled to receive such dividend or distribution
or at the opening of business on the day following the day on which such
subdivision, combination or reclassification becomes effective, as the case may
be, shall be adjusted so that the holder of any Preferred Shares thereafter
surrendered for conversion shall be entitled to receive the number of shares of
Common Stock that such holder would have owned or have been entitled to receive
after the happening of any of the events described above had such Preferred
Shares been converted



                                      -10-
<PAGE>   11
immediately prior to the record date in the case of a dividend or distribution
or the effective date in the case of a subdivision, combination or
reclassification. An adjustment made pursuant to this subparagraph (i) shall
become effective immediately after the opening of business on the day next
following the record date (except as provided in paragraph (h) below) in the
case of a dividend or distribution and shall become effective immediately after
the opening of business on the day next following the effective date in the case
of a subdivision, combination or reclassification.

                      (ii) If the Corporation shall, while any Preferred Shares
are outstanding, issue rights, options or warrants to all holders of Common
Stock entitling them (for a period expiring within 45 days after the record date
mentioned below) to subscribe for or purchase Common Stock at a price per share
less than the Current Market Price per share of Common Stock on the record date
for the determination of shareholders entitled to receive such rights or
warrants, then the Conversion Ratio in effect at the opening of business on the
day next following such record date shall be adjusted to equal the ratio
determined by multiplying (I) the Conversion Ratio in effect immediately prior
to the opening of business on the day next following the date fixed for such
determination by (II) a fraction, the numerator of which shall be the sum of (A)
the number of shares of Common Stock outstanding on the close of business on the
date fixed for such determination and (B) the number of shares that the
aggregate proceeds to the Corporation from the exercise of such rights or
warrants for Common Stock would purchase at such Current Market Price, and the
denominator of which shall be the sum of (A) the number of Shares of Common
Stock outstanding on the close of business on the date fixed for such
determination and (B) the number of additional shares of Common Stock offered
for subscription or purchase pursuant to such rights or warrants. Such
adjustment shall become effective immediately after the opening of business on
the day next following such record date (except as provided in paragraph (h)
below). In determining whether any rights or warrants entitle the holders of
Common Stock to subscribe for or purchase shares of Common Stock at less than
such Current Market Price, there shall be taken into account any consideration
received by the Corporation upon issuance and upon exercise of such rights or
warrants, the value of such consideration, if other than cash, to be determined
by the Board of Directors.

                      (iii) If the Corporation shall distribute to all holders
of its Common Stock any shares of capital stock of the Corporation (other than
Common Stock) or evidence of its indebtedness or assets (excluding Regular
Quarterly Dividends) or rights or warrants to subscribe for or purchase any of
its securities (excluding those rights and warrants issued to all holders of
Common Stock entitling them for a period expiring within 45 days after the
record date referred to in subparagraph (ii) above to subscribe for or purchase
Common Stock, which rights and warrants are referred to in and treated under
subparagraph (ii) above) (any of the foregoing being hereinafter in this
subparagraph (iii) called the "Securities"), then in each such case each holder
of Preferred Shares shall receive concurrently with the receipt by holders of
the Common Stock the kind and amount of such Securities that it would have owned
or been entitled to receive had such Preferred Shares been converted immediately
prior to such distribution or related record date, as the case may be.



                                      -11-
<PAGE>   12
                      (iv) Distribution of Cash. In case the Corporation shall
pay or make a dividend or other distribution on its Common Stock exclusively in
cash (excluding Regular Quarterly Dividends), each holder of Preferred Shares
shall receive concurrently with the receipt by holders of the Common Stock the
kind and amount of any such distribution that it would have owned or been
entitled to receive had such Preferred Shares been converted immediately prior
to such distribution or related record date, as the case may be.

