<PAGE>
 
                                                                    EXHIBIT 10.1


                                FIRST AMENDMENT

                                      TO

                               CREDIT AGREEMENT

                                      AND

                             OTHER LOAN DOCUMENTS


                                     among


                        HOMESTEAD VILLAGE INCORPORATED,



                           THE LENDERS NAMED HEREIN,


                                      and


                                COMMERZBANK AG,
                   New York Branch, as Agent for the Lenders



                          Dated as of August 25, 1997
<PAGE>
 
         FIRST AMENDMENT TO CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS
         ------------------------------------------------------------



          FIRST AMENDMENT TO CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS (this
"Amendment"), dated as of August 25, 1997, among HOMESTEAD VILLAGE INCORPORATED,
a Maryland corporation (the "Borrower"), COMMERZBANK AG, LOS ANGELES BRANCH, and
the other lenders listed on Exhibit A attached to the Agreement (as hereinafter
defined), as amended from time to time (each a "Lender" and collectively, the
"Lenders") and COMMERZBANK AG, NEW YORK BRANCH, as agent for the Lenders (the
"Agent").

                                 W I T N E S S E T H:
                                 - - - - - - - - - - 


          WHEREAS, the Lender has made certain loans to the Borrower pursuant to
a Credit Agreement dated as of May 6, 1997, among the Borrower, as borrower, and
the Lender, as lender and the Agent (the "Agreement"); all capitalized terms
used herein and not defined herein shall have the meanings ascribed respectively
thereto in the Agreement; and

          WHEREAS, Pursuant to Borrower's request, Lender has agreed to modify
the Agreement and the other Loan Documents, as more particularly hereinafter
provided.

          NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Agreement and the other Loan
Documents are hereby modified as follows:

          1.  Amendment to Credit Agreement.  The Agreement is hereby amended as
follows:

          (a) The term "Commitment" as defined in Section 2.1(b) of the
     Agreement shall mean $100,000,000;

          (b) The term "Applicable Margin" shall mean one hundred ninety (190)
     basis points;

          (c) The first sentence of Section 2.10 of the Agreement is hereby
     deleted in its entirety and replaced with the following:
<PAGE>
 
               "Section 2.10  Fees.  The Borrower shall pay to the Agent for the
               account of the Lenders a commitment fee (the "Commitment Fee")
               equal to (a) if the Average Undrawn Balance of the Commitment is
               less than or equal to 50% of the Commitment, 0.325% per annum of
               such Average Undrawn Balance and (b) if the Average Undrawn
               Balance of the Commitment is greater than 50% of the Commitment,
               0.25% per annum of such Average Undrawn Balance."

          (d) Section 3.2(g)(i)(3) of the Agreement is hereby deleted in it
     entirety and replaced with the following:

               "(3)  a notice of title continuation or an endorsement to each
               title policy referred to in Section 3.3(a)(iii) dated no more
               than seven (7) days prior to the date of any such Advance,
               indicating that since the date of the last preceding Advance
               there has been no change in the state of title not theretofore
               approved by Agent, which endorsement shall have the effect of
               redating the title policy to a date no more than seven (7) days
               prior to the date of any such Advance, and increasing the
               coverage thereof by the amount of the Advance then being made,
               together with Borrower's certificate dated on the date of any
               such Advance to the effect that there has been no change in the
               state of title since the date of such title continuation or
               endorsement or title policy, as the case may be, and the date of
               such Advance; or in the case of a New Mortgaged Property, a title
               policy as referred to in Section 3.3(a)(iii) dated no more than
               seven (7) days prior to the date of any such Advance, and"

          (e) Exhibit B attached to the Agreement is deleted in its entirety and
     replaced with Exhibit A attached hereto.

          (f) Exhibit K attached to the Agreement is deleted in its entirety and
     replaced with Exhibit B attached hereto.

          2.  Amendment to All Loan Documents.  Simultaneously herewith the
Borrower has executed and delivered to Agent an Amended and Restated Promissory
Note which effectuates certain of the amendments contained herein.  All
references in the Loan Documents to the "Promissory Note" shall be deemed to
refer to the Amended and Restated Promissory Note.  All references in the Loan
Documents to the "Credit Agreement" shall be deemed to refer to the Agreement as
modified pursuant to the terms hereof.  All references in any one of the Loan
Documents to any of the other Loan Documents shall be deemed to refer to such
other Loan Documents as modified pursuant to the terms hereof.  In the event of
any inconsistency or conflict between the terms and provisions of any of the
Loan Documents and the terms and provisions of this Amendment, the terms and
provisions of this Amendment shall control and be binding, it being the
agreement and intent of the Borrower, Lenders and Agent that the terms and
provisions contained or referred to in the Loan Documents shall hereby be and be
deemed to be amended and modified to the extent, but only to the extent,
necessary to give effect to the terms and provisions of this Amendment.

