SECURITY AGREEMENT

          This Security Agreement, dated as of February 14, 2002 (this
"Agreement"), is made and entered into by and between Shelbourne Properties III,
L.P., a Delaware limited partnership (the "Pledgor"), and Shelbourne Management
Company, LLC, a Delaware limited liability company (the "Secured Party). Certain
capitalized terms used herein have the meanings ascribed thereto in Article VI
of this Agreement.

                                  WITNESSETH:

          WHEREAS, in consideration of the execution and delivery of the Secured
Promissory Note, dated as of even date herewith (the "Note"), by the Pledgor in
favor of the Secured Party and the Secured Party's execution and delivery of the
Purchase Agreement, the parties hereto wish to enter into this Agreement.

          NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants, agreements and warranties herein contained, the parties agree as
follows:

                                   ARTICLE I

                               SECURITY INTEREST

          Section 1.1 Grant of Security Interest.  To secure the payment,
observance and performance of the Secured Obligations, the Pledgor hereby
mortgages, pledges and assigns the Collateral to the Secured Party, and grants
to the Secured Party a continuing security interest in, and a continuing lien
upon, the Collateral.

          Section 1.2 Certain Limited Exclusions. Notwithstanding anything
herein to the contrary, in no event shall the Collateral include, and the
Pledgor shall not be deemed to have granted a security interest in, any of the
Pledgor's right, title or interest in any license, contract or agreement to
which the Pledgor is a party or any of its rights or interests thereunder, to
the extent, but only to the extent, that such a grant, under the terms of such
license, contract or agreement or otherwise, results in a breach or termination
of the terms of, or constitutes a default under or termination of any such
license, contract or agreement (other than to the extent that any such term
would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409
of the uniform commercial code (or any successor provision or provisions) of any
relevant jurisdiction or any other applicable law (including the Bankruptcy
Code) or principles of equity).

          Section 1.3 Validity and Priority of Security Interest. The Pledgor
agrees, represents and warrants that (a) the Security Interest shall at all
times be valid, perfected and enforceable against the Pledgor and all third
parties, in accordance with the terms hereof, as security for the Secured
Obligations, and (b) the Collateral is not and shall not at any time be subject
to any Lien, other than a Permitted Lien, that is prior to, on a parity with or
junior to such Security Interest.


<PAGE>


          Section 1.4 Maintenance of Status of Security Interest, Collateral and
Rights; Required Action. The Pledgor shall take all reasonably commercial
actions, including, without limitation, the actions specified on Schedule 1.4
hereto, that reasonably may be necessary or desirable, or that the Secured Party
reasonably may request, so as at all times (i) to maintain the validity,
perfection, enforceability and priority of the Security Interest in the
Collateral in conformity with the requirements of Section 1.2, (ii) to protect
and preserve the Collateral as and to the extent it has done so in the past and
(iii) to protect and preserve, and to enable the exercise or enforcement of, the
rights of the Secured Party in and to the Collateral and the Collateral
Documents.

          Section 1.5 Authorized Action. The Pledgor hereby authorizes the
filing of any financing statements or continuation statements, and amendments to
financing statements, in any jurisdictions and with any filing offices as the
Secured Party may determine, in its sole discretion, are necessary or advisable
to perfect the security interest granted to the Secured Party herein. Such
financing statements may describe the Collateral in the same manner as described
herein or may contain an indication or description of collateral that describes
such property in any other manner as the Secured Party may determine, in its
sole discretion, is necessary, advisable or prudent to ensure the perfection of
the security interest in the Collateral granted to the Secured Party herein,
including, without limitation, describing such property as "all assets" or "all
personal property, whether now owned or hereafter acquired.

          Section 1.6 Evidence of Status of Security Interest. The Pledgor shall
from time to time, upon the reasonable request of the Secured Party, deliver to
the Secured Party such file search reports from such Uniform Commercial Code and
other filing and recording offices.