                      (v) No adjustment in the Conversion Ratio shall be
required unless such adjustment would require a cumulative increase or decrease
of at least 1%; provided, however, that any adjustments that by reason of this
subparagraph (v) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment until made. Notwithstanding any other
provisions of this Section 7, the Corporation shall not be required to make any
adjustment of the Conversion Ratio for (x) the issuance of any shares of Common
Stock pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Corporation and the investment of
additional optional amounts in shares of Common Stock pursuant to any plan
providing for the reinvestment of dividends or interest payable on securities of
the Corporation and the investment of additional optional amounts in shares of
Common Stock under such plan, (y) the issuance of contingent rights issued
pursuant to a stockholders' rights plan adopted by the Corporation pursuant to
which the acquisition by any third party of a specified percentage of Common
Stock triggers the exercisability of such rights to purchase Common Stock, for
so long as no event has occurred triggering such rights to exercise, and (z) the
issuance of Common Stock or options to purchase Common Stock pursuant to an
employee benefit plan. All calculations under this Section 7 shall be made to
the nearest cent (with $.005 being rounded upward) or to the nearest one-tenth
of a share (with .05 of a share being rounded upward), as the case may be.
Anything in this paragraph (d) to the contrary notwithstanding, the Corporation
shall be entitled, to the extent permitted by law, to make such reductions in
the Conversion Ratio, in addition to those required by this paragraph (d), as it
in its discretion shall determine to be advisable in order that any stock
dividends, subdivision of shares, reclassification or combination of shares,
distribution of rights or warrants to purchase stock or securities, or a
distribution of other assets (other than cash dividends) hereafter made by the
Corporation to its shareholders shall not be taxable, or if that is not
possible, to diminish any income taxes that are otherwise payable because of
such event.

                  (e) Adjustment of Conversion Ratio Upon Certain Transactions.
If the Corporation shall be a party to any transaction (including, without
limitation, a merger, consolidation, statutory share exchange, self tender offer
for all or substantially all shares of Common Stock, sale of all or
substantially all of the Corporation's assets or recapitalization of the Common
Stock and excluding any transaction as to which subparagraph (d)(i) of this
Section 7 applies) (each of the foregoing being referred to herein as a
"Transaction"), in each case as a result of which shares of Common Stock shall
be converted into the right to receive stock, securities or other property
(including cash or any combination thereof), each Preferred Share that is not
converted into the right to receive stock, securities or other property in
connection with such Transaction shall thereafter be convertible into the kind
and amount of shares of stock, securities and other property (including cash or
any combination thereof) receivable upon the consummation of such Transaction by
a holder of that number of shares of Common Stock into


                                      -12-
<PAGE>   13
which one Preferred Share was convertible immediately prior to such Transaction,
assuming such holder of Common Stock (i) is not a person with which the
Corporation consolidated or into which the Corporation merged or which merged
into the Corporation or to which such sale or transfer was made, as the case may
be (a "Constituent Person"), or an affiliate of a Constituent Person or (ii)
failed to exercise his or her rights of election, if any, as to the kind or
amount of stock, securities and other property (including cash) receivable upon
such Transaction (provided that if the kind or amount of stock, securities and
other property (including cash) receivable upon such Transaction is not the same
for each share of Common Stock of the Corporation held immediately prior to such
Transaction by other than a Constituent Person or an affiliate thereof and in
respect of which such rights of election shall not have been exercised
("Non-electing Share"), then for the purpose of this paragraph (e) the kind and
amount of stock, securities and other property (including cash) receivable upon
such Transaction by each Non-electing Share shall be deemed to be the kind and
amount so receivable per share by a plurality of the Non-electing Shares). The
Corporation shall not be a party to any Transaction unless the terms of such
Transaction are consistent with the provisions of this paragraph (e), and it
shall not consent or agree to the occurrence of any Transaction until the
Corporation has entered into an agreement with the successor or purchasing
entity, as the case may be, for the benefit of the holders of the Preferred
Shares that will contain provisions enabling the holders of the Preferred Shares
that remain outstanding after such Transaction to convert into the consideration
received by holders of Common Stock at the Conversion Ratio in effect
immediately prior to such Transaction. The provisions of this paragraph (e)
shall similarly apply to successive Transactions.