          3.  Borrower's Representations.  Borrower hereby certifies that the
following statements are true on the date hereof:

                                      -2-
<PAGE>
 
          (a) No Default or Event of Default has occurred and is continuing;

          (b) Other than the representation in the second sentence of Section
     4.5(a) of the Credit Agreement, all representations and warranties
     contained in the Agreement, before and after giving effect to this
     Amendment are true and correct in all material respects with the same
     effect as though such representations and warranties are being made as of
     the date hereof and the Borrower, before and after giving effect to this
     Amendment is in compliance in all material respects with all covenants and
     agreements contained in the Agreement and the other Loan Documents;

          (c) There has been no Material Adverse Change;

          (d) All statements and certifications contained in the most recent
     certificate delivered to Agent pursuant to Section 5.2(e) of the Agreement,
     before and after giving effect to this Amendment are true and correct in
     all material respects with the same effect as though such statements and
     certifications are being made as of the date hereof;

          (e) Except as expressly modified hereby, the Agreement and other Loan
     Documents remain unmodified and in full force and effect and are hereby
     ratified and confirmed in all respects;

          (f) The Borrower has no offsets, counterclaims or defenses to the
     enforcement of, or otherwise with respect to, the Agreement and/or other
     Loan Documents as hereby modified; and

          (g) This Amendment is hereby incorporated into and made a part of the
     Loan Documents.

          4.  Execution in Counterparts.  This Amendment may be executed in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute one
and the same instrument.

          5.  Governing Law.  This Amendment shall be governed by and construed
in accordance with the internal laws of the State of New York.

          6.  Headings.  Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.


                    [Signatures are on the Following Page]

                                      -3-
<PAGE>
 
                                                 [Amendment to Credit Agreement]

          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers and officer of the General Partner, as
the case may be, hereunto duly authorized as of the date first above written.


                              HOMESTEAD VILLAGE INCORPORATED


                              By:/s/ David C. Dressler, Jr.
                                 --------------------------
                                   Name:
                                   Title:


                              COMMERZBANK AG, New York Branch, as
                              Agent


                              By:/s/ Henry Blagden
                                 -----------------
                                   Name: Henry Blagden
                                   Title: Assistant Treasurer


                              By:/s/ Christine H.Finkel
                                 ----------------------
                                   Name: Christine H.Finkel
                                   Title: Assistant Vice President

                              COMMERZBANK AG, Los Angeles Branch,  
                              as a lender


                              By:/s/ Christian Jagenberg
                                 -----------------------
                                   Name: Christian Jagenberg
                                   Title: SVP & Manager

                              By:/s/ Steven F. Larsen
                                 --------------------
                                   Name: Steven F. Larsen
                                   Title: Vice President

                                      -4-
<PAGE>
 
                                                                       EXHIBIT A
                                                                       ---------

                          FORM OF NOTICE OF BORROWING
                          ---------------------------

                            [Borrower's Letterhead]

                                         [Date]

Commerzbank AG, New York Branch
Real Estate Finance
2 World Financial Center
New York, New York 10281-1050


          Attention:  Real Estate Finance

Gentlemen:

          The undersigned, Homestead Village Incorporated, refers to the Credit
Agreement, dated as of ______, 1997 (as amended from time to time, the "Credit
Agreement", the terms defined therein being used herein as therein defined),
among us, as borrower, Commerzbank AG, New York Branch, as agent, and the
institution(s) identified on Exhibit A of such Credit Agreement, as lender(s),
and hereby gives you notice, irrevocably, pursuant to Section 2.3 of the Credit
Agreement, that the undersigned hereby requests an Advance under the Credit
Agreement, and in that connection sets forth below the information relating to
such Advance (the "Proposed Borrowing") as required by Section 3.2 of the Credit
Agreement:

 
          1.             The Business Day of the Proposed Borrowing is
     ________________, 19__.

          2.  The aggregate principal amount of the Proposed Borrowing is
     $_____________.

          3.  The interest rate with respect to such Proposed Borrowing is,
     subject to the provisions of the Credit Agree  ment, one hundred ninety
     (190) basis points (1.9%) above the Adjusted Eurodollar Rate to the
     Maturity Date.
<PAGE>
 
          4. The Interest Period with respect to such Proposed Borrowing is
     __________ [one of the following to be inserted: (A) one month, (B) two
     months, (C) three months or (D) six months] (subject to the provisions of
     Section 2.7 of the Credit Agreement).

