<PAGE>
 
                                                                    Exhibit 10.4


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


                         FUNDING COMMITMENT AGREEMENT


                                By and Between


                    SECURITY CAPITAL ATLANTIC INCORPORATED

                                  "ATLANTIC"

                                      AND

                        HOMESTEAD VILLAGE INCORPORATED

                                  "Homestead"

                ATLANTIC HOMESTEAD VILLAGE LIMITED PARTNERSHIP

                            "Partnership Borrower"


                           Dated:  October 17, 1996


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<PAGE>
 
                               TABLE OF CONTENTS
                               -----------------

<TABLE> 
<CAPTION> 
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<S>                                                                                     <C> 
ARTICLE 1.  DEFINITIONS.................................................................   3
     Section 1.1.  Certain Defined Terms................................................   3
     Section 1.2.  Other Definitional Provisions........................................  10
 
ARTICLE 2.  THE LOANS...................................................................  11
     Section 2.1.  The Homestead Loan...................................................  11
     Section 2.2.  The Partnership Loan.................................................  11
     Section 2.3.  Future Projects......................................................  11
     Section 2.4.  Subsidiary Loans.....................................................  12
     Section 2.5.  Duration of Funding Commitment.......................................  13
     Section 2.6.  Project Specific Funding Commitment..................................  13
     Section 2.7.  Replacement Projects.................................................  14
     Section 2.8.  Release of Security Documents........................................  15
 
ARTICLE 3.  REPRESENTATIONS AND WARRANTIES..............................................  15
     Section 3.1.  Existence and Power..................................................  15
     Section 3.2.  Authorization and Binding Obligations................................  15
     Section 3.3.  No Legal Bar or Resultant Lien.......................................  16
     Section 3.4.  No Consent...........................................................  16
     Section 3.5.  Compliance with Laws.................................................  16
     Section 3.6.  Litigation...........................................................  16
     Section 3.7.  Defaults.............................................................  17
     Section 3.8.  Status of Property...................................................  17
     Section 3.9.  Use of Proceeds......................................................  17
     Section 3.10. Real Property Environmental Matters..................................  17
     Section 3.11. Financial Condition..................................................  18
     Section 3.12. No Condemnation......................................................  18
     Section 3.13. No Actions...........................................................  18
     Section 3.14. No Adverse Conditions................................................  18
 
ARTICLE 4.  COVENANTS...................................................................  18
     Section 4.1.  Construction of Improvements.........................................  18
     Section 4.2.  Plans; Project Budgets; Project Schedules and Material Changes.......  19
     Section 4.3.  Inspection and Examination...........................................  19
     Section 4.4.  Permits and Approvals................................................  19
     Section 4.5.  Governmental Requirements............................................  19
     Section 4.6.  Books and Records....................................................  20
     Section 4.7.  Title to Property and Improvements...................................  20
     Section 4.8.  Costs and Expenses...................................................  20
</TABLE>

                                      -i-
<PAGE>
 
                               TABLE OF CONTENTS
                               -----------------
                                  (continued)

<TABLE> 
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     Section 4.9.  Use of Advances..................................................  20
     Section 4.10. Insurance........................................................  20
     Section 4.11. Environmental Matters............................................  20
     Section 4.12. Selection of Architects; Contractors; Inspecting A/E's...........  21
     Section 4.13. Further Assurances...............................................  21
     Section 4.14. Quarterly Statements.............................................  21
     Section 4.15. Continued Existence..............................................  22
     Section 4.16. Defaults Under Other Loans.......................................  22
 
ARTICLE 5.  ADVANCE CONDITIONS......................................................  22
     Section 5.1.  Conditions Precedent to First Advance under this Agreement.......  22
     Section 5.2.  Conditions Precedent to First Advance for New Project............  24
     Section 5.3.  Initial Improvement Advance Conditions...........................  26
     Section 5.4.  Additional Improvement Advance Conditions........................  26
     Section 5.5.  Final-Advance Conditions.........................................  27
 
ARTICLE 6.  PROCEDURE FOR ADVANCES; RESERVES........................................  28
     Section 6.1.  General..........................................................  28
     Section 6.2.  Payments to Atlantic.............................................  28
     Section 6.3.  Retainage and Contractor's Fee Holdback..........................  29
     Section 6.4.  Interest Reserve.................................................  29
     Section 6.5.  Owner's Contingency..............................................  29
     Section 6.6.  Cost Overruns and Savings; Change Order Reserve..................  30
 
ARTICLE 7.  EVENTS OF DEFAULT.......................................................  30
     Section 7.1.  Failure to Pay...................................................  30
     Section 7.2.  Other Loan Document Defaults.....................................  31
     Section 7.3.  Judgment or Attachment...........................................  31
     Section 7.4.  Violation of Governmental Requirements...........................  31
     Section 7.5.  Insolvency, etc..................................................  31
     Section 7.6.  Unapproved Transfer..............................................  32
 
ARTICLE 8.  REMEDIES................................................................  33
     Section 8.1.  General..........................................................  33
     Section 8.2.  Remedies Cumulative..............................................  34
</TABLE>

                                     -ii-
<PAGE>
 
                               TABLE OF CONTENTS
                               -----------------
                                  (continued)

<TABLE>
<CAPTION>
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<S>                                                                                     <C>
ARTICLE 9.  MISCELLANEOUS................................................................ 35
     Section 9.1.  Survival of Representations, Warranties and Covenants................. 35
     Section 9.2.  Successors and Assigns................................................ 35
     Section 9.3.  Notices............................................................... 35
     Section 9.4.  Waiver................................................................ 36
     Section 9.5.  Amendment............................................................. 36
     Section 9.6.  Severability.......................................................... 36
     Section 9.7.  Entire Agreement...................................................... 36
     Section 9.8.  Expenses.............................................................. 36
     Section 9.9.  Captions.............................................................. 36
     Section 9.10. Governing Law......................................................... 36
     Section 9.11. No Joint Venture or Partnership....................................... 37
     Section 9.12. No Third Party Beneficiary Rights Created............................. 37
     Section 9.13. Incorporation by Reference............................................ 37
     Section 9.14. Counterparts.......................................................... 37
     Section 9.15. Scope of Review of Plans.............................................. 37
     Section 9.16. Governmental Regulation............................................... 37
     Section 9.17. Subordination......................................................... 38
     Section 9.18. Indemnity............................................................. 38
</TABLE>

                                     -iii-
<PAGE>
 
                          FUNDING COMMITMENT AGREEMENT

     THIS FUNDING COMMITMENT AGREEMENT (this "Agreement"), is entered into as of
October 17, 1996, among HOMESTEAD VILLAGE INCORPORATED, a Maryland corporation
("Homestead"), ATLANTIC HOMESTEAD VILLAGE LIMITED PARTNERSHIP, a Delaware
limited partnership (the "Partnership Borrower") and SECURITY CAPITAL ATLANTIC
INCORPORATED, a Maryland corporation ("Atlantic").


                                   RECITALS

     A.  Prior to the date hereof, Atlantic agreed to make to Atlantic Homestead
Village Incorporated (the "Prior Corporate Borrower") a loan (the "Corporate
Loan") of up to a maximum amount of $90,765,665 (the "Maximum Corporate Loan
Amount") to fund, among other things, acquisition and construction costs and
expenses incurred in connection with the acquisition and development of
Homestead Village extended stay lodging facilities.  In connection with agreeing
to make the Corporate Loan, Atlantic agreed that the Prior Corporate Borrower's
repayment obligation for funds advanced in respect of the Corporate Loan would
be adjusted by a discount factor of .8821961120 (the "Discount Factor").  To
evidence the Prior Corporate Borrower's obligation to repay the Corporate Loan,
at the discounted rate, the Prior Corporate Borrower has delivered to Atlantic
an Amended and Restated Promissory Note (the "Corporate Note"), dated May 28,
1996, in the face amount of $80,073,117 (i.e., the Maximum Corporate Loan Amount
as adjusted by the Discount Factor) (which note amended and restated a prior
promissory note dated January 24, 1996, and delivered by the Prior Corporate
Borrower to Atlantic to evidence the Corporate Loan), and to secure the payment
obligations under the Corporate Note and the Partnership Note (as defined
below), the Prior Corporate Borrower has, prior to the date hereof, delivered to
Atlantic deeds to secure debt, deeds of trust and mortgages  (the "Existing
Corporate Security Documents"), creating liens on the existing Homestead Village
Projects listed in Exhibit A hereto which are owned by the Prior Corporate
Borrower (the "Existing Corporate Projects").  (The Corporate Note, the Existing
Corporate Security Documents and all other instruments heretofore delivered by
the Prior Corporate Borrower in connection therewith to secure the payment of
the Corporate Note and the Partnership Note are herein called the "Existing
Corporate Loan Documents".)

     B.  Prior to the date hereof, Atlantic agreed to make to the Partnership
Borrower a loan (the "Partnership Loan") of up to a maximum amount of
$20,353,019 (the "Maximum Partnership Loan Amount") to fund, among other things,
acquisition and construction costs and expenses incurred in connection with the
acquisition and development of Homestead Village

                                       1
<PAGE>
 
extended stay lodging facilities. In connection with agreeing to make the
Corporate Loan, Atlantic agreed that the Partnership Borrower's repayment
obligation for funds advanced in respect of the Partnership Loan would be
adjusted by the Discount Factor. To evidence the Partnership Borrower's
obligation to repay the Partnership Loan, at the discounted rate, the
Partnership Borrower has delivered to Atlantic an Amended and Restated
Promissory Note (the "Partnership Note"), dated May 28, 1996, in the face amount
of $17,955,354 (the Maximum Partnership Loan Amount as adjusted by the Discount
Factor) (which note amended and restated a prior promissory note dated January
24, 1996, and delivered by the Partnership Borrower to Atlantic to evidence the
Partnership Loan), and to secure the payment obligations under the Corporate
Note and the Partnership Note, the Partnership Borrower has, prior to the date
hereof, delivered to Atlantic deeds to secure debt, deeds of trust and mortgages
(the "Existing Partnership Security Documents"), creating liens on the existing
Homestead Village Projects listed in Exhibit A hereto which are owned by the
Partnership Borrower (the "Existing Partnership Projects"). (The Partnership
Note, the Existing Partnership Security Documents and all other instruments
heretofore delivered by the Partnership Borrower in connection therewith to
secure the payment of the Corporate Note and the Partnership Note are herein
called the "Existing Partnership Loan Documents"; and the Existing Corporate
Loan Documents and Existing Partnership Loan Documents are collectively referred
to herein as the "Existing Loan Documents".)

     C.  On the date hereof, the parties are entering into a series of
transactions as described in that certain Merger and Distribution Agreement,
dated as of May 21, 1996, among Atlantic, Security Capital Pacific Trust
("PTR"), Security Capital Group Incorporated ("SCG") and Homestead (the "Merger
Agreement"), pursuant to which, among other things, Homestead is,
contemporaneously herewith, acquiring all of the stock of Atlantic's
subsidiaries which own, operate or develop Atlantic's Homestead Village
extended-stay lodging facilities.  As a consequence of the mergers contemplated
under the Merger Agreement, the Prior Corporate Borrower has been merged into
Homestead and in connection therewith Homestead has succeeded to and assumed all
of the Prior Corporate Borrower's obligations and liabilities, including those
under the Corporate Note and the Existing Corporate Loan Documents.

