UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

                                   (Mark One)

               [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2000

                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                         Commission file number 0-24097

                        CNL HOSPITALITY PROPERTIES, INC.
             (Exact name of registrant as specified in its charter)

                  Maryland                              59-3396369
      (State or other jurisdiction of     (I.R.S. Employer Identification No.)
       incorporation or organization)

                             450 South Orange Avenue
                             Orlando, Florida 32801
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (407) 650-1000

               Securities registered pursuant to Section 12(b) of
                                    the Act:

        Title of each class:          Name of exchange on which registered:
               None                             Not Applicable

               Securities registered pursuant to Section 12(g) of
                                    the Act:

                     Common Stock, $0.01 par value per share
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days: Yes X No --

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of shares of common stock (the
"Shares")  on Form S-11 under the  Securities  Act of 1933,  as  amended.  As of
February 22, 2001,  53,913,501 shares were beneficially owned by non-affiliates.
Since no established market for such Shares exists, there is no market value for
such Shares. Each Share was originally sold at $10 per Share.

         The number of Shares of common  stock  outstanding  as of February  22,
2001, was 53,913,501.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Registrant  incorporates  by reference  portions of the CNL Hospitality
Properties,  Inc.  Definitive  Proxy  Statement  for the 2001 Annual  Meeting of
Stockholders  (Items  10,  11, 12 and 13 of Part III) to be filed no later  than
April 30, 2001.


<PAGE>


                                    CONTENTS

<TABLE>
<CAPTION>
                                                                                                   Page
<S><C>
Part I
    Item 1.     Business                                                                             2
    Item 2.     Properties                                                                           8
    Item 3.     Legal Proceedings                                                                    9
    Item 4.     Submission of Matters to a Vote of Security Holders                                  9

Part II
    Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters               10
    Item 6.     Selected Financial Data                                                             11
    Item 7.     Management's Discussion and Analysis of Financial Condition and
                        Results of Operations                                                       12
    Item 7A.    Quantitative and Qualitative Disclosures About Market Risk                          21
    Item 8.     Financial Statements and Supplementary Data                                         22
    Item 9.     Changes in and Disagreements with Accountants on Accounting and
                        Financial Disclosure                                                        45

Part III.
    Item 10.    Directors and Executive Officers of the Registrant                                  45
    Item 11.    Executive Compensation                                                              45
    Item 12.    Security Ownership of Certain Beneficial Owners and Management                      45
    Item 13.    Certain Relationships and Related Transactions                                      45

Part IV.
    Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K                     45

Signatures.                                                                                         51

Schedule III - Real Estate and Accumulated Depreciation                                             53

Exhibits                                                                                            56

</TABLE>

<PAGE>


                                     PART I

Item 1.  Business

        CNL Hospitality Properties, Inc. was  organized  pursuant to the laws of
the  state of  Maryland  on June 12,  1996.  CNL  Hospitality  GP Corp.  and CNL
Hospitality  LP  Corp.  are  wholly  owned   subsidiaries   of  CNL  Hospitality
Properties,  Inc.,  each of which was  organized  in Delaware in June 1998.  CNL
Hospitality  Partners,  LP is a Delaware limited partnership (the "Partnership")
formed in June 1998. CNL  Hospitality GP Corp. and CNL  Hospitality LP Corp. are
the general and limited partner,  respectively, of CNL Hospitality Partners, LP.
Properties acquired are generally expected to be held by the Partnership and, as
a result, are owned by CNL Hospitality Properties, Inc. through the Partnership.
Various  other  wholly-owned  subsidiaries  have been  formed  for  purposes  of
acquiring or developing  hotel  properties.  The terms "Company" or "Registrant"
include,  unless the context  otherwise  requires,  CNL Hospitality  Properties,
Inc., CNL Hospitality Partners, LP, CNL Hospitality GP Corp., CNL Hospitality LP
Corp., CNL Hotel Investors, Inc. ("Hotel Investors"), CNL DRR Investors, LP, CNL
Philadelphia  Annex, LLC (formerly known as Courtyard Annex L.L.C.),  CNL LLB LP
Holding, Ltd., and each of their subsidiaries.  The Company operates for federal
income tax purposes as a real estate investment trust (a "REIT").

     The Company was formed primarily to acquire  properties (the  "Properties")
located across the United States to be leased on a long-term (generally, 5 to 20
years,  plus  renewal  options  generally  for up to an  additional  20  years),
"triple-net"  basis,  which means that the tenants generally are responsible for
repairs,  maintenance,  property taxes, utilities and insurance.  The Properties
are leased  either (i) to  operators of selected  national and regional  limited
service,  extended stay and full service hotel chains (the "Hotel  Chains"),  or
(ii) to indirect,  wholly-owned  subsidiaries  of the Company with management of
the  Properties  to be  performed  by  third-party  Hotel  Chain  operators,  as
permitted  by  the  Work  Incentives  Act  of  1999,  also  known  as  the  REIT
Modernization  Act of 1999 ("RMA").  In November 1999,  Congress passed the RMA,
effective  January 1, 2001,  which,  among other  things,  allows REITs to own a
taxable REIT  subsidiary  ("TRS").  A TRS may lease lodging  facilities from its
affiliated  REIT.  The Company,  consistent  with the  requirements  of the RMA,
formed two subsidiaries  (one owned directly and one indirectly  through a joint
venture) which made elections to be treated as TRS's, to act as tenants.

         The  Company  structures  the leases of its  Properties  to provide for
payment  of base rent with (i)  automatic  increases  in base rent  and /or (ii)
percentage  rent based on a percentage  of gross sales above a specified  level.
The  Company  may also  provide  Mortgage  Loans (the  "Mortgage  Loans") in the
aggregate principal amount of approximately 5 percent to 10 percent of the gross
offering proceeds.  The Company also may offer furniture,  fixture and equipment
financing  ("Secured  Equipment  Leases") to operators of Hotel Chains.  Secured
Equipment Leases will be funded from the proceeds of financing to be obtained by
the Company.  The aggregate  outstanding  principal amount of Secured  Equipment
Leases will not exceed 10 percent of gross proceeds from the Company's offerings
of Shares of common stock.

         On July 9, 1997, the Company  commenced an offering to the public of up
to 16,500,000 shares of common stock (the "Shares") ($165,000,000) (the "Initial
Offering")  pursuant  to  a  registration  statement  on  Form  S-11  under  the
Securities  Act of 1933, as amended.  Of the  16,500,000  Shares of common stock
offered, 1,500,000 ($15,000,000) were available only to stockholders who elected
to participate in the Company's  reinvestment  plan (the  "Reinvestment  Plan").
Upon  completion  of the  Initial  Offering  on June 17,  1999,  the Company had
received aggregate  subscription  proceeds of $150,072,637  (15,007,264 Shares),
including  $72,637  (7,264  Shares)  through the  Company's  Reinvestment  Plan.
Following the completion of its Initial Offering, the Company commenced a second
offering  (the  "1999  Offering")  of up to  27,500,000  Shares of common  stock
($275,000,000). Upon completion of the 1999 Offering, on September 14, 2000, the
Company had received aggregate subscription proceeds of $274,998,988 (27,499,899
Shares)  from its 1999  Offering,  including  $965,194  (96,520  Shares)  issued
pursuant  to the  Reinvestment  Plan.  Following  the  completion  of  the  1999
Offering,  the Company commenced a third offering (the "2000 Offering") of up to
45,000,000  Shares of common stock  ($450,000,000).  Of the 45,000,000 Shares of
common  stock  offered,  up to  5,000,000  will  be  available  to  stockholders
purchasing  Shares  through the  Reinvestment  Plan. The price per Share and the
other terms of the 2000  Offering,  including the  percentage of gross  proceeds
payable (i) to the  managing  dealer for  selling  commissions  and  expenses in
connection with the offering and (ii) to CNL  Hospitality  Corp. (the "Advisor")
for  acquisition  fees,  are  substantially  the same as those  for the  Initial
Offering and 1999  Offering.  As of December 31, 2000,  the Company had received
subscription proceeds of $67,570,406  (6,757,040 Shares) from its 2000 Offering,
including $702,339 (70,233 Shares) issued pursuant to the Reinvestment Plan.

         As of December 31,  2000,  net proceeds to the Company from its Initial
Offering,  1999 Offering and 2000 Offering of Shares,  loan proceeds and capital
contributions  from  the  Advisor,   after  deduction  of  selling  commissions,
marketing   support   and  due   diligence   expense   reimbursement   fees  and
organizational and offering expenses,  totaled approximately  $615,052,000.  The
Company  has  used  approximately  $332,202,000  of net  offering  proceeds  and
$179,952,000 of loan proceeds to invest in 28 hotel Properties, including two on
which hotel Properties are being constructed, approximately $8,800,000 to invest
in a joint  venture,  approximately  $26,300,000  to  acquire an  additional  22
percent ownership in Hotel Investors, approximately $2,622,000 to redeem 282,161
Shares of common stock and  approximately  $29,300,000  to  pay acquisition fees
and expenses,  leaving  approximately  $35,900,000  available for  investment in
Properties and Mortgage Loans.

         During the period  January  1, 2001  through  February  22,  2001,  the
Company received  additional net offering proceeds of approximately  $46,300,000
and had  approximately  $57,100,000  available for  investment in Properties and
Mortgage Loans. The Company expects to use the uninvested net proceeds, plus any
additional  net  proceeds  from the sale of  Shares  from the 2000  Offering  to
purchase  additional  Properties  and,  to a lesser  extent,  invest in Mortgage
Loans. In addition,  the Company  intends to borrow money to acquire  additional
Properties,  to invest in Mortgage Loans and Secured Equipment Leases and to pay
certain  related fees. The Company intends to encumber assets in connection with
such  borrowings.  The  Company  currently  has a  $30,000,000  line  of  credit
available,  as described  below.  Borrowings on the line of credit may be repaid
with offering  proceeds,  working  capital or permanent  financing.  The maximum
amount the Company may borrow, absent a satisfactory showing that a higher level
of  borrowing  is  appropriate  as  approved  by a majority  of the  independent
directors, is 300 percent of the Company's net assets. The Company believes that
the net  proceeds  received  from the 2000  Offering  will enable the Company to
continue to grow and take  advantage  of  acquisition  opportunities  until such
time, if any, that the Company lists it Shares on a national securities exchange
or over-the-counter  market,  although there is no assurance that such a listing
("Listing")  will occur.  If Listing does not occur by December  31,  2007,  the
Company will commence the orderly sale of its assets and the distribution of the
proceeds. Listing does not assure liquidity.

         The Company's primary investment  objectives are to preserve,  protect,
and enhance the Company's assets while (i) making quarterly distributions;  (ii)
obtaining  fixed income  through the receipt of base rent,  and  increasing  the
Company's income (and distributions) and providing  protection against inflation
through automatic increases in base rent and/or  receipt of percentage rent, and
obtaining  fixed income  through the receipt of payments from Mortgage Loans and
Secured  Equipment  Leases;  (iii)  continuing  to qualify as a REIT for federal
income  tax  purposes;  and (iv)  providing  stockholders  of the  Company  with
liquidity of their investment  within two to seven years,  either in whole or in
part,  through  (a)  Listing or (b) the  commencement  of  orderly  sales of the
Company's  assets and distribution of the proceeds thereof (outside the ordinary
course of business and consistent  with its objectives of qualifying as a REIT).
There can be no assurance that these investment objectives will be met.

        In  November  1999,  Congress  passed  the RMA,  which  allows a REIT to
own 100  percent  of the  stock of a TRS.  A TRS can  provide  services  to REIT
tenants and others without disqualifying the rents that a REIT receives from its
tenants from being "rents from real  property"  under federal tax law. A TRS may
not operate or manage lodging  facilities,  but it may lease lodging  facilities
from its affiliated REIT, at market rates, as long as an independent  contractor
operates  and manages  the lodging  facilities.  The  provisions  of the RMA are
effective  January 1, 2001. The Company,  consistent  with the provisions of the
RMA,  formed two  subsidiaries,  which made elections to be treated as TRS's(one
directly  owned and one  indirectly  owned through a joint  venture),  to act as
tenants.

         For the next two to seven  years,  the Company  intends,  to the extent
consistent with the Company's  objective of qualifying as a REIT, to reinvest in
additional  Properties or Mortgage  Loans any proceeds of the sale of a Property
or Mortgage  Loan that are not required to be  distributed  to  stockholders  in
order to preserve the  Company's  REIT status for federal  income tax  purposes.
Similarly,  and to the extent  consistent with REIT  qualification,  the Company
plans  to use the  proceeds  of the sale of  Secured  Equipment  Leases  to fund
additional  Secured Equipment Leases, or to reduce its outstanding  indebtedness
on the line of credit.  The Company  will not sell any assets if such sale would
not be  consistent  with the Company's  objective of  qualifying as a REIT.  The
Company  intends to provide  stockholders of the Company with liquidity of their
investment,  either in whole or in part,  through  Listing  of the Shares of the
Company (although  liquidity cannot be assured thereby) or by commencing orderly
sales of the Company's assets. If Listing occurs,  the Company intends to invest
in additional  Properties,  Mortgage  Loans and Secured  Equipment  Leases.  The
Company's Articles of Incorporation  provide,  however, that if Listing does not
occur,  the Company  thereafter  will  undertake the orderly  liquidation of the
Company and the sale of the Company's  assets and will  distribute any net sales
proceeds to stockholders.

         In deciding the precise timing and terms of Property sales, the Advisor
will consider  factors such as national and local market  conditions,  potential
capital  appreciation,  cash flows, and federal income tax  considerations.  The
terms of certain leases,  however, may require the Company to sell a Property at
an earlier time if the tenant  exercises its option to purchase a Property after
a specified  portion of the lease term has  elapsed.  The  Company  will have no
obligation  to sell all or any  portion of a Property  at any  particular  time,
except as may be required  under  property  or joint  venture  purchase  options
granted to certain  tenants.  In  connection  with  sales of  Properties  by the
Company,  purchase  money  obligations  may be taken by the  Company  as partial
payment of the sales  price.  The terms of payment will be affected by custom in
the area in which the Property is located and  prevailing  economic  conditions.
When a purchase money  obligation is accepted in lieu of cash upon the sale of a
Property,  the Company will  continue to have a mortgage on the Property and the
proceeds  of the sale will be  realized  over a period of years  rather  than at
closing of the sale.

         The Company currently does not anticipate selling any Secured Equipment
Leases  prior to  expiration  of the lease  term,  except in the event  that the
Company undertakes orderly  liquidation of its assets. In addition,  the Company
currently does not anticipate selling any Mortgage Loans prior to the expiration
of the loan term,  except in the event (i) the Company owns the  Property  (land
only)  underlying the building  improvements  which secure the Mortgage Loan and
the sale of the Property occurs, or (ii) the Company  undertakes an orderly sale
of its assets.

Leases

         As of December 31, 2000,  the Company had acquired  directly or through
its  subsidiaries  29  Properties,  including two Properties on which hotels are
being constructed,  and one Property through a joint venture,  on which a resort
is being  constructed,  which are  subject to  long-term,  "triple-net"  leases.
Although there are variations in the specific terms of the leases, the following
is a summarized  description of the general  structure of the Company's  leases.
The leases of the  Properties  generally  provide for  initial  terms of 5 to 20
years and expire between 2014 and 2021. The leases are on a "triple-net"  basis,
and in most cases the tenants  are  required  to pay all  repairs,  maintenance,
property taxes, utilities,  and insurance.  The tenants also are required to pay
for special  assessments,  sales and use taxes,  and the cost of any renovations
permitted  under the leases.  The leases of the  Properties  provide for minimum
base annual  rental  payments  (payable in monthly  installments)  ranging  from
approximately  $716,000 to  $6,500,000.  In addition to minimum rent, the tenant
must generally pay the Company "percentage rent" and/or automatic  increases in
the minimum annual rent at predetermined intervals during the term of the lease.
Percentage rent is generally computed as a percentage of the gross sales above a
specified  level at a particular  Property.  The leases of the  Properties  also
provide for the tenant to fund, in addition to its lease payment, a reserve fund
up to a  pre-determined  amount.  Generally,  money in that fund is owned by the
Company and may be used by the tenant to pay for  replacement  of furniture  and
fixtures.  The Company may be responsible for capital expenditures or repairs in
excess of the amounts in the reserve  fund,  and the tenant  generally  would be
responsible for  replenishing  the reserve fund and to pay a specified return on
the amount of capital  expenditures or repairs paid for by the Company in excess
of amounts in the reserve fund.

         Generally,  the leases provide for up to four, five to ten-year renewal
options. During the initial term of each lease, the tenant must pay the Company,
as  landlord,  minimum  annual  rent  equal  to a  specified  percentage  of the
Company's cost of purchasing the Property  payable in monthly  installments.  If
the  Company is  acquiring a Property  that is to be  constructed  or  renovated
pursuant to a development  agreement,  the costs of purchasing the Property will
include the purchase price of the land,  including all fees, costs, and expenses
paid by the Company in connection  with its purchase of the land,  and all fees,
costs,  and  expenses  disbursed  by the  Company for  construction  of building
improvements.  In addition  to the minimum  annual  rent,  the leases  generally
provide for  percentage  rent based on a  percentage  of the gross sales above a
specified amount to be paid by the tenant.

Major Tenants

         Crestline Capital Corporation, City Center Annex Tenant Corporation and
WI Leasing,  LLC each  contributed  more than 10 percent of the Company's  total
rental income for the year ended  December 31, 2000. In addition,  a significant
portion of the Company's  rental income was earned from Properties  operating as
Marriott(R) brand chains.  Although the Company intends to acquire Properties in
various  states and  regions  and to  carefully  screen its  tenants in order to
reduce  risks of  default,  failure of these  lessees or the  Marriott(R)  brand
chains  could  significantly  impact the results of  operations  of the Company.
However,  management  believes  that the risk of default  is reduced  due to the
essential or important nature of these Properties for the ongoing  operations of
the  lessees.  It is  expected  that  the  percentage  of  total  rental  income
contribution  by these  lessees  will  decrease  as  additional  Properties  are
acquired and leased during 2001 and subsequent years.

Joint Venture Arrangements

         Hotel  Investors.  During 1999,  Five Arrows  Realty  Securities II LLC
("Five Arrows") and the Company invested a total of approximately $86 million in
Hotel  Investors,  resulting  in the  Company  owning 49 percent and Five Arrows
owning 51 percent of Hotel  Investors.  Five  Arrows  owned  48,337  shares of 8
percent Class A cumulative  preferred stock ("Class A Preferred Stock") of Hotel
Investors and the Company owned 37,979 shares of 9.76 percent Class B cumulative
preferred  stock  ("Class B Preferred  Stock") of Hotel  Investors.  The Class A
Preferred Stock was  exchangeable  upon demand into common stock of the Company,
using  an  exchange  ratio  based  on the  relationship  between  the  Company's
operating results and that of Hotel Investors.

         In October 2000, Five Arrows,  the Company and Hotel Investors  entered
into an agreement ("Initial Transaction") with the following terms:

o        Hotel Investors  agreed to redeem 2,104 shares of both Class A
         Preferred Stock and common stock of Hotel Investors held by Five Arrows
         for $2,104,000;
o        Hotel  Investors  agreed to redeem  1,653  shares of Class B  Preferred
         Stock  and an  aggregate  of 10,115  shares  of  common  stock of Hotel
         Investors held by the Company for $1,653,000;
o        The  Company  purchased  7,563  shares of both the Class A Preferred
         Stock  and  common  stock of Hotel  Investors  from  Five  Arrows  for
         $11,395,000;
o        The  Company  repurchased  65,285 shares  of the Company's common stock
         owned by Five Arrows for $620,207;
o        The  remaining  Class A Preferred  Stock  owned by Five Arrows  (38,670
         shares) and the Company (7,563 shares) were exchanged for an equivalent
         number of shares of Class E Preferred  Stock par value $0.01  ("Class E
         Preferred Stock") of Hotel Investors;
o        Five Arrows granted the following  options (1) on or before January 31,
         2001,  the Company had the option to purchase  7,250  shares of Class E
         Preferred  Stock and an equal number of shares of common stock of Hotel
         Investors  held by Five Arrows for $1,000 per pair of Class E Preferred
         Stock and common stock of Hotel  Investors,  and (2) provided  that the
         Company purchased all of the shares under the first option, the Company
         would have the option, until June 30, 2001, to purchase 7,251 shares of
         both Class E  Preferred  Stock and an equal  number of shares of common
         stock of Hotel Investors for $1,000 for each pair;
o        The Company has agreed to pay Five Arrows additional  consideration for
         agreeing to defer the conversion of its Class A Preferred  Stock (prior
         to its  conversion  to Class E Preferred  Stock) to common stock of the
         Company.  These payments are  equivalent to the difference  between any
         distributions  received  by Five Arrows  from Hotel  Investors  and the
         distributions  that Five Arrows would have received from the Company if
         Five  Arrows  had  converted  its  Class A  Preferred  Stock  into  the
         Company's common stock on June 30, 2000;
o        Five Arrows has agreed to forfeit its priority cash distributions  from
         Hotel Investors;
o        Cash available for  distributions  of Hotel Investors is distributed to
         100 CNL  Holdings,  Inc. and  affiliates'  associates  who each own one
         share of Class C  preferred  stock in Hotel  Investors,  to  provide  a
         quarterly, cumulative,  compounded 8 percent return. All remaining cash
         available for distributions is distributed pro rata with respect to the
         interest in the common shares of Hotel Investors.

         On December 29, 2000, the Company  exercised its two options to acquire
14,501 shares of Class E Preferred Stock and common stock ("Option Transaction")
owned by Five Arrows. As of December 31, 2000, after the Initial Transaction and
the Option  Transaction,  the Company  owned  approximately  71 percent and Five
Arrows owned approximately 29 percent of Hotel Investors.  The total amount paid
by the Company for the additional 22 percent  interest was  approximately  $26.3
million.  This  acquisition  has been accounted for under the purchase method of
accounting and, accordingly,  the operating results of Hotel Investors have been
included in the  Company's  consolidated  statement of earnings from the date of
acquisition  (October 2000).  The purchase price  approximated the fair value of
the net assets  acquired.  The resulting  purchase price  adjustment (fair value
adjustment) of approximately $5.5 million has been reflected in land,  buildings
and  equipment  on operating  leases in the  accompanying  consolidated  balance
sheet.

         During  the  nine  months  ended  September  30,  2000,  prior  to  the
consolidation  of Hotel Investors,  the Company recorded  $2,780,063 in dividend
income  and  $386,627  in equity in loss  after  deduction  of  preferred  stock
dividends,   resulting  in  net  earnings  of  $2,393,436  attributable  to  its
investment  in Hotel  Investors.  During the year ended  December 31, 1999,  the
Company  recorded  $2,753,506 in dividend  income and $778,466 in equity in loss
after  deduction  of  preferred  stock  dividends,  resulting in net earnings of
$1,975,040 attributable to the investment.

         Desert Ridge. On December 21, 2000, the Company,  through subsidiaries,
acquired a 44 percent  interest in Desert  Ridge Resort  Partners,  LLC, a joint
venture  (the  "Desert  Ridge  Joint  Venture")  with an  affiliate  of Marriott
International,  Inc. and a  partnership  in which an affiliate of the Advisor is
the general  partner.  The Desert Ridge Joint  Venture  invested in Desert Ridge
Resort,  LLC, a single purpose  limited  liability  company (the "Resort Owner")
that owns the  Desert  Ridge  Marriott  Resort & Spa in  Phoenix,  Arizona  (the
"Desert Ridge  Property"),  which is currently under  construction.  The Company
made an initial  capital  contribution  of $8.8 million of its  anticipated  $25
million  investment  in the Desert  Ridge Joint  Venture.  The total cost of the
Desert  Ridge  Property   (including   acquisition  of  land,   development  and
construction) is estimated to be $298 million.  On December 21, 2000, the Resort
Owner obtained  permanent  financing from a third party lender for $179 million,
secured by a mortgage  on the Desert  Ridge  Property.  The notes have a term of
seven years with interest  payable  quarterly in arrears  commencing on March 2,
2001. Interest with respect to $109 million of the notes is payable at a rate of
7.90 percent per annum,  while interest with respect to $70 million of the notes
is payable at a floating  rate equal to 185 basis points  above the  three-month
London  Interbank  Offered Rate  ("LIBOR").  The blended  fixed rate of interest
after an interest rate swap is 9.48 percent.  All unpaid  interest and principal
will be due at maturity.  In addition,  an affiliate of Marriott  International,
Inc.  will  provide  financing  for 19 percent of the costs to the Desert  Ridge
Joint Venture,  secured by pledges of the co-venturers'  equity contributions to
the Desert Ridge Joint  Venture.  This  investment  is  accounted  for using the
equity method of accounting.

Certain Management Services

         Pursuant to an advisory  agreement (the "Advisory  Agreement") with the
Company,  the Advisor provides management services relating to the Company,  the
Properties,  the Mortgage Loans and the Secured  Equipment Lease program.  Under
this  agreement,  the  Advisor  is  responsible  for  assisting  the  Company in
negotiating  leases,  Mortgage Loans,  the line of credit and Secured  Equipment
Leases;  collecting rental,  Mortgage Loan and Secured Equipment Lease payments;
inspecting the Properties and the tenants' books and records;  and responding to
tenants'  inquiries and notices.  The Advisor also provides  information  to the
Company about the status of the leases, the Properties,  the Mortgage Loans, the
line of credit and the Secured Equipment Leases. In exchange for these services,
the  Advisor  is  entitled  to  receive  certain  fees  from  the  Company.  For
supervision of the Properties and the Mortgage Loans,  the Advisor  receives the
asset management fee, which is payable monthly in an amount equal to one-twelfth
of 0.60 percent of the total  amount  invested in the  Properties,  exclusive of
acquisition  fees and acquisition  expenses (the "Real Estate Asset Value") plus
one-twelfth of 0.60 percent of the outstanding  principal amount of any Mortgage
Loans, as of the end of the preceding month. For negotiating  Secured  Equipment
Leases and  supervising the Secured  Equipment  Lease program,  the Advisor will
receive, upon entering into each lease, a Secured Equipment Lease servicing fee,
payable  out of the  proceeds  of the line of credit,  equal to 2 percent of the
purchase price of the equipment  subject to each Secured  Equipment  Lease.  For
identifying the Properties,  structuring the terms of the acquisition and leases
of the Properties and structuring  the terms of the Mortgage Loans,  the Advisor
will receive a fee equal to 4.5 percent of gross  proceeds,  loan  proceeds from
permanent  financing and the line of credit that are used to acquire Properties,
but excluding loan proceeds used to finance Secured Equipment Leases.

         The Advisory  Agreement  continues  until June 16, 2001, and thereafter
may be extended  annually  upon  mutual  consent of the Advisor and the Board of
Directors of the Company unless terminated at an earlier date upon 60 days prior
written notice by each party.

Borrowings

         The Company has a line of credit  ("Line of Credit")  which  allows the
Company to receive advances of up to $30,000,000  until July 30, 2003.  Interest
on each advance shall be payable monthly, with all unpaid interest and principal
due no later than five years from the date of the  advance.  Advances  under the
line of credit  will bear  interest  at either (i) a rate per annum equal to 318
basis  points  above the LIBOR or (ii) a rate per annum equal to 30 basis points
above the bank's base rate,  whichever the Company  selects at the time advances
are made. In addition,  a fee of 0.5 percent per advance will be due and payable
to the bank on funds as  advanced.  Each  advance  made under the Line of Credit
will be  collateralized  by an assignment  of rents and leases.  Advances on the
Line of Credit are subject to absolute  discretion of the lender. As of December
31,  2000 and 1999,  the Company  had no amounts  outstanding  under the Line of
Credit.

         In March 2000, the Company through CNL Philadelphia  Annex, LLC ("LLC")
entered  into  a Tax  Incremental  Financing  Agreement  with  the  Philadelphia
Authority  for  Industrial  Development  ("TIF Note") for $10 million,  which is
collateralized  by the LLC's hotel  Property.  The principal and interest on the
TIF note are expected to be fully paid by the LLC's hotel Property's incremental
property  taxes  over a period  of 18  years.  The  payment  of the  incremental
property  taxes is the  responsibility  of the  tenant  of the  hotel  Property.
Implicit  interest on the TIF Note is 12.85  percent and payments are due yearly
through 2017. In the event that  incremental  property taxes are insufficient to
cover the principal and interest due, Marriott  International,  Inc. is required
to fund  such  shortfalls  pursuant  to its  guarantee  of the TIF  Note.  As of
December 31, 2000, approximately $9,685,000 was outstanding on the TIF Note.

         In November  2000,  the Company  secured  permanent  financing  for the
Courtyard(R) by Marriott(R) in Philadelphia, Pennsylvania in the amount of $32.5
million.  The loan is  collateralized  by the hotel  Property and monthly  rents
derived  from the  tenant of the hotel  Property.  The loan  agreement  requires
monthly  payments,  representing  interest only,  through November 2001 and then
principal and interest payments of $257,116 to maturity. The loan bears interest
of 8.29 percent and matures in December 2007, at which time any unpaid principal
and  interest  will  become  due. As of December  31,  2000,  $32.5  million was
outstanding on the loan.

         In November  2000,  the Company  entered  into a  construction  line of
credit  ("Construction  LOC") totaling $55 million,  which is  collateralized by
land and building  improvements of two of the Properties under  construction and
two hotel Properties  located in Georgia.  Borrowings under the Construction LOC
bear  interest at LIBOR plus 275 basis  points.  Interest  only payments are due
monthly  through  maturity,  November  15,  2003,  at which  time any  remaining
principal  and  interest  become  due. As of December  31,  2000,  approximately
$9,897,000 was outstanding on the Construction LOC.

         In December 2000,  the Company  secured  permanent  financing for three
hotel Properties located in Orlando,  Florida in the amount of $50 million.  The
loans are  collateralized by the hotel Properties and monthly rents derived from
the  tenants of such  hotel  Properties.  The loan  agreements  require  monthly
interest only payments of  approximately  $347,000  through 2007. The loans bear
interest of 8.335  percent and mature in 2007,  at which time the  principal and
any unpaid  interest  will become due. As of December 31, 2000,  $50 million was
outstanding on the loans.

         As of December 31, 2000,  Hotel  Investors had notes  payable  totaling
approximately  $87,555,000,  which are  collateralized by seven hotel Properties
and the monthly rents relating to such Properties.  The loan agreements  require
monthly  principal and interest payments totaling  approximately  $660,000.  The
loans bear  interest  ranging  from 7.50 percent to 7.75 percent and mature July
31, 2009, at which time any unpaid principal and interest will become due.

         The  Company  expects to use net  proceeds  it  receives  from the 2000
Offering to purchase additional Properties and, to a lesser extent, to invest in
Mortgage  Loans.  In  addition,  the Company  intends to borrow money to acquire
additional Properties, to invest in Mortgage Loans and Secured Equipment Leases,
and to pay  certain  related  fees.  The Company  intends to encumber  assets in
connection  with such  borrowing.  The Company  currently  plans to increase its
borrowing  capacity  under the Line of Credit from $30  million to $75  million,
and, in addition,  obtain additional permanent financing. The Line of Credit may
be repaid  with  offering  proceeds,  working  capital or  permanent  financing.
Although the Board of Directors  anticipates that the Line of Credit will be $75
million and that the aggregate amount of any permanent financing will not exceed
30 percent of the  Company's  total assets,  the maximum  amount the Company may
borrow,  absent a  satisfactory  showing  that a higher  level of  borrowing  is
appropriate  as  approved  by a majority of the  independent  directors,  is 300
percent of the Company's net assets.

Competition

         The  hotel  industry  is  generally  characterized  as being  intensely
competitive.  The operators of the hotels  located on the Properties do, and are
expected to in the future, compete with independently owned hotels, hotels which
are part of local or regional chains,  and hotels in other  well-known  national
chains, including those offering different types of accommodations.

         The Company will be in competition with other persons and entities both
to locate  suitable  Properties  to  acquire  and to locate  purchasers  for its
Properties.  The Company also will compete with other financing  sources such as
banks, mortgage lenders, and sale/leaseback  companies for suitable Properties,
tenants, Mortgage Loan borrowers and equipment tenants.

Employees

         Reference is made to Item 10.  Directors and Executive  Officers of the
Registrant for a listing of the Company's Executive Officers. The Company has no
other employees.

Item 2.  Properties

         As of December 31,  2000,  the Company  owned  directly and through its
subsidiaries 29 hotel Properties, located in 15 states, including two Properties
on which hotels are being constructed, and one Property through a joint venture,
on which a resort is being  constructed.  Reference  is made to the  Schedule of
Real Estate and Accumulated Depreciation filed with this report for a listing of
the directly owned Properties and their respective costs,  including acquisition
fees and certain acquisition  expenses.  The Company is currently negotiating to
acquire additional Properties.

         Generally, Properties acquired or to be acquired by the Company consist
of both land and building;  although in some cases,  the Company may acquire the
land  underlying  the building with the building  owned by the tenant or a third
party,  or may acquire the  building  only with the land owned by a third party.
The 29 Properties directly or indirectly owned by the Company as of December 31,
2000, conform generally to the following  specifications of size, cost, and type
of land and buildings.

         Hotel  Properties.  The  lot  sizes  generally  range  up to  10  acres
depending on product,  market and design considerations,  and are available at a
broad range of pricing.  The hotel sites are  generally  in primary or secondary
urban,  suburban,  airport,  highway or resort markets which have been evaluated
for past and future anticipated lodging demand trends.

         The hotel buildings generally are mid-rise construction. The Properties
consist of limited  service,  extended  stay or full service  hotel  Properties.
Limited service hotels generally minimize non-guest room space and offer limited
food  service  such as  complimentary  continental  breakfasts  and do not  have
restaurant or lounge facilities on-site.  Extended stay hotels generally contain
guest  suites with a kitchen  area and living area  separate  from the  bedroom.
Extended  stay  hotels  vary  with  respect  to  providing  on-site   restaurant
facilities.  Full service hotels generally have conference or meeting facilities
and on-site food and beverage facilities.  The Properties include equipment.  In
addition,  the  Properties  held conform to the Hotel  Chain's  approved  design
concepts.

         The tenants generally are required by the lease agreements to make such
capital  expenditures  as may be  reasonably  necessary to refurbish  buildings,
premises,  signs,  and  equipment so as to comply with the tenant's or manager's
obligations  under the  franchise  agreement  to reflect the current  commercial
image of the Hotel Chain. These capital  expenditures  generally will be paid by
the tenant during the term of the lease. Some Property leases however,  obligate
the tenant to fund,  in addition to its lease  payment,  a reserve  fund up to a
pre-determined amount. Generally, money in that fund is owned by the Company and
may be used by the tenant to pay for replacement of furniture and fixtures.  The
Company may be responsible for capital  expenditures or repairs in excess of the
amounts in the reserve fund, and the tenant  generally  would be responsible for
replenishing  the reserve  fund and to pay a  specified  return on the amount of
capital expenditures paid for by the Company in excess of amounts in the reserve
fund.

         As  of  December  31,  2000,  15  Properties   (including  three  under
construction)   were  pledged  as  collateral  under  the  Company's   financing
arrangements.  For more detailed information relating to these arrangements, see
"Item 1. Business - Borrowings".



<PAGE>


         The following table lists the number of Properties  owned,  directly or
indirectly  through joint  ventures,  by the Company as of December 31, 2000, by
state and includes  properties  under  construction.  More detailed  information
regarding  the location of the  Properties  is contained in the Schedule of Real
Estate and Accumulated Depreciation filed with this report.

                     State                          Total Number of Properties
        ---------------------------------        -------------------------------
        Arizona                                                  3*
        California                                               4
        Colorado                                                 1
        Florida                                                  5**
        Georgia                                                  3
        Maine                                                    1
        Massachusetts                                            2
        Maryland                                                 1
        Nevada                                                   1
        New Jersey                                               1
        Pennsylvania                                             1
        Texas                                                    3
        Utah                                                     1
        Virginia                                                 1
        Washington                                               1
        ---------------------------------        -------------------------------
        Total Number of Properties                              29
        =================================        ===============================
        *  Includes  one   Property   owned by a joint  venture  currently under
           construction.
        ** Includes two Properties currently under construction.

         Leases with Major  Tenants.  The terms of the leases with the Company's
major  tenants as of December 31, 2000 (see Item 1.  Business - Major  Tenants),
are substantially the same as those described in Item 1. Business - Leases.

         Crestline  Capital  Corporation  leases  five  Properties  owned by the
Company. Properties include a Residence Inn(R) by Marriott(R),  three TownePlace
Suites(TM) by Marriott(R) and one Courtyard(R) by Marriott(R).  The initial term
of each lease is  approximately  19 years  (expiring in 2019) and the  aggregate
minimum base annual rent is approximately $5,237,000.

         City  Center  Annex  Tenant  Corporation  leases  the  Courtyard(R)  by
Marriott(R)  Property in  Philadelphia,  Pennsylvania.  The initial  term of the
lease is 15 years (expiring in 2015) and the aggregate  minimum base annual rent
is approximately $6,500,000.

         WI  Leasing,  LLC leases  seven  Properties  owned by Hotel  Investors.
Properties include three Residence Inns(R) by Marriott(R),  three  Courtyards(R)
by  Marriott(R)  and one Marriott  Suites(R).  The initial term of each lease is
approximately 19 years (expiring in 2018) and the aggregate  minimum base annual
rent is approximately $17,500,000.

         Management   considers  the  Properties  to  be   well-maintained   and
sufficient for the Company's operations.

Item 3.  Legal Proceedings

         Neither  the  Company,  nor any of its  subsidiaries,  nor any of their
respective Properties,  is a party to, or subject to, any material pending legal
proceedings.

Item 4.  Submission of Matters to a Vote of Security Holders

         None



<PAGE>



                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

        As  of  February  22, 2001,  there were 17,062 stockholders of record of
common stock.  There is no public trading market for the Shares, and even though
the  Company  intends to list the Shares on a national  securities  exchange  or
over-the-counter  market within two to seven years,  there is no assurance  that
one will  develop  and it is not known at this time if a public  market  for the
Shares will develop. The Company is not aware of trades in its Shares other than
purchases made in its public  offering and redemptions of Shares by the Company.
Prior to such time, if any, as Listing occurs,  any stockholder  (other than the
Advisor)  may present  all or any  portion  equal to at least 25 percent of such
stockholder's  Shares to the Company for  redemption  at any time, in accordance
with the  procedures  outlined in the Company's  prospectus.  At such time,  the
Company may, at its sole option, redeem such Shares presented for redemption for
cash to the extent it has sufficient funds  available.  The price to be paid for
any Share  transferred  other than pursuant to the redemption plan is subject to
negotiation  by the purchaser and the selling  stockholder.  For the years ended
December  31,  2000 and 1999,  269,276  and 12,885  Shares,  respectively,  were
retired pursuant to the redemption plan.

         As of December 31, 2000, the offering price per Share was $10.

         The Company expects to make distributions to the stockholders  pursuant
to the provisions of the Articles of Incorporation. For the years ended December
31, 2000 and 1999, the Company  declared cash  distributions  of $28,082,275 and
$10,765,881,  respectively,  to the  stockholders.  No  amounts  distributed  to
stockholders  for the years ended December 31, 2000 and 1999, are required to be
or have been  treated  by the  Company as a return of capital  for  purposes  of
calculating the stockholders'  return on their invested  capital.  The following
table presents total distributions and distributions per Share:

<TABLE>
<CAPTION>
2000 Quarter                                  First        Second         Third        Fourth         Year
------------                                ---------    ----------     ---------    ----------    -----------
<S><C>
Total distributions declared               $5,522,124    $6,414,210    $7,533,536    $8,612,405    $28,082,275
Distributions per Share                         0.181         0.181         0.188         0.188          0.738

1999 Quarter                                  First        Second         Third        Fourth         Year
------------                                ---------    ----------     ---------    ----------    -----------

Total distributions declared                 $998,652    $2,053,964    $3,278,456    $4,434,809    $10,765,881
Distributions per Share                         0.175         0.181         0.181         0.181          0.718


</TABLE>

         On  January  1,  2001  and  February  1,  2001,  the  Company  declared
distributions totaling $3,120,827 and $3,217,630,  respectively, or $0.06354 per
Share of common  stock,  payable in March  2001,  to  stockholders  of record on
January 1, 2001 and February 1, 2001, respectively.

         The Company  intends to continue  to declare  distributions  of cash to
stockholders  on a monthly  basis  during the  offering  period,  and  quarterly
thereafter.


<PAGE>


Item 6.  Selected Financial Data
<TABLE>
<CAPTION>
                                                  2000                1999              1998           1997 (1)(4)     1996(1)(2)(4)
<S><C>                                       ----------------    ---------------    --------------    --------------  --------------

 Year Ended December 31:

   Revenues                                     $36,099,219        $10,677,505        $1,955,461          $ 46,071             $  --
   Net earnings                                  20,670,462          7,515,988           958,939            22,852                --
     Cash flows from operating activities        43,650,561         12,890,161         2,776,965            22,469                --
     Cash flows from investing activities      (334,236,686)      (130,231,475)      (34,510,982)         (463,470)               --
     Cash flows from financing activities       238,811,538        206,084,832        36,093,102         9,308,755                --
     Cash distributions declared                 28,082,275         10,765,881         1,168,145            29,776                --
      Funds from operations (3)                  30,316,348         10,478,103         1,343,105            22,852                --
      Earning per Share:
                  Basic                                0.53               0.47              0.40              0.03                --
                  Diluted                              0.53               0.45              0.40              0.03                --
     Cash distributions declared per Share             0.74               0.72              0.47              0.05                --
     Weighted average number of Shares
                  outstanding:
                  Basic                          38,698,066         15,890,212         2,402,344           686,063                --
                  Diluted                        45,885,742         21,437,859         2,402,344           686,063                --
      At December 31:
           Total assets                        $653,962,058       $266,968,274       $48,856,690        $9,443,476          $598,190
           Mortgages payable                    170,055,326                 --                --                --                --
           Other notes payable                   19,581,950                 --                --                --                --
           Total stockholders' equity           419,288,998        253,054,839        37,116,491         9,233,917           200,000


</TABLE>

(1)      No operations  commenced until  the  Company received  minimum offering
         proceeds  and  funds  were   released  from escrow on October 15, 1997.

(2)      Selected  financial data for  1996 represents  the period June 12, 1996
         (date of inception) through December 31, 1996.

(3)      Funds from operations ("FFO"),  based on the revised definition adopted
         by the Board of Governors of the  National  Association  of Real Estate
         Investment Trusts ("NAREIT") in October 1999 and as used herein,  means
         net  earnings   determined  in  accordance   with  generally   accepted
         accounting principles ("GAAP"), excluding gains or losses from sales of
         property,  plus depreciation and amortization of real estate assets and
         after adjustments for  unconsolidated  partnerships and joint ventures.
         (Net earnings  determined  in accordance  with GAAP include the noncash
         effect of  straight-lining  rent increases  throughout the lease terms.
         This  straight-lining  is  a  GAAP  convention  requiring  real  estate
         companies to report  rental  revenue based on the average rent per year
         over the life of the leases.  During the years ended December 31, 2000,
         1999 and 1998,  net earnings  included  $117,282,  $35,238 and $44,160,
         respectively,  of these  amounts.  No such amounts  were earned  during
         1997.) FFO was developed by NAREIT as a relative measure of performance
         and   liquidity  of  an  equity  REIT  in  order  to   recognize   that
         income-producing  real estate  historically  has not depreciated on the
         basis determined under GAAP.  However,  FFO (i) does not represent cash
         generated from operating activities  determined in accordance with GAAP
         (which, unlike FFO, generally reflects all cash effects of transactions
         and other events that enter into the  determination  of net  earnings),
         (ii) is not necessarily  indicative of cash flow available to fund cash
         needs and (iii)  should  not be  considered  as an  alternative  to net
         earnings  determined  in  accordance  with GAAP as an indication of the
         Company's  operating  performance,  or  to  cash  flow  from  operating
         activities  determined in  accordance  with GAAP as a measure of either
         liquidity or the Company's ability to make distributions.  Accordingly,
         the Company believes that in order to facilitate a clear  understanding
         of the consolidated  historical  operating results of the Company,  FFO
         should be considered in conjunction with the Company's net earnings and
         cash  flows as  reported  in the  accompanying  consolidated  financial
         statements and notes thereto.

(4)      The  weighted  average  number  of  Shares  outstanding  is  based upon
         the period the Company was operational.


<PAGE>


Item 7.   Management's  Discussion   and   Analysis  of  Financial Condition and
          Results of Operations

         The  following  information  that  are  not  historical  facts,  may be
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933 and  Section 21E of the  Securities  Act of 1934.  These  statements
generally are characterized by the use of terms such as "believe,"  "expect" and
"may."  Although the Company  believes that the  expectations  reflected in such
forward-looking statements are based upon reasonable assumptions,  the Company's
actual   results   could  differ   materially   from  those  set  forth  in  the
forward-looking  statements.  Certain factors that might cause such a difference
include the following: changes in general economic conditions,  changes in local
and national real estate  conditions,  availability  of capital from  borrowings
under  the  Company's   Line  of  Credit  and  security   agreement,   continued
availability of proceeds from the Company's offering, the ability of the Company
to obtain permanent  financing on satisfactory terms, the ability of the Company
to identify suitable investments,  the ability of the Company to locate suitable
tenants for its  properties  and  borrowers  for its Mortgage  Loans and Secured
Equipment Leases, and the ability of such tenants and borrowers to make payments
under their  respective  leases,  Mortgage Loans and Secured  Equipment  Leases.
Given these uncertainties,  readers are cautioned not to place undue reliance on
such statements.

                                  Introduction

The Company

        CNL Hospitality Properties, Inc.  was organized pursuant to the laws  of
the  state of  Maryland  on June 12,  1996.  CNL  Hospitality  GP Corp.  and CNL
Hospitality  LP  Corp.  are  wholly  owned   subsidiaries   of  CNL  Hospitality
Properties,  Inc.,  each of which was  organized  in Delaware in June 1998.  CNL
Hospitality  Partners,  LP is a Delaware limited partnership (the "Partnership")
formed in June 1998. CNL  Hospitality GP Corp. and CNL  Hospitality LP Corp. are
the general and limited partner,  respectively, of CNL Hospitality Partners, LP.
Properties acquired are generally expected to be held by the Partnership and, as
a result, are owned by CNL Hospitality Properties, Inc. through the Partnership.
Various  other  wholly-owned  subsidiaries  have been  formed  for  purposes  of
acquiring or developing  hotel  Properties.  The terms "Company" or "Registrant"
include,  unless the context  otherwise  requires,  CNL Hospitality  Properties,
Inc., CNL Hospitality Partners, LP, CNL Hospitality GP Corp., CNL Hospitality LP
Corp., CNL Hotel Investors, Inc. ("Hotel Investors"), CNL DRR Investors, LP, CNL
Philadelphia  Annex, LLC (formerly known as Courtyard Annex L.L.C.),  CNL LLB LP
Holding, Ltd. and  each of their subsidiaries.  The Company operates for federal
income tax purposes as a real estate investment trust (a "REIT").

         The Company may also provide mortgage financing and furniture,  fixture
and equipment  financing to operators of Hotel Chains.  Secured Equipment Leases
will be funded from the proceeds of financing to be obtained by the Company. The
aggregate  outstanding  principal  amount of Secured  Equipment  Leases will not
exceed 10 percent of gross  proceeds from the  Company's  offerings of Shares of
common stock.

                         Liquidity and Capital Resources

Common Stock Offerings

         The Company was formed in June 1996, at which time it received  initial
capital  contributions  of $200,000  for 20,000  Shares of common stock from CNL
Hospitality  Corp.  On July 9, 1997,  the Company  commenced  an offering to the
public of up to 16,500,000 Shares of common stock  ($165,000,000)  pursuant to a
registration  statement  on Form  S-11  under  the  Securities  Act of 1933,  as
amended.   Of  the  16,500,000   Shares  of  common  stock  offered,   1,500,000
($15,000,000)  were available only to stockholders who elected to participate in
the Company's Reinvestment Plan. Upon completion of the Initial Offering on June
17,  1999,  the  Company  had  received  aggregate   subscription   proceeds  of
$150,072,637  (15,007,264 Shares),  including $72,637 (7,264 Shares) through the
Company's  Reinvestment Plan.  Following the completion of its Initial Offering,
the Company  commenced a second  offering of up to  27,500,000  Shares of common
stock  ($275,000,000).  Upon  completion of the 1999 Offering,  on September 14,
2000, the Company had received aggregate  subscription  proceeds of $274,998,988
(27,499,899  Shares) from its 1999 Offering,  including $965,194 (96,520 Shares)
issued pursuant to the Reinvestment  Plan.  Following the completion of the 1999
Offering on September 14, 2000, the Company  commenced a third offering of up to
45,000,000  Shares of common stock  ($450,000,000).  Of the 45,000,000 Shares of
common  stock  offered,  up to  5,000,000  will  be  available  to  stockholders
purchasing  Shares  through the  Reinvestment  Plan. The price per Share and the
other terms of the 2000  Offering,  including the  percentage of gross  proceeds
payable (i) to the  managing  dealer for  selling  commissions  and  expenses in
connection with the offering and (ii) to the Advisor for  acquisition  fees, are
substantially  the same as those for the Initial Offering and 1999 Offering.  As
of  December  31,  2000,  the  Company  had  received  subscription  proceeds of
$67,570,406  (6,757,040  Shares)  from its  2000  Offering,  including  $702,339
(70,233 Shares) issued pursuant to the Reinvestment Plan.