          5.  The funds under such Proposed Borrowing shall be disbursed as
     follows:

                         _____________________
                         _____________________
                         _____________________
                         ABA #: _________
                         For credit to:
                         Homestead Village Incorporated
                         Account #: ___________

          6.  All of the documents, instruments, evidence and other matters and
     things required pursuant to Article III and all of the other provisions of
     the Credit Agreement to be furnished to Agent as a condition to the
     Proposed Borrowing are either enclosed herewith or have been previously
     furnished to Agent and, as required pursuant to the Credit Agreement,
     previously or contemporaneously herewith furnished to Agent's counsel (or,
     if any of documents or instruments have not been so enclosed or furnished,
     the explanation for such omission, in reasonable detail, is attached hereto
     as an exhibit (the "Exhibit"), Borrower agreeing that no such omission or
     explanation shall constitute a waiver or modification of a condition to an
     Advance or any other provision of the Credit Agreement or other Loan
     Documents).

          7.  Borrower hereby certifies that the following statements are true
     on the date hereof and will be true on the date of the Proposed Borrowing:

               (a) No Default or Event of Default has occurred and is continuing
     or would result from the Proposed Borrowing or from the application of the
     proceeds thereof;

               (b) The Proposed Borrowing shall not cause the aggregate
     principal amount of all outstanding Advances (including and after giving
     effect to the Proposed Borrowing) to exceed the lesser of (i) the
     Commitment, and (ii) the Maximum Availability Amount. The Draw Request
     attached hereto sets forth the calculations establishing the accuracy of
     the foregoing;

               (c) Subject to the provisions of Section 5.5 of the Credit
     Agreement, unless limited to a specific date, all representations and
     warranties contained in the Credit Agreement, before and after giving
     effect to the Proposed Borrowing and to the application of the proceeds
     thereof, are true and correct in all material respects with the same effect
     as though such representations and warranties are being made as of the date
     hereof and on and as of the date of the Proposed Borrowing and the
     Borrower, before and after

                                      A-2
<PAGE>
 
     giving effect to the Proposed Borrowing and to the application of the
     proceeds thereof, is in compliance in all material respects with all
     covenants and agreements contained in Article V hereof and elsewhere in the
     Credit Agreement;

               (d) There has been no Material Adverse Change;

               (e) Borrower has actually incurred the Total Costs for which it
     is seeking reimbursement with respect to the requested Advance, such costs
     have not been made the basis for any other request for an Advance under the
     Credit Agreement, and the requested Advance will be used for (and only for)
     the Permitted Purpose;

               (f) If the Proposed Borrowing relates to the Acquisition Cost for
     any Mortgaged Property, (i) the zoning district in which the Mortgaged
     Property is located permits the development, use and operation of the
     Mortgaged Property as an extended stay facility, and that all zoning,
     planning board and similar approvals required to be obtained under any
     Requirements of Law or Use Requirements for the development, use and
     operation of an extended stay facility on such Mortgaged Property have been
     obtained and are in full force and effect and (ii) the building permit and
     all other permits, authorizations and approvals required to be obtained
     under any Requirements of Law or Use Requirements for the construction and
     operation of an extended stay facility on such Mortgaged Property will be
     promptly and duly applied for, are capable of being obtained, Borrower will
     pursue the obtainment of such permits, authorizations and approvals with
     due diligence, the construction and operation of an extended stay facility
     on such Mortgaged Property shall at all times comply with all applicable
     Requirements of Law and Use Requirements;

               (g) If the Proposed Borrowing relates to the Direct Cost for any
     Mortgaged Property, (i) the building permit and all other permits,
     authorizations and approvals required to be obtained under any Requirements
     of Law or Use Requirements for the construction and operation of an
     extended stay facility on such Mortgaged Property have been obtained and
     are in full force and effect, (ii) final plans and specifications for the
     construction of an extended stay facility on such Mortgaged Property have
     been duly filed with all Governmental Authorities having jurisdiction over
     the construction of such facility, and (iii) agreements with the general
     contractor and all major trade contractors and subcontractors required for
     the construction of an extended stay facility on such Mortgaged Property
     have been duly executed and delivered by all parties thereto and are in
     full force and effect;

                                      A-3
<PAGE>
 
               (h) Pursuant to Section 3.2 of the Credit Agreement, Borrower
     hereby certifies that there has been no change in the state of title of any
     Mortgaged Property to which this Proposed Borrowing relates since the date
     of the most recent title continuation or endorsement or title policy, as
     the case may be, issued with respect to any such Mortgaged Property; and

               (i) All statements and certifications contained in the most
     recent certificate delivered to Agent pursuant to Section 5.2(e) of the
     Credit Agreement, before and after giving effect to the Proposed Borrowing
     and to the application of the proceeds thereof, are true and correct in
     all material respects with the same effect as though such statements and
     certifications are being made as of the date hereof and on and as of the
     date of the Proposed Borrowing.