          Section 1.7 Pledgor Remains Obligated; Secured Party Not Obligated.
The grant by the Pledgor to the Secured Party of the Security Interest shall not
(a) relieve the Pledgor of any liability to any Person under or in respect of
any of the Collateral or (b) impose on the Secured Party any such liability or
any liability for any act or omission on the part of the Pledgor relative
thereto.

                                   ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

          Section 2.1 Status of Collateral.

                (a) None of the Collateral of the Pledgor has been issued or
transferred in of the securities registration, securities disclosure or similar
laws of any jurisdiction to which such issuance or transfer may be subject.

                (b) This Agreement creates a valid priority lien on and a
priority perfected security interest in the Collateral pledged by the Pledgor,
and the proceeds thereof, securing the payment of the Secured Obligations.

          Section 2.2 Organization, Standing and Power.


<PAGE>


               (a) The Pledgor is a limited partnership, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
limited partnership power and authority to own, lease and operate its properties
and to carry on its business as now being conducted and the Pledgor has not
filed any certificates of domestication, transfer or continuance in any other
jurisdiction.

               (b) The Pledgor's full legal name is as set forth in the
introductory paragraph hereto.

          Section 2.3 Due Authorization. The Pledgor has full limited
partnership power and authority to enter into the Loan Documents and to
consummate the transactions contemplated thereby. The execution, delivery and
performance of the Loan Documents have been duly and validly approved by the
Pledgor and no other actions or proceedings on the part of the Pledgor are
necessary to authorize the Loan Documents and the transactions contemplated
thereby. The Pledgor has duly and validly executed and delivered the Loan
Documents. Each of the Loan Documents constitutes the legal, valid and binding
obligation of the Pledgor and upon execution and delivery by the parties thereto
will constitute the legal, valid and binding obligation of the Pledgor
enforceable in accordance with its terms.

          Section 2.4 Consents and Approvals; Authority Relative to this
Agreement.

               (a) No consent, authorization or approval of, except as
contemplated in Schedule 1.4, filing or registration with, or cooperation from,
any Governmental Authority or any other Person not a party to this Agreement is
necessary in connection with the execution, delivery and performance by the
Pledgor of the Loan Documents or the consummation of the transactions
contemplated thereby.

               (b) The execution, delivery and performance of the Loan Documents
by the Pledgor and any actions contemplated therein to be taken by the Pledgor
do not and will not, and the consummation of the transactions contemplated
hereby does not and will not, (i) violate any Law; or (ii) contravene or
conflict with any provision of any of the Pledgor's organizational instruments.

          Section 2.5 Required Taxes. No recording or other Taxes or recording,
filing or other fees or charges are payable in connection with, arise out of, or
are in any way related to, the execution, delivery, performance, filing or
recordation of any of Collateral Documents or the creation or perfection of the
Security Interest.

          Section 2.6 Pledged Securities.

                (a) Schedule 2.5 (as such schedule may be supplemented from time
to time) sets forth all of the Pledged Stock and Pledged Equity Interests owned
by the Pledgor.

               (b) None of the Pledged Equity Interests are or represent
interests in issuers that are: (a) registered as investment companies, (b) are
dealt in or


<PAGE>


traded on securities exchanges or markets or (c) have opted to be treated as
securities under the uniform commercial code of any jurisdiction.

                                  ARTICLE III

                                   COVENANTS

          Section 3.1 Preservation of Status of Security Interest.

               (a) Chief Executive Office. The Pledgor has no chief executive
office. If and when the Pledgor establishes a chief executive office, the
Pledgor shall give the Secured Party prompt written notice specifying the new
address.

               (b) Change of Name, Identity, Etc. The Pledgor shall not change
its name, type of organization or jurisdiction of organization, engage in any
merger or reorganization or cease to be a limited partnership without giving
the Secured Party ten days' prior notice thereof including all relevant
information related thereto.

               (c) Additional Matters. The Pledgor covenants and agrees that:

                         (i) The Pledgor covenants and agrees that it will
                    comply in all material respects with all the terms and
                    limitations contained in its governing documents.

                         (ii) Without the prior written consent of the Secured
                    Party, the Pledgor shall not permit the issuer of the
                    Collateral to be treated as securities for purposes of the
                    Uniform Commercial Code.