         As of December 31,  2000,  net proceeds to the Company from its Initial
Offering,  1999 Offering and 2000 Offering of Shares,  loan proceeds and capital
contributions  from  the  Advisor,   after  deduction  of  selling  commissions,
marketing   support   and  due   diligence   expense   reimbursement   fees  and
organizational and offering expenses,  totaled approximately  $615,052,000.  The
Company  has  used  approximately  $332,202,000  of net  offering  proceeds  and
$179,952,000 of loan proceeds to invest in 28 hotel Properties, including two on
which hotel Properties are being constructed, approximately $8,800,000 to invest
in a joint  venture,  approximately  $26,300,000  to  acquire an  additional  22
percent ownership in Hotel Investors, approximately $2,622,000 to redeem 282,161
Shares of common stock and  approximately  $29,300,000  to  pay acquisition fees
and expenses,  leaving  approximately  $35,900,000  available for  investment in
Properties and Mortgage Loans.

         During the period  January  1, 2001  through  February  22,  2001,  the
Company received  additional net offering proceeds of approximately  $46,300,000
and had  approximately  $57,100,000  available for  investment in Properties and
Mortgage Loans. The Company expects to use the uninvested net proceeds, plus any
additional  net  proceeds  from the sale of  Shares  from the 2000  Offering  to
purchase  additional  Properties  and,  to a lesser  extent,  invest in Mortgage
Loans. In addition,  the Company  intends to borrow money to acquire  additional
Properties, to invest in Mortgage Loans and Secured Equipment Leases, and to pay
certain  related fees. The Company intends to encumber assets in connection with
such  borrowings.  The  Company  currently  has a  $30,000,000  Line  of  Credit
available,  as described  below.  Borrowings on the Line of Credit may be repaid
with offering  proceeds,  working  capital or permanent  financing.  The maximum
amount the Company may borrow, absent a satisfactory showing that a higher level
of  borrowing  is  appropriate  as  approved  by a majority  of the  independent
directors, is 300 percent of the Company's net assets.

Redemptions

         In  October  1998,  the Board of  Directors  elected to  implement  the
Company's  redemption  plan.  Under the redemption  plan, the Company elected to
redeem Shares,  subject to certain conditions and limitations.  During the years
ended   December  31,  2000  and  1999,   269,276   Shares  and  12,885  Shares,
respectively,  were  redeemed at  $2,503,484  and  $118,542,  respectively,  and
retired from Shares outstanding of common stock. No Shares were redeemed in 1998
or 1997.

Borrowings

         The  Company has a Line of Credit  which  allows the Company to receive
advances of up to  $30,000,000  until July 30,  2003.  Interest on each  advance
shall be payable  monthly,  with all unpaid  interest and principal due no later
than five years from the date of the advance.  Advances under the line of credit
will bear  interest  at either  (i) a rate per annum  equal to 318 basis  points
above  the  LIBOR or (ii) a rate per annum  equal to 30 basis  points  above the
bank's base rate,  whichever the Company  selects at the time advances are made.
In  addition,  a fee of 0.5 percent  per advance  will be due and payable to the
bank on funds as  advanced.  Each  advance made under the Line of Credit will be
collateralized  by an  assignment  of rents and leases.  Advances on the Line of
Credit are subject to absolute discretion of the lender. As of December 31, 2000
and 1999, the Company had no amounts outstanding under the line of credit.

         In  March  2000,  the  Company,  through  the LLC,  entered  into a Tax
Incremental  Financing Agreement with the Philadelphia  Authority for Industrial
Development  for  $10  million,  which  is  collateralized  by the  LLC's  hotel
Property.  The  principal  and interest on the TIF note are expected to be fully
paid by the LLC's hotel Property's  incremental  property taxes over a period of
18 years. The payment of the incremental property taxes is the responsibility of
the tenant of the hotel Property.  Implicit  interest  on  the TIF Note is 12.85
percent and payments are due yearly through 2017. In the event that  incremental
property  taxes  are  insufficient  to cover the  principal  and  interest  due,
Marriott International, Inc. is required to fund such shortfalls pursuant to its
guarantee of the TIF Note. As of December 31, 2000, approximately $9,685,000 was
outstanding on the TIF Note.

         In November  2000,  the Company  secured  permanent  financing  for the
Courtyard(R) by Marriott(R) in Philadelphia, Pennsylvania in the amount of $32.5
million.  The loan is  collateralized  by the hotel  Property and monthly  rents
derived  from the  tenant of the hotel  Property.  The loan  agreement  requires
monthly  payments,  representing  interest only,  through November 2001 and then
principal and interest payments of $257,116 to maturity. The loan bears interest
of 8.29 percent and matures in December 2007, at which time any unpaid principal
and  interest  will  become  due. As of December  31,  2000,  $32.5  million was
outstanding on the loan.

         In November 2000, the Company entered into a Construction  LOC totaling
$55 million, which is collateralized by land and building improvements of two of
the Properties under  construction and two hotel Properties  located in Georgia.
Borrowings  under the  Construction  LOC bear  interest  at LIBOR plus 275 basis
points.  Interest only payments are due monthly through  maturity,  November 15,
2003,  at which time any  remaining  principal  and  interest  become due. As of
December 31, 2000,  approximately $9,897,000 was outstanding on the Construction
LOC.

         In December 2000,  the Company  secured  permanent  financing for three
hotel Properties located in Orlando,  Florida in the amount of $50 million.  The
loans are  collateralized by the hotel Properties and monthly rents derived from
the  tenants of such  hotel  Properties.  The loan  agreements  require  monthly
interest only payments of  approximately  $347,000  through 2007. The loans bear
interest of 8.335  percent and mature in 2007,  at which time the  principal and
any unpaid  interest  will become due. As of December 31, 2000,  $50 million was
outstanding on the loans.

         As of December 31, 2000,  Hotel  Investors had notes  payable  totaling
approximately  $87,555,000,  which are  collateralized by seven hotel Properties
and monthly  rents  relating to such  Properties.  The loan  agreements  require
monthly  principal and interest payments totaling  approximately  $666,000.  The
loans bear  interest  ranging  from 7.50 percent to 7.75 percent and mature July
31, 2009, at which time any unpaid principal and interest will become due.

         The  Company  expects to use net  proceeds  it  receives  from the 2000
Offering to purchase additional Properties and, to a lesser extent, to invest in
Mortgage  Loans.  In  addition,  the Company  intends to borrow money to acquire
additional Properties,  to invest in Mortgage Loans and Secured Equipment Leases
and to pay  certain  related  fees.  The Company  intends to encumber  assets in
connection  with such  borrowing.  The Company  currently  plans to increase its
borrowing capacity under the Line of Credit from $30 million to $75 million, and
obtain  additional  permanent  financing.  The Line of Credit may be repaid with
offering proceeds, working capital or permanent financing. Although the Board of
Directors  anticipates  that the Line of Credit will be $75 million and that the
aggregate  amount of any permanent  financing  will not exceed 30 percent of the
Company's  total  assets,  the maximum  amount the Company may borrow,  absent a
satisfactory showing that a higher level of borrowing is appropriate as approved
by a majority of the independent directors,  is 300 percent of the Company's net
assets.

Market Risk

         The  Company  may  be  subject  to  interest   rate  risk  through  any
outstanding  balances on its variable rate Line of Credit and Construction  LOC.
The Company may mitigate  this risk by paying down any  outstanding  balances on
the  Line  of  Credit  from  offering   proceeds   should  interest  rates  rise
substantially.  There were no amounts outstanding on its variable Line of Credit
and approximately $9,897,000 outstanding on the Construction LOC at December 31,
2000.

         In  addition,  the Company has issued  fixed  interest  rate  mortgages
payable and notes payable to lenders under permanent financing arrangements. The
Company  believes that the estimated  fair value of the amounts  outstanding  on
such notes at December 31, 2000  approximated the outstanding  principal amount.
The  following  table  presents  the expected  cash flows of principal  that are
sensitive to these changes:

                                     Notes Payable
                             ----------------------------
       2001                                  $ 2,292,415
       2002                                    2,194,877
       2003                                   12,243,846
       2004                                    2,510,389
       2005                                    2,687,520
       Thereafter                            167,708,229
                             ----------------------------
                                           $ 189,637,276
                             ============================

Property Acquisitions and Investments

         During  1999,  Five  Arrows  and  the  Company   invested  a  total  of
approximately $86 million in Hotel Investors, resulting in the Company owning 49
percent and Five Arrows owning 51 percent of Hotel Investors.  Five Arrows owned
48,337 shares of 8 percent Class A cumulative preferred stock of Hotel Investors
and the Company owned 37,979 shares of 9.76 percent Class B cumulative preferred
stock of Hotel  Investors.  The Class A Preferred  Stock was  exchangeable  upon
demand into common  stock of the Company,  using an exchange  ratio based on the
relationship   between  the  Company's  operating  results  and  that  of  Hotel
Investors.

         In October 2000, Five Arrows,  the Company and Hotel Investors  entered
into an agreement ("Initial Transaction") with the following terms:

o        Hotel   Investors   agreed  to redeem 2,104   shares  of  both  Class A
         Preferred  Stock  and  common  stock  of Hotel  Investors  held by Five
         Arrows for $2,104,000;
o        Hotel  Investors  agreed to redeem  1,653  shares of Class B  Preferred
         Stock  and an  aggregate  of 10,115  shares  of  common  stock of Hotel
         Investors held by the Company for $1,653,000;
o        The Company  purchased 7,563 shares of both the Class A Preferred Stock
         and common stock of Hotel Investors from Five Arrows for $11,395,000;
o        The  Company  repurchased  65,285  shares of the Company's common stock
         owned by Five Arrows for $620,207;
o        The  remaining  Class A Preferred  Stock  owned by Five Arrows  (38,670
         shares) and the Company (7,563 shares) were exchanged for an equivalent
         number of shares of Class E  Preferred  Stock par value  $0.01 of Hotel
         Investors;
o        Five Arrows granted the following  options (1) on or before January 31,
         2001,  the Company had the option to purchase  7,250  shares of Class E
         Preferred  Stock and an equal number of shares of common stock of Hotel
         Investors  held by Five Arrows for $1,000 per pair of Class E Preferred
         Stock and common stock of Hotel  Investors,  and (2) provided  that the
         Company purchased all of the shares under the first option, the Company
         would have the option, until June 30, 2001, to purchase 7,251 shares of
         both Class E  Preferred  Stock and an equal  number of shares of common
         stock of Hotel Investors for $1,000 for each pair;
o        The Company has agreed to pay Five Arrows additional  consideration for
         agreeing to defer the conversion of its Class A Preferred  Stock (prior
         to its  conversion  to Class E Preferred  Stock) to common stock of the
         Company.  These payments are  equivalent to the difference  between any
         distributions  received  by Five Arrows  from Hotel  Investors  and the
         distributions  that Five Arrows would have received from the Company if
         Five  Arrows  had  converted  its  Class A  Preferred  Stock  into  the
         Company's common stock on June 30, 2000;
o        Five Arrows has agreed to forfeit its priority cash distributions from
         Hotel Investors;
o        Cash available for  distributions  of Hotel Investors is distributed to
         100 CNL  Holdings,  Inc. and  affiliates'  associates  who each own one
         share of Class C  preferred  stock in Hotel  Investors,  to  provide  a
         quarterly, cumulative,  compounded 8 percent return. All remaining cash
         available for distributions is distributed pro rata with respect to the
         interest in the common shares of Hotel Investors.

         On December 29, 2000, the Company  exercised its two options to acquire
14,501  shares  of Class E  Preferred  Stock and  common  stock  owned  ("Option
Transaction")  by Five  Arrows  as of  December  31,  2000.  After  the  Initial
Transaction  and the Option  Transaction,  the Company  owned  approximately  71
percent and Five Arrows owned  approximately 29 percent of Hotel Investors.  The
total  amount paid by the Company for the  additional  22 percent  interest  was
approximately  $26.3 million.  This acquisition has been accounted for under the
purchase method of accounting and,  accordingly,  the operating results of Hotel
Investors have been included in the Company's consolidated statement of earnings
from the date of acquisition (October 2000). The purchase price approximated the
fair value of the net assets acquired.  The resulting  purchase price adjustment
(fair value  adjustment)  of  approximately  $5.5 million has been  reflected in
land,   buildings  and  equipment  on  operating   leases  in  the  accompanying
consolidated balance sheet.

         During  the  nine  months  ended  September  30,  2000,  prior  to  the
consolidation  of Hotel Investors,  the Company recorded  $2,780,063 in dividend
income  and  $386,627  in equity in loss  after  deduction  of  preferred  stock
dividends,   resulting  in  net  earnings  of  $2,393,436  attributable  to  its
investment  in Hotel  Investors.  During the year ended  December 31, 1999,  the
Company  recorded  $2,753,506 in dividend  income and $778,466 in equity in loss
after  deduction  of  preferred  stock  dividends,  resulting in net earnings of
$1,975,040 attributable to the investment.

         During 2000,  the Company made the following  additional  acquisitions,
all of which are operated by a tenant as the noted brand affiliation:

<TABLE>
<CAPTION>
                      Brand Affiliation                 Property Location          Purchase Date
 <S><C>          ----------------------------------     -----------------------    ------------------
                 Wyndham(SM)                            Billerica, MA              June 1, 2000
                 Wyndham(SM)                            Denver, CO                 June 1, 2000
                 Residence Inn(R)by Marriott(R)         Palm Desert, CA            June 16, 2000
                 Courtyard(R)by Marriott(R)             Palm Desert, CA            June 16, 2000
                 SpringHill Suites(TM) by Marriott(R)   Gaithersburg, MD           July 28, 2000
                 Residence Inn(R)by Marriott(R)         Merrifield, VA             July 28, 2000
                 TownePlace Suites(R)by Marriott(R)     Mt. Laurel, NJ             August 22, 2000
                 TownePlace Suites(R)by Marriott(R)     Scarborough, ME            August 22, 2000
                 TownePlace Suites(R)by Marriott(R)     Tewksbury, MA              August 22, 2000
                 Courtyard(R)by Marriott(R)             Alpharetta, GA             August 22, 2000
                 Residence Inn(R)by Marriott(R)         Salt Lake City, UT         August 22, 2000
                 TownePlace Suites(R)by Marriott(R)     Newark, CA                 November 3, 2000
                 Courtyard(R)by Marriott(R)             Orlando, FL                November 21, 2000
                 Fairfield Inn by Marriott(R)           Orlando, FL                November 21, 2000
                 Residence Inn(R)by Marriott(R)         Orlando, FL                December 6, 2000
                 SpringHill Suites(TM) by Marriott(R)   Orlando, FL                December 15, 2000
                 Courtyard(R)by Marriott(R)             Weston, FL                 December 22, 2000

</TABLE>

         The Company, as lessor, has entered into long-term, "triple-net" leases
with operators of Hotel Chains or wholly-owned  subsidiaries of the Company,  as
described below in "Liquidity Requirements."

         On December 21, 2000, the Company, through subsidiaries,  acquired a 44
percent interest in Desert Ridge Resort  Partners,  LLC, a joint venture with an
affiliate  of  Marriott  International,  Inc.  and a  partnership  in  which  an
affiliate of the Advisor is the general partner.  The Desert Ridge Joint Venture
invested in Desert Ridge Resort, LLC, a single purpose limited liability company
that owns the Desert Ridge Marriott Resort & Spa in Phoenix,  Arizona,  which is
currently under construction.  The Company made an initial capital  contribution
of $8.8 million of its  anticipated  $25 million  investment in the Desert Ridge
Joint  Venture.   The  total  cost  of  the  Desert  Ridge  Property  (including
acquisition  of land,  development  and  construction)  is  estimated to be $298
million.  On December 21, 2000,  the Resort Owner obtained  permanent  financing
from a third party lender for $179 million,  secured by a mortgage on the Desert
Ridge  Property.  The notes  have a term of seven  years with  interest  payable
quarterly in arrears commencing on March 2, 2001.  Interest with respect to $109
million  of the notes is  payable at a rate of 7.90  percent  per  annum,  while
interest  with respect to $70 million of the notes is payable at a floating rate
equal to 185 basis points above the three-month LIBOR. The blended fixed rate of
interest  after an interest rate swap is 9.48 percent.  All unpaid  interest and
principal  will  be  due  at  maturity.   In  addition,  an  affiliate  Marriott
International,  Inc.  will provide  financing for 19 percent of the costs to the
Desert  Ridge  Joint  Venture,  secured by pledges of the  co-venturers'  equity
contributions  to the Desert Ridge Joint Venture.  This  investment is accounted
for using the equity method of accounting.

Commitments

         As of January 26, 2001, the Company had initial  commitments to acquire
four  hotel   Properties  for  an  anticipated   aggregate   purchase  price  of
approximately  $45  million.  The  acquisition  of each of these  Properties  is
subject to the  fulfillment  of certain  conditions.  In order to acquire  these
Properties,  the Company  must obtain  additional  funds  through the receipt of
additional offering proceeds and/or advances on the Line of Credit. There can be
no  assurance  that  any or all of the  conditions  will  be  satisfied  or,  if
satisfied, that one or more of these Properties will be acquired by the Company.
The Company is presently negotiating to acquire additional Properties, but as of
January 26, 2001,  the Company had not acquired any such  Properties  or entered
into any Mortgage  Loans.  In addition,  as of January 26, 2001, the Company had
not entered into any other arrangements creating a reasonable probability that a
particular Property, Mortgage Loan or Secured Equipment Lease would be funded.

Cash and Cash Equivalents

         Until Properties are acquired,  or Mortgage Loans are entered into, net
offering proceeds are held in short-term (defined as investments with a maturity
of three months or less),  highly  liquid  investments,  such as demand  deposit
accounts at commercial banks, certificates of deposit and money market accounts.
This  investment  strategy  provides high  liquidity in order to facilitate  the
Company's  use of these funds to acquire  Properties  at such time as Properties
suitable for  acquisition are located or to fund Mortgage Loans. At December 31,
2000, the Company had  $50,197,854  invested in such  short-term  investments as
compared  to  $101,972,441  at December  31,  1999.  The  decrease in the amount
invested in short-term investments was primarily attributable to the acquisition
of  Properties  during 2000 offset by proceeds  received from the sale of common
stock in the  1999  Offering  and 2000  Offering.  These  funds  will be used to
purchase  additional  Properties,  to make Mortgage  Loans,  to pay offering and
acquisition  expenses,  to pay  distributions  to stockholders and other Company
expenses and, at management's discretion, to create cash reserves.

Liquidity Requirements

         The  Company  expects to meet its  short-term  liquidity  requirements,
other  than for  offering  expenses,  for the  acquisition  and  development  of
Properties  and  investment  in  Mortgage  Loans and Secured  Equipment  Leases,
through cash flow provided by operating  activities.  The Company  believes that
cash flow  provided by operating  activities  will be  sufficient to fund normal
recurring   operating   expenses,   regular   debt  service   requirements   and
distributions  to  stockholders.  To the  extent  that the  Company's  cash flow
provided by  operating  activities  is not  sufficient  to meet such  short-term
liquidity  requirements as a result, for example,  of unforeseen expenses due to
tenants  defaulting under the terms of their lease agreements,  the Company will
use borrowings under its Line of Credit. No such borrowings had occurred through
December 31, 2000.

         The   Company   expects   to  meet  its  other   short-term   liquidity
requirements,  including payment of offering expenses, Property acquisitions and
development and investment in Mortgage Loans and Secured Equipment Leases,  with
additional  advances  under its Line of Credit and proceeds from its  offerings.
The Company expects to meet its long-term liquidity  requirements  through short
or long-term, unsecured or secured debt financing or equity financing.

         Due  to  the  fact  that  the  Company   leases  its  Properties  on  a
"triple-net"  basis,  meaning  that  tenants are  generally  required to pay all
repairs and  maintenance,  property taxes,  insurance and utilities,  Management
does not believe  that  working  capital  reserves  are  necessary at this time.
Management believes that the Properties are adequately covered by insurance.  In
addition,  the Advisor has obtained  contingent  liability and property coverage
for the  Company.  This  insurance  policy is intended  to reduce the  Company's
exposure  in the  unlikely  event  a  tenant's  insurance  policy  lapses  or is
insufficient to cover a claim relating to a Property.

Distributions

         During the years ended  December 31, 2000,  1999 and 1998,  the Company
generated  cash from  operations of  $43,650,561,  $12,890,161  and  $2,776,965,
respectively. The Company declared and paid distributions to its stockholders of
$28,082,275,  $10,765,881  and  $1,168,145  during the years ended  December 31,
2000, 1999 and 1998, respectively.  In addition, on January 1, 2001 and February
1, 2001, the Company declared distributions to stockholders of record on January
1, 2001 and February 1, 2001, totaling $3,120,827 and $3,217,630,  respectively,
or $0.6354 per Share, payable in March 2001.

         For the years ended December 31, 2000, 1999 and 1998,  approximately 63
percent, 75 percent and 76 percent,  respectively, of the distributions received
by  stockholders  were  considered to be ordinary  income and  approximately  37
percent,  25 percent  and 24 percent  were  considered  a return of capital  for
federal income tax purposes.  No amounts distributed to the stockholders for the
years ended  December 31, 2000,  1999 and 1998 were  required to be or have been
treated by the Company as a return of capital for  purposes of  calculating  the
stockholders' return on their invested capital.



<PAGE>


Related Party Transactions

         During the years ended December 31, 2000, 1999 and 1998,  affiliates of
the  Company  incurred  on  behalf of the  Company  $4,363,326,  $3,257,822  and
$459,250,  respectively,  for certain offering expenses,  $717,273, $653,231 and
$392,863, respectively, for certain acquisition expenses, and $605,517, $325,622
and $98,212,  respectively,  for certain operating expenses.  As of December 31,
2000 and 1999, the Company owed the Advisor and other related parties $1,359,417
and $995,500,  respectively,  for expenditures incurred on behalf of the Company
and for  acquisition  fees.  The Advisor has agreed to pay or  reimburse  to the
Company all offering expenses  (excluding  commissions and marketing support and
due diligence  expense  reimbursement  fees) in excess of three percent of gross
offering proceeds.

         The  Company  maintains  13 bank  accounts  in a bank in which  certain
officers  and  directors  of the  Company  serve as  directors,  and in which an
affiliate  of the  Advisor  is a  stockholder.  The amount  deposited  with this
affiliate  was  $17,568,909  and  $15,275,629  at  December  31,  2000 and 1999,
respectively.

Other

         As of December 31, 2000,  1999 and 1998,  the tenants of the Properties
have  established  reserve  funds  which  will be used for the  replacement  and
renewal of furniture,  fixtures and equipment  relating to the hotel  Properties
("the FF&E  Reserve").  Funds in the FF&E  Reserve  have been paid,  granted and
assigned to the Company.  For the years ended December 31, 2000,  1999 and 1998,
revenues  relating to the FF&E  Reserve of the  Properties  owned by the Company
totaled,  directly or  indirectly,  $2,508,949,  $320,356 and $98,099,  of which
$3,263,712,  $275,630 and $82,407,  respectively,  is  classified  as restricted
cash.  Due  to  the  fact  that  the  Properties  are  leased  on  a  long-term,
"triple-net"  basis,  management  does not believe  that other  working  capital
reserves  are  necessary  at this  time.  Management  has the right to cause the
Company to maintain additional reserves if, in their discretion,  they determine
such reserves are required to meet the Company's working capital needs.

                              Results of Operations
                              ---------------------

Comparison of year ended December 31, 2000 to year ended December 31, 1999

As  of  December  31,  2000,  the  Company  directly  and  indirectly  owned  29
Properties,   consisting  of  land,  buildings  and  equipment,   including  two
Properties  on which hotel  Properties  are being  constructed and one Property,
through a joint venture, on which a resort is being constructed  and had entered
into long-term,  "triple-net" lease agreements relating to these Properties. The
Property  leases  provide for minimum base annual rental  payments  ranging from
approximately $716,000 to $6,500,000, which are payable in monthly installments.
In addition,  certain of the leases also provide that,  commencing in the second
lease year,  the annual base rent required  under the terms of the leases,  will
increase.  In  addition to annual base rent,  the tenant  pays  contingent  rent
computed as a percentage  of gross sales of the Property.  The Company's  leases
also  require  the  establishment  of  the  FF&E  Reserves.  The  FF&E  Reserves
established  for the  Properties  have been reported as additional  rent for the
years ended December 31, 2000 and 1999.

         During the years ended  December 31, 2000 and 1999,  the Company earned
rental income from operating  leases,  contingent rental income and FF&E Reserve
revenue of  $26,681,838  and  $4,230,995,  respectively.  The increase in rental
income,  contingent  rental income and FF&E Reserve income is due to the Company
owning 28 Properties  during the year ended December 31, 2000, as compared to 11
Properties during the year ended December 31, 1999. In addition,  several of the
Properties,  which were owned for only a portion of 1999,  were owned for a full
year in 2000.  Because additional  Property  acquisitions are expected to occur,
revenues  for the year ended  December  31,  2000,  represent  only a portion of
revenues which the Company is expected to earn in future periods.

         In October  2000,  the  Company  acquired a majority  interest in Hotel
Investors,  as described  above in "Liquidity  and Capital  Resources - Property
Acquisitions and  Investments."  In connection with its investment,  the Company
recognized  $2,780,063  in dividend  income and $386,627 in equity in loss after
deduction of preferred stock dividends,  resulting in net earnings of $2,393,436
prior to consolidating Hotel Investors,  for the nine months ended September 30,
2000. During the year ended December 31, 1999, the Company recognized $2,753,506
in dividend  income and $778,466 in equity in loss after  deduction of preferred
stock  dividends,  resulting in net earnings  attributable to this investment of
$1,975,040.


<PAGE>

         During the years ended  December 31, 2000 and 1999,  the Company earned
$6,637,318 and $3,693,004,  respectively, in interest income from investments in
money market accounts and other short-term  highly liquid  investments and other
income.  The  increase  in  interest  income was  primarily  attributable  to an
increase in the dollar amount invested in short-term liquid  investments and the
period of time the funds were  invested  as compared  to 1999.  As net  offering
proceeds from the Company's offering are invested in Properties and used to make
Mortgage  Loans,  the  percentage of the Company's  total revenues from interest
income from  investments  in money market  accounts or other short term,  highly
liquid investments, is expected to remain constant or decrease.

         Crestline Capital  Corporation,  City Center Annex Tenant  Corporation,
and WI Leasing, LLC each contributed more than 10 percent of the Company's total
rental income for the year ended  December 31, 2000. In addition,  a significant
portion of the Company's  rental income was earned from Properties  operating as
Marriott(R) brand chains.  Although the Company intends to acquire Properties in
various  states and  regions  and to  carefully  screen its  tenants in order to
reduce  risks of  default,  failure of these  lessees or the  Marriott(R)  brand
chains  could  significantly  impact the result of  operations  of the  Company.
However,  management believes that the risk of such as default is reduced due to
the essential or important nature of these Properties for the ongoing operations
of the  lessees.  It is expected  that the  percentage  of total  rental  income
contributed by these lessees will decrease as additional Properties are acquired
and leased during 2001 and subsequent years.

         Operating  expenses,  including  interest  expense and depreciation and
amortization  expense,  were  $13,525,893  and  $2,318,717  for the years  ended
December  31,  2000 and  1999,  respectively  (37.5  percent  and 21.7  percent,
respectively,  of total revenues). The increase in operating expenses during the
year ended  December  31,  2000,  as  compared  to 1999,  was as a result of the
Company  owning 11  Properties  during 1999  compared to 29  Properties in 2000.
Additionally,  general,  operating and  administrative  expenses  increased as a
result of Company growth, while interest expense increased from $248,094 for the
year ended December 31, 1999 to $2,383,449 for the year ended December 31, 2000.
The increase in interest expense was a result of the Company securing  permanent
financing in 2000.

         Pursuant  to  the  Advisory  Agreement,  the  Advisor  is  required  to
reimburse the Company the amount by which the total  operating  expenses paid or
incurred by the Company  exceed in any four  consecutive  fiscal  quarters,  the
greater of two  percent of average  invested  assets or 25 percent of net income
(the  "Expense  Cap").  For the years  ended  December  31,  2000 and 1999,  the
Company's operating expenses did not exceed the Expense Cap.

         The dollar amount of operating  expenses is expected to increase as the
Company acquires additional  Properties and invests in Mortgage Loans.  However,
general operating and administrative  expenses as a percentage of total revenues
is  expected  to decrease as the  Company  acquires  additional  Properties  and
invests in Mortgage Loans.

Comparison of year ended December 31, 1999 to year ended December 31, 1998

         As of December  31,  1999,  the  Company  owned 11  Properties,  either
directly or  indirectly,  consisting  of land,  buildings  and equipment and had
entered  into  long-term,   triple-net  lease   agreements   relating  to  these
Properties.  The Property leases provide for minimum base annual rental payments
ranging  from  approximately  $1,204,000  to  $6,500,000,  which are  payable in
monthly  installments.  In addition,  certain of the leases also  provide  that,
commencing  in the second lease year,  the annual base rent  required  under the
terms of the leases, will increase.  In addition to annual base rent, the tenant
pays  contingent  rent  computed as a percentage of gross sales of the Property.
The Company's leases also require the  establishment  of the FF&E Reserves.  The
FF&E Reserves  established for the Properties,  directly or indirectly  owned by
the Company,  have been reported as additional rent for the years ended December
31, 1999 and 1998.

         During the years ended  December 31, 1999 and 1998,  the Company earned
rental income from operating  leases,  contingent rental income and FF&E Reserve
revenue of $4,230,995 and $1,316,599,  respectively. No contingent rental income
was earned for the year ended  December 31, 1998. The increase in rental income,
contingent  rental  income and FF&E Reserve  income was due to the fact that the
Company owned directly four Properties  during the year ended December 31, 1999,
as compared to two Properties for approximately six months during the year ended
December  31,  1998.  Because  the  Company  had  not  yet  acquired  all of its
Properties,  revenues for the year ended  December 31,  1999,  represent  only a
portion of revenues which the Company is expected to earn in future periods.

         During the year ended  December  31,  1999,  the Company  acquired  and
leased seven Properties indirectly through its investment in Hotel Investors, as
described above in "Liquidity and Capital Resources - Property  Acquisitions and
Investments."  In  connection  with  its  investment,   the  Company  recognized
$2,753,506 in dividend  income and $778,466 in equity in loss after deduction of
preferred  stock  dividends,  resulting  in net  earnings  attributable  to this
investment of $1,975,040.

         During the years ended  December 31, 1999 and 1998,  the Company earned
$3,693,004 and $638,862,  respectively,  in interest income from  investments in
money market accounts and other short-term  highly liquid  investments and other
income. The increase in interest income was primarily  attributable to increased
offering proceeds in 1999 being temporarily invested in money market accounts or
other short-term,  highly liquid investments pending investment in Properties or
Mortgage  Loans.  As net offering  proceeds  from the  Company's  offerings  are
invested in Properties  and used to make Mortgage  Loans,  the percentage of the
Company's total revenues from interest  income from  investments in money market
accounts or other short term, highly liquid investments is expected to decrease.

         During the year ended  December 31, 1999,  three  lessees,  City Center
Annex Tenant  Corporation,  Crestline Capital  Corporation and WI Hotel Leasing,
LLC, each  contributed more than 10 percent of the Company's total rental income
(including the Company's share of total rental income from Hotel Investors).  In
addition,  all of the Company's rental income  (including the Company's share of
total rental income from Hotel  Investors) was earned from Properties  operating
as Marriott(R) brand chains.  Although the Company intends to acquire additional
Properties  located in various  states and regions and to  carefully  screen its
tenants in order to reduce  risks of  default,  failure of these  lessees or the
Marriott(R) chains could  significantly  impact the results of operations of the
Company. However, management believes that the risk of such a default is reduced
due to the  essential or important  nature of these  Properties  for the ongoing
operations of the lessees.

         Operating  expenses,  including  interest  expense and depreciation and
amortization  expense, were $2,318,717 and $996,522 for the years ended December
31, 1999 and 1998, respectively (21.7 percent and 51 percent,  respectively,  of
total  revenues).  The  increase  in  operating  expenses  during the year ended
December 31, 1999,  as compared to 1998,  was as a result of the Company  owning
two Properties for  approximately six months during 1998 compared to a full year
during  1999.  Additionally,   general  operating  and  administrative  expenses
increased as a result of Company growth,  while interest expense  decreased from
$350,322  for the year ended  December  31, 1998 to $248,094  for the year ended
December 31, 1999. The decrease in interest  expense was a result of the Line of
Credit being  outstanding  for two months in 1999 as compared to the majority of
1998.

         Pursuant  to  the  Advisory  Agreement,  the  Advisor  is  required  to
reimburse the Company the amount by which the total  operating  expenses paid or
incurred by the Company  exceed in any four  consecutive  fiscal  quarters,  the
greater of two  percent of average  invested  assets or 25 percent of net income
(the  "Expense  Cap").  For the year ended  December  31,  1999,  the  Company's
operating  expenses did not exceed the Expense Cap. For the year ended  December
31, 1998, the Company's  operating expenses exceeded the Expense Cap by $92,733;
therefore, the Advisor reimbursed the Company such amount in accordance with the
Advisory Agreement.

Other

         The Company has made an election  under Section  856(c) of the Internal
Revenue Code of 1986, as amended (the  "Code"),  to be taxed as a REIT under the
Code  beginning  with its taxable year ended  December 31, 1997. As a REIT,  for
federal  income  tax  purposes,  the  Company  generally  will not be subject to
federal  income tax on income that it distributes  to its  stockholders.  If the
Company  fails to qualify as a REIT in any taxable  year,  it will be subject to
federal income tax on its taxable income at regular corporate rates and will not
be permitted to qualify for treatment as a REIT for federal  income tax purposes
for four years  following the year during which  qualification  is lost. Such an
event could materially affect the Company's net earnings.  However,  the Company
believes  that it is  organized  and operates in such a manner as to qualify for
treatment as a REIT for the years ended  December 31,  2000,  1999 and 1998.  In
addition, the Company intends to continue to operate the Company so as to remain
qualified as a REIT for federal income tax purposes.

         The  Company   anticipates   that  its  leases  will   continue  to  be
"triple-net"  leases and will contain  provisions that management  believes will
mitigate the effect of inflation. Such provisions will include clauses requiring
the payment of  percentage  rent based on certain  gross sales above a specified
level and/or automatic increases in base rent at specified times during the term
of the lease.  Management  expects that  increases in gross sales volumes due to
inflation  and real sales growth  should  result in an increase in rental income
over  time.  Continued  inflation  also may cause  capital  appreciation  of the
Company's Properties.  Inflation and changing prices,  however, also may have an
adverse  impact  on  the  sales  of the  Properties  and  on  potential  capital
appreciation of the Properties.

         Management of the Company currently knows of no trends that will have a
material  adverse  effect  on  liquidity,   capital   resources  or  results  of
operations.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

         See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk for information  related to quantitative
and qualitative disclosure about market risk.



<PAGE>


Item 8.  Financial Statements and Supplementary Data




                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES


                                    CONTENTS



                                                                  Page

Report of Independent Certified Public Accountants                 23

Financial Statements:

  Consolidated Balance Sheets                                      24

  Consolidated Statements of Earnings                              25

  Consolidated Statements of Stockholders' Equity                  26

  Consolidated Statements of Cash Flows                            27

  Notes to Consolidated Financial Statements                       30





<PAGE>




               Report of Independent Certified Public Accountants
               --------------------------------------------------


To the Board of Directors
CNL Hospitality Properties, Inc.



In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) presents fairly,  in all material  respects,
the  financial  position  of  CNL  Hospitality  Properties,   Inc.  (a  Maryland
corporation) and its subsidiaries at December 31, 2000 and 1999, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period  ended  December 31,  2000,  in  conformity  with  accounting  principles
generally accepted in the United States of America. In addition, in our opinion,
the  financial  statement  schedule  listed in the index  appearing  under  Item
14(a)(2)  presents fairly, in all material  respects,  the information set forth
therein  when  read in  conjunction  with  the  related  consolidated  financial
statements.  These financial statements and financial statement schedule are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements in  accordance  with  auditing  standards  generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.





/s/ PRICEWATERHOUSECOOPERS LLP

Orlando, Florida
January 26, 2001



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                  2000               1999
<S><C>                                                                      ---------------     --------------

                                 ASSETS
    Land, buildings and equipment on operating leases, less
       accumulated depreciation of $9,433,790 and $1,603,334,
       respectively                                                       $   581,528,928     $   112,227,771
    Investment in unconsolidated subsidiaries                                  10,174,209          38,364,157
    Cash and cash equivalents                                                  50,197,854         101,972,441
    Restricted cash                                                             3,263,712             275,630
    Certificate of deposit                                                             --           5,000,000
    Dividends receivable                                                               --           1,215,993
    Receivables                                                                 1,009,421             112,184
    Prepaid expenses                                                               28,170              41,165
    Loan costs, less accumulated amortization of $152,621 and
        $86,627, respectively                                                   1,976,630              51,969
    Accrued rental income                                                         597,234              79,399
    Other assets                                                                5,185,900           7,627,565
                                                                           ---------------     ---------------
                                                                          $   653,962,058     $   266,968,274
                                                                            ===============     ===============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
    Mortgages payable and accrued interest                                $   170,055,326     $            --
    Other notes payable                                                        19,581,950                  --
    Accounts payable and accrued expenses                                       2,126,365             405,855
    Distributions payable                                                       1,089,394              89,843
    Due to related parties                                                      1,359,417             995,500
    Security deposits                                                          15,418,626           5,042,054
    Rents paid in advance                                                       2,271,836             255,568
                                                                            ---------------     ---------------
           Total liabilities                                                  211,902,914           6,788,820
                                                                            ---------------     ---------------

    Commitments and contingencies                                                      --                  --

    Minority interest                                                          22,770,146           7,124,615
                                                                            ---------------     ---------------

    Stockholders' equity:
        Preferred stock, without par value.
           Authorized and unissued  3,000,000  shares                                  --                  --
        Excess shares,  $.01 par value per share.
           Authorized and unissued 63,000,000 shares                                   --                  --
        Common stock, $.01 par value per share. Authorized
           150,000,000 and 60,000,000  shares,  respectively;  issued 49,284,203
           and  28,915,799  shares,  respectively;  outstanding  49,002,042  and
           28,902,914 shares, respectively                                        490,020             289,029
        Capital in excess of par value                                        432,403,246         256,231,833
        Accumulated distributions in excess of net earnings                   (10,877,836)         (3,466,023)
        Minority  interest  distributions  in excess of contributions
           and accumulated earnings                                            (2,726,432)                 --
                                                                            ---------------     ---------------
               Total stockholders' equity                                     419,288,998         253,054,839
                                                                            ---------------     ---------------

                                                                          $   653,962,058     $   266,968,274
                                                                            ===============     ===============
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                        2000                1999               1998
<S><C>                                              ------------        ------------       ------------

      Revenues:
          Rental income from
             operating leases                    $   24,172,889      $    3,910,639     $    1,218,500
          FF&E reserve income                         2,508,949             320,356             98,099
          Dividend income                             2,780,063           2,753,506                 --
          Interest and other income                   6,637,318           3,693,004            638,862
                                                   -------------       -------------      -------------
                                                     36,099,219          10,677,505          1,955,461
                                                   -------------       -------------      -------------

      Expenses:
          Interest and loan cost amortization         2,383,449             248,094            350,322
          General operating and administrative        1,780,472             626,649            167,951
          Professional services                         196,028              69,318             21,581
          Asset management fees to
             related parties                          1,335,488             106,788             68,114
          Depreciation and amortization               7,830,456           1,267,868            388,554
                                                   -------------       -------------      -------------
                                                     13,525,893           2,318,717            996,522
                                                   -------------       -------------      -------------

      Earnings Before Equity in Loss of
          Unconsolidated Subsidiaries
          After Deduction of Preferred
          Stock Dividends and Minority
          Interest                                   22,573,326           8,358,788            958,939

      Equity in Loss of Unconsolidated
          Subsidiaries After Deduction of
          Preferred Stock Dividends                    (386,627)           (778,466)                --

      Minority Interest                              (1,516,237)            (64,334)                --
                                                   -------------       -------------      -------------

      Net Earnings                               $   20,670,462      $    7,515,988     $      958,939
                                                   =============       =============      =============

      Earnings Per Share of Common Stock:
          Basic                                  $         0.53      $         0.47     $         0.40
                                                   =============       =============      =============
          Diluted                                $         0.53      $         0.45     $         0.40
                                                   =============       =============      =============

      Weighted Average Number of Shares of
          Common Stock Outstanding:
             Basic                                   38,698,066          15,890,212          2,402,344
                                                   =============       =============      =============
             Diluted                                 45,885,742          21,437,859          2,402,344
                                                   =============       =============      =============



</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>

                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
                            Years Ended December 31,
                               2000, 1999 and 1998


<TABLE>
<CAPTION>

                                                                                             Minority interest
                                                                              Accumulated      distributions
                                      Common stock                           distributions     in excess of
                                --------------------------    Capital in      in excess        contributions
                                 Number of        Par          excess of        of net        and accumulated
                                   Shares        value         par value       earnings          Earnings              Total
<S><C>                          -------------  -----------   --------------  -------------   ------------------    --------------
Balance at December 31, 1997       1,152,540     $ 11,525      $ 9,229,316      $  (6,924)           $      --       $ 9,233,917

Subscriptions received for
    common stock through public
    offering and distribution
    reinvestment plan              3,169,368       31,694       31,661,984             --                   --        31,693,678

Stock issuance costs                      --           --       (3,601,898)            --                   --        (3,601,898)

Net earnings                              --           --               --        958,939                   --           958,939

Distributions declared and paid
    ($.47 per share)                      --           --               --     (1,168,145)                  --        (1,168,145)
                                 ------------  -----------   --------------  ----------------------------------    --------------
Balance at December 31, 1998       4,321,908     $ 43,219     $ 37,289,402    $  (216,130)           $      --      $ 37,116,491

Subscriptions received for
    common stock through public
    offerings and distribution
    reinvestment plan             24,593,891      245,939      245,692,968             --                   --       245,938,907

Retirement of common stock           (12,885)        (129)        (118,413)            --                   --          (118,542)

Stock issuance costs                      --           --      (26,632,124)            --                   --       (26,632,124)

Net earnings                              --           --               --      7,515,988                   --         7,515,988

Distributions declared and paid
    ($.72 per share)                      --           --               --    (10,765,881)                  --       (10,765,881)
                                 ------------  -----------   --------------  -------------   ------------------    --------------
Balance at December 31, 1999      28,902,914    $ 289,029    $ 256,231,833    $(3,466,023)           $      --      $253,054,839

Subscriptions received for
    common stock through public
    offerings and distribution
    reinvestment plan             20,368,404      203,684      203,480,360             --                   --       203,684,044

Retirement of common stock          (269,276)      (2,693)      (2,500,791)            --                   --        (2,503,484)

Stock issuance costs                      --           --      (24,808,156)            --                   --       (24,808,156)

Net earnings                              --           --               --     20,670,462                   --        20,670,462

Minority interest
    distributions in excess of
    contributions and
    accumulated earnings                  --           --               --             --           (2,726,432)       (2,726,432)

Distributions declared and paid
    ($.74 per share)                      --           --               --    (28,082,275)                  --       (28,082,275)
                                 ------------  -----------   --------------  -------------   ------------------    --------------
Balance at December 31, 2000      49,002,042    $ 490,020     $432,403,246   $(10,877,836)     $    (2,726,432)     $419,288,998
                                 ============  ===========   ==============  =============   ==================    ==============
</TABLE>


          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                              2000              1999              1998
<S><C>                                                    -------------     ------------     --------------
Cash flows from operating activities:
   Net earnings                                       $     20,670,462  $     7,515,988           958,939
    Adjustments to reconcile net earnings
      to net cash provided by operating
      activities:
        Depreciation                                         7,830,456        1,230,499           384,166
        Amortization                                            65,994          130,769            17,368
        Distribution from investment in
          unconsolidated subsidiaries, net
          of equity in losses                                1,123,687        1,478,111                --
        Minority interest                                    1,516,237           64,334                --
        Changes in operating assets and
          liabilities:
            Dividends receivable                             1,215,993       (1,215,993)               --
            Receivables                                       (812,688)         (67,352)          (44,832)
            Prepaid expenses                                    19,975          (31,774)            1,788
            Accrued rental income                             (124,329)         (35,239)          (44,160)
            Interest payable                                        --          (66,547)           66,547
            Accounts payable and accrued
              expenses                                         860,676           (2,191)            5,322
            Due to related parties -
              operating expenses                               360,696           12,923            10,838
            Security deposits                               10,376,573        3,624,554         1,417,500
            Rents paid in advance                              546,829          252,079             3,489
                                                        ---------------   --------------   ---------------
               Net cash provided by
                 operating  activities                      43,650,561       12,890,161         2,776,965
                                                        ---------------   --------------   ---------------

Cash flows from investing activities:
    Additions to land, buildings and
       equipment on operating leases                      (310,711,912)     (85,089,887)      (28,752,549)
    Investment in unconsolidated
           subsidiaries                                    (10,174,209)     (39,879,638)               --
     Acquisition of additional interest in
         Hotel Investors, net of Hotel
         Investors' cash                                   (17,872,573)              --                --
    Increase (decrease) in certificate of deposit            5,000,000               --        (5,000,000)
    Increase in restricted cash                             (2,988,082)        (193,223)          (82,407)
    Increase (decrease) in other assets                      2,510,090       (5,068,727)         (676,026)
                                                        ---------------   --------------   ---------------

              Net cash used in investing
                 activities                               (334,236,686)    (130,231,475)      (34,510,982)
                                                        ---------------   --------------   ---------------

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS -
                                    CONTINUED
<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                                           2000               1999              1998
<S><C>                                                ---------------     -------------     -------------

Cash flows from financing activities:
    Proceeds from borrowings on line of
      credit                                                     --                --          9,600,000
    Repayment of borrowings on line of
      credit                                                     --        (9,600,000)               --
    Payment of loan costs                                (1,342,713)          (47,334)           (91,262)
    Proceeds from mortgage loans and
      other notes payable                               102,081,950                --                 --
    Contributions from minority interest
      of consolidated subsidiaries                               --         7,150,000                 --
    Subscriptions received from
      stockholders                                      203,684,044       245,938,907         31,693,678
    Distributions to stockholders                       (28,082,275)      (10,765,881)        (1,168,145)
    Distributions to minority interest                  (10,217,828)               --                 --
    Retirement of common stock                           (2,503,484)         (118,542)                --
    Payment of stock issuance costs                     (24,808,156)      (26,472,318)        (3,948,669)
    Other                                                        --                 --             7,500
                                                     ---------------     --------------   ---------------

      Net cash provided by financing
         activities                                     238,811,538       206,084,832         36,093,102
                                                     ---------------     --------------   ---------------

Net increase (decrease) in cash and cash
      equivalents                                       (51,774,587)       88,743,518          4,359,085

Cash and cash equivalents at beginning of
    year                                                101,972,441        13,228,923          8,869,838
                                                     ---------------     --------------   ---------------

Cash and cash equivalents at end of year           $     50,197,854    $  101,972,441         13,228,923
                                                     ===============     ==============   ===============

</TABLE>


          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS -
                                    CONTINUED

<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
<S><C>                                                     2000               1999              1998
                                                      ---------------     -------------     -------------


Supplemental disclosures of cash flow information:

      Cash paid during the year for interest         $    1,802,451      $     240,994     $      270,795
                                                     ===============     ==============   ===============

Supplemental schedule of non-cash investing activities:

      Amounts incurred but not paid for
             construction in progress                $      832,551       $         --     $           --
                                                     ===============     ==============   ===============

     During the year ended December 31, 2000, the Company acquired an additional
     interest in its previously unconsolidated  subsidiary, CNL Hotel Investors,
     Inc. ("Hotel Investors") increasing its ownership interest to approximately
     71 percent. The Company paid $26,317,810 and accounted for this acquisition
     using the purchase method of accounting.  The net assets of Hotel Investors
     at September 30, 2000 were as follows:

             Cash                                  $     8,445,237
             Other assets                              162,787,701
             Liabilities                               (91,079,932)
                                                     ---------------
             Net assets                            $    80,153,006
                                                     ===============

Supplemental schedule of non-cash
financing activities:

      Distributions declared not paid to
        minority interest at year end              $      1,089,394     $       89,843   $            --
                                                     ===============     ==============   ===============

</TABLE>


          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  Years Ended December 31, 2000, 1999 and 1998


1.   Significant Accounting Policies:
     -------------------------------

     Organization and Nature of Business - CNL Hospitality Properties,  Inc. was
     organized  pursuant  to the laws of the state of Maryland on June 12, 1996.
     CNL  Hospitality  GP Corp.  and CNL  Hospitality  LP Corp. are wholly owned
     subsidiaries  of CNL  Hospitality  Properties,  Inc.,  each  of  which  was
     organized  in  Delaware in June 1998.  CNL  Hospitality  Partners,  LP is a
     Delaware limited partnership (the  "Partnership")  formed in June 1998. CNL
     Hospitality  GP Corp.  and CNL  Hospitality  LP Corp.  are the  general and
     limited partner,  respectively, of CNL Hospitality Partners, LP. Properties
     acquired are  generally  expected to be held by the  Partnership  and, as a
     result,  are  owned  by  CNL  Hospitality  Properties,   Inc.  through  the
     Partnership.  Various other wholly-owned  subsidiaries have been formed for
     purposes of acquiring or developing hotel  Properties.  The terms "Company"
     or  "Registrant"  include,  unless  the  context  otherwise  requires,  CNL
     Hospitality Properties, Inc., CNL Hospitality Partners, LP, CNL Hospitality
     GP Corp.,  CNL  Hospitality LP Corp.,  CNL Hotel  Investors,  Inc.  ("Hotel
     Investors"),  CNL DRR Investors,  LP, CNL Philadelphia Annex, LLC (formerly
     known as Courtyard  Annex  L.L.C.),  CNL LLB LP Holding,  Ltd., and each of
     their subsidiaries.