          8.  All of the conditions and requirements required pursuant to
     Article III and all of the other provisions of the Credit Agreement to be
     satisfied as a condition to the Proposed Borrowing have been satisfied.



Exhibit attached:  Yes___       No___

This Notice of Borrowing shall be deemed incomplete unless the Draw Request
referred to in Paragraph 7(b) is attached.

The Exhibit and the Draw Request attached hereto is hereby deemed incorporated
into this Notice of Borrowing by this reference as if fully set forth herein.


                         Very truly yours,

                         HOMESTEAD VILLAGE INCORPORATED



                         By:
                            Name:
                            Title:

                                      A-4
<PAGE>
 
                                                                       Exhibit B

                         AMENDED AND RESTATED GUARANTY
                         -----------------------------


          THIS AMENDED AND RESTATED GUARANTY dated as of August 25, 1997 is made
by HOMESTEAD ALABAMA INCORPORATED, an Alabama corporation, having an address at
2030 Powers Ferry Road, Suite 200, Atlanta, Georgia 30339 ("Guarantor")  in
favor of COMMERZBANK AG, LOS ANGELES BRANCH, a branch duly licensed under the
laws of the State of California, having an address at 633 West 5th Street, Suite
6600, Los Angeles, California, and the other lenders listed on Exhibit A
attached to the Credit Agreement (as hereinafter defined), as amended from time
to time (each a "Lender" and collectively, "Lenders") and COMMERZBANK AG, NEW
YORK BRANCH, a branch duly licensed under the laws of the State of New York,
having an address at 2 World Financial Center, New York, New York 10281-1050, as
agent for the Lenders (the "Agent").


                                   BACKGROUND
                                   ----------

     A.   Lenders are making a loan in the principal amount of up to
$100,000,000 (the "Loan") to HOMESTEAD VILLAGE INCORPORATED, a Maryland
corporation ("Borrower"), pursuant to a Credit Agreement dated as of May 6, 1997
between Lenders and Borrower, as amended by that certain First Amendment to
Credit Agreement and Other Loan Documents of even date (the "First Amendment")
(as the same may be amended, supplemented, restated, replaced or otherwise
modified from time to time, the "Credit Agreement").

     B.   The Loan is evidenced by promissory notes (as the same may be amended,
supplemented, restated, replaced or otherwise modified from time to time, the
"Notes") of even date made by Borrower to each Lender and secured by certain
Deeds of Trust and Mortgages of even date made by Borrower in favor of Agent
(each as may be amended, supplemented, restated, replaced or otherwise modified
from time to time, a "Mortgage" and collectively, the "Mortgages").

     C.   The Borrower will apply a portion of the proceeds of the Loan to
develop the premises more particularly described in
<PAGE>
 
Exhibit A attached hereto, which premises is owned by Guarantor, and, therefore,
Guarantor shall derive substantial benefit as a result of the Lenders making the
Loan to Borrower.

     D.   Lenders are requiring Guarantor to deliver this Guaranty as a
condition to its making the Loan.

                                    Guaranty
                                    --------

          Guarantor hereby agrees as follows:

          1.  Guaranty.  Guarantor, as a primary obligor and not merely as a 
surety, unconditionally and irrevocably guarantees to Agent and Lenders the
prompt and complete payment when due (whether at the stated maturity, by
acceleration or otherwise) of (i) all principal and interest due under the Notes
and (ii) all other obligations and liabilities of Borrower to Agent and Lenders
of every nature whatsoever, including all reimbursement obligations, fees, costs
and expenses, arising under or in connection with the Notes, the Credit
Agreement, the Mortgages, the Environmental Indemnity (as such term is defined
in the Credit Agreement) or any other document or instrument evidencing,
securing or otherwise relating to the Loan (the Notes, the Credit Agreement, the
Mortgages and any other document or instrument evidencing, securing or otherwise
relating to the Loan being referred to collectively as the "Loan Documents"),
and Guarantor further agrees to pay any and all expenses which may be incurred
by Agent or Lenders in collecting any or all of the obligations of Guarantor
under this Guaranty and/or enforcing any rights under this Guaranty. The
obligations and liabilities of Guarantor to Agent and Lenders under (i) and (ii)
above are referred to collectively in this Guaranty as the "Guaranteed
Obligations."