          Section 3.2 Distributions; Other Secured Debt. The Pledgor shall not
pay distributions other than on its Series A Preferred Units or otherwise in
accordance with past practice and shall not incur secured indebtedness
(including capital leases and sale/leasebacks) or secured guarantees other than
in connection with the repayment of the Note.

          Section 3.3 Certain Rights of the Secured Party and the Pledgor.
During an Event of Default, the Secured Party, after a notice to the Pledgor
that it intends to exercise its rights under this Section 3.3, may, from time to
time, in its own or the Pledgor's name, exercise any and all rights, powers and
privileges with respect to the Collateral, and with the same force and effect,
as could the Pledgor.

                                   ARTICLE IV

                                EVENT OF DEFAULT

          During an Event of Default, and in each such case:

          A. Proceeds.


<PAGE>


          Section 4.1 Application of Proceeds. All cash proceeds received by the
Secured Party upon any sale of, collection of, or other realization upon, all or
any part of the Collateral and all cash held by the Secured Party as Collateral,
shall, subject to the Secured Party's right to continue to hold the same as cash
Collateral, be applied as follows:

First: To the payment of all reasonable out-of-pocket costs and expenses
incurred in connection with the sale of or other realization upon the
Collateral, including attorneys' fees and disbursements;

Second: To the payment of the Secured Obligations owing to the Secured Party
(with the Pledgor remaining liable for any deficiency);

Third: To the extent of the balance (if any) of such proceeds, to the payment to
the Pledgor, subject to applicable law

          B. Remedies.

          Section 4.2 General; Secured Party's Rights with Respect to Proceeds
and Other Collateral.

               (a) All Collateral (including all proceeds resulting from the
exercise by the Secured Party of its rights under Section 4.2(b) or (c) or
otherwise) may, at the election of the Secured Party, (i) be or continue to be
held by the Secured Party, or any Person designated by the Secured Party to
receive or hold the same, as Collateral, (ii) be applied as provided in Section
4.1, (iii) be disposed of as provided in Section 4.2(b) and (c), or (iv) in full
satisfaction of the obligation under the Note and with the consent of the
Pledgor, be transferred directly to the Secured Party who shall then and thereby
be the sole and exclusive owner thereof.

               (b) Power of Sale. The Secured Party (i) may sell the Collateral
in one or more parcels at public or private sale, at any of its offices or
elsewhere, for cash, on credit or for future delivery, and at such price or
prices and upon such other terms as it may deem commercially reasonable and the
Secured Party and any of its affiliates, officers, directors and stockholders
may be the buyer at any such sale, (ii) shall not be obligated to make any sale
of Collateral regardless of notice of sale having been given, and (iii) may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.

          Section 4.3 Foreclosure. The Secured Party, instead of exercising the
power of sale conferred upon it by Section 4.2(b) and applicable law, may
proceed by a suit or suits at law or in equity to foreclose the Security
Interest and sell the Collateral, or any portion thereof, under a judgment or a
decree of a court or courts of competent jurisdiction.


<PAGE>




          Section 4.4 Receiver. The Secured Party may obtain the appointment of
a receiver of the Collateral and the Pledgor consents to and waives any right to
notice of such appointment.

         Section 4.5 Enforcement by Secured Party; Adjustments.

               (a) Enforcement by Secured Party. The Secured Party may, without
notice to the Pledgor and at such time or times as the Secured Party in its sole
discretion may determine, exercise any or all of the Pledgor's rights in, to and
under, or in any way connected with or related to, any or all of the Collateral,
including (i) demanding and enforcing payment and performance of, and exercising
any or all of the Pledgor's rights and remedies with respect to the collection,
enforcement or prosecution of, any or all of the Secured Obligations, in each
case by legal proceedings or otherwise, (ii) settling, adjusting, compromising,
extending, renewing, discharging and releasing any or all of, and any legal
proceedings brought to collect or enforce any or all of, the Secured Obligations
and (iii) preparing, filing and signing the name of the Pledgor on (A) any proof
of claim or similar document to be filed in any bankruptcy or similar proceeding
involving Collateral and (B) any notice of lien, assignment or satisfaction of
lien, or similar document in connection with any Secured Obligation.