     The Company was formed primarily to acquire  properties (the  "Properties")
     located across the United States to be leased on a long-term,  "triple-net"
     basis to hotel operators.  The Company may also provide mortgage  financing
     (the  "Mortgage  Loans") and  furniture,  fixture and  equipment  financing
     ("Secured  Equipment  Leases") to operators of hotel chains.  The aggregate
     outstanding principal amount of Secured Equipment Leases will not exceed 10
     percent of gross proceeds from the Company's  offerings of shares of common
     stock.

     Principles  of  Consolidation  - The  accompanying  consolidated  financial
     statements  include the accounts of CNL Hospitality  Properties,  Inc., and
     its wholly owned subsidiaries, CNL Hospitality GP Corp. and CNL Hospitality
     LP Corp.,  as well as the accounts of CNL Hospitality  Partners,  LP, Hotel
     Investors (a 71 percent owned  corporation),  CNL DRR  Investor,  LP, CNL
     Philadelphia  Annex, LLC (an 89 percent owned limited  liability  company),
     CNL LLB Holding,  Ltd.,  and each of their  subsidiaries.  All  significant
     intercompany   balances   and   transactions   have  been   eliminated   in
     consolidation.  Interest of  unaffiliated  third  parties is  reflected  as
     minority interest.  Hotel Investors was previously  accounted for under the
     equity method,  however,  effective October 2000, the Company increased its
     ownership interest in Hotel Investors to approximately 71 percent resulting
     in consolidation at year end (see note 3).

     Real Estate and Lease  Accounting - The Company  records the acquisition of
     land,  buildings and equipment at cost,  including  acquisition and closing
     costs. Land,  buildings and equipment are leased to unrelated third parties
     on a "triple-net"  basis,  whereby the tenant is generally  responsible for
     all operating expenses relating to the Property,  including property taxes,
     insurance, maintenance and repairs.

     The Property leases are accounted for using the operating method. Under the
     operating  method,  land,  building  and  equipment  are  recorded at cost,
     revenue is recognized as rentals are earned and  depreciation is charged to
     operations as incurred.  Buildings and  equipment  are  depreciated  on the
     straight-line  method  over their  estimated  useful  lives of 40 and seven
     years,  respectively.  When  scheduled  rentals vary during the lease term,
     income is recognized on a  straight-line  basis so as to produce a constant
     periodic  rent over the lease term  commencing  on the date the Property is
     placed in service. Accrued rental income represents the aggregate amount of
     income  recognized on a straight-line  basis in excess of scheduled  rental
     payments to date.

     When the Properties or equipment are sold, the related cost and accumulated
     depreciation,  plus any accrued  rental  income,  will be removed  from the
     accounts  and any gain or loss  from  sale  will be  reflected  as  income.
     Management reviews its Properties for impairment whenever events or changes
     in circumstances indicate that the carrying amount of the assets may not be
     recoverable through operations. Management determines whether impairment in
     value has occurred by comparing  the  estimated  future  undiscounted  cash
     flows, including the residual value of the Property, with the carrying cost
     of the individual Property.  If an impairment is indicated,  the assets are
     adjusted to their fair value.



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  Years Ended December 31, 2000, 1999 and 1998

1.   Significant Accounting Policies - Continued:
     -------------------------------------------

     Cash and Cash Equivalents   -   The  Company  considers  all  highly liquid
     investments with a maturity of three months or less to be cash equivalents.
     Cash and cash  equivalents  consist of demand deposits at commercial  banks
     and money market funds (some of which are backed by government securities).
     Cash  equivalents  are  stated  at  cost  plus  accrued   interest,   which
     approximates  market  value.  Cash  accounts  maintained  on  behalf of the
     Company in demand  deposits at commercial  banks and money market funds may
     exceed federally insured levels;  however,  the Company has not experienced
     any losses in such accounts. Management believes the Company is not exposed
     to any significant credit risk on cash and cash equivalents.

     Certain  amounts of cash are restricted for  maintenance and replacement of
     furniture,   fixtures,   and  equipment  at  the  Company's  various  hotel
     properties.  These  amounts have been  separately  classified as restricted
     cash in the accompanying consolidated balance sheets.

     Loan Costs - Loan costs incurred in connection  with securing  financing of
     the Company's  various  acquisitions and developments have been capitalized
     and are being amortized over the terms of the loans using the straight-line
     method, which approximates the effective interest method.

     Income  Taxes - The  Company  has  made an  election  to be taxed as a real
     estate  investment  trust  (REIT)  under  Sections  856  through 860 of the
     Internal  Revenue Code of 1986, as amended,  and related  regulations.  The
     Company  generally will not be subject to corporate income taxes on amounts
     distributed to  stockholders,  providing it distributes at least 95 percent
     of its REIT  taxable  income  and  meets  certain  other  requirements  for
     qualifying as a REIT.  Accordingly,  no provision for federal  income taxes
     has  been  made  in the  accompanying  consolidated  financial  statements.
     Notwithstanding  the Company's  qualification  for taxation as a REIT,  the
     Company is subject to  certain  state  taxes on its income and  Properties.
     Beginning  on  January  1,  2001,  the  REIT  taxable  income  distribution
     requirement is reduced from 95 percent to 90 percent in accordance with the
     REIT Modernization Act of 1999.

     Earnings Per Share - Basic  earnings per share ("EPS") is calculated  based
     upon the  weighted  average  number of shares of common  stock  outstanding
     during each year and diluted  earnings per share is  calculated  based upon
     weighted  average  number of common  shares  outstanding  plus  potentially
     dilutive common shares.

     Reclassification - Certain items in the prior years' consolidated financial
     statements have been  reclassified  to conform with the 2000  presentation.
     These  reclassifications  had no  effect  on  stockholders'  equity  or net
     earnings.

     Staff  Accounting  Bulletin  No. 101 ("SAB  101") - In December  1999,  the
     Securities  and Exchange  Commission  released SAB 101,  which provides the
     staff's  view in  applying  generally  accepted  accounting  principles  to
     selected revenue  recognition issues. SAB 101 requires the Company to defer
     recognition  of certain  percentage  rental  income until  certain  defined
     thresholds are met. The Company adopted SAB 101 beginning  January 1, 2000.
     Implementation  of SAB 101 did not have a material  impact on the Company's
     results of operations.

     Statement of Financial  Accounting  Standards No. 133 ("FAS 133") - In June
     1998,  the  Financial   Accounting  Standards  Board  issued  Statement  of
     Financial   Accounting   Standards  No.  133,  "Accounting  for  Derivative
     Instruments and Hedging Activities".  The Statement establishes  accounting
     and  reporting  standards for  derivative  instruments,  including  certain
     derivative instruments,  embedded in other contracts (collectively referred
     to as derivatives), and for hedging activities. The Statement requires that
     an entity  recognize all derivatives as either assets or liabilities in the
     balance sheet and measure those  instruments at fair value. The Company has
     reviewed the  provisions of this standard and has  determined  that FAS 133
     does not apply to the Company as of December 31, 2000.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998


1.   Significant Accounting Policies - Continued:
     -------------------------------------------

     Statement of Financial  Accounting  Standards  No.137 ("FAS 137") - In June
     1999,  the  Financial   Accounting  Standards  Board  issued  Statement  of
     Financial   Accounting   Standards  No.  137,  "Accounting  for  Derivative
     Instruments and Hedging Activities - Deferral of the Effective Date of FASB
     Statement  No.  133, an  Amendment  of FASB  Statement  No.  133".  FAS 137
     deferred the effective  date of FAS 133 for one year.  FAS 133, as amended,
     is now  effective  for all fiscal  quarters of all fiscal  years  beginning
     after June 15,  2000.  The Company has  reviewed  both  statements  and has
     determined  that both FAS 133 and FAS 137 do not apply to the Company as of
     December 31, 2000.

     REIT  Modernization  Act - In  November  1999,  Congress  passed  the  Work
     Incentives Act of 1999, also known as the REIT  Modernization  Act ("RMA"),
     which allows a REIT to own up to 100 percent of the stock of a Taxable REIT
     subsidiary  ("TRS").  A TRS can provide services to REIT tenants and others
     without  disqualifying the rents that a REIT receives from its tenants from
     being "rents from real  property"  under federal  income tax law. A TRS may
     not  operate  or  manage  lodging  facilities,  but  it may  lease  lodging
     facilities  from  its  affiliated  REIT,  at  market  rates,  as long as an
     independent  contractor  operates and manages the lodging  facilities.  The
     provisions  of  the  RMA  are  effective  January  1,  2001.  The  Company,
     consistent  with the  requirements  /  provisions  of the RMA,  formed  two
     subsidiaries,  which made  elections  to be treated as TRS's (one  directly
     owned and one indirectly owned through a joint venture).

     Use of Estimates - Management of the Company has made a number of estimates
     and assumptions relating to the reporting of assets and liabilities and the
     disclosure  of  contingent   assets  and   liabilities   to  prepare  these
     consolidated  financial  statements in conformity  with generally  accepted
     accounting principles. Actual results could differ from those estimates.

     Capitalization of Interest - The Company's policy is to capitalize interest
     incurred during the construction period for hotel construction projects.

2.   Public Offerings:
     ----------------

     On June 17, 1999, the Company  completed its offering of 16,500,000  shares
     of common stock  ($165,000,000)  (the "Initial  Offering"),  which included
     1,500,000 shares  ($15,000,000)  available only to stockholders who elected
     to  participate  in the  Company's  reinvestment  plan  (the  "Reinvestment
     Plan").  Following  the  completion  of the Initial  Offering,  the Company
     commenced an offering of up to 27,500,000 additional shares of common stock
     ($275,000,000)  (the "1999  Offering").  On September 14, 2000, the Company
     completed  the 1999  Offering and commenced an offering of up to 45,000,000
     additional shares of common stock ($450,000,000) (the "2000 Offering").  Of
     the 45,000,000  shares of common stock to be offered,  up to 5,000,000 will
     be available to  stockholders  purchasing  shares through the  Reinvestment
     Plan. The price per share and other terms of the 2000  Offering,  including
     the  percentage of gross  proceeds  payable (i) to the managing  dealer for
     selling  commissions  and expenses in connection with the offering and (ii)
     to  CNL  Hospitality  Corp.  (the  "Advisor")  for  acquisition  fees,  are
     substantially  the  same as the  Company's  Initial  Offering  and the 1999
     Offering.  As  of  December  31,  2000,  the  Company  had  received  total
     subscription proceeds from the Initial Offering,  the 1999 Offering and the
     2000 Offering of $492,642,031  (49,264,203  Shares),  including  $1,740,170
     (174,017 Shares) through the Reinvestment  Plan. The Company expects to use
     the net proceeds from the 2000 Offering to purchase additional  Properties,
     and, to a lesser extent, make Mortgage Loans.

3.   Investment in Unconsolidated Subsidiaries:
     -----------------------------------------

     During 1999,  Five Arrows Realty  Securities II LLC ("Five Arrows") and the
     Company invested a total of  approximately  $86 million in Hotel Investors,
     resulting  in the  Company  owning 49  percent  and Five  Arrows  owning 51
     percent of Hotel  Investors.  Five Arrows owned 48,337  shares of 8 percent
     Class A  cumulative  preferred  stock  ("Class A Preferred  Stock") and the
     Company owned 37,979  shares of 9.76 percent  Class B cumulative  preferred
     stock  ("Class  B  Preferred  Stock").  The  Class A  Preferred  Stock  was
     exchangeable  upon  demand  into  common  stock  of the  Company,  using an
     exchange ratio based on the  relationship  between the Company's  operating
     results and that of Hotel Investors.


<PAGE>



                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998

3.   Investment in Unconsolidated Subsidiaries - Continued:
     -----------------------------------------------------

     In October 2000, Five Arrows,  the Company and Hotel Investors entered into
     an agreement ("Initial Transaction") with the following terms:

     o    Hotel  Investors  agreed  to  redeem  2,104  shares  of  both  Class A
          Preferred  Stock  and  common  stock of Hotel  Investors  held by Five
          Arrows for $2,104,000;
     o    Hotel  Investors  agreed to redeem  1,653  shares of Class B Preferred
          Stock  and an  aggregate  of 10,115  shares  of common  stock of Hotel
          Investors held by the Company for $1,653,000;
     o    The Company purchased 7,563 shares of both the Class A Preferred Stock
          and common stock of Hotel Investors from Five Arrows for $11,395,000;
     o    The Company  repurchased  65,285 shares of the Company's  common stock
          owned by Five Arrows for $620,207;
     o    The  remaining  Class A Preferred  Stock owned by Five Arrows  (38,670
          shares)  and  the  Company   (7,563  shares)  were  exchanged  for  an
          equivalent number of shares of Class E Preferred Stock par value $0.01
          ("Class E Preferred Stock") of Hotel Investors;
     o    Five Arrows granted the following options (1) on or before January 31,
          2001,  the Company had the option to purchase  7,250 shares of Class E
          Preferred Stock and an equal number of shares of common stock of Hotel
          Investors held by Five Arrows for $1,000 per pair of Class E Preferred
          Stock and common stock of Hotel  Investors,  and (2) provided that the
          Company  purchased  all of the  shares  under  the first  option,  the
          Company would have the option,  until June 30, 2001, to purchase 7,251
          shares of both Class E Preferred  Stock and an equal  number of shares
          of common stock of Hotel Investors for $1,000 for each pair;
     o    The Company has agreed to pay Five Arrows additional consideration for
          agreeing to defer the conversion of its Class A Preferred Stock (prior
          to its  conversion to Class E Preferred  Stock) to common stock of the
          Company.  These payments are equivalent to the difference  between any
          distributions  received by Five Arrows  from Hotel  Investors  and the
          distributions that Five Arrows would have received from the Company if
          Five  Arrows  had  converted  its  Class A  Preferred  Stock  into the
          Company's common stock on June 30, 2000;
     o    Five Arrows has agreed to forfeit its priority cash distributions from
          Hotel Investors;
     o    Cash available for  distributions of Hotel Investors is distributed to
          100 CNL Holdings,  Inc. and  affiliates'  associates  who each own one
          share of Class C  preferred  stock in Hotel  Investors,  to  provide a
          quarterly, cumulative, compounded 8 percent return. All remaining cash
          available for  distributions  is distributed  pro rata with respect to
          the interest in the common shares of Hotel Investors.

     On December 29, 2000, the Company exercised  its  two  options  to  acquire
     14,501  shares of Class E  Preferred  Stock and the common  stock  ("Option
     Transaction")  owned by Five Arrows.  As of December  31,  2000,  after the
     Initial  Transaction  and  the  Option   Transaction,   the  Company  owned
     approximately 71 percent and Five Arrows owned  approximately 29 percent of
     Hotel Investors. The total amount paid by the Company for the additional 22
     percent interest was approximately $26.3 million. This acquisition has been
     accounted for under the purchase method of accounting and, accordingly, the
     operating  results of Hotel  Investors  have been included in the Company's
     consolidated  statement of earnings from the date of  acquisition  (October
     2000).  The purchase  price  approximated  the fair value of the net assets
     acquired.  The resulting  purchase price adjustment (fair value adjustment)
     of  approximately  $5.5 million has been  reflected in land,  buildings and
     equipment on operating  leases,  in the accompanying  consolidated  balance
     sheet.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998

3.   Investment in Unconsolidated Subsidiaries - Continued:
     -----------------------------------------------------

     During the nine months ended September 30, 2000, prior to the consolidation
     of Hotel Investors,  the Company recorded $2,780,063 in dividend income and
     $386,627 in equity in loss after  deduction of preferred  stock  dividends,
     resulting in net earnings of $2,393,436  attributable  to its investment in
     Hotel  Investors.  During the year ended  December  31,  1999,  the Company
     recorded $2,753,506 in dividend income and $778,466 in equity in loss after
     deduction  of  preferred  stock  dividends,  resulting  in net  earnings of
     $1,975,040 attributable to the investment.

     The following presents condensed financial  information for Hotel Investors
     as of and for the year ended December 31, 1999:

          Land, buildings and equipment on operating
                leases, net                                       $165,088,059
          Cash and cash equivalents                                  4,884,014
          Restricted cash                                              288,644
          Loan costs, net                                              708,006
          Accrued rental income                                        283,914
          Prepaid expenses, receivables and other assets             3,422,806
          Liabilities                                               92,229,193
          Redeemable preferred stock                                85,361,864
          Stockholders' deficit                                     (2,915,614)
          Revenues                                                  13,025,978
          Net earnings                                               4,104,936
          Preferred stock dividends                                  5,693,642
          Income (loss) applicable to common stockholders           (1,588,706)

     The following  presents  unaudited pro forma  information on the results of
     operations for the Company as if the acquisition had taken place on January
     1, 1999:

                                                   2000                1999
                                           -------------------   ---------------
         Revenues                                $47,676,054       $20,949,977
         Expenses                                 22,945,999        11,239,759
         Net earnings                             21,767,326         8,443,138
         Basic EPS                                      0.56              0.53
         Diluted EPS                                    0.56              0.49






<PAGE>



                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998

3.   Investment in Unconsolidated Subsidiaries - Continued:
     -----------------------------------------------------

     On December 21,  2000,  the Company,  through  subsidiaries,  acquired a 44
     percent interest in Desert Ridge Resort Partners, LLC, a joint venture (the
     "Desert Ridge Joint Venture") with an affiliate of Marriott  International,
     Inc. and a partnership  in which an affiliate of the Advisor is the general
     partner.  The Desert Ridge Joint  Venture  invested in Desert Ridge Resort,
     LLC, a single purpose limited  liability  company (the "Resort Owner") that
     owns the  Desert  Ridge  Marriott  Resort & Spa in  Phoenix,  Arizona  (the
     "Desert  Ridge  Property"),  which is  currently  under  construction.  The
     Company  made  an  initial  capital  contribution  of $8.8  million  of its
     anticipated $25 million  investment in the Desert Ridge Joint Venture.  The
     total cost of the Desert Ridge  Property  (including  acquisition  of land,
     development and construction) is estimated to be $298 million.  On December
     21, 2000, the Resort Owner obtained permanent  financing from a third party
     lender  for  $179  million,  secured  by a  mortgage  on the  Desert  Ridge
     Property.  The  notes  have a term of seven  years  with  interest  payable
     quarterly in arrears commencing on March 2, 2001.  Interest with respect to
     $109  million of the notes is payable at a rate of 7.90  percent per annum,
     while  interest  with  respect to $70  million of the notes is payable at a
     floating rate equal to 185 basis points above the  three-month  LIBOR.  The
     blended fixed rate of interest after an interest rate swap is 9.48 percent.
     All unpaid interest and principal will be due at maturity.  In addition, an
     affiliate  Marriott  International,  Inc.  will  provide  financing  for 19
     percent of the costs to the Desert Ridge Joint Venture,  secured by pledges
     of the  co-venturers'  equity  contributions  to  the  Desert  Ridge  Joint
     Venture.  This  investment  was  accounted  for using the equity  method of
     accounting.

     The difference  between the Company's  carrying amount of the investment in
     the Desert Ridge Joint Venture and the underlying  equity in the net assets
     of the Desert Ridge Joint Venture was $1,375,573 at December 31, 2000. This
     amount will be amortized over the estimated life of the building  beginning
     on date that the hotel begins operations.

     The follow  presents  unaudited  condensed  financial  information  for the
     Desert Ridge Joint Venture as of December 31, 2000:

             Land, buildings and equipment on operating
                  leases, net                                      $43,803,084
             Capitalized loan costs                                 11,482,378
             Restricted cash                                       143,510,658
             Receivable                                              3,687,341
             Cash and cash equivalents
                                                                     2,047,614
             Prepaid and other assets                                  180,780
             Note payable                                          179,000,000
             Due to related parties                                  9,800,036
             Stockholders' equity                                   15,911,819

4.   Land, Buildings and Equipment on Operating Leases:
     -------------------------------------------------

     During the year ended December 31, 2000, the Company acquired 15 Properties
     throughout  the United  States,  including two  Properties  which are under
     construction. The Company did not dispose of any Properties during 2000.



<PAGE>



                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998


4.   Land, Buildings and Equipment on Operating Leases - Continued:
     -------------------------------------------------------------

     The Company  leases its land,  buildings and equipment to hotel  operators.
     The leases are accounted for under the provisions of Statement of Financial
     Accounting  Standards  No.  13,  "Accounting  for  Leases,"  and have  been
     classified  as operating  leases.  The lease terms range from 5 to 20 years
     and provide for minimum and  contingent  rentals.  In addition,  the tenant
     pays all property taxes and assessments and carries insurance  coverage for
     public liability,  property damage,  fire and extended coverage.  The lease
     options  allow the  tenants  to renew  each of the  leases  for two to five
     successive  five-year  to  ten-year  periods  subject to the same terms and
     conditions of the initial leases. The leases also require the establishment
     of capital expenditure reserve funds which will be used for the replacement
     and renewal of  furniture,  fixtures  and  equipment  relating to the hotel
     Properties  (the  "FF&E  Reserve").  Funds in the FF&E  Reserve  have  been
     earned,  granted and assigned to the Company as  additional  rent.  For the
     years  ended  December  31,  2000,  1999 and 1998,  revenues  from the FF&E
     Reserve totaled $2,508,949,  $320,356 and $98,099,  respectively,  of which
     $3,263,712  and $275,630 is classified  as restricted  cash at December 31,
     2000 and 1999,  respectively.  Land,  buildings  and equipment on operating
     leases consisted of the following at December 31:

                                                 2000                 1999
                                             --------------       -------------
          Land                            $     93,758,025     $    12,337,950
          Buildings                            446,132,337          92,220,370
          Equipment                             46,050,378           9,272,785
                                            ---------------      --------------
                                               585,940,740         113,831,105
          Less accumulated depreciation         (9,433,790)         (1,603,334)
          Construction in progress               5,021,978                  --
                                            ---------------      --------------
                                          $    581,528,928     $   112,227,771
                                            ===============      ==============

     Certain  leases  provide  an  increase  in the  minimum  annual  rent  at a
     predetermined  interval  during the terms of the  leases.  Rent  revenue is
     recognized on a straight-line basis over the terms of the leases commencing
     on the date the Property is placed in service. For the years ended December
     31,  2000,  1998 and 1998,  the Company  recognized  $117,282,  $35,238 and
     $44,160,  respectively,  of such rental income.  This amount is included in
     rental  income  from  operating  leases  in the  accompanying  consolidated
     statements of earnings.

     The following is a schedule of future minimum lease payments to be received
     on the noncancellable operating leases at December 31, 2000:


                 2001                           $       59,182,433
                 2002                                   59,527,707
                 2003                                   59,572,962
                 2004                                   59,572,962
                 2005                                   59,572,962
                 Thereafter                            643,959,055
                                                   ----------------
                                                 $     941,388,081
                                                   ================

     Since  leases are  renewable  at the option of the tenant,  the above table
     only presents  future  minimum lease  payments due during the initial lease
     terms.  In  addition,  this table does not  include  any amounts for future
     contingent  rents which may be received on the leases based on a percentage
     of the tenant's gross sales.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998

5.   Other Assets:
     ------------

     Other  assets  as of  December  31,  2000  and  1999  were  $5,185,900  and
     $7,627,565,  respectively, which consisted of acquisition fees and expenses
     relating to Properties the Company intends to acquire.

6.   Redemption of Shares:

     The  Company  has a  redemption  plan such that  prior to any  listing on a
     national  securities  exchange  or  over-the-counter  market,  if any,  any
     stockholder  (other than the Advisor) may present all or any portion  equal
     to at least 25  percent of such  stockholder's  shares to the  Company  for
     redemption at any time, in accordance  with the procedures  outlined in the
     Company's  prospectus.  At such time,  the Company may, at its sole option,
     redeem such shares  presented for  redemption for cash to the extent it has
     sufficient  funds  available.  During the year ended  December 31, 2000 and
     1999, 269,276 and 12,885 shares, respectively, were redeemed for $2,503,484
     and $118,542,  respectively,  and retired from shares outstanding of common
     stock. No shares were redeemed in 1998.

7.   Indebtedness:
     -------------

     At December 31, 2000 and 1999, indebtedness consisted of:
<TABLE>
<CAPTION>
<S><C>                                                                                  December 31, 2000        December 31, 1999
                                                                                      ---------------------    ---------------------
          Mortgages  payable,   collateralized  by  hotel  Properties,   bearing
          interest  rates ranging from 7.50 percent to 7.75 percent,  with total
          monthly principal and interest payments of $665,619, maturing July 31,  $            87,555,326    $                    --
          2009

          Mortgages  payable,   collateralized  by  hotel  Properties,   bearing
          interest of 8.335  percent,  with monthly  interest  only  payments of
          $347,000, maturing December 1, 2007                                                  50,000,000                         --

          Mortgage payable,  collateralized by hotel Property,  bearing interest
          of 8.29 percent,  with monthly interest only payments through November
          2001 and principal and interest payments of $257,116 through maturity,
          maturing December 1, 2007                                                            32,500,000                         --

          Construction  loan  facility  for up to  $55  million  in  borrowings,
          collateralized  by  hotel  Properties,   bearing  interest  of  London
          Interbank  Offered Rate ("LIBOR") plus 275 basis points,  with monthly
          payments of interest only, maturing November 15, 2003                                 9,897,341                         --

          Tax  Increment  Financing  Note,  collateralized  by  hotel  Property,
          implicit interest  of  12.85  percent,  with  principal  and  interest
          payments made by  incremental  property  tax payments  paid by tenant,
          maturing December 1, 2017                                                             9,684,609                         --
                                                                                      ---------------------    ---------------------
                                                                                  $           189,637,276    $                    --
                                                                                      =====================    =====================
</TABLE>



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998

7.   Indebtedness - Continued:
     ------------------------

     The Company has a line of credit in the amount of $30,000,000 which expires
     on July 30, 2003.  Advances  under the line of credit will bear interest at
     either (i) a rate per annum  equal to 318 basis  points  above the LIBOR or
     (ii) a rate per annum equal to 30 basis  points above the bank's base rate,
     whichever the Company selects at the time advances are made. In addition, a
     fee of 0.5 percent per advance will be due and payable to the bank on funds
     as  advanced.   Each  advance  made  under  the  line  of  credit  will  be
     collateralized  by the  assignment of rents and leases.  As of December 31,
     2000 and 1999,  the  Company had no amounts  outstanding  under the line of
     credit.

     The following is a schedule of maturities  for all long-term  borrowings at
     December 31, 2000:

                 2001                                  $        2,292,415
                 2002                                           2,194,877
                 2003                                          12,243,846
                 2004                                           2,510,389
                 2005                                           2,687,520
                 Thereafter                                   167,708,229
                                                          ----------------
                 Total                                 $      189,637,276
                                                         ================


8.   Stock Issuance Costs:
     --------------------

     The Company has incurred certain expenses  associated with its offerings of
     common stock,  including  commissions,  marketing support and due diligence
     expense  reimbursement fees, filing fees, legal,  accounting,  printing and
     escrow  fees,  which  have been  deducted  from the gross  proceeds  of the
     offerings.  The Advisor has agreed to pay all  organizational  and offering
     expenses  (excluding  commissions  and marketing  support and due diligence
     expense  reimbursement  fees)  which  exceed  three  percent  of the  gross
     proceeds received from the sale of shares of the Company in connection with
     the offerings.

     During the years  ended  December  31,  2000,  1999 and 1998,  the  Company
     incurred $24,808,156, $26,632,124 and $3,601,898, respectively, in offering
     costs, including $16,113,399,  $18,475,145 and $2,535,494, respectively, in
     commissions and marketing support and due diligence  expense  reimbursement
     fees  (see Note  11).  The  stock  issuance  costs  have  been  charged  to
     stockholders' equity subject to the three percent cap described above.

9.   Distributions:
     -------------

     For the years ended  December 31,  2000,  1999 and 1998,  approximately  63
     percent, 75 percent and 76 percent, respectively, of the distributions paid
     to stockholders  were considered  ordinary income,  and for the years ended
     December 31, 2000, 1999 and 1998,  approximately 37 percent, 25 percent and
     24  percent,   respectively,   were  considered  a  return  of  capital  to
     stockholders for federal income tax purposes. No amounts distributed to the
     stockholders  for the years  ended  December  31,  2000,  1999 and 1998 are
     required  to be or have been  treated by the Company as a return of capital
     for purposes of  calculating  the  stockholders'  return on their  invested
     capital.

10.  Capitalized Interest:
     --------------------

     The Company's policy is to capitalize  interest incurred on debt related to
     the construction projects. During the year ended December 31, 2000, $52,780
     was capitalized. No interest was capitalized in 1999.




<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998

11.  Related Party Transactions:
     --------------------------

     Certain  directors and officers of the Company hold similar  positions with
     the Advisor and the managing dealer,  CNL Securities Corp. These affiliates
     are  entitled  to receive  fees and  compensation  in  connection  with the
     offerings,  and the  acquisition,  management and sale of the assets of the
     Company.

     During the years  ended  December  31,  2000,  1999 and 1998,  the  Company
     incurred $15,116,931,  $17,320,448 and $2,237,026 respectively,  in selling
     commissions due to CNL Securities Corp. for services in connection with its
     offerings. A substantial portion of these amounts ($14,557,335, $16,164,488
     and $2,200,516,  respectively) were or will be paid by CNL Securities Corp.
     as commissions to other broker-dealers.

     In  addition,  CNL  Securities  Corp.  is  entitled  to receive a marketing
     support and due diligence expense reimbursement fee equal to 0.5 percent of
     the total amount raised from the sale of shares,  a portion of which may be
     reallowed  to other  broker-dealers.  During the years ended  December  31,
     2000,  1999 and 1998,  the  Company  incurred  $1,016,468,  $1,154,697  and
     $158,468,  respectively, of such fees, the majority of which were reallowed
     to other broker-dealers and from which all bona fide due diligence expenses
     were paid.

     CNL  Securities  Corp.  will also receive,  in connection  with the Initial
     Offering of up to  16,500,000  shares of common stock and the 2000 Offering
     of up to 45,000,000  shares of common stock, a soliciting  dealer servicing
     fee payable annually by the Company,  on December 31 of each year following
     the year in which the offering terminates, in the amount of 0.20 percent of
     "invested  capital,"  as  defined  by the  Company's  prospectus,  from the
     Initial  Offering  and 2000  Offering.  CNL  Securities Corp., in turn, may
     reallow all or a portion of such fee to  soliciting  dealers  whose clients
     hold shares on such date.  As of December 31,  2000,  $300,145 of such fees
     was  incurred  and payable at December 31,  2000,  in  connection  with the
     Initial Offering. No such fees were incurred in 1999 and 1998.

     In addition,  in connection with its 1999 Offering,  the Company had agreed
     to issue and sell soliciting dealer warrants ("Soliciting Dealer Warrants")
     to CNL  Securities  Corp.  The price for each  warrant  was $0.0008 and one
     warrant was issued for every 25 shares sold by the managing dealer.  All or
     a portion of the Soliciting  Dealer Warrants may be reallowed to soliciting
     dealers with prior written  approval from,  and in the sole  discretion of,
     the managing  dealer,  except where  prohibited by either  federal or state
     securities  laws. The holder of a Soliciting  Dealer Warrant is entitled to
     purchase  one share of common  stock from the  Company at a price of $12.00
     during the five year period commencing the date the 1999 Offering began. No
     Soliciting  Dealer Warrants,  however,  will be exercisable  until one year
     from the date of issuance.  During the year ended  December  31, 2000,  the
     Company issued 960,900 Soliciting Dealer Warrants to CNL Securities Corp.

     The  Advisor  is  entitled  to receive  acquisition  fees for  services  in
     identifying   Properties  and  structuring  the  terms  of  leases  of  the
     Properties and Mortgage Loans equal to 4.5 percent of the gross proceeds of
     the  offerings,  loan  proceeds  from  permanent  financing and the line of
     credit that are used to acquire  properties  but excluding  amounts used to
     finance Secured Equipment Leases. During the years ended December 31, 2000,
     1999  and  1998,  the  Company   incurred   $17,056,532,   $10,956,455  and
     $1,426,216,  respectively,  of such fees based on offering  proceeds.  Such
     fees are included in land,  buildings and equipment on operating leases and
     other assets in the accompanying consolidated balance sheets.

     The Advisor is entitled to receive fees in connection with the development,
     construction,  or renovation of a Property, generally equal to 4 percent of
     anticipated  project  costs.  During the year ended  December 31, 2000, the
     Company incurred $2,125,857 of such fees. No such fees were incurred during
     1999 or 1998.  Such fees are included in land,  buildings  and equipment on
     operating  leases  in  the  accompanying  consolidated  balance  sheet  and
     investment in unconsolidated subsidiaries.




<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998


11.  Related Party Transactions - Continued:
     ---------------------------------------

     The Company incurs operating expenses which, in general, are those expenses
     relating to administration of the Company on an ongoing basis.  Pursuant to
     the  advisory  agreement  described  below,  the  Advisor  is  required  to
     reimburse the Company the amount by which the total operating expenses paid
     or incurred by the Company exceed in any four consecutive  fiscal quarters,
     the greater of two percent of average  invested assets or 25 percent of net
     income (the "Expense Cap"). For the years ended December 31, 2000 and 1999,
     the Company's operating expenses did not exceed the Expense Cap. During the
     year ended December 31, 1998, the Company's operating expenses exceeded the
     Expense Cap by $92,733;  therefore, the Advisor reimbursed the Company such
     amount in accordance with the advisory agreement.

     The  Company  and the  Advisor  have  entered  into an  advisory  agreement
     pursuant to which the Advisor will receive a monthly asset  management  fee
     of one-twelfth of 0.60 percent of the Company's real estate asset value and
     the  outstanding  principal  balance of any Mortgage Loans as of the end of
     the preceding  month.  The management  fee, which will not exceed fees that
     are  competitive for similar  services in the same geographic  area, may or
     may  not be  taken,  in  whole  or in  part  as to any  year,  in the  sole
     discretion  of the Advisor.  All or any portion of the  management  fee not
     taken as to any fiscal year shall be deferred  without  interest and may be
     taken in such other fiscal year, as the Advisor shall determine. During the
     years  ended  December  31,  2000,  1999 and  1998,  the  Company  incurred
     $1,335,488, $106,788 and $68,114, respectively, of such fees. Additionally,
     the Company's  consolidated  subsidiary,  Hotel  Investors,  incurred asset
     management fees and  subordinated  incentive fees to the Advisor,  of which
     the Company's pro rata share  totalled  $61,806 and $55,741,  respectively,
     and  $157,135  and  $164,428,  respectively,  during the nine months  ended
     September  30, 2000 and the year ended  December 31, 1999.

     The Advisor and its affiliates provide various  administrative  services to
     the Company,  including services related to accounting;  financial, tax and
     regulatory compliance reporting;  stockholder  distributions and reporting;
     due   diligence   and   marketing;   and  investor   relations   (including
     administrative services in connection with the offerings),  on a day-to-day
     basis. The expenses incurred for these services were classified as follows:

<TABLE>
<CAPTION>
<S><C>                                                               Years Ended December 31,
                                                          2000              1999              1998
                                                      -------------     -------------     -------------

               Stock issuance costs               $      3,851,925   $     3,854,739   $       494,729
               General operating and
                   administrative expenses                 542,870           351,846           140,376
               Land, buildings and equipment
                   on operating leases and
                   other assets                                 --               124             9,084
                                                     --------------     -------------     -------------
                                                     --------------     -------------     -------------
                                                  $      4,394,795   $     4,206,709   $       644,189
                                                     ==============     =============     =============

</TABLE>


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998


11.  Related Party Transactions - Continued:
     ---------------------------------------

     The  amounts  due  to  related  parties  consisted  of   the  following  at
     December 31:

<TABLE>
<CAPTION>
<S><C>
                                                                             2000               1999
                                                                        -------------     ---------------
               Due to the Advisor:
                    Expenditures incurred on behalf
                       of the Company for accounting
                       and administrative services                   $       531,220   $         387,690
                    Acquisition fees                                         209,254             337,797
                    Management fees                                               --              19,642
                                                                        -------------     ---------------
                                                                             740,474             745,129
                                                                        -------------     ---------------
               Due to CNL Securities Corp.:
                    Commissions                                              598,899             229,834
                    Marketing support and due diligence
                       expense reimbursement fee                              20,044              16,764
                                                                        -------------     ---------------
                                                                             618,943             246,598
                                                                        -------------     ---------------

               Due to other related party                                         --               3,773
                                                                        -------------     ---------------
                                                                     $     1,359,417   $         995,500
                                                                        =============     ===============
</TABLE>

     The Company  maintains 13 bank accounts in a bank in which certain officers
     and directors of the Company serve as directors,  and in which an affiliate
     of the Advisor is a stockholder.  The amount  deposited with this affiliate
     was   $17,568,909   and   $15,275,629   at  December  31,  2000  and  1999,
     respectively.

12.  Fair Value of Financial Instruments:
     -----------------------------------

     The estimated fair value of cash and cash  equivalents and accounts payable
     and  accrued  expenses   approximates   carrying  value  because  of  short
     maturities.  The estimated fair value of long-term borrowings  approximates
     carrying  value as interest rates on the  borrowings  approximates  current
     market rates.

13.  Concentration of Credit Risk:
     ----------------------------

     Crestline Capital Corporation,  City Center Annex Tenant Corporation and WI
     Leasing,  LLC each  contributed more than 10 percent of the Company's total
     rental  income  for the year  ended  December  31,  2000.  In  addition,  a
     significant  portion  of  the  Company's  rental  income  was  earned  from
     Properties operating as Marriott(R) brand chains.

     Although the Company  intends to acquire  Properties in various  states and
     regions and to  carefully  screen its  tenants in order to reduce  risks of
     default,  failure of these  lessees or the  Marriott(R)  brand chains could
     significantly  impact the results of  operations  of the Company.  However,
     management  believes that the risk of such as default is reduced due to the
     essential  or  important   nature  of  these  Properties  for  the  ongoing
     operations of the lessees.

     In  addition,  the  hotel  industry  is  generally  characterized  as being
     intensely  competitive.   The  operators  of  the  hotels  located  on  the
     Properties   do,  and  are   expected  to  in  the  future,   compete  with
     independently  owned  hotels,  hotels  which are part of local or  regional
     chains,  and hotels in other well-known  national  chains,  including those
     offering  different  types of  accommodations.  Additionally,  any  general
     downturn in the domestic  hotel market could have a negative  impact on the
     Company's operations.

<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998


14.  Earnings Per Share:

     Basic EPS excludes dilution and is computed by dividing income available to
     common  stockholders  by the  weighted  average  number  of  common  shares
     outstanding  for the period.  Diluted EPS reflects the  potential  dilution
     that could occur if other  contracts to issue  common stock were  exercised
     and shared in the earnings of the Company.  For the year ended December 31,
     2000 and 1999,  approximately  7.2 and 5.5  million  shares,  respectively,
     related  to the  conversion  of  Hotel  Investors'  Preferred  Stock to the
     Company's common stock,  were considered  dilutive after the application of
     the "if  converted  method"  and were  included in the  denominator  of the
     diluted EPS calculation.

     As a result of the Initial  Transaction with Five Arrows (see Note 3), Five
     Arrows has the right to exchange its remaining Class E Preferred Stock and
     Common  Stock  in  Hotel   Investors,   at  certain  defined  dates,   into
     approximately 3.8 million shares of the Company's common stock.

     The numerator in the diluted EPS calculation includes an adjustment for the
     net earnings of Hotel  Investors for the applicable  period.  Additionally,
     the Company had no potentially dilutive common shares in 1998.

     The  following  represents  the  calculation  of earnings per share and the
     weighted average number of shares of potentially  dilutive common stock for
     the years ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
<S><C>                                                           2000                 1999                1998
                                                            --------------       --------------      --------------
Basic Earnings Per Share:
   Net earnings                                          $     20,670,462     $      7,515,988    $        958,939
                                                            ==============       ==============      ==============

   Weighted average number of shares outstanding               38,698,066           15,890,212           2,402,344
                                                            ==============       ==============      ==============

   Basic earnings per share                              $           0.53     $           0.47    $           0.40
                                                            ==============       ==============      ==============

Diluted Earnings Per Share:
   Net earnings                                          $     20,670,462     $      7,515,988    $        958,939

   Additional income attributable to investment in
      unconsolidated subsidiary assuming all
      Preferred Shares were converted                           3,563,543            2,129,899                  --
                                                            --------------       --------------      --------------

         Adjusted net earnings assuming dilution         $     24,234,005     $      9,645,887    $        958,939
                                                            ==============       ==============      ==============

Weighted average number of shares outstanding                  38,698,066           15,890,212           2,402,344

Assumed conversion of Preferred Stock                           7,187,676            5,547,647                  --
                                                            --------------       --------------      --------------

         Adjusted weighted average number of
         shares outstanding                                    45,885,742           21,437,859           2,402,344
                                                            ==============       ==============      ==============

Diluted earnings per share                               $           0.53     $           0.45       $        0.40
                                                            ==============       ==============      ==============

</TABLE>

<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998


15.  Commitments and Contingencies:
     ------------------------------

     In connection  with the  acquisition of two Properties in 1998, the Company
     may be required to make an additional  payment (the "Earnout Amount") of up
     to $1 million if certain earnout  provisions are achieved by July 31, 2001.
     After July 31,  2001,  the Company  will no longer be obligated to make any
     payments  under the earnout  provision.  The Earnout Amount is equal to the
     difference  between  earnings  before  interest,  taxes,  depreciation  and
     amortization expense adjusted by the earnout factor (7.44), and the initial
     purchase  price.  Rental income will be adjusted  upward in accordance with
     the lease  agreements for any amount paid. As of December 31, 2000, no such
     amounts were payable under this agreement; however, $96,688 was paid during
     2000 and has been  properly  reflected in land,  buildings and equipment on
     operating leases on the accompanying consolidated balance sheet at December
     31, 2000.

     In addition,  in connection with the acquisition of an 89 percent  interest
     in the CNL Philadelphia  Annex,  LLC, the Company and the minority interest
     holder  each  have  the  right  to  obligate  the  other  to  sell  or buy,
     respectively, the 11 percent interest in CNL Philadelphia Annex, LLC. These
     rights are effective five years after the hotel's opening which is November
     2004.  The price for the 11 percent  interest is equal to 11 percent of the
     lesser of (a) an amount  equal to the product of 8.5  multiplied  times net
     house profit  (defined as total hotel revenues less property  expenses) for
     the 13 period  accounting year preceding the notice of the option exercise,
     or (b) the appraised fair market value.

     In connection with the purchase of two Properties in June 2000, the Company
     may be required to make an additional payment (the "Earnout Provision") not
     to exceed $2,471,500 if certain earnout  provisions are achieved by June 1,
     2003.  After the June 1, 2003,  the Company  will no longer be obligated to
     make any payments  under the Earnout  Provision.  The Earnout  Provision is
     equal  to  the  difference   between  earnings  before   interest,   taxes,
     depreciation  and  amortization  expense  adjusted  by the  earnout  factor
     (7.33),  and the initial  purchase  price.  Rental  income will be adjusted
     upward in accordance  with the lease  agreements for any amount paid. As of
     December 31, 2000, no such amounts were payable under this agreement.

     On November 7, 2000,  the Company,  through CNL  Philadelphia  Annex,  LLC,
     obtained  a letter  of credit  for  $775,000  in the favor of a lender,  in
     accordance  with the related  loan  agreements.  Draws under this letter of
     credit may occur if default on the loan were to occur.  No such default has
     occurred as of December 31, 2000 and the letter of credit  remained  unused
     at that time. The letter of credit is in effect for one year with automatic
     annual extensions until November 10, 2007.

     The  Company  had  commitments  to  acquire  four hotel  Properties  for an
     anticipated aggregate purchase price of approximately $45 million.



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  Years Ended December 31, 2000, 1999 and 1998


16.  Selected Quarterly Financial Data:
     ----------------------------------

     The following table presents selected  unaudited  quarterly  financial data
     for each full quarter during the years ended December 31, 2000 and 1999:
<TABLE>
<CAPTION>
<S><C>
        2000 Quarter                          First            Second              Third             Fourth              Year
        ------------
                                          --------------    --------------     --------------    ---------------    ---------------
        Revenue                        $      5,581,157   $     6,690,682   $      8,540,296   $     15,287,084  $      36,099,219
        Net income                            3,945,084         4,642,940          5,251,624          6,830,814         20,670,462
        Earning per share:
              Basic                    $           0.13   $          0.13   $           0.13   $           0.16  $            0.53
              Diluted                              0.12              0.13               0.13               0.15               0.53

        1999 Quarter                          First            Second              Third             Fourth              Year
        ------------
                                          --------------    --------------     --------------    ---------------    ---------------
        Revenue                        $     $1,333,352   $     2,087,077   $      2,981,701  $      4,275,375   $     10,677,505
        Net income                              430,280         1,462,249          2,421,516         3,201,943          7,515,988
        Earning per share:
              Basic                    $           0.07   $          0.12   $           0.13  $           0.12   $           0.47
              Diluted                              0.06              0.12               0.12              0.12               0.45

</TABLE>

17.  Subsequent Events:
     -----------------

     During the period  January 1, 2001 through  January 26,  2001,  the Company
     received   subscription   proceeds  for  an  additional   1,264,915  shares
     ($12,649,150) of common stock.

     On January 1, 2001, the Company declared distributions totaling $3,120,827,
     or  $0.06354  per  share,  of  common  stock,  payable  in March  2001,  to
     stockholders of record on January 1, 2001.




<PAGE>

Item 9.  Changes  in   and   Disagreements  with  Accountants  on Accounting and
         Financial Disclosure

         None.

                                    PART III


Item 10. Directors and Executive Officers of the Registrant

         The  information  required by this Item is incorporated by reference to
the  Company's  Definitive  Proxy  Statement to be filed with the  Commission no
later than April 30, 2001.

Item 11. Executive Compensation

         The  information  required by this Item is incorporated by reference to
the  Company's  Definitive  Proxy  Statement to be filed with the  Commission no
later than April 30, 2001.

Item 12. Security Ownership of Certain Beneficial Owners and Management

         The  information  required by this Item is incorporated by reference to
the  Company's  Definitive  Proxy  Statement to be filed with the  Commission no
later than April 30, 2001.

Item 13. Certain Relationships and Related Transactions

         The  information  required by this Item is incorporated by reference to
the  Company's  Definitive  Proxy  Statement to be filed with the  Commission no
later than April 30, 2001.

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)      The following documents are filed as part of this report.

         1.  Consolidated Financial Statements

                  Report of Independent Certified Public Accountants

                  Consolidated Balance Sheets at December 31, 2000 and 1999

                  Consolidated Statements of Earnings for the years ended Decem-
                        ber 31, 2000, 1999 and 1998

                  Consolidated  Statements of Stockholders' Equity for the years
                        ended December 31, 2000, 1999 and 1998

                  Consolidated Statements  of  Cash Flows for  the  years  ended
                        December 31, 2000, 1999 and 1998

                  Notes to Consolidated Financial Statements
<PAGE>

         2. Financial Statement Schedules

                  Schedule  III  -  Real Estate and  Accumulated Depreciation at
                         December 31, 2000

                  Notes to  Schedule III - Real Estate and Accumulated Deprecia-
                        tion at December 31, 2000

                  All other Schedules are omitted as the required information is
                        inapplicable or is presented in the financial statements
                        or notes thereto.

         3. Exhibits

             3.1    CNL-American Realty Fund, Inc. amended and restated Articles
                    of  Incorporation  (Previously  filed as Exhibit  3.2 to the
                    Registrant's    Registration    Statement   on   Form   S-11
                    (Registration  No.  333-9943)  (the  "1996  Form  S-11") and
                    incorporated herein by reference.)