          Guarantor agrees that whenever at any time or from time to time it
shall make any payment to Agent hereunder on account of Guarantor's liability
hereunder, it will notify Agent in writing that such payment is made under this
Guaranty for such purpose.  No payment or payments made by Borrower or any other
person or received or collected by Agent or Lenders from Borrower or any other
person by virtue of any action or proceeding or any set-off or appropriation or
application at any time or from time to time in reduction of or in payment of
the Guaranteed Obligations shall be deemed to modify, reduce, release or
otherwise affect the liability of Guarantor hereunder which shall,
notwithstanding any such payment or payments, remain liable for the Guaranteed
Obligations until the earlier of (i) the date upon which the Guaranteed
Obligations are paid in full or (ii) the date upon which Guarantor's obligations
under this Guaranty are paid in full.

          2.  Right of Set-Off.  Guarantor irrevocably authorizes Agent and 
Lenders upon the occurrence and during the continuance of an Event of Default
(as such term is defined in the Credit Agreement) without notice to Guarantor or
any other guarantor to set off and apply any and all deposits and any other
credits or claims held or owing by Agent or Lenders, as the case may be, to or
for the credit or the account of Guarantor, or any part thereof in such amounts
as Agent or Lenders, as the case may

                                     -2-
<PAGE>
 
be, may elect, against and on account of the obligations and liabilities of
Guarantor to Agent and Lenders under this Guaranty, whether or not Agent or
Lenders have made any demand for payment and although such obligations,
liabilities and claims may be contingent or unmatured.  Agent and Lenders agree
to notify Guarantor promptly of any such set-off and the application made by
Agent or Lenders, as the case may be, provided that the failure to give such
notice shall not affect the validity of such set-off and application.

          3.  Waiver of subrogation.  Notwithstanding anything to the contrary 
in this Guaranty, Guarantor hereby irrevocably waives all rights which may have
arisen in connection with this Guaranty to be subrogated to any of the rights
(whether contractual, under the Federal Bankruptcy Code, including Section 509
thereof, under common law or otherwise) of Agent and Lenders against Borrower or
against any collateral security or guarantee or right of offset held by Agent
and Lenders for the payment of the Guaranteed Obligations. Guarantor hereby
further irrevocably waives all contractual, common law, statutory or other
rights of reimbursement, contribution, exoneration or indemnity (or any similar
right) from or against Borrower or any other person which may have arisen in
connection with this Guaranty. So long as the Guaranteed Obligations remain
outstanding, if any amount shall be paid by or on behalf of Borrower to
Guarantor on account of any of the rights waived in this paragraph, such amount
shall be held by Guarantor in trust, segregated from other funds of Guarantor,
and shall, forthwith upon receipt by Guarantor, be turned over to Agent in the
exact form received by Guarantor (duly indorsed by Guarantor to Agent, if
required), to be applied against the Guaranteed Obligations, whether matured or
unmatured, in such order as Agent may determine. The provisions of the first two
sentences of this Paragraph shall survive the term of this Guaranty and the
payment in full of the Guaranteed Obligations.

          4.  Amendments to Loan Documents; Demands.  Guarantor shall remain 
obligated under this Guaranty notwithstanding that, without any reservation of
rights against Guarantor and without notice to or further consent by Guarantor,
the Guaranteed Obligations, or the liability of any other party upon or for any
part of the Guaranteed Obligations, may, from time to time, in whole or in part,
be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by Agent or Lenders, and the Notes, the Credit
Agreement, the Mortgages or any of the other Loan Documents may be amended,
restated, replaced, modified, supplemented or terminated, in whole or in part.
For the purposes of this Guaranty, any reference to the Notes, the Credit
Agreement, the Mortgages or any other Loan Document shall mean such document as
it now exists and as it may be modified, amended, restated, replaced, renewed or
extended from time to time. When making any demand against Guarantor, Agent may,
but shall be under no obligation to, make a

                                     -3-
<PAGE>
 
similar demand on Borrower or any other guarantor and any failure by Agent to
make any such demand or to collect any payments from Borrower or any other
guarantor shall not relieve Guarantor of any of its liabilities under this
Guaranty and shall not impair or affect the rights and remedies of Agent or
Lenders against Guarantor.