                  (f) Notice of Certain Events. If:

                      (i) the Corporation shall declare a dividend (or any other
distribution) on the Common Stock (other than the Regular Quarterly Dividend);
or

                      (ii) the Corporation shall authorize the granting to all
holders of the Common Stock of rights or warrants to subscribe for or purchase
any shares of any class or any other rights or warrants; or

                      (iii) there shall be any reclassification of the Common
Stock (other than any event to which subparagraph (d)(i) of this Section 7
applies) or any consolidation or merger to which the Corporation is a party and
for which approval of any shareholders of the Corporation is required, or a
statutory share exchange, or self tender offer by the Corporation for all or
substantially all of its outstanding shares of Common Stock or the sale or
transfer of all or substantially all of the assets of the Corporation as an
entity (other than the Corporation's current exchange offer with respect to its
outstanding 8.375% Convertible Subordinated Debentures due 2001); or

                      (iv) there shall occur the involuntary or voluntary
liquidation, dissolution or winding up of the Corporation,

then the Corporation shall cause to be mailed to the holders of Preferred
Shares, at the address as shown on the stock records of the Corporation, as
promptly as possible, but at least 15 Business Days prior to the applicable date
hereinafter specified, a notice stating (A) the date on which a


                                      -13-
<PAGE>   14
record is to be taken for the purpose of such dividend, distribution or rights
or warrants, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend, distribution
or rights or warrants are to be determined or (B) the date on which such
reclassification, consolidation, merger, statutory share exchange, sale,
transfer, liquidation, dissolution or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
shall be entitled to exchange their shares of Common Stock for securities or
other property, if any, deliverable upon such reclassification, consolidation,
merger, statutory share exchange, sale, transfer, liquidation, dissolution or
winding up. Failure to give or receive such notice or any defect therein shall
not affect the legality or validity of the proceedings described in this Section
7.

                  (g) Notice of Adjustment of Conversion Ratio. Whenever the
Conversion Ratio is adjusted as herein provided, the Corporation shall prepare a
notice of such adjustment of the Conversion Ratio setting forth the adjusted
Conversion Ratio and the effective date of such adjustment and shall mail such
notice of such adjustment of the Conversion Ratio to the holders of the
Preferred Shares at such holders' last address as shown on the stock records of
the Corporation.

                  (h) Timing of Adjustment. In any case in which paragraph (d)
of this Section 7 provides that an adjustment shall become effective on the day
next following the record date for an event, the Corporation may defer until the
occurrence of such event (A) issuing to the holder of Preferred Shares converted
after such record date and before the occurrence of such event the additional
shares of Common Stock issuable upon such conversion by reason of the adjustment
required by such event over and above the Common Stock issuable upon such
conversion before (giving effect to such adjustment and (B) paying to Such
holder any amount of cash in lieu of any fraction pursuant to paragraph (c) of
this Section 7.

                  (i) No Duplication of Adjustments. There shall be no
adjustment of the Conversion Ratio in case of the issuance of any stock of the
Corporation in a reorganization, acquisition or other similar transaction except
as specifically set forth in this Section 7. If any action or transaction would
require adjustment of the Conversion Ratio pursuant to more than one paragraph
of this Section 7, only one adjustment shall be made and such adjustment shall
be the amount of adjustment that has the highest absolute value.

                  (j) Other Adjustments to Conversion Ratio. If the Corporation
shall take any action affecting the Common Stock, other than action described in
this Section 7, that would materially adversely affect the conversion rights of
the holders of the Preferred Shares or the value of such conversion rights, the
Conversion Ratio for the Preferred Shares may be adjusted, to the extent
permitted by law, in such manner, if any, and at such time, as the Board of
Directors, in its sole discretion, may determine to be equitable in the
circumstances.

                  (k) Reservation, Validity, Listing and Securities Law
Compliance With Respect to Shares of Common Stock.