             3.2    CNL American Realty Fund, Inc. Bylaws  (Previously  filed as
                    Exhibit 3.3 to the 1996 Form S-11 and incorporated herein by
                    reference.)

             3.3    CNL American Realty Fund, Inc. Articles of Amendement to the
                    Amended and Restated  Articles of Incorporation  (Previously
                    filed as Exhibit 3.4 to the 1996 Form S-11 and  incorporated
                    herein by reference.)

             3.4    Articles of Amendment  to the Amended and Restated  Articles
                    of Incorporation of CNL Hospitality  Properties,  Inc. dated
                    May  26,  1999  (Previously  filed  as  Exhibit  3.5  to the
                    Registrant's    Registration    Statement   on   Form   S-11
                    (Registration  No.  333-67787)  (the "1998  Form  S-11") and
                    incorporated herein by reference.)

             3.6    Articles of Amendment  to the Amended and Restated  Articles
                    of Incorporation of CNL Hospitality  Properties,  Inc. dated
                    June  27,  2000  (Previously  filed  as  Exhibit  3.6 to the
                    Registrant's  Registration  Statement on Form S-11 (File No.
                    333-89691)  (the  "1999  Form  S-11")  and  incorporated  by
                    reference).

             3.7    Amendment No. 1 to the Bylaws of CNL Hospitality Properties,
                    Inc.  (Previously filed as Exhibit 3.7 to the 1999 Form S-11
                    and incorporated herein by reference.)

             4.1    Reinvestment  Plan  (Previously  filed as Exhibit 4.4 to the
                    1996 Form S-11 and incorporated herein by reference.)

             4.2    CNL-American Realty Fund, Inc. Amended and Restated Articles
                    of  Incorporation  (Previously  filed as Exhibit  3.2 to the
                    1996 Form S-11 and incorporated herein by reference.)

             4.3    CNL American Realty Fund, Inc. Bylaws  (Previously  filed as
                    Exhibit 3.3 to the 1996 Form S-11 and incorporated herein by
                    reference.)

             4.4    Articles of Amendment  to the Amended and Restated  Articles
                    of  Incorporation  of CNL American  Realty Fund,  Inc. dated
                    June 3, 1998  (Previously  filed as Exhibit  3.4 to the 1996
                    Form S-11 and incorporated herein by reference.)

             4.5    Articles of Amendment  to the Amended and Restated  Articles
                    of Incorporation of CNL Hospitality  Properties,  Inc. dated
                    May 26,  1999  (Previously  filed as Exhibit 3.5 to the 1998
                    Form S-11 and incorporated herein by reference.)

             4.7    Articles of Amendment  to the Amended and Restated  Articles
                    of Incorporation of CNL Hospitality  Properties,  Inc. dated
                    June 27, 2000  (Previously  filed as Exhibit 3.6 to the 1999
                    Form S-11 and incorporated herein by reference.)

             4.8    Amendment No. 1 to the Bylaws of CNL Hospitality Properties,
                    Inc.  (Previously filed as Exhibit 3.7 to the 1999 Form S-11
                    and incorporated herein by reference.)

             10.1   Advisory  Agreement  dated as of June 17, 2000,  between CNL
                    Hospitality  Properties,  Inc.  and  CNL  Hospitality  Corp.
                    (Previously  filed as  Exhibit  10.2 to the 1999  Form  S-11
                    (Registration  No.  333-89691)  (the "1999  Form  S-11") and
                    incorporated herein by reference.)

             10.2   Indemnification    Agreement    between   CNL    Hospitality
                    Properties,  Inc. and Lawrence A. Dustin dated  February 24,
                    1999.  Each of the following  directors  and/or officers has
                    signed a substantially  similar agreement as follows:  James
                    M. Seneff,  Jr., Robert A. Bourne, G. Richard Hostetter,  J.
                    Joseph Kruse, Richard C. Huseman,  Charles A. Muller, Jeanne
                    A. Wall and Lynn E.  Rose,  dated  July 9,  1997;  C.  Brian
                    Strickland  dated October 31, 1998; John A. Griswold,  dated
                    January 7, 1999;  Charles E. Adams and Craig M.  McAllaster,
                    dated  February 10, 1999;  Matthew W. Kaplan dated  February
                    24,  1999;  and Thomas J.  Hutchison  III dated May 16, 2000
                    (Previously  filed as Exhibit 10.2 to the Form 10-Q filed on
                    May 17, 1999 and incorporated herein by reference.)

             10.3   Agreement  of  Limited   Partnership   of  CNL   Hospitality
                    Partners,  LP (Previously filed as Exhibit 10.10 to the 1996
                    Form S-11 and incorporated herein by reference.)

             10.4   Hotel  Purchase  and Sale  Contract  between CNL Real Estate
                    Advisors,  Inc.  and  Gwinnett  Residence  Associates,  LLC,
                    relating to the Residence Inn - Gwinnett  Place  (Previously
                    filed  as   Exhibit   10.11  to  the  1996   Form  S-11  and
                    incorporated herein by reference.)

             10.5   Assignment and Assumption  Agreement between CNL Real Estate
                    Advisors, Inc. and CNL Hospitality Partners, LP, relating to
                    the  Residence  Inn - Gwinnett  Place  (Previously  filed as
                    Exhibit 10.12 to the 1996 Form S-11 and incorporated  herein
                    by reference.)

             10.6   Hotel  Purchase  and Sale  Contract  between CNL Real Estate
                    Advisors,  Inc.  and  Buckhead  Residence  Associates,  LLC,
                    relating  to  the  Residence  Inn -  Buckhead  (Lenox  Park)
                    (Previously filed as Exhibit 10.13 to the 1996 Form S-11 and
                    incorporated herein by reference.)

             10.7   Assignment and Assumption  Agreement between CNL Real Estate
                    Advisors, Inc. and CNL Hospitality Partners, LP, relating to
                    the Residence Inn - Buckhead (Lenox Park)  (Previously filed
                    as  Exhibit  10.14 to the 1996  Form  S-11 and  incorporated
                    herein by reference.)

             10.8   Lease Agreement between CNL Hospitality Partners, LP and STC
                    Leasing  Associates,  LLC, dated August 1, 1998, relating to
                    the  Residence  Inn - Gwinnett  Place  (Previously  filed as
                    Exhibit  to the 1996  Form S-11 and  incorporated  herein by
                    reference.)

             10.9   Lease Agreement between CNL Hospitality Partners, LP and STC
                    Leasing  Associates,  LLC, dated August 1, 1998, relating to
                    the Residence Inn - Buckhead (Lenox Park)  (Previously filed
                    as  Exhibit  10.16 to the 1996  Form  S-11 and  incorporated
                    herein by reference.)

             10.10  Master  Revolving  Line of Credit  Loan  Agreement  with CNL
                    Hospitality  Properties,  Inc., CNL Hospitality Partners, LP
                    and Colonial Bank, dated July 31, 1998 (Previously  filed as
                    Exhibit 10.17 to the 1996 Form S-11 and incorporated  herein
                    by reference.)

             10.11  Master Loan  Agreement  by and between CNL Hotel  Investors,
                    Inc.  and  Jefferson-Pilot  Life  Insurance  Company,  dated
                    February 24, 1999 (Previously  filed as Exhibit 10.18 to the
                    1996 Form S-11 and incorporated herein by reference.)

             10.12  Securities   Purchase   Agreement  between  CNL  Hospitality
                    Properties,  Inc.  and  Five  Arrows  Realty  Securities  II
                    L.L.C., dated February 24, 1999 (Previously filed as Exhibit
                    10.19  to the 1996  Form  S-11 and  incorporated  herein  by
                    reference.)

             10.13  Subscription  and  Stockholders'  Agreement  among CNL Hotel
                    Investors,  Inc.,  Five Arrows Realty  Securities II L.L.C.,
                    CNL Hospitality Partners, LP and CNL Hospitality Properties,
                    Inc., dated February 24, 1999  (Previously  filed as Exhibit
                    10.20  to the 1996  Form  S-11 and  incorporated  herein  by
                    reference.)

             10.14  Registration   Rights   Agreement   by   and   between   CNL
                    Hospitality   Properties,   Inc.  and  Five  Arrows   Realty
                    Securities II L.L.C.,  dated  February 24, 1999  (Previously
                    filed  as   Exhibit   10.21  to  the  1996   Form  S-11  and
                    incorporated herein by reference.)

             10.15  First Amendment to Lease  Agreement  between CNL Hospitality
                    Partners,  LP and STC Leasing Associates,  LLC, dated August
                    1, 1998,  related  to the  Residence  Inn - Gwinnett  Place,
                    (amends  Exhibit  10.8  above)  and the First  Amendment  to
                    Agreement  of   Guaranty,   dated  August  1,  1998  (amends
                    Agreement  of Guaranty  attached as Exhibit I to 10.8 above)
                    (Previously  filed as Exhibit 10.8 to the Form 10-Q filed on
                    November 10, 1999 and incorporated herein by reference.)

             10.16  First Amendment to Lease  Agreement  between CNL Hospitality
                    Partners,  LP and STC Leasing Associates,  LLC, dated August
                    1, 1998,  related  to the  Residence  Inn - Buckhead  (Lenox
                    Park) (amends Exhibit 10.9 above) and the First Amendment to
                    Agreement  of   Guaranty,   dated  August  1,  1998  (amends
                    Agreement  of Guaranty  attached as Exhibit I to 10.9 above)
                    (Previously  filed as Exhibit 10.9 to the Form 10-Q filed on
                    November 10, 1999 and incorporated herein by reference.)

             10.17  Lease Agreement  between  Courtyard  Annex,  L.L.C. and City
                    Center Annex Tenant  Corporation,  dated  November 15, 1999,
                    relating to the Courtyard - Philadelphia  (Previously  filed
                    as  Exhibit  10.22 to the 1998  Form  S-11 and  incorporated
                    herein by reference.)

             10.18  First  Amended  and  Restated  Limited   Liability   Company
                    Agreement  of  Courtyard  Annex,  L.L.C.,  relating  to  the
                    Courtyard - Philadelphia  (Previously filed as Exhibit 10.23
                    to the 1998 Form S-11 and incorporated herein by reference.)

             10.19  Purchase and Sale Agreement between Marriott  International,
                    Inc., CBM Annex,  Inc.,  Courtyard Annex,  Inc., as Sellers,
                    and  CNL  Hospitality  Partners,  LP,  as  Purchaser,  dated
                    November 15, 1999,  relating to the Courtyard - Philadelphia
                    (Previously filed as Exhibit 10.24 to the 1998 Form S-11 and
                    incorporated herein by reference.)

             10.20  Lease Agreement  between CNL Hospitality  Partners,  LP, and
                    RST4 Tenant LLC,  dated  December 10, 1999,  relating to the
                    Residence Inn - Mira Mesa (Previously filed as Exhibit 10.25
                    to the 1998 Form S-11 and incorporated herein by reference.)

             10.21  Purchase and Sale Agreement between Marriott  International,
                    Inc., TownePlace Management Corporation and Residence Inn by
                    Marriott,  Inc., as Sellers,  and CNL Hospitality  Partners,
                    LP, as Purchaser,  dated November 24, 1999,  relating to the
                    Residence Inn - Mira Mesa and the TownePlace Suites - Newark
                    (Previously filed as Exhibit 10.26 to the 1998 Form S-11 and
                    incorporated herein by reference.)

             10.22  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    WYN Orlando Lessee, LLC, dated May 31, 2000, relating to the
                    Wyndham  Denver  Tech  Center  (Previously  filed as Exhibit
                    10.29  to the 1998  Form  S-11 and  incorporated  herein  by
                    reference.)

             10.23  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    WYN Orlando Lessee, LLC, dated May 31, 2000, relating to the
                    Wyndham Billerica  (Previously filed as Exhibit 10.30 to the
                    1998 Form S-11 and incorporated herein by reference.)

             10.24  Purchase and Sale Agreement  between CNL Hospitality  Corp.,
                    as Buyer,  and WII Denver Tech, LLC and PAH Billerica Realty
                    Company, LLC, as Sellers, and Wyndham  International,  Inc.,
                    relating to the  Wyndham  Denver Tech Center and the Wyndham
                    Billerica  (Previously  filed as  Exhibit  10.31 to the 1998
                    Form S-11 and incorporated herein by reference.)

             10.25  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    RST4  Tenant  LLC,  dated  June 17,  2000,  relating  to the
                    Courtyard - Palm Desert and the  Residence Inn - Palm Desert
                    (Previously filed as Exhibit 10.32 to the 1999 Form S-11 and
                    incorporated by reference).

             10.26  Purchase and Sale Agreement  between PDH Associates  LLC, as
                    Seller,  and CNL Hospitality  Corp., as Buyer, dated January
                    19,  2000,  relating to the  Courtyard - Palm Desert and the
                    Residence  Inn - Palm  Desert  (Previously  filed as Exhibit
                    10.33 to the 1999 Form S-11 and incorporated by reference).

             10.27  Amendment  to  Purchase  and  Sale  Agreement   between  PDH
                    Associates LLC and CNL Hospitality  Corp., dated January 19,
                    2000,  relating to Courtyard - Palm Desert and the Residence
                    Inn - Palm Desert (amends  Exhibit 10.26 above)  (Previously
                    filed  as   Exhibit   10.34  to  the  1999   Form  S-11  and
                    incorporated by reference).

             10.28  Assignment  Agreement  between CNL Hospitality Corp. and CNL
                    Hospitality  Partners,  LP, relating to the Courtyard - Palm
                    Desert and the Residence Inn - Palm Desert (Previously filed
                    as Exhibit 10.35 to the 1999 Form S-11 and  incorporated  by
                    reference).

             10.29  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    RST4  Tenant  LLC,  dated  July 28,  2000,  relating  to the
                    SpringHill  Suites  -  Gaithersburg   (Previously  filed  as
                    Exhibit  10.36 to the 1999  Form  S-11 and  incorporated  by
                    reference).

             10.30  Purchase  and  Sale   Agreement   between   SpringHill   SMC
                    Corporation, as Seller, and CNL Hospitality Partners, LP, as
                    Purchaser,  and joined in by Marriott  International,  Inc.,
                    dated June 30,  2000,  relating to the  SpringHill  Suites -
                    Gaithersburg  (Previously filed as Exhibit 10.37 to the 1999
                    Form S-11 and incorporated by reference).

             10.31  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    RST4  Tenant  LLC,  dated  July 28,  2000,  relating  to the
                    Residence  Inn -  Merrifield  (Previously  filed as  Exhibit
                    10.38 to the 1999 Form S-11 and incorporated by reference).

             10.32  Purchase and Sale Agreement  between  TownePlace  Management
                    Corporation and Residence Inn by Marriott, Inc., as Sellers,
                    and CNL Hospitality Partners,  LP, as Purchaser,  and joined
                    in by Marriott International, Inc., dated November 24, 1999,
                    relating to the Residence Inn - Merrifield (Previously filed
                    as Exhibit 10.39 to the 1999 Form S-11 and  incorporated  by
                    reference).

             10.33  First  Amendment  to  Purchase  and Sale  Agreement  between
                    TownePlace  Management  Corporation  and  Residence  Inn  by
                    Marriott, as Sellers, and CNL Hospitality  Partners,  LP, as
                    Purchaser,  and joined in by Marriott  International,  Inc.,
                    dated  November 24, 1999,  relating to the  Residence  Inn -
                    Mira Mesa, SpringHill Suites - Gaithersburg, Residence Inn -
                    Merrifield,  and TownePlace Suites - Newark (amends Exhibits
                    10.21,  10.30, and 10.32 above) (Previously filed as Exhibit
                    10.40 to the 1999 Form S-11 and incorporated by reference).

             10.34  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    CCCL  Leasing LLC,  dated  August 18, 2000,  relating to the
                    Courtyard - Alpharetta (Previously filed as Exhibit 10.41 to
                    the 1999 Form S-11 and incorporated by reference).

             10.35  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    CCCL  Leasing LLC,  dated  August 18, 2000,  relating to the
                    Residence  Inn -  Cottonwood  (Previously  filed as  Exhibit
                    10.42 to the 1999 Form S-11 and incorporated by reference).

             10.36  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    CCCL  Leasing LLC,  dated  August 18, 2000,  relating to the
                    TownePlace Suites - Mt. Laurel  (Previously filed as Exhibit
                    10.43 to the 1999 Form S-11 and incorporated by reference).

             10.37  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    CCCL  Leasing LLC,  dated  August 18, 2000,  relating to the
                    TownePlace Suites - Scarborough (Previously filed as Exhibit
                    10.44 to the 1999 Form S-11 and incorporated by reference).

             10.38  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    CCCL  Leasing LLC,  dated  August 18, 2000,  relating to the
                    TownePlace  Suites - Tewksbury  (Previously filed as Exhibit
                    10.45 to the 1999 Form S-11 and incorporated by reference).

             10.39  Purchase  and  Sale  Agreement   between  Residence  Inn  by
                    Marriott, Inc., Courtyard Management Corporation, SpringHill
                    SMC Corporation and TownePlace  Management  Corporation,  as
                    Sellers, CNL Hospitality  Partners,  LP, as Purchaser,  CCCL
                    Leasing  LLC,  as  Tenant,  Crestline  Capital  Corporation,
                    Marriott   International,   Inc.,   and  joined  in  by  CNL
                    Hospitality   Properties,   Inc.,  dated  August  18,  2000,
                    relating  to the  Residence  Inn -  Cottonwood,  Courtyard -
                    Alpharetta  and Overland Park  SpringHill  Suites - Raleigh,
                    and  TownePlace   Suites  -  Mt.  Laurel,   Scarborough  and
                    Tewksbury  (Previously  filed as  Exhibit  10.46 to the 1999
                    Form S-11 and incorporated by reference).

             10.40  First  Amendment  to  Purchase  and Sale  Agreement  between
                    Residence  Inn  by  Marriott,   Inc.,  Courtyard  Management
                    Corporation,   SpringHill  SMC  Corporation  and  TownePlace
                    Management   Corporation,   as  Sellers,   CNL   Hospitality
                    Partners,  LP, as  Purchaser,  CCCL  Leasing LLC, as tenant,
                    Crestline Capital Corporation,  and Marriott  International,
                    Inc., dated August 18, 2000, relating to the Residence Inn -
                    Cottonwood,   Courtyard  -  Alpharetta,  and  Overland  Park
                    SpringHill  Suites -  Raleigh  and  TownePlace  Suites - Mt.
                    Laurel,  Scarborough  and  Tewksbury  (Previously  filed  as
                    Exhibit  10.47 to the 1999  Form  S-11 and  incorporated  by
                    reference).

             10.41  Lease  Agreement  between CNL Hospitality  Partners,  LP and
                    RST4 Tenant  LLC,  dated  November 4, 2000,  relating to the
                    TownePlace  Suites -  Newark  (Previously  filed as  Exhibit
                    10.48  to the 1999  Form  S-11 and  incorporated  herein  by
                    reference.)

             10.42  Lease Agreement  between LLB C-Hotel,  L.L.C. and LLB Tenant
                    Corporation,   dated  October  12,  2000,  relating  to  the
                    Courtyard - Little Lake Bryan  (Previously  filed as Exhibit
                    10.49 to the 1999  Form  S-11  (File  No.  333-89691)  filed
                    October 26, 1999,  as amended,  and  incorporated  herein by
                    reference.)

             10.43  Lease  Agreement  between LLB F-Inn,  L.L.C.  and LLB Tenant
                    Corporation,   dated  October  12,  2000,  relating  to  the
                    Fairfield  Inn -  Little  Lake  Bryan  (Previously  filed as
                    Exhibit 10.50 to the 1999 Form S-11 and incorporated  herein
                    by reference.)

             10.44  First  Amendment  to Lease  Agreement  between LLB  C-Hotel,
                    L.L.C. and LLB Tenant Corporation,  dated November 17, 2000,
                    relating  to the  Courtyard  -  Little  Lake  Bryan  (amends
                    Exhibit 10.42 above)  (Previously  filed as Exhibit 10.51 to
                    the 1999 Form S-11 and incorporated herein by reference.)

             10.45  First  Amendment  to  Lease  Agreement  between  LLB  F-Inn,
                    L.L.C. and LLB Tenant Corporation,  dated November 17, 2000,
                    relating to the  Fairfield  Inn - Little Lake Bryan  (amends
                    Exhibit 10.43 above)  (Previously  filed as Exhibit 10.52 to
                    the 1999 Form S-11 and incorporated herein by reference.)

             10.46  Purchase and Sale Agreement between Marriott  International,
                    Inc.,  as  Seller,  and CNL  Hospitality  Partners,  LP,  as
                    Purchaser,   dated  September  17,  1998,  relating  to  the
                    Courtyard - Little Lake Bryan,  the  Fairfield  Inn - Little
                    Lake  Bryan and the  SpringHill  Suites - Little  Lake Bryan
                    (Previously filed as Exhibit 10.53 to the 1999 Form S-11 and
                    incorporated herein by reference.)

             10.47  Second Amendment to Lease Agreement  between CNL LLB C-Hotel
                    Management, LP (formerly LLB C-Hotel, L.L.C.) and LLB Tenant
                    Corporation,  dated  December  15,  2000,  relating  to  the
                    Courtyard - Little  Lake Bryan  (amends  Exhibits  10.42 and
                    10.44 above) (Filed herewith.)

             10.48  Second  Amendment to Lease  Agreement  between CNL LLB F-Inn
                    Management,  LP (formerly  LLB F-Inn  L.L.C.) and LLB Tenant
                    Corporation,  dated  December  15,  2000,  relating  to  the
                    Fairfield Inn - Little Lake Bryan (amends Exhibits 10.43 and
                    10.45 above) (Filed herewith.)

             10.49  Indenture  Agreement  among  Desert  Ridge  Resort,  LLC, as
                    Issuer;  Bank One,  National  Association,  as Trustee;  and
                    Financial Structures Limited, as Insurer, dated December 15,
                    2000,   relating  to  the  Desert  Ridge   Property   (Filed
                    herewith.)

27.  Financial Data Schedule (Filed herewith.)

     (b)      The Registrant filed reports on Form 8-K on November 16,  December
              21, 2000, relating to the acquisition of properties.

(d)  Other Financial Information

     The  Company  is  required  to  file  audited  financial  information  of a
     guarantor, Marriott International,  Inc. ("Marriott") of two of its tenants
     as a  result  of  Marriott  guaranteeing  lease  payments  for  two  of the
     Company's  tenants which leased more than 20 percent of the Company's total
     assets for the year ended  December 31, 2000  Marriott is a public  company
     and as the date  hereof,  had not filed  its  Form  10-K;   therefore,  the
     financial  statements  are not  available to the Company to include in this
     filing.  The Company will file this financial  information under cover of a
     Form 10-K/A as soon as it is available.

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 1st day of
March, 2001.

                                   CNL HOSPITALITY PROPERTIES, INC.

                                   By:      ROBERT A. BOURNE
                                            President

                                            /s/ Robert A. Bourne
                                            --------------------------
                                            ROBERT A. BOURNE


<PAGE>


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

              Signature              Title                              Date

/s/ James M. Seneff, Jr.   Chairman of the Board and Chief         March 1, 2001
-------------------------  Executive Officer (Principal
James M. Seneff, Jr.       Executive Officer)



/s/ Robert A. Bourne       Vice Chairman and President             March 1, 2001
-------------------------
Robert A. Bourne



/s/ Matthew W. Kaplan      Director                                March 1, 2001
-------------------------
Matthew W. Kaplan



/s/ C. Brian Strickland    Senior Vice President, Finance          March 1, 2001
-------------------------  Administration   (Principal
C. Brian Strickland        Financial and Accounting Officer)




/s/ Charles E. Adams       Independent Director                    March 1, 2001
-------------------------
Charles E. Adams



/s/ Lawrence A. Dustin     Independent Director                    March 1, 2001
-------------------------
Lawrence A. Dustin



/s/ John A. Griswold       Independent Director                    March 1, 2001
-------------------------
John A. Griswold



/s/ Craig M. McAllaster    Independent Director                    March 1, 2001
-------------------------
Craig M. McAllaster


<PAGE>


CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
<TABLE>
<CAPTION>
<S><C>
                                                                                                          Costs Capitalized
Properties the Company                                                                                       Subsequent
 has Invested in Under                                       Initial Costs                                To Acquisition
                                                 ----------------------------------------  ----------------------------------
 Operating Leases:
                                                                                                               Carrying
                             Encumbrances        Land         Buildings       Equipment     Improvements        Costs
                            -------------- --------------- --------------- --------------- --------------- ---------------
  Atlanta, Georgia           $          -   $   1,907,479   $  13,459,040   $   1,270,174   $     130,974   $           -
  Duluth, Georgia                       -       1,019,497      10,017,402       1,140,942          63,026               -
  Mira Mesa, California                 -       2,002,314      12,924,317       1,701,280               -               -
  Palm Desert, California               -       2,186,790      14,211,931       1,375,396               -               -
  Merrifield, Virginia                  -       2,621,040      15,499,358       2,011,476               -               -
  Cottonwood, Utah                      -       2,329,871      11,658,677       1,479,849               -               -
  Plano, Texas                  5,818,645       1,409,287       9,876,280         682,567               -               -
  Las Vegas, Nevada            17,492,259       3,784,463      28,809,831       1,333,202               -               -
  Phoenix, Arizona             10,392,015       2,215,181      18,670,889       1,090,121               -               -
  Orlando, Florida              6,673,553       3,532,687               -               -       3,695,552               -

Courtyard by Marriott:
  Philadelphia, Pennsylvania   42,184,609       7,408,660      55,819,611       5,160,389          48,840               -
  Alpharetta, Georgia                   -       2,460,479      10,916,325       1,392,450               -               -
  Palm Desert, California               -       1,488,906      11,268,720       1,598,905               -               -
  Orlando, Florida             17,305,000       9,025,240      24,583,035       4,284,741               -               -
  Plano, Texas                  6,576,262       1,686,729      10,511,792         770,295               -               -
  Seattle, Washington          19,094,297       7,552,190      28,558,057       1,464,447               -               -
  Scottsdale Arizona           10,751,181       2,869,201      16,474,852         948,896               -               -
  Weston, Florida               3,223,788       1,809,838               -               -       1,326,426               -

Marriott Suites:
  Dallas, Texas                17,430,667       2,777,725      28,900,548       1,954,411               -               -

Springhill Suites:
  Gaithersburg, Maryland                -       2,592,431      11,931,078       1,683,008               -               -
  Orlando, Florida             17,740,000       8,749,895      26,380,932       3,716,553               -               -

TownePlace Suites:
  Tewksbury, Massachusetts              -       1,059,743       7,982,137         590,519               -               -
  Scarborough, Maine                    -         918,734       6,108,981         611,883               -               -
  Mount Laurel, New Jersey              -       1,223,679       6,395,420         623,253               -               -
  Newark, California                    -       2,304,707      10,828,211       1,353,030               -               -

Wyndham:
  Billerica, Massachusetts              -       3,838,446      20,471,101       2,255,001               -               -
  Denver, Colorado                      -       3,882,969      13,436,260       2,094,428               -               -

Fairfield Inn:
  Orlando, Florida             14,955,000       9,076,860      20,318,202       3,362,656               -               -
                            -------------- --------------- --------------- --------------- --------------- ---------------
                             $189,637,276   $  93,735,040   $ 446,012,989   $  45,949,871   $   5,264,818   $           -
                            ============== =============== =============== =============== =============== ===============
<PAGE>

              Gross Amount at Which Carried
                   at Close of Period                                              Date
----------------------------------------------------------      Accumulated       of Con-            Date
      Land        Buildings       Equipment         Total       Depreciation      struction        Acquired
-------------- --------------- --------------- --------------- --------------- --------------- ---------------
 $  1,913,900   $  13,504,345   $   1,349,422   $  16,767,667   $   1,250,184       1997            Aug-98
    1,022,920      10,051,037       1,166,909      12,240,867         997,537       1997            Aug-98
    2,002,314      12,924,317       1,701,280      16,627,911         600,272       1999            Dec-99
    2,186,790      14,211,931       1,375,396      17,774,117         298,883       1999            Jun-00
    2,621,040      15,499,358       2,011,476      20,131,874         282,996       2000            Jul-00
    2,329,871      11,658,677       1,479,849      15,468,397         183,846       1999            Aug-00
    1,409,287       9,876,280         682,567      11,968,133          91,920       1998            Feb-99
    3,784,463      28,809,831       1,333,202      33,927,496         241,207       1998            Feb-99
    2,215,181      18,670,889       1,090,121      21,976,191         163,076       1999            Jun-99
    3,532,687       3,695,552               -       7,228,239               -         -                -


    7,421,800      55,860,018       5,155,682      68,437,500       2,372,730       1999            Nov-99
    2,460,479      10,916,325       1,392,450      14,769,253         172,497       2000            Aug-00
    1,488,906      11,268,720       1,598,905      14,356,531         276,322       1999            Jun-00
    9,025,240      24,583,035       4,284,741      37,893,016         146,520       2000            Nov-00
    1,686,729      10,511,792         770,295      12,968,816         100,759       1998            Feb-99
    7,552,190      28,558,057       1,464,447      37,574,694         241,686       1999            Jun-99
    2,869,201      16,474,852         948,896      20,292,949         142,895       1999            Jun-99
    1,809,838       1,326,426               -       3,136,264               -         -                -

    2,777,725      28,900,548       1,954,411      33,632,683         268,082       1998            Feb-99

    2,592,431      11,931,078       1,683,008      16,206,518         225,909       2000            Jul-00
    8,749,895      26,380,932       3,716,553      38,847,380          48,002       2000            Dec-00

    1,059,743       7,982,137         590,519       9,632,399         103,796       1999            Aug-00
      918,734       6,108,981         611,883       7,639,598          87,792       1999            Aug-00
    1,223,679       6,395,420         623,253       8,242,352          91,004       1999            Aug-00
    2,304,707      10,828,212       1,353,030      14,485,948          70,887       2000            Nov-00

    3,838,446      20,471,101       2,255,001      26,564,548         486,454       1999            Jun-00
    3,882,969      13,436,260       2,094,427      19,413,657         370,481       1999            Jun-00

    9,076,860      20,318,202       3,362,656      32,757,718         118,051       2000            Nov-00
-------------- --------------- --------------- --------------- --------------- --------------- ---------------

 $ 93,758,025   $ 451,154,315   $  46,050,378   $ 590,962,718   $   9,433,790
============== =============== =============== =============== ===============
</TABLE>

<PAGE>

(1) Transactions in real estate and accumulated  depreciation  during 2000, 1999
        and 1998 are summarized as follows:
<TABLE>
<CAPTION>
<S><C>
                                                               Cost (2) (4)                    Accumulated Depreciation
                                                         ----------------------------------------------------------------

    Properties the Company has Invested
       in Under Operating Leases:
          Balance, December 31, 1997                      $                     -             $                         -
            Acquisitions                                               28,752,549                                       -
            Depreciation expense (3)                                            -                                 384,166
                                                         ----------------------------------------------------------------

          Balance, December 31, 1998                                   28,752,549                                 384,166
            Acquisitions                                               85,078,556                                       -
            Depreciation expense (3)                                            -                               1,219,168
                                                         ----------------------------------------------------------------

          Balance, December 31, 1999                                  113,831,105                               1,603,334
            Acquisitions                                              477,131,613                                     -
            Depreciation expense (3)                                            -                               7,830,456
                                                         ----------------------------------------------------------------

          Balance, December 31, 2000                      $           590,962,718             $                 9,433,790
                                                         ================================================================

</TABLE>

(2) As of December 31, 2000, 1999 and 1998, the aggregate cost of the Properties
    owned by the Company and its  subsidiaries  for federal  income tax purposes
    was  $589,498,826,  $113,831,105 and $28,752,549,  respectively.  All of the
    leases are treated as operating leases for federal income tax purposes.

(3) Depreciation  expense is computed for  buildings  and  equipment  based upon
    estimated lives of 40 and seven years, respectively.

(4) During  the years  ended  December  31,  2000,  1999 and 1998,  the  Company
    incurred acquisition fees totaling  $16,182,043,  $4,470,836 and $1,507,010,
    respectively, paid to the Advisor. Acquisition fees are included in land and
    buildings on operating leases at December 31, 2000 and 1999.


<PAGE>





     3.1  CNL-American  Realty  Fund,  Inc.  amended  and  restated  Articles of
          Incorporation  (Previously  filed as Exhibit  3.2 to the  Registrant's
          Registration  Statement on Form S-11  (Registration No. 333-9943) (the
          "1996  Form  S-11") and  incorporated  herein by  reference.)

     3.2  CNL American Realty Fund, Inc. Bylaws (Previously filed as Exhibit 3.3
          to the 1996 Form S-11 and incorporated herein by reference.)

     3.3  CNL American Realty Fund,  Inc.  Articles of Amendement to the Amended
          and Restated  Articles of Incorporation  (Previously  filed as Exhibit
          3.4 to the 1996 Form S-11 and incorporated herein by reference.)

     3.4  Articles  of  Amendment  to  the  Amended  and  Restated  Articles  of
          Incorporation of CNL Hospitality  Properties,  Inc. dated May 26, 1999
          (Previously  filed as  Exhibit  3.5 to the  Registrant's  Registration
          Statement on Form S-11  (Registration  No.  333-67787) (the "1998 Form
          S-11") and incorporated herein by reference.)

     3.6  Articles  of  Amendment  to  the  Amended  and  Restated  Articles  of
          Incorporation of CNL Hospitality Properties,  Inc. dated June 27, 2000
          (Previously  filed as  Exhibit  3.6 to the  Registrant's  Registration
          Statement on Form S-11 (File No. 333-89691) (the "1999 Form S-11") and
          incorporated by reference).

     3.7  Amendment  No. 1 to the  Bylaws of CNL  Hospitality  Properties,  Inc.
          (Previously   filed  as  Exhibit   3.7  to  the  1999  Form  S-11  and
          incorporated herein by reference.)

     4.1  Reinvestment  Plan  (Previously  filed as Exhibit 4.4 to the 1996 Form
          S-11 and incorporated herein by reference.)

     4.2  CNL-American  Realty  Fund,  Inc.  Amended  and  Restated  Articles of
          Incorporation  (Previously  filed  as  Exhibit  3.2 to the  1996  Form
          S-11 and incorporated herein by reference.)

     4.3  CNL American Realty Fund, Inc. Bylaws (Previously filed as Exhibit 3.3
          to the 1996 Form S-11 and incorporated herein by reference.)

     4.4  Articles  of  Amendment  to  the  Amended  and  Restated  Articles  of
          Incorporation  of CNL American  Realty Fund,  Inc.  dated June 3, 1998
          (Previously   filed  as  Exhibit   3.4  to  the  1996  Form  S-11  and
          incorporated herein by reference.)

     4.5  Articles  of  Amendment  to  the  Amended  and  Restated  Articles  of
          Incorporation of CNL Hospitality  Properties,  Inc. dated May 26, 1999
          (Previously   filed  as  Exhibit   3.5  to  the  1998  Form  S-11  and
          incorporated herein by reference.)

     4.7  Articles  of  Amendment  to  the  Amended  and  Restated  Articles  of
          Incorporation of CNL Hospitality Properties,  Inc. dated June 27, 2000
          (Previously   filed  as  Exhibit   3.6  to  the  1999  Form  S-11  and
          incorporated herein by reference.)

     4.8  Amendment  No. 1 to the  Bylaws of CNL  Hospitality  Properties,  Inc.
          (Previously   filed  as  Exhibit   3.7  to  the  1999  Form  S-11  and
          incorporated herein by reference.)

    10.1  Advisory  Agreement dated as of June 17, 2000, between CNL Hospitality
          Properties,  Inc.  and CNL  Hospitality  Corp.  (Previously  filed  as
          Exhibit 10.2 to the 1999 Form S-11  (Registration  No. 333-89691) (the
          "1999 Form S-11") and incorporated herein by reference.)

    10.2  Indemnification Agreement between CNL Hospitality Properties, Inc. and
          Lawrence A. Dustin  dated  February 24,  1999.  Each of the  following
          directors and/or officers has signed a substantially similar agreement
          as  follows:  James M.  Seneff,  Jr.,  Robert A.  Bourne,  G.  Richard
          Hostetter,  J. Joseph Kruse,  Richard C.  Huseman,  Charles A. Muller,
          Jeanne  A.  Wall  and Lynn E.  Rose,  dated  July 9,  1997;  C.  Brian
          Strickland dated October 31, 1998; John A. Griswold,  dated January 7,
          1999;  Charles E. Adams and Craig M.  McAllaster,  dated  February 10,
          1999;  Matthew  W.  Kaplan  dated  February  24,  1999;  and Thomas J.
          Hutchison III dated May 16, 2000 (Previously  filed as Exhibit 10.2 to
          the  Form  10-Q  filed  on May 17,  1999 and  incorporated  herein  by
          reference.)

    10.3  Agreement  of Limited  Partnership  of CNL  Hospitality  Partners,  LP
          (Previously  filed  as  Exhibit  10.10  to  the  1996  Form  S-11  and
          incorporated herein by reference.)

    10.4  Hotel  Purchase and Sale  Contract  between CNL Real Estate  Advisors,
          Inc. and Gwinnett Residence Associates, LLC, relating to the Residence
          Inn - Gwinnett  Place  (Previously  filed as Exhibit 10.11 to the 1996
          Form S-11 and incorporated herein by reference.)

    10.5  Assignment and Assumption  Agreement between CNL Real Estate Advisors,
          Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
          Gwinnett  Place  (Previously  filed as Exhibit  10.12 to the 1996 Form
          S-11 and incorporated herein by reference.)

    10.6  Hotel  Purchase and Sale  Contract  between CNL Real Estate  Advisors,
          Inc. and Buckhead Residence Associates, LLC, relating to the Residence
          Inn - Buckhead (Lenox Park)  (Previously filed as Exhibit 10.13 to the
          1996 Form S-11 and incorporated herein by reference.)

    10.7  Assignment and Assumption  Agreement between CNL Real Estate Advisors,
          Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
          Buckhead (Lenox Park)  (Previously  filed as Exhibit 10.14 to the 1996
          Form S-11 and incorporated herein by reference.)

    10.8  Lease Agreement between CNL Hospitality  Partners,  LP and STC Leasing
          Associates, LLC, dated August 1, 1998, relating to the Residence Inn -
          Gwinnett  Place  (Previously  filed as Exhibit   to the 1996 Form
          S-11 and incorporated herein by reference.)

    10.9  Lease Agreement between CNL Hospitality  Partners,  LP and STC Leasing
          Associates, LLC, dated August 1, 1998, relating to the Residence Inn -
          Buckhead (Lenox Park)  (Previously  filed as Exhibit 10.16 to the 1996
          Form S-11 and incorporated herein by reference.)

    10.10 Master  Revolving Line of Credit Loan  Agreement with CNL  Hospitality
          Properties,  Inc.,  CNL  Hospitality  Partners,  LP and Colonial Bank,
          dated July 31,  1998  (Previously  filed as Exhibit  10.17 to the 1996
          Form S-11 and incorporated herein by reference.)

    10.11 Master Loan  Agreement  by and between CNL Hotel  Investors,  Inc. and
          Jefferson-Pilot  Life  Insurance  Company,  dated  February  24,  1999
          (Previously  filed  as  Exhibit  10.18  to  the  1996  Form  S-11  and
          incorporated herein by reference.)

    10.12 Securities  Purchase  Agreement  between CNL  Hospitality  Properties,
          Inc. and Five Arrows Realty  Securities II L.L.C.,  dated February 24,
          1999  (Previously  filed as  Exhibit  10.19 to the 1996  Form S-11 and
          incorporated herein by reference.)

    10.13 Subscription  and  Stockholders'  Agreement among CNL Hotel Investors,
          Inc.,  Five  Arrows  Realty  Securities  II  L.L.C.,  CNL  Hospitality
          Partners, LP and CNL Hospitality Properties,  Inc., dated February 24,
          1999  (Previously  filed as  Exhibit  10.20 to the 1996  Form S-11 and
          incorporated herein by reference.)

    10.14 Registration   Rights   Agreement  by  and  between  CNL   Hospitality
          Properties,  Inc. and Five Arrows Realty  Securities II L.L.C.,  dated
          February 24, 1999 (Previously  filed as Exhibit 10.21 to the 1996 Form
          S-11 and incorporated herein by reference.)

    10.15 First Amendment to Lease Agreement  between CNL Hospitality  Partners,
          LP and STC Leasing  Associates,  LLC, dated August 1, 1998, related to
          the Residence Inn - Gwinnett  Place,  (amends Exhibit 10.8  above) and
          the First  Amendment to  Agreement  of Guaranty,  dated August 1, 1998
          (amends  Agreement  of Guaranty  attached as Exhibit I to 10.8  above)
          (Previously  filed as Exhibit 10.8  to the Form 10-Q filed on November
          10, 1999 and incorporated herein by reference.)

    10.16 First Amendment to Lease Agreement  between CNL Hospitality  Partners,
          LP and STC Leasing  Associates,  LLC, dated August 1, 1998, related to
          the Residence Inn - Buckhead (Lenox Park) (amends Exhibit 10.9  above)
          and the First Amendment to Agreement of Guaranty, dated August 1, 1998
          (amends  Agreement  of Guaranty  attached as Exhibit I to 10.9  above)
          (Previously  filed as Exhibit 10.9  to the Form 10-Q filed on November
          10, 1999 and incorporated herein by reference.)

    10.17 Lease Agreement between Courtyard Annex,  L.L.C. and City Center Annex
          Tenant Corporation, dated November 15, 1999, relating to the Courtyard
          -  Philadelphia  (Previously  filed as Exhibit  10.22 to the 1998 Form
          S-11 and incorporated herein by reference.)

    10.18 First  Amended and Restated  Limited  Liability  Company  Agreement of
          Courtyard  Annex,  L.L.C.,  relating to the  Courtyard -  Philadelphia
          (Previously  filed  as  Exhibit  10.23  to  the  1998  Form  S-11  and
          incorporated herein by reference.)

    10.19 Purchase and Sale Agreement between Marriott International,  Inc., CBM
          Annex, Inc.,  Courtyard Annex,  Inc., as Sellers,  and CNL Hospitality
          Partners,  LP, as Purchaser,  dated November 15, 1999, relating to the
          Courtyard -  Philadelphia  (Previously  filed as Exhibit  10.24 to the
          1998 Form S-11 and incorporated herein by reference.)

    10.20 Lease Agreement between CNL Hospitality Partners,  LP, and RST4 Tenant
          LLC,  dated  December 10, 1999,  relating to the  Residence Inn - Mira
          Mesa  (Previously  filed as  Exhibit  10.25 to the 1998  Form S-11 and
          incorporated herein by reference.)

    10.21 Purchase and Sale  Agreement  between  Marriott  International,  Inc.,
          TownePlace Management Corporation and Residence Inn by Marriott, Inc.,
          as Sellers,  and CNL  Hospitality  Partners,  LP, as Purchaser,  dated
          November 24, 1999,  relating to the  Residence Inn - Mira Mesa and the
          TownePlace  Suites - Newark  (Previously filed as Exhibit 10.26 to the
          1998 Form S-11 and incorporated herein by reference.)

    10.22 Lease Agreement between CNL Hospitality  Partners,  LP and WYN Orlando
          Lessee,  LLC, dated May 31, 2000,  relating to the Wyndham Denver Tech
          Center  (Previously  filed as Exhibit  10.29 to the 1998 Form S-11 and
          incorporated herein by reference.)

    10.23 Lease Agreement between CNL Hospitality  Partners,  LP and WYN Orlando
          Lessee,  LLC,  dated May 31, 2000,  relating to the Wyndham  Billerica
          (Previously  filed  as  Exhibit  10.30  to  the  1998  Form  S-11  and
          incorporated herein by reference.)

    10.24 Purchase and Sale Agreement  between CNL Hospitality  Corp., as Buyer,
          and WII Denver Tech,  LLC and PAH Billerica  Realty  Company,  LLC, as
          Sellers,  and  Wyndham  International,  Inc.,  relating to the Wyndham
          Denver  Tech  Center and the Wyndham  Billerica  (Previously  filed as
          Exhibit  10.31  to the  1998  Form  S-11 and  incorporated  herein  by
          reference.)

    10.25 Lease Agreement between CNL Hospitality  Partners,  LP and RST4 Tenant
          LLC, dated June 17, 2000,  relating to the Courtyard - Palm Desert and
          the Residence Inn - Palm Desert  (Previously filed as Exhibit 10.32 to
          the 1999 Form S-11 and incorporated by reference).

    10.26 Purchase and Sale  Agreement  between PDH  Associates  LLC, as Seller,
          and CNL Hospitality Corp., as Buyer, dated January 19, 2000,  relating
          to the  Courtyard  - Palm Desert and the  Residence  Inn - Palm Desert
          (Previously  filed  as  Exhibit  10.33  to  the  1999  Form  S-11  and
          incorporated by reference).

    10.27 Amendment to Purchase and Sale  Agreement  between PDH  Associates LLC
          and CNL  Hospitality  Corp.,  dated  January  19,  2000,  relating  to
          Courtyard - Palm Desert and the  Residence  Inn - Palm Desert  (amends
          Exhibit  10.26 above)  (Previously  filed as Exhibit 10.34 to the 1999
          Form S-11 and incorporated by reference).

    10.28 Assignment   Agreement   between  CNL   Hospitality   Corp.   and  CNL
          Hospitality Partners,  LP, relating to the Courtyard - Palm Desert and
          the Residence Inn - Palm Desert  (Previously filed as Exhibit 10.35 to
          the 1999 Form S-11 and incorporated by reference).

    10.29 Lease Agreement between CNL Hospitality  Partners,  LP and RST4 Tenant
          LLC,  dated  July  28,  2000,  relating  to the  SpringHill  Suites  -
          Gaithersburg  (Previously filed as Exhibit 10.36 to the 1999 Form S-11
          and incorporated by reference).

    10.30 Purchase and Sale Agreement  between  SpringHill SMC  Corporation,  as
          Seller, and CNL Hospitality Partners, LP, as Purchaser,  and joined in
          by Marriott International,  Inc., dated June 30, 2000, relating to the
          SpringHill Suites - Gaithersburg (Previously filed as Exhibit 10.37 to
          the 1999 Form S-11 and incorporated by reference).

    10.31 Lease Agreement between CNL Hospitality  Partners,  LP and RST4 Tenant
          LLC,  dated July 28, 2000,  relating to the Residence Inn - Merrifield
          (Previously  filed  as  Exhibit  10.38  to  the  1999  Form  S-11  and
          incorporated by reference).

    10.32 Purchase and Sale Agreement between TownePlace Management  Corporation
          and Residence Inn by Marriott,  Inc., as Sellers,  and CNL Hospitality
          Partners, LP, as Purchaser,  and joined in by Marriott  International,
          Inc.,  dated  November  24,  1999,  relating  to the  Residence  Inn -
          Merrifield  (Previously  filed as Exhibit  10.39 to the 1999 Form S-11
          and incorporated by reference).

    10.33 First  Amendment to Purchase  and Sale  Agreement  between  TownePlace
          Management  Corporation and Residence Inn by Marriott, as Sellers, and
          CNL Hospitality Partners, LP, as Purchaser,  and joined in by Marriott
          International,   Inc.,  dated  November  24,  1999,  relating  to  the
          Residence Inn - Mira Mesa, SpringHill Suites - Gaithersburg, Residence
          Inn - Merrifield,  and  TownePlace  Suites - Newark  (amends  Exhibits
          10.21,  10.30, and 10.32 above)  (Previously filed as Exhibit 10.40 to
          the 1999 Form S-11 and incorporated by reference).

    10.34 Lease Agreement between CNL Hospitality  Partners, LP and CCCL Leasing
          LLC,  dated  August 18, 2000,  relating to the  Courtyard - Alpharetta
          (Previously  filed  as  Exhibit  10.41  to  the  1999  Form  S-11  and
          incorporated by reference).

    10.35 Lease Agreement between CNL Hospitality  Partners, LP and CCCL Leasing
          LLC, dated August 18, 2000, relating to the Residence Inn - Cottonwood
          (Previously  filed  as  Exhibit  10.42  to  the  1999  Form  S-11  and
          incorporated by reference).

    10.36 Lease Agreement between CNL Hospitality  Partners, LP and CCCL Leasing
          LLC, dated August 18, 2000,  relating to the  TownePlace  Suites - Mt.
          Laurel  (Previously  filed as Exhibit  10.43 to the 1999 Form S-11 and
          incorporated by reference).

    10.37 Lease Agreement between CNL Hospitality  Partners, LP and CCCL Leasing
          LLC,  dated  August 18,  2000,  relating  to the  TownePlace  Suites -
          Scarborough  (Previously  filed as Exhibit 10.44 to the 1999 Form S-11
          and incorporated by reference).

    10.38 Lease Agreement between CNL Hospitality  Partners, LP and CCCL Leasing
          LLC,  dated  August 18,  2000,  relating  to the  TownePlace  Suites -
          Tewksbury (Previously filed as Exhibit 10.45 to the 1999 Form S-11 and
          incorporated by reference).