               (b) Adjustments. The Secured Party may settle or adjust disputes
and claims directly with the Collateral for amounts and on terms that the
Secured Party considers advisable and in all such cases only the net amounts
received by the Secured Party in payment of such amounts, after deduction of
out-of-pocket costs and expenses of collection, including reasonable attorneys'
fees, shall be subject to the other provisions of this Agreement.

                                   ARTICLE V

                                 MISCELLANEOUS

         Section. 5.1 Expenses of Pledgor's Agreements and Duties. The
terms, conditions, covenants and agreements to be observed or performed by the
Pledgor under the Collateral Documents shall be observed or performed by it at
its sole cost and expense.

          Section 5.2 Secured Party's Right to Perform on Pledgor's Behalf. If
the Pledgor shall fail to observe or perform any of the terms, conditions,
covenants and agreements to be observed or performed by it under the Collateral
Documents, the Secured Party may (but shall not be obligated to) do the same or
cause it to be done or performed or observed, either in its name or in the name
and on behalf of the Pledgor, and the Pledgor hereby authorizes the Secured
Party to do so.

          Section 5.3 Secured Party's Right to Use Agents and to Act in Name of
Pledgor. The Secured Party may exercise its rights and remedies under the
Collateral Documents through an agent or other designee and, in the exercise
thereof, the Secured


<PAGE>




Party or any such other Person may act in its own name or in the name and on
behalf of the Pledgor.

Section 5.4 No Interference; Compensation or Expense. The
Secured Party may exercise its rights and remedies under the Collateral
Documents (a) without resistance or interference by the Pledgor, (b) without
payment of any kind to the Pledgor and (c) for the account, and at the expense,
of the Pledgor, provided that Pledgor shall not be responsible for any such
expense if the Secured Party was not entitled to exercise such rights and
remedies under the Collateral Documents or applicable law.

          Section 5.5 Limitation of Secured Party's Obligations with Respect to
Collateral.

               (a) The Secured Party shall have no obligation to protect or
preserve any Collateral or to preserve rights pertaining thereto other than the
obligation to use reasonable care in the custody and preservation of any
Collateral in its actual possession. The Secured Party shall be deemed to have
exercised reasonable care in the custody and preservation of any Collateral in
its possession if such Collateral is accorded treatment substantially equal to
that which the Secured Party accords its own property. The Secured Party shall
be relieved of all responsibility for any Collateral in its possession upon
surrendering it, or tendering surrender of it, to the Pledgor.

               (b) Nothing contained in the Collateral Documents shall be
construed as requiring or obligating the Secured Party, and the Secured Party
shall not be required or obligated, to (i) make any demand, or to make any
inquiry as to the nature or sufficiency of any payment received by it, or to
present or file any claim or notice or take any action, with respect to any
Secured Obligation or any other Collateral or the monies due or to become due
thereunder or in connection therewith, (ii) ascertain or take action with
respect to calls, conversions, exchanges, maturities, tenders, offers or other
matters relating to any Collateral, whether or not the Secured Party has or is
deemed to have knowledge or notice thereof, (iii) take any necessary steps to
preserve rights against any prior parties with respect to any Collateral or (iv)
notify the Pledgor of any decline in the value of any Collateral.

          Section 5.6 Rights of Secured Party Under Uniform Commercial Code and
Applicable Law.

               (a) The Secured Party shall have, in addition to all of its
rights and remedies under the Collateral Documents, (i) the rights and remedies
of a secured party under the Uniform Commercial Code, whether or not the Uniform
Commercial Code would otherwise apply to the Collateral in question, and (ii)
the rights and remedies of a secured party under all other applicable law.