                      (i) The Corporation covenants that it will at all times
reserve and keep available, free from preemptive rights, out of the aggregate of
its authorized but unissued shares


                                      -14-
<PAGE>   15
of Common Stock for the purpose of effecting conversion of the Preferred Shares,
the full number of shares of Common Stock deliverable upon the conversion of all
outstanding Preferred Shares not therefore converted. Before taking any action
which would cause an adjustment in the Conversion Ratio such that Common Stock
issuable upon the conversion of Preferred Shares would be issued below par value
of the Common Stock, the Corporation will take any corporate action which may,
in the opinion of its counsel, be reasonably necessary in order that the
Corporation may validly and legally issue fully-paid and nonassessable shares of
Common Stock at such adjusted Conversion Ratio.

                      (ii) The Corporation covenants that any shares of Common
Stock issued upon the conversion of the Preferred Shares shall be validly
issued, fully paid and non-assessable.

                      (iii) The Corporation shall endeavor to list the shares of
Common Stock required to be delivered upon conversion of the Preferred Shares,
prior to such delivery, upon each national securities exchange, if any, upon
which the outstanding Common Stock is listed at the time of such delivery.

                      (iv) Prior to the delivery of any securities that the
Corporation shall be obligated to deliver upon conversion of the Preferred
Shares, the Corporation shall endeavor to comply with all federal and state laws
and regulations thereunder requiring the registration of such securities with,
or any approval of or consent to the delivery thereof, by any governmental
authority.

                  (l) Transfer Taxes. The Corporation will pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock or other securities or property on
conversion of the Preferred Shares pursuant hereto; provided, however, that the
Corporation shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issue or delivery of shares of Common Stock or
other securities or property in a name other than that of the holder of the
Preferred Shares to be converted, and no such issue or delivery shall be made
unless and until the person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or established, to the reasonable
satisfaction of the Corporation, that such tax has been paid.

                  (m) Certain Defined Terms. The following definitions shall
apply to terms used in this Section 7:

                  (1) Current Market Price. For the purpose of any computation
                  under this Section 7, the Current Market Price per share of
                  Common Stock on any date in question shall be deemed to be the
                  average of the daily closing prices for the five consecutive
                  Trading Days preceding such date in question; provided,
                  however, that if another event occurs that would require an
                  adjustment pursuant to subsection (f) through (j), inclusive,
                  the Board may make such adjustments to the closing prices
                  during such five Trading Day period as it deems appropriate to
                  effectuate the intent of the adjustments in this Section 7, in
                  which case any such determination by the Board shall be set
                  forth in a resolution of the Board and shall be conclusive.


                                      -15-
<PAGE>   16
                  (2) "Trading Day" shall mean a day on which Preferred Shares
                  are traded on the national Preferred Shares exchange or
                  quotation system used to determine the Closing Price.

                  Section 8. Preferred Shares -- Change of Control and Put
Option.

                  (a) Subject to the last sentence of this Section 8(a), if a
Change of Control or Put Event occurs, in either case as a result of the
voluntary (and not legally compelled) act, omission or participation of the
Corporation, which act, omission or participation the Corporation had the
discretion under existing laws and regulations to refrain from, then each holder
of Preferred Shares will have the right to require that the Corporation, to the
extent it shall have Legally Available Funds therefor, to redeem such holder's
Preferred Shares at a redemption price payable in cash in an amount equal to
102% of the Liquidation Value thereof, plus accrued and unpaid dividends whether
or not declared, if any (the "Put Payment"), to the date of purchase or the date
payment is made available (the "Put Date") pursuant to the offer described in
subsection (b) below (the "Put Offer"). If a Change of Control or Put Event
occurs that is not the result of such voluntary act, omission or participation
of the Corporation, the Corporation may elect not to make the foregoing Put
Payment by not commencing the Put Offer on the Put Date, in which event the
Conversion Ratio shall be revised to the greater of (i) 75% of the then current
Conversion Ratio so that each Preferred Share will be convertible into 133% of
the number of shares of Common Stock into which it would otherwise have been
convertible and (ii) a fraction the numerator of which is 75% of the Current
Market Price (as defined in Section 7 hereof) and the denominator of which is
$18.50. Notwithstanding the foregoing, if the Securities and Exchange Commission
or its staff (collectively, the "SEC"), by written communication to the
Corporation, indicates that the provisions of the first sentence of this Section
8(a) would preclude the Corporation from treating the Preferred Shares as equity
on its financial statements, then those events constituting either a Change of
Control Event or Put Event for which the SEC objects to the holder of Preferred
Shares having a cash redemption right shall, instead, be covered by the
Conversion Ratio revision alternative set forth in the second sentence of this
Section 8(a).