     D.  Upon and subject to the provisions of this Agreement, Homestead, the
Partnership Borrower and Atlantic desire to continue the funding provided for
under the Existing Loan Documents, and in consideration of the issuance,
pursuant to that certain Warrant Purchase Agreement, dated as of May 21, 1996
among Atlantic, PTR, SCG and Homestead, to Atlantic by Homestead of warrants to
purchase shares of common stock, $0.01 par value per share, of Homestead
("Homestead Common Stock"), Atlantic is willing to provide funds to Homestead
and the Partnership Borrower for the costs incurred in connection with
performing due diligence investigations, securing required development approvals
and otherwise completing the acquisition

                                       2
<PAGE>
 
and development of the proposed future Homestead Village projects listed in
Exhibit A (which projects, and any replacement projects approved by Atlantic
pursuant to the provisions of this Agreement, are herein called the "Future
Projects").

     E.  The execution of this Agreement is a condition to the consummation of
the transactions contemplated by the Merger Agreement.

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


                                  ARTICLE 1.

                                  DEFINITIONS

     Section 1.1.  CERTAIN DEFINED TERMS.  As used herein, the following terms
shall have the following meanings:

     "Agreement" shall mean this Funding Commitment Agreement.

     "Acquisition Notice" has the meaning set forth in Section 2.3 of this
Agreement.

     "Architect" means the architect retained by a Borrower to provide
architectural services for a Project.

     "Architect's Agreement" means the agreement for architectural services
executed by a Borrower and an Architect in connection with the design of a
Project, and all exhibits, attachments, riders and addenda thereto.

     "Architect's Certificate" means a Certificate from the Architect for a
Project, in form and substance reasonably acceptable to Atlantic, wherein the
Architect acknowledges the collateral assignment of the Architect's Agreement
and the Plans prepared by such Architect from Borrower to Atlantic pursuant to
this Agreement and agrees to perform all of its obligations under the
Architect's Agreement in the event Atlantic takes possession of the subject
Project in connection with the exercise of its remedies hereunder or under the
Security Documents after an Event of Default.

     "Atlantic" has the meaning set forth in the Preamble to this Agreement.


                                       3
<PAGE>
 
     "Borrower" means Homestead, in its capacity as maker under the Corporate
Note, the Partnership Borrower or any Subsidiary, whichever entity is the owner
of the subject Project.

     "Business Day" means any day other than Saturday, Sunday, or any other day
on which commercial banks in New Mexico are not required to be open for
business.

     "Change Order" means a written order executed by a Borrower authorizing a
Contractor to proceed with a change in the work as provided for in the original
Plans for a Project, which change has been made in accordance with the
applicable provisions of this Agreement.

     "Completion and Payment Guaranty" means that certain Guaranty of Completion
and Payment of even date herewith from Homestead to Atlantic in the form
attached as Exhibit B.

     "Construction Contract" means the contract for construction executed by a
Borrower and the Contractor in connection with the construction of a Project,
and all exhibits, attachments, riders and addenda thereto.

     "Consultant" means any civil engineer or other material consultant, other
than the Architect, retained directly by a Borrower to provide design or
engineering services for a Project.

     "Consultant's Agreement" means the agreement for engineering or other
consultant services executed by a Borrower and a Consultant in connection with a
Project, and all exhibits, attachments, riders and addenda thereto.

     "Consultant's Certificate" means a Certificate from a Consultant for a
Project, in form and substance reasonably acceptable to Atlantic, wherein the
Consultant acknowledges the collateral assignment of the Consultant's Agreement
and the Plans prepared by such Consultant from Borrower to Atlantic pursuant to
this Agreement and agrees to perform all of its obligations under the
Consultant's Agreement in the event Atlantic takes possession of the subject
Project in connection with the exercise of its remedies hereunder or under the
Security Documents after an Event of Default.

     "Contractor" means the general contractor retained by a Borrower to provide
construction services for a Project.

     "Contractor's Certificate" means a Certificate from the Contractor for a
Project, in form and substance reasonably acceptable to Atlantic, wherein the
Contractor acknowledges the collateral assignment of the Construction Contract
from Borrower to Atlantic pursuant to this


                                       4
<PAGE>
 
Agreement and agrees to perform all of its obligations under the Construction
Contract in the event Atlantic takes possession of the subject Project in
connection with the exercise of its remedies hereunder or under the Security
Documents after an Event of Default.

     "Corporate Loan" has the meaning set forth in Recital A to this Agreement.

     "Corporate Note" has the meaning set forth in Recital A to this Agreement.

     "Default" means any condition or event that constitutes an Event of Default
or that with the giving of notice or lapse of time or both would, unless cured
or waived, become an Event of Default.

     "Development Budget" has the meaning set forth in Section 2.3 of this
Agreement.

     "Development Schedule" has the meaning set forth in Section 2.3 of this
Agreement.

     "Environmental Laws" means any and all laws, statutes, ordinances, rules,
regulations, orders, or determinations of any governmental authority pertaining
to health or the environment applicable to a Borrower, or a Property owned by
such Borrower, in effect in the jurisdiction in which such Property is located,
or where any hazardous substances generated by or disposed of by a Borrower in
connection with such Property are located, including but not limited to the
Clean Air Act, as amended, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 as amended by the Superfund Amendments
and Reauthorization Act of 1986, as amended ("CERCLA"), the Federal Water
Pollution Control Act, as amended, the Resource Conservation and Recovery Act of
1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal
Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984, as
amended ("RCRA"), the Safe Drinking Water Act, as amended, the Toxic Substances
Control Act, as amended, the Hazardous Materials Transportation Act, as amended
any analogous state law of the state in which the Property is located and other
environmental conservation or protection laws. The terms "hazardous substance,"
"release," and "threatened release" shall have the meanings specified in CERCLA,
and the terms "solid waste" and "disposal" (or "disposed") shall have the
meanings specified in RCRA; provided, however, that (i) in the event either
CERCLA or RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective date of
such amendment and (ii) to the extent the laws of the state in which the
Property is located establish a meaning for "hazardous substance," "release,"
"threatened release," "solid waste," or "disposal" which is broader than that
specified in either CERCLA or RCRA, such broader meaning shall apply.

                                       5
<PAGE>
 
     "Event of Default" means the occurrence of any of the events specified in
Article 7 hereof.

     "Existing Corporate Projects" has the meaning set forth in Recital A to
this Agreement.

     "Existing Corporate Security Documents" has the meaning set forth in
Recital A to this Agreement.

     "Existing Loan Documents" has the meaning set forth in Recital B to this
Agreement.

     "Existing Partnership Loan Documents" has the meaning set forth in Recital
B to this Agreement.

     "Existing Partnership Projects" has the meaning set forth in Recital B to
this Agreement.

     "Existing Partnership Security Documents" has the meaning set forth in
Recital B to this Agreement.

     "Existing Projects" means the Existing Corporate Projects and the Existing
Partnership Projects.

     "Expiration Date" has the meaning set forth in Section 2.5 of this
Agreement.

     "Final Advance" means the final advance of Loan proceeds to a Borrower for
construction of a Project in accordance with the applicable provisions of this
Agreement.

     "Final Completion" means that the requirements of Section 5.5 have been
fully satisfied for a Project.

     "Final CO" means a final unconditional certificate of occupancy for a
Project issued by the applicable Governmental Authority.

     "Force Majeure" means, with respect to any Project, an event entitling a
Contractor to an extension of time in constructing the Improvements as
established in the Construction Contract and any act of God, war, riots,
unusually severe weather, shortages of labor or materials (but not a shortage of
funds), strikes, lock-outs, explosions, the order of any court or governmental
authority or unavailability of or delay in issuance of any Permits despite a
Borrower's reasonable diligence in securing same, which results in any delay in
whole or in part

                                       6
<PAGE>
 
in the design, engineering or construction of a Project, or the duration of any
inspection, testing, or remediation related to any environmental condition or
aspect of a Project.

     "Funding Notice" has the meaning set forth in Section 2.3 of this
Agreement.

     "Future Project" has the meaning set forth in Recital D to this Agreement.

     "Geographic Area" means the States of Alabama, Florida, Georgia, North
Carolina, Tennessee, Maryland and Virginia and the District of Columbia.

     "Governmental Authority" means any Federal, state, county, municipal or
other governmental or quasi-governmental department, commission, board, court,
agency or other instrumentality having jurisdiction over a Borrower and any
Project.

     "Governmental Requirement" means any law, statute, code, ordinance, order,
rule, regulation, judgment, decree, injunction, franchise, permit, certificate,
license, authorization or other direction or requirement (including, without
limitation, any of the foregoing that relate to environmental standards or
controls, energy regulations and occupational safety and health standards or
controls) of any Governmental Authority.

     "Homestead" has the meaning set forth in the Preamble to this Agreement.

     "Homestead Common Stock" has the meaning set forth in Recital D to this
Agreement.

     "Homestead Affiliate" means (a) an entity that directly or indirectly
controls, is controlled by or is under common control with Homestead or (b) an
entity at least a majority of whose economic interest is owned by Homestead; and
the term "control" means the power to direct the management of such entity
through voting rights, ownership or contractual obligations; provided, however,
in no event shall PTR, Atlantic, SCG or any wholly-owned subsidiary of any of
the foregoing be deemed a Homestead affiliate.

     "Homestead Security Documents" means the deeds of trust, deeds to secured
debt and/or mortgage instruments, substantially in the forms attached as Exhibit
C hereto, to be delivered to Atlantic by Homestead in connection with the
funding of any Project acquired by Homestead after the date of this Agreement,
as security for the Corporate Note, the Partnership Note and any Subsidiary Note
executed and delivered after the date hereof, and any other security instruments
delivered by Homestead from time to time as security for the Corporate Note, the
Partnership Note and any such Subsidiary Note.

                                       7
<PAGE>
 
     "Improvements" means the buildings, structures, and other improvements to
be constructed on the Land as described on the Plans for the subject Project.

     "Inspecting A/E" means the inspecting architect or engineer retained by a
Borrower to inspect, monitor and administer the progress of construction of a
Project.

     "Land" means the parcel or parcels of land on which a Project is or is to
be located, together with all easements, rights of way and other appurtenances
thereto.

     "Lien Waivers" means a waiver of all liens relating to a Project executed
by any and all contractors, subcontractors and/or suppliers of a Borrower who
have provided any goods or services relating to Improvements.

     "Loan" means the Corporate Loan, the Partnership Loan, or any Subsidiary
Loan made after the date hereof, as the context may require; and "Loans" means
the Corporate Loan, the Partnership Loan, and any Subsidiary Loans made after
the date hereof, collectively.

     "Loan Documents" means this Agreement, the Notes, the Security Documents,
the Completion and Payment Guaranty and any and all other agreements or
instruments now or hereafter executed and delivered by a Borrower, Homestead or
any other person in connection with, or as security for, the payment or
performance of the Notes.

     "Material Adverse Effect" means any material and adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of Homestead and its Subsidiaries, taken as a
whole.

     "Material Change" means any change to the Plans or to a Project which would
result in a material increase or decrease in the number of lodging units in such
Project from the number contained in a Prototypical Project, a material increase
or decrease in the overall cost of completing a Project above the costs
contemplated in the Prototypical Project Budget, or would otherwise result in
such Project materially deviating from the product and/or investment concept of
a Prototypical Project as set forth in the Prototypical Plans.

     "Maximum Corporate Loan Amount" has the meaning set forth in Recital A to
this Agreement.

     "Maximum Loan Amount" means the aggregate of the Maximum Corporate Loan
Amount and the Maximum Partnership Loan Amount.


                                       8
<PAGE>
 
     "Maximum Partnership Loan Amount" has the meaning set forth in Recital B to
this Agreement.

     "Note" means the Corporate Note, the Partnership Note, or any Subsidiary
Note executed and delivered after the date hereof, as the context may require,
and "Notes" means the Corporate Note, the Partnership Note, and any Subsidiary
Notes executed and delivered after the date hereof, collectively.