    10.39 Purchase and Sale Agreement between  Residence Inn by Marriott,  Inc.,
          Courtyard  Management  Corporation,  SpringHill  SMC  Corporation  and
          TownePlace  Management   Corporation,   as  Sellers,  CNL  Hospitality
          Partners,  LP, as  Purchaser,  CCCL Leasing LLC, as Tenant,  Crestline
          Capital Corporation,  Marriott  International,  Inc., and joined in by
          CNL Hospitality  Properties,  Inc., dated August 18, 2000, relating to
          the Residence Inn -  Cottonwood,  Courtyard - Alpharetta  and Overland
          Park SpringHill Suites - Raleigh,  and TownePlace Suites - Mt. Laurel,
          Scarborough  and Tewksbury  (Previously  filed as Exhibit 10.46 to the
          1999 Form S-11 and incorporated by reference).

    10.40 First Amendment to Purchase and Sale Agreement  between  Residence Inn
          by Marriott,  Inc., Courtyard Management  Corporation,  SpringHill SMC
          Corporation and TownePlace  Management  Corporation,  as Sellers,  CNL
          Hospitality Partners,  LP, as Purchaser,  CCCL Leasing LLC, as tenant,
          Crestline Capital Corporation, and Marriott International, Inc., dated
          August 18, 2000, relating to the Residence Inn - Cottonwood, Courtyard
          -  Alpharetta,  and  Overland  Park  SpringHill  Suites - Raleigh  and
          TownePlace Suites - Mt. Laurel,  Scarborough and Tewksbury (Previously
          filed as  Exhibit  10.47 to the 1999  Form  S-11 and  incorporated  by
          reference).

    10.41 Lease Agreement between CNL Hospitality  Partners,  LP and RST4 Tenant
          LLC,  dated  November  4, 2000,  relating to the  TownePlace  Suites -
          Newark  (Previously  filed as Exhibit  10.48 to the 1999 Form S-11 and
          incorporated herein by reference.)

    10.42 Lease   Agreement   between  LLB  C-Hotel,   L.L.C.   and  LLB  Tenant
          Corporation,  dated  October 12,  2000,  relating  to the  Courtyard -
          Little Lake Bryan  (Previously filed as Exhibit 10.49 to the 1999 Form
          S-11 (File No.  333-89691)  filed  October 26, 1999,  as amended,  and
          incorporated herein by reference.)

    10.43 Lease Agreement between LLB F-Inn,  L.L.C. and LLB Tenant Corporation,
          dated  October 12, 2000,  relating to the  Fairfield Inn - Little Lake
          Bryan  (Previously  filed as  Exhibit  10.50 to the 1999 Form S-11 and
          incorporated herein by reference.)

    10.44 First Amendment to Lease  Agreement  between LLB C-Hotel,  L.L.C.  and
          LLB Tenant  Corporation,  dated  November  17,  2000,  relating to the
          Courtyard - Little Lake Bryan (amends Exhibit 10.42 above) (Previously
          filed as Exhibit 10.51 to the 1999 Form S-11  and  incorporated herein
          by reference.)

    10.45 First Amendment to Lease Agreement  between LLB F-Inn,  L.L.C. and LLB
          Tenant Corporation, dated November 17, 2000, relating to the Fairfield
          Inn - Little Lake Bryan (amends Exhibit 10.43 above) (Previously filed
          as  Exhibit 10.52 to the 1999 Form S-11  and  incorporated  herein  by
          reference.)

    10.46 Purchase and Sale Agreement between Marriott  International,  Inc., as
          Seller,  and  CNL  Hospitality  Partners,  LP,  as  Purchaser,   dated
          September 17, 1998, relating to the Courtyard - Little Lake Bryan, the
          Fairfield Inn - Little Lake Bryan and the  SpringHill  Suites - Little
          Lake Bryan (Previously filed as Exhibit  10.53  to the 1999  Form S-11
          and incorporated herein by reference.)

    10.47 Second   Amendment  to  Lease   Agreement   between  CNL  LLB  C-Hotel
          Management,   LP  (formerly  LLB  C-Hotel,   L.L.C.)  and  LLB  Tenant
          Corporation,  dated  December  15, 2000,  relating to the  Courtyard -
          Little  Lake Bryan  (amends  Exhibits  10.42 and 10.44  above)  (Filed
          herewith.)

    10.48 Second Amendment to Lease Agreement  between CNL LLB F-Inn Management,
          LP  (formerly  LLB F-Inn  L.L.C.)  and LLB Tenant  Corporation,  dated
          December 15, 2000,  relating to the  Fairfield Inn - Little Lake Bryan
          (amends Exhibits 10.43 and 10.45 above) (Filed herewith.)

    10.49 Indenture  Agreement among Desert Ridge Resort,  LLC, as Issuer;  Bank
          One,  National  Association,  as  Trustee;  and  Financial  Structures
          Limited,  as Insurer,  dated December 15, 2000, relating to the Desert
          Ridge Property (Filed herewith.)


<PAGE>


Exhibit 10.47

                   Second Amendment to Lease Agreement between
                         CNL LLB C-Hotel Management, LP
                         (formerly LLB C-Hotel, L.L.C.)
                           and LLB Tenant Corporation
                  relating to the Courtyard - Little Lake Bryan


<PAGE>


                                                                      [LLB CTYD]

                       SECOND AMENDMENT TO LEASE AGREEMENT


         THIS SECOND  AMENDMENT TO LEASE  AGREEMENT (the "Second  Amendment") is
made as of the  15th day of  December,  2000,  by and  between  CNL LLB  C-HOTEL
MANAGEMENT,  LP, a Delaware limited  partnership,  f/k/a LLB C-HOTEL,  L.L.C., a
Delaware limited liability company ("Landlord"),  and LLB TENANT CORPORATION,  a
Delaware corporation ("Tenant").

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

         WHEREAS,  Landlord  and Tenant have  entered  into that  certain  Lease
Agreement  dated as of  October  12,  2000,  as amended  by that  certain  First
Amendment to Lease  Agreement dated as of November 17, 2000  (collectively,  the
"Original  Lease"),  for the leasing of that certain Courtyard by Marriott hotel
property located in Little Lake Bryan,  Orlando,  Florida, and more particularly
described in the Original Lease; and

         WHEREAS,  Landlord  and  Tenant  desire  to  amend  certain  terms  and
conditions of the Original Lease.

         NOW,  THEREFORE,  in  consideration  of  the  mutual  covenants  herein
contained  and other good and  valuable  consideration,  the mutual  receipt and
legal sufficiency of which are hereby  acknowledged,  Landlord and Tenant hereby
agree as follows:

         1.  Recitals.  The foregoing  recitals are correct and complete and are
hereby incorporated into this Second Amendment by this reference.

         2. Defined Terms.  Capitalized  terms used in this Second Amendment and
not defined  elsewhere  herein shall have the meanings set forth in the Original
Lease.

         3. Amendments to Original Agreement. From and after the date hereof the
Original Lease is hereby amended as follows:

         (a) In Article One of the Original Lease (captioned "Definitions"), the
defined term "Tenant's Personal Property" is hereby deleted in its entirety and,
in lieu thereof, the following is hereby substituted:

         ""Tenant's  Personal  Property" shall mean all motor vehicles,  and any
         other tangible  personal property of Tenant, if any, acquired by Tenant
         at its election and with its own funds on and after the date hereof and
         located at the Leased  Property  or used in  Tenant's  business  at the
         Leased Property and all  modifications,  replacements,  alterations and
         additions to such personal property installed at the expense of Tenant,
         other  than  any  items  included   within  the  definition  of  Leased
         Property."

         (b)  Section  2.1(e) of the  Original  Lease is hereby  deleted  in its
entirety and, in lieu thereof, the following is hereby substituted:

                  "(e)  all  machinery,   equipment,   furniture,   furnishings,
         moveable  walls  or  partitions,  computers,  trade  fixtures,  FAS  or
         Inventories  located  on  or  in  the  Leased  Improvements,   and  all
         modifications,   replacements,   alterations   and  additions  to  such
         property,  except  items,  if any,  included  within  the  category  of
         Fixtures,  but  specifically  excluding all items  included  within the
         category  of  Tenant's  Personal  Property  (collectively,  the "Leased
         Personal Property");"

         (c) Section 5.2 of the Original  Lease  (captioned  "Tenant's  Personal
Property") is hereby deleted in its entirety.

         4.  Counterparts.  This Second Amendment may be executed in two or more
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same instrument.

         5.  Governing  Law.  This  Second   Amendment   shall  be  interpreted,
construed, applied and enforced in accordance with Section 22.13 of the Original
Lease.

         6. Section and Other  Headings.  The headings  contained in this Second
Amendment  are for  reference  purposes only and shall not in any way affect the
meaning or interpretation of this Second Amendment.

         7. Entire  Agreement.  The  Original  Lease,  as amended by this Second
Amendment, contains and embodies the entire agreement of the parties hereto, and
no representations, inducements, or agreements, oral or otherwise, not contained
in the  Original  Lease,  as amended by this Second  Amendment,  shall be of any
force or effect.  This Second  Amendment may not be modified or changed in whole
or in part in any manner other than by an  instrument  in writing duly signed by
the parties hereto.  Except as modified by this Second Amendment,  the terms and
provisions  of the  Original  Lease,  which  are  incorporated  herein  by  this
reference, are hereby reaffirmed and shall be binding upon the parties hereto.


                    [SIGNATURES APPEAR ON THE FOLLOWING PAGE]



<PAGE>


         IN WITNESS WHEREOF, the parties have caused this Second Amendment to be
executed as a sealed instrument as of the date first above written.


                                 LANDLORD:

                                 CNL LLB C-HOTEL MANAGEMENT, L.P.
                                 a Delaware limited partnership
                                 By:      CNL LLB C-Hotel Management Corp.,
                                          a Delaware corporation
                                          its managing member

                                          By:      /s/ Charles A. Muller
                                                   --------------------------
                                                   Charles A. Muller
                                                   Executive Vice President


                                 TENANT:

                                 LLB TENANT CORPORATION,
                                 a Delaware corporation

                                 By:      /s/ Timothy J. Grisius
                                          -----------------------------------
                                          Timothy J. Grisius
                                          Vice President

<PAGE>

EXHIBIT 10.48

                   Second Amendment to Lease Agreement between
                          CNL LLB F-Inn Management, LP
                           (formerly LLB F-Inn L.L.C.)
                           and LLB Tenant Corporation
                relating to the Fairfield Inn - Little Lake Bryan


<PAGE>

                                                                     [LLB F-INN]

                       SECOND AMENDMENT TO LEASE AGREEMENT


         THIS SECOND  AMENDMENT TO LEASE  AGREEMENT (the "Second  Amendment") is
made as of the  15th  day of  December,  2000,  by and  between  CNL  LLB  F-INN
MANAGEMENT,  LP, a Delaware  limited  partnership,  f/k/a LLB F-INN,  L.L.C.,  a
Delaware limited liability company ("Landlord"),  and LLB TENANT CORPORATION,  a
Delaware corporation ("Tenant").

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

         WHEREAS,  Landlord  and Tenant have  entered  into that  certain  Lease
Agreement  dated as of  October  12,  2000,  as amended  by that  certain  First
Amendment to Lease  Agreement dated as of November 17, 2000  (collectively,  the
"Original Lease"),  for the leasing of that certain Fairfield Inn hotel property
located in Little Lake Bryan, Orlando,  Florida, and more particularly described
in the Original Lease; and

         WHEREAS,  Landlord  and  Tenant  desire  to  amend  certain  terms  and
conditions of the Original Lease.

         NOW,  THEREFORE,  in  consideration  of  the  mutual  covenants  herein
contained  and other good and  valuable  consideration,  the mutual  receipt and
legal sufficiency of which are hereby  acknowledged,  Landlord and Tenant hereby
agree as follows:

         1.  Recitals.  The foregoing  recitals are correct and complete and are
hereby incorporated into this Second Amendment by this reference.

         2. Defined Terms.  Capitalized  terms used in this Second Amendment and
not defined  elsewhere  herein shall have the meanings set forth in the Original
Lease.

         3. Amendments to Original Agreement. From and after the date hereof the
Original Lease is hereby amended as follows:

         (a) In Article One of the Original Lease (captioned "Definitions"), the
defined term "Tenant's Personal Property" is hereby deleted in its entirety and,
in lieu thereof, the following is hereby substituted:

         ""Tenant's  Personal  Property" shall mean all motor vehicles,  and any
         other tangible  personal property of Tenant, if any, acquired by Tenant
         at its election and with its own funds on and after the date hereof and
         located at the Leased  Property  or used in  Tenant's  business  at the
         Leased Property and all  modifications,  replacements,  alterations and
         additions to such personal property installed at the expense of Tenant,
         other  than  any  items  included   within  the  definition  of  Leased
         Property."

         (b)  Section  2.1(e) of the  Original  Lease is hereby  deleted  in its
entirety and, in lieu thereof, the following is hereby substituted:

                  "(e)  all  machinery,   equipment,   furniture,   furnishings,
         moveable  walls  or  partitions,  computers,  trade  fixtures,  FAS  or
         Inventories  located  on  or  in  the  Leased  Improvements,   and  all
         modifications,   replacements,   alterations   and  additions  to  such
         property,  except  items,  if any,  included  within  the  category  of
         Fixtures,  but  specifically  excluding all items  included  within the
         category  of  Tenant's  Personal  Property  (collectively,  the "Leased
         Personal Property");"

         (c) Section 5.2 of the Original  Lease  (captioned  "Tenant's  Personal
Property") is hereby deleted in its entirety.

         4.  Counterparts.  This Second Amendment may be executed in two or more
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same instrument.

         5.  Governing  Law.  This  Second   Amendment   shall  be  interpreted,
construed, applied and enforced in accordance with Section 22.13 of the Original
Lease.

         6. Section and Other  Headings.  The headings  contained in this Second
Amendment  are for  reference  purposes only and shall not in any way affect the
meaning or interpretation of this Second Amendment.

         7. Entire  Agreement.  The  Original  Lease,  as amended by this Second
Amendment, contains and embodies the entire agreement of the parties hereto, and
no representations, inducements, or agreements, oral or otherwise, not contained
in the  Original  Lease,  as amended by this Second  Amendment,  shall be of any
force or effect.  This Second  Amendment may not be modified or changed in whole
or in part in any manner other than by an  instrument  in writing duly signed by
the parties hereto.  Except as modified by this Second Amendment,  the terms and
provisions  of the  Original  Lease,  which  are  incorporated  herein  by  this
reference, are hereby reaffirmed and shall be binding upon the parties hereto.


                    [SIGNATURES APPEAR ON THE FOLLOWING PAGE]



<PAGE>


         IN WITNESS WHEREOF, the parties have caused this Second Amendment to be
executed as a sealed instrument as of the date first above written.


                                 LANDLORD:

                                 CNL LLB F-INN MANAGEMENT, L.P.
                                 a Delaware limited partnership
                                 By:      CNL LLB F-Inn Management Corp.,
                                          a Delaware corporation
                                          its managing member

                                          By:      /s/ Charles A. Muller
                                                   --------------------------
                                                   Charles A. Muller
                                                   Executive Vice President


                                 TENANT:

                                 LLB TENANT CORPORATION,
                                 a Delaware corporation

                                 By:      /s/ Timothy J. Grisius
                                          -----------------------------------
                                          Timothy J. Grisius
                                          Vice President





<PAGE>

EXHIBIT 10.49

               Indenture Agreement among Desert Ridge Resort, LLC,
                   as Issuer; Bank One, National Association,
                  as Trustee; and Financial Structures Limited,
                as Insurer, relating to the Desert Ridge Property

<PAGE>


                                    INDENTURE

                                      among

                                  DESERT RIDGE
                                   RESORT, LLC

                                   as Issuer,


                         BANK ONE, NATIONAL ASSOCIATION

                                   as Trustee,


                                       and


                          FINANCIAL STRUCTURES LIMITED

                                   as Insurer


                          Dated as of December 15, 2000


                                   $70,000,000
                   Senior Secured Floating Rate Notes Due 2007

                                  $109,000,000
                       7.90% Senior Secured Notes Due 2007





<PAGE>

                                TABLE OF CONTENTS


                                                                            Page

RECITALS......................................................................1

                                  ARTICLE I DEFINITIONS.......................1
         SECTION 1.1  Definitions.............................................1
         SECTION 1.2  Rules of Construction..................................14

                                  ARTICLE II THE NOTES.......................15
         SECTION 2.1  Forms of the Notes Generally...........................15
         SECTION 2.2  Form of Trustee's Certificate of Authentication........17
         SECTION 2.3  The Notes..............................................17
         SECTION 2.4  Execution, Authentication and Delivery of the Notes....18
         SECTION 2.5  Registration; Transfer and Exchange; Restrictions on
                        Transfer of Notes....................................18
         SECTION 2.6  Mutilated, Destroyed, Lost and Stolen Notes............23
         SECTION 2.7  Payment of Principal and Interest......................24
         SECTION 2.8  Interest on New Notes..................................24
         SECTION 2.9  Cancellation...........................................24
         SECTION 2.10 Transfer Agent and Paying Agent........................24
         SECTION 2.11 Rule 144A Information..................................24
         SECTION 2.12 Provision of Payment Date Statements and Other
                        Information to Holders...............................25
         SECTION 2.13  Provision of Financial Information of Insurer.........26

                                  ARTICLE III COVENANTS......................27
         SECTION 3.1  Payment of Principal and Interest; Appointment of
                        Agents...............................................27
         SECTION 3.2  Performance of Obligations.............................27
         SECTION 3.3  Further Instruments and Acts...........................27
         SECTION 3.4  Notice of Events of Default............................28
         SECTION 3.5  Maintenance of Books and Records.......................28
         SECTION 3.6  Continuation of Ratings................................28

                                  ARTICLE IV REMEDIES........................28
         SECTION 4.1  Notices of Default.....................................28
         SECTION 4.2  Exercise of Remedies...................................28
         SECTION 4.3  Limitation of Suits....................................29
         SECTION 4.4  Unconditional Rights of Noteholders To Receive
                        Principal, Interest and Additional Amounts...........29
         SECTION 4.5  Performance and Enforcement of Certain Obligations.....30
         SECTION 4.6  Special Construction Servicer..........................30

                                  ARTICLE V THE TRUSTEE......................31
         SECTION 5.1  Duties of the Trustee..................................31
         SECTION 5.2  Rights of Trustee......................................33
         SECTION 5.3  Individual Rights of Trustee...........................34
         SECTION 5.4  Trustee's Disclaimer...................................34
         SECTION 5.5  Notice of Defaults; Notice of Requirement to Pay
                        Additional Amounts...................................34
         SECTION 5.6  Appointment of Administrative Agent....................35
         SECTION 5.7  Compensation and Indemnity.............................36
         SECTION 5.8  Replacement of Trustee.................................37
         SECTION 5.9  Successor Trustee by Merger............................38
         SECTION 5.10 Eligibility; Disqualification..........................38
         SECTION 5.11 Unclaimed Funds........................................39

                                  ARTICLE VI NOTEHOLDERS' LISTS, REPORTS
                                   AND MEETINGS..............................39
         SECTION 6.1  Preservation of Information; Communications to
                        Noteholders..........................................39
         SECTION 6.2  Voting by Noteholders..................................39
         SECTION 6.3  Purposes for Which Noteholder Meetings May Be Called...39
         SECTION 6.4  Call, Notice and Place of Meetings.....................40
         SECTION 6.5  Persons Entitled to Vote at Meetings...................40
         SECTION 6.6  Quorum; Action.........................................40
         SECTION 6.7  Determination of Voting Rights; Conduct and
                        Adjournment of Meetings..............................41
         SECTION 6.8  Counting Votes and Recording Action of Meetings........42

                                  ARTICLE VII ACCOUNTS, COLLECTIONS AND
                                   DISBURSEMENTS.............................43
         SECTION 7.1  Collection and Disbursements of Money..................43
         SECTION 7.2  The Accounts...........................................45
         SECTION 7.3  General Provisions Regarding Accounts..................45
         SECTION 7.4  Payment of Accounts Balances...........................46

                                  ARTICLE VIII SUPPLEMENTAL INDENTURES.......46
         SECTION 8.1  Supplemental Indentures Without Consent of Noteholders.46
         SECTION 8.2  Supplemental Indentures with Consent of Noteholders....47
         SECTION 8.3  Execution of Supplemental Indentures...................48
         SECTION 8.4  Effect of Supplemental Indenture.......................48
         SECTION 8.5  Reference in Notes to Supplemental Indentures..........49

                                  ARTICLE IX REDEMPTION OF NOTES; PURCHASE
                                   OF NOTES; DEFEASANCE......................49
         SECTION 9.1  Redemption.............................................49
         SECTION 9.2  Purchase...............................................49
         SECTION 9.3  Mechanics of Redemption or Purchase....................50
         SECTION 9.4  Form of Redemption Notice or Purchase Notice...........52
         SECTION 9.5  Notes Payable on Payoff Date...........................52
         SECTION 9.6  Defeasance.............................................52
         SECTION 9.7  Release of Collateral..................................53

                                  ARTICLE X OBLIGATIONS ABSOLUTE.............53
         SECTION 10.1  Issuer's Obligations Absolute.........................53

                                  ARTICLE XI THE INSURER.....................53
         SECTION 11.1  Effect of Payment by Insurer; Subrogation.............53
         SECTION 11.2  Rights of the Insurer.................................54
         SECTION 11.3  Indemnification; Reimbursement of Costs...............55
         SECTION 11.4  Liability of the Insurer..............................56
         SECTION 11.5  Consents..............................................56
         SECTION 11.6  Substitution of Reinsurer.............................56
         SECTION 11.7  Notice of Failure to Pay Premiums.....................56

                                  ARTICLE XII MISCELLANEOUS..................56
         SECTION 12.1  Compliance Certificates and Opinions, etc.............56
         SECTION 12.2  Form of Documents Delivered to Trustee................57
         SECTION 12.3  Acts of Noteholders...................................58
         SECTION 12.4  Notices, etc., to the Trustee, the Issuer, the
                        Insurer, the Guarantor and the Rating Agencies.......59
         SECTION 12.5  Notices to and from Noteholders; Waiver...............62
         SECTION 12.6  Payment and Notice Dates..............................63
         SECTION 12.7  Alternative Payment and Notice Provisions.............63
         SECTION 12.8  Effect of Headings and Table of Contents..............63
         SECTION 12.9  Successors and Assigns................................63
         SECTION 12.10 Separability..........................................63
         SECTION 12.11 Benefits of Indenture.................................63
         SECTION 12.12 Legal Holiday.........................................63
         SECTION 12.13 Governing Law.........................................64
         SECTION 12.14 Counterparts..........................................64
         SECTION 12.15 Recording of Indenture................................64
         SECTION 12.16 Corporate Obligation..................................64
         SECTION 12.17 Inspection............................................64
         SECTION 12.18 Waiver of Immunities..................................65
         SECTION 12.19 Satisfaction and Discharge............................65

EXHIBIT A-1 FORM OF REGULATION S GLOBAL FLOATING RATE NOTE DUE 2007.......A-1-1

EXHIBIT A-2 FORM OF RESTRICTED GLOBAL FLOATING RATE NOTE DUE 2007.........A-2-1

EXHIBIT B-1 FORM OF REGULATION S GLOBAL FIXED RATE NOTE...................B-1-1

EXHIBIT B-2 FORM OF RESTRICTED GLOBAL FIXED RATE NOTE.....................B-2-1

EXHIBIT C FORM OF SECURITIES LEGEND.........................................C-1

EXHIBIT DFORM OF REGULATION S CERTIFICATE...................................D-1

EXHIBIT EFORM OF RULE 144A EXCHANGE CERTIFICATE.............................E-1

                                    EXHIBIT F

Opinions of Arent Fox, Kelley Drye, and Skadden, Arps, Slate,
  Meagher & Flom LLP........................................................F-1

EXHIBIT GFORM OF CLEARING SYSTEM CERTIFICATE................................G-1

EXHIBIT HFORM OF INFORMATION REQUEST........................................H-1



<PAGE>


                                    INDENTURE

         INDENTURE,  dated as of December 15, 2000 (as amended,  supplemented or
otherwise  modified and in effect from time to time,  this  "Indenture"),  among
DESERT RIDGE RESORT,  LLC, a limited  liability company organized under the laws
of the State of Delaware  (together with any successor  thereto (the  "Issuer");
BANK ONE, NATIONAL ASSOCIATION,  a national banking association,  as trustee and
not in its  individual  capacity  (in  such  capacity  and,  together  with  any
successor thereto as trustee hereunder, the "Trustee"); and FINANCIAL STRUCTURES
LIMITED, a company organized under the laws of Bermuda (the "Insurer").

                                    RECITALS

         The Issuer has duly  authorized  the  execution  and  delivery  of this
Indenture  to provide  for the  issuance  and  delivery of the Notes (as defined
herein).

         Each party agrees as follows for the benefit of the other party and for
the equal and ratable  benefit of the Noteholders (as defined herein) of (i) the
Issuer's Senior Secured Floating Rate Notes Due 2007 (the "Floating Rate Notes")
and (ii) the  Issuer's  7.90%  Senior  Secured  Notes Due 2007 (the  "Fixed Rate
Notes" and together with the Floating Rate Notes, the "Notes"):


                                    ARTICLE I

                                   DEFINITIONS

         SECTION 1.1 Definitions. Except as otherwise specified herein or as the
context may otherwise require,  the following terms have the respective meanings
specified below for all purposes of this Indenture. Other capitalized terms used
herein without  definition  have the meanings given to them in the  Construction
Loan Agreement.

         "Accounts" shall mean, collectively, the Guarantee Payment Account, the
Note Purchase Account, the Payment Account and the Policy Payment Account.

         "Act" shall have the meaning specified in Section 12.3(a).

         "Additional   Amounts"   shall  have  the  meaning   specified  in  the
Construction Loan Agreement.

         "Additional Premium" shall have the meaning specified in the Policy.

<PAGE>
         "Affiliate" shall mean, with respect to any specified Person, any other
Person  controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect to
any Person  shall mean the power to direct the  management  and policies of such
Person,  directly  or  indirectly,  whether  through  the  ownership  of  voting
securities,   by  contract  or  otherwise;   and  the  terms  "controlling"  and
"controlled" shall have meanings correlative to the foregoing.

         "Agents" shall have the meaning specified in Section 3.1(b).

         "Applicable  Procedures"  shall mean the rules and  procedures  of DTC,
Euroclear or Clearstream, in each case to the extent applicable and as in effect
from time to time.

         "Assignment of Reinsurance" shall mean the Assignment of Reinsurance of
even date  herewith  between  the Insurer and the Trustee for the benefit of the
Noteholders, a copy of which is attached as Exhibit N.

         "Assignment  of  Reinsurance  (Swap)"  shall  mean  the  Assignment  of
Reinsurance of even date herewith  between the Insurer and Merrill Lynch Capital
Services, Inc., a copy of which is attached as Exhibit O.

         "Authenticating Agent" shall mean the Trustee.

         "Authorized  Officer"  with  respect  to the  Issuer,  shall  mean  any
officer, or Person performing the same or a similar function, of a member of the
Issuer  who is  authorized  to act for or on  behalf of the  Issuer  in  matters
relating to the Issuer and who is identified on the list of Authorized  Officers
delivered  by the Issuer to the Trustee on the Closing Date (as such list may be
modified or  supplemented  from time to time  thereafter).  With  respect to the
Trustee, any Agent or the DTC Custodian, "Authorized Officer" shall mean a Trust
Officer.  With  respect  to the  Insurer,  "Authorized  Officer"  shall mean any
officer,  employee  or agent of the  Insurer  who is  authorized  to act for the
Insurer in matters  relating to, and binding upon,  the Insurer.  Each party may
receive  and  accept a  certification  of the  authority  of any other  party as
conclusive   evidence  of  the   authority  of  any  person  to  act,  and  such
certification  may be  considered  as in full force and effect until  receipt by
such other party of written notice to the contrary.

         "Basic Documents" shall mean this Indenture, the Policy, the
Reinsurance  Agreement,  the Assignment of Reinsurance,  and the other documents
and certificates delivered in connection therewith, as the same may from time to
time be amended, supplemented or otherwise modified and in effect.

         "Beneficial Owner" shall mean each Person having a beneficial  interest
in a Global Note.



<PAGE>


         "Business  Day" shall mean any day,  other than a Saturday or a Sunday,
on which  commercial  banks  in New  York  City or the  jurisdiction  where  the
Corporate  Trust  Office is  located  are not  required  or  authorized  by law,
executive  order or regulation to close and on which such  commercial  banks are
open for business.

         "Cash" shall mean such coin or currency of the United States of America
as at the time  shall be legal  tender for  payment  of all  public and  private
debts.

         "Cede" shall mean Cede & Co., as DTC's nominee.

         "Certificate  of  Authentication"  shall have the meaning  specified in
Section 2.2.

         "Clearance  System" shall mean either Clearstream or Euroclear or both,
as the context requires.

         "Clearance   System   Certificate"   shall   mean  a   certificate   in
substantially  the form of Exhibit G hereto or such other form of certificate as
shall be satisfactory to the Note Registrar, Euroclear and Clearstream.

         "Clearstream"  shall mean Clearstream  Banking,  societe anonyme or any
successor securities clearing agency.

         "Closing Date" shall mean December 21, 2000.

         "Code" shall mean the Internal Revenue Code of 1986, as amended.

         "Construction   Loan  Agreement"  shall  mean  the  Construction   Loan
Agreement of even date  herewith  among the Issuer,  DRR Tenant  Corporation  as
Operating Tenant, the Trustee and Administrative Agent.

         "Construction  Loan Proceeds  Account" shall have the meaning specified
in the Construction Loan Agreement.

         "Corporate Trust Office" shall mean the principal office of the Trustee
at  which  at  any  particular  time  its  corporate  trust  business  shall  be
administered, which office at the date of execution of this Indenture is located
at 1 Bank One Plaza, Suite IL1-0126,  Chicago, IL 60670-0126,  Attention: Global
Corporate Trust  Services,  or at such other address within the United States as
the Trustee may designate  from time to time by notice to the  Noteholders,  the
Insurer and the Issuer, or the principal corporate trust office of any successor
Trustee at the address  designated  by such  successor  Trustee by notice to the
Noteholders, the Insurer and the Issuer.

         "Default"  shall mean any occurrence or  circumstance  that is, or with
notice or the lapse of time or both would become, an Event of Default.


<PAGE>

         "Default  Payment"  shall  mean any money  collected  by or paid to the
Trustee by any Person  after the  occurrence  and during the  continuance  of an
Event of Default,  including the proceeds collected by the Trustee upon the sale
or other  disposition  of Collateral or upon the exercise of any remedies  under
the Construction Loan Documents.

         "Default Payment Date" shall mean the first Business Day on which funds
in an  Account  resulting  from a deposit  therein  by the  Trustee of a Default
Payment are available to be disbursed as immediately available funds.

         "Default  Rate" shall have the meaning  specified  in the  Construction
Loan Agreement.

         "Defeasance  Collateral"  shall have the meaning  specified  in Section
8.6(b) of the Construction Loan Agreement.

         "Defeasance  Redemption  Date"  shall  have the  meaning  specified  in
Section 9.1(b).

         "Depository"  shall mean,  with respect to any Global Note, DTC or such
other Person as shall be designated as Depository by the Issuer pursuant hereto.

         "Depository Institution" shall mean any depository institution or trust
company  incorporated  under the laws of the United  States or any state thereof
and  subject  to  supervision  and  examination  by  federal  or  state  banking
authorities.

         "DTC" shall mean The Depository Trust Company, a New York corporation.

         "DTC Custodian" shall mean Bank One, National Association, as custodian
of the Global Notes for the Depository under a custody  agreement or any similar
successor agreement.

<PAGE>


         "Eligible Account" shall mean an account that is either: (a) maintained
with  an  Eligible  Institution  or (b) a  trust  account  maintained  with  the
corporate  trust  department of a Depository  Institution  with corporate  trust
powers acting in its fiduciary  capacity and which is subject to  regulations or
has  established  internal  guidelines  regarding  fiduciary  funds  on  deposit
substantially  similar to 12 CFR 9.10(b).  Each Eligible  Account shall (i) be a
separate,  identifiable and segregated  account from all other funds held by the
Depository  Institution  holding such Eligible Account,  (ii) be established and
maintained  in the name of, or on behalf of, the Trustee,  and clearly  indicate
that the funds deposited therein are held for the benefit of the Noteholders and
the Issuer, (iii) provide that the Trustee possess all right, title and interest
in all funds on deposit therein from time to time and all proceeds thereof, (iv)
provide that it is under the sole dominion and control of the Trustee, on behalf
of the Noteholders and the Issuer,  and (v) be an account as to which the holder
thereof has agreed that it has no right of setoff or banker's lien against,  and
no right to otherwise  deduct from any funds in such account for any amount owed
to such holder by the Noteholder or the Issuer.  Notwithstanding  the foregoing,
an Eligible  Account  shall also include such other  accounts  having such other
characteristics  as are  reasonably  acceptable to the Trustee and the Issuer so
long as the deposit of funds  hereunder in such other accounts would not result,
in and of itself,  in the  withdrawal,  qualification  or  reduction of the then
current  ratings of the Rating  Agencies  assigned to the Notes, as confirmed in
writing by the Rating Agencies.

         "Eligible  Institution"  shall  mean  any  Depository  Institution  the
short-term  unsecured deposit or debt obligations of which (or, in the case of a
Depository  Institution  that is the principal  subsidiary of a holding company,
the short-term  unsecured debt obligations of such holding company) are rated at
least "P-1" by Moody's and "A-1" by S&P;  provided  that, if any funds are to be
held in an  Eligible  Account  for  more  than 30  calendar  days,  an  Eligible
Institution  shall mean a Depository  Institution  the long-term  unsecured debt
obligations  of which  (or,  in the case of a  Depository  Institution  or trust
company that is the  principal  subsidiary of a holding  company,  the long-term
unsecured debt  obligations of such holding company) are rated at least "Aa3" by
Moody's  and  "AA-"  by  S&P.   Notwithstanding  the  foregoing,   an  "Eligible
Institution" shall also include such other Depository  Institutions  having such
other characteristics as are reasonably acceptable to the Trustee so long as the
deposit of funds  hereunder  in such  other  Depository  Institutions  would not
result, in and of itself, in the withdrawal, qualification or downgrading of the
then current ratings of the Rating Agencies  assigned to the Notes, as confirmed
in writing by the Rating Agencies.

         "Euroclear" shall mean Morgan Guaranty Trust Company,  Brussels Office,
as  operator of the  Euroclear  System,  or any  successor  securities  clearing
agency.

         "Event of Default" shall have the meaning specified in the Construction
Loan Agreement.

         "Fixed Rate Notes" shall have the meaning  specified in the preamble of
this Indenture.

         "Floating Rate Notes" shall have the meaning  specified in the preamble
of this Indenture.

         "Four-Year Date" shall mean December 15, 2004.

         "Global  Note" shall mean a  Regulation  S Global Note or a  Restricted
Global Note, as the case may be.

         "Guarantee Payment Account" shall mean the Eligible Account established
by the Trustee for the benefit of the  Noteholders  and the Insurer  pursuant to
Section 7.2 for payments made with respect to the Notes by the Guarantor and all
monies,  securities,  instruments,  documents  and  other  property  on  deposit
therein.

<PAGE>

         "Indenture"  shall have the meaning  specified  in the preamble of this
Indenture and shall include the terms of the Notes.

         "Independent"  shall  mean,  when used with  respect  to any  specified
Person,  that such  Person  (a) is in fact  independent  of the  Issuer  and any
Affiliate of the Issuer,  (b) does not have any direct financial interest or any
material  indirect  financial  interest  in the Issuer or any  Affiliate  of the
Issuer and (c) is not  connected  with the Issuer or any Affiliate of the Issuer
as an officer, employee,  promoter,  underwriter,  trustee, partner, director or
person performing similar functions.

         "Independent  Certificate"  shall mean a  certificate  or opinion to be
delivered to the Trustee  under the  circumstances  described  in, and otherwise
complying  with,  the  applicable  requirements  of  Section  12.1,  made  by an
Independent  appraiser or other expert  appointed by an Issuer  Order,  and such
opinion or certificate  shall state that the signator has read the definition of
"Independent" in this Indenture and that the signator is Independent  within the
meaning thereof.

         "Individual  Note" shall mean a Floating Rate Note or a Fixed Rate Note
issued in  definitive,  certificated,  fully  registered  form without  interest
coupons and  substantially  in the form  attached  hereto as Exhibit A-3 or B-3,
respectively.

         "Information  Request" shall mean an information request in the form of
Exhibit H hereto,  which Information Request, if delivered by a Beneficial Owner
of a Global Note,  shall include a certification  as to such owner's  beneficial
ownership.

         "Insurer"  shall have the  meaning  specified  in the  preamble of this
Indenture.

         "Interest  Payment  Date"  shall  have  the  meaning  specified  in the
Construction Loan Agreement.

         "Interest  Period" shall have the meaning specified in the Construction
Loan Agreement.

         "Issuer"  shall have the  meaning  specified  in the  preamble  of this
Indenture.

         "Issuer  Order" and  "Issuer  Request"  shall  mean a written  order or
request signed in the name of the Issuer by any one of its  Authorized  Officers
and  delivered  to the  Trustee at least one (1)  Business  Day (or such  longer
period as the Trustee may reasonably request) prior to the date of the requested
action specified therein.

         "Legended  Individual  Note" shall mean an Individual  Note bearing the
Securities Legend which shall initially be all Individual Notes.

<PAGE>

         "Lien"  shall  mean any  assignment  for  security,  charge,  mortgage,
pledge,  security interest,  conditional sale or other title retention agreement
or similar lien.

         "Make  Whole   Amount"   shall  have  the  meaning   specified  in  the
Construction Loan Agreement.

         "Make Whole Hedge" shall have the meaning specified in Section 9.6(b).

         "Marriott" shall mean Marriott International, Inc. and its successors.

         "Moody's" shall mean Moody's Investors  Service,  Inc. or any successor
thereto.

         "New Note" has the meaning specified in Section 2.8.

         "Noteholder"  or "Holder" shall mean the Person in whose name a Note is
registered in the Note Register.

         "Note Purchase Account" shall mean the Eligible Account  established by
the  Trustee  for the  benefit of the  Noteholders  pursuant  to Section 7.2 for
payments  made with respect to the purchase of the Notes by a Purchaser  and all
monies,  securities,  instruments,  documents  and  other  property  or  deposit
therein.

         "Note Register" has the meaning specified in Section 2.5.

         "Note Registrar" shall mean the Trustee.

         "Notes"  shall  have the  meaning  specified  in the  preamble  of this
Indenture.

         "Notice of Claim" shall have the meaning specified in the Policy.

         "Officer's   Certificate"  shall  mean  a  certificate  signed  by  any
Authorized  Officer of the Issuer,  under the  circumstances  described  in, and
otherwise  complying  with,  the  applicable  requirements  of Section 12.1, and
delivered  to the Trustee  and the  Insurer.  Unless  otherwise  specified,  any
reference in this Indenture to an Officer's Certificate shall be to an Officer's
Certificate of any Authorized Officer of the Issuer.

         "Opinion of Counsel" shall mean one or more written opinions of counsel
who may, except as otherwise expressly provided in this Indenture, be counsel to
the Issuer (and, if expressly provided herein, may be an employee of the Issuer)
and which opinion or opinions  shall be addressed to the Trustee in its capacity
as such, and shall comply with any applicable requirements of Section 12.1.

<PAGE>


         "Opening Date" shall have the meaning specified in the Hotel Management
Agreement.

         "Original  Principal  Amount" shall mean (i) with respect to the Notes,
$179,000,000,  (ii) with respect to the  Floating  Rate Notes,  $70,000,000  and
(iii) with respect to the Fixed Rate Notes, $109,000,000.

         "Outstanding Principal Amount" shall mean the Original Principal Amount
of the Notes  reduced from time to time by the amount of any payment  (including
prepayment)  of the Original  Principal  Amount made by the Issuer in accordance
with the terms of the Notes;  provided,  however, that the Outstanding Principal
Amount for any Note shall not be less than zero.

         "Paying Agent" shall mean the Trustee.

         "Payment Date" shall mean an Interest  Payment Date, a Payoff Date, the
Stated Maturity Date or a Default Payment Date.

         "Payment Date  Statement"  shall have the meaning  specified in Section
2.12.

         "Payoff  Date"  shall  mean  the  date on which  all of the  Notes  are
required to be redeemed or purchased, as the case may be, following the delivery
of a Redemption Notice or a Purchase Notice, as the case may be.

         "Payment  Account" shall mean the Eligible  Account  established by the
Trustee for the benefit of the Noteholders  and the Insurer  pursuant to Section
7.2 for  payments  made with  respect to the Notes by the Issuer and all monies,
securities, instruments, documents and other property on deposit therein.

         "Permitted  Investments" shall mean at any time, any one or more of the
following obligations and securities, including those issued by, or entered into
with,  the  Trustee  as long as the rating  level  described  in the  applicable
sub-paragraph, if any, is complied with:

                  (a) direct debt  obligations  of, and debt  obligations  fully
         guaranteed  as to timely  payment of  principal  and  interest  by, the
         United States, or any agency or instrumentality thereof,  provided such
         obligations  are  backed  by the full  faith and  credit of the  United
         States;



<PAGE>


                  (b) direct debt  obligations  of, and debt  obligations  fully
         guaranteed   as  to  timely   payment  of  principal  and  interest  by
         government-sponsored  corporations  and agencies of the United  States,
         whether  or not  backed  by the full  faith and  credit  of the  United
         States, including, without limitation, debt obligations of Federal Home
         Mortgage Corporation,  Federal National Mortgage  Association,  Student
         Mortgage Loan Marketing Association, Financing Corp. (FICO), Resolution
         Funding Corp. (REFCORP), Consolidated Systemwide Bonds and notes of the
         Farm Credit System and  Consolidated  Debt  Obligations  of the Federal
         Home Mortgage Loan Banks;

                  (c)  commercial  paper of a  depository  institution  or other
         corporation  organized  under the law of the United States or any state
         thereof  which  commercial  paper is rated at the time of  purchase  at
         least "A1" by Standard & Poor's and "P1" by Moody's;

                  (d) unsecured certificates of deposit, time deposits,  federal
         funds or bankers'  acceptances  issued by any  Depository  Institution;
         provided  that  the  short-term  unsecured  debt  obligations  of  such
         Depository  Institution  (or in the  case of the  principal  Depository
         Institution in a holding company system, the short-term  unsecured debt
         obligations  of such holding  company) is rated at the time of purchase
         at least "A1" by Standard & Poor's and "P1" by Moody's;

                  (e) demand and time  deposits  of any  Depository  Institution
         which  deposits  are fully  insured by the  Federal  Deposit  Insurance
         Corporation;

                  (f)  repurchase  obligations  with  respect  to  any  security
         described  in clauses (a) and (b) of this  definition  and entered into
         with a Depository Institution (acting as principal) described in clause
         (d) above;

                  (g) debt  obligations  (other than stripped  bonds or stripped
         coupons)  bearing  interest  or sold at a  discount  and  issued by any
         corporation  incorporated  under the laws of the  United  States or any
         state  thereof  which is rated at the time of  purchase in at least the
         second highest generic long-term unsecured debt rating category of each
         of the Rating Agencies;

                  (h) money  market  funds  rated at the time of  purchase in at
         least the second  highest money market  rating  category of each of the
         Rating Agencies;

                  (i) principal-only  strips and interest-only strips in respect
         of non-callable obligations issued by the United States Treasury;

                  (j) Resolution Funding Corp.  (REFCORP) securities stripped by
         the Federal Reserve Bank of New York; and



<PAGE>


                  (k) any other instrument or security  acceptable to the Rating
         Agencies as  evidenced  by a letter  delivered to the Trustee from each
         such Rating Agency to the effect that the rating  assigned to the Notes
         by such Rating Agency would not be  downgraded,  qualified or withdrawn
         if such  instrument  or security  were  included in the  definition  of
         "Permitted Investment."

         Unless otherwise  specified herein,  (i) any such Permitted  Investment
must be available for withdrawal  without  penalty and must mature no later than
the Business Day immediately  preceding the next Interest  Payment Date; (ii) no
such  instrument  shall have a remaining term to maturity in excess of 365 days;
(iii) no such instrument  specified above (other than the instruments  described
in  clauses  (i)  and (j) of  this  definition)  shall  constitute  a  Permitted
Investment  if such  instrument  evidences  a right  to  receive  only  interest
payments with respect to the obligations  underlying such instrument;  (iv) such
instrument (other than interest-only  strips described in clauses (i) and (j) of
this  definition)  shall  provide for a  predetermined  fixed dollar  payment of
principal  that  cannot  vary  or  change;  and  (v) no  such  instrument  shall
constitute a "mortgage-backed" security.

         "Person" shall mean any individual,  corporation,  estate, partnership,
joint venture,  association,  joint stock company,  limited  liability  company,
trust  (including any  beneficiary  thereof),  unincorporated  organization,  or
government or any agency or political subdivision thereof.

         "Policy"  shall  mean the Debt  Service  Insurance  Policy of even date
herewith  issued  by  the  Insurer  to  the  Trustee  for  the  benefit  of  the
Noteholders,  a copy of which is attached as Exhibit L,  including  any novation
and assumption of liability by the Reinsurer thereunder,  as provided for in the
Assumption of Liability and Novation Endorsement to the Reinsurance Agreement.

         "Policy Event" shall mean the occurrence and continuation of any one of
the following events:

         (1)      the Trustee  shall have  delivered a valid  Notice of Claim to
                  the  Insurer  and  the  Reinsurer,   the  Insurer  and/or  the
                  Reinsurer shall have failed to make all required payments then
                  due under the  Policy and such  failure  has not been cured in
                  all respects; or

         (2)      the  Insurer  or  the  Reinsurer  shall  be the  subject  of a
                  bankruptcy,   insolvency  or  similar   proceeding   and  such
                  proceeding shall not have been dismissed.

         "Policy  Payment  Account"  shall  mean the  segregated  trust  account
established  by the  Trustee  for the  benefit of the  Noteholders  pursuant  to
Section 7.2 for payments made with respect to the Notes by or for the account of
the Insurer or the Reinsurer  (other than payments made as a Purchaser)  and all
monies,  securities,  instruments,  documents  and  other  property  on  deposit
therein.



<PAGE>


         "Pool Members" shall mean the member  companies,  from time to time, of
the Royal Indemnity Pool, which are, as of the date hereof, the Reinsurer, Globe
Indemnity  Company,  American & Foreign Insurance Company,  Safeguard  Insurance
Company, and Royal Insurance Company of America.

         "Predecessor  Note" of any  particular  Note shall mean every  previous
Note  evidencing all or a portion of the same  indebtedness as that evidenced by
such particular Note.

         "Prepayment Date" shall have the meaning specified in Section 9.1(a).

         "Principal   Amount"  shall  mean  the  Original  Principal  Amount  or
Outstanding  Principal  Amount of the Notes,  as the case may be,  payable  upon
maturity or redemption in respect of the  principal  thereof in accordance  with
the terms of this Indenture.

         "Priority  of  Payments"  shall have the meaning  specified  in Section
7.1(b).

         "Proceeding"  shall  mean any suit in  equity,  action  at law or other
judicial or administrative proceeding.

         "Purchase Notice" shall have the meaning specified in Section 9.2(a).

         "Purchaser" shall have the meaning specified in Section 9.2(a).

         "QIB" shall mean a qualified  institutional buyer within the meaning of
Rule 144A.

         "Rating Agencies" shall mean Moody's and S&P.

         "Rating Agency Condition" shall mean, with respect to any action,  that
the Rating  Agencies  shall have been given  prior  notice  thereof and that the
Rating Agencies shall have notified the Trustee, the Issuer and the Insurer that
such action shall not result in a reduction,  qualification or withdrawal of the
then-current rating assigned to the Notes.

         "Record  Date" shall mean,  with respect to any Interest  Payment Date,
the Stated Maturity Date, Payoff Date or Default Payment Date as applicable, the
close of business on the date  (whether or not a Business Day) ten (10) calendar
days preceding such date.