               (b) The Pledgor waives (i) any claim that, as to any part of the
Collateral, a public sale, should the Secured Party elect so to proceed, is, in
and of itself, not a commercially reasonable method of sale for such Collateral,
(ii) the right to assert in any action or proceeding between it and the Secured
Party any offsets that it may have,


<PAGE>




(iii) TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE OR JUDICIAL HEARING IN
CONNECTION WITH THE SECURED PARTY'S TAKING POSSESSION OR DISPOSITION OF ANY OF
THE COLLATERAL INCLUDING ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY
PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT THE PLEDGOR WOULD
OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF
ANY STATE, AND ALL OTHER REQUIREMENTS AS TO THE TIME, PLACE AND TERMS OF SALE OR
OTHER REQUIREMENTS WITH RESPECT TO THE ENFORCEMENT OF THE SECURED PARTY'S RIGHTS
HEREUNDER, or (iv) all rights (A) of redemption, appraisement, valuation, stay
and extension or moratorium and (B) to the marshalling of assets.

          Section 5.7 Governing Law. The rights and duties of the Pledgor and
the Secured Party under the Loan Documents shall be governed by the law of the
State of New York.

          Section 5.8 Power of Attorney.

               (a) In addition to the other powers granted the Secured Party by
the Pledgor under the Loan Documents, the Pledgor hereby appoints the Secured
Party, and any other Person that the Secured Party may designate, as the
Pledgor's attorney-in-fact to act, in the name, place and stead of the Pledgor
in any way in which the Pledgor itself could do, with respect to each of the
following: (i) endorsing the Pledgor's name on (A) any checks, notes,
acceptances, money orders, drafts or other forms of payment, (B) any securities,
instruments, documents, notices, or other documents or agreements relating to
the Collateral, (C) schedules and assignments of Collateral Obligations and (D)
notices of assignment, financing statements and other public records; (ii)
taking any actions or exercising any rights, powers or privileges that the
Pledgor is entitled to take or exercise and that, under the terms of any of the
Collateral Documents, the Secured Party is authorized to take or exercise; (iii)
during an Event of Default, doing or causing to be done any or all things
necessary or, in the determination of the Secured Party, desirable to observe or
perform the terms, conditions, covenants and agreements to be observed or
performed by the Pledgor under the Collateral Documents and otherwise to carry
out the provisions of the Collateral Documents; and (iv) during an Event of
Default, notifying the post office authorities to change the address for
delivery of the Pledgor's mail to an address designated by the Secured Party,
and receiving, opening and disposing of all mail addressed to the Pledgor (with
all mail not constituting, evidencing or relating to the Collateral to be
forwarded by the Secured Party to the Pledgor). The Pledgor hereby ratifies and
approves all acts of the attorney.

               (b) To induce any third Person to act under this Section 5.8, the
Pledgor hereby agrees that any third Person receiving a duly executed copy or
facsimile of this Agreement may act under this Section 5.8, and that the
termination of this Section 5.8 shall be ineffective as to such third Person
unless and until actual written notice of such termination shall have been
received by such third Person, and the Pledgor, on behalf of itself and its
successors and assigns, hereby agrees to indemnify and hold harmless any such
third Person from and against any and all claims that may arise against


<PAGE>




such third Person by reason of such third Person having relied on the provisions
of this Section 5.8.

          Section 5.9 LIMITATION OF LIABILITY. NEITHER THE SECURED PARTY NOR ANY
OTHER PRINCIPAL SHALL HAVE ANY LIABILITY WITH RESPECT TO, AND THE PLEDGOR HEREBY
WAIVES, RELEASES AND AGREES NOT TO SUE FOR:

               (a) ANY LOSS OR DAMAGE SUSTAINED BY THE PLEDGOR, OR ANY LOSS,
DAMAGE, DEPRECIATION OR OTHER DIMINUTION IN THE VALUE OF ANY COLLATERAL, THAT
MAY OCCUR AS A RESULT OF, IN CONNECTION WITH, OR THAT IS IN ANY WAY RELATED TO,
ANY EXERCISE OF ANY RIGHT OR REMEDY UNDER THE COLLATERAL DOCUMENTS, EXCEPT FOR
ANY SUCH LOSS, DAMAGE, DEPRECIATION OR DIMINUTION TO THE EXTENT THAT THE SAME IS
DETERMINED BY A JUDGMENT OF A COURT THAT IS BINDING ON THE PLEDGOR AND SUCH
PRINCIPAL, FINAL AND NOT SUBJECT TO REVIEW ON APPEAL, TO BE THE RESULT OF ACTS
OR OMISSIONS ON THE PART OF SUCH PRINCIPAL CONSTITUTING (y) WILLFUL MISCONDUCT
OR (z) NEGLIGENCE; OR

               (b) ANY SPECIAL, INDIRECT OR CONSEQUENTIAL, AND, TO THE EXTENT
PERMITTED UNDER APPLICABLE LAW, PUNITIVE DAMAGES SUFFERED BY THE PLEDGOR IN
CONNECTION WITH ANY COLLATERAL DOCUMENT RELATED CLAIM.

          Section 5.10 Counterparts. Each Collateral Document may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto were upon the same instrument.

          Section 5.11 Entire Agreement. This Agreement embodies the entire
agreement among the Pledgor and the Secured Party relating to the subject matter
hereof and supersedes all prior agreements, representations and understandings,
if any, relating to the subject matter hereof.

          Section 5.12 Successors and Assigns. All of the provisions of each
Collateral Document shall be binding on and inure to the benefit of the parties
thereto and their respective successors and assigns.

          Section 5.13 Hart-Scott. In the event that any filing is required to
be made in connection with any sale, purchase or other acquisition or transfer
of any Collateral under the Hart-Scott-Rodino Antitrust Improvement Act of 1976,
as amended, or any related rules or forms, the Pledgor, at the request of the
Secured Party, will promptly take such action as may be required to allow and
facilitate any such filing and the completion of any such sale, purchase or
other acquisition or transfer in compliance with all such requirements, it being
agreed that the Secured Party shall be responsible for all filing fees.


<PAGE>




          Section 5.14 Notices. Any notice, request, instruction or other
document to be given hereunder by a party hereto shall be in writing and shall
be deemed to have been given, when received:

                        (a) If to the Secured Party, addressed as follows:

Shelbourne Management LLC
c/o NorthStar Capital Investment Corp.
527 Madison Avenue, 16th floor
New York, New York 10022
Attention: Richard J. McCready, Esq.
Facsimile No.: (212) 319-4557

with a copy to:

Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
Attention: Randall H. Doud
Facsimile No.: (212) 735-2000

                        (b) If to the Pledgor, addressed as follows:

c/o Shearman & Sterling
599 Lexington Avenue
New York, York 10022-6030
Attention: Peter D. Lyons; Christa A. d'Alimonte
Facsimile No.:  (212) 848-7179,

or to such other individual or address as a party hereto may designate for
itself by notice given as herein provided.

                                   ARTICLE VI

                                 INTERPRETATION

          Section 6.1 Definitional Provisions.

                (a) Certain Terms Defined by Reference.  Except where the
context clearly indicates a different meaning, all defined in Article 1, 8 or 9
of the Uniform Commercial Code, as in effect on the date of this
Agreement, are used herein with the meanings therein ascribed to them. In
addition, the terms "collateral" and "security interest", capitalized, have the
meanings specified in Section 6.1(b).

                (b) Other Defined Terms. For purposes of this Agreement:


<PAGE>




          "Agreement" has the meaning set forth in the preamble hereto.

          "Agreement Date" means the date of this Agreement.

          "Code" means the Internal Revenue Code of 1986, as amended.

          "Collateral" shall mean all right, title and interest in, to and under
the interests in the joint venture owning 568-578 Broadway in New York City.

          "Collateral Documents" means this Agreement and the financing
statement and other documents referred to on Schedule 1.4 hereto.

          "Event of Default" has the meaning set forth in the Note.

          "Governmental Authority" means the government of the United States of
America or any foreign country or any state or political subdivision thereof and
any entity, body or authority exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.