     "Partnership Borrower" has the meaning set forth in the Preamble to this
Agreement.

     "Partnership Loan" has the meaning set forth in Recital B to this
Agreement.

     "Partnership Note" has the meaning set forth in Recital B to this
Agreement.

     "Partnership Security Documents" means the deeds of trust, deeds to secure
debt and/or mortgage instruments, substantially in the forms attached as Exhibit
D hereto, to be delivered to Atlantic by the Partnership Borrower in connection
with the funding of any Project acquired by the Partnership after the date of
this Agreement, as security for the Partnership Note, the Corporate Note and any
Subsidiary Note executed and delivered after the date hereof, and any other
security instruments delivered by the Partnership Borrower from time to time as
security for the Corporate Note, the Partnership Note and any such Subsidiary
Note.

     "Permits" shall mean all permits, licenses, registrations, certificates,
authorizations and approvals now or hereafter issued or required to be issued by
any governmental or quasi-Governmental Authority for the lawful ownership,
construction, use and operation of a Project.

     "Personalty" means all items of tangible or intangible personal property
owned by a Borrower, or in which a Borrower has any interest, to the extent of
such interest, that now are or hereafter may be purchased, prepared, constructed
or placed for, upon or in a Project owned by such Borrower.

     "Plans" means the final plans and specifications for the construction of
the Improvements comprising a Project, together with any modifications or
additions to the same subsequently permitted under the terms of this Agreement
or, to the extent required hereunder, approved by Atlantic in accordance with
the provisions of this Agreement.

     "Project" means each Existing Project and each Future Project for which an
Acquisition Notice has been delivered to Atlantic prior to the Expiration Date.


                                       9
<PAGE>
 
     "Project Budget" means the budget for a Project delivered by a Borrower to
Atlantic.

     "Project Schedule" means the schedule for the design and construction of
the Improvements encompassed within a Project delivered by a Borrower to
Atlantic.

     "Property" means any property from time to time subject to any of the
Security Documents, including the Land and all Improvements now or hereafter
located thereon and all Personalty associated therewith.

     "Proposed Substitute Future Project" has the meaning set forth in Section
2.7 of this Agreement.

     "Prototypical Project Budget" means the due diligence, development
approval, land acquisition, design and construction budget for a Prototypical
Project heretofore delivered to, and approved by, Atlantic.

     "Prototypical Project Schedule" means the due diligence, development
approval, design and construction schedule for a Prototypical Project heretofore
delivered to, and approved by, Atlantic.

     "Prototypical Plans" means the standard plans and specifications for a
Homestead Village extended-stay lodging facility heretofore delivered to, and
approved by, Atlantic.

     "Prototypical Project" means a Homestead Village extended-stay lodging
facility designed and constructed in substantial accordance with the
Prototypical Plans.

     "PTR" has the meaning set forth in the Preamble to this Agreement.

     "Pursuit Costs" has the meaning set forth in Section 2.3 of this Agreement.

     "Quarterly Statement" has the meaning set forth in Section 4.14 of this
Agreement.

     "Rejected Project" has the meaning set forth in Section 2.7 of this
Agreement.
 
     "Security Documents" means the Homestead Security Documents, the Existing
Corporate Security Documents, the Existing Partnership Security Documents, the
Partnership Security Documents, and any Subsidiary Security Documents,
collectively.

                                       10
<PAGE>
 
     "Subcontractor" means all persons performing labor or services, or
providing materials, equipment or furnishings in connection with the
construction of Improvements, other than Contractor.

     "Subsidiary" means any entity now or hereafter in existence including the
Partnership Borrower, all of the outstanding equity securities of which are
owned by Homestead.

     "Subsidiary Loan" means any portion of the Corporate Loan or Partnership
Loan which Homestead may direct Atlantic to advance to a Subsidiary instead of
to Homestead or the Partnership Borrower in accordance with the provisions of
this Agreement.

     "Subsidiary Note" means any promissory note, substantially in the form of
the Partnership Note, which a Subsidiary executes and delivers to Atlantic after
the date hereof to evidence a Subsidiary Loan made by Atlantic to such
Subsidiary.

     "Subsidiary Security Documents" means the deed of trust or mortgage
instrument to be delivered to Atlantic by a Subsidiary, substantially in the
form of the Homestead Security Documents, in connection with the funding of any
Future Project owned by Subsidiary as security for the Corporate Note, the
Partnership Note and any Subsidiary Note executed and delivered after the date
hereof, and any other security instruments delivered by such Subsidiary from
time to time as security for the Corporate Note, the Partnership Note and any
such Subsidiary Note.

     "Title Insurer" means Chicago Title Insurance Company or any other
nationally recognized title insurance company issuing a Title Policy.

     "Title Policy" means the lender's policy of title insurance for a Property
issued by the Title Insurer for the benefit of Atlantic and all endorsements
thereto, which insures the lien priority of the Security Documents applicable to
such Property.

     "UCC" means the Uniform Commercial Code as in force in the state in which a
Project is located.

     Section 1.2.  OTHER DEFINITIONAL PROVISIONS.

     (a)  Except as otherwise specified herein, all references herein (i) to any
person or entity shall be deemed to include such person's or entity's heirs,
legal representatives, successors and assigns, as appropriate, (ii) to any
Governmental Requirement defined or referred to herein shall be deemed
references to such Governmental Requirement as the same may have been or

                                       11
<PAGE>
 
may be amended or supplemented from time to time and (iii) to any Loan Document
or other agreement defined or referred to herein shall be deemed references to
such Loan Document or agreement (and, in the case of the Notes or other
instruments, any instrument issued in substitution therefor) as the terms
thereof may have been or may be amended, supplemented, waived or otherwise
modified from time to time in writing.

     (b)  Whenever the context so requires, the neuter gender includes the
masculine or feminine, the masculine gender includes the feminine, and the
singular number includes the plural, and vice versa.


                                  ARTICLE 2.

                                  THE LOANS

     Section 2.1.  THE HOMESTEAD LOAN.  Subject to the limitations set forth in
Sections 2.5, 2.6 and 2.7 below, Atlantic hereby agrees, upon the terms and
conditions set forth herein and in the other applicable Loan Documents, to
advance to Homestead (or, as Homestead may direct, to any Subsidiary) up to the
amount of the Maximum Corporate Loan Amount for the purpose of paying the costs
and expenses incurred by Homestead (or by any such Subsidiary, as the case may
be) in completing the design and construction of the Existing Projects and in
performing its due diligence review, obtaining all Permits required for
development of and otherwise acquiring the Land for, and completing the design
and construction of, such of the Future Projects hereafter pursued by Homestead
or any such Subsidiary as may be funded under the provisions of this Agreement.
Principal and accrued interest on the Corporate Note shall be due and payable in
accordance with the terms and conditions set forth therein and herein.

     Section 2.2.  THE PARTNERSHIP LOAN.  Subject to the limitations set forth
in Sections 2.5, 2.6 and 2.7 below, Atlantic hereby agrees, upon the terms and
conditions set forth herein and in the other applicable Loan Documents, to
advance to the Partnership Borrower (or, as Homestead may direct, to Homestead
or any Subsidiary) up to the amount of the Maximum Partnership Loan Amount for
the purpose of paying the costs and expenses incurred by the Partnership
Borrower (or by Homestead or any such Subsidiary, as the case may be) in
completing the design and construction of the Existing Projects and in
performing its due diligence review, obtaining all Permits required for
development of and otherwise acquiring the Land for, and completing the design
and construction of the Future Projects hereafter pursued by Homestead, the
Partnership Borrower or any other Subsidiary as may be funded under the
provisions of this Agreement. Principal and accrued interest on the Partnership
Note shall be due and payable in accordance with the terms and conditions set
forth therein and herein.

                                       12
<PAGE>
 
     Section 2.3.  FUTURE PROJECTS.  The parties acknowledge and agree that the
Future Projects identified in Exhibit A hereto are in differing stages of
consideration by Homestead and that, at any point in the process of its due
diligence review, the negotiation of definitive acquisition and related
documents and its efforts to obtain all Permits required for development of any
such Future Project, Homestead may determine, in its sole and absolute
discretion, either to proceed with the acquisition of the land for, and
development of, any such Future Project or to discontinue its efforts in respect
of any such Future Project. Requests for advances of Loan proceeds hereunder may
include amounts required to reimburse Homestead for the costs and expenses
incurred by Homestead in its due diligence review of any such Future Project, as
well as all costs incurred in connection with its efforts to secure the Permits
required for development of any such Future Project. Whenever such pursuit costs
("Pursuit Costs") are to be funded with Loan proceeds, prior to the first
advance in respect of a Future Project, Homestead will provided Atlantic with a
notice (a "Funding Notice") identifying the Future Project, together with a
development budget (a "Development Budget") indicating the anticipated costs
that are likely to be incurred prior to the acquisition of such Future Project
by Homestead or a Subsidiary, the amount of such costs to be funded by Loan
proceeds, which amount shall in no event exceed $100,000 per Future Project, and
a schedule setting forth the anticipated time-frames for completing the due
diligence review and obtaining required Permits (a "Development Schedule").

     If Homestead elects to proceed with a Future Project, then Homestead shall
provide Atlantic at least 10 Business Days' prior written notice (an
"Acquisition Notice") of the anticipated closing date for the acquisition of the
subject Land, the identity of the Borrower for such transaction, and the
estimated amount of Loan proceeds that will need to be advanced at such closing.
From and after delivery of an Acquisition Notice to Atlantic, the subject
project shall, for all purposes under this Agreement, be deemed a "Project".
Notwithstanding anything to the contrary in the foregoing, funding of the first
advance of Loan proceeds in respect of any such Project shall require the
recordation of Security Documents adding such Project as security for the Loan
and the satisfaction of the other conditions set forth in Section 5.2 as to such
Project.

     In the event, however, that Homestead determines from time to time that any
Future Project is unacceptable to it and that Homestead will not expend further
efforts with respect to such Future Project, Homestead shall provide written
notice to Atlantic identifying any such Future Project.  In such event, any
Pursuit Costs theretofore funded with Loan proceeds, together with accrued and
unpaid interest thereon due under the terms of the Corporate Note, shall be
repaid by Homestead to Atlantic within 30 days after delivery of such notice to
Atlantic.

     Section 2.4.  SUBSIDIARY LOANS.  With respect to any Future Project for
which an Acquisition Notice is delivered to Atlantic in accordance with Section
2.3 above, Homestead

                                       13
<PAGE>
 
shall have the right to determine, in its sole and absolute discretion, that a
Subsidiary acquire the subject Project, in which event, the subject Subsidiary
shall, at such time as it acquires the subject Future Project, execute and
deliver to Atlantic Subsidiary Security Documents in connection therewith
together with an agreement in form and substance satisfactory to Atlantic
pursuant to which such Subsidiary agrees to be bound by the terms of this
Agreement as to such Project. In addition, at the election of Homestead, the
subject Subsidiary shall execute a Subsidiary Note in the amount of the Loan
determined by Homestead to be allocable to such Project and the Maximum
Corporate Loan Amount and/or the Maximum Partnership Loan Amount (as Homestead
may elect) shall be decreased by the amount of any such Subsidiary Note.
Alternatively, Homestead may elect to have funds advanced with respect to such
Project under the Corporate Loan or Partnership Loan and either loan or
contribute, or cause the Partnership Borrower to loan or contribute, the funds
so advanced to the subject Subsidiary. In the event any Subsidiary executes a
Subsidiary Note and/or any Subsidiary Security Documents as contemplated under
this Section 2.4, the parties shall, contemporaneously therewith, execute,
deliver, and, if appropriate, record, such amendments to the Loan Documents as
may reasonably be necessary or appropriate to properly document any resulting
changes in the Maximum Corporate Loan Amount and/or the Maximum Partnership Loan
Amount.