<PAGE>


         "Redemption/Purchase  Deposit  Amount"  shall mean,  as of any date, an
amount equal to the sum of the  following as of such date:  (i) the  Outstanding
Principal  Amount of the  Floating  Rate Notes and the Make Whole  Amount of the
Fixed Rate Notes,  if applicable,  (ii) accrued and unpaid interest on the Notes
to the  date of  deposit  of the  Redemption/Purchase  Deposit  Amount  with the
Trustee and (x) with respect to the  Floating  Rate Notes,  interest  which will
accrue from such date of deposit  through the scheduled  Redemption  Date at the
fixed rate provided for in the Interest Rate Swap Agreement and (y) with respect
to the Fixed Rate  Notes,  interest  which will accrue from such date of deposit
until the  scheduled  Redemption  Date at the rate  provided for under the Fixed
Rate Notes, (iii) any unpaid Additional  Amounts,  (iv) any other amounts due or
to become due through the Redemption Date pursuant to this Indenture and unpaid,
(v)  accrued and unpaid  interest  at the  Default  Rate and due and unpaid Late
Payment  Fees,  (vi) all amounts paid to the Trustee  pursuant to the Policy and
not previously  reimbursed,  and (vii) the amount of any Additional Premium then
due or to become due on or prior to the Redemption Date to the Insurer  pursuant
to the Policy;  provided,  however,  if the Notes are being  redeemed in part on
such date, the Redemption/Purchase Deposit Amount shall equal the sum of (A) the
aggregate Outstanding Principal Amount of the Floating Rate Notes to be redeemed
or the Make Whole Amount of the Fixed Rate Notes to be redeemed, (B) accrued and
unpaid  interest  on the  amount of clause  (A)  through  such date and (x) with
respect to the Floating Rate Notes, interest which will accrue from such date of
deposit through the scheduled  Redemption Date at the fixed rate provided for in
the Interest  Rate Swap  Agreement and (y) with respect to the Fixed Rate Notes,
interest  which  will  accrue  from such  date of  deposit  until the  scheduled
Redemption  Date at the rate  provided  for under the Fixed Rate Notes,  (C) any
Additional  Amounts due with respect to the amount being paid in connection with
such redemption and (D) Additional  Premiums due or to become due on or prior to
the Redemption Date as provided in the Policy.

         "Redemption  Date" shall mean either a Prepayment  Date or a Defeasance
Redemption Date.

         "Redemption  Notice" shall mean the notice of  prepayment  given by the
Issuer to the Trustee pursuant to the Construction Loan Agreement.

         "Registered Owners" has the meaning specified in Section 2.7(b).

         "Regulation S" shall mean Regulation S under the Securities Act.

         "Regulation S Certificate"  shall mean a certificate  substantially  in
the form of Exhibit D hereto.

         "Regulation  S Global Note" shall mean a Floating  Rate Note or a Fixed
Rate Note initially sold in an offshore  transaction in reliance on Regulation S
under  the  Securities  Act and  represented  by one or  more  Global  Notes  in
definitive,  fully registered form without interest coupons,  deposited with the
DTC Custodian or any successor,  and substantially in the form of Exhibit A-2 or
B-2, respectively.

         "Reinsurance   Agreement"  shall  mean  the  Quota  Share   Reinsurance
Agreement including the Assumption of Liability and Novation Endorsement thereto
of even date herewith  issued by the  Reinsurer,  a copy of which is attached as
Exhibit M.

<PAGE>

         "Reinsurer" shall mean Royal Indemnity Company, a Delaware corporation,
and its successors as reinsurer under the Reinsurance Agreement.

         "Restricted  Global  Note"  shall mean a Floating  Rate Note or a Fixed
Rate Note initially sold within the United States to U.S.  Persons that are QIBs
issued in  definitive,  fully  registered  form without  interest  coupons,  and
represented  by one or more  Restricted  Global  Notes,  deposited  with the DTC
Custodian or any successor, and substantially in the form of Exhibit A-1 or B-1,
respectively.

         "Restricted  Period"  shall mean the period of forty (40) calendar days
commencing  on the day  after  the  latest of (i) the day on which the Notes are
first  offered to Persons  other than  distributors  (as defined in Regulation S
under the  Securities  Act) in reliance on Regulation S under the Securities Act
and (ii) the Closing Date.

         "Rule 144A" shall mean Rule 144A under the Securities Act.

         "Rule 144A Exchange Certificate" shall mean a certificate substantially
in the form of Exhibit E hereto.

         "Rule 144A  Information"  shall mean such  information  as is specified
pursuant  to Rule  144A(d)(4)  under the United  States  Securities  Act (or any
successor provision thereto) (which, at the date of this Indenture,  consists of
(x) a very brief statement of the nature of the business,  products and services
(which statement shall be as of a date within 12 months prior to the date of the
intended resale) of the Issuer and (y) the most recent financial  statements for
such period of time during the two fiscal years  preceding the period covered in
the most recent financial statements that the Issuer has been in operation. Such
financial  statements  shall  include a balance sheet (as of a date less than 16
months before the date of the intended transaction for which such information is
required  to be made  available)  and  profit  and  loss and  retained  earnings
statements  (provided  that if the balance sheet is not as of a date less than 6
months before the date of the intended transaction,  such most recent profit and
loss and retained  earnings  statements shall be for the period from the date of
such balance  sheet to a date less than 6 months before the date of the intended
transaction) and shall be audited to the extent reasonably available.

         "S&P" shall mean Standard & Poor's Ratings Services,  a division of The
McGraw-Hill Companies, Inc. or any successor thereto.

         "Securities  Act" shall mean the United States  Securities Act of 1933,
as amended.

         "Securities  Legend"  shall  mean the  legend  set  forth in  Exhibit C
hereto.

         "Special  Construction  Servicer"  shall have the meaning  specified in
Section 4.6.



<PAGE>


         "State"  shall  mean any of the fifty  states of the  United  States of
America or the District of Columbia.

         "Stated Maturity Date" shall mean December 15, 2007.

         "Swap  Policy"  shall  mean the Debt  Service  Insurance  Policy  dated
December 14, 2000 issued by the Insurer to Merrill Lynch Capital Services, Inc.,
a copy of which is attached as Exhibit L,  including any novation and assumption
of liability by the  Reinsurer,  as provided in the  Assumption of Liability and
Novation Endorsement (Swap) to the Swap Reinsurance Agreement.

         "Swap  Reinsurance  Agreement"  shall mean the Quota Share  Reinsurance
Agreement including the Assumption of Liability and Novation  Endorsement (Swap)
thereto  dated  December  14, 2000 issued by the  Reinsurer,  a copy of which is
attached hereto as Exhibit M.

         "Transfer Agent" shall mean the Trustee.

         "Trustee"  shall have the  meaning  specified  in the  preamble of this
Indenture.

         "Trust  Officer" shall mean when used with respect to the Trustee,  any
officer  within  the  Corporate  Trust  Office  (or any  successor  group of the
Trustee) including any officer of the Trustee customarily  performing  functions
similar  to  those  performed  by the  persons  who at the  time  shall  be such
officers, respectively, or any other officers to whom any corporate trust matter
is  referred  because  of his or her  knowledge  of  and  familiarity  with  the
particular subject.

         "Two-Year Date" shall mean December 15, 2002.

         "United  States" or "U.S." shall mean the United  States of America and
any State,  Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands and other
territories or possessions of the United States of America.

         "Unlegended  Individual  Note" shall mean an Individual Note which does
not bear the  Securities  Legend  and which  can only be  issued  if the  Issuer
determines under  applicable law that the placement of the Securities  Legend is
no longer required.

         SECTION  1.2  Rules  of  Construction.  Unless  the  context  otherwise
requires:

                  (1) a term has the meaning assigned to it;

                  (2) an accounting  term not otherwise  defined has the meaning
assigned to it in accordance with United States  generally  accepted  accounting
principles as in effect from time to time;



<PAGE>


                  (3) "or" is not exclusive;

                  (4) "including" means including without limitation;

                  (5) words in the singular  include the plural and words in the
plural include the singular;

                  (6)  all  references  to  "$"  are  to  U.S.  dollars,  unless
otherwise stated;

                  (7) any agreement,  instrument or statute  defined or referred
to herein or in any instrument or certificate  delivered in connection  herewith
means  such  agreement,  instrument  or  statute  as from time to time  amended,
modified or supplemented and includes (in the case of agreements or instruments)
references to all  attachments  thereto and  instruments  incorporated  therein;
references to a Person are also to its permitted successors and assigns; and

                  (8) all percentages  resulting from any calculation in respect
of a Note shall be rounded to the nearest one hundred-thousandth of a percentage
point,  with five  one-millionths  of a percentage  point rounded upwards (e.g.,
9.8976545% (or .09876545)  would be rounded to 9.87655% (or .0987655)),  and all
dollar amounts used in or resulting  from such  calculation in respect of a Note
shall be rounded to the nearest cent (with one-half cent rounded upwards).


                                   ARTICLE II

                                    THE NOTES

         SECTION 1.3 Forms of the Notes Generally.  (a) On the Closing Date, the
Notes shall be in substantially the forms provided for in Exhibit A (in the case
of the Floating  Rate Notes) and Exhibit B (in the case of the Fixed Rate Notes)
to this Indenture,  with such appropriate insertions,  omissions,  substitutions
and other  variations  as are required or permitted by this  Indenture,  and may
have such letters,  numbers or other marks of  identification or designation and
such legends or  endorsements  placed  thereon as may be required to comply with
any law or with  any  rules  made  pursuant  thereto  or with  the  rules of any
securities  exchange on which the Notes may be listed or governmental  agency or
as may, consistent herewith,  be determined by the Authorized Officers executing
such Notes,  as  evidenced by their  execution of the Notes.  The Notes shall be
typewritten,  printed, lithographed or engraved on steel engraved borders or may
be produced in any other manner,  all as  determined  by the officers  executing
such Notes, as evidenced by their execution of such Notes.

                  (1) Each Note  shall be dated the date of its  authentication.
Each Note shall bear the Trustee's  Certificate of Authentication as provided in
Section 2.2.



<PAGE>


                  (2) On the Closing Date, the appropriate  Authorized  Officers
of the Issuer will  execute and deliver to the Trustee (i) a  Restricted  Global
Floating Rate Note to be in an aggregate  principal  amount of up to $70,000,000
and a Restricted  Global Fixed Rate Note to be in an aggregate  principal amount
of up to  $109,000,000,  and (ii) a Regulation S Global Floating Rate Note to be
in an aggregate  principal amount of up to $70,000,000 and a Regulation S Global
Fixed Rate Note to be in an aggregate  principal  amount of up to  $109,000,000;
provided,  however,  that the aggregate principal amount of such Notes shall not
exceed $179,000,000.

         Each Global Note (i) shall be delivered by the Trustee to DTC acting as
the Depository  or,  pursuant to DTC's  instructions,  shall be delivered by the
Trustee on behalf of DTC to and deposited with the DTC Custodian,  and in either
case  shall be  registered  in the name of Cede  and  (ii)  shall  bear a legend
substantially to the following effect:

                  "Unless  this   certificate  is  presented  by  an  authorized
         representative of The Depository Trust Company,  a New York corporation
         ("DTC"),  to the  Issuer  or its agent for  registration  of  transfer,
         exchange or payment,  and any  certificate  issued is registered in the
         name  of  Cede & Co.  or in  such  other  name  as is  requested  by an
         authorized representative of DTC (and any payment is made to Cede & Co.
         or to such other entity as is requested by an authorized representative
         of  DTC),  ANY  TRANSFER,  PLEDGE  OR OTHER  USE  HEREOF  FOR  VALUE OR
         OTHERWISE  BY OR TO ANY PERSON IS WRONGFUL  inasmuch as the  registered
         owner hereof, Cede & Co., has an interest herein."

         Any Global  Note may be  deposited  with such other  Depository  as the
Issuer may from time to time  designate,  and shall  bear such  legend as may be
appropriate;  provided  that such  successor  Depository  maintains a book-entry
system that qualifies to be treated as "registered form" under Section 163(f)(3)
of the Code.



<PAGE>


                  (3) If at any time the Depository for the Global Note notifies
the Issuer that it is  unwilling  or unable to continue as  Depository  for such
Global  Note or if at any time the  Depository  for such  Global  Note  shall no
longer be  eligible  to act as such under this  Section  2.1,  the Issuer  shall
appoint a  successor  Depository  with  respect to such  Global  Note.  Any such
successor  Depository  must maintain a book-entry  system that  qualifies  under
Section 163(f)(3) of the Code. If a successor Depository for such Global Note is
not appointed by the Issuer within 90 days after the Issuer receives such notice
or becomes aware of such  ineligibility,  the Issuer's election pursuant to this
Section 2.1 that such Notes be  represented  by a Global Note shall no longer be
effective and the Issuer will  execute,  and the Trustee will  authenticate  and
deliver  Individual  Notes  in  any  authorized  denominations  in an  aggregate
principal  amount equal to the principal  amount of such Global Note in exchange
for such Global  Note.  If the Trustee has  instituted  or has been  directed to
institute  any  judicial  proceeding  in a court to  enforce  the  rights of the
Noteholders under the Notes, and the Trustee has been advised by counsel that in
connection  with such  proceeding it is necessary or appropriate for the Trustee
to obtain  possession  of the  Notes,  the  Trustee  may in its sole  discretion
determine  that the  Notes  represented  by a Global  Note  shall no  longer  be
represented  by such Global Note.  In such event,  the Issuer  hereby  agrees to
execute and the Trustee  will  authenticate  and  deliver,  in exchange for such
Global  Note,  Individual  Notes  (and  if the  Trustee  has  in its  possession
Individual   Notes  previously   executed  by  the  Issuer,   the  Trustee  will
authenticate  and  deliver  such  Notes),  in  authorized  denominations,  in an
aggregate principal amount equal to the principal amount of such Global Note.

                  (4) The Global  Notes shall in all respects be entitled to the
same  benefits  under this  Indenture  as  Individual  Notes  authenticated  and
delivered hereunder.

         Beneficial  interests  in the  Global  Notes  shall be held in  minimum
denominations of $25,000 of Original  Principal Amount and integral multiples of
$1,000 of Original Principal Amount above such minimum amount. Beneficial Owners
of a Global  Note will be entitled to receive  physical  delivery of  Individual
Notes only as provided herein.  The Individual Notes will be issuable in minimum
denominations of $25,000 of Original  Principal Amount and integral multiples of
$1,000 of Original Principal Amount above such minimum amount.

         SECTION 1.4 Form of Trustee's Certificate of Authentication.

         The  Trustee's  certificate  of  authentication  for Notes  shall be in
substantially the following form:

         This Note is one of the Notes  designated  above and referred to in the
         within-mentioned Indenture.

                                            ____________________________,
                                            as Trustee

                                            By:_________________________
                                               Authorized Officer

                                    OR

                                            ____________________________,
                                            as Authenticating Agent

                                            By:_________________________
                                               Authorized Officer



<PAGE>


         SECTION  1.5 The Notes.  (a) The Notes shall be  designated  as (i) the
Issuer's  Senior Secured  Floating Rate Notes due December 15, 2007 and (ii) the
Issuer's 7.90% Senior Secured Notes due December 15, 2007.  Each Note shall rank
pari  passu  with each other  Note and be  equally  and  ratably  secured by the
Collateral. The aggregate principal amount of Floating Rate Notes and Fixed Rate
Notes that may be  authenticated,  delivered and  outstanding  at any time under
this Indenture is limited to $70,000,000 and $109,000,000,  respectively (except
for Notes  authenticated  and delivered upon transfer of, or in exchange for, or
in lieu of,  other Notes  pursuant to the  provisions  of this  Indenture or the
Notes). All Notes shall be substantially  identical to all other Notes except as
to denominations and tenor and except as may otherwise be provided by resolution
of the Issuer and expressly permitted in this Indenture.

                  (1) The Notes shall be secured as provided in the Construction
Loan Agreement.

         SECTION 1.6 Execution,  Authentication  and Delivery of the Notes. Each
Note shall be executed  manually or in  facsimile on behalf of the Issuer by its
Authorized  Officer.  Notes  bearing  the  manual  or  facsimile  signatures  of
individuals  who were at any time the  Authorized  Officers of the Issuer  shall
bind the Issuer,  notwithstanding  that such individuals,  or any of them, shall
have ceased,  for any reason,  to hold such offices prior to the  authentication
and  delivery of such Note or did not hold such  offices at the date of any such
Note.

         The  Trustee is  authorized,  upon  receipt of Notes duly  executed  on
behalf of the Issuer for the purposes of the original  issuance of Notes, (i) to
authenticate  such Notes in an aggregate  principal  amount not in excess of the
aggregate  principal  amount  specified  herein  and to  deliver  such  Notes in
accordance  with the written  order or orders of the Issuer signed on its behalf
by any Authorized  Officer and (ii) thereafter to authenticate and deliver Notes
in accordance with the provisions hereinafter set forth.

         No Note shall be  entitled to any benefit  under this  Indenture  or be
valid  or  obligatory  for any  purpose  unless  there  appears  on such  Note a
certificate  of  authentication  substantially  in the form provided for herein,
executed  by  the  Trustee  by  manual   signature,   and  such  certificate  of
authentication  upon  any  Note  shall  be  conclusive  evidence,  and the  only
evidence, that such Note has been duly authenticated and delivered hereunder and
is entitled to the benefits of this Indenture.

         SECTION  1.7  Registration;  Transfer  and  Exchange;  Restrictions  on
Transfer  of  Notes.  (a)  The  Trustee  shall  be the  Note  Registrar  for the
registration  and transfer of the Notes.  The Note  Registrar  shall cause to be
maintained in accordance with the provisions of this Section 2.5 a register (the
"Note  Register") in which,  subject to such  reasonable  regulations  as it may
prescribe,  the Note Registrar  shall provide for the  registration of the Notes
and of transfers and exchanges of Notes as herein provided.



<PAGE>


                  (1) The Note  Register  shall show the  amount of such  Notes,
whether a Note is a Fixed Rate Note or a Floating Rate Note,  the date of issue,
all  subsequent  transfers  and changes of ownership in respect  thereof and the
names,  taxpayer  identifying  numbers (if relevant to a specific  Holder),  and
addresses of the Holders of the Notes and any payment  instructions with respect
thereto (if different  from a Holder's  registered  address).  The Note Register
shall also include  notations as to whether  Notes have been paid or  cancelled,
and, in the case of  mutilated,  destroyed,  stolen or lost Notes,  whether such
Notes have been  replaced.  In the case of the  replacement of any of the Notes,
the Note Register will include notations of the Note so replaced,  and the Notes
issued in replacement  thereof.  In the case of the  cancellation  of any of the
Notes, the Note Register will include notations of the Note so cancelled and the
date on  which  such  Note  was  cancelled.  The  Note  Registrar  shall  at all
reasonable  times during  office hours make the Note  Register  available,  upon
reasonable advance request therefor,  to the Trustee (if the Trustee is not then
serving as Note Registrar), the Issuer or any Person authorized by the Issuer in
writing  for  inspection  and for the  taking  of  copies  thereof  or  extracts
therefrom,  and at the expense of the Issuer the Note Registrar shall deliver to
such Persons all lists of Holders as they may request.

                  (2) A Note may be  transferred by the Holder thereof only upon
presentation  and  surrender of such Note at the  Corporate  Trust Office of the
Note Registrar  duly endorsed or  accompanied by an assignment  duly executed by
such  Holder or his duly  authorized  attorney-in-fact  in such form as shall be
satisfactory to the Note Registrar.  Upon the transfer of any Note in accordance
with the preceding  sentence and subject to the  provisions of this Section 2.5,
the Issuer shall execute,  the  Authenticating  Agent shall authenticate and the
Note Registrar shall deliver to the transferee one or more new Notes of the same
type (i.e.,  Fixed Rate Note or Floating Rate Note, as applicable) in authorized
denominations,  evidencing,  in the aggregate, the same principal balance as the
Note being transferred.

                  (3) A Note may be  exchanged  by the  Holder  thereof  for any
number of new Notes of the same type  (i.e.,  Fixed Rate Note or  Floating  Rate
Note, as applicable) in authorized denominations,  representing in the aggregate
the same principal balance as the Note  surrendered,  upon surrender of the Note
to be  exchanged at the  Corporate  Trust  Office of the Note  Registrar.  Notes
delivered  upon any such exchange will evidence the same  obligations  under the
Notes  and  this  Agreement,  and  will  be  entitled  to the  same  rights  and
privileges,  as  the  Notes  surrendered.  Upon  the  exchange  of any  Note  in
accordance  with  the  preceding  sentence,   the  Issuer  shall  execute,   the
Authenticating  Agent shall authenticate and the Note Registrar shall deliver to
the exchanging  Holder one or more new Notes of the same type (i.e.,  Fixed Rate
Note or  Floating  Rate  Note,  as  applicable),  in  authorized  denominations,
evidencing,  in the  aggregate,  the same  principal  balance  as the Note being
exchanged. No certifications shall be required in respect of any such exchange.



<PAGE>


                  (4) If Individual  Notes have been issued  pursuant to Section
2.1(d),  subject to Section 2.5(j), no restrictions  shall apply to the transfer
or  registration  of transfer of an Unlegended  Individual  Note to a transferee
that takes  delivery  in the form of an  Individual  Note.  By  acceptance  of a
Legended Individual Note, whether upon original issuance or subsequent transfer,
each Holder of such a Note acknowledges the restrictions on the transfer of such
Note set forth in the Securities  Legend and agrees that it will transfer such a
Note only as provided  herein.  In addition to the provisions of Section 2.5(j),
the  following  restrictions  shall  apply  with  respect  to the  transfer  and
registration  of transfer of a Legended  Individual  Note to a  transferee  that
takes delivery in the form of an Individual Note:

                           (1) The Note Registrar shall register the transfer of
         a Legended  Individual  Note if the  requested  transfer  is (x) to the
         Issuer or an  Affiliate  of the  Issuer  (such  Affiliate  status to be
         certified in writing by an  Authorized  Officer of the Issuer in a form
         satisfactory  to the Note  Registrar) or (y) being made by a transferor
         who  has  provided  the  Note  Registrar  with  a  Rule  144A  Exchange
         Certificate; and

                           (2) The Note Registrar shall register the transfer of
         a Legended  Individual  Note if the  transferor  has  provided the Note
         Registrar with a Regulation S Certificate.

                  (5)  Subject to Section  2.5(j),  so long as the Global  Notes
remain outstanding and are held by or on behalf of the Depository,  transfers of
beneficial interests in any of such Global Notes, may be made only in accordance
with this Section 2.5(f) and in accordance with Applicable Procedures.

                           (1) A  beneficial  interest in a  Regulation S Global
         Note  may be  transferred  to a  transferee  that  is a QIB  and  takes
         delivery in the form of a beneficial  interest in the Restricted Global
         Note only upon receipt by the Note  Registrar  of a Rule 144A  Exchange
         Certificate.

                           (2) A beneficial interest in a Restricted Global Note
         may be transferred to a transferee that takes delivery in the form of a
         beneficial  interest in a Regulation S Global Note only upon receipt by
         the Note Registrar of a Regulation S Certificate.

                           (3) No  restrictions  shall apply with respect to the
         transfer or registration of transfer of (x) a beneficial  interest in a
         Restricted  Global  Note  to a  transferee  that  is a QIB  that  takes
         delivery in the form of a beneficial  interest in a  Restricted  Global
         Note or (y) a  beneficial  interest in a  Regulation S Global Note to a
         transferee that takes delivery in the form of a beneficial  interest in
         a Regulation S Global Note.

                  (6) Upon  acceptance for transfer of a beneficial  interest in
any Global Note for a  beneficial  interest  in another  Global Note as provided
herein, the Note Registrar shall (or shall request the Depository to) endorse on
the schedules  affixed to each of such Global Notes (or on continuations of such
schedules  affixed  to  each  of such  Global  Notes  and  made  parts  thereof)
appropriate  notations  evidencing the date of such transfer and (x) in the case
of the Global Note from which such transfer is made, a decrease in the principal
balance of such Global Note equal to the principal balance being transferred and
(y) in the case of the Global Note into which such transfer is made, an increase
in the  principal  balance of such  Global Note equal to the  principal  balance
being transferred.



<PAGE>


                  (7) The following  provisions  shall apply to the placement of
the  Securities  Legend on any  Individual  Note  initially  issued  pursuant to
Section 2.1(d) or issued in exchange for or upon transfer of another  Individual
Note or of a  beneficial  interest in any of the Global Notes and to the removal
of the Securities Legend from any Legended Individual Note.

                           (1) Unless determined otherwise by the Note Registrar
         in accordance with applicable law, an Individual Note initially  issued
         pursuant to Section  2.1(d) in exchange for a beneficial  interest in a
         Restricted  Global Note or a  Regulation S Global Note prior to the end
         of the Restricted Period shall bear the Securities Legend.

                           (2) Unless determined  otherwise by the Issuer, based
         upon an Opinion  of  Counsel  satisfactory  to the Note  Registrar,  in
         accordance with  applicable  law, an Individual  Note initially  issued
         pursuant to Section 2.1(d) in exchange for a beneficial  interest in an
         Regulation S Global Note shall not bear the Securities Legend.

                           (3) Upon the transfer,  exchange or  replacement of a
         Legended  Individual  Note, or upon  specific  request of a holder of a
         Legended   Individual  Note  for  removal  of  the  Securities   Legend
         therefrom,  the Note Registrar  shall deliver an Unlegended  Individual
         Note or  Notes  if there is  provided  to the Note  Registrar  evidence
         reasonably  satisfactory  to the Note  Registrar  (which may include an
         Opinion of Counsel to the  transferor or  transferee) as may reasonably
         be required by the Note Registrar  that neither the  Securities  Legend
         nor the  restrictions  on transfer  set forth  therein are  required to
         ensure compliance with the provisions of the Securities Act.

                           (4) Upon the transfer,  exchange or replacement of an
         Unlegended  Individual Note for an Individual  Note, the Note Registrar
         shall deliver a Legended or Unlegended Individual Note or Notes, as the
         Holder may request.



<PAGE>


                  (8) Subject to the  restrictions  on transfer and exchange set
forth in this  Section 2.5,  the holder of any  Individual  Note may transfer or
exchange the same in whole or in part (in an initial  principal balance equal to
$25,000 or any integral  multiple of $1,000 in excess  thereof) by  surrendering
such Individual Note at the Corporate Trust Office of the Note Registrar,  or at
the office of any other Transfer Agent,  together with an executed instrument of
assignment and transfer satisfactory in form and substance to the Note Registrar
in the case of  transfer  and a  written  request  for  exchange  in the case of
exchange.  Subject to Section 2.1 and the  restrictions  imposed by this Section
2.5,  the  Beneficial  Owner  of  a  Global  Note  may,  subject  to  Applicable
Procedures,  cause the  Depository (or its nominee) to notify the Note Registrar
in writing of a request for transfer or exchange of such beneficial  interest in
whole or in part (in an  initial  principal  balance  equal  to  $25,000  or any
integral  multiple of $1,000 in excess thereof) for an Individual Note or Notes.
Following a proper request for transfer or exchange,  the Note Registrar  shall,
within  five  Business  Days of such  request  if made at such  Corporate  Trust
Office,  or within 10  Business  Days if made at the office of another  Transfer
Agent  (other  than the Note  Registrar),  cause the Issuer to  execute  and the
Authenticating  Agent to  authenticate,  and the Note Registrar shall deliver at
such Corporate  Trust Office or such transfer  agent, as the case may be, to the
transferee (in the case of transfer) or holder (in the case of exchange) or send
by first class mail at the risk of the  transferee  (in the case of transfer) or
holder (in the case of exchange) to such address as the transferee or holder, as
applicable,  may request,  an Individual Note or Notes, as the case may require,
for a like aggregate  principal  balance and in such authorized  denomination or
denominations as may be requested.  The presentation for transfer or exchange of
any Individual Note shall not be valid unless made at the Corporate Trust Office
of the  Note  Registrar  or at the  office  of  another  Transfer  Agent  by the
registered holder in person, or by a duly authorized attorney-in-fact.  The Note
Registrar or any other  transfer  agent may decline to accept any request for an
exchange or registration of transfer of any Note during the period commencing on
a Record Date and ending on the related Payment Date on the Notes.

                  (9) Transfer,  registration and exchange shall be permitted as
provided in this  Section  2.5  without any charge to the Holder  except for the
expenses of delivery (if any) not made by regular  mail and except,  if the Note
Registrar  shall so require,  the payment of a sum sufficient to cover any stamp
duty,  tax or  governmental  charge or  insurance  charge that may be imposed in
relation thereto; provided that any Opinions of Counsel or certificates required
by this  Section  2.5 shall be at the  expense  of the  Holder  or its  proposed
transferee and provided further that, in the event of any exchange of beneficial
interests in a Global Note for  Individual  Notes pursuant to Section 2.1(d) and
stamp duties,  taxes or  governmental  charges or insurance  charges shall be an
expense  of the  Issuer.  Registration  of the  transfer  of a Note by the  Note
Registrar shall be deemed to be the acknowledgment of such transfer on behalf of
the Issuer.

                  (10) All Notes  surrendered  for  registration  of transfer or
exchange  shall be cancelled by the Note  Registrar or the Trustee in accordance
with their standard procedures.

                  (11) The Note Registrar  shall provide to the Trustee  (unless
the Trustee is acting as Note  Registrar) (i) upon receipt of a written  request
from the Trustee,  notice of each  registration  of transfer of a Note,  (ii) an
updated copy of the Note Register at the beginning of each calendar  quarter and
(iii)  upon  receipt  of a written  request  therefor,  a list of Holders of the
Notes.

                  (12) Prior to due  presentment of a Note for  registration  of
transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may
treat the Person in whose name such Note is  registered as the absolute and sole
owner of such Note for the purpose of  receiving  payment of  principal  of, and
interest (and  Additional  Amounts,  if any) on such registered Note and for all
other purposes  whatsoever,  whether or not such registered Note be overdue, and
neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee shall
be  affected by notice to the  contrary,  and  payment of the  principal  of and
interest on such  registered  Note by the Trustee  shall be made only to or upon
the order of such registered owner.

                  (13) The transfer of any Note, or beneficial interest therein,
inconsistent  with or contrary to this Indenture  shall be deemed void ab initio
for all purposes under this Indenture.

<PAGE>

         Notwithstanding  anything to the contrary in this Section, a Fixed Rate
Note may be replaced or exchanged only for another Fixed Rate Note in accordance
with this Indenture,  and a Floating Rate Note may be replaced or exchanged only
for another Floating Rate Note in accordance with this Indenture.

         SECTION  1.8  Mutilated,  Destroyed,  Lost  and  Stolen  Notes.  If any
mutilated Note is surrendered to the Trustee,  the Issuer shall execute, and the
Trustee shall authenticate and deliver in exchange therefor,  a new Note of like
tenor  and  principal   amount  and  bearing  a  number  not   contemporaneously
outstanding.  Each new Note issued  pursuant to this Section in exchange for, in
substitution  for, or in lieu of a  Predecessor  Note shall be dated the date of
such Predecessor Note.

         If there shall be  delivered to the Issuer and the Trustee (i) evidence
to their  satisfaction  of the  destruction,  loss or theft of any Note and (ii)
such  security or  indemnity  as may be required by each of them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the  Issuer  or the  Trustee  that such  Note has been  acquired  by a bona fide
purchaser,  the Issuer  shall  execute and upon its  request  the Trustee  shall
authenticate and deliver, in lieu of any such destroyed,  lost or stolen Note, a
new Note of like kind (Fixed Rate or Floating  Rate) tenor and principal  amount
and  bearing  a number  not  contemporaneously  outstanding.  In  every  case of
mutilation or defacement,  the applicant shall surrender to the Trustee the Note
so mutilated or defaced.  Upon the issuance of any  substitute  Note, the Issuer
may  require  the  payment  of a sum  sufficient  to  cover  any  tax  or  other
governmental  charge  that may be  imposed  in  relation  thereto  and any other
expenses connected therewith.

         Every  new  Note  issued  pursuant  to  this  Section  in  lieu  of any
destroyed,   lost  or  stolen  Note  shall  constitute  an  original  additional
contractual  obligation  of  the  Issuer,   evidencing  the  same  debt  as  the
Predecessor Note, whether or not the destroyed,  lost or stolen Note shall be at
any time  enforceable by anyone,  and any such new Note shall be entitled to all
the  benefits  of  this  Indenture  and of the  other  Basic  Documents  and the
Construction Loan Agreement equally and  proportionately  with any and all other
Notes and to the same extent as such Predecessor Note.

         All Notes shall be held and owned upon the express  condition  that, to
the extent permitted by law, the foregoing provisions are exclusive with respect
to the replacement or payment of mutilated,  destroyed, lost or stolen Notes and
shall preclude (to the extent lawful) all other rights and remedies with respect
to the replacement or payment of mutilated,  destroyed,  lost or stolen Notes or
negotiable instruments without their surrender.

         Notwithstanding  anything to the contrary in this Section, a Fixed Rate
Note may be replaced or exchanged only for another Fixed Rate Note in accordance
with this Indenture,  and a Floating Rate Note may be replaced or exchanged only
for another Floating Rate Note in accordance with this Indenture.


<PAGE>


         SECTION 1.9 Payment of Principal  and  Interest.  (a0 The Issuer hereby
authorizes  and directs  the Trustee to make or cause to be made  payment of the
principal of,  interest on and  Additional  Amounts with respect to the Notes as
set forth in this Indenture, including Section 7.1(b).

                  (1) Any interest shall be paid,  unless otherwise  provided in
the text of the Notes, to the persons (the  "Registered  Owners") in whose names
such Notes are  registered on the Note Register  maintained  pursuant to Section
2.5(a)  hereof at the close of business on the related  Record  Date;  provided,
however,  that  interest  payable upon the Maturity Date of the principal of any
Note shall be payable to the Person to whom such principal is payable. Principal
of the Notes  shall be payable  when due against  surrender  of the Notes at the
Corporate  Trust  Office of the  Paying  Agent.  Payments  of  principal  of and
interest on, and  Additional  Amounts,  if any, the Notes shall be made by check
mailed on or before the due date for such payment to the person entitled thereto
at such person's address appearing on the Note Register for the Notes maintained
pursuant to Section 2.5(a) hereof, or, in the case of payments of principal,  to
such other address as the registered Holder shall provide in writing at the time
of surrender of the Notes.  Payments of principal of and interest and Additional
Amounts,  if any,  on the Notes shall be paid by wire  transfer  of  immediately
available  funds to such account with a bank in the United States as such Holder
shall  designate  by written  instruction  received by the Trustee not less than
five days prior to the applicable Payment Date.

         SECTION 1.10  Interest on New Notes.  Interest  shall be deemed to have
been paid on each new Note (a "New Note") issued  pursuant to Section 2.5 hereof
in exchange for, in  substitution  for, or in lieu of a Predecessor  Note to the
date to which interest was paid on such Predecessor Note.

         SECTION  1.11  Cancellation.  The Issuer may at any time deliver to the
Trustee  for  cancellation  any Notes  previously  authenticated  and  delivered
hereunder which the Issuer may have acquired in any manner  whatsoever,  and all
Notes so delivered shall be promptly cancelled by the Trustee.

         All Notes delivered to the Trustee for payment, redemption, or exchange
as herein or in the Notes  provided  shall be  cancelled  and  destroyed  by the
Trustee or such other person as may be jointly  designated by the Issuer and the
Trustee,  which shall thereupon furnish  certificates of such destruction to the
Issuer.

         SECTION 1.12 Transfer Agent and Paying Agent.  The Trustee shall be the
Transfer Agent for the Notes and the Paying Agent for the Notes.



<PAGE>


         SECTION  1.13  Rule 144A  Information.  For so long as any of the Notes
remain  Outstanding and are "restricted  securities"  within the meaning of Rule
144(a)(3) under the Securities Act, the Issuer will,  during any period in which
the Issuer is not subject to Section 13 or 15(d) under the  Securities  Act make
available the Rule 144A  Information  at its own expense to any Holder of a Note
or any Beneficial  Owner of a Global Note, to a prospective  purchaser of a Note
or  beneficial  interest  therein  who is a QIB,  in each  case at the  Holder's
written  request to the Issuer or to the Trustee  (which shall notify the Issuer
in writing of any such request).  Upon request by the Issuer,  the Trustee shall
so furnish the Rule 144A Information to the extent provided by the Issuer to the
Trustee.

         SECTION 1.14 Provision of Payment Date Statements and Other Information
to Holders. (a0 On each Payment Date, the Trustee shall forward a statement (the
"Payment  Date  Statement")  in  respect  of the  distribution  made on any such
Payment Date by mail to (i) the Depository,  (ii) the Rating Agencies, (iii) the
Issuer, (iv) the Holders of Individual Notes that deliver an Information Request
to the Trustee,  (v) the Insurer and (vi) other Beneficial  Owners of Notes that
deliver an  Information  Request to the  Trustee,  confirming  their  beneficial
ownership of Notes.  To the extent such  information  is either known by a Trust
Officer of the Trustee or furnished to the Trustee  pursuant to Section  2.12(b)
below by the Issuer,  each Payment  Date  Statement  will include the  following
information:

                           (1) the amount of the  payment  made on such  Payment
         Date  allocable to principal (or the Make Whole Amount,  as applicable)
         and  separately  identifying  the  amount of any  principal  payment or
         prepayments (specifying the reason therefor) included therein;

                           (2) the amount of the  payment  made on such  Payment
         Date  allocable to interest and the amount of  Additional  Amounts,  if
         any;

                           (3) if the  payment to the  Noteholders  is less than
         the full  amount  payable on such  Payment  Date to such  Holders,  the
         amount of the shortfall;

                           (4) the Outstanding  Principal Amount of the Floating
         Rate Notes and the Fixed Rate Notes after giving  effect to any payment
         of principal on such Payment Date;

                           (5) LIBOR as  determined  on the  Determination  Date
         with respect to the Reset Date immediately  preceding such Payment Date
         and the interest  rate  applicable  to the Floating  Rate Notes for the
         period  commencing  on  such  Payment  Date  and  ending  on  (but  not
         including) the next succeeding Payment Date;

                           (6) notice of the occurrence of a Default or Event of
         Default;

                           (7) notice of any claims made or payments  made under
         the Policy or the Reinsurance Agreement;

                           (8) the  then-current  estimated  date on  which  the
         Resort will first accept paying guests;



<PAGE>


                           (9) the amount, if any, by which the Issuer's current
         construction project budget is estimated to exceed $298,000,000;

                           (10) the  amount  spent by or on behalf of the Issuer
         to  acquire,  construct,  equip  and  furnish  the Hotel as part of the
         construction project budget; and

                           (11) the then-remaining amounts of committed debt and
         equity  funds  available  for payment of costs to  acquire,  construct,
         equip and furnish the Hotel.

         The Issuer shall provide the  information  specified in paragraphs  (8)
through and  including  (11) of the Payment Date  Statement to the Trustee on or
before the Deposit Date preceding the applicable Interest Payment Date.

                  (2) Additional  information regarding the Notes and the Issuer
shall also be  prepared  by the  Issuer  upon  reasonable  request by the Rating
Agencies,  the Trustee,  any agent acting on its behalf, or any Beneficial Owner
that provides to the Trustee an Information Request certifying to its beneficial
ownership of Notes or any Noteholder  that provides an  Information  Request and
upon payment of the  Trustee's  fees and expenses in connection  with  providing
such  information.  Such  additional  information (to the extent provided to the
Trustee  by the  Issuer)  shall be  distributed  by the  Trustee  to the  Rating
Agencies and, upon payment or  reimbursement of the Trustee's costs and expenses
of distribution  thereof,  to requesting  Beneficial  Owners that provide to the
Trustee an Information Request certifying to their beneficial ownership of Notes
and Noteholders that provide an Information Request.

                  (3) Within 60 days  following the end of each  calendar  year,
the Trustee shall prepare,  or cause to be prepared,  and provide to each Person
who at any time  during  the  calendar  year  was a  Noteholder  such  customary
information  as the Trustee  deems  necessary or desirable  for  Noteholders  to
prepare their federal income tax returns.  Such  obligation of the Trustee shall
be deemed to have been  satisfied  to the extent that  substantially  comparable
information shall be provided by the Trustee pursuant to any requirements of the
Code. Upon prior written request and the prior payment of the costs and expenses
to be incurred in  connection  therewith,  the Trustee  will  prepare such other
reasonable reports as may be requested in writing by any Holder of a Note.

<PAGE>

         SECTION 1.15  Provision of Financial  Information  of Insurer.  (a0 The
Insurer agrees that, while any of the Notes remain outstanding,  it will deliver
to the Trustee,  for redelivery,  upon request, to any Noteholder or prospective
purchasers of Notes or the Initial  Purchaser any quarterly or annual  financial
statements  (which may be prepared in  accordance  with the  statutory  basis of
accounting)   that  it  most  recently  filed  with  the  insurance   regulatory
authorities of its  jurisdiction  of domicile.  The Insurer further agrees that,
while any of the Notes remain outstanding,  it will cause to be delivered to the
Trustee,  upon request,  for  redelivery  to any holder of Notes or  prospective
purchasers  of Notes or the Initial  Purchaser  quarterly  and annual  financial
statements  (which may be prepared in  accordance  with the  statutory  basis of
accounting)  presented  on an  individual  and a combined  basis  based upon the
financial  statements  most recently filed by the Reinsurer and each Pool Member
with the insurance regulatory  authorities of their respective  jurisdictions of
domicile.

                  (1) Upon the  request  of any Holder or  Beneficial  Owner for
financial  statements  of  the  Insurer  or  the  Pool  Members  (including  the
Reinsurer),  the Trustee shall deliver a written  request for such statements to
the Insurer and upon receipt of such  statements  deliver such statements to the
requesting Holder or Beneficial Owner.


                                   ARTICLE III

                                    COVENANTS

         SECTION 1.16 Payment of Principal and Interest;  Appointment of Agents.
(a) The Issuer shall duly and  punctually  pay to the Trustee the principal (and
Make Whole Amounts,  as applicable) of, interest on, and Additional Amounts with
respect to the Notes and all other  amounts due to the Trustee  pursuant to this
Indenture,  the  Construction  Loan  Agreement and the other  Construction  Loan
Documents,  all in accordance with the terms of the Notes, the Construction Loan
Agreement, the other Construction Loan Documents and this Indenture.

                  (1) The  Issuer  hereby  appoints  the  Trustee  as the Paying
Agent, the Calculation Agent, the  Authenticating  Agent, the Transfer Agent and
the Note Registrar  (collectively the "Agents").  Each Person which ceases to be
the Trustee for any reason  shall cease to be the Agents,  and each Person which
becomes a  successor  Trustee  pursuant  to  Article V hereof  shall  become the
Agents.

         SECTION  1.17   Performance  of  Obligations.   (a0  The  Issuer  shall
punctually  perform and observe all its obligations and agreements  specified in
this Indenture and the Construction Loan Documents.

                  (1) The Issuer may contract with other Persons to assist it in
performing its duties under this  Indenture,  and any performance of such duties
by a Person identified to the Trustee in an Officer's  Certificate of the Issuer
shall be deemed to be action taken by the Issuer.

                  (2) So long as any Notes are  outstanding  or any  amounts due
with respect to the Notes or to the Holders, the Trustee or the Insurer pursuant
to this  Indenture  remain  unpaid,  the Issuer shall not permit the validity or
effectiveness of this Indenture to be impaired.

         SECTION 1.18 Further Instruments and Acts. Upon request of the Trustee,
the Issuer  shall  execute  and deliver  such  further  instruments  and do such
further  acts as may be  reasonably  necessary  or  proper  to  carry  out  more
effectively the purposes of this Indenture and the Construction Loan Documents.

<PAGE>

         SECTION  1.19  Notice of Events of Default.  The Issuer  shall give the
Trustee,  the Insurer,  the Guarantor and the Rating Agencies  written notice of
each  Default as provided in Section 4.1 and of each  default on the part of any
party to the Basic Documents or the Construction  Loan Documents with respect to
any of the provisions thereof to which the Issuer has knowledge.

         SECTION  1.20  Maintenance  of Books  and  Records.  The  Issuer  shall
maintain  and  implement  administrative  and  operating  procedures  reasonably
necessary in the performance of its  obligations  hereunder and the Issuer shall
keep and maintain at all times,  or cause to be kept and maintained at all times
at its principal  office,  all  documents,  books,  records,  accounts and other
information  reasonably  necessary  or  advisable  for  the  performance  of its
obligations hereunder to the extent required under applicable law.

         SECTION 1.21 Continuation of Ratings.  The Issuer agrees to provide the
Rating Agencies with  information,  to the extent  reasonably  obtainable by the
Issuer,  to allow the Rating  Agencies to monitor  the rating of the Notes.  The
Issuer shall pay such ongoing fees of the Rating Agencies as they may reasonably
request to monitor the ratings of the Notes.


                                   ARTICLE IV

                                    REMEDIES

         SECTION 1.22 Notices of Default.  The Issuer shall  deliver to Trustee,
the Insurer and the Guarantor (with a copy to the Rating Agencies),  within five
Business  Days after  obtaining  knowledge of the  occurrence  thereof,  written
notice in the form of an Officer's Certificate of the occurrence of any Default,
its status and what action the Issuer is taking or proposes to take with respect
thereto. In addition, the Trustee shall deliver the notices required pursuant to
Section 5.5.

         SECTION 1.23 Exercise of Remedies.  If an Event of Default has occurred
and is  continuing,  the Insurer so long as no Policy  Event has occurred and is
continuing,  or the  Holders of greater  than 50% of the  Outstanding  Principal
Amount of the Notes if a Policy Event has occurred and is continuing, shall have
the right (subject to providing an indemnity to the reasonable  satisfaction  of
the  Trustee)  to direct  the time,  method and place of  exercising  any remedy
available  to the  Trustee,  and of  conducting  any  Proceeding  for any remedy
available  to the  Trustee,  with  respect to the  Notes,  this  Indenture,  the
Construction Loan Agreement,  the Construction Loan Deed of Trust and each other
Construction  Loan Document,  and of exercising any trust or power  conferred on
the Trustee; provided that:

                  (1) such  direction  shall not be in conflict with any rule of
law or with this Indenture; and

<PAGE>

                  (2) if  Noteholders  (and not the Insurer)  have  directed the
Trustee to take the action in  question,  the  Trustee  need not take any action
which  might  materially  adversely  affect  the rights of any  Noteholders  not
consenting to such action.

         SECTION 1.24 Limitation of Suits. No Noteholder shall have any right to
institute any Proceeding,  judicial or otherwise, with respect to this Indenture
or for the  appointment  of a  receiver  or  trustee,  or for any  other  remedy
hereunder, unless:

                  (1) a Policy Event has occurred and is continuing;

                  (2) such Holder has  previously  given  written  notice to the
Trustee of a continuing Event of Default;

                  (3)  the  Holders  of  greater  than  50% of  the  Outstanding
Principal  Amount of Notes have made written request to the Trustee to institute
such  Proceeding  in respect of such Event of Default in its own name as Trustee
hereunder;

                  (4)  such  Holder  or  Holders  has  offered  to  the  Trustee
indemnity reasonably satisfactory to the Trustee against the costs, expenses and
liabilities  to be incurred or in respect of which it may be or become liable in
complying with such request;

                  (5) the Trustee for sixty (60) calendar days after its receipt
of such  notice,  request and offer of indemnity  has failed to  institute  such
Proceedings; and

                  (6) no direction  inconsistent  with such written  request has
been  received  by the Trustee  during  such  60-day  period from the Holders of
greater than 50% of the Outstanding Principal Amount of the Notes.

         It is  understood  and intended  that no one or more Holders shall have
any  right in any  manner  whatsoever  by  virtue  of, or by  availing  of,  any
provision of this  Indenture to affect,  disturb or prejudice  the rights of any
other Holders or to obtain or to seek to obtain  priority or preference over any
other Holders or to enforce any right under this Indenture, except in the manner
herein provided.

         SECTION 1.25 Unconditional  Rights of Noteholders To Receive Principal,
Interest and Additional  Amounts.  Notwithstanding  any other provisions in this
Indenture and subject to the Priority of Payments, the Holder of each Note shall
have the right, which is absolute and  unconditional,  to receive payment of the
principal  (or the  Make  Whole  Amount,  as  applicable)  of,  interest  on and
Additional  Amounts  with  respect  to such Note,  and such  right  shall not be
impaired without the consent of such Holder.



<PAGE>


         SECTION 1.26  Performance and Enforcement of Certain  Obligations.  (a0
Unless a Policy Event has occurred  and is  continuing,  the Trustee may, and at
the direction of the Insurer (subject to having been  indemnified  reasonably to
its  satisfaction)  shall,  take all  lawful  action to  compel  or  secure  the
performance  and  observance by the Issuer and the  Guarantor,  of each of their
respective  obligations  under this Indenture,  the Construction Loan Agreement,
Construction  Loan  Deed of Trust and each  other  Construction  Loan  Documents
including the Completion Guaranty and the Payment Guaranty, and, if so directed,
the Trustee shall exercise any and all rights,  remedies,  powers and privileges
lawfully available under or in connection with all of such agreements, including
the transmission of notices of default  thereunder and the institution of legal,
arbitral  or   administrative   actions  or  proceedings  to  compel  or  secure
performance thereunder.

                  (1) If an Event of Default  and a Policy  Event have  occurred
and are  continuing,  the Trustee  may,  and at the  direction of the Holders of
greater than 50% of the  Outstanding  Principal  Amount of the Notes (subject to
having been  indemnified to its  satisfaction),  shall take all lawful action to
compel or secure the performance  and observance by the Insurer,  the Issuer and
the Guarantor of each of their respective obligations under this Indenture,  the
other Basic Documents, the Construction Loan Agreement, the Construction Deed of
Trust, the other Construction Loan Documents (including the Completion Guarantee
and the Payment  Guarantee) and, if so directed,  the Trustee shall exercise any
and all rights,  remedies,  powers and privileges lawfully available under or in
connection with all of such agreements, including the transmission of notices of
default  thereunder and the  institutions of legal,  arbitral or  administrative
actions or proceedings to compel or secure performance thereunder.