          "Law" means any law, statute, regulation, ordinance, rule, order,
decree, judgment, consent decree, settlement agreement or governmental
requirement enacted, promulgated, entered into, agreed or imposed by any
Governmental Authority.

          "Lender" means the Secured Party.

          "Lien" means any mortgage, lien (except for any lien for Taxes not yet
due and payable), charge, restriction, pledge, security interest, option, lease
or sublease, claim, proxy, right of any third party, easement, encroachment or
encumbrance.

          "Loan Documents" means the Note and the Collateral Documents.

          "Note" has the meaning set forth in the recitals of this Agreement.

          "Permitted Lien" means (i) any lien in favor of the Secured Party for
the benefit of the Secured Party to secure the Security Interest; (ii) any lien
in favor of third parties granted or caused to be granted by the Secured Party;
(iii) any immaterial lien for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings; and (iv) any lien arising solely by virtue of any
statutory or common-law provision relating to banker's liens, rights of setoff
or similar rights and remedies as to deposit accounts or other funds maintained
with a creditor depository institution.

          "Person" means any individual, corporation, proprietorship, firm,
partnership, limited liability company, limited partnership, trust, association
or other entity, including a government or government department, agency or
instrumentality.

          "Pledgor" has the meaning set forth in the preamble to this Agreement.


<PAGE>




          "Proceeds" shall mean: (i) all "proceeds" as defined in Article 9 of
the Uniform Commercial Code and (ii) whatever is receivable or received when
Collateral or proceeds are sold, exchanged, collected or otherwise disposed of,
whether such disposition is voluntary or involuntary.

          "Purchase Agreement" shall mean the Purchase and Contribution
Agreement, dated as of the date hereof, by and among the Pledgor, the Secured
Party and certain other parties.

          "Secured Obligations" means all indebtedness, liabilities and
obligations of the Pledgor owing under the Note and the obligation of the
Pledgor to pay the "Reacquisition Price" (as defined in Section 5.3 of the
Purchase Agreement).

          "Secured Party" has the meaning set forth in the preamble to this
Agreement.

          "Security Interest" means the mortgages, pledges and assignments to
the Secured Party of, the continuing security interest of the Secured Party in,
and the continuing lien of the Secured Party upon, the Collateral intended to be
effected by the terms of this Agreement or any of the other Collateral
Documents.

          "Taxes" means all taxes, charges, fees, duties, levies or other
assessments, including income, gross receipts, net proceeds, ad valorem,
turnover, real and personal property (tangible and intangible), sales, use,
franchise, excise, value added, stamp, leasing, lease, user, transfer, fuel,
excess profits, occupational, interest equalization, windfall profits,
severance, employee's income withholding, other withholding (including, without
limitation, dividend withholding and withholding required under Sections 1445
and 1446 of the Code), unemployment and Social Security taxes, which are imposed
by any Governmental Authority, and such term shall include any interest,
penalties or additions to tax attributable thereto.

          "Uniform Commercial Code" means the Uniform Commercial Code as adopted
in the State of New York as in effect from time to time.

          Section 6.2 Other Interpretative Provisions.

               (a) Except as otherwise specified herein, all references herein
(i) to any Person shall be deemed to include such Person's successors and
assigns, (ii) to any applicable law defined or referred to herein shall be
deemed references to such applicable law or any successor applicable law as the
same may have been or may be amended or supplemented from time to time and (iii)
to any Loan Document defined or referred to herein shall be deemed references to
such Loan Document (and, in the case of any instrument, any other instrument
issued in substitution therefor) as the terms thereof may have been or may be
amended, supplemented, waived or otherwise modified from time to time.

               (b) When used in this Agreement, the words "herein", "hereof" and
"hereunder" and words of similar import shall refer to this Agreement as a whole
and not to any provision of this Agreement, and the words "Article", "Section"
and


<PAGE>

"Schedule" shall refer to Articles, Sections of, and Schedules to, this
Agreement unless otherwise specified.