     Section 2.5.  Duration Of Funding Commitment. The obligation of Atlantic to
advance Loan proceeds in respect of Future Projects for which an Acquisition
Notice has not yet been delivered to Atlantic shall expire on March 31, 1998
(the "Expiration Date"). Notwithstanding anything to the contrary in the
foregoing, Atlantic shall continue to be obligated, subject to and upon the
terms and conditions set forth herein and in the other Loan Documents, to
continue to make advances of Loan proceeds after such date for each Project for
which an Acquisition Notice has theretofore been delivered to Atlantic under the
terms of this Agreement, but shall not have any obligation to make further
advances in respect of Pursuit Costs for any Future Project for which only a
Funding Notice has been delivered to Atlantic. On or before April 30, 1998,
Homestead shall repay, or cause to be repaid, to Atlantic any advances of Loan
proceeds in respect of Pursuit Costs (together with accrued and unpaid interest
thereon) that have not been repaid pursuant to Section 2.3 hereof as of the
Expiration Date.

     Section 2.6.  Project Specific Funding Commitment. Atlantic's obligation
under this Agreement to make advances of Loan proceeds in respect of a
designated Project shall not exceed the lesser of (i) the actual aggregate hard
and soft costs incurred by the applicable Borrower in connection with the
acquisition, development, design and construction of such Project, or (ii),
except as provided in Section 6.6, the amount allocated to such Project in
Exhibit A hereto, and all costs in respect of a Project in excess of the Loan
amount allocated to such Project shall, except as provided in such Section 6.6,
be funded by Homestead as and when needed. In addition, Atlantic's obligation to
make advances in respect of a designated

                                      14
<PAGE>
 
Project shall expire on the second anniversary of the date on which the subject
Land was acquired by Homestead or the applicable Subsidiary. In the event Final
Completion of such Project has not been achieved by such date, Atlantic shall
have no obligation to make any further advances of Loan proceeds in connection
with such Project and all costs required to complete such Project shall be
funded by Homestead as and when required in order to assure that such Project is
completed and placed in operation as soon as is reasonably practicable. If,
however, Final Completion of such Project has not been achieved by the date
which is 30 months after the date of acquisition of the subject Land, then, at
the election of Atlantic, exercised by delivering written notice to Homestead,
Homestead shall repay, or cause the applicable Subsidiary to repay, within 30
days after receipt of such notice the amount of Loan proceeds advanced in
respect of such Project (together with accrued and unpaid interest on such
amount), and upon receipt of such payment, this Agreement, solely as it relates
to such Project, shall terminate and Atlantic shall cause to be released the
Security Documents recorded or filed against such Project.

     Section 2.7.  Replacement Projects.  Homestead agrees that for each Future
Project rejected by Homestead pursuant to Section 2.3 (a "Rejected Project"),
Homestead will propose to Atlantic in writing a proposed substitute future
project (a "Proposed Substitute Future Project") to take the place of such
Rejected Project. Any such Proposed Substitute Future Project shall be located
within the Geographic Area and, except as specifically noted in writing by
Homestead, shall conform, to Homestead's then current knowledge, to the
Prototypical Project requirements. Homestead may select a Proposed Substitute
Future Project from its then contemplated Homestead Village projects which
Homestead is considering pursuing or, if all such contemplated projects are then
already included within the list of Future Projects under this Agreement, then
Homestead may delay in identifying a Proposed Substitute Future Project until,
in the ordinary course of its business, a new site for a contemplated Homestead
Village project is identified within the Geographic Area. Homestead shall not,
however, be obligated to identify a new potential Homestead Village site solely
for the purposes of presenting to Atlantic a Proposed Substitute Future Project.

     Atlantic shall have a period of 20 Business Days after receipt of any such
Proposed Substitute Project to approve or reject, in its sole and absolute
discretion, any such proposal, and failure of Atlantic to provide Homestead with
written notice within such 20-Business Day period shall be deemed a rejection by
Atlantic of the subject Proposed Substitute Future Project. If Atlantic timely
approves a Proposed Substitute Future Project, then such project shall be
substituted in the place and stead of the Rejected Project in Exhibit A hereto,
and shall for all purposes under this Agreement thereafter be deemed a Future
Project. The maximum amount of Loan proceeds that will be available to fund such
Future Project (if Homestead thereafter

                                      15
<PAGE>
 
delivers an Acquisition Notice for such Project) shall be equal to the Loan
amount originally allocated to the applicable Rejected Project in Exhibit A.

     In the event that any Proposed Substitute Future Project is rejected or
deemed rejected by Atlantic, Homestead shall be free to pursue the Proposed
Substitute Future Project on its own. For each Rejected Project, Homestead shall
be required (subject to the limitations set forth above) to propose to Atlantic
up to a maximum of three (3) Proposed Substitute Future Projects. If Atlantic
rejects all three (3) Proposed Substitute Future Projects submitted by Homestead
in respect of a particular Rejected Project, then the Maximum Loan Amount, and
Atlantic's funding commitment hereunder, shall be reduced by the amount
allocated to the Rejected Project in Exhibit A hereto. The obligation of
Homestead to propose to Atlantic Proposed Substitute Future Projects shall in
any event terminate on the Expiration Date.

     Section 2.8.  Release Of Security Documents.  The parties acknowledge and
agree that the Notes are convertible, in whole or in part, into shares of
Homestead Common Stock up to the maximum amount of the unpaid principal amount
of such Notes outstanding from time to time and otherwise pursuant and subject
to the terms and conditions of such Notes. Any such conversion shall reduce the
amount of the debt evidenced by the Notes and secured by the Security Documents
by the amount determined in accordance with the conversion provisions of the
Notes. In connection with any partial conversion of the Notes, Homestead may
request that, in lieu of or in addition to reducing the amount secured by the
Security Documents, Atlantic release any one or more of the Projects then
subject to the Security Documents and having a value equivalent to or less than
the amount of the debt reduction resulting from such conversion. The release of
any Projects from the lien of the Security Documents shall, however, be subject
to the approval of Atlantic, which approval shall not to be unreasonably
withheld or delayed.

     At such time as all amounts owing to Atlantic under or in respect of any of
the Loan Documents have been paid in accordance with the provisions of the Loan
Documents or if not paid then, to the extent permitted under the Notes,
converted into Homestead Common Stock, and when Atlantic has no further
obligation to make any advance, disbursement or payment of any kind or to extend
credit under or with respect to any of the Loan Documents, then this Agreement
shall terminate and upon receipt of demand therefor from Homestead, Atlantic
shall execute and deliver to Homestead appropriate instruments of release or
reconveyance of any Security Documents then in effect.

                                      16
<PAGE>
 
                                  ARTICLE 3.

                        REPRESENTATIONS AND WARRANTIES

          To induce Atlantic to enter into this Agreement, Homestead and each
Borrower represents and warrants to Atlantic (each representation and warranty
herein being given as of the date of this Agreement and deemed repeated and
reaffirmed on the date of each advance of funds by Atlantic) as follows:

          Section 3.1. Existence And Power. Homestead and each Borrower is duly
organized, validly existing and in good standing under the laws of the State of
its organization and to the extent required is qualified to do business in and
is in good standing in each jurisdiction in which it owns property; has full
power and authority to own its assets, to conduct the activities in which it is
engaged, and to own and develop each Project which it owns.

          Section 3.2.  Authorization and Binding Obligations. The borrowing
evidenced by the Notes and the execution, delivery and performance of this
Agreement and all other Loan Documents by Homestead and each Borrower (i) are
within the power of the subject entity and (ii) have been duly authorized. Each
of the Loan Documents executed by Homestead and/or any Borrower, when executed
and delivered, will constitute the legal, valid and binding obligations of such
entity and are enforceable against such entity in accordance with its respective
terms, subject to bankruptcy and insolvency laws, equitable principles, and laws
affecting creditors rights generally.

          Section 3.3.  No Legal Bar or Resultant Lien. None of the (i)
execution and delivery of, (ii) fulfillment of the terms and conditions of, or
(iii) the consummation of the transactions contemplated by the Loan Documents to
which Homestead and/or any Borrower is a party (a) violate any provisions of the
articles or certificate of incorporation, bylaws or partnership agreement of
such entity, (b) violate or constitute a default under any contract, agreement
or instrument, or any law, ordinance, rule or regulation of any Governmental
Authority, to which such entity is subject, (c) to such entity's knowledge,
violate or constitute a default under any Governmental Requirement so as to
create a Material Adverse Effect or (d) to such entity's knowledge, result in
the creation or imposition of any lien upon any property of such entity, other
than those permitted by this Agreement.

          Section 3.4.  No Consent. The execution, delivery and performance of
the Loan Documents to which Homestead and/or each Borrower is a party does not
require the consent or approval of any other person, including, without
limitation, any financial institution or other creditor of such entity, any
trustee, conservator, receiver or administrator, or any regulatory

                                      17
<PAGE>
 
authority or governmental body of the United States of America or any state
thereof or any Governmental Authority.

          Section 3.5.  Compliance with Laws. All Plans, Projects, Properties,
Improvements and their intended use presently comply, and throughout the term of
this Agreement will continue to comply, in all material respects with all
Governmental Requirements and all public and private restrictions or other
agreements affecting each such Property, including, without limitation, building
codes, special use permits, zoning codes, Environmental Laws, applicable
requirements of fire underwriters, restrictive covenants, easements and other
agreements affecting the Property. All Permits currently required by
Governmental Requirements to be obtained for the Projects now subject to this
Agreement have been obtained, and neither Homestead nor any Borrower has any
reason to believe that any Permits that subsequently may be required to enable
it to construct, occupy, operate, use or sell any of the Property will not be
obtained in due course.

          Section 3.6.  Litigation. Except as disclosed to Atlantic in writing,
at the date of this Agreement there is no litigation, legal, administrative, or
arbitral proceeding, investigation or other action of any nature pending or, to
the knowledge of Homestead or any Borrower, threatened against or affecting any
Borrower or Homestead that involves the possibility of any judgment or liability
(not fully covered by insurance) that would have a Material Adverse Effect.

          Section 3.7.  Defaults. To the knowledge of Homestead and each
Borrower, neither Homestead nor any Borrower is in default, and no event or
circumstance has occurred that, but for the passage of time or the giving of
notice, or both, would constitute a default, in any respect under any agreement
of instrument that may have a Material Adverse Effect. No Event Default has
occurred hereunder.

          Section 3.8.  Status of Property. The Borrower delivering any Security
Documents to Atlantic is the fee simple owner of the subject Property free and
clear of all restrictions, covenants, easements, liens and encumbrances,
including, without limitation, mechanics', materialmen's and suppliers' liens
(except liens securing Atlantic and matters reflected in the Title Policy). To
Homestead and each Borrower's knowledge: each Property is a legal lot under
applicable laws, statutes, ordinances and regulations of the governing
jurisdiction; each Property is carried, or is in the process of being changed so
as to be carried, on the tax rolls of the governing jurisdiction as a separate,
subdivided parcel; each Property has, or will have upon completion of
construction, full access to the public highways and to the services of all
utilities, including water, storm sewer, sanitary sewer, electricity and
telephone, required to serve the intended use of the Property; each Property
under construction or completed is zoned under applicable zoning laws and
ordinances so as to permit the construction and development of the

                                      18
<PAGE>
 
Project planned for such Property and the use and occupancy of the Property as
contemplated under this Agreement; and each Property under construction or
completed currently complies in all material respects with such laws and
ordinances and with all private restrictions applicable thereto and any special
use permit, variance, exception, or other special zoning authorization
applicable thereto; each Property currently complies in all material respects
with all Governmental Requirements applicable thereto. To Borrower's knowledge,
the liens of the Security Documents executed by it are valid liens covering the
subject Properties.