          5.  Guaranty Absolute and Unconditional; Waivers. Guarantor waives any
and all notice of the creation, renewal, extension or accrual of any of the
Guaranteed Obligations and notice of or proof of reliance by Agent or Lenders
upon this Guaranty or acceptance of this Guaranty. The Guaranteed Obligations
shall conclusively be deemed to have been created, contracted or incurred, or
renewed, extended, amended or waived, in reliance upon this Guaranty. Guarantor
waives diligence, presentment, protest, demand for payment and notice of default
or nonpayment to or upon Borrower with respect to the Guaranteed Obligations.
Guarantor understands and agrees that this Guaranty shall be construed as a
continuing, absolute and unconditional guaranty of payment without regard to (a)
the validity, regularity or enforceability of the Notes, the Credit Agreement,
the Mortgages, any of the Loan Documents or any of the Guaranteed Obligations,
(b) any defense, set-off or counterclaim which at any time may be available to
or be asserted by Borrower against Lenders or (c) any other circumstance
whatsoever which constitutes, or might be construed to constitute, an equitable
or legal discharge of Borrower for the Guaranteed Obligations, or of Guarantor
under this Guaranty, in bankruptcy or in any other instance, except for payment
in full of such Guaranteed Obligations. Guarantor waives any right to require
Agent or Lenders to proceed against any collateral security in any manner which
would preserve any right of subrogation which Guarantor might have against
Borrower and also waives any defense arising from any action by Agent or Lenders
which may limit or affect adversely any such right of subrogation and any
defense based on any statutory or other limitation of the amount of any
deficiency judgment available to Agent or Lenders after foreclosure or other
proceedings to realize upon any collateral security. When pursuing their rights
and remedies against Guarantor, Agent and Lenders may, but shall be under no
obligation to, pursue such rights and remedies as it may have against Borrower
or any other person or entity or against any collateral security or guaranty for
the Guaranteed Obligations and any failure by Agent or Lenders to pursue such
other rights or remedies or to collect any payments from Borrower or any such
other person or entity or to realize upon any such collateral security or
guaranty, or any release of Borrower or any such other person or entity or any
such collateral security or guarantee, shall not relieve Guarantor of any
liability, and shall not impair or affect the rights and remedies of Agent and
Lenders against Guarantor. This Guaranty shall remain in full force and effect
and be binding in accordance with and to the extent of its terms upon Guarantor

                                     -4-
<PAGE>
 
until the earlier of (i) the date upon which all the Guaranteed Obligations are
paid in full or (ii) the date upon which Guarantor's Obligations under this
Guaranty are paid in full.

          6.  Reinstatement.  This Guaranty shall continue to be effective, or 
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any of the Guaranteed Obligations is rescinded or otherwise must be restored
or returned by Agent or Lenders upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of Borrower, or Guarantor, or upon or as a result
of the appointment of a receiver, intervenor or conservator of, or trustee or
similar officer for, Borrower or Guarantor or substantial part of its property,
or otherwise, all as though such payments had not been made.

          7.  Subordination.  (a)  All indebtedness, liabilities and obligations
of Borrower to Guarantor, whether secured or unsecured and whether or not
evidenced by any instrument, now existing or subsequently created or incurred,
are and shall be subordinate and junior in right of payment to the Guaranteed
Obligations.

               (b) Guarantor shall not sell, assign or otherwise transfer, in
whole or in part, or create, incur or suffer to exist any security interest,
lien, charge or other encumbrance with respect to any indebtedness, liabilities
or obligations of Borrower to Guarantor or any instrument or document evidencing
or securing the same unless, in any such case, the person or entity to whom such
sale, assignment or transfer is made or the beneficiary of such security
interest, lien, charge or en cumbrance acknowledges the foregoing subordination
and agrees to be bound thereby.

               (c) Guarantor shall cause each document or instrument evidencing
or securing any indebtedness, liabilities or obligations of Borrower to
Guarantor to contain a statement or legend to the effect that such indebtedness,
liabilities or obligations are subordinate and junior in right of payment to the
Guaranteed Obligations in the manner and to the extent set forth in this
Guaranty.

               (d) Should any payment or distribution or security, or any
proceeds thereof, be collected or received by Guarantor in respect of any
indebtedness, liabilities or obligations of Borrower to Guarantor, and such
collection or receipt is not permitted under the subordination provisions of
this Guaranty, Guarantor shall immediately turn over such payment, distribution
or security or proceeds to Agent, in the form received, and, until so turned
over, the same shall be held in trust by Guarantor as the property of Agent.

                                     -5-
<PAGE>
 
               (e) For purposes of this Guaranty "subordinate and junior in
right of payment" shall mean:

                    (i)  No part of any subordinated indebtedness, liabilities
          or obligations shall have any claim to the assets of Borrower on a
          parity with or prior to the claim of the Guaranteed Obligations or the
          principal amount of the Loan and other amounts due under the Notes,
          the Credit Agreement, the Mortgages and the other Loan Documents.
          Unless and until the Guaranteed Obligations shall have been fully paid
          and satisfied, Guarantor will not take, demand or receive, directly or
          indirectly, by set-off, redemption, purchase or in any manner, any
          payment or security for the whole or any part of any subordinated
          indebtedness, liabilities or obligations, and Guarantor will not
          accelerate the scheduled maturities of any amounts owing on account of
          such indebtedness, liabilities or obligations or demand payment
          thereof; provided that so long as no default or event of default under
          the Notes, the Credit Agreement, the Mortgages, this Guaranty or any
          other Loan Document exists or would be in existence immediately after
          giving effect to such payment, Guarantor may receive currently
          scheduled payments on account of such indebtedness, liabilities and
          obligations; and

                    (ii)  Guarantor will not enforce or take any action to
          enforce or collect any subordinated indebt  edness, liabilities or
          obligations or any part thereof or to enforce any lien or security
          interest securing payment or performance of subordinated indebtedness,
          liabilities or obligations or exercise any claims, rights, remedies or
          powers in connection with such indebtedness, liabilities or
          obligations.