<PAGE>


         SECTION 1.27 Special Construction  Servicer. In the event that a Policy
Event  occurs prior to the Opening  Date,  the Trustee  shall  appoint a special
construction  servicer (the "Special  Construction  Servicer") to administer the
application of the balance  remaining in the Construction  Loan Proceeds Account
to the payment of Costs under the  Construction  Loan  Agreement  and to provide
other  services  determined by the Trustee  related to the  construction  of the
Required  Improvements  on  behalf  of  the  Trustee  for  the  benefit  of  the
Noteholders.  Any such  Special  Construction  Servicer  will be an entity  that
appears at the time of appointment on the list of "approved  special  servicers"
for  commercial  mortgage   securitizations   maintained  by  S&P.  The  Special
Construction  Servicer  will be  required  to  perform  its  duties  in the best
interests of and for the sole benefit of the  Noteholders  (as determined by the
Special Construction Servicer in its reasonable good-faith business judgment) in
accordance with the terms of the Construction  Loan Documents and in furtherance
of and to the extent  consistent  with such terms,  and in  accordance  with the
higher of (a) the same  care,  skill,  prudence  and  diligence  with  which the
Special  Construction  Servicer  services and administers  similar  construction
mortgage loans for other  third-party  portfolios,  giving due  consideration to
customary and usual  standards of practice of prudent  institutional  commercial
loan special servicers servicing commercial construction loans for third parties
generally and (b) the same care, skill, prudence and diligence which the Special
Construction Servicer uses for construction mortgage loans in its own portfolio.
The   administration   of  the  Construction   Loan  Agreement  by  the  Special
Construction  Servicer is required to be  undertaken  without  regard to (i) any
relationship  (other  than that  created  by this  Indenture,  the  other  Basic
Documents and the Construction  Loan Agreement) that it or any of its Affiliates
may have with the Noteholders, the Issuer, the Guarantor, the Insurers or any of
their  respective  Affiliates;  (ii)  ownership  of any Note by it or any of its
Affiliates;  (iii) the adequacy of its compensation for its services or (iv) its
ownership,  servicing or special servicing of other mortgage loans. Any expenses
incurred by the Trustee in retaining the Special  Construction  Servicer and all
amounts of compensation,  fees and expenses payable to the Special  Construction
Servicer shall be paid by the Issuer on demand.


                                    ARTICLE V

                                   THE TRUSTEE

         SECTION 1.28 Duties of the Trustee.  (a) So long as no Policy Event has
occurred and is continuing, the Trustee shall take all lawful action directed by
the Insurer to enforce the Trustee's rights and exercise the remedies  available
to the  Trustee,  including  at law and in equity,  under or with respect to the
Basic Documents,  the Construction Loan Agreement, the Construction Loan Deed of
Trust and all of the  other  Construction  Loan  Documents,  and shall  take all
lawful  actions  directed by the Insurer to fully enable the Insurer to exercise
its  rights  pursuant  to  Article  XI of  this  Indenture.  The  Trustee  shall
authenticate  the  Notes and  execute  and  deliver  this  Indenture,  the Basic
Documents,  the Construction Loan Documents to which it is a party and any other
documents, instruments or certificates to which it is a party to be executed and
delivered in connection therewith.

                  (1) The  Trustee  shall hold the  Policy,  the  Assignment  of
Reinsurance  and the  Assumption of Liability and Novation  Endorsement  for the
benefit of the Noteholders  and shall enforce all of the rights and powers,  and
satisfy all of the obligations, of the beneficiary thereunder.

                  (2) After the  occurrence  and  during the  continuance  of an
Event of Default,  the Trustee shall exercise the rights and powers vested in it
by this Indenture,  the other Basic Documents,  the Construction  Loan Agreement
and the other Construction Loan Documents,  and use the same degree of skill and
care in their  exercise  as a prudent  person  would use or  exercise  under the
circumstances in the conduct of such Person's own affairs.

                  (3)  Prior  to the  occurrence  of an Event  of  Default,  the
Trustee  undertakes  to  perform  such  duties  and  only  such  duties  as  are
specifically specified in this Indenture,  the Construction Loan Agreement,  the
other Construction Loan Documents and the other documents to which it is a party
and no implied  covenants or  obligations  shall be read into this Indenture and
the other documents to which it is a party against the Trustee.



<PAGE>


                  (4) In  addition,  prior  to the  occurrence  of an  Event  of
Default,  in the absence of bad faith on its part, the Trustee may  conclusively
rely,  as to the truth of the  statements  and the  correctness  of the opinions
expressed  therein,  upon  certificates  or opinions  which are furnished to the
Trustee  and  conform  to the  requirements  of this  Indenture  and  the  other
documents to which it is a party;  however, in the case of any such certificates
or  opinions  which by any  provisions  hereof are  specifically  required to be
furnished  to the  Trustee,  the  Trustee  shall  examine the  certificates  and
opinions to determine  whether or not they conform to the  requirements  of this
Indenture  and the other  documents to which it is a party;  provided,  however,
that the Trustee  shall not be  responsible  for the  accuracy or content of any
resolution,  certificate,  statement,  opinion, report, document, order or other
instrument furnished by the Issuer hereunder.

                  (5) The Trustee may not be relieved from liability for its own
negligent action or its own willful misconduct, except that:

                           (1) the Trustee  shall not be liable for any error of
         judgment made in good faith by a Trust Officer unless it is proved that
         the Trustee was negligent in ascertaining the pertinent facts;

                           (2) no  provision  of  this  Indenture  or the  other
         documents to which it is a party shall require the Trustee to expend or
         risk its own  funds  or  otherwise  incur  financial  liability  in the
         performance of any of its duties hereunder or in the exercise of any of
         its rights or powers,  if it shall have  reasonable  grounds to believe
         that repayment of such funds or adequate indemnity against such risk or
         liability is not reasonably assured to it;

                           (3)  anything  in  this   Indenture   and  the  other
         documents to which it is a party to the contrary notwithstanding, in no
         event   shall  the   Trustee  be  liable  for   special,   indirect  or
         consequential loss or damage of any kind whatsoever (including, but not
         limited to, lost profits),  even if the Trustee has been advised of the
         likelihood of such loss or damage and regardless of the form of action,
         or any insufficiency in the Accounts  resulting from a loss,  including
         loss of principal, on any Permitted Investment included therein; and

                           (4)  the  right  of  the   Trustee  to  perform   any
         discretionary  act enumerated in this Indenture and the other documents
         to  which  it is a party  shall  not be  construed  as a duty,  and the
         Trustee  shall not be  answerable  for  other  than its  negligence  or
         willful misconduct in the performance of such act.

                  (6) Every  provision of this Indenture and the other documents
to which it is a party that in any way relates to the  Trustee  acting in any of
its capacities is subject to this Section 5.1.

                  (7) The Trustee  shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Issuer.

<PAGE>


                  (8)  Whether  or  not  herein  expressly  so  provided,  every
provision  of this  Indenture  and the  other  documents  to which it is a party
relating to the conduct or affecting the liability of or affording protection to
the  Trustee  (in any  capacity  in which it may serve)  shall be subject to the
provisions of this Section 5.1.

                  (9) The Trustee  shall not be charged  with  knowledge  of any
Default,  Event of Default or Policy  Event  unless  either (1) a Trust  Officer
shall have actual knowledge of such Default, Event of Default or Policy Event or
(2) written notice of such Default,  Event of Default or Policy Event shall have
been  received by a Trust  Officer in  accordance  with the  provisions  of this
Indenture.

                  (10) The Trustee accepts its appointment as the Agents.

         SECTION  1.29  Rights  of  Trustee.  (a) The  Trustee  may  rely on any
document  believed by it to be genuine and to have been signed or  presented  by
the proper Person. The Trustee need not investigate any fact or matter stated in
such document.

                  (1) Any request or  direction of the Issuer  mentioned  herein
shall be sufficiently evidenced by an Issuer Order or an Issuer Request.

                  (2) Before the Trustee acts or refrains  from  acting,  it may
require an Officer's Certificate or an Opinion of Counsel. The Trustee shall not
be liable for any action it takes or omits to take in good faith in  reliance on
such Officer's Certificate or Opinion of Counsel.

                  (3) The  Trustee  may  execute  any of the  trusts  or  powers
hereunder  or perform  any duties  hereunder  either  directly  or by or through
Affiliates,  delegates,  agents or attorneys or a custodian or nominee,  and the
Trustee shall not be  responsible  for any  misconduct or negligence on the part
of, or for the  supervision of, any such agent,  attorney,  custodian or nominee
appointed with due care by it hereunder.

                  (4) The Trustee shall not be liable for any action it takes or
omits to take in good faith  which it believes  to be  authorized  or within its
rights or powers.

                  (5) The Trustee may consult  with  counsel,  and the advice or
opinion of such  counsel or any  Opinion of Counsel  shall be full and  complete
authorization  and  protection  from  liability in respect of any action  taken,
omitted or suffered by it hereunder in good faith and in reliance thereon.



<PAGE>


                  (6) The Trustee  shall be under no  obligation to exercise any
of the rights or powers vested in it by this  Indenture and the other  documents
to which it is a party at the request or  direction of the Insurer or any of the
Noteholders  pursuant to this Indenture and the other documents to which it is a
party or to institute, conduct or defend any litigation hereunder or in relation
hereto  at  the  request,  order  or  direction  of  the  Insurer  or any of the
Noteholders  pursuant to this Indenture and the other documents to which it is a
party, unless the Insurer or such Noteholders, as applicable, shall have offered
to the Trustee  reasonable  security or  indemnity  satisfactory  to the Trustee
against the costs,  expenses  and  liabilities  which might be incurred by it in
compliance with such request or direction.

                  (7) The Trustee  shall not be bound to make any  investigation
into the  facts or  matters  stated in any  document,  but the  Trustee,  in its
discretion,  may make such further inquiry or  investigation  into such facts or
matters as it may see fit,  and, if the  Trustee  shall  determine  to make such
further  inquiry or  investigation,  it shall be  entitled to examine the books,
records and premises of the Issuer, personally or by an agent or attorney.

                  (8) The  Trustee  shall  not be  required  to give any bond or
surety in respect of the  execution  of the trust  created  hereby or the powers
granted hereunder.

         SECTION  1.30  Individual  Rights  of  Trustee.  The  Trustee,  in  its
individual or any other  capacity,  may become the owner or pledgee of Notes and
may otherwise  deal with the Issuer or its Affiliates and with the other parties
to the Basic Documents and the Construction  Loan Documents and their respective
Affiliates with the same rights it would have had if it were not Trustee.

         SECTION  1.31  Trustee's  Disclaimer.  The  Trustee  (i)  shall  not be
responsible for, and makes no representation,  as to the validity or adequacy of
the Notes, any Basic Document or any Construction Loan Document,  (ii) shall not
be  accountable  for the Issuer's  use of the proceeds  from the Notes and (iii)
shall not be responsible for any statement of the Issuer in this Indenture or in
any document  executed in connection with the sale of the Notes or in the Notes,
any Basic Document, or any Construction Loan Document,  other than the Trustee's
Certificate of Authentication.

         The Trustee is and will be acting  hereunder  solely in its capacity as
Trustee. All parties to this Indenture acknowledge and agree that where there is
any reference herein to Trustee performing any activity,  making any decision or
determination,  approving or  consenting to any matter,  exercising  any rights,
fulfilling any obligation,  exercising any discretion or otherwise acting in any
capacity,  the Trustee will not be the party doing so unless it is  specifically
authorized  and directed to do so in each instance by an  appropriate  direction
hereunder. Any such performance,  decision, determination,  approval, consent or
action to be made, taken, given or exercised by Trustee under any Basic Document
that the Trustee is not so  specifically  authorized  and directed to perform in
each instance as required by the terms of this  Indenture or such Basic Document
may be made, taken, given or exercised by other parties who are beneficiaries or
agents of beneficiaries of this Indenture.



<PAGE>


         SECTION  1.32  Notice  of  Defaults;   Notice  of  Requirement  to  Pay
Additional Amounts. (a) If the Trustee obtains knowledge (as provided in Section
5.1(j)) of an Event of Default or Policy  Event,  the Trustee shall mail to each
Noteholder, the Issuer, the Guarantor and the Insurer (with a copy to the Rating
Agencies),  notice of such  Event of  Default or Policy  Event  within  five (5)
calendar days after obtaining knowledge thereof;  provided,  however,  that with
respect to an Event of Default caused by a failure to pay when due the principal
of,  interest on or  Additional  Amounts with  respect to the Notes,  the notice
shall be mailed promptly after obtaining such notice.  If the Trustee receives a
notice from the Issuer  pursuant to Section 4.1, the Trustee will include a copy
of such  notice  with its notice of an Event of  Default.  Where a notice of the
occurrence  of an Event of Default or Policy Event has been given by the Trustee
pursuant  to this  Section  5.5 and the  Event of  Default  or  Policy  Event is
thereafter  cured,  the  Trustee  shall give notice that the Event of Default or
Policy Event is no longer  continuing  within ten (10)  calendar  days after the
Trustee obtains knowledge thereof.

                  (1) The Trustee shall deliver to the Issuer, the Guarantor and
the Insurer,  within five (5) Business Days after obtaining knowledge or receipt
thereof, written notice of any event, condition or circumstance,  or any notice,
publication or communication, whether sent or published by a governmental entity
or  otherwise,  the effect of which would  require the Issuer to pay  Additional
Amounts  hereunder.  To the extent  that the Trustee  has  received  information
sufficient  for it to do so,  the  Trustee  shall  calculate  the  amount of any
Additional  Amounts  required  to be paid by the Issuer on any  Deposit  Date or
otherwise,  and shall  deliver  notice of such  calculation  to the Issuer,  the
Guarantor  and  the  Insurers  as  soon  as  reasonably  practicable  under  the
circumstances.

         Absent manifest error, such calculation shall be binding on the Issuer,
the Guarantor and the Insurer,  and the Issuer's making of a payment in reliance
on such calculation,  even if such calculation is erroneous, shall not result in
a Default or an Event of Default if the Issuer  makes  payment of any  shortfall
immediately after its receipt of written notice thereof from the Trustee.

                  (2) Before 5:00 p.m.  (New York City time) on the Business Day
next  succeeding  each  Deposit  Date or any  other  date on which  the  Trustee
receives any payment,  the Trustee shall provide to the Issuer,  the  Guarantor,
the  Insurer,  and the  Administrative  Agent  prompt  notice of all  amounts it
receives under or pursuant to the Notes,  the Construction  Loan Agreement,  the
Construction  Loan Deed of Trust,  any interest rate protection  agreement,  any
other  Construction Loan Document  (including  proceeds collected by the Trustee
upon the sale or other  disposition  of  Collateral  or upon the exercise of any
remedies under the Construction Loan Documents),  the Policy,  the Assignment of
Reinsurance  and the  Reinsurance  Agreement,  the Completion  Guarantee and the
Payment Guarantee.  The Trustee shall specify in such notice the amount received
and the source of such payment and any other relevant  details  concerning  such
payment.



<PAGE>


         SECTION 1.33 Appointment of Administrative  Agent.  Until the principal
of and  interest  on the Notes is  indefeasibly  paid in full,  the  Insurer  is
irrevocably  appointed the  "Administrative  Agent" under and in accordance with
the terms of the  Construction  Loan Agreement and the other  Construction  Loan
Documents;  provided,  however,  that (i) if a Policy  Event occurs prior to the
Opening  Date,  the Insurer shall cease to be the  Administrative  Agent and the
Special Construction  Servicer shall become the Administrative Agent and (ii) if
a Policy Event occurs on or after the Opening  Date,  the Insurer shall cease to
be the  Administrative  Agent and the  Trustee  may,  at its  option,  appoint a
successor  Administrative  Agent,  or,  if  it  does  not  appoint  a  successor
Administrative Agent, the Trustee shall perform the duties of the Administrative
Agent. Any  Administrative  Agent may resign (other than the Insurer,  which may
not resign unless a Policy Event occurs),  and, if any such Administrative Agent
resigns, a successor  Administrative Agent shall be appointed as provided in the
Construction Loan Agreement.

         Each  Administrative  Agent shall have the right and power to take such
action as Administrative Agent and to exercise such powers under this Indenture,
the Construction Loan Agreement,  the other  Construction Loan Documents and any
other documents as are delegated to the Administrative Agent by the terms hereof
and thereof, together with all such powers as are reasonably incidental thereto.
The Insurer hereby accepts such appointment.

         SECTION 1.34  Compensation  and Indemnity.  (a) On the Closing Date and
from time to time  thereafter,  the Issuer  shall pay to the  Trustee any costs,
fees and expenses of its counsel and a fee as agreed upon between the Issuer and
the Trustee in a letter agreement,  dated as of the date hereof, as compensation
for its  services  as Trustee,  Paying  Agent,  Registrar  and  Transfer  Agent,
hereunder and under the Construction  Loan Documents to which it is a party. The
Trustee's  compensation  shall not be  limited by any law on  compensation  of a
trustee of an express trust. The Issuer shall reimburse the Trustee upon request
for all  reasonable  out-of-pocket  expenses  incurred or made by it,  including
costs of  collection,  in  addition to the  compensation  to the Trustee for its
services.  Such  expenses  shall  include,  but  will  not be  limited  to,  the
reasonable  compensation  and  expenses,   disbursements  and  advances  of  the
Trustee's agents (including any receiver),  delegates,  counsel, accountants and
experts.  The Issuer  shall  indemnify  the  Trustee  against  any and all loss,
liability or expense  (including  reasonable  attorney's fees) incurred by it in
connection  with the  administration  of this trust and the  performance  of its
duties  hereunder or under the Construction  Loan Documents  including the costs
and expenses of defending  against any claim or liability in connection with the
exercise or performance of any powers or duties  hereunder and  thereunder.  The
Trustee  shall  notify  the Issuer  promptly  of any claim for which it may seek
indemnity.  Failure by the Trustee to so notify the Issuer shall not relieve the
Issuer of its obligations  hereunder.  The Issuer need not reimburse any expense
or  indemnity  against any loss,  liability  or expense  incurred by the Trustee
through the Trustee's own willful misconduct, negligence or bad faith unless the
act in question has been directed pursuant to this Indenture.  To the extent the
Trustee renders services or incurs expenses after an Event of Default  involving
a bankruptcy, insolvency or the like, the compensation for services and expenses
incurred by it are intended to constitute  expenses of administration  under any
applicable federal, state or foreign bankruptcy, insolvency or other similar law
now or hereafter in effect.



<PAGE>


                  (1)   Indemnification  by  the  Insurer.   The  Insurer  shall
indemnify  and hold the  Trustee  harmless  from and  against  any and all loss,
damage, liability, cost and expense (including,  without limitation,  reasonable
attorney's  fees  and  disbursements)  incurred  by  the  Trustee,  any  of  its
Affiliates,  or any  of  their  respective  officers,  directors,  shareholders,
employees and agents,  arising out of or in connection  with any action taken by
the Trustee under or pursuant to this Indenture, the Construction Loan Agreement
or any of the other  Construction  Documents in  accordance  with or pursuant to
written  directions  from the  Insurer  after  the  occurrence  and  during  the
continuance of an Event of Default.

                  (2) The Issuer's and the Insurer's payment  obligations to the
Trustee pursuant to this Section 5.7 shall survive the resignation or removal of
the Trustee,  the occurrence of any Policy Event, the payment in full of all the
Notes,  and the  termination or discharge of any Basic Document or  Construction
Loan  Document,  and shall not be affected by any obligation  which Issuer,  the
Insurer  and  the  Trustee  may  have  to  provide  indemnification  under  this
Agreement.

         SECTION 1.35  Replacement of Trustee.  (a) No resignation or removal of
the Trustee,  and no appointment of a successor Trustee,  shall become effective
until the acceptance of appointment  by the successor  Trustee  pursuant to this
Section  5.8.  The  Trustee may resign at any time upon not less than sixty (60)
calendar days prior written notice to the Issuer and the Insurer.  So long as no
Event of  Default  has  occurred  and is  continuing  the  Issuer may remove the
Trustee  without cause by so notifying  the Trustee;  provided,  however,  if no
Policy Event has  occurred and is  continuing,  such removal  shall  require the
consent of the Insurer.  If an Event of Default has occurred and is  continuing,
the Insurer,  so long as no Policy Event has occurred and is continuing,  or the
Holders of 662/3% of the Outstanding  Principal Amount of the Notes, if a Policy
Event has occurred or is continuing,  may remove the Trustee without cause by so
notifying  the  Trustee  and the  Issuer.  The Issuer  shall  remove the Trustee
promptly if:

                           (1) the Trustee fails to comply with Section 5.10;

                           (2)  the  Trustee  is  adjudged  to  be  bankrupt  or
         insolvent;

                           (3) a receiver or other public  officer  takes charge
         of the Trustee or its property; or

                           (4)  the  Trustee   otherwise  becomes  incapable  of
         acting.

<PAGE>


If the  Trustee  resigns or is  removed or if a vacancy  exists in the office of
Trustee  for any reason (the  Trustee in such event being  referred to herein as
the  retiring  Trustee),  (i) so long as no Event of Default has occurred and is
continuing, the Issuer shall promptly appoint a successor Trustee, provided that
so long as no Policy Event has occurred and is  continuing,  the  appointment of
any such successor Trustee shall be subject to the prior consent of the Insurer,
(ii) if an Event of Default has occurred and is  continuing  and no Policy Event
has occurred and is continuing,  the Insurer shall appoint a successor  Trustee,
or (iii) if an Event of Default  has  occurred  and is  continuing  and a Policy
Event has  occurred  and is  continuing,  Holders  of 662/3% of the  Outstanding
Principal Amount of the Notes may appoint a successor Trustee.

                  (2) Any successor  Trustee shall,  without further act, be the
Trustee under the other Basic Documents and the Construction Loan Agreement, and
shall deliver a written  acceptance of its  appointment  as Trustee (which shall
include  acceptance  of its  appointment  as the Agents and as Trustee under the
other Basic  Documents  and the  Construction  Loan  Documents)  to the retiring
Trustee and to the Issuer and the Insurer. Thereupon, the resignation or removal
of the retiring Trustee shall become effective,  and the successor Trustee shall
have all the rights, powers and duties of the Trustee under this Indenture.  The
successor  Trustee shall mail a notice of its succession to the Noteholders.  If
the retiring Trustee resigns or is removed,  and the Issuer,  the Insurer or the
requisite  Holders fail to appoint a successor  Trustee as provided herein,  the
retiring Trustee,  the Issuer, the Insurer or the Holders of greater than 50% of
the  Outstanding  Principal  Amount  of the  Notes  may  petition  any  court of
competent  jurisdiction  for the  appointment  of a  successor  Trustee.  If the
Trustee fails to comply with Section 5.10, any Noteholder may petition any court
of competent  jurisdiction for the removal of the Trustee and the appointment of
a successor Trustee.

                  (3) Notwithstanding the replacement of the Trustee pursuant to
this Section 5.8, the Issuer's  obligations under Section 5.7 shall continue for
the benefit of the retiring Trustee.

         SECTION  1.36  Successor   Trustee  by  Merger.   (a)  If  the  Trustee
consolidates  with,  merges or converts into, or transfers all or  substantially
all of its corporate trust business or assets to, another corporation or banking
association,  the  resulting,  surviving or  transferee  corporation  or banking
association  without any further act shall be the successor  Trustee;  provided,
however,  that  such  corporation  or  banking  association  shall be  otherwise
qualified and eligible  under Section 5.10. The Trustee shall provide the Rating
Agencies with written notice of any such transaction.

                  (1) In  case at the  time  such  successor  or  successors  by
merger,  conversion or  consolidation to the Trustee shall succeed to the trusts
created by this Indenture any of the Notes shall have been authenticated but not
delivered,  any such  successor  to the  Trustee  may adopt the  Certificate  of
Authentication   of  any  predecessor   trustee,   and  deliver  such  Notes  so
authenticated,  and in case at that  time any of the  Notes  shall not have been
authenticated,  any successor to the Trustee may authenticate  such Notes either
in the name of any predecessor  hereunder or in the name of the successor to the
Trustee.  In all such cases such certificates shall have the full force which it
is anywhere in the Notes or in this Indenture  provided that the  certificate of
the Trustee shall have.



<PAGE>


         SECTION 1.37 Eligibility;  Disqualification.  The Trustee or its parent
shall have a combined capital and surplus of at least  $250,000,000 as specified
in its most recent  published  annual  report and shall have a long-term  senior
unsecured  debt rating of no lower than "BBB-" by S&P and "Baa3" by Moody's,  or
shall otherwise be acceptable to the Rating Agencies.

         SECTION 1.38 Unclaimed  Funds.  Subject to applicable laws with respect
to  abandoned  property,  any funds held by the Trustee (as Trustee or as Paying
Agent) for the payment of principal (or the Make Whole Amount, as applicable) or
purchase price on any Note that remains unclaimed for five (5) years and for the
payment of interest  (including  interest which is a part of the purchase price)
and Additional  Amounts on any Note that remain unclaimed for ten (10) years, in
each case, after such amount shall have become due and payable, shall be paid to
the Insurer to the extent of any unreimbursed or outstanding amounts paid by the
Insurer pursuant to the terms of the Policy and thereafter  repaid to the Person
which  originally  paid such funds to the  Trustee,  and the Holder of such Note
shall thereafter  look, as an unsecured  general  creditor,  only to the Issuer,
Insurer or Purchaser (whichever was liable to make the payment being sought) for
payment  thereof,  and all  liability  of the Trustee with respect to such funds
shall thereupon cease.  The Trustee shall also adopt and employ,  at the expense
and direction of the Issuer,  any other reasonable means of notification of such
repayment  (including,  but not limited to,  mailing notice of such repayment to
the  Holders  whose  Notes have been  called but have not been  surrendered  for
redemption  or  purchase or whose right to or interest in monies due and payable
but not claimed is  determinable  from the records of the  Trustee,  at the last
address of record for each such Holder).


                                   ARTICLE VI

                    NOTEHOLDERS' LISTS, REPORTS AND MEETINGS

         SECTION   1.39   Preservation   of   Information;   Communications   to
Noteholders.  The Trustee  shall  preserve in as current a form as is reasonably
practicable,  the names and addresses of Holders of Global Notes received by the
Trustee in its capacity as Registrar.

         SECTION 1.40 Voting by Noteholders. Except as otherwise provided in the
Indenture  (including,  without  limitation,  the provisions of Section 8.2) all
resolutions of the Noteholders  shall be passed by votes  representing more than
50% of the Outstanding Principal Amount.

         SECTION 1.41 Purposes for Which  Noteholder  Meetings May Be Called.  A
meeting of Noteholders  may be called at any time and from time to time pursuant
to this  Article VI to make,  give or take any request,  demand,  authorization,
direction, notice, consent, waiver or other action provided by this Indenture to
be made, given or taken by the Noteholders.



<PAGE>


         SECTION 1.42 Call, Notice and Place of Meetings.

                  (1) The Trustee may at any time call a meeting of  Noteholders
for any purpose  specified  in Section  6.3, to be held at such time and at such
place as the Trustee shall  determine.  Notice of every meeting of  Noteholders,
setting forth the time and place of such meeting and in general terms the action
proposed  to be taken at such  meeting,  shall be given by the  Trustee,  in the
manner  provided  in  Section  11.4,  not less  than ten (10) nor more  than 180
calendar days prior to the date fixed for the meeting.

                  (2) In case at any time the Issuer,  pursuant to a  resolution
of the  managing  member of the  Issuer,  or the  Holders of at least 10% of the
Outstanding  Principal  Amount of the Notes shall have  requested the Trustee to
call a meeting of the Noteholders  for any purpose  specified in Section 6.3, by
written  request  setting forth in reasonable  detail the action  proposed to be
taken at the meeting,  and the Trustee shall not have made the first publication
of the notice of such meeting  within ten (10)  calendar  days after  receipt of
such request or shall not thereafter  proceed to cause the meeting to be held as
provided  herein,  then  the  Issuer  or the  Noteholders  in the  amount  above
specified,  as the case may be, may determine  the time and the place,  for such
meeting and may call such meeting for such purposes by giving notice  thereof as
provided in subsection (a) of this Section 6.4.

         SECTION 1.43 Persons Entitled to Vote at Meetings.

         To be entitled to vote at any meeting of the Noteholders a Person shall
(a) be a  Holder  of one or more of the  outstanding  Notes  or (b) be a  Person
appointed by an instrument in writing as proxy by a Holder of one or more Notes.
The only  Persons who shall be entitled to be present or to speak at any meeting
of Noteholders  shall be the Persons  entitled to vote at such meeting and their
counsel  and  any   representatives   of  the  Trustee  and  its  counsel,   any
representatives  of the Issuer and its counsel,  and any  representatives of the
Insurer and its counsel.

         SECTION 1.44 Quorum; Action.



<PAGE>


         Persons  entitled  to vote at least  51% of the  Outstanding  Principal
Amount of the Notes shall  constitute a quorum for a meeting of the Noteholders.
In the absence of a quorum within 60 minutes of the time  appointed for any such
meeting,  the meeting  shall,  if convened  at the  request of  Noteholders,  be
dissolved.  In any other case the meeting may be  adjourned  for a period of not
less than ten (10)  calendar  days as  determined by the chairman of the meeting
prior to the adjournment of such meeting. In the absence of a quorum at any such
adjourned meeting,  such adjourned meeting may be further adjourned for a period
of not less than ten (10)  calendar  days as  determined  by the chairman of the
meeting  prior to the  adjournment  of such  adjourned  meeting.  Notice  of the
reconvening of any adjourned meeting shall be given as provided in Section 12.4,
except that such notice need be given only once not less than five (5)  calendar
days  prior to the date on which the  meeting  is  scheduled  to be  reconvened.
Notice of the  reconvening  of an adjourned  meeting  shall state  expressly the
percentage,  as provided above, of the Outstanding Principal Amount of the Notes
that shall constitute a quorum.

         Except as limited by the proviso to the first paragraph of Section 8.2,
any resolution  presented to a meeting or adjourned  meeting duly  reconvened at
which a quorum is present as aforesaid may be adopted by the affirmative vote of
the Holders of at least 51% of the  Outstanding  Principal  Amount of the Notes;
provided, however, that, except as limited by the proviso to the first paragraph
of  Section  8.2,  any   resolution   with  respect  to  any  request,   demand,
authorization,  direction,  notice,  consent,  waiver or other  action that this
Indenture  expressly  provides  may be made,  given or taken by the Holders of a
specified percentage, which is less than 51% of the Outstanding Principal Amount
of the  Notes,  may  be  adopted  at a  meeting  or an  adjourned  meeting  duly
reconvened and at which a quorum is present as aforesaid by the affirmative vote
of the Holders of such specified percentage of the Outstanding  Principal Amount
of the Notes.

         Any  resolution  passed or decision  taken at any meeting of Holders of
Notes duly held in  accordance  with this Article VI shall be binding on all the
Noteholders, whether or not present or represented at the meeting.

         Notwithstanding  the  foregoing  provisions  of this Article VI, if any
action is to be taken at a meeting of  Noteholders  with respect to any request,
demand,  authorization,  direction, notice, consent, waiver or other action that
this Indenture  expressly provides may be made, given or taken by the Holders of
a specified  percentage in aggregate  Outstanding  Principal Amount of the Notes
affected thereby, or of the Noteholders:

                  (1) there  shall be no  minimum  quorum  requirement  for such
meeting; and

                  (2) the aggregate  Outstanding  Principal  Amount of the Notes
that vote in favor of such request, demand,  authorization,  direction,  notice,
consent,  waiver or other  action  shall be taken into  account  in  determining
whether such request, demand, authorization,  direction, notice, consent, waiver
or other action has been made, given or taken under this Indenture.

         SECTION 1.45 Determination of Voting Rights; Conduct and Adjournment of
Meetings.


<PAGE>


                  (1)  Notwithstanding  any other  provisions of this Indenture,
the Trustee may make such  reasonable  regulations  as it may deem advisable for
any meeting of Noteholders in regard to proof of the holding of the Notes and of
the  appointment  of  proxies  and in regard to the  appointment  and  duties of
inspectors of votes, the submission and examination of proxies, certificates and
other  evidence  of the right to vote,  and such other  matters  concerning  the
conduct  of the  meeting  as it shall  deem  appropriate.  Except  as  otherwise
permitted  or  required by any such  regulations,  the holding of Notes shall be
proved in the manner  specified  in Section  2.5(m) and the  appointment  of any
proxy shall be proved in the manner specified in Section 2.5(m) or by having the
signature of the person executing the proxy witnessed or guaranteed by any trust
company,  bank or banker  authorized by Section  2.5(m).  Such  regulations  may
provide that written instruments appointing proxies,  regular on their face, may
be presumed valid and genuine  without the proof  specified in Section 2.5(m) or
other proof.

                  (2) The Trustee shall, by an instrument in writing,  appoint a
chairman of the meeting, unless the meeting shall have been called by the Issuer
or by Holders of Notes as provided  in Section  6.4, in which case the Issuer or
the Holders of Notes  calling  the  meeting,  as the case may be,  shall in like
manner appoint a chairman. A permanent chairman and a permanent secretary of the
meeting shall be elected by vote of the Persons entitled to vote at least 51% of
the Outstanding Principal Amount of the Notes represented at the meeting.

                  (3) At any meeting each  Noteholder or proxy shall be entitled
to one vote for each  $1,000 of the  Outstanding  Principal  Amount of the Notes
held or represented  by him;  provided,  however,  that no vote shall be cast or
counted at any meeting in respect of any Note  challenged as not Outstanding and
ruled by the chairman of the meeting to be not Outstanding.  The chairman of the
meeting shall have no right to vote, except as a Noteholder or of a proxy.

                  (4) Any meeting of Noteholders duly called pursuant to Section
6.4 at which a quorum is present may be  adjourned  from time to time by Persons
entitled to vote at least 51% of the Outstanding  Principal  Amount of the Notes
represented at the meeting;  and the meeting may be held as so adjourned without
further notice.

         SECTION 1.46 Counting Votes and Recording Action of Meetings.

         The vote upon any  resolution  submitted to any meeting of  Noteholders
shall be by written  ballots on which shall be subscribed  the signatures of the
Noteholders  or their  representatives  by proxy and the  Outstanding  Principal
Amount  and  serial  numbers  of the  Notes  held or  represented  by them.  The
permanent  chairman of the meeting  shall  appoint two  inspectors  of votes who
shall count all votes cast at the meeting for or against any  resolution and who
shall make and file with the  secretary of the meeting  their  verified  written
reports in  duplicate of all votes cast at the  meeting.  A record,  at least in
duplicate,  of the proceedings of each meeting of Noteholders  shall be prepared
by the  secretary  of the meeting and there shall be attached to said record the
original  reports of the inspectors of votes on any vote by ballot taken thereat
and  affidavits  by one or more persons  having  knowledge of the facts  setting
forth a copy of the notice of the meeting and showing that said notice was given
as provided in Section 6.4 and, if  applicable,  Section 6.8. Each copy shall be
signed and verified by the affidavits of the permanent chairman and secretary of
the meeting and one such copy shall be delivered  to the Issuer,  and another to
the Trustee to be preserved by the Trustee,  the latter to have attached thereto
the ballots  voted at the meeting.  Any record so signed and  verified  shall be
conclusive evidence of the matters therein stated.


<PAGE>

                                   ARTICLE VII

                     ACCOUNTS, COLLECTIONS AND DISBURSEMENTS

         SECTION 1.47 Collection and Disbursements of Money.

                  (1) All moneys paid to or  collected  by the Trustee  under or
pursuant to the Notes, the Construction  Loan Agreement,  the Construction  Loan
Deed of Trust, any interest rate protection  agreement or any other Construction
Loan  Document  (including  proceeds  collected  by the Trustee upon the sale or
other  disposition  of Collateral or upon the exercise of any remedies under the
Construction Loan Documents, but excluding moneys collected under the Completion
Guaranty or the Payment  Guaranty),  after making any payments required pursuant
to Section 2.3(f) of the Construction Loan Agreement,  shall be deposited in the
Payment Account for  application in accordance  with this Indenture.  All moneys
paid to or  collected  by the  Trustee  under  the  Policy,  the  Assignment  of
Reinsurance and the Reinsurance Agreement,  shall be deposited by the Trustee in
the Policy Payment  Account for  application in accordance  with this Indenture.
All moneys paid to or collected by the Trustee  under the  Completion  Guarantee
and the  Payment  Guarantee,  after  making any  payments  required  pursuant to
Section 2.3(f) of the  Construction  Loan  Agreement,  shall be deposited by the
Trustee in the Guarantee Payment Account for application in accordance with this
Indenture.  All moneys  paid to the  Trustee  pursuant  to  Section  9.2(b) by a
Purchaser,  after making any payments required pursuant to Section 2.3(f) of the
Construction  Loan  Agreement,  shall be  deposited  by the  Trustee in the Note
Purchase Account for application in accordance with this Indenture.

                  (2) On  each  Interest  Payment  Date,  Payoff  Date,  Default
Payment Date and on the Stated  Maturity Date the Trustee will pay the following
amounts  then held in the  Accounts  in the  following  order of  priority  (the
"Priority of Payments"):

                           (1)  first,  out  of  the  Payment  Account  and  the
         Purchase  Account  only,  to the  Trustee  for all  amounts  due to the
         Trustee in each of its capacities hereunder,  including all amounts due
         under  Section 5.7, and for all amounts due to the Trustee  pursuant to
         the  Construction  Loan  Documents and for any amounts due to a Special
         Construction Servicer appointed pursuant to Section 4.6;

                           (2)  second,  out  of the  Payment  Account  and  the
         Purchase  Account  only,  to the  Insurer  for all  amounts  due to the
         Insurer in both its  capacities  as Insurer  and  Administrative  Agent
         under this Indenture and the  Construction  Loan  Documents,  including
         indemnification and reimbursement of costs and expenses,  but exclusive
         of the amounts referred to in clauses fifth, sixth and seventh below;



<PAGE>


                  (3) third, to the Holders of the Notes the amounts of interest
and  Additional  Amounts  due and unpaid  with  respect  to the  Notes,  and any
interest at the Default  Rate,  from the due date thereof until the date paid to
the Noteholders;

                  (4)  fourth,  to the  Holders  of the  Notes  the  amounts  of
principal (or, if applicable,  Make Whole Amount) due and unpaid with respect to
the Notes;

                  (5) fifth,  to the  Insurer  the amount of all  payments  made
under the  Policy and the Swap  Policy  which  have not been  reimbursed  to, or
collected by, the Insurer;

                  (6) sixth,  to the Insurer  the amount of any  interest at the
Default  Rate (to the extent not  required to be paid under  clause third above)
and Late Payment Fees paid by the Issuer or for the Issuer's  account  under the
Construction  Loan Agreement and not previously paid to the Insurer  pursuant to
this  clause  sixth and the  amount of  interest  at the  Default  Rate and Late
Payment Fees then due and unpaid under the Construction Loan Agreement;

                  (7)  seventh,  to the Insurer all amounts due and unpaid under
or pursuant to the Policy and the Swap Policy;

                  (8) eighth,  to the Trustee  amounts  necessary  to enable the
Trustee to pay, repay, or reimburse third parties for amounts expended on Costs;

                  (9)  ninth,  if no  Event  of  Default  has  occurred  and  is
continuing to the Issuer, the Insurer, the Guarantor or a Purchaser, as the case
may be, the amounts set forth in Section 7.3(a); and

                  (10) tenth,  if the  conditions  set forth in Section 12.19 to
the  satisfaction  and  discharge of this  Indenture  have been  satisfied,  the
balance in the  Accounts  to the  Issuer or such other  Person as may be legally
entitled  thereto  or as may be  ordered  or  directed  by a court of  competent
jurisdiction.

         Notwithstanding the foregoing,  if an Event of Default has occurred and
is  continuing  and the  Trustee  receives  proceeds  from  the  sale  or  other
disposition of the Collateral or upon the exercise of remedies under or pursuant
to the Construction Loan Documents, no payments from such proceeds shall be made
pursuant to clause fifth of this Section 7.1(b) until the Outstanding  Principal
Amount of, accrued and unpaid interest on, and Additional  Amounts, if any, with
respect to the Notes have been paid in full.



<PAGE>


         Notwithstanding  anything  in  this  Indenture  to  the  contrary,  all
payments  made  by the  Reinsurer  under  the  Assignment  of  Reinsurance,  the
Assignment  of  Reinsurance  (Swap),  the  Reinsurance  Agreement  or  the  Swap
Reinsurance  Agreement  and all  amounts  due to the  Reinsurer  pursuant to any
thereof,   respectively,   for  all  purposes  of  this   Indenture,   including
specifically this Section 7.1(b) and Section 12.19, shall be deemed to have been
made by the Insurer under the Policy or the Swap Policy, and shall be deemed due
to the Insurer under the Policy or the Swap Policy, respectively.

         SECTION 1.48 The Accounts. On or prior to the Closing Date, the Trustee
shall establish and thereafter maintain the Accounts at an Eligible Institution.
The Accounts shall initially be held at Bank One, National  Association.  If any
Eligible  Institution  ceases to be an Eligible  Institution,  the Issuer  shall
choose  another  Eligible  Institution,  which  Eligible  Institution  shall  be
reasonably  acceptable  to the  Insurer  (so long as no Policy  Event shall have
occurred and be continuing)  to hold the Accounts,  and shall direct the Trustee
in writing to  transfer  the  Accounts  to such  Eligible  Institution,  and the
Trustee shall cause the Accounts to be transferred to such Eligible Institution.
All  amounts  deposited  in the  Accounts  shall be held for the  benefit of the
Noteholders.  The only  permitted  withdrawal  from or  application  of funds on
deposit in, or otherwise to the credit of, the Accounts,  shall be in accordance
with the  provisions of this  Indenture.  The Trustee agrees to give the Issuer,
the Insurer, the Guarantor,  the Purchasers and the Noteholders prompt notice if
any of the  Accounts  any funds on deposit  therein,  or otherwise to the credit
thereof,  shall  become  subject  to  any  writ,  order,  judgment,  warrant  of
attachment, execution or similar process.

         SECTION 1.49 General Provisions Regarding Accounts.  (a) Any funds held
in an Account shall be invested by the Trustee in Permitted  Investments  at the
written  direction  of the Person  which made the  payment to the Trustee of the
funds to be so  invested;  provided,  however,  that (i) if an Event of  Default
shall have  occurred and is  continuing  and no Policy Event has occurred and is
continuing, such funds shall be invested in Permitted Investments at the written
direction  of the  Insurer,  or (ii) if an Event of Default has  occurred and is
continuing  and a  Policy  Event  has  occurred  and is  continuing,  or,  if no
Permitted  Investment has been designated in writing to the Trustee by the party
having the right to make such  designation,  such funds shall be invested in the
One Group Prime  Institutional  Fund.  If no Event of Default has  occurred  and
continuing,  on each  Interest  Payment  Date,  Payoff  Date  and on the  Stated
Maturity Date all income or other gain (net of losses and  investment  expenses)
from investments of monies deposited in the Accounts,  shall be withdrawn by the
Trustee from such account and remitted to the Issuer, the Insurer, the Guarantor
or a  Purchaser,  whichever  made the  payment  to the  Trustee  of the funds so
deposited in the Accounts,  pursuant to clause (ix) of the Priority of Payments,
to the extent of the funds on deposit in the relevant Account after the payments
required to be made  pursuant to clauses (i) through  (viii) of the  Priority of
Payments are made. If any  investment  of funds in an Account  results in a loss
such that the amount remaining on deposit will not be sufficient to pay in full,
when due,  the amounts for which the deposit of such funds was made,  the Person
which made the payment to the Trustee of the funds shall  immediately pay to the
Trustee an amount  sufficient  to pay in full,  when due, such amounts for which
the deposit was made, and if such additional amount is paid to the Trustee prior
to the due date of the payment to be made with such funds, the existence of such
deficiency  shall  not  constitute  an  Event  of  Default  notwithstanding  any
provision in the Construction Loan Documents to the contrary.



<PAGE>


                  (b) The Trustee  shall not in any way be held liable by reason
of any  insufficiency in the Accounts,  resulting from any loss on any Permitted
Investment  included  therein  acquired  at the  direction  of the  Issuer,  the
Insurer,  the  Guarantor  or a Purchaser  pursuant to clause (a) of this Section
7.3.

         SECTION  1.50  Payment  of  Accounts  Balances.  At  such  time  as the
principal  of,  interest on and all other amounts due with respect to the Notes,
and all  amounts due to any other  Person  pursuant  to this  Indenture  and the
Policy have been  indefeasibly paid in full, the Trustee shall withdraw from the
Accounts any moneys then on deposit therein and disburse such moneys as follows:
if from the (i) Payment Account, to the Issuer, (ii) the Policy Payment Account,
to the Insurer, (iii) the Note Purchase Account, to the Purchaser,  and (iv) the
Guarantee Payment Account, to the Guarantor.


                                  ARTICLE VIII

                             SUPPLEMENTAL INDENTURES

         SECTION 1.51  Supplemental  Indentures  Without Consent of Noteholders.
Without  the  consent of the  Noteholders,  but with prior  notice to the Rating
Agencies,  the Issuer,  the Insurer (so long as no Policy Event has occurred and
is continuing) and the Trustee,  when authorized by an Issuer Order, at any time
and from  time to time,  may  enter  into  one or more  indentures  supplemental
hereto, in form satisfactory to the Trustee, for any of the following purposes:

                  (1)  to  evidence  the  succession,  in  compliance  with  the
applicable  provisions  hereof,  of  another  Person  to  the  Issuer,  and  the
assumption  by any such  successor of the  covenants of the Issuer herein and in
the Notes;

                  (2) to add to the covenants of the Issuer,  for the benefit of
the Insurer  and the  Noteholders,  or to  surrender  any right or power  herein
conferred upon the Issuer;

                  (3) to  convey,  transfer,  assign,  mortgage  or  pledge  any
additional property to or with the Trustee;

                  (4) to cure  any  ambiguity,  to  correct  or  supplement  any
provision herein or in any supplemental  indenture that may be inconsistent with
any other provision herein or in any supplemental indenture or to make any other
provisions  with respect to matters or questions  arising  under this  Indenture
which will not be inconsistent with other provisions of the Indenture; or



<PAGE>


                  (5)  to  evidence  and  provide  for  the  acceptance  of  the
appointment  hereunder  by a successor  trustee with respect to the Notes and to
add to or change any of the  provisions of this  Indenture as shall be necessary
to  facilitate  the  administration  of the  trusts  hereunder  by more than one
trustee, pursuant to the requirements of Article V;

provided, however, that (i) such action shall not, as evidenced by an Opinion of
Counsel,  adversely  affect the  interests  of any  Noteholder;  (ii) the Rating
Agency Condition shall have been satisfied with respect to such action and (iii)
any additional property Environmental Report reasonably requested by the Trustee
(if any additional real property is conveyed,  transferred,  assigned, mortgaged
or  pledged  to or with the  Trustee)  shall  have  been  received  and shall be
reasonably satisfactory to the Trustee. The Trustee is hereby authorized to join
in the  execution  of any such  supplemental  indenture  and to make any further
appropriate agreements and stipulations that may be therein specified.

         SECTION 1.52 Supplemental  Indentures with Consent of Noteholders.  The
Issuer,  the Insurer and the Trustee,  when authorized by an Issuer Order,  also
may (i) so long as a Policy  Event  has  occurred  and is  continuing,  with the
consent of the Holders of greater than 50% of the Outstanding  Principal  Amount
of the Notes affected  thereby,  or (ii) so long as no Policy Event has occurred
and is continuing,  with the prior consent of the Insurer and without consent of
the Holders,  enter into an indenture or indentures  supplemental hereto for the
purpose of adding any  provisions  to, or changing in any manner or  eliminating
any of the  provisions  of, this Indenture or modifying in any manner the rights
of the Holders of the Notes under this  Indenture;  provided that (x) the Rating
Agency  Condition  shall have been satisfied with respect to such action and (y)
no such supplemental  indenture shall, without the consent of the Holder of each
outstanding Note affected thereby:

                  (1) change the Stated Maturity Date, any Interest Payment Date
or any  Payoff  Date  (or  the  dates  on  which a  redemption  or  purchase  is
permitted),  or reduce the Outstanding  Principal Amount,  the interest rate (or
manner of calculation of the interest rate) or the  Redemption/Purchase  Deposit
Amount with respect to any Note,  or change any time or place of payment  where,
or the coin or currency in which,  any principal  (or the Make Whole Amount,  as
applicable)  of,  interest on or Additional  Amounts with respect to any Note is
payable  (or  modify the  definition  of  "Additional  Amounts"  or "Make  Whole
Amount"),  or impair  the right to  institute  suit for the  enforcement  of the
provisions  of this  Indenture  requiring  the  application  of funds  available
therefor,  as  provided  in Article IV, to the payment of any such amount due on
the  Notes on or after the  respective  due dates  thereof  (or,  in the case of
redemption on or after the Redemption  Date or, in the case of a purchase of the
Notes by Marriott, on or after the Purchase Date);

                  (2) reduce the percentage of the Outstanding  Principal Amount
of the Notes the consent of the respective  Noteholders of which is required for
any such supplemental indenture, or the consent of the respective Noteholders of
which is required for any waiver of future compliance with certain provisions of
this  Indenture  or  certain  past  defaults  hereunder  and their  consequences
provided for in this Indenture;



<PAGE>


                  (3)  modify  any  provision  of this  Indenture  specifying  a
percentage of the aggregate  Outstanding Principal Amount of the Notes necessary
to amend this Indenture;

                  (4) modify any of the  provisions  of this  Indenture  in such
manner as to affect the  calculation of any amounts of principal or interest due
with respect to the Notes, or the manner or method of calculating such amounts;

                  (5)  change  the  dates  upon  which  optional  redemption  or
purchase of the Notes is permitted; or

                  (6)  release  the  Insurer   from  all  or  any  part  of  its
obligations  under or with respect to the Policy or release the  Reinsurer  from
all or any part of its  obligations  under or with respect to the  Assignment of
Reinsurance or the Reinsurance Agreement.