          Section 3.9.  Use Of Proceeds. None of the proceeds of the Loans has
been or shall be used to purchase or carry, or to reduce or retire or refinance
any credit incurred to purchase or carry, any margin stock (within the meaning
of Regulations G and U of the Board of Governors of the Federal Reserve System)
or to extend credit to others for the purpose of purchasing or carrying any
margin stock.

          Section 3.10.  Real Property Environmental Matters. To the actual
knowledge of Homestead and each Borrower, except as disclosed in the
environmental audits prepared for Homestead and/or any such Borrower and
delivered to Atlantic, no hazardous substances or solid waste are located at or
on or have been disposed of or otherwise released on or to any of the Properties
in violation of any Environmental Laws.

          Section 3.11.  Financial Condition. All financial statements delivered
to Atlantic concerning Homestead and each Borrower fairly and accurately present
the financial condition of such entities as of the date of such statements and
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis, and there are no contingent liabilities not
disclosed thereby which would have a Material Adverse Effect. Since the close of
the period covered by the latest financial statements delivered to Atlantic with
respect to Homestead's and each Borrower's assets, liabilities, or financial
condition, no event has occurred (including, without limitation, any litigation
or administrative proceedings) and no change in such entities' financial
condition exists or, to the knowledge of Homestead or any Borrower, is
threatened, which (i) materially adversely affects a Borrower's ability to
perform its obligations under the Loan Documents, (ii) constitutes or which
after notice or lapse of time, or both, would constitute a Default hereunder, or
(iii) materially adversely affects the validity or priority of the lien of the
Security Documents on any Borrower's Property or the financial condition of
Homestead or any Borrower.

          Section 3.12.  No Condemnation. No taking of any Property or any
material part thereof, through eminent domain, conveyance in lieu thereof,
condemnation or similar proceeding is pending or, to the best of Homestead's and
each Borrower's knowledge, threatened by any governmental agency.

                                       19
<PAGE>
 
          Section 3.13. No Actions. There is no action, proceeding or
investigation pending or, to the best of Homestead's and each Borrower's
knowledge, threatened (or any basis therefor) which questions, directly or
indirectly, the validity of this Agreement, the Notes, the Security Documents,
or any other Loan Document or any action taken or to be taken pursuant hereto or
thereto.

          Section 3.14. No Adverse Conditions. To the best of Homestead's and
each Borrower's knowledge, there are no existing, pending or threatened events
which could materially adversely affect any of the Properties or the operation
thereof.


                                  ARTICLE 4.

                                   COVENANTS

          Each Borrower will, at all times, comply with the covenants contained
in this Article 4 from the date hereof and for so long as any part of the Loans
is outstanding.

          Section 4.1.  Construction of Improvements. Each Borrower will proceed
with the design, engineering and construction of its Improvements with
reasonable diligence and continuity and will endeavor in good faith to complete
the design, engineering and construction of its Improvements substantially in
accordance with the applicable Project Schedule, subject to Force Majeure, and
substantially in accordance with the Plans for such Improvement and applicable
Governmental Requirements.

          Section 4.2.  Plans; Project Budgets; Project Schedules and Material
CHANGES. Prior to the date hereof, Homestead has delivered to Atlantic and
Atlantic has approved Homestead's Prototypical Plans, Prototypical Project
Budget and Prototypical Project Schedule. So long as the Plans and Project
Budget (including the Development Budget which is a part of the overall Project
Budget) for a given Project do not contain any Material Change and the Project
Schedule does not deviate in any material respect from the Prototypical
Schedule, no further approval by Atlantic of the Plans, Project Schedule or
Project Budget for a Project shall be required. Borrower shall not, however,
make any Material Change in the Plans for any of its Projects or construct any
Improvements which are not substantially in accordance with the Prototypical
Plans or make any change to any Plans or install any material or equipment which
would constitute a Material Change, without Homestead's obtaining in each
instance Atlantic's prior written consent, which consent shall not be
unreasonably withheld or delayed. Homestead shall promptly notify Atlantic in
writing of any Material Change desired by a Borrower, which notice shall be
accompanied by such plans or other information as may reasonably be necessary
for

                                      20
<PAGE>
 
Atlantic to evaluate the proposed Material Change. Atlantic shall deliver
written notice to Homestead within 10 Business Days after receipt of the
requested Material Change stating whether such Material Change has been approved
or disapproved by Atlantic.

     Section 4.3. Inspection and Examination. Borrower will permit
representatives and agents of Atlantic to enter each Property owned by such
Borrower at all reasonable times to inspect the progress of the construction of
the subject Improvements and all materials to be used therein and to examine all
detailed plans and shop drawings which are or may be kept at the construction
site, and such Borrower will use reasonable efforts to cause the Contractor and
all Subcontractors to cooperate with Atlantic or its representatives in such
inspections or examinations. Homestead and each other Borrower shall also permit
representatives and agents of Atlantic to examine their respective books,
records and accounting data applicable to the Loans and the subject Projects
(and to make extracts therefrom or copies thereof) and, to the extent Homestead
or such Borrower has such right, all Contractor's and Subcontractors' books,
records and accounting data applicable to the subject Project.

     Section 4.4. Permits and Approvals. Borrower will comply in all material
respects with, and keep in full force and effect, all Permits necessary for
ownership, development and operation of the Projects owned or operated by it.

     Section 4.5.  Governmental Requirements. Borrower will cause all
Governmental Requirements and all restrictive covenants affecting its Projects
to be complied with in all material respects (except matters contested in good
faith by appropriate proceedings).

     Section 4.6.  Books and Records. Borrower will implement and maintain
payment and accounting systems which will assure accurate and complete records
of all amounts owed and paid in connection with the completion of each Project.
Borrower shall require each Contractor and each Subcontractor having a
subcontract in excess of $100,000 to deliver lien waivers or releases as a
condition to receiving payments. Contractor lien waivers shall cover the amount
paid to the Contractor under its application for payment for the month or other
payment period just ending; Subcontractor lien waivers shall cover the amount
paid to such Subcontractor pursuant to the Contractor's application for payment
for the immediately preceding month or other payment period.

     Section 4.7.  Title to Property and Improvements. Neither the legal or
beneficial title and ownership of a Borrower in the Property(ies) and
Improvements or any portion thereof owned by it will be conveyed, pledged or
encumbered in any way other than to Homestead or a Homestead Affiliate without
the consent of Atlantic, which may be granted or denied in Atlantic's sole and
absolute discretion. Borrower will promptly pay and discharge prior to the

                                      21
<PAGE>
 
date when any interest or penalties shall accrue thereon, all taxes, levies,
charges, impositions, water and sewer rents, and assessments of every kind or
nature, whether foreseen or unforeseen and whether general or special, which are
now or shall hereafter be charged or assessed against the Property(ies) or the
Improvements owned by it, or any part thereof, or which may become a lien
thereon (except matters contested in good faith by appropriate proceedings and
for which adequate reserves have been provided).

     Section 4.8.  Costs and Expenses. Borrower shall pay any out-of-pocket
expenses reasonably incurred by Atlantic in the enforcement or collection of the
Loans, including without limitation, attorneys' fees and expenses, records
searches, documentary stamps, transfer taxes and recording taxes and court
costs.

     Section 4.9.  Use of Advances. Borrower shall not apply any advances of
Loan proceeds to costs other than those incurred in connection with the subject
Future Project or Project for which the advance has been made. Borrower shall
not apply such advances to the cost of acquiring any additional real property
other than a Project. Borrower shall not receive or apply advances of Loan
proceeds except to the purposes for which such proceeds have been advanced by
Atlantic, and in accordance with the provisions of the Loan Documents generally.

     Section 4.10.  Insurance.  Borrower shall keep in full force and effect at
all times the policies of insurance applicable to the Property owned by it and
required by the Security Documents, and Borrower shall provide Atlantic with
evidence of such insurance upon receipt or request therefor.

     Section 4.11.  Environmental Matters.  Borrower shall not, by any act or
omission, cause or permit any hazardous substances, solid wastes or other
pollutants to exist on or about any Project in violation of Environmental Laws.
In the event of a breach of the foregoing provision, Homestead and the subject
Borrower shall remove the same (or if removal is prohibited by law, take
whatever action is required by law) promptly upon discovery at Homestead's and
such Borrower's sole expense. Homestead will promptly notify Atlantic in writing
of any existing, pending or threatened action, investigation or inquiry by any
Governmental Authority of which it has knowledge relating to any Property in
connection with any Environmental Laws.

     Section 4.12.  Selection of Architects; Contractors; Inspecting A/e's.
Prior to the date hereof, Homestead has delivered to Atlantic and Atlantic has
approved, a list of potential Contractors, Architects, Consultants and
Inspecting A/E's that Homestead, or any of its Subsidiaries, has or may retain
in connection with any Project funded, or to be funded, under this Agreement.
Homestead may, from time to time, subject to the prior written approval of

                                      22
<PAGE>
 
Atlantic, add Contractor, Architect, Consultant and Inspecting A/E names to such
list. So long as any Contractor, Architect, Consultant and Inspecting A/E
retained by Homestead or a Subsidiary in connection with a Project is on such
pre-approved list, no further approval of such hiring by Atlantic shall be
required. If Homestead or any Subsidiary desires to retain a Contractor,
Architect, Consultant or Inspecting A/E not on the current pre-approved list,
then prior to retaining such individual or entity, Homestead shall be required
to obtain the prior written approval of Atlantic, such approval not to be
unreasonably withheld or delayed, and such approval shall be deemed given if
Atlantic does not deliver written notice of objection to Homestead within 10
Business Days after receipt by Atlantic of a request for approval from
Homestead.

     Section 4.13.  Further Assurances.  Homestead and each Borrower shall
execute such further documents, agreements and instruments, and take all other
actions, as may reasonably be necessary to carry out the purposes of the Loan
Documents or to protect and enforce the validity and priority of the Security
Documents.

     Section 4.14.  Quarterly Statements.  Within 20 Business Days after the
expiration of each calendar quarter, Homestead shall deliver to Atlantic a
written summary (each, a "Quarterly Statement") containing a status report for
each Future Project or Project then being funded pursuant to this Agreement,
indicating whether and to what extent each such Future Project or Project is
proceeding substantially on schedule and on budget or, if not, the amount of any
overrun and/or schedule slippage and setting forth in reasonable detail any
efforts being undertaken to remedy any noted material problems. Each Quarterly
Statement shall also include any pertinent information in respect of Future
Projects and the anticipated timing of when any such Future Projects may be
acquired and construction commenced and such other information as Homestead may
deem appropriate, or Atlantic may reasonably request, to keep Atlantic
reasonably apprised of the status of the Future Projects.

     Section 4.15.  Continued Existence.  Homestead and each Borrower shall at
all times preserve and keep in full force and effect its existence and rights
and franchises material to its business and rights and franchises material to
its business and properties.

     Section 4.16.  Defaults Under Other Loans.  Borrower shall notify Atlantic
in writing within fifteen (15) days following Borrower's receipt of notice of a
default under any document or instrument governing, evidencing, securing, or
otherwise relating to any loan (other than the Loan) made to Borrower.

                                      23
<PAGE>
 
                                  ARTICLE 5.