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

               (d) Any item or list of items set forth following the word
"including", "include" or "includes" is set forth only for the purpose of
indicating that, regardless of whatever other items are in the category in which
such item or items are "included", such item or items are in such category, and
shall not be construed as indicating that the items in the category in which
such item or items are "included" are limited to such items or to items similar
to such items.

               (e) Each power of attorney, license and other authorization in
favor of the Secured Party or any other Person granted by or pursuant to this
Agreement shall be deemed to be irrevocable and coupled with an interest.

               (f) Except as otherwise indicated, any reference herein to the
"Collateral", the "Secured Obligations", the "Loan Documents" or any other
collective or plural term shall be deemed a reference to each and every item
included within the category described by such collective or plural term, so
that (i) a reference to the "Collateral" or the "Secured Obligations" shall be
deemed a reference to any or all of the Collateral or the Secured Obligations,
as the case may be, and (ii) a reference to the "obligations" of the Pledgor
under the "Loan Documents" or the "Collateral Documents" shall be deemed a
reference to each and every obligation under each and every Loan Document or
Collateral Document, as the case may be, whether any such obligation is incurred
under one, some or all of the Loan Documents or the Collateral Documents, as the
case may be.

               (g) Except as otherwise specified therein, all terms defined in
this Agreement shall have the meanings herein ascribed to them when used in the
other Collateral Documents or any certificate, opinion or other document
delivered pursuant hereto or thereto.

          Section 6.3 Captions. Captions to Articles, Sections and subsections
of, and Annexes and Schedules to, the Collateral Documents are included for
convenience of reference only and shall not constitute a part of the Collateral
Documents for any other purpose or in any way affect the meaning or
construction of any provision of the Collateral Documents.

          Section 6.4 Reinstatement. This Agreement and the Security Interest
shall terminate upon written acknowledgment by Secured Party given to the
Pledgor in the event that the Note shall be repaid and all obligations under the
Loan Documents are discharged, by the Pledgor in full by final irrevocable
payment, provided that no such termination shall occur or shall be deemed to
have occurred and no such final irrevocable payment shall be deemed to have been
paid, and the liens, perfection, rights and


<PAGE>

obligations under the Loan Documents shall continue and not be discharged (and
shall be deemed to have and continued without interruption), in the event that
any payment, observance or performance is recovered from or otherwise setoff
against or paid over by or for the account of the Secured Party or in the event
of any occurrence having a similar effect, for any reason, including a
bankruptcy, preference or fraudulent transfer or by virtue of any subordination
(whether present or future or contractual or otherwise) and whether any of the
foregoing is effected by any judgment, decree or order of any court or
governmental agency, by any plan of reorganization or by settlement, compromise
or otherwise.


<PAGE>


          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers all as of the date first above
written.

                                        PLEDGOR:

                                        SHELBOURNE PROPERTIES III, L.P.

                                        By: SHELBOURNE PROPERTIES III GP, INC.,
                                        as General Partner

                                        By:  /s/ [illegible]
                                            -----------------------------------
                                        Name:
                                        Title:

                                        SECURED PARTY:

                                        SHELBOURNE MANAGEMENT LLC

                                        By: PRESIDIO INVESTMENT CAPITAL
                                        COMPANY, LLC

                                        By: /s/ [illegible]
                                            -----------------------------------
                                        Name:
                                        Title:


<PAGE>


                                                                    Schedule 1.4
                          Schedule of Required Action


          Pursuant to, and without thereby limiting, its obligations under
Section 1.4, the Pledgor hereby agrees that it will:

     1.   file UCC-1 financing statements in the form of Schedule 1.4(a)-1; in
          the following offices: Delaware Secretary of State;

     2.   mark all its books and records as may be necessary or appropriate to
          evidence, protect and perfect the Security Interest;

     3.   cause its financial statements to reflect the Security Interest;

     4.   cause the issuer of the Collateral to either (i) register the Secured
          Party as the registered owner thereof on the books and records of the
          issuer or (ii) execute an agreement, in form and substance
          satisfactory to the Secured Party, pursuant to which such issuer
          agrees to comply with the Secured Party's instructions with respect to
          such uncertificated security without further consent by the Pledgor.