                  (b) Within 15 days following the Company becoming aware that
an event has occurred that has resulted in any Change of Control or Put Event,
the Corporation shall mail a notice to each holder of Preferred Shares, at such
holder's address appearing in the records of the Corporation, stating (i) that a
Change of Control or Put Event, as applicable, has occurred and that such holder
has the right to require the Corporation to redeem such holder's Preferred
Shares in cash, (ii) the date of redemption (which shall be a Business Day, no
earlier than 30 days and no later than 60 days from the date such notice is
mailed, or such later date as may be necessary to comply with the requirements
of applicable law including the Exchange Act), (iii) the redemption price for
the redemption, and (iv) the instructions determined by the Corporation,
consistent with this subsection, that a holder must follow in order to have its
Preferred Shares redeemed.

                  (c) On the Put Date, the Corporation will, to the extent
lawful, accept for payment Preferred Shares or portions thereof tendered
pursuant to the Put Offer and pay an amount equal to the Put Payment in respect
of all Preferred Shares or portions thereof so


                                      -16-
<PAGE>   17
tendered. The Corporation shall promptly mail to each holder of Preferred Shares
to be redeemed the Put Payment for such Preferred Shares.

                  (d) Notwithstanding anything else herein, to the extent they
are applicable to any Change of Control Offer, the Corporation will comply with
Section 14 of the Exchange Act and the provisions of Regulation 14D and 14E and
any other tender offer rules under the Exchange Act and any other federal and
state securities laws, rules and regulations and all-time periods and
requirements shall be adjusted accordingly.

                  (e) "Change of Control" means each occurrence of any of the
following: (i) the acquisition, directly or indirectly, by any individual or
entity or group (as such term is used in Section 13(d)(3) of the Exchange Act of
beneficial ownership (as defined in Rule 13d-3 under the Exchange Act, except
that such individual or entity shall be deemed to have beneficial ownership of
all shares that any such individual or entity has the right to acquire, whether
such right is exercisable immediately or only after passage of time) of more
than 25% of the aggregate outstanding voting power of capital stock of the
Corporation; (ii) other than with respect to the election, resignation or
replacement of the Preferred Directors, during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors of the Corporation (together with any new directors whose election by
such Board of Directors or whose nomination for election by the shareholders of
the Corporation was approved by a vote of 66 2/3% of the directors of the
Corporation (excluding Preferred Directors) then still in office who were either
directors at the beginning of such period, or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Corporation then in office; and (iii)
(A) the Corporation consolidates with or merges into another entity (the "Merger
Entity) or conveys, transfers or leases all or substantially all of its
respective assets (including, but not limited to, real property investments) to
any individual or entity (the "Acquiring Entity", and, together with the Merger
Entity, the "Successor Entity"), or (B) any corporation consolidates with or
merges into the Corporation, which in either event (A) or (B) is pursuant to a
transaction in which the outstanding voting capital stock of the Corporation is
reclassified or changed into or exchanged for cash, securities or other property
(unless the holders of the voting capital stock of the Corporation immediately
prior to such transaction hold immediately after such transaction more than 50%
of the outstanding voting capital stock of the Successor Entity.