                              ADVANCE CONDITIONS

     Section 5.1.  Conditions Precedent to First Advance under this
Agreement.  Atlantic shall not be obligated to advance funds pursuant to this
Agreement until each of the following conditions is fulfilled:

     (a) Receipt by Atlantic of each of the following:

         (i)   evidence reasonably satisfactory to Atlantic that Homestead,
               either directly or through one or more of its Subsidiaries, has
               expended at least $16,824,509 of its own funds in developing and
               placing in operation Homestead Village projects in the Geographic
               Area (the "Equity Projects");

         (ii)  duly executed Security Documents creating first and prior liens
               on all of the Equity Projects;

         (iii) a fully executed copy of this Agreement;

         (iv)  duly executed copies of each of the Notes from any Subsidiaries
               owning Projects for which a Funding Notice or Acquisition Notice
               has been delivered to Atlantic and Security Documents for any
               Land then owned or to be acquired with such initial funding by
               Homestead or any Subsidiary for which the subject Project is to
               be financed with Loan proceeds, the Completion and Payment
               Guaranty and all other Loan Documents Atlantic may reasonably
               require to be executed and delivered in connection with the first
               advance hereunder;

         (v)   Title Policies for all Properties then subject to Security
               Documents or to be made subject to Security Documents
               contemporaneously with the first advance of Loan proceeds (or an
               irrevocable commitment to issue each such Title Policy),
               effective as of the date of the Notes, in form and substance
               satisfactory to Atlantic in its reasonable judgment, confirming
               the first priority status and validity of the lien of the
               Security Documents on the Property to secure the obligations
               under the Notes, the Security Documents and the other Loan
               Documents;

                                      24
<PAGE>
 
        (vi)   for each Project then subject to this Agreement, a survey of the
               subject Land, and a geotechnical report and environmental audit,
               satisfactory to Atlantic, in its reasonable judgment;

        (vii)  opinions of counsel reasonably satisfactory to Atlantic
               addressing the following matters:

               (A)  each Borrower then executing and delivering any Loan
                    Documents is duly organized and validly existing, and in
                    good standing and authorized to do business in each state in
                    which it owns a Project, with power and authority to own its
                    Projects and to perform its obligations under the Loan
                    Documents to which it is a party and to carry on its
                    business as it is now being conducted;

               (B)  the execution, delivery and performance of the Loan
                    Documents delivered by each such Borrower have been duly and
                    validly authorized by all necessary action of such Borrower;
                    and

               (C)  the Loan Documents executed by each such Borrower constitute
                    valid and binding obligations of such Borrower, enforceable
                    against such Borrower in accordance with their respective
                    terms, except as such enforcement may be limited by
                    applicable bankruptcy laws and other customary exceptions;

        (viii) for each Project then under construction or completed,
               certificates of insurance confirming the existence of all
               insurance required by Section 4.9 hereof;

        (ix)   Copies of the Plans, Project Budget and Project Schedule for each
               Project then under construction or then being added to this
               Agreement; and

        (x)    Certification from Homestead that any Property(ies) then being
               added to this Agreement either contain no Material Changes or any
               Material Changes have previously been approved by Atlantic.

    (b) The Title Insurer shall have been paid all title insurance premiums,
filing fees, recording fees and taxes required for proper recording of the
Security Documents to be recorded at such time and any other Loan Document to be
filed or recorded at such time.

                                      25
<PAGE>
 
     (c) There shall not have occurred and be continuing any Default.

     (d) There shall be no actual or threatened condemnation of all or any
portion of the Land comprising any Property then subject to any of the Security
Documents.

     (e) Neither Homestead nor any Borrower shall be the subject of any
bankruptcy or similar proceeding.

     (f) There shall not have occurred and be continuing beyond any applicable
cure or grace period any default under any of the Prior Loan Documents.

     (g) The representations and warranties set forth in Article 3 hereof shall
be true and correct in all material respects with respect to each Project then
subject to the Security Documents.

     Section 5.2.  Conditions Precedent To First Advance For New Project.
Atlantic shall not be obligated to advance funds in respect of a new Future
Project for which Pursuit Costs are to be funded or for any Project to be
acquired by Homestead or any Subsidiary until each of the following conditions
is fulfilled:

     (a) The conditions precedent set forth in Section 5.1 shall remain
satisfied.

     (b) Receipt by Atlantic of each of the following for each Future Project
for which Pursuit Costs are to be funded:

         (i)   a Funding Notice for the subject Future Project;

         (ii)  if applicable, a fully executed copy of any agreement to be
               delivered by a Subsidiary in connection with such Future Project
               whereby such Subsidiary agrees to be bound by the terms of this
               Agreement with respect to the subject Future Project; and

         (iii) a Development Budget and Development Schedule for the subject
               Future Project.

     (c) Receipt by Atlantic of each of the following for each Project:

         (i)   an Acquisition Notice for the subject Project;

                                      26
<PAGE>
 
          (ii)  if applicable, a fully executed copy of any agreement to be
                delivered by a Subsidiary in connection with such Project
                whereby such Subsidiary agrees to be bound by the terms of this
                Agreement with respect to the subject Project;

          (iii) duly executed copies of any Homestead Security Documents,
                Partnership Security Documents or Subsidiary Security Documents,
                any Subsidiary Note, and any other Loan Documents which Atlantic
                may reasonably require to be executed and delivered in
                connection with such Project;

          (iv)  an opinion of counsel addressing, as to the subject Borrower and
                the Loan Documents then being executed by such Borrower, the
                matters set forth in Section 5.1(a)(viii) above;

          (v)   the Title Policy for the subject Property (or irrevocable
                commitment to issue such Title Policy), effective as of the date
                of the first advance in respect of such Project, in form and
                substance satisfactory to Atlantic in its reasonable judgment,
                confirming the first priority status and validity of the lien of
                the Security Documents on the Property to secure the obligations
                under the Notes, the Security Documents and the other Loan
                Documents;

          (vi)  a survey of the subject Land, and a soils report, geotechnical
                report and environmental audit of the Land, satisfactory to
                Atlantic, in its reasonable judgment; and

          (vii) Copies of the Plans, Project Budget and Project Schedule for the
                subject Project.

     (d)  With respect to each Project, the Title Insurer shall have been paid
all title insurance premiums, filing fees, recording fees and taxes required for
proper recording of the Security Documents to be recorded at such time and any
other Loan Document to be filed or recorded at such time.

     (e)  There shall not have occurred and be continuing any Default.

     (f)  There shall be no actual or threatened condemnation of all or any
portion of the Land comprising the Property.

                                      27
<PAGE>
 
     (g)  The Completion and Payment Guaranty shall be in full force and effect.

     Section 5.3.  INITIAL IMPROVEMENT ADVANCE CONDITIONS. Atlantic's initial
obligation to advance any of the Loan proceeds to a Borrower for construction of
Improvements is conditioned upon the conditions precedent set forth in Sections
5.1 and 5.2 remaining satisfied and, if requested by Atlantic, receipt of the
following:
 
     (a)  Evidence of the issuance of all Permits required by any Governmental
Authority as a condition to the commencement of construction of the subject
Improvements.

     (b)  A copy of the Construction Contract, Architect's Agreement and any
Consultants' Agreements for the subject Project.

     (c)  Certificates of insurance and other certificates or information in
form and substance reasonably satisfactory to Atlantic confirming the existence
of all insurance required by Section 4.9 hereof.

     (d)  An executed Contractor's Certificate, Architect's Certificate and
Consultants' Certificates from the Contractor, Architect and Consultants
performing services to the subject Project.

     (e)  Such further financing statements and security agreements, executed
and acknowledged by the subject Borrower, relating to construction materials for
the subject Project as Atlantic may reasonably require.

     (f)  Evidence of the availability of utilities and access to and from the
subject Project sufficient for its intended use.

     Section 5.4.  ADDITIONAL IMPROVEMENT ADVANCE CONDITIONS. After the initial
advance, additional advances made for the purpose of constructing any subject
Improvements shall be subject to the following conditions:

     (a)  The conditions precedent set forth in Sections 5.1, 5.2 and 5.3 shall
remain satisfied.

     (b)  All Permits required under Governmental Requirements for construction
of the subject Improvements shall be legally valid and in force and effect.

                                      28
<PAGE>
 
     (c)  The subject Property and Improvements shall not have suffered any
damage or deterioration without provision for arrangements satisfactory to
Atlantic for the restoration and replacement of the damage or deterioration to
such Property or Improvements.

     Section 5.5.  FINAL-ADVANCE CONDITIONS. Atlantic's obligation to advance
any of the Loan proceeds to a Borrower for the Final Advance for the
Improvements comprising a Project is conditioned upon the following and, if
requested by Atlantic, receipt by Atlantic of evidence reasonably satisfactory
to Atlantic that such conditions have been satisfied:

     (a)  The completion of all Improvements in substantial accordance with the
Plans.

     (b)  Receipt by the Borrower of all Final CO's issued by the appropriate
Governmental Authorities for the Improvements and all other Permits necessary
for use of the subject Improvements and Property.

     (c)  The Inspecting A/E for the Project shall have executed a certificate
of final completion with respect to all of the Improvements required under the
applicable Construction Contract.

     (d)  The Contractor, all Subcontractors and other parties (including
Architects and Consultants, if applicable) who performed work for the subject
Project have been paid (or with the application of the final advance of Loan
proceeds for such Project, will have been paid) in full, except for amounts
which the Borrower in good faith disputes and/or amounts which Homestead and/or
the subject Borrower intends to pay with its own funds provided any liens filed
against the Project have been released or bonded over.

     (e)  Receipt by Borrower of an as-built survey showing the location of all
Improvements, including parking areas, streets and the location of all utilities
and other easements, encroachments and building set back lines, if any, together
with delivery to Atlantic of an endorsement to the Title Policy removing any
exception for matters of survey.

     (f)  All remaining punchlist items have been completed by the Contractor
and approved by the Borrower.

     (g)  All conditions precedent to the "Final Payment" required under the
Construction Contract shall have been satisfied.

     (h)  The Project is otherwise ready for immediate occupancy by guests.

                                      29
<PAGE>
 
                                  ARTICLE 6.

                       PROCEDURE FOR ADVANCES; RESERVES

     Section 6.1.  GENERAL. Atlantic will disburse the proceeds of the Loans on
a monthly basis for the cost categories set forth in the applicable Development
Budgets and Project Budgets. Homestead shall submit a written request for
advance in a form approved by Atlantic by the 25th day of each month and,
provided Atlantic determines that all conditions precedent to the advance have
been satisfied, disbursements will be made by the 1st day of the immediately
following month. Each request for advance shall set forth, on a Project-by-
Project basis, Homestead's reasonable estimate of the hard and soft costs and
expenses incurred during the month just ending and for which reimbursement is
being sought. With each request for advance after the first, Homestead shall
also provide a reconciliation indicating the amount by which the immediately
preceding advance made by Atlantic exceeded the actual hard and soft costs for
the period covered by such advance and the amount by which the request for
advance for the month just ending has been adjusted on account of any over- or
underpayment by Atlantic for the preceding month. With respect to the final
advance of Loan proceeds in respect of a Project, if the final reconciliation
submitted in the month following such advance reflects that Loan proceeds in
excess of actual costs were advanced, such overpayment (together with accrued
and unpaid interest thereon) shall be repaid by Borrower to Atlantic within 15
days after such reconciliation is delivered to Atlantic. Any additional Loan
proceeds owing to Borrower on the basis of such final reconciliation shall be
advanced by Atlantic with the balance of the monthly advance made by Atlantic
under this Section 6.1.

     All disbursements with respect to any request for an advance submitted
other than on the 25th day of a month will be made within ten (10) business days
after the later of (i) receipt by Atlantic of a written request for an advance
from Homestead in a form approved by Atlantic and (ii) Atlantic's determination
that all conditions precedent to the advance have been satisfied.

     All disbursements shall be made in accordance with any instructions
contained in the Homestead request for advance.