         It shall not be  necessary  for any act of the  Noteholders  under this
Section  8.2  to  approve  the  particular  form  of any  proposed  supplemental
indenture,  but it shall be  sufficient  if such Act shall approve the substance
thereof.

         Promptly after the execution by the Issuer, the Insurer and the Trustee
of any  supplemental  indenture  pursuant to this Section 8.2, the Trustee shall
mail to the  Guarantor  and the Holders of the Notes to which such  amendment or
supplemental  indenture  relates a notice  setting  forth in  general  terms the
substance  of such  supplemental  indenture.  Any failure of the Trustee to mail
such notice,  or any defect therein,  shall not,  however,  in any way impair or
affect the validity of any such supplemental indenture.

         SECTION 1.53 Execution of  Supplemental  Indentures.  In executing,  or
permitting  the  additional  trusts  created  by,  any  supplemental   indenture
permitted by this Article VIII or the modification thereby of the trusts created
by this  Indenture,  the Trustee  shall be  entitled to receive,  and subject to
Sections 6.1 and 6.2,  shall be fully  protected in relying  upon, an Opinion of
Counsel stating that the execution of such supplemental  indenture is authorized
or  permitted  by this  Indenture  and  that  all  conditions  precedent  to the
execution and delivery of such supplemental  indenture have been satisfied.  The
Trustee  may, but shall not be  obligated  to, enter into any such  supplemental
indenture  that  affects  the  Trustee's  own  rights,  duties,  liabilities  or
immunities under this Indenture or otherwise.



<PAGE>


         SECTION 1.54 Effect of  Supplemental  Indenture.  Upon the execution of
any supplemental  indenture  pursuant to the provisions  hereof,  this Indenture
shall be and shall be deemed to be modified and amended in accordance  therewith
with  respect  to  the  Notes  affected  thereby,  and  the  respective  rights,
limitations of rights,  obligations,  duties,  liabilities and immunities  under
this  Indenture of the Trustee,  the Issuer,  the Insurer and the Holders of the
Notes shall thereafter be determined,  exercised and enforced  hereunder subject
in all  respects to such  modifications  and  amendments,  and all the terms and
conditions of any such supplemental  indenture shall be and be deemed to be part
of the terms and conditions of this Indenture for any and all purposes.

         SECTION  1.55  Reference  in Notes to  Supplemental  Indentures.  Notes
authenticated  and delivered after the execution of any  supplemental  indenture
pursuant to this  Article VIII may, and if required by the Issuer or the Insurer
shall, bear a notation in form approved by the Trustee as to any matter provided
for in such  supplemental  indenture.  If the  Issuer  or the  Trustee  shall so
determine,  new Notes so modified  as to conform,  in the opinion of the Trustee
and the Issuer, to any such supplemental  indenture may be prepared and executed
by the Issuer, and upon Issuer Order  authenticated and delivered by the Trustee
in exchange for Outstanding Notes.


                                   ARTICLE IX

               REDEMPTION OF NOTES; PURCHASE OF NOTES; DEFEASANCE

         SECTION  1.56  Redemption.  (a) On any date on which the Issuer makes a
prepayment  of the  Construction  Loan,  in whole or in  part,  pursuant  to the
Construction Loan Agreement (a "Prepayment Date"),  principal of the Notes in an
amount  equal to the  principal  of the  Construction  Loan so prepaid  shall be
redeemed in accordance with this Article IX.

                  (1) If the Issuer has elected to defease the Construction Loan
pursuant to the Construction  Loan Agreement and the Issuer has delivered to the
Trustee for deposit in the Payment  Account the  Defeasance  Collateral,  on the
first Business Day following the Four-Year  Date (also a "Defeasance  Redemption
Date"), the Notes shall be redeemed in whole pursuant to this Article IX. If the
Trustee has required the Issuer to defease the Construction Loan pursuant to the
Construction  Loan  Agreement  and the Issuer has  delivered  to the Trustee for
deposit in the Payment Account the Defeasance Collateral,  on the first Business
Day following the Two-Year Date (also a "Defeasance Redemption Date"), the Notes
shall be redeemed in whole pursuant to this Article IX.

                  (c) In the event that,  after the  Defeasance  Collateral  has
been  delivered to the Trustee prior to the Two-Year Date or Four-Year  Date, as
applicable,  an event occurs which would  require the payment of any  Additional
Amounts on the Notes (the payment of which is not provided for in the Defeasance
Collateral),  then the Trustee  promptly  shall give notice of redemption to the
Noteholders.  The date of redemption  shall be the first  Business Day following
the 30th calendar day after the Trustee gives such  redemption  notice.  On such
Redemption Date, the Issuer shall redeem the entire Outstanding Principal Amount
of the Notes in accordance with this Article IX.



<PAGE>


         SECTION 1.57  Purchase.  (a) On any date on or after the Four-Year Date
Marriott  may  purchase  the Notes in whole  but not in part.  On any date on or
after  the  Two-Year  Date,  (i) if an  Event of  Default  has  occurred  and is
continuing,  Marriott may purchase the Notes, in whole but not in part, and (ii)
if Marriott has not previously elected to purchase the Notes and any payment has
been made pursuant to the Policy, the Swap Policy, the Reinsurance  Agreement or
the Swap  Reinsurance  Agreement  on  account of a claim  made  thereunder,  the
Insurer or the Reinsurer  may purchase the Notes,  in whole but not in part (the
party electing to purchase the Notes under the preceding  sentence or clause (i)
or (ii) above being referred to as the "Purchaser"). In addition, if the Insurer
or the  Reinsurer  elects to purchase the Notes under clause (ii) above,  within
ten  (10)  calendar  days  after  receipt  of  notice  from the  Insurer  or the
Reinsurer,  Marriott  may instead  elect to purchase  the Notes under clause (i)
above,  which election by Marriott will supersede the election by the Insurer or
the Reinsurer  under clause (ii) above.  Any election to purchase the Notes will
be made by delivery from the Purchaser to the Trustee and to the Insurer (in the
case of the first  sentence  of this  Section  9.2(a) or  clause  (i)  above) or
Marriott  (in the case of  clause  (ii)  above) of  written  notice  thereof  (a
"Purchase Notice").  A Purchase Notice shall be delivered at least 35 (or fewer,
but not less than 30, with the  consent of the  Trustee)  calendar  days and not
more than 95 calendar  days prior to the date upon which a purchase  will occur,
which notice shall be  irrevocable.  The purchase price of the Notes shall be as
set forth in Section 9.3(a).

                  (1) If the  Purchaser  is  Marriott,  simultaneously  with the
giving of a Purchase  Notice,  such  Purchaser  shall deliver to the Trustee for
deposit into the Note Purchase Account the  Redemption/Purchase  Deposit Amount,
and no  Purchase  Notice  from such  Purchaser  shall be deemed to be  effective
unless  and  until  such  funds  have  been  deposited.  If the  Insurer  is the
Purchaser,  the  Insurer  shall  deliver to the  Trustee for deposit in the Note
Purchase  Account by 11:00 a.m.  New York City Time on the Payoff Date an amount
equal to the  Outstanding  Principal  Amount of, accrued and unpaid interest on,
and due and unpaid Additional Amounts with respect to the Notes as of the Payoff
Date.

                  SECTION 1.58 Mechanics of Redemption or Purchase.

                  (1) If the Notes are to be redeemed in whole,  the  redemption
price  shall be 100% of the  Outstanding  Principal  Amount of the Notes (or the
Make Whole  Amount of the Fixed Rate  Notes,  if  applicable)  plus  accrued and
unpaid interest thereon and any due and unpaid  Additional  Amounts with respect
thereto as of the Payoff  Date.  If the Notes are to be  redeemed  in part,  the
redemption  price  shall be 100% of the  portion  of the  Outstanding  Principal
Amount of the Notes (or the Make  Whole  Amount  of the  Fixed  Rate  Notes,  if
applicable)  to be redeemed plus accrued and unpaid  interest on and any due and
unpaid  Additional  Amounts with respect to the amount being  redeemed as of the
Payoff Date. If the Notes are being  purchased by Marriott,  the purchase  price
shall be 100% of the  Outstanding  Principal  Amount  of the  Notes (or the Make
Whole  Amount of the Fixed Rate Notes,  if  applicable)  plus accrued and unpaid
interest and any due and unpaid Additional Amounts as of the Payoff Date. If the
Notes are being  purchased by the Insurer,  the purchase  price shall be 100% of
the Outstanding  Principal Amount of the Notes (and not the Make Whole Amount of
the Fixed Rate Notes), plus accrued interest and unpaid Additional Amounts as of
the Payoff Date.

<PAGE>



                  (2) If the  Notes  are to be  partially  redeemed,  a  ratable
portion of each Note outstanding on the Payoff Date shall be redeemed.

                  (3) In the case of (i) a redemption pursuant to Section 9.1(a)
or a purchase  pursuant to Section  9.2,  not more than five (5)  calendar  days
following  receipt of the Redemption  Notice or the Purchase Notice, as the case
may be, (ii) a redemption following a defeasance, not less than thirty (30) days
prior to a Defeasance Redemption Date, or (iii) a redemption pursuant to Section
9.1(c),  promptly after obtaining  knowledge of the event  requiring  payment of
Additional Amounts,  the Trustee shall give notice of the redemption or purchase
to the Noteholders  and the Insurer,  such notice to be in the form of Notice of
Redemption/Purchase attached hereto as Exhibit I-1.

                  (4)  Payments  to  the   Noteholders  in  connection   with  a
redemption  or  purchase of the Notes will be made  pursuant  to Section  7.1(b)
hereof, provided, however, and notwithstanding the provisions of Section 7.1(b),
(i)  if the  Notes  are to be  redeemed,  each  Noteholder,  as a  condition  to
receiving  payment under Section 7.1(b),  shall surrender such Noteholder's Note
to the Trustee for  cancellation  at the location  specified  in the  Redemption
Notice or (ii) if the Notes are to be purchased, each Noteholder, as a condition
to  receiving   payment  pursuant  to  Section  7.1(b),   shall  surrender  such
Noteholder's  Note to the  Trustee at the  location  specified  in the  Purchase
Notice duly endorsed for transfer to the Purchaser. Further, notwithstanding the
provisions of Section 7.1(b), if the funds required to be paid to the Trustee by
the Issuer or a Purchaser have been so paid and deposited in the Payment Account
or Note  Purchase  Account,  as the case may be, if any  Noteholder  is not paid
because  such  Noteholder  failed to  satisfy  the  condition  specified  in the
preceding  sentence,  the amount due to such Noteholder shall be retained in the
appropriate  Account until the condition is satisfied and such amount is paid to
such Noteholder (and the retention of such amount in such Account shall be taken
into  account by the  Trustee in making  payments  and all  subsequent  payments
pursuant to the Priority of Payments).

                  (5) If the Notes are  redeemed by the  Issuer,  in whole or in
part, all Notes delivered to the Trustee for cancellation  shall be cancelled by
the Trustee, provided,  however, if any Note is redeemed in part, upon surrender
of such Note to the Trustee for  cancellation,  the Issuer shall execute and the
Trustee shall  authenticate and deliver to the Holder of such Note a new Note in
a principal  amount equal to the  unredeemed  portion of such Note. If the Notes
are purchased by the Purchaser, the Notes will remain outstanding and thereafter
the Purchaser will be the Holder thereof. Notwithstanding anything herein to the
contrary, upon the purchase of the Notes the Policy will terminate in accordance
with its terms, and the Purchaser (rather than the Insurer) will have all of the
rights and powers,  granted to the Insurer pursuant to this Indenture (including
Section  12.2)  and shall  have the same  rights  and  benefits  as the  Insurer
pursuant to this Indenture (including Sections 12.3 and 12.4).



<PAGE>


                  (6) If the Notes are to be  purchased  and the  Purchaser  has
paid the  Redemption/Purchase  Deposit Amount to the Trustee pursuant to Section
9.2(b), on the Payoff Date the Notes shall be deemed to have been transferred to
the Purchaser  (whether or not Holders have delivered  their Notes duly endorsed
for transfer as required by Section 9.3(c)),  from and after the Payoff Date the
Holders'  only  rights  with  respect to the Notes  shall be to receive  payment
therefor from the Trustee pursuant to Section 7.1(b), and the Trustee shall take
all actions necessary to register the Notes in the name of the Purchaser.

         SECTION 1.59 Form of Redemption  Notice or Purchase Notice.  Redemption
Notices  shall  be in the form  and  contain  the  information  required  by the
Construction  Loan Agreement.  Purchase  Notices shall state the Payoff Date and
the Redemption/Purchase Deposit Amount as of such Payoff Date.

         SECTION 1.60 Notes Payable on Payoff Date. In the case of a redemption,
the principal amount of the Notes to be redeemed shall become due and payable on
the Payoff Date specified in the  Redemption  Notice and interest shall cease to
accrue on the amount to be redeemed  from and after such Payoff  Date.  From and
after the Payoff Date the Notes or portions  thereof  redeemed shall cease to be
outstanding  for all  purposes,  and the  Holders'  rights  shall be  limited to
receiving payment therefor,  together with any Additional Amounts, in accordance
with this Indenture.

         SECTION 1.61 Defeasance.

                  (1) If the Issuer  elects or is  required to defease the Notes
pursuant  to  the  Construction  Loan  Agreement  and  delivers  the  Defeasance
Collateral and the Make Whole Hedge to the Trustee,  the  Defeasance  Collateral
shall be  deposited in the Payment  Account and  disbursed  in  accordance  with
Section  7.1(b).  In addition,  the Trustee shall deposit in the Payment Account
all amounts  received  pursuant to the Make Whole Hedge in the Payment  Account.
The Trustee  shall call the Notes for  redemption on the  Defeasance  Redemption
Date and, on such date,  shall make the  payments  from the  Payment  Account as
specified in Section 7.1(b).

                  (2) In order to ensure that the amount  deposited  pursuant to
Section  9.6(a) above is sufficient to pay any  applicable  Make Whole Amount on
the Fixed Rate Notes,  the Issuer  shall enter into (and  pre-fund)  one or more
interest rate hedging arrangements (a "Make Whole Hedge") with a counterparty or
counterparties  having long-term debt ratings at least equal to "AA-" by S&P and
"Aa3" by Moody's.  The Issuer  shall  remain  liable for any  shortfall  on such
deposit and for any Additional Amounts that become payable on the Notes.



<PAGE>


                  (3) Notwithstanding the deposit of the Defeasance  Collateral,
the entering into and pre-funding of the Make Whole Hedge and the application of
such Defeasance  Collateral and the proceeds of the Make Whole Hedge as provided
herein and in the Construction  Loan Agreement,  the Insurer shall remain liable
for the  payment  of the  entire  Principal  Amount of the  Notes at the  Stated
Maturity Date, and interest when due in accordance with the terms of the Policy

         SECTION  1.62  Release of  Collateral.  If the Issuer has  delivered  a
Notice of  Redemption  for a  redemption  of the Notes in whole and has paid the
Redemption/Purchase  Deposit  Amount to the  Trustee  for deposit in the Payment
Account,  or the Issuer has elected or is  required to fund the cash  collateral
account as described in Section 9.6 above and the  Construction  Loan  Agreement
and has  delivered  the  Defeasance  Collateral  and the Make Whole Hedge to the
Trustee,  upon  receipt of an Issuer  Request  and an Opinion  of  Counsel,  the
Trustee shall take or cause to be taken,  at the Issuer's sole cost and expense,
all  action  to  release  all of the  Liens  on and  security  interests  in the
Collateral as provided in the  Construction  Loan Agreement and, at the Issuer's
sole cost and  expense,  shall  execute  and deliver  all  documents  reasonably
requested by the Issuer to accomplish such release. Notwithstanding the delivery
of the  Defeasance  Collateral  and the Make Whole  Hedge to the  Trustee by the
Issuer and the release of the Collateral to the Issuer  pursuant to this Section
9.7, the Issuer shall remain liable with respect to any Additional  Amounts that
become due with  respect to the Notes,  as  provided  in the  Construction  Loan
Agreement.


                                    ARTICLE X

                              OBLIGATIONS ABSOLUTE

         SECTION 1.63 Issuer's Obligations  Absolute.  Nothing contained in this
Indenture shall impair,  as between the Issuer,  the Guarantor,  the Insurer and
the Trustee,  the obligation of the Issuer to pay to the Trustee all amounts due
and  payable  under  or  pursuant  to  the  Construction  Loan  Agreement,   the
Construction Loan Deed of Trust and the other Construction Loan Documents as and
when the same shall become due and payable in accordance with the terms thereof,
or prevent the Trustee or the Insurer  from  exercising  all rights,  powers and
remedies otherwise permitted by this Indenture, any of the other Basic Documents
or the Construction  Loan Documents  (including the Construction  Loan Agreement
and the Construction Loan Deed of Trust).


                                   ARTICLE XI

                                   THE INSURER



<PAGE>


         SECTION  1.64  Effect of Payment by  Insurer;  Subrogation.  THE ISSUER
EXPRESSLY  ACKNOWLEDGES AND AGREES THAT THE OBLIGATIONS OF THE ISSUER UNDER THIS
INDENTURE, THE NOTES, THE CONSTRUCTION LOAN AGREEMENT,  INCLUDING THE PAYMENT OF
THE  PRINCIPAL OF, AND INTEREST ON AND  ADDITIONAL  AMOUNTS WITH RESPECT TO, THE
NOTES,  THE  CONSTRUCTION  LOAN DEED OF TRUST AND THE  OTHER  CONSTRUCTION  LOAN
DOCUMENTS  ARE OWED TO, AND ARE FOR THE BENEFIT OF THE TRUSTEE (ON BEHALF OF THE
NOTEHOLDERS  AND THE  INSURER)  AND NO PAYMENT  MADE  PURSUANT TO THE POLICY THE
ASSIGNMENT OF REINSURANCE,  OR THE REINSURANCE AGREEMENT ON ACCOUNT OF PRINCIPAL
OR  INTEREST  ON THE  NOTES OR ANY OTHER  AMOUNT  DUE TO THE  NOTEHOLDERS  SHALL
MODIFY,  AMEND,  DIMINISH OR  EXTINGUISH  ANY AMOUNTS DUE FROM THE ISSUER TO THE
TRUSTEE,  OR OTHERWISE  AFFECT THE  OBLIGATIONS  OF THE ISSUER OR THE RIGHTS AND
REMEDIES OF THE TRUSTEE UNDER THIS INDENTURE,  THE NOTES, THE CONSTRUCTION  LOAN
AGREEMENT,  THE CONSTRUCTION  LOAN DEED OF TRUST OR ANY OTHER  CONSTRUCTION LOAN
DOCUMENT. In addition to any other rights granted to the Insurer pursuant to the
terms of this Indenture,  the Issuer and the Trustee  acknowledge that,  without
the need for any further  action on the part of the  Insurer,  the  Issuer,  the
Trustee  or any other  Person,  to the  extent  payments  are made  with  monies
received  pursuant to the Policy,  the  Reinsurance  Policy or the Assignment of
Reinsurance  on  account  of  principal  of or  interest  on  the  Notes  or any
Additional  Amounts to the Noteholders,  the Insurer will be fully subrogated to
the rights of the Noteholders to receive such amounts of principal, interest and
Additional  Amounts;  provided,  however,  that to the  extent  such  payment is
derived  from the sources and in the manner  provided  herein for the payment of
such principal,  interest or Additional  Amounts,  the Insurer shall be paid, in
each case,  only after the  Noteholders  have  received  payments as provided in
Section 7.1(b).

         SECTION 1.65 Rights of the Insurer.

                  (1) So long as no Policy Event has occurred and is continuing,
to the  extent  that (i) the  Trustee  in its  capacity  as  Trustee  under this
Indenture or (ii) the Trustee under the Construction  Loan Documents  (including
the  Construction  Loan  Agreement and the  Construction  Loan Deed of Trust) is
required to take any actions (other than the collection and payment of moneys in
accordance  with the  Construction  Loan  Documents),  or grant  any  approvals,
consents or waivers  pursuant to the  Construction  Loan Documents,  the Trustee
will take such  actions only at the  direction of or with the prior  approval of
the Insurer.

                  (2) Without limiting paragraph (a), so long as no Policy Event
has occurred and is continuing, the Trustee shall cooperate in all respects with
any request by the  Insurer  for action to  preserve  or enforce  the  Insurer's
rights or  interests  under this  Indenture,  including  a request to  institute
Proceedings  for the collection of all amounts then payable under this Indenture
or the  Construction  Loan  Documents  and a request  to  enforce  any  judgment
obtained and collect the amount adjudged due.



<PAGE>


                  (3) Without limiting paragraph (a), so long as no Policy Event
has occurred and is continuing,  (i) the Insurer shall have all rights to direct
the  Trustee  to  enforce  all  rights  and  exercise  all  remedies  under  the
Construction  Loan Documents;  (ii) no amendment,  modification or waiver of any
term of this Indenture or the Construction  Loan Documents shall be made without
the prior  consent  of the  Insurer;  (iii) the  Trustee  shall not be  replaced
without the prior  written  consent of the Insurer;  (iv) the Insurer shall have
the sole right to direct the time, method and place of conducting any Proceeding
for any  remedy  available  to the  Trustee  or  exercising  any  trust or power
conferred on the Trustee, and the Noteholders shall have no right or entitlement
to so  direct  the  Trustee;  and (v) no  Noteholder  shall  have  any  right to
institute  any   Proceeding,   judicial  or  otherwise,   with  respect  to  the
Construction Loan Documents,  or for the appointment of a receiver or a trustee,
or for any other remedy under the Construction Loan Documents.

                  (4)   Notwithstanding   anything   in  this   Indenture,   the
Construction  Loan  Agreement  or any other  Construction  Loan  Document to the
contrary,  at its  option  the  Insurer,  in its own  name or in the name of the
Trustee,  shall have the right , to the  exclusion of the  Trustee,  to take any
action under this  Indenture,  the  Construction  Loan  Agreement and each other
Construction  Loan Document  which the Trustee has the right to take pursuant to
the terms and provisions  thereof,  including the right to exercise all remedies
after the occurrence of a Default or Event of Default.  If the Insurer elects or
is  required  to take any such  action in the name of the  Trustee,  the Trustee
shall  reasonably  cooperate  with the Insurer to facilitate  the taking of such
action,  which  actions by the Trustee  shall be covered by the  indemnification
provided in Section 5.7.

                  (5) Each of the rights  and  remedies  granted to the  Insurer
pursuant to this  Indenture and the  Construction  Loan Documents are granted to
the Insurer in its individual  capacity as obligor under the Policy for the sole
benefit of the Insurer to  facilitate  any  recovery to which the Insurer may be
entitled.  No such grant contained herein or in any  Construction  Loan Document
shall  in any  way  create  or be  deemed  to  create  any  duty  to,  or  trust
relationship  with, any Noteholder or the Trustee,  and each Noteholder,  by its
acceptance of a Note hereunder, acknowledges and agrees that the sole duties and
obligations  of the Insurer to the  Trustee  for the benefit of the  Noteholders
shall be specified in the Policy.

         SECTION 1.66  Indemnification;  Reimbursement  of Costs. (a) The Issuer
agrees to indemnify and hold harmless the Insurer and Affiliates,  shareholders,
directors,  officers,  employees  and agents  against  any and all  liabilities,
costs,   expenses  and  losses   (including   reasonable   attorneys   fees  and
disbursements) incurred by the Insurer in the performance of obligations and the
exercise of its rights and  remedies  hereunder or under the  Construction  Loan
Documents other than if caused by the gross negligence or willful  misconduct of
the Insurer,  including,  without limitation, for any amounts of indemnification
paid to the Trustee pursuant to Section 5.7.

                  (1) The Issuer  agrees to pay or reimburse the Insurer for all
costs and  expenses,  including  reasonable  attorneys  fees and  disbursements,
incurred by the Insurer in connection  with this Indenture and the  Construction
Loan Documents, and the transactions  contemplated hereby or thereby,  including
the reasonable fees and  disbursements of consultants  (including a construction
consultant), other experts and counsel.

<PAGE>



         SECTION 1.67  Liability of the Insurer.  Unless  specifically  provided
otherwise in a Construction  Loan Document,  so long as the Insurer performs all
of its obligations under the Policy,  the Insurer shall not be liable for taking
or failing to take any action  delegated  to the Insurer  hereunder or under the
Construction Loan Documents.

         SECTION 1.68  Consents.  Unless  specifically  provided  otherwise in a
Construction Loan Document, all actions by the Insurer hereunder,  including the
giving or withholding  of consents,  may be taken by the Insurer in its sole and
absolute discretion.

         SECTION 1.69  Substitution of Reinsurer.  If, pursuant to Assumption of
Liability and Novation Endorsement to the Reinsurance  Agreement,  the Policy is
deemed  novated and amended and the  obligations  of the Insurer  thereunder are
assumed by the Reinsurer in substitution for the Insurer, the Reinsurer shall be
substituted  for the Insurer  hereunder,  all  references  to the Insurer  shall
thereafter  refer to the Reinsurer,  the Reinsurer shall have all of the rights,
duties  and  obligations  that  the  Insurer  had  prior  to such  substitution,
including  the right to receive all  payments  pursuant to Section  7.1(b) to be
made on account of periods beginning after such substitution, and all references
to the Policy shall mean the Policy as so amended.  If the foregoing occurs, the
Issuer  and the  Trustee  shall  join  with the  Insurer  and the  Reinsurer  in
executing and delivering any documents or  instruments  reasonably  requested by
the Issuer,  the Trustee,  the Insurer or the Reinsurer to effectuate the intent
of this Section  11.6,  including  documents  necessary to make the Reinsurer or
party to this  Indenture.  Notwithstanding  the  foregoing,  the  Insurer  shall
continue  to have the right to receive  all  payments  under  Section  7.1(b) on
account of payments  made by the  Insurer  prior to such  substitution  or which
accrued to the benefit of the Insurer during periods prior to such substitution,
all  indemnification  payments  under this Indenture and the  Construction  Loan
Documents for acts, events and occurrences  prior to such substitution  (even if
claims therefor are made after such substitution) in its capacity as Insurer and
Administrative  Agent, and  reimbursement of all costs and expenses that accrued
prior to such substitution.

         SECTION 1.70 Notice of Failure to Pay Premiums.  The Insurer shall give
the Issuer,  the Trustee and the Guarantor  prompt written notice of any failure
by the Issuer to pay premiums  due with respect to the Policy,  the Swap Policy,
the Reinsurance Agreement or the Swap Reinsurance Agreement.


                                   ARTICLE XII

                                  MISCELLANEOUS

<PAGE>


         SECTION  1.71  Compliance  Certificates  and  Opinions,  etc.  Upon any
application or request by the Issuer to the Trustee to take any action under any
provision of this  Indenture,  the Issuer  shall  furnish to the Trustee and, if
applicable, the Insurer (a) an Officer's Certificate stating that all conditions
precedent,  if any,  provided  for in this  Indenture  relating to the  proposed
action have been complied with, (b) if required hereunder, an Opinion of Counsel
stating that in the opinion of such counsel all such  conditions  precedent,  if
any, have been complied with and (c) if applicable,  an Independent  Certificate
from a firm of certified public accountants meeting the applicable  requirements
of this  Section  12.1,  except  that,  in the case of any such  application  or
request as to which the furnishing of such documents is specifically required by
any provision of this  Indenture,  no additional  certificate or opinion need be
furnished.

         Every  certificate  or  opinion  with  respect  to  compliance  with  a
condition or covenant provided for in this Indenture shall include:

                  (1) a statement  that each  signatory of such  certificate  or
opinion  has read or has caused to be read such  covenant or  condition  and the
definitions herein relating thereto;

                  (2) a  brief  statement  as to the  nature  and  scope  of the
examination or investigation upon which the statements made or opinions given in
such certificate or opinion are based;

                  (3) a statement  that, in the opinion of each such  signatory,
such  signatory has made such  examination or  investigation  as is necessary to
enable such  signatory to express an informed  opinion as to whether or not such
covenant or condition has been complied with; and

                  (4) a  statement  as to  whether,  in the opinion of each such
signatory, such condition or covenant has been complied with.

         The  Trustee  and the  Insurer  may  conclusively  rely on and be fully
protected in acting in reliance on any such Officer's  Certificate or Opinion of
Counsel  without  any  further  investigation  on its  parts  as to  any  matter
specified therein.

         SECTION  1.72 Form of Documents  Delivered to Trustee.  (a) In any case
where several  matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by, or covered  by the  opinion  of,  only one such  Person,  or that they be so
certified  or covered by only one  document,  but one such Person may certify or
give an opinion  with respect to some matters and one or more other such Persons
as to other  matters,  and any such  Person may certify or give an opinion as to
such matters in one or several documents.



<PAGE>


                  (1) Any certificate or opinion of an Authorized Officer of the
Issuer may be based, insofar as it relates to legal matters,  upon a certificate
or opinion of, or representations by, counsel,  unless such officer knows, or in
the exercise of reasonable  care should know, that the certificate or opinion or
representations  with respect to the matters upon which such Officer Certificate
or opinion is based are erroneous. Any such certificate of an Authorized Officer
or Opinion of Counsel  may be based,  insofar as it relates to factual  matters,
upon a certificate or opinion of, or representations  by, an officer or officers
of the Issuer, stating that the information with respect to such factual matters
is in the  possession  of the  Issuer,  unless  such  officer or officers of the
Issuer or such counsel knows, or in the exercise of reasonable care should know,
that the certificate or opinion or representations  with respect to such matters
are erroneous.

                  (2) Where any Person is required to make,  give or execute two
or more applications, requests, comments, certificates,  statements, opinions or
other instruments under this Indenture,  they may, but need not, be consolidated
and form one instrument.

                  (3)  Whenever  in  this  Indenture,  in  connection  with  any
application  or  certificate  or report to the Trustee,  it is provided that the
Issuer  shall  deliver  any  document  as a  condition  of the  granting of such
application,  or as evidence of the Issuer's compliance with any term hereof, it
is intended  that the truth and  accuracy,  at the time of the  granting of such
application or at the effective date of such  certificate or report (as the case
may be), of the facts and opinions stated in such document shall in such case be
conditions precedent to the right of the Issuer to have such application granted
or to the  sufficiency of such  certificate or report.  The foregoing shall not,
however,  be construed to affect the Trustee's  right to rely upon the truth and
accuracy of any statement made or opinion given in any such document as provided
in Article V.

         SECTION   1.73  Acts  of   Noteholders.   (a)  Any   request,   demand,
authorization,  direction,  notice,  consent, waiver or other action provided by
this  Indenture  to be  given or taken by  Noteholders  may be  embodied  in and
evidenced by one or more  instruments of  substantially  similar tenor signed by
such Noteholders in person or by agents duly appointed in writing; and except as
herein otherwise expressly provided such action shall become effective when such
instrument or instruments are delivered to the Trustee,  and, where it is hereby
expressly  required,  to the Issuer.  Such  instrument or  instruments  (and the
action embodied herein and evidenced  thereby) are herein sometimes  referred to
as the "Act" of the Noteholders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be  sufficient  for any purpose of this  Indenture  and (subject to Section 5.1)
conclusive  in  favor  of the  Trustee  and the  Issuer,  if made in the  manner
provided in this Section 12.3.

                  (1) The  ownership  of the  Notes  shall be proved by the Note
Register.

                  (2) Any request,  demand,  authorization,  direction,  notice,
consent, waiver or other action by the Holder of any Notes shall bind the Holder
of every Note issued upon the registration thereof or in exchange therefor or in
lieu thereof, in respect of anything done, omitted or suffered to be done by the
Trustee or the Issuer in  reliance  thereon,  whether  or not  notation  of such
action is made upon such Note.



<PAGE>


         SECTION 1.74 Notices,  etc., to the Trustee,  the Issuer,  the Insurer,
the Guarantor and the Rating Agencies.

                  (1) Any request,  demand,  authorization,  direction,  notice,
consent,  waiver or Act of Noteholders or other documents  provided or permitted
by  this   Indenture   shall  be  in  writing  and  if  such  request,   demand,
authorization, direction, notice, consent, waiver or Act of Noteholders is to be
made upon, given or furnished to or filed with:

                           (1) the Trustee by any Noteholder, the Insurer or the
         Issuer,  shall be sufficient for every purpose  hereunder if in writing
         and mailed  first-class,  postage  prepaid or sent by  facsimile to the
         Trustee addressed to:

                           1 Bank One Plaza, Suite IL1-0126
                           Chicago, IL  60670-0126
                           Attention:  Global Corporate Trust Services
                           Fax No.:  [(312) 407-4656]

Any  notice  to be given to the  Trustee  hereunder  shall  also be given to the
Depository  and shall not be deemed given to the Trustee until also given to the
Depository;

                           (2) the  Issuer by the  Trustee,  the  Insurer or any
         Noteholder,  shall be  sufficient  for every  purpose  hereunder  if in
         writing and mailed first-class, postage prepaid or sent by facsimile to
         the Issuer addressed to:

                           Desert Ridge Resort LLC
                           CNL Center at City Commons
                           450 South Orange Avenue
                           Orlando, Florida 32801
                           Attention:  Chief Operating Officer
                           Fax No.:  (407) 650-1085

                  with a copy to:

                           Lowndes, Drosdick, Doster, Kantor & Reed
                           215 North Eola Drive
                           Orlando, Florida 32802
                           Attention:  Richard Fildes, Esq.
                           Fax No.:  (407) 843-4444

                  with a copy to:

                           Skadden, Arps, Slate, Meagher & Flom LLP
                           Four Times Square
                           New York, New York 10036
                           Attention:  Harvey R. Uris, Esq.
                           Fax No.:  (212) 735-2000

or at any other  address  previously  furnished in writing to the Trustee by the
Issuer.  The Issuer shall promptly  transmit any notice  received by it from the
Noteholders to the Trustee.

                           (3) the Insurer by the Issuer or the  Trustee,  shall
         be  sufficient  for  every  purpose  hereunder  if given in the  manner
         required  for notices  pursuant to the terms of the Policy,  including,
         without limitation, satisfying the requirements specified in the Policy
         for telephonic  confirmation of deliveries by facsimile and delivery of
         original   copies   of   required   notices   and    documentation   by
         internationally  recognized  overnight  courier  service or by personal
         delivery.  The Insurer's address for notices,  subject to any change of
         address pursuant to the terms of the Policy, shall be:

                           Financial Structures Limited
                           Chevron House, 11 Church Street
                           Hamilton, HMHX Bermuda
                           Attention: President
                           Fax No.: (441) 295-6448

                  with a copy to:

                           FSL Group, Inc.
                           10 Wright Street, Suite 120
                           Westport, CT 06880
                           Attention:  Martin J. Walker
                           Fax No.:  (203) 227-2555

                  with a copy to:

                           Kelley Drye & Warren LLP
                           101 Park Avenue
                           New York, NY  10178
                           Attention: John A. Garraty, Jr.
                           Fax No.: (212) 808-7897

with a copy to the Reinsurer.  The Reinsurer's  address for notices,  subject to
any change of address pursuant to the terms of the Reinsurance Agreement,  shall
be:

                           Royal Indemnity Company
                           9300 Arrowpoint Blvd.
                           Charlotte, NC  28273-8135
                           Attention: B.J. Rood, General Manager
                           Fax No.: (704) 543-3499

                           -and-

                           Royal Indemnity Company
                           9300 Arrowpoint Blvd.
                           Charlotte, NC  28273-8135
                           Attention:  Arthur W. Francis, Legal
                             and Regulatory Services
                           Fax No.:  (704) 522-2688

Any notice given to the Insurer  shall be deemed to be given or delivered to the
Insurer  at the time and in the same  manner  in which  any  Notice  of Claim is
deemed to be "Received" (as defined in the Policy).

                           (4) the Rating Agencies by the Issuer or the Trustee,
         shall be  sufficient  for every  purpose  hereunder  if in writing  and
         mailed first-class,  postage prepaid or sent by facsimile to the Rating
         Agencies addressed to:

                           Standard & Poor's Ratings Services
                           55 Water Street
                           New York, NY 10041
                           Attention: Structured Finance Surveillance Group
                           Fax No.: (212) 438-7190

                           Moody's Investors Service, Inc.
                           99 Church Street
                           New York, NY 10004
                           Attention: Structured Finance Monitoring
                           Fax No.: (212) 553-4170

                           (5) the  Guarantor by the Issuer,  the Trustee or the
         Insurer, shall be sufficient for every purpose hereunder if in writing,
         and mailed  first-class,  postage  prepaid or sent by  facsimile to the
         Guarantor address to:

                           Marriott International, Inc.
                           One Marriott Drive
                           Washington, D.C. 20058
                           Attention:  Treasurer
                           Fax No.:  (301) 380-5067

                           Marriott International, Inc.
                           One Marriott Drive
                           Washington, D.C. 20058
                           Attention:  General Counsel
                           Fax No.:  (301) 380-6727

                  with a copy to:

                           Arent, Fox Kintner, Plotkin & Kahn
                           1050 Connecticut Ave., N.W.
                           Washington, D.C. 20036-5339
                           Attention:  Gerald L. Mitchell, Esq.
                           Fax No.:  (202) 857-6395

                  (2) The  Issuer  shall  give the  Insurer a copy of any notice
given by the Issuer to any party hereunder.

                  (3) A copy of any notice given by or received by the Issuer or
the Trustee shall be provided to the Insurer.

         SECTION 1.75 Notices to and from Noteholders; Waiver. (a) There may be,
so long as a Global Note is held in its  entirety  on behalf of the  Depository,
the delivery of the relevant notice to the Depository for  communication by them
to the Beneficial  Owners. Any such notice shall be deemed to have been given to
the Beneficial  Owners on the seventh (7th) calendar day after the date on which
the said notice was given to the Depository.

         Notices to be given by any Noteholder  shall be in writing and given by
lodging the same with the Trustee.  Such notice may be given by a Noteholder  to
the Trustee via the  Depository in such manner as the Trustee and the Depository
may approve for this purpose.

                  (1) Where this  Indenture  provides  for notice in any manner,
such  notice may be waived in writing by any  Person  entitled  to receive  such
notice,  either  before  or  after  the  event,  and  such  waiver  shall be the
equivalent of such notice.  Waivers of notice by Noteholders shall be filed with
the Trustee but such filing  shall not be a condition  precedent to the validity
of any action taken in reliance upon such a waiver.

                  (2) In case,  by  reason of the  suspension  of  regular  mail
service as a result of a strike, work stoppage or similar activity,  it shall be
impractical  to mail  notice of any  event to  Noteholders  when such  notice is
required  to be given  pursuant to any  provision  of this  Indenture,  then any
manner of giving such notice as shall be  satisfactory  to the Trustee  shall be
deemed to be a sufficient giving of such notice.

                  (3) Where  this  Indenture  provides  for notice to the Rating
Agencies,  failure to give such notice to the Rating  Agencies  shall not affect
any  other  rights or  obligations  created  hereunder,  and shall not under any
circumstance constitute a Default or an Event of Default.

<PAGE>



                  (4) Notices to be given by any Noteholders shall be in writing
and given by lodging  the same with the  Trustee.  Such notice may be given by a
Noteholder  to the Trustee via the  Depository in such manner as the Trustee and
the Depository may approve for this purpose.

                  (5) At any  time at  which a  Global  Note is not  held in its
entirety on behalf of the Depository,  notices to Noteholders  shall be given by
the Trustee to the  Noteholders in writing at the address  therefor set forth in
the Note Register.

         SECTION  1.76  Payment and Notice  Dates.  All  payments to be made and
notices  to be  delivered  pursuant  to  this  Indenture  shall  be  made by the
responsible party as of the dates specified herein.

         SECTION 1.77 Alternative Payment and Notice Provisions. Notwithstanding
any provision of this Indenture or any of the Notes to the contrary, the Issuer,
subject  to  receipt of the prior  consent  of the  Insurer,  may enter into any
agreement  with any Noteholder  providing for a method of payment,  or notice by
the  Trustee or any Paying  Agent,  to such Holder  that is  different  from the
methods provided for in this Indenture for such payments or notices.  The Issuer
shall  furnish  to the  Trustee a copy of each such  agreement  and the  Trustee
shall,  if  practicable,  cause  payments  to be made and notices to be given in
accordance with such agreements.

         SECTION 1.78 Effect of Headings and Table of Contents.  The Article and
Section  headings herein and the Table of Contents are for convenience  only and
shall not affect the construction hereof.

         SECTION 1.79  Successors  and Assigns.  All covenants and agreements in
this  Indenture  and the  Notes by the  Issuer  shall  bind its  successors  and
assigns,  whether so  expressed or not.  All  agreements  of the Trustee in this
Indenture shall bind its successors, co-trustees and agents.

         SECTION 1.80  Separability.  In case any provision in this Indenture or
in the Notes shall be invalid, illegal or unenforceable, the validity, legality,
and enforceability of the remaining  provisions shall not in any way be affected
or impaired thereby.

         SECTION 1.81 Benefits of Indenture. Subject to Sections 9.1 and 9.2 and
Article XI, nothing in this Indenture or in the Notes, express or implied, shall
give  to any  Person,  other  than  the  parties  hereto  and  their  successors
hereunder,  and the  Noteholders,  any benefit or any legal or equitable  right,
remedy or claim under this Indenture.



<PAGE>


         SECTION  1.82  Legal  Holiday.  In any case where the date on which any
payment  is due shall not be a Business  Day,  then  (notwithstanding  any other
provision of the Notes or this Indenture) payment need not be made on such date,
but may be made on the next  succeeding  Business  Day with the same  force  and
effect as if made on the date on which  nominally due, and,  except as otherwise
expressly provided herein, interest shall continue to accrue for the period from
and after any such nominal date.

         SECTION  1.83  Governing  Law.  THIS  INDENTURE  AND EACH NOTE SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

         SECTION 1.84 Counterparts. This Indenture may be executed in any number
of  counterparts,  each of which so executed  shall be deemed to be an original,
but all  such  counterparts  shall  together  constitute  but  one and the  same
instrument.

         SECTION 1.85  Recording of Indenture.  If this  Indenture is subject to
recording in any appropriate public recording  offices,  such recording is to be
effected by the Issuer and at its expense.

         SECTION 1.86 Corporate  Obligation.  No recourse may be taken, directly
or  indirectly  (i) with respect to the  obligations  of the Trustee  under this
Indenture or any certificate or other writing  delivered in connection  herewith
or therewith,  against (A) the Trustee in its  individual  capacity,  or (B) any
partner, owner, beneficiary,  agent, officer, director, employee or agent of the
Trustee in its  individual  capacity,  any holder of equity in the Trustee or in
any successor or assign of the Trustee in its, his or her  individual  capacity,
(it being  understood that the Trustee has no such obligations in its individual
capacity);  (ii) with respect to the obligations of the Insurer or the Reinsurer
under this Indenture,  the Policy, the Reinsurance Agreement,  the Assignment of
Reinsurance or any certificate or other writing delivered in connection herewith
or therewith, against any partner, owner, beneficiary, agent, officer, director,
shareholder  or employee of the Insurer or the  Reinsurer  or any  Affiliate  of
either  thereof,  each in its, his or her  individual  capacity or any holder of
equity in the Insurer or the Reinsurer or any Affiliate of either thereof,  each
in  its,  his  or  her  individual  capacity;  and  (iii)  with  respect  to the
obligations of the Issuer on the Notes or under the Indenture or any certificate
or other  writing  delivered in connection  herewith or  therewith,  against any
partner, owner, beneficiary,  agent, officer, director or employee of the Issuer
or any Affiliate of the Issuer, each in its, his or her individual capacity,  or
any holder of equity in the Issuer or any Affiliate of the Issuer,  each in its,
his or her individual capacity, provided, however, nothing in this Section 12.16
shall  limit  the  obligations  and  liabilities  of  the  Guarantor  under  the
Completion Guarantee or the Payment Guarantee.



<PAGE>


         SECTION 1.87 Inspection.  The Issuer agrees that, with reasonable prior
notice, it will permit any  representative of the Trustee and the Insurer during
the  Issuer's  normal  business  hours,  to  examine  all the books of  account,
records,  reports and other  papers of the Issuer,  to make copies and  extracts
therefrom,  to cause such books to be audited by  independent  certified  public
accountants, and to discuss the Issuer's affairs, finances and accounts with the
Issuer's officers,  employees and Independent certified public accountants,  all
at such  reasonable  times and as often as may be reasonably  requested.  Except
with  respect  to  any  such  information  disclosed  to or  on  behalf  of  the
Noteholders,  the Trustee and the Insurer shall and shall cause their respective
representatives  to hold in confidence all such information except to the extent
disclosure  may  be  required  by  law  (and  all  reasonable  applications  for
confidential treatment are unavailing).

         SECTION 1.88 Waiver of Immunities. To the extent that the Issuer has or
hereafter  may acquire any immunity from  jurisdiction  of any court or from any
legal process (whether through service of notice,  attachment prior to judgment,
attachment in aid of execution,  execution or otherwise)  with respect to itself
or its property,  the Issuer hereby  irrevocably waives such immunity in respect
of its obligations  under this Indenture and the Notes, to the extent  permitted
by law.

         SECTION 1.89  Satisfaction and Discharge.  This Indenture,  upon Issuer
Request and  receipt by the Trustee of an Opinion of Counsel,  shall cease to be
of further  effect,  and the Trustee,  at the Issuer's  expense,  shall  execute
proper  instruments  acknowledging  satisfaction and discharge of this Indenture
when all Notes (except those  theretofore paid in full, which were lost,  stolen
or destroyed and replaced, or delivered to the Trustee for cancellation) and all
amounts  due to the  Insurer  (whether  by  virtue  of the  Insurer's  rights of
subrogation  set forth in the last sentence of Section 11.1 or  otherwise)  have
been indefeasibly paid in full (including all amounts of principal, interest and
Additional  Amounts, if any) or funds in an amount sufficient to make payment in
full have been irrevocably deposited with the Trustee, in trust, for the purpose
of making  such  payments,  and all other  amounts  due and  payable  under this
Indenture to the Trustee and the Insurer, including the fees and expenses of the
Trustee in all of its capacities,  have been paid in full.  Notwithstanding  the
foregoing,  the  provisions  of Sections  5.7, 11.3 and 12.16 shall survive such
satisfaction  and discharge.  Any moneys  deposited with the Trustee pursuant to
this  Section  12.19  shall be held by the  Trustee in trust and  applied to the
payment to the Persons entitled thereto, all in accordance with the terms of the
Notes and this Indenture,  including  Section 7.1(b).  Upon the satisfaction and
discharge of this  Indenture as provided in this Section  12.19,  the Collateral
shall be released.


                     [REMAINDER OF PAGE INTENTIONALLY BLANK]


<PAGE>


                  IN WITNESS  WHEREOF,  the Issuer,  the Trustee and the Insurer
have caused this  Indenture to be duly  executed by their  respective  officers,
thereunto duly  authorized  and duly attested,  all as of the day and year first
above written.

             DESERT RIDGE RESORT, LLC,
             as Issuer

             By:     Desert Ridge Resort Partners, LLC,
                     a Delaware limited liability company,
                     its sole member

             By:     CNL DRR Investor LP,
                     a Delaware limited partnership,
                     its managing member

                     By:      CNL Phoenix GP Corp., general partner


                              By:      /s/ C. Brian Strickland
                                       -----------------------
                              Name:    C. Brian Strickland
                              Title:   Senior Vice President of Finance
                                       and Administration



                              BANK ONE, NATIONAL ASSOCIATION,
                              not in its individual capacity but solely as
                              the Trustee under this Indenture



                              By:      /s/ Chris Holly
                                       ------------------------
                              Name:    Chris Holly
                              Title:   Assistant Vice President



                               FINANCIAL STRUCTURES LIMITED,
                                        as Insurer


                               By:      /s/ David Ezekiel
                                        -----------------
                               Name:    David Ezekiel
                               Title:   Authorized Representative
                                        FSL-00-239