                  (f) "Put Event" means each occurrence of any of (i) the
Corporation fails to qualify as a real estate investment trust as described in
Section 856 of the Internal Revenue Code of 1986, as amended, other than as a
result of any action, or unreasonable failure to act, by any holder of Preferred
Shares; (ii) the Corporation becomes a "Pension-held REIT" as defined in Section
856(h)(3)(D) of the Internal Revenue Code of 1986, as amended, other than as a
result of any action, or unreasonable failure to act, by the holders of
Preferred Shares; or (iii) the Corporation ceases to be engaged primarily in the
business of owning and managing multi-family properties and/or industrial
properties directly, or through subsidiaries, as carried on as of the date
hereof and described in the Corporation's Annual Report on Form 10-K, as
amended, as filed with the Securities and Exchange Commission for the year ended
December 31, 1995.


                                      -17-
<PAGE>   18
                  Section 9. Preferred Shares -- Restrictions on Ownership
                             Transfer to Preserve Tax Benefit.

                  (a) The Preferred Shares shall be governed by the restrictions
on ownership and transfer set forth in subsection (D)(4) of Article V of the
Charter.

                  (b) So long as Preferred Shares are outstanding, without the
consent of the holders of at least a majority of the Preferred Shares at the
time outstanding, given in person or by proxy, at a meeting called for that
purpose at which the holders of the Preferred Shares shall vote separately as a
class, or by unanimous written consent in writing of all holders of the
Preferred Shares, the Corporation will not effect or validate any amendment,
alteration or repeal of any Section of the Charter, so as to increase in any
respect the restrictions or limitations on ownership applicable to the Preferred
Shares pursuant thereto.

                  Section 10. Preferred Shares--Conversion and Exchange for
Excess Stock. Preferred Shares exchanged for Excess Stock pursuant to
subsection(D)(4)(c) of the Charter shall be governed by Article V.E. of the
Charter.

                  Section 11. Miscellaneous.

                  (a) Exchange or Market Transactions. Nothing in Section 9,
Section 10 or this Section 11 shall preclude the settlement of any transaction
entered into through the facilities of the NYSE or any other national securities
exchange or automated inter-dealer quotation system. However, as set forth in
Section 9, Section 10 or this Section 11, certain transactions may be settled by
providing shares of Excess Stock.

                  (b) Severability. If any provision of Section 9, Section 10 or
this Section 11 or any application of any such provision is determined to be
invalid by any federal or state court having jurisdiction over the issues, the
validity of the remaining provisions shall not be affected and other
applications of such provisions shall be affected only to the extent necessary
to comply with the determination of such court.

                  (c) Mailings. All mailings shall be made by overnight United
States mail or by another overnight courier service.

                  (d) Reacquired Shares. Any Preferred Shares purchased or
otherwise acquired by the Corporation in any matter whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock and
may be classified again and reissued as part of a new series or class of
Preferred Stock to be created by the Board pursuant to its power contained in
the Charter, subject to conditions and restrictions on issuance set forth
herein.



                                      -18-
<PAGE>   19
                  IN WITNESS WHEREOF, PACIFIC GULF PROPERTIES INC. has caused
its corporate seal to be hereunto affixed and these Articles Supplementary to be
signed by its Chairman, Chief Executive Officer and President, Glenn L.
Carpenter, and attested by its Secretary, Donald G. Herrman this __th day of
January, 1997.


                                        PACIFIC GULF PROPERTIES INC.



                                        By: ________________________________
                                            Name:  Glenn L. Carpenter
                                            Title: Chairman, Chief Executive
                                                   Officer and President



                  THE UNDERSIGNED, Secretary of Pacific Gulf Properties Inc. who
executed on behalf of said corporation the foregoing Articles Supplementary, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles Supplementary to be the
corporate act of said corporation and further certify that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof or otherwise required to be verified under oath
are true in all material respects, under the penalties of perjury.



By:    ________________________
       Name:  Donald G. Herrman
       Title: Secretary


Corporate Seal


                                      -19-