     Section 6.2.  PAYMENTS TO ATLANTIC. Notwithstanding any other provisions of
this Agreement, Atlantic may, at it's option and without notice or authorization
by Homestead or any Borrower, use any Loan proceeds to pay, as and when due, any
interest on the Loans. The parties acknowledge that the Loans provide for
interest reserves in amounts sufficient to pay all interest due and payable in
respect of each Project through completion of same, and Homestead and each
Borrower specifically authorizes Atlantic to advance portions of such interest
reserves to pay interest on the Loans as and when the same comes due.

                                      30
<PAGE>
 
     Section 6.3.  RETAINAGE AND CONTRACTOR'S FEE HOLDBACK. The parties
acknowledge that Atlantic shall retain, and Homestead shall not request
disbursement, of any retainages provided for under any Construction Contract,
which amounts shall be retained by Atlantic to secure full and complete
performance of all construction obligations hereunder (hereinafter, the
"Retainage Holdback"). Provided no Default exists hereunder, Atlantic shall
disburse the Retainage Holdback in accordance with the provisions of the
applicable Construction Contract as requested by Homestead in its requests for
advances. Upon the occurrence of a Default hereunder, Atlantic shall have no
obligation to make further disbursements from the Retainage Holdback, and no
Borrower shall be entitled to any such disbursements, until such Default is
cured. Upon the occurrence of an Event of Default hereunder, Atlantic may apply
the Retainage Holdback against any of the obligations secured by the Security
Documents as Atlantic sees fit or, in Atlantic's discretion, to the completion
of any incomplete Improvements. Subject to the foregoing terms and provisions,
to the extent not theretofore disbursed, Atlantic will disburse the amounts in
the Retainage Holdback in respect of a Project concurrently with the Final
Advance for such Project.

     Section 6.4.  INTEREST RESERVE. Atlantic shall, on the date hereof,
withhold from the proceeds of the Loans available for distribution the amount of
Six Million, Eight Hundred Thirty-Five Thousand, Seven Hundred Thirty-Six
Dollars ($6,835,736) (the "Interest Reserve"). Provided no Default exists
hereunder, the Interest Reserve shall be disbursed for the payment of interest
on the Loans as such interest becomes due and payable. Upon the occurrence of a
Default hereunder, Atlantic shall have no obligation to make further
disbursements from the Interest Reserve, and no Borrower shall be entitled to
any such disbursements, until such Default is cured. Should interest payable on
the Loans exceed the amount of the Interest Reserve, the Borrowers shall
promptly pay such amounts. Upon the occurrence of an Event of Default, Atlantic
may apply any undisbursed portion of the foregoing reserve against any of the
obligations secured by the Security Documents as it sees fit or, at Atlantic's
discretion, to the completion of and incomplete Improvements.

     Section 6.5.  OWNER'S CONTINGENCY. The parties acknowledge that each
Project Budget shall contain an owner's contingency (an "Owner's Contingency")
equal to no less than 2% of Project hard and soft costs contained within the
Project Budget. Provided no Default exists hereunder, the Owner's Contingency
for a Project shall be disbursed by Atlantic to the subject Borrower to cover
unanticipated Project costs, costs associated with change orders and hard and
soft cost overruns (before such Borrower or Homestead, as guarantor under the
Completion and Payment Guaranty, shall be required to cover such additional
costs pursuant to the provisions of Section 6.6 hereinbelow or the Completion
and Payment Guaranty) as and when such payments are due and payable. Requests
for disbursement of portions of the Owner's Contingency shall be made with
Homestead's monthly requests for advance of Loan proceeds.

                                      31
<PAGE>
 
Upon the occurrence of a Default hereunder, Atlantic shall have no obligation to
advance any portion of the Owner's Contingency until such Default is cured. Upon
the occurrence of an Event of Default, Atlantic may apply the Owner's
Contingency against any of the obligations secured by the Security Documents as
Atlantic sees fit, or at Atlantic's option, to the completion of any incomplete
Improvements.

     Section 6.6.  COST OVERRUNS AND SAVINGS; CHANGE ORDER RESERVE. In the event
that the costs to acquire and complete any Project in its entirety, including,
without limitation, the furnishing thereof, exceed the amount of Loan proceeds
available for the subject Project (including the applicable Owner's
Contingency), then the subject Borrower shall with its own funds pay all costs
and expenses which may be required to complete the subject Project as and when
such costs and expenses become due and payable. In the event the costs to
acquire and complete any Project are less than the amount of Loan proceeds
allocated to the subject Project, then the unapplied portion of the Loan
proceeds (including any unexpended portion of the applicable Owner's Contingency
and amounts required to be refunded by Borrower under Section 6.1 for any
overpayments of Loan proceeds made in the final advance for a Project) shall be
retained by Atlantic as a reserve for Change Orders on other Projects which are
made in accordance with the requirements of this Agreement (the "Change Order
Reserve"). Provided no Default exists hereunder, the Change Order Reserve shall
be disbursed by Atlantic to any Borrower from time to time to cover the costs of
Change Orders to the extent any such Change Order results in Project costs
exceeding the Project Budget, including the Owner's Contingency, for such
Project (before such Borrower or Homestead, as guarantor under the Completion
and Payment Guaranty, shall be required to cover such additional costs pursuant
to the provisions of this Section 6.6 or the Completion and Payment Guaranty).
Requests for disbursement of portions of the Change Order Reserve shall be made
with Homestead's monthly requests for advance of Loan proceeds. Upon the
occurrence of a Default hereunder, Atlantic shall have no obligation to advance
any portion of the Change Order Reserve until such Default is cured. Upon the
occurrence of an Event of Default, Atlantic may apply the Change Order Reserve
against any of the obligations secured by the Security Documents as Atlantic
sees fit or, at Atlantic's option, to the completion of any incomplete
Improvements.


                                  ARTICLE 7.

                               EVENTS OF DEFAULT

     The occurrence of any one or more of the following shall constitute an
Event of Default under this Agreement:

                                      32
<PAGE>
 
     Section 7.1.  FAILURE TO PAY. The failure by a Borrower to pay when due any
sums required to be paid under the Notes, the Security Documents, this Agreement
or any other Loan Documents, and such failure is not cured within 10 days after
receipt of written notice from Atlantic.

     Section 7.2.  OTHER LOAN DOCUMENT DEFAULTS. To the extent any such failure,
breach or inaccuracy has, or would have, a Material Adverse Effect, the failure
by a Borrower or Homestead to perform or observe, as and when required, any
covenant, agreement, obligation or condition required to be performed or
observed under this Agreement or under any of the other Loan Documents other
than as set forth elsewhere in this Article 7 (for which no additional grace or
cure period is given by this Section 7.2, or the existence of any breach or
inaccuracy in any of the representations, covenants or warranties set forth in
this Agreement or in any of the other Loan Documents, provided, however, that
(i) no Event of Default shall exist hereunder on account of a breach of any
representation, warranty or covenant set forth in any of the other Loan
Documents (other than this Agreement) until Homestead or such Borrower, as
applicable, shall have failed to cure such breach within any applicable notice
and cure period therein provided; and (ii) no Event of Default shall exist
hereunder on account of a breach of any representation, warranty or covenant
contained herein unless and until Atlantic shall provide written notice of such
breach to Homestead or such Borrower and such entity shall fail to cure the same
within 30 days after receipt of such notice, provided if such breach is of such
a nature that it cannot be cured within such 30 day period, it shall not
constitute an Event of Default hereunder so long as Homestead or such Borrower,
as applicable, commences its cure of such breach within such 30 day period and
thereafter diligently and continuously proceeds with the curing of same within a
reasonable period of time not to exceed 180 days.

     Section 7.3.  JUDGMENT OR ATTACHMENT. The entry by any court of a final
judgment in excess of $500,000 against Homestead or a Borrower that is not
satisfactorily stayed or discharged within 30 days from the date thereof, or any
attachment of any of the Properties or any of the proceeds of the Loans that
shall not be released, stayed or otherwise provided for to Atlantic's
satisfaction within 30 days after the occurrence thereof; provided that in the
case of a stay, Homestead or the subject Borrower, as applicable, shall have
reserved for the full amount thereof.

     Section 7.4.  VIOLATION OF GOVERNMENTAL REQUIREMENTS. The institution of
any judicial or administrative proceeding alleging that any of the Improvements
violate any Governmental Requirements if such violation gives rise to a Material
Adverse Effect and the failure to have such proceeding dismissed or such
violation corrected within 30 days after the institution thereof, except that
Homestead or the applicable Borrower shall have the right to contest any such
proceeding beyond such 30 day period, provided that Atlantic is satisfied that
the prosecution

                                      33
<PAGE>
 
of such proceeding will neither have any Material Adverse Effect nor materially
impair Atlantic's security.

     Section 7.5.  INSOLVENCY, ETC.  The occurrence of any of the following:

     (a)  Homestead or any Borrower shall generally not pay its debts as they
become due or shall admit in writing its inability to pay its debts, or shall
make a general assignment for the benefit of creditors;

     (b)  Homestead or any Borrower shall commence any case, proceeding or other
action seeking reorganization, arrangement, adjustment, liquidation, dissolution
or composition of it or its debts under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its property;

     (c)  Homestead or any Borrower shall take any corporate action to authorize
any of the actions set forth above in paragraphs (a) or (b); or

     (d)  Any case, proceeding or other action against Homestead or any Borrower
shall be commenced seeking to have an order for relief entered against it as
debtor, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its property, and such case, proceeding or
other action (i) results in the entry of an order for relief against it which is
not fully stayed within 15 Business Days after the entry thereof or (ii) remains
undismissed for a period of 60 days.

     Section 7.6.  UNAPPROVED TRANSFER. Any sale, conveyance, transfer,
disposition, alienation, hypothecation, leasing (except in the ordinary course
of business) or further encumbrancing of a Project, or any portion thereof or
any interest therein, by any Borrower, other than any conveyance of a portion of
the unimproved land associated with such Project which is in excess of what is
needed for such Project (which conveyance is permitted), or a sale, conveyance,
transfer, disposition, alienation, hypothecation or encumbrancing of any legal
or equitable interest in a Borrower or Homestead in violation of the Loan
Documents shall be an Event of Default as of the date of such transfer, without
any right to cure. In the case of a permitted conveyance of excess land, as
hereinbefore provided, Lender shall, upon request of Homestead, execute a
partial release, releasing the lien of any Security Documents applicable to such
excess land.

                                      34
<PAGE>
 
                                  ARTICLE 8.

                                   REMEDIES

     Section 8.1. GENERAL. Upon the occurrence of any Event of Default as
defined in Article 7 of this Agreement, Atlantic, at its option, shall have the
following rights and remedies:

     (a) Atlantic may declare any one or more of the Notes to be immediately due
and payable, whereupon the Notes shall become forthwith due and payable without
presentment, demand, protest or further notice of any kind.

     (b) Atlantic may bring a foreclosure action with respect to the Security
Documents, take possession of any one or more of the Properties or exercise any
other remedy provided for in the Security Documents.

     (c) Atlantic shall be entitled to proceed simultaneously, or selectively
and successively, to enforce its rights and remedies under the Notes, the
Security Documents, the Completion and Payment Guaranty or this Agreement, and
to exercise any or all other rights and remedies available to Atlantic at law or
in equity.

     (d) In the event Atlantic shall elect to enforce its rights selectively
under any one or more of the Loan Documents, such action shall not be deemed a
waiver or discharge of any lien or encumbrance securing payment of the Notes
until such time as Atlantic shall have been paid in full all sums due under the
Notes or secured by the Security Documents, including any sums advanced or
disbursed pursuant to this Agreement. The foreclosure of any lien provided
pursuant to this Agreement or the Security Documents, without the simultaneous
foreclosure of all such liens, shall not merge the liens granted which are not
foreclosed with any interest which Atlantic might obtain as a result of such
selective and successive foreclosure.