                    (iii)  In the event of:

                         (A)  any distribution, division or application, partial
               or complete, voluntary or involuntary, by operation of law or
               otherwise, of all or any substantial part of the property, assets
               or business of Borrower or the proceeds thereof, to any creditor
               or creditors of Borrower or

                         (B)  any liquidation, dissolution or other winding-up
               of Borrower or its business or any sale, receivership,
               insolvency, reorganization or bankruptcy proceedings, assignment
               for the benefit of creditors, arrangement or any proceeding by or
               against Borrower for any relief

                                    -6-
<PAGE>
 
               under any bankruptcy, reorganization or insolvency law or laws,
               Federal or state, or any law, Federal or state, relating to the
               relief of debtors, readjustment of indebtedness, reorganization,
               composition or extension or

                         (C)  any indebtedness of Borrower to Guarantor being
               declared due and payable prior to its stated maturity or

                         (D)  the indebtedness evidenced by the Notes becoming
               or being declared to be due and payable and not being paid in
               accordance with its terms,

then and in any such event any payment or distribution of any kind or character,
whether in cash, property or securities which, but for the subordination
provisions contained herein would be payable or deliverable to Guarantor shall
instead be paid over or delivered to Agent for application to payment or
prepayment of the Guaranteed Obligations, and Guarantor shall not receive any
such payment or distribution therefrom unless and until the obligations have
been fully paid and satisfied.

          8.  Payments.  Guarantor hereby agrees that payments under this
Guaranty will be paid to Agent without setoff or counterclaim in U.S. Dollars at
the office of Agent located at 2 World Financial Center, New York, New York
10038.

          9.  Representations and Warranties.  Guarantor represents and warrants
that:

               (a) this Guaranty constitutes a legal, valid and binding
     obligation of Guarantor enforceable in accordance with its terms, except as
     enforceability may be limited by bankruptcy, insolvency, reorganization,
     moratorium or similar laws affecting the enforcement of creditors' rights
     generally;

               (b) no litigation, investigation or proceeding of or before any
     arbitrator or governmental authority is pending or, to the actual knowledge
     of Guarantor, threatened by or against Guarantor or against any of its
     properties or revenues (i) with respect to this Guaranty or in any way
     relating to the Loan or (ii) which would constitute a Material Adverse
     Change; and

               (c) Guarantor has filed or caused to be filed all tax returns
     required to be filed by it, and has paid all taxes due on said returns or
     on any assessments made against it (other than those being contested in
     good faith by

                                    -7-
<PAGE>
 
     appropriate proceedings for which adequate reserves have been provided on
     its books).

Guarantor agrees that the foregoing representations and warranties shall be
deemed to have been made by Guarantor on the date of each borrowing by Borrower
under the Credit Agreement on and as of such date of borrowing as though made
hereunder on and as of such date.

          10.  Covenants.  Guarantor covenants and agrees that:

               (a)  Guarantor will not convey, sell, lease, assign, transfer or
     otherwise dispose of all or substantially all of its property, business or
     assets, or make any material change in the present method of conducting
     business.

               (b)  Guarantor will pay, discharge or otherwise satisfy at or
     before maturity or before they become delinquent, as the case may be, all
     its material obligations of whatever nature, except when the amount or
     validity is being contested currently in good faith by appropriate
     proceedings.

          11.  Severability.  Any provision of this Guaranty which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Guaranty, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

          12.  No Waiver; Cumulative Remedies.  Agent and Lenders will not by
any act, delay, omission or otherwise be deemed to have waived any right or
remedy under this Guaranty or to have acquiesced in any default or event of
default under the Notes, the Credit Agreement, the Mortgages or any of the other
Loan Documents.  No failure to exercise, nor any delay in exercising, on the
part of Agent or any Lender, any right, power or privilege under this Guaranty
shall operate as a waiver.  A waiver by Agent or any Lender of any right or
remedy under this Guaranty on any one occasion shall not be construed as a bar
to any right or remedy which Agent or Lenders otherwise would have on any future
occasion.  The rights and remedies provided to Agent and Lenders are cumulative,
may be exercised singly or concurrently and are not exclusive of any rights or
remedies provided by law.