     (e) Atlantic shall have the right, but not the obligation, to take
possession of any one or more of the Properties and proceed to complete the
Improvements thereto according to the applicable Plans. For this purpose, each
Borrower hereby conditionally assigns to Atlantic as additional security for the
repayment of the Loans all of each such Borrower's rights to the Plans for the
Projects owned by it, any contracts pertaining to the Project owned by such
Borrower, whether for construction, sale or otherwise, and any Permits
pertaining to the subject Property(ies); provided, Atlantic shall, upon
occurrence of an Event of Default, have the option to exercise this assignment,
but shall not be obligated to accept this assignment or to assume any liability
of any Borrower under any such Plans, contracts or Permits. Furthermore, each
Borrower hereby constitutes and appoints Atlantic as its true and lawful
attorney-in-fact with full

                                      35

<PAGE>
 
power of substitution to complete, or cause to be completed, the Improvements
owned by such Borrower in the name of such Borrower and hereby empowers said
attorney or attorneys as follows: (i) to use any funds of Borrower, including
any balance that may be held in escrow and any funds which may remain unadvanced
hereunder, for the purpose of completing the Improvements being built by such
Borrower; (ii) to make such additional changes and corrections in the Plans for
such Improvements as may reasonably be necessary or desirable to complete such
Improvements in substantially the manner contemplated by the Plans for such
Improvements and in a good and workmanlike manner; (iii) to employ such
contractors, subcontractors, agents, architects and inspectors as shall be
required for said purposes; (iv) to pay, settle or compromise all existing bills
and claims that are or may become liens against the subject Property(ies) or any
part thereof or may be necessary or desirable for the completion of the subject
Improvements or the clearance of title; (v) to execute all applications and
certificates in the name of Borrower which may be required by law or by any
contract relating to the subject Improvements; and (vi) to do any and every act
with respect to the applicable Property(ies) which such Borrower may do in its
own behalf. It is understood and agreed that this power of attorney shall be
deemed to be a power coupled with an interest which cannot be revoked. Atlantic,
as attorney-in-fact, shall also have the power to defend, to the extent Atlantic
reasonably deems necessary, at such Borrower's cost, all actions or proceedings
in connection with the subject Improvements and Property(ies). At the time
Atlantic takes possession of a Property(ies), or any part thereof, all materials
on such Property owned by Borrower shall become the property of Atlantic for the
purpose of completing the subject Improvements. In addition, any materials or
equipment paid for with the proceeds of the Notes but stored at a location other
than the subject Property(ies) shall become the property of Atlantic when it
takes possession of the subject Property(ies). Such Borrower shall pay Atlantic
the cost of completion. Each Borrower hereby authorizes Atlantic to add such
costs to the indebtedness of the Borrowers to Atlantic, which costs shall be
secured by the Security Documents. Any of the foregoing actions by Atlantic
shall not relieve the Borrowers of their responsibility to repay the Notes. The
foregoing provision shall not be construed as creating any third party
beneficiary contract and nothing in the foregoing shall be construed as giving
or conferring any rights or benefits whatsoever to or upon any other person or
entities other than the parties to this Agreement. Homestead shall indemnify,
defend and hold harmless Atlantic from and against any and all claims,
liabilities, loss, damages, suits, actions, expenses (including reasonable
attorneys' fees) and costs arising from any actions taken by Atlantic in
accordance with the power of attorney herein granted except to the extent
attributable to the gross negligence or willful misconduct of Atlantic.

     (f) Atlantic shall not have any obligation to make any advances under the
Notes pursuant to this Agreement after the occurrence and during the continuance
of an Event of

                                      36

<PAGE>
 
Default and at any time during such period, may unilaterally elect to terminate
any obligation of Atlantic to make any future advances under the Notes pursuant
to this Agreement.

     Section 8.2. REMEDIES CUMULATIVE. No failure or delay by Atlantic in the
exercise of any rights or remedies available to it under the Loan Documents or
at law or in equity shall operate as a waiver thereof, nor shall any single or
partial exercise by Atlantic of any such right or remedy preclude any further
exercise thereof or of any other right or remedy. The remedies provided in the
Loan Documents or available at law or in equity are cumulative and not
alternative.


                                  ARTICLE 9.

                                 MISCELLANEOUS

     Section 9.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations, warranties and covenants contained herein shall survive the
execution of this Agreement, the making of the Loans and the delivery of the
Notes and other Loan Documents and the release of any portion of the liens of
the Security Documents, and shall remain in full force and effect until the
termination of this Agreement in accordance with Section 2.8 hereof.

     Section 9.2. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon,
and inure to the benefit of, the parties hereto and their respective heirs,
personal representatives, successors, assigns and affiliates, but shall not be
assignable by any party hereto without the prior written consent of the other
party hereto; provided that Homestead and/or the Partnership Borrower may assign
its rights hereunder in whole or in part to a Homestead Affiliate or Subsidiary.
Other than to a Homestead Affiliate or Subsidiary, no Borrower shall, without
the prior written consent of Atlantic, which consent Atlantic may withhold in
its sole discretion, directly or indirectly assign, transfer or convey (i) this
Agreement or any of the other Loan Documents, (ii) any of Borrower's rights or
obligations under any of the Loan Documents, (iii) any portion of the proceeds
of the Notes, (iv) any legal or equitable interest in the Property or (v) any
legal or equitable interest in such Borrower.

     Section 9.3. NOTICES. Any notice or other communication provided for herein
or given hereunder to a party hereto shall be in writing and shall be given by
delivery, by telex, telecopier or by mail (registered or certified mail, postage
prepaid, return receipt requested) to the respective parties as follows:

                                      37

<PAGE>
 
     If to Homestead:

          Homestead Village Incorporated
          125 Lincoln Avenue, Suite 300
          Santa Fe, New Mexico  87501
          Attention:  David C. Dressler, Jr.
          Facsimile:  (505) 982-2925

     If to Atlantic:

          Security Capital Atlantic Incorporated
          7777 Market Center Avenue
          El Paso, Texas  79912
          Attention:  James C. Potts
          Facsimile:  (915) 877-3301

or to such other address with respect to a party as such party shall notify the
other in writing.

     Section 9.4. WAIVER. No party may waive any of the terms or conditions of
this Agreement, except by a duly executed writing referring to the specific
provision to be waived.

     Section 9.5. AMENDMENT. This Agreement may be amended only by a writing
duly executed by both Homestead and Atlantic.

     Section 9.6. SEVERABILITY. Insofar as is possible, each provision of this
Agreement shall be interpreted so as to render it valid and enforceable under
applicable law and severable from the remainder of this Agreement. A finding
that any such provision is invalid or unenforceable in any jurisdiction shall
not affect the validity or enforceability of any other provision or the validity
or enforceability of such provision under the laws of any other jurisdiction.

     Section 9.7. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement, and supersedes all other prior agreements and understandings, both
written and oral, among the parties hereto and their affiliates, with respect to
the subject matter hereof. The provisions of this Agreement supersede any
provisions set forth in the Existing Loan Documents relating to the disbursement
of Loan proceeds for the Projects.

     Section 9.8. EXPENSES. Except as otherwise expressly contemplated herein to
the contrary, regardless of whether the transactions contemplated hereby are
consummated, each

                                      38

<PAGE>
 
party hereto shall pay its own expenses incident to preparing for, entering into
and carrying out this Agreement and the consummation of the transactions
contemplated hereby.

     Section 9.9. CAPTIONS. The Article, Section and Paragraph captions herein
are for convenience of reference only, do not constitute part of this Agreement
and shall not be deemed to limit or otherwise affect any of the provisions
hereof.

     Section 9.10. GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of New Mexico.

     Section 9.11. NO JOINT VENTURE OR PARTNERSHIP. Nothing contained in this
Agreement or in any of the other Loan Documents and no other aspect of the
relationship between Homestead or any Borrower and Atlantic shall be construed
as creating a partnership, joint venture, or other relationship of or between
Homestead or any Borrower and Atlantic other than the lending relationship of
lender and borrower. All rights and obligations granted to or undertaken by
either of the parties hereto shall be construed as incidents of such lending
relationship.

     Section 9.12. NO THIRD PARTY BENEFICIARY RIGHTS CREATED. The parties hereto
expressly declare that it is their joint and mutual intention that this
Agreement and the transactions contemplated hereby shall not be construed as
creating a third party beneficiary contract, and neither this Agreement nor any
of the other Loan Documents shall be construed as giving or conferring any
rights or benefits whatsoever to or upon any other persons or entities other
than Homestead, any Borrower and Atlantic.

     Section 9.13. INCORPORATION BY REFERENCE. This Agreement, the Notes and the
Security Documents are intended to be construed as part of the same transaction,
and all of the covenants, agreements, conditions, terms and provisions contained
in any one of the Loan Documents shall be deemed to be included in each of the
other Loan Documents with the same force and effect as though set forth in full
therein. In the event any of the provisions of this Agreement are in conflict
with or inconsistent with the provisions of the Security Documents, this
Agreement shall govern and control.

     Section 9.14. COUNTERPARTS. This Agreement may be executed in counterpart
copies, each of which shall constitute an original, and all of which together
shall constitute one and the same document.

     Section 9.15. SCOPE OF REVIEW OF PLANS. Neither the approval of the Plans
nor any subsequent inspections or approvals of the Improvements during
construction shall constitute a

                                      39

<PAGE>
 
warranty or representation by Atlantic or any of its agents, representatives or
designees as to the technical or legal sufficiency, adequacy or safety of the
structures or any of their component parts, including without limitation
fixtures, equipment or furnishings, nor shall such approvals or inspections
constitute such a warranty or representation as to the subsoil conditions
involved in the Property or any other physical condition or feature pertaining
to the Property. All acts, including any failure to act, relating to the
Property by any agents, representatives or designees of Atlantic are performed
solely for the benefit of Atlantic to assure repayment of the Loans and are not
for the benefit of Borrower or any other person, including without limitation
purchasers, guests or other occupants.

     Section 9.16. GOVERNMENTAL REGULATION. Anything contained in this Agreement
to the contrary notwithstanding, Atlantic shall not be obligated to extend
credit to Borrower in an amount in violation of any limitation or prohibition
provided by any applicable governmental statute or regulation.

     Section 9.17. SUBORDINATION. Each Borrower hereby subordinates all rights,
liens and claims for any of the proceeds and advances under the Notes to the
liens, operation and effect of the Security Documents.

     Section 9.18. INDEMNITY. Homestead and each Borrower agree to indemnify,
defend and hold Atlantic harmless from and against any and all claims, injuries,
damages and liabilities that may be asserted or claimed against Atlantic by any
person as a result or by reason of, or that may be incurred or suffered by
Atlantic as a result or by reason of, the construction contemplated herein or
the operation of the ownership or Encumbered Property or any part thereof.

                                      40

<PAGE>
 
     IN WITNESS WHEREOF, each of the undersigned has executed this Agreement, or
caused this Agreement to be duly executed on its behalf, as of the date first
set forth above.


                                       HOMESTEAD VILLAGE INCORPORATED 
                                                                      
                                                                      
                                                                      
                                       By:  /s/ David C. Dressler, Jr.
                                            --------------------------
                                            David C. Dressler, Jr.    
                                            Chairman                   



                                       SECURITY CAPITAL ATLANTIC INCORPORATED



                                       By:  /s/ James C. Potts
                                            ------------------
                                            James C. Potts    
                                            Co-Chairman        

                                      S-1