          13.  Waivers and Amendments; Successors and Assigns. None of the terms
or provisions of this Guaranty may be waived, amended or supplemented or
otherwise modified except by a written instrument executed by Guarantor and
Agent.  This Guaranty shall be binding upon the successors and assigns of
Guarantor and shall

                                    -8-
<PAGE>
 
inure to the benefit of Agent and Lenders and each of their successors and
assigns.

          14.  Governing Law; Submission to Jurisdiction.  This Guaranty is made
and delivered in New York, New York, and shall be governed by and construed and
interpreted in accordance with the laws of the State of New York, without regard
to principles of conflict of laws.  All judicial actions, suits or proceedings
brought against Guarantor with respect to its obligations, liabilities or any
other matter under or arising out of or in connection with this Guaranty or any
transaction contemplated or for recognition or enforcement of any judgment
rendered in any such proceedings may be brought in any state or federal court of
competent jurisdiction in the City of New York.  By execution and delivery of
this Guaranty, Guarantor accepts, generally and unconditionally, the
nonexclusive jurisdiction of such courts and irrevocably agrees to be bound by
any final judgment rendered thereby in connection with this Guaranty or any
transaction contemplated hereby from which no appeal has been taken or is
available.  Guarantor irrevocably agrees that all process in any proceeding or
any court arising out of or in connection with this Guaranty may be effected by
mailing a copy thereof by registered or certified mail or any substantially
similar form of mail, postage prepaid, to Guarantor at its address referred to
in Section 15 hereof.  Such service shall be effective five days after such
mailing.  Guarantor hereby acknowledges that such service will be effective and
binding service in every respect. Guarantor shall not assert that such service
did not constitute effective and binding service within the meaning of any
applicable state or federal law, rule, regulation or the like. Guarantor, Agent
and each Lender hereby irrevocably waives trial by jury and Guarantor hereby
irrevocably waives any objections, including, without limitation, any objection
to the laying of venue or based on the grounds of forum non conveniens which it
now or hereafter may have to the bringing of any such action or proceeding in
any such jurisdiction.  Nothing herein shall affect the right of Agent or any
Lender to serve process in any other manner permitted by law or limit the right
of Agent or any Lender to bring any action, suit or proceeding against Guarantor
in the court of any jurisdiction.  Guarantor acknowledges that final judgment
against it in any action, suit or proceeding referred to in this Section shall
be conclusive and may be enforced in any other jurisdiction, by suit on the
judgment, a certified or exemplified copy of which shall be conclusive evidence
of the fact and of the amount of Guarantor's indebtedness.

          15.  Notices.  All notices, requests and demands under this Guaranty
shall be in writing and shall be deemed to have been sufficiently given or
served when presented personally, when delivered to an overnight courier service
with guaranteed next business day delivery or, if deposited in the mail, postage
prepaid, certified or registered, addressed to Guarantor at

                                    -9-
<PAGE>
 
___________________________, 2030 Powersferry Road, Suite 200, Atlanta, Georgia
30339, with a copy to Homestead Village Incorporated, 125 Lincoln Avenue, Santa
Fe, New Mexico  87501, and to Agent at 2 World Financial Center, New York, New
York 10038, Attention: David Schwarz upon the earlier of actual receipt or the
third calendar day after such mailing.  Any party may change its address by
notice to the other parties.

          16.  Limitation on Liability Not Applicable.  Any provisions in the
Notes and the other Loan Documents which limit Agent's or Lender's action upon a
default under the Notes to an action of foreclosure and realization on the
collateral encumbered thereby and prohibit any action to recover a deficiency
judgment following foreclosure and realization on the collateral encumbered
thereby, shall not be construed to abrogate or limit any Guarantor's obligations
hereunder.

          This Guaranty has been duly executed by the undersigned.

                    HOMESTEAD ALABAMA INCORPORATED


                    By:  ________________________
                         Name:
                         Title:

                                    -10-
<PAGE>
 
STATE OF ________________      )
                          :
COUNTY OF _________________    )


          I, the undersigned, a notary public in and for said county in said
state, hereby certify that _______________________ _________, whose name as
________________________ of Homestead Alabama Incorporated, a corporation, is
signed to the foregoing instrument, and who is known to me, acknowledged before
me on this day that, being informed of the contents of said instrument, he, as
such officer and with full authority, executed the same voluntarily for and as
the act of said corporation.

          Given under my hand and official seal this _____ day of
______________, 1997.


                                    ___________________________________
                                                        Notary Public



[NOTARIAL SEAL]                     My commission expires:_____________
<PAGE>
 
                                   Exhibit A

                                  The Premises